10-Q 1 a2018q210-q.htm 10-Q 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 June 30, 2018
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 1-35335

Groupon, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
27-0903295
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
600 West Chicago Avenue, Suite 400
Chicago, Illinois
 
60654
(Address of principal executive offices)
 
(Zip Code)
312-334-1579
(Registrant's telephone number, including area code)

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 August 1, 2018, there were 568,395,979 shares of the registrant's common stock outstanding.




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

______________________________________________________




2



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, risk 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, or the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
As used herein, "Groupon," the "Company," "we," "our," and similar terms include Groupon, Inc. and its subsidiaries, unless the context indicates otherwise.


3



ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GROUPON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
June 30, 2018
 
December 31, 2017
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
662,893

 
$
880,129

Accounts receivable, net
76,302

 
98,294

Prepaid expenses and other current assets (including $8,517 and $0 at June 30, 2018 and December 31, 2017, respectively, at fair value)
104,524

 
94,025

Total current assets
843,719

 
1,072,448

Property, equipment and software, net
148,450

 
151,145

Goodwill
328,799

 
286,989

Intangible assets, net
37,075

 
19,196

Investments (including $86,578 and $109,751 at June 30, 2018 and December 31, 2017, respectively, at fair value)
109,606

 
135,189

Other non-current assets
21,051

 
12,538

Total Assets
$
1,488,700

 
$
1,677,505

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
23,026

 
$
31,968

Accrued merchant and supplier payables
528,224

 
770,335

Accrued expenses and other current liabilities
367,519

 
331,196

Total current liabilities
918,769

 
1,133,499

Convertible senior notes, net
195,559

 
189,753

Other non-current liabilities
103,235

 
102,408

Total Liabilities
1,217,563

 
1,425,660

Commitments and contingencies (see Note 8)

 

Stockholders' Equity
 
 
 
Common stock, par value $0.0001 per share, 2,010,000,000 shares authorized; 755,806,627 shares issued and 567,204,385 shares outstanding at June 30, 2018; 748,541,862 shares issued and 559,939,620 shares outstanding at December 31, 2017
76

 
75

Additional paid-in capital
2,206,741

 
2,174,708

Treasury stock, at cost, 188,602,242 shares at June 30, 2018 and December 31, 2017
(867,450
)
 
(867,450
)
Accumulated deficit
(1,101,342
)
 
(1,088,204
)
Accumulated other comprehensive income (loss)
32,307

 
31,844

Total Groupon, Inc. Stockholders' Equity
270,332

 
250,973

Noncontrolling interests
805

 
872

Total Equity
271,137

 
251,845

Total Liabilities and Equity
$
1,488,700

 
$
1,677,505

See Notes to Condensed Consolidated Financial Statements.


4



GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Service
$
295,652

 
$
315,854

 
$
597,449

 
$
617,426

Product
321,744

 
346,765

 
646,487

 
718,819

Total revenue
617,396

 
662,619

 
1,243,936

 
1,336,245

Cost of revenue:
 
 
 
 
 
 
 
Service
30,230

 
38,478

 
61,375

 
81,351

Product
263,508

 
296,074

 
534,018

 
617,376

Total cost of revenue
293,738

 
334,552

 
595,393

 
698,727

Gross profit
323,658

 
328,067

 
648,543

 
637,518

Operating expenses:
 
 
 
 
 
 
 
Marketing
94,178

 
100,658

 
193,334

 
187,000

Selling, general and administrative
294,124

 
230,223

 
516,185

 
462,281

Restructuring charges
(399
)
 
4,584

 
(116
)
 
7,315

  Total operating expenses
387,903

 
335,465

 
709,403

 
656,596

Income (loss) from operations
(64,245
)
 
(7,398
)
 
(60,860
)
 
(19,078
)
Other income (expense), net
(26,457
)
 
5,878

 
(34,972
)
 
1,276

Income (loss) from continuing operations before provision (benefit) for income taxes
(90,702
)
 
(1,520
)
 
(95,832
)
 
(17,802
)
Provision (benefit) for income taxes
1,552

 
3,883

 
(783
)
 
8,470

Income (loss) from continuing operations
(92,254
)
 
(5,403
)
 
(95,049
)
 
(26,272
)
Income (loss) from discontinued operations, net of tax

 
(1,376
)
 

 
(889
)
Net income (loss)
(92,254
)
 
(6,779
)
 
(95,049
)
 
(27,161
)
Net income attributable to noncontrolling interests
(2,780
)
 
(2,547
)
 
(6,873
)
 
(6,579
)
Net income (loss) attributable to Groupon, Inc.
$
(95,034
)
 
$
(9,326
)
 
$
(101,922
)
 
$
(33,740
)
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
(0.17
)
 
$
(0.01
)
 
$
(0.18
)
 
$
(0.06
)
Discontinued operations
0.00

 
(0.01
)
 
0.00

 
0.00

Basic and diluted net income (loss) per share
$
(0.17
)
 
$
(0.02
)
 
$
(0.18
)
 
$
(0.06
)
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding
 
 
 
 
 
 
 
Basic
565,284,705

 
559,762,180

 
563,502,954

 
560,978,712

Diluted
565,284,705

 
559,762,180

 
563,502,954

 
560,978,712

See Notes to 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,
 
2018
 
2017
 
2018
 
2017
Income (loss) from continuing operations
$
(92,254
)
 
$
(5,403
)
 
$
(95,049
)
 
$
(26,272
)
Other comprehensive income (loss) from continuing operations:
 
 
 
 
 
 
 
Net change in unrealized gain (loss) on foreign currency translation adjustments
2,806

 
(6,144
)
 
1,238

 
(5,714
)
Net change in unrealized gain (loss) on defined benefit pension plan

 

 

 
585

Available for sale securities:
 
 
 
 
 
 
 
