Quarterly Report


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________

Commission file number: 1-353335

Groupon, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
27-0903295
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
600 West Chicago Avenue, Suite 620
Chicago, Illinois
 
60654
(Address of principal executive offices)
 
(Zip Code)

312-676-5773
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x          No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x          No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.        
Large accelerated filer ¨                     Accelerated filer      ¨
    
Non-accelerated filer x (Do not check if a smaller reporting company)  Smaller reporting company ¨
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ¨     No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Outstanding at August 9, 2012
Class A Common Stock
Class B Common Stock
 
 651,279,534 shares
2,399,976 shares

1

TABLE OF CONTENTS

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



2



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

3




ITEM 1.     FINANCIAL STATEMENTS

GROUPON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

 
December 31,
2011
 
June 30, 2012
 
 
 
(unaudited)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,122,935

 
$
1,185,798

Accounts receivable, net
108,747

 
98,673

Prepaid expenses and other current assets
91,645

 
116,141

Total current assets
1,323,327

 
1,400,612

Property and equipment, net of accumulated depreciation of $14,627 and $28,147, respectively
51,800

 
83,293

Goodwill
166,903

 
192,018

Intangible assets, net
45,667

 
54,303

Investments in equity interests
50,604

 
131,177

Deferred income taxes, non-current
46,104

 
45,517

Other non-current assets
90,071

 
76,178

Total Assets
$
1,774,476

 
$
1,983,098

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
40,918

 
$
60,364

Accrued merchant payables
520,723

 
543,840

Accrued expenses
212,007

 
258,343

Deferred income taxes, current
76,841

 
73,942

Other current liabilities
144,673

 
163,692

Total current liabilities
995,162

 
1,100,181

Deferred income taxes, non-current
7,428

 
25,837

Other non-current liabilities
70,766

 
74,773

Total Liabilities
1,073,356

 
1,200,791

Commitments and contingencies (see Note 7)

 

Redeemable noncontrolling interests
1,653

 
5,943

Groupon, Inc. Stockholders' Equity
 
 
 
Class A common stock, par value $0.0001 per share, 2,000,000,000 shares authorized, 641,745,225 shares issued and outstanding at December 31, 2011; 2,000,000,000 shares authorized, 649,165,744 shares issued and outstanding at June 30, 2012
64

 
65

Class B common stock, par value $0.0001 per share, 10,000,000 shares authorized, 2,399,976 shares issued and outstanding at December 31, 2011 and June 30, 2012
—

 
—

Common stock, par value $0.0001 per share, 2,010,000 shares authorized, and no shares issued and outstanding as of December 31, 2011 and June 30, 2012
—

 
—

Additional paid-in capital
1,388,253

 
1,437,327

Stockholder receivable
—

 
(166
)
Accumulated deficit
(698,704
)
 
(670,848
)
Accumulated other comprehensive income
12,928

 
12,937

Total Groupon, Inc. Stockholders' Equity
702,541

 
779,315

Noncontrolling interests
(3,074
)
 
(2,951
)
Total Equity
699,467

 
776,364

Total Liabilities and Equity
$
1,774,476

 
$
1,983,098


See Notes to unaudited Condensed Consolidated Financial Statements.

4

GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2012
 
2011
 
2012
 
 
 
 
 
(Restated)
 
 
Third party and other revenue
$
392,582

 
$
502,985

 
$
688,105

 
$
1,043,038

Direct revenue
—

 
65,350

 
—

 
84,580

Total revenue
392,582

 
568,335

 
688,105

 
1,127,618

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
54,803

 
135,184

 
94,568

 
254,682

Marketing
212,739

 
88,407

 
442,824

 
205,022

Selling, general and administrative
226,067

 
299,894

 
368,888

 
583,477

Acquisition-related
—

 
(1,635
)
 
—

 
(1,687
)
  Total operating expenses
493,609

 
521,850

 
906,280

 
1,041,494

(Loss) income from operations
(101,027
)
 
46,485

 
(218,175
)
 
86,124

Interest and other income, net
479

 
57,367

 
1,539

 
53,828

Loss on equity method investees
(7,881
)
 
(3,428
)
 
(8,763
)
 
(8,556
)
(Loss) income before provision for income taxes
(108,429
)
 
100,424

 
(225,399
)
 
131,396

Provision (benefit) for income taxes
1,347

 
66,875

 
(1,732
)
 
101,440

Net (loss) income
(109,776
)
 
33,549

 
(223,667
)
 
29,956

Less: Net loss (income) attributable to noncontrolling interests
8,536

 
(1,220
)
 
19,759

 
(2,100
)
Net (loss) income attributable to Groupon, Inc.
(101,240
)
 
32,329

 
(203,908
)
 
27,856

Redemption of preferred stock in excess of carrying value
—

 
—

 
(34,327
)
 
—

Adjustment of redeemable noncontrolling interests to redemption value
(6,166
)
 
(3,943
)
 
(15,651
)
 
(11,165
)
Net (loss) income attributable to common stockholders
$
(107,406
)
 
$
28,386

 
$
(253,886
)
 
$
16,691

 
 
 
 
 
 
 
 
Net (loss) earnings per share
 
 
 
 
 
 
 
Basic
$
(0.35
)
 
$
0.04

 
$
(0.83
)
 
$
0.03

Diluted
$
(0.35
)
 
$
0.04

 
$
(0.83
)
 
$
0.03

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding
 
 
 
 
 
 
 
Basic
303,414,676

 
647,149,537

 
305,626,028

 
645,073,582

Diluted
303,414,676

 
663,122,709

 
305,626,028

 
663,230,558

 
 
 
 
 
 
 
 

See Notes to unaudited Condensed Consolidated Financial Statements.

5


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2012
 
2011
 
2012
Net (loss) income
$
(109,776
)
 
$
33,549

 
$
(223,667
)
 
$
29,956

Other comprehensive income (loss), net of tax:

 

 

 

Foreign currency translation adjustments
535
 
(1,257
)
 
3,568

 
9

Other comprehensive income (loss)
535
 
(1,257
)
 
3,568

 
9

Comprehensive (loss) income
(109,241
)
 
32,292

 
(220,099
)
 
29,965

Comprehensive loss (income) attributable to the noncontrolling interest
8,536

 
(1,220
)
 
19,759

 
(2,100
)
Comprehensive (loss) income attributable to Groupon, Inc.
$
(100,705
)
 
$
31,072

 
$
(200,340
)
 
$
27,865



See Notes to unaudited Condensed Consolidated Financial Statements

6


GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
Six Months Ended June 30,
 
2011
 
2012
Operating activities
 
 
 
Net (loss) income
$
(223,667
)
 
$
29,956

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
15,696

 
24,526

Stock-based compensation
57,582

 
55,087

Deferred income taxes
(2,237
)
 
12,997

Excess tax benefits on stock based compensation
(3,532
)
 
(21,750
)
Loss on equity method investees
8,763

 
8,556

Acquisition-related
—

 
(1,687
)
Gain on E-Commerce transaction (see Note 5)
—

 
(56,032
)
Change in assets and liabilities, net of acquisitions:
 
 
 
Restricted cash
(1,025
)
 
(2,828
)
Accounts receivable
(53,072
)
 
8,085

Prepaid expenses and other current assets
(17,221
)
 
(21,745
)
Accounts payable
(14,374
)
 
18,268

Accrued merchant payable
216,870

 
32,021

Accrued expenses and other current liabilities
74,756

 
63,077

Other, net
(1,580
)
 
10,498

Net cash provided by operating activities
56,959

 
159,029

Investing activities
 
 
 
Purchases of property and equipment
(21,202
)
 
(39,792
)
Acquisitions of businesses, net of acquired cash
(3,696
)
 
(40,271
)
Purchases of intangible assets
(272
)
 
(10
)
Purchases of investments in subsidiaries
(34,387
)
 
(13,427
)
Purchases of cost and equity method investments
(9,921
)
 
(13,097
)
Net cash used in investing activities
(69,478
)
 
(106,597
)
Financing activities
 
 
 
