Craft marketplace Etsy just filed for an IPO.
In 2014, the company had revenue of $US195 million and incurred a net loss of about $US15 million.
But aside from financials, when a company files its S-1 we get all kinds of information about a company’s risks and potential issues that we were sometimes only guessing at ahead of the filing.
And in Etsy’s filing, it disclosed that it has identified two material weaknesses.
A material weakness is a deficiency in internal controls related to financial reporting, which means basically that the company’s process for reporting financial statements has some problems.
In its filing on Wednesday night, Etsy disclosed that its two weaknesses related to:
1) A lack of adequate procedures and controls to appropriately account for certain non-income tax-related expenses and comply with the related filing requirements.
2) And a lack of adequate cut-off procedures to ensure the timely recording of certain period-end accruals.
These two weaknesses, “resulted in a misstatement of expenses in prior periods that were immaterial to previously issued annual financial statements but in combination were material to certain interim periods.”
Here are all the periods the company has had to restate its results for:
“The impact of these material weaknesses resulted in the revision of our consolidated financial statements for the years ended December 31, 2012 and 2013, for the three months ended March 31, 2013, the three and six months ended June 30, 2013, the three and nine months ended September 30, 2013, the three months ended December 31, 2013 and the three months ended September 30, 2014. The impacts of these material weaknesses also resulted in the restatement of our consolidated financial statements for the three months ended March 31, 2014, the three and six months ended June 30, 2014 and the nine months ended September 30, 2014.”
To right these wrongs, Etsy says it is doing the following:
We are working to remediate the material weaknesses. We have taken steps to enhance our internal control environment and plan to take additional steps to remediate the material weaknesses. Specifically:
- We began building an in-house tax function in early 2014 and have added a global head of tax, senior tax manager of planning and a dedicated senior state tax accountant and plan to add an experienced director of tax accounting. We have also hired additional qualified personnel in our accounts payable function, including an experienced supervisor, and plan to add an additional experienced senior accountant. We will continue to evaluate the structure of the finance organisation and add resources as needed;
- We are implementing additional internal reporting procedures, including those designed to add depth to our review processes and improve our segregation of duties;
- We are updating our systems so that we may collect the necessary information to enable us to more effectively monitor and comply with applicable non-income tax-filing requirements on a timely basis;
- We are improving the communication and coordination among our finance departments and our record-keeping procedures and we have expanded cross-functional involvement and input into period-end accruals. We are also planning enhancements in our procure-to-pay process as well as additions to analytical procedures used to assess period-end accruals; and
- We are in the process of documenting, assessing and testing our internal control over financial reporting as part of our efforts to comply with Section 404 of the Sarbanes-Oxley Act.
The actions that we are taking are subject to ongoing senior management review as well as audit committee oversight. Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our efforts may not be successful in re mediating these material weaknesses. In addition, we will incur additional costs in improving our internal control over financial reporting. If we are unable to successfully remediate these material weaknesses or if we identify additional material weaknesses, we may not detect errors on a timely basis. This could harm our operating results, cause us to fail to meet our SEC reporting obligations or Nasdaq listing requirements on a timely basis, adversely affect our reputation, cause our stock price to decline or result in inaccurate financial reporting or material misstatements in our annual or interim financial statements.