$MT, $ML, $CANO, $DCT, $SRNE, $MARA, $BALY, $SMFR
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Filings from the week of March 9 - March 15.
Arcelormittal ($MT) changes up audit firms and segment reporting, Sorrento Therapeutics ($SRNE) attributes ineffective controls to the CFO’s death, Crypto mining company Marathon Digital Holdings ($MARA) reports ineffective controls in its revenue recognition.
Top Red Flags
DUCK CREEK TECHNOLOGIES INC ($DCT) | 10-Q | $2.5B - DCT announced the resignation of Vincent Chippari as CFO. This is the fourth resignation from DCT’s C-suite or Board of Directors in 2022, which include the resignations of its COO and Chief Revenue Officer (CRO).
MONEYLION INC ($ML) | 10-Q | $485M - On March 10, 2022, the same day as ML’s FY 2021 earnings release, the company reported a restatement of its consolidated statement of operations for the three months ending September 30, 2021, regarding the accounting for convertible debt and the exercise of warrants. ML also found a SECOND error involving diluted income per share calculations.
CANO HEALTH INC ($CANO) | 10-K | $3B - CANO reported a restatement in its 2019 - 2021 financials due to the misapplication of revenue recognition accounting standards (ASC 606) to Medicare contracts. CANO filed their 10-K late, just one day before the 15-day NT extension deadline.
SEMA4 HOLDINGS CORP ($SMFR) | 8-K | $670M - SMFR reported multi-year restatements related to the timing of recognition of cost of sales and the classification of expenses.
BALLY'S CORP ($4BALY) | 8-K | $1.6B - BALY's CFO is resigning to "pursue other interests and opportunities".
ARCELORMITTAL ($MT)
20-F | Market Cap: $28B
Multinational steel company ArcelorMittal modified the structure of its segment information, which led to the recasting of its operating segments’ results. [1]
One of MT’s operating segments is ACIS, which has facilities located in Ukraine, South Africa, and Kazakhstan. [2] This segment had consistently declining revenues from 2018 through 2020. Revenues in 2020 were recast with a $136M increase. Revenues at this segment increased by over 66% in 2021, the year of the presentation change. [3]
Due to Russia’s invasion of Ukraine, MT announced its indefinite suspension of its operations in its Kryvyi Rih steel plant on March 3, 2022. [4]
The CFO of ArcelorMittal Kryvyi Rih was placed under an investigation by the Prosecutor General’s Office and Security Service of Ukraine for alleged tax evasion and official forgery on November 17, 2021. This investigation seems to be pushed to the backburner due to Russia's invasion. [5]
ArcelorMittal’s audit relationship with Deloitte is scheduled to end on May 4, 2022. The Board proposed the appointment of EY as the new external auditor for 2022. [6]
- “As from April 1, 2021, ArcelorMittal implemented changes to its organizational structure whereby primary responsibility for captive mining operations whose output is mainly consumed by their respective steel segments has been transferred to such segments…. Accordingly, the Company modified the structure of its segment information in order to reflect changes in its approach to managing its operations and segment disclosures have been recast to reflect this new segmentation.”
- “ACIS produces a combination of flat, long and tubular products. Its steel facilities are located in South Africa, Ukraine and Kazakhstan. The raw material supply of the ACIS operations includes sourcing from iron ore captive mines in Kazakhstan and Ukraine and coal captive mines in Kazakhstan.”
- Segment information according to AccelorMittal’s FY 2020 20-F and FY 2021 20-F.
- “On March 3, 2022, ArcelorMittal announced its decision to idle its steelmaking operations in Kryvyi Rih, Ukraine in order to ensure the safety and security of its employees and assets. The Company has been evaluating the situation on a daily basis and production had previously been reduced with the plant operating at a technical minimum (approximately one-third of its normal production levels).”
- “On November 17, 2021, the Prosecutor General’s office and the Security Service of Ukraine notified the Chief Financial Officer of ArcelorMittal Kryvyi Rih that he had been placed under an investigation on suspicion of alleged tax evasion and official forgery, and (b) on January 4, 2022 the Prosecutor General’s office, acting pursuant to a ruling of the Shevchenkivsky District Court of Kyiv dated November 30, 2021 blocked the accounts of ArcelorMittal Kryvyi Rih with three banks in Ukraine. ArcelorMittal Kryvyi Rih appealed the blocking of these accounts; as of the date of these financial statements, by court order the restrictions on two of the three accounts have been partially lifted to allow the payment of wages, taxes and other mandatory payments.”
