Edgar Filing: Groupon, Inc.

Three Months Ended March 31,

Units (in thousands)

Groupon 2013 Q1 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 1-353335

Groupon, Inc.

(Exact name of registrant as specified in its charter)



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

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

312-676-5773

(Registrant's telephone number, including area code)

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

Yes x No

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

Yes x No

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

Large accelerated filer x Accelerated filer

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

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

As of May 7, 2013, there were 659,159,133 shares of the registrant's Class A Common Stock outstanding and 2,399,976 shares of the registrant's Class B Common Stock outstanding.

TABLE OF CONTENTS



PART I. Financial Information	Page
Forward-Looking Statements	3
Item 1. Financial Statements	4
Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 (unaudited)	4
Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited)	5
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2013 and 2012 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)	7
Condensed Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2013 (unaudited)	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures about Market Risk	52
Item 4. Controls and Procedures	53
PART II. Other Information
Item 1. Legal Proceedings	54
Item 1A. Risk Factors	54
Item 2. Unregistered sales of equity securities and use of proceeds	68
Item 6. Exhibits	68
Signatures	69
Exhibits	70

______________________________________________________

PART I. Financial Information

FORWARD‑LOOKING STATEMENTS

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

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

ITEM 1. FINANCIAL STATEMENTS

GROUPON, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



	March 31, 2013			December 31, 2012
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,165,650		$	1,209,289
Accounts receivable, net	102,717			96,713
Deferred income taxes	30,679			31,211
Prepaid expenses and other current assets	132,324			150,573
Total current assets	1,431,370			1,487,786
Property, equipment and software, net of accumulated depreciation and amortization of $60,291 and $46,236, respectively	128,773			121,072
Goodwill	205,466			206,684
Intangible assets, net	36,838			42,597
Investments	97,245			84,209
Deferred income taxes, non-current	29,710			29,916
Other non-current assets	52,855			59,210
Total Assets	$	1,982,257		$	2,031,474
Liabilities and Equity
Current liabilities:
Accounts payable	$	40,898		$	59,865
Accrued merchant and supplier payables	620,485			671,305
Accrued expenses	245,889			246,924
Deferred income taxes	52,875			53,700
Other current liabilities	140,433			136,647
Total current liabilities	1,100,580			1,168,441
Deferred income taxes, non-current	19,917			20,860
Other non-current liabilities	97,791			100,072
Total Liabilities	1,218,288			1,289,373
Commitments and contingencies (see Note 6)
Stockholders' Equity
Class A common stock, par value $0.0001 per share, 2,000,000,000 shares authorized, 657,774,882 and 654,523,706 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively	66			65
Class B common stock, par value $0.0001 per share, 10,000,000 shares authorized, 2,399,976 shares issued and outstanding at March 31, 2013 and December 31, 2012	—			—
Common stock, par value $0.0001 per share, 2,010,000,000 shares authorized, no shares issued and outstanding at March 31, 2013 and December 31, 2012	—			—
Additional paid-in capital	1,508,972			1,485,006
Accumulated deficit	(757,469		)	(753,477		)
Accumulated other comprehensive income	14,787			12,446
Total Groupon, Inc. Stockholders' Equity	766,356			744,040
Noncontrolling interests	(2,387		)	(1,939		)
Total Equity	763,969			742,101
Total Liabilities and Equity	$	1,982,257		$	2,031,474

See Notes to unaudited Condensed Consolidated Financial Statements.

GROUPON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)



	Three Months Ended March 31,
	2013			2012
Revenue:
Third party and other	$	439,108		$	540,053
Direct	162,294			19,230
Total revenue	601,402			559,283
Cost of revenue:
Third party and other	70,016			102,629
Direct	152,377			16,869
Total cost of revenue	222,393			119,498
Gross profit	379,009			439,785
Operating expenses:
Marketing	49,557			116,615
Selling, general and administrative	308,206			283,583
Acquisition-related expense (benefit), net	68			(52		)
Total operating expenses	357,831			400,146
Income from operations	21,178			39,639
Interest and other expense, net	(5,064		)	(3,539		)
Loss on equity method investments	(19		)	(5,128		)
Income before provision for income taxes	16,095			30,972
Provision for income taxes	19,337			34,565
Net loss	(3,242		)	(3,593		)
Less: Net income attributable to noncontrolling interests	(750		)	(880		)
Net loss attributable to Groupon, Inc.	(3,992		)	(4,473		)
Adjustment of redeemable noncontrolling interests to redemption value	—			(7,222		)
Net loss attributable to common stockholders	$	(3,992	)	$	(11,695	)

Net loss per share
Basic	$	(0.01	)	$	(0.02	)
Diluted	$	(0.01	)	$	(0.02	)

Weighted average number of shares outstanding
Basic	658,800,417			644,097,375
Diluted	658,800,417			644,097,375

See Notes to unaudited Condensed Consolidated Financial Statements.

GROUPON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)



	Three Months Ended March 31,
	2013			2012
Net loss	$	(3,242	)	$	(3,593	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments	2,143			1,266
Unrealized gain on available-for-sale debt security	157			—
Other comprehensive income	2,300			1,266
Comprehensive loss	(942		)	(2,327		)
Less: Comprehensive income attributable to noncontrolling interests	(709		)	(880		)
Comprehensive loss attributable to Groupon, Inc.	$	(1,651	)	$	(3,207	)

See Notes to unaudited Condensed Consolidated Financial Statements.