Net unrealized gain (loss) during the period
(541
)
 
(952
)
 
(1,042
)
 
(713
)
Reclassification adjustment for realized (gain) loss on investment included in income (loss) from continuing operations
106

 
(1,341
)
 
106

 
(1,341
)
Net change in unrealized gain (loss) on available-for-sale securities (net of tax effect of $0 and $147 for the three months ended June 30, 2018 and 2017, respectively, and $0 and $0 for the six months ended June 30, 2018 and 2017, respectively)
(435
)
 
(2,293
)
 
(936
)
 
(2,054
)
Other comprehensive income (loss) from continuing operations
2,371

 
(8,437
)
 
302

 
(7,183
)
Comprehensive income (loss) from continuing operations
(89,883
)
 
(13,840
)
 
(94,747
)
 
(33,455
)
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations

 
(1,376
)
 

 
(889
)
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

 
(1,376
)
 

 
(17,400
)
 
 
 
 
 
 
 
 
Comprehensive income (loss)
(89,883
)
 
(15,216
)
 
(94,747
)
 
(50,855
)
Comprehensive income (loss) attributable to noncontrolling interests
(2,780
)
 
(2,547
)
 
(6,873
)
 
(6,579
)
Comprehensive income (loss) attributable to Groupon, Inc.
$
(92,663
)
 
$
(17,763
)
 
$
(101,620
)
 
$
(57,434
)
See Notes to Condensed Consolidated Financial Statements.


6



GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
 
Groupon, Inc. Stockholders' Equity
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Groupon, Inc. Stockholders' Equity
 
Non-controlling Interests
 
Total Equity
 
Shares
 
Amount
Shares
 
Amount
 
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)

 

 

 

 

 
(101,922
)
 

 
(101,922
)
 
6,873

 
(95,049
)
Foreign currency translation

 

 

 

 

 

 
1,238

 
1,238

 

 
1,238

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

 

 

 

 

 

 
(936
)
 
(936
)
 

 
(936
)
Exercise of stock options
667,743

 

 
70

 

 

 

 

 
70

 

 
70

Vesting of restricted stock units and performance share units
7,785,719

 
1

 
(1
)
 

 

 

 

 

 

 

Shares issued under employee stock purchase plan
746,773

 

 
2,434

 

 

 

 

 
2,434

 

 
2,434

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
(3,175,849
)
 

 
(14,499
)
 

 

 

 

 
(14,499
)
 

 
(14,499
)
Stock-based compensation on equity-classified awards

 

 
37,593

 

 

 

 

 
37,593

 

 
37,593

Distributions to noncontrolling interest holders

 

 

 

 

 

 

 

 
(6,940
)
 
(6,940
)
Balance at June 30, 2018
755,806,627

 
$
76

 
$
2,206,741

 
(188,602,242
)
 
$
(867,450
)
 
$
(1,101,342
)
 
$
32,307

 
$
270,332

 
$
805

 
$
271,137

See Notes to Condensed Consolidated Financial Statements.


7



GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
Operating activities
 
 
 
Net income (loss)
$
(95,049
)
 
$
(27,161
)
Less: Income (loss) from discontinued operations, net of tax

 
(889
)
Income (loss) from continuing operations
(95,049
)
 
(26,272
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property, equipment and software
52,149

 
57,163

Amortization of acquired intangible assets
6,466

 
11,583

Stock-based compensation
35,644

 
41,141

Impairments of Investments
10,044

 

Deferred income taxes
(6,575
)
 
759

(Gain) loss from changes in fair value of investments
8,068

 
1,145

Amortization of debt discount on convertible senior notes
5,806

 
5,242

Change in assets and liabilities, net of acquisitions and dispositions:
 
 
 
Accounts receivable
27,296

 
16,229

Prepaid expenses and other current assets
1,489

 
(11,139
)
Accounts payable
(9,340
)
 
(10,723
)
Accrued merchant and supplier payables
(172,982
)
 
(182,954
)
Accrued expenses and other current liabilities
51,140

 
(41,491
)
Other, net
10,272

 
(18,159
)
Net cash provided by (used in) operating activities from continuing operations
(75,572
)
 
(157,476
)
Net cash provided by (used in) operating activities from discontinued operations

 
(2,195
)
Net cash provided by (used in) operating activities
(75,572
)
 
(159,671
)
Investing activities
 
 
 
Purchases of property and equipment and capitalized software
(37,517
)
 
(29,461
)
Proceeds from maturity of investment

 
1,843

Acquisition of business, net of acquired cash
(57,821
)
 

Acquisitions of intangible assets and other investing activities
(758
)
 
(184
)
Net cash provided by (used in) investing activities from continuing operations
(96,096
)
 
(27,802
)
Net cash provided by (used in) investing activities from discontinued operations

 
(9,548
)
Net cash provided by (used in) investing activities
(96,096
)
 
(37,350
)
Financing activities
 
 
 
Payments for purchases of treasury stock

 
(51,513
)
Taxes paid related to net share settlements of stock-based compensation awards
(16,138
)
 
(15,356
)
Proceeds from stock option exercises and employee stock purchase plan
2,504

 
2,477

Distributions to noncontrolling interest holders
(6,940
)
 
(6,426
)
Payments of capital lease obligations
(17,239
)
 
(16,670
)
Payments of contingent consideration related to acquisitions
(1,815
)
 
(5,689
)
Other financing activities

 
(473
)
Net cash provided by (used in) financing activities
(39,628
)
 
(93,650
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash, including cash classified within current assets of discontinued operations
(6,644
)
 
17,297

Net increase (decrease) in cash, cash equivalents and restricted cash, including cash classified within current assets of discontinued operations
(217,940
)
 
(273,374
)
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
(217,940
)
 
(244,508
)
Cash, cash equivalents and restricted cash, beginning of period
885,481

 
874,906

Cash, cash equivalents and restricted cash, end of period
$
667,541

 
$
630,398

Non-cash investing and financing activities
 
 
 
Continuing operations:
 
 
 
Equipment acquired under capital lease obligations
$
9,581

 
$
16,509

Leasehold improvements funded by lessor
557

 
402

Liability for purchases of treasury stock

 
561

Increase (decrease) in liabilities related to purchases of property and equipment and capitalized software
(789
)
 
539

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.


