Groupon, Inc.
Groupon, Inc. (Form: 10-Q, Received: 10/31/2014 06:04:31)

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 September 30, 2014
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 1-35335
Groupon, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
27-0903295
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
600 West Chicago Avenue, Suite 400
Chicago, Illinois
 
60654
(Address of principal executive offices)
 
(Zip Code)
312-334-1579
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   x          No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).         
Yes   x          No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 October 28, 2014, there were 668,957,164 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 September 30, 2014 (unaudited) and December 31, 2013
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013 (unaudited)
Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2014 (unaudited)
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)
     Notes to Condensed Consolidated Financial Statements
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 5. Other Information
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 2013 Annual Report on Form 10-K and Part II, "Item 1A. Risk Factors" 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. 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)

 
September 30, 2014
 
December 31, 2013
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
855,168

 
$
1,240,472

Accounts receivable, net
124,598

 
83,673

Deferred income taxes
26,564

 
27,938

Prepaid expenses and other current assets
243,750

 
210,415

Total current assets
1,250,080

 
1,562,498

Property, equipment and software, net
170,534

 
134,423

Goodwill
441,290

 
220,827

Intangible assets, net
119,810

 
28,443

Investments
23,639

 
20,652

Deferred income taxes, non-current
44,709

 
35,941

Other non-current assets
22,103

 
39,226

Total Assets
$
2,072,165

 
$
2,042,010

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
25,848

 
$
27,573

Accrued merchant and supplier payables
754,628

 
752,943

Accrued expenses
223,677

 
226,986

Deferred income taxes
44,787

 
47,558

Other current liabilities
134,116

 
132,718

Total current liabilities
1,183,056

 
1,187,778

Deferred income taxes, non-current
9,668

 
10,853

Other non-current liabilities
151,486

 
131,697

Total Liabilities
1,344,210

 
1,330,328

Commitments and contingencies (see Note 6)

 

Stockholders' Equity
 
 
 
Class A common stock, par value $0.0001 per share, 2,000,000,000 shares authorized, 694,272,530 shares issued and 668,185,526 shares outstanding at September 30, 2014 and 670,149,976 shares issued and 665,717,176 shares outstanding at December 31, 2013
70

 
67

Class B common stock, par value $0.0001 per share, 10,000,000 shares authorized, 2,399,976 shares issued and outstanding at September 30, 2014 and December 31, 2013

 

Common stock, par value $0.0001 per share, 2,010,000,000 shares authorized, no shares issued and outstanding at September 30, 2014 and December 31, 2013

 

Additional paid-in capital
1,814,040

 
1,584,211

Treasury stock, at cost, 26,087,004 shares at September 30, 2014 and 4,432,800 shares at December 31, 2013
(190,355
)
 
(46,587
)
Accumulated deficit
(930,748
)
 
(848,870
)
Accumulated other comprehensive income
34,948

 
24,830

Total Groupon, Inc. Stockholders' Equity
727,955

 
713,651

Noncontrolling interests

 
(1,969
)
Total Equity
727,955

 
711,682

Total Liabilities and Equity
$
2,072,165

 
$
2,042,010


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,
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
Third party and other
$
399,803

 
$
394,987

 
$
1,232,173

 
$
1,252,966

Direct
357,251

 
200,072

 
1,034,094

 
552,242

Total revenue
757,054

 
595,059

 
2,266,267

 
1,805,208

Cost of revenue:
 
 
 
 
 
 
 
Third party and other
61,497

 
54,001

 
182,226

 
179,524

Direct
315,413

 
181,436

 
928,314

 
502,359

Total cost of revenue
376,910

 
235,437

 
1,110,540

 
681,883

Gross profit
380,144

 
359,622

 
1,155,727

 
1,123,325

Operating expenses:
 
 
 
 
 
 
 
Marketing
59,935

 
53,265

 
203,134

 
158,319

Selling, general and administrative
325,942

 
294,074

 
983,751

 
904,880

Acquisition-related (benefit) expense, net
(304
)
 
(1,529
)
 
2,078

 
(2,276
)
  Total operating expenses
385,573

 
345,810

 
1,188,963

 
1,060,923

(Loss) income from operations
(5,429
)
 
13,812

 
(33,236
)
 
62,402

Other (expense) income, net
(20,023
)
 
832

 
(21,886
)
 
(9,830
)
(Loss) income before (benefit) provision for income taxes
(25,452
)
 
14,644

 
(55,122
)
 
52,572

(Benefit) provision for income taxes
(6,434
)
 
15,936

 
20,181

 
62,657

Net loss
(19,018
)
 
(1,292
)
 
(75,303
)
 
(10,085
)
Net income attributable to noncontrolling interests
(2,190
)
 
(1,288
)
 
(6,575
)
 
(4,061
)
Net loss attributable to Groupon, Inc.
$
(21,208
)
 
$
(2,580
)
 
$
(81,878
)
 
$
(14,146
)
 
 
 
 
 
 
 
 
Net loss per share
 
 
 
 
 
 
 
Basic
$(0.03)
 
$(0.00)
 
$(0.12)
 
$(0.02)
Diluted
$(0.03)
 
$(0.00)
 
$(0.12)
 
$(0.02)
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding
 
 
 
 
 
 
 
Basic
669,526,524

 
666,432,848

 
675,814,535

 
662,531,567

Diluted
669,526,524

 
666,432,848

 
675,814,535

 
662,531,567


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,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(19,018
)
 
$
(1,292
)
 
$
(75,303
)
 
$
(10,085
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
   Foreign currency translation adjustments
1,827

 
(1,072
)
 
9,899

 
11,416

Available-for-sale securities:
 
 
 
 
 
 
 
Net unrealized loss during the period
(425
)
 
(109
)
 
(799
)
 
(19
)
Reclassification adjustment for impairment included in net loss
831

 

 
831

 

Net change in unrealized gain (loss) (net of tax effects of $248 and ($68) for the three months ended September 30, 2014 and 2013, respectively, and $23 and ($12) for the nine months ended September 30, 2014 and 2013, respectively)
406

 
(109
)
 
32

 
(19
)
Other comprehensive income (loss)
2,233

 
(1,181
)
 
9,931

 
11,397

Comprehensive (loss) income
(16,785
)
 
(2,473
)
 
(65,372
)
 
1,312

Comprehensive income attributable to noncontrolling interests
(2,187
)
 
(1,302
)
 
(6,388
)
 
(4,325
)
Comprehensive loss attributable to Groupon, Inc.
$
(18,972
)
 
$
(3,775
)
 
$
(71,760
)
 
$
(3,013
)

See Notes to unaudited Condensed Consolidated Financial Statements.