Proceeds from issuance of stock, net of issuance costs
509,692

 
—

Excess tax benefits on stock based compensation
3,532

 
21,750

Tax withholdings related to net share settlements of restricted stock units
—

 
(5,668
)
Payments of contingent acquisition liability
—

 
(4,250
)
Repayments of loans to related parties
(14,358
)
 
—

Repurchase of common stock
(353,550
)
 
—

Proceeds from exercise of stock options
1,234

 
5,657

Proceeds from the sale of common stock
137

 
—

Partnership distributions to noncontrolling interest holders
—

 
(1,606
)
Redemption of preferred stock
(35,003
)
 
—

Net cash provided by financing activities
111,684

 
15,883

Effect of exchange rate changes on cash and cash equivalents
7,095

 
(5,452
)
Net increase in cash and cash equivalents
106,260

 
62,863

Cash and cash equivalents, beginning of the period
118,833

 
1,122,935

Cash and cash equivalents, end of the period
$
225,093

 
$
1,185,798

Supplemental disclosure of cash flow information
 
 
 
Non-cash investing activity
 
 
 
Contingent consideration in connection with acquisitions
$
15,920

 
$
421

Contribution of investment in E-Commerce transaction
$
—

 
$
47,042

Liability incurred in E-Commerce transaction
$
—

 
$
20,000


See Notes to unaudited Condensed Consolidated Financial Statements.

7

GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
 
Groupon, Inc. Stockholders' Equity
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Stockholder Receivable
 
Accumulated
Deficit
 
Accumulated
Other Comp.
Income
 
Total
Groupon Inc.
Stockholders'
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2011
644,145,201

 
$
64

 
$
1,388,253

 
$
—

 
$
(698,704
)
 
$
12,928

 
$
702,541

 
$
(3,074
)
 
$
699,467

Net income
—

 
—

 
—

 
—

 
27,856

 
—

 
27,856

 
1,729

 
29,585

Foreign currency translation
—

 
—

 
—

 
—

 
—

 
9

 
9

 
—

 
9

Adjustment of redeemable noncontrolling interests to redemption value
—

 
—

 
(10,482
)
 
—

 
—

 
—

 
(10,482
)
 
—

 
(10,482
)
Restricted stock issued in connection with business combinations
221,723

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Purchase of additional shares in majority-owned subsidiary
127,622

 
—

 
(1,378
)
 
—

 
—

 
—

 
(1,378
)
 
—

 
(1,378
)
Exercise of stock options
5,510,843

 
1

 
5,822

 
(166
)
 
—

 
—

 
5,657

 
—

 
5,657

Vesting of restricted stock units
1,560,331

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Tax withholding related to net share settlements of restricted stock units
—

 
—

 
(12,165
)
 
—

 
—

 
—

 
(12,165
)
 
—

 
(12,165
)
Stock-based compensation expense
—

 
—

 
45,527

 
—

 
—

 
—

 
45,527

 
—

 
45,527

Tax benefits from stock-based compensation
—

 
—

 
21,750

 
—

 
—

 
—

 
21,750

 
—

 
21,750

Partnership distributions to noncontrolling interest holders
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,606
)
 
(1,606
)
Balance at June 30, 2012
651,565,720

 
$
65

 
$
1,437,327

 
$
(166
)
 
$
(670,848
)
 
$
12,937

 
$
779,315

 
$
(2,951
)
 
$
776,364




See Notes to unaudited Condensed Consolidated Financial Statements

8

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. FINANCIAL STATEMENT INFORMATION
Company Information
Groupon, Inc., together with the subsidiaries through which it conducts business (the "Company"), is a local commerce marketplace (www.groupon.com) that connects merchant partners to consumers by offering goods and services at a discount. The Company has organized its operations into two segments: North America and International. See Note 12 " Segment Information. "
Unaudited Interim Financial Information
The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These condensed consolidated financial statements are unaudited and, in the Company's opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of the Company's condensed consolidated balance sheets, and statements of operations, comprehensive income (loss), cash flows and stockholders' equity for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year ended December 31, 2012. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. accounting principles generally accepted in the United States (“U.S. GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of the Company's 2011 Annual Report on Form 10-K, and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company's condensed consolidated financial statements were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenue and expenses of all wholly‑owned subsidiaries and majority‑owned subsidiaries over which the Company exercises control and variable interest entities for which the Company has determined it is the primary beneficiary. Outside stockholders' interests in subsidiaries are shown in the condensed consolidated financial statements as “Noncontrolling interests" and "Reedemable noncontrolling interests". Investments in entities in which the Company does not have a controlling financial interest are accounted for under either the equity method or cost method of accounting, as appropriate.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenue and expenses, and the related disclosures of contingent liabilities in the condensed consolidated financial statements and accompanying notes. Estimates are utilized for, but not limited to, stock‑based compensation, income taxes, valuation of acquired goodwill and intangible assets, customer refunds, contingent liabilities and the depreciable lives of fixed assets. Actual results could differ materially from those estimates.
Significant Accounting Policies
Revenue

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

Third party revenue recognition
The Company generates third party revenue, where it acts as the third party agent, by offering goods and services at a

9
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


discount through its local commerce marketplace that connects merchants to consumers. The Company's marketplace includes deals offered through a variety of channels including: Featured Daily Deals, National Deals, Groupon Now!, Groupon Goods, Groupon Getaways and GrouponLive. Customers purchase Groupons from the Company and redeem them with the Company's merchant partners.

The revenue recognition criteria are met when the number of customers who purchase the deal exceeds the predetermined threshold (where applicable), the Groupon has been electronically delivered to the purchaser and a listing of Groupons sold has been made available to the merchant. At that time, the Company's obligations to the merchant, for which it is serving as an agent, are substantially complete. The Company's remaining obligations, which are limited to remitting payment to the merchant and continuing to make available on the Company's website the listing of Groupons sold previously provided to the merchant, are inconsequential or perfunctory. The Company records as revenue the net amount it retains from the sale of Groupons after paying an agreed upon percentage of the purchase price to the featured merchant, excluding any applicable taxes. Revenue is recorded on a net basis because the Company is acting as an agent of the merchant in the transaction.
    
The Company evaluates whether it is appropriate to record the gross amount of its Groupon Goods sales and related costs by considering a number of factors, including, among other things, whether the Company is the primary obligor under the arrangement, has inventory risk, and has latitude in establishing prices. For Groupon Goods transactions where the Company is performing a service by acting as the agent of the merchant responsible for fulfillment, revenue is recorded on a net basis.
    
Direct revenue recognition

Direct revenue is derived primarily from selling products through the Company's Groupon Goods channel where the Company is the merchant of record. The Company is the primary obligor in these transactions, is subject to inventory risk and has latitude in establishing prices. Accordingly, direct revenue is recorded on a gross basis. Direct revenue, including associated shipping revenue, is recorded when the products are shipped and title passes to customers. The Company recognized no direct revenue for the six months ended June 30, 2011.

Cost of revenue
Cost of revenue is composed of direct and indirect costs incurred to generate revenue, including costs related to credit card processing fees, refunds provided to customers which are not recoverable from the merchant, certain technology costs, editorial costs, other processing fees and the purchase price of consumer products where the Company is selling the product as the merchant of record and outbound shipping charges. Credit card and other processing fees are expensed as incurred. At the time of sale, the Company records a liability for estimated costs to provide refunds which are not recoverable from the merchant based upon the nature of the product or service and historical experience. Technology costs in cost of revenue consist of a portion of the payroll and stock‑based compensation expense related to the Company's technology support personnel who are responsible for operating and maintaining the infrastructure of the Company's existing website. Such technology costs also include website hosting and email distribution costs. Editorial costs consist of a portion of the payroll and stock‑based compensation expense related to the Company's editorial personnel, as such staff is primarily dedicated to drafting and promoting merchant deals.  Purchase price of consumer products related to direct revenue is included in the Company's inventory and recognized along with outbound shipping charges as cost of revenue upon sale and delivery of the products to customers. 

Cost method investments

Nonmarketable equity investments for which the Company does not have the ability to exercise significant influence are accounted for using the cost method of accounting and classified as “Other non-current assets” on the condensed consolidated balance sheets. Under the cost method, investments are carried at cost and are adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. The Company evaluates the investments for impairment annually or more frequently when a triggering event occurs.

