Groupon, Inc.2011 Initial Public Offering

Daniel G. ReynoldsFall 2013

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Agenda• Background• Initial public offering• Non-GAAP financial measure• Revenue recognition• Internal control weakness

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Background

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Beginnings• Started in November 2008• Chicago, IL• Original business model–Offer “Deals” from local merchants– “Deal” would activate when enough

consumers purchased one

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Typical Groupon “Deal”

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How it works• Groupon arranges with local merchant to

sell $20 value coupon for $10• Groupon sends email with “deal” to its

subscribers• Subscriber purchases and prints coupon• Subscriber takes coupon to local merchant

to redeem• Merchant provides the goods or service• Groupon sends $5 to local merchant and

keeps $5 for itself

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Rapid Growth

2008 2009 20100

100

200

300

400

500

600

700

800

0.130.5

713.4

Revenue

$ m

illi

ons

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Rapid Growth

2008 2009 20100

10

20

30

40

50

60

0 1.8

50.6

Subscribers

mil

lio

ns

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Rapid Growth

2008 2009 20100

5

10

15

20

25

30

35

0 1.2

30.3

Coupons sold

mil

lio

ns

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Forbes® Magazine August 2010• Featured co-

founder and CEO Andrew Mason

• “Groupon is on pace to pull in $1 billion in sales faster than any company in history”

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Hot Market for Internet Companies

• Google offers $6 billion for Groupon

• Zynga files for IPO

• Pandora Media files for IPO

• Groupon files for IPO

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Initial Public Offering

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Form S-1• Registration Statement Under the

Securities Act of 1933• Filed with the SEC June 2, 2011• Amended eight (8) times• Became effective November 2, 2011• Key accounting issues:–Non-GAAP financial measure–Revenue recognition

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Non-GAAP Financial Measure

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Why Use a Non-GAAP Measure?

• Groupon had lost money each year from 2008-2010

• Heavy spending to grow subscriber base

• Several acquisitions with contingent consideration

• So, Groupon invented “Adjusted CSOI”

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What was Adjusted CSOI?• “Adjusted Consolidated Segment

Operating Income”• Start with Operating Income (loss)• Add-back:–Online marketing expenses–Stock-based compensation–Acquisition-related expenses

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Converts Losses into Income

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Regulation G• Adopted by SEC in 2003• Governs use of non-GAAP financial

measures• Must reconcile to most directly-

comparable GAAP measure• Must not adjust for non-recurring

items if reasonably likely to recur

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Groupon Claimed• Online marketing expense would

eventually go away–At some unspecified future date–When its subscriber base was fully-

developed

• Adjusted CSOI used for internal performance measurement

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SEC Staff Required• Adjusted CSOI must be removed from

the Form S-1 filing–To avoid making the filing misleading to

investors

• Groupon changed it to “CSOI”–Leaving the online marketing expense–Still mentioned Adjusted CSOI in the

president’s letter

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Revenue Recognition

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Principal or Agent?• Groupon’s sales force contacted local

merchants to advertise using a Groupon offer

• Subscribers purchased a coupon on the Web site

• Groupon collected payment• And sent payment to merchant• After deducting its fee

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US GAAP GuidanceASC 605-45

• Revenue Recognition, Principal Agent Considerations–Report gross amount billed as revenue

when earned as a principal–Report net amount retained as revenue

when earn a commission or fee as agent

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Indicator of gross revenue reporting Groupon

Primary obligor in the arrangement No

General inventory risk before order placed or after return No

Latitude in establishing price No

Changes the product or performs part of the service No

Has discretion in supplier selection No

Determines product or service specifications No

Physical loss inventory risk after order placed or during shipping

No

Credit risk No

ASC 605-45-45 (3 through 14)

Indicators of Gross Revenue

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Indicator of net revenue reporting Groupon

Supplier is primary obligor Yes

Amount earned is fixed Yes

Supplier has credit risk Yes

ASC 605-45-45 (15 through 18)

Indicators of Net Revenue

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SEC Staff Required• Financial

statements had to be restated– Years 2008-2010– Interim periods

through June 2011

• Reduced revenue• Reduced cost of

sales• No effect on net

income/loss

2008 2009 20100

100

200

300

400

500

600

700

800

0.130.5

713.4

0 14.5

312.9

Revenue

As reported As corrected

$ m

illi

ons

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Internal Control Weakness

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Groupon Completes IPO

$20/share – raised $800 million

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Groupon’s first report....

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...had to be revised

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What Happened?• “Material adjustment” to 4th quarter

allowance for refunds

• Caused by “shift in the deal mix to higher price point offers”

• “Material weakness in internal controls”

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Embarrassing Announcement

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What Was Lacking?• Written policies and procedures• Specific assignments for reconciliations

and journal entries• Documentation of closing procedures

performed• Oversight procedures• Validation of accounting for non-

routine judgments and estimations

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Corrective Actions• Hired KPMG to develop internal

controls• Expanded audit committee with

additional financial experts• Named former KPMG partner as

Principal Accounting Officer

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Questions?