Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________

Commission file number: 1-35335

Groupon, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
27-0903295
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
600 West Chicago Avenue, Suite 400
Chicago, Illinois
 
60654
(Address of principal executive offices)
 
(Zip Code)
312-334-1579
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x         No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        
Yes  x         No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x                           Accelerated filer ☐         
Non-accelerated filer (Do not check if a smaller reporting company) ☐    Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐            No  x 
As of May 7, 2018, there were 564,615,531 shares of the registrant's common stock outstanding.




TABLE OF CONTENTS
PART I. Financial Information
Page
Forward-Looking Statements
Item 1. Financial Statements and Supplementary Data
Condensed Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017
Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 (unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2018 and 2017 (unaudited)
Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2018 (unaudited)
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Item 4. Controls and Procedures
PART II. Other Information
 
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered sales of equity securities and use of proceeds
Item 5. Other Information
Item 6. Exhibits
Signatures

______________________________________________________




2



PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations. The words "may," "will," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "continue" and other similar expressions are intended to identify forward-looking statements. We have based these forward looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, but are not limited to, risk related to volatility in our operating results; execution of our business and marketing strategies; retaining existing customers and adding new customers; challenges arising from our international operations, including fluctuations in currency exchange rates, legal and regulatory developments and any potential adverse impact from the United Kingdom's likely exit from the European Union; retaining and adding high quality merchants; our voucherless offerings; cybersecurity breaches; competing successfully in our industry; changes to merchant payment terms; providing a strong mobile experience for our customers; maintaining our information technology infrastructure; delivery and routing of our emails; claims related to product and service offerings; managing inventory and order fulfillment risks; litigation; managing refund risks; retaining and attracting members of our executive team; completing and realizing the anticipated benefits from acquisitions, dispositions, joint ventures and strategic investments; lack of control over minority investments; tax liabilities; tax legislation; compliance with domestic and foreign laws and regulations, including the CARD Act, GDPR and regulation of the Internet and e-commerce; classification of our independent contractors; protecting our intellectual property; maintaining a strong brand; customer and merchant fraud; payment-related risks; our ability to raise capital if necessary and our outstanding indebtedness; global economic uncertainty; our common stock, including volatility in our stock price; our senior convertible notes; our ability to realize the anticipated benefits from the hedge and warrant transactions; and those risks and other factors discussed in Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2017, as well as in our condensed consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
As used herein, "Groupon," "we," "our," and similar terms include Groupon, Inc. and its subsidiaries, unless the context indicates otherwise.


3



ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GROUPON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
March 31, 2018
 
December 31, 2017
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
725,909

 
$
880,129

Accounts receivable, net
81,571

 
98,294

Prepaid expenses and other current assets
89,282

 
94,025

Total current assets
896,762

 
1,072,448

Property, equipment and software, net
146,717

 
151,145

Goodwill
289,945

 
286,989

Intangible assets, net
16,925

 
19,196

Investments (including $103,579 and $109,751 at March 31, 2018 and December 31, 2017, respectively, at fair value)
129,373

 
135,189

Other non-current assets
23,206

 
12,538

Total Assets
$
1,502,928

 
$
1,677,505

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
23,400

 
$
31,968

Accrued merchant and supplier payables
568,570

 
770,335

Accrued expenses and other current liabilities
265,920

 
331,196

Total current liabilities
857,890

 
1,133,499

Convertible senior notes, net
192,619

 
189,753

Other non-current liabilities
102,047

 
102,408

Total Liabilities
1,152,556

 
1,425,660

Commitments and contingencies (see Note 8)

 

Stockholders' Equity
 
 
 
Common stock, par value $0.0001 per share, 2,010,000,000 shares authorized; 752,664,286 shares issued and 564,062,044 shares outstanding at March 31, 2018; 748,541,862 shares issued and 559,939,620 shares outstanding at December 31, 2017
75

 
75

Additional paid-in capital
2,192,469

 
2,174,708

Treasury stock, at cost, 188,602,242 shares at March 31, 2018 and December 31, 2017
(867,450
)
 
(867,450
)
Accumulated deficit
(1,006,308
)
 
(1,088,204
)
Accumulated other comprehensive income (loss)
29,936

 
31,844

Total Groupon, Inc. Stockholders' Equity
348,722

 
250,973

Noncontrolling interests
1,650

 
872

Total Equity
350,372

 
251,845

Total Liabilities and Equity
$
1,502,928

 
$
1,677,505

See Notes to Condensed Consolidated Financial Statements.


4



GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Revenue:
 
 
 
Service
$
301,797

 
$
301,577

Product
324,743

 
372,049

Total revenue
626,540

 
673,626

Cost of revenue:
 
 
 
Service
31,145

 
42,873

Product
270,510

 
321,302

Total cost of revenue
301,655

 
364,175

Gross profit
324,885

 
309,451

Operating expenses:
 
 
 
Marketing
99,156

 
86,342

Selling, general and administrative
222,061

 
232,058

Restructuring charges
283

 
2,731

  Total operating expenses
321,500

 
321,131

Income (loss) from operations
3,385

 
(11,680
)
Other income (expense), net
(8,515
)
 
(4,602
)
Income (loss) from continuing operations before provision (benefit) for income taxes
(5,130
)
 
(16,282
)
Provision (benefit) for income taxes
(2,335
)
 
4,587

Income (loss) from continuing operations
(2,795
)
 
(20,869
)
Income (loss) from discontinued operations, net of tax

 
487

Net income (loss)
(2,795
)
 
(20,382
)
Net income attributable to noncontrolling interests
(4,093
)
 
(4,032
)
Net income (loss) attributable to Groupon, Inc.
$
(6,888
)
 
$
(24,414
)
 
 
 
 
Basic and diluted net income (loss) per share:
 
 
 
Continuing operations
$
(0.01
)
 
$
(0.04
)
Discontinued operations
0.00

 
0.00

Basic and diluted net income (loss) per share
$
(0.01
)
 
$
(0.04
)
 
 
 
 
Weighted average number of shares outstanding
 
 
 
Basic
561,735,937

 
562,195,243

Diluted
561,735,937

 
562,195,243

See Notes to Condensed Consolidated Financial Statements.


5



GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Income (loss) from continuing operations
$
(2,795
)
 
$
(20,869
)
Other comprehensive income (loss) from continuing operations:
 
 
 
Net change in unrealized gain (loss) on foreign currency translations adjustments
(1,568
)
 
430

Reclassification adjustments related to defined benefit pension plan

 
585

Net change in unrealized gain (loss) on available-for-sale securities (net of tax effect of $0 and $147 for the three months ended March 31, 2018 and 2017, respectively)
(501
)
 
239

Other comprehensive income (loss) from continuing operations
(2,069
)
 
1,254

Comprehensive income (loss) from continuing operations
(4,864
)
 
(19,615
)
 
 
 
 
Income (loss) from discontinued operations

 
487

Other comprehensive income (loss) from discontinued operations - Foreign currency translation adjustments:
 
 
 
Net unrealized gain (loss) during the period

 
(1,793
)
Reclassification adjustment included in net income (loss) from discontinued operations

 
(14,718
)
Net change in unrealized gain (loss)

 
(16,511
)
Comprehensive income (loss) from discontinued operations

 
(16,024
)
 
 
 
 
Comprehensive income (loss)
(4,864
)
 
(35,639
)
Comprehensive income (loss) attributable to noncontrolling interests
(4,093
)
 
(4,032
)
Comprehensive income (loss) attributable to Groupon, Inc.
$
(8,957
)
 
$
(39,671
)
See Notes to Condensed Consolidated Financial Statements.


6



GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
 
Groupon, Inc. Stockholders' Equity
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Groupon, Inc. Stockholders' Equity
 
Non-controlling Interests
 
Total Equity
 
Shares
 
Amount
Shares
 
Amount
 
Balance at December 31, 2017
748,541,862

 
$
75

 
$
2,174,708

 
(188,602,242
)
 
$
(867,450
)
 
$
(1,088,204
)
 
$
31,844

 
$
250,973

 
$
872

 
$
251,845

Cumulative effect of change in accounting principle, net of tax

 

 

 

 

 
88,945

 

 
88,945

 

 
88,945

Reclassification for impact of U.S. tax rate change

 

 

 

 

 
(161
)
 
161

 

 

 

Net income (loss)

 

 

 

 

 
(6,888
)
 

 
(6,888
)
 
4,093

 
(2,795
)
Foreign currency translation

 

 

 

 

 

 
(1,568
)
 
(1,568
)
 

 
(1,568
)
Unrealized gain (loss) on available-for-sale securities, net of tax

 

 

 

 

 

 
(501
)
 
(501
)
 

 
(501
)
Exercise of stock options
2,400

 

 
6

 

 

 

 

 
6

 

 
6

Vesting of restricted stock units and performance share units
4,157,462

 

 

 

 

 

 

 

 

 

Shares issued under employee stock purchase plan
746,773

 

 
2,434

 

 

 

 

 
2,434

 

 
2,434

Shares issued to settle liability-classified awards
1,240,379

 

 
6,436

 

 

 

 

 
6,436

 

 
6,436

Tax withholdings related to net share settlements of stock-based compensation awards
(2,024,590
)
 

 
(9,355
)
 

 

 

 

 
(9,355
)
 

 
(9,355
)
Stock-based compensation on equity-classified awards

 

 
18,240

 

 

 

 

 
18,240

 

 
18,240

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

 
(3,315
)
 
(3,315
)
Balance at March 31, 2018
752,664,286

 
$
75

 
$
2,192,469

 
(188,602,242
)
 
$
(867,450
)
 
$
(1,006,308
)
 
$
29,936

 
$
348,722

 
$
1,650

 
$
350,372

See Notes to Condensed Consolidated Financial Statements.


