Illegal P2P Lending Business Switched to Crypto Mining
CISO, WISH, FSLY, SES, TMUS, BTBT
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Filings from the week of April 13 - April 19.
With a late 10-K filing, Cerberus Cyber Sentinel Corporation (CISO) disclosed ineffective controls, officer and director resignations, and goodwill impairment. Bit Digital Inc (BTBT), whose P2P lending business was suspended due to criminal activity, switched to crypto mining and reported ineffective controls.
Read the full post on our blog here.
Top Red Flags
FASTLY INC (FSLY) | 8-K | $2.4B - FSLY announced the resignation of its Chief Legal and Trust Officer. The company reported ineffective controls in its most recent annual report. The company also had two board members resign in November 2021. Plus their CFO resigned in May 2021.
FSLY’s stock price is up more than 15% month-over-month.
CONTEXTLOGIC INC (WISH) | 8-K | $1.4B - WISH announced the dismissal of EY as its auditors. EY had given an adverse opinion on WISH’s internal controls in its most recent audit. The company hired PwC as its successor auditors.
T-MOBILE US INC (TMUS) | 8-K | $166B - TMUS dismissed PwC as its auditors and hired Deloitte as a replacement.
SES AI CORP (SES) | 8-K | $2.9B - SES is replacing Withum Smith + Brown with KPMG. SES reported ineffective controls in its 2021 annual report.
CERBERUS CYBER SENTINEL CORP (CISO)
10-K | Market Cap: $616M
Cerberus Cyber Sentinel Corporation (CISO), a cybersecurity services company, filed a notification of late filing (NT 10-K) on April 1, 2022 and filed its 10-K on April 15, 2022.
The late filing came along with several company issues during 2021. The company concluded that its controls were ineffective for the year ended December 31, 2021. [1]
Furthermore, multiple resignations preceded the 10-K filing. Sandra D. Morgan, an Audit Committee Board member, resigned on March 15, 2022 [2] and Bryce Hancock, CISO’s President and COO, resigned on February 15, 2022. [3]
The company also suffered goodwill impairment expenses totaling $22 million, which was more than the company’s 2021 revenue of $15 million. [4]
How did CISO incur so much impairment expense? The company paid approximately $38.5 million to acquire four different companies in 2021. Through these acquisitions, CISO recorded approximately $35 million of goodwill in its balance sheet. [5] In layman’s terms, CISO paid a premium of $35 million for these companies in the hopes that these new businesses will help CISO grow significantly.
Unfortunately, $22 million of that goodwill was written off before the year had even ended. In other words, CISO essentially overpaid for these companies by $22 million. [6]
“Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting described below.”
“Effective March 15, 2022, Sandra D. Morgan resigned from her position as a member of our Board of Directors. At the time of her resignation, Ms. Morgan served on the Audit Committee and the Governance and Nominating Committee.”
“Effective February 15, 2022, Bryce Hancock resigned as our President and Chief Operating Officer.”
Per CISO’s Consolidated Statements of Operations in its 2021 Form 10-K.
Per Note 3 of CISO’s 2021 Form 10-K.
Per Note 6 of CISO’s 2021 Form 10-K.
BIT DIGITAL INC (BTBT)
20-F | Market Cap: $193M
Bit Digital Inc (BTBT), a crypto mining business, reported ineffective controls in its 20-F for the year ended December 31, 2021.
BTBT has quite a turbulent history and has been featured by Bedrock AI before. The company was formerly called Golden Bull Limited and engaged in peer to peer (“P2P”) online lending in China. However, the Chinese government had suspended its lending business due to suspected criminal activity. [1]
Individuals involved with the company, including a former director, were convicted of committing fundraising fraud. Furthermore, Chinese authorities are still in search of BTBT’s former CEO for criminal prosecution. [2] [3]
Somehow, the corporation survived the criminal activity investigation and transformed into a crypto mining business, with mining facilities in the US and Canada. (BTBT also took a shot at the car rental business, but that failed rather quickly). [4] [5]
Despite changing up its business and management, BTBT still disclosed a red flag in its most recent annual report: ineffective controls. [6] The company stated that its ineffective controls related to lack of proper personnel and lack of well-structured IT control policies. [7]
BTBT is audited by Audit Alliance LLP, a firm based in Singapore. The audit firm’s publicly traded clients are mostly based from China. Audit Alliance LLP has never been inspected by the PCAOB. [8]
“We may be subject to penalties as a result of the Chinese government suspension of our former P2P lending business. The Company is currently engaged in the bitcoin mining business, but previously, before the involvement of any of the Company’s current directors, officers or employees, was primarily an online finance marketplace, or “peer-to- peer” lending company, in China that provided borrowers access to loans.”
“On October 24, 2019, the Pudong Branch of the Shanghai Public Security Bureau (the “Bureau”) announced that it was conducting an investigation of Shanghai Dianniu Internet Finance Information Service Co. Ltd, which was a variable interest entity (VIE) of the Company, for suspected illegal collection of public deposits. The Bureau took criminal enforcement measures against 17 suspects in the case and detained at least six of those suspects.”
“On March 24, 2020, the Bureau announced that it had transferred seven suspects to the procuratorates for criminal prosecution and took criminal action against 14 defendants and is searching for our former CEO as of the date of this report. While the Company has not been subject to any enforcement actions or investigations, nine persons, including a former director of the Company, have been found guilty of fund-raising fraud or illegally collecting public deposits by the People’s Court of Shanghai Pudong New District, and were sentenced to imprisonment and the confiscations and return of all the illegal gains, which may or may not include assets of the Company. The Company’s current management believes that its former Chief Financial Officer, as well as members of the VIE’s management, may have been the subject of these proceedings.”
“The Company commenced its mining operations in February 2020 and disposed of our former peer-to-peer lending business (which ceased operation in October 2019) and the former car rental business in PRC on September 8, 2020.”
BTBT acknowledged in its 2021 20-F that crypto mining was banned in China during 2021. The company completed the migration of all of its China-based miners into North America by September 2021.
“As of December 31, 2021, our disclosure controls and procedures were not effective and management determined that we did not maintain effective internal control over financial reporting due to certain significant deficiencies and material weaknesses.”
“Based on this assessment, management determined that, as of December 31, 2021, we did not maintain effective internal control over financial reporting due to the existence of the following significant deficiencies and material weaknesses: Lack of a functional internal audit department or personnel that monitors the consistencies of the preventive internal control procedures and, as a result, the Company may not be able to discover the existence of problems and prevent the problematic behavior in internal control; Lack of well-structured IT general control policies and procedures for documentation of program changes, periodic transaction log reviews; control quality evaluations, backup restoration tests and centralized anti-virus detections, which may result in failure to accurately collect operational data to prepare the financial statements.”
https://rasr.pcaobus.org/Firms/FirmSummaryPublic.aspx?FirmID=DEBCBE6C9110455CF298BCE5B5B20F51
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