Hudson Labs Red Flags - Dirty Laundry
Welcome to our weekly reports featuring impactful and unusual disclosures as extracted by Hudson Labs' algorithms.
Filings from the week of November 8-12.
Top red flags from last week:
APELLIS PHARMACEUTICALS INC (APLS) Apellis added a going concern issue this quarter. Cash and anticipated sales will only sustain operations until Q3'2022.
WORKHORSE GROUP INC (WKHS) The SEC is looking into unusual trading prior to the US Postal Service contract announcement. .
BEAZER HOMES USA INC (BZH) Beazer has a new credit agreement and has pledged ~1.1B in inventory as collateral.
IMMUNITYBIO INC (IBRX)
10-Q | Market cap: $4B
For a healthcare company, ImmunityBio has an unusual number of related party real-estate transactions:
- In September 2021, the company entered into a sale and leaseback transaction with Nant Capital
- In September 2021, the company entered into an agreement to lease ~20,000sq ft in El Segundo to 420 Nash, LLC.
- In February and May 2021, the company entered into two agreements, leasing ~64,000sq ft in El Segundo to 605 Nash, LLC.
- The company leases space (through a subsidiary) from Duley Road, LLC.
Nant Capital, 605 Nash, LLC, and Duley Road, LLC are all controlled by Dr. Patrick Soon-Shiong, the company’s Executive Chairman and Global Chief Scientific and Medical Officer. Though not disclosed, it would be reasonable to assume 420 Nash, LLC is also controlled by Dr. Soon-Shiong.
The company discloses a number of other related party transactions with NantBio, NantOmics, NantCell, and NantWorks, all of which are controlled by or under common ownership interest of Dr. Soon-Shiong.
The company has various ongoing litigation with Sorrento Therapeutics (SRNE) Therapeutics. In 2019, Sorrento and the company jointly formed NANTibody, LLC. Sorrento alleges that Dr. Soon-Shiong improperly caused NANTibody to purchase an affiliated company.
- “In September 2021, we entered into a sale transaction with Nant Capital, a related party, for a building located at 557 South Douglas Street, El Segundo, California. We subsequently leased back the building for an initial seven-year lease term with an option to extend the lease for two additional seven-year periods.”
- “On September 27, 2021, we entered into a lease agreement with 420 Nash, LLC, a related party, whereby we leased an approximately 19,125 rentable square foot property located at 420 Nash Street, El Segundo, California, to be used primarily for the warehousing and storage of drug manufacturing supplies, products and equipment and ancillary office space.”
- “In February 2021, but effective on January 1, 2021, we entered into a lease agreement with 605 Nash, a related party, whereby we leased approximately 6,883 square feet (the “Initial Premises”) in a two story mixed use building containing approximately 64,643 rentable square feet on 605-607 Nash Street in El Segundo, California.”
- “In February 2017, Altor BioScience Corporation... entered into a lease agreement with Duley Road, a related party that is indirectly controlled by our Executive Chairman and Global Chief Scientific and Medical Officer, for approximately 12,000 rentable square feet of office and cGMP manufacturing facility space in El Segundo, California.”
- “Sorrento Therapeutics, Inc. (“Sorrento”), derivatively on behalf of NANTibody, LLC (“NANTibody”), filed an action in the Superior Court of California, Los Angeles County (the “Superior Court”) against the company, Dr. Soon-Shiong and Charles Kim. The action alleged that the defendants improperly caused NANTibody to acquire IgDraSol, Inc. from our affiliate NantPharma, LLC (“NantPharma”) and sought to have the transaction undone and the purchase amount returned to NANTibody. In 2019, we filed a demurrer to several causes of action alleged in the Superior Court act
- ion, and Sorrento filed an amended complaint, eliminating Mr. Kim as a defendant and dropping the causes of action we had challenged in our demurrer.”
LYELL IMMUNOPHARMA INC (LYEL)
10-Q | Market cap: $3B
In September, Lyell’s founder and executive chairman resigned [1].
The company pays doctors/healthcare providers for consulting services with stock options [2]. While healthcare companies may compensate doctors for consulting service, the practice raises questions about doctor independence in recommending courses of treatments.
The company recognizes certain revenues from their GSK agreement on a cost plus margin. Revenues from GSK have increased by 200% compared to the same quarter in the prior year (and increased by 42% YTD) [3].