7



GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Operating activities
 
 
 
Net income (loss)
$
(2,795
)
 
$
(20,382
)
Less: Income (loss) from discontinued operations, net of tax

 
487

Income (loss) from continuing operations
(2,795
)
 
(20,869
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property, equipment and software
26,721

 
28,667

Amortization of acquired intangible assets
2,940

 
5,400

Stock-based compensation
19,326

 
19,701

Deferred income taxes
(6,575
)
 
(74
)
(Gain) loss from changes in fair value of investments
5,033

 
(303
)
Impairment of investment
855

 

Amortization of debt discount on convertible senior notes
2,866

 
2,587

Change in assets and liabilities, net of acquisitions and dispositions:
 
 
 
Accounts receivable
17,623

 
10,594

Prepaid expenses and other current assets
9,601

 
5,380

Accounts payable
(8,341
)
 
(13,184
)
Accrued merchant and supplier payables
(143,330
)
 
(138,238
)
Accrued expenses and other current liabilities
(41,564
)
 
(36,040
)
Other, net
(2,107
)
 
(1,707
)
Net cash provided by (used in) operating activities from continuing operations
(119,747
)
 
(138,086
)
Net cash provided by (used in) operating activities from discontinued operations

 
(1,098
)
Net cash provided by (used in) operating activities
(119,747
)
 
(139,184
)
Investing activities
 
 
 
Purchases of property and equipment and capitalized software
(20,144
)
 
(14,076
)
Acquisitions of intangible assets and other investing activities
(238
)
 
56

Net cash provided by (used in) investing activities from continuing operations
(20,382
)
 
(14,020
)
Net cash provided by (used in) investing activities from discontinued operations

 
(7,547
)
Net cash provided by (used in) investing activities
(20,382
)
 
(21,567
)
Financing activities
 
 
 
Payments for purchases of treasury stock

 
(27,234
)
Taxes paid related to net share settlements of stock-based compensation awards
(9,179
)
 
(8,970
)
Proceeds from stock option exercises and employee stock purchase plan
2,434

 
2,468

Distributions to noncontrolling interest holders
(3,315
)
 
(3,450
)
Payments of capital lease obligations
(9,024
)
 
(8,067
)
Payments of contingent consideration related to acquisitions
(1,815
)
 

Other financing activities

 
(473
)
Net cash provided by (used in) financing activities
(20,899
)
 
(45,726
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash, including cash classified within current assets of discontinued operations
6,191

 
3,973

Net increase (decrease) in cash, cash equivalents and restricted cash, including cash classified within current assets of discontinued operations
(154,837
)
 
(202,504
)
Less: Net increase (decrease) in cash classified within current assets of discontinued operations

 
(28,866
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(154,837
)
 
(173,638
)
Cash, cash equivalents and restricted cash, beginning of period
885,481

 
874,906

Cash, cash equivalents and restricted cash, end of period
$
730,644

 
$
701,268

Non-cash investing and financing activities
 
 
 
Continuing operations:
 
 
 
Equipment acquired under capital lease obligations
1,470

 
1,340

Increase (decrease) in liabilities related to purchases of property and equipment and capitalized software
(1,022
)
 
(1,185
)
Investments acquired in connection with business dispositions


 
2,022

See Notes to Condensed Consolidated Financial Statements.


8



GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Company Information
Groupon, Inc. and subsidiaries (the "Company"), which commenced operations in October 2008, operates online local commerce marketplaces throughout the world that connect merchants to consumers by offering goods and services, generally at a discount. Customers access those marketplaces through the Company's websites, primarily localized groupon.com sites in many countries, and its mobile applications.
The Company's operations are organized into two segments: North America and International. See Note 15, Segment Information.
Unaudited Interim Financial Information
The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. These condensed consolidated financial statements are unaudited and, in the Company's opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the Company's condensed consolidated balance sheets, statements of operations, comprehensive income (loss), cash flows and stockholders' equity for the periods presented. Operating results for the periods presented are not necessarily indicative of the results to be expected for the full year ending December 31, 2018. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 14, 2018, as amended by the Form 10-K/A for the year ended December 31, 2017, filed with the SEC on March 23, 2018.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company's condensed consolidated financial statements were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenue and expenses of all wholly-owned subsidiaries and majority-owned subsidiaries over which the Company exercises control and variable interest entities for which the Company has determined that it is the primary beneficiary. Outside stockholders' interests in subsidiaries are shown on the condensed consolidated financial statements as Noncontrolling interests. Equity investments in entities in which the Company does not have a controlling financial interest are accounted for under the equity method, the fair value option, as available-for-sale securities or at cost adjusted for observable price changes and impairments, as appropriate.
Reclassifications and Terminology Changes
Certain reclassifications have been made to the condensed consolidated financial statements of prior periods and the accompanying notes to conform to the current period presentation, including the change in presentation of restricted cash in the condensed consolidated statements of cash flows upon adoption of ASU 2016-18. Refer to Note 2, Adoption of New Accounting Standards, for additional information. Additionally, in prior periods, the Company referred to its product revenue and service revenue as "direct revenue" and "third-party and other revenue," respectively. This terminology change did not impact the amounts presented in the condensed consolidated financial statements.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenue and expenses, and the related disclosures of contingent liabilities in the condensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, variable consideration from unredeemed vouchers, income taxes, valuation of goodwill and intangible assets, investments, customer refunds, contingent liabilities and the useful lives of property, equipment and software and intangible assets. Actual results could differ materially from those estimates.


9



2. ADOPTION OF NEW ACCOUNTING STANDARDS
The Company adopted the guidance in ASC Topic 606, Revenue from Contracts with Customers, on January 1, 2018. Topic 606 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. See Changes to Accounting Policies from Adoption of New Accounting Standards below and Note 10, Revenue Recognition, for information on the impact of adopting Topic 606 on the Company's accounting policies.
The Company adopted the guidance in ASU 2016-01, Financial Instruments (Topic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities, as amended, on January 1, 2018. This ASU generally requires equity investments to be measured at fair value with changes in fair value recognized through net income and eliminates the cost method for equity securities. However, for equity investments without readily determinable fair values the ASU permits entities to elect to measure the investments at cost adjusted for observable price changes and impairments, with changes in the measurement recognized through net income. We applied that measurement alternative to our equity investments that were previously accounted for under the cost method. The adoption of ASU 2016-01 did not have a material impact on the condensed consolidated financial statements. See Changes to Accounting Policies from Adoption of New Accounting Standards below for additional information on the impact of adopting the ASU on the Company's accounting policies.
The Company adopted the guidance in ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, on January 1, 2018. This ASU requires companies to include amounts generally described as restricted cash and restricted cash equivalents, along with cash and cash equivalents, when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. Previously, changes in restricted cash were reported within cash flows from operating activities. The Company applied that change in cash flow classification on a retrospective basis, which resulted in an increase of $1.6 million to net cash used in operating activities for the three months ended March 31, 2017.
Restricted cash primarily represents amounts that the Company is unable to access for operational purposes pursuant to letters of credit with financial institutions. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet to amounts shown in the condensed consolidated statements of cash flows, as of March 31, 2018 and 2017 and December 31, 2017 (in thousands):
 
