Groupon, Inc.
Groupon, Inc. (Form: 10-Q, Received: 11/04/2015 06:15:10)

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, 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 October 30, 2015, there were 611,890,572 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 September 30, 2015 (unaudited) and December 31, 2014
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2015 and 2014 (unaudited)
Condensed Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 2015 (unaudited)
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Item 4. Controls and Procedures
PART II. Other Information
 
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered sales of equity securities and use of proceeds
Item 5. Other Information
Item 6. Exhibits
Signatures
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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations. The words "may," "will," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "continue" and other similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, but are not limited to, volatility in our revenue and operating results; risks related to our business strategy, including our marketing strategy and spend and the productivity of those marketing investments; the impact of our shift away from lower-margin products in our Goods category; effectively dealing with challenges arising from our international operations, including fluctuations in currency exchange rates; retaining existing customers and adding new customers, including as we increase our marketing spend and shift away from lower-margin products in our Goods category; 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, attracting and integrating members of 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; seasonality; payment-related risks; customer and merchant fraud; global economic uncertainty; our ability to raise capital if necessary; difficulties, delays or our inability to successfully complete all or part of the announced restructuring actions or to realize the operating efficiencies and other benefits of such restructuring actions; higher than anticipated restructuring charges or changes in the timing of such restructuring charges; the impact of our ongoing strategic review and any potential strategic alternatives we may choose to pursue; 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 for the quarter ended September 30, 2015, 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)
 
September 30, 2015
 
December 31, 2014
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
963,559

 
$
1,016,634

Accounts receivable, net
76,121

 
90,597

Deferred income taxes
19,349

 
16,271

Prepaid expenses and other current assets
223,986

 
192,382

Current assets held for sale

 
85,445

Total current assets
1,283,015

 
1,401,329

Property, equipment and software, net
202,714

 
176,004

Goodwill
291,084

 
236,756

Intangible assets, net
40,841

 
30,609

Investments (including $149.2 million and $7.4 million at September 30, 2015 and December 31, 2014, respectively, at fair value)
163,789

 
24,298

Deferred income taxes, non-current
28,791

 
41,323

Other non-current assets
20,407

 
16,173

Non-current assets held for sale

 
301,105

Total Assets
$
2,030,641

 
$
2,227,597

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
195,000

 
$

Accounts payable
15,503

 
13,822

Accrued merchant and supplier payables
640,044

 
772,156

Accrued expenses
260,883

 
214,260

Deferred income taxes
28,573

 
31,998

Other current liabilities
142,925

 
127,121

Current liabilities held for sale

 
166,239

Total current liabilities
1,282,928

 
1,325,596

Deferred income taxes, non-current
4,756

 
773

Other non-current liabilities
142,005

 
129,531

Non-current liabilities held for sale

 
6,753

Total Liabilities
1,429,689

 
1,462,653

Commitments and contingencies (see Note 8)

 

Stockholders' Equity
 
 
 
Class A common stock, par value $0.0001 per share, 2,000,000,000 shares authorized, 714,074,671 shares issued and 620,933,460 shares outstanding at September 30, 2015 and 699,008,084 shares issued and 671,768,980 shares outstanding at December 31, 2014
71

 
70

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, 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 September 30, 2015 and December 31, 2014

 

Additional paid-in capital
1,933,994

 
1,847,420

Treasury stock, at cost, 93,141,211 shares at September 30, 2015 and 27,239,104 shares at December 31, 2014
(532,530
)
 
(198,467
)
Accumulated deficit
(854,764
)
 
(921,960
)
Accumulated other comprehensive income
53,369

 
35,763

Total Groupon, Inc. Stockholders' Equity
600,140

 
762,826

Noncontrolling interests
812

 
2,118

Total Equity
600,952

 
764,944

Total Liabilities and Equity
$
2,030,641

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
 
Third party and other
 
$
326,306

 
$
362,903

 
$
1,027,273

 
$
1,133,109

Direct
 
387,289

 
351,366

 
1,175,073

 
1,025,786

Total revenue
 
713,595

 
714,269

 
2,202,346

 
2,158,895

Cost of revenue:
 
 
 
 
 
 
 
 
Third party and other
 
46,050

 
50,774

 
145,292

 
153,333

Direct
 
338,633

 
308,217

 
1,043,729

 
918,362

Total cost of revenue
 
384,683

 
358,991

 
1,189,021

 
1,071,695

Gross profit
 
328,912

 
355,278

 
1,013,325

 
1,087,200

Operating expenses:
 
 
 
 
 
 
 
 
Marketing
 
61,587

 
55,258

 
171,127

 
182,142

Selling, general and administrative
 
326,248

 
299,275

 
904,816

 
905,919

Restructuring charges
 
24,146

 

 
24,146

 

Gain on disposition of business
 
(13,710
)
 

 
(13,710
)
 

Acquisition-related expense (benefit), net
 
1,064

 
(304
)
 
1,300

 
2,078

  Total operating expenses
 
399,335

 
354,229

 
1,087,679

 
1,090,139

Income (loss) from operations
 
(70,423
)
 
1,049

 
(74,354
)
 
(2,939
)
Other income (expense), net
 
(8,160
)
 
(20,056
)
 
(25,146
)
 
