Edgar Filing: Groupon, Inc.

Groupon Q3 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 1-353335

Groupon, Inc.

(Exact name of registrant as specified in its charter)



Delaware		27-0903295
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

600 West Chicago Avenue, Suite 620 Chicago, Illinois		60654
(Address of principal executive offices)		(Zip Code)

312-676-5773

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨

Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.



Class of Stock	Outstanding at November 7, 2012
Class A Common Stock	653,316,120	shares
Class B Common Stock	2,399,976	shares

TABLE OF CONTENTS



PART I. Financial Information	Page
Forward-Looking Statements	3
Item 1. Financial Statements	4
Condensed Consolidated Balance Sheets as of December 31, 2011 and September 30, 2012 (unaudited)	4
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2012 (unaudited)	5
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2011 and 2012 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2012 (unaudited)	7
Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2012 (unaudited)	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosure about Market Risk	55
Item 4. Controls and Procedures	55
PART II. Other Information
Item 1. Legal Proceedings	57
Item 1A. Risk Factors	57
Item 2. Unregistered sales of equity securities and use of proceeds	74
Item 6. Exhibits	74
Signatures	75
Exhibits	76

______________________________________________________

FORWARD‑LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations. The words “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “continue” and other similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations and objectives, and financial needs. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in “Item 1A: Risk Factors” of our Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as in our condensed consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

ITEM 1. FINANCIAL STATEMENTS

GROUPON, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



	December 31, 2011			September 30, 2012
				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,122,935		$	1,201,011
Accounts receivable, net	108,747			110,058
Prepaid expenses and other current assets	91,645			121,338
Total current assets	1,323,327			1,432,407
Property and equipment, net of accumulated depreciation of $14,627 and $37,564, respectively	51,800			103,876
Goodwill	166,903			196,978
Intangible assets, net	45,667			51,447
Investments in equity interests	50,604			131,039
Deferred income taxes, non-current	46,104			48,753
Other non-current assets	90,071			68,314
Total Assets	$	1,774,476		$	2,032,814
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	40,918		$	60,016
Accrued merchant payables	520,723			573,477
Accrued expenses	212,007			245,083
Deferred income taxes, current	76,841			75,203
Other current liabilities	144,673			171,422
Total current liabilities	995,162			1,125,201
Deferred income taxes, non-current	7,428			28,585
Other non-current liabilities	70,766			74,643
Total Liabilities	1,073,356			1,228,429
Commitments and contingencies (see Note 7)
Redeemable noncontrolling interests	1,653			7,190
Stockholders' Equity
Class A common stock, par value $0.0001 per share, 2,000,000,000 shares authorized, 641,745,225 shares issued and outstanding at December 31, 2011; 2,000,000,000 shares authorized, 652,501,880 shares issued and outstanding at September 30, 2012	64			65
Class B common stock, par value $0.0001 per share, 10,000,000 shares authorized, 2,399,976 shares issued and outstanding at December 31, 2011 and September 30, 2012	—			—
Common stock, par value $0.0001 per share, 2,010,000,000 shares authorized, no shares issued and outstanding at December 31, 2011 and September 30, 2012	—			—
Additional paid-in capital	1,388,253			1,459,485
Accumulated deficit	(698,704		)	(672,494		)
Accumulated other comprehensive income	12,928			11,956
Total Groupon, Inc. Stockholders' Equity	702,541			799,012
Noncontrolling interests	(3,074		)	(1,817		)
Total Equity	699,467			797,195
Total Liabilities and Equity	$	1,774,476		$	2,032,814

See Notes to unaudited Condensed Consolidated Financial Statements.

GROUPON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2012			2011			2012
Revenue:
Third party and other revenue	$	422,989		$	423,564		$	1,111,094		$	1,466,602
Direct revenue	7,172			144,988			7,172			229,568
Total revenue	430,161			568,552			1,118,266			1,696,170
Cost of revenue:
Third party and other revenue	62,339			54,173			156,907			233,834
Direct revenue	5,707			127,613			5,707			202,634
Total cost of revenue	68,046			181,786			162,614			436,468
Operating expenses:
Marketing	170,349			70,919			613,173			275,941
Selling, general and administrative	196,798			287,978			565,686			871,455
Acquisition-related (benefit) expense, net	(4,793		)	2,431			(4,793		)	744
Total operating expenses	362,354			361,328			1,174,066			1,148,140
(Loss) income from operations	(239		)	25,438			(218,414		)	111,562
Interest and other income, net	8,269			617			9,808			54,445
Loss on equity method investees	(11,211		)	(138		)	(19,974		)	(8,694		)
(Loss) income before provision for income taxes	(3,181		)	25,917			(228,580		)	157,313
Provision for income taxes	11,235			26,857			9,503			128,297
Net (loss) income	(14,416		)	(940		)	(238,083		)	29,016
Less: Net loss (income) attributable to noncontrolling interests	3,843			(706		)	23,602			(2,806		)
Net (loss) income attributable to Groupon, Inc.	(10,573		)	(1,646		)	(214,481		)	26,210
Redemption of preferred stock in excess of carrying value	—			—			(34,327		)	—
Adjustment of redeemable noncontrolling interests to redemption value	(43,656		)	(1,333		)	(59,307		)	(12,498		)
Net (loss) income attributable to common stockholders	$	(54,229	)	$	(2,979	)	$	(308,115	)	$	13,712

Net (loss) earnings per share
Basic	$(0.18)			$(0.00)			$(1.01)			$0.02
Diluted	$(0.18)			$(0.00)			$(1.01)			$0.02

Weighted average number of shares outstanding
Basic	307,605,060			653,223,610			305,288,502			648,021,943
Diluted	307,605,060			653,223,610			305,288,502			663,557,250

See Notes to unaudited Condensed Consolidated Financial Statements.

GROUPON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2012			2011			2012
Net (loss) income	$	(14,416	)	$	(940	)	$	(238,083	)	$	29,016
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	81			(387		)	3,649			(378		)
Other comprehensive income (loss)	81			(387		)	3,649			(378		)
Comprehensive (loss) income	(14,335		)	(1,327		)	(234,434		)	28,638
Less: Comprehensive loss (income) attributable to the noncontrolling interests	3,843			(1,300		)	23,602			(3,400		)
Comprehensive (loss) income attributable to Groupon, Inc.	$	(10,492	)	$	(2,627	)	$	(210,832	)	$	25,238

See Notes to unaudited Condensed Consolidated Financial Statements

GROUPON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Nine Months Ended September 30,
	2011			2012
Operating activities
Net (loss) income	$	(238,083	)	$	29,016
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	22,754			39,836
Stock-based compensation	60,922			77,706
Deferred income taxes	602			9,608
Excess tax benefits on stock-based compensation	(11,323		)	(24,620		)
Loss on equity method investees	19,974			8,694
Acquisition-related (benefit) expense, net	(4,793		)	744
Gain on redemption of common stock	(4,916		)	—
Gain on E-Commerce transaction	—			(56,032		)
Change in assets and liabilities, net of acquisitions:
Restricted cash	(8,141		)	(1,855		)
Accounts receivable	(69,690		)	(2,189		)
Prepaid expenses and other current assets	(41,023		)	(24,937		)
Accounts payable	(21,924		)	13,174
Accrued merchant payables	314,872			53,889
Accrued expenses and other current liabilities	108,963			68,010
Other, net	(6,824		)	10,073
Net cash provided by operating activities	121,370			201,117
Investing activities
Purchases of property and equipment and software capitalization	(29,825		)	(55,802		)
Acquisitions of businesses, net of acquired cash	(12,553		)	(44,790		)
Purchases of intangible assets	(15,072		)	(10		)
Purchases of additional interests in consolidated subsidiaries	(34,887		)	(8,527		)
Purchases of cost and equity method investments	(20,189		)	(33,097		)
Net cash used in investing activities	(112,526		)	(142,226		)
Financing activities
Proceeds from issuance of stock, net of issuance costs	509,829			—
Excess tax benefit on stock-based compensation	11,323			24,620
Tax withholdings related to net share settlements of restricted stock units	—			(7,586		)
Payments of contingent acquisition liability	—			(4,250		)
Repayments of loans with related parties	(14,358		)	—
Repurchase of common stock	(353,550		)	—
Proceeds from exercise of stock options	2,269			8,868
Partnership distributions to noncontrolling interest holders	—			(3,062		)
Redemption of preferred stock	(35,221		)	—
Net cash provided by financing activities	120,292			18,590
Effect of exchange rate changes on cash and cash equivalents	(4,034		)	595
Net increase in cash and cash equivalents	125,102			78,076
Cash and cash equivalents, beginning of the period	118,833			1,122,935
Cash and cash equivalents, end of the period	$	243,935		$	1,201,011
Supplemental disclosure of cash flow information
Non-cash investing activity
Issuance of common stock in connection with acquisitions	$	11,067		$	—
Contingent consideration in connection with acquisitions	$	17,755		$	2,521
Issuance of non-voting common stock in connection with investments in equity interests	$	45,218		$	—
Stock issued in exchange for additional interests in consolidated subsidiaries	$	10,400		$	527
Contribution of investment in E-Commerce transaction	$	—		$	47,042

See Notes to unaudited Condensed Consolidated Financial Statements.