6


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
 
Groupon, Inc. Stockholders' Equity
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Total Groupon Inc. Stockholders' Equity
 
Non-controlling Interests
 
Total Equity
 
Shares
 
Amount
Shares
 
Amount
 
Balance at December 31, 2013
672,549,952

 
$
67

 
$
1,584,211

 
(4,432,800
)
 
$
(46,587
)
 
$
(848,870
)
 
$
24,830

 
$
713,651

 
$
(1,969
)
 
$
711,682

Net loss

 

 

 

 

 
(81,878
)
 

 
(81,878
)
 
6,575

 
(75,303
)
Foreign currency translation

 

 

 

 

 

 
10,086

 
10,086

 
(187
)
 
9,899

Unrealized gain on available-for-sale securities, net of tax

 

 

 

 

 

 
32

 
32

 

 
32

Common stock issued in connection with acquisition of business, net of issuance costs
13,825,283

 
2

 
162,703

 

 

 

 

 
162,705

 

 
162,705

Shares issued to settle liability-classified awards and contingent consideration
102,180

 

 
1,041

 

 

 

 

 
1,041

 

 
1,041

Purchase of interests in consolidated subsidiaries

 

 
(6,310
)
 

 

 

 

 
(6,310
)
 
2,415

 
(3,895
)
Exercise of stock options
805,225

 

 
807

 

 

 

 

 
807

 

 
807

Vesting of restricted stock units
12,741,462

 
1

 
(1
)
 

 

 

 

 

 

 

Shares issued under employee stock purchase plan
857,171

 

 
5,397

 

 

 

 

 
5,397

 

 
5,397

Tax withholdings related to net share settlements of stock-based compensation awards
(4,208,767
)
 

 
(33,149
)
 

 

 

 

 
(33,149
)
 

 
(33,149
)
Stock-based compensation on equity-classified awards

 

 
97,857

 

 

 

 

 
97,857

 

 
97,857

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

 

 
1,484

 

 

 

 

 
1,484

 

 
1,484

Purchases of treasury stock

 

 

 
(21,654,204
)
 
(143,768
)
 

 

 
(143,768
)
 

 
(143,768
)
Partnership distributions to noncontrolling interest holders

 

 

 

 

 

 

 

 
(6,834
)
 
(6,834
)
Balance at September 30, 2014
696,672,506

 
$
70

 
$
1,814,040

 
(26,087,004
)
 
$
(190,355
)
 
$
(930,748
)
 
$
34,948

 
$
727,955

 
$

 
$
727,955


See Notes to unaudited Condensed Consolidated Financial Statements.


7


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
Operating activities
 
 
 
Net loss
$
(75,303
)
 
$
(10,085
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property, equipment and software
71,476

 
49,186

Amortization of acquired intangible assets
36,068

 
16,131

Stock-based compensation
89,958

 
89,223

Deferred income taxes
(1,956
)
 
(1,225
)
Excess tax benefits on stock-based compensation
(12,573
)
 
(12,116
)
Loss on equity method investments
459

 
58

Net gain from changes in fair value of contingent consideration
(1,059
)
 
(2,276
)
Impairment of investments
2,036

 

Change in assets and liabilities, net of acquisitions:
 
 
 
Restricted cash
6,961

 
(81
)
Accounts receivable
(29,267
)
 
8,999

Prepaid expenses and other current assets
(32,397
)
 
13,146

Accounts payable
(8,964
)
 
(25,867
)
Accrued merchant and supplier payables
(61,219
)
 
(72,290
)
Accrued expenses and other current liabilities
(27,091
)
 
(27,790
)
Other, net
44,873

 
15,144

Net cash provided by operating activities
2,002

 
40,157

Investing activities
 
 
 
Purchases of property and equipment and capitalized software
(67,461
)
 
(43,574
)
Acquisitions of businesses, net of acquired cash
(117,303
)
 
(6,349
)
Purchases of investments
(6,704
)
 
(19,583
)
Settlement of liabilities related to purchase of additional interests in consolidated subsidiaries
(1,599
)
 
(1,959
)
Purchases of intangible assets
(500
)
 
(1,520
)
Net cash used in investing activities
(193,567
)
 
(72,985
)
Financing activities
 
 
 
Payments for purchases of treasury stock
(145,395
)
 
(7,376
)
Excess tax benefits on stock-based compensation
12,573

 
12,116

Taxes paid related to net share settlements of stock-based compensation awards
(32,390
)
 
(26,504
)
Debt issuance costs
(1,029
)
 

Common stock issuance costs in connection with acquisition of business
(158
)
 

Payments of contingent consideration from acquisitions

 
(780
)
Settlements of purchase price obligations related to acquisitions
(3,136
)
 
(5,000
)
Proceeds from stock option exercises and employee stock purchase plan
6,204

 
6,578

Partnership distribution payments to noncontrolling interest holders
(6,178
)
 
(4,286
)
Payments of capital lease obligations
(3,559
)
 
(1,001
)
Net cash used in financing activities
(173,068
)
 
(26,253
)
Effect of exchange rate changes on cash and cash equivalents
(20,671
)
 
(10,351
)
Net decrease in cash and cash equivalents
(385,304
)
 
(69,432
)
Cash and cash equivalents, beginning of period
1,240,472

 
1,209,289

Cash and cash equivalents, end of period
$
855,168

 
$
1,139,857



8


Non-cash investing and financing activities
 
 
 
Issuance of common stock in connection with acquisition of business
$
162,862

 
$
3,051

Contingent consideration liabilities incurred in connection with acquisitions
$
4,006

