Groupon, Inc.
Groupon, Inc. (Form: 10-Q, Received: 05/06/2015 06:12:52)

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, 2015
 
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)

Securities registered pursuant to Section 12(b) of the Act:
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 1, 2015, there were 674,283,590 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 and Supplementary Data
Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014
Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (unaudited)
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2015 and 2014 (unaudited)
Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2015 (unaudited)
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (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 Disclosure about Market Risk
Item 4. Controls and Procedures
PART II. Other Information
 
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered sales of equity securities and use of proceeds
Item 5. Other Information
Item 6. Exhibits
Signatures
Exhibits

______________________________________________________




2


PART I
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, as amended, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations. The words "may," "will," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "continue" and other similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, but are not limited to, volatility in our revenue and operating results; risks related to our business strategy including our marketing strategy and spend; effectively dealing with challenges arising from our international operations, including fluctuations in currency exchange rates; retaining existing customers and adding new customers; retaining and adding new and high quality merchants; cyber security breaches; incurring expenses as we expand our business; competing successfully in our industry; maintaining favorable payment terms with our business partners; providing a strong mobile experience for our customers; delivery and routing of our emails; maintaining a strong brand; managing inventory and order fulfillment risks; integrating our technology platforms; managing refund risks; retaining our executive team; litigation; compliance with domestic and foreign laws and regulations, including the CARD Act and regulation of the Internet and e-commerce; tax liabilities; tax legislation; maintaining our information technology infrastructure; protecting our intellectual property; completing and realizing the anticipated benefits from acquisitions, dispositions, joint ventures and strategic investments, including our proposed Ticket Monster transaction; seasonality; payment-related risks; customer and merchant fraud; global economic uncertainty; our ability to raise capital if necessary; and those risks and other factors discussed in Part I, "Item 1A: Risk Factors" of our 2014 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, 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, 2015
 
December 31, 2014
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
975,504

 
$
1,016,634

Accounts receivable, net
92,140

 
90,597

Deferred income taxes
44,379

 
16,271

Prepaid expenses and other current assets
184,092

 
192,382

Current assets held for sale
362,731

 
85,445

Total current assets
1,658,846

 
1,401,329

Property, equipment and software, net
169,966

 
176,004

Goodwill
224,685

 
236,756

Intangible assets, net
24,854

 
30,609

Investments
22,970

 
24,298

Deferred income taxes, non-current
39,453

 
41,323

Other non-current assets
13,877

 
16,173

Non-current assets held for sale

 
301,105

Total Assets
$
2,154,651

 
$
2,227,597

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
17,539

 
$
13,822

Accrued merchant and supplier payables
723,593

 
772,156

Accrued expenses
194,311

 
214,260

Deferred income taxes
29,077

 
31,998

Other current liabilities
125,243

 
127,121

Current liabilities held for sale
172,375

 
166,239

Total current liabilities
1,262,138

 
1,325,596

Deferred income taxes, non-current
719

 
773

Other non-current liabilities
122,781

 
129,531

Non-current liabilities held for sale

 
6,753

Total Liabilities
1,385,638

 
1,462,653

Commitments and contingencies (see Note 6)

 

Stockholders' Equity
 
 
 
Class A common stock, par value $0.0001 per share, 2,000,000,000 shares authorized, 704,655,248 shares issued and 674,998,444 shares outstanding at March 31, 2015 and 699,008,084 shares issued and 671,768,980 shares outstanding at December 31, 2014
70

 
70

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, 2015 and December 31, 2014

 

Common stock, par value $0.0001 per share, 2,010,000,000 shares authorized, no shares issued and outstanding at March 31, 2015 and December 31, 2014

 

Additional paid-in capital
1,873,582

 
1,847,420

Treasury stock, at cost, 29,656,804 shares at March 31, 2015 and 27,239,104 shares at December 31, 2014
(217,000
)
 
(198,467
)
Accumulated deficit
(936,233
)
 
(921,960
)
Accumulated other comprehensive income
44,216

 
35,763

Total Groupon, Inc. Stockholders' Equity
764,635

 
762,826

Noncontrolling interests
4,378

 
2,118

Total Equity
769,013

 
764,944

Total Liabilities and Equity
$
2,154,651

 
$
2,227,597


See Notes to Condensed Consolidated Financial Statements.


4


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Revenue:
 
 
 
 
Third party and other
 
$
360,121

 
$
397,702

Direct
 
390,235

 
330,713

Total revenue
 
750,356

 
728,415

Cost of revenue:
 
 
 
 
Third party and other
 
51,697

 
53,802

Direct
 
351,253

 
309,101

Total cost of revenue
 
402,950

 
362,903

Gross profit
 
347,406

 
365,512

Operating expenses:
 
 
 
 
Marketing
 
52,533

 
69,185

Selling, general and administrative
 
289,847

 
300,906

Acquisition-related (benefit) expense, net
 
(269
)
 
1,785

  Total operating expenses
 
342,111

 
371,876

Income (loss) from operations
 
5,295

 
(6,364
)
Other expense, net
 
(19,927
)
 
(840
)
Loss from continuing operations before provision for income taxes
 
(14,632
)
 
(7,204
)
Provision for income taxes
 
2,107

 
14,570

Loss from continuing operations
 
(16,739
)
 
(21,774
)
Income (loss) from discontinued operations, net of tax
 
6,284

 
(13,589
)
Net loss
 
(10,455
)
 
(35,363
)
Net income attributable to noncontrolling interests
 
(3,818
)
 
(2,432
)
Net loss attributable to Groupon, Inc.
 