GROUPON, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

(unaudited)



	Groupon, Inc. Stockholders' Equity
	Common Stock				Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comp. Income			Total Groupon Inc. Stockholders' Equity			Non- controlling Interests				Total Equity
	Shares		Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comp. Income			Total Groupon Inc. Stockholders' Equity			Non- controlling Interests				Total Equity
Balance at December 31, 2011	644,145,201		$	64	$	1,388,253		$	(698,704	)	$	12,928		$	702,541		$	(3,074	)		$	699,467
Net income	—		—		—			26,210			—			26,210			2,706			⁽¹⁾	28,916			⁽¹⁾
Foreign currency translation	—		—		—			—			(972		)	(972		)	594				(378		)
Adjustment of redeemable noncontrolling interests to redemption value	—		—		(12,498		)	—			—			(12,498		)	—				(12,498		)
Purchase of additional interests in consolidated subsidiaries	153,231		—		(2,493		)	—			—			(2,493		)	1,019				(1,474		)
Restricted stock issued in connection with business combinations	221,723		—		—			—			—			—			—				—
Vesting of restricted stock units	3,225,241		—		—			—			—			—			—				—
Tax withholding related to net share settlements of restricted stock units	(1,177,671	)	—		(12,980		)	—			—			(12,980		)	—				(12,980		)
Stock-based compensation on equity-classified awards	—		—		65,716			—			—			65,716			—				65,716
Excess tax benefits on stock-based compensation	—		—		24,620			—			—			24,620			—				24,620
Exercise of stock options	8,334,131		1		8,867			—			—			8,868			—				8,868
Partnership distributions to noncontrolling interest holders	—		—		—			—			—			—			(3,062		)		(3,062		)
Balance at September 30, 2012	654,901,856		$	65	$	1,459,485		$	(672,494	)	$	11,956		$	799,012		$	(1,817	)		$	797,195


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

See Notes to unaudited Condensed Consolidated Financial Statements

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. FINANCIAL STATEMENT INFORMATION

Company Information

Groupon, Inc., together with the subsidiaries through which it conducts business (the "Company"), is a local commerce marketplace (www.groupon.com) that connects merchants to consumers by offering goods and services at a discount. The Company has organized its operations into two segments: North America and International. See Note 12 "Segment Information."

Basis of Presentation / Unaudited Interim Financial Information

The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These condensed consolidated financial statements are unaudited and, in the Company's opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the Company's condensed consolidated balance sheets, and statements of operations, comprehensive income (loss), cash flows and stockholders' equity for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2012. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of the Company's 2011 Annual Report on Form 10-K.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company's condensed consolidated financial statements were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenue and expenses of all wholly‑owned subsidiaries and majority‑owned subsidiaries over which the Company exercises control and variable interest entities for which the Company has determined that it is the primary beneficiary. Outside stockholders' interests in subsidiaries are shown in the condensed consolidated financial statements as “Noncontrolling interests" and "Redeemable noncontrolling interests." Investments in entities in which the Company does not have a controlling financial interest are accounted for under either the equity method or cost method of accounting, as appropriate.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenue and expenses, and the related disclosures of contingent liabilities in the condensed consolidated financial statements and accompanying notes. Estimates are utilized for, but not limited to, stock‑based compensation, income taxes, valuation of acquired goodwill and intangible assets, investments in equity interests, customer refunds, contingent liabilities and the depreciable lives of property and equipment. Actual results could differ materially from those estimates.

Significant Accounting Policies

Revenue

The Company recognizes revenue when the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the selling price is fixed or determinable; and collection is reasonably assured.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Third party revenue recognition

The Company generates third party revenue, where it acts as a third party marketing agent, by offering goods and services provided by third party merchant partners at a discount through its local commerce marketplace that connects merchants to consumers. The Company's marketplace includes deals offered in a variety of categories including: Local, National, Now!, Goods, Getaways and Live. Customers purchase Groupons from the Company and redeem them with the Company's merchant partners.

The revenue recognition criteria are met when the number of customers who purchase a given deal exceeds the predetermined threshold (where applicable), the Groupon has been electronically delivered to the purchaser and a listing of Groupons sold has been made available to the merchant. At that time, the Company's obligations to the merchant, for which it is serving as a marketing agent, are substantially complete. The Company's remaining obligations, which are limited to remitting payment to the merchant and continuing to make available on the Company's website the listing of Groupons sold that were previously provided to the merchant, are inconsequential or perfunctory. The Company records as revenue the net amount it retains from the sale of Groupons after paying an agreed upon percentage of the purchase price to the featured merchant, excluding any applicable taxes. Revenue is recorded on a net basis because the Company is acting as a marketing agent of the merchant in the transaction.

For merchant payment arrangements that are structured under a redemption model, merchant partners are not paid until the customer redeems the Groupon that has been purchased. If a customer does not redeem the Groupon under this payment model, the Company retains all the gross billings. The Company recognizes revenue from unredeemed Groupons and derecognizes the related accrued merchant payable when its legal obligation to the merchant expires, which the Company believes is shortly after deal expiration in most jurisdictions that have payment arrangements structured under a redemption model. However, the Company has historically concluded based on its interpretation of applicable German law that its obligation to merchants in that jurisdiction extended for three years. Due to a recent German tax ruling, which will require the Company to remit value-added taxes (VAT) earlier on unredeemed Groupons, the Company began recognizing revenue from unredeemed Groupons in Germany shortly after deal expiration during the quarter ended September 30, 2012, consistent with most other jurisdictions. As a result, the quarter ended September 30, 2012 includes an $18.5 million one-time increase to third party revenue, which represents the cumulative impact of deals in Germany for which, based on the recent tax ruling, the Company's obligation to the merchant would have ended prior to the current quarterly period (i.e., prior to July 1, 2012).

Direct revenue recognition

The Company evaluates whether it is appropriate to record the gross amount of its sales and related costs by considering a number of factors, including, among other things, whether the Company is the primary obligor under the arrangement, has inventory risk and has latitude in establishing prices.

Direct revenue is derived primarily from selling products through the Company's Goods category where the Company is the merchant of record. The Company is the primary obligor in these transactions, is subject to general inventory risk and has latitude in establishing prices. Accordingly, direct revenue is recorded on a gross basis. Direct revenue, including associated shipping revenue, is recorded when the products are shipped and title passes to customers. For Goods transactions where the Company is performing a service by acting as a marketing agent of the merchant responsible for fulfillment, revenue is recorded on a net basis and is presented within third party revenues.

Cost of revenue

Cost of revenue is comprised of direct and indirect costs incurred to generate revenue. For direct revenue transactions, cost of revenue includes the purchase price of consumer products, warehousing, shipping costs and inventory markdowns. For third party revenue transactions, cost of revenue includes estimated refunds that are not recoverable from the merchant, for which the Company records a liability based upon the nature of the product or service and historical experience. Other costs incurred to generate revenue, which include credit card processing fees, editorial costs, certain technology costs, web hosting, and other processing fees, are allocated to cost of third party revenue, direct revenue and other revenue in proportion to relative gross billings during the period.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Technology costs in cost of revenue consist of a portion of the payroll and stock‑based compensation expense related to the Company's technology support personnel who are responsible for operating and maintaining the infrastructure of the Company's existing website. Such technology costs also include website hosting and email distribution costs. Editorial costs consist of a portion of the payroll and stock‑based compensation expense related to the Company's editorial personnel, as these staff members are primarily dedicated to drafting and promoting merchant deals.

Refunds

The Company estimates future refunds utilizing a statistical model that incorporates the following data inputs and factors: historical refund experience developed from millions of deals featured on the Company's website, the relative risk of refund based on expiration date, deal value, deal category and other qualitative factors that could impact the level of future refunds, such as introductions of new deals, discontinuations of legacy deals and expected changes, if any, in Company practices in response to refund experience or economic trends that might impact customer demand.

In early 2012, actual refund activity for deals featured late in 201l was demonstrating a consistent trend that was deviating from the modeled refund behavior, due in part to a shift in fourth quarter deal mix and higher price point offers. Accordingly, the Company updated its refund model to better capture variations in trends in its business. By continually refining the refund model to reflect such data inputs as discussed above, the Company believes its model enables it to track and anticipate refund behavior.

