Financial Shenanigans at Demand Media?
How to Cook the Books
Another amended SEC filing and more accounting irregularities.
The press jumped all over Demand Media’s late December amendment to their S-1 filing with the SEC. Inside was a thinly veiled note that the SEC was sniffing around their aggressive amortization of written content. It stirred up a hornets nest of indignant journalists, while perhaps receiving glee at the same time by the CFO of Yahoo!
Such “blogosphere” luminaries as Kara Swisher, Henry Blodget and Jason Calacanis weighed in with opinions, so you know it’s getting hot and heavy on the Interwebs.
Oh snap, the Henry Blodget who was banned by the SEC for assorted conflicts of interest calls Richard Rosenblatt and Demand Media bogus? Criminy!
Guess what kids?
They’re at it again. Another amendment to Demand’s S-1 filing with the SEC (dated January 3, 2011) and another accounting issue comes to light. This one may not be as egregious, but what is it about the accountants over there at Demand Media that all these issues are suddenly popping up under the scrutiny of the Securities and Exchange Commission?
If you’d like to see the highlighted differences between the latest SEC filing and the one in December, or between that and the previous filing in October, skip down to the end of the post for the links.
Here’s how Demand defines the latest problem in a footnote.
Results for the years ended December 31, 2008 and 2009 and the nine months ended September 30, 2009 have been revised to correct for immaterial errors relating to an international tax return, the application of certain expected federal deferred income tax benefits and the application of a forfeiture rate assumption associated with stock-based compensation expense. See note 2 to the consolidated financial statements.
I don’t know about the general reader of this blog, but to me $1.2 million is not at all immaterial. Perhaps Richard Rosenblatt might consider that pocket change. If it was so immaterial, why correct it at all? Look at the adjustments to their consolidated Balance Sheet. What had been a shareholder deficit of only $18.3 million is now a deficit of $19.5 million. Yes, that is immaterial … perhaps if you’re in Congress and used to a few billion here and there.
We also get some new verbiage to better define exactly what Adjusted OIBDA is and why Demand Media finds it necessary at all. Remember I discussed the topic of Adjusted OIBDA earlier in the IPO process. Seems that the SEC “suggested” Demand’s accountants and lawyers got some ‘splainin to do, to paraphrase Ricky Ricardo. Starting with why they should amortize the cost of content generation over five years when every other media website expenses such costs as they are incurred. The SEC may not want to set a precedent that allows the Yahoo!’s of the world to restate their earnings to meet the new low of adjusted OIBDA set down in the snake pits with Richard.
Most of the rest of the filing is taken up with boilerplate adjustments to ready it for 2011. I figure they’ll find a way to make this happen yet. There is one other little thing. It concerns the August 2010 grant to insiders and executives for an aggregate of 5,825,000 share option grants, which stand to be forfeited if the DMD IPO does not occur prior to March 31, 2011. Double snap! If any Demand Media exec is reading this, don’t worry your little head too much. Those magic beans have a way of being re-granted on an as-needed basis in the corporate world in cases like this.
My oh my, the schadenfreude runs thick in the journalism world:
- All Things D: Demand Media’s IPO–Which Won’t Happen Until After the New Year Now–Depends on How It Accounts for Content
- C|Net News: Financial gray areas plague Demand Media IPO bid
- Business Insider: Come On, Demand Media, Just Drop The Bogus Accounting
- New York Magazine: Demand Media’s Questionable Accounting Over Freelance Writers
- CNN Money: Demand Media IPO stalls amid accounting questions
- Forbes: Demand Media’s Accounting Is Even More Bogus Than It Seems
- Going Concern (Accounting News for Accountants): Demand Media Uses Fancy Math to Support Aggressive Accounting
- Adotas: Demand’s Creative Accounting
- Bnet: The Content Farm Bubble: Demand Media Isn’t Profitable Despite Its Dodgy Accounting
- CNN / Fortune: Lack of demand for Demand Media
- Los Angeles Business Journal: Will an IPO Still Be In Demand?
For the full differences, between the Dec. S-1/A (12/21/2010) and the Jan. S-1/A (01/03/2010), please reference this set of differences.
For the full differences, between the Oct. S-1/A (10/29/2010) and the Dec. S-1/A (12/21/2010), this document is just the ticket.
Note: Let the page finish loading. Additions are highlighted in green; deletions in red.
Actually, straight-line amortization would be $3, $3, $3, $3, $3 or the same amount each year. What you’re referring to is a form of accelerated amortization. They are only accounting for 20% of an article expense in the first year, so the GAAP losses would actually be much higher over the past few years. Eighty percent of their content-generation expenses have been deferred to years 2 through 5.
It’s absurd, in my opinion. Nothing on the Internet has a 5 year lifespan, and to claim that 20% of the expense of producing this content is not recoverable until year 5 of the article’s life is mighty aggressive by any standard. That’s why even the accountants are calling it bogus.
The most conservative thing they could have done was expense the cost from the get-go. There are all sort of subtle in-between options. They could have chosen a 3-year amortization schedule with or without accelerated amortization. They’d have a better leg to stand on if they did, say $7, $5, $3.
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Thanks for the clarification, 3 3 3 3 3 is even worse, ye gods! Even if older articles have higher SE rankings under Google’s current algorithm, the very fact that Google can (and does) change their algorithm should give them pause before accounting this way.
DM websites live and die Adsense and Google search hits, I would love to know what a Google insider thinks about DM’s accounting shenanigans and their pollution of the internet. If I were Rosenblatt, I would be making a back up plan for the day when Goog kicks the chair out from underneath DM’s ass.
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The IPO was his back up plan, and he would have gotten away with it too, if it wasn’t for those meddling Feds.
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I think his backup to the backup plan is to see if he can get Rupert Murdoch to trust him just one more time.
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I don’t think Rupe will fall for that same trick again. Rosenblatt does seem to have an uncanny ability to surf these techno-financial waves like a pro.
Batman, looks like you got a little tip of the hat in this article, in reference to comments you made elsewhere.
http://www.inc.com/max-chafkin/demand-medias-magical-thinking.html
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RHead, I enjoy your posts on the IPO! Quick question from someone who knows math but doesn’t know accounting jargon very well:
According to the Going Concern article, Demand uses straight line amortization over 5 years. That means that the cost of a $15 article is amortized as $5-$4-$3-$2-$1, correct?
And even if you include the cost of copy editing, and even if you count higher paying articles, the ratios of the yearly amortized costs are the same under this model. So that means they are only accounting for 1/3 of an article’s cost in the first year.
It blows the mind that if they are showing losses even with this fancy accounting, how much more red the balance sheets would be if they accounted for the full cost of an article the first year.
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But what does it mean really? Ok, so Demand cooks the books to appear more profitable than it is. Some in the financial consider creative, others say it is bogus. But what does it mean to people writing or editing at Demand?
First, will the IPO go through this year? More than likely but not until late summer.
How will it affect writers and editors? Nobody really knows. Plan for the worst, hope for the best. Either way do NOT rely on Demand as a sole source of income. The bad thing is that writers have more opportunities than the editors. But either way, don’t wait to see the “writing the wall.” If it improves pay and assignments, great. But it will more than likely decrease pay and resemble AC or Seed a lot more late in the year. Don’t sit around waiting to find out in the meantime.
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