Refunds

10
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


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

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

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

The Company assesses the trends that could affect its estimates and makes changes to the refund reserve quarterly when it appears refunds may differ from our original estimates. If actual results are not consistent with the estimates or assumptions stated above, the Company may need to change its future estimates and the effects could be material to the consolidated financial statements.
2. RESTATEMENT
The Company restated the Condensed Consolidated Statements of Operations for the six months ended June 30, 2011, included in the Form S-1 filed with the SEC on September 23, 2011, to correct for an error in its presentation of certain income statement expenses. These changes were to be consistent with the Company's reporting of revenue on a net basis. As a result, a portion of technology costs and editorial costs have been reclassified to cost of revenue from selling, general and administrative expense for the six months ended June 30, 2011. In addition, costs associated with the Company’s marketing staff, including payroll, benefits and stock compensation, have been reclassified to marketing for the six months ended June 30, 2011 from selling general and administrative. The change in presentation had no effect on pre-tax loss, net loss or any per share amounts for the period.

The following tables summarize the corrections on each of the affected financial statement line items
for the six months ended June 30, 2011 (in thousands):

 
As previously reported (unaudited)
 
Restatement adjustment
 
As restated
Cost of revenue
$
66,522

 
28,046

 
$
94,568

Marketing
$
432,093

 
10,731

 
$
442,824

Selling, general and administrative
$
407,665

 
(38,777
)
 
$
368,888


3 . ACQUISITIONS
During the six months ended June 30, 2012, the Company acquired certain entities and the results of each of the entities have been included in the condensed consolidated financial statements beginning on the respective date of acquisition. The primary purpose of these acquisitions was to enhance the Company's technology and marketing services and to expand and advance product offerings. The aggregate acquisition-date fair value of the consideration transferred for these acquisitions totaled $45.8 million, which consisted of the following (in thousands):

11
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Fair Value of Consideration Transferred
 
Fair Value
Cash
 
$
41,997

Acquisition-related liabilities
 
3,364

Contingent consideration
 
421

Total
 
$
45,782

The Company determined the acquisition-date fair value of the contingent consideration liabilities, based on the likelihood of issuing stock related to the contingent earn-out clauses, as part of the consideration transferred. For contingent consideration to be settled in common stock, the Company uses public market data to determine the fair value of the shares as of the acquisition date and on an ongoing basis. See Note 10 “ Fair Value Measurements" for subsequent measurements of these contingent liabilities.

The following table summarizes the preliminary allocation of the fair value of consideration transferred as of the acquisition date (in thousands):
Description
 
Fair Value
Net working capital (including cash of $1.7 million)
 
$
1,368

Property and equipment, net
 
165

Goodwill
 
28,672

Intangible assets (1) :
 
 
Developed technology
 
19,490

Deferred tax liability
 
(3,913
)
 
 
$
45,782


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

The fair value of consideration transferred is being allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on their corresponding acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocations are preliminary as the Company is in the process of finalizing the intangibles valuation. The goodwill of $28.7 million represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The Company paid this premium for a number of reasons, including acquiring an experienced workforce. The goodwill is not deductible for tax purposes.

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

Purchase of Additional Interests

In February 2012, the Company acquired additional interests of two majority-owned subsidiaries for an aggregate purchase price of $9.5 million , including $8.7 million in cash and $0.8 million of Class A common stock. In connection with these purchases, certain subsidiary awards were settled in exchange for cash and shares of stock. As a result, $5.4 million related to the vested liability awards as of the settlement date was equal to the fair value of the consideration transferred. In addition, $1.7 million will be recognized as compensation expense over a service period of two years payable in $0.4 million of cash and $1.3 million of common stock.

In May 2012, the Company acquired additional interests of two majority-owned subsidiaries for an aggregate purchase price of $ 6.6 million , including $ 6.0 million in cash and $ 0.6 million of Class A common stock.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The following summarizes the Company's goodwill activity for the six months ended June 30, 2012 (in thousands):


12
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


 
 
North America
 
International
 
Consolidated
Balance as of December 31, 2011
 
$
40,731

 
$
126,172

 
$
166,903

Goodwill related to acquisitions
 
28,672

 
—

 
28,672

Other adjustments (1)
 
102

 
(3,659
)
 
(3,557
)
Balance as of June 30, 2012
 
$
69,505

 
$
122,513

 
$
192,018


(1)
Includes changes in foreign exchange rates for goodwill.


The following summarizes the Company's other intangible assets (in thousands):
 
 
As of December 31, 2011
Asset Category
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Subscriber relationships
 
$
41,272

 
$
12,882

 
$
28,390

Merchant relationships
 
6,600

 
6,600

 
—

Trade names
 
5,801

 
5,801

 
—

Developed technology
 
5,583

 
2,151

 
3,432

Other intangible assets
 
15,420

 
1,575

 
13,845

 
 
$
74,676

 
$
29,009

 
$
45,667


 
 
As of June 30, 2012
Asset Category
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Subscriber relationships
 
$
40,244

 
$
16,520

 
$
23,724

Merchant relationships
 
6,411

 
6,411

 
—

Trade names
 
5,632

 
5,632

 
—

Developed technology
 
24,522

 
6,380

 
18,142

Other intangible assets
 
15,351

 
2,914

 
12,437


 
$
92,160

 
$
37,857

 
$
54,303



Amortization expense for these intangible assets was $5.0 million and $5.5 million for the three months ended June 30, 2011 and 2012 and $10.7 million and $10.0 million for the six months ended June 30, 2011 and 2012, respectively. As of June 30, 2012, the Company's estimated future amortization expense of these intangible assets for each of the next five years and thereafter is as follows (in thousands):

Year Ended December 31,
 
 
Remaining amounts in 2012
 
$
11,460

2013
 
21,579

2014
 
12,728

2015
 
6,879

2016
 
1,657

     Thereafter
 
—

 
 
$
54,303


 


13
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


5. INVESTMENTS IN EQUITY AND OTHER INTERESTS

The following summarizes the Company's investments in equity interests (in thousands):
 
As of December 31, 2011
 
Percent Ownership of Common Stock
 
As of June 30, 2012
 
Percent Ownership of Common and Preferred Stock
E-Commerce King Limited
$
49,395

 
49
%
 
$
—

 
—
%
Life Media Limited
 
 
 
 
128,074

 
19
%
Other investments in equity interests
1,209

 
50% or less

 
3,103

 
50% or less

Total investments in equity interests
$
50,604

 
 
 
$
131,177

 
 
Equity Method Investment in E-Commerce King Limited
In January 2011, the Company acquired 40% of the ordinary shares of E-Commerce King Limited (“E-Commerce”), a company organized under the laws of the British Virgin Islands, in exchange for $4.0  million. The Company entered into the joint venture along with Rocket Asia GmbH & Co. KG (“Rocket Asia”), an entity controlled by former CityDeal shareholders Oliver Samwer, Marc Samwer and Alexander Samwer. Rocket Asia acquired 10% of the ordinary shares in E-Commerce. E-Commerce subsequently established a wholly-owned foreign enterprise that created a domestic operating company headquartered in Beijing, China.
On July 31, 2011, the Company entered into an agreement to purchase additional interests in E-Commerce from Rocket Asia for a purchase price of $45.2  million, consisting of 2,908,856  shares of non-voting common stock. The investment increased the Company's ownership from 40% to 49% .
Throughout 2011 and 2012, the Company made cash investments in E-commerce for an aggregate amount of $32.9 million. As of May 31, 2012, the Company's ownership in E-Commerce was 49.8% .
In June 2012, Life Media Limited (F-tuan), an exempted company incorporated under the laws of the Cayman Islands, with operations in China, acquired E-Commerce. In exchange for its 49.8% interest in E-Commerce and an additional $25.0 million cash consideration, the Company received a 19% interest in F-tuan in the form of common and Series E preferred shares. The Company paid $5.0 million of the cash investment on June 25, 2012 and the remaining amount was paid on July 2, 2012. The liability for the amounts payable to F-tuan as of June 30, 2012 is recorded in “Other current liabilities” on the condensed consolidated balance sheet.
The Company recognized a non-operating pre-tax gain of $56.0 million ( $33.0 million after tax), as a result of the transaction, which is included in "Interest and other income, net" on the condensed consolidated statement of operations. The gain represents the excess of the fair value of the Company's 19% investment in F-tuan over the carrying value of its E-Commerce investment as of the date of the transaction and the $25,000,000.0 million cash consideration for the Series E preferred shares.
Cost Method Investment in Life Media Limited
The investment in Life Media Limited or F-tuan is accounted for using the cost method as the Company does not have the ability to exercise significant influence. The total investment was $128.1 million as of June 30, 2012, represents the fair value as of the date of the transaction and is classified as part of "Investments in equity interests" on the condensed consolidated balance sheet. The investment will be adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments.