(21,919
)
Income (loss) from continuing operations before provision (benefit) for income taxes
 
(78,583
)
 
(19,007
)
 
(99,500
)
 
(24,858
)
Provision (benefit) for income taxes
 
(53,970
)
 
(6,434
)
 
(42,881
)
 
20,181

Income (loss) from continuing operations
 
(24,613
)
 
(12,573
)
 
(56,619
)
 
(45,039
)
Income (loss) from discontinued operations, net of tax
 

 
(6,445
)
 
133,463

 
(30,264
)
Net income (loss)
 
(24,613
)
 
(19,018
)
 
76,844

 
(75,303
)
Net income (loss) attributable to noncontrolling interests
 
(3,002
)
 
(2,190
)
 
(9,648
)
 
(6,575
)
Net income (loss) attributable to Groupon, Inc.
 
$
(27,615
)
 
$
(21,208
)
 
$
67,196

 
$
(81,878
)
 
 
 
 
 
 
 
 
 
Basic net income (loss) per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.04
)
 
$
(0.02
)
 
$
(0.10
)
 
$
(0.08
)
Discontinued operations
 

 
(0.01
)
 
0.20

 
(0.04
)
Basic net income (loss) per share
 
$
(0.04
)
 
$
(0.03
)
 
$
0.10

 
$
(0.12
)
 
 
 
 
 
 
 
 
 
Diluted net income (loss) per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.04
)
 
$
(0.02
)
 
$
(0.10
)
 
$
(0.08
)
Discontinued operations
 

 
(0.01
)
 
0.20

 
(0.04
)
Diluted net income (loss) per share
 
$
(0.04
)
 
$
(0.03
)
 
$
0.10

 
$
(0.12
)
 
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding
 
 
 
 
 
 
 
 
Basic
 
644,894,785

 
669,526,524

 
664,302,630

 
675,814,535

Diluted
 
644,894,785

 
669,526,524

 
664,302,630

 
675,814,535


See Notes to 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,
 
 
2015
 
2014
 
2015
 
2014
Income (loss) from continuing operations
 
$
(24,613
)
 
$
(12,573
)
 
$
(56,619
)
 
$
(45,039
)
Other comprehensive income (loss) from continuing operations:
 
 
 
 
 
 
 
 
   Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
Net unrealized gain (loss) during the period
 
(1,246
)
 
11,879

 
6,085

 
10,701

Reclassification adjustments included in income (loss) from continuing operations
 
(906
)
 

 
3,495

 

Net change in unrealized gain (loss)
 
(2,152
)
 
11,879

 
9,580

 
10,701

Amortization of pension net actuarial loss to earnings (net of tax effect of $5 for the three months ended September 30, 2015 and $15 for the nine months ended September 30, 2015)
 
26

 

 
79

 

Available-for-sale-securities
 
 
 
 
 
 
 
 
Net unrealized gain (loss) during period
 
(193
)
 
(425
)
 
(17
)
 
(799
)
Reclassification adjustment for impairment included in income (loss) from continuing operations
 

 
831

 

 
831

Net change in unrealized gain (loss) on available-for-sale securities (net of tax effect of $(116) and $248 for the three months ended September 30, 2015 and 2014, respectively, and $(9) and $23 for the nine months ended September 30, 2015 and 2014, respectively)
 
(193
)
 
406

 
(17
)
 
32

Other comprehensive income (loss) from continuing operations
 
(2,319
)
 
12,285

 
9,642

 
10,733

Comprehensive income (loss) from continuing operations
 
(26,932
)
 
(288
)
 
(46,977
)
 
(34,306
)
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations
 

 
(6,445
)
 
133,463

 
(30,264
)
Other comprehensive income (loss) from discontinued operations - Foreign currency translation adjustments:
 


 


 


 


Net unrealized gain (loss) during the period
 

 
(10,052
)
 
(4,349
)
 
(802
)
Reclassification adjustment included in net income (loss) from discontinued operations
 

 

 
12,313

 

Net change in unrealized gain (loss)
 

 
(10,052
)
 
7,964

 
(802
)
Comprehensive income (loss) from discontinued operations
 

 
(16,497
)
 
141,427

 
(31,066
)
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
(26,932
)
 
(16,785
)
 
94,450

 
(65,372
)
Comprehensive income (loss) attributable to noncontrolling interests
 
(3,002
)
 
(2,187
)
 
(9,648
)
 
(6,388
)
Comprehensive income (loss) attributable to Groupon, Inc.
 
