Edgar Filing: Groupon, Inc.

Groupon 2013 Q2 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 1-353335

Groupon, Inc.

(Exact name of registrant as specified in its charter)



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

600 West Chicago Avenue, Suite 400 Chicago, Illinois		60654
(Address of principal executive offices)		(Zip Code)

312-676-5773

(Registrant's telephone number, including area code)

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

Yes x No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No

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

Large accelerated filer x Accelerated filer

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x

As of August 6, 2013, there were 663,145,295 shares of the registrant's Class A Common Stock outstanding and 2,399,976 shares of the registrant's Class B Common Stock outstanding.

TABLE OF CONTENTS



PART I. Financial Information	Page
Forward-Looking Statements	3
Item 1. Financial Statements	4
Condensed Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012	4
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012 (unaudited)	5
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (unaudited)	7
Condensed Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2013 (unaudited)	8
Notes to Condensed Consolidated Financial Statements	9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3. Quantitative and Qualitative Disclosures about Market Risk	73
Item 4. Controls and Procedures	74
PART II. Other Information
Item 1. Legal Proceedings	76
Item 1A. Risk Factors	76
Item 2. Unregistered sales of equity securities and use of proceeds	90
Item 6. Exhibits	90
Signatures	91
Exhibits	92

______________________________________________________

PART I. Financial Information

FORWARD‑LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations. The words “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “continue” and other similar expressions are intended to identify forward-looking statements. We have based these forward looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations and objectives, and financial needs. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in “Item 1A: Risk Factors” of our 2012 Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as in our condensed consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

As used herein, “Groupon,” “we,” “our,” and similar terms include Groupon, Inc. and its subsidiaries, unless the context indicates otherwise.

ITEM 1. FINANCIAL STATEMENTS

GROUPON, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



	June 30, 2013			December 31, 2012
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,182,011		$	1,209,289
Accounts receivable, net	96,808			96,713
Deferred income taxes	30,636			31,211
Prepaid expenses and other current assets	127,496			150,573
Total current assets	1,436,951			1,487,786
Property, equipment and software, net of accumulated depreciation and amortization of $75,210 and $46,236, respectively	125,860			121,072
Goodwill	206,683			206,684
Intangible assets, net	33,186			42,597
Investments	97,321			84,209
Deferred income taxes, non-current	28,837			29,916
Other non-current assets	47,830			59,210
Total Assets	$	1,976,668		$	2,031,474
Liabilities and Equity
Current liabilities:
Accounts payable	$	35,499		$	59,865
Accrued merchant and supplier payables	616,605			671,305
Accrued expenses	226,846			246,924
Deferred income taxes	51,191			53,700
Other current liabilities	134,805			136,647
Total current liabilities	1,064,946			1,168,441
Deferred income taxes, non-current	20,387			20,860
Other non-current liabilities	100,907			100,072
Total Liabilities	1,186,240			1,289,373
Commitments and contingencies (see Note 6)
Stockholders' Equity
Class A common stock, par value $0.0001 per share, 2,000,000,000 shares authorized, 661,630,188 and 654,523,706 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively	66			65
Class B common stock, par value $0.0001 per share, 10,000,000 shares authorized, 2,399,976 shares issued and outstanding at June 30, 2013 and December 31, 2012	—			—
Common stock, par value $0.0001 per share, 2,010,000,000 shares authorized, no shares issued and outstanding at June 30, 2013 and December 31, 2012	—			—
Additional paid-in capital	1,532,699			1,485,006
Accumulated deficit	(765,043		)	(753,477		)
Accumulated other comprehensive income	24,774			12,446
Total Groupon, Inc. Stockholders' Equity	792,496			744,040
Noncontrolling interests	(2,068		)	(1,939		)
Total Equity	790,428			742,101
Total Liabilities and Equity	$	1,976,668		$	2,031,474

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 June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Revenue:
Third party and other	$	418,871		$	502,985		$	857,979		$	1,043,038
Direct	189,876			65,350			352,170			84,580
Total revenue	608,747			568,335			1,210,149			1,127,618
Cost of revenue:
Third party and other	55,507			77,032			125,523			179,661
Direct	168,546			58,152			320,923			75,021
Total cost of revenue	224,053			135,184			446,446			254,682
Gross profit	384,694			433,151			763,703			872,936
Operating expenses:
Marketing	55,497			88,407			105,054			205,022
Selling, general and administrative	302,600			299,894			610,806			583,477
Acquisition-related benefit, net	(815		)	(1,635		)	(747		)	(1,687		)
Total operating expenses	357,282			386,666			715,113			786,812
Income from operations	27,412			46,485			48,590			86,124
Loss on equity method investments	(14		)	(3,428		)	(33		)	(8,556		)
Other (expense) income, net	(5,565		)	57,367			(10,629		)	53,828
Income before provision for income taxes	21,833			100,424			37,928			131,396
Provision for income taxes	27,384			66,875			46,721			101,440
Net (loss) income	(5,551		)	33,549			(8,793		)	29,956
Net income attributable to noncontrolling interests	(2,023		)	(1,220		)	(2,773		)	(2,100		)
Net (loss) income attributable to Groupon, Inc.	(7,574		)	32,329			(11,566		)	27,856
Adjustment of redeemable noncontrolling interests to redemption value	—			(3,943		)	—			(11,165		)
Net (loss) income attributable to common stockholders	$	(7,574	)	$	28,386		$	(11,566	)	$	16,691

Net (loss) earnings per share
Basic	$	(0.01	)	$	0.04		$	(0.02	)	$	0.03
Diluted	$	(0.01	)	$	0.04		$	(0.02	)	$	0.03

Weighted average number of shares outstanding
Basic	662,361,436			647,149,537			660,580,927			645,073,582
Diluted	662,361,436			663,122,709			660,580,927			663,230,558

See Notes to unaudited Condensed Consolidated Financial Statements.

GROUPON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net (loss) income	$	(5,551	)	$	33,549		$	(8,793	)	$	29,956
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	10,345			(1,257		)	12,488			9
Unrealized (loss) gain on available-for-sale debt security	(67		)	—			90			—
Other comprehensive income (loss)	10,278			(1,257		)	12,578			9
Comprehensive income	4,727			32,292			3,785			29,965
Comprehensive income attributable to noncontrolling interests	(2,314		)	(1,220		)	(3,023		)	(2,100		)
Comprehensive income attributable to Groupon, Inc.	$	2,413		$	31,072		$	762		$	27,865

See Notes to unaudited Condensed Consolidated Financial Statements.

