Edgar Filing: Groupon, Inc.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 1-35335

Groupon, Inc.

(Exact name of registrant as specified in its charter)



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

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

312-334-1579

(Registrant's telephone number, including area code)

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

Yes x No ☐

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

Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth 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 ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 November 5, 2018, there were 570,780,015 shares of the registrant's common stock outstanding.

TABLE OF CONTENTS



PART I. Financial Information	Page
Forward-Looking Statements	3
Item 1. Financial Statements and Supplementary Data	4
Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017	4
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (unaudited)	5
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2018 and 2017 (unaudited)	6
Condensed Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 2018 (unaudited)	7
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited)	8
Notes to Condensed Consolidated Financial Statements (unaudited)	10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3. Quantitative and Qualitative Disclosure about Market Risk	66
Item 4. Controls and Procedures	67
PART II. Other Information
Item 1. Legal Proceedings	68
Item 1A. Risk Factors	68
Item 2. Unregistered sales of equity securities and use of proceeds	68
Item 5. Other Information	68
Item 6. Exhibits	69
Signatures	70

______________________________________________________

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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations. The words "may," "will," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "continue" and other similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, but are not limited to, risks related to volatility in our operating results; execution of our business and marketing strategies; retaining existing customers and adding new customers; challenges arising from our international operations, including fluctuations in currency exchange rates, legal and regulatory developments and any potential adverse impact from the United Kingdom's likely exit from the European Union; retaining and adding high quality merchants; our voucherless offerings; cybersecurity breaches; competing successfully in our industry; changes to merchant payment terms; providing a strong mobile experience for our customers; maintaining our information technology infrastructure; delivery and routing of our emails; claims related to product and service offerings; managing inventory and order fulfillment risks; litigation; managing refund risks; retaining and attracting members of our executive team; completing and realizing the anticipated benefits from acquisitions, dispositions, joint ventures and strategic investments; lack of control over minority investments; tax liabilities; tax legislation; compliance with domestic and foreign laws and regulations, including the CARD Act, GDPR and regulation of the Internet and e-commerce; classification of our independent contractors; protecting our intellectual property; maintaining a strong brand; customer and merchant fraud; payment-related risks; our ability to raise capital if necessary and our outstanding indebtedness; global economic uncertainty; our common stock, including volatility in our stock price; our convertible senior notes; our ability to realize the anticipated benefits from the hedge and warrant transactions; and those risks and other factors discussed in Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2017 and Part II, Item 1A, Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, 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 ("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," the "Company," "we," "our," "us" and similar terms include Groupon, Inc. and its subsidiaries, unless the context indicates otherwise.

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GROUPON, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



	September 30, 2018			December 31, 2017
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	572,358		$	880,129
Accounts receivable, net	81,478			98,294
Prepaid expenses and other current assets	98,169			94,025
Total current assets	752,005			1,072,448
Property, equipment and software, net	146,897			151,145
Goodwill	327,430			286,989
Intangible assets, net	49,032			19,196
Investments (including $84,861 and $109,751 at September 30, 2018 and December 31, 2017, respectively, at fair value)	109,306			135,189
Other non-current assets	19,250			12,538
Total Assets	$	1,403,920		$	1,677,505
Liabilities and Equity
Current liabilities:
Accounts payable	$	16,810		$	31,968
Accrued merchant and supplier payables	484,626			770,335
Accrued expenses and other current liabilities	269,726			331,196
Total current liabilities	771,162			1,133,499
Convertible senior notes, net	198,575			189,753
Other non-current liabilities	102,543			102,408
Total Liabilities	1,072,280			1,425,660
Commitments and contingencies (see Note 9)
Stockholders' Equity
Common stock, par value $0.0001 per share, 2,010,000,000 shares authorized; 758,800,610 shares issued and 570,198,368 shares outstanding at September 30, 2018; 748,541,862 shares issued and 559,939,620 shares outstanding at December 31, 2017	76			75
Additional paid-in capital	2,222,423			2,174,708
Treasury stock, at cost, 188,602,242 shares at September 30, 2018 and December 31, 2017	(867,450		)	(867,450		)
Accumulated deficit	(1,056,727		)	(1,088,204		)
Accumulated other comprehensive income (loss)	32,329			31,844
Total Groupon, Inc. Stockholders' Equity	330,651			250,973
Noncontrolling interests	989			872
Total Equity	331,640			251,845
Total Liabilities and Equity	$	1,403,920		$	1,677,505

See Notes to 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,
	2018			2017			2018			2017
Revenue:
Service	$	289,214		$	302,458		$	886,663		$	919,884
Product	303,669			332,008			950,156			1,050,827
Total revenue	592,883			634,466			1,836,819			1,970,711
Cost of revenue:
Service	29,792			41,858			91,167			123,209
Product	257,102			283,183			791,120			900,559
Total cost of revenue	286,894			325,041			882,287			1,023,768
Gross profit	305,989			309,425			954,532			946,943
Operating expenses:
Marketing	92,717			101,456			286,051			288,456
Selling, general and administrative	160,214			214,828			676,399			677,109
Restructuring charges	35			11,503			(81		)	18,818
Gain on sale of intangible assets	—			(17,149		)	—			(17,149		)
Total operating expenses	252,966			310,638			962,369			967,234
Income (loss) from operations	53,023			(1,213		)	(7,837		)	(20,291		)
Other income (expense), net	(4,860		)	7,546			(39,832		)	8,822
Income (loss) from continuing operations before provision (benefit) for income taxes	48,163			6,333			(47,669		)	(11,469		)
Provision (benefit) for income taxes	988			2,531			205			11,001
Income (loss) from continuing operations	47,175			3,802			(47,874		)	(22,470		)
Income (loss) from discontinued operations, net of tax	—			(862		)	—			(1,751		)
Net income (loss)	47,175			2,940			(47,874		)	(24,221		)
Net income attributable to noncontrolling interests	(2,560		)	(2,881		)	(9,433		)	(9,460		)
Net income (loss) attributable to Groupon, Inc.	$	44,615		$	59		$	(57,307	)	$	(33,681	)

Basic and diluted net income (loss) per share:
Continuing operations	$	0.08		$	0.00		$	(0.10	)	$	(0.06	)
Discontinued operations	0.00			(0.00		)	0.00			(0.00		)
Basic and diluted net income (loss) per share	$	0.08		$	0.00		$	(0.10	)	$	(0.06	)

Weighted average number of shares outstanding
Basic	568,634,988			557,221,040			565,227,625			559,726,154
Diluted	576,379,421			566,669,049			565,227,625			559,726,154

See Notes to 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,
	2018			2017			2018			2017
Income (loss) from continuing operations	$	47,175		$	3,802		$	(47,874	)	$	(22,470	)
Other comprehensive income (loss) from continuing operations:
Net change in unrealized gain (loss) on foreign currency translation adjustments	(72		)	(5,034		)	1,166			(10,748		)
Net change in unrealized gain (loss) on defined benefit pension plan	—			—			—			585
Available for sale securities:
Net unrealized gain (loss) during the period	94			(225		)	(948		)	(938		)
Reclassification adjustment for realized (gain) loss on investment included in income (loss) from continuing operations	—			—			106			(1,341		)
Net change in unrealized gain (loss) on available-for-sale securities (net of tax effect of $46 and $0 for the three months ended September 30, 2018 and 2017, respectively, and $60 and $0 for the nine months ended September 30, 2018 and 2017, respectively)	94			(225		)	(842		)	(2,279		)
Other comprehensive income (loss) from continuing operations	22			(5,259		)	324			(12,442		)
Comprehensive income (loss) from continuing operations	47,197			(1,457		)	(47,550		)	(34,912		)

Income (loss) from discontinued operations	—			(862		)	—			(1,751		)
Other comprehensive income (loss) from discontinued operations - Foreign currency translation adjustments:
Net unrealized gain (loss) during the period	—			—			—			(1,793		)
Reclassification adjustment included in net income (loss) from discontinued operations	—			—			—			(14,718		)
Net change in unrealized gain (loss)	—			—			—			(16,511		)
Comprehensive income (loss) from discontinued operations	—			(862		)	—			(18,262		)

Comprehensive income (loss)	47,197			(2,319		)	(47,550		)	(53,174		)
Comprehensive income (loss) attributable to noncontrolling interests	(2,560		)	(2,881		)	(9,433		)	(9,460		)
Comprehensive income (loss) attributable to Groupon, Inc.	$	44,637		$	(5,200	)	$	(56,983	)	$	(62,634	)

See Notes to Condensed Consolidated Financial Statements.

