Groupon, Inc.
Groupon, Inc. (Form: 10-Q, Received: 05/09/2013 06:05:30)

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

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
 
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 400
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).         
Yes   x              No


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x                            Accelerated filer         

Non-accelerated filer (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  

As of May 7, 2013, there were 659,159,133 shares of the registrant's Class A Common Stock outstanding and 2,399,976 shares of the registrant's Class B Common Stock outstanding.

1


TABLE OF CONTENTS
PART I. Financial Information
Page
Forward-Looking Statements
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 (unaudited)
Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited)
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2013 and 2012 (unaudited)
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)
Condensed Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2013 (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 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


PART I. Financial Information

FORWARD‑LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 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 2012 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.
As used herein, “Groupon,” “we,” “our,” and similar terms include Groupon, Inc. and its subsidiaries, unless the context indicates otherwise.

3






ITEM 1.     FINANCIAL STATEMENTS

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

 
March 31, 2013
 
December 31, 2012
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,165,650

 
$
1,209,289

Accounts receivable, net
102,717

 
96,713

Deferred income taxes
30,679

 
31,211

Prepaid expenses and other current assets
132,324

 
150,573

Total current assets
1,431,370

 
1,487,786

Property, equipment and software, net of accumulated depreciation and amortization of $60,291 and $46,236, respectively
128,773

 
121,072

Goodwill
205,466

 
206,684

Intangible assets, net
36,838

 
42,597

Investments
97,245

 
84,209

Deferred income taxes, non-current
29,710

 
29,916

Other non-current assets
52,855

 
59,210

Total Assets
$
1,982,257

 
$
2,031,474

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
40,898

 
$
59,865

Accrued merchant and supplier payables
620,485

 
671,305

Accrued expenses
245,889

 
246,924

Deferred income taxes
52,875

 
53,700

Other current liabilities
140,433

 
136,647

Total current liabilities
1,100,580

 
1,168,441

Deferred income taxes, non-current
19,917

 
20,860

Other non-current liabilities
97,791

 
100,072

Total Liabilities
1,218,288

 
1,289,373

Commitments and contingencies (see Note 6)

 

Stockholders' Equity
 
 
 
Class A common stock, par value $0.0001 per share, 2,000,000,000 shares authorized, 657,774,882 and 654,523,706 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively
66

 
65

Class B common stock, par value $0.0001 per share, 10,000,000 shares authorized, 2,399,976 shares issued and outstanding at March 31, 2013 and December 31, 2012

 

Common stock, par value $0.0001 per share, 2,010,000,000 shares authorized, no shares issued and outstanding at March 31, 2013 and December 31, 2012

 

Additional paid-in capital
1,508,972

 
1,485,006

Accumulated deficit
(757,469
)
 
(753,477
)
Accumulated other comprehensive income
14,787

 
12,446

Total Groupon, Inc. Stockholders' Equity
766,356

 
744,040

Noncontrolling interests
(2,387
)
 
(1,939
)
Total Equity
763,969

 
742,101

Total Liabilities and Equity
$
1,982,257

 
$
2,031,474


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 March 31,
 
2013
 
2012
Revenue:
 
 
 
Third party and other
$
439,108

 
$
540,053

Direct
162,294

 
19,230

Total revenue
601,402

 
559,283

Cost of revenue:
 
 
 
Third party and other
70,016

 
102,629

Direct
152,377

 
16,869

Total cost of revenue
222,393

 
119,498

Gross profit
379,009

 
439,785

Operating expenses:
 
 
 
Marketing
49,557

 
116,615

Selling, general and administrative
308,206

 
283,583

Acquisition-related expense (benefit), net
68

 
(52
)
  Total operating expenses
357,831

 
400,146

Income from operations
21,178

 
39,639

Interest and other expense, net
(5,064
)
 
(3,539
)
Loss on equity method investments
(19
)
 
(5,128
)
Income before provision for income taxes
16,095

 
30,972

Provision for income taxes
19,337

 
34,565

Net loss
(3,242
)
 
(3,593
)
Less: Net income attributable to noncontrolling interests
(750
)
 
(880
)
Net loss attributable to Groupon, Inc.
(3,992
)
 
(4,473
)
Adjustment of redeemable noncontrolling interests to redemption value

 
(7,222
)
Net loss attributable to common stockholders
$
(3,992
)
 
$
(11,695
)
 
 
 
 
Net loss per share
 
 
 
Basic
$
(0.01
)
 
$
(0.02
)
Diluted
$
(0.01
)
 
$
(0.02
)
 
 
 
 
Weighted average number of shares outstanding
 
 
 
Basic
658,800,417

 
644,097,375

Diluted
658,800,417

 
644,097,375


See Notes to unaudited Condensed Consolidated Financial Statements.

5


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2013
 
2012
Net loss
$
(3,242
)
 
$
(3,593
)
Other comprehensive income, net of tax:
 
 
 
   Foreign currency translation adjustments
2,143

 
1,266

Unrealized gain on available-for-sale debt security
157

 

Other comprehensive income
2,300

 
1,266

Comprehensive loss
(942
)
 
(2,327
)
Less: Comprehensive income attributable to noncontrolling interests
(709
)
 
(880
)
Comprehensive loss attributable to Groupon, Inc.
$
(1,651
)
 
$
(3,207
)

See Notes to unaudited Condensed Consolidated Financial Statements.

6


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2013
 
2012
Operating activities
 
 
 
Net loss
$
(3,242
)
 
$
(3,593
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
20,700

 
11,716

Stock-based compensation
29,907

 
28,003

Deferred income taxes
(258
)
 
(876
)
Excess tax benefits on stock-based compensation
(832
)
 
(2,881
)
Loss on equity method investments
19

 
5,128

Acquisition-related expense (benefit), net
68

 
(52
)
Change in assets and liabilities, net of acquisitions:
 
 
 
Restricted cash
2,523

 
(1,357
)
Accounts receivable
(7,684
)
 
(11,878
)
Prepaid expenses and other current assets
12,527

 
(4,121
)
Accounts payable
(19,606
)
 
(1,821
)
Accrued merchant and supplier payables
(39,417
)
 
46,000

Accrued expenses and other current liabilities
13,302

 
13,420

Other, net
753

 
6,026

Net cash provided by operating activities
8,760

 
83,714

Investing activities
 
 
 
Purchases of property and equipment and capitalized software
(14,468
)
 
(13,083
)
Acquisitions of businesses, net of acquired cash
(1,169
)
 
(23,004
)
Purchases of investments
(13,083
)
 
(3,000
)
Settlement of liability related to purchase of additional interest in consolidated subsidiary
(1,959
)
 

