- Today's Participating Investors Effectively Now Own The Entire Company
- Common Stock and Shares of Company's Employees Now WORTHLESS
- LivingSocial senior company insider tells PrivCo: "We scrambled for cash quickly....we did receive one other funding offer, but the current investors' terms were the least bad of two terrible proposals....which we had no choice but to take it or file for Chapter 11."
- LivingSocial ended year with just $76 Million in cash & current assets, against a stunning $338 Million in short-term liabilities; down to just $28 Million in February (less than 30 days worth) out of $853 Million of Funding Raised
- "The company threw itself at the mercy of its investors - who, having already sunk $823,624,695 before the emergency funding, were in a position to dictate the terms - to avoid a total collapse of the company within days...though this will likely be LivingSocial's - and the daily-deals bubble's -final gasp." - PrivCo CEO Sam Hamadeh
- New $110 Million Must Be Repaid By LivingSocial In 4 Years Plus Dividends Plus A Large Additional "Stated Valuation Elimination Amount"
- LivingSocial Insider Tells PrivCo: "It was a take-it-or-leave it deal"
- After an extensive fact-checking phone conversation with LivingSocial's Head of Communications ANDREW WEINSTEIN, PrivCo then provided an advanced initial draft of this Research Note to Mr. Weinstein at his request prior to publication, seeking any factual corrections and to provide an Official Statement for inclusion verbatim; after receiving the draft, LivingSocial's Head of Communications Mr. Weinstein declined to suggest any factual correction nor to provide any Statement
February 20, 2013 8:15 PM EST - LivingSocial (PrivCo Private Company Ticker: LIVSOCP) has just received $110 million in emergency financing from some of its existing investors today, in a last ditch attempt to save the privately-held daily deals company from imminent financial ruin, PrivCo has confirmed exclusively, until the company can be sold by year's end to recoup whatever is still possible.
PrivCo today exclusively confirmed several key terms of the distressed financing (which was NOT a traditional "new VC round" as has been widely misreported - based on LivingSocial's CEO's initial sunny announcement of the financing) with both the HEAD OF COMMUNICATIONS AT LIVINGSOCIAL- ALEXANDER WEINSTEIN - who said he was familiar with the terms of the financing transaction, as well as a current LivingSocial venture capital investor participating in the new emergency debt financing:
Distressed Financing Including The Following Onerous Terms (PrivCo Exclusive):
- LIVINGSOCIAL Issued A New Complex Class of Convertible Debt-Like Securities, Which Even if Deemed Equity Is More Debt-Like In Its Protections, Convertible Into a Still New Class of Preferred Stock With Still More New Preferences - Traditional EQUITY or stock was NOT issued today as widely misreported today
- "Super liquidation preferences" of up to several times the $110 Million in debt (for example, at 3x, a debt liquidation preference of up to $330 Million)
- Annual dividends to be paid in cash by LivingSocial
- An additional large payment to today's funders called in financing documents the "Stated Value Elimination Amount", which accounts for re-pricing of participating investors' investments in previous rounds, retroactively at sharply lower valuations
- LivingSocial Must Repay the $110 Million emergency funding in 4 years (plus cash dividends plus the additional large "Stated Value Elimination Amount" premium), effectively structuring the emergency funding as a complex 4 year loan (debt) rather than traditional equity
- Provided an Advanced Draft of this Research Note for any corrections prior to publication, LivingSocial's spokesman declined to provide any
According to PrivCo sources, the financing effort was led by LivingSocial's largest outside shareholder, Amazon.com, with participation from some of its major venture capital investors (who had already invested $823,624,695 in equity in LivingSocial - per PrivCo V.C. Funding data - before today's emergency debt financing) in the hopes of salvaging what they can, with strict terms in place to ensure they are first to be paid upon a sale or bankruptcy. (Prior investors in LivingSocial include: Lightspeed Venture Partners, Grotech Ventures, Revolution Ventures, and U.S. Venture Partners; the VC firm confirming today's deal terms preferred not be to named. PrivCo is not suggesting any particular firm named above participated in the new financing.)