GROUPON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Three Months Ended March 31,
	2013			2012
Operating activities
Net loss	$	(3,242	)	$	(3,593	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	20,700			11,716
Stock-based compensation	29,907			28,003
Deferred income taxes	(258		)	(876		)
Excess tax benefits on stock-based compensation	(832		)	(2,881		)
Loss on equity method investments	19			5,128
Acquisition-related expense (benefit), net	68			(52		)
Change in assets and liabilities, net of acquisitions:
Restricted cash	2,523			(1,357		)
Accounts receivable	(7,684		)	(11,878		)
Prepaid expenses and other current assets	12,527			(4,121		)
Accounts payable	(19,606		)	(1,821		)
Accrued merchant and supplier payables	(39,417		)	46,000
Accrued expenses and other current liabilities	13,302			13,420
Other, net	753			6,026
Net cash provided by operating activities	8,760			83,714
Investing activities
Purchases of property and equipment and capitalized software	(14,468		)	(13,083		)
Acquisitions of businesses, net of acquired cash	(1,169		)	(23,004		)
Purchases of investments	(13,083		)	(3,000		)
Settlement of liability related to purchase of additional interest in consolidated subsidiary	(1,959		)	—
Purchases of additional interests in consolidated subsidiaries	—			(7,347		)
Purchases of intangible assets	—			(10		)
Net cash used in investing activities	(30,679		)	(46,444		)
Financing activities
Excess tax benefits on stock-based compensation	832			2,881
Taxes paid related to net share settlements of stock-based compensation awards	(7,712		)	(6,632		)
Payments of contingent consideration liabilities	—			(4,250		)
Settlements of purchase price obligations related to acquisitions	(2,000		)	—
Proceeds from exercise of stock options	705			378
Partnership distributions to noncontrolling interest holders	(1,065		)	(652		)
Payments of capital lease obligations	(102		)	—
Net cash used in financing activities	(9,342		)	(8,275		)
Effect of exchange rate changes on cash and cash equivalents	(12,378		)	9,059
Net (decrease) increase in cash and cash equivalents	(43,639		)	38,054
Cash and cash equivalents, beginning of period	1,209,289			1,122,935
Cash and cash equivalents, end of period	$	1,165,650		$	1,160,989
Non-cash investing and financing activities
Contingent consideration in connection with acquisitions	$	30		$	421
Equipment acquired under capital lease obligations	$	6,538		$	—
Shares issued to settle liability-classified awards	$	1,131		$	—
Accounts payable and accrued expenses related to purchases of property and equipment and capitalized software	$	2,828		$	3,402

See Notes to unaudited Condensed Consolidated Financial Statements.

GROUPON, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

(unaudited)



	Groupon, Inc. Stockholders' Equity
	Common Stock				Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comp. Income		Total Groupon Inc. Stockholder's Equity			Non-controlling Interests			Total Equity
	Shares		Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comp. Income		Total Groupon Inc. Stockholder's Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2012	656,923,682		$	65	$	1,485,006		$	(753,477	)	$	12,446	$	744,040		$	(1,939	)	$	742,101
Net loss	—		—		—			(3,992		)	—		(3,992		)	750			(3,242		)
Foreign currency translation	—		—		—			—			2,184		2,184			(41		)	2,143
Unrealized gain on available-for-sale debt security, net of tax	—		—		—			—			157		157			—			157
Shares issued to settle liability-classified awards	286,915		—		1,131			—			—		1,131			—			1,131
Exercise of stock options	714,035		—		705			—			—		705			—			705
Vesting of restricted stock units	3,162,803		1		—			—			—		1			—			1
Shares issued under employee stock purchase plan	271,402		—		1,121			—			—		1,121			—			1,121
Tax withholdings related to net share settlements of stock-based compensation awards	(1,183,979	)	—		(6,537		)	—			—		(6,537		)	—			(6,537		)
Stock-based compensation on equity-classified awards	—		—		29,991			—			—		29,991			—			29,991
Excess tax benefits, net of shortfalls, on stock-based compensation	—		—		(2,445		)	—			—		(2,445		)	—			(2,445		)
Partnership distributions to noncontrolling interest holders	—		—		—			—			—		—			(1,157		)	(1,157		)
Balance at March 31, 2013	660,174,858		$	66	$	1,508,972		$	(757,469	)	$	14,787	$	766,356		$	(2,387	)	$	763,969

See Notes to unaudited Condensed Consolidated Financial Statements.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


1.	DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Company Information

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

The Company has organized its operations into two principal segments: North America and International. See Note 11 "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 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, 2013. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on February 27, 2013.

Principles of Consolidation

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

Use of Estimates

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

2. BUSINESS COMBINATIONS

The Company acquired two businesses during the three months ended March 31, 2013. These business combinations were accounted for using the acquisition method, and the results of each of those acquired businesses have been included in the condensed consolidated financial statements beginning on the respective acquisition dates. The fair value of consideration

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

transferred in business combinations is allocated to the tangible and intangible assets acquired and liabilities assumed at the acquisition date, with the remaining unallocated amount recorded as goodwill. The allocations of the purchase price for these acquisitions have been prepared on a preliminary basis, and changes to those allocations may occur as additional information becomes available. Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The Company paid this premium for a number of reasons, including acquiring an experienced workforce. The goodwill is generally not deductible for tax purposes.

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

The primary purpose of the Company's two acquisitions during the three months ended March 31, 2013 was to acquire an experienced workforce and to expand and advance product offerings. The aggregate acquisition-date fair value of the consideration transferred for these acquisitions totaled $1.2 million, which consisted of the following (in thousands):



Fair Value of Consideration Transferred	Fair Value
Cash	$	1,170
Contingent consideration	30
Total	$	1,200

The following table summarizes the allocation of the aggregate purchase price of acquisitions for the three months ended March 31, 2013 (in thousands):



Net working capital (including acquired cash of less than $0.1 million)	$	38
Goodwill	991
Developed technology ⁽¹⁾	171
Total purchase price	$	1,200


(1)	The developed technology acquired intangible assets have estimated useful lives of 1 year.

