This memorandum discusses Groupon's use of non-GAAP financial measures in its S-1 and S-1/A filings. Specifically, it focuses on Groupon's exclusion of online marketing expenses from its adjusted consolidated segment operating income (ACSOI) measure. The SEC has questioned this exclusion, as online marketing represents a normal recurring operating expense for Groupon and excluding it could mislead readers. While Groupon claims marketing expenses are not indicative of future expenses, it also states these expenses are based on the growth it wishes to pursue. Therefore, the SEC argues exclusion of marketing is not justified as Groupon's business relies on acquiring new customers regularly through online marketing. The memorandum agrees with the SEC's position. It

1. MEMORANDUM
TO:ProfessorSiyiLi
FROM:Richard Valimohammad
DATE:October29,2013
SUBJECT:GrouponS-1&S-1/AFillings
Adjusted consolidated segment operating income (ACSOI) is a non- GAAP financial measure
used by Groupon. The company believes this as an important measure because it specifically
excludes expenses that are,“non-cash or otherwise indicative to future operating expensing”.
Under this measure Groupon has excluded the following expenses; stock-based compensation,
acquisition related costs and online marketing expenses. In accordance with Regulation G, this
non-GAAP financial measure is most comparable to the U.S. GAAP measure, “(Loss) income
from operations”.
The letter from SEC is requesting from Groupon, clarification about how the company applies
the use of its non-GAAP financial measure (ACSOI). The exclusion of the online marketing
expenses are of specific importance to the SEC, as they believe that this is a normal recurring
operating cash expenditure and the removal of this expenses can be potentially misleading to the
readers. Groupon states that online marketing expense represents the cost to acquire new
subscribers and is dictated by the company according to the amount of growth they want to
pursue.
I agree with the position the SEC has taken about the company’s exclusion of online marketing
expenses. Groupon says these are not indicative to future operating expenses, but at the same
time they say that it’s up to them on the growth rate they wish to pursue. From the view of the
SEC, for Groupon to justify the removal of online marketing expenses, they would not be in
pursuit of acquiring new customers on a recurring basis. Since the Groupon is an online company
it would make sense that their marketing expenses are incurred online and on a regular basis. The
company should be in pursuit of growth and acquiring new customers, thus the exclusion of
these expenses are not justified.
The primary difference in the reporting of revenues and the reason for large decrease is because
on its original S-1 the company was reporting revenue as the gross amount (the amount it
receives from its customers before it distributes to its vendors).FASB ASC Section 605-45-45-04
[The entity is the primary obligor in the arrangement]. For Groupon to report revenue at the
gross amount, the “entity” should be responsible for fulfilment of the product or service. By
the nature of the company’s business they serve as an intermediary between the supplier and
customer, therefore they are not considered the entity/primary obligor. Groupon should have
reported revenue in the net amount, as they did on their S-1/A filing. After reporting revenue in
the “net amount” there was a significant decrease in the presentation of revenue.