March 31, 2018
 
March 31, 2017
 
December 31, 2017
Cash and cash equivalents
$
725,909

 
$
690,975

 
$
880,129

Restricted cash included in prepaid expenses and other current assets
4,332

 
5,250

 
4,932

Restricted cash included in other non-current assets
403

 
5,043

 
420

Cash, cash equivalents and restricted cash
$
730,644

 
$
701,268

 
$
885,481

The Company adopted the guidance in ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, on January 1, 2018. This ASU is meant to clarify the scope of ASC Subtopic 610-20, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets. The adoption of ASU 2017-05 did not have a material impact on the condensed consolidated financial statements.
The Company adopted the guidance in ASU 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on January 1, 2018. This ASU requires employers to include only the service cost component of net periodic pension cost in operating expenses, together with other employee compensation costs. The other components of net periodic pension cost, including interest cost, expected return on plan assets, amortization of prior service cost and settlement and curtailment effects, are to be included in non-operating expenses. The adoption of ASU 2017-07 did not have a material impact on the condensed consolidated financial statements.
The Company adopted the guidance in ASU 2017-09, Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting, on January 1, 2018. This ASU clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting. The adoption of ASU 2017-09 did not have a material impact on the condensed consolidated financial statements.
The Company adopted the guidance in ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, as of January 1, 2018. This ASU permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Jobs Act"). As a result of the adoption of ASU 2018-02, the Company reclassified $0.2 million from accumulated other comprehensive income (loss) to accumulated deficit.
Changes to Accounting Policies from Adoption of New Accounting Standards
Revenue Recognition
Prior to its adoption of Topic 606, the Company recognized revenue when the following criteria were met: persuasive evidence of an arrangement existed; delivery had occurred; the selling price was fixed or determinable and collection was reasonably assured. Following its adoption of Topic 606, the Company recognizes revenue when it satisfies a performance obligation by transferring a promised good or service to a customer. Substantially all of the Company's performance obligations are satisfied at a point in time rather than over time.
Product Revenue
The Company generates product revenue from direct sales of merchandise inventory through its Goods category. For product revenue transactions, the Company is the primary party responsible for providing the good to the customer, it has inventory risk and it has discretion in establishing prices. As such, product revenue is reported on a gross basis as the purchase price received from the customer. Product revenue, including associated shipping revenue, is recognized when title passes to the customer upon delivery of the product.
Service Revenue
Service revenue is primarily earned from transactions in which the Company earns commissions by selling goods or services on behalf of third-party merchants. Those transactions generally involve a customer's purchase of a voucher through one of the Company's online marketplaces that can be redeemed with a third-party merchant for specified goods or services (or for discounts on specified goods or services). Service revenue from those transactions is reported on a net basis as the purchase price collected from the customer less the portion of the purchase price that is payable to the third-party merchant. The Company recognizes revenue from those transactions when its commission has been earned, which occurs when a sale through one of the Company's online marketplaces is completed and the related voucher has been made available to the customer. The Company believes that its remaining obligations to remit payment to the merchant and to provide information about vouchers sold are administrative activities that are immaterial in the context of the contract with the merchant. Prior to its adoption of Topic 606, the Company deferred the revenue from hotel reservation offerings until the customer's stay commenced. Following its adoption of Topic 606, revenue from hotel reservation offerings is recognized at the time the reservation is made, net of an allowance for estimated cancellations.
The Company also earns commissions when customers make purchases with retailers using digital coupons accessed through its websites and mobile applications and from voucherless merchant offerings in which customers earn cash back on their credit card statements when they transact with third-party merchants. The Company recognizes those commissions as revenue in the period in which the underlying transactions between the customer and the third-party merchant are completed.
Variable Consideration for Unredeemed Vouchers
For merchant agreements with redemption payment terms, the merchant is not paid its share of the sale price for a voucher sold through one of the Company's online marketplaces until the customer redeems the related voucher. If the customer does not redeem a voucher with such merchant payment terms, the Company retains all of the gross billings for that voucher, rather than retaining only its net commission. Prior to its adoption of Topic 606, the Company recognized that variable consideration from unredeemed vouchers and derecognized the related accrued merchant payables when its legal obligation to the merchant expired, which the Company believes is shortly after the voucher expiration date in most jurisdictions. Following its adoption of Topic 606, the Company estimates the variable consideration from vouchers that will not ultimately be redeemed and recognizes that amount as revenue at the time of sale, rather than when the Company's legal obligation expires. The Company estimates variable consideration from unredeemed vouchers using its historical voucher redemption experience. If actual redemptions differ from the Company's estimates, the effects could be material to the condensed consolidated financial statements.
Refunds
Prior to the adoption of Topic 606, refunds were recorded as a reduction of revenue, except for refunds on service revenue transactions for which the merchant's share was not recoverable, which were presented as a cost of revenue. Following the adoption of Topic 606, all refunds are recorded as a reduction of revenue. The liability for estimated refunds is included within Accrued expenses and other current liabilities on the consolidated balance sheets.
The Company estimates its refund reserve using historical refund experience by deal category. The Company assesses the trends that could affect its estimates on an ongoing basis and makes adjustments to the refund reserve calculations if it appears that changes in circumstances, including changes to the Company's refund policies or general economic conditions, may cause future refunds to differ from its initial estimates. If actual refunds differ from the Company's estimates, the effects could be material to the condensed consolidated financial statements.
Discounts, Customer Credits and Other Consideration Payable to Customers
The Company provides discount offers to encourage purchases of goods and services through its online marketplaces. The Company records discounts as a reduction of revenue.
Additionally, the Company issues credits to customers that can be applied to future purchases through its online marketplaces. Credits are primarily issued as consideration for refunds. To a lesser extent, credits are issued for customer relationship purposes. Credits issued to satisfy refund requests are applied as a reduction to the refunds reserve. Prior to the adoption of Topic 606, customer credits issued for relationship purposes were classified in the condensed consolidated statement of operations as a marketing expense. Following the adoption of Topic 606, customer credits issued for relationship purposes are classified as a reduction of revenue.
Prior to its adoption of Topic 606, the Company recognized breakage income for unused customer credits when they expired or were forfeited. Following its adoption of Topic 606, breakage income from customer credits that are not expected to be used is estimated and recognized as revenue in proportion to the pattern of redemption for customer credits that are used.
Sales and Related Taxes
Sales, use, value-added and related taxes that are imposed on specific revenue-generating transactions are presented on a net basis and excluded from revenue.
Costs of Obtaining Contracts
Prior to its adoption of Topic 606, the Company expensed the incremental costs to obtain contracts with third-party merchants, such as sales commissions, as incurred. Following its adoption of Topic 606, those costs are deferred and recognized over the expected period of the merchant arrangement, generally from 12 to 18 months. As of March 31, 2018, the Company had $3.9 million and $12.5 million of deferred contract acquisition costs recorded within Prepaid and other current assets and Other non-current assets, respectively. For the three months ended March 31, 2018, the Company amortized $6.8 million of deferred contract acquisition costs and did not recognize any impairment losses in relation to the deferred costs. Those costs are classified within Selling, general and administrative expenses in the condensed consolidated statements of operations.
Cost of Revenue
Cost of revenue is comprised of direct and certain indirect costs incurred to generate revenue. Costs incurred to generate revenue, which include credit card processing fees, editorial costs, compensation expense for technology support personnel who are responsible for maintaining the infrastructure of the Company's websites, amortization of internal-use software relating to customer-facing applications, web hosting and other processing fees are attributed to the cost of service and product revenue in proportion to gross billings during the period. For product revenue transactions, cost of revenue also includes the cost of inventory, shipping and fulfillment costs and inventory markdowns. Fulfillment costs are comprised of third-party logistics provider costs, as well as rent, depreciation, personnel costs and other costs of operating the Company's fulfillment center. Prior to adoption of Topic 606, cost of revenue on service revenue transactions also included refunds for which the merchant's share was not recoverable.
Financial Instruments
Prior to the adoption of the guidance in ASU 2016-01, investments in nonmarketable equity shares with no redemption provisions that are not common stock or in-substance common stock or for which the Company does not have the ability to exercise significant influence were accounted for using the cost method of accounting and are classified within Investments on the consolidated balance sheets. Under the cost method of accounting, investments were carried at cost and adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. Subsequent to the adoption of the guidance in ASU 2016-01, the Company applies a measurement alternative for equity investments without readily determinable fair values that permits entities to elect to measure the investments at cost adjusted for observable price changes and impairments, with changes in the measurement recognized through net income.
3. DISCONTINUED OPERATIONS AND OTHER BUSINESS DISPOSITIONS
In October 2016, the Company completed a strategic review of its international markets in connection with its efforts to optimize its global footprint and focus on the markets that it believes have the greatest potential to benefit the Company's long-term financial performance. Based on that review, the Company decided to focus its business on 15 core countries and to pursue strategic alternatives for its operations in the remaining 11 countries, which were primarily based in Asia and Latin America. The dispositions of the Company's operations in those 11 countries were completed between November 2016 and March 2017.
A business disposition that represents a strategic shift and has (or will have) a major effect on an entity's operations and financial results is reported as a discontinued operation. The Company determined that the decision reached by its management and Board of Directors to exit those 11 non-core countries, which comprised a substantial majority of its operations outside of North America and EMEA, represented a strategic shift in its business. Additionally, based on its review of quantitative and qualitative factors relevant to the dispositions, the Company determined that the disposition of the businesses in those countries would have a major effect on its operations and financial results. As such, the results of operations and cash flows for its operations in those countries, including the gains and losses on the dispositions and related income tax effects, are presented as discontinued operations in the accompanying condensed consolidated financial statements for the three months ended March 31, 2018 and 2017.
Dispositions Completed in 2017
In connection with its strategic initiative to exit non-core countries as discussed above, the Company sold an 83% controlling stake in its subsidiary in Israel and sold its subsidiaries in Argentina, Chile, Colombia, Peru, Mexico, Brazil, Singapore and Hong Kong during the three months ended March 31, 2017. The Company recognized a net pretax loss on those dispositions of $1.3 million, which consisted of the following (in thousands):
 
Three Months Ended March 31, 2017
Net consideration received:
 
Fair value of minority investments retained or acquired
$
2,021

Cash proceeds received
3,462

Cash proceeds receivable
2,000

Less: transaction costs
1,394

Total net consideration received
6,089

Cumulative translation gain reclassified to earnings
14,718

Less: Net book value upon closing of the transactions
14,596

Less: Indemnification liabilities (1)
5,365

Less: Unfavorable contract liability for transition services
2,114

Loss on dispositions
$
(1,268
)
(1)
See Note 8, Commitments and Contingencies, for additional information about the indemnification liabilities.


10

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Results of Discontinued Operations and Assets and Liabilities of Discontinued Operations
The following table summarizes the major classes of line items included in income (loss) from discontinued operations, net of tax, for the three months ended March 31, 2017 (in thousands):
 
Three Months Ended March 31, 2017 (1)
Service revenue
$
12,602

Product revenue
2,962

Service cost of revenue
(2,557
)
Product cost of revenue
(3,098
)
Marketing expense
(1,239
)
Selling, general and administrative expense
(9,908
)
Restructuring
(778
)
Other income, net
3,852

Income (loss) from discontinued operations before loss on dispositions and provision for income taxes
1,836

Loss on dispositions
(1,268
)
Provision for income taxes
(81
)
Income (loss) from discontinued operations, net of tax
$
487

(1)
The income (loss) from discontinued operations before loss on dispositions and provision for income taxes for the three months ended March 31, 2017 includes the results of each business through its respective disposition date.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the Company's goodwill activity by segment for the three months ended March 31, 2018 (in thousands):
 
North America
 
International
 
Consolidated
Balance as of December 31, 2017
$
178,685

 
$
108,304

 
$
286,989

Foreign currency translation

 
2,956

 
2,956

Balance as of March 31, 2018
$
178,685

 
$
111,260

 
$
289,945

The following table summarizes the Company's intangible assets as of March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
Asset Category
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Customer relationships
$
57,573

 
$
48,845

 
$
8,728

 
$
56,749

 
$
46,513

 
$
10,236

Merchant relationships
11,755

 
10,302

 
1,453

 
11,598

 
9,853

 
1,745

Trade names
12,212

 
10,891

 
1,321

 
12,077

 
10,469

 
1,608

Developed technology
37,045

 
37,045

 

 
36,864

 
36,864

 

Patents
19,697

 
15,563

 
4,134

 
19,031

 
15,204

 
3,827

Other intangible assets
10,757

 
9,468

 
1,289

 
10,875

 
9,095

 
1,780

Total
$
149,039

 
$
132,114

 
$
16,925

 
$
147,194

 
$
127,998

 
$
19,196



11

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Amortization of intangible assets is computed using the straight-line method over their estimated useful lives, which range from 1 to 5 years. Amortization expense related to intangible assets was $2.9 million and $5.4 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, the Company's estimated future amortization expense related to intangible assets is as follows (in thousands):
Remaining amounts in 2018
$
7,870

2019
6,790

2020
1,280

2021
641

2022
325

Thereafter
19

Total
$
16,925

5. INVESTMENTS
The following table summarizes the Company's investments as of March 31, 2018 and December 31, 2017 (dollars in thousands):
 
March 31, 2018
 
Percent Ownership of Voting Stock
 
December 31, 2017
 
Percent Ownership of Voting Stock
Available-for-sale securities:
 
 
 
 
 
 
 
Convertible debt securities
$
11,070

 
 
 
$
11,354

 
 
Redeemable preferred shares
14,576

 
19%
to
25%
 
15,431

 
19%
to
25%
Total available-for-sale securities
25,646

 
 
 
26,785

 
 
Fair value option investments
77,933

 
10%
to
19%
 
82,966

 
10%
to
19%
Other equity investments (1)
25,794

 
1%
to
19%
 
25,438

 
1%
to
19%
Total investments
$
129,373

 
 
 
$
135,189

 
 
(1)
Represents equity investments without readily determinable fair values. Those investments were previously accounted for using the cost method of accounting. Under the cost method, investments were carried at cost and adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. The Company adopted the guidance in ASU 2016-01 on January 1, 2018. Under that guidance, the Company has elected to record equity investments without readily determinable fair values at cost adjusted for observable price changes and impairments. There were no adjustments for observable price changes or impairments related to these investments for the three months ended March 31, 2018.
The following table summarizes the amortized cost, gross unrealized gain, gross unrealized loss and fair value of the Company's available-for-sale securities as of March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss (1)
 
Fair Value
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss (1)
 
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible debt securities
$
10,422

 
$
1,176

 
$
(528
)
 
$
11,070

 
$
10,205

 
$
1,653

 
$
(504
)
 
$
11,354

Redeemable preferred shares
14,576

 

 

 
14,576

 
15,431

 

 

 
15,431

Total available-for-sale securities
$
24,998

 
$
1,176

 
$
(528
)
 
$
25,646

 
$
25,636

 
$
1,653

 
$
(504
)
 
$
26,785

(1)
Gross unrealized loss is related to one security that was in a loss position for greater than 12 months as of March 31, 2018 and December 31, 2017.