The Company accrues costs associated with refunds in accrued expenses on the condensed consolidated balance sheets. The cost of refunds for third party revenue where the amount payable to the merchant is recoverable and for all direct revenue is presented in the condensed consolidated statements of operations as a reduction to revenue. The cost of refunds for third party revenue when there is no amount recoverable from the merchant is presented as a cost of revenue.

The Company assesses the trends that could affect its estimates and makes changes to the refund reserve quarterly when it appears that refunds may differ from its original estimates. If actual results are not consistent with the estimates or assumptions stated above, the Company may need to change its future estimates, and the effects could be material to the condensed consolidated financial statements.

Cost method investments

Non-marketable equity investments for which the Company does not have the ability to exercise significant influence are accounted for using the cost method of accounting and classified within investments in equity interests on the condensed consolidated balance sheets. Under the cost method, investments are carried at cost and are adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. The Company evaluates the value of cost method investments for other-than-temporary impairment on a quarterly basis. See Note 10, "Fair Value Measurements" for information about the fair values and carrying amounts of cost method investments.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

2. ACQUISITIONS

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



Fair Value of Consideration Transferred	Fair Value
Cash	$	46,913
Purchase price obligations	3,364
Contingent consideration	2,521
Total	$	52,798

Liabilities for contingent consideration (i.e., earn-outs) are measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred and subsequent changes in fair value recorded in earnings as acquisition-related expense (benefit), net. The Company determines the fair values of contingent consideration liabilities based on the likelihood of contingent earn-out payments and stock issuances. See Note 10 “Fair Value Measurements" for information about subsequent fair value measurements of contingent consideration liabilities.

The following table summarizes the preliminary allocation of the fair value of consideration transferred as of the acquisition date (in thousands):



Description	Fair Value
Net working capital (including acquired cash of $2.1 million)	$	1,750
Property and equipment, net	165
Goodwill	32,557
Intangible assets⁽¹⁾:
Subscriber relationships	170
Merchant relationships	1,370
Developed technology	20,070
Deferred tax liability	(3,284		)
Total Purchase Price	$	52,798


(1)	Acquired intangible assets have estimated useful lives of 2 years.

The fair value of consideration transferred is being allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on their corresponding acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocations are preliminary as the Company is in the process of finalizing the intangibles valuations. The goodwill of $32.6 million represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The Company paid this premium for a number of reasons, including acquiring an experienced workforce. The goodwill is not deductible for tax purposes.

Pro forma results of operations have not been presented because the effects of these business combinations, individually and in the aggregate, were not material to the Company's condensed consolidated results of operations.

Purchases of Additional Interests in Consolidated Subsidiaries

During the nine months ended September 30, 2012, the Company acquired additional shares in various majority-

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

owned subsidiaries, including both shares owned by investors not employed by the Company, as well as subsidiary stock-based compensation awards that were granted in conjunction with the original acquisitions. The acquired subsidiary stock-based compensation awards were classified as liabilities mainly due to the existence of rights that allow the holders to sell their shares back to the Company.

In February 2012, the Company acquired an additional interest in one majority-owned subsidiary for $2.5 million. Additionally, in connection with this transaction, certain liability-classified subsidiary stock-based compensation awards were settled in exchange for $2.5 million. Also in February 2012, the Company settled certain liability-classified subsidiary stock-based compensation awards in exchange for $2.4 million of cash, $0.5 million of Class A common stock and $1.7 million of deferred compensation that will be recognized as compensation expense over a service period of two years and is payable in $1.3 million of cash and $0.4 million of Class A common stock.

In May 2012, the Company acquired additional interests of two majority-owned subsidiaries for an aggregate purchase price of $6.6 million, including $6.0 million of cash and $0.6 million of Class A common stock.

3. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the Company's goodwill activity for the nine months ended September 30, 2012 (in thousands):



	North America			International			Consolidated
Balance as of December 31, 2011	$	40,731		$	126,172		$	166,903
Goodwill related to acquisitions	32,557			—			32,557
Other adjustments⁽¹⁾	(1,254		)	(1,228		)	(2,482		)
Balance as of September 30, 2012	$	72,034		$	124,944		$	196,978


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

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table summarizes the Company's other intangible assets (in thousands):



	As of December 31, 2011
Asset Category	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Subscriber relationships	$	41,272	$	12,882	$	28,390
Merchant relationships	6,600		6,600		—
Trade names	5,801		5,801		—
Developed technology	5,583		2,151		3,432
Other intangible assets	15,420		1,575		13,845
Total	$	74,676	$	29,009	$	45,667



	As of September 30, 2012
Asset Category	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Subscriber relationships	$	41,161	$	18,853	$	22,308
Merchant relationships	7,920		6,550		1,370
Trade names	5,751		5,751		—
Developed technology	25,422		9,432		15,990
Other intangible assets	15,469		3,690		11,779
Total	$	95,723	$	44,276	$	51,447

Amortization expense for these intangible assets was $3.4 million and $5.6 million for the three months ended September 30, 2011 and 2012, respectively, and $14.1 million and $15.6 million for the nine months ended September 30, 2011 and 2012, respectively.

As of September 30, 2012, the Company's estimated future amortization expense of these intangible assets was as follows (in thousands):



Year Ending December 31, 2011
Remaining amounts in 2012	$	6,199
2013	22,933
2014	13,703
2015	6,949
2016	1,663
Thereafter	—
	$	51,447

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

4. INVESTMENTS IN EQUITY INTERESTS

The following table summarizes the Company's investments in equity interests (dollars in thousands):



	December 31, 2011		Percent Ownership of Common Stock				September 30, 2012		Percent Ownership of Common and Preferred Stock
Cost method:
Life Media Limited	$	—	—			%	$	128,074	19			%
Equity method:
E-Commerce King Limited	49,395		49			%	—		—			%
Other investments in equity interests	1,209		50	%	or less		2,965		50	%	or less
Total investments in equity interests	$	50,604					$	131,039

Equity Method Investment in E-Commerce King Limited

In January 2011, the Company acquired 40% of the ordinary shares of E-Commerce King Limited (“E-Commerce”), a company organized under the laws of the British Virgin Islands, in exchange for $4.0 million. The Company entered into the joint venture along with Rocket Asia GmbH & Co. KG (“Rocket Asia”), an entity controlled by former CityDeal shareholders Oliver Samwer, Marc Samwer and Alexander Samwer. Rocket Asia acquired 10% of the ordinary shares in E-Commerce. E-Commerce subsequently established a wholly-owned foreign enterprise that created a domestic operating company headquartered in Beijing, China.

On July 31, 2011, the Company entered into an agreement to purchase additional interests in E-Commerce from Rocket Asia for a purchase price of $45.2 million, consisting of 2,908,856 shares of non-voting common stock. The investment increased the Company's ownership from 40% to 49%.

Throughout 2011 and 2012, the Company made cash investments in E-commerce for an aggregate amount of $32.9 million. As of May 31, 2012, the Company's ownership in E-Commerce was 49.8%.

In June 2012, Life Media Limited (F-tuan), an exempted company incorporated under the laws of the Cayman Islands with operations in China, acquired E-Commerce. In exchange for its 49.8% interest in E-Commerce and an additional $25.0 million of cash consideration, the Company received a 19% interest in F-tuan in the form of common and Series E preferred shares. The Company paid $5.0 million of the cash consideration on June 25, 2012 and the remaining amount was paid on July 2, 2012.

The Company recognized a non-operating pre-tax gain of $56.0 million as a result of the transaction, which is included in "Interest and other income, net" on the condensed consolidated statement of operations. The gain represents the excess of the fair value of the Company's 19% investment in F-tuan over the carrying value of its E-Commerce investment as of the date of the transaction and the $25.0 million of cash consideration for the Series E preferred shares.

Cost Method Investment in Life Media Limited

The investment in Life Media Limited is accounted for using the cost method because the Company does not have the ability to exercise significant influence. The total investment of $128.1 million, which represents the fair value on the date the Company obtained this investment, is classified within "Investments in equity interests" on the condensed consolidated balance sheet as of September 30, 2012. The investment will be adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. The approximate fair value of the investment as of September 30, 2012 was $124.9 million. As of September 30, 2012, the gross unrealized loss of the Company's investment in Life Media was $3.2 million, which has been in an unrealized loss position for less than 12 months.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

5. VARIABLE INTEREST ENTITY

On May 9, 2011, the Company entered into a collaborative arrangement which was later amended on January 1, 2012 to create a jointly-owned sales category with a strategic partner ("Partner"), and a limited liability company ("LLC") was established. The Company and its Partner each owns 50% of the LLC, and income and cash flows of the LLC are allocated based on agreed upon percentages between the Company and the Partner. The liabilities of the LLC are solely the LLC's obligations and are not obligations of the Company or the Partner.