 
$
3,567

Equipment acquired under capital lease obligations
$
18,546

 
$
7,377

Shares issued to settle liability-classified awards and contingent consideration
$
1,041

 
$
3,394

Liability for purchases of treasury stock
$
120

 
$
1,638

Liability for purchase consideration
$
359

 
$

Liability for purchase of additional interests in consolidated subsidiaries
$
2,296

 
$

Accounts payable and accrued expenses related to purchases of property and equipment and capitalized software
$
5,508

 
$
1,713



9


GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.     DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION     
Company Information
Groupon, Inc. and subsidiaries (the "Company"), which commenced operations in October 2008, operates online local commerce marketplaces throughout the world that connect merchants to consumers by offering goods and services at a discount. The Company also offers deals on products for which it acts as the merchant of record. Customers can access the Company's deal offerings directly through its websites and mobile applications. The Company also sends emails to its subscribers with deal offerings that are targeted by location and personal preferences.
The Company's operations are organized into three segments: North America, EMEA, which is comprised of Europe, Middle East and Africa, and the remainder of the Company's international operations ("Rest of World"). See Note 12 "Segment Information."
Unaudited Interim Financial Information
The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. These condensed consolidated financial statements are unaudited and, in the Company's opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the Company's condensed consolidated balance sheets, statements of operations, comprehensive income (loss), cash flows and stockholders' equity for the periods presented. Operating results for the periods presented are not necessarily indicative of the results to be expected for the full year ending December 31, 2014. 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, 2013, as filed with the SEC on February 20, 2014.
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 consolidated financial statements were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenue and expenses of all wholly-owned subsidiaries and majority-owned subsidiaries over which the Company exercises control and variable interest entities for which the Company has determined that it is the primary beneficiary. Outside stockholders' interests in subsidiaries are shown on the condensed consolidated financial statements as "Noncontrolling interests." Equity investments in entities in which the Company does not have a controlling financial interest are accounted for under either the equity method, the cost method or as available-for-sale securities, as appropriate.
Reclassifications
Certain reclassifications have been made to the condensed consolidated financial statements of prior periods and the accompanying notes to conform to the current period presentation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenue and expenses, and the related disclosures of contingent liabilities in the condensed consolidated financial statements and accompanying notes. Estimates are 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.


10

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


Actual results could differ materially from those estimates.
2. BUSINESS COMBINATIONS
The Company acquired four businesses during the nine months ended September 30, 2014 .  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 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 acquisition price for recent acquisitions have been prepared on a preliminary basis, and changes to those allocations may occur as a result of final working capital adjustments and tax return filings. 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 growing the Company's merchant and customer base, acquiring assembled workforces, expanding its presence in international markets, expanding and advancing its product offerings and enhancing technology capabilities. The goodwill from these business combinations is generally not deductible for tax purposes.
For the three and nine months ended September 30, 2014 , $0.7 million and $3.1 million , respectively, of external transaction costs related to business combinations, primarily consisting of legal and advisory fees, are classified within "Acquisition-related (benefit) expense, net" on the condensed consolidated statements of operations.
LivingSocial Korea, Inc.
On January 2, 2014, the Company acquired all of the outstanding equity interests of LivingSocial Korea, Inc., a Korean corporation and holding company of Ticket Monster Inc. ("Ticket Monster"). Ticket Monster is an e-commerce company based in the Republic of Korea that connects merchants to consumers by offering goods and services at a discount. The primary purpose of this acquisition was to grow the Company's merchant and customer base and expand its presence in the Korean e-commerce market. The aggregate acquisition-date fair value of the consideration transferred for the Ticket Monster acquisition totaled $259.4 million , which consisted of the following (in thousands):
Cash
 
$
96,496

Issuance of 13,825,283 shares of Class A common stock
 
162,862

Total
 
$
259,358

The fair value of the Class A Common Stock issued as consideration was measured based on the stock price upon closing of the transaction on January 2, 2014.


11

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


The following table summarizes the allocation of the aggregate acquisition price of the Ticket Monster acquisition (in thousands):
Cash and cash equivalents
$
24,768

Accounts receivable
15,832

Deferred income taxes
1,264

Prepaid expenses and other current assets
829

Property, equipment and software
5,944

Goodwill
220,592

Intangible assets: (1)
 
Subscriber relationships
57,022

Merchant relationships
32,176

Developed technology
571

Trade name
19,325

Other non-current assets
3,033

Total assets acquired
$
381,356

Accounts payable
$
5,951

Accrued merchant and supplier payables
82,934

Accrued expenses
22,700

Other current liabilities
3,482

Deferred income taxes, non-current
1,264

Other non-current liabilities
5,667

Total liabilities assumed
$
121,998

Total acquisition price
$
259,358

(1)
The acquired intangible assets have estimated useful lives of between 2 and 5 years.
      Ideeli, Inc.
On January 13, 2014, the Company acquired all of the outstanding equity interests of Ideeli, Inc. (d/b/a "Ideel"), a fashion flash site based in the United States. The primary purpose of this acquisition was to expand and advance the Company's product offerings. The aggregate acquisition-date fair value of the consideration transferred for the Ideel acquisition totaled $42.7 million , which consisted of the following (in thousands):
Cash
 
$
42,339

Liability for purchase consideration
 
359

Total
 
$
42,698

    



12

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


The following table summarizes the allocation of the aggregate acquisition price of the Ideel acquisition (in thousands):
Cash and cash equivalents
$
79

Accounts receivable
988

Deferred income taxes
572

Prepaid expenses and other current assets
22,081

Property, equipment and software
8,173

Goodwill
5,379

Intangible assets: (1)
 
Subscriber relationships
5,490

Brand relationships
7,100

Trade name
4,500

Deferred income taxes, non-current
7,753

Total assets acquired
$
62,115

Accounts payable
$
1,640

Accrued supplier payables
4,092

Accrued expenses
9,118

Other current liabilities
482

Deferred income taxes, non-current
332

Other non-current liabilities
3,753

Total liabilities assumed
$
19,417

Total acquisition price
$
42,698

(1)
The acquired intangible assets have estimated useful lives of between 3 and 5 years.
Other Acquisitions
The Company acquired two other businesses during the nine months ended September 30, 2014 . The primary purpose of these acquisitions was to acquire an experienced workforce, expand and advance product offerings and enhance technology capabilities. The aggregate acquisition-date fair value of the consideration transferred for these acquisitions totaled $7.5 million , which consisted of the following (in thousands):
    