Purchases of additional interests in consolidated subsidiaries

 
(7,347
)
Purchases of intangible assets

 
(10
)
Net cash used in investing activities
(30,679
)
 
(46,444
)
Financing activities
 
 
 
Excess tax benefits on stock-based compensation
832

 
2,881

Taxes paid related to net share settlements of stock-based compensation awards
(7,712
)
 
(6,632
)
Payments of contingent consideration liabilities

 
(4,250
)
Settlements of purchase price obligations related to acquisitions
(2,000
)
 

Proceeds from exercise of stock options
705

 
378

Partnership distributions to noncontrolling interest holders
(1,065
)
 
(652
)
Payments of capital lease obligations
(102
)
 

Net cash used in financing activities
(9,342
)
 
(8,275
)
Effect of exchange rate changes on cash and cash equivalents
(12,378
)
 
9,059

Net (decrease) increase in cash and cash equivalents
(43,639
)
 
38,054

Cash and cash equivalents, beginning of period
1,209,289

 
1,122,935

Cash and cash equivalents, end of period
$
1,165,650

 
$
1,160,989

Non-cash investing and financing activities
 
 
 
Contingent consideration in connection with acquisitions
$
30

 
$
421

Equipment acquired under capital lease obligations
$
6,538

 
$

Shares issued to settle liability-classified awards
$
1,131

 
$

Accounts payable and accrued expenses related to purchases of property and equipment and capitalized software
$
2,828

 
$
3,402

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. Stockholder's Equity
 
Non-controlling Interests
 
Total Equity
 
 
Shares
 
Amount
Balance at December 31, 2012
656,923,682

 
$
65

 
$
1,485,006

 
$
(753,477
)
 
$
12,446

 
$
744,040

 
$
(1,939
)
 
$
742,101

 
Net loss

 

 

 
(3,992
)
 

 
(3,992
)
 
750

 
(3,242
)
 
Foreign currency translation

 

 

 

 
2,184

 
2,184

 
(41
)
 
2,143

 
Unrealized gain on available-for-sale debt security, net of tax

 

 

 

 
157

 
157

 

 
157

 
Shares issued to settle liability-classified awards
286,915

 

 
1,131

 

 

 
1,131

 

 
1,131

 
Exercise of stock options
714,035

 

 
705

 

 

 
705

 

 
705

 
Vesting of restricted stock units
3,162,803

 
1

 

 

 

 
1

 

 
1

 
Shares issued under employee stock purchase plan
271,402

 

 
1,121

 

 

 
1,121

 

 
1,121

 
Tax withholdings related to net share settlements of stock-based compensation awards
(1,183,979
)
 

 
(6,537
)
 

 

 
(6,537
)
 

 
(6,537
)
 
Stock-based compensation on equity-classified awards

 

 
29,991

 

 

 
29,991

 

 
29,991

 
Excess tax benefits, net of shortfalls, on stock-based compensation

 

 
(2,445
)
 

 

 
(2,445
)
 

 
(2,445
)
 
Partnership distributions to noncontrolling interest holders

 

 

 

 

 

 
(1,157
)
 
(1,157
)
 
Balance at March 31, 2013
660,174,858

 
$
66

 
$
1,508,972

 
$
(757,469
)
 
$
14,787

 
$
766,356

 
$
(2,387
)
 
$
763,969

 

See Notes to unaudited Condensed Consolidated Financial Statements.

8


GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Company Information
Groupon, Inc. and subsidiaries (the "Company") is a local commerce marketplace (www.groupon.com) that connects merchants to consumers by offering goods and services at a discount. The Company also offers deals on products for which it acts as the merchant of record. The Company, which commenced operations in October 2008, sends emails to its subscribers each day with discounted offers for goods and services that are targeted by location and personal preferences. Consumers also access deals directly through the Company's website and mobile application.
The Company has organized its operations into two principal segments: North America and International. See Note 11 "Segment Information."
Unaudited Interim Financial Information
The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These condensed consolidated financial statements are unaudited and, in the Company's opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the Company's condensed consolidated balance sheets, statements of operations, comprehensive loss, cash flows and stockholders' equity for the periods presented. Operating results for the periods presented are not necessarily indicative of the results to be expected for the full year ending December 31, 2013. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on February 27, 2013.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company's condensed consolidated financial statements were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenue and expenses of all wholly‑owned subsidiaries and majority‑owned subsidiaries over which the Company exercises control and variable interest entities for which the Company has determined that it is the primary beneficiary. Outside stockholders' interests in subsidiaries are shown on the condensed consolidated financial statements as “Noncontrolling interests" and "Redeemable noncontrolling interests." Equity 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 consolidated financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenue and expenses, and the related disclosures of contingent liabilities in the condensed consolidated financial statements and accompanying notes. Estimates are utilized for, but not limited to, stock‑based compensation, income taxes, valuation of acquired goodwill and intangible assets, investments, customer refunds, contingent liabilities and the useful lives of property, equipment and software and intangible assets. Actual results could differ materially from those estimates.
2. BUSINESS COMBINATIONS
The Company acquired two businesses during the three months ended March 31, 2013 .  These business combinations were accounted for using the acquisition method, and the results of each of those acquired businesses have been included in the condensed consolidated financial statements beginning on the respective acquisition dates. The fair value of consideration

9

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


transferred in business combinations is allocated to the tangible and intangible assets acquired and liabilities assumed at the acquisition date, with the remaining unallocated amount recorded as goodwill. The allocations of the purchase price for these acquisitions have been prepared on a preliminary basis, and changes to those allocations may occur as additional information becomes available. Acquired goodwill 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 generally not deductible for tax purposes.
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 within earnings as "Acquisition-related expense (benefit), net."  See Note 9 "Fair Value Measurements" for information about fair value measurements of contingent consideration liabilities.
The primary purpose of the Company's two acquisitions during the three months ended March 31, 2013 was to acquire an experienced workforce and to expand and advance product offerings. The aggregate acquisition-date fair value of the consideration transferred for these acquisitions totaled $1.2 million , which consisted of the following (in thousands):
Fair Value of Consideration Transferred
 
Fair Value
Cash
 
$
1,170

Contingent consideration
 
30

Total
 
$
1,200

The following table summarizes the allocation of the aggregate purchase price of acquisitions for the three months ended March 31, 2013 (in thousands):
Net working capital (including acquired cash of less than $0.1 million)
 
$
38

Goodwill
 
991

Developed technology (1)
 
