Groupon, Inc.
Groupon, Inc. (Form: 10-Q, Received: 11/09/2012 06:05:12)

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

FORM 10-Q
 x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
 
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: 1-353335

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 620
Chicago, Illinois
 
60654
(Address of principal executive offices)
 
(Zip Code)

312-676-5773
(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 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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.        

Large accelerated filer ¨                         Accelerated filer      ¨     
Non-accelerated filer x (Do not check if a smaller reporting company)      Smaller reporting company ¨
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ¨     No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class of Stock
 
Outstanding at November 7, 2012
Class A Common Stock
 
653,316,120

shares
Class B Common Stock
 
2,399,976

shares

1


TABLE OF CONTENTS

PART I. Financial Information
Page
Forward-Looking Statements
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2011 and September 30, 2012 (unaudited)
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2012 (unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2011 and 2012 (unaudited)
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2012 (unaudited)
Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2012 (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 6. Exhibits
Signatures
Exhibits
______________________________________________________



2


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 and Section 21E of the Securities Exchange Act of 1934, 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, among others, those discussed in “Item 1A: Risk Factors” of our Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, 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.

3





ITEM 1.     FINANCIAL STATEMENTS

GROUPON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

 
December 31, 2011
 
September 30, 2012
 
 
 
(unaudited)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,122,935

 
$
1,201,011

Accounts receivable, net
108,747

 
110,058

Prepaid expenses and other current assets
91,645

 
121,338

Total current assets
1,323,327

 
1,432,407

Property and equipment, net of accumulated depreciation of $14,627 and $37,564, respectively
51,800

 
103,876

Goodwill
166,903

 
196,978

Intangible assets, net
45,667

 
51,447

Investments in equity interests
50,604

 
131,039

Deferred income taxes, non-current
46,104

 
48,753

Other non-current assets
90,071

 
68,314

Total Assets
$
1,774,476

 
$
2,032,814

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
40,918

 
$
60,016

Accrued merchant payables
520,723

 
573,477

Accrued expenses
212,007

 
245,083

Deferred income taxes, current
76,841

 
75,203

Other current liabilities
144,673

 
171,422

Total current liabilities
995,162

 
1,125,201

Deferred income taxes, non-current
7,428

 
28,585

Other non-current liabilities
70,766

 
74,643

Total Liabilities
1,073,356

 
1,228,429

Commitments and contingencies (see Note 7)

 

Redeemable noncontrolling interests
1,653

 
7,190

Stockholders' Equity
 
 
 
Class A common stock, par value $0.0001 per share, 2,000,000,000 shares authorized, 641,745,225 shares issued and outstanding at December 31, 2011; 2,000,000,000 shares authorized, 652,501,880 shares issued and outstanding at September 30, 2012
64

 
65

Class B common stock, par value $0.0001 per share, 10,000,000 shares authorized, 2,399,976 shares issued and outstanding at December 31, 2011 and September 30, 2012

 

Common stock, par value $0.0001 per share, 2,010,000,000 shares authorized, no shares issued and outstanding at December 31, 2011 and September 30, 2012

 

Additional paid-in capital
1,388,253

 
1,459,485

Accumulated deficit
(698,704
)
 
(672,494
)
Accumulated other comprehensive income
12,928

 
11,956

Total Groupon, Inc. Stockholders' Equity
702,541

 
799,012

Noncontrolling interests
(3,074
)
 
(1,817
)
Total Equity
699,467

 
797,195

Total Liabilities and Equity
$
1,774,476

 
$
2,032,814


See Notes to unaudited Condensed Consolidated Financial Statements.

4


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2012
 
2011
 
2012
Revenue:
 
 
 
 
 
 
 
Third party and other revenue
$
422,989

 
$
423,564

 
$
1,111,094

 
$
1,466,602

Direct revenue
7,172

 
144,988

 
7,172

 
229,568

Total revenue
430,161

 
568,552

 
1,118,266

 
1,696,170

Cost of revenue:
 
 
 
 
 
 
 
Third party and other revenue
62,339

 
54,173

 
156,907

 
233,834

Direct revenue
5,707

 
127,613

 
5,707

 
202,634

Total cost of revenue
68,046

 
181,786

 
162,614

 
436,468

Operating expenses:
 
 
 
 
 
 
 
Marketing
170,349

 
70,919

 
613,173

 
275,941

Selling, general and administrative
196,798

 
287,978

 
565,686

 
871,455

Acquisition-related (benefit) expense, net
(4,793
)
 
2,431

 
(4,793
)
 
744

  Total operating expenses
362,354

 
361,328

 
1,174,066

 
1,148,140

(Loss) income from operations
(239
)
 
25,438

 
(218,414
)
 
111,562

Interest and other income, net
8,269

 
617

 
9,808

 
54,445

Loss on equity method investees
(11,211
)
 
(138
)
 
(19,974
)
 
(8,694
)
(Loss) income before provision for income taxes
(3,181
)
 
25,917

 
(228,580
)
 
157,313

Provision for income taxes
11,235

 
26,857

 
9,503

 
128,297

Net (loss) income
(14,416
)
 
(940
)
 
(238,083
)
 
29,016

Less: Net loss (income) attributable to noncontrolling interests
3,843

 
(706
)
 
23,602

 
(2,806
)
Net (loss) income attributable to Groupon, Inc.
(10,573
)
 
(1,646
)
 
(214,481
)
 
26,210

Redemption of preferred stock in excess of carrying value

 

 
(34,327
)
 

Adjustment of redeemable noncontrolling interests to redemption value
(43,656
)
 
(1,333
)
 
(59,307
)
 
(12,498
)
Net (loss) income attributable to common stockholders
$
(54,229
)
 
$
(2,979
)
 
$
(308,115
)
 
$
13,712

 
 
 
 
 
 
 
 
Net (loss) earnings per share
 
 
 
 
 
 
 
Basic
$(0.18)
 
$(0.00)
 
$(1.01)
 
$0.02
Diluted
$(0.18)
 
$(0.00)
 
$(1.01)
 
$0.02
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding
 
 
 
 
 
 
 
Basic
307,605,060

 
653,223,610

 
305,288,502

 
648,021,943

Diluted
307,605,060

 
653,223,610

 
305,288,502

 
663,557,250


See Notes to unaudited Condensed Consolidated Financial Statements.

5



GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2012
 
2011
 
2012
Net (loss) income
$
(14,416
)
 
$
(940
)
 
$
(238,083
)
 
$
29,016

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
   Foreign currency translation adjustments
81

 
(387
)
 
3,649

 
(378
)
Other comprehensive income (loss)
81

 
(387
)
 
3,649

 
(378
)
Comprehensive (loss) income
(14,335
)
 
(1,327
)
 
(234,434
)
 
28,638

Less: Comprehensive loss (income) attributable to the noncontrolling interests
3,843

 
(1,300
)
 
23,602

 
(3,400
)
Comprehensive (loss) income attributable to Groupon, Inc.
$
(10,492
)
 
$
(2,627
)
 
$
(210,832
)
 
$
25,238


See Notes to unaudited Condensed Consolidated Financial Statements

6



GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2011
 
2012
Operating activities
 
 
 
Net (loss) income
$
(238,083
)
 
$
29,016

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
22,754

 
39,836

Stock-based compensation
60,922

 
77,706

Deferred income taxes
602

 
9,608

Excess tax benefits on stock-based compensation
(11,323
)
 
(24,620
)
Loss on equity method investees
19,974

 
8,694

Acquisition-related (benefit) expense, net
(4,793
)
 
744

Gain on redemption of common stock
(4,916
)
 

Gain on E-Commerce transaction

 
(56,032
)
Change in assets and liabilities, net of acquisitions:
 
 
 
Restricted cash
(8,141
)
 
(1,855
)
Accounts receivable
(69,690
)
 
(2,189
)
Prepaid expenses and other current assets
(41,023
)
 
(24,937
)
Accounts payable
(21,924
)
 
13,174

Accrued merchant payables
314,872

 
53,889

Accrued expenses and other current liabilities
108,963

 
68,010

Other, net
(6,824
)
 
10,073

Net cash provided by operating activities
121,370

 
201,117

Investing activities
 
 
 
Purchases of property and equipment and software capitalization
(29,825
)
 
(55,802
)
Acquisitions of businesses, net of acquired cash
(12,553
)
 
(44,790
)
Purchases of intangible assets
(15,072
)
 
