RCAT - Uh-Oh. 3 Stocks That Are Sorry They Used 'Sham Audit Mill' BF Borgers
2024-07-14 13:00:00 ET
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In May, the Securities and Exchange Commission (SEC) charged Colorado-based audit firm BF Borgers with massive fraud . Specifically, the SEC stated that the auditor had engaged in “deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards in its audits and reviews incorporated in more than 1,500 SEC filings from January 2021 through June 2023.”
The SEC warned that Borgers’ noncompliant audits and review put public investors at risk. The firm, among other things, fabricated audit documentation. This cast into doubt the validity of numerous financial documents across dozens of small publicly-traded companies .
This scandal received a great deal of publicity due to BF Borgers’ highest-profile auditing client, the Trump Media & Technology Group (NASDAQ: DJT ). Former President Trump’s controversial social media company was forced to switch from BF Borgers to Semple, Marchal & Cooper LLP , following the scandal .
These are three stocks to avoid that unwisely ended up using BF Borgers as their auditing firm in recent quarters.
Trump Media & Technology Group (DJT)
Now, to be sure, the Trump Media & Technology Group has plenty of things to be concerned about right now. A frighteningly low revenue base , large operating losses and a distinct lack of a proven business model to name a few.
If these weren’t enough, however, just months after completing its long-delayed SPAC transaction, the company has had to switch auditors. While moving away from BF Borgers was undoubtedly the right move, the replacement, Semple, Marchal & Cooper LLP, is hardly top-tier either.
For a company that claims to have great ambitions within the media landscape, Trump Media & Technology Group could seemingly afford to hire a higher-profile auditor. Having reliable financial statements is a basic step toward being a credible investment-worthy firm, especially as Trump Media & Technology will need to execute more financial transactions going forward.
DJT stock has plenty of issues, both big and small, right now. Perhaps auditing concerns aren’t top of mind right now for that particular company. But investors should take it under consideration before investing in this option among stocks to avoid.
SS Innovations (SSII)
SS Innovations (OTCMKTS: SSII ) is an Indian firm focused on surgical robotics products. The company claims that its robotic solution is one-of-a-kind and offers unmatched cost effectiveness while being appropriate for a wide range of surgical treatments.
Unfortunately, there’s not much evidence of commercial demand for SS Innovations’ products as of yet. The company generated just $6 million in revenues last year. And that’s according to the firm’s SEC filings, which may now be in doubt given the scandal with BF Borgers.
In February, SS Innovations filed for a $50 million stock offering in conjunction with a planned uplisting to the Nasdaq exchange. However, the BF Borgers scandal will likely make it more difficult to complete its planned stock underwriting. In any case, SSII stock is an easy avoid for the time being.
Red Cat Holdings (RCAT)
Red Cat Holdings (NASDAQ: RCAT ) is a company focused on the military drone technology market. It previously had a consumer drone products division, but this was subsequently sold to Unusual Machines (NYSE: UMAC ).
With the war in Ukraine and rising tensions in the Middle East, military drones are in high demand. This might seem to make Red Cat an appealing speculative play.
However, the company’s financials don’t leave much to get excited about. It generated just $10 million in revenues in 2023. Furthermore, it generated no gross margin whatsoever on these sales, indicating that it is merely selling goods for around its production costs. It’s hard to build a sustainable business that way.
RCAT stock has rallied sharply over the past month. But traders should be awfully cautious with this cat. Between its tiny revenue base, large operating losses and the BF Borgers scandal, this stock has little to recommend it today.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines .
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
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