12

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Fair Value Option Investments    
In connection with the dispositions of controlling stakes in Ticket Monster, an entity based in the Republic of Korea, in May 2015 and Groupon India in August 2015, the Company obtained minority investments in Monster Holdings LP ("Monster LP") and in Nearbuy Pte Ltd. ("Nearbuy"), respectively. The Company has made an irrevocable election to account for both of those investments at fair value with changes in fair value reported in earnings. The Company elected to apply fair value accounting to those investments because it believes that fair value is the most relevant measurement attribute for those investments, as well as to reduce operational and accounting complexity.
The Company determined that the fair value of its investments in Monster LP and Nearbuy was $73.7 million and $4.2 million, respectively, as of March 31, 2018 and $78.9 million and $4.0 million, respectively, as of December 31, 2017. For the three months ended March 31, 2018, the Company recognized a loss of $5.2 million and a gain of $0.2 million from changes in the fair value of its investments in Monster LP and Nearbuy, respectively. For the three months ended March 31, 2017, the Company recognized a gain of $2.4 million and a loss of $2.1 million from changes in the fair value of its investments in Monster LP and Nearbuy, respectively.
6. SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS INFORMATION
The following table summarizes the Company's other income (expense), net for the three months ended March 31, 2018 and 2017 (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Interest income
$
1,509

 
$
602

Interest expense
(5,493
)
 
(5,319
)
Gains (losses), net on changes in fair value of investments
(5,033
)
 
303

Foreign currency gains (losses), net
1,398

 
51

Impairment of investment
(855
)
 

Other
(41
)
 
(239
)
Other income (expense), net
$
(8,515
)
 
$
(4,602
)
The following table summarizes the Company's prepaid expenses and other current assets as of March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
Merchandise inventories
$
24,771

 
$
25,528

Prepaid expenses
34,668

 
40,399

Income taxes receivable
9,918

 
10,299

Other
19,925

 
17,799

Total prepaid expenses and other current assets
$
89,282

 
$
94,025

The following table summarizes the Company's accrued merchant and supplier payables as of March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
Accrued merchant payables
$
395,085

 
$
459,662

Accrued supplier payables (1)
173,485

 
310,673

Total accrued merchant and supplier payables
$
568,570

 
$
770,335

(1)
Amounts include payables to suppliers of inventories and providers of shipping and fulfillment services.


13

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The following table summarizes the Company's accrued expenses and other current liabilities as of March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
Refunds reserve
$
29,434

 
$
31,275

Compensation and benefits
47,255

 
73,096

Customer credits
18,761

 
28,487

Income taxes payable
12,239

 
9,645

Deferred revenue
22,185

 
29,539

Current portion of capital lease obligations
22,023

 
25,958

Other
114,023

 
133,196

Total accrued expenses and other current liabilities
$
265,920

 
$
331,196

The following table summarizes the Company's other non-current liabilities as of March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
Contingent income tax liabilities
$
45,469

 
$
43,699

Capital lease obligations
15,448

 
18,500

Deferred income taxes
880

 
811

Other
40,250

 
39,398

Total other non-current liabilities
$
102,047

 
$
102,408

The following table summarizes the components of accumulated other comprehensive income (loss) as of March 31, 2018 and December 31, 2017 (in thousands):
 
Foreign currency translation adjustments
 
Unrealized gain (loss) on available-for-sale securities
 
Total
Balance as of December 31, 2017
$
30,962

 
$
882

 
$
31,844

Reclassification for impact of U.S. tax rate change

 
161

 
161

Other comprehensive income (loss)
(1,568
)
 
(501
)
 
(2,069
)
Balance as of March 31, 2018
$
29,394

 
$
542

 
$
29,936

7. FINANCING ARRANGEMENTS
Convertible Senior Notes
On April 4, 2016, the Company issued $250.0 million in aggregate principal amount of convertible senior notes (the "Notes") in a private placement to A-G Holdings, L.P. ("AGH"). Michael Angelakis, the chairman and chief executive officer of Atairos Group, Inc. ("Atairos"), joined the Company's Board of Directors in connection with the issuance of the Notes. Atairos controls the voting power of AGH. The net proceeds from this offering were $243.2 million after deducting issuance costs. The Notes bear interest at a rate of 3.25% per annum, payable annually in arrears on April 1 of each year, beginning on April 1, 2017. The Notes will mature on April 1, 2022, subject to earlier conversion or redemption.
Each $1,000 of principal amount of the Notes initially is convertible into 185.1852 shares of common stock, which is equivalent to an initial conversion price of $5.40 per share, subject to adjustment upon the occurrence of specified events. Upon conversion, the Company can elect to settle the conversion value in cash, shares of its common stock, or any combination of cash and shares of its common stock. Holders of the Notes may convert their Notes at their option at any time until the close of business on the scheduled trading day immediately preceding the maturity date. In addition, if specified corporate events occur prior to the maturity date, the Company may be required to increase the conversion rate for holders who elect to convert based on the effective date of such event and the applicable stock price attributable to the event, as set forth in a table contained in the indenture governing the Notes (the "Indenture"). Based on the closing price of the Company's common stock of $4.34 as of March 31, 2018, the if-converted value of the Notes was less than the principal amount.
With certain exceptions, upon a fundamental change (as defined in the Indenture), the holders of the Notes may require the Company to repurchase all or a portion of their Notes for cash at a purchase price equal to the principal amount plus accrued and unpaid interest. In addition, the Company may redeem the Notes, at its option, at a purchase price equal to the principal amount plus accrued and unpaid interest on or after April 1, 2020, if the closing sale price of the common stock exceeds 150% of the then-current conversion price for 20 or more trading days in the 30 consecutive trading day period preceding the Company’s exercise of this redemption right.
The Notes are senior unsecured obligations of the Company that rank equal in right of payment to all senior unsecured indebtedness of the Company and rank senior in right of payment to any indebtedness that is contractually subordinated to the Notes.
The Indenture includes customary events of default. If an event of default, as defined in the Indenture, occurs and is continuing, the principal amount of the Notes and any accrued and unpaid interest may be declared immediately due and payable. In the case of bankruptcy or insolvency, the principal amount of the Notes and any accrued and unpaid interest would automatically become immediately due and payable.
The Company has separated the Notes into their liability and equity components in the accompanying condensed consolidated balance sheet. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the principal amount of the Notes. The difference between the principal amount of the Notes and the liability component (the "debt discount") is amortized to interest expense at an effective interest rate of 9.75% over the term of the Notes. The equity component of the Notes is included in additional paid-in capital in the condensed consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification.
The Company incurred transaction costs of approximately $6.8 million related to the issuance of the Notes. Those transaction costs were allocated to the liability and equity components in the same manner as the allocation of the proceeds from the Notes. Transaction costs attributable to the liability component of $4.8 million were recorded as a debt discount in the condensed consolidated balance sheet and are being amortized to interest expense over the term of the Notes. Transaction costs attributable to the equity component of $2.0 million were recorded in stockholders' equity as a reduction of the equity component.
The carrying amount of the Notes consisted of the following as of March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
Liability component:
 
 
 
Principal amount
$
250,000

 
$
250,000

Less: debt discount
(57,381
)
 
(60,247
)
Net carrying amount of liability component
$
192,619

 
$
189,753

 
 
 
 
Net carrying amount of equity component
$
67,014

 
$
67,014

The estimated fair value of the Notes as of March 31, 2018 and December 31, 2017 was $281.5 million and $285.6 million, respectively, and was determined using a lattice model. The Company classified the fair value of the Notes as a Level 3 measurement due to the lack of observable market data over fair value inputs such as its stock price volatility over the term of the Notes and its cost of debt.
As of March 31, 2018, the remaining term of the Notes is approximately four years. During the three months ended March 31, 2018 and 2017, the Company recognized interest expense on the Notes as follows (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Contractual interest expense (3.25% of the principal amount per annum)
$
2,032

 
$
2,032

Amortization of debt discount
2,866

 
2,587

Total interest expense
$
4,898

 
$
4,619

Note Hedges and Warrants
In May 2016, the Company purchased convertible note hedges with respect to its common stock for a cost of $59.1 million from certain bank counterparties. The convertible note hedges provide the Company with the right to purchase up to 46.3 million shares of the Company's common stock at an initial strike price of $5.40 per share, which corresponds to the initial conversion price of the Notes, and are exercisable by the Company upon conversion of the Notes. The convertible note hedges are intended to reduce the potential economic dilution upon conversion of the Notes. The convertible note hedges are separate transactions and are not part of the terms of the Notes. Holders of the Notes do not have any rights with respect to the convertible note hedges.
In May 2016, the Company also sold warrants for total cash proceeds of $35.5 million to certain bank counterparties. The warrants provide the counterparties with the right to purchase up to 46.3 million shares of the Company's common stock at a strike price of $8.50 per share. The warrants expire on various dates between July 1, 2022 and August 26, 2022 and are exercisable on their expiration dates. The warrants are separate transactions and are not part of the terms of the Notes or convertible note hedges. Holders of the Notes and convertible note hedges do not have any rights with respect to the warrants.
The amounts paid and received for the convertible note hedges and warrants were recorded in additional paid-in capital in the condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017. The convertible note hedges and warrants are not remeasured as long as they continue to meet the conditions for equity classification. The amounts paid for the convertible note hedges are tax deductible over the term of the Notes, while the proceeds received from the warrants are not taxable. 
Under the if-converted method, the shares of common stock underlying the conversion option in the Notes are included in the diluted earnings per share denominator and the interest expense on the Notes, net of tax, is added to the numerator. However, upon conversion, there will be no economic dilution from the Notes, as exercise of the convertible note hedges eliminates any dilution from the Notes that would have otherwise occurred when the price of the Company’s common stock exceeds the conversion price. Taken together, the purchase of the convertible note hedges and sale of warrants are intended to offset any actual dilution from the conversion of the Notes and to effectively increase the overall conversion price from $5.40 to $8.50 per share.
Revolving Credit Agreement
The Company's amended and restated senior secured revolving credit agreement (the "Amended and Restated Credit Agreement") provides for aggregate principal borrowings of up to $250.0 million and matures in June 2019. Borrowings under the Amended and Restated Credit Agreement bear interest, at the Company's option, at a rate per annum equal to the Alternate Base Rate or Adjusted LIBO Rate (each as defined in the Amended and Restated Credit Agreement) plus an additional margin ranging between 0.50% and 2.25%. The Company is required to pay quarterly commitment fees ranging from 0.25% to 0.40% per annum of the average daily amount of unused commitments available under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also provides for the issuance of up to $45.0 million in letters of credit, provided that the sum of outstanding borrowings and letters of credit do not exceed the maximum funding commitment of $250.0 million.
The Amended and Restated Credit Agreement is secured by substantially all of the Company's and its subsidiaries' tangible and intangible assets, including a pledge of 100% of the outstanding capital stock of substantially all of its direct and indirect domestic subsidiaries and 65% of the shares or equity interests of first-tier foreign subsidiaries and each U.S. entity whose assets substantially consist of capital stock and/or intercompany debt of one or more foreign subsidiaries, subject to certain exceptions. Certain of the Company's domestic subsidiaries are guarantors under the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement contains various customary restrictive covenants that limit the Company's ability to, among other things: incur additional indebtedness; make dividend and other restricted payments, including share repurchases; enter into sale and leaseback transactions; make investments, loans or advances; grant or incur liens on assets; sell assets; engage in mergers, consolidations, liquidations or dissolutions; and engage in transactions with affiliates. The Amended and Restated Credit Agreement requires the Company to maintain compliance with specified financial covenants, comprised of a minimum fixed charge coverage ratio, a maximum leverage ratio, a maximum senior secured indebtedness ratio and a minimum liquidity ratio, each as set forth in the Amended and Restated Credit Agreement. The Company is also required to maintain, as of the last day of each fiscal quarter, unrestricted cash of at least $400.0 million, including $200.0 million in accounts held with lenders under the Amended and Restated Credit Agreement or their affiliates. Non-compliance with these covenants may result in termination of the commitments under the Amended and Restated Credit Agreement and any then outstanding borrowings may be declared due and payable immediately. The Company has the right to terminate the Amended and Restated Credit Agreement or reduce the available commitments at any time.
As of March 31, 2018 and December 31, 2017, the Company had no borrowings and had outstanding letters of credit of $23.4 million and $22.7 million, respectively, under the Amended and Restated Credit Agreement.
8. COMMITMENTS AND CONTINGENCIES
Except for the changes set forth below, the Company's commitments as of March 31, 2018 and through the date these condensed consolidated financial statements were issued did not materially change from the amounts set forth in the Company's 2017 Annual Report on Form 10-K.
Purchase Obligations
In the first quarter 2018, the Company entered into a non-cancelable arrangement for cloud computing services. As of March 31, 2018, future payments under that contractual obligation are as follows (in thousands):
2018
$
1,500