171

Total purchase price
$
1,200

(1)
The developed technology acquired intangible assets have estimated useful lives of 1 year.
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.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the Company's goodwill activity by segment for the three months ended March 31, 2013 (in thousands):
 
 
North America
 
International
 
Consolidated
Balance as of December 31, 2012
 
$
79,276

 
$
127,408

 
$
206,684

Goodwill related to acquisitions
 
991

 

 
991

Other adjustments (1)
 
1,396

 
(3,605
)
 
(2,209
)
Balance as of March 31, 2013
 
$
81,663

 
$
123,803

 
$
205,466

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

10

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


The following tables summarize the Company's other intangible assets (in thousands):
 
 
As of March 31, 2013
Asset Category
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Subscriber relationships
 
$
41,216

 
$
22,936

 
$
18,280

Merchant relationships
 
7,997

 
6,861

 
1,136

Trade names
 
6,342

 
5,899

 
443

Developed technology
 
19,942

 
13,148

 
6,794

Other intangible assets
 
15,597

 
5,412

 
10,185

Total
 
$
91,094

 
$
54,256

 
$
36,838

 
 
As of December 31, 2012
Asset Category
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Subscriber relationships
 
$
42,075

 
$
21,356

 
$
20,719

Merchant relationships
 
8,187

 
6,873

 
1,314

Trade names
 
6,490

 
5,900

 
590

Developed technology
 
20,000

 
10,994

 
9,006

Other intangible assets
 
15,601

 
4,633

 
10,968

Total
 
$
92,353

 
$
49,756

 
$
42,597

Amortization of intangible assets is computed using the straight-line method over their estimated useful lives, which range from one to five years. Amortization expense for these intangible assets was $5.6 million and $4.5 million for the three months ended March 31, 2013 and 2012 , respectively. As of March 31, 2013 , the Company's estimated future amortization expense for these intangible assets is as follows (in thousands):
Remaining amounts in 2013
 
$
14,846

2014
 
13,279

2015
 
7,012

2016
 
1,690

2017
 
11

Thereafter
 

 
 
$
36,838


11

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


4. INVESTMENTS
The following table summarizes the Company's investments (dollars in thousands):
 
March 31, 2013
 
Percent Ownership of Common and Preferred Stock
 
December 31, 2012
 
Percent Ownership of Common and Preferred Stock
Cost method investments:
 
 
 
 
 
 
 
Life Media Limited (F-tuan)
$
77,521

 
19
%
 
$
77,521

 
19
%
Other cost method investments
14,668

 
6
%
to
19
%
 
1,867

 
6
%
to
19
%
Total cost method investments
92,189

 
 
 
 
 
79,388

 
 
 
 
Equity method investments
1,715

 
21
%
to
50
%
 
1,734

 
21
%
to
50
%
Total investments in equity interests
$
93,904

 
 
 
$
81,122

 
 
Available-for-sale debt security
3,341

 
 
 
3,087

 
 
Total investments
$
97,245

 
 
 
$
84,209

 
 
Cost Method Investments
In February 2013, the Company acquired a 10.3% ownership interest in a non-U.S.-based payment processor for $13.1 million . This investment is accounted for using the cost method of accounting because the Company does not have the ability to exercise significant influence over the operating and financial policies of the investee. Accordingly, the investment is adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments.
In June 2012, Life Media Limited ("F-tuan"), an exempted company incorporated under the laws of the Cayman Islands with operations in China, acquired the Company's 49.8% interest in E-Commerce King Limited ("E-Commerce"). In exchange for its interest in E-Commerce and an additional $25.0 million of cash consideration, the Company received a 19.1% interest in F-tuan in the form of common and Series E preferred shares. The investment in F-tuan is accounted for using the cost method of accounting because the Company does not have the ability to exercise significant influence over the operating and financial policies of the investee. Accordingly, the investment is adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments.
Available-for-Sale Debt Security
In November 2012, the Company purchased a convertible debt security issued by a nonpublic entity for $3.0 million and has classified the security as available-for-sale. As of March 31, 2013 , the amortized cost, gross unrealized gain and fair value of this security were $3.0 million , $0.3 million and $3.3 million , respectively. As of December 31, 2012 , the amortized cost, gross unrealized gain and fair value of this security were $3.0 million , $0.1 million and $3.1 million , respectively. The contractual maturity date of the security is November 1, 2015.
Other-Than-Temporary Impairment
An unrealized loss exists when the current fair value of an investment is less than its amortized cost basis. The Company conducts periodic reviews of all of its investments with unrealized losses to evaluate whether those impairments are other-than-temporary. This evaluation, which is performed at the individual investment level, consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as the Company's intent and ability to hold the investment for a period of time that is sufficient to allow for an anticipated recovery in value. Evidence considered in this evaluation includes the amount of the impairment, the length of time that the investment has been impaired, the factors contributing to the impairment, the financial condition and near-term prospects of the investee, recent operating trends and forecasted performance of the investee, market conditions in the geographic area or industry in which the investee operates, and the Company's strategic plans for holding the investment in relation to the period of time expected for an anticipated recovery in value. Additionally, the Company considers whether it intends to sell the investment or whether it is more likely than not that it will be required to sell the investment before recovery of its amortized cost basis. Investments with unrealized losses that are determined to be other-than-temporary are written

12

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


down to fair value with a charge to earnings. Unrealized losses that are determined to be temporary in nature are not recorded for cost method investments and equity method investments, while such losses are recorded, net of tax, in accumulated other comprehensive income for available-for-sale securities.
The Company previously concluded that its cost method investment in F-tuan was other-than-temporarily impaired as of December 31, 2012 and the investment was written down to its fair value of $77.5 million at that time. In April 2013, the Company obtained F-tuan's actual results for the three months ended March 31, 2013, as well as their updated financial projections for future periods. The investee's operating loss for the three months ended March 31, 2013 was higher than forecasted at the time of the December 31, 2012 fair value measurement. This increase was due to lower gross billings and higher operating expenses as compared to its forecast in the prior quarter, while deal margins were substantially consistent with that forecast. Additionally, F-tuan reduced its forecasted revenues and operating income for the remainder of 2013, as compared to its forecast in the prior quarter, but did not reduce its forecasted results for subsequent years. For purposes of measuring the fair value of this investment as of March 31, 2013, the Company applied a discounted cash flow method, which is an income approach, and the resulting value was corroborated by a market approach. The Company used a discount rate of 30% , consistent with the discount rate used in the December 31, 2012 fair value measurement, and used the investee's updated financial projections for the year ending December 31, 2013. However, the Company applied downward adjustments to the investee's financial projections for future years based on our expectations for the investee's future performance and related market conditions. The resulting fair value measurement of the investment in F-tuan as of March 31, 2013 was $71.6 million , a $5.9 million decrease from the $77.5 million fair value measurement as of December 31, 2012.
The other-than-temporary impairment recorded at December 31, 2012 established a new cost basis for the investment in F-tuan. The factors that the Company considered in evaluating whether the $5.9 million unrealized loss as of March 31, 2013 constituted an other-than-temporary impairment included the severity of the impairment (i.e., an unrealized loss equal to 7.6% of the investment's amortized cost), the duration of the impairment of less than three months since the current cost basis was established and the Company's intent to hold the investment for a sufficient period of time to allow for a recovery in fair value. Based on this assessment, which also considered other qualitative factors, the Company concluded that the investment was not other-than-temporarily impaired as of March 31, 2013. However, if the operating performance of the investee deteriorates significantly in future periods or if the investee obtains additional funding at a substantially lower valuation, it may be necessary to recognize an other-than-temporary impairment charge in earnings at that time.
5. SUPPLEMENTAL CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION
The following table summarizes the Company's interest and other expense, net for the three months ended March 31, 2013 and 2012 (in thousands):
 