GROUPON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

(unaudited)



	Groupon, Inc. Stockholders' Equity
	Common Stock				Additional Paid-In Capital			Treasury Stock					Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Groupon, Inc. Stockholders' Equity			Non-controlling Interests			Total Equity
	Shares		Amount		Additional Paid-In Capital			Shares		Amount			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Groupon, Inc. Stockholders' Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2017	748,541,862		$	75	$	2,174,708		(188,602,242	)	$	(867,450	)	$	(1,088,204	)	$	31,844		$	250,973		$	872		$	251,845
Cumulative effect of change in accounting principle, net of tax	—		—		—			—		—			88,945			—			88,945			—			88,945
Reclassification for impact of U.S. tax rate change	—		—		—			—		—			(161		)	161			—			—			—
Net income (loss)	—		—		—			—		—			(57,307		)	—			(57,307		)	9,433			(47,874		)
Foreign currency translation	—		—		—			—		—			—			1,166			1,166			—			1,166
Unrealized gain (loss) on available-for-sale securities, net of tax	—		—		—			—		—			—			(842		)	(842		)	—			(842		)
Exercise of stock options	670,393		—		76			—		—			—			—			76			—			76
Vesting of restricted stock units and performance share units	11,007,259		1		(1		)	—		—			—			—			—			—			—
Shares issued under employee stock purchase plan	1,621,061		—		5,634			—		—			—			—			5,634			—			5,634
Shares issued to settle liability-classified awards	1,240,379		—		6,436			—		—			—			—			6,436			—			6,436
Tax withholdings related to net share settlements of stock-based compensation awards	(4,280,344	)	—		(19,030		)	—		—			—			—			(19,030		)	—			(19,030		)
Stock-based compensation on equity-classified awards	—		—		54,600			—		—			—			—			54,600			—			54,600
Distributions to noncontrolling interest holders	—		—		—			—		—			—			—			—			(9,316		)	(9,316		)
Balance at September 30, 2018	758,800,610		$	76	$	2,222,423		(188,602,242	)	$	(867,450	)	$	(1,056,727	)	$	32,329		$	330,651		$	989		$	331,640

See Notes to Condensed Consolidated Financial Statements.

GROUPON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Nine Months Ended September 30,
	2018			2017
Operating activities
Net income (loss)	$	(47,874	)	$	(24,221	)
Less: Income (loss) from discontinued operations, net of tax	—			(1,751		)
Income (loss) from continuing operations	(47,874		)	(22,470		)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of property, equipment and software	76,984			86,355
Amortization of acquired intangible assets	10,316			17,622
Stock-based compensation	50,670			60,318
Gain on sale of intangible assets	—			(17,149		)
Gain on sale of investment	—			(7,624		)
Impairments of investments	10,156			—
Deferred income taxes	(6,575		)	845
(Gain) loss from changes in fair value of investments	8,312			5,100
Amortization of debt discount on convertible senior notes	8,822			7,964
Change in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable	20,217			787
Prepaid expenses and other current assets	(2,695		)	(3,114		)
Accounts payable	(16,034		)	(5,616		)
Accrued merchant and supplier payables	(214,748		)	(197,836		)
Accrued expenses and other current liabilities	(45,175		)	(39,396		)
Other, net	14,663			(21,490		)
Net cash provided by (used in) operating activities from continuing operations	(132,961		)	(135,704		)
Net cash provided by (used in) operating activities from discontinued operations	—			(2,195		)
Net cash provided by (used in) operating activities	(132,961		)	(137,899		)
Investing activities
Purchases of property and equipment and capitalized software	(53,611		)	(43,716		)
Proceeds from sale of intangible assets	1,500			18,333
Proceeds from sales and maturities of investments	8,594			16,561
Acquisition of business, net of acquired cash	(57,821		)	—
Acquisitions of intangible assets and other investing activities	(17,147		)	(750		)
Net cash provided by (used in) investing activities from continuing operations	(118,485		)	(9,572		)
Net cash provided by (used in) investing activities from discontinued operations	—			(9,548		)
Net cash provided by (used in) investing activities	(118,485		)	(19,120		)
Financing activities
Payments for purchases of treasury stock	—			(61,233		)
Taxes paid related to net share settlements of stock-based compensation awards	(18,638		)	(23,340		)
Proceeds from stock option exercises and employee stock purchase plan	5,710			5,486
Distributions to noncontrolling interest holders	(9,316		)	(8,974		)
Payments of capital lease obligations	(25,289		)	(25,298		)
Payments of contingent consideration related to acquisitions	(1,815		)	(7,790		)
Other financing activities	—			(473		)
Net cash provided by (used in) financing activities	(49,348		)	(121,622		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash, including cash classified within current assets of discontinued operations	(9,287		)	23,275
Net increase (decrease) in cash, cash equivalents and restricted cash, including cash classified within current assets of discontinued operations	(310,081		)	(255,366		)
Less: Net increase (decrease) in cash classified within current assets of discontinued operations	—			(28,866		)
Net increase (decrease) in cash, cash equivalents and restricted cash	(310,081		)	(226,500		)
Cash, cash equivalents and restricted cash, beginning of period	885,481			874,906
Cash, cash equivalents and restricted cash, end of period	$	575,400		$	648,406



Non-cash investing and financing activities
Continuing operations:
Equipment acquired under capital lease obligations	$	13,789	$	17,892
Leasehold improvements funded by lessor	557		402
Increase (decrease) in liabilities related to purchases of property and equipment and capitalized software	699		396
Investments acquired in connection with business dispositions	—		2,022
Contingent consideration liability incurred in connection with acquisition of business	1,589		—
Financing obligation incurred in connection with acquisition of business	8,604		—

See Notes to 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, which commenced operations in October 2008, operates online local commerce marketplaces throughout the world that connect merchants to consumers by offering goods and services, generally at a discount. Customers access those marketplaces through our websites, primarily localized groupon.com sites in many countries, and our mobile applications.

Our operations are organized into two segments: North America and International. See Note 16, Segment Information.

Unaudited Interim Financial Information

We have 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 our opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations, comprehensive income (loss), cash flows and stockholders' equity for the periods presented. Operating results for the periods presented are not necessarily indicative of the results to be expected for the full year ending December 31, 2018. 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 and notes should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 14, 2018, as amended by the Form 10-K/A for the year ended December 31, 2017, filed with the SEC on March 23, 2018.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Groupon, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The 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 we exercise control and variable interest entities for which we have determined that we are the primary beneficiary. Outside stockholders' interests in subsidiaries are shown on the condensed consolidated financial statements as Noncontrolling interests. Equity investments in entities in which we do not have a controlling financial interest are accounted for under the equity method, the fair value option, as available-for-sale securities or at cost adjusted for observable price changes and impairments, as appropriate.

Reclassifications and Terminology Changes

Certain reclassifications have been made to the condensed consolidated financial statements of prior periods and the accompanying notes to conform to the current period presentation, including the change in presentation of restricted cash in the condensed consolidated statements of cash flows upon adoption of ASU 2016-18. Refer to Note 2, Adoption of New Accounting Standards, for additional information. Additionally, in prior years, we referred to our product revenue and service revenue as "direct revenue" and "third-party and other revenue," respectively. This terminology change did not impact the amounts presented in the condensed consolidated financial statements.

Use of Estimates

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

2. ADOPTION OF NEW ACCOUNTING STANDARDS

We adopted the guidance in ASC Topic 606, Revenue from Contracts with Customers, on January 1, 2018. Topic 606 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. See Changes to Accounting Policies from Adoption of New Accounting Standards below and Note 11, Revenue Recognition, for information on the impact of adopting Topic 606 on our accounting policies.

We adopted the guidance in ASU 2016-01, Financial Instruments (Topic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities, as amended, on January 1, 2018. This ASU generally requires equity investments to be measured at fair value with changes in fair value recognized through net income and eliminates the cost method for equity securities. However, for equity investments without readily determinable fair values the ASU permits entities to elect to measure the investments at cost adjusted for observable price changes and impairments, with changes in the measurement recognized through net income. We applied that measurement alternative to our equity investments that were previously accounted for under the cost method. The adoption of ASU 2016-01 did not have a material impact on the condensed consolidated financial statements. See Changes to Accounting Policies from Adoption of New Accounting Standards below for additional information on the impact of adopting the ASU on our accounting policies.

We adopted the guidance in ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, on January 1, 2018. This ASU requires companies to include amounts generally described as restricted cash and restricted cash equivalents, along with cash and cash equivalents, when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. Previously, changes in restricted cash were reported within cash flows from operating activities. We applied that change in cash flow classification on a retrospective basis, which resulted in a decrease of $2.6 million to net cash used in operating activities for the nine months ended September 30, 2017.

Restricted cash primarily represents amounts that we are unable to access for operational purposes pursuant to letters of credit with financial institutions. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to amounts shown in the condensed consolidated statements of cash flows, as of September 30, 2018 and 2017 and December 31, 2017 (in thousands):



	September 30, 2018		September 30, 2017		December 31, 2017
Cash and cash equivalents	$	572,358	$	638,657	$	880,129
Restricted cash included in prepaid expenses and other current assets	2,649		4,375		4,932
Restricted cash included in other non-current assets	393		5,374		420
Cash, cash equivalents and restricted cash	$	575,400	$	648,406	$	885,481

We adopted the guidance in ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, on January 1, 2018. This ASU is meant to clarify the scope of ASC Subtopic 610-20, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets. The adoption of ASU 2017-05 did not have a material impact on the condensed consolidated financial statements.