$
(29,934
)
 
$
(18,972
)
 
$
84,802

 
$
(71,760
)

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 income

 

 

 

 

 
67,196

 

 
67,196

 
9,648

 
76,844

Foreign currency translation

 

 

 

 

 

 
17,544

 
17,544

 

 
17,544

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

 

 

 

 

 

 
79

 
79

 

 
79

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

 

 

 

 

 

 
(17
)
 
(17
)
 

 
(17
)
Issuance of unvested restricted stock
2,203,861

 

 

 

 

 

 

 

 

 

Exercise of stock options
604,432

 

 
816

 

 

 

 

 
816

 

 
816

Vesting of restricted stock units
16,419,868

 
2

 
(2
)
 

 

 

 

 

 

 

Shares issued under employee stock purchase plan
1,037,198

 

 
4,857

 

 

 

 

 
4,857

 

 
4,857

Tax withholdings related to net share settlements of stock-based compensation awards
(5,198,772
)
 
(1
)
 
(35,162
)
 

 

 

 

 
(35,163
)
 

 
(35,163
)
Stock-based compensation on equity-classified awards

 

 
120,158

 

 

 

 

 
120,158

 

 
120,158

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

 

 
(4,093
)
 

 

 

 

 
(4,093
)
 

 
(4,093
)
Purchases of treasury stock

 

 

 
(65,902,107
)
 
(334,063
)
 

 

 
(334,063
)
 

 
(334,063
)
Partnership distributions to noncontrolling interest holders

 

 

 

 

 

 

 

 
(10,954
)
 
(10,954
)
Balance at September 30, 2015
716,474,647

 
$
71

 
$
1,933,994

 
(93,141,211
)
 
$
(532,530
)
 
$
(854,764
)
 
$
53,369

 
$
600,140

 
$
812

 
$
600,952




See Notes to Condensed Consolidated Financial Statements.


7


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2015
 
2014
Operating activities
 
 
 
Net income (loss)
$
76,844

 
$
(75,303
)
Less: Income (loss) from discontinued operations, net of tax
133,463

 
(30,264
)
Income (loss) from continuing operations
(56,619
)
 
(45,039
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property, equipment and software
84,241

 
68,731

Amortization of acquired intangible assets
14,966

 
16,188

Stock-based compensation
109,204

 
85,329

Restructuring charges
24,146

 

Gain on disposition of business
(13,710
)
 

Deferred income taxes
(15,252
)
 
(1,956
)
Excess tax benefits on stock-based compensation
(6,198
)
 
(12,573
)
Loss on equity method investments

 
459

Gain from changes in fair value of contingent consideration
(268
)
 
(1,059
)
Loss from changes in fair value of investments
2,114

 

Impairments of investments

 
2,036

Change in assets and liabilities, net of acquisitions:
 
 
 
Restricted cash
4,555

 
7,686

Accounts receivable
6,353

 
(26,557
)
Prepaid expenses and other current assets
(39,813
)
 
(22,883
)
Accounts payable
(944
)
 
(12,973
)
Accrued merchant and supplier payables
(101,852
)
 
(101,070
)
Accrued expenses and other current liabilities
33,413

 
(21,103
)
Other, net
(1,242
)
 
44,009

Net cash provided by (used in) operating activities from continuing operations
43,094

 
(20,775
)
Net cash provided by (used in) operating activities from discontinued operations
(36,578
)
 
22,777

Net cash provided by (used in) operating activities
6,516

 
2,002

Investing activities
 
 
 
Purchases of property and equipment and capitalized software
(68,481
)
 
(63,443
)
Cash derecognized upon disposition of subsidiary
(1,404
)
 

Acquisitions of businesses, net of acquired cash
(70,130
)
 
(45,397
)
Purchases of investments
(5,000
)
 
(6,704
)
Proceeds from sale of investment
1,231

 

Settlement of liability related to purchase of additional interest in consolidated subsidiary
(1,072
)
 
(1,599
)
Acquisitions of intangible assets
(1,156
)
 
(500
)
Net cash provided by (used in) investing activities from continuing operations
(146,012
)
 
(117,643
)
Net cash provided by (used in) investing activities from discontinued operations
244,470

 
(75,924
)
Net cash provided by (used in) investing activities
98,458

 
(193,567
)
Financing activities
 
 
 
Proceeds from borrowings under revolving credit facility
195,000



Payments for purchases of treasury stock
(329,378
)
 
(145,395
)
Excess tax benefits on stock-based compensation
6,198

 
12,573

Taxes paid related to net share settlements of stock-based compensation awards
(34,477
)
 
(32,390
)
Common stock issuance costs in connection with acquisition of business

 
(1,187
)
Settlements of purchase price obligations related to acquisitions

 
(3,136
)
Proceeds from stock option exercises and employee stock purchase plan
5,673

 
6,204

Partnership distribution payments to noncontrolling interest holders
(10,954
)
 
(6,178
)
Payment of contingent consideration related to acquisitions
(382
)
 

Payments of capital lease obligations
(17,670
)
 
(3,559
)
Net cash provided by (used in) financing activities
(185,990
)
 
(173,068
)
Effect of exchange rate changes on cash and cash equivalents, including cash classified within current assets held for sale
(27,338
)
 
(20,671
)
Net increase (decrease) in cash and cash equivalents, including cash classified within current assets held for sale
(108,354
)
 
(385,304
)
Less: Net increase (decrease) in cash classified within current assets held for sale
(55,279
)
 
43,324

Net increase (decrease) in cash and cash equivalents
(53,075
)
 
(428,628
)
Cash and cash equivalents, beginning of period
1,016,634

 
1,240,472

Cash and cash equivalents, end of period
$
963,559

 
$
811,844



8


Non-cash investing and financing activities
 
 
 
Continuing operations:
 
 
 
Equipment acquired under capital lease obligations
$
40,927

 
$
18,546

Shares issued to settle liability-classified awards and contingent consideration

 
1,041

Liability for purchases of treasury stock
5,059

 
120

Contingent consideration liabilities incurred in connection with acquisitions
9,605

