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 August 23 - 27, 2021
RIOT BLOCKCHAIN INC (RIOT)
10-Q | Market cap: $3.6B
Riot’s revenues have increased considerably this year ($34M for the quarter ended June 30, 2021, compared to $2M for the same quarter in the prior year), however impairment of cryptocurrencies of $17.5M this quarter exceeded 50% of total revenues. [1]
In May, Riot purchased 100% of Whinstone US, one of the US’s largest Bitcoin mining and hosting facilities, for $360M. [2] Whinstone has guaranteed fixed electricity supply through a Power Supply Agreement. During the February 2021 Texas storms, they capitalized on volatile energy prices reselling $125M of power back to the grid. [3] This one time gain was not excluded from pro forma statements showing combined results for the two companies over this period.
The company has a new material weakness in internal controls due to a lack of segregation of duties and access restrictions to financial records. [4]
“Impairment of cryptocurrencies for the three months ended June 30, 2021 was $17.5 million, arising from the decline in Bitcoin prices during the period.”
“Acquisitions Acquisition of Whinstone US, Inc. On May 26, 2021, the Company acquired 100% of the equity interests of Whinstone US, Inc., the owner and operator of what is believed to be North America’s largest Bitcoin mining and hosting facility, for approximately $460 million. ”
“In April 2021, under the provisions of the TXU Power Supply Agreement, Whinstone entered into a Qualified Scheduling Entity (“QSE”) Letter Agreement, which resulted in Whinstone being entitled to receive approximately $125.1 million for its power sales during the February winter storm, all under the terms and conditions of the QSE Letter Agreement.”
“Based on our assessment, as of June 30, 2021, we concluded that our internal control over financial reporting is not effective due to the following material weaknesses identified: 1) The Company did not design and/or implement user access controls to ensure appropriate segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to the appropriate Company personnel.“
COUPANG INC (CPNG)
10-Q | Market cap: $52B
The company was not in compliance with its long-term loan facility agreement at quarter-end as building and inventories pledged as collateral on the loan were extensively damaged in a fire in their Deokpyeong fulfillment centre. [1]
The loan was amended during the ‘cure period’, bringing the company back onside, pledging $212m of land and buildings as collateral for the $177M three-year term loan. [2]
The fire, which occurred in June 2021, resulted in a $285M write-off. [3]
In May 2021, the company’s Korean subsidiary became subject to additional disclosures under the Korean Monopoly Regulation and Fair Trade Act. [4] The company is currently being investigated for violations of unfair trade practices under this act. [5]
“As a result of the FC Fire described in Note 1 — "Basis of Presentation and Summary of Significant Accounting Policies," the building and inventories pledged as collateral were extensively damaged resulting in collateral falling below the required minimums.”
“The amendment, which took place within the cure period, subsequently resulted in the Company being in compliance with its term loan facility agreement.During August 2021, the Company entered into a new $177 million three-year term loan agreement. The Company pledged $212 million of certain land and buildings as collateral against the loan. The loan bears interest at a fixed rate of 3.155%.”
It resulted in a material write-off of $285 million for the six months ended June 30, 2021.”... “In addition, our business was negatively impacted by, but not limited to, delay in delivery, response to investigations in relation to the fire, and compensation for damages caused.”
“As of May 1, 2021, our Korean subsidiary, Coupang Corp., and a group of companies affiliated with it have been designated as a business group subject to disclosure under the Korean Monopoly Regulation and Fair Trade Act. Such a designation imposes additional corporate governance and public disclosure requirements on this group of affiliated companies. “
“We are also subject to investigations by Korean government authorities, including an investigation alleging that we violated the Korean Act on Fair Transactions in Large Retail Business and the Korean Fair Trade Act. The complaint claimed, among other issues, that we engaged in unfair returns of LG Household & Healthcare (“LGHH”) products, illegally requested that LGHH disclose confidential business information, and unfairly refused to do business with LGHH.”... “Recently, the KFTC initiated an investigation into a potential violation of the Korean Fair Trade Act, including alleged unfair trade practices in our dealings with suppliers or merchants and the providing of preferential treatment for private labelled products sold by CPLB.”
PELOTON INTERACTIVE INC (PTON)
10-K | Market cap: $30B
The company issued a product recall in May 2021 following a US Consumer Product Safety Commission issuing a consumer warning in April 2021 for their Tread+ product. [1]
Costs associated with Tread+ product recalls totaled about $100M for the year, including $81M in estimated returns and $16M other costs (including write-downs and repairs). [2]
No accruals have been made for DOJ, DHS, or SEC investigations, nor have any accruals been made for various lawsuits filed relating to the Tread+ recall.
Inventory process issues (specifically around inventory counts and reporting) have resulted in a new material weakness in internal controls. [3]
“Product recall update In April 2021, the U.S. Consumer Product Safety Commission (“CPSC”) unilaterally issued a warning to consumers about the safety hazards associated with the Tread+.”... “After further discussion with the CPSC, on May 5, 2021, we decided to issue a voluntary product recall of our Tread+, which we are conducting in collaboration with the CPSC.”
“As a result of these recalls, the Company accrued for a reduction to connected fitness products revenue for actual and estimated future returns of $81.1 million for the year ended June 30, 2021, and a return reserve of $40.8 million is included within Accounts payable and accrued expenses in the accompanying consolidated balance sheets related to the impacts of the recall.The estimated returns reserve is primarily based on historical and expected product returns. The Company recorded costs in connected fitness products cost of revenue associated with inventory write-downs, logistic costs, and recall-related hardware development and repair costs of $15.7 million.”
In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Peloton Interactive, Inc. (the Company) has not maintained effective internal control over financial reporting as of June 30, 2021, based on the COSO criteria. “... “Management has identified a material weakness in the Company’s inventory process.”
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