September 19, 2021

Volume XI, Number 262

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September 17, 2021

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The Dog Ate My Financials: Dissembling Filers Sanctioned by the SEC

On Thursday, April 29, 2021, the U.S. Securities and Exchange Commission (“SEC”) charged eight public companies for failing to disclose (in requests for permission to file periodic disclosure reports including financials late) that the delays were caused by anticipated restatement or correction of previously filed financial statements. In each case, the company had filed a Form NT (technically a “Form 12b-25 Notification of Late Filing”) as permitted by Rule 12b-25 adopted under the Securities Exchange Act of 1934, as amended. None of the eight companies had made full disclosures of their financials to the SEC as required by the Form. Of particular interest is that the SEC used data analytics to identify the eight “miscreants.” As the Acting Director of the SEC’s Division of Enforcement said, “we will continue to use data analytics to uncover difficult to detect disclosure violations.”

Public companies are required to file a Form NT when requesting additional time to file a periodic report (Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K). The Form NT must be filed no later than one day after the day the Report is due; this gives the company five additional calendar days to file a 10-Q and 15 additional calendar days to file a 10-K. The Form NT must explain why the company is unable to file on time and state whether the company anticipates “any significant change in results of operations from the corresponding period for the last fiscal year will be reflected by the earnings statements to be included” in the delayed Report. If any significant change is anticipated, the company must “explain …the change, both narratively and quantitatively, and, if appropriate, state the reasons why a reasonable estimate of the results cannot be made.”

Filing Sanctions Imposed

As the Acting Director of Enforcement also noted, “[i]n these cases, due to the [eight] companies’ failure to include required disclosure in their…Form [NT’s], investors relying on the deficient Forms NT were kept in the dark regarding the unreliability of the company’s financial reporting or anticipated material changes in operating results.”

The eight companies, the financials they failed to disclose, and the sanctions imposed under their respective settlements with the SEC are as follows:

  1. Fortem Resources, Inc.: Fortem is a Nevada corporation based in Vancouver, British Columbia, involved in the acquisition, exploration, and development of oil and gas. Fortem claimed in its Form NT that it was “still compiling information necessary to complete the preparation of its financial statements” for a Form 10-Q due July 15, 2019. On July 15, 2019, the company filed a Form 8-K Current Report disclosing that its financial statements for all of 2018 and the first three quarters of 2019 could not be relied upon because its FORMER auditor had “incorrectly reported that four companies acquired were not variable interest entities,” which in fact they were. The change resulted in a 52% increase in anticipated quarterly loss in the first quarter of FY 2020 compared to the 2019 quarter. Fortem agreed to pay $25,000 as a civil penalty.

  2. TruTankless, Inc.: TruTankless, a Nevada corporation based in Scottsdale, Arizona, sells electric tankless water heaters. On August 15, 2019, TruTankless filed a Form NT stating that it could not timely file the Form 10-Q for the 2019 FY second quarter because it had “encountered some difficulty in compiling necessary disclosures and compilation of its financial statements.” On August 19, 2019, the company filed its Form 10-Q including a restatement of the financial statements for the first quarter to correct the accounting for the conversion of $110,000 of convertible promissory notes at $0.25 instead of the $1.00 originally provided, resulting in a loss of $126,813 and materially increasing the first-quarter loss to $1,261,643. TruTankless agreed to pay a $25,000 penalty.

  3.  ShiftPixy, Inc.: ShiftPixy, a Wyoming corporation based in Miami, Florida, is involved in human capital management services. On July 15, 2019, the company filed its Form NT “due to …difficulty in completing and obtaining required financial and other information” to complete its third-quarter Form 10-Q. On July 22, 2019, ShiftPixy filed a Current Report on Form 8-K disclosing that its second-quarter 10-Q could not be relied upon due to the “mistaken issuance of shares in a conversion at a price less than the original price” AND “the resulting issuance of additional shares,” which caused a material misstatement. The corrections caused a 175% increase in the 2019 third-quarter loss compared to the 2018 third quarter. The company paid a $25,000 penalty.

  4. Rokk3r, Inc.: Rokk3r, a Nevada corporation based in Miami, Florida, provides consulting services. In May 2020 the company went private. On November 14, 2019, the company filed a Form NT in which it stated: “due to its delay in compiling financial information required to be included in its Quarterly Report on Form 10-Q.” On November 18, 2019, the company filed a Current Report on Form 8-K on which it disclosed that its financial statements for the first and second quarter of 2019 “should not be relied upon” because the company had “incorrectly accounted” for variable interest entities. The 8-K disclosed material changes to the company’s total assets, total revenues, net loss, and stockholder equity. The SEC determined that the Form NT was deficient and that the 8-K was late. The company agreed to a $50,000 penalty.