$
(14,273
)
 
$
(37,795
)
 
 
 
 
 
Basic net income (loss) per share:
 
 
 
 
Continuing operations
 
$(0.03)
 
$(0.04)
Discontinued operations
 
0.01
 
(0.02)
Basic net loss per share
 
$(0.02)
 
$(0.06)
 
 
 
 
 
Diluted net income (loss) per share:
 
 
 
 
Continuing operations
 
$(0.03)
 
$(0.04)
Discontinued operations
 
0.01
 
(0.02)
Diluted net loss per share
 
$(0.02)
 
$(0.06)
 
 
 
 
 
Weighted average number of shares outstanding
 
 
 
 
Basic
 
676,382,937

 
682,378,690

Diluted
 
676,382,937

 
682,378,690


See Notes to Condensed Consolidated Financial Statements.


5


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net loss from continuing operations
 
$
(16,739
)
 
$
(21,774
)
Other comprehensive income (loss) from continuing operations:
 
 
 
 
   Foreign currency translation adjustments
 
$
10,707

 
$
(1,224
)
Amortization of pension net actuarial loss to earnings (net of tax effect of $5 for the three months ended March 31, 2015)
 
26

 

Unrealized gain (loss) on available-for-sale securities (net of tax effect of $83 and $(180) for the three months ended March 31, 2015 and 2014, respectively)
 
137

 
(301
)
Other comprehensive income (loss) from continuing operations
 
10,870

 
(1,525
)
Comprehensive loss from continuing operations
 
(5,869
)
 
(23,299
)
 
 
 
 
 
Net income (loss) from discontinued operations
 
6,284

 
(13,589
)
Other comprehensive loss from discontinued operations - Foreign currency translation adjustments (net of tax effect of $1,428 for the three months ended March 31, 2015)
 
(2,417
)
 
(3,388
)
Comprehensive income (loss) from discontinued operations
 
3,867

 
(16,977
)
 
 
 
 
 
Comprehensive loss
 
(2,002
)
 
(40,276
)
Comprehensive income attributable to noncontrolling interests
 
(3,818
)
 
(2,329
)
Comprehensive loss attributable to Groupon, Inc.
 
$
(5,820
)
 
$
(42,605
)

See Notes to Condensed Consolidated Financial Statements.


6


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
 
Groupon, Inc. Stockholders' Equity
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Total Groupon Inc. Stockholders' Equity
 
Non-controlling Interests
 
Total Equity
 
Shares
 
Amount
Shares
 
Amount
 
Balance at December 31, 2014
701,408,060

 
$
70

 
$
1,847,420

 
(27,239,104
)
 
$
(198,467
)
 
$
(921,960
)
 
$
35,763

 
$
762,826

 
$
2,118

 
$
764,944

Net loss

 

 

 

 

 
(14,273
)
 

 
(14,273
)
 
3,818

 
(10,455
)
Foreign currency translation, net of tax

 

 

 

 

 

 
8,290

 
8,290

 

 
8,290

Amortization of pension net actuarial loss to earnings, net of tax

 

 

 

 

 

 
26

 
26

 

 
26

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

 

 

 

 

 

 
137

 
137

 

 
137

Issuance of unvested restricted stock
984,843

 

 

 

 

 

 

 

 

 

Exercise of stock options
184,626

 

 
122

 

 

 

 

 
122

 

 
122

Vesting of restricted stock units
6,101,202

 

 

 

 

 

 

 

 

 

Shares issued under employee stock purchase plan
328,644

 

 
1,824

 

 

 

 

 
1,824

 

 
1,824

Tax withholdings related to net share settlements of stock-based compensation awards
(1,952,151
)
 

 
(15,390
)
 

 

 

 

 
(15,390
)
 

 
(15,390
)
Stock-based compensation on equity-classified awards

 

 
39,079

 

 

 

 

 
39,079

 

 
39,079

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

 

 
527

 

 

 

 

 
527

 

 
527

Purchases of treasury stock

 

 

 
(2,417,700
)
 
(18,533
)
 

 

 
(18,533
)
 

 
(18,533
)
Partnership distributions to noncontrolling interest holders

 

 

 

 

 

 

 

 
(1,558
)
 
(1,558
)
Balance at March 31, 2015
707,055,224

 
$
70

 
$
1,873,582

 
(29,656,804
)
 
$
(217,000
)
 
$
(936,233
)
 
$
44,216

 
$
764,635

 
$
4,378

 
$
769,013




See Notes to Condensed Consolidated Financial Statements.


