On September 22, 2011, Groupon was forced by the S.E.C. to file amended financial statements in connection with its IPO, restating and reducing its revenue to less than half previous figures. Prior to the restatement, Groupon’s revenues were based upon “gross billings”, thus including the 50% cut that Groupon is responsible for paying merchants on each sale.
Groupon’s revenue reduction represents the largest IPO accounting restatement in history, slashing over $1 billion from Groupon’s revenues. Although Groupon’s substantial net losses remain unchanged, the revenue restatement is particularly damaging to a company that had been largely valued as a multiple of its revenues, further reducing the likelihood, timing, or both, of any initial public offering.
“Before even considering buying shares in a Groupon IPO, sophisticated investors will rightfully demand to see Groupon’s financial metrics, cash, and liabilities figures for the quarter ended September 30,” says to Sam Hamadeh, chief executive officer at PrivCo.com. Hamadeh adds that Groupon’s figures “are likely to show further deterioration in Groupon’s business and liquidity.”
Groupon Must Take Action Immediately to Fend Off an Imminent Liquidity Crisis
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.
Short-Term Float From Merchants Remains Sole Reason Groupon Stays Afloat
Groupon’s Revenue Restatement & Further IPO Delays Likely to Create Self-Fulfilling Liquidity Crisis
According to Groupon's Amended S-1, September 23, 2011:
“Our accrued merchant payable, which primarily consists of payment obligations to our merchants, has grown, both nominally and as a percentage of gross billings, as our gross billings have increased, particularly the gross billings from our International segment. Our accrued merchant payable balance increased from $4.3 million as of December 31, 2009 to $391.9 million as of June 30, 2011. We use the operating cash flow provided by our merchant payment terms and revenue growth to fund our working capital needs. If we offer our merchants more favorable or accelerated payment terms or our gross billings do not continue to grow in the future, our operating cash flow and results of operations could be adversely impacted and we may have to seek alternative financing to fund our working capital needs."
News of Groupon’s material revenue restatement, IPO delays, and rapidly worsening liquidity will reach local merchants, and merchants will likely demand faster payment terms for Groupon sales before they begin to deliver goods and services to Groupon customers. Groupon pays U.S. based merchants 60 days after its sales close and makes overseas merchants, who make up nearly half of Groupon’s sales, wait even longer for payment. Groupon competitor Google Offers already pays most merchants only four days after its sales close.
Groupon's sales force is likely to meet stiffening resistance when attempting to sign local merchants for new Groupons in the near future. Any shortening of Groupon’s two-month free cash “float” from merchant payment delays will cause Groupon’s cash on hand to rapidly vanish. PrivCo.com analysis estimates that a move to faster average payment terms by even 15 days—a reduction from 60 days to to 45—would cause Groupon to run out of cash within weeks.
Merchants aside, concerns about Groupon’s liquidity may also cause consumers to cease purchasing pre-paid Groupons for fear that they may become unusable in the future. In the event that Groupon were to discontinue its operations, unpaid merchants may find themselves with a line of customers out the door, Groupons in hand, and refuse to honor them.
Further, since Groupon depends upon sales of new Groupons in the next quarter to pay merchants from the prior quarter, PrivCo.com estimates that even a flattening of Groupon’s growth rate would quickly cause the company to exhaust its cash.
Groupon Insiders Cashing Out, Contributing Minimal Working Capital to Company
Since March 2010, Groupon has received nearly $1.1 billion in private financing yet only $151.4 million has been contributed to the company's working capital. Founders, investors, and other shareholders have been taking cash off the table at a time of which the company itself seriously needs the money (Groupon co-founder Eric Lefkofsky received over $380 million).
“Had more of Groupon’s outside investment been contributed to working capital, the company may not be facing as serious a predicament as its current liquidity crisis,” says Joseph Ranzenbach, vice president of operations at PrivCo. “Out of the $1.1 billion raised since March 2010, only 14% has gone to the company and that raises serious questions about where Groupon insiders actually believed the company was headed. They saw the company’s deteriorating business metrics while pushing for an IPO to raise funds from the public.”
For PrivCo's full Private Company Financial Report on Groupon, Inc., please see:
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