The Company's obligations associated with its interests in the LLC are primarily building, maintaining, customizing, managing and operating the LLC website, contributing intellectual property, identifying deals and promoting the sale of deal vouchers, coordinating the fulfillment of deal vouchers in certain instances and providing the record keeping.

Under the LLC agreement, the LLC shall be dissolved upon the occurrence of any of the following events: (1) either party becoming a majority owner; (2) the third anniversary of the date of the LLC agreement; (3) certain elections of the Company or the Partner based on the operational and financial performance of the LLC or other changes to certain terms in the agreement; (4) election of either the Company or the Partner in the event of bankruptcy by the other party; (5) sale of the LLC; or (6) a court's dissolution of the LLC.

Variable interest entities (VIEs) are entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest (i.e., the ability to make significant decisions through voting rights and the right to receive the expected residual returns of the entity or the obligation to absorb the expected losses of the entity). A variable interest holder that has both (a) the power to direct the activities of the VIE that most significantly impact its economic performance and (b) either an obligation to absorb losses or a right to receive benefits that could potentially be significant to the VIE is referred to as the primary beneficiary and must consolidate the VIE.

The Company has determined that the LLC is a VIE and the Company is its primary beneficiary. The Company consolidates the LLC because it has the power to direct activities of the LLC that most significantly impact the LLC's economic performance. In particular, the Company identifies and promotes the deal vouchers, provides all of the back office support (i.e. website, contracts, personnel resources, accounting, etc.), presents the LLC's deals via email and the Company's website and provides the editorial resources that create the verbiage included on the website with the LLC's deal offer.

6. SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION

The following table summarizes the Company's accrued expenses (in thousands):



	As of December 31, 2011		As of September 30, 2012
Refunds reserve	$	67,452	$	69,826
Marketing	33,472		14,042
Payroll and benefits	36,404		57,665
Subscriber rewards and credits	36,144		61,438
Professional fees	18,656		15,690
Other	19,879		26,422
Total accrued expenses	$	212,007	$	245,083

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

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



	As of December 31, 2011		As of September 30, 2012
Income taxes payable	$	70,861	$	47,451
VAT and sales tax payable	50,554		63,745
Other	23,258		60,226
Total other current liabilities	$	144,673	$	171,422

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



	As of December 31, 2011		As of September 30, 2012
Long-term tax liabilities	$	55,127	$	56,246
Other	15,639		18,397
Total other non-current liabilities	$	70,766	$	74,643

7. COMMITMENTS AND CONTINGENCIES

The Company's commitments as of September 30, 2012 did not materially change from the amounts set forth in the Company's 2011 Annual Report on Form 10-K.

Legal Matters

From time to time, the Company is party to various legal proceedings incident to the operation of its business. For example, the Company is currently involved in proceedings by former employees, intellectual property infringement suits (as discussed below) and suits by customers (individually or as class actions) alleging, among other things, violation of the Credit Card Accountability, Responsibility and Disclosure Act and state laws governing gift cards, stored value cards and coupons. The following is a brief description of the more significant legal proceedings.

On February 8, 2012, the Company issued a press release announcing its expected financial results for the fourth quarter of 2012. After finalizing its year-end financial statements, the Company announced on March 30, 2012 revised financial results, as well as a material weakness related to deficiencies in its financial statement close process. The revisions resulted in a reduction to fourth quarter 2011 revenue of $14.3 million. The revisions also resulted in an increase to fourth quarter operating expenses that reduced operating income by $30.0 million, net income by $22.6 million and earnings per share by $0.04. Following this announcement, the Company and several of its current and former directors and officers were named as parties to the following outstanding securities and stockholder derivative lawsuits all arising out of the same alleged events and facts.

Five putative federal class action securities complaints have been filed against the Company, certain of its directors and officers, and the underwriters that participated in the initial public offering of the Company's Class A common stock. All five cases are currently pending before the United States District Court for the Northern District of Illinois: Zhang v. Groupon, Inc., et al. was filed on April 3, 2012; Roselli v. Groupon, Inc., et al. was filed on April 3, 2012; Einspahr v. Groupon, Inc., et al. was filed on April 6, 2012; Pedrow v. Groupon, Inc., et al. was filed on April 16, 2012; and Cottrell v. Groupon, Inc., et al. was filed on April 27, 2012. All five complaints assert claims pursuant to Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Two of the complaints additionally attempt to assert claims pursuant to Section 12(a)(2) of the Securities Act of 1933. Allegations in the complaints include that the Company and its officers and directors made untrue statements or omissions of material fact by issuing inaccurate financial statements for the fiscal quarter and the fiscal year ending December 31, 2011 and by failing to disclose information about the Company's financial controls in the registration statement and prospectus for the Company's initial public offering of Class A common stock and in the Company's subsequently-issued financial statements. The putative class action lawsuits seek an unspecified amount of monetary damages, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief. On June 8, 2012, the court entered an order consolidating all five federal class actions under the caption In re Groupon, Inc. Securities Litigation, Master File No. 12- CV-2450. On August 28, 2012, the court issued an order appointing Michael Cohn as lead plaintiff and the law firm of Pomerantz Haudek Grossman & Gross LLP as lead counsel. The lead plaintiff filed a consolidated complaint on October 29, 2012. The defendants have until December 28, 2012 to file their responsive pleadings or motions.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

In addition, six federal and two state purported stockholder derivative lawsuits have been filed against certain of the Company's current and former directors and officers. All six federal derivative cases are currently pending in the United States District Court for the Northern District of Illinois: Monturano v. Lefkofsky, et al. was filed on April 5, 2012; Wong v. Mason, et al. was filed on April 12, 2012; Potter v. Mason, et al. was filed on April 30, 2012, Martin v. Mason, et al. was filed on May 4, 2012; Lutz v. Mason, et al. was filed on May 14, 2012; and Tipnis v. Mason, et. al. was filed on May 16, 2012. In the federal derivative complaints, plaintiffs assert claims for breach of fiduciary duty, abuse of control and for unjust enrichment. The state derivative cases are currently pending before the Chancery Division of the Circuit Court of Cook County, Illinois: Orrego v. Lefkofsky, et al., was filed on April 5, 2012; and Kim v. Lefkofsky, et al., was filed on May 25, 2012. The derivative complaints generally allege that the defendants breached their fiduciary duties by purportedly mismanaging the Company's business by, among other things, failing to utilize proper accounting controls and, in the case of one of the state derivative lawsuits, by engaging in alleged insider trading of the Company's Class A common stock and misappropriating information. In addition, one state derivative case asserts a claim for unjust enrichment. The derivative lawsuits purport to seek to recoup for the Company an unspecified amount of monetary damages allegedly sustained by the Company, restitution from defendants, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief. On May 30, 2012, the federal court entered an order consolidating all six federal derivative actions and appointing lead plaintiff and co-lead counsel, and the consolidated action was subsequently assigned the caption In re: Groupon Derivative Litigation, File No. 12-CV-5300. On June 20, 2012, the Company and the individual defendants filed a motion requesting that the court stay the federal derivative actions pending resolution of the Federal Class Actions. On July 31, 2012, the court granted defendants' motion in part, and stayed the Federal derivative actions pending a separate resolution of upcoming motions to dismiss in the federal class actions. On June 15, 2012, the state plaintiffs filed a motion to consolidate the state derivative actions, which was granted on July 2, 2012, and on July 5, 2012, the plaintiffs filed a motion for appointment of co-lead plaintiffs and co-lead counsel, which was granted on July 27, 2012.

On September 14, 2012, the court granted a motion filed by the parties requesting that the court stay the state derivative actions pending the federal court's resolution of anticipated motions to dismiss in the federal class actions. The Company intends to defend all of the securities and shareholder derivative lawsuits vigorously.