7


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
Operating activities
 
 
 
Net loss
$
(10,455
)
 
$
(35,363
)
Less: Income (loss) from discontinued operations, net of tax
6,284

 
(13,589
)
Loss from continuing operations
(16,739
)
 
(21,774
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property, equipment and software
26,266

 
21,448

Amortization of acquired intangible assets
5,934

 
5,985

Stock-based compensation
35,144

 
22,911

Deferred income taxes
22

 
573

Excess tax benefits on stock-based compensation
(2,896
)
 
(5,855
)
Gain on equity method investments

 
(52
)
Gain from changes in fair value of contingent consideration
(279
)
 
(39
)
Impairments of investments

 
397

Change in assets and liabilities, net of acquisitions:
 
 
 
Restricted cash
3,245

 
3,536

Accounts receivable
(8,901
)
 
(20,835
)
Prepaid expenses and other current assets
(2,513
)
 
3,013

Accounts payable
2,244

 
2,313

Accrued merchant and supplier payables
(17,034
)
 
(33,523
)
Accrued expenses and other current liabilities
(2,470
)
 
(2,202
)
Other, net
18,688

 
9,530

Net cash provided by (used in) operating activities from continuing operations
40,711

 
(14,574
)
Net cash used in operating activities from discontinued operations
(24,355
)
 
(6,143
)
Net cash provided by (used in) operating activities
16,356

 
(20,717
)
Investing activities
 
 
 
Purchases of property and equipment and capitalized software
(18,294
)
 
(16,093
)
Acquisitions of businesses, net of acquired cash
(800
)
 
(42,302
)
Purchases of investments

 
(4,599
)
Settlement of liability related to purchase of additional interest in consolidated subsidiary
(349
)
 

Net cash used in investing activities from continuing operations
(19,443
)
 
(62,994
)
Net cash used in investing activities from discontinued operations
(624
)
 
(75,614
)
Net cash used in investing activities
(20,067
)
 
(138,608
)
Financing activities
 
 
 
Payments for purchases of treasury stock
(18,006
)
 
(29,840
)
Excess tax benefits on stock-based compensation
2,896

 
5,855

Taxes paid related to net share settlements of stock-based compensation awards
(14,584
)
 
(14,083
)
Common stock issuance costs in connection with acquisition of business

 
(158
)
Settlements of purchase price obligations related to acquisitions

 
(3,136
)
Proceeds from stock option exercises and employee stock purchase plan
1,946

 
2,812

Partnership distribution payments to noncontrolling interest holders
(1,558
)
 
(2,053
)
Payments of capital lease obligations
(3,636
)
 
(889
)
Net cash used in financing activities
(32,942
)
 
(41,492
)
Effect of exchange rate changes on cash and cash equivalents, including cash classified within current assets held for sale
(30,199
)
 
(831
)
Net decrease in cash and cash equivalents, including cash classified within current assets held for sale
(66,852
)
 
(201,648
)
Less: Net (decrease) increase in cash classified within current assets held for sale
(25,722
)
 
18,006

Net decrease in cash and cash equivalents
(41,130
)
 
(219,654
)
Cash and cash equivalents, beginning of period
1,016,634

 
1,240,472

Cash and cash equivalents, end of period
$
975,504

 
$
1,020,818

 
 
 
 
 
 
 
 


8


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

 
$
4,031

Shares issued to settle liability-classified awards and contingent consideration

 
1,041

Liability for purchases of treasury stock
901

 
1,368

Liability for purchase of additional interest in consolidated subsidiary
1,249

 

Liability for purchase consideration

 
359

Accounts payable and accrued expenses related to purchases of property and equipment and capitalized software
3,440

 
11,847

Discontinued operations:
 
 
 
Issuance of common stock in connection with acquisition of Ticket Monster
$

 
$
162,862

Accounts payable and accrued expenses related to purchases of property and equipment and capitalized software
415

 
576

See Notes to Condensed Consolidated Financial Statements.



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 and indirectly using search engines. 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 11 "Segment Information."     
In January 2014, the Company acquired all of the outstanding equity interests of LivingSocial Korea, Inc., including its subsidiary Ticket Monster, Inc. ("Ticket Monster"), for total consideration of $259.4 million , consisting of $96.5 million in cash and $162.9 million of Class A common stock. 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 operations of Ticket Monster were previously reported in the Company's Rest of World segment. On March 30, 2015, the Company's Board of Directors approved a transaction that would result in the deconsolidation of Ticket Monster. The Company entered into a definitive agreement with an investor group on April 19, 2015 to sell a controlling stake in that business and the proposed transaction is expected to close during the three months ending June 30, 2015. The financial results of Ticket Monster are presented as discontinued operations and its assets and liabilities are presented as held for sale in the accompanying condensed consolidated financial statements. The prior period condensed consolidated financial statements as of December 31, 2014 and for the three months ended March 31, 2014 have been retrospectively adjusted to reflect this presentation. See Note 2, "Discontinued Operations," and Note 12, "Subsequent Event," for additional 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, 2015. 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, 2014, as filed with the SEC on February 13, 2015.
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.


10

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

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. Actual results could differ materially from those estimates.
2. DISCONTINUED OPERATIONS     
On March 30, 2015, the Company's Board of Directors approved a transaction that will result in the deconsolidation of Ticket Monster and, accordingly, its assets and liabilities are classified as held for sale in the accompanying condensed consolidated balance sheets. The Company entered into a definitive agreement with an investor group in connection with this proposed transaction on April 19, 2015. See Note 12, "Subsequent Event," for additional information. In the proposed transaction, the Company will sell the holding company that owns all of the outstanding shares of Ticket Monster to a newly formed limited partnership ("Newco") in exchange for $285.0 million in cash consideration and a minority limited partner interest in Newco.
The Company adopted the guidance in Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity , on January 1, 2015 for disposal transactions that occur on or after that date. Under that guidance, a component of an entity is reported in discontinued operations after meeting the criteria for held-for-sale classification if the disposition represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results. The Company analyzed the quantitative and qualitative factors relevant to Ticket Monster and the proposed disposition transaction and determined that those conditions for discontinued operations presentation have been met. As such, the financial results of Ticket Monster are reported within discontinued operations in the accompanying condensed consolidated financial statements.

