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 15-19.
Top red flags from last week:
EMBARK TECHNOLOGY INC (EMBK) Embark announced the dismissal of Deloitte as auditors the same day they announced a restatement of temporary equity. They also admitted that they should have used the term "restatement" rather than "revision" in their recently filed 10-Q. Oops!
PRA GROUP INC (PRAA) PRA Group has dismissed their auditors, KPMG (effective after their Dec '21 statements have been filed). They did not announce a newly appointed firm.
IDEANOMICS INC (IDEX) Ideanomics announced a change in auditors from BFB to BDO in September. Last week they filed an NT 10-Q indicating a previous issue with the accounting treatment of a subsidiary. They are in the process of refiling this year's quarterly statements.
VELO3D INC (VLD)
10-Q | Market cap: $2B
3D printer sales are the largest component of Velo3D’s sales to their largest customer, SpaceX, and delivery of those systems dwindled to one in 2021. New SpaceX orders are for a system still under development [1].
Velo3D identified material weaknesses in internal controls resulting in adjustments/restatements to inventory, other current assets, accrued expenses, current liabilities, and various equity accounts [2].
The material weaknesses identified include a lack of segregation of duties, insufficient finance staff with appropriate knowledge and expertise, and a lack of IT controls [3].
These weaknesses could result in misstatements in substantially all accounts [4].
Strangely, the company filed a NT 10-Q (a notification of inability to file on time) just minutes before filing their 10-Q.
- “SpaceX revenue is comprised of 3D Printer sales, which is the largest component and is recognized in the quarter that the shipment occurs, and revenue from Support Services which is significantly smaller and is recognized over the service period. SpaceX ordered its first Sapphire system in 2018, eleven Sapphire systems in 2019, and one Sapphire system in 2021. Of these 13 3D Printers, we delivered one in 2018, seven in 2019, four in 2020 and one in 2021.” … “In June 2020, we received an order from SpaceX for ten of our next generation Sapphire XC systems, which are currently under development, as discussed above under “Commercial Launch of the Sapphire XC System”. We anticipate that we will ship the first Sapphire XC system at the end of 2021, with the majority of the shipments under this order occurring in 2022.”
- “These material weaknesses resulted in audit adjustments to inventory, other current assets, accrued expenses and other current liabilities, redeemable convertible preferred stock, additional paid-in capital and accumulated deficit, which were recorded prior to the issuance of the financial statements as of and for the years ended December 31, 2019 and 2020, and to contingent earnout liabilities, which were recorded prior to the issuance of the financial statements as of and for the interim period ended September 30, 2021.”
- “Specifically, we did not maintain a sufficient complement of personnel with an appropriate degree of internal controls and accounting knowledge, experience, and training commensurate with our accounting and financial reporting requirements.”... “We did not design and maintain effective controls over the segregation of duties related to journal entries and account reconciliations.”... “We did not design and maintain effective controls over certain information technology (“IT”) general controls for information systems that are relevant to the preparation of our financial statements.”
- “Additionally, these material weaknesses could result in a misstatement of substantially all of our accounts or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.”
ATI PHYSICAL THERAPY INC (ATIP)
10-Q | Market cap: $800M
ATI recognized a $200M goodwill/intangible impairment charge in the current quarter during Q2 2021 [1], in addition to a $433M impairment recognized last quarter [2].
The company has been named in lawsuits alleging false and/or misleading information in their SPAC merger proxy materials [3].
ATI has had two recent C-suite resignations. Their CEO resigned effective August (disclosed August 9, we believe this counts as an “effective immediately” resignation), and their CHRO resigned effective July 23 [4].
- “As a result of the changes in these assumptions, we recognized a $200.6 million non-cash impairment charge during the three months ended September 30, 2021 in the line item goodwill and intangible asset impairment charges in the Company's condensed consolidated statements of operations, which represents the difference between the estimated fair value of the Company’s trade name indefinite-lived intangible asset and its carrying value.”
- “As a result of the analysis, we recognized a $433.2 million non-cash impairment charge during the period ended June 30, 2021 in the line item goodwill and intangible asset impairment charges in the Company's condensed consolidated statements of operations, which represents the difference between the estimated fair value of the Company’s single reporting unit and its carrying value.”
- “The Burbige/Nie and City of Melbourne complaints generally allege that the proxy materials for the FVAC/ATI merger, as well as other ATI disclosures (including the press release announcing ATI’s financial results for the first quarter of 2021), were false and misleading”
- “Effective July 23, 2021, Cedric Coco, Chief Human Resources Officer ("CHRO"), resigned from the Company. ”.. “Effective August 7, 2021, Labeed Diab stepped down from his positions as Chief Executive Officer ("CEO") of the Company and as a member of the board of directors of the Company.
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