The blurred lines of Livestrong - the spin bike sham

[sartain]

Good work.

This is outrageous. While people can make an argument that it is okay that Armstrong benefits if the LAF also makes money from the deal, how the heck does someone justify Knaggs and Stapleton getting a cut? And it is a pretty large cut, almost a third of what the LAF is getting.

BD,

Not really in this case, as I am fairly sure LA demanded it; those two have been with him since the rocket ship was launched. He does take care of his inner circle, which is pretty small.

 

[AussieGoddess]

If LA had kept Livestrong out of it all, I would not have a problem at all.

He is quite entitled to set up or invest in a new business. He is quite entitled to be paid a substantial figure to provide content for this venture.

My issue is that he got LAF involved in it. He got Livestrong to licence their name (and their image/reputation etc) for no fees but for equity in a fledgeling business that now has dubious accounting practices (I am an accountant and I am horrified at what is written about in those articles linked).

He got his charity to provide legitimacy and branding to an online business which he had a personal financial interest in.

Definition of conflict of interest

 

[Dallas_]

If LA had kept Livestrong out of it all, I would not have a problem at all.

He is quite entitled to set up or invest in a new business. He is quite entitled to be paid a substantial figure to provide content for this venture.

My issue is that he got LAF involved in it. He got Livestrong to licence their name (and their image/reputation etc) for no fees but for equity in a fledgeling business that now has dubious accounting practices (I am an accountant and I am horrified at what is written about in those articles linked).

He got his charity to provide legitimacy and branding to an online business which he had a personal financial interest in.

Definition of conflict of interest

Interesting to read the comments of an accountant. In that case:
Would Novitzky be interested in this tangled web? or has he already had a peek under the hood? cheers

 

[AussieGoddess]

It sounds like the SEC (securities exchange commission I think????) is looking into the accounting practices of Demand Media anyway. Its a pretty big thing to be putting those kind of accounting policies into an IPO, so it will be looked at pretty closely.

thats not to do with LA though - he seems to be only a fairly small shareholder who is also paid for content .... I wouldnt think he has much to do with the IPO itself, and its not illegal to use whatever accounting principles you like when you are not offering shares to the public. Its only a problem because they are offering shares to the public.

As for Novitsky - what Armstrong has done with Livestrong and the .com is not actually a crime. Its not illegal - just a massive conflict of interest in mixing his personal finances and those of his charity. I would think the tax office would be interested in following up some of those - and whatever government body looks into charities and the charitable status of companies -..... but no, I dont think Novitsky would be interested.

Just waiting for the Wall Street Journal, or another major publication to come out with a full investigation into Livestrong once the poo hits the fan though .... should be fun to watch.

 

[thehog]

Problem being the investors are not been given the real "picture" on what earnings and profit are today and what they could potentially be. Fudging the books to heighten the value of stock is the realm of Enron. It only ends in tears. But I think thats the idea. Get the IPO out, inflate and over value the stock and then sell. The three amigos are well protected as they're all taking "consultancy" fees. Armstrong 1 million a year will cover if any losses eventuate. Its the investors who take the risk. Judging by what the commentators are saying it's a "sack" stock. If they go public and the stock is dumped they're all sorts very early on.

What would be interesting to know is what is the liability of Livestrong and by extension the LAF? Does Livestrong bail out Demand and does LAF/Livestrong money go to Demand if there's no money to continue operating? I should think not but the licensing agreement is sketchy. I wold assume LAF would start being pawned by Demand to cover the losses.

My biggest concern is confidence. If charges are laid and/or more Floyd revelations start to leak the boat starts to get more holes than they can fill at any one time. Investors need confidence. Already we're seeing the IPO being questioned on accounting practices and the golden goose is fast becoming a turkey.

 

[AussieGoddess]

yep agreed.

The fact that such red flags have been raised about a company who trades using the Livestrong banner should be of HUGE concern to the Board of the LAF.