In June 2012, the Company was sued for breach of contract in Berlin, Germany by Fast Group S.A. (“Airfast”). Airfast sold vouchers for air travel to a subsidiary of the Company for resale by the Company to its customers under two similar agreements. On June 5, 2012, Fast Group filed a lawsuit against the Company alleging that the Company failed to make payments due to Fast Group. This case is pending before the District Court (Landgericht) Berlin under case number 19 O 344/12. On August 2, 2012, Fast Group expanded its claim to increase the amounts alleged to be due. The Company has filed an Answer and a Counterclaim on September 13, 2012. An oral hearing is scheduled for December 14, 2012. On August 27, 2012 and September 4, 2012, Fast Group filed additional lawsuits with respect to a similar agreement. The cases are pending before the District Court (Landgericht) Berlin under case numbers 19 O 447/12 and 7 O 343/12, respectively. The Company has filed an answer on October 10, 2012 with respect to the August 27, 2012 suit and intends to file an answer shortly with respect to September 4, 2012 suit. The District Court has not scheduled hearing dates yet. The Company believes it has meritorious defenses to the lawsuit and does not expect any resolution of the lawsuit to be material to its results of operations.

In addition, third parties have from time to time claimed, and others may claim in the future, that the Company has infringed their intellectual property rights. The Company is subject to intellectual property disputes, and expects that it will increasingly be subject to intellectual property infringement claims as its services expand in scope and complexity. The Company has in the past been forced to litigate such claims, and several of these claims are currently pending. The Company may also become more vulnerable to third-party claims as laws such as the Digital Millennium Copyright Act are interpreted by the courts, and as the Company becomes subject to laws in jurisdictions where the underlying laws with respect to the potential liability of online intermediaries are either unclear or less favorable. The Company believes that additional lawsuits alleging that it has violated patent, copyright or trademark laws will be filed against it. Intellectual property claims, whether meritorious or not, are time consuming and costly to resolve, could require expensive changes in the Company's methods of doing business, or could require it to enter into costly royalty or licensing agreements.

The Company is also subject to, or in the future may become subject to, a variety of regulatory inquiries across the jurisdictions where the Company conducts its business, including for example consumer protection, marketing practices, tax and privacy rules and regulations. Any regulatory actions against the Company, whether meritorious or not, could be time consuming, result in costly litigation, damage awards, injunctive relief or increased costs of doing business through adverse judgment or

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

settlement, require the Company to change its business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm the Company's business.

The Company assesses the likelihood of any adverse judgments or outcomes with respect to these matters and determines loss contingency assessments on a gross basis after assessing the probability of incurrence of a loss and whether a loss is reasonably estimable. In addition, the Company considers other relevant factors that could impact its ability to reasonably estimate a loss. A determination of the amount of reserves required, if any, for these contingencies is made after analyzing each matter. The Company's reserves may change in the future due to new developments or changes in strategy in handling these matters.

Although the results of litigation and claims cannot be determined, based on the information currently available the Company currently believes that the final outcome of these matters will not have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

Indemnifications

In the normal course of business to facilitate transactions related to its operations, the Company indemnifies certain parties, including lessors and from time to time merchants with respect to certain matters. The Company has agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company's bylaws contain similar indemnification obligations to agents.

It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, the payments that the Company has made under these agreements have not had a material impact on the operating results, financial position, or cash flows of the Company.

8. STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION

Common Stock

The Board of Directors of the Company (the Board) has authorized three classes of common stock: Class A common stock, Class B common stock and common stock. No shares of common stock will be issued or outstanding until November 5, 2016, at which time all outstanding shares of Class A common stock and Class B common stock will automatically convert into shares of common stock. In addition, the Board authorized shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by the Board.

The Company's authorized common stock has a par value of $0.0001 per share, and consists of 2,000,000,000 shares designated as Class A common stock, 10,000,000 shares designated as Class B common stock and 2,010,000,000 shares designated as common stock. As of September 30, 2012, there were 652,501,880 shares of Class A common stock and 2,399,976 shares of Class B common stock outstanding.

Groupon, Inc. Stock Plans

The Groupon, Inc. Stock Plans (the "Plans") are administered by the Compensation Committee of the Board, which determines the number of awards to be issued, the corresponding vesting schedule and the exercise price for options. As of September 30, 2012, 30,857,092 shares were available for future issuance under the Plans.

The Company recognized stock-based compensation expense of $3.3 million and $22.6 million during the three months ended September 30, 2011 and 2012, respectively, and $60.9 million and $77.7 million during the nine months ended September 30, 2011 and 2012, respectively, related to stock awards issued under the Plans, acquisition-related awards and subsidiary awards. The Company also capitalized $3.2 million and $5.6 million of stock-based compensation during the three and nine months ended

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

September 30, 2012, respectively, in connection with internally developed software. No amounts were capitalized during the three and nine months ended September 30, 2011.

As of September 30, 2012, a total of $251.9 million of unrecognized compensation costs related to unvested stock awards, unvested acquisition-related awards and unvested subsidiary awards are expected to be recognized over the remaining weighted average period of two years.

Stock Award Activity

The table below summarizes the stock option activity during the nine months ended September 30, 2012:



	Options		Weighted- Average Exercise Price	Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands) (1)
Outstanding at December 31, 2011	17,870,713		$1.12	8.06	$	348,743
Exercised	(8,334,131	)	$1.06
Forfeited	(657,333	)	$2.34
Expired	(14,293	)	$1.78
Outstanding at September 30, 2012	8,864,956		$1.07	7.25	$	32,752

Exercisable at September 30, 2012	4,982,867		$0.82	6.93	$	19,645

(1)

The aggregate intrinsic value of options outstanding and exercisable represents the total pretax intrinsic value (the difference between the fair value of the Company's stock on the last day of each period and the exercise price, multiplied by the number of options where the exercise price exceeds the fair value) that would have been received by the option holders had all option holders exercised their options as of December 31, 2011 and September 30, 2012, respectively.

The table below summarizes the restricted stock unit activity during the nine months ended September 30, 2012:



	Restricted Stock Units		Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2011	11,944,844		$	12.23
Granted	22,759,517		$	9.83
Vested	(3,225,241	)	$	10.63
Forfeited	(2,385,596	)	$	15.36
Unvested at September 30, 2012	29,093,524		$	10.29

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

9. EARNINGS (LOSS) PER SHARE OF CLASS A AND CLASS B COMMON STOCK

The following tables set forth the computation of basic and diluted net loss per share of common stock for the three and nine months ended September 30, 2011 (in thousands, except share amounts and per share amounts):



	Three Months Ended September 30,			Nine Months Ended September 30,
	2011			2011
Net loss	$	(14,416	)	$	(238,083	)
Redemption of preferred stock in excess of carrying value	—			(34,327		)
Adjustment of redeemable noncontrolling interests to redemption value	(43,656		)	(59,307		)
Less: Net loss attributable to noncontrolling interests	3,843			23,602
Net loss attributable to common stockholders	$	(54,229	)	$	(308,115	)

Net loss per share:
Weighted-average shares outstanding for basic and diluted net loss per share⁽¹⁾	307,605,060			305,288,502
Basic and diluted net loss per share	$	(0.18	)	$	(1.01	)

(1)

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

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following tables set forth the computation of basic and diluted earnings per share of Class A and Class B common stock for the three and nine months ended September 30, 2012 (in thousands, except share amounts and per share amounts):



	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Class A			Class B			Class A		Class B
Basic earnings per share:
Numerator
Allocation of net (loss) income	$	(937	)	$	(3	)	$	28,908	$	108
Less: Allocation of adjustment of redeemable noncontrolling interests to redemption value	1,328			5			12,452		46
Less: Allocation of net income attributable to noncontrolling interests	703			3			2,796		10
Allocation of net (loss) income attributable to common stockholders	(2,968		)	(11		)	13,660		52
Denominator
Weighted-average common shares outstanding	650,823,634			2,399,976			645,621,967		2,399,976
Basic earnings per share	$(0.00)			$(0.00)			$0.02		$0.02

Diluted earnings per share:
Numerator
Allocation of net income attributable to common stockholders	$	(2,968	)	$	(11	)	$	13,660	$	52
Reallocation of net income attributable to common stockholders as a result of conversion of Class B	—			—			52		—
Allocation of net income attributable to common stockholders	(2,968		)	(11		)	13,712		52
Denominator
Weighted-average common shares outstanding used in basic computation	650,823,634			2,399,976			645,621,967		2,399,976
Conversion of Class B	—			—			2,399,976		—
Employee stock options	—			—			10,909,749		—
Restricted shares and RSUs	—			—			4,625,558		—
Weighted-average diluted shares outstanding	650,823,634			2,399,976			663,557,250		2,399,976
Diluted earnings per share	$(0.00)			$(0.00)			$0.02		$0.02

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following outstanding equity awards are not included in the diluted net (loss) earnings per share calculation above because they would have had an antidilutive effect:



	Three Months Ended September 30,		Nine Months Ended September 30,
Antidilutive equity awards	2011	2012	2011	2012
Stock options	18,407,510	8,864,956	18,407,510	9,018
Restricted stock units	10,575,100	29,093,524	10,575,100	7,249,438
Restricted stock	86,758	39,390	86,758	—
Convertible preferred shares	293,309,716	—	293,309,716	—
Total	322,379,084	37,997,870	322,379,084	7,258,456

10. FAIR VALUE MEASUREMENTS

Fair value is defined under GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs in valuation methodologies used to measure fair value:

Level 1-Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2-Include other inputs that are directly or indirectly observable in the marketplace.