 
4,006

Liability for purchase consideration
250

 
359

Accounts payable and accrued expenses related to purchases of property and equipment and capitalized software
1,500

 
5,061

Liability for purchase of additional interest in consolidated subsidiaries
526

 
2,296

Minority investment recognized in connection with disposition of Ticket Monster
122,075

 

Minority investment recognized in connection with disposition of Groupon India
16,400

 

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

 
447

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 14, "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 May 27, 2015, the Company sold a controlling stake in Ticket Monster that resulted in its deconsolidation. The financial results of Ticket Monster, including the gain on disposition and related tax effects, are presented as discontinued operations in the accompanying condensed consolidated financial statements for the nine months ended September 30, 2015 and the three and nine months ended September 30, 2014 . Additionally, the assets and liabilities of Ticket Monster are presented as held for sale in the accompanying condensed consolidated balance sheet as of December 31, 2014. See Note 2, "Discontinued Operations and Other Dispositions," 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 condensed consolidated financial statements were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenue and expenses of all wholly-owned subsidiaries and majority-owned subsidiaries over which the Company exercises control and variable interest entities for which the Company has determined that it is the primary beneficiary. Outside stockholders' interests in subsidiaries are shown on the condensed consolidated financial statements as "Noncontrolling interests." Equity investments in entities in which the Company does not have a controlling financial interest are accounted for under the equity method, the cost method, the fair value option 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 AND OTHER DISPOSITIONS
Discontinued Operations        
On May 27, 2015, the Company sold a controlling stake in Ticket Monster to an investor group. See Note 5, " Investments ," for information about this transaction. The Company recognized a pre-tax gain on the disposition of $202.2 million ( $138.0 million net of tax), which represents the excess of (a) the $398.8 million in net consideration received, consisting of (i) $285.0 million in cash proceeds and (ii) the $122.1 million fair value of its retained minority investment, less (iii) $8.3 million in transaction costs, over (b) the sum of (i) the $184.3 million net book value of Ticket Monster upon the closing of the transaction and (ii) Ticket Monster's $12.3 million cumulative translation loss, which was reclassified to earnings.
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 the Ticket Monster disposition transaction and determined that those conditions for discontinued operations presentation have been met. As such, the financial results of Ticket Monster, the gain on disposition and the related income tax effects are reported within discontinued operations in the accompanying condensed consolidated financial statements.

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 September 30, 2014 and the nine months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2015 (1)
 
2014
Third party and other revenue
$
36,900

 
$
28,145

 
$
99,064

Direct revenue
5,885

 
39,065

 
8,308

Third party and other cost of revenue
(10,723
)
 
(13,958
)
 
(28,893
)
Direct cost of revenue
(7,196
)
 
(38,031
)
 
(9,952
)
Marketing expense
(4,677
)
 
(8,495
)
 
(20,992
)
Selling, general and administrative expense
(26,667
)
 
(38,102
)
 
(77,832
)
Other income, net
33

 
96

 
33

Loss from discontinued operations before gain on disposition and provision for income taxes
(6,445
)
 
(31,280
)
 
(30,264
)
Gain on disposition

 
202,158

 

Provision for income taxes

 
(37,415
)
 

Income (loss) from discontinued operations, net of tax
$
(6,445
)
 
$
133,463

 
$
(30,264
)


11

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

(1)
The income from discontinued operations, net of tax, for the nine months ended September 30, 2015 includes the results of Ticket Monster through the disposition date of May 27, 2015.    
The $37.4 million provision for income taxes for the nine months ended September 30, 2015 reflects (i) the $64.2 million current and deferred income tax effects of the Ticket Monster disposition during the second quarter of 2015, partially offset by (ii) a $26.8 million tax benefit that 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 during the first quarter of 2015. No income tax benefits were recognized for the three and nine months ended September 30, 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 sheet as of December 31, 2014 (in thousands):

 
 
December 31, 2014
Cash
 
$
55,279

Accounts receivable, net
 
14,557

Deferred income taxes
 
512

Property, equipment and software, net
 
6,471

Goodwill
 
211,054

Intangible assets, net
 
79,948

Other assets
 
18,729

Assets classified as held for sale
 
$
386,550

 
 
 
Accounts payable
 
$
8,033

Accrued merchant and supplier payables
 
138,411

Accrued expenses
 
16,092

Deferred income taxes
 
512

Other liabilities
 
9,944

Liabilities classified as held for sale
 
$
172,992


Other Dispositions
    
Groupon India

On August 6, 2015, the Company’s subsidiary in India ("Groupon India") completed an equity financing transaction with a third party investor that obtained a majority voting interest in the entity. See Note 5, " Investments ," for information about this transaction. The Company recognized a pre-tax gain on the disposition of $13.7 million , which represents the excess of (a) the sum of (i) $14.2 million in net consideration received, consisting of the $16.4 million fair value of its retained minority investment, less $1.3 million in transaction costs and a $0.9 million guarantee liability and (ii) Groupon India's $0.9 million cumulative translation gain, which was reclassified to earnings, over (b) the $1.4 million net book value of Groupon India upon the closing of the transaction. The Company did not receive any cash proceeds in connection with the transaction.