Basically what they are doing is recording all revenue in the year it is earned, but only recording 1/5th of some of the major expenses (depreciating them over 5 years). This means that the recorded profit is substantially higher .... and the assessed value of the stock is being sold on the basis of this artificially inflated profit.

Being associated with a company (and having it using your brand) that is being investigated by the SEC (if it comes to that, which it very well might) isnt a good look for a charity who already has questions about its financial impartiality ....

 

[Cloxxki]

Awesome review.

People are so worried about the possible travel expenses LA gets to claim.
Hey, with such deal rolling, I wouldn't mind having the traveling expenes, even a company jet plus fuel, put on my tap. The general public might get upset to see such costs declaration, I'll just throw those is as my donation to the charity. It's after all almost as good as cause as me myself and I.

 

[thehog]

I wonder who's going to cover the losses? That's a staggering amount of money. Looks to me the IPO is funding the debt. They are yet to turn a profit in 5 years. I wouldn't touch that stock. Looks like the 3 Amigos want to cash in and get out.

Which leads to the next question. Why would a charity align itself to such a high risk venture?

--
http://money.cnn.com/2010/12/23/technology/demand_media_IPO/

Demand CEO Richard Rosenblatt has been insisting for years to media outlets, including Fortune, that his company -- which churns out vast amounts of low-cost content optimized to grab search-engine clicks -- is profitable.

But in its IPO filing, Demand disclosed that it was more than $6 million in the red for 2010 as of August. It posted a net loss of $22 million in 2009, a $14 million loss in 2008 and a nearly $6 million loss in 2007.

All Things D reported Thursday that regulators are taking a closer took at Demand's unusual accounting practices. Demand Media filed an amended Form S-1 to the Securities and Exchange Commission on Tuesday that shed more light on its accounting.

What the added information boils down to: Demand doesn't expense the cost of paying its writers upfront. Instead, it spreads those costs over five years, which boosts its bottom line.

Demand's rationale is that the writers' content will generate revenue for the company revenue for multiple years, so it shouldn't have to recognize the costs upfront. It estimates the "average useful life" -- meaning the amount of time it will make money -- of its content to be 5.4 years.

Traditionally, publishing companies expense their editorial costs immediately. Demand is instead treating them as a capital investment, like a new building or piece of equipment.

Demand's business model is based on creating a giant trove of content at rock-bottom rates, typically $15 for an article of several hundred words or $30 for a video. The company currently has 13,000 active freelancers and a stash of around 2 million articles and videos.

 

[Race Radio]

I wonder who's going to cover the losses? That's a staggering amount of money. Looks to me the IPO is funding the debt. They are yet to turn a profit in 5 years. I wouldn't touch that stock. Looks like the 3 Amigos want to cash in and get out.

Which leads to the next question. Why would a charity align itself to such a high risk venture?

--
http://money.cnn.com/2010/12/23/technology/demand_media_IPO/

Demand CEO Richard Rosenblatt has been insisting for years to media outlets, including Fortune, that his company -- which churns out vast amounts of low-cost content optimized to grab search-engine clicks -- is profitable.

But in its IPO filing, Demand disclosed that it was more than $6 million in the red for 2010 as of August. It posted a net loss of $22 million in 2009, a $14 million loss in 2008 and a nearly $6 million loss in 2007.

All Things D reported Thursday that regulators are taking a closer took at Demand's unusual accounting practices. Demand Media filed an amended Form S-1 to the Securities and Exchange Commission on Tuesday that shed more light on its accounting.

What the added information boils down to: Demand doesn't expense the cost of paying its writers upfront. Instead, it spreads those costs over five years, which boosts its bottom line.

Demand's rationale is that the writers' content will generate revenue for the company revenue for multiple years, so it shouldn't have to recognize the costs upfront. It estimates the "average useful life" -- meaning the amount of time it will make money -- of its content to be 5.4 years.

Traditionally, publishing companies expense their editorial costs immediately. Demand is instead treating them as a capital investment, like a new building or piece of equipment.