(10
)
Purchases of additional interests in consolidated subsidiaries
(34,887
)
 
(8,527
)
Purchases of cost and equity method investments
(20,189
)
 
(33,097
)
Net cash used in investing activities
(112,526
)
 
(142,226
)
Financing activities
 
 
 
Proceeds from issuance of stock, net of issuance costs
509,829

 

Excess tax benefit on stock-based compensation
11,323

 
24,620

Tax withholdings related to net share settlements of restricted stock units

 
(7,586
)
Payments of contingent acquisition liability

 
(4,250
)
Repayments of loans with related parties
(14,358
)
 

Repurchase of common stock
(353,550
)
 

Proceeds from exercise of stock options
2,269

 
8,868

Partnership distributions to noncontrolling interest holders

 
(3,062
)
Redemption of preferred stock
(35,221
)
 

Net cash provided by financing activities
120,292

 
18,590

Effect of exchange rate changes on cash and cash equivalents
(4,034
)
 
595

Net increase in cash and cash equivalents
125,102

 
78,076

Cash and cash equivalents, beginning of the period
118,833

 
1,122,935

Cash and cash equivalents, end of the period
$
243,935

 
$
1,201,011

Supplemental disclosure of cash flow information
 
 
 
Non-cash investing activity
 
 
 
Issuance of common stock in connection with acquisitions
$
11,067

 
$

Contingent consideration in connection with acquisitions
$
17,755

 
$
2,521

Issuance of non-voting common stock in connection with investments in equity interests
$
45,218

 
$

Stock issued in exchange for additional interests in consolidated subsidiaries
$
10,400

 
$
527

Contribution of investment in E-Commerce transaction
$

 
$
47,042


See Notes to unaudited Condensed Consolidated Financial Statements.

7


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
 
Groupon, Inc. Stockholders' Equity
 
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other Comp.
Income
 
Total
Groupon Inc.
Stockholders'
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2011
644,145,201

 
$
64

 
$
1,388,253

 
$
(698,704
)
 
$
12,928

 
$
702,541

 
$
(3,074
)
 
$
699,467

 
Net income

 

 

 
26,210

 

 
26,210

 
2,706

(1)  
28,916

(1)  
Foreign currency translation

 

 

 

 
(972
)
 
(972
)
 
594

 
(378
)
 
Adjustment of redeemable noncontrolling interests to redemption value

 

 
(12,498
)
 

 

 
(12,498
)
 

 
(12,498
)
 
Purchase of additional interests in consolidated subsidiaries
153,231

 

 
(2,493
)
 

 

 
(2,493
)
 
1,019

 
(1,474
)
 
Restricted stock issued in connection with business combinations
221,723

 

 

 

 

 

 

 

 
Vesting of restricted stock units
3,225,241

 

 

 

 

 

 

 

 
Tax withholding related to net share settlements of restricted stock units
(1,177,671
)
 

 
(12,980
)
 

 

 
(12,980
)
 

 
(12,980
)
 
Stock-based compensation on equity-classified awards

 

 
65,716

 

 

 
65,716

 

 
65,716

 
Excess tax benefits on stock-based compensation

 

 
24,620

 

 

 
24,620

 

 
24,620

 
Exercise of stock options
8,334,131

 
1

 
8,867

 

 

 
8,868

 

 
8,868

 
Partnership distributions to noncontrolling interest holders

 

 

 

 

 

 
(3,062
)
 
(3,062
)
 
Balance at September 30, 2012
654,901,856

 
$
65

 
$
1,459,485

 
$
(672,494
)
 
$
11,956

 
$
799,012

 
$
(1,817
)
 
$
797,195

 

(1)  
Excludes $0.1 million attributable to redeemable noncontrolling interests, which are reported outside of permanent equity in the consolidated balance sheets.

See Notes to unaudited Condensed Consolidated Financial Statements

8


GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. FINANCIAL STATEMENT INFORMATION
Company Information
Groupon, Inc., together with the subsidiaries through which it conducts business (the "Company"), is a local commerce marketplace (www.groupon.com) that connects merchants to consumers by offering goods and services at a discount. The Company has organized its operations into two segments: North America and International. See Note 12 " Segment Information. "
Basis of Presentation / 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 (the “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, and 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 that may be expected for the entire year ending December 31, 2012 . Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of the Company's 2011 Annual Report on Form 10-K.
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 in the condensed consolidated financial statements as “Noncontrolling interests" and "Redeemable noncontrolling interests." Investments in entities in which the Company does not have a controlling financial interest are accounted for under either the equity method or cost method of accounting, as appropriate.
Use of Estimates
The preparation of 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 utilized for, but not limited to, stock‑based compensation, income taxes, valuation of acquired goodwill and intangible assets, investments in equity interests, customer refunds, contingent liabilities and the depreciable lives of property and equipment. Actual results could differ materially from those estimates.
Significant Accounting Policies
Revenue
The Company recognizes revenue when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the selling price is fixed or determinable; and collection is reasonably assured.

9

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Third party revenue recognition
The Company generates third party revenue, where it acts as a third party marketing agent, by offering goods and services provided by third party merchant partners at a discount through its local commerce marketplace that connects merchants to consumers. The Company's marketplace includes deals offered in a variety of categories including: Local, National, Now!, Goods, Getaways and Live. Customers purchase Groupons from the Company and redeem them with the Company's merchant partners.
The revenue recognition criteria are met when the number of customers who purchase a given deal exceeds the predetermined threshold (where applicable), the Groupon has been electronically delivered to the purchaser and a listing of Groupons sold has been made available to the merchant. At that time, the Company's obligations to the merchant, for which it is serving as a marketing agent, are substantially complete. The Company's remaining obligations, which are limited to remitting payment to the merchant and continuing to make available on the Company's website the listing of Groupons sold that were previously provided to the merchant, are inconsequential or perfunctory. The Company records as revenue the net amount it retains from the sale of Groupons after paying an agreed upon percentage of the purchase price to the featured merchant, excluding any applicable taxes. Revenue is recorded on a net basis because the Company is acting as a marketing agent of the merchant in the transaction.
For merchant payment arrangements that are structured under a redemption model, merchant partners are not paid until the customer redeems the Groupon that has been purchased. If a customer does not redeem the Groupon under this payment model, the Company retains all the gross billings. The Company recognizes revenue from unredeemed Groupons and derecognizes the related accrued merchant payable when its legal obligation to the merchant expires, which the Company believes is shortly after deal expiration in most jurisdictions that have payment arrangements structured under a redemption model. However, the Company has historically concluded based on its interpretation of applicable German law that its obligation to merchants in that jurisdiction extended for three years. Due to a recent German tax ruling, which will require the Company to remit value-added taxes (VAT) earlier on unredeemed Groupons, the Company began recognizing revenue from unredeemed Groupons in Germany shortly after deal expiration during the quarter ended September 30, 2012, consistent with most other jurisdictions. As a result, the quarter ended September 30, 2012 includes an $18.5 million one-time increase to third party revenue, which represents the cumulative impact of deals in Germany for which, based on the recent tax ruling, the Company's obligation to the merchant would have ended prior to the current quarterly period (i.e., prior to July 1, 2012).
Direct revenue recognition
The Company evaluates whether it is appropriate to record the gross amount of its sales and related costs by considering a number of factors, including, among other things, whether the Company is the primary obligor under the arrangement, has inventory risk and has latitude in establishing prices.
Direct revenue is derived primarily from selling products through the Company's Goods category where the Company is the merchant of record. The Company is the primary obligor in these transactions, is subject to general inventory risk and has latitude in establishing prices. Accordingly, direct revenue is recorded on a gross basis. Direct revenue, including associated shipping revenue, is recorded when the products are shipped and title passes to customers. For Goods transactions where the Company is performing a service by acting as a marketing agent of the merchant responsible for fulfillment, revenue is recorded on a net basis and is presented within third party revenues.
Cost of revenue
Cost of revenue is comprised of direct and indirect costs incurred to generate revenue. For direct revenue transactions, cost of revenue includes the purchase price of consumer products, warehousing, shipping costs and inventory markdowns. For third party revenue transactions, cost of revenue includes estimated refunds that are not recoverable from the merchant, for which the Company records a liability based upon the nature of the product or service and historical experience. Other costs incurred to generate revenue, which include credit card processing fees, editorial costs, certain technology costs, web hosting, and other processing fees, are allocated to cost of third party revenue, direct revenue and other revenue in proportion to relative gross billings during the period.