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

3. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the Company's goodwill activity by segment for the three months ended March 31, 2013 (in thousands):



	North America		International			Consolidated
Balance as of December 31, 2012	$	79,276	$	127,408		$	206,684
Goodwill related to acquisitions	991		—			991
Other adjustments ⁽¹⁾	1,396		(3,605		)	(2,209		)
Balance as of March 31, 2013	$	81,663	$	123,803		$	205,466


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

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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



	As of March 31, 2013
Asset Category	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Subscriber relationships	$	41,216	$	22,936	$	18,280
Merchant relationships	7,997		6,861		1,136
Trade names	6,342		5,899		443
Developed technology	19,942		13,148		6,794
Other intangible assets	15,597		5,412		10,185
Total	$	91,094	$	54,256	$	36,838



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

Amortization of intangible assets is computed using the straight-line method over their estimated useful lives, which range from one to five years. Amortization expense for these intangible assets was $5.6 million and $4.5 million for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, the Company's estimated future amortization expense for these intangible assets is as follows (in thousands):



Remaining amounts in 2013	$	14,846
2014	13,279
2015	7,012
2016	1,690
2017	11
Thereafter	—
	$	36,838

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

4. INVESTMENTS

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



	March 31, 2013		Percent Ownership of Common and Preferred Stock					December 31, 2012		Percent Ownership of Common and Preferred Stock
Cost method investments:
Life Media Limited (F-tuan)	$	77,521	19				%	$	77,521	19				%
Other cost method investments	14,668		6	%	to	19	%	1,867		6	%	to	19	%
Total cost method investments	92,189							79,388
Equity method investments	1,715		21	%	to	50	%	1,734		21	%	to	50	%
Total investments in equity interests	$	93,904						$	81,122
Available-for-sale debt security	3,341							3,087
Total investments	$	97,245						$	84,209

Cost Method Investments

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

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

Available-for-Sale Debt Security

In November 2012, the Company purchased a convertible debt security issued by a nonpublic entity for $3.0 million and has classified the security as available-for-sale. As of March 31, 2013, the amortized cost, gross unrealized gain and fair value of this security were $3.0 million, $0.3 million and $3.3 million, respectively. As of December 31, 2012, the amortized cost, gross unrealized gain and fair value of this security were $3.0 million, $0.1 million and $3.1 million, respectively. The contractual maturity date of the security is November 1, 2015.

Other-Than-Temporary Impairment

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

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

down to fair value with a charge to earnings. Unrealized losses that are determined to be temporary in nature are not recorded for cost method investments and equity method investments, while such losses are recorded, net of tax, in accumulated other comprehensive income for available-for-sale securities.

The Company previously concluded that its cost method investment in F-tuan was other-than-temporarily impaired as of December 31, 2012 and the investment was written down to its fair value of $77.5 million at that time. In April 2013, the Company obtained F-tuan's actual results for the three months ended March 31, 2013, as well as their updated financial projections for future periods. The investee's operating loss for the three months ended March 31, 2013 was higher than forecasted at the time of the December 31, 2012 fair value measurement. This increase was due to lower gross billings and higher operating expenses as compared to its forecast in the prior quarter, while deal margins were substantially consistent with that forecast. Additionally, F-tuan reduced its forecasted revenues and operating income for the remainder of 2013, as compared to its forecast in the prior quarter, but did not reduce its forecasted results for subsequent years. For purposes of measuring the fair value of this investment as of March 31, 2013, the Company applied a discounted cash flow method, which is an income approach, and the resulting value was corroborated by a market approach. The Company used a discount rate of 30%, consistent with the discount rate used in the December 31, 2012 fair value measurement, and used the investee's updated financial projections for the year ending December 31, 2013. However, the Company applied downward adjustments to the investee's financial projections for future years based on our expectations for the investee's future performance and related market conditions. The resulting fair value measurement of the investment in F-tuan as of March 31, 2013 was $71.6 million, a $5.9 million decrease from the $77.5 million fair value measurement as of December 31, 2012.

The other-than-temporary impairment recorded at December 31, 2012 established a new cost basis for the investment in F-tuan. The factors that the Company considered in evaluating whether the $5.9 million unrealized loss as of March 31, 2013 constituted an other-than-temporary impairment included the severity of the impairment (i.e., an unrealized loss equal to 7.6% of the investment's amortized cost), the duration of the impairment of less than three months since the current cost basis was established and the Company's intent to hold the investment for a sufficient period of time to allow for a recovery in fair value. Based on this assessment, which also considered other qualitative factors, the Company concluded that the investment was not other-than-temporarily impaired as of March 31, 2013. However, if the operating performance of the investee deteriorates significantly in future periods or if the investee obtains additional funding at a substantially lower valuation, it may be necessary to recognize an other-than-temporary impairment charge in earnings at that time.

5. SUPPLEMENTAL CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

The following table summarizes the Company's interest and other expense, net for the three months ended March 31, 2013 and 2012 (in thousands):



	Three Months Ended March 31,
	2013			2012
Interest income, net	$	372		$	203
Foreign exchange and other	(5,436		)	(3,742		)
Total interest and other expense, net	$	(5,064	)	$	(3,539	)

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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



	March 31, 2013		December 31, 2012
Current portion of unamortized tax effects on intercompany transactions	$	33,163	$	37,589
Inventories	27,482		39,733
Prepaid expenses	15,886		20,964
Restricted cash	14,059		16,507
VAT and other taxes receivable	17,773		16,439
Prepayments of inventory purchases and other	23,961		19,341
Total prepaid expenses and other current assets	$	132,324	$	150,573

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



	March 31, 2013		December 31, 2012
Marketing	$	10,773	$	11,237
Refunds reserve	59,736		69,209
Payroll and benefits	61,335		61,557
Subscriber credits	54,832		58,977
Professional fees	17,826		16,938
Other	41,387		29,006
Total accrued expenses	$	245,889	$	246,924

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



	March 31, 2013		December 31, 2012
Income taxes payable	$	38,373	$	33,887
VAT and sales tax payable	44,404		55,728
Deferred revenue	36,224		25,780
Other	21,432		21,252
Total other current liabilities	$	140,433	$	136,647

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



	March 31, 2013		December 31, 2012
Long-term tax liabilities	$	77,976	$	77,553
Deferred rent	9,308		9,162
Other	10,507		13,357
Total other non-current liabilities	$	97,791	$	100,072

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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



	March 31, 2013		December 31, 2012
Foreign currency translation adjustments	$	14,577	$	12,393
Unrealized gain on available-for-sale debt security, net of tax	210		53
Accumulated other comprehensive income	$	14,787	$	12,446

6. COMMITMENTS AND CONTINGENCIES

The Company's commitments as of March 31, 2013 did not materially change from the amounts set forth in the Company's 2012 Annual Report on Form 10-K.