Demand's business model is based on creating a giant trove of content at rock-bottom rates, typically $15 for an article of several hundred words or $30 for a video. The company currently has 13,000 active freelancers and a stash of around 2 million articles and videos.

This is the kind of accounting that got Worldcom in trouble.

Given Rosenblatt's questionable history many in the industry were openly sceptically of Demand's claims......yet Armstrong was drawn to him. Birds of a feather.

 

[thehog]

This is the kind of accounting that got Worldcom in trouble.

Given Rosenblatt's questionable history many in the industry were openly sceptically of Demand's claims......yet Armstrong was drawn to him. Birds of a feather.

Bloody hell. No wonder the charity has to fund the jet. With paragraph you highlighted in bold could be considered if they produced high quality output. But it's guys sitting in their mothers basements churning out krap articles with zero research. So how can that hold a vaule of 5 years!!!!!

I didn't realise it was that bad. That's shocking.

 

[Epicycle]

If it hasn't been mentioned already...the other big issue with Demand is that the bulk of their business model is built around gaming a Google search loophole that may be closed to combat spammers. Once Google tweaks the search algorithm Demand is screwed. Shady accounting practices notwithstanding, I don't see why anyone would put much faith in a business whose future rests on Google not improving their search service.

 

[jimbob_in_co]

Bloody hell. No wonder the charity has to fund the jet. With paragraph you highlighted in bold could be considered if they produced high quality output. But it's guys sitting in their mothers basements churning out krap articles with zero research. So how can that hold a vaule of 5 years!!!!!

I didn't realise it was that bad. That's shocking.

This whole partnership with Demand Media reminds me of when the Foundation decided to 'outsource' and nationalize their fund raising cycling events in 2006, moving from the Austin only "Ride for the Roses"/"Peloton Project" to the five event "Livestrong Challenge Series" from L.A. to Philly.

They choose an event organizer that had no real experience in this type of work, distanced themselves from assisting or interacting with the participants and fundraisers in theses events (even Armstrong went to a U of Texas football game at Ohio Sate Univ. rather than show up at the Philly event that same day), and darned near killed off the whole 'cycling event fundraising aspect' of their Foundation.

I guess it should not be too surprising to see how Demand Media operates.

 

[BotanyBay]

Demand's business model is based on creating a giant trove of content at rock-bottom rates, typically $15 for an article of several hundred words or $30 for a video. The company currently has 13,000 active freelancers and a stash of around 2 million articles and videos.

And this is why these two professions (and many others like them) have been commoditized down to the point of not being worth pursuing (by anyone) anymore.

 

[MD FACG FACP]

What institutional investment firm wants that IPO anyway. It's like buying a drug company IPO when their most successful drug may be taken off the market.

 

[Velocentric]

Some people really need a hobby....Holy Cow!

I had a hobby. Once. Honest.

Something else that I'm looking as closely at as I can are the arrangements between LAF / Livestrong and the various Research Institutes around the World that are now Livestrong branded. For example, the Flinders Institute which Armstrong announced in January would become the Flinders LIVESTRONG Cancer Research Centre. (Press release here).

The funding for the building of this Centre comes from Local & National Government funding, public donations and corporate sponsorship. But it carries LIVESTRONG branding (even the car park "future site of..." sign) and according to a number of people I've discussed this with, Flinders will pay a licensing fee to Livestrong, (No word yet if that's LAF or Demand / CSE / whoever decides they own the rights at that time), for the use of the trade mark which it's 'expected' will increase public & corporate interest in donation.

I'm still waiting to hear back from Flinders about the existence or size of the licensing fee payable by them to Livestrong and what the benefits are expected to be.

My concern is this: if, as I've been told, they are paying an undisclosed licence fee to use a trademark of dubious provenance. How much do centres like this pay and where does the fee go?

 

[Black-Balled]

aye but i know who i'd rather trust donating my money to

We are not talking about Floyd here.

With or without the programme, get it?

