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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 July 12 - 16,2021.



10-K | Market cap: $280M

The company is dependent on their audio streaming contract with Tesla, comprising 36% and 60% of consolidated revenues in the current and prior year, respectively. Tesla may terminate the agreement for convenience at any time. [1]

The company acquired Courtside Group (dba PodcastOne) in July 2020 for $16.1M, accounting for an increase of advertising revenue to 32% of total revenues (6% in prior year). [2]

The company continues to have material weaknesses in internal controls in multiple areas, including controls surrounding acquisition accounting. [3]

The company also continues to have continuing going concern issues due to a history of operating losses and working capital deficiency of $15.7M at year-end. [4]

  1. “Our business is dependent, and we believe that it will continue to depend, on our customer relationship with Tesla, which accounted for 36% of our consolidated revenue for the year ended March 31, 2021, and 60% of our consolidated revenue for the year ended March 31, 2020.”... “Tesla may also terminate our agreement for convenience at any time.

  2. “With the acquisition of PodcastOne, our advertising revenue substantially increased as an overall percentage of our total revenue from 6% to 32%.”... “As described in Notes 1 and 4 to the consolidated financial statements, on July 1, 2020 the Company acquired 100% of the equity interests of Courtside Group, Inc. (dba PodcastOne) for net consideration of $16.1 million including $1.1 million of contingent consideration and on December 22, 2020 acquired 100% of the equity interests of Custom Personalization Solutions, Inc. ($CPS) for net consideration of $8.4 million.”

  3. “(iii)our controls were not adequately designed to allow management to identify errors in the accounting for business combinations. Specifically, these deficiencies resulted in errors related to the determination of purchase consideration, the classification of earnouts, and identification of income tax assets and liabilities resulting from business combinations.”

  4. “As reflected in its consolidated financial statements included elsewhere herein, the Company has a history of losses, incurred a net loss of $41.8 million, and utilized cash of $9.5 million in operating activities for the year ended March 31, 2021, and had a working capital deficiency of $15.7 million as of March 31, 2021. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date that these financial statements are filed. “



10-Q | Market cap: $900M

The company has significant differences reported between EBITDA and Adjusted EBITDA:

The primary drivers of the difference are adjustments of $22.5M related to revenue reductions arising from business combinations, $59.9M related to the loss on warrant liabilities, and $73.3 million related to the loss on the sponsor side letter and common stock contingent liability. [1]

The company continues to have unremediated weaknesses in internal controls arising from issues with warrant accounting in their February 2021 annual statements. [2]

  1. “EBITDA was a loss of $141.6 million for the three months ended May 31, 2021, a $161.8 million decrease compared to $20.2 million for three months ended May 31, 2020. EBITDA margins decreased to a negative 214% for first quarter of fiscal 2022 compared to 24% in the prior year. The decrease in EBITDA and EBITDA margin was primarily related to the $22.5 million amortization of the fair value adjustment to deferred revenue related to the purchase price allocation in the Business Combination, loss of $59.9 million for the fair value adjustment as of May 31, 2021 for the warrant liability and loss of $73.3 million associated with the fair value adjustment as of May 31, 2021 for the contingent consideration liability related to the Sponsor Side Letter and restricted Series B-1 and B-2 common stock. “

  2. “As previously disclosed, in connection with our financial statement close process for the year ended February 28, 2021, we continued to report a material weakness in our internal control over financial reporting related to the accounting for warrants. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As noted in our 2021 Form 10-K for the post-combination company, our remediation plan was implemented as of February 28, 2021. However, the material weakness was not considered remediated because the controls needed to operate for a sufficient period of time and management needed to test that the controls were operating effectively in order to conclude such material weakness was remediated. “


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