Consolidated Variable Interest in LLC
On May 9, 2011, the Company entered into a collaborative arrangement, amended on January 1, 2012, to create a jointly-owned sales channel with a strategic partner ("Partner") and a limited liability company ("LLC") was established. The Company and its Partner each owns 50% of the LLC and income and cash flows of the LLC are allocated based on agreed upon percentages

14
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


between the Company and the Partner. The liabilities of the LLC are solely the LLC's obligations and not of the Company or Partner.
The Company's obligations associated with its interests in the LLC are primarily building, maintaining, customizing, managing and operating the LLC website, contributing intellectual property, identifying deals and promoting the sale of deal vouchers, coordinating the fulfillment of deal vouchers in certain instances and providing the record keeping.
Under the LLC agreement, the LLC shall be dissolved upon the occurrence of any of the following events: (1) either party becoming a majority owner; (2) the third anniversary of the date of the LLC agreement; (3) certain elections of the Company or the Partner based on the operational and financial performance of the LLC or other changes to certain terms in the agreement; (4) election of either the Company or Partner in the event of bankruptcy by the other party; (5) sale of the LLC; or (6) a court's dissolution of the LLC.
The Company has determined it is the primary beneficiary of the LLC and consolidates the entity because it has the power to direct activities of the LLC that most significantly impact the LLC's economic performance. In particular, the Company identifies and promotes the deal vouchers, provides all of the back office support, i.e. website, contracts, personnel resources, accounting, etc., presents the LLC's deals via email and the Company's website, provides the editorial resources that create the verbiage included on the website with the LLC's deal offer.
6. SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION
The following summarizes the Company's accrued expenses (in thousands):
 
As of December 31, 2011
 
As of June 30, 2012
Refunds reserve
$
67,452

 
$
72,454

Marketing
33,472

 
17,322

Payroll and benefits
36,404

 
57,520

Subscriber rewards and credits
36,144

 
51,952

Professional fees
18,656

 
17,828

Other
19,879

 
41,267

 
$
212,007

 
$
258,343


The following summarizes the Company's other current liabilities (in thousands):
 
As of December 31, 2011
 
As of June 30, 2012
Income taxes payable
$
70,861

 
$
54,656

VAT payable
50,554

 
49,834

Other
23,258

 
59,202

 
$
144,673

 
$
163,692


The following summarizes the Company's other non-current liabilities (in thousands):
 
As of December 31, 2011
 
As of June 30, 2012
Long-term tax liabilities
$
55,127

 
$
54,303

Other
15,639

 
20,470

 
$
70,766

 
$
74,773

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

15
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


From time to time, the Company is party to various legal proceedings incident to the operation of its business. For example, the Company is currently involved in proceedings by former employees, intellectual property infringement suits (as discussed below) and suits by customers (individually or as class actions) alleging, among other things, violation of the Credit Card Accountability, Responsibility and Disclosure Act and state laws governing gift cards, stored value cards and coupons. The following is a brief description of the more significant legal proceedings.
On February 8, 2012, the Company issued a press release announcing its expected financial results for the fourth quarter of 2012.  After finalizing its year-end financial statements, the Company announced on March 30, 2012 revised financial results, as well as a material weakness related to deficiencies in its financial statement close process.  The revisions resulted in a reduction to fourth quarter 2011 revenue of $14.3 million . The revisions also resulted in an increase to fourth quarter operating expenses that reduced operating income by $30.0 million , net income by $22.6 million , and earnings per share by $0.04 .  Following this announcement, the Company and several of its current and former directors and officers were named as parties to the following outstanding securities and shareholder derivative lawsuits all arising out of the same alleged events and facts.
Five putative federal class action securities complaints have been filed against the Company, certain of its directors and officers, and the underwriters that participated in the initial public offering of the Company's Class A common stock.  All five cases are currently pending before the United States District Court for the Northern District of Illinois: Zhang v. Groupon, Inc., et al. was filed on April 3, 2012; Roselli v. Groupon, Inc., et al. was filed on April 3, 2012; Einspahr v. Groupon, Inc., et al. was filed on April 6, 2012; Pedrow v. Groupon, Inc., et al. was filed April 16, 2012; and Cottrell v. Groupon, Inc., et al. was filed April 27, 2012.  All five complaints assert claims pursuant to Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  Two of the complaints additionally attempt to assert claims pursuant to Section 12(a)(2) of the Securities Act of 1933.  Allegations in the complaints include that the Company and its officers and directors made untrue statements or omissions of material fact by issuing inaccurate financial statements for the fiscal quarter ending December 31, 2011 and the fiscal year ending December 31, 2011 and by failing to disclose information about the Company's financial controls in the registration statement and prospectus for the Company's initial public offering of Class A common stock and in the Company's subsequently-issued financial statements. The putative class action lawsuits seek an unspecified amount of monetary damages, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief. On June 8, 2012, the court entered an order consolidating all five federal class actions under the caption In re Groupon, Inc. Securities Litigation , Master File No. 12- CV-2450. The court set a schedule for appointment of lead plaintiff and lead counsel, and set deadlines for the filing of a consolidated or amended complaint.  A status conference is scheduled for August 24, 2012, and it is expected that the court will appoint a lead plaintiff at or around this time.  Once appointed, lead plaintiff will have 60 days to file a consolidated or amended complaint. 
 In addition, six federal and two state purported stockholder derivative lawsuits have been filed against certain of the Company's current and former directors and officers.  All six federal derivative cases are currently pending in the United States District Court for the Northern District of Illinois: Monturano v. Lefkofsky, et al. was filed on April 5, 2012; Wong v. Mason, et al. was filed on April 12, 2012; Potter v. Mason, et al. was filed on April 30, 2012, Martin v. Mason, et al. was filed on May 4, 2012; Lutz v. Mason, et al. was filed on May 14, 2012; and Tipnis v. Mason, et. al. was filed on May 16, 2012.  In the federal derivative complaints, plaintiffs assert claims for breach of fiduciary duty, abuse of control and for unjust enrichment. The state derivative cases are currently pending before the Chancery Division of the Circuit Court of Cook County, Illinois: Orrego v. Lefkofsky, et al. , was filed on April 5, 2012; and Kim v. Lefkofsky, et al. , was filed on May 25, 2012. The derivative complaints generally allege that the defendants breached their fiduciary duties by purportedly mismanaging the Company's business by, among other things, failing to utilize proper accounting controls and, in the case of one of the state derivative lawsuits, by engaging in alleged insider trading of the Company's Class A common stock and misappropriating information. In addition, one state derivative case asserts a claim for unjust enrichment.  The derivative lawsuits purport to seek to recoup for the Company an unspecified amount of monetary damages allegedly sustained by the Company, restitution from defendants, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief. On May 30, 2012, the federal court entered an order consolidating all six federal derivative actions and appointing lead plaintiff and co-lead counsel, and the consolidated action was subsequently assigned the caption In re: Groupon Derivative Litigation, File No. 12-CV-5300.  On June 20, 2012, the Company and the individual defendants filed a motion requesting that the court stay the federal derivative actions pending resolution of the Federal  Class Actions.    On July 31, 2012, the court granted defendants' motion in part, and stayed the Federal derivative actions pending a separate resolution of upcoming motions to dismiss in the federal class actions.  On June 15, 2012, the state plaintiffs filed a motion to consolidate the state derivative actions, which was granted on July 2, 2012, and on July 5, 2012, the plaintiffs filed a motion for