8



GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Company Information
Groupon, Inc. and subsidiaries (the "Company"), which commenced operations in October 2008, operates online local commerce marketplaces throughout the world that connect merchants to consumers by offering goods and services, generally at a discount. Customers access those marketplaces through the Company's websites, primarily localized groupon.com sites in many countries, and its mobile applications.
The Company's operations are organized into two segments: North America and International. See Note 16, 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 ("SEC") for interim financial reporting. These condensed consolidated financial statements are unaudited and, in the Company's opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the Company's condensed consolidated balance sheets, statements of operations, comprehensive income (loss), cash flows and stockholders' equity for the periods presented. Operating results for the periods presented are not necessarily indicative of the results to be expected for the full year ending December 31, 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 the Company's 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 the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company's condensed consolidated financial statements were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenue and expenses of all wholly-owned subsidiaries and majority-owned subsidiaries over which the Company exercises control and variable interest entities for which the Company has determined that it is the primary beneficiary. Outside stockholders' interests in subsidiaries are shown on the condensed consolidated financial statements as Noncontrolling interests. Equity investments in entities in which the Company does not have a controlling financial interest are accounted for under the equity method, the 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, the Company referred to its 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
The Company 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 the Company's accounting policies.
The Company 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. The Company 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 the Company's accounting policies.
The Company 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. The Company applied that change in cash flow classification on a retrospective basis, which resulted in an increase of $0.5 million to net cash used in operating activities for the six months ended June 30, 2017.
Restricted cash primarily represents amounts that the Company is 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 June 30, 2018 and 2017 and December 31, 2017 (in thousands):
 
June 30, 2018
 
June 30, 2017
 
December 31, 2017
Cash and cash equivalents
$
662,893

 
$
618,550

 
$
880,129

Restricted cash included in prepaid expenses and other current assets
4,250

 
6,569

 
4,932

Restricted cash included in other non-current assets
398

 
5,279

 
420

Cash, cash equivalents and restricted cash
$
667,541

 
$
630,398

 
$
885,481

The Company 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.
The Company 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.
The Company 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.
The Company 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, the Company 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 its adoption of Topic 606, the Company 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 its adoption of Topic 606, the Company recognizes revenue when it satisfies a performance obligation by transferring a promised good or service to a customer. Substantially all of the Company's performance obligations are satisfied at a point in time rather than over time.
Product Revenue
The Company generates product revenue from direct sales of merchandise inventory through its Goods category. For product revenue transactions, the Company is the primary party responsible for providing the good to the customer, it has inventory risk and it has 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 the Company earns 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 the Company's 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. The Company recognizes revenue from those transactions when its commission has been earned, which occurs when a sale through one of the Company's online marketplaces is completed and the related voucher has been made available to the customer. The Company believes that its 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 its adoption of Topic 606, the Company deferred the revenue from hotel reservation offerings until the customer's stay commenced. Following its 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.
The Company also earns commissions when customers make purchases with retailers using digital coupons accessed through its 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. The Company recognizes 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 the Company's online marketplaces until the customer redeems the related voucher. If the customer does not redeem a voucher with such merchant payment terms, the Company retains all of the gross billings for that voucher, rather than retaining only its net commission. Prior to its adoption of Topic 606, the Company recognized that variable consideration from unredeemed vouchers and derecognized the related accrued merchant payables when its legal obligation to the merchant expired, which the Company believes is shortly after the voucher expiration date in most jurisdictions. Following its adoption of Topic 606, the Company estimates the variable consideration from vouchers that will not ultimately be redeemed and recognizes that amount as revenue at the time of sale, rather than when the Company's legal obligation expires. The Company estimates variable consideration from unredeemed vouchers using its historical voucher redemption experience. If actual redemptions differ from the Company's estimates, the effects could be material to the condensed consolidated financial statements.
Refunds
Prior to the 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 the 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.
The Company estimates its refund reserve using historical refund experience by deal category. The Company assesses the trends that could affect its estimates on an ongoing basis and makes adjustments to the refund reserve calculations if it appears that changes in circumstances, including changes to the Company's refund policies or general economic conditions, may cause future refunds to differ from its initial estimates. If actual refunds differ from the Company's estimates, the effects could be material to the condensed consolidated financial statements.
Discounts, Customer Credits and Other Consideration Payable to Customers
The Company provides discount offers to encourage purchases of goods and services through its online marketplaces. The Company records discounts as a reduction of revenue.
Additionally, the Company issues credits to customers that can be applied to future purchases through its 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 the 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 its adoption of Topic 606, the Company recognized breakage income for unused customer credits when they expired or were forfeited. Following its 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 its adoption of Topic 606, the Company expensed the incremental costs to obtain contracts with third-party merchants, such as sales commissions, as incurred. Following its 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 June 30, 2018, the Company had $3.4 million and $11.5 million of deferred contract acquisition costs recorded within Prepaid expenses and other current assets and Other non-current assets, respectively. For the three and six months ended June 30, 2018, the Company amortized $6.5 million and $13.3 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 the Company's 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 the Company's fulfillment center. Prior to 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 the 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 the Company does 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 the adoption of the guidance in ASU 2016-01, the Company applies 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 the Company has the ability to exercise significant influence are accounted for under the equity method, except where the Company has 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 Company's 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 Prepaid expenses and other current assets and 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, the Company completed a strategic review of its international markets in connection with its efforts to optimize its global footprint and focus on the markets that it believes have the greatest potential to benefit the Company's long-term financial performance. Based on that review, the Company decided to focus its business on 15 core countries and to pursue strategic alternatives for its operations in the remaining 11 countries, which were primarily based in Asia and Latin America. The dispositions of the Company's 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 an entity's operations and financial results is reported as a discontinued operation. The Company determined that the decision reached by its management and Board of Directors to exit those 11 non-core countries, which comprised a substantial majority of its operations outside of North America and EMEA, represented a strategic shift in its business. Additionally, based on its review of quantitative and qualitative factors relevant to the dispositions, the Company determined that the disposition of the businesses in those countries would have a major effect on its operations and financial results. As such, the results of operations and cash flows for its 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 six months ended June 30, 2018 and 2017.
Dispositions Completed in 2017
In connection with its strategic initiative to exit non-core countries as discussed above, the Company sold an 83% controlling stake in its subsidiary in Israel and sold its subsidiaries in Argentina, Chile, Colombia, Peru, Mexico, Brazil, Singapore and Hong Kong during the first quarter 2017. The Company recognized a net pretax loss on those dispositions of $1.3 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
14,596

