JAKE MERL: Welcome to Trade Ideas. I'm Jake Merl, sitting down Gabriel Grego at Quintessential Capital Management. Gabriel, great to have you on the show for your very first Real Vision interview.

GABRIEL GREGO: Glad to be here.

JAKE MERL: Today, we're talking about a company called Bio-On, which is actually a bio plastics company based in Italy. You published a report at the end of July, and you basically called the company a house of cards. The stock fell 75% immediately after you publish the report. The stock was suspended from trading. It's currently trading around 60% to 70% below from when you initially publish the report.

Break it all down for us. How do you look at companies? What's your methodology for shorting stocks, and what specifically led you to Bio-On.

GABRIEL GREGO: The methodology in general is pretty clear. What I like to do is I try to pick my battles well. In other words, I don't go after a social situation, but look for extreme circumstances, which usually be in some catastrophic, but hidden situations inside the company. It can be a fraud, it can be crime, it can be dishonest management, it can be failing-- completely failing business model, but in a hidden way. That's the first phase.

We have a bunch of ways in order to receive ideas and deal flows. For example, at our funds, we do our own proprietary research, our screening mechanisms. Once we go over to first screening, the second screening is to try and understand exactly what's going on. Come up with a rational thesis of the underlying problem of the company, and then collect a critical mass of information that not only explains in depth what's going on, but also can prove the thesis beyond reasonable doubt, so to speak.

The final phase is to find a way to communicate our findings with the wider public, with the market in a way that is both understandable, clear, and verifiable, this was very important. We want the average reader, the average person who watches our thesis to be able to reverse engineer at least some of the most critical point of the thesis so that they can convince themselves of the acceptance of the thesis basically.

JAKE MERL: What specifically led you to Bio-On?

GABRIEL GREGO: Well, Bio-On is a stock that many funds have been looking at to the last year or so, a lot of short funds, some of them are well known. They had large short positions, persistent short positions and sometimes increasing short positions. It was definitely on our watch list and we started looking at a company and the first one we saw were glaring, what we believe are glaring, accounting anomalies, of the type that we see in the companies that usually interest us, for one reason or another.

For example, huge discrepancy between cash flow generation and earnings. For example, sales that for the most part, are never or almost never cash or sales and huge receivables. Then we saw was a pattern of press releases and communication to the investors that in our opinion were at least a little bit exaggerated. The company claimed to produce certain variety of its product-- the company does plastics, plastic that is contributing to the cure of cancer, plastic that clean the oceans, plastic that can replace metal, a plastic that can replace human bones and many other. I'm not going to list all of them, but a lot of them strike to us is very unlikely.

Finally, all we did is going and analyzing this communication from the very beginning, from before the IPO all the way 'til today and we try to see what happened after the communication. We saw that very often, these projects were announced, together with huge investments in plans and large purchases of technology. But then if you go see during the years, most of them, the overwhelming majority of them, nothing ever happens. If it's about collaboration with some auto industry reality, the factory never gets built. In some cases, the licenses, which is technology transfers, don't really get paid, if they get paid, they get paid in something that looks to us quite strange. Like, essentially using some of Bio-On's own cash in order to pay itself and so on so forth.

