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

FORM 10-Q
FORM 10-QQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______    
Commission file number: File Number: 1-35335

Groupon, Inc.
(Exact name of registrant as specified in its charter)
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) (I.R.S. Employer Identification No.)
   
600 WestW Chicago Avenue Suite 400
Chicago, Illinois
 60654
Suite 400(Zip Code)
Chicago
Illinois(312)334-1579
(Address of principal executive offices) (Zip Code)Registrant's telephone number, including area code)
312-334-1579Securities registered pursuant to Section 12(b) of the Act:
(Registrant's telephone number, including area code)

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.0001 per shareGRPNNASDAQ Global Select Market
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.
Yesx         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).        
Yesx        No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerx                            Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)                             Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes         No  x
As of August 1, 2018,July 26, 2019, there were 568,395,979567,619,924 shares of the registrant's common stock outstanding.






TABLE OF CONTENTS
PART I. Financial InformationPage
Forward-Looking Statements
Item 1. Financial Statements and Supplementary Data
Condensed Consolidated Balance Sheets as of June 30, 20182019 (unaudited) and December 31, 20172018
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 (unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 20182019 and 20172018 (unaudited)
Condensed Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2019 and 2018 (unaudited)
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 20182019 and 20172018 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative DisclosureDisclosures about Market Risk
Item 4. Controls and Procedures
PART II. Other Information 
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered salesSales of equity securitiesEquity Securities and useUse of proceedsProceeds
Item 5. Other Information
Item 6. Exhibits
Signatures








2





PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations. The words "may," "will," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "continue" and other similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, but are not limited to, riskrisks related to volatility in our operating results; execution of our business and marketing strategies; retaining existing customers and adding new customers; challenges arising from our international operations, including fluctuations in currency exchange rates, legal and regulatory developments and any potential adverse impact from the United Kingdom's likely exit from the European Union; retaining and adding high quality merchants; our voucherless offerings; cybersecurity breaches; reliance on cloud-based computing platforms; competing successfully in our industry; changes to merchant payment terms; providing a strong mobile experience for our customers; maintaining and improving our information technology infrastructure; delivery and routing of our emails; claims related to product and service offerings; managing inventory and order fulfillment risks; litigation; managing refund risks; retaining and attracting members of our executive team; completing and realizing the anticipated benefits from acquisitions, dispositions, joint ventures and strategic investments; lack of control over minority investments; tax liabilities; tax legislation; compliance with domestic and foreign laws and regulations, including the CARD Act, GDPR and regulation of the Internet and e-commerce; classification of our independent contractors;contractors or employees; tax liabilities; tax legislation; protecting our intellectual property; maintaining a strong brand; customer and merchant fraud; payment-related risks; our ability to raise capital if necessary and our outstanding indebtedness; global economic uncertainty; our common stock, including volatility in our stock price; our convertible senior notes; our ability to realize the anticipated benefits from the hedge and warrant transactions; and those risks and other factors discussed in Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 20172018, and Part II, Item 1A , Risk Factors of our Quarterly Reportreport on Form 10-Q for the quarter ended March 31, 2018,2019, 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.("SEC"). Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
As used herein, "Groupon," the "Company," "we," "our," "us" and similar terms include Groupon, Inc. and its subsidiaries, unless the context indicates otherwise.




3





ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


GROUPON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
June 30, 2018 December 31, 2017June 30, 2019 December 31, 2018
(unaudited)  (unaudited)  
Assets      
Current assets:      
Cash and cash equivalents$662,893
 $880,129
$596,837
 $841,021
Accounts receivable, net76,302
 98,294
74,706
 69,493
Prepaid expenses and other current assets (including $8,517 and $0 at June 30, 2018 and December 31, 2017, respectively, at fair value)104,524
 94,025
Prepaid expenses and other current assets91,056
 88,115
Total current assets843,719
 1,072,448
762,599
 998,629
Property, equipment and software, net148,450
 151,145
134,672
 143,117
Right-of-use assets - operating leases, net114,500
 
Goodwill328,799
 286,989
324,705
 325,491
Intangible assets, net37,075
 19,196
38,996
 45,401
Investments (including $86,578 and $109,751 at June 30, 2018 and December 31, 2017, respectively, at fair value)109,606
 135,189
Investments39,301
 108,515
Other non-current assets21,051
 12,538
24,435
 20,989
Total Assets$1,488,700
 $1,677,505
$1,439,208
 $1,642,142
Liabilities and Equity      
Current liabilities:      
Accounts payable$23,026
 $31,968
$26,968
 $38,359
Accrued merchant and supplier payables528,224
 770,335
464,125
 651,781
Accrued expenses and other current liabilities367,519
 331,196
258,610
 267,034
Total current liabilities918,769
 1,133,499
749,703
 957,174
Convertible senior notes, net195,559
 189,753
208,100
 201,669
Operating lease obligations121,526
 
Other non-current liabilities103,235
 102,408
53,740
 100,688
Total Liabilities1,217,563
 1,425,660
1,133,069
 1,259,531
Commitments and contingencies (see Note 8)
 
Commitments and contingencies (see Note 7)
 
Stockholders' Equity      
Common stock, par value $0.0001 per share, 2,010,000,000 shares authorized; 755,806,627 shares issued and 567,204,385 shares outstanding at June 30, 2018; 748,541,862 shares issued and 559,939,620 shares outstanding at December 31, 201776
 75
Common stock, par value $0.0001 per share, 2,010,000,000 shares authorized; 767,155,735 shares issued and 566,664,464 shares outstanding at June 30, 2019; 760,939,440 shares issued and 569,084,312 shares outstanding at December 31, 201876
 76
Additional paid-in capital2,206,741
 2,174,708
2,271,600
 2,234,560
Treasury stock, at cost, 188,602,242 shares at June 30, 2018 and December 31, 2017(867,450) (867,450)
Treasury stock, at cost, 200,491,271 and 191,855,128 shares at June 30, 2019 and December 31, 2018(907,599) (877,491)
Accumulated deficit(1,101,342) (1,088,204)(1,093,232) (1,010,499)
Accumulated other comprehensive income (loss)32,307
 31,844
34,485
 34,602
Total Groupon, Inc. Stockholders' Equity270,332
 250,973
305,330
 381,248
Noncontrolling interests805
 872
809
 1,363
Total Equity271,137
 251,845
306,139
 382,611
Total Liabilities and Equity$1,488,700
 $1,677,505
$1,439,208
 $1,642,142
See Notes to Condensed Consolidated Financial Statements.




4





GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 20172019 2018 2019 2018
Revenue:              
Service$295,652
 $315,854
 $597,449
 $617,426
$277,603
 $295,652
 $563,430
 $597,449
Product321,744
 346,765
 646,487
 718,819
254,974
 321,744
 547,557
 646,487
Total revenue617,396
 662,619
 1,243,936
 1,336,245
532,577
 617,396
 1,110,987
 1,243,936
Cost of revenue:              
Service30,230
 38,478
 61,375
 81,351
28,595
 30,230
 57,222
 61,375
Product263,508
 296,074
 534,018
 617,376
211,850
 263,508
 455,617
 534,018
Total cost of revenue293,738
 334,552
 595,393
 698,727
240,445
 293,738
 512,839
 595,393
Gross profit323,658
 328,067
 648,543
 637,518
292,132
 323,658
 598,148
 648,543
Operating expenses:              
Marketing94,178
 100,658
 193,334
 187,000
88,923
 94,178
 182,320
 193,334
Selling, general and administrative294,124
 230,223
 516,185
 462,281
210,348
 293,725
 420,772
 516,069
Restructuring charges(399) 4,584
 (116) 7,315
Total operating expenses387,903
 335,465
 709,403
 656,596
299,271
 387,903
 603,092
 709,403
Income (loss) from operations(64,245) (7,398) (60,860) (19,078)(7,139) (64,245) (4,944) (60,860)
Other income (expense), net(26,457) 5,878
 (34,972) 1,276
(28,494) (26,457) (75,349) (34,972)
Income (loss) from continuing operations before provision (benefit) for income taxes(90,702) (1,520) (95,832) (17,802)(35,633) (90,702) (80,293) (95,832)
Provision (benefit) for income taxes1,552
 3,883
 (783) 8,470
2,012
 1,552
 (1,478) (783)
Income (loss) from continuing operations(92,254) (5,403) (95,049) (26,272)(37,645) (92,254) (78,815) (95,049)
Income (loss) from discontinued operations, net of tax
 (1,376) 
 (889)
 
 2,162
 
Net income (loss)(92,254) (6,779) (95,049) (27,161)(37,645) (92,254) (76,653) (95,049)
Net income attributable to noncontrolling interests(2,780) (2,547) (6,873) (6,579)(2,601) (2,780) (6,080) (6,873)
Net income (loss) attributable to Groupon, Inc.$(95,034) $(9,326) $(101,922) $(33,740)$(40,246) $(95,034) $(82,733) $(101,922)
              
Basic and diluted net income (loss) per share:              
Continuing operations$(0.17) $(0.01) $(0.18) $(0.06)$(0.07) $(0.17) $(0.15) $(0.18)
Discontinued operations0.00
 (0.01) 0.00
 0.00
0.00
 0.00
 0.01
 0.00
Basic and diluted net income (loss) per share$(0.17) $(0.02) $(0.18) $(0.06)$(0.07) $(0.17) $(0.14) $(0.18)
              
Weighted average number of shares outstanding              
Basic565,284,705
 559,762,180
 563,502,954
 560,978,712
567,962,461
 565,284,705
 569,014,065
 563,502,954
Diluted565,284,705
 559,762,180
 563,502,954
 560,978,712
567,962,461
 565,284,705
 569,014,065
 563,502,954
       
Comprehensive income (loss):       
Net income (loss)$(37,645) $(92,254) $(76,653) $(95,049)
Other comprehensive income (loss):       
Other comprehensive income (loss) from continuing operations:       
Net change in unrealized gain (loss) on foreign currency translation adjustments(3,285) 2,806
 (13) 1,238
Net change in unrealized gain (loss) on available-for-sale securities (net of tax effect of ($48) and $0 for the three months ended June 30, 2019 and 2018, and ($35) and $0 for the six months ended June 30, 2019 and 2018)(145) (435) (104) (936)
Other comprehensive income (loss) from continuing operations(3,430) 2,371
 (117) 302
Other comprehensive income (loss) from discontinued operations
 
 
 
Other comprehensive income (loss)(3,430) 2,371
 (117) 302
       
Comprehensive income (loss)(41,075) (89,883) (76,770) (94,747)
Comprehensive income (loss) attributable to noncontrolling interest(2,601) (2,780) (6,080) (6,873)
Comprehensive income (loss) attributable to Groupon, Inc.$(43,676) $(92,663) $(82,850) $(101,620)
See Notes to Condensed Consolidated Financial Statements.




5




GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Income (loss) from continuing operations$(92,254) $(5,403) $(95,049) $(26,272)
Other comprehensive income (loss) from continuing operations:       
Net change in unrealized gain (loss) on foreign currency translation adjustments2,806
 (6,144) 1,238
 (5,714)
Net change in unrealized gain (loss) on defined benefit pension plan
 
 
 585
Available for sale securities:       
Net unrealized gain (loss) during the period(541) (952) (1,042) (713)
Reclassification adjustment for realized (gain) loss on investment included in income (loss) from continuing operations106
 (1,341) 106
 (1,341)
Net change in unrealized gain (loss) on available-for-sale securities (net of tax effect of $0 and $147 for the three months ended June 30, 2018 and 2017, respectively, and $0 and $0 for the six months ended June 30, 2018 and 2017, respectively)(435) (2,293) (936) (2,054)
Other comprehensive income (loss) from continuing operations2,371
 (8,437) 302
 (7,183)
Comprehensive income (loss) from continuing operations(89,883) (13,840) (94,747) (33,455)
        
Income (loss) from discontinued operations
 (1,376) 
 (889)
Other comprehensive income (loss) from discontinued operations - Foreign currency translation adjustments:       
Net unrealized gain (loss) during the period
 
 
 (1,793)
Reclassification adjustment included in net income (loss) from discontinued operations
 
 
 (14,718)
Net change in unrealized gain (loss)
 
 
 (16,511)
Comprehensive income (loss) from discontinued operations
 (1,376) 
 (17,400)
        
Comprehensive income (loss)(89,883) (15,216) (94,747) (50,855)
Comprehensive income (loss) attributable to noncontrolling interests(2,780) (2,547) (6,873) (6,579)
Comprehensive income (loss) attributable to Groupon, Inc.$(92,663) $(17,763) $(101,620) $(57,434)
See Notes to Condensed Consolidated Financial Statements.