The gain on disposition and related tax effects that would be recognized upon closing of the proposed transaction, which is expected to occur during the three months ending June 30, 2015, would be reported within discontinued operations. After closing, the Company would account for its minority limited partner interest in Newco under the equity method, unless an irrevocable election is made by the Company at closing to account for that investment at fair value with changes in fair value reported in earnings. Income or losses related to the Company's investment in Newco after closing are expected to be reported as non-operating items within continuing operations.

The following table summarizes the major classes of line items included in income (loss) from discontinued operations, net of tax, for the three months ended March 31, 2015 and 2014 (in thousands):



11

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

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Third party and other revenue
 
$
17,883

 
$
28,727

Direct revenue
 
24,823

 
495

Third party and other cost of revenue
 
(9,524
)
 
(8,549
)
Direct cost of revenue
 
(25,949
)
 
(464
)
Marketing expense
 
(5,023
)
 
(9,739
)
Selling, general and administrative expense
 
(22,763
)
 
(24,059
)
Other income, net
 
61

 

Loss from discontinued operations before benefit from income taxes
 
(20,492
)
 
(13,589
)
Benefit from income taxes
 
26,776

 

Income (loss) from discontinued operations, net of tax
 
$
6,284

 
$
(13,589
)
    
The Company recognized an income tax benefit from discontinued operations of $26.8 million for the three months ended March 31, 2015. That tax benefit resulted from the recognition of a deferred tax asset related to the excess of the tax basis over the financial reporting basis of the Company's investment in Ticket Monster upon meeting the criteria for held-for-sale classification. No tax benefits were recognized in relation to Ticket Monster's pre-tax losses for the three months ended March 31, 2015 and 2014 because valuation allowances have been provided against the related net deferred tax assets.

The following table summarizes the carrying amounts of the major classes of assets and liabilities held for sale in the condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014 (in thousands):

 
 
March 31, 2015
 
December 31, 2014
Cash
 
$
29,557

 
$
55,279

Accounts receivable, net
 
25,703

 
14,557

Deferred income taxes
 
502

 
512

Property, equipment and software, net
 
6,313

 
6,471

Goodwill
 
206,980

 
211,054

Intangible assets, net
 
72,185

 
79,948

Other assets
 
21,491

 
18,729

Assets classified as held for sale
 
$
362,731

 
$
386,550

 
 
 
 
 
Accounts payable
 
$
6,930

 
$
8,033

Accrued merchant and supplier payables
 
140,142

 
138,411

Accrued expenses
 
14,490

 
16,092

Deferred income taxes
 
502

 
512

Other liabilities
 
10,311

 
9,944

Liabilities classified as held for sale
 
$
172,375

 
$
172,992


3. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the Company's goodwill activity by segment for three months ended March 31, 2015 (in thousands):


12

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

 
 
North America
 
EMEA
 
Rest of World
 
Consolidated
Balance as of December 31, 2014
 
$
116,718

 
$
102,179

 
$
17,859

 
$
236,756

Goodwill related to acquisition
 
152

 

 

 
152

Foreign currency translation
 
(1
)
 
(10,882
)
 
(1,340
)
 
(12,223
)
Balance as of March 31, 2015
 
$
116,869

 
$
91,297

 
$
16,519

 
$
224,685

The following tables summarize the Company's intangible assets (in thousands):
 
 
March 31, 2015
Asset Category
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Subscriber relationships
 
$
45,285

 
$
38,180

 
$
7,105

Merchant relationships
 
7,695

 
7,639

 
56

Trade names
 
10,043

 
6,568

 
3,475

Developed technology
 
24,659

 
21,541

 
3,118

Brand relationships
 
7,960

 
1,879

 
6,081

Other intangible assets
 
16,712

 
11,693

 
5,019

Total
 
$
112,354

 
$
87,500

 
$
24,854

 
 
December 31, 2014
Asset Category
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Subscriber relationships
 
$
48,810

 
$
37,744

 
$
11,066

Merchant relationships
 
8,386

 
8,323

 
63

Trade names
 
10,532

 
6,935

 
3,597

Developed technology
 
25,352

 
21,713

 
3,639

Brand relationships
 
7,664

 
1,486

 
6,178

Other intangible assets
 
17,045

 
10,979

 
6,066

Total
 
$
117,789

 
$
87,180

 
$
30,609

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 $5.9 million and $6.0 million for the three months ended March 31, 2015 and 2014 , respectively. As of March 31, 2015 , the Company's estimated future amortization expense related to intangible assets is as follows (in thousands):
Remaining amounts in 2015
 