GROUPON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Six Months Ended June 30,
	2013			2012
Operating activities
Net (loss) income	$	(8,793	)	$	29,956
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	42,168			24,526
Stock-based compensation	62,353			55,087
Deferred income taxes	(566		)	12,997
Excess tax benefits on stock-based compensation	(3,768		)	(21,750		)
Loss on equity method investments	33			8,556
Acquisition-related benefit, net	(747		)	(1,687		)
Gain on E-Commerce transaction	—			(56,032		)
Change in assets and liabilities, net of acquisitions:
Restricted cash	3,267			(2,828		)
Accounts receivable	(2,941		)	8,085
Prepaid expenses and other current assets	15,992			(21,745		)
Accounts payable	(22,831		)	18,268
Accrued merchant and supplier payables	(37,975		)	32,021
Accrued expenses and other current liabilities	(7,237		)	63,077
Other, net	13,107			10,498
Net cash provided by operating activities	52,062			159,029
Investing activities
Purchases of property and equipment and capitalized software	(28,510		)	(39,792		)
Acquisitions of businesses, net of acquired cash	(1,469		)	(40,271		)
Purchases of investments	(13,083		)	(13,097		)
Settlement of liability related to purchase of additional interest in consolidated subsidiary	(1,959		)	—
Purchases of additional interests in consolidated subsidiaries	—			(13,427		)
Purchases of intangible assets	(1,520		)	(10		)
Net cash used in investing activities	(46,541		)	(106,597		)
Financing activities
Excess tax benefits on stock-based compensation	3,768			21,750
Taxes paid related to net share settlements of stock-based compensation awards	(16,016		)	(5,668		)
Payments of contingent consideration from acquisitions	(30		)	(4,250		)
Settlements of purchase price obligations related to acquisitions	(5,000		)	—
Proceeds from stock option exercises and employee stock purchase plan	3,015			5,657
Partnership distributions to noncontrolling interest holders	(2,815		)	(1,606		)
Payments of capital lease obligations	(205		)	—
Net cash (used in) provided by financing activities	(17,283		)	15,883
Effect of exchange rate changes on cash and cash equivalents	(15,516		)	(5,452		)
Net (decrease) increase in cash and cash equivalents	(27,278		)	62,863
Cash and cash equivalents, beginning of period	1,209,289			1,122,935
Cash and cash equivalents, end of period	$	1,182,011		$	1,185,798
Non-cash investing and financing activities
Contingent consideration liabilities incurred in connection with acquisitions	$	30		$	421
Equipment acquired under capital lease obligations	$	6,482		$	—
Shares issued to settle liability-classified awards	$	2,263		$	—
Accounts payable and accrued expenses related to purchases of property and equipment and capitalized software	$	1,660		$	6,556
Contribution of investment in E-Commerce transaction	$	—		$	47,042
Liability incurred in E-Commerce transaction	$	—		$	20,000

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. Stockholder's Equity			Non-controlling Interests			Total Equity
	Shares		Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comp. Income		Total Groupon Inc. Stockholder's Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2012	656,923,682		$	65	$	1,485,006		$	(753,477	)	$	12,446	$	744,040		$	(1,939	)	$	742,101
Net loss	—		—		—			(11,566		)	—		(11,566		)	2,773			(8,793		)
Foreign currency translation	—		—		—			—			12,238		12,238			250			12,488
Unrealized gain on available-for-sale debt security, net of tax	—		—		—			—			90		90			—			90
Shares issued to settle liability-classified awards	478,304		—		2,263			—			—		2,263			—			2,263
Exercise of stock options	1,884,546		—		1,894			—			—		1,894			—			1,894
Vesting of restricted stock units	7,057,420		1		(1		)	—			—		—			—			—
Shares issued under employee stock purchase plan	271,402		—		1,121			—			—		1,121			—			1,121
Tax withholdings related to net share settlements of stock-based compensation awards	(2,585,190	)	—		(15,776		)	—			—		(15,776		)	—			(15,776		)
Stock-based compensation on equity-classified awards	—		—		62,115			—			—		62,115			—			62,115
Tax shortfalls, net of excess tax benefits, on stock-based compensation awards	—		—		(3,923		)	—			—		(3,923		)	—			(3,923		)
Partnership distributions to noncontrolling interest holders	—		—		—			—			—		—			(3,152		)	(3,152		)
Balance at June 30, 2013	664,030,164		$	66	$	1,532,699		$	(765,043	)	$	24,774	$	792,496		$	(2,068	)	$	790,428

See Notes to unaudited Condensed Consolidated Financial Statements.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Company Information

Groupon, Inc. and subsidiaries (the "Company") is a local commerce marketplace (www.groupon.com) that connects merchants to consumers by offering goods and services at a discount. The Company also offers deals on products for which it acts as the merchant of record. The Company, which commenced operations in October 2008, sends emails to its subscribers each day with discounted offers for goods and services that are targeted by location and personal preferences. Consumers also access deals directly through the Company's website and mobile application.

The Company's operations are organized into three principal segments: North America, EMEA, which is comprised of Europe, Middle East and Africa, and the remainder of the Company's international operations ("Rest of World"). During the second quarter of 2013, the Company changed the composition of its operating segments to separate its former International segment between EMEA and Rest of World. See Note 11 "Segment Information" for further information.

Unaudited Interim Financial Information

The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. These condensed consolidated financial statements are unaudited and, in the Company's opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the Company's condensed consolidated balance sheets, statements of operations, comprehensive income, cash flows and stockholders' equity for the periods presented. Operating results for the periods presented are not necessarily indicative of the results to be expected for the full year ending December 31, 2013. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on February 27, 2013.

Principles of Consolidation

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

Use of Estimates

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

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

2. BUSINESS COMBINATIONS

The Company acquired three businesses during the six months ended June 30, 2013. These business combinations were accounted for using the acquisition method, and the results of each of those acquired businesses have been included in the condensed consolidated financial statements beginning on the respective acquisition dates. The fair value of consideration transferred in business combinations is allocated to the tangible and intangible assets acquired and liabilities assumed at the acquisition date, with the remaining unallocated amount recorded as goodwill. The allocations of the purchase price for these acquisitions have been prepared on a preliminary basis, and changes to those allocations may occur as additional information becomes available. Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The Company paid this premium for a number of reasons, including acquiring an experienced workforce. The goodwill is generally not deductible for tax purposes.

Liabilities for contingent consideration (i.e., earn-outs) are measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred and subsequent changes in fair value recorded within earnings as "Acquisition-related benefit, net." See Note 9 "Fair Value Measurements" for information about fair value measurements of contingent consideration liabilities.