16
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


appointment of co-lead plaintiffs and co-lead counsel, which was granted on July 27, 2012.  The parties are currently in discussions regarding a joint stipulation to stay the state derivative actions pending the court's resolution of upcoming motions to dismiss in the Federal class actions.
The parties have agreed to temporarily stay the state derivative actions pending developments in the federal derivative actions. The Company intends to defend all of the securities and shareholder derivative lawsuits vigorously.
In July 2012, a subsidiary of the Company was sued for breach of contract in Berlin, Germany by Fast Group S.A. (“Fast Group”).  Fast Group has sold vouchers for air travel to a subsidiary of the Company for resale by Groupon to Groupon's customers.  The suit alleges that Groupon's subsidiary is in breach of payment obligations to Fast Group of approximately $2.8 million, which represents a portion of the payment obligations contained in agreements entered into between Groupon's subsidiary and Fast Group.  The Company believes it has meritorious defenses to the lawsuit and does not expect any resolution of the lawsuit to be material to its results of operations.
In addition, third parties have from time to time claimed, and others may claim in the future, that the Company has infringed their intellectual property rights. The Company is subject to intellectual property disputes, and expects that it will increasingly be subject to intellectual property infringement claims as its services expand in scope and complexity. The Company has in the past been forced to litigate such claims. The Company may also become more vulnerable to third-party claims as laws such as the Digital Millennium Copyright Act are interpreted by the courts, and as the Company becomes subject to laws in jurisdictions where the underlying laws with respect to the potential liability of online intermediaries are either unclear or less favorable. The Company believes that additional lawsuits alleging that it has violated patent, copyright or trademark laws will be filed against it. Intellectual property claims, whether meritorious or not, are time consuming and costly to resolve, could require expensive changes in the Company's methods of doing business, or could require it to enter into costly royalty or licensing agreements.
The Company is also subject to, or in the future may become subject to, a variety of regulatory inquiries across the jurisdictions where the Company conducts its business, including for example consumer protection, marketing practices, tax and  privacy rules and regulations. Any regulatory actions against the Company, whether meritorious or not, could be time consuming, result in costly litigation, damage awards, injunctive relief or increased costs of doing business through adverse judgment or settlement, require the Company to change its business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm the Company's business. 
The Company assesses the likelihood of any adverse judgments or outcomes with respect to these matters and determines loss contingency assessments on a gross basis after assessing the probability of incurrence of a loss and whether a loss is reasonably estimable. In addition, the Company considers other relevant factors that could impact its ability to reasonably estimate a loss. A determination of the amount of reserves required, if any, for these contingencies is made after analyzing each matter. The Company's reserves may change in the future due to new developments or changes in strategy in handling these matters.
Although the results of litigation and claims cannot be determined, based on the information currently available the Company currently believes that the final outcome of these matters will not have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
Indemnifications
In the normal course of business to facilitate transactions related to its operations, the Company indemnifies certain parties, including lessors and from time to time merchants with respect to certain matters. The Company has agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company's bylaws contain similar indemnification obligations to agents.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, the payments that the Company has made under these agreements have not had a material impact on the operating results, financial position, or cash flows of the Company.
8. STOCKHOLDERS' EQUITY

17
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Common Stock
The Board has authorized three classes of common stock: Class A common stock, Class B common stock and common stock. No shares of common stock will be issued or outstanding until November 5, 2016 at which time all outstanding shares of Class A common stock and Class B common stock will automatically convert into shares of common stock. In addition, the Board authorized shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by the Board.
The Company's authorized common stock has a par value of $0.0001 per share, and consists of 2,000,000,000 shares designated as Class A common stock, 10,000,000 shares designated as Class B common stock, and 2,010,000 shares designated as common stock. As of June 30, 2012, there were 649,165,744 shares of Class A common stock and 2,399,976 shares of Class B common stock outstanding.
Groupon, Inc. Stock Plans
The Groupon, Inc. Stock Plans (the "Plans) are administered by the Board, which determines the number of awards to be issued, the corresponding vesting schedule and the exercise price for options. As of June 30, 2012, 41,258,295 shares were available for future issuance under the Plans.
The Company recognized stock-based compensation expense of $38.7 million and $27.1 million during the three months ended June 30, 2011 and 2012 and $57.6 million and $55.1 million during the six months ended June 30, 2011 and 2012, respectively, related to stock awards issued under the Plans, acquisition-related awards, and subsidiary awards. The Company also capitalized $1.2 million and $2.5 million of stock-based compensation during the three and six months ended June 30, 2012 in connection with internally developed software. No such amounts were capitalized during the three and six months ended June 30, 2011.
As of June 30, 2012, a total of $ 229.7 million of unrecognized compensation costs related to unvested stock awards, unvested acquisition-related awards and unvested subsidiary awards are expected to be recognized over the remaining weighted average period of two years.     
Stock Award Activity
The table below summarizes the stock option activity during the six months ended June 30, 2012:
 
 
Options
 
Weighted- Average Exercise Price
 
Weighted- Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
(in thousands) (a)
Outstanding at December 31, 2011
 
17,870,713

 
$1.12
 
8.06
 
$
348,743

    Exercised
 
(5,510,843
)
 
$1.06
 
 
 
 
    Forfeited
 
(541,534
)
 
$2.43
 
 
 
 
    Expired
 
(6,801
)
 
$1.84
 
 
 
 
Outstanding at June 30, 2012
 
11,811,535

 
$1.08
 
7.53
 
$
112,778

 
 
 
 
 
 
 
 
 
Exercisable at June 30, 2012
 
6,706,370

 
$0.94
 
7.35
 
$
64,969

(a)
The aggregate intrinsic value of options outstanding and exercisable represents the total pretax intrinsic value (the difference between the fair value of the Company's stock on the last day of each period and the exercise price, multiplied by the number of options where the exercise price exceeds the fair value) that would have been received by the option holders had all option holders exercised their options as of December 31, 2011 and June 30, 2012, respectively.
The table below summarizes the restricted stock unit activity during the six months ended June 30, 2012:

18
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


 
 
Restricted Stock Units
 
Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2011
 
11,944,844

 
$
12.23

    Granted
 
11,046,575

 
$
14.63

    Vested
 
(2,373,129
)
 
$
10.06

    Forfeited
 
(1,197,148
)
 
$
16.73

Unvested at June 30, 2012
 
19,421,142

 
$
13.60




19
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


9. EARNINGS (LOSS) PER SHARE OF CLASS A AND CLASS B COMMON STOCK
The following tables set forth the computation of basic and diluted net loss per share of common stock for the three and six months ended June 30, 2011 (in thousands, except share amounts and per share amounts):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2011
 
2011
Net loss
 
$
(109,776
)
 
$
(223,667
)
Redemption of preferred stock in excess of carrying value
 
—

 
(34,327
)
Adjustment of redeemable noncontrolling interests to redemption value
 
(6,166
)
 
(15,651
)
Less: Net loss attributable to noncontrolling interests
 
8,536

 
19,759

Net loss attributable to common stockholders
 
$
(107,406
)
 
$
(253,886
)
Net loss per share:
 
 
 
 
Weighted-average shares outstanding for basic and diluted net loss per share (1)
 
303,414,676

 
305,626,028

Basic and diluted net loss per share
 
$
(0.35
)
 
$
(0.83
)


(1)
Stock options, restricted stock units, performance stock units and convertible preferred shares are not included in the calculation of diluted net loss per share for the three and six months ended June 30, 2011 because the Company had a net loss for each period. Accordingly, the inclusion of these equity awards would have had an antidilutive effect on the calculation of diluted loss per share.