The gain from this transaction is presented as "Gain on disposition of business" in the accompanying condensed consolidated statements of operations. The financial results of Groupon India are presented within income from continuing operations in the accompanying condensed consolidated financial statements through the August 6, 2015 disposition date. Those financial results were not material for the three and nine months ended September 30, 2015 and 2014.


12

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



3. BUSINESS COMBINATIONS

The Company acquired six businesses during the nine months ended September 30, 2015 .  Business combinations are accounted for using the acquisition method, and the results of each of those acquired businesses are 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 these premiums 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 and service 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, 2015 , $0.6 million and $1.5 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.
OrderUp, Inc.
On July 16, 2015, the Company acquired all of the outstanding equity interests of OrderUp, Inc. ("OrderUp"), an on-demand online and mobile food ordering and delivery marketplace based in the United States. The purpose of this acquisition was to extend the Company's local marketplaces in the food ordering and delivery sector and enhance related technology capabilities. The aggregate acquisition-date fair value of the consideration transferred for the OrderUp acquisition totaled $78.6 million , which consisted of the following (in thousands):
Cash
 
$
69,024

Contingent consideration
 
9,605

Total
 
$
78,629
















13

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

    
The following table summarizes the allocation of the aggregate acquisition price of the OrderUp acquisition (in thousands):
Cash and cash equivalents
$
2,264

Accounts receivable
1,377

Prepaid expenses and other current assets
404

Property, equipment and software
24

Goodwill
61,140

Intangible assets: (1)
 
Subscriber relationships
5,600

Merchant relationships
1,100

Developed technology
11,300

Trade name
900

Other intangible assets
1,850

Other non-current assets
31

Total assets acquired
$
85,990

Accounts payable
$
901

Accrued merchant and supplier payables
1,021

Accrued expenses
2,356

Other current liabilities
562

Deferred income taxes, non-current
2,500

Other non-current liabilities
21

Total liabilities assumed
$
7,361

Total acquisition price
$
78,629

(1)
Acquired intangible assets have estimated useful lives of between 3 and 5 years.
Other Acquisitions
The Company acquired five other businesses during the nine months ended September 30, 2015 . The primary purpose of these acquisitions was to acquire an assembled workforce, expand internationally, expand and advance product offerings and enhance technology capabilities. The aggregate acquisition-date fair value of the consideration transferred for these acquisitions totaled $6.0 million , which consisted of the following (in thousands):
Cash
 
$
5,711

Liability for purchase consideration
 
250

Total
 
$
5,961



14

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

    
The following table summarizes the allocation of the aggregate acquisition price of the other acquisitions for the nine months ended September 30, 2015 (in thousands):
Net working capital deficit (including acquired cash of $2.3 million)
 
$
(647
)
Goodwill
 
2,898

Intangible assets: (1)
 
 
Subscriber relationships
 
1,016

Merchant relationships
 
809

Developed technology
 
1,339

Brand relationships
 
296

Other intangible assets
 
250

Total acquisition price
 
$
5,961

(1)
Acquired intangible assets have estimated useful lives of between 1 and 5 years.
Pro forma results of operations for the OrderUp acquisition and these other acquisitions are not presented because the pro forma effects of those acquisitions, individually and in the aggregate, were not material to the Company's condensed consolidated results of operations.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the Company's goodwill activity by segment for the nine months ended September 30, 2015 (in thousands):
 
 
North America
 
EMEA
 
Rest of World
 
Consolidated
Balance as of December 31, 2014
 
$
116,718

 
$
102,179

 
$
17,859

 
$
236,756

Goodwill related to acquisitions
 
63,089

 

 
949

 
64,038

Goodwill related to disposition
 

 

 
(975
)
 
(975
)
Foreign currency translation
 
(1
)
 
(7,635
)
 
(1,099
)
 
(8,735
)
Balance as of September 30, 2015
 
$
179,806

 
$
94,544

 
$
16,734

 
$
291,084



15

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

The following tables summarize the Company's intangible assets (in thousands):
 
 
September 30, 2015
Asset Category
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Subscriber relationships
 
$
52,859

 
$
42,844

 
$
10,015

Merchant relationships
 
9,771

 
8,042

 
1,729

Trade names
 
11,143

 
7,253

 
3,890

Developed technology
 
37,287

 
24,015

 
13,272

Brand relationships
 
7,960

 
2,675

 
5,285

Other intangible assets
 
20,006

 
13,356

 
6,650

Total
 
$
139,026

 
$
98,185

 
$
40,841

 
 
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 $5.2 million and $5.1 million for the three months ended September 30, 2015 and 2014 , respectively, and $15.0 million and $16.2 million for the nine months ended September 30, 2015 and 2014 , respectively. As of September 30, 2015 , the Company's estimated future amortization expense related to intangible assets is as follows (in thousands):
Remaining amounts in 2015
 
$
4,947

2016
 
16,111

2017
 
11,180

2018
 
7,643

2019
 
646

Thereafter
 
314

Total
 
$
40,841



16

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

5. INVESTMENTS
The following table summarizes the Company's investments (dollars in thousands):
 
September 30, 2015
 
Percent Ownership of Voting Stock
 
December 31, 2014
 
Percent Ownership of Voting Stock
Available-for-sale securities:
 