 

[D-Queued]

It sounds like the SEC (securities exchange commission I think????) is looking into the accounting practices of Demand Media anyway.
...

its not illegal to use whatever accounting principles you like when you are not offering shares to the public.

...

Yes, SEC is the Securities and Exchange Commission. There are typically many filings with the SEC that are required to pursue an IPO. There absolutely are accounting rules even for the IRS. The SEC can also get involved depending how many shareholders there are in a private company.

...

Basically what they are doing is recording all revenue in the year it is earned, but only recording 1/5th of some of the major expenses (depreciating them over 5 years). This means that the recorded profit is substantially higher .... and the assessed value of the stock is being sold on the basis of this artificially inflated profit.

...

This (potentially) violates US GAAP. Many software companies have found themselves in big trouble with respect to Revenue Recognition - the expense of an item must be aligned with its cost. This may not be as big a deal in Australia, but it is a big problem here.

Revenue Recognition is a huge practice area in accounting. Since Revenue Recognition can be difficult for any 'virtual' product, the most conservative practice is the best. In this case, the item should be expensed when paid.

In a 13 year study on Material Accounting Misstatements, the authors observed:

misstating firms have a greater proportion of assets with valuations that are more subject to managerial discretion

In misstatement years, cash profit margins and earnings growth decline, while accruals increase

The Internet bust well demonstrated that Internet business models are non-durable.

--
http://money.cnn.com/2010/12/23/technology/demand_media_IPO/

...What the added information boils down to: Demand doesn't expense the cost of paying its writers upfront. Instead, it spreads those costs over five years, which boosts its bottom line.

...

Yup, that is a problem. Basically they are trying to create a profit by overvaluing inventory. Been done before.

They haven't invented a new business model, and they cannot just change accounting practices because they feel like it. They didn't invent Internet commerce.

They should minimally expect annual audits to assess the inventory value - even as a private company now.

Look for the pump and dump (form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price).

This is the kind of accounting that got Worldcom in trouble.

Given Rosenblatt's questionable history many in the industry were openly sceptically of Demand's claims......yet Armstrong was drawn to him. Birds of a feather.

Yup. More companies than just Worldcom have been in trouble for this.

Dave.

 

[thehog]

Just so I get this right. The hospital pays the charity to use its name? I thought it was the other way around!

I think I've seen it all now.

Armstrong shows up being paid a fee to appear to "donate" his name to the centre. But they're actually paying him to use the name??!!!!?!?

No wonder he's going back to Australia. Cancers pays big.

I had a hobby. Once. Honest.

Something else that I'm looking as closely at as I can are the arrangements between LAF / Livestrong and the various Research Institutes around the World that are now Livestrong branded. For example, the Flinders Institute which Armstrong announced in January would become the Flinders LIVESTRONG Cancer Research Centre. (Press release here).

The funding for the building of this Centre comes from Local & National Government funding, public donations and corporate sponsorship. But it carries LIVESTRONG branding (even the car park "future site of..." sign) and according to a number of people I've discussed this with, Flinders will pay a licensing fee to Livestrong, (No word yet if that's LAF or Demand / CSE / whoever decides they own the rights at that time), for the use of the trade mark which it's 'expected' will increase public & corporate interest in donation.

I'm still waiting to hear back from Flinders about the existence or size of the licensing fee payable by them to Livestrong and what the benefits are expected to be.

My concern is this: if, as I've been told, they are paying an undisclosed licence fee to use a trademark of dubious provenance. How much do centres like this pay and where does the fee go?

 

[BotanyBay]

Just so I get this right. The hospital pays the charity to use its name? I thought it was the other way around!

I think I've seen it all now.

Armstrong shows up being paid a fee to appear to "donate" his name to the centre. But they're actually paying him to use the name??!!!!?!?

No wonder he's going back to Australia. Cancers pays big.

Why put the resources into actually "doing/raising" something when you can just have Lance show-up and they'll pay for the opportunity to be associated with it.

Man, I hope we see the exposé very very soon.

