Groupon is an online discount merchant. In the company’s initial S-1 registration statement in 2011, then-CEO Andrew Mason gave prospective investors an up-front warning in a section entitled “We don’t measure ourselves in conventional ways.” He described Groupon’s adjusted consolidated segment operating income (adjusted CSOI) measure. Exhibit 11 provides excerpts from a section entitled “Non-GAAP Financial Measures,” which offered a more detailed explanation of the measure. Exhibit 12 , also from the initial registration statement, shows a reconciliation of CSOI to the most comparable US GAAP measure. In its review, the SEC took the position that online marketing expenses were a recurring cost of business. Groupon responded that the marketing costs were similar to acquisition costs, not recurring costs, and that “we’ll ramp down marketing just as fast as we ramped it up, reducing the customer acquisition part of our marketing expenses” as time passes. 20 Eventually, and after much negative publicity, Groupon changed its non-GAAP measure. Exhibit 13 shows an excerpt from the final prospectus fi led in November, after the SEC’s review. Use the three exhibits to answer the questions that follow.

Because of these limitations, Adjusted CSOI should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. When evaluating our performance, you should consider Adjusted CSOI alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.

1. What cautions did Groupon include along with its description of the “Adjusted CSOI” metric?
2. Groupon excludes “online marketing” from “Adjusted CSOI.” How does the exclusion of this expense compare with the SEC’s limits on non-GAAP performance measures?
3. In the first quarter of 2011, what was the effect of excluding online marketing expenses on the calculation of “Adjusted CSOI”?
4. For 2010, how did results under the revised non-GAAP metric compare with the originally reported metric?

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EXHIBIT 11 Groupon's "Non-GAAP Financial Measures" Disclosures from June S-1 Filing Adjusted CSOI is operating income of our two segments, North America and Inter- national, adjusted for online marketing expense, acquisition-related costs and stock- based compensation expense. Online marketing expense primarily represents the cost to acquire new subscribers and is dictated by the amount of growth we wish to pursue. Acquisition-related costs are non-recurring non-cash items related to certain of our ac- quisitions. Stock-based compensation expense is a non-cash item. We consider Adjusted CSOI to be an important measure of the performance of our business as it excludes expenses that are non-cash or otherwise not indicative of future operating expenses. We believe it is important to view Adjusted CSOI as a complement to our entire consoli- dated statements of operations. Our use of Adjusted CSOI has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: Adjusted CSOI does not reflect the significant cash investments that we currently are making to acquire new subscribers; Adjusted CSOI does not reflect the potentially dilutive impact of issuing equity-based compensation to our management team and employees or in connection with acquisitions; Adjusted CSOI does not reflect any interest expense or the cash requirements neces- sary to service interest or principal payments on any indebtedness that we may incur; Adjusted CSOI does not reflect any foreign exchange gains and losses; Adjusted CSOI does not reflect any tax payments that we might make, which would represent a reduction in cash available to us; Adjusted CSOI does not reflect changes in, or cash requirements for, our working capital needs; and Other companies, including companies in our industry, may calculate Adjusted CSOI differently or may use other financial measures to evaluate their profitability, which reduces the usefulness of it as a comparative measure.