6




GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
Groupon, Inc. Stockholders' Equity    Groupon, Inc. Stockholders' Equity    
Common Stock Additional Paid-In Capital Treasury Stock Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Groupon, Inc. Stockholders' Equity Non-controlling Interests Total EquityCommon Stock Additional Paid-In Capital Treasury Stock Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Groupon, Inc. Stockholders' Equity Non-controlling Interests Total Equity
Shares AmountShares Amount Shares AmountShares Amount 
Balance at December 31, 2017748,541,862
 $75
 $2,174,708
 (188,602,242) $(867,450) $(1,088,204) $31,844
 $250,973
 $872
 $251,845
Cumulative effect of change in accounting principle, net of tax
 
 
 
 
 88,945
 
 88,945
 
 88,945
Reclassification for impact of U.S. tax rate change
 
 
 
 
 (161) 161
 
 
 
Balance at December 31, 2018760,939,440
 $76
 $2,234,560
 (191,855,128) $(877,491) $(1,010,499) $34,602
 $381,248
 $1,363
 $382,611
Net income (loss)
 
 
 
 
 (101,922) 
 (101,922) 6,873
 (95,049)
 
 
 
 
 (42,487) 
 (42,487) 3,479
 (39,008)
Foreign currency translation
 
 
 
 
 
 1,238
 1,238
 
 1,238

 
 
 
 
 
 3,272
 3,272
 
 3,272
Unrealized gain (loss) on available-for-sale securities, net of tax
 
 
 
 
 
 (936) (936) 
 (936)
 
 
 
 
 
 41
 41
 
 41
Exercise of stock options667,743
 
 70
 
 
 
 
 70
 
 70
12,500
 
 8
 
 
 
 
 8
 
 8
Vesting of restricted stock units and performance share units7,785,719
 1
 (1) 
 
 
 
 
 
 
4,160,415
 
 
 
 
 
 
 
 
 
Shares issued under employee stock purchase plan746,773
 
 2,434
 
 
 
 
 2,434
 
 2,434
719,297
 
 1,998
 
 
 
 
 1,998
 
 1,998
Shares issued to settle liability-classified awards1,240,379
 
 6,436
 
 
 
 
 6,436
 
 6,436
Tax withholdings related to net share settlements of stock-based compensation awards(3,175,849) 
 (14,499) 
 
 
 
 (14,499) 
 (14,499)(1,585,728) 
 (5,681) 
 
 
 
 (5,681) 
 (5,681)
Purchases of treasury stock
 
 
 (4,407,995) (15,055) 
 
 (15,055) 
 (15,055)
Stock-based compensation on equity-classified awards
 
 37,593
 
 
 
 
 37,593
 
 37,593

 
 17,731
 
 
 
 
 17,731
 
 17,731
Distributions to noncontrolling interest holders
 
 
 
 
 
 
 
 (6,940) (6,940)
 
 
 
 
 
 
 
 (3,521) (3,521)
Balance at June 30, 2018755,806,627
 $76
 $2,206,741
 (188,602,242) $(867,450) $(1,101,342) $32,307
 $270,332
 $805
 $271,137
Balance at March 31, 2019764,245,924
 76
 2,248,616
 (196,263,123) (892,546) (1,052,986) 37,915
 341,075
 1,321
 342,396
Net income (loss)
 
 
 
 
 (40,246) 
 (40,246) 2,601
 (37,645)
Foreign currency translation
 
 
 
 
 
 (3,285) (3,285) 
 (3,285)
Unrealized gain (loss) on available-for-sale securities, net of tax
 
 
 
 
 
 (145) (145) 
 (145)
Exercise of stock options30,000
 
 32
 
 
 
 
 32
 
 32
Vesting of restricted stock units and performance share units4,404,213
 
 
 
 
 
 
 
 
 
Tax withholdings related to net share settlements of stock-based compensation awards(1,524,402) 
 (5,387) 
 
 
 
 (5,387) 
 (5,387)
Purchases of treasury stock
 
 
 (4,228,148) (15,053) 
 
 (15,053) 
 (15,053)
Stock-based compensation on equity-classified awards
 
 28,339
 

 
 
 
 28,339
 
 28,339
Distributions to noncontrolling interest holders
 
 
 
 
 
 
 
 (3,113) (3,113)
Balance at June 30, 2019767,155,735
 $76
 $2,271,600
 (200,491,271) $(907,599) $(1,093,232) $34,485
 $305,330
 $809
 $306,139
See Notes to Condensed Consolidated Financial Statements.




6



GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
 Groupon, Inc. Stockholders' Equity    
 Common Stock Additional Paid-In Capital Treasury Stock Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Groupon, Inc. Stockholders' Equity Non-controlling Interests Total Equity
 Shares AmountShares Amount 
Balance at December 31, 2017748,541,862
 $75
 $2,174,708
 (188,602,242) $(867,450) $(1,088,204) $31,844
 $250,973
 $872
 $251,845
Cumulative effect of change in accounting principle, net of tax
 
 
 
 
 88,945
 
 88,945
 
 88,945
Reclassification for impact of U.S. tax rate change
 
 
 
 
 (161) 161
 
 
 
Net income (loss)
 
 
 
 
 (6,888) 
 (6,888) 4,093
 (2,795)
Foreign currency translation
 
 
 
 
 
 (1,568) (1,568) 
 (1,568)
Unrealized gain (loss) on available-for-sale securities, net of tax
 
 
 
 
 
 (501) (501) 
 (501)
Exercise of stock options2,400
 
 6
 
 
 
 
 6
 
 6
Vesting of restricted stock units and performance share units4,157,462
 
 
 
 
 
 
 
 
 
Shares issued under employee stock purchase plan746,773
 
 2,434
 
 
 
 
 2,434
 
 2,434
Shares issues to settle liability-classified awards1,240,379
 
 6,436
 
 
 
 
 6,436
 
 6,436
Tax withholdings related to net share settlements of stock-based compensation awards(2,024,590) 
 (9,355) 
 
 
 
 (9,355) 
 (9,355)
Stock-based compensation on equity-classified awards
 
 18,240
 
 
 
 
 18,240
 
 18,240
Distributions to noncontrolling interest holders
 
 
 
 
 
 
 
 (3,315) (3,315)
Balance on March 31, 2018752,664,286
 75
 2,192,469
 (188,602,242) (867,450) (1,006,308) 29,936
 348,722
 1,650
 350,372
Net income (loss)
 
 
 
 
 (95,034) 
 (95,034) 2,780
 (92,254)
Foreign currency translation
 
 
 
 
 
 2,806
 2,806
 
 2,806
Unrealized gain (loss) on available-for-sale securities, net of tax
 
 
 
 
 
 (435) (435) 
 (435)
Exercise of stock options665,343
 
 64
 
 
 
 
 64
 
 64
Vesting of restricted stock units and performance share units3,628,257
 1
 (1) 
 
 
 
 
 
 
Tax withholdings related to net share settlements of stock-based compensation awards(1,151,259) 
 (5,144) 
 
 
 
 (5,144) 
 (5,144)
Stock-based compensation on equity-classified awards
 
 19,353
 
 
 
 
 19,353
 
 19,353
Distributions to noncontrolling interest holders
 
 
 
 
 
 
 
 (3,625) (3,625)
Balance at June 30, 2018755,806,627
 $76
 $2,206,741
 (188,602,242) $(867,450) $(1,101,342) $32,307
 $270,332
 $805
 $271,137
See Notes to Condensed Consolidated Financial Statements.


7





GROUPON,GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six Months Ended June 30,
 2018 2017
Operating activities   
Net income (loss)$(95,049) $(27,161)
Less: Income (loss) from discontinued operations, net of tax
 (889)
Income (loss) from continuing operations(95,049) (26,272)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:   
Depreciation and amortization of property, equipment and software52,149
 57,163
Amortization of acquired intangible assets6,466
 11,583
Stock-based compensation35,644
 41,141
Impairments of Investments10,044
 
Deferred income taxes(6,575) 759
(Gain) loss from changes in fair value of investments8,068
 1,145
Amortization of debt discount on convertible senior notes5,806
 5,242
Change in assets and liabilities, net of acquisitions and dispositions:   
Accounts receivable27,296
 16,229
Prepaid expenses and other current assets1,489
 (11,139)
Accounts payable(9,340) (10,723)
Accrued merchant and supplier payables(172,982) (182,954)
Accrued expenses and other current liabilities51,140
 (41,491)
Other, net10,272
 (18,159)
Net cash provided by (used in) operating activities from continuing operations(75,572) (157,476)
Net cash provided by (used in) operating activities from discontinued operations
 (2,195)
Net cash provided by (used in) operating activities(75,572) (159,671)
Investing activities   
Purchases of property and equipment and capitalized software(37,517) (29,461)
Proceeds from maturity of investment
 1,843
Acquisition of business, net of acquired cash(57,821) 
Acquisitions of intangible assets and other investing activities(758) (184)
Net cash provided by (used in) investing activities from continuing operations(96,096) (27,802)
Net cash provided by (used in) investing activities from discontinued operations
 (9,548)
Net cash provided by (used in) investing activities(96,096) (37,350)
Financing activities   
Payments for purchases of treasury stock
 (51,513)
Taxes paid related to net share settlements of stock-based compensation awards(16,138) (15,356)
Proceeds from stock option exercises and employee stock purchase plan2,504
 2,477
Distributions to noncontrolling interest holders(6,940) (6,426)
Payments of capital lease obligations(17,239) (16,670)
Payments of contingent consideration related to acquisitions(1,815) (5,689)
Other financing activities
 (473)
Net cash provided by (used in) financing activities(39,628) (93,650)
Effect of exchange rate changes on cash, cash equivalents and restricted cash, including cash classified within current assets of discontinued operations(6,644) 17,297
Net increase (decrease) in cash, cash equivalents and restricted cash, including cash classified within current assets of discontinued operations(217,940) (273,374)
Less: Net increase (decrease) in cash classified within current assets of discontinued operations
 (28,866)
Net increase (decrease) in cash, cash equivalents and restricted cash(217,940) (244,508)
Cash, cash equivalents and restricted cash, beginning of period885,481
 874,906
Cash, cash equivalents and restricted cash, end of period$667,541
 $630,398
Non-cash investing and financing activities   
Continuing operations:   
Equipment acquired under capital lease obligations$9,581
 $16,509
Leasehold improvements funded by lessor557
 402
Liability for purchases of treasury stock
 561
Increase (decrease) in liabilities related to purchases of property and equipment and capitalized software(789) 539
Investments acquired in connection with business dispositions
 2,022
Contingent consideration liability incurred in connection with acquisition of business1,589
 
Financing obligation incurred in connection with acquisition of business8,604
 
 Six Months Ended June 30,
 2019 2018
Operating activities   
Net income (loss)$(76,653) $(95,049)
Less: Income (loss) from discontinued operations, net of tax2,162
 
Income (loss) from continuing operations(78,815) (95,049)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:   
Depreciation and amortization of property, equipment and software47,861
 52,149
Amortization of acquired intangible assets7,671
 6,466
Stock-based compensation42,974
 35,644
Impairments of investments
 10,044
Deferred income taxes360
 (6,575)
(Gain) loss from changes in fair value of investments68,985
 8,068
Amortization of debt discount on convertible senior notes6,431
 5,806
Change in assets and liabilities, net of acquisitions and dispositions:   
Accounts receivable(5,311) 27,296
Prepaid expenses and other current assets(4,021) 1,489
Accounts payable(10,890) (9,340)
Accrued merchant and supplier payables(186,519) (172,982)
Accrued expenses and other current liabilities(44,696) 51,140
Other, net7,268
 10,272
Net cash provided by (used in) operating activities from continuing operations(148,702) (75,572)
Net cash provided by (used in) operating activities from discontinued operations
 
Net cash provided by (used in) operating activities(148,702) (75,572)
Investing activities   
Purchases of property and equipment and capitalized software(34,161) (37,517)
Acquisition of business, net of acquired cash
 (57,821)
Acquisitions of intangible assets and other investing activities(1,189) (758)
Net cash provided by (used in) investing activities from continuing operations(35,350) (96,096)
Net cash provided by (used in) investing activities from discontinued operations
 
Net cash provided by (used in) investing activities(35,350) (96,096)
Financing activities   
Issuance costs for revolving credit agreement(2,334) 
Payments for purchases of treasury stock(29,569) 
Taxes paid related to net share settlements of stock-based compensation awards(10,231) (16,138)
Proceeds from stock option exercises and employee stock purchase plan2,038
 2,504
Distributions to noncontrolling interest holders(6,634) (6,940)
Payments of finance lease obligations(12,628) (17,239)
Payments of contingent consideration related to acquisitions
 (1,815)
Net cash provided by (used in) financing activities(59,358) (39,628)
Effect of exchange rate changes on cash, cash equivalents and restricted cash, including cash classified within current assets(1,755) (6,644)
Net increase (decrease) in cash, cash equivalents and restricted cash, including cash classified within current assets(245,165) (217,940)
Less: Net increase (decrease) in cash classified within current assets of discontinued operations
 
Net increase (decrease) in cash, cash equivalents and restricted cash(245,165) (217,940)
Cash, cash equivalents and restricted cash, beginning of period844,728
 885,481
Cash, cash equivalents and restricted cash, end of period (1)
$599,563
 $667,541
Non-cash investing and financing activities   
Continuing operations:   
Equipment acquired under capital lease arrangements (2)
$
 $9,581
Leasehold improvements funded by lessor
 557
Liability for purchases of treasury stock(995) 
Increase (decrease) in liabilities related to purchases of property and equipment and capitalized software(767) (789)
Contingent consideration liabilities incurred in connection with acquisition of business
 1,589
Financing obligation incurred in connection with acquisition of business
 8,604


8



GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(1)The following table provides a reconciliation of cash, cash equivalents and restricted cash shown above to amounts reported within the condensed consolidated balance sheet as of June 30, 2019 and December 31, 2018 and amounts previously reported within the condensed consolidated balance sheet in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 (in thousands):
 June 30, 2019 June 30, 2018 December 31, 2018
Cash and cash equivalents$596,837
 $662,893
 $841,021
Restricted cash included in prepaid expenses and other current assets2,340
 4,250
 3,320
Restricted cash included in other non-current assets386
 398
 387
Cash, cash equivalents and restricted cash$599,563
 $667,541
 $844,728

(2)
Please refer to Note 6, Leases, for supplemental cash flow information on our leasing obligations, as required by our adoption of ASU 2016-02, Leases ("Topic 842"), on January 1, 2019.


See Notes to Condensed Consolidated Financial Statements.