Three Months Ended March 31,
 
2013
 
2012
Interest income, net
$
372

 
$
203

Foreign exchange and other
(5,436
)
 
(3,742
)
Total interest and other expense, net
$
(5,064
)
 
$
(3,539
)

13

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


The following table summarizes the Company's prepaid expenses and other current assets as of March 31, 2013 and December 31, 2012 (in thousands):
 
March 31, 2013
 
December 31, 2012
Current portion of unamortized tax effects on intercompany transactions
$
33,163

 
$
37,589

Inventories
27,482

 
39,733

Prepaid expenses
15,886

 
20,964

Restricted cash
14,059

 
16,507

VAT and other taxes receivable
17,773

 
16,439

Prepayments of inventory purchases and other
23,961

 
19,341

Total prepaid expenses and other current assets
$
132,324

 
$
150,573

The following table summarizes the Company's accrued expenses as of March 31, 2013 and December 31, 2012 (in thousands):
 
March 31, 2013
 
December 31, 2012
Marketing
$
10,773

 
$
11,237

Refunds reserve
59,736

 
69,209

Payroll and benefits
61,335

 
61,557

Subscriber credits
54,832

 
58,977

Professional fees
17,826

 
16,938

Other
41,387

 
29,006

Total accrued expenses
$
245,889

 
$
246,924

The following table summarizes the Company's other current liabilities as of March 31, 2013 and December 31, 2012 (in thousands):
 
March 31, 2013
 
December 31, 2012
Income taxes payable
$
38,373

 
$
33,887

VAT and sales tax payable
44,404

 
55,728

Deferred revenue
36,224

 
25,780

Other
21,432

 
21,252

Total other current liabilities
$
140,433

 
$
136,647

The following table summarizes the Company's other non-current liabilities as of March 31, 2013 and December 31, 2012 (in thousands):
 
March 31, 2013
 
December 31, 2012
Long-term tax liabilities
$
77,976

 
$
77,553

Deferred rent
9,308

 
9,162

Other
10,507

 
13,357

Total other non-current liabilities
$
97,791

 
$
100,072


14

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


The following table summarizes the components of accumulated other comprehensive income, net of tax as of March 31, 2013 and December 31, 2012 (in thousands):
 
March 31, 2013
 
December 31, 2012
Foreign currency translation adjustments
$
14,577

 
$
12,393

Unrealized gain on available-for-sale debt security, net of tax
210

 
53

Accumulated other comprehensive income
$
14,787

 
$
12,446

6. COMMITMENTS AND CONTINGENCIES
The Company's commitments as of March 31, 2013 did not materially change from the amounts set forth in the Company's 2012 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 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, as well as general customer complaints seeking monetary damages. 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 in its internal control over financial reporting 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.
The Company is currently a defendant in a proceeding pursuant to which, on October 29, 2012, a consolidated amended class action complaint was 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.  Originally filed in April 2012, the case is currently pending before the United States District Court for the Northern District of Illinois: In re Groupon, Inc. Securities Litigation. The complaint asserts 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. Allegations in the consolidated amended complaint 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 lawsuit seeks 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.  The defendants filed a motion to dismiss the consolidated amended complaint on January 18, 2013. The lead plaintiff filed his response to the motion to dismiss on March 19, 2013, and defendants filed their reply in support of the motion to dismiss on April 22, 2013. The lead plaintiff recently filed a sur-reply in further opposition to the motion to dismiss, and the Company will be asking the court to consider the Company's brief response to the sur-reply.
In addition, federal and state purported stockholder derivative lawsuits have been filed against certain of the Company's current and former directors and officers.  The federal purported stockholder derivative lawsuit was originally filed in April 2012 and a consolidated stockholder derivative complaint, filed on July 30, 2012, is currently pending in the United States District Court for the Northern District of Illinois: In re Groupon Derivative Litigation . Plaintiffs assert claims for breach of fiduciary duty and abuse of control.  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 state derivative complaints generally allege that the defendants breached their fiduciary duties by purportedly mismanaging