10

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Technology costs in cost of revenue consist of a portion of the payroll and stock‑based compensation expense related to the Company's technology support personnel who are responsible for operating and maintaining the infrastructure of the Company's existing website. Such technology costs also include website hosting and email distribution costs. Editorial costs consist of a portion of the payroll and stock‑based compensation expense related to the Company's editorial personnel, as these staff members are primarily dedicated to drafting and promoting merchant deals.
Refunds
The Company estimates future refunds utilizing a statistical model that incorporates the following data inputs and factors: historical refund experience developed from millions of deals featured on the Company's website, the relative risk of refund based on expiration date, deal value, deal category and other qualitative factors that could impact the level of future refunds, such as introductions of new deals, discontinuations of legacy deals and expected changes, if any, in Company practices in response to refund experience or economic trends that might impact customer demand.
In early 2012, actual refund activity for deals featured late in 201l was demonstrating a consistent trend that was deviating from the modeled refund behavior, due in part to a shift in fourth quarter deal mix and higher price point offers. Accordingly, the Company updated its refund model to better capture variations in trends in its business. By continually refining the refund model to reflect such data inputs as discussed above, the Company believes its model enables it to track and anticipate refund behavior.
The Company accrues costs associated with refunds in accrued expenses on the condensed consolidated balance sheets. The cost of refunds for third party revenue where the amount payable to the merchant is recoverable and for all direct revenue is presented in the condensed consolidated statements of operations as a reduction to revenue. The cost of refunds for third party revenue when there is no amount recoverable from the merchant is presented as a cost of revenue.
The Company assesses the trends that could affect its estimates and makes changes to the refund reserve quarterly when it appears that refunds may differ from its original estimates. If actual results are not consistent with the estimates or assumptions stated above, the Company may need to change its future estimates, and the effects could be material to the condensed consolidated financial statements.
Cost method investments
Non-marketable equity investments for which the Company does not have the ability to exercise significant influence are accounted for using the cost method of accounting and classified within investments in equity interests on the condensed consolidated balance sheets. Under the cost method, investments are carried at cost and are adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. The Company evaluates the value of cost method investments for other-than-temporary impairment on a quarterly basis. See Note 10, "Fair Value Measurements" for information about the fair values and carrying amounts of cost method investments.

11

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


2 . ACQUISITIONS
During the nine months ended September 30, 2012 , the Company acquired certain entities, and the results of each of the entities have been included in the condensed consolidated financial statements beginning on the respective date of acquisition. The primary purpose of these acquisitions was to enhance the Company's technology and marketing services and to expand and advance product offerings. The aggregate acquisition-date fair value of the consideration transferred for these acquisitions totaled $52.8 million , which consisted of the following (in thousands):
Fair Value of Consideration Transferred
 
Fair Value
Cash
 
$
46,913

Purchase price obligations
 
3,364

Contingent consideration
 
2,521

Total
 
$
52,798

Liabilities for contingent consideration (i.e., earn-outs) are 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 as acquisition-related expense (benefit), net. The Company determines the fair values of contingent consideration liabilities based on the likelihood of contingent earn-out payments and stock issuances. See Note 10 “ Fair Value Measurements" for information about subsequent fair value measurements of contingent consideration liabilities.    
The following table summarizes the preliminary allocation of the fair value of consideration transferred as of the acquisition date (in thousands):
Description
 
Fair Value
Net working capital (including acquired cash of $2.1 million)
 
$
1,750

Property and equipment, net
 
165

Goodwill
 
32,557

Intangible assets (1) :
 
 
Subscriber relationships
 
170

Merchant relationships
 
1,370

Developed technology
 
20,070

Deferred tax liability
 
(3,284
)
Total Purchase Price
 
$
52,798

(1)
Acquired intangible assets have estimated useful lives of 2 years.
The fair value of consideration transferred is being allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on their corresponding acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocations are preliminary as the Company is in the process of finalizing the intangibles valuations. The goodwill of $32.6 million represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The Company paid this premium for a number of reasons, including acquiring an experienced workforce. The goodwill is not deductible for tax purposes.
Pro forma results of operations have not been presented because the effects of these business combinations, individually and in the aggregate, were not material to the Company's condensed consolidated results of operations.
Purchases of Additional Interests in Consolidated Subsidiaries
During the nine months ended September 30, 2012, the Company acquired additional shares in various majority-

12

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


owned subsidiaries, including both shares owned by investors not employed by the Company, as well as subsidiary stock-based compensation awards that were granted in conjunction with the original acquisitions. The acquired subsidiary stock-based compensation awards were classified as liabilities mainly due to the existence of rights that allow the holders to sell their shares back to the Company.
In February 2012, the Company acquired an additional interest in one majority-owned subsidiary for $2.5 million . Additionally, in connection with this transaction, certain liability-classified subsidiary stock-based compensation awards were settled in exchange for $2.5 million . Also in February 2012, the Company settled certain liability-classified subsidiary stock-based compensation awards in exchange for $2.4 million of cash, $0.5 million of Class A common stock and $1.7 million of deferred compensation that will be recognized as compensation expense over a service period of two years and is payable in $1.3 million of cash and $0.4 million of Class A common stock.
In May 2012, the Company acquired additional interests of two majority-owned subsidiaries for an aggregate purchase price of $6.6 million , including $6.0 million of cash and $0.6 million of Class A common stock.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the Company's goodwill activity for the nine months ended September 30, 2012 (in thousands):
 
 
North America
 
International
 
Consolidated
Balance as of December 31, 2011
 
$
40,731

 
$
126,172

 
$
166,903

Goodwill related to acquisitions
 
32,557

 

 
32,557

Other adjustments (1)
 
(1,254
)
 
(1,228
)
 
(2,482
)
Balance as of September 30, 2012
 
$
72,034

 
$
124,944

 
$
196,978

(1)
Includes changes in foreign exchange rates for goodwill and purchase accounting adjustments.

13

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


The following table summarizes the Company's other intangible assets (in thousands):
 
 
As of December 31, 2011
Asset Category
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Subscriber relationships
 
$
41,272

 
$
12,882

 
$
28,390

Merchant relationships
 
6,600

 
6,600

 

Trade names
 
5,801

 
5,801

 

Developed technology
 
5,583

 
2,151

 
3,432

Other intangible assets
 
15,420

 
1,575

 
13,845

Total
 
$
74,676

 
$
29,009

 
$
45,667

 
 
As of September 30, 2012
Asset Category
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Subscriber relationships
 
$
41,161

 
$
18,853

 
$
22,308

Merchant relationships
 
7,920

 
6,550

 
1,370

Trade names
 
5,751

 
5,751

 

Developed technology
 
25,422

 
9,432

 
15,990

Other intangible assets
 
15,469

 
3,690

 
11,779

Total
 
$
95,723

 
$
44,276

 
$
51,447

Amortization expense for these intangible assets was $3.4 million and $5.6 million for the three months ended September 30, 2011 and 2012 , respectively, and $14.1 million and $15.6 million for the nine months ended September 30, 2011 and 2012 , respectively.
As of September 30, 2012 , the Company's estimated future amortization expense of these intangible assets was as follows (in thousands):
Year Ending December 31, 2011
 
 
Remaining amounts in 2012
 
$
6,199

2013
 
22,933

2014
 
13,703

2015
 
6,949

2016
 
1,663

Thereafter
 

 
 
$
51,447


14

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


4. INVESTMENTS IN EQUITY INTERESTS
The following table summarizes the Company's investments in equity interests (dollars in thousands):
 
December 31, 2011
 
Percent Ownership of Common Stock
 
September 30, 2012
 
Percent Ownership of Common and Preferred Stock
Cost method:
 
 
 
 
 
 
 
Life Media Limited
$

 
%
 
$
128,074

 
19
%
Equity method:
 
 
 
 
 
 
 
E-Commerce King Limited
49,395

 
49
%
 

 
%
Other investments in equity interests
1,209

 
50
%
or less

 
2,965

 
50
%
or less

Total investments in equity interests
$
50,604

 
 
 
$
131,039

 
 