$
10,010

2016
 
8,204

2017
 
3,584

2018
 
2,912

2019
 
144

Thereafter
 

Total
 
$
24,854



13

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, 2015
 
Percent Ownership of Voting Stock
 
December 31, 2014
 
Percent Ownership of Voting Stock
Cost and equity method investments:
 
 
 
 
 
 
 
 
 
 
 
Cost method investments
$
14,082

 
6%
to
19%
 
$
15,630

 
6%
to
19%
Equity method investments
1,231

 
21%
to
50%
 
1,231

 
21%
to
50%
Total cost and equity method investments
15,313

 
 
 
16,861

 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Convertible debt securities
2,757

 
 
 
2,527

 
 
Redeemable preferred shares
4,900

 
17%
to
19%
 
4,910

 
17%
to
19%
Total available-for-sale securities
7,657

 
 
 
7,437

 
 
Total investments
$
22,970

 
 
 
$
24,298

 
 
The following table summarizes the amortized cost, gross unrealized gain, gross unrealized loss and fair value of the Company's available-for-sale securities as of March 31, 2015 and December 31, 2014 , respectively (in thousands):
 
March 31, 2015
 
December 31, 2014
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible debt securities
$
2,030

 
$
727

 
$

 
$
2,757

 
$
2,030

 
$
497

 
$

 
$
2,527

Redeemable preferred shares
4,599

 
301

 

 
4,900

 
4,599

 
311

 

 
4,910

Total available-for-sale securities
$
6,629

 
$
1,028

 
$

 
$
7,657

 
$
6,629

 
$
808

 
$

 
$
7,437



14

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

5. SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS INFORMATION
The following table summarizes the Company's other expense, net for the three months ended March 31, 2015 and 2014 (in thousands):
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Interest income
 
$
227

 
$
376

Interest expense
 
(670
)
 
(88
)
Impairments of investments
 

 
(397
)
Gain on equity method investments
 

 
52

Foreign exchange losses, net
 
(19,497
)
 
(747
)
Other
 
13

 
(36
)
Other expense, net
 
$
(19,927
)
 
$
(840
)
The following table summarizes the Company's prepaid expenses and other current assets as of March 31, 2015 and December 31, 2014 (in thousands):
 
March 31, 2015
 
December 31, 2014
Unamortized tax effects on intercompany transactions
$
8,168

 
$
14,170

Finished goods inventories
45,669

 
52,237

Prepaid expenses
31,739

 
32,758

Restricted cash
8,082

 
10,852

Income taxes receivable
55,646

 
41,769

VAT receivable
15,068

 
17,746

Prepaid marketing
6,022

 
7,413

Other
13,698

 
15,437

Total prepaid expenses and other current assets
$
184,092

 
$
192,382

    


15

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

The following table summarizes the Company's accrued merchant and supplier payables as of March 31, 2015 and December 31, 2014 (in thousands):
 
March 31, 2015
 
December 31, 2014
Accrued merchant payables
$
501,126

 
$
499,317

Accrued supplier payables (1)
222,467

 
272,839

Total accrued merchant and supplier payables
$
723,593

 
$
772,156

(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 March 31, 2015 and December 31, 2014 (in thousands):
 
March 31, 2015
 
December 31, 2014
Marketing
$
19,992

 
$
15,962

Refunds reserve
30,498

 
32,535

Payroll and benefits
50,010

 
59,802

Customer credits
32,794

 
42,729

Professional fees
13,814

 
14,254

Other
47,203

 
48,978

Total accrued expenses
$
194,311

 
$
214,260

The following table summarizes the Company's other current liabilities as of March 31, 2015 and December 31, 2014 (in thousands):
 
March 31, 2015
 
December 31, 2014
Income taxes payable
$
18,173

 
$
14,461

VAT payable
21,548

 
30,778

Sales taxes payable
5,456

 
9,042

Deferred revenue
52,900

 
46,344

Capital lease obligations
14,499

 
14,872

Other
12,667

 
11,624

Total other current liabilities
$
125,243

 
$
127,121

The following table summarizes the Company's other non-current liabilities as of March 31, 2015 and December 31, 2014 (in thousands):
 
March 31, 2015
 
December 31, 2014
Long-term tax liabilities
$
80,255

 
$
82,138

Deferred rent
12,903

 
13,200

Capital lease obligations
19,063

 
23,387

Other
10,560

 
10,806

Total other non-current liabilities
$
122,781

 
$
129,531



16

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, 2015 and December 31, 2014 (in thousands):
 
Foreign currency translation adjustments
 
Unrealized gain (loss) on available-for-sale securities
 
Pension adjustments
 
Total
Balance as of December 31, 2014
$
36,764

 
$
499

 
$
(1,500
)
 
$
35,763

Other comprehensive income
8,290

 
137

 
26

 
8,453

Balance as of March 31, 2015
$
45,054

 
$
636

 
$
(1,474
)
 