20
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



The following tables set forth the computation of basic and diluted earnings per share of Class A and Class B common stock for the three and six months ended June 30, 2012 (in thousands, except share amounts and per share amounts):
Insert Title Here
 
 
Three Months Ended June 30, 2012
 
Six Months Ended June 30, 2012
 
 
Class A
 
Class B
 
Class A
 
Class B
Basic earnings per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Allocation of net income
 
33,425

 
124

 
29,845

 
111

Allocation of adjustment of redeemable noncontrolling interests to redemption value
 
(3,928
)
 
(15
)
 
(11,123
)
 
(42
)
Less: Allocation of net income attributable to noncontrolling interests
 
1,215

 
5

 
2,092

 
8

Allocation of net income attributable to common stockholders
 
28,282

 
104

 
16,630

 
61

Denominator
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
644,749,561

 
2,399,976

 
642,673,606

 
2,399,976

Basic earnings per share
 
$
0.04

 
$
0.04

 
$
0.03

 
$
0.03

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Allocation of net income attributable to common stockholders
 
28,282

 
104

 
16,630

 
61

Reallocation of net income attributable to common stockholders as a result of conversion of Class B
 
104

 
—

 
61

 
—

Allocation of net income attributable to common stockholders
 
28,386

 
104

 
16,691

 
61

Denominator
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding used in basic computation
 
644,749,561

 
2,399,976

 
642,673,606

 
2,399,976

Conversion of Class B
 
2,399,976

 
—

 
2,399,976

 
—

Employee stock options
 
11,794,679

 
—

 
12,971,501

 
—

Restricted shares and RSUs
 
4,178,493

 
—

 
5,185,475

 
—

Weighted-average diluted shares outstanding
 
663,122,709

 
2,399,976

 
663,230,558

 
2,399,976

Diluted earnings per share
 
$
0.04

 
$
0.04

 
$
0.03

 
$
0.03

    

21
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
Antidilutive equity awards
2011
 
2012
 
2011
 
2012
Stock options
23,226,638

 
816

 
23,226,638

 
816

Restricted stock units
10,968,466

 
7,909,056

 
10,968,466

 
2,499,130

Restricted stock
47,368

 
—

 
47,368

 
—

Convertible preferred shares
293,322,364

 
—

 
293,322,364

 
—

Performance stock units
960,000

 
—

 
960,000

 
—

Total
328,524,836

 
7,909,872

 
328,524,836

 
2,499,946



10. FAIR VALUE MEASUREMENTS
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1-Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2-Include other inputs that are directly or indirectly observable in the marketplace.
Level 3-Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. These fair value measurements require significant judgment.
In determining fair value, the Company uses various valuation approaches within the fair value measurement framework. The valuation methodologies used for the Company's instruments measured at fair value and their classification in the valuation hierarchy are summarized below:
Cash equivalents - Cash equivalents primarily consisted of AAA-rated money market funds with over night liquidity and no stated maturities. The Company classified cash equivalents as Level 1, due to their short-term maturity, and measured the fair value based on quoted prices in active markets for identical assets.
Short term investments - Short term investments consisted of certificates of deposit held for investment with an original maturity greater than 90 days but less than one year, which are carried at cost and included in “Other current assets” on the condensed consolidated balance sheets. The Company classified short term investments as Level 1, due to their short-term maturity, and measured the fair value based on quoted prices in active markets for identical assets.
Contingent consideration - As of June 30, 2012, the Company had obligations to transfer $6.1  million in contingent payment considerations and $1.2  million in contingent stock issuances to the former owners of certain entities in conjunction with their acquisition, if specified future operational objectives and financial results are met over the next three years. The Company recorded the acquisition-date fair value of these contingent liabilities, based on the likelihood of contingent earn-out payments and stock issuances, as part of the consideration transferred. The earn-out payments and value of stock issuances are subsequently remeasured to fair value each reporting date. For contingent consideration to be settled in cash, the Company used two approaches to value the liabilities. The first is an income approach that is primarily determined based on the present value of future cash flows using internal models. The second is an option pricing methodology within a Black-Scholes framework . For contingent consideration to be settled in a variable number

22
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


of shares of common stock, the Company used the most recent Groupon stock price as reported on the NASDAQ to determine the fair value of the shares expected to be issued as of December 31, 2011 and June 30, 2012. The Company classified the financial liabilities to be settled in a variable number of shares of common stock as Level 2 as the fair market value of the shares is an observable input that is directly observable in the marketplace. The Company classified the financial liabilities to be settled in cash as Level 3, due to the lack of relevant observable inputs and market activity. Changes in assumptions described above could have an impact on the payout of contingent consideration with a maximum payout being $ 17.6 million.
The following tables summarize the Company's assets and liabilities that are measured at fair value on a recurring basis (in thousands):
 
 
 
Fair Value Measurement at
Reporting Date Using
Description
As of
December 31,
2011
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
750,004

 
$
750,004

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$
13,218

 
 
 
$
1,988

 
$
11,230


 
 
 
Fair Value Measurement at
Reporting Date Using
Description
As of
June 30,
2012
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
607,457

 
$
607,457

 
 
 
 
    Short term investments
$
3,952

 
$
3,952

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$
7,325

 
 
 
$
1,244

 
$
6,081


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2012
 
2011
 
2012
Beginning balance
$
16,568

 
$
7,031

 
$
—

 
$
11,230

Issuance of contingent consideration in connection with acquisitions
—

 
—

 
15,920

 
—

Payments made on contingent liabilities
—

 
—

 
—

 
(4,250
)
Change in fair value and other
(648
)
 
(950
)
 
—

 
(899
)
Ending balance
$
15,920

 
$
6,081

 
$
15,920

 
$
6,081


23
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



At December 31, 2011 and June 30, 2012, no material fair value adjustments were required for non-financial assets and liabilities.
Estimated Fair Value of Financial Assets and Liabilities Not Measured at Fair Value
The fair value of the Company's cost method investment in F-tuan approximates its carrying amount of $128.1 million as of June 30, 2012. The fair value of this nonmarketable equity investment was determined using the income approach. The Company classified the cost method investment as Level 3, due to the lack of relevant observable inputs and market activity.
The Company's other financial instruments not carried at fair value consist primarily of accounts receivable, accounts payable, accrued merchant payable, and accrued expenses. The carrying value of these assets and liabilities approximate their respective fair values as of December 31, 2011 and June 30, 2012, due to their short term nature.
11. INCOME TAXES
The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items.
For the three months ended June 30, 2011, the Company recorded an income tax expense of $1.3 million on a pre-tax loss of $108.4 million, for an effective tax rate of (1.2)% . For the three months ended June 30, 2012, the Company recorded income tax expense of $66.9 million on pre-tax income of $100.4 million, for an effective tax rate of 66.6% .
For the six months ended June 30, 2011, the Company recorded an income tax benefit of $1.7 million on a pre-tax loss of (225.4) million , for an effective tax rate of 0.8% . For the six months ended June 30, 2012, the Company recorded income tax expense of 101.4 million on pre-tax income of 131.4 million , for an effective tax rate of 77.2% .
The Company's U.S. statutory rate is 35% . The Company's effective tax rates for the three and six months ended June 30, 2012, reflect losses which the Company was not able to benefit, the current year expense amortization of taxes paid from the 2011 taxable sale of certain intellectual property rights within the Company's international structure and the tax impact of the gain on the E-Commerce transaction. The Company recognized a tax benefit for the three and six months ended June 30, 2011 as it was able to record a benefit for losses incurred in certain foreign jurisdictions.
The Company's reserve for unrecognized tax benefits, exclusive of interest and penalties, as of June 30, 2012, increased from the balance as of December 31, 2011, by $8.8 million as a result of taxes attributable to current year operations. The Company's total unrecognized tax benefits, if recognized, would impact the Company's income tax expense by $3.2 million and $21.0 million as of December 31, 2011 and June 30, 2012, respectively.
12. SEGMENT INFORMATION
The Company has organized its operations into two principal segments: North America, which represents the United States and Canada; and International, which represents the rest of the Company's global operations. Segment operating results reflect earnings before stock-based compensation, acquisition-related, interest and other income, net, loss on equity-method investees and provision (benefit) for income taxes. Segment information reported below represents the operating segments of the Company for which separate information is available and for which segment results are evaluated regularly by the Company's chief operating decision-maker (i.e., chief executive officer) in assessing performance and allocating resources.
Revenue for each segment is based on the geographic market that sells the Groupons. Revenue and profit or loss information by reportable segment reconciled to consolidated net (loss) income for the three and six months ended June 30, 2011 and 2012 were as follows (in thousands):


