Just look at the closing comments in Mason's email to "employees":
"We are generating cash, not losing it — we generated $25M in cash last quarter alone, adding to the $200M we had before. In other words, we’re doing the opposite of running out of money."
Apparently, the opposite of running out of money is holding cash that you owe to others. Very sleazy, IMO.
P.S.: I almost forgot to address the nonsense about us running out of money in the article above. If you apply the same logic used in the article, you’d have concluded long ago that companies like Amazon and Wal-Mart were running out of cash too. Both have often had payables far in excess of their cash. Finance geeks call this a working capital deficit. It’s normal, manageable and a lot of folks actually believe it’s good thing and would kill to get paid from their customers long before they have to pay their suppliers. We are generating cash, not losing it — we generated $25M in cash last quarter alone, adding to the $200M we had before. In other words, we’re doing the opposite of running out of money.
In that light I don't believe either of us is qualified to assess the sleaziness of their cash flow management.
The way Groupon defines their 'revenue' is the problem. Groupon uses Gross Revenue Treatment, not net revenue (as eBay does).
They include in their revenue the total price of the offering, but they only actually see half of that price. For example, if the coupon is sold for $20, Groupon only actually see $10 of it and they should be accounting their revenue using the $10, not the $20.
Imagine how much revenue eBay would have if they counted the total cost of the auction and not just the portion they actually receive?
>Groupon accounts for its revenue differently than say eBay, and in a way that some say is misleading to potential investors. The company defines revenue as “the purchase price paid by customers.” Then there’s the issue of “the cost of revenue,” leaving the company with what it calls “gross profit,” which is “the amount of revenue we retain after paying an agreed upon percentage of the purchase price to the featured merchant.”
Here’s the thing: Many companies like eBay [...], which also take a fee for transactions, would consider that “gross profit” number a “net revenue number.” UCLA Anderson School’s accounting lecturer Gordon Klein says the S-1 uses terms in a way he’s never used them before, and this unusual accounting tells him that investors should “run from the stock.” : http://goingconcern.com/2011/06/theres-some-fuss-about-group...
Also, the fact that Groupon delays paying their merchants is what allows them to have an operating cash-flow as they even say in their S-1 filing:
Our merchant payment terms and revenue growth have provided us with operating cash flow to fund our working capital needs. Our merchant arrangements are generally structured such that we collect cash up front when our customers purchase Groupons and make payments to our merchants at a subsequent date.
>The second issue is that the accumulation of the merchant payable, has resulted in a substantial working capital deficit. Essentially, despite being cash flow positive in the short term, they are not generating enough to cover their operating expenses like the amounts owing to merchants, salaries, rent and other costs of running of the business. As such, without additional financing, they will not be able to meet their obligations. This is extremely serious and which is why many have analyzed Groupon as being on the brink of insolvency: http://www.montrealfinancial.ca/blog/5-notable-disclosures-i...
This all makes sense, but the point that 'sunchild was raising wasn't about gross vs. net revenue; it was the fact that Mason was talking about their revenue without talking about their offsetting liabilities.
I have 100% confidence that any 2 people on HN could, given enough time to dig through accounting details, find something to disagree about in the 10K of any public company in the world.
eBay couldn't meaningfully do Groupon accounting because they do not beneficially possess the total transaction cost for any length of time. Paypal accounting gets incredibly complicated, but basically, if A agrees to buy B's widget on eBay for $100 with $10 of eBay fees, eBay gets the $10 from B's credit card and, a short period later, A pays B directly through a subsidiary which Very Carefully (TM) never puts the $100 on eBay's balance sheet or under their direct control. eBay doesn't call it revenue because eBay can't spend that money.
Groupon can spend that money.
There are many businesses which make active use of money that is owed to other people prior to actually paying it. Warren Buffets owns a lot of insurance companies. A huge portion of his investment operations are funded by float: basically, you have to pay him premiums and then he gives them back to you when (statistically speaking) your house burns down some years later. In the interim, it's his money, and if he manages float correctly it buys a company like e.g. Coca Cola on a continuous basis.
Or: take Bingo Card Creator as an example at the waaaaay opposite end of the scale. Many of my sales come through Google ads. It is basically economically equivalent to giving them 50% of the purchase price of 50% of my sales -- in fact, there is a Google pricing option which would make that exactly equivalent. However, crucially, I do not pay Google contemporaneously with the sale: like Groupon, our contractual arrangement means I pay them quite a bit later.
Ads placed on September 4th turn into sales on, statistically, September 5th which turns into money in my bank account on roughly September 7th. I get invoiced for the ads on approximately September 25th and then have until October 20th to pay my credit card prior to paying a penny of interest.
This means that I'm generally holding a couple of thousand of dollars of "Google's money" in my pockets at any given time. (It goes up and down depending on what time of the year this is. At the moment, it's a little under $1.5k off the top of my head.) Crucially, I can spend it. I'd have to replace it prior to summer (when the float tends to evaporate, due to how my market works), but if I want to replace a laptop or pay for a plane ticket for a couple months without having to pay credit card interest rates or dip into savings, I can take the money I was going to pay to Chase to pay Google in October, and then instead pay Chase in October with the money I was going to pay them in November, and then... you get the general picture.
money is just a money and logic can be twisted any way. This is why there is GAAP, and anytime somebody creatively twist their accounting beyond it there is train wreck like Enron, Merrill Lynch or Groupon.
>eBay doesn't call it revenue because eBay can't spend that money.
I'm no accountant, but my understanding is that cash on hand cannot be recognized as revenue if it carries a contingency (e.g., having to pay out to merchants). Please correct me if I am being naive on this point.