Equity Method Investment in E-Commerce King Limited
In January 2011, the Company acquired 40% of the ordinary shares of E-Commerce King Limited (“E-Commerce”), a company organized under the laws of the British Virgin Islands, in exchange for $4.0 million . The Company entered into the joint venture along with Rocket Asia GmbH & Co. KG (“Rocket Asia”), an entity controlled by former CityDeal shareholders Oliver Samwer, Marc Samwer and Alexander Samwer. Rocket Asia acquired 10% of the ordinary shares in E-Commerce. E-Commerce subsequently established a wholly-owned foreign enterprise that created a domestic operating company headquartered in Beijing, China.
On July 31, 2011, the Company entered into an agreement to purchase additional interests in E-Commerce from Rocket Asia for a purchase price of $45.2 million , consisting of 2,908,856  shares of non-voting common stock. The investment increased the Company's ownership from 40% to 49% .
Throughout 2011 and 2012, the Company made cash investments in E-commerce for an aggregate amount of $32.9 million . As of May 31, 2012, the Company's ownership in E-Commerce was 49.8% .
In June 2012, Life Media Limited (F-tuan), an exempted company incorporated under the laws of the Cayman Islands with operations in China, acquired E-Commerce. In exchange for its 49.8% interest in E-Commerce and an additional $25.0 million of cash consideration, the Company received a 19% interest in F-tuan in the form of common and Series E preferred shares. The Company paid $5.0 million of the cash consideration on June 25, 2012 and the remaining amount was paid on July 2, 2012.
The Company recognized a non-operating pre-tax gain of $56.0 million as a result of the transaction, which is included in "Interest and other income, net" on the condensed consolidated statement of operations. The gain represents the excess of the fair value of the Company's 19% investment in F-tuan over the carrying value of its E-Commerce investment as of the date of the transaction and the $25.0 million of cash consideration for the Series E preferred shares.
Cost Method Investment in Life Media Limited
The investment in Life Media Limited is accounted for using the cost method because the Company does not have the ability to exercise significant influence. The total investment of $128.1 million , which represents the fair value on the date the Company obtained this investment, is classified within "Investments in equity interests" on the condensed consolidated balance sheet as of September 30, 2012 . The investment will be adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. The approximate fair value of the investment as of September 30, 2012 was $124.9 million . As of September 30, 2012 , the gross unrealized loss of the Company's investment in Life Media was $3.2 million , which has been in an unrealized loss position for less than 12 months.

15

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


5. VARIABLE INTEREST ENTITY
On May 9, 2011, the Company entered into a collaborative arrangement which was later amended on January 1, 2012 to create a jointly-owned sales category with a strategic partner ("Partner"), and a limited liability company ("LLC") was established. The Company and its Partner each owns 50% of the LLC, and income and cash flows of the LLC are allocated based on agreed upon percentages between the Company and the Partner. The liabilities of the LLC are solely the LLC's obligations and are not obligations of the Company or the Partner.
The Company's obligations associated with its interests in the LLC are primarily building, maintaining, customizing, managing and operating the LLC website, contributing intellectual property, identifying deals and promoting the sale of deal vouchers, coordinating the fulfillment of deal vouchers in certain instances and providing the record keeping.
Under the LLC agreement, the LLC shall be dissolved upon the occurrence of any of the following events: (1) either party becoming a majority owner; (2) the third anniversary of the date of the LLC agreement; (3) certain elections of the Company or the Partner based on the operational and financial performance of the LLC or other changes to certain terms in the agreement; (4) election of either the Company or the Partner in the event of bankruptcy by the other party; (5) sale of the LLC; or (6) a court's dissolution of the LLC.
Variable interest entities (VIEs) are entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest (i.e., the ability to make significant decisions through voting rights and the right to receive the expected residual returns of the entity or the obligation to absorb the expected losses of the entity). A variable interest holder that has both (a) the power to direct the activities of the VIE that most significantly impact its economic performance and (b) either an obligation to absorb losses or a right to receive benefits that could potentially be significant to the VIE is referred to as the primary beneficiary and must consolidate the VIE.
The Company has determined that the LLC is a VIE and the Company is its primary beneficiary. The Company consolidates the LLC because it has the power to direct activities of the LLC that most significantly impact the LLC's economic performance. In particular, the Company identifies and promotes the deal vouchers, provides all of the back office support (i.e. website, contracts, personnel resources, accounting, etc.), presents the LLC's deals via email and the Company's website and provides the editorial resources that create the verbiage included on the website with the LLC's deal offer.
6. SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION
The following table summarizes the Company's accrued expenses (in thousands):
 
As of December 31, 2011
 
As of September 30, 2012
Refunds reserve
$
67,452

 
$
69,826

Marketing
33,472

 
14,042

Payroll and benefits
36,404

 
57,665

Subscriber rewards and credits
36,144

 
61,438

Professional fees
18,656

 
15,690

Other
19,879

 
26,422

Total accrued expenses
$
212,007

 
$
245,083

The following table summarizes the Company's other current liabilities (in thousands):

16

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


 
As of December 31, 2011
 
As of September 30, 2012
Income taxes payable
$
70,861

 
$
47,451

VAT and sales tax payable
50,554

 
63,745

Other
23,258

 
60,226

Total other current liabilities
$
144,673

 
$
171,422

The following table summarizes the Company's other non-current liabilities (in thousands):
 
As of December 31, 2011
 
As of September 30, 2012
Long-term tax liabilities
$
55,127

 
$
56,246

Other
15,639

 
18,397

Total other non-current liabilities
$
70,766

 
$
74,643

7. COMMITMENTS AND CONTINGENCIES
The Company's commitments as of September 30, 2012 did not materially change from the amounts set forth in the Company's 2011 Annual Report on Form 10-K.
Legal Matters
From time to time, the Company is party to various legal proceedings incident to the operation of its business. For example, the Company is currently involved in proceedings by former employees, intellectual property infringement suits (as discussed below) and suits by customers (individually or as class actions) alleging, among other things, violation of the Credit Card Accountability, Responsibility and Disclosure Act and state laws governing gift cards, stored value cards and coupons. The following is a brief description of the more significant legal proceedings.
On February 8, 2012, the Company issued a press release announcing its expected financial results for the fourth quarter of 2012.  After finalizing its year-end financial statements, the Company announced on March 30, 2012 revised financial results, as well as a material weakness related to deficiencies in its financial statement close process.  The revisions resulted in a reduction to fourth quarter 2011 revenue of $14.3 million . The revisions also resulted in an increase to fourth quarter operating expenses that reduced operating income by $30.0 million , net income by $22.6 million and earnings per share by $0.04 .  Following this announcement, the Company and several of its current and former directors and officers were named as parties to the following outstanding securities and stockholder derivative lawsuits all arising out of the same alleged events and facts.
Five putative federal class action securities complaints have been filed against the Company, certain of its directors and officers, and the underwriters that participated in the initial public offering of the Company's Class A common stock.  All five cases are currently pending before the United States District Court for the Northern District of Illinois: Zhang v. Groupon, Inc., et al. was filed on April 3, 2012; Roselli v. Groupon, Inc., et al. was filed on April 3, 2012; Einspahr v. Groupon, Inc., et al. was filed on April 6, 2012; Pedrow v. Groupon, Inc., et al. was filed on April 16, 2012; and Cottrell v. Groupon, Inc., et al. was filed on April 27, 2012.  All five complaints assert claims pursuant to Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  Two of the complaints additionally attempt to assert claims pursuant to Section 12(a)(2) of the Securities Act of 1933.  Allegations in the complaints include that the Company and its officers and directors made untrue statements or omissions of material fact by issuing inaccurate financial statements for the fiscal quarter and the fiscal year ending December 31, 2011 and by failing to disclose information about the Company's financial controls in the registration statement and prospectus for the Company's initial public offering of Class A common stock and in the Company's subsequently-issued financial statements. The putative class action lawsuits seek an unspecified amount of monetary damages, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief. On June 8, 2012, the court entered an order consolidating all five federal class actions under the caption In re Groupon, Inc. Securities Litigation , Master File No. 12- CV-2450. On August 28, 2012, the court issued an order appointing Michael Cohn as lead plaintiff and the law firm of Pomerantz Haudek Grossman & Gross LLP as lead counsel. The lead plaintiff filed a consolidated complaint on October 29, 2012. The defendants have until December 28, 2012 to file their responsive pleadings or motions.