Implied valuation of LivingSocial in today's financing is likely $330 million, a 94% decrease from December 2011's $5.7 Billion valuation, although with the complex sets of rights/re-pricings of earlier rounds/cash dividends, etc. the implied valuation could be as little as $165 million. ("There really is no valuation anymore," said one source familiar with the transaction terms, given the complexity of the securities and rights that were issued.) (Note: Major investor Amazon.com's accountants recently reduced the book value of LivingSocial from $1 Billion in June to under $150 million in December.)
Ramifications of LivingSocial's Acceptance of The Oppressive Terms of Emergency Funding:
- 4,000 employees' stock is rendered worthless
- Employees' stock options are worthless
- Founder stock is worthless
- Emergency funding terms means LivingSocial handed over the company to today's funders
- Nearly a billion dollars of investor money has been lost, as all early rounds (Series A, B etc.) are worthless
- Sources said LivingSocial's Board made clear this was the final lifeline, that the company must break even by the end of the year including closing dozens of unprofitable offices and laying off thousands of employees
- PrivCo expects Chapter 11 by year end, with secured convertible debt holders ahead of merchants in liquidation preferences
- Despite company's attempt to say this funding was a vote of confidence by investors, virtually no risk to investors because primary spot in line in a bankruptcy liquidation
- LivingSocial's merchants owed money stand behind today's funders in the event of a bankruptcy, as unlike today's funders they are unsecured creditors
- PrivCo's sources indicate that investors are forcing the company to break even in an attempt to sell the company by year's end
- Needless to say, there will not be a LivingSocial IPO
When reached by PrivCo today, LivingSocial's Head of Corporate Communications, Andrew Weinstein, stated that he would put his best positive spin on what PrivCO had pieced together was a negative situation, making statements suggesting:
- Shareholders extended a lifeline to the company which is a major vote of confidence
- Yes most of our Current Liabilities are Merchant Payables, which are local merchants' share of the dailydeals we sell and yes we collect that cash in advance, and we do owe them for all that - and yes it's now hundreds of millions of dollars more than our cash on hand. But despite our Current Liabilities being high, they at least are not as frightening as Groupon's Merchant Payables gap, as Groupon pays out usually in 1/3rds (30 days, 60 days, then 90 days), while at LivingSocial, we usually pay 80% of the total daily deal's sales to a merchant within 10 days of the offer ending, and then we owe them the other 20% months later. So yes we owe local merchants a lot of money, more than our Cash, and these Merchant Payables are most of our Current Liabilities as PrivCo surmised, but I will point out that at least it's not as as great a portion of our Current Liabilities as Groupon's."
- Our CEO said we do now plan to break even and become profitable by year end. I'm not sure exactly how, but that is our goal.
- Hopefully the announcement today of new financing helps alleviate concerns of LivingSocial's solvency...and we know they are out there....especially concerns from our merchants we owed money to.
- We also did get a second offer to finance us, so we were able to choose between two offers. And that's a great position to be in, and shows we had a second offer and they were also interested. And the current investors' offer was the better of the two so that's the Financing deal we took. ("As a corporate lawyer who has seen thousands of funding term sheets," said PrivCo CEO Sam Hamadeh, Esq.,"given the oppressive terms of the offer they accepted, I can't imagine how ugly the other financing offer looked.")
PrivCo's Hamadeh concluded: "LivingSocial's issuance of this onerous emergency debt-equivalent financing effectively means that its most recent investors entirely control the equity of the company. LivingSocial essentially threw itself at the mercy of its investors - who had already sunk over $823 Million in the company before today's $110 Million additional lifeline - to avoid a total collapse of the company that would have occurred within days. Regardless, this will likely be LivingSocial's - and the daily-deal bubble's - final gasp."
