The dark side of Darktrace

Quintessential Capital Management is SHORT shares of Darktrace Plc (“LSE: Dark”)

•We targeted Darktrace (“DT”) with a deep investigation into its business model, selling practices, international partnerships, and sales force

•We are skeptical about the validity of DT’s financial statements and fear that sales, margins, and growth rates may be overstated and close to a sharp correction.

•Detected numerous transactions in the period leading to DT’s IPO seemingly involving simulated or anticipated sales to phantom end-users through a network of resellers.

•DT seems to have repeatedly used marketing activities to channel funds back into its partners as payment for apparently fictitious purchases

•These alleged channel stuffing and round-tripping activities may have involved shell companies in offshore jurisdictions manned by individuals with ties to organized crime, money-laundering, and fraud

•We have detected a pattern of transactions suggesting that a portion of Darktrace’s past recurring software sales may instead be one-off sales of hardware appliances

•Accounting anomalies involving deferred revenue suggest possible problems with DT’s revenue recognition, providing a potentially misleading picture about the Company’s cash generation.

•Presence of serious accounting red flags consistent with reality detected in the field

•Multiple executives, board members, line managers not adequately disclosing their involvement with Autonomy and selling shares

•Increasing competition, questionable product value, “front loading” of existing contracts, high churn rates and lack of sustainable cash generation, point to a rapid, possibly sharp, deterioration financials

•Employment, website traffic and search volume metric suggest a sharp slowdown may be underway

We are of the opinion that Darktrace’s financial statements may not be relied upon as the company looks like a sophisticated replica of the Autonomy debacle

Quintessential Capital Management is SHORT shares of Darktrace Plc (“LSE: Dark”)

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