Cash
 
$
3,477

Contingent consideration
 
4,006

Total
 
$
7,483



13

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


The following table summarizes the allocation of the aggregate purchase price of these other acquisitions (in thousands):
Net working capital (including acquired cash of $0.2 million)
 
$
(52
)
Goodwill
 
6,261

Intangible assets: (1)
 
 
Subscriber relationships
 
560

Brand relationships
 
579

Developed technology
 
568

Deferred income taxes, non-current
 
(433
)
Total acquisition price
 
$
7,483

(1)
Acquired intangible assets have estimated useful lives of between 3 and 5 years.
Pro forma results of operations presented below do not include the results of these other acquisitions because the effects of these acquisitions, individually and in the aggregate, were not material to the Company's condensed consolidated results of operations.
Pro Forma Financial Information
     The following unaudited pro forma information presents the combined operating results of the Company for the three and nine months ended September 30, 2013 , as if the Company had acquired Ticket Monster and Ideel as of January 1, 2013 (in thousands). Pro forma results of operations have not been presented for the nine months ended September 30, 2014 , because the operating results of Ticket Monster and Ideel from January 1, 2014 through their respective acquisition dates were not material to the Company's consolidated results of operations for the nine months ended September 30, 2014 . The underlying pro forma results include the historical financial results of the Company and these two acquired businesses adjusted for depreciation and amortization expense associated with the assets acquired. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of the Company and the acquired entities. Accordingly, these unaudited pro forma results are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisitions had occurred as of January 1, 2013, nor are they indicative of future results of operations.
    
 
Three Months Ended 
 September 30, 2013
Nine Months Ended 
 September 30, 2013
Revenue
$
642,645

$
1,949,406

Net loss
(23,004
)
(79,936
)
     The revenue and net loss of Ticket Monster included in our condensed consolidated statements of operations were $42.8 million and $6.4 million for the three months ended September 30, 2014 , respectively, and $107.4 million and $30.3 million for the nine months ended September 30, 2014 , respectively. The revenue and net loss of Ideel included in our condensed consolidated statements of operations were $20.6 million and $0.5 million for the three months ended September 30, 2014 , respectively, and $58.1 million and $3.7 million for the nine months ended September 30, 2014 , respectively.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the Company's goodwill activity by segment for the nine months ended September 30, 2014 (in thousands):


14

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


 
 
North America
 
EMEA
 
Rest of World
 
Consolidated
Balance as of December 31, 2013
 
$
85,457

 
$
115,669

 
$
19,701

 
$
220,827

Goodwill related to acquisitions
 
11,640

 

 
220,592

 
232,232

Other adjustments (1)
 
(157
)
 
(9,578
)
 
(2,034
)
 
(11,769
)
Balance as of September 30, 2014
 
$
96,940

 
$
106,091

 
$
238,259

 
$
441,290

(1)
Represents the impact of changes in foreign exchange rates on goodwill.
The following tables summarize the Company's other intangible assets (in thousands):
 
 
September 30, 2014
Asset Category
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Subscriber relationships
 
$
105,108

 
$
44,891

 
$
60,217

Merchant relationships
 
40,653

 
16,522

 
24,131

Trade names
 
29,980

 
9,800

 
20,180

Developed technology
 
23,415

 
21,663

 
1,752

Brand relationships
 
7,664

 
1,103

 
6,561

Other intangible assets
 
17,199

 
10,230

 
6,969

Total
 
$
224,019

 
$
104,209

 
$
119,810

 
 
December 31, 2013
Asset Category
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Subscriber relationships
 
$
45,541

 
$
30,866

 
$
14,675

Merchant relationships
 
9,186

 
7,991

 
1,195

Trade names
 
6,739

 
6,739

 

Developed technology
 
23,038

 
19,547

 
3,491

Other intangible assets
 
16,776

 
7,694

 
9,082

Total
 
$
101,280

 
$
72,837

 
$
28,443

Amortization of intangible assets is computed using the straight-line method over their estimated useful lives, which range from 1 to 5 years. Amortization expense related to intangible assets was $11.8 million and $5.3 million for the three months ended September 30, 2014 and 2013 , respectively, and $36.1 million and $16.1 million for the nine months ended September 30, 2014 and 2013 , respectively. As of September 30, 2014 , the Company's estimated future amortization expense related to intangible assets is as follows (in thousands):
Remaining amounts in 2014
 
$
11,094

2015
 
39,055

2016
 
32,912

2017
 
18,575

2018
 
18,089

Thereafter
 
85

Total
 
$
119,810



15

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


4. INVESTMENTS
The following table summarizes the Company's investments (dollars in thousands):
 
September 30, 2014
 
Percent Ownership of Voting Stock
 
December 31, 2013
 
Percent Ownership of Voting Stock
Cost and equity method investments:
 
 
 
 
 
 
 
 
 
 
 
Cost method investments
$
15,920

 
6
%
to
19
%
 
$
15,788

 
6
%
to
19
%
Equity method investments
1,231

 
21
%
to
50
%
 
1,690

 
21
%
to
50
%
Total cost and equity method investments
17,151

 
 
 
17,478

 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Convertible debt securities
2,030

 
 
 
3,174

 
 
Redeemable preferred shares
4,458

 
19
%
to
23
%
 

 
19
%
 
 
Total available-for-sale securities
6,488

 
 
 
3,174

 
 
Total investments
$
23,639

 
 
 
$
20,652

 
 
In February 2014, the Company acquired redeemable preferred shares in an online home services company for $4.6 million . The shares are accounted for as available-for-sale securities.
The following table summarizes the amortized cost, gross unrealized loss and fair value of the Company's available-for-sale securities as of September 30, 2014 and December 31, 2013 (in thousands):
 
September 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Gross Unrealized Loss
 