Less: Indemnification liabilities (1)
5,365

Less: Unfavorable contract liability for transition services
2,114

Loss on dispositions
$
(1,268
)
(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 six months ended June 30, 2017 (in thousands):
 
Three Months Ended June 30, 2017 (1)
 
Six Months Ended June 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
(1,376
)
 
(11,284
)
Restructuring

 
(778
)
Other income, net

 
3,852

Income (loss) from discontinued operations before loss on dispositions and provision for income taxes
(1,376
)
 
460

Loss on dispositions

 
(1,268
)
Provision for income taxes

 
(81
)
Income (loss) from discontinued operations, net of tax
$
(1,376
)
 
$
(889
)
(1)
Selling, general and administrative expenses from discontinued operations for the three months ended June 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 six months ended June 30, 2017 includes the results of each business through its respective disposition date.


9

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




4. BUSINESS COMBINATIONS
On April 30, 2018, the Company 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 the Company's international segment. Concurrent with the acquisition, the Company entered into an agreement with the noncontrolling shareholder giving the Company 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 the Company to purchase its 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 the condensed consolidated financial statements from the date of acquisition through June 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 the Company paid over the fair value of the net tangible and intangible assets acquired. The Company paid a premium for a number of reasons, including growing the Company's 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 three and six months ended June 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 the condensed consolidated statements of operations.
The revenue and net loss of Cloud Savings included in the Company's condensed consolidated statements of operations were $3.0 million and $0.1 million, respectively, for the period from April 30, 2018 through June 30, 2018. Pro forma results of operations for the Cloud Savings acquisition are not presented as the pro forma effects of that acquisition were not material to the Company's condensed consolidated results of operations.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the Company's goodwill activity by segment for the six months ended June 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

 
(4,407
)
 
(4,407
)
Balance as of June 30, 2018
$
178,685

 
$
150,114

 
$
328,799

The following table summarizes the Company's intangible assets as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 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
$
55,952

 
$
48,695

 
$
7,257

 
$
56,749

 
$
46,513

 
$
10,236

Merchant relationships
30,969

 
10,778

 
20,191

 
11,598

 
9,853

 
1,745

Trade names
14,456

 
10,965

 
3,491

 
12,077

 
10,469

 
1,608

Developed technology
37,151

 
36,667

 
484

 
36,864

 
36,864

 

Patents
20,132

 
15,895

 
4,237

 
19,031

 
15,204

 
3,827

Other intangible assets
11,342

 
9,927

 
1,415

 
10,875

 
9,095

 
1,780

Total
$
170,002

 
$
132,927

 
$
37,075

 
$
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 8 years. Amortization expense related to intangible assets was $3.5 million and $6.2 million for the three months ended June 30, 2018 and 2017, respectively, and $6.4 million and $11.6 million for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, the Company's estimated future amortization expense related to intangible assets is as follows (in thousands):
Remaining amounts in 2018
$
7,446

2019
11,025

2020
5,120

2021
4,393

2022
4,077

Thereafter
5,014

Total
$
37,075



10

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




6. INVESTMENTS
The following table summarizes the Company's investments as of June 30, 2018 and December 31, 2017 (dollars in thousands):
 
June 30, 2018
 
Percent Ownership of Voting Stock
 
December 31, 2017
 
Percent Ownership of Voting Stock
Current (1):
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Convertible debt securities
$
8,517

 
 
 
$

 
 
Non-current (1):
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Convertible debt securities
$
1,719

 
 
 
$
11,354

 
 
Redeemable preferred shares
9,961

 
19%
to
25%
 
15,431

 
19%
to
25%
Total available-for-sale securities
11,680

 
 
 
26,785

 
 
Fair value option investments
74,898

 
10%
to
19%
 
82,966

 
10%
to
19%
Other equity investments (2)
23,028

 
1%
to
19%
 
25,438

 
1%
to
19%
Total non-current investments
$
109,606

 
 
 
$
135,189

 
 
Total investments
$
118,123

 
 
 
 
 
$
135,189

 
 
 
 
(1)
Current and non-current investments are classified within Prepaid expenses and other current assets and Investments, respectively, on the condensed consolidated balance sheets.
(2)
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. The Company adopted the guidance in ASU 2016-01 on January 1, 2018. Under that guidance, the Company has 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 six months ended June 30, 2018. See further discussion under Impairments of Investments below.
The following table summarizes the amortized cost, gross unrealized gain, gross unrealized loss and fair value of the Company's available-for-sale securities as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 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
$
10,129

 
$
107

 
$

 
$
10,236

 
$
10,205

 
$
1,653

 
$
(504
)
 
$
11,354

Redeemable preferred shares
9,961

 

 

 
9,961

 
15,431

 

 

 
15,431

Total available-for-sale securities
$
20,090

 
$
107

 
$

 
$
20,197

 
$
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, the Company obtained minority investments in Monster Holdings LP ("Monster LP") and in Nearbuy Pte Ltd. ("Nearbuy"), respectively. The Company has made an irrevocable election to account for both of those investments at fair value with changes in fair value reported in earnings. The Company elected to apply fair value accounting to those investments because it believes that fair value is the most relevant measurement attribute for those investments, as well as to reduce operational and accounting complexity. The Company determined that the fair value of its investments in Monster LP and Nearbuy were $70.6 million and $4.3 million, respectively, as of June 30, 2018 and $78.9 million and $4.0 million, respectively, as of December 31, 2017.