- “Change in certifying accountant On February 9, 2021, following a tender process to appoint an external auditor for the period beginning January 1, 2022, the Audit and Risk Committee recommended to the Board that it propose to the AGM to take place on May 4, 2022 (the "2022 AGM") the appointment of Ernst & Young S.A. (“EY”) as the new external auditor of ArcelorMittal for the financial year 2022, and on that date the Board resolved to make such proposal, which appointment would become effective upon ratification at the 2022 AGM. Accordingly, the Company’s audit relationship with Deloitte Audit S.à r.l. (“Deloitte”) would cease on the date of the 2022 AGM.”
SORRENTO THERAPEUTICS INC (SRNE)
10-K | Market Cap: $740M
Biotechnology company SRNE attributed the company’s ineffective controls in virtually all business processes, including revenue, business combinations, investments, debt, derivative liabilities, and leases to the unexpected death of its CFO, Najjam Asghar. [1]
The company is struggling to stay afloat due to its recurring negative cash flows. Management is making efforts to fund its operations but cannot conclude that such plans will be effectively implemented within a year. [2]
If SRNE is unable to raise capital, it may have to scale back, delay, or discontinue some of its product lines. [3]
- “As a result of our former Chief Financial Officer`s passing as well as other considerations, management concluded that we did not employ sufficient accounting resources with appropriate experience and technical expertise to effectively execute controls over certain judgmental accounting areas. As a result, certain of our control activities in the areas of revenue, business combinations, investments, debt, derivative liabilities and leases did not operate effectively and have been deemed deficient and the combination of the aforementioned deficiencies represents a material weakness in our internal control over financial reporting.”
- “The Company has negative working capital and recurring losses from operations, recurring negative cash flows from operations and substantial cumulative net losses to date and anticipates that it will continue to do so for the foreseeable future as it continues to identify and invest in advancing product candidates, as well as expanding corporate infrastructure. The Company has plans in place to obtain sufficient additional fundraising to fulfill its operating and capital requirements for the next 12 months. The Company’s plans include continuing to fund its operating losses and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. Although management believes such plans, if executed, should provide the Company sufficient financing to meet its needs, successful completion of such plans is dependent on factors outside of the Company’s control. As such, management cannot conclude that such plans will be effectively implemented within one year after the date that the financial statements are issued. As a result, management has concluded that the aforementioned conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.”
- “If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable, the Company may have to significantly delay, scale back or discontinue the development or commercialization of one or more of its product candidates.”
MARATHON DIGITAL HOLDINGS INC ($MARA)
10-K | Market Cap: $2.3B
Cryptocurrency mining company MARA reported ineffective controls related to its “processes around revenue recognition and digital assets.” [1]
These deficient controls affect its financial IT applications, digital currency mining equipment and underlying accounting records. [1]
On December 17, 2021, a class action lawsuit was filed in the US District Court against the company and present and former senior management regarding its Hardin, Montana data center facility. [2] The company had executed a Data Facility Services Agreement, which suspiciously included the issuance of 6 million restricted common stock to certain parties. Along with the class action lawsuit, this agreement triggered an investigation from the SEC. [3]
- “The following material weakness have been identified and included in “Management’s Annual Report on Internal Control Over Financial Reporting”: The Company did not design and/or implement user access controls to ensure appropriate segregation of duties or program change management controls for certain financially relevant systems impacting the Company’s processes around revenue recognition and digital assets to ensure that IT program and data changes affecting the Company’s (i) financial IT applications, (ii) digital currency mining equipment, and (iii) underlying accounting records, are identified, tested, authorized and implemented appropriately to validate that data produced by its relevant IT system(s) were complete and accurate.”
- “On December 17, 2021, a putative class action complaint was filed in the United States District Court for the District Court of Nevada, against the company and present and former senior management. The Complaint alleges securities fraud related to the disclosures of an SEC investigation previously made by the Company on November 15, 2021. Plaintiff Tad Schaltre served the Complaint on the Company on March 1, 2022.”
- “During the quarter ended September 30, 2021, the Company and certain of its executives received a subpoena from the SEC to produce documents and communications concerning the Hardin, Montana data center facility described in our Form 8-K dated October 13, 2020. On October 6, 2020, the Company entered into a series of agreements with multiple parties to design and build a data center for up to 100-megawatts in Hardin, MT. In conjunction therewith, the Company filed a Current Report on Form 8-K on October 13, 2020. The 8-K discloses that, pursuant to a Data Facility Services Agreement, the Company issued 6,000,000 shares of restricted Common Stock, in transactions exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. We understand that the SEC may be investigating whether or not there may have been any violations of the federal securities law. We are cooperating with the SEC.”
- “On February 18, 2022, a shareholder derivative complaint was filed in the United States District Court for the District of Nevada, against current and former members of the Company’s board of directors and senior management. The complaint is based on allegations substantially similar to the allegations in the December 17, 2021 putative securities class action complaint, related to the Company’s disclosure of an SEC investigation previously made by the Company on November 15, 2021. On March 4, 2022, the Complaint was served on the Company.”
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