The primary purpose of the Company's three acquisitions during the six months ended June 30, 2013 was to acquire an experienced workforce and to expand and advance product offerings. The aggregate acquisition-date fair value of the consideration transferred for these acquisitions totaled $1.5 million, which consisted of the following (in thousands):



Fair Value of Consideration Transferred	Fair Value
Cash	$	1,470
Contingent consideration	30
Total	$	1,500

The following table summarizes the allocation of the aggregate purchase price of acquisitions for the six months ended June 30, 2013 (in thousands):



Net working capital (including acquired cash of less than $0.1 million)	$	38
Goodwill	1,241
Intangible assets: ⁽¹⁾
Developed technology	171
Other intangible assets	50
Total purchase price	$	1,500


(1)	Acquired intangible assets have estimated useful lives of between 1 and 5 years.

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

3. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is tested for impairment at the reporting unit level. Previously, the Company's four reporting units were North America, EMEA, Asia Pacific ("APAC") and Latin America ("LATAM"). As discussed in Note 11 "Segment Information," the Company changed the composition of its operating segments during the three months ended June 30, 2013 to separate its former International segment between EMEA and Rest of World. As a result of this change in operating segments, the Company's former EMEA reporting unit has been disaggregated into four new reporting units for goodwill impairment testing purposes: Southern EMEA, Western EMEA, Northern EMEA and Eastern/Central EMEA. Goodwill from the former EMEA reporting unit was reallocated to the four new EMEA reporting units based on their relative fair values.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Due to the establishment of the four new reporting units in the current period, the Company performed an interim goodwill impairment evaluation for those reporting units as of June 30, 2013. For the Southern EMEA and Northern EMEA reporting units, there was no impairment of goodwill because the fair values of those reporting units exceeded their carrying values. As of the June 30, 2013 testing date, liabilities exceeded assets for the Western EMEA and Eastern/Central EMEA reporting units. For reporting units with a negative book value (i.e., excess of liabilities over assets), qualitative factors are evaluated to determine whether it is necessary to perform the second step of the goodwill impairment test. Based on that evaluation, which included consideration of the significant growth of the businesses and improvement in their operating performance since they were acquired in May 2010, the Company determined that the likelihood of a goodwill impairment for the two reporting units with negative book values did not reach the more-likely-than-not threshold specified in U.S. GAAP. Accordingly, the Company concluded that the goodwill relating to the Western EMEA and Eastern/Central EMEA reporting units was not impaired as of June 30, 2013 and step two of the goodwill impairment test was not required to be performed. The Company also tested the former EMEA reporting unit for goodwill impairment immediately prior to the establishment of the four new reporting units and there was no impairment of goodwill because its fair value exceeded its carrying value.

The following table summarizes the Company's goodwill activity by segment for the six months ended June 30, 2013 (in thousands):



	North America		International			EMEA		Rest of World		Consolidated
Balance as of December 31, 2012	$	79,276	$	127,408		$	—	$	—	$	206,684
Goodwill related to acquisitions	1,241		—			—		—		1,241
Other adjustments⁽¹⁾	1,396		(2,638		)	—		—		(1,242		)
Reallocation to new segments	—		(124,770		)	105,347		19,423		—
Balance as of June 30, 2013	$	81,913	$	—		$	105,347	$	19,423	$	206,683


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

The following tables summarize the Company's other intangible assets (in thousands):



	As of June 30, 2013
Asset Category	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Subscriber relationships	$	41,602	$	25,227	$	16,375
Merchant relationships	8,075		7,117		958
Trade names	6,419		6,124		295
Developed technology	20,024		15,211		4,813
Other intangible assets	16,832		6,087		10,745
Total	$	92,952	$	59,766	$	33,186



	As of December 31, 2012
Asset Category	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Subscriber relationships	$	42,075	$	21,356	$	20,719
Merchant relationships	8,187		6,873		1,314
Trade names	6,490		5,900		590
Developed technology	20,000		10,994		9,006
Other intangible assets	15,601		4,633		10,968
Total	$	92,353	$	49,756	$	42,597

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Amortization of intangible assets is computed using the straight-line method over their estimated useful lives, which range from 1 to 5 years. Amortization expense for these intangible assets was $5.2 million and $5.5 million for the three months ended June 30, 2013 and 2012, respectively, and $10.8 million and $10.0 million for the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, the Company's estimated future amortization expense for these intangible assets is as follows (in thousands):



Remaining amounts in 2013	$	9,999
2014	13,613
2015	7,283
2016	1,966
2017	325
Thereafter	—
	$	33,186

4. INVESTMENTS

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



	June 30, 2013		Percent Ownership of Common and Preferred Stock					December 31, 2012		Percent Ownership of Common and Preferred Stock
Cost method investments:
Life Media Limited (F-tuan)	$	77,521	19				%	$	77,521	19				%
Other cost method investments	14,866		6	%	to	17	%	1,867		6	%	to	19	%
Total cost method investments	92,387							79,388
Equity method investments	1,701		21	%	to	50	%	1,734		21	%	to	50	%
Total investments in equity interests	$	94,088						$	81,122
Available-for-sale debt security	3,233							3,087
Total investments	$	97,321						$	84,209

Cost Method Investments

In February 2013, the Company acquired a 10.3% ownership interest in a non-U.S.-based payment processor for $13.1 million. This investment is accounted for using the cost method of accounting because the Company does not have the ability to exercise significant influence over the operating and financial policies of the investee. Accordingly, the investment is adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments.

In June 2012, Life Media Limited ("F-tuan"), an exempted company incorporated under the laws of the Cayman Islands with operations in China, acquired the Company's 49.8% interest in E-Commerce King Limited ("E-Commerce"). In exchange for its interest in E-Commerce and an additional $25.0 million of cash consideration, the Company received a 19.1% interest in F-tuan in the form of common and Series E preferred shares. The 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 gain of $56.0 million as a result of the transaction, which is included within "Other (expense) income, net" on the consolidated statement of operations. The gain represents the excess of the fair value of the Company's 19.1% 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. The investment in F-tuan is accounted for using the cost method of accounting because the Company does not have the ability to exercise significant influence over the operating and financial policies of the investee. Accordingly, the investment is adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Available-for-Sale Debt Security

In November 2012, the Company purchased a convertible debt security issued by a nonpublic entity for $3.0 million and has classified the security as available-for-sale. As of June 30, 2013, the amortized cost, gross unrealized gain and fair value of this security were $3.0 million, $0.2 million and $3.2 million, respectively. As of December 31, 2012, the amortized cost, gross unrealized gain and fair value of this security were $3.0 million, $0.1 million and $3.1 million, respectively. The contractual maturity date of the security is November 1, 2015.