24
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


 
Three Months Ended June 30,
 
 Six Months Ended June 30,
 
2011
 
2012
 
2011
 
2012
North America
 
 
 
 
 
 
 
Revenue (1)
$
157,205

 
$
260,181

 
$
293,817

 
$
498,746

Segment operating expenses (2)
167,706

 
216,752

 
326,096

 
415,145

Segment operating (loss) income
(10,501
)
 
43,429

 
(32,279
)
 
83,601

International
 
 
 
 
 
 
 
Revenue
235,377

 
308,154

 
$
394,288

 
$
628,872

Segment operating expenses (2)
287,185

 
279,649

 
522,602

 
572,949

Segment operating (loss) income
(51,808
)
 
28,505

 
(128,314
)
 
55,923

Consolidated
 
 
 
 
 
 
 
Revenue
392,582

 
568,335

 
$
688,105

 
$
1,127,618

Segment operating expenses (2)
454,891

 
496,401

 
848,698

 
988,094

Segment operating (loss) income
(62,309
)
 
71,934

 
(160,593
)
 
139,524

Stock-based compensation
38,718

 
27,084

 
57,582

 
55,087

Acquisition-related
—

 
(1,635
)
 
—

 
(1,687
)
Interest and other income, net
(479
)
 
(57,367
)
 
(1,539
)
 
(53,828
)
Loss on equity method investees
7,881

 
3,428

 
8,763

 
8,556

(Loss) income before income taxes
(108,429
)
 
100,424

 
(225,399
)
 
131,396

Provision (benefit) for income taxes
1,347

 
66,875

 
(1,732
)
 
101,440

Net (loss) income
$
(109,776
)
 
$
33,549

 
$
(223,667
)
 
$
29,956



(1)
North America contains revenue from the United States of $144.0 million and $243.1 million for the three months ended June 30, 2011 and 2012, respectively and $272.2 million and $468.3 million for the six months ended June 30, 2011 and 2012, respectively.

(2)
Represents operating expenses, excluding stock-based compensation and acquisition-related which are not allocated to segments.

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

 
As of December 31, 2011
 
As of June 30, 2012
North America (1)
$
1,076,099

 
$
1,156,012

International  (2)
698,377

 
827,086

Consolidated total assets
$
1,774,476

 
$
1,983,098


(1)
North America contains assets from the United States of $1,061.0 million at December 31, 2011 and $1,137.7 million at June 30, 2012.

(2) Total assets located in the Netherlands represented approximately 14% of consolidated total assets. There were no other individual countries located outside of the United States that represented more than 10% of consolidated total assets.

13. RELATED PARTIES
Marketing Services
During 2011, the Company engaged with InnerWorkings, Inc. (“InnerWorkings”) to provide marketing services. The Company's Executive Chairman, Eric P. Lefkofsky, is a director and significant stockholder of InnerWorkings. Amounts paid in advance to InnerWorkings for services which had not yet been expensed as of June 30, 2012 totaled $1.3  million, and were recorded

25
GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


in “Prepaid expenses and other current assets” on the condensed consolidated balance sheet.
Logistics Services
In connection with the Company's expansion of Groupon Goods offerings, during 2012, the Company entered into a transportation and supply chain management agreement with Echo Global Logistics, Inc. ("Echo"). Three of the Company's directors, Peter A. Barris, Eric P. Lefkofsky and Bradley A. Keywell, are either currently are or were in 2012 directors of Echo and have direct and/or indirect ownership interests in Echo. As a result of the agreement, Echo provides services either related to carrier rate negotiation and management, shipping origin and destination coordination, inventory facility set-up and management and supply chain cost analysis. As a result of this agreement, Echo received payments of approximately $0.6 million for its services under the agreement for the six months ended June 30, 2012, which were expensed by the Company through "Cost of revenue" on the condensed consolidated statements of operations. As the Groupon Goods channel has expanded, the Company has hired other outside vendors for logistics services and is in the process of evaluating its arrangement with Echo.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included under Item 1 of this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under "Risk Factors" and elsewhere in this Quarterly Report.
Overview
Groupon is a local commerce marketplace that connects merchant partners to consumers by offering goods and services at a discount. Traditionally, local merchants have tried to reach consumers and generate sales through a variety of methods, including telephone directories, direct mail, newspaper, radio, television and online advertisements and promotions. By bringing the brick and mortar world of local commerce onto the Internet, Groupon is creating a new way for local merchant partners to attract customers and sell goods and services. We provide consumers with savings and help them discover what to do, eat, see and buy in the places where they live and work.
Each day we email our subscribers discounted offers for goods and services that are targeted by location and personal preferences. Current and potential customers also access our deals directly through our websites and mobile applications. Our revenue from deals where we act as the third party agent is the purchase price paid by the customer for a Groupon voucher ("Groupon") less an agreed upon percentage of the purchase price paid to the featured merchant partners, excluding any applicable taxes and net of estimated refunds which are recoverable from the merchant. Our direct revenue from deals where we act as the merchant of record is the purchase price paid by the customer for the Groupon excluding any applicable taxes and net of estimated refunds. In the six months ended June 30, 2011, we generated revenue of $688.1 million, compared to $1,127.6 million in the six months ended June 30, 2012. Revenue has increased as a result of expanding the scale of our business both domestically and internationally. Revenue from our international operations was $394.3  million and $628.9  million in the six months ended June 30, 2011 and 2012, respectively.
We have organized our operations into two principal segments: North America, which represents the United States and Canada, and International, which represents the rest of our global operations. For the six months ended June 30, 2012, we derived 55.8% of our revenue from our International segment, compared to 44.2% from our North America segment. We expect the percentage of revenue derived internationally to continue to be the majority of our revenue in future periods as we continue to expand globally and increase our penetration of the marketing opportunities in countries outside of North America, including those where we are already established.
Primarily as a result of our net losses in prior years, we have an accumulated deficit of $670.8  million as of June 30, 2012. Since our inception, we have driven our growth through substantial investments in infrastructure and marketing to increase customer acquisition. In particular, our net loss in previous years was driven primarily by the rapid expansion of our International segment, which involved investing heavily in upfront marketing, sales and infrastructure related to the build out of our operations in early stage countries. We intend to continue to pursue a strategy of significant investment in this segment and

26

elsewhere in the future, consistent with the strategy we previously employed in North America and Europe.
How We Measure Our Business
We measure our business with several financial and operating metrics. We use these metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the long‑term performance of our marketplace. The key metrics are as follows:
Financial Metrics
•
Revenue. Our third party revenue is derived from deals where we act as the agent and is the purchase price paid by the customer for the Groupon less an agreed upon percentage of the purchase price paid to the featured merchant partner, excluding any applicable taxes and net of estimated refunds which are recoverable from the merchant. Direct revenue, when the Company is selling the product as the merchant of record, is the purchase price paid by the customer, excluding any applicable taxes and net of estimated refunds. We believe revenue is an important indicator for our business because it is a reflection of the amount retained by Groupon excluding payment processing fees, and the value of our service to our merchant partners.
•
Consolidated segment operating (loss) income. Consolidated segment operating (loss) income is the consolidated operating (loss) income of our two segments, North America and International, adjusted for acquisition-related costs and stock-based compensation expense. Acquisition-related costs are non-cash items related to certain of our acquisitions. Stock-based compensation expense is a non-cash item. As reported under U.S. GAAP, we do not allocate stock‑based compensation and acquisition‑related expense to our segments. We use consolidated segment operating (loss) income to allocate resources and evaluate performance internally. Consolidated segment operating (loss) income is a non‑GAAP financial measure. For further information and a reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the " Results of Operations " section.
•
Free cash flow. Free cash flow is "Net cash provided by operating activities" less "Purchases of property and equipment." We use free cash flow, and ratios based on it, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it typically will present a more appropriate measure of cash flows as purchases of fixed assets, software developed for internal use and website development costs are a necessary component of ongoing operations. Free cash flow is a non-GAAP financial measure. For further information and a reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the " Results of Operations " section.
Operating Metrics
•
Gross billings. This metric represents the gross amounts collected from customers for third party revenue deals and direct revenue deals, excluding any applicable taxes and net of estimated refunds. We consider this metric to be an important indicator of our growth and business performance as it is a proxy for the dollar volume of transactions through our marketplace, net of tax and refunds which are recoverable from the merchant. Tracking gross billings also allows us to track changes in the percentage of gross billings that we are able to retain after payments to our merchant partners. Gross billings are not equivalent to revenue or any other financial metric presented in our condensed consolidated financial statements.
•
Active customers. We define active customers as unique user accounts that have purchased Groupons during the trailing twelve months. We consider this metric to be an important indicator of our business performance as it helps us to understand how the number of customers purchasing Groupons is trending.
•
Gross billings per average active customer. This metric represents the trailing twelve months gross billings generated per average active customer. This metric is presented as the total gross billings generated in the trailing twelve months, divided by the average number of active customers in such time period. Although we believe total gross billings, not trailing twelve months gross billings per average active customer, is a better indication of the overall growth of our marketplace over time, trailing twelve months gross billings per average active customer provides an opportunity to evaluate whether our growth is primarily driven by growth in total customers or in spend per customer in any given period.