17

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


In addition, six federal and two state purported stockholder derivative lawsuits have been filed against certain of the Company's current and former directors and officers.  All six federal derivative cases are currently pending in the United States District Court for the Northern District of Illinois: Monturano v. Lefkofsky, et al. was filed on April 5, 2012; Wong v. Mason, et al. was filed on April 12, 2012; Potter v. Mason, et al. was filed on April 30, 2012, Martin v. Mason, et al. was filed on May 4, 2012; Lutz v. Mason, et al. was filed on May 14, 2012; and Tipnis v. Mason, et. al. was filed on May 16, 2012.  In the federal derivative complaints, plaintiffs assert claims for breach of fiduciary duty, abuse of control and for unjust enrichment. The state derivative cases are currently pending before the Chancery Division of the Circuit Court of Cook County, Illinois: Orrego v. Lefkofsky, et al. , was filed on April 5, 2012; and Kim v. Lefkofsky, et al. , was filed on May 25, 2012. The derivative complaints generally allege that the defendants breached their fiduciary duties by purportedly mismanaging the Company's business by, among other things, failing to utilize proper accounting controls and, in the case of one of the state derivative lawsuits, by engaging in alleged insider trading of the Company's Class A common stock and misappropriating information. In addition, one state derivative case asserts a claim for unjust enrichment.  The derivative lawsuits purport to seek to recoup for the Company an unspecified amount of monetary damages allegedly sustained by the Company, restitution from defendants, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief. On May 30, 2012, the federal court entered an order consolidating all six federal derivative actions and appointing lead plaintiff and co-lead counsel, and the consolidated action was subsequently assigned the caption In re: Groupon Derivative Litigation, File No. 12-CV-5300.  On June 20, 2012, the Company and the individual defendants filed a motion requesting that the court stay the federal derivative actions pending resolution of the Federal Class Actions.  On July 31, 2012, the court granted defendants' motion in part, and stayed the Federal derivative actions pending a separate resolution of upcoming motions to dismiss in the federal class actions.  On June 15, 2012, the state plaintiffs filed a motion to consolidate the state derivative actions, which was granted on July 2, 2012, and on July 5, 2012, the plaintiffs filed a motion for appointment of co-lead plaintiffs and co-lead counsel, which was granted on July 27, 2012. 
On September 14, 2012, the court granted a motion filed by the parties requesting that the court stay the state derivative actions pending the federal court's resolution of anticipated motions to dismiss in the federal class actions. The Company intends to defend all of the securities and shareholder derivative lawsuits vigorously.
In June 2012, the Company was sued for breach of contract in Berlin, Germany by Fast Group S.A. (“Airfast”).  Airfast sold vouchers for air travel to a subsidiary of the Company for resale by the Company to its customers under two similar agreements.  On June 5, 2012, Fast Group filed a lawsuit against the Company alleging that the Company failed to make payments due to Fast Group. This case is pending before the District Court (Landgericht) Berlin under case number 19 O 344/12. On August 2, 2012, Fast Group expanded its claim to increase the amounts alleged to be due. The Company has filed an Answer and a Counterclaim on September 13, 2012. An oral hearing is scheduled for December 14, 2012. On August 27, 2012 and September 4, 2012, Fast Group filed additional lawsuits with respect to a similar agreement. The cases are pending before the District Court (Landgericht) Berlin under case numbers 19 O 447/12 and 7 O 343/12, respectively. The Company has filed an answer on October 10, 2012 with respect to the August 27, 2012 suit and intends to file an answer shortly with respect to September 4, 2012 suit. The District Court has not scheduled hearing dates yet.  The Company believes it has meritorious defenses to the lawsuit and does not expect any resolution of the lawsuit to be material to its results of operations.
In addition, 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, 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 been forced to litigate such claims, and several of these claims are currently pending. 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 costly to resolve, could require expensive changes in the Company's methods of doing business, or could require it to enter into costly royalty or licensing agreements.
The Company is also subject to, or in the future may become subject to, a variety of regulatory inquiries across the jurisdictions where the Company conducts its business, including for example consumer protection, marketing practices, tax 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, injunctive relief or increased costs of doing business through adverse judgment or

18

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


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 assesses the likelihood of any adverse judgments or outcomes with respect to these matters and determines loss contingency assessments on a gross basis after assessing the probability of incurrence of a loss and whether a loss is reasonably estimable. In addition, the Company considers other relevant factors that could impact its ability to reasonably estimate a loss. A determination of the amount of reserves required, if any, for these contingencies is made after analyzing each matter. The Company's reserves may change in the future due to new developments or changes in strategy in handling these matters.
Although the results of litigation and claims cannot be determined, based on the information currently available the Company currently believes that the final outcome of these matters will not have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
Indemnifications
In the normal course of business to facilitate transactions related to its operations, the Company indemnifies certain parties, including lessors and from time to time merchants with respect to certain 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 certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company's bylaws contain similar indemnification obligations to agents.
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, the 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.
8. STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION
Common Stock
The Board of Directors of the Company (the Board) has authorized three classes of common stock: Class A common stock, Class B common stock and common stock. No shares of common stock will be issued or outstanding until November 5, 2016, at which time all outstanding shares of Class A common stock and Class B common stock will automatically convert into shares of common stock. In addition, the Board authorized shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by the Board.
The Company's authorized common stock has a par value of $0.0001 per share, and consists of 2,000,000,000 shares designated as Class A common stock, 10,000,000 shares designated as Class B common stock and 2,010,000,000 shares designated as common stock. As of September 30, 2012 , there were 652,501,880 shares of Class A common stock and 2,399,976 shares of Class B common stock outstanding.
Groupon, Inc. Stock Plans
The Groupon, Inc. Stock Plans (the "Plans") are administered by the Compensation Committee of the Board, which determines the number of awards to be issued, the corresponding vesting schedule and the exercise price for options. As of September 30, 2012 , 30,857,092 shares were available for future issuance under the Plans.
The Company recognized stock-based compensation expense of $3.3 million and $22.6 million during the three months ended September 30, 2011 and 2012 , respectively, and $60.9 million and $77.7 million during the nine months ended September 30, 2011 and 2012 , respectively, related to stock awards issued under the Plans, acquisition-related awards and subsidiary awards. The Company also capitalized $3.2 million and $5.6 million of stock-based compensation during the three and nine months ended

19

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


September 30, 2012 , respectively, in connection with internally developed software. No amounts were capitalized during the three and nine months ended September 30, 2011 .
As of September 30, 2012 , a total of $251.9 million of unrecognized compensation costs related to unvested stock awards, unvested acquisition-related awards and unvested subsidiary awards are expected to be recognized over the remaining weighted average period of two years.
Stock Award Activity
The table below summarizes the stock option activity during the nine months ended September 30, 2012 :
 
 
Options
 
Weighted- Average Exercise Price
 
Weighted- Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
(in thousands) (1)
Outstanding at December 31, 2011
 
17,870,713

 
$1.12
 
8.06
 
$
348,743

    Exercised
 
(8,334,131
)
 
$1.06
 
 
 
 
    Forfeited
 
(657,333
)
 
$2.34
 
 
 
 
    Expired
 
(14,293
)
 
$1.78
 
 
 
 
Outstanding at September 30, 2012
 
8,864,956

 
$1.07
 
7.25
 
$
32,752

 
 
 
 
 
 
 
 
 
Exercisable at September 30, 2012
 
4,982,867

 
$0.82
 
6.93
 
$
19,645

(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 exercise price exceeds the fair value) that would have been received by the option holders had all option holders exercised their options as of December 31, 2011 and September 30, 2012 , respectively.
The table below summarizes the restricted stock unit activity during the nine months ended September 30, 2012 :
 
 
Restricted Stock Units
 
Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2011
 
11,944,844

 
$
12.23

    Granted
 
22,759,517

 
$
9.83

    Vested
 
(3,225,241
)
 
$
10.63

    Forfeited
 
(2,385,596
)
 
$
15.36

Unvested at September 30, 2012
 
29,093,524

 
$
10.29


20

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


9. EARNINGS (LOSS) PER SHARE OF CLASS A AND CLASS B COMMON STOCK
The following tables set forth the computation of basic and diluted net loss per share of common stock for the three and nine months ended September 30, 2011 (in thousands, except share amounts and per share amounts):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2011
 
2011
Net loss
 
$
(14,416
)
 
$
(238,083
)
Redemption of preferred stock in excess of carrying value
 

 
(34,327
)
Adjustment of redeemable noncontrolling interests to redemption value
 
(43,656
)
 
(59,307
)
Less: Net loss attributable to noncontrolling interests
 
3,843

 
23,602

Net loss attributable to common stockholders
 
$
(54,229
)
 
$
(308,115
)
 
 
 
 
 
Net loss per share:
 
 
 
 
Weighted-average shares outstanding for basic and diluted net loss per share (1)
 
307,605,060

 
305,288,502

Basic and diluted net loss per share
 
$
(0.18
)
 
$
(1.01
)
(1)
Stock options, restricted stock units, performance stock units and convertible preferred shares are not included in the calculation of diluted net loss per share for the three and nine months ended September 30, 2011 because the Company had a net loss for each period. Accordingly, the inclusion of these equity awards would have had an antidilutive effect on the calculation of diluted loss per share.     
    