11

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




The following table summarizes the Company’s gains and losses due to changes in fair value of those investments for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Monster LP
$
(3,054
)
 
$
(77
)
 
$
(8,285
)
 
$
2,276

Nearbuy
19

 
(1,371
)
 
217

 
(3,421
)
Total
$
(3,035
)
 
$
(1,448
)
 
$
(8,068
)
 
$
(1,145
)
Impairments of Investments
The Company recorded other-than-temporary impairments of available-for-sale securities of $4.6 million and $5.4 million for the three and six months ended June 30, 2018, respectively. The Company also recorded a $4.6 million impairment of an other equity investment for the three and six months ended June 30, 2018. Those impairments are classified within Other income (expense), net on the condensed consolidated statements of operations.
7. SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS INFORMATION
The following table summarizes the Company's other income (expense), net for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest income
$
1,836

 
$
659

 
$
3,345

 
$
1,261

Interest expense
(5,228
)
 
(4,948
)
 
(10,721
)
 
(10,267
)
Gains (losses), net on changes in fair value of investments
(3,035
)
 
(1,448
)
 
(8,068
)
 
(1,145
)
Foreign currency gains (losses), net
(12,533
)
 
10,826

 
(11,135
)
 
10,877

Impairments of investments
(9,189
)
 

 
(10,044
)
 

Other
1,692

 
789

 
1,651

 
550

Other income (expense), net
$
(26,457
)
 
$
5,878

 
$
(34,972
)
 
$
1,276

The following table summarizes the Company's prepaid expenses and other current assets as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
Merchandise inventories
$
28,307

 
$
25,528

Prepaid expenses
38,519

 
40,399

Income taxes receivable
9,565

 
10,299

Investments
8,517

 

Other
19,616

 
17,799

Total prepaid expenses and other current assets
$
104,524

 
$
94,025

The following table summarizes the Company's accrued merchant and supplier payables as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
Accrued merchant payables
$
377,097

 
$
459,662

Accrued supplier payables (1)
151,127

 
310,673

Total accrued merchant and supplier payables
$
528,224

 
$
770,335

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


12

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




The following table summarizes the Company's accrued expenses and other current liabilities as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
Refunds reserve
$
30,355

 
$
31,275

Compensation and benefits
55,827

 
73,096

Accrued marketing
29,297

 
32,912

Customer credits
18,316

 
28,487

Income taxes payable
12,448

 
9,645

Deferred revenue
21,802

 
29,539

Current portion of capital lease obligations
23,808

 
25,958

Accrued litigation and other (1)
175,666

 
100,284

Total accrued expenses and other current liabilities
$
367,519

 
$
331,196

(1)
Includes an $82.5 million accrual as of June 30, 2018 related to IBM patent litigation. See Note 9, Commitments and Contingencies, for additional information.
The following table summarizes the Company's other non-current liabilities as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
Contingent income tax liabilities
$
45,326

 
$
43,699

Deferred rent
31,434

 
29,032

Capital lease obligations
12,990

 
18,500

Deferred income taxes
2,841

 
811

Other
10,644

 
10,366

Total other non-current liabilities
$
103,235

 
$
102,408

The following table summarizes the components of accumulated other comprehensive income (loss) as of June 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)
1,238

 
(936
)
 
302

Balance as of June 30, 2018
$
32,200

 
$
107

 
$
32,307

8. FINANCING ARRANGEMENTS
Convertible Senior Notes
On April 4, 2016, the Company 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 the Company's 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, the Company can elect to settle the conversion value in cash, shares of its common stock, or any combination of cash and shares of its 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, the Company 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 Company's common stock of $4.30 as of June 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 the Company 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, the Company may redeem the Notes, at its 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 Company’s exercise of this redemption right.
The Notes are senior unsecured obligations of the Company that rank equal in right of payment to all senior unsecured indebtedness of the Company 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.
The Company has separated the Notes into their liability and equity components in the accompanying condensed consolidated balance sheet. 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 sheet and is not remeasured as long as it continues to meet the conditions for equity classification.
The Company 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 June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
Liability component:
 
 
 
Principal amount
$
250,000

 
$
250,000

Less: debt discount
(54,441
)
 
(60,247
)
Net carrying amount of liability component
$
195,559

 
$
189,753

 
 
 
 
Net carrying amount of equity component
$
67,014

 
$
67,014

The estimated fair value of the Notes as of June 30, 2018 and December 31, 2017 was $273.8 million and $285.6 million, respectively, and was determined using a lattice model. The Company 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 its stock price volatility over the term of the Notes and its cost of debt.
As of June 30, 2018, the remaining term of the Notes is approximately 3.75 years. During the three and six months ended June 30, 2018 and 2017, the Company recognized interest costs on the Notes as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Contractual interest (3.25% of the principal amount per annum)
$
2,032