2019
3,400

2020
3,400

2021
3,400

2022
3,400

Total
$
15,100

Leases
In May 2018, the Company entered into a new office lease for one of its foreign locations. The future payments under that operating lease for each of the next five years and thereafter are as follows (in thousands):
2018
$
2,461

2019
2,749

2020
2,749

2021
2,749

2022
2,749

Thereafter
6,187

Total minimum lease payments
$
19,644

Legal Matters and Other Contingencies
From time to time, the Company is party to various legal proceedings incident to the operation of its business. For example, the Company currently is involved in proceedings brought by former employees and merchants, intellectual property infringement suits, customer lawsuits, consumer class actions and suits alleging, among other things, violations of state consumer protection or privacy laws. The following is a brief description of significant legal proceedings.
On March 2, 2016, International Business Machines Corporation ("IBM") filed a complaint in the United States District Court for the District of Delaware against the Company (the "Delaware Action"). In the Delaware Action, IBM alleges that the Company has infringed and continues to willfully infringe certain IBM patents that IBM claims relate to the presentation of applications and advertising in an interactive service, preserving state information in online transactions and single sign-on processes in a computing environment and seeks damages (including a request that the amount of compensatory damages be trebled), injunctive relief and costs and reasonable attorneys’ fees. On December 13, 2016, the Company filed a motion to invalidate two of IBM’s patents relating to the presentation of applications and advertising on the grounds that such patents are patent-ineligible. The court denied the motion on November 17, 2017. The court issued an order construing disputed terms in the patent claims on August 3, 2017. On March 24, 2017, the Company filed a petition for inter partes review with the United States Patent and Trademark Office seeking to invalidate IBM’s asserted patent related to single sign-on processes. IBM filed its preliminary response on July 6, 2017. The Patent Trial and Appeal Board denied the Company’s petition for review on October 2, 2017. The Company filed a Request for Rehearing and Reconsideration with the Patent Trial and Appeal Board on November 1, 2017, which was also denied. In the Delaware Action, the Company filed a motion on March 5, 2018 for summary judgment that it does not infringe the asserted patents and that IBM may not claim an earlier priority date for its patent relating to preserving state information in online transactions to overcome the Company’s challenge that the patent is invalid. The Company also filed a motion to exclude IBM’s damages expert's testimony, on the ground that the expert's opinions of IBM’s damages claim do not meet the requisite standard for expert testimony. On March 5, 2018, IBM moved for summary judgment that certain asserted claims of IBM’s patent relating to preserving state information in online transactions are not invalid, that certain prior art references raised by the Company do not anticipate or render obvious asserted claims of two of IBM’s patents, and that the Company cannot claim certain affirmative defenses. IBM filed a motion to preclude the Company’s damages or technical expert from referencing alternatives to the allegedly infringing technologies, but did not ask the court to exclude either of their testimonies in full. The parties participated in a mediation on the case before a federal magistrate judge in Delaware on April 3, 2018.  No settlement was reached at that mediation. A hearing on the parties' cross-motions for summary judgment, and on the parties’ respective challenges to expert witness testimony, subsequently was held on April 24, 2018 and the court has taken the motions under advisement. There is no set ruling date. Trial is scheduled to commence on July 16, 2018 in the Delaware Action. On May 9, 2016, the Company filed a complaint in the United States District Court for the Northern District of Illinois against IBM (the "Illinois Action"). The Company alleges that IBM has infringed and continues to willfully infringe one of the Company’s patents relating to location-based services. The Company intends to seek damages and injunctive relief for IBM’s infringement of this patent. On December 20, 2016, IBM filed a motion to dismiss this case, and the court denied that motion. The court held a Markman hearing on April 3, 2017, but has not yet construed the claims. On May 18, 2017, IBM filed two petitions for inter partes review with the United States Patent and Trademark Office seeking to invalidate the Company’s patent relating to location-based services. The Company filed its preliminary responses on September 6, 2017. The Patent Office denied one petition and instituted a review of the Company’s patent in response to the other petition, but such review did not include all claims requested by IBM. On May 1, 2018, the Patent Office stated that it would institute review of the claims that were not previously under review based on a recent Supreme Court decision (SAS Institute, Inc. v. Iancu) finding that the Patent Office must institute review of either all or none of claims petitioners seek to review. A trial date is not yet set in the Illinois Action. The Company plans to vigorously defend against the claims filed by IBM in the Delaware Action and the challenges to the Company’s patent in the Illinois Action.
In addition, other third parties have from time to time claimed, and others may claim in the future, that the Company has infringed their intellectual property rights. The Company is subject to intellectual property disputes, including patent infringement claims, and expects that it will increasingly be subject to intellectual property infringement claims as its services expand in scope and complexity. The Company has in the past litigated such claims, and the Company is presently involved in several patent infringement and other intellectual property-related claims (including the IBM matter described above), including pending litigation or trademark disputes relating to, for example, the Company's Goods category, some of which could involve potentially substantial claims for damages or injunctive relief. The Company may also become more vulnerable to third-party claims as laws such as the Digital Millennium Copyright Act are interpreted by the courts, and as the Company becomes subject to laws in jurisdictions where the underlying laws with respect to the potential liability of online intermediaries are either unclear or less favorable. The Company believes that additional lawsuits alleging that it has violated patent, copyright or trademark laws will be filed against it. Intellectual property claims, whether meritorious or not, are time consuming and often costly to resolve, could require expensive changes in the Company's methods of doing business or the goods it sells, or could require it to enter into costly royalty or licensing agreements.
The Company also is subject to consumer claims or lawsuits relating to alleged violations of consumer protection or privacy rights and statutes, some of which could involve potentially substantial claims for damages, including statutory or punitive damages. Consumer and privacy related claims or lawsuits, whether meritorious or not, could be time consuming, result in costly litigation, damage awards, fines and penalties, injunctive relief or increased costs of doing business through adverse judgment or settlement, or require the Company to change its business practices, sometimes in expensive ways.
The Company also is subject to, or in the future may become subject to, a variety of regulatory inquiries, audits, and investigations across the jurisdictions where the Company conducts its business, including, for example, inquiries related to consumer protection, employment matters and/or hiring practices, marketing practices, tax, unclaimed property and privacy rules and regulations. Any regulatory actions against the Company, whether meritorious or not, could be time consuming, result in costly litigation, damage awards, fines and penalties, injunctive relief or increased costs of doing business through adverse judgment or settlement, require the Company to change its business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm the Company's business.
The Company establishes an accrued liability for loss contingencies related to legal and regulatory matters when the loss is both probable and reasonably estimable. Those accruals represent management's best estimate of probable losses and, in such cases, there may be an exposure to loss in excess of the amounts accrued. For certain of the matters described above, there are inherent and significant uncertainties based on, among other factors, the stage of the proceedings, developments in the applicable facts of law, or the lack of a specific damage claim. However, the Company believes that the amount of reasonably possible losses in excess of the amounts accrued for those matters would not have a material adverse effect on its business, consolidated financial position, results of operations or cash flows. The Company's accrued liabilities for loss contingencies related to legal and regulatory matters may change in the future as a result of new developments, including, but not limited to, the occurrence of new legal matters, changes in the law or regulatory environment, adverse or favorable rulings, newly discovered facts relevant to the matter, or changes in the strategy for the matter. Regardless of the outcome, litigation and other regulatory matters can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
Indemnifications
In connection with the dispositions of the Company's operations in Latin America (see Note 3Discontinued Operations and Other Business Dispositions), the Company agreed to indemnify the buyer for certain tax and other matters. The indemnification liabilities were initially recorded at their fair value, estimated to be $5.4 million using a probability-weighted expected cash flow approach, upon closing of the transactions as an adjustment to the net loss on the dispositions within discontinued operations. The Company estimates that the total amount of obligations that are reasonably possible to arise under the indemnifications in excess of amounts accrued as of March 31, 2018 is approximately $19.0 million.
In the normal course of business to facilitate transactions related to its operations, the Company indemnifies certain parties, including employees, lessors, service providers, merchants, and counterparties to investment agreements and asset and stock purchase agreements with respect to various matters. The Company has agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or other claims made against those parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. The Company is also subject to increased exposure to various claims as a result of its divestitures and acquisitions, particularly in cases where the Company is entering into new businesses in connection with such acquisitions. The Company may also become more vulnerable to claims as it expands the range and scope of its services and is subject to laws in jurisdictions where the underlying laws with respect to potential liability are either unclear or less favorable. In addition, the Company has entered into indemnification agreements with its officers, directors and underwriters, and the Company's bylaws contain similar indemnification obligations that cover officers, directors, employees and other agents. 
Except as noted above, it is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, any payments that the Company has made under these agreements have not had a material impact on the operating results, financial position or cash flows of the Company.
9. STOCKHOLDERS' EQUITY AND COMPENSATION ARRANGEMENTS
The Company's Board of Directors (the "Board") has the authority, without approval by the stockholders, to issue up to a total of 50,000,000 shares of preferred stock in one or more series. The Board may establish the number of shares to be included in each such series and may fix the designations, preferences, powers and other rights of the shares of a series of preferred stock. The Board could authorize the issuance of preferred stock with voting or conversion rights that could dilute the voting power or rights of the holders of its common stock. As of March 31, 2018 and December 31, 2017, there were no shares of preferred stock outstanding.