Fair Value
 
Amortized Cost
 
Gross Unrealized Loss
 
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Convertible debt securities
$
2,030

 
$

 
$
2,030

 
$
3,370

 
$
(196
)
 
$
3,174

Redeemable preferred shares
4,599

 
(141
)
 
4,458

 

 

 

Total available-for-sale securities
$
6,629

 
$
(141
)
 
$
6,488

 
$
3,370

 
$
(196
)
 
$
3,174

The Company's investments in available-for-sale securities have been in an unrealized loss position for less than one year as of September 30, 2014.
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 reviews of all of its investments with unrealized losses on a quarterly basis 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 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 recorded a $1.3 million other-than-temporary impairment of an investment in the convertible debt securities of a nonpublic entity, which is reported within "Other


16

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


(expense) income, net" on the condensed consolidated statements of operations for the three and nine months ended September 30, 2014. The Company's investment in Life Media Limited ("F-tuan"), an entity with operations based in China, was written down to zero through an other-than-temporary impairment charge as of December 31, 2013, and continues to have an estimated fair value of zero as of September 30, 2014 .
5. SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS INFORMATION
The following table summarizes the Company's other (expense) income, net for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Interest income
$
409

 
$
487

 
$
1,151

 
$
1,348

Interest expense
(277
)
 
(39
)
 
(444
)
 
(187
)
Impairment of investments
(1,448
)
 

 
(2,036
)
 

Loss on equity method investments
(91
)
 
(25
)
 
(459
)
 
(58
)
Foreign exchange (losses) gains, net
(18,638
)
 
326

 
(20,108
)
 
(11,156
)
Other
22

 
83

 
10

 
223

Other (expense) income, net
$
(20,023
)
 
$
832

 
$
(21,886
)
 
$
(9,830
)
The following table summarizes the Company's prepaid expenses and other current assets as of September 30, 2014 and December 31, 2013 (in thousands):
 
September 30, 2014
 
December 31, 2013
Current portion of unamortized tax effects on intercompany transactions
$
23,377

 
$
28,502

Finished goods inventories
57,301

 
57,097

Prepaid expenses
42,603

 
29,404

Restricted cash
11,056

 
14,579

VAT and income taxes receivable
82,804

 
52,960

Prepaid marketing
9,832

 
17,301

Other
16,777

 
10,572

Total prepaid expenses and other current assets
$
243,750

 
$
210,415

    


17

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


The following table summarizes the Company's accrued merchant and supplier payables as of September 30, 2014 and December 31, 2013 (in thousands):
 
September 30, 2014
 
December 31, 2013
Accrued merchant payables
$
575,145

 
$
518,233

Accrued supplier payables (1)
179,483

 
234,710

Total accrued merchant and supplier payables
$
754,628

 
$
752,943

(1)
Amounts include payables to suppliers of inventories and providers of shipping and fulfillment services.
The following table summarizes the Company's accrued expenses as of September 30, 2014 and December 31, 2013 (in thousands):
 
September 30, 2014
 
December 31, 2013
Marketing
$
11,860

 
$
12,001

Refunds reserve
29,221

 
38,597

Payroll and benefits
64,751

 
64,966

Customer credits
46,297

 
44,728

Professional fees
16,902

 
18,906

Other
54,646

 
47,788

Total accrued expenses
$
223,677

 
$
226,986

The following table summarizes the Company's other current liabilities as of September 30, 2014 and December 31, 2013 (in thousands):
 
September 30, 2014
 
December 31, 2013
Income taxes payable
$
27,020

 
$
21,994

VAT payable
30,476

 
37,627

Sales taxes payable
6,229

 
10,412

Deferred revenue
50,677

 
47,259

Other
19,714

 
15,426

Total other current liabilities
$
134,116

 
$
132,718

The following table summarizes the Company's other non-current liabilities as of September 30, 2014 and December 31, 2013 (in thousands):
 
September 30, 2014
 
December 31, 2013
Long-term tax liabilities
$
108,233

 
$
109,286

Deferred rent
13,216

 
9,148

Other
30,037

 
13,263

Total other non-current liabilities
$
151,486

 
$
131,697

    


18

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 September 30, 2014 and December 31, 2013 (in thousands):
 
Foreign currency translation adjustments
 
Unrealized loss on available-for-sale securities, net of tax
 
Total
Balance as of December 31, 2013
$
24,952

 
$
(122
)
 
$
24,830

Other comprehensive income (loss) before reclassification adjustments
10,086

 
(799
)
 
9,287

Reclassification adjustment for impairment included in net loss

 
831

 
831

Other comprehensive income
10,086

 
32

 
10,118

Balance as of September 30, 2014
$
35,038

 
$
(90
)
 
$
34,948

The effects of amounts reclassified from accumulated other comprehensive income (loss) to net loss for the three and nine months ended September 30, 2014 and 2013 are presented within the following line items in the condensed consolidated statements of operations (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Condensed Consolidated Statements of Operations Line Item
 
2014
 
2013
 
2014
 
2013
 
Other-than-temporary impairment of available-for-sale security
$
1,340

 
$

 
$
1,340

 
$

 
Other (expense) income, net
Less: Tax effect
(509
)
 

 
(509
)
 

 
(Benefit) provision for income taxes
Reclassification adjustment
$
831

 
$

 
$
831

 
$

 
 
6. COMMITMENTS AND CONTINGENCIES
Except as it relates to commitments under operating leases that were assumed in connection with the Ticket Monster and Ideel acquisitions, as described in Note 2, " Business Combinations ," the Company's commitments as of September 30, 2014 did not materially change from the amounts set forth in its 2013 Annual Report on Form 10-K. As of September 30, 2014 , estimated future payments under operating leases assumed in connection with the Ticket Monster and Ideel acquisitions for each of the next five years and thereafter are as follows (in thousands):
 
 
Operating leases
2014
 
$
1,348

2015
 
5,148

2016
 
4,936

2017
 
4,342

2018
 
2,631

Thereafter
 
11,110

Total minimum lease payments
 
$
29,515

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 stockholders, former employees, merchants, 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. Additionally,