 
 
 
 
 
 
Convertible debt securities
$
7,882

 
 
 
$
2,527

 
 
Redeemable preferred shares
4,934

 
17%
to
19%
 
4,910

 
17%
to
19%
Total available-for-sale securities
12,816

 
 
 
7,437

 
 
Cost method investments
$
14,612

 
2%
to
10%
 
$
15,630

 
6%
to
19%
Equity method investments

 
—%
 
 
 
1,231

 
21%
to
50%
Fair value option investments
136,361

 
43%
to
48%
 

 
 
 
 
Total investments
$
163,789

 
 
 
$
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 September 30, 2015 and December 31, 2014 , respectively (in thousands):
 
September 30, 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
$
7,435

 
$
447

 
$

 
$
7,882

 
$
2,030

 
$
497

 
$

 
$
2,527

Redeemable preferred shares
4,599

 
335

 

 
4,934

 
4,599

 
311

 

 
4,910

Total available-for-sale securities
$
12,034

 
$
782

 
$

 
$
12,816

 
$
6,629

 
$
808

 
$

 
$
7,437

Investment in Monster LP
On May 27, 2015, the Company completed the sale of a controlling stake in Ticket Monster to an investor group, whereby (a) the investor group contributed $350.0 million in cash to Monster Holdings LP ("Monster LP"), a newly-formed limited partnership, in exchange for 70,000,000 Class A units of Monster LP and (b) the Company contributed all of the issued and outstanding share capital of Ticket Monster to Monster LP in exchange for (i) 64,000,000 Class B units of Monster LP and (ii) $285.0 million in cash consideration. The investor group and Mr. Daniel Shin, the current chief executive officer and founder of Ticket Monster, will contribute an additional $10.0 million of cash consideration to Monster LP within six months of the closing date in exchange for 2,000,000 Class A units of Monster LP. Additionally, Monster LP is authorized to issue 20,321,839 Class C units to its management that will be subject to time-based vesting conditions and, for a portion of Class C units, a performance-based vesting condition. The Class A units of Monster LP are entitled to a $486.0 million liquidation preference, which must be paid prior to any distributions to the holders of Class B and Class C units. All distributions in excess of $486.0 million and up to $680.0 million will be paid to holders of Class B units. Holders of Class B units will be entitled to share in distributions between $703.0 million and $1,116.0 million in accordance with the terms of Monster LP's distribution waterfall, and distributions in excess of $1,116.0 million will be made pro rata to all unit holders.
In connection with the disposition of Ticket Monster as discussed above, the Company obtained a minority limited partner interest in Monster LP. The investment in Monster LP was measured at its fair value of $122.1 million as of its acquisition date. The initial fair value was determined using the backsolve valuation method, which is a form of the market approach. Under this method, assumptions are made about the expected time to liquidity, volatility and risk-free rate such that the price paid by a third-


17

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

party investor in a recent financing round can be used to determine the value of the entity and its other securities using option-pricing methodologies. The $122.1 million fair value of the Company's investment in Monster LP was based on the contractual liquidation preferences and the following valuation assumptions: 4-year expected time to a liquidity event, 60% volatility and a 1.3% risk-free rate. The initial fair value of Monster LP, determined using the backsolve method, was calibrated to a discounted cash flow valuation, an income approach, and was further corroborated using a market approach.
The Company has made an irrevocable election to account for its minority limited partner interest in Monster LP at fair value with changes in fair value reported in earnings. The Company elected to apply fair value accounting because it believes that fair value is the most relevant measurement attribute for this investment, as well as to reduce operational and accounting complexity. As of September 30, 2015 , the Company measured the fair value of Monster LP using the discounted cash flow method and the market approach. The Company recognized a loss of $2.5 million and $2.0 million from changes in the fair value of its investment in Monster LP for the three and nine months ended September 30, 2015 , respectively.
The following table summarizes the condensed consolidated financial information for Monster LP (in thousands):
 
Three Months Ended 
 September 30, 2015
 
Period from May 28, 2015 through September 30, 2015 (1)
Revenue
$
33,465

 
$
47,575

Gross profit
(6,826
)
 
(2,488
)
Loss before income taxes
(38,425
)
 
(46,764
)
Net loss
(38,485
)
 
(46,764
)
 