The next thing we did is we came up with a thesis and then we sought out people in the industry that could give us their opinion on what was going on. We spoke to, for example, CEOs of other companies that are in the same or similar industries. We spoke to some scientists, and we hired accountants and auditors to go through their accounts, and try to make sure whether our impression of these account were actually validated by a professional. I would say with very few exception, everybody corroborated our fears. It turns out that the accounting is showing some serious irregularities that a lot of the people that we spoke to question some of the declaration of the company, some of the technology application. Overall, we believe our thesis was validated and once we saw a critical mass of validation, we decided to share with the market and with the public our findings. JAKE MERL: Based on the analysis you've done, are you saying the company just has poor management and maybe the technology isn't quite as what they say, or are you saying the company is an actual fraud and the stock price is worth zero dollars? GABRIEL GREGO: We never use the word fraud every time we are doing our reports, but this is only for legal reasons. What we like to do is to share all the most important findings with the public, maybe with our opinion as to what could be going on underneath but we prefer not to give real judgment. We like the public to give their judgments, so come to your own conclusion. But basically, what we saw is a company that in 12 years of operations and several years as a public company has never created any free cash flow, is a company that at the very least, until the end of 2018 has never sold anything or produced anything of substance outside of its network of shell companies. In other words, they do show some sales, but these sales tend to be two companies which are affiliated or related to themselves. The game that they do is they seek out some partner, they're usually a real company sometime with a good reputation, and they form a JV. This JV is actually shell company and the terms changed from company to company but the idea is, well, we're going to start research into this application for bio plastic or on our application and at some point, we'll build a factor. We will commit large amounts of capital in this factory and right away, this entity buys that technology from Bio-On. Now, a few things happen. Number one, the people we spoke to and the auditors who looked at the account say that the price at which this license were sold, the amount that has been determined may have been irregular, because in Italy, every time you're selling an asset to a company that you yourself control or is affiliated to you, you cannot just give it an arbitrary value but you need to get an official appraiser nominated by the courthouse which basically comes up with a business plan and evaluation based on this business plan, which then checks it over time to make sure that the asset is performing according to expectation. Now, what seems to happen is that this exercise was not done or at least, we didn't find any evidence of this exercise being done so we cannot trust the amount that was paid for this technology transfer. Their model was sold, but in many cases, it was never paid. In other words, the company sells technology to these entities, which are sometimes 50% owned by the company itself, sometimes 90% owned by the company itself but then the payment never occurs, or almost never occurs. In the few cases where some money didn't go back in, what happened? Bio-On made what looks like a capital injection into the vehicle and then used the capital injection money to pay itself back from the license. This is the type of thing that we saw and this companies themselves, these joint ventures that we call them shell companies, they have Bio-On administrators and directors, the offices are located inside Bio-On so they they don't seem to have any dedicated employees. They don't have any sales of their own. They don't have any production of their own, at least not in 2018. This $50 million almost never turns into cash. In 2019, they seem to have started a little bit of production, but it's really minimal amounts. JAKE MERL: Obviously, you're pessimistic on the company, but the stock price today is actually up 20% or so on news that a Russian company might be using some of their technology. What do you make of that? GABRIEL GREGO: Well, today's company is non news for anybody that has been following what's going on. They announced this joint venture with a Russian company, at least back in February this year so there is nothing new about it. All they did today is saying that that project has gone to the subsequent phase of implementation without really defining what is this implementation. It was not clear to us who exactly is going to pay for this factory that they want to build. It was not clear to us why would a Russian company whose core business is hydrocarbons be interested in producing plastics, especially since Russia is not a particularly environmentally sensitive country. To us, this is the usual modus operandi. In other words, you go and seek out partners and you open with them a joint venture, you announce a big project and if the past is history, nothing concrete will turn out, out of these things. JAKE MERL: You've been short the stock for quite some time, and you've obviously done quite well, but how do you suggest traders currently play the setup? Have you already taken profits or do you think there's more room to run on the downside? GABRIEL GREGO: We still have a position open in the company. The reason why we're here highly skeptical, and we think there may be more downside has to do with the financial situation of the company. The financial health of a company is a function of liquidity and solvency. As far as the liquidity of the company lost in 2018, something like 21 million euros so it's actually negative free cash flow and has a pretty high burn rate. Some of this euro was CapEx, but even if you take out the CapEx, it's still burning a lot of cash so liquidity is negative. What about solvency? What's the balance sheet? On the asset side, you have receivables about 40%, 44% of the assets. These receivables, who's the counterparty to that? These joint ventures which are related to Bio-On and they themselves don't seem to have enough financial solidity. They don't have production of their own, they're not generating any cash so how exactly are they going to repay these payables? Some of them are very old, even 40 years old. We don't trust this 40% and we don't believe that any of it or at least most of it will generate cash eventually. The rest is a factory, the only factory that they managed to build and it's a really tiny factory of 1000 tons of production per year, which sounds a lot but we're talking about plastic. We made a financial analysis, we don't think that this factory can produce economically. They're producing what is pretty much a commodity, which is a product called PHA. It's a type of bio plastic. They're not the only producer of this bio plastic. There are many around the world, and they usually wholesales for something like $4, $5, $6, $7 per kilo. The company claims that it's doing a particular type use for cosmetics, which might sell for more. We'd believe it when we see it. With those numbers, that factory cannot be economical, can only lose cash, therefore, it should be [inaudible], should not be considered an asset. The rest, only about 5% of the assets is just technology. This technology has been purchased for modest amounts, so it's not significant relative to the size of the balance sheet. A lot of scientists we spoke to, they had a lot of objection and skepticism on this patents. In our opinion, almost worthless. Since that is the case, the asset side of the balance sheet is not worth very much. They have some cash, they had some cash at the beginning of 2019, about 20 million Euros, which can give them some breathing time. But what's on the other side, you have large amounts of bank debt and large amount of account payables, in other words, money that they owe to their suppliers and to the companies that have built the factory. A large amount of this liability have to be settled by the end of the year. Right now, they don't have enough resources to settle so either they raise cash with a share issue, or somehow they get a refinancing. We're very skeptical on the possibility of doing either at reasonable terms. That's why we think there may be a lot more downside. Of course, in cases like this, sometimes the regulators jumps in and terminates the party. JAKE MERL: In terms of the actual stock price, how low do you see shares actually going? GABRIEL GREGO: It's very hard to come up with a target price. Usually, when we intervene, you can see at our track record, in a large percentage of cases, the stock goes to zero and the company gets obliterated. We're not saying that this is necessarily the case here. That could happen or it could not, but I certainly think there was a more than a zero percent chance that this happens. JAKE MERL: What would you say is the biggest risks to your short thesis, what could go wrong that could actually lift the share price higher? GABRIEL GREGO: Well, you can come up with very remote scenarios. For example, somebody-- and this, we see this sometime, for example, somebody may offer to buy the company, maybe because they haven't done enough due diligence, or maybe because they just want to be in the headlines for buying something that is considered green technology. That's a possibility. For some miracle, one of their joint ventures might actually start producing and generate real money, something that we haven't seen so far, except for minimal amounts. Finally, headline risks, like we saw today, for example. They managed to pull out another press release, which in our opinion, didn't say very much but the price reacted in a very bullish way. All of this will probably be temporary price spikes. We think there is a very low chance that long term, this is a good investment. This our opinion, of course, we don't have the crystal ball. JAKE MERL: Would you have a stop loss just in case any of those things do play out? GABRIEL GREGO: We don't believe in stop loss very much. We usually analyze the situation and we update our view of the situation based on whatever new information we get. When we get a rational assessment, if we believe that all of a sudden, the intrinsic value changed, then we may change our mind. Honestly, my gut feeling is that that's not going to happen here. JAKE MERL: Since because this stock is already down so much in just the past few months, what's the short interest look like right now? Is it expensive to borrow shares and to short the stock? GABRIEL GREGO: I checked a few days later. Short interest has been already high and has been increasing. Most of the short interest is accounted for by four large funds. Most of these funds, if not all of them, have been slightly increasing our position ever since we published which we find very heartening because it means they probably share our thesis. The borrow was very expensive, something like 40% per year. I would say anybody that would be interested in replicating the trade to make sure that they managed to have like a nice exit plan and not to plan to be there indefinitely because again, the borrow is expensive. JAKE MERL: Well, Gabriel, that was great. Thanks so much for joining us. It's great having you on the show. GABRIEL GREGO: You're most welcome.

