Chicago tech start-up Groupon reported on Friday that its fourth quarter loss was actually greater than it originally reported because, according to the Associated Press, “it needed to increase the amount of money it sets aside for refunds.”
Refunds are a part of the game for Groupon because it promises them to customers unhappy with a deal. Because the company has gotten in the business of dealing out more expensive deals, the amount of money necessary for refund set-asides has increased. In revising its fourth quarter numbers, then, Groupon lowered their quarterly revenue by $14.3 million. This widened its losses by roughly four cents a share or $22.6 million. In the larger picture, that means Groupon had losses of $65 million in the fourth quarter.
As if that misstep wasn’t bad enough for investors, Groupon’s auditor Ernst & Young pointed to a “weakness” in the company’s internal controls over its financial statement. The company is apparently hiring more financial experts to “improve processes and procedures,” but seems to know that stock prices could be hurt by the “material weakness.” If the situation continues, says Groupon, it may not even be able to comply with stock exchange listing requirements.
For the uninitiated, Groupon essentially makes money by sending out regular emails to subscribers with various offers to buy discount deals on a wide variety of products and services. The company then gets a cut from what subscribers pay for the deal and sends the rest over to the manufacturer or merchant.
“It is troubling if you have accounting irregularities out of the gate,” Morningstar analyst Rick Summer said. “This is a big company with blue-chip investors, blue-chip investment banks, blue-chip accounting firms and what was deemed to be a blue-chip management team.”
The “irregularities out of the gate” effectively refers to the company’s troubles from the outset. When we consider that Groupon’s IPO used “non-standard accounting metrics” and looked to, at least initially, appear to be bleeding money, it’s no small surprise that investors were wary. The idea behind CEO Andrew Mason’s venture seemed to be the perfect melding of technology and savings, but the practices behind the scenes left a lot to be desired.
As is generally the case in the wild world of technology-related ventures, however, Groupon was soon facing a world of competition. Merchants, too, have been complaining about being overwhelmed by coupons and the relationships surrounding the company seem to be souring. The number of merchants electing to be part of Groupon’s scheme is diminishing and the number of customers signing up for the service is shrinking, but the company says it’s still in the game.
“We remain confident in the fundamentals of our business, as our performance continues to highlight the value that we provide to customers and merchants,” Groupon’s Chief Financial Officer Jason Child said.