Legal Matters

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

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

The Company is currently a defendant in a proceeding pursuant to which, on October 29, 2012, a consolidated amended class action complaint was filed against the Company, certain of its directors and officers, and the underwriters that participated in the initial public offering of the Company's Class A common stock. Originally filed in April 2012, the case is currently pending before the United States District Court for the Northern District of Illinois: In re Groupon, Inc. Securities Litigation. The complaint asserts claims pursuant to Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Allegations in the consolidated amended complaint include that the Company and its officers and directors made untrue statements or omissions of material fact by issuing inaccurate financial statements for the fiscal quarter and the fiscal year ending December 31, 2011 and by failing to disclose information about the Company's financial controls in the registration statement and prospectus for the Company's initial public offering of Class A common stock and in the Company's subsequently-issued financial statements. The putative class action lawsuit seeks an unspecified amount of monetary damages, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief. The defendants filed a motion to dismiss the consolidated amended complaint on January 18, 2013. The lead plaintiff filed his response to the motion to dismiss on March 19, 2013, and defendants filed their reply in support of the motion to dismiss on April 22, 2013. The lead plaintiff recently filed a sur-reply in further opposition to the motion to dismiss, and the Company will be asking the court to consider the Company's brief response to the sur-reply.

In addition, federal and state purported stockholder derivative lawsuits have been filed against certain of the Company's current and former directors and officers. The federal purported stockholder derivative lawsuit was originally filed in April 2012 and a consolidated stockholder derivative complaint, filed on July 30, 2012, is currently pending in the United States District Court for the Northern District of Illinois: In re Groupon Derivative Litigation. Plaintiffs assert claims for breach of fiduciary duty and abuse of control. The state derivative cases are currently pending before the Chancery Division of the Circuit Court of Cook County, Illinois: Orrego v. Lefkofsky, et al., was filed on April 5, 2012; and Kim v. Lefkofsky, et al., was filed on May 25, 2012. The state derivative complaints generally allege that the defendants breached their fiduciary duties by purportedly mismanaging

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

the Company's business by, among other things, failing to utilize proper accounting controls and, in the case of one of the state derivative lawsuits, by engaging in alleged insider trading of the Company's Class A common stock and misappropriating information. In addition, one state derivative case asserts a claim for unjust enrichment. The derivative lawsuits purport to seek to recoup from the Company an unspecified amount of monetary damages allegedly sustained by the Company, restitution from defendants, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief. On June 20, 2012, the Company and the individual defendants filed a motion requesting that the court stay the federal derivative actions pending resolution of the Federal Class Actions. On July 31, 2012, the court granted defendants' motion in part, and stayed the Federal derivative actions pending a separate resolution of upcoming motions to dismiss in the federal class actions. On June 15, 2012, the state plaintiffs filed a motion to consolidate the state derivative actions, which was granted on July 2, 2012, and on July 5, 2012, the plaintiffs filed a motion for appointment of co-lead plaintiffs and co-lead counsel, which was granted on July 27, 2012. No consolidated complaint has been filed in the state derivative action. On September 14, 2012, the court granted a motion filed by the parties requesting that the court stay the state derivative actions pending the federal court's resolution of anticipated motions to dismiss in the federal class actions. On April 18, 2013, the court entered an order appointing a lead plaintiff and approving its selection of lead counsel and local counsel for the purported class.

Two federal putative class action securities complaints were filed in the United States District Court for the Northern District of Illinois: Weber v. Groupon, Inc., et al was filed on December 21, 2012; and Earley v. Groupon, Inc. et al. was filed on January 22, 2013. Both complaints assert claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Allegations in the complaints include that the Company and its officers and directors made untrue statements or omissions of material fact beginning on May 14, 2012, with the Company's press release reporting its first quarter 2012 earnings results, through the Company's November 8, 2012 press release announcing its third quarter 2012 earnings results, and failed to disclose information about the Company's revenue growth and revenue mix. These putative class action lawsuits seek an unspecified amount of monetary damages, reimbursement for fees and costs incurred in connection with the actions, including attorneys' fees, and various other forms of monetary and non-monetary relief.

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

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

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

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

In addition, third parties have from time to time claimed, and others may claim in the future, that the Company has

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

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

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

Indemnifications

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

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

7. STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION

Common Stock

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

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Groupon, Inc. Stock Plans

The Groupon, Inc. Stock Plans (the "Plans") are administered by the Compensation Committee of the Board, which determines the number of awards to be issued, the corresponding vesting schedule and the exercise price for options. As of March 31, 2013, 20,508,543 shares were available for future issuance under the Plans.

The Company recognized stock-based compensation expense of $29.9 million and $28.0 million for the three months ended March 31, 2013 and 2012, respectively, related to stock awards issued under the Plans, acquisition-related awards and subsidiary awards. The Company also capitalized $2.6 million and $1.3 million of stock-based compensation for the three months ended March 31, 2013 and 2012, respectively, in connection with internally-developed software.

Employee Stock Purchase Plan

The Company is authorized to grant up to 10 million shares of common stock under the ESPP. As of March 31, 2013, 271,402 shares of common stock were issued under the ESPP. As of December 31, 2012, no shares of common stock were issued under the ESPP.