15

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


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 from 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 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. No consolidated complaint has been filed in the state derivative action. 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. On April 18, 2013, the court entered an order appointing a lead plaintiff and approving its selection of lead counsel and local counsel for the purported class.
Two federal putative class action securities complaints were filed in the United States District Court for the Northern District of Illinois: Weber v. Groupon, Inc., et al was filed on December 21, 2012; and Earley v. Groupon, Inc. et al . was filed on January 22, 2013. Both complaints assert claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Allegations in the complaints include that the Company and its officers and directors made untrue statements or omissions of material fact beginning on May 14, 2012, with the Company's press release reporting its first quarter 2012 earnings results, through the Company's November 8, 2012 press release announcing its third quarter 2012 earnings results, and failed to disclose information about the Company's revenue growth and revenue mix. These 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.  
Two additional state stockholder derivative complaint were filed in January 2013, in the Chancery Division of the Circuit of Court of Cook County, Illinois: Charles v. Mason, et al. was filed on January 24, 2013, and Walsh v. Mason, et al. was filed on January 31, 2013. The Charles and Walsh complaints generally allege that the defendants breached their fiduciary duties through a series of statements about the Company's financial health and business prospects beginning on May 14, 2012, through November 2012 related to the Company's revenue and customer base, and alleges claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. Both complaints seek to recoup an unspecified amount of monetary damages allegedly sustained by the Company, restitution from defendants, reimbursements for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of non-monetary relief. On March 19, 2013, the court ordered the Charles and Mason actions to be consolidated. The parties are currently negotiating deadlines for responses to the complaints.
The Company intends to defend all of the securities and stockholder derivative lawsuits vigorously.
The Company was named as a defendant in a series of class actions that came to be consolidated into a single case in the U.S. District Court for the Northern District of California.  The consolidated case is referred to as In re Groupon Marketing and Sales Practices Litigation . The Company denies liability, but the parties agreed to settle the litigation for $8.5 million before any determination had been made on the merits or with respect to class certification.  Because the case had been filed as a class action, the parties were required to provide proper notice and obtain court approval for the settlement. During that process, certain individuals asserted various objections to the settlement.  The parties to the case opposed the objections and on December 14, 2012, the district court approved the settlement over the various objections.
Subsequent to the entry of the order approving settlement, certain of the objectors filed a notice of appeal, contesting the settlement and appealing the matter to the Ninth Circuit of the U.S. Court of Appeals, where the case remains pending.  The Company believes that the settlement is valid and intends to oppose the appeal.  Plaintiffs also maintain that the settlement is valid and will be opposing the appeal.  The settlement, however, is not effective during the pendency of the appeal.  The Company does not know when the appeal will be resolved.  Depending on the outcome of the appeal, it is possible that the settlement will be rejected, or that there will be further proceedings in the appellate court or district court, or that the settlement will be enforced at that time without further objections or proceedings.
In addition, third parties have from time to time claimed, and others may claim in the future, that the Company has

16

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


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 settlement, require the Company to change its business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm the Company's business. 
The Company establishes an accrued liability for loss contingencies related to legal and regulatory matters when the loss is both probable and estimable. In such cases, there may be an exposure to loss in excess of the amounts accrued. Because of the inherent uncertainty related to the matters described above, including the early stage and lack of specific damage claims in many of them, we are unable to estimate a range of reasonably possible losses in excess of the amounts accrued, if any. Although the future results of litigation and claims cannot be determined, based on the information currently available the Company 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. The Company's accrued liabilities for loss contingencies related to legal and regulatory matters may change in the future due to new developments or changes in strategy in handling these matters. 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 merchants, with respect to various matters. The Company has agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or other claims made against those parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. The Company is also subject to increased exposure to various claims as a result of its acquisitions, particularly in cases where the Company is entering into new businesses in connection with such acquisitions. The Company may also become more vulnerable to claims as it expands the range and scope of its services and is subject to laws in jurisdictions where the underlying laws with respect to potential liability are either unclear or less favorable. In addition, the Company has entered into indemnification agreements with its officers 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.
7. STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION
Common Stock
The Company's Board of Directors ("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 has authorized shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by the Board.

17

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


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 March 31, 2013 , 20,508,543 shares were available for future issuance under the Plans.
The Company recognized stock-based compensation expense of $29.9 million and $28.0 million for the three months ended March 31, 2013 and 2012 , respectively, related to stock awards issued under the Plans, acquisition-related awards and subsidiary awards. The Company also capitalized $2.6 million and $1.3 million of stock-based compensation for the three months ended March 31, 2013 and 2012 , respectively, in connection with internally-developed software.
Employee Stock Purchase Plan
The Company is authorized to grant up to 10 million shares of common stock under the ESPP. As of March 31, 2013, 271,402 shares of common stock were issued under the ESPP. As of December 31, 2012, no shares of common stock were issued under the ESPP.
Stock Options
The table below summarizes the stock option activity during the three months ended March 31, 2013 :
 
 
Options
 
Weighted- Average Exercise Price
 
Aggregate Intrinsic Value
(in thousands)
(1)
Outstanding at December 31, 2012
 
7,713,421

 
$1.09
 
$
29,063

    Exercised
 
(714,035
)
 
$1.09
 
 
    Forfeited
 
(139,896
)
 
$0.87
 
 
    Expired
 
(5,181
)
 
$2.18
 
 
Outstanding at March 31, 2013
 
6,854,309

 
$1.10
 
$
34,429

 
 
 
 
 
 
 
Exercisable at March 31, 2013
 
4,886,156

 
$0.88
 
$
25,623

(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 March 31, 2013 and December 31, 2012 , respectively.

18

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


Restricted Stock Units
The table below summarizes activity regarding unvested restricted stock units under the Plans during the three months ended March 31, 2013 :
 
 
Restricted Stock Units
 
Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2012
 
29,699,348

 
$
9.31

    Granted
 
10,644,528

 
$
5.63

    Vested
 
(3,162,803
)
 
$
9.15

    Forfeited
 
(1,956,614
)
 
$
11.43

Unvested at March 31, 2013
 
35,224,459

 
$
8.13

Restricted Stock Awards
The Company has granted restricted stock awards in connection with prior period business combinations. Compensation expense on these awards is recognized on a straight-line basis over the requisite service period.
The table below summarizes activity regarding unvested restricted stock during the three months ended March 31, 2013:
 
 
Restricted Stock
 
Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2012
 
577,048

 
$
10.31

    Vested
 
(222,920
)
 
$
6.82

Unvested at March 31, 2013
 
354,128

 
$
12.51

8. LOSS PER SHARE OF CLASS A AND CLASS B COMMON STOCK
The Company computes loss per share of Class A and Class B common stock using the two-class method. Basic loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed using the weighted-average number of common shares and the effect of potentially dilutive equity awards outstanding during the period. Potentially dilutive securities consist of stock options, restricted stock units, unvested restricted stock awards and ESPP shares. The dilutive effect of these equity awards are reflected in diluted loss per share by application of the treasury stock method. The computation of the diluted loss per share of Class A common stock assumes the conversion of Class B common stock, while the diluted loss per share of Class B common stock does not assume the conversion of those shares.
The rights, including the liquidation and dividend rights, of the holders of Class A and Class B common stock are identical, except with respect to voting. As a result, the undistributed earnings for each period are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the period had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as the Company assumes the conversion of Class B common stock in the computation of the diluted loss per share of Class A common stock, the undistributed earnings are equal to net income for that computation.

