Hudson Labs Red Flags - Dirty Laundry
Welcome to our reports featuring impactful and unusual disclosures as extracted by Hudson Labs' algorithms.
Filings from the week of August 16 - 20,2021
QUANTUM-SI INC (QSI)
10-Q | Market cap: $1.1B
The company has new disclosure relating to an August 2020 ransomware attack encrypting files and breaching the company’s Amazon Web Services account. They chose not to pay the 50 bitcoin ransom, believing that no files to have been extracted, with sufficient back-up of encrypted files. As the company did not believe employee data or other personal information was extracted, they did not initiate regulatory or breach notifications for the incident. [1]
In June 2021, the company adopted a dual class structure and has become a “controlled company” and is exempt from certain listing rules, including having a majority of independent directors. [2]
The company has a number of transactions with 4C, a company under common control, including outsourcing their accounting and finance, sharing capital assets, subleasing space, and entering into administrative and and management agreements. [3]
The outsourcing of the accounting function to 4C is the cause of one of the company’s material weaknesses in internal control (the other relates to accounting for warrants). [4]
- “In August 2020, we discovered ransomware on a server along with a ransom note seeking 50 bitcoin of approximately $500,000, to restore various files encrypted by the intruder. We also discovered that our Amazon Web Services account had been breached.“... “Our investigation found evidence of snooping within our network, but concluded that no data was exfiltrated and we did not pay ransom to the attacker because the documents that were encrypted by the attacker were sufficiently backed up. The investigation further confirmed that no employee data or other personal information was accessed so the incident did not prompt regulatory or breach notification requirements.”
- “As a consequence of filing the Restated Certificate, the Company adopted a dual class structure, comprised of the Company’s Class A common stock, which is entitled to one vote per share, and the Company’s Class B common stock, which is entitled to 20 votes per share.”... “we are a “controlled company” within the meaning of the Nasdaq corporate governance standards and are not subject to the requirements that would otherwise require us to have: (i) a majority of independent directors; (ii) a compensation committee comprised solely of independent directors; and (iii) director nominees selected, or recommended for our board of director’s selection, either by a majority of the independent directors or a nominating committee comprised solely of independent directors.”
- “ The Company utilizes and subleases other office and laboratory spaces from 4Catalyzer Corporation (“4C”), a company under common ownership.”... “The Company also made payments to 4C to prefund the acquisition of certain shared capital assets, reflected in Other assets”... “The ARTSA also provided for 4C to perform certain services for the Company and each other participant company such as monthly administrative, management and technical consulting services to the Company which were pre-funded approximately once per quarter.”
- “ Legacy Quantum-Si outsourced its accounting and financial reporting to 4Catalyzer Corporation (“4C”), a medical technology incubator controlled by Dr. Rothberg, and as of and during the years ended December 31, 2020 and 2019, did not have its own financing function or finance or accounting professionals that had the requisite experience or were in a position to appropriately perform the supervision and review of the information received from 4C and assess its reasonableness and accuracy.
FINANCE OF AMERICA COMPANIES INC (FOA)
10-Q | Market cap: $300M
The company has a non-revolving facility commitment to sell related parties a beneficial interest in the Mortgage Servicing Rights income. [1]
During the quarter, the company securitized certain interests in residential mortgage loans, with the securitization meeting the definition of a VIE. Results for the quarter include a $12.5M gain on sale related to this transaction. [2]
Provisions for repurchases declined by $8M and 82% during the quarter due to a drop in refinance volume. [3]
- “ In 2020, the Company entered into a nonrevolving facility commitment with various related parties, to sell beneficial interests in the servicing fees generated from its originated or acquired MSRs. Under these agreements, the Company has agreed to sell excess servicing income or pay an amount equal to excess servicing income to third parties, in each case, taking into account cost of servicing and ancillary income related to the identified MSRs in exchange for an upfront payment equal to the purchase price or fair value of the identified MSRs. These transactions are accounted for as financings.”
- “In June 2021, FAM executed the HAWT 2021-INV1 securitization, where FAM’s beneficial interest in the securitization is limited to its U.S. Risk Retention Certificates, a 5% eligible vertical interest in the Trust. The Company determined that the securitization structure meets the definition of a VIE…” “ The transfer of the loans to the VIE was determined to be a sale.”... “The Company recorded a gain on sale on the securitization of $12.5 million.”
- “Provision for repurchases decreased $8.0 million or 81.6% due to a drop in refinance volume that drives premium recapture.”
ROBINHOOD MARKETS INC (HOOD)
10-Q | Market cap: $41B
Robinhood just filed their first 10-Q since becoming a public company.
The company has a $61.5M accrual related to FINRA matters. This is in addition to the $65M SEC civic penalty levied in December 2020. [1]
The company has reached a ‘settlement in principle’ NYDFS’s Consumer Protection and Financial Enforcement Division relating to anti-money laundering and cyber-security issues, for which the company expects to be required to pay $30M and engage a monitor. [2]
Legal and tax settlement add-backs to Adjusted EBITDA were $15M and $55M for the 3 and six months ended June 30, 2021, respectively.
The company has a dual class share structure, with Class A share having one one vote per share and Class B (founders and related parties) with ten votes per share. [3]
- “We have also accrued as accounts payable and accrued expenses on the unaudited condensed consolidated balance sheets at June 30, 2021 of (i) a $57.0 million fine and a $4.5 million customer restitution to be paid in connection with an agreement RHF reached with FINRA to resolve, on a no admit, no deny basis, the FINRA Matters, and (ii) $30.0 million settlement in principle, subject to final documentation, in connection with the resolution of an NYDFS Matter.”
- “On July 24, 2020, the New York State Department of Financial Services (“NYDFS”) issued a report of its examination of RHC citing a number of “matters requiring attention” focused primarily on anti-money laundering and cybersecurity-related issues. The matter was subsequently referred to the NYDFS’s Consumer Protection and Financial Enforcement Division for investigation. In March 2021, the NYDFS informed RHC of certain alleged violations of applicable (i) anti-money laundering and New York Banking Law requirements, including the failure to maintain and certify a compliant anti-money laundering program, (ii) notification provisions under RHC’s Supervisory Agreement with the NYDFS, and (iii) cybersecurity and virtual currency requirements, including certain deficiencies in our policies and procedures regarding risk assessment, lack of an adequate incident response and business continuity plan, and deficiencies in our application development security. RHC and the NYDFS have reached a settlement in principle with respect to these allegations, subject to final documentation, in connection with which, among other things, RHC expects to pay a monetary penalty of $30.0 million and engage a monitor.”
- “On August 2, 2021 (the “IPO Closing Date”), we amended and restated our certificate of incorporation to effect a reclassification of our outstanding common stock into Class A common stock (with one vote per share) and, with respect to shares held by our founders and certain of their related entities, Class B common stock (with ten votes per share).”