We adopted the guidance in ASU 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on January 1, 2018. This ASU requires employers to include only the service cost component of net periodic pension cost in operating expenses, together with other employee compensation costs. The other components of net periodic pension cost, including interest cost, expected return on plan assets, amortization of prior service cost and settlement and curtailment effects, are to be included in non-operating expenses. The adoption of ASU 2017-07 did not have a material impact on the condensed consolidated financial statements.

We adopted the guidance in ASU 2017-09, Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting, on January 1, 2018. This ASU clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting. The adoption of ASU 2017-09 did not have a material impact on the condensed consolidated financial statements.

We adopted the guidance in ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, as of January 1, 2018. This ASU permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Jobs Act"). As a result of the adoption of ASU 2018-02, we reclassified $0.2 million from accumulated other comprehensive income (loss) to accumulated deficit.

Changes to Accounting Policies from Adoption of New Accounting Standards

Revenue Recognition

Prior to our adoption of Topic 606, we recognized revenue when the following criteria were met: persuasive evidence of an arrangement existed; delivery had occurred; the selling price was fixed or determinable and collection was reasonably assured. Following our adoption of Topic 606, we recognize revenue when we satisfy a performance obligation by transferring a promised good or service to a customer. Substantially all of our performance obligations are satisfied at a point in time rather than over time.

Product Revenue

We generate product revenue from direct sales of merchandise inventory through our Goods category. For product revenue transactions, we are the primary party responsible for providing the good to the customer, we have inventory risk and we have discretion in establishing prices. As such, product revenue is reported on a gross basis as the purchase price received from the customer. Product revenue, including associated shipping revenue, is recognized when title passes to the customer upon delivery of the product.

Service Revenue

Service revenue is primarily earned from transactions in which we earn commissions by selling goods or services on behalf of third-party merchants. Those transactions generally involve a customer's purchase of a voucher through one of our online marketplaces that can be redeemed with a third-party merchant for specified goods or services (or for discounts on specified goods or services). Service revenue from those transactions is reported on a net basis as the purchase price collected from the customer less the portion of the purchase price that is payable to the third-party merchant. We recognize revenue from those transactions when our commission has been earned, which occurs when a sale through one of our online marketplaces is completed and the related voucher has been made available to the customer. We believe that our remaining obligations to remit payment to the merchant and to provide information about vouchers sold are administrative activities that are immaterial in the context of the contract with the merchant. Prior to our adoption of Topic 606, we deferred the revenue from hotel reservation offerings until the customer's stay commenced. Following our adoption of Topic 606, revenue from hotel reservation offerings is recognized at the time the reservation is made, net of an allowance for estimated cancellations.

We also earn commissions when customers make purchases with retailers using digital coupons accessed through our websites and mobile applications and from voucherless merchant offerings in which customers earn cash back on their credit card statements when they transact with third-party merchants. We recognize those commissions as revenue in the period in which the underlying transactions between the customer and the third-party merchant are completed.

Variable Consideration for Unredeemed Vouchers

For merchant agreements with redemption payment terms, the merchant is not paid its share of the sale price for a voucher sold through one of our online marketplaces until the customer redeems the related voucher. If the customer does not redeem a voucher with such merchant payment terms, we retain all of the gross billings for that voucher, rather than retaining only our net commission. Prior to our adoption of Topic 606, we recognized that variable consideration from unredeemed vouchers and derecognized the related accrued merchant payables when our legal obligation to the merchant expired, which we believe is shortly after the voucher expiration date in most jurisdictions. Following our adoption of Topic 606, we estimate the variable consideration from vouchers that will not ultimately be redeemed and recognize that amount as revenue at the time of sale, rather than when our legal obligation expires. We estimate variable consideration from unredeemed vouchers using our historical voucher redemption experience. If actual redemptions differ from our estimates, the effects could be material to the condensed consolidated financial statements.

Refunds

Prior to our adoption of Topic 606, refunds were recorded as a reduction of revenue, except for refunds on service revenue transactions for which the merchant's share was not recoverable, which were presented as a cost of revenue. Following our adoption of Topic 606, all refunds are recorded as a reduction of revenue. The liability for estimated refunds is included within Accrued expenses and other current liabilities on the condensed consolidated balance sheets.

We estimate our refund reserve using historical refund experience by deal category. We assess the trends that could affect our estimates on an ongoing basis and make adjustments to the refund reserve calculations if it appears that changes in circumstances, including changes to the refund policies or general economic conditions, may cause future refunds to differ from our initial estimates. If actual refunds differ from our estimates, the effects could be material to the condensed consolidated financial statements.

Discounts, Customer Credits and Other Consideration Payable to Customers

We provide discount offers to encourage purchases of goods and services through our online marketplaces. We record discounts as a reduction of revenue.

Additionally, we issue credits to customers that can be applied to future purchases through our online marketplaces. Credits are primarily issued as consideration for refunds. To a lesser extent, credits are issued for customer relationship purposes. Credits issued to satisfy refund requests are applied as a reduction to the refunds reserve. Prior to our adoption of Topic 606, customer credits issued for relationship purposes were classified in the condensed consolidated statement of operations as a marketing expense. Following the adoption of Topic 606, customer credits issued for relationship purposes are classified as a reduction of revenue.

Prior to our adoption of Topic 606, we recognized breakage income for unused customer credits when they expired or were forfeited. Following our adoption of Topic 606, breakage income from customer credits that are not expected to be used is estimated and recognized as revenue in proportion to the pattern of redemption for customer credits that are used.

Sales and Related Taxes

Sales, use, value-added and related taxes that are imposed on specific revenue-generating transactions are presented on a net basis and excluded from revenue.

Costs of Obtaining Contracts

Prior to our adoption of Topic 606, we expensed the incremental costs to obtain contracts with third-party merchants, such as sales commissions, as incurred. Following our adoption of Topic 606, those costs are deferred and recognized over the expected period of the merchant arrangement, generally from 12 to 18 months. As of September 30, 2018, we had $3.1 million and $11.0 million of deferred contract acquisition costs recorded within Prepaid expenses and other current assets and Other non-current assets, respectively. For the three and nine months ended September 30, 2018, we amortized $6.2 million and $19.5 million, respectively, of deferred contract acquisition costs and did not recognize any impairment losses in relation to the deferred costs. Those costs are classified within Selling, general and administrative expenses in the condensed consolidated statements of operations.

Cost of Revenue

Cost of revenue is comprised of direct and certain indirect costs incurred to generate revenue. Costs incurred to generate revenue, which include credit card processing fees, editorial costs, compensation expense for technology support personnel who are responsible for maintaining the infrastructure of our websites, amortization of internal-use software relating to customer-facing applications, web hosting and other processing fees are attributed to the cost of service and product revenue in proportion to gross billings during the period. For product revenue transactions, cost of revenue also includes the cost of inventory, shipping and fulfillment costs and inventory markdowns. Fulfillment costs are comprised of third-party logistics provider costs, as well as rent, depreciation, personnel costs and other costs of operating our fulfillment center. Prior to our adoption of Topic 606, cost of revenue on service revenue transactions also included refunds for which the merchant's share was not recoverable.

Investments

Prior to our adoption of the guidance in ASU 2016-01, investments in nonmarketable equity shares with no redemption provisions that are not common stock or in-substance common stock or for which we do not have the ability to exercise significant influence were accounted for using the cost method of accounting. Those investments are classified within Investments on the condensed consolidated balance sheets. Under the cost method of accounting, investments were carried at cost and adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. Subsequent to our adoption of the guidance in ASU 2016-01, we apply a measurement alternative for equity investments without readily determinable fair values that permits entities to elect to measure the investments at cost adjusted for observable price changes and impairments, with changes in the measurement recognized through net income.

Investments in common stock or in-substance common stock for which we have the ability to exercise significant influence are accounted for under the equity method, except where we have made an irrevocable election to account for the investments at fair value. Those investments are classified within Investments on the condensed consolidated balance sheets. The proportionate share of income or loss on equity method investments and changes in the fair values of investments for which the fair value option has been elected are presented within Other income (expense), net on the condensed consolidated statements of operations.

Investments in convertible debt securities and convertible redeemable preferred shares are accounted for as available-for-sale securities, which are classified within Investments on the condensed consolidated balance sheets. Available-for-sale securities are recorded at fair value each reporting period. Unrealized gains and losses, net of the related tax effects, are excluded from earnings and recorded as a separate component within Accumulated other comprehensive income (loss) on the condensed consolidated balance sheets until realized. Interest income from available-for-sale securities is reported within Other income (expense), net on the condensed consolidated statements of operations.

3. DISCONTINUED OPERATIONS AND OTHER BUSINESS DISPOSITIONS

In October 2016, we completed a strategic review of our international markets in connection with our efforts to optimize our global footprint and focus on the markets that we believe have the greatest potential to benefit our long-term financial performance. Based on that review, we decided to focus our business on 15 core countries and to pursue strategic alternatives for our operations in the remaining 11 countries, which were primarily based in Asia and Latin America. The dispositions of our operations in those 11 countries were completed between November 2016 and March 2017.