19

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


The following tables set forth the computation of basic and diluted loss per share of Class A and Class B common stock for the three months ended March 31, 2013 and 2012 (in thousands, except share amounts and per share amounts):     
 
 
Three Months Ended March 31, 2013
 
Three Months Ended March 31, 2012
 
 
Class A
 
Class B
 
Class A
 
Class B
Basic loss per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Allocation of net loss
 
$
(3,231
)
 
$
(11
)
 
$
(3,579
)
 
$
(14
)
Less: Allocation of adjustment of redeemable noncontrolling interests to redemption value
 

 

 
7,195

 
27

Less: Allocation of net income attributable to noncontrolling interests
 
747

 
3

 
877

 
3

Allocation of net loss attributable to common stockholders
 
$
(3,978
)
 
$
(14
)
 
$
(11,651
)
 
$
(44
)
Denominator
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
656,400,441

 
2,399,976

 
641,697,399

 
2,399,976

Basic loss per share
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.02
)
 
$
(0.02
)
 
 
 
 
 
 
 
 
 
Diluted loss per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Allocation of net loss attributable to common stockholders
 
$
(3,978
)
 
$
(14
)
 
$
(11,651
)
 
$
(44
)
Reallocation of net income (loss) attributable to common stockholders as a result of conversion of Class B (1)
 

 

 

 

Allocation of net loss attributable to common stockholders
 
$
(3,978
)
 
$
(14
)
 
$
(11,651
)
 
$
(44
)
Denominator
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding used in basic computation
 
656,400,441

 
2,399,976

 
641,697,399

 
2,399,976

Conversion of Class B (1)
 

 

 

 

Employee stock options (1)
 

 

 

 

Restricted shares and RSUs (1)
 

 

 

 

Weighted-average diluted shares outstanding (1)
 
656,400,441

 
2,399,976

 
641,697,399

 
2,399,976

Diluted loss per share
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.02
)
 
$
(0.02
)
(1)
Conversion of Class B shares into Class A shares and outstanding equity awards have not been reflected in the diluted loss per share calculation for the three months ended March 31, 2013 and 2012 because the effect would be antidilutive.

20

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


The following outstanding equity awards are not included in the diluted net loss per share calculation above because they would have had an antidilutive effect:
 
Three Months Ended March 31,
 
2013
 
2012
Stock options
6,854,309

 
17,596,820

Restricted stock units
35,224,459

 
14,848,854

Restricted stock
354,128

 
86,758

ESPP shares
568,174

 

Total
43,001,070

 
32,532,432

9. FAIR VALUE MEASUREMENTS
Fair value is defined under U.S. GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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 consist 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.
Available-for-sale debt security - The Company has an investment in a convertible debt security issued by a nonpublic entity. This available-for-sale debt security is measured at fair value each reporting period, with unrealized gains and losses recorded in other comprehensive income. The Company measures its fair value using an income approach that incorporates probability-weighted outcomes. The Company has classified this investment as Level 3 due to the lack of observable market data over fair value inputs such as the fair value of the nonmarketable equity shares underlying the conversion option. Increases in the estimated fair value of the nonmarketable equity shares underlying the conversion option contribute to increases in the fair value of the available-for-sale debt security and decreases in the estimated fair value of the underlying shares contribute to decreases in its fair value. Additionally, increases in the assessed likelihood of a default by the convertible debt issuer contribute to decreases in the fair value of the available-for-sale debt security and decreases in the assessed likelihood of a default contribute to increases in its fair value.
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 an income approach to value contingent consideration liabilities, which is determined based on the

21

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


present value of probability-weighted future cash flows using internal models . 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 March 31, 2013 and December 31, 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. Increases in the assessed likelihood of a higher payout under a contingent consideration arrangement contribute to increases in the fair value of the related liability. Conversely, decreases in the assessed likelihood of a higher payout under a contingent consideration arrangement contribute to decreases in the fair value of the related liability. Changes in assumptions could have an impact on the payout of contingent consideration arrangements with a maximum payout of $14.8 million cash and 0.1 million shares of the Company's common stock as of March 31, 2013 .
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 March 31, 2013
 
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
585,434

 
$
585,434

 
$

 
$

Available-for-sale debt security
$
3,341

 
$

 
$

 
$
3,341

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$
7,699

 
$

 
$

 
$
7,699

 
 
 
Fair Value Measurement at Reporting Date Using
Description
As of December 31, 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
$
585,393

 
$
585,393

 
$

 
$

Available-for-sale debt security
$
3,087

 
$

 
$

 
$
3,087

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 Contingent consideration
$
7,601

 
$

 
$

 
$
7,601


22

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


The following table provides a roll-forward of the fair value of recurring Level 3 fair value measurements for the three months ended March 31, 2013 and 2012 (in thousands):
 
 
Three Months Ended March 31, 2013
 
Three Months Ended March 31, 2012
 
 
Available-for-Sale Debt Security
 
Contingent Consideration
 
Contingent Consideration
Beginning balance
 
$
3,087

 
$
7,601

 
$
11,230

Issuance of contingent consideration in connection with acquisitions
 

 
30

 

Total gains or losses (realized / unrealized)
 


 


 


Loss included in earnings (1)
 

 
68

 
51

Gain included in other comprehensive income
 
254

 

 

Settlements of contingent consideration liabilities
 

 

 
(4,250
)
Ending balance
 
$
3,341

 
$
7,699

 
$
7,031

 
 
 
 
 
 
 
Unrealized (gains) losses still held (2)
 
$
(254
)
 
$
68

 
$

(1)
Changes in the fair value of contingent consideration liabilities are classified as "Acquisition-related expense (benefit), net" on the condensed consolidated statements of operations.
(2)
Represents the unrealized (gains) losses recorded in earnings or other comprehensive income during the period for assets and liabilities classified as Level 3 that are still held (or outstanding) at the end of the period.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets that are written down to fair value as a result of an impairment. The Company did not record any nonrecurring fair value measurements during the three months ended March 31, 2013 and 2012.
Estimated Fair Value of Financial Assets and Liabilities Not Measured at Fair Value
The following table presents the carrying amounts and fair values of financial instruments that are not carried at fair value in the condensed consolidated financial statements (in thousands):
 
 
As of March 31, 2013
 
As of December 31, 2012
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Cost method investments:
 
 
 
 
 
 
 
 
Life Media Limited (F-tuan)
 
$
77,521

 
$
71,639

 
$
77,521

(1  
)  
$
77,521

Other cost method investments
 
$
14,668

 
$
14,765

 
$
1,867

 
$
2,260

(1)
The Company's cost method investment in F-tuan was determined to be other-than-temporarily impaired and was written down to its fair value of $77.5 million as of December 31, 2012.
See Note 4 " Investments " for further information regarding the Company's valuation methodology for its investment in F-tuan. The fair values of the Company's other cost method investments were determined using the market approach or the income approach, depending on the availability of fair value inputs such as financial projections for the investees and market multiples for comparable companies. The Company has classified the fair value measurements of its cost method investments as Level 3 measurements within the fair value hierarchy because they involve significant unobservable inputs.