 
$
2,032

 
$
4,064

 
$
4,064

Amortization of debt discount
2,940

 
2,655

 
5,806

 
5,242

Total
$
4,972

 
$
4,687

 
$
9,870

 
$
9,306

Note Hedges and Warrants
In May 2016, the Company purchased convertible note hedges with respect to its common stock for a cost of $59.1 million from certain bank counterparties. The convertible note hedges provide the Company with the right to purchase up to 46.3 million shares of the Company's 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 by the Company 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, the Company 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 the Company's 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 June 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 the Company’s 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 Company's 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 the Company's 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%. The Company is 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 the Company's and its subsidiaries' tangible and intangible assets, including a pledge of 100% of the outstanding capital stock of substantially all of its direct and indirect domestic subsidiaries and 65% of the shares or equity interests of first-tier foreign subsidiaries and each U.S. entity whose assets substantially consist of capital stock and/or intercompany debt of one or more foreign subsidiaries, subject to certain exceptions. Certain of the Company's domestic subsidiaries are guarantors under the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement contains various customary restrictive covenants that limit the Company's 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 the Company 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. The Company is also required to maintain, as of the last day of each fiscal quarter, unrestricted cash of at least $400.0 million, including $200.0 million in accounts held with lenders under the 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. The Company has the right to terminate the Amended and Restated Credit Agreement or reduce the available commitments at any time.
As of June 30, 2018 and December 31, 2017, the Company had no borrowings and had outstanding letters of credit of $18.6 million and $22.7 million, respectively, under the Amended and Restated Credit Agreement.
9. COMMITMENTS AND CONTINGENCIES
Except for the changes set forth below, the Company's commitments as of June 30, 2018 and through the date these condensed consolidated financial statements were issued did not materially change from the amounts set forth in the Company's 2017 Annual Report on Form 10-K.
Leases
In May 2018, the Company entered into a new office lease for one of its foreign locations. As of June 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
$
1,296

2019
2,592

2020
2,592

2021
2,592

2022
2,592

Thereafter
5,832

Total minimum lease payments
$
17,496

Other Contractual Commitments
In the first quarter 2018, the Company entered into a non-cancelable arrangement for cloud computing services. As of June 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, the Company is party to various legal proceedings incident to the operation of its business. For example, the Company currently is 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 the Company (the "Delaware Action"). In the Delaware Action, IBM alleges that the Company has infringed and continues to willfully infringe certain IBM patents that IBM claims 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 seeks 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 the Company willfully infringed each of these patents and awarded damages of $82.5 million to IBM. The court has the discretion to enhance this award for willfulness, impose interest, impose a continuing royalty for the two unexpired patents or award injunctive relief. The court also has the discretion to reduce or vacate the damages award or enter judgment for the Company on some or all of the claims notwithstanding the jury verdict. The Company intends to seek to overturn the verdict and reduce the damages award through post-trial motions and appeal. For the three months ended June 30, 2018, the Company recorded a $75.0 million charge to increase its contingent liability for this matter. That charge is classified within Selling, general and administrative in the accompanying condensed consolidated statement of operations.
On May 9, 2016, the Company filed a complaint in the United States District Court for the Northern District of Illinois against IBM (the "Illinois Action"). The Company alleges that IBM has infringed and continues to willfully infringe one of the Company’s patents relating to location-based services. The Company intends to seek damages and injunctive relief for IBM’s infringement of this patent. On December 20, 2016, IBM filed a motion to dismiss this case, and the court denied that motion. The court held a Markman hearing on April 3, 2017, but has not yet construed the claims. On May 18, 2017, IBM filed two petitions for inter partes review with the United States Patent and Trademark Office seeking to invalidate the Company’s patent relating to location-based services. The Company filed its preliminary responses on September 6, 2017. The Patent Office denied one petition and instituted a review of the Company’s patent in response to the other petition, but such review did not include all claims requested by IBM. On May 1, 2018, the Patent Office stated that it would institute a review of the claims that were not previously under review based on a recent Supreme Court decision (SAS Institute, Inc. v. Iancu) finding that the Patent Office must institute a review of either all or none of claims petitioners seek to review. A trial date is not yet set in the Illinois Action. The Company plans to vigorously defend against the challenges to the Company’s patent in the Illinois Action.
In addition, other third parties have from time to time claimed, and others may claim in the future, that the Company has infringed their intellectual property rights. The Company is subject to intellectual property disputes, including patent infringement claims, and expects that it will increasingly be subject to intellectual property infringement claims as its services expand in scope and complexity. The Company has in the past litigated such claims, and the Company is presently involved in several patent infringement and other intellectual property-related claims (including the IBM matter described above), including pending litigation or trademark disputes relating to, for example, the Company's Goods category, some of which could involve potentially substantial claims for damages or injunctive relief. 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 often costly to resolve, could require expensive changes in the Company's methods of doing business or the goods it sells, or could require it to enter into costly royalty or licensing agreements.
The Company also is 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 the Company to change its business practices, sometimes in expensive ways.
The Company also is subject to, or in the future may become subject to, a variety of regulatory inquiries, audits, and investigations across the jurisdictions where the Company conducts its 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 the Company, 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 the Company to change its business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm the Company's business.
The Company establishes an accrued liability for loss contingencies related to legal and regulatory matters when the loss is both probable and 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, the Company believes that the amount of reasonably possible losses in excess of the amounts accrued for those matters would not have a material adverse effect on its business, consolidated financial position, results of operations or cash flows. The Company's accrued liabilities for loss contingencies related to legal and regulatory matters may change in the future as a result of new developments, including, but not limited to, the occurrence of new legal matters, changes 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 the Company because of defense and settlement costs, diversion of management resources and other factors.
Indemnifications
In connection with the dispositions of the Company's operations in Latin America (see Note 3Discontinued Operations and Other Business Dispositions), the Company 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. The Company estimates that the total amount of obligations that are reasonably possible to arise under the indemnifications in excess of amounts accrued as of June 30, 2018 is approximately $18.0 million.
In the normal course of business to facilitate transactions related to its operations, the Company indemnifies certain parties, including employees, lessors, service providers, merchants, and counterparties to investment agreements and asset and stock purchase agreements with respect to various matters. The Company has agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or other claims made against those parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. The Company is also subject to increased exposure to various claims as a result of its divestitures and acquisitions, particularly in cases where the Company is entering into new businesses in connection with such acquisitions. The Company may also become more vulnerable to claims as it expands the range and scope of its services and is subject to laws in jurisdictions where the underlying laws with respect to potential liability are either unclear or less favorable. In addition, the Company has entered into indemnification agreements with its officers, directors and underwriters, and the Company's bylaws contain similar indemnification obligations 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 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.