$
44,216



17

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

6. COMMITMENTS AND CONTINGENCIES
The Company's commitments as of March 31, 2015 did not materially change from the amounts set forth in the Company's 2014 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 brought by stockholders, former employees and merchants, intellectual property infringement suits and suits by customers (individually or as class actions) alleging, among other things, violations of the federal securities laws, the Credit Card Accountability, Responsibility and Disclosure Act and state laws governing gift cards, stored value cards and coupons. Additionally, 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 putative securities class action and purported 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 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.  On September 25, 2014, the district court entered an order granting plaintiff's motion for class certification. The Company has filed a petition for leave to appeal that order in the United States Court of Appeals for the Seventh Circuit. On March 6, 2015, the magistrate judge entered an order denying defendants' motion to exclude the opinions and testimony of the plaintiff's proposed market efficiency expert. On March 20, 2015, defendants filed objections to the magistrate judge's order with the district court, which are currently pending. Those objections have now been fully briefed by the parties and are currently pending. The Seventh Circuit is holding the petition for leave to appeal. Meanwhile, the parties continue to be engaged in discovery, including depositions.
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 action.  On July


18

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

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 action.  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 derivative action. Following entry of the federal court's order denying defendants' motions to dismiss in In re Groupon 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 in the U.S. District Court for the Southern District of California.  The consolidated actions are 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 to the settlement class 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 United States Court of Appeals for the Ninth Circuit. The Company and the Plaintiffs opposed the appeal and sought confirmation of the settlement approved by the District Court. On February 19, 2015, the Court of Appeals vacated the settlement and remanded the case for further proceedings concerning the proposed settlement consistent with the Court of Appeals' opinion. The litigation is now pending in the District Court.
The parties have the right to terminate the settlement. Pursuant to an agreement of the parties and an order of the court, the parties have until June 22, 2015 to make this election or supplement the record consistent with the opinion from the Court of Appeals in an effort to seek re-approval of the settlement. The Company is presently analyzing its options with respect to this matter.
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, including patent infringement claims, and expects that it will increasingly be subject to intellectual property infringement claims as its services expand in scope and complexity. The Company has in the past litigated such claims, and the Company is presently involved in several patent infringement and other intellectual property-related claims, including pending litigation, some of which could involve potentially substantial claims for damages. 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.
Certain foreign tax authorities have issued assessments totaling $41.7 million to subsidiaries of the Company for additional value-added taxes (VAT) covering periods ranging from January 2011 to May 2014, including interest and penalties through the


19

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

date of the assessments. Those tax authorities are alleging that, for VAT purposes, the Company's revenues from voucher sales should reflect the total amounts collected from purchasers of those vouchers, rather than the amounts that the Company retains after deducting the portion that is payable to the featured merchants. The Company believes that the assessments are without merit and intends to vigorously defend itself in these matters.

The Company establishes an accrued liability for loss contingencies related to legal and regulatory matters when the loss is both probable and estimable. These accruals represent management's best estimate of probable losses and in such cases, there may be an exposure to loss in excess of the amounts accrued. For each matter described above, there are inherent and significant uncertainties based on, among other factors, the stage of the proceedings, developments in the applicable facts of law, or the lack of a specific damage claim. 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 or 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.
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, directors and underwriters, 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. STOCKHOLDERS' EQUITY AND COMPENSATION ARRANGEMENTS
Common Stock
The Company's certificate of incorporation, as amended and restated, 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 stock. In addition, the Company's certificate 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 previously authorized the Company to purchase up to $300.0 million of its outstanding Class A common stock through August 2015. During the three months ended March 31, 2015 and 2014 , the Company purchased 2,417,700 and 3,075,700 shares of Class A common stock, respectively, for an aggregate purchase price of $18.5 million and $29.5 million (including fees


20

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

and commissions), respectively, under this share repurchase program. As of March 31, 2015 , up to $83.0 million of Class A common stock remains available for repurchase under this share repurchase program. In April 2015, the Company announced that its Board approved a new share repurchase program, under which the Company is authorized to repurchase up to an additional $300.0 million of its Class A common stock through August 2017. The new share repurchase program is subject to, and will be effective upon, the closing of the proposed Ticket Monster transaction, as discussed in Note 2, "Discontinued Operations," and Note 12, "Subsequent Event." The timing and amount of any share repurchases are determined based on market conditions, share price and other factors, and the programs may be discontinued or suspended at any time.
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, 2015 , 44,799,386 shares were available for future issuance under the Plans.
The Company recognized stock-based compensation expense from continuing operations of $35.1 million and $22.9 million for the three months ended March 31, 2015 and 2014 , respectively, related to stock awards issued under the Plans and acquisition-related awards. The Company recognized stock-based compensation expense from discontinued operations of $1.1 million and $0.8 million for the three months ended March 31, 2015 and 2014 , respectively. The Company also capitalized $3.1 million and $2.3 million of stock-based compensation for the three months ended March 31, 2015 and 2014 , respectively, in connection with internally-developed software.
As of March 31, 2015 , a total of $220.8 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 1.26 years.
Employee Stock Purchase Plan
The Company is authorized to grant up to 10,000,000 shares of common stock under its employee stock purchase plan ("ESPP"). For the three months ended March 31, 2015 and 2014 , 328,644 and 333,824 shares of common stock were issued under the ESPP, respectively.
Stock Options
The table below summarizes the stock option activity for the three months ended March 31, 2015 :
 
 
Options
 
Weighted- Average Exercise Price
 
Weighted- Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
(in thousands)
(1)
Outstanding at December 31, 2014
 
2,262,994

 
$
1.09

 
5.03
 
$
16,226

    Exercised
 
(184,626
)
 
$
0.66

 
 
 
 