19

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


the Company is subject to general customer complaints seeking monetary damages, particularly in its Rest of World segment. The following is a brief description of significant legal proceedings.
On February 8, 2012, the Company issued a press release announcing its expected financial results for the fourth quarter of 2011.  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 earnings release dated February 8, 2012.  The 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 plaintiff filed an amended motion for class certification on December 4, 2013.  On March 18, 2014, the court entered a scheduling order setting deadlines for fact discovery by March 13, 2015, expert discovery by August 31, 2015, and dispositive motions by October 30, 2015. On May 2, 2014, defendants filed a motion requesting exclusion of the opinions of plaintiff’s proposed market efficiency expert in resolving the motion for class certification. The court held a hearing on the motion to exclude plaintiff’s expert on September 11, 2014 and ordered that the parties file post-hearing briefings. On September 23, 2014, before the parties had commenced the ordered post-hearing briefing, the court entered an order granting plaintiff's motion for class certification. On October 1, 2014, the Company filed a petition for leave to appeal that order in the United States Court of Appeals for the Seventh Circuit. The petition is currently pending.

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 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 June 20, 2012, the Company and the individual defendants filed a motion requesting that the court stay the consolidated federal derivative action pending resolution of the consolidated federal class actions.  On July 31, 2012, the court granted defendants' motion in part, and stayed the consolidated federal derivative action pending a separate resolution of upcoming motions to dismiss in the consolidated 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 consolidated federal class action.  On April 18, 2013, the state court appointed a lead plaintiff and approved its selection of lead counsel and local counsel for the purported class. Following entry of the court's order denying defendants' motions to dismiss in In re Groupon


20

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


Securities Litigation, the courts in both the state and federal derivative actions granted motions requesting that the respective courts extend the litigation stays currently in place pending further developments in In re Groupon, Inc. Securities Litigation.  
The Company intends to defend all of the securities and stockholder derivative lawsuits vigorously.
In 2010, 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 Southern 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 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 litigated 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. This accrual represents management's best estimate of probable loss and in such cases, there may be an exposure to loss in excess of the amounts accrued. For each matter described above, there is inherent and significant uncertainties based on, among other factors, the stage of the proceedings, developments in the applicable facts of law, or the lack of a specific damage claim. In addition, for some matters for which a loss is probable or reasonably possible, an estimate of the amount of loss or range of loss is not possible, and we may be unable to estimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies. Currently, the Company is unable to reasonably estimate the amount of reasonably possible losses in excess of the amounts accrued for the securities and stockholder derivative lawsuits. For the remaining matters described above, the Company believes that the amount of reasonably possible losses in excess of the amounts accrued would not have a material adverse effect on its business, consolidated financial position, results of operations or cash flows. The Company's accrued liabilities for loss contingencies related to legal and regulatory matters may change in the future as a result of new developments, including, but not limited to, the occurrence of new legal matters, changes in the law or regulatory environment, adverse of favorable rulings, newly discovered facts relevant to the matter, or changes in the strategy for the matter. 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.


21

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


Indemnifications
In the normal course of business to facilitate transactions related to its operations, the Company indemnifies certain parties, including employees, lessors, service providers 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, any payments that the Company has made under these agreements have not had a material impact on the operating results, financial position or cash flows of the Company.
7. REVOLVING CREDIT AGREEMENT
In August 2014, the Company entered into a three-year senior secured revolving credit agreement (the "Credit Agreement") that provides for aggregate principal borrowings of up to $250.0 million . Borrowings under the Credit Agreement bear interest, at the Company's option, at a rate per annum equal to the Alternate Base Rate or Adjusted LIBO Rate (each as defined in the Credit Agreement) plus an additional margin ranging between 0.25% and 2.00% . The Company is required to pay quarterly commitment fees ranging from 0.20% to 0.35% per annum of the average daily amount available under the Credit Agreement. The Credit Agreement also provides for the issuance of up to $45.0 million in letters of credit, provided that the sum of outstanding borrowings and letters of credit do not exceed the maximum funding commitment of $250.0 million .
The Credit Agreement is secured by substantially all of the Company's and its subsidiaries' tangible and intangible assets, including a pledge of 100% of the outstanding capital stock of substantially all of its direct and indirect domestic subsidiaries and 65% of the shares or equity interests of first-tier foreign subsidiaries and each U.S. entity whose assets substantially consist of capital stock and/or intercompany debt of one or more foreign subsidiaries, subject to certain exceptions. Certain of the Company's domestic subsidiaries are guarantors under the Credit Agreement.
The Credit Agreement contains various customary restrictive covenants that limit the Company's ability to, among other things: incur additional indebtedness; enter into sale or leaseback transactions; make investments, loans or advances; grant or incur liens on assets; sell assets; engage in mergers, consolidations, liquidations or dissolutions; engage in transactions with affiliates; and make dividend payments. The Credit Agreement requires the Company to maintain compliance with specified financial covenants, comprised of a minimum fixed charge coverage ratio, a maximum leverage ratio, and a minimum liquidity ratio, each as set forth in the Credit Agreement. The Company is also required to maintain, as of the last day of each fiscal quarter, unrestricted cash of at least $400.0 million , including $200.0 million in accounts held with lenders under the Credit Agreement or their affiliates. Non-compliance with these covenants may result in termination of the commitments under the Credit Agreement and any then outstanding borrowings may be declared due and payable immediately. The Company has the right to terminate the Credit Agreement or reduce the available commitments at any time.
As of September 30, 2014, the Company had no borrowings or letters of credit outstanding under the Credit Agreement and was in compliance with all covenants.
8. STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION
Common Stock
The Company's Certification of Incorporations authorizes 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 October 31, 2016, at which time all outstanding shares of Class A common stock and Class B common stock will automatically convert into shares of common