21

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


The following tables set forth the computation of basic and diluted earnings per share of Class A and Class B common stock for the three and nine months ended September 30, 2012 (in thousands, except share amounts and per share amounts):
 
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
 
 
Class A
 
Class B
 
Class A
 
Class B
Basic earnings per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Allocation of net (loss) income
 
$
(937
)
 
$
(3
)
 
$
28,908

 
$
108

Less: Allocation of adjustment of redeemable noncontrolling interests to redemption value
 
1,328

 
5

 
12,452

 
46

Less: Allocation of net income attributable to noncontrolling interests
 
703

 
3

 
2,796

 
10

Allocation of net (loss) income attributable to common stockholders
 
(2,968
)
 
(11
)
 
13,660

 
52

Denominator
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
650,823,634

 
2,399,976

 
645,621,967

 
2,399,976

Basic earnings per share
 
$(0.00)
 
$(0.00)
 
$0.02
 
$0.02
 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Allocation of net income attributable to common stockholders
 
$
(2,968
)
 
$
(11
)
 
$
13,660

 
$
52

Reallocation of net income attributable to common stockholders as a result of conversion of Class B
 

 

 
52

 

Allocation of net income attributable to common stockholders
 
(2,968
)
 
(11
)
 
13,712

 
52

Denominator
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding used in basic computation
 
650,823,634

 
2,399,976

 
645,621,967

 
2,399,976

Conversion of Class B
 

 

 
2,399,976

 

Employee stock options
 

 

 
10,909,749

 

Restricted shares and RSUs
 

 

 
4,625,558

 

Weighted-average diluted shares outstanding
 
650,823,634

 
2,399,976

 
663,557,250

 
2,399,976

Diluted earnings per share
 
$(0.00)
 
$(0.00)
 
$0.02
 
$0.02
    

22

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



The following outstanding equity awards are not included in the diluted net (loss) earnings per share calculation above because they would have had an antidilutive effect:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Antidilutive equity awards
2011
 
2012
 
2011
 
2012
Stock options
18,407,510

 
8,864,956

 
18,407,510

 
9,018

Restricted stock units
10,575,100

 
29,093,524

 
10,575,100

 
7,249,438

Restricted stock
86,758

 
39,390

 
86,758

 

Convertible preferred shares
293,309,716

 

 
293,309,716

 

Total
322,379,084

 
37,997,870

 
322,379,084

 
7,258,456

10. FAIR VALUE MEASUREMENTS
Fair value is defined under 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. As such, fair value is a market-based measurement that should be 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-Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2-Include other inputs that are directly or indirectly observable in the marketplace.
Level 3-Valuations 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 consisted of AAA-rated money market funds with overnight liquidity and no stated maturities. 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.
Contingent consideration - The Company has contingent obligations to transfer cash payments and equity shares to the former owners in conjunction with certain acquisitions if specified future operational objectives and financial results are met over future reporting periods. Liabilities for contingent consideration (i.e., earn-outs) are 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 as acquisition-related expense (benefit), net.
The Company uses one of two approaches to value the contingent consideration liabilities. The first is an income approach that is primarily determined based on the present value of probability-weighted future cash flows using internal models. The second is an option pricing methodology within a Black-Scholes framework . For contingent consideration to be settled in a variable number of shares of common stock, the Company used the most recent Groupon stock price as reported on the NASDAQ to determine the fair value of the shares potentially issuable as of December 31, 2011 and September 30, 2012 . The Company has generally 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 for payment outcomes. Changes in assumptions could have an impact on the payout of contingent consideration with a maximum payout of $17.6 million .

23

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


The following tables summarize the Company's assets and liabilities that are measured at fair value on a recurring basis (in thousands):
 
 
 
Fair Value Measurement at
Reporting Date Using
Description
As of
December 31,
2011
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
750,004

 
$
750,004

 
$

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$
13,218

 
$

 
$
1,988

 
$
11,230

 
 
 
Fair Value Measurement at
Reporting Date Using
Description
As of
September 30,
2012
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
585,331

 
$
585,331

 
$

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$
12,601

 
$

 
$

 
$
12,601

    

24

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


The following table provides a roll-forward of the fair value of the contingent consideration categorized as Level 3 for the three and nine months ended September 30, 2011 and 2012 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2012
 
2011
 
2012
Beginning balance
$
15,920

 
$
6,081

 
$

 
$
11,230

Issuance of contingent consideration in connection with acquisitions
1,835

 
2,100

 
17,755

 
2,100

Payments made on contingent liabilities

 

 

 
(4,250
)
Change in fair value and other (1)
(4,793
)
 
3,176

 
(4,793
)
 
2,277

Reclass of contingent consideration from Level 2 to Level 3

 
1,244

 

 
1,244

Ending balance
$
12,962

 
$
12,601

 
$
12,962

 
$
12,601

 
 
 
 
 
 
 
 
Unrealized (gains) losses still held (2)
$
(4,793
)
 
$
3,176

 
$
(4,793
)
 
$
2,277

(1)
Changes in the fair value of contingent consideration liabilities are classified as "acquisition-related expense (benefit), net" in the condensed consolidated statements of operations.
(2)
Represents the unrealized gains (losses) recorded in earnings during the period for assets (and liabilities) classified as Level 3 that are still held (or outstanding) at the end of the period.
At December 31, 2011 and September 30, 2012 , no material fair value adjustments were required for non-financial assets and liabilities.
Estimated Fair Value of Financial Assets and Liabilities Not Measured at Fair Value
The fair value and carrying amount of the Company's cost method investment in F-tuan were $124.9 million and $128.1 million , respectively, as of September 30, 2012 . The fair value of this nonmarketable equity investment was determined using the income approach and the market approach. The income approach was primarily determined based on the present value of the probability-weighted future cash flows using internal models. The market approach was primarily determined based on a revenue multiple using prior year reported results and current year projections. The Company believes that this combination is an appropriate indicator of the investment's fair value in an orderly transaction between market participants. The Company classified the fair value measurement for this cost method investment as Level 3 because it involves significant unobservable inputs.
The Company's other financial instruments not carried at fair value consist primarily of short term certificates of deposit, accounts receivable, accounts payable, accrued merchant payables and accrued expenses. The carrying values of these assets and liabilities approximate their respective fair values as of December 31, 2011 and September 30, 2012 due to their short term nature.
11. 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 September 30, 2011 , the Company recorded an income tax expense of $11.2 million on a pre-tax loss of $3.2 million , for an effective tax rate of (353.2)% . For the three months ended September 30, 2012 , the Company recorded income tax expense of $26.9 million on pre-tax income of $25.9 million , for an effective tax rate of 103.6% .
For the nine months ended September 30, 2011 , the Company recorded an income tax expense of $9.5 million on a pre-tax loss of $228.6 million , for an effective tax rate of (4.2)% . For the nine months ended September 30, 2012 , the Company recorded income tax expense of $128.3 million on pre-tax income of $157.3 million , for an effective tax rate of 81.6% .

25

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


The Company's U.S. statutory rate is 35% . The Company's effective tax rates for the three and nine months ended September 30, 2012 reflect losses in certain jurisdictions, which the Company was not able to benefit due to valuation allowances and the current year amortization expense of taxes paid from the 2011 taxable sale of certain intellectual property rights within the Company's international structure.
The Company's reserve for unrecognized tax benefits, exclusive of interest and penalties, as of September 30, 2012 , increased from the balance as of December 31, 2011 , by $10.1 million as a result of taxes attributable to current year operations. The total amount of unrecognized tax benefits at December 31, 2011 and September 30, 2012 that, if recognized, would affect the effective tax rate are $3.2 million and $24.8 million , respectively.
12. SEGMENT INFORMATION
The Company has organized its operations into two principal segments: North America, which represents the United States and Canada, and International, which represents the rest of the Company's global operations. Segment operating results reflect earnings before stock-based compensation, acquisition-related expense (benefit), net, interest and other income, net, loss on equity-method investees and provision (benefit) for income taxes. Segment information reported in the tables below represents the operating segments of the Company for which separate information is available and for which segment results are evaluated regularly by the Company's chief operating decision-maker (i.e., chief executive officer) in assessing performance and allocating resources.