Stock Options

The table below summarizes the stock option activity during the three months ended March 31, 2013:



	Options		Weighted- Average Exercise Price	Aggregate Intrinsic Value (in thousands) ⁽¹⁾
Outstanding at December 31, 2012	7,713,421		$1.09	$	29,063
Exercised	(714,035	)	$1.09
Forfeited	(139,896	)	$0.87
Expired	(5,181	)	$2.18
Outstanding at March 31, 2013	6,854,309		$1.10	$	34,429

Exercisable at March 31, 2013	4,886,156		$0.88	$	25,623

(1)

The aggregate intrinsic value of options outstanding and exercisable represents the total pretax intrinsic value (the difference between the fair value of the Company's stock on the last day of each period and the exercise price, multiplied by the number of options where the exercise price exceeds the fair value) that would have been received by the option holders had all option holders exercised their options as of March 31, 2013 and December 31, 2012, respectively.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Restricted Stock Units

The table below summarizes activity regarding unvested restricted stock units under the Plans during the three months ended March 31, 2013:



	Restricted Stock Units		Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2012	29,699,348		$	9.31
Granted	10,644,528		$	5.63
Vested	(3,162,803	)	$	9.15
Forfeited	(1,956,614	)	$	11.43
Unvested at March 31, 2013	35,224,459		$	8.13

Restricted Stock Awards

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

The table below summarizes activity regarding unvested restricted stock during the three months ended March 31, 2013:



	Restricted Stock		Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2012	577,048		$	10.31
Vested	(222,920	)	$	6.82
Unvested at March 31, 2013	354,128		$	12.51

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

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

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

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following tables set forth the computation of basic and diluted loss per share of Class A and Class B common stock for the three months ended March 31, 2013 and 2012 (in thousands, except share amounts and per share amounts):



	Three Months Ended March 31, 2013						Three Months Ended March 31, 2012
	Class A			Class B			Class A			Class B
Basic loss per share:
Numerator
Allocation of net loss	$	(3,231	)	$	(11	)	$	(3,579	)	$	(14	)
Less: Allocation of adjustment of redeemable noncontrolling interests to redemption value	—			—			7,195			27
Less: Allocation of net income attributable to noncontrolling interests	747			3			877			3
Allocation of net loss attributable to common stockholders	$	(3,978	)	$	(14	)	$	(11,651	)	$	(44	)
Denominator
Weighted-average common shares outstanding	656,400,441			2,399,976			641,697,399			2,399,976
Basic loss per share	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)

Diluted loss per share:
Numerator
Allocation of net loss attributable to common stockholders	$	(3,978	)	$	(14	)	$	(11,651	)	$	(44	)
Reallocation of net income (loss) attributable to common stockholders as a result of conversion of Class B ⁽¹⁾	—			—			—			—
Allocation of net loss attributable to common stockholders	$	(3,978	)	$	(14	)	$	(11,651	)	$	(44	)
Denominator
Weighted-average common shares outstanding used in basic computation	656,400,441			2,399,976			641,697,399			2,399,976
Conversion of Class B ⁽¹⁾	—			—			—			—
Employee stock options ⁽¹⁾	—			—			—			—
Restricted shares and RSUs ⁽¹⁾	—			—			—			—
Weighted-average diluted shares outstanding ⁽¹⁾	656,400,441			2,399,976			641,697,399			2,399,976
Diluted loss per share	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)


(1)	Conversion of Class B shares into Class A shares and outstanding equity awards have not been reflected in the diluted loss per share calculation for the three months ended March 31, 2013 and 2012 because the effect would be antidilutive.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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



	Three Months Ended March 31,
	2013	2012
Stock options	6,854,309	17,596,820
Restricted stock units	35,224,459	14,848,854
Restricted stock	354,128	86,758
ESPP shares	568,174	—
Total	43,001,070	32,532,432

9. FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

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

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

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

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

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



			Fair Value Measurement at Reporting Date Using
Description	As of March 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	585,434	$	585,434	$	—	$	—
Available-for-sale debt security	$	3,341	$	—	$	—	$	3,341

Liabilities:
Contingent consideration	$	7,699	$	—	$	—	$	7,699



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

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

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table provides a roll-forward of the fair value of recurring Level 3 fair value measurements for the three months ended March 31, 2013 and 2012 (in thousands):



	Three Months Ended March 31, 2013					Three Months Ended March 31, 2012
	Available-for-Sale Debt Security			Contingent Consideration		Contingent Consideration
Beginning balance	$	3,087		$	7,601	$	11,230
Issuance of contingent consideration in connection with acquisitions	—			30		—
Total gains or losses (realized / unrealized)
Loss included in earnings ⁽¹⁾	—			68		51
Gain included in other comprehensive income	254			—		—
Settlements of contingent consideration liabilities	—			—		(4,250		)
Ending balance	$	3,341		$	7,699	$	7,031

Unrealized (gains) losses still held ⁽²⁾	$	(254	)	$	68	$	—


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


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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets that are written down to fair value as a result of an impairment. The Company did not record any nonrecurring fair value measurements during the three months ended March 31, 2013 and 2012.

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

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



	As of March 31, 2013				As of December 31, 2012
	Carrying Amount		Fair Value		Carrying Amount				Fair Value
Cost method investments:
Life Media Limited (F-tuan)	$	77,521	$	71,639	$	77,521	⁽¹	⁾	$	77,521
Other cost method investments	$	14,668	$	14,765	$	1,867			$	2,260


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

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

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

10. INCOME TAXES

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

For the three months ended March 31, 2013, the Company recorded income tax expense of $19.3 million on pre-tax income of $16.1 million, for an effective tax rate of 120.1%. For the three months ended March 31, 2012, the Company recorded income tax expense of $34.6 million on pre-tax income of $31.0 million, for an effective tax rate of 111.6%.

The Company's U.S. statutory rate is 35%. The most significant drivers of the effective tax rate for the three months ended March 31, 2013 and 2012 were losses in jurisdictions that the Company is not able to benefit due to uncertainty as to the realization of those losses, amortization of the tax effects of intercompany sales of intellectual property and nondeductible stock-based compensation expense.