A business disposition that represents a strategic shift and has (or will have) a major effect on our operations and financial results is reported as a discontinued operation. We determined that the decision reached by management and our Board of Directors to exit those 11 non-core countries, which comprised a substantial majority of the operations outside of North America and EMEA, represented a strategic shift in our business. Additionally, based on our review of quantitative and qualitative factors relevant to the dispositions, we determined that the disposition of the businesses in those countries would have a major effect on our operations and financial results. As such, the results of operations and cash flows for the operations in those countries, including the gains and losses on the dispositions and related income tax effects, are presented as discontinued operations in the accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2017.

Dispositions Completed in 2017

In connection with our strategic initiative to exit non-core countries as discussed above, we sold an 83% controlling stake in our subsidiary in Israel and sold our subsidiaries in Argentina, Chile, Colombia, Peru, Mexico, Brazil, Singapore and Hong Kong during the first quarter 2017. We recognized a net pretax loss on those dispositions of $1.6 million, which consisted of the following (in thousands):



Net consideration received:
Fair value of minority investments retained or acquired	$	2,021
Cash proceeds received	3,462
Cash proceeds receivable	2,000
Less: transaction costs	1,394
Total net consideration received	6,089
Cumulative translation gain reclassified to earnings	14,718
Less: Net book value upon closing of the transactions	14,958
Less: Indemnification liabilities ⁽¹⁾	5,365
Less: Unfavorable contract liability for transition services	2,114
Loss on dispositions	$	(1,630	)


(1)	See Note 9, Commitments and Contingencies, for additional information about the indemnification liabilities.

Results of Discontinued Operations

The following table summarizes the major classes of line items included in income (loss) from discontinued operations, net of tax, for the three and nine months ended September 30, 2017 (in thousands):



	Three Months Ended September 30, 2017 ⁽¹⁾			Nine Months Ended September 30, 2017 ⁽²⁾
Service revenue	$	—		$	12,602
Product revenue	—			2,962
Service cost of revenue	—			(2,557		)
Product cost of revenue	—			(3,098		)
Marketing expense	—			(1,239		)
Selling, general and administrative expense	(500		)	(11,784		)
Restructuring	—			(778		)
Other income, net	—			3,852
Income (loss) from discontinued operations before loss on dispositions and provision for income taxes	(500		)	(40		)
Loss on dispositions	(362		)	(1,630		)
Provision for income taxes	—			(81		)
Income (loss) from discontinued operations, net of tax	$	(862	)	$	(1,751	)


(1)	Selling, general and administrative expense from discontinued operations for the three months ended September 30, 2017 primarily related to increases to contingent liabilities under indemnification agreements. See Note 9, Commitments and Contingencies, for information about indemnification obligations related to discontinued operations.


(2)	The income (loss) from discontinued operations before loss on dispositions and provision for income taxes for the nine months ended September 30, 2017 includes the results of each business through its respective disposition date.

4. BUSINESS COMBINATIONS

On April 30, 2018, we acquired 80% of the outstanding shares of Cloud Savings Company, Ltd. ("Cloud Savings"), a UK-based business that operates online discount code and digital gift card platforms. The primary purpose of this acquisition was to expand digital coupon offerings in our International segment. Concurrent with the acquisition, we entered into an agreement with the noncontrolling shareholder giving us the right to acquire the remaining outstanding shares of Cloud Savings for $8.9 million in December 2018. Additionally, the noncontrolling shareholder has the right to require us to purchase the shares in December 2018 for that same amount. The rights and obligations to acquire the remaining outstanding shares were recorded as a financing obligation at its acquisition-date fair value of $8.6 million and is classified within Accrued expenses and other current liabilities on the condensed consolidated balance sheets. The transaction also included a contingent consideration arrangement with an acquisition-date fair value of $1.6 million. The aggregate acquisition-date fair value of the consideration transferred for the Cloud Savings acquisition totaled $74.3 million, which consisted of the following (in thousands):



Cash	$	64,065
Financing obligation	8,604
Contingent consideration	1,589
Total	$	74,258

The results of the Cloud Savings acquisition are included in our condensed consolidated financial statements from the date of acquisition through September 30, 2018. The fair value of consideration transferred in the business combination is allocated to the tangible and intangible assets acquired and liabilities assumed at the acquisition date, with the remaining unallocated amount recorded as goodwill. Acquired goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired. We paid a premium for a number of reasons, including growing our merchant base and acquiring an assembled workforce. The goodwill from this business combination is not deductible for tax purposes. The allocation of the acquisition price has been prepared on a preliminary basis, and changes to that allocation may occur as a result of final working capital adjustments and tax return filings.

The following table summarizes the allocation of the aggregate acquisition price of the Cloud Savings acquisition (in thousands):



Cash and cash equivalents	$	6,244
Accounts receivable	5,885
Prepaid expenses and other current assets	804
Property, equipment and software	226
Goodwill	46,217
Intangible assets⁽¹⁾:
Merchant relationships	20,322
Trade names	2,609
Developed technology	549
Other intangible assets	687
Total assets acquired	$	83,543
Accounts payable	$	693
Accrued merchant and supplier payables	386
Accrued expenses and other current liabilities	6,130
Other non-current liabilities	2,076
Total liabilities assumed	$	9,285
Total acquisition price	$	74,258


(1)	The estimated useful lives of the acquired intangible assets are 6 years for merchant relationships, 8 years for trade names, 2 years for developed technology, and 1 year for other intangible assets.

For the nine months ended September 30, 2018, $0.7 million of external transaction costs related to that business combination, primarily consisting of legal and advisory fees, are classified within Selling, general and administrative on our condensed consolidated statements of operations.

The revenue and net income of Cloud Savings included in our condensed consolidated statements of operations were $7.3 million and $0.1 million, respectively, for the period from April 30, 2018 through September 30, 2018. Pro forma results of operations for the Cloud Savings acquisition are not presented because the pro forma effects of that acquisition were not material to our condensed consolidated results of operations.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes goodwill activity by segment for the nine months ended September 30, 2018 (in thousands):



	North America		International			Consolidated
Balance as of December 31, 2017	$	178,685	$	108,304		$	286,989
Goodwill related to acquisition	—		46,217			46,217
Foreign currency translation	—		(5,776		)	(5,776		)
Balance as of September 30, 2018	$	178,685	$	148,745		$	327,430

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table summarizes intangible assets as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018						December 31, 2017
Asset Category	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Customer relationships	$	55,758	$	49,908	$	5,850	$	56,749	$	46,513	$	10,236
Merchant relationships	30,650		11,769		18,881		11,598		9,853		1,745
Trade names	14,390		11,298		3,092		12,077		10,469		1,608
Developed technology	37,093		36,680		413		36,864		36,864		—
Patents	36,184		16,236		19,948		19,031		15,204		3,827
Other intangible assets	11,294		10,446		848		10,875		9,095		1,780
Total	$	185,369	$	136,337	$	49,032	$	147,194	$	127,998	$	19,196

Amortization of intangible assets is computed using the straight-line method over their estimated useful lives, which range from 1 to 10 years. Amortization expense related to intangible assets was $3.9 million and $6.0 million for the three months ended September 30, 2018 and 2017, respectively, and $10.3 million and $17.6 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, estimated future amortization expense related to intangible assets is as follows (in thousands):



Remaining amounts in 2018	$	4,448
2019	14,179
2020	8,279
2021	7,553
2022	7,237
Thereafter	7,336
Total	$	49,032

Sale of Intangible Assets

On September 15, 2017, we sold customer lists and other intangible assets in certain food delivery markets to a subsidiary of Grubhub Inc. ("Grubhub"). We recognized a pretax gain on the sale of assets of $17.1 million, which represents the excess of the $19.8 million in net proceeds received, consisting of $20.0 million in cash less $0.2 million in transaction costs, over the $2.7 million net book value of the assets upon closing of the transaction.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

6. INVESTMENTS

The following table summarizes investments as of September 30, 2018 and December 31, 2017 (dollars in thousands):



	September 30, 2018		Percent Ownership of Voting Stock			December 31, 2017		Percent Ownership of Voting Stock
Available-for-sale securities:
Convertible debt securities	$	—				$	11,354
Redeemable preferred shares	10,207		19%	to	25%	15,431		19%	to	25%
Total available-for-sale securities	10,207					26,785
Fair value option investments	74,654		10%	to	19%	82,966		10%	to	19%
Other equity investments ⁽¹⁾	24,445		1%	to	19%	25,438		1%	to	19%
Total investments	$	109,306				$	135,189

(1)

Represents equity investments without readily determinable fair values. Those investments were previously accounted for using the cost method of accounting. Under the cost method, investments were carried at cost and adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. We adopted the guidance in ASU 2016-01 on January 1, 2018. Under that guidance, we have elected to record equity investments without readily determinable fair values at cost adjusted for observable price changes and impairments. There were no adjustments for observable price changes related to these investments for the three and nine months ended September 30, 2018. See further discussion under Impairments of Investments below.