26

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Revenue for each segment is based on the geographic market where the sales are completed. Revenue and profit or loss information by reportable segment reconciled to consolidated net (loss) income for the three and nine months ended September 30, 2011 and 2012 were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2012
 
2011
 
2012
North America
 
 
 
 
 
 
 
Revenue (1)
$
161,525

 
$
291,603

 
$
455,342

 
$
790,349

Segment cost of revenue and operating expenses (2)
142,689

 
252,510

 
468,785

 
667,655

   Segment operating (loss) income
18,836

 
39,093

 
(13,443
)
 
122,694

International
 
 
 
 
 
 
 
Revenue
268,636

 
276,949

 
662,924

 
905,821

Segment cost of revenue and operating expenses (2)
289,164

 
265,554

 
811,766

 
838,503

   Segment operating (loss) income
(20,528
)
 
11,395

 
(148,842
)
 
67,318

Consolidated
 
 
 
 
 
 
 
Revenue
430,161

 
568,552

 
1,118,266

 
1,696,170

Segment cost of revenue and operating expenses (2)
431,853

 
518,064

 
1,280,551

 
1,506,158

Segment operating (loss) income
(1,692
)
 
50,488

 
(162,285
)
 
190,012

Stock-based compensation
3,340

 
22,619

 
60,922

 
77,706

Acquisition-related (benefit) expense, net
(4,793
)
 
2,431

 
(4,793
)
 
744

Interest and other income, net
(8,269
)
 
(617
)
 
(9,808
)
 
(54,445
)
Loss on equity method investees
11,211

 
138

 
19,974

 
8,694

(Loss) income before income taxes
(3,181
)
 
25,917

 
(228,580
)
 
157,313

Provision for income taxes
11,235

 
26,857

 
9,503

 
128,297

Net (loss) income
$
(14,416
)
 
$
(940
)
 
$
(238,083
)
 
$
29,016

(1)
North America contains revenue from the United States of $147.9 million and $278.5 million for the three months ended September 30, 2011 and 2012 , respectively, and $420.1 million and $746.8 million for the nine months ended September 30, 2011 and 2012 , respectively.
(2)
Represents cost of revenue and operating expenses, excluding stock-based compensation and acquisition-related (benefit) expense, net, which are not allocated to segments.
The following table summarizes the Company's total assets (in thousands):
 
As of December 31, 2011
 
As of September 30, 2012
North America (1)(3)
$
989,170

 
$
1,135,772

International  (2)(3)
785,306

 
897,042

Consolidated total assets
$
1,774,476

 
$
2,032,814

(1)
North America contains assets from the United States of $981.0 million and $1,084.3 million at December 31, 2011 and September 30, 2012 , respectively.
(2)
Total assets in the Netherlands represented approximately 11.5% of consolidated total assets at September 30, 2012 . There were no other individual countries located outside of the United States that represented more than 10% of consolidated total assets at December 31, 2011 or September 30, 2012 .
(3)
The December 31, 2011 total asset amounts have been reclassified in the disclosure above to conform to the current presentation, which excludes intercompany balances.


27

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


13. RELATED PARTIES
Marketing Services
During 2011, the Company engaged InnerWorkings, Inc. (“InnerWorkings”) to provide marketing services. The Company's Executive Chairman, Eric Lefkofsky, is a former director and significant stockholder of InnerWorkings. Amounts paid in advance to InnerWorkings for services which had not yet been rendered as of September 30, 2012 totaled $1.3 million and were recorded in “Prepaid expenses and other current assets” on the condensed consolidated balance sheet.
Logistics Services
In connection with the Company's expansion of Goods offerings during 2012, the Company entered into a transportation and supply chain management agreement with Echo Global Logistics, Inc. ("Echo"). Three of the Company's directors, Peter Barris, Eric Lefkofsky and Bradley Keywell, either are currently or were previously in 2012 directors of Echo and have direct and/or indirect ownership interests in Echo. Pursuant to the agreement, Echo provided services either related to carrier rate negotiation and management, shipping origin and destination coordination, inventory facility set-up and management and supply chain cost analysis. Echo received payments of approximately $1.9 million for its services under the agreement for the nine months ended September 30, 2012 , which were expensed by the Company through "Cost of revenue" on the condensed consolidated statements of operations. As the Goods category has expanded, the Company has hired other outside vendors for logistics services and as of September 30, 2012, the Company has terminated its arrangement with Echo.

28



ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included under Item 1 of this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under "Risk Factors" and elsewhere in this Quarterly Report.
Overview
Our vision is to be the operating system for local commerce. As part of that vision, we act as the local commerce marketplace that connects merchants to consumers by offering goods and services at a discount. Traditionally, local merchants have tried to reach consumers and generate sales through a variety of methods, including telephone directories, direct mail, newspaper, radio, television and online advertisements and promotions. By bringing the brick and mortar world of local commerce onto the Internet, Groupon is creating a new way for local merchant partners to attract customers and sell goods and services. We provide consumers with savings and help them discover what to do, eat, see, buy and where to travel. We also provide a suite of other merchant-oriented products and services to consumers including a customer loyalty program, scheduler and payment processing.
Each day we email our subscribers discounted offers on goods, services and travel that are targeted by location, purchase history and personal preferences. Current and potential customers also access our deals directly through our websites and mobile applications. Our revenue from deals where we act as the third party marketing agent is the purchase price paid by the customer for a Groupon voucher ("Groupon") less an agreed upon percentage of the purchase price paid to the featured merchant partners, excluding any applicable taxes and net of estimated refunds for which the merchant's share is recoverable. Our direct revenue from deals where we act as the merchant of record is the purchase price paid by the customer for the Groupon excluding any applicable taxes and net of estimated refunds. In the nine months ended September 30, 2011 , we generated revenue of $1,118.3 million , compared to $1,696.2 million in the nine months ended September 30, 2012 . Revenue has increased as a result of expanding the scale of our business both domestically and internationally and as a result of expanding our products and services.
We have organized our operations into two principal segments: North America, which represents the United States and Canada, and International, which represents the rest of our global operations. For the nine months ended September 30, 2012 , we derived 53.4% of our revenue from our International segment, compared to 46.6% from our North America segment.
Primarily as a result of our net losses in prior years, we have an accumulated deficit of $672.5 million as of September 30, 2012 . Since our inception, we have driven our growth through substantial investments in infrastructure and marketing to increase customer acquisition. In particular, our net loss in previous years was driven primarily by the rapid expansion of our International segment, which involved investing heavily in upfront marketing, sales and infrastructure related to the build out of our operations in early stage countries. We intend to continue to pursue a strategy of significant investment in this segment and elsewhere in the future to support continued growth, consistent with the strategy we previously employed in North America and Europe.
How We Measure Our Business
We measure our business with several financial and operating metrics. We use these metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the long‑term performance of our marketplace. The key metrics are as follows:
Financial Metrics
Revenue. We believe revenue is an important indicator for our business. Our third party revenue is derived from deals where we act as the marketing agent and is the purchase price paid by the customer for the Groupon less an agreed upon percentage of the purchase price paid to the featured merchant partner, excluding any applicable taxes and net of estimated refunds for which the merchant's share is recoverable. Direct revenue, when the Company is selling the product as the merchant of record, is the purchase price paid by the customer, excluding any applicable taxes and net of estimated refunds.