Other-Than-Temporary Impairment

An unrealized loss exists when the current fair value of an investment is less than its amortized cost basis. The Company conducts periodic reviews of all of its investments with unrealized losses to evaluate whether those impairments are other-than-temporary. This evaluation, which is performed at the individual investment level, consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as the Company's intent and ability to hold the investment for a period of time that is sufficient to allow for an anticipated recovery in value. Evidence considered in this evaluation includes the amount of the impairment, the length of time that the investment has been impaired, the factors contributing to the impairment, the financial condition and near-term prospects of the investee, recent operating trends and forecasted performance of the investee, market conditions in the geographic area or industry in which the investee operates, and the Company's strategic plans for holding the investment in relation to the period of time expected for an anticipated recovery in value. Additionally, the Company considers whether it intends to sell the investment or whether it is more likely than not that it will be required to sell the investment before recovery of its amortized cost basis. Investments with unrealized losses that are determined to be other-than-temporary are written down to fair value with a charge to earnings. Unrealized losses that are determined to be temporary in nature are not recorded for cost method investments and equity method investments, while such losses are recorded, net of tax, in accumulated other comprehensive income for available-for-sale securities.

The Company previously concluded that its cost method investment in F-tuan was other-than-temporarily impaired as of December 31, 2012, and the investment was written down to its fair value of $77.5 million at that time. For purposes of measuring the fair value of this investment as of June 30, 2013, the Company applied a discounted cash flow method, which is an income approach, and the resulting value was corroborated by a market approach. The Company used a discount rate of 31%, compared to a discount rate of 30% used in the December 31, 2012 fair value measurement, and the Company used the investee's financial projections for the remainder of the year ending December 31, 2013. However, the Company applied downward adjustments to the investee's financial projections for future years in the June 30, 2013 fair value measurement based on our expectations for the investee's future performance and related market conditions. The resulting fair value measurement of the investment in F-tuan as of June 30, 2013 was $69.1 million, an $8.4 million decrease from the $77.5 million fair value measurement as of December 31, 2012.

The other-than-temporary impairment recorded at December 31, 2012 established a new cost basis for the investment in F-tuan. The factors that the Company considered in evaluating whether the $8.4 million unrealized loss as of June 30, 2013 constituted an other-than-temporary impairment included the severity of the impairment (i.e., an unrealized loss equal to 10.8% of the investment's amortized cost), the duration of the impairment of less than six months since the current cost basis was established and the Company's intent to hold the investment for a sufficient period of time to allow for a recovery in fair value. Based on this assessment, which also considered other qualitative factors, the Company concluded that the investment was not other-than-temporarily impaired as of June 30, 2013. However, if the operating performance of the investee deteriorates significantly in future periods or if the investee obtains additional funding at a substantially lower valuation, it may be necessary to recognize an other-than-temporary impairment charge in earnings at that time.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

5. SUPPLEMENTAL CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

The following table summarizes the Company's other (expense) income, net for the three and six months ended June 30, 2013 and 2012 (in thousands):



	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013			2012
Interest income	$	441		$	828	$	870		$	1,406
Interest expense	(101		)	—		(158		)	—
Gain on E-Commerce transaction	—			56,032		—			56,032
Foreign exchange and other	(5,905		)	507		(11,341		)	(3,610		)
Other (expense) income, net	$	(5,565	)	$	57,367	$	(10,629	)	$	53,828

The following table summarizes the Company's prepaid expenses and other current assets as of June 30, 2013 and December 31, 2012 (in thousands):



	June 30, 2013		December 31, 2012
Current portion of unamortized tax effects on intercompany transactions	$	32,670	$	37,589
Finished goods inventories	18,711		39,733
Prepaid expenses	21,944		20,964
Restricted cash	13,261		16,507
VAT and other taxes receivable	15,352		16,439
Prepaid marketing⁽¹⁾	19,051		—
Prepayments of inventory purchases and other⁽¹⁾	6,507		19,341
Total prepaid expenses and other current assets	$	127,496	$	150,573

(1)

The Company previously remitted prepayments to an online travel company in connection with a two-year agreement to offer discounted airline ticket deals. These prepayments were recorded within "Prepayments of inventory purchases and other." In June 2013, the parties entered into an amended agreement whereby the Company's prepayments were applied as consideration for certificates that can be used to obtain discounts on the purchase of air travel through the online travel company's website. The Company intends to periodically issue these certificates to customers in connection with its marketing activities. The cost of the certificates is recorded as "Prepaid marketing" as of June 30, 2013, and marketing expense will be recognized in future periods as the certificates are issued to customers.

The following table summarizes the Company's accrued expenses as of June 30, 2013 and December 31, 2012 (in thousands):



	June 30, 2013		December 31, 2012
Marketing	$	14,042	$	11,237
Refunds reserve	43,852		69,209
Payroll and benefits	59,771		61,557
Subscriber credits	51,572		58,977
Professional fees	16,871		16,938
Other	40,738		29,006
Total accrued expenses	$	226,846	$	246,924

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table summarizes the Company's other current liabilities as of June 30, 2013 and December 31, 2012 (in thousands):



	June 30, 2013		December 31, 2012
Income taxes payable	$	43,173	$	33,887
VAT and sales tax payable	41,206		55,728
Deferred revenue	31,619		25,780
Other	18,807		21,252
Total other current liabilities	$	134,805	$	136,647

The following table summarizes the Company's other non-current liabilities as of June 30, 2013 and December 31, 2012 (in thousands):



	June 30, 2013		December 31, 2012
Long-term tax liabilities	$	79,185	$	77,553
Deferred rent	8,990		9,162
Other	12,732		13,357
Total other non-current liabilities	$	100,907	$	100,072

The following table summarizes the components of accumulated other comprehensive income as of June 30, 2013 and December 31, 2012 (in thousands):



	June 30, 2013		December 31, 2012
Foreign currency translation adjustments	$	24,631	$	12,393
Unrealized gain on available-for-sale debt security, net of tax	143		53
Accumulated other comprehensive income	$	24,774	$	12,446

6. COMMITMENTS AND CONTINGENCIES

The Company's commitments as of June 30, 2013 did not materially change from the amounts set forth in the Company's 2012 Annual Report on Form 10-K.