89





GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Company Information
Groupon, Inc. and its subsidiaries, (the "Company"), which commenced operations in October 2008, operatesoperate online local commerce marketplaces throughout the world that connect merchants to consumers by offering goods and services, generally at a discount. Customers access those marketplaces through the Company'sour websites, primarily localized groupon.com sites in many countries, and itsour mobile applications.
The Company'sOur operations are organized into two segments: North America and International. See Note 16, 13, Segment Information.
Unaudited Interim Financial Information
The Company hasWe have prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. These condensed consolidated financial statements are unaudited and, in the Company'sour 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 and comprehensive income (loss), cash flows and stockholders' equity for the periods presented. Operating results for the periods presented are not necessarily indicative of the results to be expected for the full year ending December 31, 2018.2019. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes included in the Company'sour Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the SEC on February 14, 2018, as amended by the Form 10-K/A for the year ended December 31, 2017, filed with the SEC on March 23, 2018.12, 2019.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the CompanyGroupon, Inc. 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 exerciseswe exercise control and a variable interest entitiesentity for which the Company haswe have determined that it iswe are the primary beneficiary. In the first quarter of 2019, we extended our arrangement through July 2022 with the strategic partner in the variable interest entity that we consolidate. Outside stockholders' interests in subsidiaries are shown on the condensed consolidated financial statements as Noncontrolling interests. Equity investmentsInvestments in entities in which the Company doeswe do not have a controlling financial interest are accounted for under the equity method, the fair value option, as available-for-sale securities or at cost adjusted for observable price changes and impairments, as appropriate.
Adoption of New Accounting Standards
We adopted the guidance in ASU 2016-02, Leases (Topic 842) on January 1, 2019. This ASU requires the recognition of lease assets and liabilities for operating leases, in addition to the finance lease assets and liabilities historically recorded on our condensed consolidated balance sheets. See Note 6, Leases, for information on the impact of adopting Topic 842 on our accounting policies.
We adopted the guidance in ASU 2018-07, Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, on January 1, 2019. This ASU expands the scope to make the guidance for share-based payment awards to nonemployees consistent with the guidance for share-based payment awards to employees. The adoption of ASU 2018-07 did not have a material impact on the condensed consolidated financial statements.
We adopted the guidance in ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, on January 1, 2019. This ASU requires entities in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40, Internal Use Software, to determine which costs to implement the service contract would be capitalized as an asset related to the service contract and which costs would be expensed. The requirements of ASU 2018-15 have been applied on a prospective basis to implementation costs incurred on or after January 1, 2019. As a result of the adoption of ASU 2018-15, we capitalized $1.9 million and $2.8 million of implementation costs for the three and six months ended June 30, 2019. Those capitalized costs are included within Other non-current assets on the condensed consolidated balance sheet as of June 30, 2019. We have not recognized any amortization related to these implementation costs. We will amortize the implementation costs on a straight-line basis over the term of the associated hosting arrangement for each module or component of the related hosting arrangement when it is ready for its intended use. Amortization costs will be recorded in Selling, general and administrative expense on the condensed consolidated statements of operations.
Reclassifications and Terminology Changes
Certain reclassifications have been made to the condensed consolidated financial statements of prior periods and the accompanying notes to conform to the current period presentation, including the change in presentation of restricted cash in the condensed consolidated statements of cash flows upon adoption of ASU 2016-18. Refer to Note 2, Adoption of New Accounting Standards, for additional information. Additionally, in prior years, the Company referred to its product revenue and service revenue as "direct revenue" and "third-party and other revenue," respectively. This terminology change did not impact the amounts presented in the condensed consolidated financial statements.presentation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenue and expenses, and the related disclosures of contingent liabilities in the condensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, variable consideration from unredeemed vouchers, income taxes, initial valuation and subsequent impairment testing of goodwill and intangible assets, investments, customer refunds, contingent liabilities and the useful lives of property, equipment and software and intangible assets. Actual results could differ materially from those estimates.
2. ADOPTION OF NEW ACCOUNTING STANDARDSGOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted the guidance in ASC Topic 606, Revenue from Contracts with Customers, on January 1, 2018. Topic 606 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. See Changes to Accounting Policies from Adoption of New Accounting Standards below and Note 11, Revenue Recognition, for information on the impact of adopting Topic 606 on the Company's accounting policies.
The Company adopted the guidance in ASU 2016-01, Financial Instruments (Topic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities, as amended, on January 1, 2018. This ASU generally requires equity investments to be measured at fair value with changes in fair value recognized through net income and eliminates the cost method for equity securities. However, for equity investments without readily determinable fair values the ASU permits entities to elect to measure the investments at cost adjusted for observable price changes and impairments, with changes in the measurement recognized through net income. The Company applied that measurement alternative to our equity investments that were previously accounted for under the cost method. The adoption of ASU 2016-01 did not have a material impact on the condensed consolidated financial statements. See Changes to Accounting Policies from Adoption of New Accounting Standards below for additional information on the impact of adopting the ASU on the Company's accounting policies.
The Company adopted the guidance in ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, on January 1, 2018. This ASU requires companies to include amounts generally described as restricted cash and restricted cash equivalents, along with cash and cash equivalents, when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. Previously, changes in restricted cash were reported within cash flows from operating activities. The Company applied that change in cash flow classification on a retrospective basis, which resulted in an increase of $0.5 million to net cash used in operating activitiesfollowing table summarizes goodwill activity by segment for the six months ended June 30, 2017.
Restricted cash primarily represents amounts that the Company is unable to access for operational purposes pursuant to letters of credit with financial institutions. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to amounts shown in the condensed consolidated statements of cash flows, as of June 30, 2018 and 2017 and December 31, 20172019 (in thousands):
 North America International Consolidated
Balance as of December 31, 2018$178,685
 $146,806
 $325,491
Foreign currency translation
 (786) (786)
Balance as of June 30, 2019$178,685
 $146,020
 $324,705
 June 30, 2018 June 30, 2017 December 31, 2017
Cash and cash equivalents$662,893
 $618,550
 $880,129
Restricted cash included in prepaid expenses and other current assets4,250
 6,569
 4,932
Restricted cash included in other non-current assets398
 5,279
 420
Cash, cash equivalents and restricted cash$667,541
 $630,398
 $885,481
The Company adopted the guidance in ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, on January 1, 2018. This ASU is meant to clarify the scope of ASC Subtopic 610-20, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets. The adoption of ASU 2017-05 did not have a material impact on the condensed consolidated financial statements.
The Company adopted the guidance in ASU 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on January 1, 2018. This ASU requires employers to include only the service cost component of net periodic pension cost in operating expenses, together with other employee compensation costs. The other components of net periodic pension cost, including interest cost, expected return on plan assets, amortization of prior service cost and settlement and curtailment effects, are to be included in non-operating expenses. The adoption of ASU 2017-07 did not have a material impact on the condensed consolidated financial statements.
The Company adopted the guidance in ASU 2017-09, Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting, on January 1, 2018. This ASU clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting. The adoption of ASU 2017-09 did not have a material impact on the condensed consolidated financial statements.
The Company adopted the guidance in ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, as of January 1, 2018. This ASU permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Jobs Act"). As a result of the adoption of ASU 2018-02, the Company reclassified $0.2 million from accumulated other comprehensive income (loss) to accumulated deficit.
Changes to Accounting Policies from Adoption of New Accounting Standards
Revenue Recognition
Prior to its adoption of Topic 606, the Company recognized revenue when the following criteria were met: persuasive evidence of an arrangement existed; delivery had occurred; the selling price was fixed or determinable and collection was reasonably assured. Following its adoption of Topic 606, the Company recognizes revenue when it satisfies a performance obligation by transferring a promised good or service to a customer. Substantially all of the Company's performance obligations are satisfied at a point in time rather than over time.
Product Revenue
The Company generates product revenue from direct sales of merchandise inventory through its Goods category. For product revenue transactions, the Company is the primary party responsible for providing the good to the customer, it has inventory risk and it has discretion in establishing prices. As such, product revenue is reported on a gross basis as the purchase price received from the customer. Product revenue, including associated shipping revenue, is recognized when title passes to the customer upon delivery of the product.
Service Revenue
Service revenue is primarily earned from transactions in which the Company earns commissions by selling goods or services on behalf of third-party merchants. Those transactions generally involve a customer's purchase of a voucher through one of the Company's online marketplaces that can be redeemed with a third-party merchant for specified goods or services (or for discounts on specified goods or services). Service revenue from those transactions is reported on a net basis as the purchase price collected from the customer less the portion of the purchase price that is payable to the third-party merchant. The Company recognizes revenue from those transactions when its commission has been earned, which occurs when a sale through one of the Company's online marketplaces is completed and the related voucher has been made available to the customer. The Company believes that its remaining obligations to remit payment to the merchant and to provide information about vouchers sold are administrative activities that are immaterial in the context of the contract with the merchant. Prior to its adoption of Topic 606, the Company deferred the revenue from hotel reservation offerings until the customer's stay commenced. Following its adoption of Topic 606, revenue from hotel reservation offerings is recognized at the time the reservation is made, net of an allowance for estimated cancellations.
The Company also earns commissions when customers make purchases with retailers using digital coupons accessed through its websites and mobile applications and from voucherless merchant offerings in which customers earn cash back on their credit card statements when they transact with third-party merchants. The Company recognizes those commissions as revenue in the period in which the underlying transactions between the customer and the third-party merchant are completed.
Variable Consideration for Unredeemed Vouchers
For merchant agreements with redemption payment terms, the merchant is not paid its share of the sale price for a voucher sold through one of the Company's online marketplaces until the customer redeems the related voucher. If the customer does not redeem a voucher with such merchant payment terms, the Company retains all of the gross billings for that voucher, rather than retaining only its net commission. Prior to its adoption of Topic 606, the Company recognized that variable consideration from unredeemed vouchers and derecognized the related accrued merchant payables when its legal obligation to the merchant expired, which the Company believes is shortly after the voucher expiration date in most jurisdictions. Following its adoption of Topic 606, the Company estimates the variable consideration from vouchers that will not ultimately be redeemed and recognizes that amount as revenue at the time of sale, rather than when the Company's legal obligation expires. The Company estimates variable consideration from unredeemed vouchers using its historical voucher redemption experience. If actual redemptions differ from the Company's estimates, the effects could be material to the condensed consolidated financial statements.
Refunds
Prior to the adoption of Topic 606, refunds were recorded as a reduction of revenue, except for refunds on service revenue transactions for which the merchant's share was not recoverable, which were presented as a cost of revenue. Following the adoption of Topic 606, all refunds are recorded as a reduction of revenue. The liability for estimated refunds is included within Accrued expenses and other current liabilities on the condensed consolidated balance sheets.
The Company estimates its refund reserve using historical refund experience by deal category. The Company assesses the trends that could affect its estimates on an ongoing basis and makes adjustments to the refund reserve calculations if it appears that changes in circumstances, including changes to the Company's refund policies or general economic conditions, may cause future refunds to differ from its initial estimates. If actual refunds differ from the Company's estimates, the effects could be material to the condensed consolidated financial statements.
Discounts, Customer Credits and Other Consideration Payable to Customers
The Company provides discount offers to encourage purchases of goods and services through its online marketplaces. The Company records discounts as a reduction of revenue.
Additionally, the Company issues credits to customers that can be applied to future purchases through its online marketplaces. Credits are primarily issued as consideration for refunds. To a lesser extent, credits are issued for customer relationship purposes. Credits issued to satisfy refund requests are applied as a reduction to the refunds reserve. Prior to the adoption of Topic 606, customer credits issued for relationship purposes were classified in the condensed consolidated statement of operations as a marketing expense. Following the adoption of Topic 606, customer credits issued for relationship purposes are classified as a reduction of revenue.
Prior to its adoption of Topic 606, the Company recognized breakage income for unused customer credits when they expired or were forfeited. Following its adoption of Topic 606, breakage income from customer credits that are not expected to be used is estimated and recognized as revenue in proportion to the pattern of redemption for customer credits that are used.
Sales and Related Taxes
Sales, use, value-added and related taxes that are imposed on specific revenue-generating transactions are presented on a net basis and excluded from revenue.
Costs of Obtaining Contracts
Prior to its adoption of Topic 606, the Company expensed the incremental costs to obtain contracts with third-party merchants, such as sales commissions, as incurred. Following its adoption of Topic 606, those costs are deferred and recognized over the expected period of the merchant arrangement, generally from 12 to 18 months. As of June 30, 2018, the Company had $3.4 million and $11.5 million of deferred contract acquisition costs recorded within Prepaid expenses and other current assets and Other non-current assets, respectively. For the three and six months ended June 30, 2018, the Company amortized $6.5 million and $13.3 million, respectively, of deferred contract acquisition costs and did not recognize any impairment losses in relation to the deferred costs. Those costs are classified within Selling, general and administrative expenses in the condensed consolidated statements of operations.
Cost of Revenue
Cost of revenue is comprised of direct and certain indirect costs incurred to generate revenue. Costs incurred to generate revenue, which include credit card processing fees, editorial costs, compensation expense for technology support personnel who are responsible for maintaining the infrastructure of the Company's websites, amortization of internal-use software relating to customer-facing applications, web hosting and other processing fees are attributed to the cost of service and product revenue in proportion to gross billings during the period. For product revenue transactions, cost of revenue also includes the cost of inventory, shipping and fulfillment costs and inventory markdowns. Fulfillment costs are comprised of third-party logistics provider costs, as well as rent, depreciation, personnel costs and other costs of operating the Company's fulfillment center. Prior to adoption of Topic 606, cost of revenue on service revenue transactions also included refunds for which the merchant's share was not recoverable.
Investments
Prior to the adoption of the guidance in ASU 2016-01, investments in nonmarketable equity shares with no redemption provisions that are not common stock or in-substance common stock or for which the Company does not have the ability to exercise significant influence were accounted for using the cost method of accounting. Those investments are classified within Investments on the condensed consolidated balance sheets. Under the cost method of accounting, investments were carried at cost and adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. Subsequent to the adoption of the guidance in ASU 2016-01, the Company applies a measurement alternative for equity investments without readily determinable fair values that permits entities to elect to measure the investments at cost adjusted for observable price changes and impairments, with changes in the measurement recognized through net income.
Investments in common stock or in-substance common stock for which the Company has the ability to exercise significant influence are accounted for under the equity method, except where the Company has made an irrevocable election to account for the investments at fair value. Those investments are classified within Investments on the condensed consolidated balance sheets. The Company's proportionate share of income or loss on equity method investments and changes in the fair values of investments for which the fair value option has been elected are presented within Other income (expense), net on the condensed consolidated statements of operations.
Investments in convertible debt securities and convertible redeemable preferred shares are accounted for as available-for-sale securities, which are classified within Prepaid expenses and other current assets and Investments on the condensed consolidated balance sheets. Available-for-sale securities are recorded at fair value each reporting period. Unrealized gains and losses, net of the related tax effects, are excluded from earnings and recorded as a separate component within Accumulated other comprehensive income (loss) on the condensed consolidated balance sheets until realized. Interest income from available-for-sale securities is reported within Other income (expense), net on the condensed consolidated statements of operations.
3. DISCONTINUED OPERATIONS AND OTHER BUSINESS DISPOSITIONS
In October 2016, the Company completed a strategic review of its international markets in connection with its efforts to optimize its global footprint and focus on the markets that it believes have the greatest potential to benefit the Company's long-term financial performance. Based on that review, the Company decided to focus its business on 15 core countries and to pursue strategic alternatives for its operations in the remaining 11 countries, which were primarily based in Asia and Latin America. The dispositions of the Company's operations in those 11 countries were completed between November 2016 and March 2017.
A business disposition that represents a strategic shift and has (or will have) a major effect on an entity's operations and financial results is reported as a discontinued operation. The Company determined that the decision reached by its management and Board of Directors to exit those 11 non-core countries, which comprised a substantial majority of its operations outside of North America and EMEA, represented a strategic shift in its business. Additionally, based on its review of quantitative and qualitative factors relevant to the dispositions, the Company determined that the disposition of the businesses in those countries would have a major effect on its operations and financial results. As such, the results of operations and cash flows for its operations in those countries, including the gains and losses on the dispositions and related income tax effects, are presented as discontinued operations in the accompanying condensed consolidated financial statements for the three and six months ended June 30, 2018 and 2017.
Dispositions Completed in 2017
In connection with its strategic initiative to exit non-core countries as discussed above, the Company sold an 83% controlling stake in its subsidiary in Israel and sold its subsidiaries in Argentina, Chile, Colombia, Peru, Mexico, Brazil, Singapore and Hong Kong during the first quarter 2017. The Company recognized a net pretax loss on those dispositions of $1.3 million, which consisted of the following (in thousands):
Net consideration received: 
Fair value of minority investments retained or acquired$2,021
Cash proceeds received3,462
Cash proceeds receivable2,000
Less: transaction costs1,394
Total net consideration received6,089
Cumulative translation gain reclassified to earnings14,718
Less: Net book value upon closing of the transactions14,596
Less: Indemnification liabilities (1)
5,365
Less: Unfavorable contract liability for transition services2,114
Loss on dispositions$(1,268)
(1)
See Note 9, Commitments and Contingencies, for additional information about the indemnification liabilities.
Results of Discontinued Operations
The following table summarizes the major classesintangible assets as of line items included in income (loss) from discontinued operations, net of tax, for the three and six months ended June 30, 20172019 and December 31, 2018 (in thousands):
 June 30, 2019 December 31, 2018
Asset CategoryGross Carrying Value Accumulated Amortization Net Carrying Value Gross Carrying Value Accumulated Amortization Net Carrying Value
Customer relationships$16,200
 $14,400
 $1,800
 $16,200
 $11,700
 $4,500
Merchant relationships21,486
 6,157
 15,329
 21,554
 4,105
 17,449
Trade names9,467
 7,074
 2,393
 9,476
 6,799
 2,677
Developed technology13,813
 13,601
 212
 13,825
 13,485
 340
Patents21,744
 17,254
 4,490
 20,508
 16,451
 4,057
Other intangible assets26,091
 11,319
 14,772
 26,007
 9,629
 16,378
Total$108,801
 $69,805
 $38,996
 $107,570
 $62,169
 $45,401