 
September 30, 2015
Current assets
 
$
149,662

Non-current assets
 
483,108

Current liabilities
 
223,667

Non-current liabilities
 
7,038

(1)
The summarized financial information is presented for the period beginning May 28, 2015, after completion of the Ticket Monster disposition transaction that resulted in the Company obtaining its minority limited partner interest in Monster LP.
Investment in GroupMax
On August 6, 2015, the Company's subsidiary in India ("Groupon India") completed an equity financing transaction with a third party investor that obtained a majority voting interest in the entity, whereby (a) the investor contributed $17.0 million in cash to GroupMax Pte Ltd. ("GroupMax"), a newly formed Singapore-based entity, in exchange for Series A Preference Shares and (b) the Company contributed the shares of Groupon India to GroupMax in exchange for seed preference shares of GroupMax. Additionally, GroupMax is authorized to issue up to 376,096 options on ordinary shares to its employees that will be subject to time-based vesting conditions and performance based vesting conditions. The Series A Preference Shares are entitled to a $17.0 million liquidation preference, which must be paid prior to any distributions to the other equity holders.
In connection with the disposition of Groupon India as discussed above, the Company obtained a minority investment in GroupMax. The investment in GroupMax was measured at its fair value of $16.4 million as of its acquisition date. The initial fair value was determined using the backsolve valuation method. The $16.4 million fair value of the Company's investment in GroupMax was based on the contractual liquidation preferences and the following valuation assumptions: 5-year expected time to a liquidity event, 65% volatility and a 1.6% risk-free rate. The initial fair value of GroupMax, determined using the backsolve method, was calibrated to a discounted cash flow valuation, an income approach, and was further corroborated using a market approach. The Company has made an irrevocable election to account for its minority investment in GroupMax at fair value with changes in fair value reported in earnings. The Company elected to apply fair value accounting because it believes that fair value is the most relevant measurement attribute for this investment, as well as to reduce operational and accounting complexity. As of September 30, 2015 , the Company measured the fair value of GroupMax using the discounted cash flow method and the market approach. The Company recognized a loss of $0.1 million from changes in the fair value of its investment in GroupMax from the acquisition date to September 30, 2015 .


18

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

6. SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS INFORMATION
The following table summarizes the Company's other income (expense), net for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Interest income
 
$
331

 
$
291

 
$
888

 
$
1,087

Interest expense
 
(783
)
 
(207
)
 
(1,926
)
 
(428
)
Impairments of investments
 

 
(1,448
)
 

 
(2,036
)
Loss on equity method investments
 

 
(91
)
 

 
(459
)
Loss on changes in fair value of investments
 
(2,564
)
 

 
(2,114
)
 

Foreign currency gains (losses), net (1)
 
(5,153
)
 
(18,619
)
 
(22,118
)
 
(20,092
)
Other
 
9

 
18

 
124

 
9

Other income (expense), net
 
$
(8,160
)
 
$
(20,056
)
 
$
(25,146
)
 
$
(21,919
)
    
(1)
Foreign currency gains (losses), net for the nine months ended September 30, 2015 includes a $4.4 million cumulative translation adjustment loss from the Company's legacy business in the Republic of Korea that was reclassified to earnings as a result of the Ticket Monster disposition.
The following table summarizes the Company's prepaid expenses and other current assets as of September 30, 2015 and December 31, 2014 (in thousands):
 
September 30, 2015
 
December 31, 2014
Unamortized tax effects on intercompany transactions
$
1,076

 
$
14,170

Finished goods inventories
57,294

 
52,237

Prepaid expenses
50,982

 
32,758

Restricted cash
4,672

 
10,852

Income taxes receivable
78,431

 
41,769

VAT receivable
11,817

 
17,746

Prepaid marketing

 
7,413

Other
19,714

 
15,437

Total prepaid expenses and other current assets
$
223,986

 
$
192,382

    


19

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, 2015 and December 31, 2014 (in thousands):
 
September 30, 2015
 
December 31, 2014
Accrued merchant payables
$
430,405

 
$
499,317

Accrued supplier payables (1)
209,639

 
272,839

Total accrued merchant and supplier payables
$
640,044

 
$
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 September 30, 2015 and December 31, 2014 (in thousands):
 
September 30, 2015
 
December 31, 2014
Marketing
$
15,968

 
$
15,962

Refunds reserve
27,616

 
32,535

Payroll and benefits
51,360

 
59,802

Customer credits
34,671

 
42,729

Professional fees
16,195

 
14,254

Restructuring-related liabilities
21,289

 

Other
93,784

 
48,978

Total accrued expenses
$
260,883

 
$
214,260

The following table summarizes the Company's other current liabilities as of September 30, 2015 and December 31, 2014 (in thousands):
 
September 30, 2015
 
December 31, 2014
Income taxes payable
$
11,364

 
$
14,461

VAT payable
22,244

 
30,778

Sales taxes payable
5,856

 
9,042

Deferred revenue
46,793

 
46,344

Capital lease obligations
26,201

 
14,872

Other
30,467

 
11,624

Total other current liabilities
$
142,925

 
$
127,121

The following table summarizes the Company's other non-current liabilities as of September 30, 2015 and December 31, 2014 (in thousands):
 
September 30, 2015
 
December 31, 2014
Long-term tax liabilities
$
76,147

 
$
82,138

Deferred rent
17,031

 
13,200

Capital lease obligations
34,398

 
23,387

Other
14,429

 
10,806

Total other non-current liabilities
$
142,005

 
$
129,531



20

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

The following table summarizes the components of accumulated other comprehensive income as of September 30, 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
17,544

 
(17
)
 
79

 
17,606

Balance at September 30, 2015
$
54,308

 
$
482

 
$
(1,421
)
 
$
53,369



21

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

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, 2015, the Company had $195.0 million of short-term borrowings outstanding under the Credit Agreement and was in compliance with all covenants.