    Forfeited
 
(876
)
 
$
2.48

 
 
 
 
Outstanding at March 31, 2015
 
2,077,492

 
$
1.13

 
4.80
 
$
12,631

 
 
 
 
 
 
 
 
 
Exercisable at March 31, 2015
 
2,077,492

 
$
1.13

 
4.80
 
$
12,631

(1)
The aggregate intrinsic value of options outstanding and exercisable represents the total pretax intrinsic value (the difference between the fair value of the Company's stock on the last day of each period and the exercise price, multiplied by the number of options where the fair value exceeds the exercise price) that would have been received by the option holders had all option holders exercised their options as of March 31, 2015 and December 31, 2014 , respectively.
Restricted Stock Units
The restricted stock units granted under the Plans generally vest over a four-year period, with 25% of the awards vesting after one year and the remaining awards vesting on a monthly or quarterly basis thereafter. Restricted stock units are generally amortized on a straight-line basis over the requisite service period, except for restricted stock units with performance conditions, which are amortized using the accelerated method.


21

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

The table below summarizes activity regarding unvested restricted stock units under the Plans for the three months ended March 31, 2015 :
 
 
Restricted Stock Units
 
Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2014
 
41,337,927

 
$
7.78

    Granted
 
2,235,833

 
$
7.48

    Vested
 
(6,101,202
)
 
$
8.02

    Forfeited
 
(1,983,289
)
 
$
8.11

Unvested at March 31, 2015
 
35,489,269

 
$
7.70

Performance Share Units
The Company completed its acquisition of Ticket Monster in January 2014 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. No shares were issued for the 2014 annual performance period because the financial targets were not met. Stock-based compensation expense has not been recognized for the performance share units for the three months ended March 31, 2015 because it is not probable that the financial targets for the remaining annual performance periods will be achieved.
The table below summarizes activity regarding unvested performance share units for the three months ended March 31, 2015:    
 
 
Performance Share Units
 
Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2014
 
1,015,844

 
$
8.07

    Granted
 

 
$

    Vested
 

 
$

    Forfeited
 
(111,287
)
 
$
8.07

Unvested at March 31, 2015
 
904,557

 
$
8.07

Restricted Stock Awards
The Company has granted restricted stock awards in connection with 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 three months ended March 31, 2015 :
 
 
Restricted Stock Awards
 
Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2014
 
34,067

 
$
15.53

    Granted
 
984,843

 
$
7.42

    Vested
 
(1,591
)
 
$
17.07

    Forfeited
 

 
$

Unvested at March 31, 2015
 
1,017,319

 
$
7.56



22

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

8. 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, 2015 , the Company recorded income tax expense from continuing operations of $2.1 million on pre-tax losses from continuing operations of $14.6 million , for an effective tax rate of (14.4)% . For the three months ended March 31, 2014 , the Company recorded income tax expense from continuing operations of $14.6 million on pre-tax losses from continuing operations of $7.2 million , for an effective tax rate of (202.2)% .
The Company's U.S. statutory rate is 35% . Significant factors impacting the effective tax rate for the three months ended March 31, 2015 and 2014 included losses from continuing operations 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.
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. As of March 31, 2015 , the Company believes that it is reasonably possible that changes of up to $19.0 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 March 31, 2015 and December 31, 2014 , unamortized tax effects of intercompany transactions of $8.2 million and $14.2 million , respectively, are included within "Prepaid expenses and other current assets" on the condensed consolidated balance sheets. As of March 31, 2015 , the estimated future amortization of the tax effects of intercompany transactions is $8.2 million for the remainder of 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.     
See Note 2, "Discontinued Operations," for discussion of the income tax provision (benefit) from discontinued operations for the three months ended March 31, 2015 and 2014.
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 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


23

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

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 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 or shares to the former owners of acquired businesses if specified financial results are met over future reporting periods (i.e. earn-outs). The Company also has a contingent obligation to transfer up to $1.1 million of cash or shares to the former owners of an acquired business if the Company's share price is less than $6.48 per share on June 8, 2015. Liabilities for contingent consideration 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 expense (benefit), net" on the condensed consolidated statements of operations.
The Company uses an income approach to value contingent consideration obligations based on future financial performance, 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. The Company uses a Black-Scholes-Merton option pricing model to value the contingent consideration obligation that is payable upon declines in the Company's share price. Increases in volatility and decreases in the Company's share price contribute to the increases in the fair value of that contingent consideration liability. Conversely, decreases in volatility and increases in the Company's share price contribute to decreases in the fair value of the contingent consideration liability. Changes in assumptions could have an impact on the payout of contingent consideration arrangements with a maximum payout of $8.1 million .     
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
March 31, 2015
 
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
440,616

 
$
440,616

 
$

 
$

Available-for-sale securities:
 
 
 
 
 
 
 
Convertible debt securities
2,757

 

 

 
2,757

Redeemable preferred shares
4,900

 

 

 
4,900

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 Contingent consideration
1,373

 

 

 
1,373



24

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

 
 
 
Fair Value Measurement at Reporting Date Using
Description
December 31, 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
$
440,596

 
$
440,596

 
$

 
$

Available-for-sale securities:
 
 
 
 
 
 
 
Convertible debt securities
2,527

 

 

 
2,527

Redeemable preferred shares
4,910

 