22

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


stock. In addition, the Company's Certification of Incorporation authorizes shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by the Board.
Share Repurchase Programs
The Board has authorized the Company to purchase up to $300.0 million of its outstanding Class A common stock through August 2015. The timing and amount of any share repurchases is determined based on market conditions, share price and other factors, and the program may be discontinued or suspended at any time. During the three and nine months ended September 30, 2014 , the Company purchased 1,349,712 shares and 21,654,204 shares, respectively, of Class A common stock for an aggregate purchase price of $8.3 million and $143.8 million (including fees and commissions), respectively, under the share repurchase program. As of September 30, 2014 , up to $109.6 million of Class A common stock remains available for repurchase under the share repurchase program.
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, 2014 , 45,500,684 shares were available for future issuance under the Plans.
The Company recognized stock-based compensation expense of $34.6 million and $26.9 million for the three months ended September 30, 2014 and 2013 , respectively, and $90.0 million and $89.2 million for the nine months ended September 30, 2014 and 2013 , respectively, related to stock awards issued under the Plans, acquisition-related awards and subsidiary awards. The Company also capitalized $2.8 million and $2.2 million of stock-based compensation for the three months ended September 30, 2014 and 2013 , respectively, and $7.9 million and $6.9 million of stock-based compensation for the nine months ended September 30, 2014 and 2013 , respectively, in connection with internally-developed software.
As of September 30, 2014 , a total of $230.1 million of unrecognized compensation costs related to unvested stock awards and unvested acquisition-related awards are expected to be recognized over a remaining weighted average period of 1.4 years.
Employee Stock Purchase Plan
The Company is authorized to grant up to 10,000,000 shares of common stock under its employee stock purchase plan ("ESPP"). For the nine months ended September 30, 2014 and 2013 , 857,171 and 774,288 shares of common stock were issued under the ESPP, respectively.
Stock Options
The table below summarizes the stock option activity for the nine months ended September 30, 2014 :
 
 
Options
 
Weighted- Average Exercise Price
 
Weighted- Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
(in thousands)
(1)
Outstanding at December 31, 2013
 
3,355,054

 
$
1.11

 
6.04
 
$
35,742

    Exercised
 
(805,225
)
 
$
1.00

 
 
 
 
    Forfeited
 
(59,489
)
 
$
2.41

 
 
 
 
Outstanding at September 30, 2014
 
2,490,340

 
$
1.14

 
5.30
 
$
13,796

 
 
 
 
 
 
 
 
 
Exercisable at September 30, 2014
 
2,484,486

 
$
1.13

 
5.30
 
$
13,789

(1)
The aggregate intrinsic value of options outstanding and exercisable represents the total pretax intrinsic value (the difference between the fair value of the Company's stock on the last day of each period and the exercise price, multiplied by the number of options where the fair value exceeds the exercise price) that would have been received by the option holders had all option holders exercised their options as of September 30, 2014 and December 31, 2013 , respectively.


23

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 for the nine months ended September 30, 2014 :
 
 
Restricted Stock Units
 
Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2013
 
41,648,055

 
$
8.06

    Granted
 
22,885,522

 
$
7.83

    Vested
 
(12,741,462
)
 
$
7.97

    Forfeited
 
(9,586,804
)
 
$
8.00

Unvested at September 30, 2014
 
42,205,311

 
$
8.03

Performance Share Units
The Company completed its acquisition of Ticket Monster on January 2, 2014, as described in Note 2 " Business Combinations ," and approximately 2,000,000 performance share units were granted to certain key employees of that subsidiary. The vesting of these awards into shares of the Company's Class A common stock is contingent upon the subsidiary's achievement of specified financial targets over three annual performance periods for the years ending December 31, 2014, 2015 and 2016 and is subject to continued employment at the end of each performance period. If the financial targets for a performance period are not achieved, no shares will be issued for that performance period. The grant date fair value of the performance share units was $8.07 per share.
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 periods.
The table below summarizes activity regarding unvested restricted stock for the nine months ended September 30, 2014 :
 
 
Restricted Stock
 
Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2013
 
97,677

 
$
14.00

    Vested
 
(48,890
)
 
$
14.45

    Forfeited
 
(13,129
)
 
$
17.07

Unvested at September 30, 2014
 
35,658

 
$
15.59

9. 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, 2014 , the Company recorded an income tax benefit of $6.4 million on pre-tax losses of $25.5 million , for an effective tax rate of 25.3% . For the three months ended September 30, 2013 , the Company recorded income tax expense of $15.9 million on pre-tax income of $14.6 million , for an effective tax rate of 108.8% .
For the nine months ended September 30, 2014 , the Company recorded income tax expense of $20.2 million on pre-tax losses of $55.1 million , for an effective tax rate of (36.6)% . For the nine months ended September 30, 2013 , the Company recorded income tax expense of $62.7 million on pre-tax income of $52.6 million , for an effective tax rate of 119.2% .


24

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


The Company's U.S. statutory rate is 35% . Significant factors impacting the effective tax rate for the three and nine months ended September 30, 2014 and 2013 included 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. Addi tionally, the effective tax rate for the three and nine months ended September 30, 2014 included a $7.7 million decrease to the Company's liabilities for uncertain tax positions, as discussed in the following paragraph.
The Company is currently undergoing income tax audits in multiple jurisdictions. There are many factors, including factors outside of the Company's control, which influence the progress and completion of these audits. For the three and nine months ended September 30, 2014, the Company decreased its liabilities for uncertain tax positions and income tax expense by $7.7 million as a result of new information that impacted its estimates of amounts that are more-likely-than not of being realized upon ultimate settlement. As of September 30, 2014 , the Company believes that it is reasonably possible that additional changes of up to $35.5 million in unrecognized tax benefits may occur within the next 12 months upon closing of income tax audits or the expiration of applicable statutes of limitations.
As of September 30, 2014 , unamortized tax effects of intercompany transactions of $23.4 million and $1.5 million are included within "Prepaid expenses and other current assets" and "Other non-current assets," respectively, on the condensed consolidated balance sheet. As of December 31, 2013, unamortized tax effects of intercompany transactions of $28.5 million and $20.4 million are included within "Prepaid expenses and other current assets" and "Other non-current assets," respectively, on the condensed consolidated balance sheet. As of September 30, 2014 , the estimated future amortization of the tax effects of intercompany transactions is $6.2 million for the remainder of 2014 and $18.7 million for 2015. These amounts exclude the benefits, if any, for tax deductions in other jurisdictions that the Company may be entitled to as a result of the related intercompany transactions.
10. 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 is determined based on assumptions that market participants would use in pricing an asset or a liability.
To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs in valuation methodologies used to measure fair value:
Level 1 - Measurements that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Measurements that include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. These fair value measurements require significant judgment.
In determining fair value, the Company uses various valuation approaches within the fair value measurement framework. The valuation methodologies used for the Company's assets and liabilities measured at fair value and their classification in the valuation hierarchy are summarized below:
Cash equivalents - Cash equivalents primarily consist of AAA-rated money market funds 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 securities - The Company has investments in redeemable preferred shares and convertible debt securities issued by nonpublic entities. The Company measures the fair value of available-for-sale securities using the discounted cash flow method, which is an income approach, and the probability-weighted expected return method, which is an income approach that incorporates probability-weighted outcomes.
The Company has classified its investments in available-for-sale securities as Level 3 due to the lack of observable market data over fair value inputs such as cash flow projections, discount rates and probability-weightings. Increases in projected