Legal Matters

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

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

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The Company is currently a defendant in a proceeding pursuant to which, on October 29, 2012, a consolidated amended class action complaint was filed against the Company, certain of its directors and officers, and the underwriters that participated in the initial public offering of the Company's Class A common stock. Originally filed in April 2012, the case is currently pending before the United States District Court for the Northern District of Illinois: In re Groupon, Inc. Securities Litigation. The complaint asserts claims pursuant to Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Allegations in the consolidated amended complaint include that the Company and its officers and directors made untrue statements or omissions of material fact by issuing inaccurate financial statements for the fiscal quarter and the fiscal year ending December 31, 2011 and by failing to disclose information about the Company's financial controls in the registration statement and prospectus for the Company's initial public offering of Class A common stock and in the Company's subsequently-issued financial statements. The putative class action lawsuit seeks an unspecified amount of monetary damages, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief. The defendants filed a motion to dismiss the consolidated amended complaint on January 18, 2013. The motion to dismiss is fully briefed, and the Company awaits the court's ruling.

In addition, federal and state purported stockholder derivative lawsuits have been filed against certain of the Company's current and former directors and officers. The federal purported stockholder derivative lawsuit was originally filed in April 2012 and a consolidated stockholder derivative complaint, filed on July 30, 2012, is currently pending in the United States District Court for the Northern District of Illinois: In re Groupon Derivative Litigation. Plaintiffs assert claims for breach of fiduciary duty and abuse of control. The state derivative cases are currently pending before the Chancery Division of the Circuit Court of Cook County, Illinois: Orrego v. Lefkofsky, et al., was filed on April 5, 2012; and Kim v. Lefkofsky, et al., was filed on May 25, 2012. The state derivative complaints generally allege that the defendants breached their fiduciary duties by purportedly mismanaging the Company's business by, among other things, failing to utilize proper accounting controls and, in the case of one of the state derivative lawsuits, by engaging in alleged insider trading of the Company's Class A common stock and misappropriating information. In addition, one state derivative case asserts a claim for unjust enrichment. The derivative lawsuits purport to seek to recoup from the Company an unspecified amount of monetary damages allegedly sustained by the Company, restitution from defendants, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief. On June 20, 2012, the Company and the individual defendants filed a motion requesting that the court stay the federal derivative actions pending resolution of the Federal Class Actions. On July 31, 2012, the court granted defendants' motion in part, and stayed the Federal derivative actions pending a separate resolution of upcoming motions to dismiss in the federal class actions. On June 15, 2012, the state plaintiffs filed a motion to consolidate the state derivative actions, which was granted on July 2, 2012, and on July 5, 2012, the plaintiffs filed a motion for appointment of co-lead plaintiffs and co-lead counsel, which was granted on July 27, 2012. No consolidated complaint has been filed in the state derivative action. On September 14, 2012, the court granted a motion filed by the parties requesting that the court stay the state derivative actions pending the federal court's resolution of anticipated motions to dismiss in the federal class actions. On April 18, 2013, the court entered an order appointing a lead plaintiff and approving its selection of lead counsel and local counsel for the purported class.

On July 1, 2013, a putative class action captioned Weber v. Groupon, Inc. pending in the United States District Court for the Northern District of Illinois was voluntarily dismissed without prejudice by the lead plaintiff. The putative class action was originally filed as two federal putative class action securities complaints: Weber v. Groupon, Inc., et al (filed on December 21, 2012) and Earley v. Groupon, Inc. et al. (filed on January 22, 2013), consolidated as Weber v. Groupon, Inc., et al. The actions asserted claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and the allegations included that the Company and its officers and directors made untrue statements or omissions of material fact, including with respect to the Company's revenue growth and revenue mix. The putative class action lawsuit sought an unspecified amount of monetary damages, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief.

Two additional state stockholder derivative complaints were filed in January 2013, in the Chancery Division of the Circuit of Court of Cook County, Illinois: Charles v. Mason, et al. was filed on January 24, 2013, and Walsh v. Mason, et al. was filed on January 31, 2013. The Charles and Walsh complaints generally allege that the defendants breached their fiduciary duties through a series of statements about the Company's financial health and business prospects beginning on May 14, 2012, through November 2012 related to the Company's revenue and customer base, and alleges claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. Both complaints seek to recoup an unspecified amount of monetary damages allegedly sustained by the Company, restitution from defendants, reimbursements for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of non-monetary relief. On March 19, 2013, the court ordered the Charles and Walsh

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

actions to be consolidated. On May 13, 2013, the court entered a stipulation and order granting plaintiff's request to appoint lead counsel and liaison counsel, and to stay the cases pending the Court's resolution of an anticipated motion to dismiss in Weber v. Groupon, Inc. As discussed above, the lead plaintiff in Weber subsequently voluntarily dismissed the case without prejudice. Pursuant to the May 13, 2013 stipulation and order, the parties conferred following dismissal of Weber, and the Company is awaiting a decision as to whether plaintiff intends to proceed further.

The Company intends to defend all of the securities and stockholder derivative lawsuits vigorously.

The Company was named as a defendant in a series of class actions that came to be consolidated into a single case in the U.S. District Court for the Southern District of California. The consolidated case is referred to as In re Groupon Marketing and Sales Practices Litigation. The Company denies liability, but the parties agreed to settle the litigation for $8.5 million before any determination had been made on the merits or with respect to class certification. Because the case had been filed as a class action, the parties were required to provide proper notice and obtain court approval for the settlement. During that process, certain individuals asserted various objections to the settlement. The parties to the case opposed the objections and on December 14, 2012, the district court approved the settlement over the various objections.

Subsequent to the entry of the order approving settlement, certain of the objectors filed a notice of appeal, contesting the settlement and appealing the matter to the Ninth Circuit of the U.S. Court of Appeals, where the case remains pending. The Company believes that the settlement is valid and intends to oppose the appeal. Plaintiffs also maintain that the settlement is valid and will be opposing the appeal. The settlement, however, is not effective during the pendency of the appeal. The Company does not know when the appeal will be resolved. Depending on the outcome of the appeal, it is possible that the settlement will be rejected, or that there will be further proceedings in the appellate court or district court, or that the settlement will be enforced at that time without further objections or proceedings.

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

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

The Company establishes an accrued liability for loss contingencies related to legal and regulatory matters when the loss is both probable and estimable. In such cases, there may be an exposure to loss in excess of the amounts accrued. Because of the inherent uncertainty related to the matters described above, including the early stage and lack of specific damage claims in many of them, we are unable to estimate a range of reasonably possible losses in excess of the amounts accrued, if any. Although the future results of litigation and claims cannot be determined, based on the information currently available the Company believes that the final outcome of these matters will not have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. The Company's accrued liabilities for loss contingencies related to legal and regulatory matters may change in the future due to new developments or changes in strategy in handling these matters. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Indemnifications

In the normal course of business to facilitate transactions related to its operations, the Company indemnifies certain parties, including lessors and merchants, with respect to various matters. The Company has agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or other claims made against those parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. The Company is also subject to increased exposure to various claims as a result of its acquisitions, particularly in cases where the Company is entering into new businesses in connection with such acquisitions. The Company may also become more vulnerable to claims as it expands the range and scope of its services and is subject to laws in jurisdictions where the underlying laws with respect to potential liability are either unclear or less favorable. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company's bylaws contain similar indemnification obligations to agents.