Level 3-Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. These fair value measurements require significant judgment.

In determining fair value, the Company uses various valuation approaches within the fair value measurement framework. The valuation methodologies used for the Company's assets and liabilities measured at fair value and their classification in the valuation hierarchy are summarized below:

Cash equivalents - Cash equivalents primarily consisted of AAA-rated money market funds with overnight liquidity and no stated maturities. The Company classified cash equivalents as Level 1 due to the short-term nature of these instruments and measured the fair value based on quoted prices in active markets for identical assets.

Contingent consideration - The Company has contingent obligations to transfer cash payments and equity shares to the former owners in conjunction with certain acquisitions if specified future operational objectives and financial results are met over future reporting periods. Liabilities for contingent consideration (i.e., earn-outs) are measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred and subsequent changes in fair value recorded in earnings as acquisition-related expense (benefit), net.

The Company uses one of two approaches to value the contingent consideration liabilities. The first is an income approach that is primarily determined based on the present value of probability-weighted future cash flows using internal models. The second is an option pricing methodology within a Black-Scholes framework. For contingent consideration to be settled in a variable number of shares of common stock, the Company used the most recent Groupon stock price as reported on the NASDAQ to determine the fair value of the shares potentially issuable as of December 31, 2011 and September 30, 2012. The Company has generally classified the contingent consideration liabilities as Level 3 due to the lack of relevant observable market data over fair value inputs such as probability-weighting for payment outcomes. Changes in assumptions could have an impact on the payout of contingent consideration with a maximum payout of $17.6 million.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following tables summarize the Company's assets and liabilities that are measured at fair value on a recurring basis (in thousands):



			Fair Value Measurement at Reporting Date Using
Description	As of December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	750,004	$	750,004	$	—	$	—

Liabilities:
Contingent consideration	$	13,218	$	—	$	1,988	$	11,230



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

Liabilities:
Contingent consideration	$	12,601	$	—	$	—	$	12,601

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table provides a roll-forward of the fair value of the contingent consideration categorized as Level 3 for the three and nine months ended September 30, 2011 and 2012 (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2012		2011			2012
Beginning balance	$	15,920		$	6,081	$	—		$	11,230
Issuance of contingent consideration in connection with acquisitions	1,835			2,100		17,755			2,100
Payments made on contingent liabilities	—			—		—			(4,250		)
Change in fair value and other ⁽¹⁾	(4,793		)	3,176		(4,793		)	2,277
Reclass of contingent consideration from Level 2 to Level 3	—			1,244		—			1,244
Ending balance	$	12,962		$	12,601	$	12,962		$	12,601

Unrealized (gains) losses still held ⁽²⁾	$	(4,793	)	$	3,176	$	(4,793	)	$	2,277


(1)	Changes in the fair value of contingent consideration liabilities are classified as "acquisition-related expense (benefit), net" in the condensed consolidated statements of operations.


(2)	Represents the unrealized gains (losses) recorded in earnings during the period for assets (and liabilities) classified as Level 3 that are still held (or outstanding) at the end of the period.

At December 31, 2011 and September 30, 2012, no material fair value adjustments were required for non-financial assets and liabilities.

Estimated Fair Value of Financial Assets and Liabilities Not Measured at Fair Value

The fair value and carrying amount of the Company's cost method investment in F-tuan were $124.9 million and $128.1 million, respectively, as of September 30, 2012. The fair value of this nonmarketable equity investment was determined using the income approach and the market approach. The income approach was primarily determined based on the present value of the probability-weighted future cash flows using internal models. The market approach was primarily determined based on a revenue multiple using prior year reported results and current year projections. The Company believes that this combination is an appropriate indicator of the investment's fair value in an orderly transaction between market participants. The Company classified the fair value measurement for this cost method investment as Level 3 because it involves significant unobservable inputs.

The Company's other financial instruments not carried at fair value consist primarily of short term certificates of deposit, accounts receivable, accounts payable, accrued merchant payables and accrued expenses. The carrying values of these assets and liabilities approximate their respective fair values as of December 31, 2011 and September 30, 2012 due to their short term nature.

11. INCOME TAXES

The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items.

For the three months ended September 30, 2011, the Company recorded an income tax expense of $11.2 million on a pre-tax loss of $3.2 million, for an effective tax rate of (353.2)%. For the three months ended September 30, 2012, the Company recorded income tax expense of $26.9 million on pre-tax income of $25.9 million, for an effective tax rate of 103.6%.

For the nine months ended September 30, 2011, the Company recorded an income tax expense of $9.5 million on a pre-tax loss of $228.6 million, for an effective tax rate of (4.2)%. For the nine months ended September 30, 2012, the Company recorded income tax expense of $128.3 million on pre-tax income of $157.3 million, for an effective tax rate of 81.6%.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The Company's U.S. statutory rate is 35%. The Company's effective tax rates for the three and nine months ended September 30, 2012 reflect losses in certain jurisdictions, which the Company was not able to benefit due to valuation allowances and the current year amortization expense of taxes paid from the 2011 taxable sale of certain intellectual property rights within the Company's international structure.

The Company's reserve for unrecognized tax benefits, exclusive of interest and penalties, as of September 30, 2012, increased from the balance as of December 31, 2011, by $10.1 million as a result of taxes attributable to current year operations. The total amount of unrecognized tax benefits at December 31, 2011 and September 30, 2012 that, if recognized, would affect the effective tax rate are $3.2 million and $24.8 million, respectively.

12. SEGMENT INFORMATION

The Company has organized its operations into two principal segments: North America, which represents the United States and Canada, and International, which represents the rest of the Company's global operations. Segment operating results reflect earnings before stock-based compensation, acquisition-related expense (benefit), net, interest and other income, net, loss on equity-method investees and provision (benefit) for income taxes. Segment information reported in the tables below represents the operating segments of the Company for which separate information is available and for which segment results are evaluated regularly by the Company's chief operating decision-maker (i.e., chief executive officer) in assessing performance and allocating resources.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2012			2011			2012
North America
Revenue⁽¹⁾	$	161,525		$	291,603		$	455,342		$	790,349
Segment cost of revenue and operating expenses⁽²⁾	142,689			252,510			468,785			667,655
Segment operating (loss) income	18,836			39,093			(13,443		)	122,694
International
Revenue	268,636			276,949			662,924			905,821
Segment cost of revenue and operating expenses⁽²⁾	289,164			265,554			811,766			838,503
Segment operating (loss) income	(20,528		)	11,395			(148,842		)	67,318
Consolidated
Revenue	430,161			568,552			1,118,266			1,696,170
Segment cost of revenue and operating expenses⁽²⁾	431,853			518,064			1,280,551			1,506,158
Segment operating (loss) income	(1,692		)	50,488			(162,285		)	190,012
Stock-based compensation	3,340			22,619			60,922			77,706
Acquisition-related (benefit) expense, net	(4,793		)	2,431			(4,793		)	744
Interest and other income, net	(8,269		)	(617		)	(9,808		)	(54,445		)
Loss on equity method investees	11,211			138			19,974			8,694
(Loss) income before income taxes	(3,181		)	25,917			(228,580		)	157,313
Provision for income taxes	11,235			26,857			9,503			128,297
Net (loss) income	$	(14,416	)	$	(940	)	$	(238,083	)	$	29,016


(1)	North America contains revenue from the United States of $147.9 million and $278.5 million for the three months ended September 30, 2011 and 2012, respectively, and $420.1 million and $746.8 million for the nine months ended September 30, 2011 and 2012, respectively.


(2)	Represents cost of revenue and operating expenses, excluding stock-based compensation and acquisition-related (benefit) expense, net, which are not allocated to segments.

The following table summarizes the Company's total assets (in thousands):



	As of December 31, 2011		As of September 30, 2012
North America ⁽¹⁾⁽³⁾	$	989,170	$	1,135,772
International⁽²⁾⁽³⁾	785,306		897,042
Consolidated total assets	$	1,774,476	$	2,032,814


(1)	North America contains assets from the United States of $981.0 million and $1,084.3 million at December 31, 2011 and September 30, 2012, respectively.


(2)	Total assets in the Netherlands represented approximately 11.5% of consolidated total assets at September 30, 2012. There were no other individual countries located outside of the United States that represented more than 10% of consolidated total assets at December 31, 2011 or September 30, 2012.