 

[jimbob_in_co]

Man, I hope we see the exposé very very soon.

+1 Me too BB

 

[BroDeal]

Just so I get this right. The hospital pays the charity to use its name? I thought it was the other way around!

I think I've seen it all now.

Armstrong shows up being paid a fee to appear to "donate" his name to the centre. But they're actually paying him to use the name??!!!!?!?

The LAF is a reverse Robin Hood charity. It takes from the sick...and gives to Armstrong and his few friends.

After years of homers defending Armstrong by claiming the LAF funds cancer research, it turns out that cancer research funds Livestrong.

I cannot wait to hear kurtinsc's excuses for this.

 

[JMBeaushrimp]

Wow! The last half-dozen pages of this thread have been some of the best I've seen in the Clinic for a long time.

Thanks to all the contributors! Nice to see not everybody developed holiday-induced retardation...

Keep it up!

 

[BotanyBay]

Wow! The last half-dozen pages of this thread have been some of the best I've seen in the Clinic for a long time.

Thanks to all the contributors! Nice to see not everybody developed holiday-induced retardation...

Keep it up!

To quote Tom Cruise:

"It's BEAUTIFUL MAN!"

 

[AussieGoddess]

If it hasn't been mentioned already...the other big issue with Demand is that the bulk of their business model is built around gaming a Google search loophole that may be closed to combat spammers. Once Google tweaks the search algorithm Demand is screwed. Shady accounting practices notwithstanding, I don't see why anyone would put much faith in a business whose future rests on Google not improving their search service.

I did notice something about this in one of the asseswments. It will be very interesting to see what happens here .... but google ads getting the revenue to fill the remaining ad space may very well mean that google wont shut it down so quickly as they are getting a good cut of the action.

Yes, SEC is the Securities and Exchange Commission. There are typically many filings with the SEC that are required to pursue an IPO. There absolutely are accounting rules even for the IRS. The SEC can also get involved depending how many shareholders there are in a private company.

This (potentially) violates US GAAP. Many software companies have found themselves in big trouble with respect to Revenue Recognition - the expense of an item must be aligned with its cost. This may not be as big a deal in Australia, but it is a big problem here.

Revenue Recognition is a huge practice area in accounting. Since Revenue Recognition can be difficult for any 'virtual' product, the most conservative practice is the best. In this case, the item should be expensed when paid.

snip

They should minimally expect annual audits to assess the inventory value - even as a private company now.

Yep - basically that is what I was saying .... its not a Generally Accepted Accounting Principle by any means (in the US or anywhere else in the world).

However, I dont know about the US, but here in Aus privately held companies that are not offering shares to the public do not have to adhere to the International Accounting Standards. They only must report appropriate financial statements to their shareholders. Therefore, up until they do the IPO they are not actually doing anything wrong.

Putting such biased and artificially inflated statements into an IPO (Initial Public Offering) IS a HUGE deal though (certainly in Aus, and I am assuming in the US as well). To do the IPO you have to use either an assets test or an income test to prove value in the company. If the company does not have actual physical assets, and is listing based on its revenue potential, they must lodge between 3-5 years worth of audited financial statements proving up their profitablity.


It is incredibly interesting to note that the full financial statements show net losses of-$19m, -$42m & -$52m respectively for the last 3 years.....

Also interesting when regarding the total $479m total assets, $324m is for intangible assets and goodwill. If you take out those assets, it gives net assets for the company of just $31m as at 30 Sept 2010.

How the hell is this company allowed to list?

I couldnt see in all of that who the auditor is?????????

financial statements start at pg F-1 (after pg 209)

 

[Race Radio]

I did notice something about this in one of the asseswments. It will be very interesting to see what happens here .... but google ads getting the revenue to fill the remaining ad space may very well mean that google wont shut it down so quickly as they are getting a good cut of the action.

Demand actually talks about this as their biggest risk in their S-1. As Google moves into Demand's space do anyone think they will continue to enable Demand's business model?