 
Three Months Ended June 30, 2017 (1)
 
Six Months Ended June 30, 2017 (2)
Service revenue$
 $12,602
Product revenue
 2,962
Service cost of revenue
 (2,557)
Product cost of revenue
 (3,098)
Marketing expense
 (1,239)
Selling, general and administrative expense(1,376) (11,284)
Restructuring
 (778)
Other income, net
 3,852
Income (loss) from discontinued operations before loss on dispositions and provision for income taxes(1,376) 460
Loss on dispositions
 (1,268)
Provision for income taxes
 (81)
Income (loss) from discontinued operations, net of tax$(1,376) $(889)
(1)
Selling, general and administrative expenses from discontinued operations for the three months ended June 30, 2017 primarily related to increases to contingent liabilities under indemnification agreements. See Note 9, Commitments and Contingencies, for information about indemnification obligations related to discontinued operations.
(2)The income (loss) from discontinued operations before loss on dispositions and provision for income taxes for the six months ended June 30, 2017 includes the results of each business through its respective disposition date.




910

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




4. BUSINESS COMBINATIONS
On April 30, 2018, the Company acquired 80% of the outstanding shares of Cloud Savings Company, Ltd. ("Cloud Savings"), a UK-based business that operates online discount code and digital gift card platforms. The primary purpose of this acquisition was to expand digital coupon offerings in the Company's international segment. Concurrent with the acquisition, the Company entered into an agreement with the noncontrolling shareholder giving the Company the right to acquire the remaining outstanding shares of Cloud Savings for $8.9 million in December 2018. Additionally, the noncontrolling shareholder has the right to require the Company to purchase its shares in December 2018 for that same amount. The rights and obligations to acquire the remaining outstanding shares were recorded as a financing obligation at its acquisition-date fair value of $8.6 million and is classified within Accrued expenses and other current liabilities on the condensed consolidated balance sheets. The transaction also included a contingent consideration arrangement with an acquisition-date fair value of $1.6 million. The aggregate acquisition-date fair value of the consideration transferred for the Cloud Savings acquisition totaled $74.3 million, which consisted of the following (in thousands):
Cash$64,065
Financing obligation 
8,604
Contingent consideration1,589
Total$74,258
The results of the Cloud Savings acquisition are included in the condensed consolidated financial statements from the date of acquisition through June 30, 2018. The fair value of consideration transferred in the business combination is allocated to the tangible and intangible assets acquired and liabilities assumed at the acquisition date, with the remaining unallocated amount recorded as goodwill. Acquired goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The Company paid a premium for a number of reasons, including growing the Company's merchant base and acquiring an assembled workforce. The goodwill from this business combination is not deductible for tax purposes. The allocation of the acquisition price has been prepared on a preliminary basis, and changes to that allocation may occur as a result of final working capital adjustments and tax return filings.
The following table summarizes the allocation of the aggregate acquisition price of the Cloud Savings acquisition (in thousands):
Cash and cash equivalents$6,244
Accounts receivable5,885
Prepaid expenses and other current assets804
Property, equipment and software226
Goodwill46,217
Intangible assets (1) :
 
Merchant relationships20,322
Trade names2,609
Developed technology549
Other intangible assets687
Total assets acquired$83,543
Accounts payable$693
Accrued merchant and supplier payables386
Accrued expenses and other current liabilities6,130
Other non-current liabilities2,076
Total liabilities assumed$9,285
Total acquisition price$74,258
(1)The estimated useful lives of the acquired intangible assets are 6 years for merchant relationships, 8 years for trade names, 2 years for developed technology, and 1 year for other intangible assets.
For the three and six months ended June 30, 2018, $0.7 million of external transaction costs related to that business combination, primarily consisting of legal and advisory fees, are classified within Selling, general and administrative on the condensed consolidated statements of operations.
The revenue and net loss of Cloud Savings included in the Company's condensed consolidated statements of operations were $3.0 million and $0.1 million, respectively, for the period from April 30, 2018 through June 30, 2018. Pro forma results of operations for the Cloud Savings acquisition are not presented as the pro forma effects of that acquisition were not material to the Company's condensed consolidated results of operations.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the Company's goodwill activity by segment for the six months ended June 30, 2018 (in thousands):
 North America International Consolidated
Balance as of December 31, 2017$178,685
 $108,304
 $286,989
Goodwill related to acquisition
 46,217
 46,217
Foreign currency translation
 (4,407) (4,407)
Balance as of June 30, 2018$178,685
 $150,114
 $328,799
The following table summarizes the Company's intangible assets as of June 30, 2018 and December 31, 2017 (in thousands):
 June 30, 2018 December 31, 2017
Asset CategoryGross Carrying Value Accumulated Amortization Net Carrying Value Gross Carrying Value Accumulated Amortization Net Carrying Value
Customer relationships$55,952
 $48,695
 $7,257
 $56,749
 $46,513
 $10,236
Merchant relationships30,969
 10,778
 20,191
 11,598
 9,853
 1,745
Trade names14,456
 10,965
 3,491
 12,077
 10,469
 1,608
Developed technology37,151
 36,667
 484
 36,864
 36,864
 
Patents20,132
 15,895
 4,237
 19,031
 15,204
 3,827
Other intangible assets11,342
 9,927
 1,415
 10,875
 9,095
 1,780
Total$170,002
 $132,927
 $37,075
 $147,194
 $127,998
 $19,196

Amortization of intangible assets is computed using the straight-line method over their estimated useful lives, which range from 1 to 810 years. Amortization expense related to intangible assets was $3.5$3.8 million and $6.2$3.5 million for the three months ended June 30, 2019 and 2018, and 2017, respectively,$7.7 million and $6.4 million and $11.6 million for the six months ended June 30, 20182019 and 2017, respectively.2018. As of June 30, 2018, the Company's2019, estimated future amortization expense related to intangible assets is as follows (in thousands):
Remaining amounts in 2019$6,384
20207,780
20217,046
20226,730
20235,582
Thereafter5,474
Total$38,996

Remaining amounts in 2018$7,446
201911,025
20205,120
20214,393
20224,077
Thereafter5,014
Total$37,075


10

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




6.3. INVESTMENTS
The following table summarizes the Company's investments as of June 30, 20182019 and December 31, 20172018 (dollars in thousands):
 June 30, 2019 Percent Ownership of Voting Stock December 31, 2018 Percent Ownership of Voting Stock
Available-for-sale securities - redeemable preferred shares$10,201
 19%to25% $10,340
 19%to25%
Fair value option investments4,917
 10%to19% 73,902
 10%to19%
Other equity investments24,183
 1%to19% 24,273
 1%to19%
Total investments$39,301
     $108,515
    

 June 30, 2018 Percent Ownership of Voting Stock December 31, 2017 Percent Ownership of Voting Stock
Current (1):
       
Available-for-sale securities:       
Convertible debt securities$8,517
   $
  
Non-current (1):
       
Available-for-sale securities:       
Convertible debt securities$1,719
   $11,354
  
Redeemable preferred shares9,961
 19%to25% 15,431
 19%to25%
Total available-for-sale securities11,680
   26,785
  
Fair value option investments74,898
 10%to19% 82,966
 10%to19%
Other equity investments (2)
23,028
 1%to19% 25,438
 1%to19%
Total non-current investments$109,606
   $135,189
  
Total investments$118,123
     $135,189
    
Available-for-Sale Securities - Redeemable Preferred Shares
(1)Current and non-current investments are classified within Prepaid expenses and other current assets and Investments, respectively, on the condensed consolidated balance sheets.
(2)
Represents equity investments without readily determinable fair values. Those investments were previously accounted for using the cost method of accounting. Under the cost method, investments were carried at cost and adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. The Company adopted the guidance in ASU 2016-01 on January 1, 2018. Under that guidance, the Company has elected to record equity investments without readily determinable fair values at cost adjusted for observable price changes and impairments. There were no adjustments for observable price changes related to these investments for the three and six months ended June 30, 2018. See further discussion under Impairments of Investments below.
The following table summarizes the amortized cost, gross unrealized gain, gross unrealized loss and fair value of the Company's available-for-sale securitiesredeemable preferred shares as of June 30, 20182019 and December 31, 20172018 (in thousands):
 June 30, 2019 December 31, 2018
Amortized cost$9,961
 $9,961
Gross unrealized gain (loss)240
 379
Fair value$10,201
 $10,340

 June 30, 2018 December 31, 2017
 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value Amortized Cost Gross Unrealized Gain 
Gross Unrealized Loss (1)
 Fair Value
Available-for-sale securities:               
Convertible debt securities$10,129
 $107
 $
 $10,236
 $10,205
 $1,653
 $(504) $11,354
Redeemable preferred shares9,961
 
 
 9,961
 15,431
 
 
 15,431
Total available-for-sale securities$20,090
 $107
 $
 $20,197
 $25,636
 $1,653
 $(504) $26,785
(1)Gross unrealized loss is related to one security that was in a loss position for greater than 12 months as of December 31, 2017.
Fair Value Option Investments    
In connection with the dispositions of controlling stakes in Ticket Monster, an entity based in the Republic of Korea, in May 2015 and Groupon India in August 2015, the Company obtained minority investments in Monster Holdings LP ("Monster LP") and in Nearbuy Pte Ltd. ("Nearbuy"), respectively. The Company has made an irrevocable election to account for both of those investments at fair value with changes in fair value reported in earnings. The Company elected to apply fair value accounting to those investments because it believes that fair value is the most relevant measurement attribute for those investments, as well as to reduce operational and accounting complexity. The Company determined that the fair value of its investments in Monster LP and Nearbuy were $70.6 million and $4.3 million, respectively, as of June 30, 2018 and $78.9 million and $4.0 million, respectively, as of December 31, 2017.


11

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




The following table summarizes the Company’s gains and losses due to changes in fair value of those investments for the three and six months ended June 30, 2018 and 2017 (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Monster LP$(3,054) $(77) $(8,285) $2,276
Nearbuy19
 (1,371) 217
 (3,421)
Total$(3,035) $(1,448) $(8,068) $(1,145)
Impairments of Investments
The CompanyWe recorded other-than-temporary impairments of available-for-sale securities of $4.6 million and $5.4 million for the three and six months ended June 30, 2018, respectively. The Company also recorded a $4.6 million impairment of an other equity investment for the three and six months ended June 30, 2018. Those impairments are classified within Other income (expense), net on the condensed consolidated statements of operations. There were no impairments of available-for-sale securities for the three and six months ended June 30, 2019.