I think the contingencies you're talking about here are things like channel inventory and buybacks, not "any expenses".
"The money you have before accounting for expenses" is practically the definition of "revenue", isn't it? When people say "revenue" they're talking about the top line.
I'm not an accountant either, but having worked with them my understanding of "revenue recognition" is, loosely, "the point at which a promise of income can be accounted for as actual income". For instance, when a reseller commits to move Nx1000 units of a product at $Y, when does the producer get to account for $Nx1000xY dollars income.
Actually, I wasn't referring to gross vs. net revenue. I was referring to recognized revenue vs. cash on hand. If I can convince someone to give me $500 but I owe it all back to them, my only revenue should be interest/proceeds from investment of the $500 when actually earned – but the $500 on hand is not counted as my revenue. If my obligation to repay the $500 were to end, then it would become revenue.
I believe there are accounting strategies that might be exceptions to this, but I've never encountered any public companies can get away with using them.
There's a simple term for the issue you're describing: solvency. I don't think this is a rev rec issue. Like Patrick said upthread, Groupon is capitalizing on transaction float. They aren't borrowing money from people, claiming it as revenue, and then returning it.
I'm not saying they're solvent or that they're a good business. I don't know whether they are or aren't.
You're right: I re-read the original memo and I agree with you – he's addressing insolvency, not revenue. Leading up to an IPO, the key issue is solvency.
I'm going to take my own advice and ignore the Groupon sideshow until it goes away.
Companies pay top dollar for CFOs who can, among other things, engage in such sleazy behavior. Working capital management is critical to a company that wants to grow fast--it's conceivable that Amazon could have gone under if they hadn't operated this way, too.
Merchants agree to Groupon's terms; there is nothing sleazy about striking a deal and holding up your end of it.
Why is this downvoted? The very definition of a capital cost is a one-time (or mostly one-time) expense.
Regardless of whether you expect marketing costs to fall in the future, they are still operating expenses. After all, Groupon can't operate without this expense.
If marketing is a capital cost, then everything is, and therefor capital cost becomes a rather useless classification.
Let me put it this way: What is an operating expense for Groupon?
tl:dr he and Mason didn't see eye to eye. Msson flew by the seat of his pants and did things like send out company memos in what is meant to be the SEC quiet period, against Williams's advice.
Honestly, at this point, I'm just wondering how long it'll be before Groupon ends up the subject of Congressional hearings and more ridiculous legislation as the whole thing blows up.
I believe they call this kind of summary "burying the lede".
Better summary: The communications chief left Groupon just before a "leaked" "internal" memo came out of the company during the SEC quiet period. The implication is that he may have lost an argument with his boss re: the odds of going to jail if that memo was published, and decided to flee the scene of the crime before it went down.
[Note I have no idea if these allegations have any merit. I'm just the paraphraser here. Though I'm not a cautious one: the original article tiptoes quite gently around the word crime, but AFAIK that's what it means to violate an SEC rule.]
"The implication is that he may have lost an argument with his boss re: the odds of going to jail if that memo was published, and decided to flee the scene of the crime before it went down."
Why so uncharitable? Resigning, rather than participating in something they believe is wrong, is exactly what people with integrity do. Do we have any reason to believe that the argument wasn't about, say, whether sending the memo violates the spirit of the quiet period? Whether current and future investors would be best-served by the memo becoming public? How to spell "revenue"?
It's also the case that at the highest levels of executive decision making, being on the losing side of a major strategic decision often leads to resigning. If you own PR, and the entire PR strategy is overridden by the CEO, you might leave simply because it becomes clear that you can't e effective in that company; the CEO has usurped your role.
That's not a value judgement or anything; it's just life in the big city.
I agree. And the article doesn't suggest that the guy who resigned did anything against the rules; quite the contrary.
And, having drunk some more coffee since this morning, I am now sorry that I tried to summarize the article at all. I fear I may have thereby carried water for poorly-sourced rumors that, for all I know, have no basis in fact.
I would edit or delete my original comment if I could, but I no longer have the power to do so.
I apologize and I promise to try to ignore the Silicon Valley rumor mill even more aggressively in the future.
My limited understanding (after some quick research, and advance warning: reading rule 134 is no help here) is that this is not correct, and that violating the "quiet period" (which is sort of fuzzy compared to other SEC rules) is, like several other rules violations, more of a civil-type issue; fines, recission sales resulting from violation, delay of IPO, lawsuits.
So is carrying rabid dogs OR corpses in a cab in the City of London. What does that have to do with whether a particular SEC rules violation is a criminal or civil matter?
Did you know Google got into the same hot water before their IPO? But because pundits liked Google and don't like Groupon, the ledes on all those stories were "IPO might be delayed", not "founder might go to jail".
My point stands on it's own two feet. I never said Groupon was engaged in fraud.
I was responding to the parent comment's proposition that criminal behavior is irrelevant to pre-IPO activity. Fraud is a criminal offense, and fraud is defined as "an intentional deception made for personal gain". The point is: Fraud is always a course of action available to the SEC, FTC and AGs.
I can't find any historical instances of someone being criminally prosecuted for a quiet-period violation. It appears the usual enforcement is to force the IPO to be delayed after resetting the quiet-period clock.
Presumably there is some level of shenanigans that'd become criminal, if it violated some other bit of securities law (like deliberately manipulating the stock price, or making knowingly false statements to the SEC), but my non-lawyerly searching doesn't turn up any examples.
"We are generating cash, not losing it — we generated $25M in cash last quarter alone, adding to the $200M we had before. In other words, we’re doing the opposite of running out of money."
Apparently, the opposite of running out of money is holding cash that you owe to others. Very sleazy, IMO.