(3)	The December 31, 2011 total asset amounts have been reclassified in the disclosure above to conform to the current presentation, which excludes intercompany balances.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

13. RELATED PARTIES

Marketing Services

During 2011, the Company engaged InnerWorkings, Inc. (“InnerWorkings”) to provide marketing services. The Company's Executive Chairman, Eric Lefkofsky, is a former director and significant stockholder of InnerWorkings. Amounts paid in advance to InnerWorkings for services which had not yet been rendered as of September 30, 2012 totaled $1.3 million and were recorded in “Prepaid expenses and other current assets” on the condensed consolidated balance sheet.

Logistics Services

In connection with the Company's expansion of Goods offerings during 2012, the Company entered into a transportation and supply chain management agreement with Echo Global Logistics, Inc. ("Echo"). Three of the Company's directors, Peter Barris, Eric Lefkofsky and Bradley Keywell, either are currently or were previously in 2012 directors of Echo and have direct and/or indirect ownership interests in Echo. Pursuant to the agreement, Echo provided services either related to carrier rate negotiation and management, shipping origin and destination coordination, inventory facility set-up and management and supply chain cost analysis. Echo received payments of approximately $1.9 million for its services under the agreement for the nine months ended September 30, 2012, which were expensed by the Company through "Cost of revenue" on the condensed consolidated statements of operations. As the Goods category has expanded, the Company has hired other outside vendors for logistics services and as of September 30, 2012, the Company has terminated its arrangement with Echo.

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included under Item 1 of this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under "Risk Factors" and elsewhere in this Quarterly Report.

Overview

Our vision is to be the operating system for local commerce. As part of that vision, we act as the local commerce marketplace that connects merchants to consumers by offering goods and services at a discount. Traditionally, local merchants have tried to reach consumers and generate sales through a variety of methods, including telephone directories, direct mail, newspaper, radio, television and online advertisements and promotions. By bringing the brick and mortar world of local commerce onto the Internet, Groupon is creating a new way for local merchant partners to attract customers and sell goods and services. We provide consumers with savings and help them discover what to do, eat, see, buy and where to travel. We also provide a suite of other merchant-oriented products and services to consumers including a customer loyalty program, scheduler and payment processing.

Each day we email our subscribers discounted offers on goods, services and travel that are targeted by location, purchase history and personal preferences. Current and potential customers also access our deals directly through our websites and mobile applications. Our revenue from deals where we act as the third party marketing agent is the purchase price paid by the customer for a Groupon voucher ("Groupon") less an agreed upon percentage of the purchase price paid to the featured merchant partners, excluding any applicable taxes and net of estimated refunds for which the merchant's share is recoverable. Our direct revenue from deals where we act as the merchant of record is the purchase price paid by the customer for the Groupon excluding any applicable taxes and net of estimated refunds. In the nine months ended September 30, 2011, we generated revenue of $1,118.3 million, compared to $1,696.2 million in the nine months ended September 30, 2012. Revenue has increased as a result of expanding the scale of our business both domestically and internationally and as a result of expanding our products and services.

We have organized our operations into two principal segments: North America, which represents the United States and Canada, and International, which represents the rest of our global operations. For the nine months ended September 30, 2012, we derived 53.4% of our revenue from our International segment, compared to 46.6% from our North America segment.

Primarily as a result of our net losses in prior years, we have an accumulated deficit of $672.5 million as of September 30, 2012. Since our inception, we have driven our growth through substantial investments in infrastructure and marketing to increase customer acquisition. In particular, our net loss in previous years was driven primarily by the rapid expansion of our International segment, which involved investing heavily in upfront marketing, sales and infrastructure related to the build out of our operations in early stage countries. We intend to continue to pursue a strategy of significant investment in this segment and elsewhere in the future to support continued growth, consistent with the strategy we previously employed in North America and Europe.

How We Measure Our Business

We measure our business with several financial and operating metrics. We use these metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the long‑term performance of our marketplace. The key metrics are as follows:

Financial Metrics

•

Revenue. We believe revenue is an important indicator for our business. Our third party revenue is derived from deals where we act as the marketing agent and is the purchase price paid by the customer for the Groupon less an agreed upon percentage of the purchase price paid to the featured merchant partner, excluding any applicable taxes and net of estimated refunds for which the merchant's share is recoverable. Direct revenue, when the Company is selling the product as the merchant of record, is the purchase price paid by the customer, excluding any applicable taxes and net of estimated refunds.

•

Operating (loss) income excluding stock-based compensation and acquisition-related expense (benefit), net. Operating (loss) income excluding stock-based compensation and acquisition-related expense (benefit), net is the consolidated operating (loss) income of our two segments, North America and International, adjusted to exclude acquisition-related expense (benefit), net of stock-based compensation expense. Acquisition-related expense (benefit), net represents the change in the fair value of contingent consideration arrangements related to business combinations. Stock-based compensation expense is primarily a non-cash item. As reported under U.S. GAAP, we do not allocate stock‑based compensation and acquisition‑related expense (benefit), net to our segments. We use operating (loss) income excluding stock-based compensation and acquisition-related expense (benefit) to allocate resources and evaluate performance internally. Operating (loss) income excluding stock-based compensation and acquisition-related expense (benefit) is a non‑GAAP financial measure. For further information and a reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the "Results of Operations" section.

•

Free cash flow. Free cash flow is "Net cash provided by operating activities" less "Purchases of property and equipment and software capitalization." We use free cash flow, and ratios based on it, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it typically will present a more appropriate measure of cash flows as purchases of fixed assets, software developed for internal use and website development costs are a necessary component of ongoing operations. Free cash flow is a non-GAAP financial measure. For further information and a reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the "Results of Operations" section.

Operating Metrics

•

Gross billings. This metric represents the total dollar value of customer purchases of goods and services, excluding applicable taxes and net of estimated refunds. For third party revenue deals, gross billings differs from third party revenues reported in our consolidated statements of operations, which are presented net of the merchant's share of the transaction price. For direct revenue deals, gross billings are equivalent to direct revenues reported in our condensed consolidated statements of operations. We consider this metric to be an important indicator of our growth and business performance as it is a proxy for the dollar volume of transactions through our marketplace, net of tax and refunds for which the merchant's share is recoverable. Tracking gross billings also allows us to track changes in the percentage of gross billings that we are able to retain after payments to our merchant partners.


•	Active customers. We define active customers as unique user accounts that have purchased Groupons during the trailing twelve months. We consider this metric to be an important indicator of our business performance as it helps us to understand how the number of customers actively purchasing Groupons is trending.

•

Gross billings per average active customer. This metric represents the trailing twelve months gross billings generated per average active customer. This metric is presented as the total gross billings generated in the trailing twelve months, divided by the average number of active customers in such time period. Although we believe total gross billings, not trailing twelve months gross billings per average active customer, is a better indication of the overall growth of our marketplace over time, trailing twelve months gross billings per average active customer provides an opportunity to evaluate whether our growth is primarily driven by growth in total customers or in spend per customer in any given period.

•

Revenue per average active customer. This metric represents the trailing twelve months revenue generated per average active customer. This metric is presented as the revenue generated in the trailing twelve months, divided by the average number of active customers in such time period. We believe revenue, not trailing twelve months revenue per average active customer, is a better indication of the overall growth of our business. As third party revenue, which is reported net of amounts payable to the featured merchant partners, represents the majority of our total revenue, trailing twelve month revenue per average active customer provides some indication as to whether our average customer is purchasing deals with a higher or lower percentage of gross billings retained by Groupon. This amount also reflects, however, the direct revenue from sales related to Groupon Goods reported on a gross basis.



	Trailing Twelve Months Ended September 30,
	2011		2012
Operating Metrics:
Gross billings (in thousands) ⁽¹⁾	$	3,169,902	$	5,090,600
TTM Active customers (in thousands)⁽²⁾	28,906		39,525
TTM Gross billings per average active customer ⁽³⁾	$	188.55	$	148.78
Revenue per average active customer ⁽⁴⁾	$	76.49	$	63.96


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


(2)	Reflects the total number of unique accounts that have purchased Groupons during the trailing twelve months.


(3)	Reflects the total gross billings generated in the trailing twelve months per average active customer in the applicable period.


(4)	Reflects the revenue generated in the trailing twelve months per average active customer in the applicable period.