14

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Common Stock
Pursuant to the Company's restated certificate of incorporation, the Board has the authority to issue up to a total of 2,010,000,000 shares of common stock. Each holder of common stock shall be entitled to one vote for each such share on any matter that is submitted to a vote of stockholders. In addition, holders of the common stock will vote as a single class of stock on any matter that is submitted to a vote of stockholders.
Share Repurchase Program
In May 2018, the Board authorized the Company to repurchase up to $300.0 million of its common stock under a new share repurchase program. The Company's prior share repurchase program expired in April 2018. During the three months ended March 31, 2018, the Company did not purchase any shares under that program. As of March 31, 2018 and upon its expiration the following month, up to $135.2 million of common stock remained available for purchase under that prior share repurchase program. The timing and amount of share repurchases, if any, will be determined based on market conditions, limitations under the Amended and Restated Credit Agreement, share price and other factors, and the share repurchase program may be terminated at any time.
Groupon, Inc. Stock Plans
The Groupon, Inc. Stock Plans (the "Plans") are administered by the Compensation Committee of the Board (the "Compensation Committee"), which determines the number of awards to be issued, the corresponding vesting schedule and the exercise price for options. As of March 31, 2018, 63,923,154 shares of common stock were available for future issuance under the Plans.
The stock-based compensation expense related to stock awards issued under the Plans and acquisition-related awards are presented within the following line items of the condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017 (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Cost of revenue
$
396

 
$
663

Marketing
1,794

 
1,802

Selling, general and administrative
17,088

 
17,185

Other income (expense)
48

 
51

Total stock-based compensation expense
$
19,326

 
$
19,701

The Company also capitalized $1.7 million and $1.5 million of stock-based compensation for the three months ended March 31, 2018 and 2017, respectively, in connection with internally-developed software. As of March 31, 2018, a total of $107.9 million of unrecognized compensation costs related to unvested employee stock awards are expected to be recognized over a remaining weighted-average period of 1.32 years.
Employee Stock Purchase Plan
The Company is authorized to grant up to 10,000,000 shares of common stock under its employee stock purchase plan ("ESPP"). For the three months ended March 31, 2018 and 2017, 746,773 and 877,845 shares of common stock, respectively, were issued under the ESPP.
Restricted Stock Units
The restricted stock units granted under the Plans generally have vesting periods between one and four years. Restricted stock units are amortized on a straight-line basis over the requisite service period.


15

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The table below summarizes activity regarding unvested restricted stock units granted under the Plans for the three months ended March 31, 2018:
 
Restricted Stock Units
 
Weighted-Average Grant Date Fair Value (per unit)
Unvested at December 31, 2017
28,939,110

 
$
4.32

Granted
2,610,912

 
5.24

Vested
(3,878,827
)
 
4.53

Forfeited
(1,608,149
)
 
4.02

Unvested at March 31, 2018
26,063,046

 
4.40

Performance Share Units
The performance share units granted under the Plans vest in shares of the Company's common stock upon the achievement of financial and operational targets specified in the respective award. The awards are subject to both continued employment through the performance period dictated by the award and certification by the Compensation Committee that the specified financial and operational targets have been achieved.
During the three months ended March 31, 2018, the Company granted performance share units for which the maximum number of common shares issuable upon vesting of those performance share units is 3,283,114 shares, the grant date fair value was $5.20 per unit and the total grant date fair value of the shares for which the performance conditions are expected to be met was $8.5 million. During the three months ended March 31, 2018, 278,635 shares of the Company's common stock were issued related to performance share units granted in the previous year following the Compensation Committee's certification of the Company's financial and operational metrics for the year ended December 31, 2017. The weighted average grant date fair value of those units was $3.78 per share.
Performance Bonus Awards
If bonus amounts earned under the Company's primary employee bonus plans exceed targeted bonus amounts because specified financial metrics of the Company exceed the performance conditions set forth in those plans, such excess is required to be settled in the Company's common stock. The Company's obligation to issue shares for employee bonus amounts exceeding the specified bonus targets is accounted for separately as a liability-classified stock-based compensation arrangement with performance conditions.
During the three months ended March 31, 2018, 1,240,379 shares of the Company's common stock were issued related to performance bonus awards granted in the previous year following the Compensation Committee's certification of the Company's financial and operational metrics for the year ended December 31, 2017. The weighted average grant date fair value of those awards was $5.20 per share.
Stock Options
The exercise price of stock options granted is equal to the fair value of the underlying stock on the date of grant. The contractual term for stock options expires ten years from the grant date. Stock options generally vested over a three or four-year period, with 25% of the awards vesting after one year and the remainder of the awards vesting on a monthly or quarterly basis thereafter.


16

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The table below summarizes the stock option activity for the three months ended March 31, 2018:
 
Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in thousands) (1)
Outstanding and exercisable at December 31, 2017
885,580

 
$
0.62

 
1.76
 
$
3,967

Exercised
(2,400
)
 
2.36

 
 
 
 
Forfeited

 

 
 
 
 
Outstanding and exercisable at March 31, 2018
883,180

 
0.61

 
1.51
 
$
3,294

(1)
The aggregate intrinsic value of options outstanding and exercisable represents the total pretax intrinsic value (the difference between the fair value of the Company's stock on the last day of each period and the exercise price, multiplied by the number of options where the fair value exceeds the exercise price) that would have been received by the option holders had all option holders exercised their options as of March 31, 2018 and December 31, 2017, respectively.
10. REVENUE RECOGNITION
Product and service revenue are generated from sales transactions through the Company's online marketplaces in three primary categories: Local, Goods and Travel.
Product revenue is earned from direct sales of merchandise inventory to customers and includes any related shipping fees. Service revenue primarily represents the net commissions earned by the Company from selling goods and services provided by third-party merchants. Those marketplace transactions generally involve the online delivery of a voucher that can be redeemed by the purchaser with the third-party merchant for goods or services (or for discounts on goods or services). To a lesser extent, service revenue also includes commissions earned when customers make purchases with retailers using digital coupons accessed through the Company's websites and mobile applications. Additionally, in the United States the Company has recently been developing and testing voucherless offerings that are linked to customer credit cards. Customers claim those voucherless merchant offerings through the Company's online marketplaces and earn cash back on their credit card statements when they transact with the related merchants, who pay the Company commissions for such transactions.
In connection with most of our product and service revenue transactions, we collect cash from credit card payment processors shortly after a sale occurs. For transactions in which the Company earns commissions when customers make purchases with retailers using digital coupons accessed through its websites and mobile applications, the Company generally collects payment from affiliate networks on terms ranging from 30 to 150 days.
Previously, the Company referred to its product revenue and service revenue as "direct revenue" and "third-party and other revenue," respectively.
Adoption of ASC Topic 606, Revenue from Contracts with Customers
On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("Topic 606") using the modified retrospective method. Beginning on January 1, 2018, results are presented in accordance with the Company's revised policies, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historical policies. The adoption of Topic 606 did not significantly impact the Company's presentation of revenue on a gross or net basis. The following changes resulted from the adoption of Topic 606:
For merchant agreements with redemption payment terms, the merchant is not paid its share of the sale price for a voucher sold through one of the Company's online marketplaces until the customer redeems the related voucher. If the customer does not redeem a voucher with such merchant payment terms, the Company retains all of the gross billings for that voucher, rather than retaining only its net commission. Prior to its adoption of Topic 606, the Company recognized that variable consideration from unredeemed vouchers and derecognized the related accrued merchant payables when its legal obligation to the merchant expired, which the Company believes is shortly after the voucher expiration date in most jurisdictions. Following its adoption of Topic 606, the Company estimates the variable consideration from vouchers that will not ultimately be redeemed and recognizes that amount as revenue at the time of sale, rather than when the Company's legal obligation expires. The Company estimates variable consideration from unredeemed vouchers using its historical voucher redemption experience. Most vouchers sold through the Company's marketplace in the United States do not have


17

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

expiration dates and redemption payment terms were not widely used in that jurisdiction before 2017, so the Company's North America segment did not have variable consideration from unredeemed vouchers in prior periods.
Prior to its adoption of Topic 606, the Company expensed the incremental costs to obtain contracts with third-party merchants, such as sales commissions, as incurred. Following its adoption of Topic 606, those costs are deferred and recognized over the expected period of the merchant arrangement, generally from 12 to 18 months.
Prior to its adoption of Topic 606, the Company recognized breakage income for unused customer credits when they expired or were forfeited. Following its adoption of Topic 606, breakage income from customer credits that are not expected to be used is estimated and recognized as revenue in proportion to the pattern of redemption for customer credits that are used.
Prior to its adoption of Topic 606, the Company deferred the revenue from hotel reservation offerings until the customer's stay commenced. Following its adoption of Topic 606, revenue from hotel reservation offerings is recognized at the time the reservation is made, net of an allowance for estimated cancellations.
Prior to its adoption of Topic 606, the Company classified refunds on service revenue transactions for which the merchant's share of the refund amount is not recoverable as a cost of revenue. Following its adoption of Topic 606, those refunds are classified as a reduction of revenue.
Prior to its adoption of Topic 606, the Company classified credits issued to consumers for relationship purposes as a marketing expense. Following its adoption of Topic 606, those credits are classified as a reduction of revenue.
The Company recorded a net reduction to its opening accumulated deficit of $88.9 million, which is net of a $6.7 million income tax effect, as of January 1, 2018 due to the cumulative impact of adopting Topic 606. The following table summarizes balance sheet accounts impacted by the cumulative effect of adopting Topic 606 (in thousands):
Account
 
Increase (decrease) to beginning accumulated deficit
Prepaid expenses and other current assets
 