UPDATE FEB 21 2013: LIVINGSOCIAL CEO Tim O'Shaughnessy RELEASES NEW 2nd MEMO TO EMPLOYEES AND PRESS IN RESPONSE TO ABOVE PRIVCO REPORT OF FEBRUARY 20, 2013 (See Exhibits: PrivCo Private Company Research Report: LivingSocial for both Memos)
Today LivingSocial CEO Tim O'Shaughnessy released a second memo to employees and the press - following his first memo yesterday announcing what he characterized as great news of a new $110 Million funding round from existing investors, in response to PrivCo's Research Note to clients above.
False Claim By Living Social CEO Tim O'Shaughnessy Without Substantiation That All Quotes And Statements Contained in PrivCo's Research Note Were "Pure Fiction" and That No Senior Communications Executive at LivingSocial Nor Investor Spoke To PrivCo: Without providing any evidence nor substantiation, and in direct contradiction of the facts, LivingSocial's official spokesman, Head of Corporate Communications Andrew Weinstein had an extended fact-checking phone conversation with PrivCo, and PrivCo stressed to Mr. Weinstein that per our standards "we wanted to make absolutely sure we get all this right". Mr. Weinstein stated he was in fact familiar with the terms of the new financing, confirmed several key terms of the financing for PrivCo, suggested ranges and possibilities on other financing terms to PrivCo, then requested and received by email a written draft of the above Research Note offering to provide any factual corrections necessary as well as an Official Statement that PrivCo offered to include in full verbatim. Mr. Weinstein provided no factual corrections nor provided any Official Statement. After waiting hours, PrivCo proceeded to release the above Research Note. (PrivCo has retained detailed records of its phone call dates, times, and length of call with Mr. Weinstein, as well as the email communications including sending of the draft Research Note for factual corrections.)
New Misleading Valuation Claims: Despite PrivCo being told yesterday by the head of Corporate Communications at LivingSocial Andrew Weinstein that the company "can't really be valued now as the new securities issued yesterday are such complex securities with unusual terms" - and that "even our own accountants and lawyers couldn't come up with a valuation" (direct quote)...after our Research Note above, today LivingSocial CEO Tim O'Shaughnessy somehow suddenly gave his employees an implied valuation (based on first grade math using a pure clean straight common stock equity investment of "buying 7.5%" of the common stock, which was documnted as false in corporate filings.). Now, two days in a row, LivingSocial's CEO has issued highly misleading memos to his employees and to the press. (While we are sure he is under significant pressure, this does not excuse the misleading statements). O'Shaughnessy tells his employees and the press that 7.5% of the company was bought for $110 Million and that they can use that math to calculate the company's valuation, though he says the new funding's securities "have some bells and whistles" (i.e. seriously onerous terms, cram-downs, cash dividends, 4-year mandatory payback [ redemption ], new senior preferences, and so on), misleading LivingSocial's employees and the press as to the company's true all-in valuation including new liquidation preference rights, dividends cash, additional large premium repayment in the form of the Stated Value Elimination Amount at the time of any sale or end of the 4 year loan term, all of which clearly values the company's common stock at materially less than the now $963 Million in funding raised. As the $963 Million in funding raised all have liquidation preferences and now dividends senior to common stock plus the large Stated Value Elimination Amount payment to the new funders, the prior and new financings make the employees' common stock and stock options worthless and NOT WORTH $1.5 BILLION BY ANY ACCURATE CALCULATION. (Even major investor Amazon.com's accountants wrote down the book value of LivingSocial from $1 Billion in June to less than $150 Million in December).