11

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

Fair Value Option Investments    
In connection with the dispositions of controlling stakes in TMON Inc. ("TMON"), an entity based in the Republic of Korea, in May 2015 and Groupon India in August 2015, we obtained minority investments in Monster Holdings LP ("Monster LP") and in Nearbuy Pte Ltd. ("Nearbuy"), respectively. We have made an irrevocable election to account for both of those investments at fair value with changes in fair value reported in earnings. We elected to apply fair value accounting to those investments because we believe that fair value is the most relevant measurement attribute for those investments, and to reduce operational and accounting complexity. Our election to apply fair value accounting to those investments has and may continue to cause fluctuations in our earnings from period to period.
We determined that the fair value of our investments in Monster LP and Nearbuy were $0.0 million and $4.9 million, respectively, as of June 30, 2019 and $69.4 million and $4.5 million, respectively, as of December 31, 2018.The following table summarizes gains and losses due to changes in fair value of those investments for the three and six months ended June 30, 2019 and 2018 (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Monster LP$(27,949) $(3,054) $(69,408) $(8,285)
Nearbuy372
 19
 423
 217
Total$(27,577) $(3,035) $(68,985) $(8,068)

During the first quarter 2019, we recognized a $41.5 million loss from changes in the fair value of our investment in Monster LP due to the revised cash flow projections provided by TMON in March 2019 and an increase in the discount rate applied to those forecasts, which increased to 26.0% as of March 31, 2019, as compared with 21.0% as of December 31, 2018. The increase in the discount rate applied as of March 31, 2019 was due to the deterioration in the financial condition of TMON and the competitive environment in the Korean e-commerce industry, which resulted in an increase to financial projection risk. During the second quarter 2019, we recognized an additional loss of $27.9 million from changes in the fair value of our investment in Monster LP due to revised financial projections provided by TMON in June 2019. The revisions to the financial projections were made as a result of TMON’s continued underperformance as compared with prior projections along with adjustments to their business model.
The following table summarizes the condensed financial information for Monster LP for the three and six months ended June 30, 2019 and 2018 (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Revenue$131,816
 $84,525
 $252,016
 $171,384
Gross profit9,542
 6,574
 17,407
 13,811
Loss before income taxes(31,253) (35,447) (60,324) (68,867)
Net loss(31,253) (35,447) (60,324) (68,867)
Other Equity Investments
Other equity investments represents equity investments without readily determinable fair values. We have elected to record equity investments without readily determinable fair values at cost adjusted for observable price changes and impairments. We recorded a $4.6 million impairment of an other equity investment for the three and six months ended June 30, 2018. That impairment is classified within Other income (expense), net on the condensed consolidated statements of operations. There were no other adjustments for observable price changes related to these investments since our adoption of ASU 2016-01, Financial Instruments (Topic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities, on January 1, 2018.


12

7.
GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

4. SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS INFORMATION
The following table summarizes the Company's other income (expense), net for the three and six months ended June 30, 20182019 and 20172018 (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Interest income$1,915
 $1,836
 $3,851
 $3,345
Interest expense(5,442) (5,228) (11,133) (10,721)
Changes in fair value of investments(27,577) (3,035) (68,985) (8,068)
Foreign currency gains (losses), net2,609
 (12,533) 930
 (11,135)
Impairments of investments
 (9,189) 
 (10,044)
Other1
 1,692
 (12) 1,651
Other income (expense), net$(28,494) $(26,457) $(75,349) $(34,972)
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Interest income$1,836
 $659
 $3,345
 $1,261
Interest expense(5,228) (4,948) (10,721) (10,267)
Gains (losses), net on changes in fair value of investments(3,035) (1,448) (8,068) (1,145)
Foreign currency gains (losses), net(12,533) 10,826
 (11,135) 10,877
Impairments of investments(9,189) 
 (10,044) 
Other1,692
 789
 1,651
 550
Other income (expense), net$(26,457) $5,878
 $(34,972) $1,276

The following table summarizes the Company's prepaid expenses and other current assets as of June 30, 20182019 and December 31, 20172018 (in thousands):
 June 30, 2019 December 31, 2018
Merchandise inventories$29,235
 $33,739
Prepaid expenses32,414
 28,209
Income taxes receivable6,693
 6,717
Other22,714
 19,450
Total prepaid expenses and other current assets$91,056
 $88,115
 June 30, 2018 December 31, 2017
Merchandise inventories$28,307
 $25,528
Prepaid expenses38,519
 40,399
Income taxes receivable9,565
 10,299
Investments8,517
 
Other19,616
 17,799
Total prepaid expenses and other current assets$104,524
 $94,025

The following table summarizes the Company's accrued merchant and supplier payables as of June 30, 20182019 and December 31, 20172018 (in thousands):
June 30, 2018 December 31, 2017June 30, 2019 December 31, 2018
Accrued merchant payables$377,097
 $459,662
$333,441
 $371,279
Accrued supplier payables (1)
151,127
 310,673
130,684
 280,502
Total accrued merchant and supplier payables$528,224
 $770,335
$464,125
 $651,781
(1)Amounts include payables to suppliers of inventories and providers of shipping and fulfillment services.




1213

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





The following table summarizes the Company's accrued expenses and other current liabilities as of June 30, 20182019 and December 31, 20172018 (in thousands):
 June 30, 2019 December 31, 2018
Refunds reserve$19,812
 $27,957
Compensation and benefits56,600
 56,173
Accrued marketing29,227
 39,094
Customer credits17,516
 15,118
Income taxes payable5,320
 8,987
Deferred revenue19,949
 25,452
Current portion of lease obligations (1)
43,033
 17,207
Other67,153
 77,046
Total accrued expenses and other current liabilities$258,610
 $267,034
 June 30, 2018 December 31, 2017
Refunds reserve$30,355
 $31,275
Compensation and benefits55,827
 73,096
Accrued marketing29,297
 32,912
Customer credits18,316
 28,487
Income taxes payable12,448
 9,645
Deferred revenue21,802
 29,539
Current portion of capital lease obligations23,808
 25,958
Accrued litigation and other (1)
175,666
 100,284
Total accrued expenses and other current liabilities$367,519
 $331,196

(1)
Includes an $82.5 million accrualCurrent portion of lease obligations as of June 30, 2018 related2019 includes $25.0 million of additional lease obligations that were recognized on January 1, 2019 as a result of the adoption of Topic 842. Refer to IBM patent litigation. See Note 9, Commitments and Contingencies,6, Leases, for additional information.
The following table summarizes the Company's other non-current liabilities as of June 30, 20182019 and December 31, 20172018 (in thousands):
 June 30, 2019 December 31, 2018
Contingent income tax liabilities$32,756
 $39,858
Deferred rent (1)

 32,186
Deferred income taxes4,164
 6,619
Other16,820
 22,025
Total other non-current liabilities$53,740
 $100,688

 June 30, 2018 December 31, 2017
Contingent income tax liabilities$45,326
 $43,699
Deferred rent31,434
 29,032
Capital lease obligations12,990
 18,500
Deferred income taxes2,841
 811
Other10,644
 10,366
Total other non-current liabilities$103,235
 $102,408
The following table summarizes the components of accumulated other comprehensive income (loss) as of June 30, 2018 and December 31, 2017 (in thousands):
 Foreign currency translation adjustments Unrealized gain (loss) on available-for-sale securities Total
Balance as of December 31, 2017$30,962
 $882
 $31,844
Reclassification for impact of U.S. tax rate change
 161
 161
Other comprehensive income (loss)1,238
 (936) 302
Balance as of June 30, 2018$32,200
 $107
 $32,307
(1)
Non-current operating lease liabilities as of June 30, 2019 are included within Operating lease obligations on the condensed consolidated balance sheet as a result of the adoption of Topic 842 on January 1, 2019. Refer to Note 6, Leases, for additional information.
8.5. FINANCING ARRANGEMENTS
Convertible Senior Notes
On April 4, 2016, the Companywe issued $250.0 million in aggregate principal amount of convertible senior notes (the "Notes") in a private placement to A-G Holdings, L.P. ("AGH"). Michael Angelakis, the chairman and chief executive officer of Atairos Group, Inc. ("Atairos"), joined the Company'sour Board of Directors (the "Board") in connection with the issuance of the Notes. Atairos controls the voting power of AGH. The net proceeds from this offering were $243.2 million after deducting issuance costs. The Notes bear interest at a rate of 3.25% per annum, payable annually in arrears on April 1 of each year, beginning on April 1, 2017. The Notes will mature on April 1, 2022, subject to earlier conversion or redemption.
Each $1,000 of principal amount of the Notes initially is convertible into 185.1852 shares of common stock, which is equivalent to an initial conversion price of $5.40 per share, subject to adjustment upon the occurrence of specified events. Upon conversion, the Companywe can elect to settle the conversion value in cash, shares of itsour common stock, or any combination of cash and shares of itsour common stock. Holders of the Notes may convert their Notes at their option at any time until the close of business on the scheduled trading day immediately preceding the maturity date. In addition, if specified corporate events occur prior to the maturity date, the Companywe may be required to increase the conversion rate for holders who elect to convert based on the effective date of such event and the applicable stock price attributable to the event, as set forth in a table contained in the indenture governing the Notes (the "Indenture"). Based on the closing price of the Company's common stock of $4.30$3.58 as of June 30, 2018,2019, the if-converted value of the Notes was less than the principal amount.
With certain exceptions, upon a fundamental change (as defined in the Indenture), the holders of the Notes may require the Companyus to repurchase all or a portion of their Notes for cash at a purchase price equal to the principal amount plus accrued and unpaid interest. In addition, the Companywe may redeem the Notes, at itsour option, at a purchase price equal to the principal amount plus accrued and unpaid interest on or after April 1, 2020, if the closing sale price of the common stock exceeds 150% of the then-current conversion price for 20 or more trading days in the 30 consecutive trading daytrading-day period preceding the Company’s exercise of this redemption right.
The Notes are senior unsecured obligations of the Company that rank equal in right of payment to all senior unsecured indebtedness of the Company and rank senior in right of payment to any indebtedness that is contractually subordinated to the Notes.
The Indenture includes customary events of default. If an event of default, as defined in the Indenture, occurs and is continuing, the principal amount of the Notes and any accrued and unpaid interest may be declared immediately due and payable. In the case of bankruptcy or insolvency, the principal amount of the Notes and any accrued and unpaid interest would automatically become immediately due and payable.
The Company hasWe have separated the Notes into their liability and equity components in the accompanying condensed consolidated balance sheet.sheets. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the principal amount of the Notes. The difference between the principal amount of the Notes and the liability component (the "debt discount") is amortized to interest expense at an effective interest rate of 9.75% over the term of the Notes. The equity component of the Notes is included in additional paid-in capital in the condensed consolidated balance sheetsheets and is not remeasured as long as it continues to meet the conditions for equity classification.
The CompanyWe incurred transaction costs of approximately $6.8 million related to the issuance of the Notes. Those transaction costs were allocated to the liability and equity components in the same manner as the allocation of the proceeds from the Notes. Transaction costs attributable to the liability component of $4.8 million were recorded as a debt discount in the condensed consolidated balance sheet and are being amortized to interest expense over the term of the Notes. Transaction costs attributable to the equity component of $2.0 million were recorded in stockholders' equity as a reduction of the equity component.
The carrying amount of the Notes consisted of the following as of June 30, 20182019 and December 31, 20172018 (in thousands):
 June 30, 2019 December 31, 2018
Liability component:   
Principal amount$250,000
 $250,000
Less: debt discount(41,900) (48,331)
Net carrying amount of liability component$208,100
 $201,669
    
Net carrying amount of equity component$67,014
 $67,014
 June 30, 2018 December 31, 2017
Liability component:   
Principal amount$250,000
 $250,000
Less: debt discount(54,441) (60,247)
Net carrying amount of liability component$195,559
 $189,753
    
Net carrying amount of equity component$67,014
 $67,014

The estimated fair value of the Notes as of June 30, 20182019 and December 31, 20172018 was $273.8$267.1 million and $285.6$257.1 million, respectively, and was determined using a lattice model. The CompanyWe classified the fair value of the Notes as a Level 3 measurement due to the lack of observable market data over fair value inputs such as itsour stock price volatility over the term of the Notes and itsour cost of debt.
As of June 30, 2018,2019, the remaining term of the Notes is approximately 3.75 years.2 years and 9 months. During the three and six months ended June 30, 2019 and 2018, and 2017, the Companywe recognized interest costs on the Notes as follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Contractual interest (3.25% of the principal amount per annum)$2,032
 $2,032
 $4,064
 $4,064
Amortization of debt discount3,256
 2,940
 6,431
 5,806
Total$5,288
 $4,972
 $10,495
 $9,870
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Contractual interest (3.25% of the principal amount per annum)$2,032
 $2,032
 $4,064
 $4,064
Amortization of debt discount2,940
 2,655
 5,806
 5,242
Total$4,972
 $4,687
 $9,870
 $9,306