13

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




10. STOCKHOLDERS' EQUITY AND COMPENSATION ARRANGEMENTS
The Company's 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 its common stock. As of June 30, 2018 and December 31, 2017, there were no shares of preferred stock outstanding.
Common Stock
Pursuant to the Company's 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 the Company to repurchase up to $300.0 million of its common stock under a new share repurchase program. The Company's prior share repurchase program expired in April 2018. During the three and six months ended June 30, 2018, the Company 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"), which determines the number of awards to be issued, the corresponding vesting schedule and the exercise price for options. As of June 30, 2018, 52,436,687 shares of common stock were available for future issuance under the Plans.
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 six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Cost of revenue
$
288

 
$
794

 
$
684

 
$
1,457

Marketing
1,763

 
2,230

 
3,557

 
4,032

Selling, general and administrative
14,215

 
18,368

 
31,303

 
35,553

Other income (expense)
52

 
48

 
100

 
99

Total stock-based compensation expense
$
16,318

 
$
21,440

 
$
35,644

 
$
41,141

The Company also capitalized $2.0 million and $1.8 million of stock-based compensation for the three months ended June 30, 2018 and 2017, respectively, and $3.7 million and $3.3 million for the six months ended June 30, 2018 and 2017, respectively, in connection with internally-developed software. As of June 30, 2018, $138.1 million of unrecognized compensation costs related to unvested employee stock awards are expected to be recognized over a remaining weighted-average period of 1.44 years.
Employee Stock Purchase Plan
The Company is authorized to grant up to 10,000,000 shares of common stock under its employee stock purchase plan ("ESPP"). For the six months ended June 30, 2018 and 2017, 746,773 and 877,845 shares of common stock, respectively, were issued under the ESPP.


14

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




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 six months ended June 30, 2018:
 
Restricted Stock Units
 
Weighted-Average Grant Date Fair Value (per unit)
Unvested at December 31, 2017
28,939,110

 
$
4.32

Granted
14,631,563

 
4.76

Vested
(7,507,084
)
 
4.41

Forfeited
(3,202,754
)
 
4.26

Unvested at June 30, 2018
32,860,835

 
4.51

Performance Share Units
The performance share units granted under the Plans vest in shares of the Company's 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 six months ended June 30, 2018, the Company granted performance share units for which the maximum number of common shares issuable upon vesting of those performance share units is 7,706,474 shares, the weighted-average grant date fair value was $4.89 per unit and the total grant date fair value of the shares for which the performance conditions are expected to be met was $16.6 million. During the six months ended June 30, 2018, 278,635 shares of the Company's common stock were issued related to performance share units granted in the previous year following the Compensation Committee's certification of the Company's 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 the Company's primary employee bonus plans exceed targeted bonus amounts because specified financial metrics of the Company exceed the performance conditions set forth in those plans, such excess is required to be settled in the Company's common stock. The Company's 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 six months ended June 30, 2018, 1,240,379 shares of the Company's common stock were issued related to performance bonus awards granted in the previous year following the Compensation Committee's certification of the Company's financial and operational metrics for the year ended December 31, 2017. The fair value of the Company's 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.


15

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




The table below summarizes the stock option activity for the six months ended June 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
(667,743
)
 
0.10

 
 
 
 
Forfeited

 

 
 
 
 
Outstanding and exercisable at June 30, 2018
217,837

 
1.81

 
1.88
 
$
542

(1)
The aggregate intrinsic value of options outstanding and exercisable represents the total pretax intrinsic value (the difference between the fair value of the Company's stock on the last day of each period and the exercise price, multiplied by the number of options where the fair value exceeds the exercise price) that would have been received by the option holders had all option holders exercised their options as of June 30, 2018 and December 31, 2017, respectively.
11. REVENUE RECOGNITION
Product and service revenue are generated from sales transactions through the Company's 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 by the Company 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 the Company's websites and mobile applications. Additionally, in the United States the Company has recently been developing and testing voucherless offerings that are linked to customer credit cards. Customers claim those voucherless merchant offerings through the Company's online marketplaces and earn cash back on their credit card statements when they transact with the related merchants, who pay the Company commissions for such transactions.
In connection with most of our product and service revenue transactions, the Company collects cash from credit card payment processors shortly after a sale occurs. For transactions in which the Company earns commissions when customers make purchases with retailers using digital coupons accessed through its websites and mobile applications, the Company generally collects payment from affiliate networks on terms ranging from 30 to 150 days.
As discussed in Note 1, Description of Business and Basis of Presentation, the Company previously referred to its 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, the Company 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 Company's revised policies, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historical policies. The adoption of Topic 606 did not significantly impact the Company's 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 the Company's online marketplaces until the customer redeems the related voucher. If the customer does not redeem a voucher with such merchant payment terms, the Company retains all of the gross billings for that voucher, rather than retaining only its net commission. Prior to its adoption of Topic 606, the Company recognized that variable consideration from unredeemed vouchers and derecognized the related accrued merchant payables when its legal obligation to the merchant expired, which the Company believes is shortly after the voucher expiration date in most jurisdictions. Following its adoption of Topic 606, the Company estimates the variable consideration from vouchers that will not ultimately be redeemed and recognizes that amount as revenue at the time of sale, rather than when the Company's legal obligation expires.