The company entered into a new agreement to sublet 18,000sq ft in South San Francisco to a related party [4].
- “For example, in September 2021, Dr. Rick Klausner, who founded our company, resigned from his position as Executive Chairman and ceased to be an employee effective October 1, 2021.”
- “It is possible that governmental authorities will conclude that our business practices, including our relationships with physicians and other healthcare providers, some of whom are compensated in the form of stock options for consulting services provided, may not comply with current or future statutes, regulations, agency guidance or case law involving applicable fraud and abuse or other healthcare laws and regulations.”
- “The research and development services are transferred as the services are performed, with cost used as the measure of progress compared to total estimated cost to complete”... “Revenue recognized in connection with the GSK agreement was $2.6 million and $1.1 million for the three months ended September 30, 2021 and 2020, respectively, and $7.7 million and $5.4 million for the nine months ended September 30, 2021 and 2020, respectively.”
- In September 2021, the Company entered into a sublease with Sonoma Biotherapeutics, Inc. ("Sonoma"), a related party, whereby the Company agreed to sublease approximately 18,000 rentable square feet of space in South San Francisco, California currently leased by the Company.”
XOS INC (XOS)
10-Q | Market cap: $450M
XOS discloses that they enter into cancellable customer agreements [1]. In their earnings release they highlight a significant agreement with FedEx ground (120 trucks), they do not disclose whether this is cancellable [2].
The company leases property from a trust whose beneficiary is the CEO’s mom [3], and has used employees from an entity owned by the CEO to conduct repairs and maintenance at their headquarters [4].
The company continues to have going concern issues, despite funds received from their reverse merger [5].
The company has a previously identified material weakness in internal controls stemming from a SPAC warrant restatement [6].
- “In addition, we have entered and may continue to enter into purchase orders, letters of intent and memorandums of understanding or similar agreements that are not binding on our customer and may also be subject to modification and cancellation provisions.”
- “Executed agreements with FedEx Ground operators to deliver 120 zero emission electric trucks across FedEx Ground operators based in California, New York, New Jersey, Massachusetts, and Texas. Current orders to FedEx Ground operators stand at over 200 vehicles. Manufacturing has commenced on FedEx Ground vehicles and deliveries are expected to begin in the fourth quarter of 2021.”
- “The Company leases property in North Hollywood, California from the Valley Industrial Properties which is owned by the Sunseeker Trust. The Sunseeker Trust is an irrevocable trust with the beneficiary being the mother of the CEO, Dakota Semler.”
- “The Company utilized employees from an entity owned by the CEO in conducting repairs and maintenance at their new headquarters.”
- “We have realized recurring losses from operations and have cash outflows from operating activities that raise substantial doubt about our ability to continue as a going concern.”
- “Following the issuance of the SEC Staff Statement, after consultation with NextGen’s independent registered public accounting firm, NextGen’s management and NextGen’s audit committee concluded that it was appropriate to restate NextGen’s previously issued audited financial statements as of December 31, 2020 and for the period from July 29, 2020 (inception) through December 31, 2020 (the “Restatement”). As part of the Restatement, NextGen identified a material weakness in its internal control over financial reporting.”
CODEX DNA INC (DNAY)
10-Q | Market cap: $300M
In August, the company amended their loan agreement adding three-month minimum revenue covenant. The company was not in compliance with this new covenant as at September 30. In November, the company amended the loan agreement again, moving the start date for this quarterly target to December 31, 2021 [1].
The company continues to have going concern issues [2] and reported a significant deficiency in internal controls (due to a miscategorization of supplier transactions) on their December 2020 10-K [3].
- “In August 2021, the 2021 Loan Agreement was amended to change the monthly compliance reporting to quarterly reporting. For the three months ended September 30, 2021, the Company was not in compliance with the trailing three-month minimum revenue requirement. In November 2021, the Company further amended the 2021 Loan Agreement so that the trailing three-month minimum revenue requirement begins December 31, 2021 once the Company’s cash balance falls below $55 million. ”
- “Our recurring losses from operations have raised substantial doubt regarding our ability to continue as a going concern.”
- “In addition, as of December 31, 2020, we identified a significant deficiency in our internal controls over financial reporting that exists as a result of the technical categorization of transactions with a supplier.”
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