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

7. STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION

Common Stock

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

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 June 30, 2013, 7,044,353 shares were available for future issuance under the Plans.

The Company recognized stock-based compensation expense of $32.4 million and $27.1 million for the three months ended June 30, 2013 and 2012, respectively, and $62.4 million and $55.1 million for the six months ended June 30, 2013 and 2012, respectively, related to stock awards issued under the Plans, acquisition-related awards and subsidiary awards. The Company also capitalized $2.1 million and $1.2 million of stock-based compensation for the three months ended June 30, 2013 and 2012, respectively, and $4.7 million and $2.5 million for the six months ended June 30, 2013 and 2012, respectively, in connection with internally-developed software.

Employee Stock Purchase Plan

The Company is authorized to grant up to 10 million shares of common stock under the ESPP. For the six months ended June 30, 2013, 271,402 shares of common stock were issued under the ESPP. No shares of common stock were issued under the ESPP for the six months ended June 30, 2012.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Stock Options

The table below summarizes the stock option activity during the six months ended June 30, 2013:



	Options		Weighted- Average Exercise Price		Aggregate Intrinsic Value (in thousands) ⁽¹⁾
Outstanding at December 31, 2012	7,713,421		$	1.09	$	29,063
Exercised	(1,884,546	)	$	1.01
Forfeited	(203,259	)	$	1.07
Expired	(11,103	)	$	2.05
Outstanding at June 30, 2013	5,614,513		$	1.11	$	41,756

Exercisable at June 30, 2013	4,320,383		$	0.90	$	33,062

(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 June 30, 2013 and December 31, 2012, respectively.

Restricted Stock Units

The table below summarizes activity regarding unvested restricted stock units under the Plans during the six months ended June 30, 2013:



	Restricted Stock Units		Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2012	29,699,348		$	9.31
Granted	26,871,742		$	6.13
Vested	(7,057,420	)	$	9.04
Forfeited	(4,650,353	)	$	9.20
Unvested at June 30, 2013	44,863,317		$	7.49

Restricted Stock Awards

The Company has granted restricted stock awards in connection with prior period business combinations. Compensation expense on these awards is recognized on a straight-line basis over the requisite service period.

The table below summarizes activity regarding unvested restricted stock during the six months ended June 30, 2013:



	Restricted Stock		Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2012	577,048		$	10.31
Vested	(333,484	)	$	8.23
Unvested at June 30, 2013	243,564		$	13.16

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

The Company computes (loss) earnings per share of Class A and Class B common stock using the two-class method. Basic (loss) earnings per share is computed using the weighted-average number of common shares outstanding during the period. Diluted (loss) earnings per share is computed using the weighted-average number of common shares and the effect of potentially dilutive equity awards outstanding during the period. Potentially dilutive securities consist of stock options, restricted stock units, unvested restricted stock awards and ESPP shares. The dilutive effect of these equity awards are reflected in diluted (loss) earnings per share by application of the treasury stock method. The computation of the diluted (loss) earnings per share of Class A common stock assumes the conversion of Class B common stock, while the diluted (loss) earnings per share of Class B common stock does not assume the conversion of those shares.

The rights, including the liquidation and dividend rights, of the holders of Class A and Class B common stock are identical, except with respect to voting. As a result, the undistributed earnings for each period are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the period had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as the Company assumes the conversion of Class B common stock in the computation of the diluted (loss) earnings per share of Class A common stock, the undistributed earnings are equal to net income for that computation.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following tables set forth the computation of basic and diluted (loss) earnings per share of Class A and Class B common stock for the three and six months ended June 30, 2013 and 2012 (in thousands, except share amounts and per share amounts):



	Three Months Ended June 30,										Six Months Ended June 30,
	2013						2012				2013						2012
	Class A			Class B			Class A		Class B		Class A			Class B			Class A		Class B
Basic (loss) earnings per share:
Numerator
Allocation of net (loss) income	$	(5,530	)	$	(21	)	$	33,425	$	124	$	(8,761	)	$	(32	)	$	29,845	$	111
Less: Allocation of adjustment of redeemable noncontrolling interests to redemption value	—			—			3,928		15		—			—			11,123		42
Less: Allocation of net income attributable to noncontrolling interests	2,016			7			1,215		5		2,763			10			2,092		8
Allocation of net (loss) income attributable to common stockholders	$	(7,546	)	$	(28	)	$	28,282	$	104	$	(11,524	)	$	(42	)	$	16,630	$	61
Denominator
Weighted-average common shares outstanding	659,961,460			2,399,976			644,749,561		2,399,976		658,180,951			2,399,976			642,673,606		2,399,976
Basic (loss) earnings per share	$	(0.01	)	$	(0.01	)	$	0.04	$	0.04	$	(0.02	)	$	(0.02	)	$	0.03	$	0.03

Diluted (loss) earnings per share:
Numerator
Allocation of net (loss) income attributable to common stockholders	$	(7,546	)	$	(28	)	$	28,282	$	104	$	(11,524	)	$	(42	)	$	16,630	$	61
Reallocation of net income attributable to common stockholders as a result of conversion of Class B⁽¹⁾	—			—			104		—		—			—			61		—
Allocation of net (loss) income attributable to common stockholders	$	(7,546	)	$	(28	)	$	28,386	$	104	$	(11,524	)	$	(42	)	$	16,691	$	61
Denominator
Weighted-average common shares outstanding used in basic computation	659,961,460			2,399,976			644,749,561		2,399,976		658,180,951			2,399,976			642,673,606		2,399,976
Conversion of Class B⁽¹⁾	—			—			2,399,976		—		—			—			2,399,976		—
Employee stock options⁽¹⁾	—			—			11,794,679		—		—			—			12,971,501		—
Restricted shares and RSUs⁽¹⁾	—			—			4,178,493		—		—			—			5,185,475		—
Weighted-average diluted shares outstanding⁽¹⁾	659,961,460			2,399,976			663,122,709		2,399,976		658,180,951			2,399,976			663,230,558		2,399,976
Diluted (loss) earnings per share	$	(0.01	)	$	(0.01	)	$	0.04	$	0.04	$	(0.02	)	$	(0.02	)	$	0.03	$	0.03


