As a result, SFX treated some 2012 stock grants as having been made in 2013 for accounting purposes. Some acquisitions the company characterized as having closed never actually did so, and eventually failed. Improper purchase and accrual accounting caused SFX to fail to report some significant transactions and resulted in a restatement of the company's 2012 earnings.
"We believe that this was related, in part, to a lack of sufficient staff with appropriate training in GAAP and SEC rules and regulations with respect to financial reporting functions, as well as the lack of robust accounting systems," SFX concludes.
The firm says that it will correct those material weaknesses by adding experienced accounting and financial personnel, retaining third party consultants and improving its IT infrastructure.
"We will incur increased costs as a result of operating as a public company, particularly once we cease to be an emerging growth company, and our management will be required to devote substantial time to new compliance initiatives," SFX states.
Drugs as an Investment RiskBut financials and accounting aside, SFX faces serious legal risks that could threaten the company's ability to continue to put on high profile festivals. Injuries at festivals could subject the company to liabilities or increase its expense. SFX also lists drug usage as a risk factor for the firm. "Activities or conduct, such as illegal drug use, at our properties or the festivals and events we produce may expose us to liability, cause us to lose business licenses or government approvals or result in adverse publicity," the company states. While the company doesn't list litigation surrounding Electric Zoo in its S-1, it nevertheless is a risk investors need to consider. SFX says it has formed a Medical Procedure and Safety Committee to put together policies to ensure that its festivals and events are conducted in conformance with local, state and federal laws. "We have a 'no tolerance' policy on illegal drug use in or around our facilities, and we continually monitor the actions of entertainers, fans and our employees to ensure that proper behavioral standards are met," SFX states. Still, the company is not able to give shareholders assurances. Violations of the law at SFX-run concerts could result in liability for the company, the loss or termination of its lease venues, permits and even lower consumer demand for its events. Having a publicly traded entity overseeing the compliance of EDM festivals is a risk for shareholders, but it might also lead to better overall security for those who attend. Investors for now are putting their money behind the vision of a music industry titan who is launching an ambitious but money-losing enterprise. While SFX's IPO is priced at $13 a share, the company reports its net tangible book value per share as a negative 20 cents. SFX closed lower by 8.54% in Wednesday trading at $11.89 a share. -- Written by Antoine Gara in New York. Follow @antoinegara
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