GABRIEL GREGO: We never use the word fraud every time we are doing our reports, but this is only for legal reasons. What we like to do is to share all the most important findings with the public, maybe with our opinion as to what could be going on underneath but we prefer not to give real judgment. We like the public to give their judgments, so come to your own conclusion. But basically, what we saw is a company that in 12 years of operations and several years as a public company has never created any free cash flow, is a company that at the very least, until the end of 2018 has never sold anything or produced anything of substance outside of its network of shell companies.

In other words, they do show some sales, but these sales tend to be two companies which are affiliated or related to themselves. The game that they do is they seek out some partner, they're usually a real company sometime with a good reputation, and they form a JV. This JV is actually shell company and the terms changed from company to company but the idea is, well, we're going to start research into this application for bio plastic or on our application and at some point, we'll build a factor. We will commit large amounts of capital in this factory and right away, this entity buys that technology from Bio-On.

Now, a few things happen. Number one, the people we spoke to and the auditors who looked at the account say that the price at which this license were sold, the amount that has been determined may have been irregular, because in Italy, every time you're selling an asset to a company that you yourself control or is affiliated to you, you cannot just give it an arbitrary value but you need to get an official appraiser nominated by the courthouse which basically comes up with a business plan and evaluation based on this business plan, which then checks it over time to make sure that the asset is performing according to expectation.

Now, what seems to happen is that this exercise was not done or at least, we didn't find any evidence of this exercise being done so we cannot trust the amount that was paid for this technology transfer. Their model was sold, but in many cases, it was never paid. In other words, the company sells technology to these entities, which are sometimes 50% owned by the company itself, sometimes 90% owned by the company itself but then the payment never occurs, or almost never occurs. In the few cases where some money didn't go back in, what happened? Bio-On made what looks like a capital injection into the vehicle and then used the capital injection money to pay itself back from the license.

This is the type of thing that we saw and this companies themselves, these joint ventures that we call them shell companies, they have Bio-On administrators and directors, the offices are located inside Bio-On so they they don't seem to have any dedicated employees. They don't have any sales of their own. They don't have any production of their own, at least not in 2018. This $50 million almost never t