27


•
Revenue per average active customer. This metric represents the trailing twelve months revenue generated per average active customer. This metric is presented as the revenue generated in the trailing twelve months, divided by the average number of active customers in such time period. Although we believe revenue, not trailing twelve months revenue per average active customer, is a better indication of the overall growth of our business, trailing twelve month revenue per average active customer provides an opportunity to evaluate whether our average customer is purchasing deals with a higher or lower commission profile to Groupon.
 
 
Trailing Twelve Months Ended June 30,
 
 
2011
 
2012
Operating Metrics:
 
 
 
 
Gross billings (in thousands) (1)
 
$
2,206,964

 
$
5,029,554

TTM Active customers (in thousands)  (2)
 
23,037

 
38,046

TTM Gross billings per average active customer (3)
 
$
173.59

 
$
164.68

Revenue per average active customer (4)
 
$
74.10

 
$
67.12



(1)
Reflects the gross amounts collected from customers for Groupons sold, excluding any applicable taxes and net of estimated refunds, in the applicable period.
(2)
Reflects the total number of unique accounts that have purchased Groupons during the trailing twelve months.
(3)
Reflects the total gross billings generated in the trailing twelve months per average active customer in the applicable period.
(4)
Reflects the revenue generated in the trailing twelve months per average active customer in the applicable period.

Factors Affecting Our Performance

Customer acquisition costs. We must continue to acquire and retain customers who purchase Groupons in order to increase revenue and achieve profitability. If consumers do not perceive our Groupon offerings to be attractive, or if we fail to introduce new or more relevant deals, we may not be able to acquire or retain customers. In our limited operating history, we have not incurred significant marketing or other expense on initiatives designed to re-activate customers or increase the level of purchases by our existing customers. If such expenditures or initiatives become necessary to maintain a desired level of activity in our marketplace, our business and profitability could be adversely affected.
Deal sourcing and quality. We consider our merchant partner relationships to be a vital part of our business model. We depend on our ability to attract and retain merchants that are prepared to offer products or services on compelling terms. We do not have long-term arrangements to guarantee availability of deals that offer attractive quality, value and variety to consumers or favorable payment terms to us. In light of our objective to promote variety in our daily deals, our general practice to date has been to limit repeat merchants. If new merchants do not find our marketing and promotional services effective, or if our existing merchants do not believe that utilizing our services provides them with a long-term increase in customers, revenue or profit, they may stop making offers through our marketplace.
Competitive pressure. Our growth and geographical expansion have drawn a significant amount of attention to our business model. As a result, a substantial number of companies that attempt to replicate our business model have emerged around the world. We expect new competitors to emerge. In addition to such competitors, we expect to increasingly compete against other large Internet and technology‑based businesses that have launched initiatives which are directly competitive to our business. We also expect to compete against other Internet sites that are focused on specific communities or interests and offer coupons or discount arrangements related to such communities or interests.
Investment in growth. We have been a high-growth company and have aggressively invested, and intend to continue to invest, to support this growth. As a result, we have incurred net losses in the majority of quarters since our inception. We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to increase the number and variety of deals we offer each day, broaden our customer base, expand our marketing channels, expand our operations, hire additional employees and develop our technology.
Pace and effectiveness of expansion. We have grown our business rapidly since inception, adding new customers and markets both domestically and internationally. Our International operations are critical to our revenue growth and our ability to

28


achieve profitability. For the six months ended June 30, 2011 and 2012, 57.3% and 55.8% , respectively, of our revenue was generated from our International operations. Expansion into international markets requires management attention and resources and requires us to localize our services to conform to a wide variety of local cultures, business practices, laws and policies. International acquisitions also expose us to a variety of execution risks. The different commercial and Internet infrastructure in other countries may make it more difficult for us to replicate our traditional business model.
Basis of Presentation
Our basis of presentation is discussed in "Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 30, 2012. We updated our presentation of revenue in this Quarterly Report on Form 10-Q. Refer to Note 1 of the condensed consolidated financial statements where we discuss additional interim updates to the significant accounting policies for the three and six months ended June 30, 2011 and 2012.

Results of Operations
Comparison of the Six Months Ended June 30, 2011 and 2012:

 
 
 
Six Months Ended June 30,
 
 
 
2011
 
2012
 
 
 
(in thousands)
Third party and other revenue
 
$
688,105

 
$
1,043,038

Direct revenue
 
—

 
84,580

Total revenue
 
688,105

 
1,127,618

Costs and expenses:
 
 
 
 
 
Cost of revenue
 
94,568

 
254,682

 
Marketing
 
442,824

 
205,022

 
Selling, general and administrative
 
368,888

 
583,477

 
Acquisition-related
 
—

 
(1,687
)
 
  Total operating expenses
 
906,280

 
1,041,494

(Loss) income from operations
 
(218,175
)
 
86,124

Interest and other income, net
 
1,539

 
53,828

Loss on equity method investees
 
(8,763
)
 
(8,556
)
(Loss) income before provision for income taxes
 
(225,399
)
 
131,396

Provision (benefit) for income taxes
 
(1,732
)
 
101,440

Net (loss) income
 
(223,667
)
 
29,956

Less: Net loss (income) attributable to noncontrolling interests
 
19,759

 
(2,100
)
Net (loss) income attributable to Groupon, Inc.
 
(203,908
)
 
27,856

Redemption of preferred stock in excess of carrying value
 
(34,327
)
 
—

Adjustment of redeemable noncontrolling interests to redemption value
 
(15,651
)
 
(11,165
)
Net (loss) income attributable to common stockholders
 
$
(253,886
)
 
$
16,691

Operating Expenses
Operating expenses with and without stock-based compensation are follows (in thousands):

29


 
 
For the Six Months Ended June 30,
 
 
2011
 
2012
 
 
As reported
 
Stock-based compensation
 
Net
 
As reported
 
Stock-based compensation
 
Net
 
(in thousands)
Cost of revenue
 
$
94,568

 
$
(424
)
 
$
94,144

 
$
254,682

 
$
(1,497
)
 
$
253,185

Marketing
 
442,824

 
(986
)
 
441,838

 
205,022

 
(1,372
)
 
203,650

Selling, general and administrative
 
368,888

 
(56,172
)
 
312,716

 
583,477

 
(52,218
)
 
531,259

Acquisition-related
 
—

 
—

 
—

 
(1,687
)
 
—

 
(1,687
)
Total operating expenses
 
$
906,280

 
$
(57,582
)
 
$
848,698

 
$
1,041,494

 
$
(55,087
)
 
$
986,407

Foreign exchange rate neutral operating results

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

 
 
Six Months Ended June 30, 2012
 
 
At Avg.
 
Exchange
 
 
 
 
 Q2 2011 YTD
 
Rate
 
As
 
 
Rates  (1)
 
Effect (2)
 
Reported
 
 
(in thousands)
Revenue
$
1,187,851

 
$
(60,233
)
 
$
1,127,618

Costs and expenses
1,100,483

 
(58,989
)
 
1,041,494

Income from operations
$
87,368

 
$