23

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


The Company's other financial instruments not carried at fair value consist primarily of short term certificates of deposit, accounts receivable, restricted cash, accounts payable, accrued merchant and supplier payables and accrued expenses. The carrying values of these assets and liabilities approximate their respective fair values as of March 31, 2013 and December 31, 2012 due to their short term nature.
10. INCOME TAXES
The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items.
For the three months ended March 31, 2013 , the Company recorded income tax expense of $19.3 million on pre-tax income of $16.1 million , for an effective tax rate of 120.1% . For the three months ended March 31, 2012 , the Company recorded income tax expense of $34.6 million on pre-tax income of $31.0 million , for an effective tax rate of 111.6% .
The Company's U.S. statutory rate is 35% . The most significant drivers of the effective tax rate for the three months ended March 31, 2013 and 2012 were losses in jurisdictions that the Company is not able to benefit due to uncertainty as to the realization of those losses, amortization of the tax effects of intercompany sales of intellectual property and nondeductible stock-based compensation expense.
11. 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 expense, net, loss on equity-method investments and provision for income taxes. Segment information reported in the tables below represents the operating segments of the Company organized in a manner consistent with which separate information is available and for which segment results are evaluated regularly by the Company's chief operating decision-maker (collectively, the two individuals who comprise the Office of the Chief Executive) in assessing performance and allocating resources.
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 for the three months ended March 31, 2013 and 2012 were as follows (in thousands):

24

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


 
Three Months Ended March 31,
 
2013
 
2012
North America
 
 
 
Revenue (1)
$
339,554

 
$
238,565

Segment cost of revenue and operating expenses (2)
298,188

 
198,393

   Segment operating income (2)
41,366

 
40,172

International
 
 
 
Revenue
261,848

 
320,718

Segment cost of revenue and operating expenses (2)
252,061

 
293,300

   Segment operating income (2)
9,787

 
27,418

Consolidated
 
 
 
Revenue
601,402

 
559,283

Segment cost of revenue and operating expenses (2)
550,249

 
491,693

Segment operating income (2)
51,153

 
67,590

Stock-based compensation
29,907

 
28,003

Acquisition-related expense (benefit), net
68

 
(52
)
Interest and other expense, net
5,064

 
3,539

Loss on equity method investments
19

 
5,128

Income before provision for income taxes
16,095

 
30,972

Provision for income taxes
19,337

 
34,565

Net loss
$
(3,242
)
 
$
(3,593
)
(1)
North America contains revenue from the United States of $326.8 million and $225.2 million for the three months ended March 31, 2013 and 2012 , respectively.
(2)
Segment cost of revenue and operating expenses and segment operating income exclude stock-based compensation and acquisition-related expense (benefit), net. This presentation corresponds to the measure of segment profit or loss that the Company's chief operating decision maker uses in assessing segment performance and making resource allocation decisions. For the three months ended March 31, 2013 and 2012 , stock-based compensation expense was approximately $22.8 million and $18.2 million respectively, for the North America segment and approximately $7.1 million and $9.8 million , respectively, for the International segment. For the three months ended March 31, 2013 and 2012 , acquisition-related expense (benefit), net was less than $0.1 million of expense and $0.2 million of benefit, respectively, for the North America segment and less than $0.1 million of benefit and $0.1 million of expense, respectively, for the International segment. Acquisition-related expense (benefit), net for the North America segment includes gains and losses relating to contingent consideration obligations incurred by U.S. legal entities relating to purchases of businesses that became part of the International segment, which is consistent with the attribution used for internal reporting purposes.
The following table summarizes the Company's total assets by reportable segment as of March 31, 2013 and December 31, 2012 (in thousands):
 
March 31, 2013
 
December 31, 2012
North America  (1)
$
1,146,679

 
$
1,177,314

International
835,578

 
854,160

Consolidated total assets
$
1,982,257

 
$
2,031,474

(1)
North America contains assets from the United States of $1,064.5 million and $1,112.6 million at March 31, 2013 and December 31, 2012 , respectively. There were no other individual countries located outside of the United States that represented more than 10% of consolidated total assets as of March 31, 2013 or December 31, 2012 .

25

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


Category Information     
The Company offers goods and services through three primary categories: Local Deals ("Local"), Groupon Goods ("Goods") and Groupon Getaways ("Travel"). The following table summarizes the Company's third party and other and direct revenue by category for its two reportable segments for the three months ended March 31, 2013 and 2012 (in thousands):
 
North America
 
International
 
Consolidated
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Local (1) :
 
 
 
 
 
 
 
 
 
 
 
Third party and other
$
171,593

 
$
191,128

 
$
155,800

 
$
213,166

 
$
327,393

 
$
404,294

Direct

 
5,299

 

 

 

 
5,299

Total revenue
171,593

 
196,427

 
155,800

 
213,166

 
327,393

 
409,593

 
 
 
 
 
 
 
 
 
 
 
 
Goods:
 
 
 
 
 
 
 
 
 
 
 
Third party and other
3,144

 
24,941

 
63,937

 
60,365

 
67,081

 
85,306

Direct
148,065

 
2,282

 
14,229

 
7,396

 
162,294

 
9,678

Total revenue
151,209

 
27,223

 
78,166

 
67,761

 
229,375

 
94,984

 
 
 
 
 
 
 
 
 
 
 
 
Travel and other:
 
 
 
 
 
 
 
 
 
 
 
Third party and other
16,752

 
14,915

 
27,882

 
35,538

 
44,634

 
50,453

Direct

 

 

 
4,253

 

 
4,253

Total revenue
16,752

 
14,915

 
27,882

 
39,791

 
44,634

 
54,706

 
 
 
 
 
 
 
 
 
 
 
 
Total revenue
$
339,554

 
$
238,565

 
$
261,848

 
$
320,718

 
$
601,402

 
$
559,283

(1)
Includes revenue from deals with local merchants, from deals with national merchants, and through local events (i.e., GrouponLive deals).