29



Operating (loss) income excluding stock-based compensation and acquisition-related expense (benefit), net. Operating (loss) income excluding stock-based compensation and acquisition-related expense (benefit), net is the consolidated operating (loss) income of our two segments, North America and International, adjusted to exclude acquisition-related expense (benefit), net of stock-based compensation expense. Acquisition-related expense (benefit), net represents the change in the fair value of contingent consideration arrangements related to business combinations. Stock-based compensation expense is primarily a non-cash item. As reported under U.S. GAAP, we do not allocate stock‑based compensation and acquisition‑related expense (benefit), net to our segments. We use operating (loss) income excluding stock-based compensation and acquisition-related expense (benefit) to allocate resources and evaluate performance internally. Operating (loss) income excluding stock-based compensation and acquisition-related expense (benefit) is a non‑GAAP financial measure. For further information and a reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the " Results of Operations " section.
Free cash flow. Free cash flow is "Net cash provided by operating activities" less "Purchases of property and equipment and software capitalization." We use free cash flow, and ratios based on it, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it typically will present a more appropriate measure of cash flows as purchases of fixed assets, software developed for internal use and website development costs are a necessary component of ongoing operations. Free cash flow is a non-GAAP financial measure. For further information and a reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the " Results of Operations " section.
Operating Metrics
Gross billings. This metric represents the total dollar value of customer purchases of goods and services, excluding applicable taxes and net of estimated refunds. For third party revenue deals, gross billings differs from third party revenues reported in our consolidated statements of operations, which are presented net of the merchant's share of the transaction price. For direct revenue deals, gross billings are equivalent to direct revenues reported in our condensed consolidated statements of operations. We consider this metric to be an important indicator of our growth and business performance as it is a proxy for the dollar volume of transactions through our marketplace, net of tax and refunds for which the merchant's share is recoverable. Tracking gross billings also allows us to track changes in the percentage of gross billings that we are able to retain after payments to our merchant partners.
Active customers. We define active customers as unique user accounts that have purchased Groupons during the trailing twelve months. We consider this metric to be an important indicator of our business performance as it helps us to understand how the number of customers actively purchasing Groupons is trending.
Gross billings per average active customer. This metric represents the trailing twelve months gross billings generated per average active customer. This metric is presented as the total gross billings generated in the trailing twelve months, divided by the average number of active customers in such time period. Although we believe total gross billings, not trailing twelve months gross billings per average active customer, is a better indication of the overall growth of our marketplace over time, trailing twelve months gross billings per average active customer provides an opportunity to evaluate whether our growth is primarily driven by growth in total customers or in spend per customer in any given period.
Revenue per average active customer. This metric represents the trailing twelve months revenue generated per average active customer. This metric is presented as the revenue generated in the trailing twelve months, divided by the average number of active customers in such time period. We believe revenue, not trailing twelve months revenue per average active customer, is a better indication of the overall growth of our business. As third party revenue, which is reported net of amounts payable to the featured merchant partners, represents the majority of our total revenue, trailing twelve month revenue per average active customer provides some indication as to whether our average customer is purchasing deals with a higher or lower percentage of gross billings retained by Groupon. This amount also reflects, however, the direct revenue from sales related to Groupon Goods reported on a gross basis.

30



 
 
Trailing Twelve Months Ended September 30,
 
 
2011
 
2012
Operating Metrics:
 
 
 
 
Gross billings (in thousands) (1)
 
$
3,169,902

 
$
5,090,600

TTM Active customers (in thousands)  (2)
 
28,906

 
39,525

TTM Gross billings per average active customer (3)
 
$
188.55

 
$
148.78

Revenue per average active customer (4)
 
$
76.49

 
$
63.96

(1)
Reflects the total dollar value of customer purchases of goods and services, excluding applicable taxes and net of estimated refunds.
(2)
Reflects the total number of unique accounts that have purchased Groupons during the trailing twelve months.
(3)
Reflects the total gross billings generated in the trailing twelve months per average active customer in the applicable period.
(4)
Reflects the revenue generated in the trailing twelve months per average active customer in the applicable period.
Factors Affecting Our Performance
Deal sourcing and quality. We consider our merchant partner relationships to be a vital part of our business model and have made significant investments in order to expand the variety of services that we can provide to our merchant partners. We depend on our ability to attract and retain merchants that are prepared to offer products or services on compelling terms, particularly as we attempt to expand our product and service offerings in order to create a more complete online marketplace for local commerce. We generally do not have long-term arrangements to guarantee availability of deals that offer attractive quality, value and variety to consumers or favorable payment terms to us. If new merchants do not find our marketing and promotional services effective, or if our existing merchants do not believe that utilizing our services provides them with a long-term increase in customers, revenue or profit, they may stop making offers through our marketplace.
International operations. Our international operations are critical to our revenue growth and our ability to achieve and maintain profitability. For the nine months ended September 30, 2011 and 2012 , 59.3% and 53.4% , respectively, of our revenue was generated from our International segment. Expansion into and operations in international markets requires management attention and resources and requires us to localize our services to conform to a wide variety of local cultures, business practices, laws and policies. International acquisitions also expose us to a variety of execution risks. The different commercial and Internet infrastructure in other countries may make it more difficult for us to replicate our current and future business model.
Marketing costs. We must continue to acquire and retain customers who purchase Groupons in order to increase revenue and achieve profitability. If consumers do not perceive our Groupon offerings to be attractive, or if we fail to introduce new or more relevant deals, we may not be able to acquire or retain customers. In our limited operating history, we have not incurred significant marketing or other expense on initiatives designed to re-activate customers or increase the level of purchases by our existing customers. As we incur such expenditures, our business and profitability could be adversely affected.
Investment in growth. We have been a high-growth company and have aggressively invested, and intend to continue to invest, to support this growth. For example, we are developing a suite of merchant products, such as payment processing, point of sale, scheduling and rewards, which require substantial investment and these products do not currently generate a material amount of revenue. As a result, we have incurred net losses in the majority of quarters since our inception. We anticipate that we will make substantial investments in the foreseeable future as we continue to increase the number and variety of deals we offer each day, broaden our customer base, expand our marketing channels, expand our operations, hire additional employees and develop our technology.
Competitive pressure. Our growth and geographical expansion have drawn a significant amount of attention to our business model. As a result, a substantial number of companies that attempt to replicate our business model have emerged around the world. We expect new competitors to emerge. In addition to such competitors, we expect to increasingly compete against other large Internet and technology‑based businesses that have launched initiatives which are directly competitive to our core business as well as our other categories and our suite of merchant products, such as payment processing, point of sale and rewards. We also expect to compete against other Internet sites that are focused on specific communities or interests and offer coupons or discount arrangements related to such communities or interests.

31



Basis of Presentation
Our basis of presentation is discussed in "Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2011 , as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 30, 2012. We updated our presentation of cost of revenue in this Quarterly Report on Form 10-Q to present the costs separately for third party and direct revenue transactions. Refer to Note 1 of the condensed consolidated financial statements where we discuss additional interim updates to the significant accounting policies for the three and nine months ended September 30, 2011 and 2012 .
Results of Operations
Comparison of the nine months ended September 30, 2011 and 2012 :
 
 
Nine Months Ended September 30,
 
 
2011
 
2012
 
 
(in thousands)
Revenue:
 
 
 
 
Third party and other revenue
 
$
1,111,094

 
$
1,466,602

Direct revenue
 
7,172

 
229,568

Total revenue
 
1,118,266

 
1,696,170

Cost of revenue:
 
 
 
 
Third party and other revenue
 
156,907

 
233,834

Direct revenue
 
5,707

 
202,634

Total cost of revenue
 
162,614

 
436,468

Operating expenses:
 
 
 
 
Marketing
 
613,173

 
275,941

Selling, general and administrative
 
565,686

 
871,455

Acquisition-related (benefit) expense, net
 
(4,793
)
 
744

  Total operating expenses
 
1,174,066

 
1,148,140

(Loss) income from operations
 
(218,414
)
 
111,562

Interest and other income, net
 
9,808

 
54,445

Loss on equity method investees
 
(19,974
)
 
(8,694
)
(Loss) income before provision for income taxes
 
(228,580
)
 
157,313

Provision for income taxes
 
9,503

 
128,297

Net (loss) income
 
(238,083
)
 
29,016

Less: Net loss (income) attributable to noncontrolling interests
 
23,602

 
(2,806
)
Net (loss) income attributable to Groupon, Inc.
 
(214,481
)
 
26,210

Redemption of preferred stock in excess of carrying value
 
(34,327
)
 

Adjustment of redeemable noncontrolling interests to redemption value
 
(59,307
)
 
(12,498
)
Net (loss) income attributable to common stockholders
 
$
(308,115
)
 
$
13,712

    

32



Impact of stock-based compensation on cost of revenue and operating expenses
Cost of revenue and operating expenses with and without stock-based compensation are as follows:
 
 
Nine Months Ended September 30,
 
 
2011
 
2012
 
 
As reported
 
Stock-based compensation
 
Net
 
As reported
 
Stock-based compensation
 
Net
 
 
(in thousands)
Total cost of revenue
 
$
162,614

 
$
(480
)
 
$
162,134

 
$
436,468

 
$
(2,355
)
 
$
434,113

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Marketing
 
$
613,173

 
$
(1,039
)
 
$
612,134