16

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




The Company estimates variable consideration from unredeemed vouchers using its historical voucher redemption experience. Most vouchers sold through the Company's 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 Company's North America segment did not have variable consideration from unredeemed vouchers in prior periods.
Prior to its adoption of Topic 606, the Company expensed the incremental costs to obtain contracts with third-party merchants, such as sales commissions, as incurred. Following its 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 its adoption of Topic 606, the Company recognized breakage income for unused customer credits when they expired or were forfeited. Following its 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 its adoption of Topic 606, the Company deferred the revenue from hotel reservation offerings until the customer's stay commenced. Following its 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 its adoption of Topic 606, the Company 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 its adoption of Topic 606, those refunds are classified as a reduction of revenue.
Prior to its adoption of Topic 606, the Company classified credits issued to consumers for relationship purposes as a marketing expense. Following its adoption of Topic 606, those credits are classified as a reduction of revenue.
The Company recorded a net reduction to its 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 the Company's 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 the Company's condensed consolidated financial statements as of and for the three and six months ended June 30, 2018 (in thousands):
Condensed Consolidated Balance Sheet
 
June 30, 2018
 
As reported
 
Adjustments
 
Balances without adoption of Topic 606
Total assets
$
1,488,700

 
$
(11,638
)
 
$
1,477,062

Total liabilities
1,217,563

 
86,124

 
1,303,687

Total equity
271,137

 
(97,762
)
 
173,375



17

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




Condensed Consolidated Statements of Operations
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
As reported
 
Adjustments
 
Balances without adoption of Topic 606
 
As reported
 
Adjustments
 
Balances without adoption of Topic 606
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Service revenue (1)(2)
$
295,652

 
$
6,001

 
$
301,653

 
$
597,449

 
$
4,222

 
$
601,671

Product revenue
321,744

 

 
321,744

 
646,487

 

 
646,487

Total revenue
617,396

 
6,001

 
623,397

 
1,243,936

 
4,222

 
1,248,158

Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
Service cost of revenue (3)
30,230

 
7,043

 
37,273

 
61,375

 
13,318

 
74,693

Product cost of revenue
263,508

 

 
263,508

 
534,018

 

 
534,018

Cost of revenue (3)
293,738

 
7,043

 
300,781

 
595,393

 
13,318

 
608,711

Gross profit
323,658

 
(1,042
)
 
322,616

 
648,543

 
(9,096
)
 
639,447

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Marketing (4)
94,178

 
2,134

 
96,312

 
193,334

 
3,707

 
197,041

Selling, general and administrative (5)
294,124

 
(1,227
)
 
292,897

 
516,185

 
(2,491
)
 
513,694

Restructuring charges
(399
)
 

 
(399
)
 
(116
)
 

 
(116
)
Total operating expenses
387,903

 
907

 
388,810

 
709,403

 
1,216

 
710,619

Income (loss) from operations
(64,245
)
 
(1,949
)
 
(66,194
)
 
(60,860
)
 
(10,312
)
 
(71,172
)
Other income (expense), net
(26,457
)
 

 
(26,457
)
 
(34,972
)
 

 
(34,972
)
Income (loss) before provision (benefit) for income taxes
(90,702
)
 
(1,949
)
 
(92,651
)
 
(95,832
)
 
(10,312
)
 
(106,144
)
Provision (benefit) for income taxes (6)
1,552

 
886

 
2,438

 
(783
)
 
(133
)
 
(916
)
Net income (loss)
$
(92,254
)
 
$
(2,835
)
 
$
(95,089
)
 
$
(95,049
)
 
$
(10,179
)
 
$
(105,228
)
(1)
For the three months ended June 30, 2018, reflects a $9.2 million increase for refunds on service revenue transactions for which the merchant's share is not recoverable and customer credits issued for relationship purposes, which are classified as reductions of revenue under Topic 606, and an increase of $0.5 million related to the timing of recognition of revenue from hotel reservation offerings, partially offset by decreases of $2.9 million related to the timing of recognition of variable consideration from unredeemed vouchers and $0.8 million related to the timing of recognition of breakage revenue from customer credits that are not expected to be used.
(2)
For the six months ended June 30, 2018, reflects a $17.0 million increase for refunds on service revenue transactions for which the merchant's share is not recoverable and customer credits issued for relationship purposes, which are classified as reductions of revenue under Topic 606, partially offset by decreases of $8.5 million related to the timing of recognition of variable consideration from unredeemed vouchers, $2.8 million related to the timing of recognition of revenue from hotel reservation offerings and $1.5 million related to the timing of recognition of breakage revenue from customer credits that are not expected to be used.
(3)
Reflects an increase for refunds on service revenue transactions for which the merchant's share is not recoverable, which are classified as a reduction of revenue under Topic 606.
(4)
Reflects an increase for customer credits issued for relationship purposes, which are classified as a reduction of revenue under Topic 606.
(5)
Reflects the amortization of deferred contract acquisition costs in excess of amounts capitalized in the current period.
(6)
As discussed in Note 13, Income Taxes, for the six months ended June 30, 2018, the Company 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.


18

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




Segment and Category Information
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
As reported
 
Adjustments
 
Balances without adoption of Topic 606
 
As reported
 
Adjustments
 
Balances without adoption of Topic 606
North America
 
 
 
 
 
 
 
 
 
 
 
Service revenue:
 
 
 
 
 
 
 
 
 
 
 
Local
$
185,870

 
$
913

 
$
186,783

 
$
373,281

 
$
4,526

 
$
377,807

Goods
3,796

 
95

 
3,891

 
8,670

 
95

 
8,765

Travel
19,888

 
678

 
20,566

 
39,972

 
(2,401
)