Shares of SenseTime, a Chinese Artificial Intelligence (AI) company, plummeted after a report from Grizzly Research accused the company of inflating its revenue using a "round-tripping" program.
SenseTime has denied the allegations, stating that the report is "without merit", and filled with "misleading conclusions and interpretations".
The AI firm said that it was reviewing the allegations and would take an "appropriate course of action" to "safeguard the interests of all shareholders”.
It added that the report showed "a lack of understanding of the company’s business model and financial reporting structure, and a lack of thorough reading of the company’s public filings".
It also stated that Grizzly Research had not contacted the company to verify the information before it was published.
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The damning report
Grizzly Research's unflattering report said that AI, in this context, stood for Artificially Inflated revenue, and accused the company of using several revenue fabrication schemes.
The report said that SenseTime either directly or through intermediaries, provided funding to customers. This funding was then used to procure goods for SenseTime, and none of the orders were delivered.
It said that the CEO of Capital Watch, a Chinese financial media company, helped SenseTime by falsifying contributions to third-party companies, "in exchange for revenue of an equal amount without real delivery of product."
The report also mentions several undisclosed parties that are controlled by SenseTime executives and senior employees. SenseTime hides all of this from its balance sheet.
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The company's ongoing problems
SenseTime, once China's most exciting AI prospect, has continued a slow decline towards irrelevancy. In 2019, it was put on the US government's Entity List, which prevented American companies from doing business with it.
The US government said that the company is linked to human rights violations in China's Xinjiang region, mentioning that the firm's facial recognition technology was used to oppress members of the Muslim Uyghur minority in Xinjiang. SenseTime denied these allegations.
Alibaba and SoftBank Group, two prominent investors in SenseTime, have slowly been whittling down their stakes in the company. Alibaba cut its stake down from 5.29 percent to 3.15 percent in July.
The Grizzly Research report says that the firm has deep ties to the Chinese government, which has led to many unprofitable and unpaid contracts.
The research group says that SenseTime will continue its cash burn "unabated despite attempts to stem losses via headcount reductions, while large (and growing) accounts receivables indicate, at best, an inability to collect payment and, at worst, fake revenue".
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