$
(4,007
)
Other non-current assets
 
(10,223
)
Accrued merchant and supplier payables
 
(64,970
)
Accrued expenses and other current liabilities
 
(13,188
)
Other non-current liabilities
 
3,443

Effect on beginning accumulated deficit
 
$
(88,945
)
See Note 2, Adoption of New Accounting Standards, for additional information about the Company's revenue recognition policies before and after the adoption of Topic 606.
Impacts on Condensed Consolidated Financial Statements
The following tables summarize the impacts of adopting Topic 606 on the Company's condensed consolidated financial statements as of and for the three months ended March 31, 2018 (in thousands):
Condensed Consolidated Balance Sheet
 
March 31, 2018
 
As reported
 
Adjustments
 
Balances without adoption of Topic 606
Total assets
$
1,502,928

 
$
(13,082
)
 
$
1,489,846

Total liabilities
1,152,556

 
84,185

 
1,236,741

Total Groupon, Inc. stockholders' equity
350,372

 
(97,267
)
 
253,105



18

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Condensed Consolidated Statement of Operations
 
Three Months Ended March 31, 2018
 
As reported
 
Adjustments
 
Balances without adoption of Topic 606
Revenue:
 
 
 
 
 
Service revenue (1)
$
301,797

 
$
(1,779
)
 
$
300,018

Product revenue
324,743

 

 
324,743

Total revenue
626,540

 
(1,779
)
 
624,761

Cost of revenue:
 
 
 
 
 
Service cost of revenue (2)
31,145

 
6,275

 
37,420

Product cost of revenue
270,510

 

 
270,510

Cost of revenue (2)
301,655

 
6,275

 
307,930

Gross profit
324,885

 
(8,054
)
 
316,831

Operating expenses:
 
 
 
 
 
Marketing (3)
99,156

 
1,573

 
100,729

Selling, general and administrative (4)
222,061

 
(1,264
)
 
220,797

Restructuring charges
283

 

 
283

Total operating expenses
321,500

 
309

 
321,809

Income (loss) from operations
3,385

 
(8,363
)
 
(4,978
)
Other income (expense), net
(8,515
)
 

 
(8,515
)
Income (loss) before provision (benefit) for income taxes
(5,130
)
 
(8,363
)
 
(13,493
)
Provision (benefit) for income taxes (5)
(2,335
)
 
(1,019
)
 
(3,354
)
Net income (loss)
$
(2,795
)
 
$
(7,344
)
 
$
(10,139
)
(1)
Reflects decreases of $5.6 million related to the timing of recognition of variable consideration from unredeemed vouchers, $3.3 million related to the timing of recognition of revenue from hotel reservation offerings and $0.7 million related to the timing of recognition of breakage revenue from customer credits that are not expected to be used, partially offset by a $7.8 million increase for refunds on service revenue transactions for which the merchant's share is not recoverable and customer credits issued for relationship purposes, which are classified as reductions of revenue under Topic 606.
(2)
Reflects an increase for refunds on service revenue transactions for which the merchant's share is not recoverable, which are classified as a reduction of revenue under Topic 606.
(3)
Reflects an increase for customer credits issued for relationship purposes, which are classified as a reduction of revenue under Topic 606.
(4)
Reflects the amortization of deferred contract acquisition costs in excess of amounts capitalized in the current period.
(5)
As discussed in Note 12, Income Taxes, for the three months ended March 31, 2018, the Company recognized a $6.4 million income tax benefit resulting from the impact of adopting Topic 606 on intercompany activity in certain foreign jurisdictions. That income tax benefit is not reflected in this table, which presents the direct impacts of adopting Topic 606.


19

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Segment and Category Information
 
Three Months Ended March 31, 2018
 
As reported
 
Adjustments
 
Balances without adoption of Topic 606
North America
 
 
 
 
 
Service revenue:
 
 
 
 
 
Local
$
187,411

 
$
3,613

 
$
191,024

Goods
4,874

 

 
4,874

Travel
20,084

 
(3,080
)
 
17,004

Product revenue - Goods
180,887

 

 
180,887

Total North America revenue
393,256

 
533

 
393,789

 
 
 
 
 
 
International
 
 
 
 
 
Service revenue:
 
 
 
 
 
Local
74,578

 
(1,445
)
 
73,133

Goods
3,414

 
(239
)
 
3,175

Travel
11,436

 
(628
)
 
10,808

Product revenue - Goods
143,856

 

 
143,856

Total International revenue
233,284

 
(2,312
)
 
230,972

 
 
 
 
 
 
Consolidated
 
 
 
 
 
Service revenue:
 
 
 
 
 
Local
261,989

 
2,168

 
264,157

Goods
8,288

 
(239
)
 
8,049

Travel
31,520

 
(3,708
)
 
27,812

Product revenue - Goods
324,743

 

 
324,743

Total Consolidated Revenue
$
626,540

 
$
(1,779
)
 
$
624,761

Contract Balances
The following table summarizes the activity in revenue deferred from contracts with customers for the three months ended March 31, 2018 (in thousands):
 
Deferred Revenue
Balance as of January 1, 2018
$
25,763

Revenue deferred
22,185

Revenue recognized
(25,935
)
Foreign currency translation
172

Balance as of March 31, 2018
$
22,185

A substantial majority of our deferred revenue relates to product sales for which revenue will be recognized as the products are delivered to customers, generally within one week following the balance sheet date.


20

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The following table summarizes the activity in the liability for customer credits for the three months ended March 31, 2018 (in thousands):
 
Customer Credits
Balance as of January 1, 2018
$
19,414

Credits issued
32,386

Credits redeemed (1)
(28,167
)
Breakage revenue recognized
(5,036
)
Foreign currency translation
164

Balance as of March 31, 2018
$
18,761

(1)
Customer credits can be redeemed through the Company's online marketplaces for goods or services provided by a third-party merchant or for merchandise inventory sold by the Company. When customer credits are redeemed for goods or services provided by a third-party merchant, service revenue is recognized on a net basis as the difference between the carrying amount of the customer credit liability derecognized and the amount due to the merchant for the related transaction. When customer credits are redeemed for merchandise inventory sold by the Company, product revenue is recognized on a gross basis equal to the amount of the customer credit liability derecognized. Customer credits are primarily used within one year of issuance.
11. RESTRUCTURING    
In September 2015, the Company commenced a restructuring plan relating primarily to workforce reductions in its international operations. The Company has also undertaken workforce reductions in its North America segment. In addition to workforce reductions in its ongoing markets, the Company ceased operations in 17 countries within its International segment as part of the restructuring plan between September 2015 and March 2016. Those country exits, which generally comprised the Company's smallest international markets, resulted from a series of separate decisions made at different times during that period that were not part of an overall strategic shift. Costs related to the restructuring plan are classified as Restructuring charges on the condensed consolidated statements of operations. The actions under the Company's restructuring plan were completed as of September 30, 2017 and substantially all of the remaining cash payments for actions under that plan are expected to be disbursed through December 31, 2018.
The Company incurred cumulative costs for employee severance and benefits and other exit costs of $80.5 million under the plan since its inception in September 2015. In addition to those costs, the Company incurred cumulative long-lived asset impairment charges of $7.5 million resulting from its restructuring activities.
The following tables summarize the costs incurred by segment related to the Company’s restructuring plan for the three months ended March 31, 2018 and 2017 (in thousands):
 
Three Months Ended March 31, 2018
 
Employee Severance and Benefit Costs (1)
 
Other Exit Costs (1)
 
Total Restructuring Charges
North America
$

 
$

 
$

International
230

 
53

 
283

Consolidated
$
230

 
$
53

 
$
283

 
Three Months Ended March 31, 2017
 
Employee Severance and Benefit Costs (2)
 
Other Exit Costs
 
Total Restructuring Charges
North America
$
1,778

 
$
177

 
$
1,955

International
523

 
253

 
776

Consolidated
$
2,301

 
$
430

 
$
2,731

(1)
The $0.3 million of restructuring charges during three months ended March 31, 2018 reflects changes in estimates related to prior actions.
(2)
The employee severance and benefit costs for the three months ended March 31, 2017 related to the termination of approximately 200 employees.
The following table summarizes the restructuring liability activity for each period (in thousands):
 
Employee Severance and Benefit Costs
 
Other Exit Costs
 
Total
Balance as of December 31, 2017
$
3,817

 
$
304

 
$
4,121

Charges payable in cash
230

 
53

 
283

Cash payments
(720
)
 
(53
)
 
(773
)
Foreign currency translation
71

 