26

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


The following table summarizes the Company's gross profit by category for its two reportable segments for the three months ended March 31, 2013 and 2012 (in thousands):
 
North America
 
International
 
Consolidated
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Local (1) :
 
 
 
 
 
 
 
 
 
 
 
Third party and other
$
145,678

 
$
139,346

 
$
135,685

 
$
185,544

 
$
281,363

 
$
324,890

Direct

 
636

 

 

 

 
636

Total gross profit
145,678

 
139,982

 
135,685

 
185,544

 
281,363

 
325,526

 
 
 
 
 
 
 
 
 
 
 
 
Goods:
 
 
 
 
 
 
 
 
 
 
 
Third party and other
2,669

 
18,184

 
46,556

 
52,543

 
49,225

 
70,727

Direct
9,787

 
274

 
130

 
922

 
9,917

 
1,196

Total gross profit
12,456

 
18,458

 
46,686

 
53,465

 
59,142

 
71,923

 
 
 
 
 
 
 
 
 
 
 
 
Travel and other:
 
 
 
 
 
 
 
 
 
 
 
Third party and other
14,222

 
10,874

 
24,282

 
30,933

 
38,504

 
41,807

Direct

 

 

 
529

 

 
529

Total gross profit
14,222

 
10,874

 
24,282

 
31,462

 
38,504

 
42,336

 
 
 
 
 
 
 
 
 
 
 
 
Total gross profit
$
172,356

 
$
169,314

 
$
206,653

 
$
270,471

 
$
379,009

 
$
439,785

(1)
Includes gross profit from deals with local merchants, from deals with national merchants, and through local events (i.e., GrouponLive deals).
12. RELATED PARTIES
Marketing Services
During 2011, the Company engaged InnerWorkings, Inc. (“InnerWorkings”) to provide marketing services. The Company's Executive Chairman and member of the Office of the Chief Executive, Eric Lefkofsky, is a former director and significant stockholder of InnerWorkings. The Company recognized less than $0.1 million and $0.2 million of expense under its agreement with InnerWorkings for the three months ended March 31, 2013 and 2012, respectively.
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 $0.1 million for its services under the agreement for the three months ended March 31, 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 terminated its arrangement with Echo during 2012.

27


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 Part I, 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 mission is to be the operating system for local commerce. As part of that vision, we act as a 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 online advertising, the yellow pages, direct mail, newspaper, radio, television, and promotions. By bringing the brick and mortar world of local commerce onto the Internet, Groupon is helping local merchant partners to attract customers and sell goods and services. In our Goods category, through which we offer deals on merchandise, we often act as the merchant of record, particularly on deals in North America. We provide consumers with savings and help them discover what to do, eat, see, buy and where to travel.
Current and potential customers are able to access our deals through email, our website and mobile applications, where we offer discounts on goods, services and travel that are targeted by location, purchase history and personal preferences. 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 portion 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. We generated revenue of $601.4 million during the three months ended March 31, 2013, as compared to $559.3 million during the three months ended March 31, 2012 .
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 three months ended March 31, 2013 , we derived 43.5% of our revenue from our International segment, compared to 56.5% from our North America segment.
We have an accumulated deficit of $757.5 million as of March 31, 2013 . Since our inception, we have driven our growth through substantial investments in infrastructure and marketing to increase customer acquisition. In particular, our significant net losses in previous years were driven in part 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.
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. Certain of these metrics are reported in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and certain of these metrics are considered non-GAAP financial measures. As our business evolves, we may make changes to our key financial and operating metrics used to measure our business in future periods. 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.
Financial 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 revenue reported in our condensed 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 revenue 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 generated through our marketplace. Tracking gross billings on third party revenue deals also allows us to track changes in the percentage of gross billings that we are able to retain after payments to our merchant partners.

28


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 portion 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.
Gross profit . Gross profit reflects the net margin earned after deducting our cost of revenue from our revenue. Due to the lack of comparability between third party revenue, which is presented net of the merchant's share of the transaction price, and direct revenue, which is reported on a gross basis, we believe that gross profit has become an increasingly important measure for evaluating our performance.
Operating income (loss) excluding stock-based compensation and acquisition-related expense (benefit), net. Operating income (loss) excluding stock-based compensation and acquisition-related expense (benefit), net is a non-GAAP financial measure that comprises the consolidated total of the segment operating income (loss) of our two segments, North America and International. Stock‑based compensation expense and acquisition‑related expense (benefit), net are excluded from segment operating income (loss) that we report under U.S. GAAP for our segments. Stock-based compensation expense is primarily a non-cash item. Acquisition-related expense (benefit), net represents the change in the fair value of contingent consideration arrangements related to business combinations. We use consolidated operating income (loss) excluding stock-based compensation and acquisition-related expense (benefit), net to allocate resources and evaluate performance internally. 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 capitalized software. 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 that it typically represents a more useful measure of cash flows because purchases of fixed assets, software developed for internal-use and website development costs are necessary components of our ongoing operations. Free cash flow is not intended to represent the total increase or decrease in Groupon's cash balance for the applicable period. 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.
The following table presents the above Financial Metrics for the three months ended March 31, 2013 and 2012:
 
 
Three Months Ended March 31,
 
 
2013
 
2012
 
 
(in thousands)
Gross billings (1)
 
$
1,407,769

 
$
1,354,800

Revenue
 
601,402

 
559,283

Gross profit
 
379,009

 
439,785

Operating income excluding stock-based compensation and acquisition-related expense (benefit), net
 
51,153

 
67,590

Free cash flow
 
(5,708
)
 
70,631

(1)
Reflects the total dollar value of customer purchases of goods and services, excluding applicable taxes and net of estimated refunds.
Operating Metrics
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 calculated 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

29


opportunity to evaluate whether our growth is primarily driven by growth in total customers or in spend per customer in any given period.
Units . This metric represents the number of vouchers and products purchased from us by our customers, before refunds and cancellations. We consider this metric to be an important indicator of the total volume of business conducted through our marketplace.
Our Active customers and Gross billings per average active customer for the trailing twelve months ("TTM") ended March 31, 2013 and 2012 were as follows:
 
 
Trailing twelve months ended March 31,
 
 
2013
 
2012
TTM Active customers (in thousands)
 
41,711

 
36,850

TTM Gross billings per average active customer
 
$
138.32

 
$
178.92

Our Units for the three months ended March 31, 2013 and 2012 were as follows:
 
 
Three Months Ended March 31,
 
 
2013
 
2012
Units (in thousands)
 
45,182

 
43,361

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 tools 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 three months ended March 31, 2013 and 2012 , 43.5% and 57.3% , respectively, of our revenue was generated from our International segment. Operating a global business 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. The different commercial and Internet infrastructure in other countries may make it more difficult for us to replicate our current and future business model. The increase in direct revenue transactions from our Groupon Goods business in North America contributed to the decrease in International revenue as a percentage of our total revenue during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, as direct revenue is presented on a gross basis in our condensed consolidated statements of operations.
Marketing activities. 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.
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 and point of sale, which require substantial investment, and these products do not currently generate a material amount of revenue. 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

30


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 and point of sale. 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.
Components of Results of Operations
Third Party and Other Revenue
Third party revenue arises from transactions in which we are acting as a third party marketing agent and consists of the net amo