Darktrace Contemplates a New Chapter Following an Investigation into Business Practices
Highlight: Darktrace boss Poppy Gustafsson
Cybersecurity firm Darktrace aims to start a new chapter this week when it publishes its annual results after a lengthy dispute over its accounts and business practices.
Analysts predict sales of the FTSE 250 company, which uses artificial intelligence to detect and defend against cyberattacks, soared by almost a third to £438m in the year to June.
But profit is forecast to have fallen to around £548,000, from £1.2m a year earlier, as it battles higher costs.
The boom in sales will bring relief to the company and its boss Poppy Gustafsson as it ends months of trouble.
In January, short seller Quintessential Research published a report stating that it was “deeply skeptical” about Darktrace’s financials and accused it of “exaggerating” sales and profit figures.
The hedge fund alleged that Darktrace had been faking sales to “ghost” customers through a “network of willing resellers” and had possibly also misrepresented the nature of its income.
He also claimed that Darktrace might have had ties to offshore “shell companies” run by “individuals with ties to organized crime, money laundering and fraud.”
The allegations quickly sparked a dispute between Darktrace and the short seller’s boss, Gabriel Grego. Gustafsson called the claims “deeply insulting”.
The allegations also kicked off a five-month review of the company’s accounts by accounting giant EY, which concluded in July. The investigation uncovered a “small number” of accounting errors. However, EY said there was no evidence of fraud in the Darktrace accounts, a verdict that sent the share price skyrocketing.
The review has not been shared publicly, though Darktrace said regulators have received copies.
Quintessential responded by saying that the EY review had done little to “assuage” their concerns. He asked Darktrace to publish the report in its entirety.
The short seller declined to comment on whether he still had a stake in Darktrace or would continue his campaign against the company.
Darktrace has also been caught up in the legal troubles of British tech mogul Mike Lynch, who was one of the company’s original backers when it was founded in Cambridge more than a decade ago. In May, Lynch was extradited to the United States to face fraud charges over the £8bn sale of his Autonomy software company to Hewlett-Packard in 2011.
The United States has accused him of manipulating the books of his former company and of tricking HP into overpaying, something he denies. He could spend a decade behind bars if he is found guilty.
Despite selling some of his stake before and after his extradition, Lynch and his wife Angela Bacares remain among the largest investors in Darktrace, together controlling a 9.4 per cent stake in the business valued at around £232 million. .
Last month, Matt Moulding, director of e-commerce company THG, came to the company’s defense, accusing Quintessential of making “outlandish allegations of corruption” and saying the fact that short selling was legal in the UK Kingdom was “strange”.
Many will hope that the Darktrace fight provides some hope to aspiring entrepreneurs.