(1)	Conversion of Class B shares into Class A shares and outstanding equity awards have not been reflected in the diluted loss per share calculation for the three and six months ended June 30, 2013 because the effect would be antidilutive.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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



	Three Months Ended June 30,		Six Months Ended June 30,
	2013	2012	2013	2012
Stock options	6,268,708	816	6,851,765	816
Restricted stock units	42,601,423	7,909,056	37,075,549	2,499,130
Restricted stock	302,715	—	427,506	—
ESPP shares	550,165	—	559,170	—
Total	49,723,011	7,909,872	44,913,990	2,499,946

9. FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

Available-for-sale debt security - The Company has an investment in a convertible debt security issued by a nonpublic entity. This available-for-sale debt security is measured at fair value each reporting period, with unrealized gains and losses recorded in other comprehensive income. The Company measures its fair value using an income approach that incorporates probability-weighted outcomes. The Company has classified this investment as Level 3 due to the lack of observable market data over fair value inputs such as the fair value of the nonmarketable equity shares underlying the conversion option. Increases in the estimated fair value of the nonmarketable equity shares underlying the conversion option contribute to increases in the fair value of the available-for-sale debt security and decreases in the estimated fair value of the underlying shares contribute to decreases in its fair value. Additionally, increases in the assessed likelihood of a default by the convertible debt issuer contribute to decreases in the fair value of the available-for-sale debt security and decreases in the assessed likelihood of a default contribute to increases in its fair value.

Contingent consideration - The Company has contingent obligations to transfer cash payments and equity shares to the former owners in conjunction with certain acquisitions if specified 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 benefit, net.

The Company uses an income approach to value contingent consideration liabilities, which is determined based on the

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

present value of probability-weighted future cash flows using internal models. For contingent consideration to be settled in a variable number of shares of common stock, the Company used the most recent Groupon stock price as reported on the NASDAQ to determine the fair value of the shares potentially issuable as of June 30, 2013 and December 31, 2012. The Company has generally classified the contingent consideration liabilities as Level 3 due to the lack of relevant observable market data over fair value inputs such as probability-weighting for payment outcomes. Increases in the assessed likelihood of a higher payout under a contingent consideration arrangement contribute to increases in the fair value of the related liability. Conversely, decreases in the assessed likelihood of a higher payout under a contingent consideration arrangement contribute to decreases in the fair value of the related liability. Changes in assumptions could have an impact on the payout of contingent consideration arrangements with a maximum payout of $14.8 million cash and 0.1 million shares of the Company's common stock as of June 30, 2013.

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



			Fair Value Measurement at Reporting Date Using
Description	As of June 30, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	585,468	$	585,468	$	—	$	—
Available-for-sale debt security	$	3,233	$	—	$	—	$	3,233

Liabilities:
Contingent consideration	$	6,854	$	—	$	—	$	6,854



			Fair Value Measurement at Reporting Date Using
Description	As of December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	585,393	$	585,393	$	—	$	—
Available-for-sale debt security	$	3,087	$	—	$	—	$	3,087

Liabilities:
Contingent consideration	$	7,601	$	—	$	—	$	7,601

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table provides a roll-forward of the fair value of recurring Level 3 fair value measurements for the three and six months ended June 30, 2013 and 2012 (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Assets
Available-for-Sale Debt Security:
Beginning Balance	$	3,341		$	—		$	3,087		$	—
Total (losses) gains included in other comprehensive income	(108		)	—			146			—
Ending Balance	$	3,233		$	—		$	3,233		$	—

Unrealized losses (gains) still held⁽¹⁾	$	108		$	—		$	(146	)	$	—

Liabilities
Contingent Consideration:
Beginning Balance	$	7,699		$	7,031		$	7,601		$	11,230
Issuance of contingent consideration in connection with acquisitions	—			—			30			—
Total gains included in earnings⁽²⁾	(815		)	(950		)	(747		)	(899		)
Settlements of contingent consideration liabilities	(30		)	—			(30		)	(4,250		)
Ending Balance	$	6,854		$	6,081		$	6,854		$	6,081

Unrealized gains still held⁽¹⁾	$	(815	)	$	(950	)	$	(747	)	$	(950	)


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


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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets that are written down to fair value as a result of an impairment. The Company did not record any nonrecurring fair value measurements after initial recognition during the three and six months ended June 30, 2013 and 2012.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

The following table presents the carrying amounts and fair values of financial instruments that are not carried at fair value in the condensed consolidated financial statements (in thousands):



	As of June 30, 2013				As of December 31, 2012
	Carrying Amount		Fair Value		Carrying Amount				Fair Value
Cost method investments:
Life Media Limited (F-tuan)	$	77,521	$	69,148	$	77,521	⁽¹	⁾	$	77,521
Other cost method investments	$	14,866	$	15,251	$	1,867			$	2,260


(1)	The Company's cost method investment in F-tuan was determined to be other-than-temporarily impaired and was written down to its fair value of $77.5 million as of December 31, 2012.

See Note 4 "Investments" for further information regarding the Company's valuation methodology for its investment in F-tuan. The fair values of the Company's other cost method investments were determined using the market approach or the income approach, depending on the availability of fair value inputs such as financial projections for the investees and market multiples for comparable companies. The Company has classified the fair value measurements of its cost method investments as Level 3 measurements within the fair value hierarchy because they involve significant unobservable inputs.

The Company's other financial instruments not carried at fair value consist primarily of short term certificates of deposit, accounts receivable, restricted cash, accounts payable, accrued merchant and supplier payables and accrued expenses. The carrying values of these assets and liabilities approximate their respective fair values as of June 30, 2013 and December 31, 2012 due to their short term nature.

10. INCOME TAXES

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

For the three months ended June 30, 2013, the Company recorded income tax expense of $27.4 million on pre-tax income of $21.8 million, for an effective tax rate of 125.4%. For the three months ended June 30, 2012, the Company recorded income tax expense of $66.9 million on pre-tax income of $100.4 million, for an effective tax rate of 66.6%.

For the six months ended June 30, 2013, the Company recorded income tax expense of $46.7 million on pre-tax income of $37.9 million, for an effective tax rate of 123.2%. For the six months ended June 30, 2012, the Company recorded income tax expense of $101.4 million on pre-tax income of $131.4 million, for an effective tax rate of 77.2%.