The following table summarizes amortized cost, gross unrealized gain, gross unrealized loss and fair value of available-for-sale securities as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018								December 31, 2017
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss ⁽¹⁾			Fair Value
Available-for-sale securities:
Convertible debt securities	$	—	$	—	$	—	$	—	$	10,205	$	1,653	$	(504	)	$	11,354
Redeemable preferred shares	9,961		246		—		10,207		15,431		—		—			15,431
Total available-for-sale securities	$	9,961	$	246	$	—	$	10,207	$	25,636	$	1,653	$	(504	)	$	26,785


(1)	Gross unrealized loss is related to one security that was in a loss position for greater than 12 months as of December 31, 2017.

Fair Value Option Investments

In connection with the dispositions of controlling stakes in Ticket Monster, an entity based in the Republic of Korea, in May 2015 and Groupon India in August 2015, we obtained minority investments in Monster Holdings LP ("Monster LP") and in Nearbuy Pte Ltd. ("Nearbuy"), respectively. We have made an irrevocable election to account for both of those investments at fair value with changes in fair value reported in earnings. We elected to apply fair value accounting to those investments because we believe that fair value is the most relevant measurement attribute for those investments, as well as to reduce operational and accounting complexity. We determined that the fair value of our investments in Monster LP and Nearbuy were $70.2 million and $4.5 million, respectively, as of September 30, 2018 and $78.9 million and $4.0 million, respectively, as of December 31, 2017.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table summarizes gains and losses due to changes in fair value of those investments for the three and nine months ended September 30, 2018 and 2017 (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Monster LP	$	(474	)	$	(3,768	)	$	(8,759	)	$	(1,492	)
Nearbuy	230			(187		)	447			(3,608		)
Total	$	(244	)	$	(3,955	)	$	(8,312	)	$	(5,100	)

Impairments of Investments

We recorded $10.2 million of other-than-temporary impairments of available-for-sale securities and other equity investments for the nine months ended September 30, 2018. Those impairments are classified within Other income (expense), net on the condensed consolidated statements of operations.

Sales of Investments

In September 2018, we sold an available-for-sale security for total consideration of $8.6 million, which approximated its carrying amount and amortized cost as of the closing date.

In July 2017, we sold an other equity method investment for total consideration of $16.0 million, consisting of $14.7 million received in cash and $1.3 million that the acquirer paid into an escrow account that will be settled within 18 months of closing. We recognized a pretax gain on the disposition of $7.6 million, which is classified within "Other income (expense), net" on the condensed consolidated statement of operations.

7. SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS INFORMATION

The following table summarizes other income (expense), net for the three and nine months ended September 30, 2018 and 2017 (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Interest income	$	1,513		$	894		$	4,858		$	2,155
Interest expense	(5,713		)	(5,156		)	(16,434		)	(15,423		)
Gains (losses), net on changes in fair value of investments	(244		)	(3,955		)	(8,312		)	(5,100		)
Gain on sale of investment	—			7,624			—			7,624
Foreign currency gains (losses), net	(1,033		)	8,186			(12,168		)	19,063
Impairments of investments	(112		)	—			(10,156		)	—
Other	729			(47		)	2,380			503
Other income (expense), net	$	(4,860	)	$	7,546		$	(39,832	)	$	8,822

The following table summarizes prepaid expenses and other current assets as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018		December 31, 2017
Merchandise inventories	$	31,737	$	25,528
Prepaid expenses	37,847		40,399
Income taxes receivable	9,161		10,299
Other	19,424		17,799
Total prepaid expenses and other current assets	$	98,169	$	94,025

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table summarizes accrued merchant and supplier payables as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018		December 31, 2017
Accrued merchant payables	$	324,161	$	459,662
Accrued supplier payables ⁽¹⁾	160,465		310,673
Total accrued merchant and supplier payables	$	484,626	$	770,335


(1)	Amounts include payables to suppliers of inventories and providers of shipping and fulfillment services.

The following table summarizes accrued expenses and other current liabilities as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018		December 31, 2017
Refunds reserve	$	23,800	$	31,275
Compensation and benefits	56,016		73,096
Accrued marketing	34,948		32,912
Customer credits	17,420		28,487
Income taxes payable	11,587		9,645
Deferred revenue	20,709		29,539
Current portion of capital lease obligations	21,043		25,958
Other	84,203		100,284
Total accrued expenses and other current liabilities	$	269,726	$	331,196

The following table summarizes other non-current liabilities as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018		December 31, 2017
Contingent income tax liabilities	$	46,073	$	43,699
Deferred rent	31,860		29,032
Capital lease obligations	12,224		18,500
Deferred income taxes	2,776		811
Other	9,610		10,366
Total other non-current liabilities	$	102,543	$	102,408

The following table summarizes the components of accumulated other comprehensive income (loss) as of September 30, 2018 and December 31, 2017 (in thousands):



	Foreign currency translation adjustments		Unrealized gain (loss) on available-for-sale securities			Total
Balance as of December 31, 2017	$	30,962	$	882		$	31,844
Reclassification for impact of U.S. tax rate change	—		161			161
Other comprehensive income (loss)	1,166		(842		)	324
Balance as of September 30, 2018	$	32,128	$	201		$	32,329

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

8. FINANCING ARRANGEMENTS

Convertible Senior Notes

On April 4, 2016, we issued $250.0 million in aggregate principal amount of convertible senior notes (the "Notes") in a private placement to A-G Holdings, L.P. ("AGH"). Michael Angelakis, the chairman and chief executive officer of Atairos Group, Inc. ("Atairos"), joined our Board of Directors in connection with the issuance of the Notes. Atairos controls the voting power of AGH. The net proceeds from this offering were $243.2 million after deducting issuance costs. The Notes bear interest at a rate of 3.25% per annum, payable annually in arrears on April 1 of each year, beginning on April 1, 2017. The Notes will mature on April 1, 2022, subject to earlier conversion or redemption.

Each $1,000 of principal amount of the Notes initially is convertible into 185.1852 shares of common stock, which is equivalent to an initial conversion price of $5.40 per share, subject to adjustment upon the occurrence of specified events. Upon conversion, we can elect to settle the conversion value in cash, shares of our common stock, or any combination of cash and shares of our common stock. Holders of the Notes may convert their Notes at their option at any time until the close of business on the scheduled trading day immediately preceding the maturity date. In addition, if specified corporate events occur prior to the maturity date, we may be required to increase the conversion rate for holders who elect to convert based on the effective date of such event and the applicable stock price attributable to the event, as set forth in a table contained in the indenture governing the Notes (the "Indenture"). Based on the closing price of the common stock of $3.77 as of September 30, 2018, the if-converted value of the Notes was less than the principal amount.

With certain exceptions, upon a fundamental change (as defined in the Indenture), the holders of the Notes may require us to repurchase all or a portion of their Notes for cash at a purchase price equal to the principal amount plus accrued and unpaid interest. In addition, we may redeem the Notes, at our option, at a purchase price equal to the principal amount plus accrued and unpaid interest on or after April 1, 2020, if the closing sale price of the common stock exceeds 150% of the then-current conversion price for 20 or more trading days in the 30 consecutive trading day period preceding the exercise of this redemption right.

The Notes are senior unsecured obligations that rank equal in right of payment to all senior unsecured indebtedness and rank senior in right of payment to any indebtedness that is contractually subordinated to the Notes.

The Indenture includes customary events of default. If an event of default, as defined in the Indenture, occurs and is continuing, the principal amount of the Notes and any accrued and unpaid interest may be declared immediately due and payable. In the case of bankruptcy or insolvency, the principal amount of the Notes and any accrued and unpaid interest would automatically become immediately due and payable.

We have separated the Notes into their liability and equity components in the accompanying condensed consolidated balance sheets. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the principal amount of the Notes. The difference between the principal amount of the Notes and the liability component (the "debt discount") is amortized to interest expense at an effective interest rate of 9.75% over the term of the Notes. The equity component of the Notes is included in additional paid-in capital in the condensed consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification.

We incurred transaction costs of approximately $6.8 million related to the issuance of the Notes. Those transaction costs were allocated to the liability and equity components in the same manner as the allocation of the proceeds from the Notes. Transaction costs attributable to the liability component of $4.8 million were recorded as a debt discount in the condensed consolidated balance sheet and are being amortized to interest expense over the term of the Notes. Transaction costs attributable to the equity component of $2.0 million were recorded in stockholders' equity as a reduction of the equity component.

The carrying amount of the Notes consisted of the following as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018			December 31, 2017
Liability component:
Principal amount	$	250,000		$	250,000
Less: debt discount	(51,425		)	(60,247		)
Net carrying amount of liability component	$	198,575		$	189,753

Net carrying amount of equity component	$	67,014		$	67,014

The estimated fair value of the Notes as of September 30, 2018 and December 31, 2017 was $262.8 million and $285.6 million, respectively, and was determined using a lattice model. We classified the fair value of the Notes as a Level 3 measurement due to the lack of observable market data over fair value inputs such as our stock price volatility over the term of the Notes and our cost of debt.