Factors Affecting Our Performance

Deal sourcing and quality. We consider our merchant partner relationships to be a vital part of our business model and have made significant investments in order to expand the variety of services that we can provide to our merchant partners. We depend on our ability to attract and retain merchants that are prepared to offer products or services on compelling terms, particularly as we attempt to expand our product and service offerings in order to create a more complete online marketplace for local commerce. We generally do not have long-term arrangements to guarantee availability of deals that offer attractive quality, value and variety to consumers or favorable payment terms to us. If new merchants do not find our marketing and promotional services effective, or if our existing merchants do not believe that utilizing our services provides them with a long-term increase in customers, revenue or profit, they may stop making offers through our marketplace.

International operations. Our international operations are critical to our revenue growth and our ability to achieve and maintain profitability. For the nine months ended September 30, 2011 and 2012, 59.3% and 53.4%, respectively, of our revenue was generated from our International segment. Expansion into and operations in international markets requires management attention and resources and requires us to localize our services to conform to a wide variety of local cultures, business practices, laws and policies. International acquisitions also expose us to a variety of execution risks. The different commercial and Internet infrastructure in other countries may make it more difficult for us to replicate our current and future business model.

Marketing costs. We must continue to acquire and retain customers who purchase Groupons in order to increase revenue and achieve profitability. If consumers do not perceive our Groupon offerings to be attractive, or if we fail to introduce new or more relevant deals, we may not be able to acquire or retain customers. In our limited operating history, we have not incurred significant marketing or other expense on initiatives designed to re-activate customers or increase the level of purchases by our existing customers. As we incur such expenditures, our business and profitability could be adversely affected.

Investment in growth. We have been a high-growth company and have aggressively invested, and intend to continue to invest, to support this growth. For example, we are developing a suite of merchant products, such as payment processing, point of sale, scheduling and rewards, which require substantial investment and these products do not currently generate a material amount of revenue. As a result, we have incurred net losses in the majority of quarters since our inception. We anticipate that we will make substantial investments in the foreseeable future as we continue to increase the number and variety of deals we offer each day, broaden our customer base, expand our marketing channels, expand our operations, hire additional employees and develop our technology.

Competitive pressure. Our growth and geographical expansion have drawn a significant amount of attention to our business model. As a result, a substantial number of companies that attempt to replicate our business model have emerged around the world. We expect new competitors to emerge. In addition to such competitors, we expect to increasingly compete against other large Internet and technology‑based businesses that have launched initiatives which are directly competitive to our core business as well as our other categories and our suite of merchant products, such as payment processing, point of sale and rewards. We also expect to compete against other Internet sites that are focused on specific communities or interests and offer coupons or discount arrangements related to such communities or interests.

Basis of Presentation

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

Results of Operations

Comparison of the nine months ended September 30, 2011 and 2012:



	Nine Months Ended September 30,
	2011			2012
	(in thousands)
Revenue:
Third party and other revenue	$	1,111,094		$	1,466,602
Direct revenue	7,172			229,568
Total revenue	1,118,266			1,696,170
Cost of revenue:
Third party and other revenue	156,907			233,834
Direct revenue	5,707			202,634
Total cost of revenue	162,614			436,468
Operating expenses:
Marketing	613,173			275,941
Selling, general and administrative	565,686			871,455
Acquisition-related (benefit) expense, net	(4,793		)	744
Total operating expenses	1,174,066			1,148,140
(Loss) income from operations	(218,414		)	111,562
Interest and other income, net	9,808			54,445
Loss on equity method investees	(19,974		)	(8,694		)
(Loss) income before provision for income taxes	(228,580		)	157,313
Provision for income taxes	9,503			128,297
Net (loss) income	(238,083		)	29,016
Less: Net loss (income) attributable to noncontrolling interests	23,602			(2,806		)
Net (loss) income attributable to Groupon, Inc.	(214,481		)	26,210
Redemption of preferred stock in excess of carrying value	(34,327		)	—
Adjustment of redeemable noncontrolling interests to redemption value	(59,307		)	(12,498		)
Net (loss) income attributable to common stockholders	$	(308,115	)	$	13,712

Impact of stock-based compensation on cost of revenue and operating expenses

Cost of revenue and operating expenses with and without stock-based compensation are as follows:



	Nine Months Ended September 30,
	2011									2012
	As reported			Stock-based compensation			Net			As reported		Stock-based compensation			Net
	(in thousands)
Total cost of revenue	$	162,614		$	(480	)	$	162,134		$	436,468	$	(2,355	)	$	434,113

Operating expenses:
Marketing	$	613,173		$	(1,039	)	$	612,134		$	275,941	$	(2,110	)	$	273,831
Selling, general and administrative	565,686			(59,403		)	506,283			871,455		(73,241		)	798,214
Acquisition-related (benefit) expense, net	(4,793		)	—			(4,793		)	744		—			744
Total operating expenses	$	1,174,066		$	(60,442	)	$	1,113,624		$	1,148,140	$	(75,351	)	$	1,072,789

Foreign exchange rate neutral operating results

The effect on the Company's condensed consolidated statements of operations from changes in exchange rates versus the U.S. dollar was as follows:



	Nine Months Ended September 30, 2012
	At Avg.		Exchange
	Q3 2011 YTD		Rate			As
	Rates⁽¹⁾		Effect ⁽²⁾			Reported
	(in thousands)
Revenue	$	1,765,476	$	(69,306	)	$	1,696,170
Costs and expenses	1,654,709		(70,101		)	1,584,608
Income (loss) from operations	$	110,767	$	795		$	111,562


(1)	Represents the outcome that would have resulted had exchange rates in the reporting period been the same as those in effect in the comparable prior year period.


(2)	Represents the increase or decrease in reported amounts resulting from changes in exchange rates from those in effect in the comparable prior year period.

Gross Billings

Gross billings increased to $3,859.7 million for the nine months ended September 30, 2012 from $2,754.6 million for the nine months ended September 30, 2011, reflecting a growth rate of 40.1%. Gross billings have increased due to an increase in the volume of transactions as we continue to grow our business. We have experienced growth in our traditional local deals category in addition to our goods, travel and entertainment categories.

Revenue

We generate revenue from third party revenue deals, direct revenue deals and other transactions. Revenue for each of the periods was as follows:



	Nine Months Ended September 30,
	2011		2012
	(in thousands)
Revenue:
Third party revenue	$	1,109,104	$	1,449,172
Direct revenue	7,172		229,568
Other revenue	1,990		17,430
Total revenue	$	1,118,266	$	1,696,170

Revenue increased by $577.9 million to $1,696.2 million for the nine months ended September 30, 2012, as compared to $1,118.3 million for the nine months ended September 30, 2011. In addition to expanding the scale of our business domestically and internationally, several other initiatives have driven revenue growth over the recent period. Our historical marketing spend, which focused on acquiring customers through online channels, such as social networking websites and search engines, has contributed to our large revenue growth in the period. In addition, through our daily emails we have been increasingly targeting customers by sending them deals for specific locations and personal preferences. We also added substantially to our sales force in early 2012, allowing us to increase the number of merchant partner relationships, the volume of deals we offer on a daily basis on our websites and the quality of deals we offer to our customers. The unfavorable impact on revenue from year-over-year changes in foreign exchange rates for the nine months ended September 30, 2012 was $69.3 million.

Third Party Revenue

Third party revenue increased by $340.1 million to $1,449.2 million for the nine months ended September 30, 2012, as compared to $1,109.1 million for the nine months ended September 30, 2011. In addition to expanding the scale of our business domestically and internationally, several other initiatives have driven revenue growth during this period. We increased our total marketing spend significantly in 2011, focusing on acquiring customers through online channels, such as social networking websites and search engines, which we believe contributed to the increase in revenue during the nine months ended September 30, 2012. We also added to our sales force in early 2012, allowing us to increase the number of merchant partner relationships, the volume of deals we offer on a daily basis on our websites and the quality of deals we offer to our customers.

Direct Revenue

Direct revenue was $229.6 million for the nine months ended September 30, 2012, as compared to $7.2 million for the nine months ended September 30, 2011 due to the launch of Goods in the second half of 2011. We expect direct revenue deals to continue to grow, both overall and as a percentage of our revenues, through the continued growth of our Goods category. In addition, we expect that any growth in direct revenue will result in a smaller percentage increase in income from operations than third party revenue because direct revenue includes the entire amount of gross billings, excluding taxes and net of estimated refunds, while third party revenue is net of the merchant's share of the transaction price.

Other Revenue

Other revenue increased by $15.4 million to $17.4 million for the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011. Other revenue is primarily comprised of non-merchant advertising, which has increased with the growth of our business.

Revenue by Segment

Revenue by segment for each of the periods was as follows:



	Nine Months Ended September 30,
	2011		% of total		2012		% of total

North America:
Third party and other revenue	$	455,342	40.7	%	$	596,648	35.2	%
Direct revenue	—		—		193,701		11.4
Total segment revenue	$