Note Hedges and Warrants
In May 2016, the Companywe purchased convertible note hedges with respect to itsour common stock for a cost of $59.1 million from certain bank counterparties. The convertible note hedges provide the Companyus with the right to purchase up to 46.3 million shares of the Company'sour common stock at an initial strike price of $5.40 per share, which corresponds to the initial conversion price of the Notes, and are exercisable by the Company upon conversion of the Notes. The convertible note hedges are intended to reduce the potential economic dilution upon conversion of the Notes. The convertible note hedges are separate transactions and are not part of the terms of the Notes. Holders of the Notes do not have any rights with respect to the convertible note hedges.
In May 2016, the Companywe also sold warrants for total cash proceeds of $35.5 million to certain bank counterparties. The warrants provide the counterparties with the right to purchase up to 46.3 million shares of the Company'sour common stock at a strike price of $8.50 per share. The warrants expire on various dates between July 1, 2022 and August 26, 2022 and are exercisable on their expiration dates. The warrants are separate transactions and are not part of the terms of the Notes or convertible note hedges. Holders of the Notes and convertible note hedges do not have any rights with respect to the warrants.
The amounts paid and received for the convertible note hedges and warrants were recorded in additional paid-in capital in the condensed consolidated balance sheets as of June 30, 20182019 and December 31, 2017.2018. The convertible note hedges and warrants are not remeasured as long as they continue to meet the conditions for equity classification. The amounts paid for the convertible note hedges are tax deductible over the term of the Notes, while the proceeds received from the warrants are not taxable. 
Under the if-converted method, the shares of common stock underlying the conversion option in the Notes are included in the diluted earnings per share denominator and the interest expense on the Notes, net of tax, is added to the numerator. However, upon conversion, there will be no economic dilution from the Notes, as exercise of the convertible note hedges eliminates any dilution from the Notes that would have otherwise occurred when the price of the Company’sour common stock exceeds the conversion price. Taken together, the purchase of the convertible note hedges and sale of warrants are intended to offset any actual dilution from the conversion of the Notes and to effectively increase the overall conversion price from $5.40 to $8.50 per share.
Revolving Credit Agreement
The Company'sIn May 2019, we entered into a second amended and restated senior secured revolving credit agreement (the "Amended and Restated"2019 Credit Agreement") which provides for aggregate principal borrowings of up to $250.0$400.0 million and matures in May 2024. The 2019 Credit Agreement replaced our previous $250.0 million amended and restated credit agreement that was scheduled to mature in June 2019. 2019 (the "2016 Credit Agreement"). We recorded a liability for debt issuance costs of $2.3 million related to the 2019 Credit Agreement. Those costs will be amortized to interest expense over the term of the agreement.
Borrowings under the Amended and Restated2019 Credit Agreement bear interest, at the Company'sour option, at a rate per annum equal to the Alternate Base Rate(a) an adjusted LIBO rate or Adjusted LIBO Rate (each as defined(b) a customary base rate (with loans denominated in the Amended and Restated Credit Agreement)certain currencies bearing interest at rates specific to such currencies) plus an additional margin ranging between 0.50% and 2.25%2.00%. The Company isWe are required to pay quarterly commitment fees ranging from 0.25% to 0.40%0.35% per annum of the average daily amount of unused commitments available under the Amended and Restated2019 Credit Agreement. The Amended and Restated2019 Credit Agreement also provides for the issuance of up to $45.0$75.0 million in letters of credit, provided that the sum of outstanding borrowings and letters of credit do not exceed the maximum funding commitment of $250.0$400.0 million.
The Amended and Restated2019 Credit Agreement is secured by substantially all of the Company's and its subsidiaries'our tangible and intangible assets, including a pledge of 100% of the outstanding capital stock of substantially all of itsour direct and indirect domestic subsidiaries and 65% of the shares or equity interests of first-tier foreign subsidiaries and each U.S. entity whose assets substantially consist of capital stock and/or intercompany debt of one or more foreign subsidiaries, subject to certain exceptions. Certain of the Company'sour domestic subsidiaries are guarantors under the Amended and Restated2019 Credit Agreement.
The Amended and Restated2019 Credit Agreement contains various customary restrictive covenants that limit the Company'sour ability to, among other things: incur additional indebtedness; make dividend and other restricted payments, including share repurchases; enter into sale and leaseback transactions; make investments, loans or advances; grant or incur liens on assets; sell assets; engage in mergers, consolidations, liquidations or dissolutions; and engage in transactions with affiliates. The Amended and Restated2019 Credit Agreement requires the Companyus to maintain compliance with specified financial covenants, comprised of a minimum fixed charge coverage ratio, a maximum leverage ratio, a maximum senior secured indebtednessleverage ratio and a minimum liquidity ratio, each as set forth in the Amended and Restated2019 Credit Agreement. The Company isWe are also required to maintain, as of the last day of each fiscal quarter, unrestricted cash of at least $400.0$250.0 million, including $200.0$125.0 million in accounts held with lenders under the Amended and Restated2019 Credit Agreement or their affiliates. Non-compliance with these covenants may result in termination of the commitments under the Amended and Restated2019 Credit Agreement and any then outstanding borrowings may be declared due and payable immediately. The Company hasWe have the right to terminate the Amended and Restated2019 Credit Agreement or reduce the available commitments at any time.
As of June 30, 2018 and December 31, 2017, the Company2019, we had no borrowings outstanding under the 2019 Credit Agreement and as of December 31, 2018, we had no borrowings outstanding under the 2016 Credit Agreement. As of June 30, 2019, we had outstanding letters of credit of $18.6$18.2 million and $22.7 million, respectively, under the Amended2019 Credit Agreement and Restatedas of December 31, 2018, we had outstanding letters of credit of $19.2 million under the 2016 Credit Agreement.
9. COMMITMENTS AND CONTINGENCIES6. LEASES
ExceptAdoption of ASC Topic 842, Leases
On January 1, 2019, we adopted ASC Topic 842 using the modified retrospective transition method. Topic 842 requires the recognition of lease assets and liabilities for operating leases, in addition to the changes set forth below,finance lease assets and liabilities previously recorded on our condensed consolidated balance sheets. Beginning on January 1, 2019, our condensed consolidated financial statements are presented in accordance with the Company's commitmentsrevised policies, while prior period amounts are not adjusted and continue to be reported in accordance with our historical policies. The modified retrospective transition method required the cumulative effect, if any, of initially applying the guidance to be recognized as an adjustment to our accumulated deficit as of our adoption date. As a result of adopting Topic 842, we recognized additional lease assets and liabilities of $109.6 million as of January 1, 2019. The discount rate used to calculate that adjustment was the rate implicit in the lease, unless that rate was not readily determinable. For leases for which the rate was not readily determinable, the discount rate used was our incremental borrowing rate as of the adoption date, January 1, 2019. There was no cumulative effect adjustment to our accumulated deficit as a result of initially applying the guidance.
We elected the package of practical expedients permitted under the transition guidance within Topic 842, which allowed us to carry forward prior conclusions about lease identification, classification and initial direct costs for leases entered into prior to adoption of Topic 842. Additionally, we elected to not separate lease and non-lease components for all of our leases. For leases with a term of 12 months or less, we elected the short-term lease exemption, which allowed us to not recognize right-of-use assets or lease liabilities for qualifying leases existing at transition and new leases we may enter into in the future.
General Description of Leases
We have entered into various non-cancelable operating lease agreements for our offices and data centers and non-cancelable finance lease agreements for property and equipment. We classify leases at their commencement as either operating or finance leases and may receive renewal or expansion options, rent holidays and leasehold improvement or other incentives on certain lease agreements.
Our operating leases primarily consist of leases for real estate throughout the world with lease expirations between 2019 and 2026. These arrangements typically do not transfer ownership of the underlying asset as we do not assume, nor do we intend to assume, the risks and rewards of ownership. Our finance leases are related to purchases of property and equipment, primarily computer hardware, with expirations between 2019 and 2023.


14

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

We recognize a right-of-use asset and lease liability for all of our leases at the commencement of the lease. Lease liabilities are measured based on the present value of the minimum lease payments discounted by a rate determined as of the date of commencement. Right-of-use assets are measured based on the lease liability adjusted for any initial direct costs, prepaid rent, or lease incentives. Minimum lease payments made under operating and finance leases are apportioned between interest expense and a reduction of the related operating and finance lease obligations. The interest expense on operating leases is presented within Selling, general and administrative expense on the condensed consolidated statements of operations and the related operating lease obligation is presented within Accrued expenses and other current liabilities and Operating lease obligations on the condensed consolidated balance sheets. The interest expense on finance leases is presented within Other income (expense), net on the condensed consolidated statements of operations and the related finance lease obligation is presented within Accrued expenses and other current liabilities and Other non-current liabilities on the condensed consolidated balance sheets.
We have also subleased certain office facilities under operating lease agreements, with expirations between 2019 and 2026. We recognize sublease rentals on a straight-line basis over their respective lease terms.
The following summarizes right-of-use assets as of June 30, 2018 and through the date these condensed consolidated financial statements were issued did not materially change from the amounts set forth in the Company's 2017 Annual Report on Form 10-K.2019 (in thousands):
Leases
 June 30, 2019
Right-of-use assets - operating leases$127,305
Right-of-use assets - finance leases (1)
35,201
Total right-of-use assets, gross162,506
Less: accumulated depreciation and amortization(25,572)
Right-of-use assets, net$136,934

(1)Right-of-use assets for finance leases are included in Property, equipment and software, net on the condensed consolidated balance sheet.
Related Party Sublease Agreement
In May 2018, the CompanyOn December 28, 2016, we entered into a newsublease for portions of our office space at 600 West Chicago to Uptake, Inc. ("Uptake"), a Lightbank LLC ("Lightbank") portfolio company. Eric Lefkofsky, our co-founder and Chairman of the Board, is a co-founder and owns a significant equity interest in Lightbank. The sublease was a market rate transaction on terms that we believe are no less favorable than would have been reached with an unrelated third party. The sublease extends through January 31, 2026 and the sublease rentals over the entire term total approximately $18.2 million. Pursuant to our related party transaction policy, our Audit Committee approved the sublease. We recognized income from the sublease of $0.5 million and $0.5 million for the three months ended June 30, 2019 and 2018, and $1.2 million and $1.0 million for the six months ended June 30, 2019 and 2018.
Significant Assumptions and Judgments
Significant judgment is required when determining whether a contract is or contains a lease. We review contracts to determine whether the language conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
As discussed above, the present value of minimum lease payments is used in determining the value of our operating and finance leases. The discount rate used to calculate the present value for onelease payments is the rate implicit in the lease, unless that rate cannot be readily determined. For leases in which the rate implicit in the lease is not readily determinable, the discount rate is our incremental borrowing rate, which is determined based on information available at lease commencement and is equal to the rate of its foreign locations.interest that we would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The discount rate used for our lease obligations as of June 30, 2019 and January 1, 2019 ranged from 1.5% to 6.9%. As of June 30, 2018,2019, the weighted-average remaining lease term for our finance leases and operating leases was 2 years and 5 years. As of June 30, 2019, the weighted-average discount rate for our finance leases and operating leases was 5.1% and 5.6%.


15

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

The following table summarizes our lease cost and sublease income for the three and six months ended June 30, 2019 (in thousands):
 Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
Financing lease cost:   
Amortization of right-of-use assets$5,999
 $12,755
Interest on lease liabilities266
 573
Total finance lease cost6,265
 13,328
Operating lease cost8,737
 17,211
Variable lease cost1,825
 3,909
Short-term lease cost169
 210
Sublease income, gross(1,312) (2,624)
Total lease cost$15,684
 $32,034

As of June 30, 2019, the future payments under thatfinance leases and operating leaseleases for each of the next five years and thereafter are as follows (in thousands):    
 Finance Leases Operating Leases
Remaining in 2019$6,972
 $19,787
20208,971
 35,994
20215,052
 32,720
2022715
 31,962
202312
 24,516
Thereafter
 33,175
Total minimum lease payments21,722
 178,154
Less: Amount representing interest(1,080) (24,761)
Present value of net minimum lease payments20,642
 153,393
Less: Current portion of lease obligations(11,166) (31,867)
Total long-term lease obligations$9,476
 $121,526

As of June 30, 2019, the future amounts due under subleases for each of the next five years and thereafter are as follows (in thousands):
 Subleases
Remaining in 2019$2,603
20205,027
20215,065
20225,103
20234,385
Thereafter4,891
Total future sublease income$27,074



16

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Remaining amounts in 2018$1,296
20192,592
20202,592
20212,592
20222,592
Thereafter5,832
Total minimum lease payments$17,496

Other Contractual CommitmentsThe following table summarizes supplemental cash flow information on our leasing obligations for the six months ended June 30, 2019 (in thousands):
In the first quarter 2018, the Company entered into a non-cancelable arrangement for cloud computing services. As
 Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash flows from finance leases$573
Operating cash flows from operating leases(13,145)
Financing cash flows from finance leases(12,628)
Right-of-use assets obtained in exchange for lease liabilities: 
Finance leases2,872
Operating leases17,853