As of September 30, 2018, the remaining term of the Notes is approximately 3 years and 6 months. During the three and nine months ended September 30, 2018 and 2017, we recognized interest costs on the Notes as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Contractual interest (3.25% of the principal amount per annum)	$	2,032	$	2,032	$	6,096	$	6,096
Amortization of debt discount	3,016		2,722		8,822		7,964
Total	$	5,048	$	4,754	$	14,918	$	14,060

Note Hedges and Warrants

In May 2016, we purchased convertible note hedges with respect to our common stock for a cost of $59.1 million from certain bank counterparties. The convertible note hedges provide us with the right to purchase up to 46.3 million shares of our common stock at an initial strike price of $5.40 per share, which corresponds to the initial conversion price of the Notes, and are exercisable upon conversion of the Notes. The convertible note hedges are intended to reduce the potential economic dilution upon conversion of the Notes. The convertible note hedges are separate transactions and are not part of the terms of the Notes. Holders of the Notes do not have any rights with respect to the convertible note hedges.

In May 2016, we also sold warrants for total cash proceeds of $35.5 million to certain bank counterparties. The warrants provide the counterparties with the right to purchase up to 46.3 million shares of our common stock at a strike price of $8.50 per share. The warrants expire on various dates between July 1, 2022 and August 26, 2022 and are exercisable on their expiration dates. The warrants are separate transactions and are not part of the terms of the Notes or convertible note hedges. Holders of the Notes and convertible note hedges do not have any rights with respect to the warrants.

The amounts paid and received for the convertible note hedges and warrants were recorded in additional paid-in capital in the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017. The convertible note hedges and warrants are not remeasured as long as they continue to meet the conditions for equity classification. The amounts paid for the convertible note hedges are tax deductible over the term of the Notes, while the proceeds received from the warrants are not taxable.

Under the if-converted method, the shares of common stock underlying the conversion option in the Notes are included in the diluted earnings per share denominator and the interest expense on the Notes, net of tax, is added to the numerator. However, upon conversion, there will be no economic dilution from the Notes, as exercise of the convertible note hedges eliminates any dilution from the Notes that would have otherwise occurred when the price of our common stock exceeds the conversion price. Taken together, the purchase of the convertible note hedges and sale of warrants are intended to offset any actual dilution from the conversion of the Notes and to effectively increase the overall conversion price from $5.40 to $8.50 per share.

Revolving Credit Agreement

The amended and restated senior secured revolving credit agreement (the "Amended and Restated Credit Agreement") provides for aggregate principal borrowings of up to $250.0 million and matures in June 2019. Borrowings under the Amended and Restated Credit Agreement bear interest, at our option, at a rate per annum equal to the Alternate Base Rate or Adjusted LIBO Rate (each as defined in the Amended and Restated Credit Agreement) plus an additional margin ranging between 0.50% and 2.25%. We are required to pay quarterly commitment fees ranging from 0.25% to 0.40% per annum of the average daily amount of unused commitments available under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also provides for the issuance of up to $45.0 million in letters of credit, provided that the sum of outstanding borrowings and letters of credit do not exceed the maximum funding commitment of $250.0 million.

The Amended and Restated Credit Agreement is secured by substantially all of our tangible and intangible assets, including a pledge of 100% of the outstanding capital stock of substantially all of our direct and indirect domestic subsidiaries and 65% of the shares or equity interests of first-tier foreign subsidiaries and each U.S. entity whose assets substantially consist of capital stock and/or intercompany debt of one or more foreign subsidiaries, subject to certain exceptions. Certain of our domestic subsidiaries are guarantors under the Amended and Restated Credit Agreement.

The Amended and Restated Credit Agreement contains various customary restrictive covenants that limit our ability to, among other things: incur additional indebtedness; make dividend and other restricted payments, including share repurchases; enter into sale and leaseback transactions; make investments, loans or advances; grant or incur liens on assets; sell assets; engage in mergers, consolidations, liquidations or dissolutions; and engage in transactions with affiliates. The Amended and Restated Credit Agreement requires us to maintain compliance with specified financial covenants, comprised of a minimum fixed charge coverage ratio, a maximum leverage ratio, a maximum senior secured indebtedness ratio and a minimum liquidity ratio, each as set forth in the Amended and Restated Credit Agreement. We are also required to maintain, as of the last day of each fiscal quarter, unrestricted cash of at least $400.0 million, including $200.0 million in accounts held with lenders under the Amended and Restated Credit Agreement or their affiliates. Non-compliance with these covenants may result in termination of the commitments under the Amended and Restated Credit Agreement and any then outstanding borrowings may be declared due and payable immediately. We have the right to terminate the Amended and Restated Credit Agreement or reduce the available commitments at any time.

As of September 30, 2018 and December 31, 2017, we have no borrowings and have outstanding letters of credit of $18.3 million and $22.7 million, respectively, under the Amended and Restated Credit Agreement.

9. COMMITMENTS AND CONTINGENCIES

Except for the changes set forth below, our commitments as of September 30, 2018 did not materially change from the amounts set forth in our 2017 Annual Report on Form 10-K.

Leases

In the second quarter 2018, we entered into a new office lease for one of our foreign locations. As of September 30, 2018, the future payments under that operating lease for each of the next five years and thereafter are as follows (in thousands):



Remaining amounts in 2018	$	639
2019	2,556
2020	2,556
2021	2,556
2022	2,556
Thereafter	5,751
Total minimum lease payments	$	16,614

Other Contractual Commitments

In the first quarter 2018, we entered into a non-cancelable arrangement for cloud computing services. As of September 30, 2018, future payments under that contractual obligation are as follows (in thousands):



Remaining amounts in 2018	$	—
2019	3,400
2020	3,400
2021	3,400
2022	3,400
Total	$	13,600

Legal Matters and Other Contingencies

From time to time, we are party to various legal proceedings incident to the operation of our business. For example, we currently are involved in proceedings brought by former employees and merchants, intellectual property infringement suits, customer lawsuits, consumer class actions and suits alleging, among other things, violations of state consumer protection or privacy laws. The following is a brief description of significant legal proceedings.

On March 2, 2016, International Business Machines Corporation ("IBM") filed a complaint in the United States District Court for the District of Delaware against us (the "Delaware Action"). In the Delaware Action, IBM alleged that we infringed certain IBM patents that IBM claimed relate to the presentation of applications and advertising in an interactive service, preserving state information in online transactions and single sign-on processes in a computing environment and sought damages (including a request that the amount of compensatory damages be trebled), injunctive relief and costs and reasonable attorneys’ fees. Trial commenced in the Delaware Action on July 16, 2018. On July 27, 2018, a jury in this matter returned a verdict finding we willfully infringed each of these patents and awarded damages of $82.5 million to IBM.

On May 9, 2016, we filed a complaint in the United States District Court for the Northern District of Illinois against IBM (the "Illinois Action"). We alleged that IBM infringed one of our patents relating to location-based services.

On September 28, 2018, we entered into settlement and license agreements with IBM fully resolving the Delaware Action, the Illinois Action and related proceedings with IBM. The settlement terms provide for the payment of $57.5 million to IBM, a cross-license to the parties’ respective patent portfolios, mutual releases of claims and the dismissal with prejudice of the Delaware Action and the Illinois Action. On October 2, 2018, the court in the Delaware Action entered an order dismissing the Delaware Action with prejudice. On October 1, 2018, the court in the Illinois Action entered an order dismissing the Illinois Action with prejudice.

We previously recorded a $75.0 million charge in the second quarter 2018 to increase our contingent liability for this matter to the $82.5 million jury award. That charge was classified within Selling, general and administrative expense in our condensed consolidated statement of operations. During the third quarter 2018, we reduced Selling, general and administrative expense by $40.4 million as a result of the IBM settlement, reflecting the $25.0 million decrease from the jury award and $15.4 million that was capitalized for the license to use the patented technology in future periods under the terms of the settlement and license agreements. We allocated the settlement amount between the litigation settlement component and the license for future use of the patented technology based on their relative fair values.

In addition, other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to intellectual property disputes, including patent infringement claims, and expect that we will increasingly be subject to intellectual property infringement claims as our services expand in scope and complexity. We have in the past litigated such claims, and we are presently involved in several patent infringement and other intellectual property-related claims, including pending litigation or trademark disputes relating to, for example, our Goods category, some of which could involve potentially substantial claims for damages or injunctive relief. We may also become more vulnerable to third-party claims as laws such as the Digital Millennium Copyright Act are interpreted by the courts, and we become subject to laws in jurisdictions where the underlying laws with respect to the potential liability of online intermediaries are either unclear or less favorable. We believe that additional lawsuits alleging that we have violated patent, copyright or trademark laws will be filed against us. Intellectual property claims, whether meritorious or not, are time consuming and often costly to resolve, could require expensive changes in our methods of doing business or the goods we sell, or could require us to enter into costly royalty or licensing agreements.

