"We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to maintain or increase profitability in the future;"
"We have identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations;"
Second one is also a standard statement, but not standard to actually see. Honestly I don't know that I have ever seen that statement out in the wild. It's like something you study about in school - but rarely see.
It could mean anything, with regards to discrepancies found in the financials. The main thing is that, what was found is material - and when you are talking about numbers this big - the discrepancy must have been significant.
It's actually incredibly common. If a company has ever had an issue around reporting, they need to include that. See here how many companies use the same exact language:
Isn't it more the second part of the statement that is shocking, that is "may identify additional material weaknesses in the future" rather than "we have identified a material weakness".
If so, that cuts the results down from 684 to 205, of which many are from the same company, just at different times.
My guess is that they are operating at such large numbers so rapidly that they're basically saying "if you tried to audit every penny we make it, you're probably going to find discrepancies, we guarantee it".
Going from $600M to $1.9B in revenue in a year will stress any system.
Would you say this is CYA by finance when forced to go public by those with a controlling interest in the company? Because it definitely has that CYA vibe.
It is also possible that there is nothing wrong with the financials, but there is wrong with the controls over the financials.
IE, can the entire finance department sign off on checks? Or something along those lines.
But with the above example, say anyone can process process orders without any oversight (ie no sign off by 2 VPs or something like that) What is potentially stopping some AP clerk from setting up a fake company, and then paying them for services every month?
These are also the types of things that controls over financial reporting could mean.
Yes. It's like finding a security vulnerability without any evidence it was exploited.
Just because an AP clerk could embezzle money that way, doesn't mean that they've identified evidence of that happening. But now they've reported that lapse in financial controls (which may or may not have been addressed), and warned that there may be others.
One doesn’t admit to a material misstatement if it is at all possible. It is a HUGE deal because it admits that someone fucked up and the error wasn’t caught until the audit.
Auditors typically work with a firm to iron out any issues so as to avoid material statements. The fact DoorDash and the auditor weren't able to resolve this issue/these coming issues and resorting to writing it up definitely is a big deal. But business-wise, yea losses forever isn't what you want to see.
"literally every tech company" is a significant overstatement. There are a lot of tech companies that were profitable at time of IPO and that did not include the first statement.
Just because it has become standard operating procedure for tech companies to go public with a business model of "lose money on every sale, but make up for it in volume" (with a hope that they can sustain predatory pricing long enough to dominate the market) doesn't mean it's ever less interesting. It's a fairly recent phenomenon and IMO will never get old to comment about every time there's a notable IPO.
The first part is very standard language. In general, the risk section needs to cover every possible risk so no-one can sue you. The likelihood doesn't matter.
Recovering CPA/auditor here. If you're curious to what the second bullet point means...
When a CPA firm audits a public company, they're basically performing two parallel audits -- an audit of the books and records (i.e. are the numbers accurate/truthful?) and an audit of the internal controls over financial reporting (i.e are there procedures/controls to find correct errors/fraud?) This second audit is required because of Enron, basically.
Anyway, when the auditors find a big error, they will usually tell the Company how to fix it, so the books and records are fairly stated. However, since this error usually results from a deficiency in controls (i.e. you had nothing to catch this error), it is noted on the audit report on the internal controls.
A 'material weakness' is the worst kind of deficiency in internal controls. It basically means that an enormous error could occur (enormous in the sense that it would effect an investor's decision about buying or selling the stock) and the Company wouldn't be able to catch it/fix it or even know that it happens
In the S-1 they state:
"The material weakness that we and our independent registered public accounting firm identified occurred because (i) we had inadequate processes and controls to ensure an appropriate level of precision related to our revenue to cash reconciliation process, and (ii) we did not have sufficient resources with the adequate technical skills to meet the emerging needs of our financial reporting requirements"
So it basically means their accounting team was completely overwhelmed/inexperienced. My experience with software companies is that accounting is a total shitshow, so not surprising.
The surprising thing is that this weakness must be so pervasive, they can't predict with any confidence whether they will remediate it and be able to have sufficient controls over their numbers. So it sounds like they're probably trying to completely overhaul their accounting function while they try to go public. As a potential investor, wouldn't give me a huge deal of confidence in the accuracy of their financials. Pity the poor souls trying to fix this...
"To address this material weakness, we are hiring additional accounting, engineering, and business intelligence personnel and are implementing process level and management review controls to identify and address emerging risks. While we are undertaking efforts to remediate this material weakness, we cannot predict the success of such efforts or the outcome of our assessment of the remediation efforts at this time. We can give no assurance that our efforts will remediate this deficiency in internal control over financial reporting or that additional material weaknesses in our internal control over financial reporting will not be identified in the future."
Seems nuts, but sections like this can be a bit "out there" occasionally since risks not covered can technically be grounds for an eventual lawsuit. I wouldn't take this as an expectation, but if you do decide to allocate $ towards them I would definitely pay attention to the notes in every 10k/10q. But you should be doing that anyway, imo.
> may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations
This part makes it sound (especially the "fail to meet our [...] reporting obligations" part) like they should get their shit together before going public, and even if they didn't plan on going public, fix that right away.
Imagine if any other small company approached the government and said "Hey, we might be breaking the law, we're not fully sure. That's alright with you?". They would get the IRS after them so quickly, how come DoorDash can be open about maybe breaking the law? Bigger companies seem to constantly be above the law.
In today's world, every medium to large company in the world breaks at least a law a day. It's simply literally impossible for a single human to comprehend all the laws and regulation: the internal revenue code itself contains 3.4 million worlds.
"We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to maintain or increase profitability in the future;"
"We have identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations;"