11. SEGMENT INFORMATION

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

Revenue for each segment is based on the geographic market where the sales are completed. Revenue and profit or loss information by reportable segment reconciled to consolidated net loss for the three months ended March 31, 2013 and 2012 were as follows (in thousands):

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



	Three Months Ended March 31,
	2013			2012
North America
Revenue⁽¹⁾	$	339,554		$	238,565
Segment cost of revenue and operating expenses⁽²⁾	298,188			198,393
Segment operating income ⁽²⁾	41,366			40,172
International
Revenue	261,848			320,718
Segment cost of revenue and operating expenses⁽²⁾	252,061			293,300
Segment operating income ⁽²⁾	9,787			27,418
Consolidated
Revenue	601,402			559,283
Segment cost of revenue and operating expenses⁽²⁾	550,249			491,693
Segment operating income ⁽²⁾	51,153			67,590
Stock-based compensation	29,907			28,003
Acquisition-related expense (benefit), net	68			(52		)
Interest and other expense, net	5,064			3,539
Loss on equity method investments	19			5,128
Income before provision for income taxes	16,095			30,972
Provision for income taxes	19,337			34,565
Net loss	$	(3,242	)	$	(3,593	)


(1)	North America contains revenue from the United States of $326.8 million and $225.2 million for the three months ended March 31, 2013 and 2012, respectively.

(2)

Segment cost of revenue and operating expenses and segment operating income exclude stock-based compensation and acquisition-related expense (benefit), net. This presentation corresponds to the measure of segment profit or loss that the Company's chief operating decision maker uses in assessing segment performance and making resource allocation decisions. For the three months ended March 31, 2013 and 2012, stock-based compensation expense was approximately $22.8 million and $18.2 million respectively, for the North America segment and approximately $7.1 million and $9.8 million, respectively, for the International segment. For the three months ended March 31, 2013 and 2012, acquisition-related expense (benefit), net was less than $0.1 million of expense and $0.2 million of benefit, respectively, for the North America segment and less than $0.1 million of benefit and $0.1 million of expense, respectively, for the International segment. Acquisition-related expense (benefit), net for the North America segment includes gains and losses relating to contingent consideration obligations incurred by U.S. legal entities relating to purchases of businesses that became part of the International segment, which is consistent with the attribution used for internal reporting purposes.

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



	March 31, 2013		December 31, 2012
North America⁽¹⁾	$	1,146,679	$	1,177,314
International	835,578		854,160
Consolidated total assets	$	1,982,257	$	2,031,474


(1)	North America contains assets from the United States of $1,064.5 million and $1,112.6 million at March 31, 2013 and December 31, 2012, respectively. There were no other individual countries located outside of the United States that represented more than 10% of consolidated total assets as of March 31, 2013 or December 31, 2012.

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

Category Information

The Company offers goods and services through three primary categories: Local Deals ("Local"), Groupon Goods ("Goods") and Groupon Getaways ("Travel"). The following table summarizes the Company's third party and other and direct revenue by category for its two reportable segments for the three months ended March 31, 2013 and 2012 (in thousands):



	North America				International				Consolidated
	Three Months Ended March 31,				Three Months Ended March 31,				Three Months Ended March 31,
	2013		2012		2013		2012		2013		2012
Local ⁽¹⁾:
Third party and other	$	171,593	$	191,128	$	155,800	$	213,166	$	327,393	$	404,294
Direct	—		5,299		—		—		—		5,299
Total revenue	171,593		196,427		155,800		213,166		327,393		409,593

Goods:
Third party and other	3,144		24,941		63,937		60,365		67,081		85,306
Direct	148,065		2,282		14,229		7,396		162,294		9,678
Total revenue	151,209		27,223		78,166		67,761		229,375		94,984

Travel and other:
Third party and other	16,752		14,915		27,882		35,538		44,634		50,453
Direct	—		—		—		4,253		—		4,253
Total revenue	16,752		14,915		27,882		39,791		44,634		54,706

Total revenue	$	339,554	$	238,565	$	261,848	$	320,718	$	601,402	$	559,283


(1)	Includes revenue from deals with local merchants, from deals with national merchants, and through local events (i.e., GrouponLive deals).

GROUPON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table summarizes the Company's gross profit by category for its two reportable segments for the three months ended March 31, 2013 and 2012 (in thousands):



	North America				International				Consolidated
	Three Months Ended March 31,				Three Months Ended March 31,				Three Months Ended March 31,
	2013		2012		2013		2012		2013		2012
Local ⁽¹⁾:
Third party and other	$	145,678	$	139,346	$	135,685	$	185,544	$	281,363	$	324,890
Direct	—		636		—		—		—		636
Total gross profit	145,678		139,982		135,685		185,544		281,363		325,526

Goods:
Third party and other	2,669		18,184		46,556		52,543		49,225		70,727
Direct	9,787		274		130		922		9,917		1,196
Total gross profit	12,456		18,458		46,686		53,465		59,142		71,923

Travel and other:
Third party and other	14,222		10,874		24,282		30,933		38,504		41,807
Direct	—		—		—		529		—		529
Total gross profit	14,222		10,874		24,282		31,462		38,504		42,336

Total gross profit	$	172,356	$	169,314	$	206,653	$	270,471	$	379,009	$	439,785


(1)	Includes gross profit from deals with local merchants, from deals with national merchants, and through local events (i.e., GrouponLive deals).

12. RELATED PARTIES

Marketing Services

During 2011, the Company engaged InnerWorkings, Inc. (“InnerWorkings”) to provide marketing services. The Company's Executive Chairman and member of the Office of the Chief Executive, Eric Lefkofsky, is a former director and significant stockholder of InnerWorkings. The Company recognized less than $0.1 million and $0.2 million of expense under its agreement with InnerWorkings for the three months ended March 31, 2013 and 2012, respectively.