New Disclosure About Impact On Value of Employees' Stock and Stock Options: PrivCo's research clearly forced the company's CEO to cough up more information today on the financing's impact on employees' equity (note that there was no mention yesterday in his memo to employees regarding the distressed nature of the financing, which was a memo to employees of the "great news" of the new financing showing that current investors love LivingSocial's financial performance and are eager to invest more, "a vote of confidence.". Nor was there any mention yesterday (until PrivCo forced the issue last night) in his memo today to employees that yes their stock and stock options will be diluted "in short, some, but not much" and the "preference stack is a little higher now", (i.e., their common stock and options are now worthless). Nor was there any mention yesterday in his memo that the new financing has "some bells and whistles associated with the shares" (meaning onerous terms that dilute and destroy their equity value...just some :"bells and whistles" - not mentioned in his first memo.). Again, the new financing and the $963 Million now raised by LivingSocial, along with cumulative and unpaid dividends and other undisclosed payments and preferences in the unfiled Terms Document referenced in the company's updated Charter mean that using any reasonable valuation of LivingSocial (including that of major investor Amazon's own accountants), employees' common stock and stock options are now worthless.
New Misleading Claims of A Still Plausible IPO: In addition, Tim O'Shaughnessy's new memo today to employees tells them that if LivingSocial IPOs, then all of above complex new financing structure becomes moot since everything converts to common at time of an IPO. Once again O'Shaughnessy is being highly misleading to LivingSocial's 4,000 employees. There is more likelihood of there ever being a toothpick company IPO than a LivingSocial IPO...and CEO Tim O'Shaughnessy knows it, yet today uses that "possibility" as a cover-up for what just happened to the employees' stock and stock options due to his squandering $853 Million of investors' money and destruction of shareholder value.
Claim That New Financing Was Not A "Distressed Financing": Living Social Was Down to 29 Days of Cash With Just $28 Million in February: According to published reports today by Fortune and CNN, Living Social was "down to just $28 million in cash" in February right before this financing. By PrivCo's math on LivingSocial's net daily expenses revealed in most recent Amazon's 10-K, that equals just 29 days of cash for expenses remaining. After raising over $853 million from investors per PrivCo data, LivingSocial had just 3 percent of it left: four week's worth of cash remaining (perhaps 6 or 8 weeks left by paying some bills late and other maneuvers, etc.) That is the very definition of a distressed financing. The investors dictated the terms of this week's emergency additional funding, and the company was forced to accept them. For Tim O'Shaughnessy to say in today's memo in response to PrivCo's report last night that "this was not an emergency round", or in other words not a distressed financing, is again patently false and misleading.
PrivCo Stands Behind Our Research Report: Although the securities structure as we've learned more today is even more complex (it is called preferred "equity", but is de facto debt in its terms, cash dividends regardless of net losses, mandatory repayment of the funds in four years - i.e. a 4 year loan - "moving" liquidation preferences, and other convenants), which tax attorneys who have reviewed the securities' structure have concluded would be deemed legally Debt and the "dividend" payments legally "interest" for tax purposes. More precisely, we should have stated that the company has received a debt-like cash infusion but that the Company deems it to be senior preferred equity with mandatory cash dividends, mandatory redemption after 4 years, plus an additional payment called a Stated Value Elimination Amount based on unknown additional terms, which based on sources familiar with the transaction may include repricing of funders's shares, issuance of additional dilutive shares, and other additional terms that coupled with knowledge of the company's near-zero cash remaining indicate a clearly distressed emergency debt or de-facto debt financing. All of the other facts in PrivCo's Research Note on LivingSocial's distressed financing, deteriorating financials, and its path to insolvency, are accurate, as are its citing LivingSocial's head of Communications, with whom we spoke for an extended period in conducting and fact-checking our reporting.
Except for the fact that the securities issued yesterday in LivingSocial's emergency financing were legally named by the company as "Series G preferred equity," in company documents, despite really being de-facto debt with all the hallmarks of debt instruments (including cash dividends, mandatory repayment of the money after 4 years - i.e. a loan - seniority in a bankruptcy or liquidation to all stockholders, and more) - PrivCo stands by its Research Note on LivingSocial dated February 21, 2013.