We also are subject to consumer claims or lawsuits relating to alleged violations of consumer protection or privacy rights and statutes, some of which could involve potentially substantial claims for damages, including statutory or punitive damages. Consumer and privacy related claims or lawsuits, whether meritorious or not, could be time consuming, result in costly litigation, damage awards, fines and penalties, injunctive relief or increased costs of doing business through adverse judgment or settlement, or require us to change our business practices, sometimes in expensive ways.

We are also subject to, or in the future may become subject to, a variety of regulatory inquiries, audits, and investigations across the jurisdictions where we conduct our business, including, for example, inquiries related to consumer protection, employment matters and/or hiring practices, marketing practices, tax, unclaimed property and privacy rules and regulations. Any regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, damage awards, fines and penalties, injunctive relief or increased costs of doing business through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm our business.

We establish an accrued liability for loss contingencies related to legal and regulatory matters when the loss is both probable and reasonably estimable. Those accruals represent management's best estimate of probable losses and, in such cases, there may be an exposure to loss in excess of the amounts accrued. For certain of the matters described above, there are inherent and significant uncertainties based on, among other factors, the stage of the proceedings, developments in the applicable facts of law, or the lack of a specific damage claim. However, we believe that the amount of reasonably possible losses in excess of the amounts accrued for those matters would not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows. Our accrued liabilities for loss contingencies related to legal and regulatory matters may change in the future as a result of new developments, including, but not limited to, the occurrence of new legal matters, changes in the law or regulatory environment, adverse or favorable rulings, newly discovered facts relevant to the matter, or changes in the strategy for the matter. Regardless of the outcome, litigation and other regulatory matters can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Indemnifications

In connection with the dispositions of our operations in Latin America (see Note 3, Discontinued Operations and Other Business Dispositions), we agreed to indemnify the buyer for certain tax and other matters. The indemnification liabilities were initially recorded at their fair value, estimated to be $5.4 million using a probability-weighted expected cash flow approach, upon closing of the transactions as an adjustment to the net loss on the dispositions within discontinued operations. We estimate that the total amount of obligations that are reasonably possible to arise under the indemnifications in excess of amounts accrued as of September 30, 2018 is approximately $18.0 million.

In the normal course of business to facilitate transactions related to our operations, we indemnify certain parties, including employees, lessors, service providers, merchants, and counterparties to investment agreements and asset and stock purchase agreements with respect to various matters. We have 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. We are also subject to increased exposure to various claims as a result of our divestitures and acquisitions, particularly in cases where we are entering into new businesses in connection with such acquisitions. We may also become more vulnerable to claims as we expand the range and scope of our services and are subject to laws in jurisdictions where the underlying laws with respect to potential liability are either unclear or less favorable. In addition, we have entered into indemnification agreements with our officers, directors and underwriters, and our bylaws contain similar indemnification obligations that cover officers, directors, employees and other agents.

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

10. STOCKHOLDERS' EQUITY AND COMPENSATION ARRANGEMENTS

Our Board of Directors (the "Board") has the authority, without approval by the stockholders, to issue up to a total of 50,000,000 shares of preferred stock in one or more series. The Board may establish the number of shares to be included in each such series and may fix the designations, preferences, powers and other rights of the shares of a series of preferred stock. The Board could authorize the issuance of preferred stock with voting or conversion rights that could dilute the voting power or rights of the holders of our common stock. As of September 30, 2018 and December 31, 2017, there were no shares of preferred stock outstanding.

Common Stock

Pursuant to our restated certificate of incorporation, the Board has the authority to issue up to a total of 2,010,000,000 shares of common stock. Each holder of common stock shall be entitled to one vote for each such share on any matter that is submitted to a vote of stockholders. In addition, holders of the common stock will vote as a single class of stock on any matter that is submitted to a vote of stockholders.

Share Repurchase Program

In May 2018, the Board authorized us to repurchase up to $300.0 million of our common stock under a new share repurchase program. The prior share repurchase program expired in April 2018. During the three and nine months ended September 30, 2018, we did not purchase any shares under those share repurchase programs. The timing and amount of share repurchases, if any, will be determined based on market conditions, limitations under the Amended and Restated Credit Agreement, share price and other factors, and the share repurchase program may be terminated at any time.

Groupon, Inc. Stock Plans

The Groupon, Inc. Stock Plans (the "Plans") are administered by the Compensation Committee of the Board (the "Compensation Committee"). As of September 30, 2018, 54,556,190 shares of common stock were available for future issuance under the Plans.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The stock-based compensation expense related to stock awards issued under the Plans and acquisition-related awards are presented within the following line items of the condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Cost of revenue	$	419	$	582	$	1,103	$	2,039
Marketing	1,854		1,797		5,411		5,829
Selling, general and administrative	12,753		15,856		44,056		51,409
Restructuring charges	—		849		—		849
Other income (expense)	—		93		100		192
Total stock-based compensation expense	$	15,026	$	19,177	$	50,670	$	60,318

We also capitalized $2.0 million and $1.4 million of stock-based compensation for the three months ended September 30, 2018 and 2017, respectively, and $5.7 million and $4.7 million for the nine months ended September 30, 2018 and 2017, respectively, in connection with internally-developed software. As of September 30, 2018, $112.2 million of unrecognized compensation costs related to unvested employee stock awards are expected to be recognized over a remaining weighted-average period of 1.36 years.

Employee Stock Purchase Plan

We are authorized to grant up to 10,000,000 shares of common stock under our employee stock purchase plan ("ESPP"). For the nine months ended September 30, 2018 and 2017, 1,621,061 and 1,879,656 shares of common stock, respectively, were issued under the ESPP.

Restricted Stock Units

The restricted stock units granted under the Plans generally have vesting periods between one and four years. Restricted stock units are amortized on a straight-line basis over the requisite service period.

The table below summarizes activity regarding unvested restricted stock units granted under the Plans for the nine months ended September 30, 2018:



	Restricted Stock Units		Weighted-Average Grant Date Fair Value (per unit)
Unvested at December 31, 2017	28,939,110		$	4.32
Granted	16,036,764		4.75
Vested	(10,728,624	)	4.40
Forfeited	(5,222,435	)	4.30
Unvested at September 30, 2018	29,024,815		4.54

Performance Share Units

The performance share units granted under the Plans vest in shares of our common stock upon the achievement of financial and operational targets specified in the respective award. The awards are subject to both continued employment through the performance period dictated by the award and certification by the Compensation Committee that the specified financial and operational targets have been achieved.

During the nine months ended September 30, 2018, we granted performance share units for which the maximum number of common shares issuable upon vesting was 7,972,780 shares and the weighted-average grant date fair value was $4.88 per unit. The maximum number of common shares issuable upon vesting as of September 30, 2018 was 6,905,418 shares and the total grant date fair value of the shares for which the performance conditions are expected to be met was $9.7 million. During the nine months ended September 30, 2018, 278,635 shares of our common stock

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

were issued related to performance share units granted in the previous year following the Compensation Committee's certification of the financial and operational metrics for the year ended December 31, 2017. The weighted-average grant date fair value of those units was $3.78 per share.

Performance Bonus Awards

If bonus amounts earned under our primary employee bonus plans exceed targeted bonus amounts because specified financial metrics exceed the performance conditions set forth in those plans, such excess is required to be settled in our common stock. Our obligation to issue shares for employee bonus amounts exceeding the specified bonus targets is accounted for separately as a liability-classified stock-based compensation arrangement with performance conditions.

During the nine months ended September 30, 2018, 1,240,379 shares of our common stock were issued related to performance bonus awards granted in the previous year following the Compensation Committee's certification of our financial and operational metrics for the year ended December 31, 2017. The fair value of our common stock on the date of the Compensation Committee's certification was $5.20 per share.

Stock Options

The exercise price of stock options granted is equal to the fair value of the underlying stock on the date of grant. The contractual term for stock options expires ten years from the grant date. Stock options generally vested over a three- or four-year period, with 25% of the awards vesting after one year and the remainder of the awards vesting on a monthly or quarterly basis thereafter.

The table below summarizes stock option activity for the nine months ended September 30, 2018:



	Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands) ⁽¹⁾
Outstanding and exercisable at December 31, 2017	885,580		$	0.62	1.76	$	3,967
Exercised	(670,393	)	0.11
Outstanding and exercisable at September 30, 2018	215,187		1.80		1.63	$	424

(1)

The aggregate intrinsic value of options outstanding and exercisable represents the total pretax intrinsic value (the difference between the fair value of our stock on the last day of each period and the exercise price, multiplied by the number of options where the fair value exceeds the exercise price) that would have been received by the option holders had all option holders exercised their options as of September 30, 2018 and December 31, 2017, respectively.

11. REVENUE RECOGNITION

Product and service revenue are generated from sales transactions through our online marketplaces in three primary categories: Local, Goods and Travel.