7. COMMITMENTS AND CONTINGENCIES
Our purchase obligations as of June 30, 2019 did not materially change from the amounts set forth in our 2018 future payments under that contractual obligation are as follows (in thousands):
Remaining amounts in 2018$
20193,400
20203,400
20213,400
20223,400
Total$13,600
Annual Report on Form 10-K.
Legal Matters and Other Contingencies
From time to time, the Company iswe are party to various legal proceedings incident to the operation of itsour business. For example, the Companywe currently isare involved in proceedings brought by former employees and merchants, intellectual property infringement suits, customer lawsuits, consumer class actions and suits alleging, among other things, violations of state consumer protection or privacy laws. The following is a brief description of significant legal proceedings.
On March 2, 2016, International Business Machines Corporation ("IBM") filed a complaint in the United States District Court for the District of Delaware against the Company (the "Delaware Action"). In the Delaware Action, IBM alleges that the Company has infringed and continues to willfully infringe certain IBM patents that IBM claims relate to the presentation of applications and advertising in an interactive service, preserving state information in online transactions and single sign-on processes in a computing environment and seeks damages (including a request that the amount of compensatory damages be trebled), injunctive relief and costs and reasonable attorneys’ fees. Trial commenced in the Delaware Action on July 16, 2018. On July 27, 2018, a jury in this matter returned a verdict finding the Company willfully infringed each of these patents and awarded damages of $82.5 million to IBM. The court has the discretion to enhance this award for willfulness, impose interest, impose a continuing royalty for the two unexpired patents or award injunctive relief. The court also has the discretion to reduce or vacate the damages award or enter judgment for the Company on some or all of the claims notwithstanding the jury verdict. The Company intends to seek to overturn the verdict and reduce the damages award through post-trial motions and appeal. For the three months ended June 30, 2018, the Company recorded a $75.0 million charge to increase its contingent liability for this matter. That charge is classified within Selling, general and administrative in the accompanying condensed consolidated statement of operations.
On May 9, 2016, the Company filed a complaint in the United States District Court for the Northern District of Illinois against IBM (the "Illinois Action"). The Company alleges that IBM has infringed and continues to willfully infringe one of the Company’s patents relating to location-based services. The Company intends to seek damages and injunctive relief for IBM’s infringement of this patent. On December 20, 2016, IBM filed a motion to dismiss this case, and the court denied that motion. The court held a Markman hearing on April 3, 2017, but has not yet construed the claims. On May 18, 2017, IBM filed two petitions for inter partes review with the United States Patent and Trademark Office seeking to invalidate the Company’s patent relating to location-based services. The Company filed its preliminary responses on September 6, 2017. The Patent Office denied one petition and instituted a review of the Company’s patent in response to the other petition, but such review did not include all claims requested by IBM. On May 1, 2018, the Patent Office stated that it would institute a review of the claims that were not previously under review based on a recent Supreme Court decision (SAS Institute, Inc. v. Iancu) finding that the Patent Office must institute a review of either all or none of claims petitioners seek to review. A trial date is not yet set in the Illinois Action. The Company plans to vigorously defend against the challenges to the Company’s patent in the Illinois Action.
In addition, other third parties have from time to time claimed, and others may claim in the future, that the Company haswe have infringed their intellectual property rights. The Company isWe are subject to intellectual property disputes, including patent infringement claims, and expectsexpect that itwe will increasinglycontinue to be subject to intellectual property infringement claims as itsour services expand in scope and complexity. The Company has inIn the past, we have litigated such claims, and the Company iswe are presently involved in several patent infringement and other intellectual property-related claims, (including the IBM matter described above), including pending litigation or trademark disputes relating to, for example, the Company'sour Goods category, some of which could involve potentially substantial claims for damages or injunctive relief. The CompanyWe 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 becomeswe become subject to laws in jurisdictions where the underlying laws with respect to the potential liability of online intermediaries are either unclear or less favorable. The Company believesWe believe that additional lawsuits alleging that it haswe have violated patent, copyright or trademark laws will be filed against it.us. Intellectual property claims, whether meritorious or not, are time consuming and often costly to resolve, could require expensive changes in the Company'sour methods of doing business or the goods it sells,we sell, or could require itus to enter into costly royalty or licensing agreements.
The CompanyWe also isare subject to consumer claims or lawsuits relating to alleged violations of consumer protection or privacy rights and statutes, some of which could involve potentially substantial claims for damages, including statutory or punitive damages. Consumer and privacy related claims or lawsuits, whether meritorious or not, could be time consuming, result in costly litigation, damage awards, fines and penalties, injunctive relief or increased costs of doing business through adverse judgment or settlement, or require the Companyus to change itsour business practices, sometimes in expensive ways.
The CompanyWe are also is subject to, or in the future may become subject to, a variety of regulatory inquiries, audits, and investigations across the jurisdictions where the Company conducts itswe conduct our business, including, for example, inquiries related to consumer protection, employment matters and/or hiring practices, marketing practices, tax, unclaimed property and privacy rules and regulations. Any regulatory actions against the Company,us, whether meritorious or not, could be time consuming, result in costly litigation, damage awards, fines and penalties, injunctive relief or increased costs of doing business through adverse judgment or settlement, require the Companyus to change itsour business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm the Company'sour business.
The Company establishesWe establish an accrued liability for loss contingencies related to legal and regulatory matters when the loss is both probable and reasonably estimable. Those accruals represent management's best estimate of probable losses and, in such cases, there may be an exposure to loss in excess of the amounts accrued. For certain of the matters described above, there are inherent and significant uncertainties based on, among other factors, the stage of the proceedings, developments in the applicable facts of law, or the lack of a specific damage claim. However, the Company believeswe believe that the amount of reasonably possible losses in excess of the amounts accrued for those matters would not have a material adverse effect on itsour business, condensed consolidated financial position, results of operations or cash flows. The Company'sOur accrued liabilities for loss contingencies related to legal and regulatory matters may change in the future as a result of new developments, including, but not limited to, the occurrence of new legal matters, changes in the law or regulatory environment, adverse or favorable rulings, newly discovered facts relevant to the matter, or changes in the strategy for the matter. Regardless of the outcome, litigation and other regulatory matters can have an adverse impact on the Companyus because of defense and settlement costs, diversion of management resources and other factors.
Indemnifications
In connection with the dispositionsdisposition of the Company'sour operations in Latin America (see Note 3, Discontinued Operations and Other Business Dispositions),in the Company agreed to indemnify the buyerfirst quarter of 2017, we recorded $5.4 million in indemnification liabilities for certain tax and other matters. The indemnification liabilities were initially recorded at their fair value, estimated to be $5.4 million using a probability-weighted expected cash flow approach,matters upon the closing of the transactions as an adjustment to the net loss on the dispositions within discontinued operations.operations at their fair value. We estimated the indemnification liabilities using a probability-weighted expected cash flow approach. During the first quarter of 2019, we decreased our indemnification liabilities due to the expiration of certain indemnification obligations. The Company estimatesresulting benefit of $2.2 million is recorded within Income (loss) from discontinued operations on the condensed consolidated statement of operations for the six months ended June 30, 2019. Our remaining indemnification liabilities were $3.2 million as of June 30, 2019. We estimate that the total amount of obligations that are reasonably possible to arise under the indemnifications in excess of amounts accrued as of June 30, 20182019 is approximately $18.0$13.3 million.
In the normal course of business to facilitate transactions related to itsour operations, the Company indemnifieswe indemnify certain parties, including employees, lessors, service providers, merchants, and counterparties to investment agreements and asset and stock purchase agreements with respect to various matters. The Company hasWe have agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or other claims made against those parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. The Company isWe are also subject to increased exposure to various claims as a result of itsour divestitures and acquisitions, particularly in cases where the Company iswe are entering into new businesses in connection with such acquisitions. The CompanyWe may also become more vulnerable to claims as it expandswe expand the range and scope of itsour services and isare subject to laws in jurisdictions where the underlying laws with respect to potential liability are either unclear or less favorable. In addition, the Company haswe have entered into indemnification agreements with itsour officers, directors and underwriters, and the Company'sour bylaws contain similar indemnification obligations that cover officers, directors, employees and other agents. 
Except as noted above, it is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, any payments that the Company haswe have made under these agreements have not had a material impact on the operating results, financial position or cash flows of the Company.flows.


13

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




10.8. STOCKHOLDERS' EQUITY AND COMPENSATION ARRANGEMENTS
The Company's Board of Directors (the "Board") has the authority, without approval by the stockholders, to issue up to a total of 50,000,000 shares of preferred stock in one or more series. The Board may establish the number of shares to be included in each such series and may fix the designations, preferences, powers and other rights of the shares of a series of preferred stock. The Board could authorize the issuance of preferred stock with voting or conversion rights that could dilute the voting power or rights of the holders of its common stock. As of June 30, 2018 and December 31, 2017, there were no shares of preferred stock outstanding.
Common Stock
Pursuant to the Company'sour restated certificate of incorporation, the Board has the authority to issue up to a total of 2,010,000,000 shares of common stock. Each holder of common stock shall beis entitled to one vote for each suchper share on any matter that is submitted to a vote of stockholders. In addition, holders of theour common stock will vote as a single class of stock on any matter that is submitted to a vote of stockholders.
Share Repurchase Program
In May 2018, the Board authorized the Companyus to repurchase up to $300.0 million of itsour common stock under a newour share repurchase program. The Company's prior share repurchase program expired in April 2018. During the three and six months ended June 30, 2018, the Company did not2019, we repurchased 4,228,148 and 8,636,143 shares for an aggregate purchase any sharesprice of $15.1 million and $30.1 million (including fees and commissions) under those share our


17

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

repurchase programs.program. As of June 30, 2019, up to $260.0 million of common stock remained available for purchase under our program. The timing and amount of share repurchases, if any, will be determined based on market conditions, limitations under the Amended and Restated2019 Credit Agreement, share price and other factors, and the share repurchase program may be terminated at any time.
Groupon, Inc. Stock Plans
In January 2008, we adopted the 2008 Stock Option Plan, as amended (the "2008 Plan"), under which options for up to 64,618,500 shares of common stock were authorized to be issued to employees, consultants and directors. The 2008 Plan was frozen in December 2010. In April 2010, we established the Groupon, Inc. 2010 Stock Plan, as amended in April 2011 (the "2010 Plan"), under which options and restricted stock units ("RSUs") for up to 20,000,000 shares of common stock were authorized for future issuance to employees, consultants and directors. No new awards may be granted under the 2010 Plan following our initial public offering in November 2011. In August 2011, we established the Groupon, Inc. 2011 Incentive Plan (the "2011 Plan"), as amended in November 2013, May 2014, June 2016 and June 2019, under which options, RSUs and performance stock units for up to 187,500,000 shares of common stock were authorized for future issuance to employees, consultants and directors.
The Groupon, Inc. Stock Plans (the "Plans") are administered by the Compensation Committee of the Board (the "Compensation Committee"), which determines the number of awards to be issued, the corresponding vesting schedule and the exercise price for options.. As of June 30, 2018, 52,436,6872019, 64,223,134 shares of common stock were available for future issuance under the Plans.
The stock-based compensation expense related to stock awards issued under the Plans and acquisition-related awards are presented within the following line items of the condensed consolidated statements of operations for the three and six months ended June 30, 20182019 and 20172018 (in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 20172019 2018 2019 2018
Cost of revenue$288
 $794
 $684
 $1,457
$380
 $288
 $758
 $684
Marketing1,763
 2,230
 3,557
 4,032
1,490
 1,763
 2,915
 3,557
Selling, general and administrative14,215
 18,368
 31,303
 35,553
24,693
 14,215
 39,301
 31,303
Other income (expense)52
 48
 100
 99
Other income (expense), net
 52
 
 100
Total stock-based compensation expense$16,318
 $21,440
 $35,644
 $41,141
$26,563
 $16,318
 $42,974
 $35,644
The Company alsoWe capitalized $2.0$2.2 million and $1.8$2.0 million of stock-based compensation for the three months ended June 30, 2019 and 2018, and 2017, respectively,$3.5 million and $3.7 million and $3.3 million for the six months ended June 30, 20182019 and 2017, respectively,2018 in connection with internally-developed software. As of June 30, 2018, $138.1 million of unrecognized compensation costs related to unvested employee stock awards are expected to be recognized over a remaining weighted-average period of 1.44 years.software and cloud computing arrangements.
Employee Stock Purchase Plan
The Company is authorizedGroupon, Inc. 2012 Employee Stock Purchase Plan ("ESPP"), as amended in June 2019, authorizes us to grant up to 10,000,00020,000,000 shares of common stock under its employee stock purchase plan ("ESPP").that plan. For the six months ended June 30, 2019 and 2018, 719,297 and 2017, 746,773 and 877,845 shares of common stock respectively, were issued under the ESPP.


14

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




Restricted Stock Units
The restricted stock units granted under the Plans generally have vesting periods between one and four years. Restricted stock unitsyears and are amortized on a straight-line basis over thetheir requisite service period. Additionally, we are required to issue restricted stock units to settle amounts that exceed targeted bonus amounts under our primary bonus plans. We account for those obligations, if any, as liability-classified awards with performance conditions.


18

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

The table below summarizes activity regarding unvested restricted stock units grantedunit activity under the Plans for the six months ended June 30, 2018:2019:
 Restricted Stock Units Weighted-Average Grant Date Fair Value (per unit)
Unvested at December 31, 201826,623,432
 $4.47
Granted22,723,241
 3.25
Vested(7,787,055) 4.45
Forfeited(6,264,854) 4.27
Unvested at June 30, 201935,294,764
 3.92

 Restricted Stock Units Weighted-Average Grant Date Fair Value (per unit)
Unvested at December 31, 201728,939,110
 $4.32
Granted14,631,563
 4.76
Vested(7,507,084) 4.41
Forfeited(3,202,754) 4.26
Unvested at June 30, 201832,860,835
 4.51
As of June 30, 2019, $118.4 million of unrecognized compensation costs related to unvested restricted stock units are expected to be recognized over a remaining weighted-average period of 1.65 years.
Performance Share Units
TheWe grant performance share units granted under the Plans that vest in shares of the Company'sour common stock upon the achievement of financial and operational targets specified in the respective award.award agreement ("Performance Share Units"). During the six months ended June 30, 2019, we also granted performance share units that will vest if our average daily closing stock price is equal to or greater than $6.00 per share over a period of 30 consecutive trading days prior to December 31, 2022 or if a change in control occurs during the performance period at the specified stock price (and on a proportional basis for a change in control price between the grant date price and the specified stock price) ("Market-based Performance Share Units"). We determined these awards are subject to a market condition, and therefore we used a Monte Carlo simulation to calculate the grant date fair value of the awards and the related derived service period over which we will recognize the expense. The key inputs used in the Monte Carlo simulation were the risk-free rate, our volatility of 49.8% and our cost of equity of 12.8%.
All of our performance share awards are subject to both continued employment through the performance period dictated by the award and certification by the Compensation Committee that the specified financial and operational targetsperformance conditions have been achieved.
DuringThe table below summarizes Performance Share Unit activity under the Plans for the six months ended June 30, 2018, the Company granted2019:
 Performance Share Units Weighted-Average Grant Date Fair Value (per unit) Market-based Performance Share Units Weighted-Average Grant Date Fair Value (per unit)
Unvested at December 31, 20183,431,918
 $4.90
 
 $
Granted4,622,995
 3.44
 8,486,708
 3.03
Vested(777,573) 4.88
 
 
Forfeited(2,613,788) 4.71
 
 
Unvested at June 30, 20194,663,552
 3.56
 8,486,708
 3.03
        
Maximum shares issuable upon vesting at June 30, 20198,903,280
   8,486,708
  

As of June 30, 2019, $15.8 million of unrecognized compensation costs related to unvested performance share units for which the maximum number of common shares issuable upon vesting of those performance share units is 7,706,474 shares, the weighted-average grant date fair value was $4.89 per unit and the total grant date fair value of the shares for which the performance conditions are expected to be met was $16.6 million. During the six months ended June 30, 2018, 278,635 sharesrecognized over a remaining weighted-average period of the Company's common stock were issued1.94 years and $16.7 million of unrecognized compensation costs related to unvested market-based performance share units granted in the previous year following the Compensation Committee's certification of the Company's financial and operational metrics for the year ended December 31, 2017. The weighted-average grant date fair value of those units was $3.78 per share.
Performance Bonus Awards
If bonus amounts earned under the Company's primary employee bonus plans exceed targeted bonus amounts because specified financial metrics of the Company exceed the performance conditions set forth in those plans, such excess is requiredare expected to be settled in the Company's common stock. The Company's obligation to issue shares for employee bonus amounts exceeding the specified bonus targets is accounted for separately asrecognized over a liability-classified stock-based compensation arrangement with performance conditions.remaining weighted-average period of 0.66 years.
During the six months ended June 30, 2018, 1,240,379 shares of the Company's common stock were issued related to performance bonus awards granted in the previous year following the Compensation Committee's certification of the Company's financial and operational metrics for the year ended December 31, 2017. The fair value of the Company's common stock on the date of the Compensation Committee's certification was $5.20 per share.