 
71

Balance as of March 31, 2018
$
3,398

 
$
304

 
$
3,702

12. INCOME TAXES
The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items.
For the three months ended March 31, 2018, the Company recorded an income tax benefit from continuing operations of $2.3 million on a pretax loss from continuing operations of $5.1 million. For the three months ended March 31, 2017, the Company recorded income tax expense from continuing operations of $4.6 million on a pretax loss from continuing operations of $16.3 million.
The Company's U.S. Federal income tax rate is 21%. The effective tax rate for the three months ended March 31, 2018 reflected a $6.4 million income tax benefit resulting from the impact of adopting Topic 606 on intercompany activity in certain foreign jurisdictions, partially offset by pretax losses incurred in jurisdictions that have valuation allowances against their net deferred tax assets. The primary factor impacting the effective tax rate for the three months ended March 31, 2017 was the pretax losses incurred in jurisdictions that have valuation allowances against their net deferred tax assets.
The Company is currently undergoing income tax audits in multiple jurisdictions. There are many factors, including factors outside of the Company's control, which influence the progress and completion of those audits. During the fourth quarter 2017, the Company received an income tax assessment and a notification of proposed assessment from the tax authorities in two foreign jurisdictions, totaling $141.8 million in the aggregate. The Company believes that the assessments, which primarily relate to transfer pricing on transactions occurring from 2011 to 2014, are without merit and it intends to vigorously defend itself in those matters. In addition to any potential increases in its liabilities for uncertain tax positions from the ultimate resolution of those assessments, the Company believes that it is reasonably possible that reductions of up to $40.6 million in unrecognized tax benefits may occur within the 12 months following March 31, 2018 upon closing of income tax audits or the expiration of applicable statutes of limitations.
The Tax Cuts and Jobs Act (the "Jobs Act") was signed into law on December 22, 2017. The Company has made provisional estimates for the impact of the Jobs Act related to the re-measurement of deferred income taxes, valuation allowances, uncertain tax positions, and its assessment of permanently reinvested earnings. Those estimates may be impacted by the need for further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations and state tax conformity to federal tax changes. Additionally, while the Company does not expect to incur the deemed repatriation tax, it has not yet finalized the related calculations. The Jobs Act also establishes global intangible low-taxed income ("GILTI") provisions that impose a tax on foreign income in excess of a deemed return on intangible assets of foreign corporations. The Company is in the process of evaluating the impact of taxes on GILTI and has not yet determined whether its accounting policy will be to recognize deferred taxes for basis differences that are expected to affect the amount of GILTI inclusion upon reversal or to recognize taxes on GILTI as an expense in the period incurred.
In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. Additionally, while the Company does not expect to incur the deemed repatriation tax established by the Jobs Act, an actual repatriation from its non-U.S. subsidiaries could be subject to foreign and U.S. state income taxes. Aside from limited exceptions for which the related deferred tax liabilities recognized as of March 31, 2018 and December 31, 2017 are immaterial, the Company does not intend to distribute earnings of foreign subsidiaries for which it has an excess of the financial reporting basis over the tax basis of its investments and therefore has not recorded any deferred taxes related to such amounts. The actual tax cost resulting from a distribution would depend on income tax laws and circumstances at the time of distribution. Determination of the amount of unrecognized deferred tax liability related to the excess of the financial reporting basis over the tax basis of the Company's foreign subsidiaries is not practical due to the complexities associated with the calculation.
13. FAIR VALUE MEASUREMENTS
Fair value is defined under U.S. GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability.
To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs in valuation methodologies used to measure fair value:
Level 1 - Measurements that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Measurements that include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. These fair value measurements require significant judgment.
In determining fair value, the Company uses various valuation approaches within the fair value measurement framework. The valuation methodologies used for the Company's assets and liabilities measured at fair value and their classification in the valuation hierarchy are summarized below:
Cash equivalents. Cash equivalents primarily consist of AAA-rated money market funds. The Company classified cash equivalents as Level 1 due to the short-term nature of these instruments and measured the fair value based on quoted prices in active markets for identical assets.
Fair value option and available-for-sale securities investments. To determine the fair value of its fair value option investments each period, the Company first estimates the fair value of each entity in its entirety. The Company primarily uses the discounted cash flow method, which is an income approach, to estimate the fair value of the investees. The key inputs to determining fair values under that approach are cash flow forecasts and discount rates. As of March 31, 2018 and December 31, 2017, the Company applied discount rates of 21% and 22%, respectively, in its discounted cash flow valuations for Monster LP. The Company also uses a market approach valuation technique, which is based on market multiples of guideline companies, to determine the fair value of each entity. The discounted cash flow and market multiple valuations are then evaluated and weighted to determine the amount that is most representative of the fair value of each entity. Once the Company determines the fair value of each entity, it then determines the fair value of its specific investments in those entities. The entities have complex capital structures, so the Company applies an option-pricing model that considers the liquidation preferences of each investee’s respective classes of ownership interests to determine the fair value of the Company’s investment in each entity.
The Company also has investments in redeemable preferred shares and convertible debt securities issued by nonpublic entities. The Company measures the fair value of those available-for-sale securities using the discounted cash flow method.
The Company has classified its fair value option investments and its investments in available-for-sale securities as Level 3 due to the lack of observable market data over fair value inputs such as cash flow projections and discount rates. Increases in projected cash flows and decreases in discount rates contribute to increases in the estimated fair values of the fair value option investments and available-for-sale securities, whereas decreases in projected cash flows and increases in discount rates contribute to decreases in their fair values.

Contingent consideration. The Company had contingent obligations to transfer cash to the former owners of acquired businesses if specified financial results were met over future reporting periods (i.e., earn-outs). Liabilities for contingent consideration were measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred and subsequent changes in fair value recorded in earnings within Selling, general and administrative expense on the condensed consolidated statements of operations.


21

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The Company used an income approach to value contingent consideration obligations based on the present value of probability-weighted future cash flows. The Company classified the contingent consideration liabilities as Level 3 due to the lack of relevant observable market data over fair value inputs such as probability-weighting of payment outcomes.

The following tables summarize the Company's assets that are measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 (in thousands):
 
 
 
Fair Value Measurement at Reporting Date Using
 
March 31, 2018
 
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents
$
93,325

 
$
93,325

 
$

 
$

Fair value option investments
77,933

 

 

 
77,933

Available-for-sale securities:
 
 
 
 
 
 
 
Convertible debt securities
11,070

 

 

 
11,070

Redeemable preferred shares
14,576

 

 

 
14,576

 
 
 
Fair Value Measurement at Reporting Date Using
 
December 31, 2017
 
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents
$
137,975

 
$
137,975

 
$

 
$

Fair value option investments
82,966

 

 

 
82,966

Available-for-sale securities:
 
 
 
 
 
 
 
Convertible debt securities
11,354

 

 

 
11,354

Redeemable preferred shares
15,431

 

 

 
15,431



22

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The following table provides a roll-forward of the fair value of recurring Level 3 fair value measurements for the three months ended March 31, 2018 and 2017 (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Assets
 
 
 
Fair value option investments:
 
 
 
Beginning Balance
$
82,966

 
$
82,584

Total gains (losses) included in earnings
(5,033
)
 
303

Ending Balance
$
77,933

 
$
82,887

Unrealized gains (losses) still held (1)
$
(5,033
)
 
$
303

Available-for-sale securities
 
 
 
Convertible debt securities:
 
 
 
Beginning Balance
$
11,354

 
$
10,038

Acquisition of convertible debt security

 
1,612

Total gains (losses) included in other comprehensive income (loss)
(501
)
 
42

   Total gains (losses) included in earnings (2)
217

 
239

Ending Balance
$
11,070

 
$
11,931

Unrealized gains (losses) still held (1)
$
(284
)
 
$
281

Redeemable preferred shares:
 
 
 
Beginning Balance
$
15,431

 
$
17,444

Total gains (losses) included in other comprehensive income (loss)

 
344

Impairment included in earnings
(855
)
 

Ending Balance
$
14,576

 
$
17,788

Unrealized (losses) gains still held (1)
$
(855
)
 
$
344

 
 
 


Liabilities
 
 
 
Contingent Consideration:
 
 
 
Beginning Balance
$

 
$
14,588

Total losses (gains) included in earnings (3)

 
12

Ending Balance
$

 
$
14,600

Unrealized losses (gains) still held (1)
$

 
$
12

(1)
Represents the unrealized losses or gains recorded in earnings and/or other comprehensive income (loss) during the period for assets and liabilities classified as Level 3 that are still held (or outstanding) at the end of the period.
(2)
Represents accretion of interest income and changes in the fair value of an embedded derivative.
(3)
Changes in the fair value of contingent consideration liabilities are classified within Selling, general and administrative expense on the consolidated statements of operations.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets that are written down to fair value as a result of an impairment. The Company did not record any significant nonrecurring fair value measurements after initial recognition for the three months ended March 31, 2018 and 2017.


23

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Estimated Fair Value of Financial Assets and Liabilities Not Measured at Fair Value
The following table presents the carrying amount and fair value of equity securities that were classified as cost method investments as of December 31, 2017 (in thousands):
 
December 31, 2017
 
Carrying Amount
 
Fair Value
Cost method investments (1)
$
25,438

 
$
32,792

(1)
See Note 2, Adoption of New Accounting Standards, and Note 5, Investments, for information about the Company's adoption of ASU 2016-01 on January 1, 2018 and its impact on accounting for equity investments without readily determinable fair values that were previously subject to the cost method of accounting.
The fair values of the Company's cost method investments were determined using the market approach or the income approach, depending on the availability of fair value inputs such as financial projections for the investees and market multiples for comparable companies. The Company classified the fair value measurements of its cost method investments as Level 3 measurements within the fair value hierarchy as of December 31, 2017 because they involve significant unobservable inputs such as cash flow projections and discount rates.
The Company's other financial instruments not carried at fair value consist primarily of accounts receivable, restricted cash, accounts payable, accrued merchant and supplier payables and accrued expenses. The carrying values of these assets and liabilities approximate their respective fair values as of March 31, 2018 and December 31, 2017 due to their short-term nature.
14. INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares and the effect of potentially dilutive securities outstanding during the period. Potentially dilutive securities include stock options, restricted stock units, performance share units, unvested restricted stock awards, performance bonus awards, ESPP shares, warrants and convertible senior notes. If dilutive, those potentially dilutive securities are reflected in diluted net income (loss) per share by application of the treasury stock method, except for the convertible senior notes, which are subject to the if-converted method.
The following table sets forth the computation of basic and diluted net income (loss) per share of common stock for the three months ended March 31, 2018 and 2017 (in thousands, except share amounts and per share amounts):
 
Three Months Ended March 31,
 
2018
 
2017
Basic and diluted net income (loss) per share:
 
 
 
Numerator
 
 
 
Net income (loss) - continuing operations
$
(2,795
)
 
$
(20,869
)
Less: Net income (loss) attributable to noncontrolling interests
4,093

 
4,032

Net income (loss) attributable to common stockholders - continuing operations
(6,888
)
 
(24,901
)
Net income (loss) attributable to common stockholders - discontinued operations

 
487

Net income (loss) attributable to common stockholders
$
(6,888
)
 
$
(24,414
)
Denominator
 
 
 
Weighted-average common shares outstanding
561,735,937

 
562,195,243

 
 
 
 
Basic and diluted net income (loss) per share (1):
 
 
 
Continuing operations
$
(0.01
)
 
$
(0.04
)
Discontinued operations
0.00

 
0.00

Basic and diluted net income (loss) per share
$
(0.01
)
 
$
(0.04
)
(1)
The potentially dilutive impacts of outstanding equity awards, warrants and convertible senior notes have been excluded from the calculation of dilutive net income (loss) per share for the three months ended March 31, 2018 and 2017 as their effect on net income (loss) per share from


24

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

continuing operations was antidilutive.
The following weighted-average potentially dilutive instruments are not included in the diluted net income (loss) per share calculations above because they would have had an antidilutive effect on the net income (loss) per share from continuing operations:
 
Three Months Ended March 31,
 
2018
 
2017
Restricted stock units
28,033,489

 
24,360,648

Other stock-based compensation awards
3,212,026

 
3,813,848

Convertible senior notes
46,296,300

 
46,296,300

Warrants
46,296,300

 
46,296,300

Total
123,838,115

 
120,767,096

The Company had outstanding performance share units as of March 31, 2018 and 2017 that were eligible to vest into shares of common stock subject to the achievement of specified performance conditions. Contingently issuable shares are excluded from the computation of diluted earnings per share if, based on current period results, the shares would not be issuable if the end of the reporting period were the end of the contingency period. There were up to 3,283,114 and 683,076 shares of common stock issuable upon vesting of outstanding performance share units as of March 31, 2018 and 2017, respectively, that were excluded from the table above as the performance conditions were not satisfied as of the end of the respect