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S-1 Filing: Based on S-1 filing, Revenue is recognized by the sales of the groupons provided the sold quantity exceeded the threshold limit agreed between Groupon and merchants. Revenue consisted of sales of groupons excluding the taxes.
S-1/A Filing: In this, Revenue was recognized as the difference of the sales of the groupons and amount paid to merchants provided the sold quantity exceeded the threshold limit agreed between Groupon and merchants. The revenues were calculated excluding the taxes.
Due to this, the revenue of the company dropped from $1.52 billion to $688 million for the first six months of the year.
According to the 8-K filing on February 8, 2012 - The Company reported revenue of $506.5 million for the fourth year quarter 2011 showing an increase of 194% from 4th quarter year 2010.
In an amended 8-k/a Filing on March 30, 2012 - The Company restated their revenues lowering the revenue for the last quarter of 2011 by $14.3 million. This was due to reason that the actual values of refund amount for high price deals exceed the predicted value of refund amount. This impacted operating expenses by $30 million, net income by $22.6 million and earnings per share by $.04. This change also impacted the revenue and cost of the revenue for company. This also exposed the flaws in the internal operation of the company while preparing the financial data for the general public and their stockholders.
There are no issues raised by auditors (Ernst & Young LLP) in the financial statements. But they have mentioned in their statement that they have not performed an audit on the company's internal control over financial reporting. They have made an audit based on assumption that internal controls are properly functional inside the company. The financial reports are correct based on the information provided to them.
In Controls and procedures section (9A) of 10-K, company is admitting to a fact that they are taking remedial measures to improve the internal controls over financial procedures. Currently, they are not required to comply with section 404 of Sarbanes Oxley Act which mandates a company to make an assessment of effectiveness of their internal controls. Company has stated that they will not be able to assure the reliability of the internal measures until the close of next fiscal year i.e. Dec 31, 2012 and there can be some material misstatement in the financial reporting due to material weakness in their internal controls.
Based on the above information, as an investor I cannot rely upon the financials to make a decision about buying or keeping the stock. It is better not to invest in the company at present. But for year ending Dec 31, 2012, if they are successful in implementing the internal controls and able to assure the investors that there is no material weakness in their internal measures (Sarbanes Oxley 404 compliant) then once can think of investing in the company.
By retrospection the price decline could have been predicted as there were clear indications of company's internal mismanagement and loose internal controls to measure the growth in a correct way.
After Regulators questioned the initial filing of the Groupon to go public, company revised the filing and changed the way they calculated the revenues. Although the net losses to the company remains unchanged due to this change, but this led to deterioration of the investor hype they have created in the past regarding the IPO.
Company's Top executives were leaving the company just before the IPO such as Margo Georgiadis, head of operations ("Groupon Operating Chief Leaves as Company Restates Revenue - Businessweek"). It is always suspicious when the company's top brass is leaving the company at the crucial time of going public.
SEC filing 8-K/A dated March 03, 2012 exposed the material misstatements in their financial statement as Groupon reduced the revenue by 14.3 million for the last quarter. This caused their stock to drop 17% on the next day of trading. After this incident, it was assured that there can be more errors in the data presented by the Company and it was not a wise decision to carry on with such company's stock.
Analyst firm PrivCo Media LLC confirms that firm received nearly 1.1 billion$ in private financing but only $151 million was contributed toward the company's liquid cash. Founder, investor and major stock-holders were cashing out the money at a time when company required liquid cash badly("PrivCo | Research | Groupon Inc. Forced by S.E.C. to Restate Its Revenues to Less Than Half Previous Amounts"). This gives the indication that company was not thinking for the benefit of the investors.
According to me, Company did not act ethically. Following are the reasons to support the arguments -
While filing for IPO, Groupon overstated its revenue by following improper revenue accounting techniques. It is not to be believed that that material misstatements in the financial statements were caught by regulators by just looking at the Company's SEC filings whereas Ernst & young and Groupon were not aware of it. "This was done to cover troubling trends in their business models"("White Collar Fraud: Were Groupon's and Overstock's Management and Auditors Stupid or Did They Condone Improper Accounting Practices?").
The senior executive made several comments during the "quite period". This is a period in which company is refrained from making any public comments in an effort to restrict the improper IPO promotion. This was violated by company's officials Eric Lefkofsky when he passed the comments in the public regarding the IPO. CEO, Andrew mason also published his memo in the S-1/A document ("Accounting Change Cuts Groupon's Revenue - NYTimes.com")
They misstated their financial statements during the 8-K filing for the 4th quarter of 2011. They did not put any warning messages in the statements that their revenues may change based on the refund amounts. It can also be said that they masked their flawed internal controls at the expense of investor's money.
I am self-responsible for my loss of money as I did not pay attention to the happenings within the company.
From September to December, There were incidents which predicted the decline in the stock price. These needed to be analyzed and proper action was supposed to be taken-
In S-1 filing, they tried to hide the flawed business model by overstating their revenues through improper accounting techniques. It was clear that they were trying to increase the popularity of IPO through false numbers.
Top executives of the company were leaving the company as their Margo Georgiadis, head of operation and Lee Brown, Head of national sales left just before the IPO launch.("Exclusive: Groupon Senior Sales Executive Leaving - Memo - Yahoo! News")
According to Privco Media LLC report and S-1 Filing,
"Groupon is technically insolvent. As of June 30, 2011, Groupon had $680 million in short-term liabilities, including money owed to merchants for prior Groupons sold, yet held just $376 million in current assets (including just $225 million in cash), resulting in negative working capital of $304 million."
("PrivCo | Research | Groupon Inc. Forced by S.E.C. to Restate Its Revenues to Less Than Half Previous Amounts")
According to this data, they were in immediate need of cash to clear their debts. They had to restate their revenue to accomplish the task of releasing the IPO on time.
On March 30, 2012, Groupon announced the revised financial earnings for the last quarter of 2011 where they decreased the revenue by $14.3 million due to lack of proper internal controls and procedures within the company. This was admitted by company official in 10-K filing also. After this it became evident that company is having a bad business model in which there is no assurance that company's progress is tracked in an accurate way.
JOBS act of 2102, exempts the small companies to exempt the internal control reporting and audit requirements for 5 years. ("At Large and Small Companies, Internal Controls Matter - NYTimes.com")
According to 10-K filing by Groupon,
"We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, and are therefore not currently required to make an assessment of the effectiveness of our internal controls. However, we will need to evaluate our internal controls over financial reporting in connection with Section 404 of the Sarbanes Oxley Act for the year ending December 31, 2012"
Groupon survived all these restatements as 404 section of Sarbanes Oxley act allows Groupon for not making an assessment of the internal controls till December 31, 2012. As an investor, they had to rely upon company's internal operations credibility to prepare financial reports. But in real sense, Groupon cannot be considered as a small growth company and hence this exposes a loophole in the financial system. These kind of company needs to be taken into consideration and proper laws should be in place to keep a check on their operations. After Groupon, there is certainly a need of amendment in JOBS act.