Product revenue is earned from direct sales of merchandise inventory to customers and includes any related shipping fees. Service revenue primarily represents the net commissions earned from selling goods and services provided by third-party merchants. Those marketplace transactions generally involve the online delivery of a voucher that can be redeemed by the purchaser with the third-party merchant for goods or services (or for discounts on goods or services). To a lesser extent, service revenue also includes commissions earned when customers make purchases with retailers using digital coupons accessed through our websites and mobile applications. Additionally, in the United States we have recently been developing and testing voucherless offerings that are linked to customer credit cards. Customers claim those voucherless merchant offerings through our online marketplaces and earn cash back on their credit card statements when they transact with the related merchants, who pay us commissions for such transactions.

In connection with most of our product and service revenue transactions, we collect cash from credit card payment processors shortly after a sale occurs. For transactions in which we earn commissions when customers make purchases with retailers using digital coupons accessed through our websites and mobile applications, we generally collect payment from affiliate networks on terms ranging from 30 to 150 days.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

As discussed in Note 1, Description of Business and Basis of Presentation, we previously referred to our product revenue and service revenue as "direct revenue" and "third-party and other revenue," respectively.

Adoption of ASC Topic 606, Revenue from Contracts with Customers

On January 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("Topic 606") using the modified retrospective method. Beginning on January 1, 2018, results are presented in accordance with the revised policies, while prior period amounts are not adjusted and continue to be reported in accordance with our historical policies. The adoption of Topic 606 did not significantly impact our presentation of revenue on a gross or net basis. The following changes resulted from the adoption of Topic 606:

•

For merchant agreements with redemption payment terms, the merchant is not paid its share of the sale price for a voucher sold through one of our online marketplaces until the customer redeems the related voucher. If the customer does not redeem a voucher with such merchant payment terms, we retain all of the gross billings for that voucher, rather than retaining only our net commission. Prior to our adoption of Topic 606, we recognized that variable consideration from unredeemed vouchers and derecognized the related accrued merchant payables when our legal obligation to the merchant expired, which we believe is shortly after the voucher expiration date in most jurisdictions. Following our adoption of Topic 606, we estimate the variable consideration from vouchers that will not ultimately be redeemed and recognize that amount as revenue at the time of sale, rather than when our legal obligation expires. We estimate variable consideration from unredeemed vouchers using our historical voucher redemption experience. Most vouchers sold through the marketplace in the United States do not have expiration dates and redemption payment terms were not widely used in that jurisdiction before 2017, so the North America segment did not have variable consideration from unredeemed vouchers in prior periods.


•	Prior to our adoption of Topic 606, we expensed the incremental costs to obtain contracts with third-party merchants, such as sales commissions, as incurred. Following our adoption of Topic 606, those costs are deferred and recognized over the expected period of the merchant arrangement, generally from 12 to 18 months.


•	Prior to our adoption of Topic 606, we recognized breakage income for unused customer credits when they expired or were forfeited. Following our adoption of Topic 606, breakage income from customer credits that are not expected to be used is estimated and recognized as revenue in proportion to the pattern of redemption for customer credits that are used.


•	Prior to our adoption of Topic 606, we deferred the revenue from hotel reservation offerings until the customer's stay commenced. Following our adoption of Topic 606, revenue from hotel reservation offerings is recognized at the time the reservation is made, net of an allowance for estimated cancellations.


•	Prior to our adoption of Topic 606, we classified refunds on service revenue transactions for which the merchant's share of the refund amount is not recoverable as a cost of revenue. Following our adoption of Topic 606, those refunds are classified as a reduction of revenue.


•	Prior to our adoption of Topic 606, we classified credits issued to consumers for relationship purposes as a marketing expense. Following our adoption of Topic 606, those credits are classified as a reduction of revenue.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

We recorded a net reduction to our opening accumulated deficit of $88.9 million, which is net of a $6.7 million income tax effect, as of January 1, 2018 due to the cumulative impact of adopting Topic 606. The following table summarizes balance sheet accounts impacted by the cumulative effect of adopting Topic 606 (in thousands):



Account	Increase (decrease) to beginning accumulated deficit
Prepaid expenses and other current assets	$	(4,007	)
Other non-current assets	(10,223		)
Accrued merchant and supplier payables	(64,970		)
Accrued expenses and other current liabilities	(13,188		)
Other non-current liabilities	3,443
Effect on beginning accumulated deficit	$	(88,945	)

See Note 2, Adoption of New Accounting Standards, for additional information about our revenue recognition policies before and after the adoption of Topic 606.

Impacts on Condensed Consolidated Financial Statements

The following tables summarize the impacts of adopting Topic 606 on our condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018 (in thousands):

Condensed Consolidated Balance Sheet



	September 30, 2018
	As reported		Effects of Topic 606			Balances without adoption of Topic 606
Total assets	$	1,403,920	$	(10,836	)	$	1,393,084
Total liabilities	1,072,280		93,799			1,166,079
Total equity	331,640		(104,635		)	227,005

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Condensed Consolidated Statements of Operations



	Three Months Ended September 30, 2018									Nine Months Ended September 30, 2018
	As reported			Effects of Topic 606			Balances without adoption of Topic 606			As reported			Effects of Topic 606			Balances without adoption of Topic 606
Revenue:
Service revenue ⁽¹⁾⁽²⁾	$	289,214		$	1,568		$	290,782		$	886,663		$	5,790		$	892,453
Product revenue	303,669			—			303,669			950,156			—			950,156
Total revenue	592,883			1,568			594,451			1,836,819			5,790			1,842,609
Cost of revenue:
Service cost of revenue ⁽³⁾	29,792			8,609			38,401			91,167			21,927			113,094
Product cost of revenue	257,102			—			257,102			791,120			—			791,120
Cost of revenue ⁽³⁾	286,894			8,609			295,503			882,287			21,927			904,214
Gross profit	305,989			(7,041		)	298,948			954,532			(16,137		)	938,395
Operating expenses:
Marketing ⁽⁴⁾	92,717			1,799			94,516			286,051			5,506			291,557
Selling, general and administrative ⁽⁵⁾	160,214			(763		)	159,451			676,399			(3,254		)	673,145
Restructuring charges	35			—			35			(81		)	—			(81		)
Total operating expenses	252,966			1,036			254,002			962,369			2,252			964,621
Income (loss) from operations	53,023			(8,077		)	44,946			(7,837		)	(18,389		)	(26,226		)
Other income (expense), net	(4,860		)	—			(4,860		)	(39,832		)	—			(39,832		)
Income (loss) before provision (benefit) for income taxes	48,163			(8,077		)	40,086			(47,669		)	(18,389		)	(66,058		)
Provision (benefit) for income taxes ⁽⁶⁾	988			(643		)	345			205			(776		)	(571		)
Net income (loss)	$	47,175		$	(7,434	)	$	39,741		$	(47,874	)	$	(17,613	)	$	(65,487	)

(1)

For the three months ended September 30, 2018, the adoption of Topic 606 resulted in a $10.4 million decrease to Revenue for refunds on service revenue transactions for which the merchant's share is not recoverable and customer credits issued for relationship purposes and a decrease of $1.2 million related to the timing of recognition of revenue from hotel reservation offerings, partially offset by increases of $9.3 million related to the timing of recognition of variable consideration from unredeemed vouchers and $0.7 million related to the timing of recognition of breakage revenue from customer credits that are not expected to be used.

(2)

For the nine months ended September 30, 2018, the adoption of Topic 606 resulted in a $27.4 million decrease to Revenue for refunds on service revenue transactions for which the merchant's share is not recoverable and customer credits issued for relationship purposes, partially offset by increases of $17.7 million related to the timing of recognition of variable consideration from unredeemed vouchers, $1.6 million related to the timing of recognition of revenue from hotel reservation offerings and $2.3 million related to the timing of recognition of breakage revenue from customer credits that are not expected to be used.


(3)	Reflects decreases to Cost of revenue following the adoption of Topic 606 for refunds on service revenue transactions for which the merchant's share is not recoverable.


(4)	Reflects decreases to Marketing expense following the adoption of Topic 606 for customer credits issued for relationship purposes.


(5)	Reflects increases to Selling, general and Administrative expense for the amortization of deferred contract acquisition costs in excess of amounts capitalized.


(6)	As discussed in Note 13, Income Taxes, for the nine months ended September 30, 2018, we recognized an income tax benefit of $6.4 million resulting from the impact of adopting Topic 606 on intercompany activity in certain foreign jurisdictions. That income tax benefit is not reflected in this table, which presents the direct impacts of adopting Topic 606.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Segment and Category Information



	Three Months Ended September 30, 2018							Nine Months Ended September 30, 2018
	As reported		Effects of Topic 606			Balances without adoption of Topic 606		As reported		Effects of Topic 606			Balances without adoption of Topic 606
North America
Service revenue:
Local	$	180,059	$	128		$	180,187	$	553,340	$	4,654		$	557,994
Goods	4,021		(2		)	4,019		12,691		93			12,784
Travel	17,217		1,881			19,098		57,189		(520		)	56,669
Product revenue - Goods	159,854		—			159,854		511,451		—