25

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


cash flows and decreases in discount rates contribute to increases in the estimated fair values of available-for-sale securities, whereas decreases in projected cash flows and increases in discount rates contribute to decreases in their fair values. Additionally, increases in the probabilities of favorable investment outcomes, such as a sale or initial public offering of the investee, and decreases in the probabilities of unfavorable outcomes, such as a default by the investee, contribute to increases in the estimated fair value of available-for-sale securities, whereas decreases in the probabilities of favorable investment outcomes and increases in the probabilities of unfavorable investment outcomes contribute to decreases in their fair values.
Contingent consideration - The Company has contingent obligations to transfer cash payments to the former owners in conjunction with certain acquisitions if specified 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 are recorded in earnings within "Acquisition-related (benefit) expense, net" on the condensed consolidated statements of operations.
The Company uses an income approach to value contingent consideration liabilities, which is determined based on the present value of probability-weighted future cash flows. 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 of 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 cash payout of $7.3 million as of September 30, 2014 .     
    

















26

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
September 30, 2014
 
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
440,578

 
$
440,578

 
$

 
$

Available-for-sale securities:
 
 
 
 
 
 
 
Convertible debt securities
2,030

 

 

 
2,030

Redeemable preferred shares
4,458

 

 

 
4,458

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 Contingent consideration
2,986

 

 

 
2,986

 
 
 
Fair Value Measurement at Reporting Date Using
Description
December 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
$
585,514

 
$
585,514

 
$

 
$

Available-for-sale securities:
 
 
 
 
 
 
 
Convertible debt securities
3,174

 

 

 
3,174

Redeemable preferred shares

 

 

 

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 Contingent consideration
606

 

 

 
606



27

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 and nine months ended September 30, 2014 and 2013 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Assets
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
Convertible debt securities:
 
 
 
 
 
 
 
Beginning Balance
$
2,630

 
$
3,233

 
$
3,174

 
$
3,087

Total gains (losses) included in other comprehensive income
740

 
(177
)
 
196

 
(31
)
Total (losses) gains included in other expense (income), net
(1,340
)
 

 
(1,340
)
 

Ending Balance
$
2,030

 
$
3,056

 
$
2,030

 
$
3,056

Unrealized (losses) gains still held (1)
$
(600
)
 
$
(177
)
 
$
(1,144
)
 
$
(31
)
Redeemable preferred shares: (2)
 
 
 
 
 
 
 
Beginning Balance
$
4,544

 
$
42,539

 
$

 
$
42,539

Purchase of redeemable preferred shares

 

 
4,599

 

Total (losses) gains included in other comprehensive income
(86
)
 

 
(141
)
 

Ending Balance
$
4,458

 
$
42,539

 
$
4,458

 
$
42,539

Unrealized (losses) gains still held (1)
$
(86
)
 
$

 
$
(141
)
 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Contingent Consideration:
 
 
 
 
 
 
 
Beginning Balance
$
4,006

 
$
6,854

 
$
606

 
$
7,601

Issuance of contingent consideration in connection with acquisitions

 
3,537

 
4,006

 
3,567

Settlements of contingent consideration liabilities

 
(750
)
 
(424
)
 
(780
)
Reclass to non-fair value liabilities when no longer contingent

 

 
(143
)
 

Total (gains) losses included in earnings (3)
(1,020
)
 
(1,529
)
 
(1,059
)
 
(2,276
)
Ending Balance
$
2,986

 
$
8,112

 
$
2,986

 
$
8,112

Unrealized (gains) losses still held (1)
$
(1,020
)
 
$
(1,408
)
 
$
(1,020
)
 
$
(2,155
)
(1)
Represents the unrealized losses or gains recorded in earnings and/or other comprehensive (loss) income during the period for assets and liabilities classified as Level 3 that are still held (or outstanding) at the end of the period.
(2)
For the three and nine months ended September 30, 2013 , the Company's investments in Life Media Limited (F-tuan) preferred shares were previously classified as cost method investments and have been reclassified to the available-for-sale category in this table. The balance as of September 30, 2013 represents the Company’s investments in F-tuan preferred shares, which were written down to zero through an other-than-temporary impairment charge as of December 31, 2013 and continue to have an estimated fair value of zero as of September 30, 2014 . The $4.5 million balance as of September 30, 2014 represents the Company's investment in the preferred shares of an online home services company during the three months ended March 31, 2014, as described in Note 4 " Investments ."
(3)
Changes in the fair value of contingent consideration liabilities are classified within "Acquisition-related (benefit) expense, net" on the condensed consolidated statements of operations.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets that are written down to fair value as a result of an impairment. The Company did not record any significant nonrecurring fair value measurements after initial recognition during the three and nine months ended September 30, 2014 and 2013 .


28

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


Estimated Fair Value of Financial Assets and Liabilities Not Measured at Fair Value
The following table presents the carrying amounts and fair values of financial instruments that are not carried at fair value in the condensed consolidated financial statements (in thousands):
 
 
September 30, 2014
 
December 31, 2013
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Cost method investments
 
$
15,920

 
$
16,037