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Groupon: We lost more money than we said earlier

In this Sept. 22 2011 file phoemployees Grouppose silhouette with company logo lobby online coupcompany's Chicago offices.  | AP

In this Sept. 22, 2011 file photo, employees at Groupon pose in silhouette with the company logo in the lobby of the online coupon company's Chicago offices. | AP file

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Updated: May 1, 2012 8:33AM



Groupon — Chicago’s golden-boy tech startup whose founders became billionaires when it went public — tripped over its own feet again Friday.

The company, based in the old Montgomery Ward catalog warehouse at 600 W. Chicago, surprised Wall Street after the close on Friday when it disclosed in a regulatory filing that it’s having trouble with its financial controls. It also lowered its fourth-quarter earnings statement — the first results it had reported as a public company.

Groupon’s auditor flagged the online coupon site for failing to set aside enough money for customer refunds. Groupon has started offering more expensive deals that have higher refund rates than its traditional daily deals.

More troubling was Groupon’s revelation of a “material weakness” in its internal control over financial reporting.

Groupon said it is working to resolve the problem by hiring more financial experts and improving processes and procedures, but it can’t say how long the problem will last and conceded that its stock price may be hurt and that it might even be unable to comply with stock exchange listing requirements if the situation continues.

Groupon Chief Financial Officer Jason Child said in a statement that “we remain confident in the fundamentals of our business, as our performance continues to highlight the value that we provide to customers and merchants.”

But Morningstar analyst Rick Summer said Friday the situation is “serious” and investors need to know which Groupon unit — such as Groupon Now! or Groupon Goods — failed to set aside enough money for customer refunds.

“It is troubling if you have accounting irregularities out of the gate,” Summer said, referring to the first restatement after Groupon started selling its shares to the public in November.

“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 latest revision, cutting revenues by $14.3 million and reducing net income by $22.6 million, or 4 cents a share, applies to the company’s fiscal fourth quarter.

The changes mean Groupon had a loss of $65 million rather than the $43 million loss it had previously reported. The changes lowered revenue to $492.2 million from the earlier reported $506.5 million. Operating income in the fourth quarter plunged to a $15 million loss from a previously reported $15 million in income. Groupon reported no change in its cash flow.

Groupon’s stock price dropped 6.7 percent in after-hours trading Friday after it had initially closed at $18.38. Its stock jumped 31 percent on its first day of trading on Nov. 4, closing at $26.11.

Friday’s revelation follows earlier financial reversals, including restating in October its 2010 revenue to less than half what it had first reported — to $312.9 million from $713.4 million.

Experts have debated how a company that emerged from ThePoint.com, 31-year-old CEO Andrew Mason’s idealistic effort to encourage online communities to reach a “tipping point” in supporting social causes, would transform into a global leader in the competitive daily deals business.

Groupon’s founding investors, entrepreneurs Brad Keywell and Eric Lefkofsky, have become icons of Chicago’s tech community by helping finance and mentor dozens of other tech startups here. They made billions on paper in Groupon’s IPO, with Mason’s share valued at $1.23 billion, Lefkofsky’s at $3.37 billion and Keywell at $1.08 billion, according to the Wall Street Journal.

Lefkofsky and Keywell and their families had previously cashed out $382 million and $156 million, respectively, through share sales and other private transactions, according to media reports.

Earlier mistakes included Mason, a music major at Northwestern University famous for his goofy sayings, sending a memo to employees during what was supposed to be a “quiet period” last fall. In the memo, which was leaked to the media on Aug. 25, Mason said, “The degree to which we’re getting the s--- kicked out of us in the press had finally crossed the threshold from ‘annoying’ to ‘hilarious.’ ”

The U.S. Securities and Exchange Commission reportedly contacted Groupon’s attorney about the memo.

The SEC contact followed Lefkofsky’s comments on June 3, 2011, in which he said the company would be “wildly profitable.”

Groupon filed two amended reports with the U.S. Securities and Exchange Commission, one in which it backtracked from Lefkofsky’s statement and another in which it dropped a controversial accounting method that analysts had questioned.



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