 

 
4,910

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 Contingent consideration
1,983

 

 

 
1,983

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, 2015 and 2014 (in thousands):
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Assets
 
 
 
 
Available-for-sale securities
 
 
 
 
Convertible debt securities:
 
 
 
 
Beginning Balance
 
$
2,527

 
$
3,174

Total gains (losses) included in other comprehensive income
 
230

 
(481
)
Ending Balance
 
$
2,757

 
$
2,693

Unrealized gains (losses) still held (1)
 
$
230

 
$
(481
)
Redeemable preferred shares:
 
 
 
 
Beginning Balance
 
$
4,910

 
$

Purchase of redeemable preferred shares
 

 
4,599

Total (losses) gains included in other comprehensive income
 
(10
)
 

Ending Balance
 
$
4,900

 
$
4,599

Unrealized (losses) gains still held (1)
 
$
(10
)
 
$

 
 
 
 
 
Liabilities
 
 
 
 
Contingent Consideration:
 
 
 
 
Beginning Balance
 
$
1,983

 
$
606

Settlements of contingent consideration liabilities
 

 
(424
)
Reclass to non-fair value liabilities when no longer contingent
 
(331
)
 
(143
)
Total gains included in earnings (2)
 
(279
)
 
(39
)
Ending Balance
 
$
1,373

 
$

Unrealized (gains) losses still held (1)
 
$
(279
)
 
$

(1)
Represents the unrealized losses or gains recorded in earnings and/or other comprehensive income (loss) during the period for assets and liabilities classified as Level 3 that are still held (or outstanding) at the end of the period.
(2)
Changes in the fair value of contingent consideration liabilities are classified within "Acquisition-related expense (benefit), 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


25

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

initial recognition for the three months ended March 31, 2015 and 2014 .

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 consolidated financial statements (in thousands):
 
 
March 31, 2015
 
December 31, 2014
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Cost method investments
 
$
14,082

 
$
14,316

 
$
15,630

 
$
16,134

The fair values of the Company's cost method investments were determined using the market approach or the income approach, depending on the availability of fair value inputs such as financial projections for the investees and market multiples for comparable companies. The Company 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 such as cash flow projections and discount rates.
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, 2015 and December 31, 2014 due to their short-term nature.
10. LOSS PER SHARE OF CLASS A AND CLASS B COMMON STOCK
The Company computes net loss per share of Class A and Class B common stock using the two-class method. Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net 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, performance share units and ESPP shares. The dilutive effect of these equity awards is reflected in diluted net loss per share by application of the treasury stock method. The computation of the diluted net loss per share of Class A common stock assumes the conversion of Class B common stock, if dilutive, while the diluted net 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. Under the two-class method, 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, if dilutive, in the computation of the diluted net loss per share of Class A common stock, the undistributed earnings are equal to net income for that computation.


26

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

The following table sets forth the computation of basic and diluted net loss per share of Class A and Class B common stock for the three months ended March 31, 2015 and 2014 (in thousands, except share amounts and per share amounts):
 
 
Three Months Ended March 31,
 
 
2015
 
2014
 
 
Class A
 
Class B
 
Class A
 
Class B
Basic net loss per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Allocation of net loss - continuing operations
 
$
(16,681
)
 
$
(58
)
 
$
(21,698
)
 
$
(76
)
Less: Allocation of net income attributable to noncontrolling interests
 
3,804

 
14

 
2,423

 
9

Allocation of net loss attributable to common stockholders - continuing operations
 
$
(20,485
)
 
$
(72
)
 
$
(24,121
)
 
$
(85
)
Allocation of net income (loss) attributable to common stockholders - discontinued operations
 
6,261

 
23

 
(13,541
)
 
(48
)
Allocation of net loss attributable to common stockholders
 
$
(14,224
)
 
$
(49
)
 
$
(37,662
)
 
$
(133
)
Denominator
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
673,982,961

 
2,399,976

 
679,978,714

 
2,399,976

Basic net income (loss) per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.03
)
 
$
(0.03
)
 
$
(0.04
)
 
$
(0.04
)
Discontinued operations
 
0.01

 
0.01

 
(0.02
)
 
(0.02
)
Basic net loss per share
 
$
(0.02
)
 
$
(0.02
)
 
$
(0.06
)
 
$
(0.06
)
 
 
 
 
 
 
 
 
 
Diluted net loss per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Allocation of net loss attributable to common stockholders for basic computation - continuing operations
 
$
(20,485
)
 
$
(72
)
 
$
(24,121
)
 
$
(85
)
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 - continuing operations
 
$
(20,485
)
 
$
(72
)
 
$
(24,121
)
 
$
(85
)
Allocation of net income (loss) attributable to common stockholders for basic computation - discontinued operations
 
$
6,261

 
$
23

 
$
(13,541
)
 
$
(48
)
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 - discontinued operations
 
6,261

 
23

 
(13,541
)
 
(48
)
Allocation of net loss attributable to common stockholders
 
$
(14,224
)
 
$
(49
)
 
$
(37,662
)
 
$
(133
)
Denominator
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding used in basic computation
 
673,982,961

 
2,399,976

 
679,978,714

 
2,399,976

Conversion of Class B (1)
 

 

 

 

Employee stock options (1)