The Company's U.S. statutory rate is 35%. The most significant factors impacting the effective tax rate for the three and six months ended June 30, 2013 and 2012 were losses in jurisdictions that the Company is not able to benefit due to uncertainty as to the realization of those losses, amortization of the tax effects of intercompany sales of intellectual property and nondeductible stock-based compensation expense. The effective tax rates for the three and six months ended June 30, 2012 were also negatively impacted by the tax effects of the gain on the E-Commerce transaction, as described in Note 4 "Investments."

As of June 30, 2013, the unamortized tax effects of intercompany transactions of $31.0 million and $31.6 million are included within “Prepaid expenses and other current assets” and “Other non-current assets,” respectively, on the condensed consolidated balance sheet. As of December 31, 2012, unamortized tax effects of intercompany transactions of $37.6 million and $46.3 million are included within “Prepaid expenses and other current assets” and “Other non-current assets,” respectively, on the condensed consolidated balance sheet. As of June 30, 2013, the estimated future amortization of the tax effects of intercompany transactions to income tax expense is $17.2 million for the remainder of 2013, $26.5 million for 2014 and $18.9 million for 2015. These amounts exclude the benefits, if any, for tax deductions in other jurisdictions that the Company may be entitled to as a result of the related intercompany transactions.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

11. SEGMENT INFORMATION

The Company previously organized its operations into two principal segments: North America, which represents the United States and Canada, and International, which represented the rest of the Company's global operations. On February 28, 2013, the Company's former CEO was terminated by the Board of Directors and a new Office of the Chief Executive was established to serve the functions of the CEO. The Office of the Chief Executive was comprised of two members of the Board of Directors, Eric Lefkofsky and Ted Leonsis, who collectively functioned as the Company's chief operating decision-maker ("CODM"). Beginning in June 2013, the financial information reported to the CODM, which is used in making resource allocation decisions and assessing operating performance, separated the Company's former International segment between EMEA and Rest of World. As a result of this change in the financial information reported to the CODM, the Company has updated its segment disclosures to separately report three segments: North America, EMEA and Rest of World. Prior period segment information has been retrospectively adjusted to reflect this change.

In August 2013, the Board of Directors appointed Mr. Lefkofsky as CEO. Mr. Lefkofsky was previously a member of the Office of the Chief Executive and will continue to be the Company's CODM.

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 six months ended June 30, 2013 and 2012 were as follows (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
North America
Revenue⁽¹⁾	$	377,182		$	260,181		$	716,736		$	498,746
Segment cost of revenue and operating expenses⁽²⁾	328,674			216,752			626,862			415,145
Segment operating income⁽²⁾	48,508			43,429			89,874			83,601
EMEA
Revenue	159,962			211,555			343,760			441,911
Segment cost of revenue and operating expenses⁽²⁾	135,254			179,761			284,876			373,789
Segment operating income⁽²⁾	24,708			31,794			58,884			68,122
Rest of World
Revenue	71,603			96,599			149,653			186,961
Segment cost of revenue and operating expenses⁽²⁾	85,776			99,888			188,215			199,160
Segment operating loss⁽²⁾	(14,173		)	(3,289		)	(38,562		)	(12,199		)
Consolidated
Revenue	608,747			568,335			1,210,149			1,127,618
Segment cost of revenue and operating expenses⁽²⁾	549,704			496,401			1,099,953			988,094
Segment operating income⁽²⁾	59,043			71,934			110,196			139,524
Stock-based compensation	32,446			27,084			62,353			55,087
Acquisition-related benefit, net	(815		)	(1,635		)	(747		)	(1,687		)
Loss on equity method investments	14			3,428			33			8,556
Other expense (income), net	5,565			(57,367		)	10,629			(53,828		)
Income before provision for income taxes	21,833			100,424			37,928			131,396
Provision for income taxes	27,384			66,875			46,721			101,440
Net (loss) income	$	(5,551	)	$	33,549		$	(8,793	)	$	29,956


(1)	North America contains revenue from the United States of $363.8 million and $243.1 million for the three months ended June 30, 2013 and 2012, respectively, and $690.6 million and $468.3 million for the six months ended June 30, 2013 and 2012, respectively.

(2)

Segment cost of revenue and operating expenses and segment operating income (loss) exclude stock-based compensation and acquisition-related benefit, net. This presentation corresponds to the measure of segment profit or loss that the Company's chief operating decision maker uses in assessing segment performance and making resource allocation decisions. For the three months ended June 30, 2013 and 2012, stock-based compensation expense was approximately $25.6 million and $16.9 million, respectively, for the North America segment, approximately $3.3 million and $3.4 million, respectively, for the EMEA segment and approximately $3.5 million and $6.8 million, respectively, for the Rest of World segment. For the three months ended June 30, 2013 and 2012, acquisition-related benefit, net was approximately $0.5 million and $0.9 million, respectively, for the North America segment and approximately $0.3 million and $0.7 million, respectively, for the EMEA segment. For the six months ended June 30, 2013 and 2012, stock-based compensation expense was approximately $48.4 million and $35.1 million, respectively, for the North America segment, approximately $6.5 million and $6.6 million, respectively, for the EMEA segment and approximately $7.5 million and $13.4 million, respectively, for the Rest of World segment. For the six months ended June 30, 2013 and 2012, acquisition-related benefit, net was approximately $0.4 million and $1.1 million, respectively, for the North America segment and approximately $0.4 million and $0.6 million, respectively, for the EMEA segment. Acquisition-related benefit, net for the North America segment includes gains and losses relating to contingent consideration obligations incurred by U.S. legal entities relating to purchases of businesses that became part of the EMEA and Rest of World segments, which is consistent with the attribution used for internal reporting purposes.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table summarizes the Company's total assets by reportable segment as of June 30, 2013 and December 31, 2012 (in thousands):



	June 30, 2013		December 31, 2012
North America⁽¹⁾	$	1,213,663	$	1,177,314
EMEA	598,410		649,978
Rest of World	164,595		204,182
Consolidated total assets	$	1,976,668	$	2,031,474


(1)	North America contains assets from the United States of $1,120.2 million and $1,112.6 million at June 30, 2013 and December 31, 2012, respectively. There were no other individual countries located outside of the United States that represented more than 10% of consolidated total assets as of June 30, 2013 or December 31, 2012.

Category Information

The Company offers goods and services through three primary categories: Local Deals ("Local"), Groupon Goods ("Goods") and Groupon Getaways ("Travel"). The following table summarizes the Company's third party and other and direct revenue by category for its three reportable segments for the three months ended June 30, 2013 and 2012 (in thousands):



North America		EMEA		Rest of World		Consolidated
Three Months Ended June 30,		Three Months Ended June 30,		Three Months Ended June 30,		Three Months Ended June 30,
2013	2012	2013	2012	2013	2012	2013