Logistics Services

In connection with the Company's expansion of Goods offerings during 2012, the Company entered into a transportation and supply chain management agreement with Echo Global Logistics, Inc. ("Echo"). Three of the Company's directors, Peter Barris, Eric Lefkofsky and Bradley Keywell, either are currently or were previously in 2012 directors of Echo and have direct and/or indirect ownership interests in Echo. Pursuant to the agreement, Echo provided services either related to carrier rate negotiation and management, shipping origin and destination coordination, inventory facility set-up and management and supply chain cost analysis. Echo received payments of approximately $0.1 million for its services under the agreement for the three months ended March 31, 2012, which were expensed by the Company through "Cost of revenue" on the condensed consolidated statements of operations. As the Goods category has expanded, the Company has hired other outside vendors for logistics services and terminated its arrangement with Echo during 2012.

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

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

Overview

Our mission is to be the operating system for local commerce. As part of that vision, we act as a local commerce marketplace that connects merchants to consumers by offering goods and services at a discount. Traditionally, local merchants have tried to reach consumers and generate sales through a variety of methods, including online advertising, the yellow pages, direct mail, newspaper, radio, television, and promotions. By bringing the brick and mortar world of local commerce onto the Internet, Groupon is helping local merchant partners to attract customers and sell goods and services. In our Goods category, through which we offer deals on merchandise, we often act as the merchant of record, particularly on deals in North America. We provide consumers with savings and help them discover what to do, eat, see, buy and where to travel.

Current and potential customers are able to access our deals through email, our website and mobile applications, where we offer discounts on goods, services and travel that are targeted by location, purchase history and personal preferences. Our revenue from deals where we act as the third party marketing agent is the purchase price paid by the customer for a Groupon voucher ("Groupon") less an agreed upon portion of the purchase price paid to the featured merchant partners, excluding any applicable taxes and net of estimated refunds for which the merchant's share is recoverable. Our direct revenue from deals where we act as the merchant of record is the purchase price paid by the customer for the Groupon excluding any applicable taxes and net of estimated refunds. We generated revenue of $601.4 million during the three months ended March 31, 2013, as compared to $559.3 million during the three months ended March 31, 2012.

We have organized our operations into two principal segments: North America, which represents the United States and Canada, and International, which represents the rest of our global operations. For the three months ended March 31, 2013, we derived 43.5% of our revenue from our International segment, compared to 56.5% from our North America segment.

We have an accumulated deficit of $757.5 million as of March 31, 2013. Since our inception, we have driven our growth through substantial investments in infrastructure and marketing to increase customer acquisition. In particular, our significant net losses in previous years were driven in part by the rapid expansion of our International segment, which involved investing heavily in upfront marketing, sales and infrastructure related to the build out of our operations in early stage countries.

How We Measure Our Business

We measure our business with several financial and operating metrics. We use these metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the long‑term performance of our marketplace. Certain of these metrics are reported in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and certain of these metrics are considered non-GAAP financial measures. As our business evolves, we may make changes to our key financial and operating metrics used to measure our business in future periods. For further information and a reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the "Results of Operations" section.

Financial Metrics

•

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

•

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

•

Gross profit. Gross profit reflects the net margin earned after deducting our cost of revenue from our revenue. Due to the lack of comparability between third party revenue, which is presented net of the merchant's share of the transaction price, and direct revenue, which is reported on a gross basis, we believe that gross profit has become an increasingly important measure for evaluating our performance.

•

Operating income (loss) excluding stock-based compensation and acquisition-related expense (benefit), net. Operating income (loss) excluding stock-based compensation and acquisition-related expense (benefit), net is a non-GAAP financial measure that comprises the consolidated total of the segment operating income (loss) of our two segments, North America and International. Stock‑based compensation expense and acquisition‑related expense (benefit), net are excluded from segment operating income (loss) that we report under U.S. GAAP for our segments. Stock-based compensation expense is primarily a non-cash item. Acquisition-related expense (benefit), net represents the change in the fair value of contingent consideration arrangements related to business combinations. We use consolidated operating income (loss) excluding stock-based compensation and acquisition-related expense (benefit), net to allocate resources and evaluate performance internally. For further information and a reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the "Results of Operations" section.

•

Free cash flow. Free cash flow is net cash provided by operating activities less purchases of property and equipment and capitalized software. We use free cash flow, and ratios based on it, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe that it typically represents a more useful measure of cash flows because purchases of fixed assets, software developed for internal-use and website development costs are necessary components of our ongoing operations. Free cash flow is not intended to represent the total increase or decrease in Groupon's cash balance for the applicable period. For further information and a reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the "Results of Operations" section.

The following table presents the above Financial Metrics for the three months ended March 31, 2013 and 2012:



	Three Months Ended March 31,
	2013			2012
	(in thousands)
Gross billings ⁽¹⁾	$	1,407,769		$	1,354,800
Revenue	601,402			559,283
Gross profit	379,009			439,785
Operating income excluding stock-based compensation and acquisition-related expense (benefit), net	51,153			67,590
Free cash flow	(5,708		)	70,631


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

Operating Metrics


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

•

Gross billings per average active customer. This metric represents the trailing twelve months gross billings generated per average active customer. This metric is calculated as the total gross billings generated in the trailing twelve months, divided by the average number of active customers in such time period. Although we believe total gross billings, not trailing twelve months gross billings per average active customer, is a better indication of the overall growth of our marketplace over time, trailing twelve months gross billings per average active customer provides an

opportunity to evaluate whether our growth is primarily driven by growth in total customers or in spend per customer in any given period.


•	Units. This metric represents the number of vouchers and products purchased from us by our customers, before refunds and cancellations. We consider this metric to be an important indicator of the total volume of business conducted through our marketplace.

