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Groupon Accounting Is Prolonging SEC Review

Kate Kelly, With Reporting By Jesse Bergman
Wednesday, 27 Jul 2011 | 1:07 PM ET

Concerns from regulators about Groupon’s accounting metrics are prolonging the company’s pre-initial public offering document review, according to people familiar with the matter. The Internet group-discount site is now eyeing a mid to late-September debut, two of these people added.

Groupon
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Groupon

Since early June, when Groupon filed its initial S-1 registration documents to go public, staffers at the Securities and Exchange Commission have been poring over the company’s financials, say these people, and have already made a first wave of suggested tweaks.

Some of those were reflected in an amended S-1 filed in mid-July, one of these people says, which included a toned-down letter from Groupon’s chief executive and a more detailed explanation of how the company measures its own success.

But the SEC remains focused on at least two of the company’s favored accounting metrics, say the people familiar with the matter: gross profits and consolidated segment operating income, or CSOI.

Gross profits, which Groupon argues are an important way to look at revenue, are the portion of a sale that the discount provider keeps after paying the merchant that provided the service. But gross profits don’t include certain marketing and other administrative costs associated with making those sales.

CSOI is a way of measuring operating income that does not include a range of expenses that Groupon considers to be one-offs, including online marketing costs and stock-based compensation. As a result, some critics don’t think it’s a good way to gauge true profitability.

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Groupon is working through the SEC’s concerns, say the people familiar with the matter, and will not allow red flags surrounding CSOI to scuttle its IPO plans, according to one of these people— even if that means downplaying or ultimately removing the metric from the company’s final S-1 filing.

In fact, Groupon has already added new contextual language to its amended registration document, saying that CSOI, “while not a valuation metric...provides us with critical visibility into our business.”

Groupon’s upcoming IPO is one of the most hotly anticipated of the year, and will be closely watched as a harbinger of success for the Internet’s group-discount providers, which include LivingSocial (which is also formulating IPO plans). But the company is already contending with the impact of increased scrutiny—including a technology-conference appearance in which CEO Andrew Mason gave his interviewer the silent treatment and negative reactions to comments made by Chairman Eric Lefkofsky the day after the original IPO filing that Groupon will be “wildly profitable.”

In one example of how Groupon has had to retrace some of its public steps, a now-infamous letter from Mason at the beginning of the company’s June 2 registration document has been softened and moved back multiple pages in the amended filing. In the newer filing, dated July 14, the word “struggling” was changed to “dealing,” and a line about how certain “investments in growth” had in the past “turned a healthy forecasted quarterly profit into a sizable loss” was deleted entirely.

But the amended letter still contains a provocative line that reveals Mason’s self-deprecating humor about starting his business: “After selling out on our original mission of saving the world to start hawking coupons, in order to live with ourselves, we vowed to make Groupon a service that people loved using.”

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