8. COMMITMENTS AND CONTINGENCIES
In July 2015, the Company entered into a new lease agreement that replaced the previous lease agreement for its corporate headquarters located in Chicago, Illinois. The new lease agreement extended the term to 10 years and 4 months and expanded the square footage. The net increase (decrease) in operating lease commitments as of September 30, 2015 over amounts under the previous lease agreement for each of the next five years and thereafter is as follows (in thousands):
2015
 
$
116

2016
 
(595
)
2017
 
3,405

2018
 
3,787

2019
 
8,107

Thereafter
 
77,176

Net increase in lease payments
 
$
91,996

Except for the changes stated above, the Company's commitments as of September 30, 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. The following is a brief description of significant legal proceedings.


22

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

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 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 monetary damages, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief.  On June 29, 2015, the parties concluded fact discovery, including the depositions of fact witnesses. On July 30, 2015, class notice was mailed to all identifiable members of the certified class and subclass. On September 1, 2015, plaintiff filed an agreed motion to dismiss without prejudice all claims against the Underwriters defendants, which the court granted on September 10, 2015. The parties are currently engaged in expert discovery, which is scheduled to close on December 21, 2015, and dispositive motions are scheduled to be filed by January 29, 2016. The district court has not yet scheduled a trial date. The parties have participated in mediations and settlement discussions during the three months ended September 30, 2015 and thereafter but have not yet reached any agreement regarding resolution of the litigation. As a result of these settlement discussions, the Company increased its contingent liability for this matter by $37.5 million during the three months ended September 30, 2015. This expense is classified within "Selling, general and administrative expense" on the condensed consolidated statements of operations.
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 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


23

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

Litigation. In October 2015, the parties engaged in settlement discussions with the assistance of a mediator, but have not yet reached any agreement regarding resolution of the 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. On December 18, 2012, the district court approved the settlement over various objections to the settlement lodged by certain individual class members. Thereafter, certain of the objectors filed an appeal, and 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. On June 22, 2015, the Company terminated the settlement agreement as is permitted under its terms. In July 2015, the parties reached an agreement in principle regarding a new settlement involving a combination of cash and Groupon credits, worth a total of $8.5 million . On October 22, 2015, the district court granted preliminary approval of the settlement and the parties are currently engaged in complying with the process for the district court to consider granting final approval of the settlement. The Company continues to deny liability and if the settlement is not approved by the court or is not consummated for any reason, will contest the case vigorously.
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 $43.5 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 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 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. 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. However, 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


24

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

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.
Indemnification
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.


25

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

9. 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. The Company has completed its repurchases under this authorization. In April 2015, the Board approved a new share repurchase program, under which the Company is authorized to repurchase up to an additional $500.0 million of its Class A common stock through August 2017. During the three and nine months ended September 30, 2015 , the Company purchased 44,149,663 and 65,902,107 shares of Class A common stock, respectively, for an aggregate purchase price of $192.9 million and $334.1 million (including fees and commissions), respectively, under its share repurchase programs. As of September 30, 2015 , up to $268.1 million of Class A common stock remains available for purchase under its current share repurchase program. 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 September 30, 2015 , 33,976,035 shares were available for future issuance under the Plans.
The Company recognized stock-based compensation expense from continuing operations of $35.6 million and $32.7 million for the three months ended September 30, 2015 and 2014 , respectively, and $109.2 million and $85.3 million for the nine months ended September 30, 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 $1.9 million for the three months ended September 30, 2014 and $5.3 million and $4.7 million for the nine months ended September 30, 2015 and 2014 , respectively. The Company also capitalized $2.8 million of stock-based compensation for the three months ended September 30, 2015 and 2014 , respectively, and $9.2 million and $7.9 million for the nine months ended September 30, 2015 and 2014 , respectively, in connection with internally-developed software.
As of September 30, 2015 , a total of $222.2 million of unrecognized compensation costs related to unvested employee stock awards and unvested acquisition-related awards are expected to be recognized over a remaining weighted-average period of 1.2 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, 2015 and 2014 , 1,037,198 and 857,171 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, 2015 :


26

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

 
 
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
 
(604,432
)
 
$
1.35

 
 
 
 
    Forfeited
 
(1,926
)
 
$
2.42

 
 
 
 
Outstanding at September 30, 2015
 
1,656,636

 
$
0.99

 
4.23
 
$
3,761

 
 
 
 
 
 
 
 
 
Exercisable at September 30, 2015
 
1,656,636

 
$
0.99

 
4.23
 
$
3,761

(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, 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. In May 2015, 575,744 restricted stock units previously granted to Ticket Monster employees were modified to permit continued vesting following the Company’s sale of its controlling stake in Ticket Monster. These nonemployee restricted stock units, which require ongoing employment with Ticket Monster to vest, are remeasured to fair value each reporting period. As of September 30, 2015 , 441,450 nonemployee restricted stock units are outstanding.
The table below summarizes activity regarding unvested restricted stock units granted under the Plans for the nine months ended September 30, 2015 :
 
 
Restricted Stock Units
 
Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2014
 
41,337,927

 
$
7.78

    Granted
 
22,491,314

 
$
6.72

    Vested
 
(16,419,868
)
 
$
7.78

    Forfeited
 
(8,538,937
)
 
$
7.91

Unvested at September 30, 2015
 
38,870,436

 
$
7.12

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 was 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 was subject to continued employment at the end of each performance period. If the financial targets for a performance period were not achieved, no shares would have been issued for that performance period. The grant date fair value of the performance share units was $8.07 per share. No shares were issued