Our Active customers and Gross billings per average active customer for the trailing twelve months ("TTM") ended March 31, 2013 and 2012 were as follows:



	Trailing twelve months ended March 31,
	2013		2012
TTM Active customers (in thousands)	41,711		36,850
TTM Gross billings per average active customer	$	138.32	$	178.92

Our Units for the three months ended March 31, 2013 and 2012 were as follows:

Factors Affecting Our Performance

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

International operations. Our international operations are critical to our revenue growth and our ability to achieve and maintain profitability. For the three months ended March 31, 2013 and 2012, 43.5% and 57.3%, respectively, of our revenue was generated from our International segment. Operating a global business requires management attention and resources and requires us to localize our services to conform to a wide variety of local cultures, business practices, laws and policies. The different commercial and Internet infrastructure in other countries may make it more difficult for us to replicate our current and future business model. The increase in direct revenue transactions from our Groupon Goods business in North America contributed to the decrease in International revenue as a percentage of our total revenue during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, as direct revenue is presented on a gross basis in our condensed consolidated statements of operations.

Marketing activities. We must continue to acquire and retain customers who purchase Groupons in order to increase revenue and achieve profitability. If consumers do not perceive our Groupon offerings to be attractive, or if we fail to introduce new or more relevant deals, we may not be able to acquire or retain customers.

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

Competitive pressure. Our growth and geographical expansion have drawn a significant amount of attention to our business model. As a result, a substantial number of companies that attempt to replicate our business model have emerged around the world. We expect new competitors to emerge. In addition to such competitors, we expect to increasingly compete against

other large Internet and technology‑based businesses that have launched initiatives which are directly competitive to our core business as well as our other categories and our suite of merchant products, such as payment processing and point of sale. We also expect to compete against other Internet sites that are focused on specific communities or interests and offer coupons or discount arrangements related to such communities or interests.

Components of Results of Operations

Third Party and Other Revenue

Third party revenue arises from transactions in which we are acting as a third party marketing agent and consists of the net amount we retain from the sale of Groupons after paying an agreed upon portion of the purchase price to the featured merchant, excluding any applicable taxes and net of estimated refunds for which the merchant's share is recoverable. Other revenue primarily consists of advertising revenue.

Direct Revenue

Direct revenue arises from transactions, primarily in our Goods category, in which we are the merchant of record and consists of the gross amount we receive from the sale of Groupons, excluding any applicable taxes and net of estimated refunds.

Cost of Revenue

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

Technology costs included in cost of revenue consist of a portion of the payroll and stock‑based compensation expense related to the Company's technology support personnel who are responsible for operating and maintaining the infrastructure of the Company's existing website. Technology costs also include a portion of amortization expense from internal-use software related to website development. Remaining technology costs included within cost of revenue include email distribution costs. Editorial costs consist of payroll and stock‑based compensation expense related to the Company's editorial personnel, as these staff members are primarily dedicated to drafting and promoting deals.

Marketing

Marketing expense consists primarily of targeted online marketing costs, such as sponsored search, advertising on social networking sites, email marketing campaigns, affiliate programs and, to a lesser extent, offline marketing costs such as television, radio and print advertising. Marketing payroll costs, including related stock‑based compensation expense, are also classified as marketing expense. We record these costs within "Marketing" on the condensed consolidated statements of operations when incurred. Our subscriber acquisition and activation marketing activities also include elements that are not presented as "Marketing" on our condensed consolidated statements of operations, such as order discounts, free shipping on merchandise sales and accepting lower margins on our deals. Marketing is the primary method by which we acquire customers, and as such, is a critical part of our growth strategy.

Selling, General and Administrative

Selling expenses reported within "Selling, general and administrative" on the condensed consolidated statements of operations consist of payroll, including related stock-based compensation expense, and sales commissions for inside and outside sales representatives, as well as costs associated with supporting the sales function such as technology, telecommunications and travel. General and administrative expenses consist of payroll, including related stock-based compensation expense, for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources, among others. Additional costs included in general and administrative include customer service and operations, depreciation and amortization expense, rent, professional fees, litigation costs, travel and entertainment, charitable contributions, recruiting, office supplies, maintenance and other general corporate costs.

Acquisition‑Related

Acquisition-related expense (benefit), net, represents the change in the fair value of contingent consideration arrangements related to business combinations. See Note 9 "Fair Value Measurements."

Interest and Other Income (Expense)

Interest and other income (expense), net, primarily consists of interest income on our cash and cash equivalents and foreign currency gains and losses resulting from foreign currency transactions, which are denominated in currencies other than our functional currencies.

Results of Operations

Comparison of the Three Months Ended March 31, 2013 and 2012:



	Three Months Ended March 31,
	2013			2012
	(in thousands)
Revenue:
Third party and other	$	439,108		$	540,053
Direct	162,294			19,230
Total revenue	601,402			559,283
Cost of revenue:
Third party and other	70,016			102,629
Direct	152,377			16,869
Total cost of revenue	222,393			119,498
Gross profit	379,009			439,785
Operating expenses:
Marketing	49,557			116,615
Selling, general and administrative	308,206			283,583
Acquisition-related expense (benefit), net	68			(52		)
Total operating expenses	357,831			400,146
Income from operations	21,178			39,639
Interest and other expense, net	(5,064		)	(3,539		)
Loss on equity method investments	(19		)	(5,128		)
Income before provision for income taxes	16,095			30,972
Provision for income taxes	19,337			34,565
Net loss	(3,242		)	(3,593		)
Less: Net income attributable to noncontrolling interests	(750		)	(880		)
Net loss attributable to Groupon, Inc.	(3,992		)	(4,473		)
Adjustment of redeemable noncontrolling interests to redemption value	—			(7,222		)
Net loss attributable to common stockholders	$	(3,992	)	$	(11,695	)

Classification of stock-based compensation within cost of revenue and operating expenses

Cost of revenue and operating expenses include stock-based compensation as follows:



	Three Months Ended March 31,
	2013				2012
	Statement of Operations line item		Stock-based compensation included in line item		Statement of Operations line item		Stock-based compensation included in line item
	(in thousands)
Total cost of revenue	$	222,393	$	714	$	119,498	$	482

Operating expenses:
Marketing	$	49,557	$	2,261	$	116,615	$	726
Selling, general and administrative