  5. Daniels Corporate Advisory Company, Inc.: Daniels, a Nevada corporation based in Forest Hills, Queens, New York, engages in corporate financial consulting AND refurbishes, sells, and rents heavy-duty trucks. On July 15, 2019, Daniels said it could not file its 10- Q for the FY 2019 second quarter because “the Registrant has been unable to complete all aspects of its Form 10-Q.” On July 22, 2019, Daniels filed its second-quarter 10-Q and an amended Form 10-Q for the 2019 FY first quarter, as part of disclosing that its previous first quarter could no longer be relied upon because management discovered that an overstatement of sales and the cost of sales were wrongly reported. The company anticipated that its second-quarter financial results would include $1,096 million in revenue from its truck-related business, a material difference from the lack of any revenue from that line of business reported as its financial results for the second quarter of FY 2018. Daniels agreed to pay a penalty of $25,000.

  6. HDQA Elderly Life Network, Inc.: HDQA, a Nevada corporation based in Rosemount, California, provides senior housing and retirement services and products in mainland China. On November 13, 2019, HDQA filed a Form NT and advised that it could not timely file its Form 10-Q because it “was unable to compile the necessary financial information required to prepare a complete filing.” On November 19, 2019, the company filed a Form 10-Q for the 2020 FY first quarter that disclosed a restatement because the company issued 41,731,867 shares of stock for $0.15 per share in a private placement to a Chinese company for $6,259,780. The company recorded $27,125,714 of stock-based compensation. The transaction did not close for several weeks, during which the stock price had risen to $0.80 a share. This resulted in material changes to the company’s financial statements, including a 310% increase in revenue for the first quarter of FY 2020 and a 97% decrease in loss from the restated first quarter of FY 2018. The SEC determined that two faulty Form NT filings were involved and imposed a $50,000 penalty.

  7. Asta Funding, Inc.: Asta, a Delaware corporation based in Englewood Cliffs, New Jersey, is involved in dealing with consumer receivables in the U.S., Puerto Rico, and South America. Asta subsequently went private. On May 18, 2020, while still public the company filed a Form NT asserting that it could not timely file its 10-Q for its second fiscal quarter “due to delays experienced in the collection, compilation and analysis of certain information.” On May 19, 2020, nine days after the end of the five-day extension, Asta filed its Form 10-Q for the second quarter of FY 2020, in which it disclosed that understated income taxes payable and related income tax expense from foreign operations, and also it had understated professional fees and expenses. The company anticipated that its second-quarter FY 2020 financial results would differ significantly from its second-quarter FY 2019 results, including a 26% decrease in quarterly revenue and a 96% decrease in quarterly income before taxes. The SEC determined that Asta filed a deficient Form NT and a late Form 10-Q, and imposed a $50,000 penalty.

  8. Igen Networks Corp.: Igen, a Nevada corporation based in Murrietta, California, provides cloud-based automobile services including stolen vehicle protection and real-time updates on driver behavior. On May 15, 2020, Igen filed a Form NT stating that it could not timely file its Annual Report on Form 10-K because it was “unable to complete the required compilation, dissemination, and review of all information required.” On May 29, 2020, Igen filed its FY 2019 Form 10-K, which disclosed that Igen was restating its 2018 consolidated financial statements because the company had not properly recorded contract assets for revenue recognition. The restatements resulted in material decreases in Igen’s current and total liabilities.

Disclosing Financials to the SEC

The lesson of these enforcement actions is clear. Do not submit filings of financials to the SEC that contain material misstatements or material omissions. The old wisdom remains valid: honesty is the best policy. It is always difficult to admit mistakes, but these cases demonstrate the consequences of failing to confront the truth. What also comes through is that the companies and their advisors decided that dissembling was preferable to admission.

©2021 Norris McLaughlin P.A., All Rights ReservedNational Law Review, Volume XI, Number 126
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About this Author

Peter D. Hutcheon Corporate Governance Lawyer Norris
Of Counsel

Peter D. Hutcheon practices primarily in the areas of business governance, commercial transactions, securities, banking, and finance.

Peter counsels management of public and private companies and banking institutions on governance matters.  He also has particular expertise with respect to indemnification and insurance issues affecting directors and officers.  Peter has represented parties in major public-private partnership financings.  He also represents clients seeking investment capital from private placements, venture capital, and private...

(908) 252-4216
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