19

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

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


15

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




We did not grant any stock options during the six months ended June 30, 2019.
The table below summarizes the stock option activity for the six months ended June 30, 2018:2019:
 Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in years) 
Aggregate Intrinsic Value (in thousands) (1)
Outstanding and exercisable at December 31, 2017885,580
 $0.62
 1.76 $3,967
Exercised(667,743) 0.10
    
Forfeited
 
    
Outstanding and exercisable at June 30, 2018217,837
 1.81
 1.88 $542
 Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in years) 
Aggregate Intrinsic Value (in thousands) (1)
Outstanding and exercisable at December 31, 2018212,787
 $1.80
 1.37 $298
Exercised(42,500) 0.96
    
Outstanding and exercisable at June 30, 2019170,287
 $1.95
 0.92 $278
(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'sour stock on the last day of each period and the exercise price, multiplied by the number of options where the fair value exceeds the exercise price) that would have been received by the option holders had all option holders exercised their options as of June 30, 20182019 and December 31, 2017, respectively.2018.
11.9. REVENUE RECOGNITION
Product and service revenue are generated from sales transactions through the Company's online marketplaces in three primary categories: Local, Goods and Travel.
Product revenue is earned from direct sales of merchandise inventoryRefer to customers and includes any related shipping fees. Service revenue primarily represents the net commissions earned by the Company from selling goods and services provided by third-party merchants. Those marketplace transactions generally involve the online delivery of a voucher that can be redeemed by the purchaser with the third-party merchant for goods or services (or for discounts on goods or services). To a lesser extent, service revenue also includes commissions earned when customers make purchases with retailers using digital coupons accessed through the Company's websites and mobile applications. Additionally, in the United States the Company has recently been developing and testing voucherless offerings that are linked to customer credit cards. Customers claim those voucherless merchant offerings through the Company's online marketplaces and earn cash back on their credit card statements when they transact with the related merchants, who pay the Company commissions for such transactions.
In connection with most of our product and service revenue transactions, the Company collects cash from credit card payment processors shortly after a sale occurs. For transactions in which the Company earns commissions when customers make purchases with retailers using digital coupons accessed through its websites and mobile applications, the Company generally collects payment from affiliate networks on terms ranging from 30 to 150 days.
As discussed in Note 1, Description of Business and Basis of Presentation, the Company previously referred to its product revenue and service revenue as "direct revenue" and "third-party and other revenue," respectively.
Adoption of ASC Topic 606, Revenue from Contracts with Customers
On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("Topic 606") using the modified retrospective method. Beginning on January 1, 2018, results are presented in accordance with the Company's revised policies, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historical policies. The adoption of Topic 606 did not significantly impact the Company's presentation of revenue on a gross or net basis. The following changes resulted from the adoption of Topic 606:
For merchant agreements with redemption payment terms, the merchant is not paid its share of the sale price for a voucher sold through one of the Company's online marketplaces until the customer redeems the related voucher. If the customer does not redeem a voucher with such merchant payment terms, the Company retains all of the gross billings for that voucher, rather than retaining only its net commission. Prior to its adoption of Topic 606, the Company recognized that variable consideration from unredeemed vouchers and derecognized the related accrued merchant payables when its legal obligation to the merchant expired, which the Company believes is shortly after the voucher expiration date in most jurisdictions. Following its adoption of Topic 606, the Company estimates the variable consideration from vouchers that will not ultimately be redeemed and recognizes that amount as revenue at the time of sale, rather than when the Company's legal obligation expires.


16

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




The Company estimates variable consideration from unredeemed vouchers using its historical voucher redemption experience. Most vouchers sold through the Company's marketplace in the United States do not have expiration dates and redemption payment terms were not widely used in that jurisdiction before 2017, so the Company's North America segment did not have variable consideration from unredeemed vouchers in prior periods.
Prior to its adoption of Topic 606, the Company expensed the incremental costs to obtain contracts with third-party merchants, such as sales commissions, as incurred. Following its adoption of Topic 606, those costs are deferred and recognized over the expected period of the merchant arrangement, generally from 12 to 18 months.
Prior to its adoption of Topic 606, the Company recognized breakage income for unused customer credits when they expired or were forfeited. Following its adoption of Topic 606, breakage income from customer credits that are not expected to be used is estimated and recognized as revenue in proportion to the pattern of redemption for customer credits that are used.
Prior to its adoption of Topic 606, the Company deferred the revenue from hotel reservation offerings until the customer's stay commenced. Following its adoption of Topic 606, revenue from hotel reservation offerings is recognized at the time the reservation is made, net of an allowance for estimated cancellations.
Prior to its adoption of Topic 606, the Company classified refunds on service revenue transactions for which the merchant's share of the refund amount is not recoverable as a cost of revenue. Following its adoption of Topic 606, those refunds are classified as a reduction of revenue.
Prior to its adoption of Topic 606, the Company classified credits issued to consumers for relationship purposes as a marketing expense. Following its adoption of Topic 606, those credits are classified as a reduction of revenue.
The Company recorded a net reduction to its opening accumulated deficit of $88.9 million, which is net of a $6.7 million income tax effect, as of January 1, 2018 due to the cumulative impact of adopting Topic 606. The following table summarizes balance sheet accounts impacted by the cumulative effect of adopting Topic 606 (in thousands):
Account Increase (decrease) to beginning accumulated deficit
Prepaid expenses and other current assets $(4,007)
Other non-current assets (10,223)
Accrued merchant and supplier payables (64,970)
Accrued expenses and other current liabilities (13,188)
Other non-current liabilities 3,443
Effect on beginning accumulated deficit $(88,945)
See Note 2, Adoption of New Accounting Standards13, Segment Information, for additional information about the Company's revenue recognition policies beforesummarized by reportable segment and after the adoption of Topic 606.
Impacts on Condensed Consolidated Financial Statements
The following tables summarize the impacts of adopting Topic 606 on the Company's condensed consolidated financial statements as of andcategory for the three and six months ended June 30, 2018 (in thousands):
Condensed Consolidated Balance Sheet
 June 30, 2018
 As reported Adjustments Balances without adoption of Topic 606
Total assets$1,488,700
 $(11,638) $1,477,062
Total liabilities1,217,563
 86,124
 1,303,687
Total equity271,137
 (97,762) 173,375


17

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




Condensed Consolidated Statements of Operations
 Three Months Ended June 30, 2018 Six Months Ended June 30, 2018
 As reported Adjustments Balances without adoption of Topic 606 As reported Adjustments Balances without adoption of Topic 606
Revenue:           
Service revenue (1)(2)
$295,652
 $6,001
 $301,653
 $597,449
 $4,222
 $601,671
Product revenue321,744
 
 321,744
 646,487
 
 646,487
Total revenue617,396
 6,001
 623,397
 1,243,936
 4,222
 1,248,158
Cost of revenue:           
Service cost of revenue (3)
30,230
 7,043
 37,273
 61,375
 13,318
 74,693
Product cost of revenue263,508
 
 263,508
 534,018
 
 534,018
Cost of revenue (3)
293,738
 7,043
 300,781
 595,393
 13,318
 608,711
Gross profit323,658
 (1,042) 322,616
 648,543
 (9,096) 639,447
Operating expenses:           
Marketing (4)
94,178
 2,134
 96,312
 193,334
 3,707
 197,041
Selling, general and administrative (5)
294,124
 (1,227) 292,897
 516,185
 (2,491) 513,694
Restructuring charges(399) 
 (399) (116) 
 (116)
Total operating expenses387,903
 907
 388,810
 709,403
 1,216
 710,619
Income (loss) from operations(64,245) (1,949) (66,194) (60,860) (10,312) (71,172)
Other income (expense), net(26,457) 
 (26,457) (34,972) 
 (34,972)
Income (loss) before provision (benefit) for income taxes(90,702) (1,949) (92,651) (95,832) (10,312) (106,144)
Provision (benefit) for income taxes (6)
1,552
 886
 2,438
 (783) (133) (916)
Net income (loss)$(92,254) $(2,835) $(95,089) $(95,049) $(10,179) $(105,228)
(1)For the three months ended June 30, 2018, reflects a $9.2 million increase for refunds on service revenue transactions for which the merchant's share is not recoverable and customer credits issued for relationship purposes, which are classified as reductions of revenue under Topic 606, and an increase of $0.5 million related to the timing of recognition of revenue from hotel reservation offerings, partially offset by decreases of $2.9 million related to the timing of recognition of variable consideration from unredeemed vouchers and $0.8 million related to the timing of recognition of breakage revenue from customer credits that are not expected to be used.
(2)
For the six months ended June 30, 2018, reflects a $17.0 million increase for refunds on service revenue transactions for which the merchant's share is not recoverable and customer credits issued for relationship purposes, which are classified as reductions of revenue under Topic 606, partially offset by decreases of $8.5 million related to the timing of recognition of variable consideration from unredeemed vouchers, $2.8 million related to the timing of recognition of revenue from hotel reservation offerings and $1.5 million related to the timing of recognition of breakage revenue from customer credits that are not expected to be used.
(3)Reflects an increase for refunds on service revenue transactions for which the merchant's share is not recoverable, which are classified as a reduction of revenue under Topic 606.
(4)Reflects an increase for customer credits issued for relationship purposes, which are classified as a reduction of revenue under Topic 606.
(5)Reflects the amortization of deferred contract acquisition costs in excess of amounts capitalized in the current period.
(6)
As discussed in Note 13, Income Taxes, for the six months ended June 30, 2018, the Company recognized an income tax benefit of $6.4 million resulting from the impact of adopting Topic 606 on intercompany activity in certain foreign jurisdictions. That income tax benefit is not reflected in this table, which presents the direct impacts of adopting Topic 606.


18

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




Segment2019 and Category Information
 Three Months Ended June 30, 2018 Six Months Ended June 30, 2018
 As reported Adjustments Balances without adoption of Topic 606 As reported Adjustments Balances without adoption of Topic 606
North America           
Service revenue:           
Local$185,870
 $913
 $186,783
 $373,281
 $4,526
 $377,807
Goods3,796
 95
 3,891
 8,670
 95
 8,765
Travel19,888
 678
 20,566
 39,972
 (2,401) 37,571
Product revenue - Goods170,710
 
 170,710
 351,597
 
 351,597
Total North America revenue380,264
 1,686
 381,950
 773,520
 2,220
 775,740
            
International           
Service revenue:           
Local71,425
 3,946
 75,371
 146,003
 2,500
 148,503
Goods4,967
 (557) 4,410
 8,381
 (796) 7,585
Travel9,706
 926
 10,632
 21,142
 298
 21,440
Product revenue - Goods151,034
 
 151,034
 294,890
 
 294,890
Total International revenue237,132
 4,315
 241,447
 470,416
 2,002
 472,418
            
Consolidated           
Service revenue:           
Local257,295
 4,859
 262,154
 519,284
 7,026
 526,310
Goods8,763
 (462) 8,301
 17,051
 (701) 16,350
Travel29,594
 1,604
 31,198
 61,114
 (2,103) 59,011
Product revenue - Goods321,744
 
 321,744
 646,487
 
 646,487
Total Consolidated Revenue$617,396
 $6,001
 $623,397
 $1,243,936
 $4,222
 $1,248,158
2018.
Contract Balances
The following table summarizes the activity in revenue deferred from contracts with customers for the six months ended June 30, 2018 (in thousands):
 Deferred Revenue
Balance as of January 1, 2018$25,763
Revenue deferred21,802
Revenue recognized(25,364)
Foreign currency translation(399)
Balance as of June 30, 2018$21,802
A substantial majority of our deferred revenue relates to product sales for which revenue will be recognized as the products are delivered to customers, generally within one week following the balance sheet date.


19

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




Our deferred revenue was $19.9 million and $25.5 million as of June 30, 2019 and December 31, 2018. The amount of revenue recognized for the six months ended June 30, 2019 that was included in the deferred revenue balance at the beginning of the period was $25.4 million.
The following table summarizes the activity in the liability for customer credits for the six months ended June 30, 20182019 (in thousands):
Customer CreditsCustomer Credits
Balance as of January 1, 2018$19,414
Balance as of December 31, 2018$15,118
Credits issued67,025
56,477
Credits redeemed (1)
(57,074)(49,928)
Breakage revenue recognized(10,961)(4,177)
Foreign currency translation(88)26
Balance as of June 30, 2018$18,316
Balance as of June 30, 2019$17,516
(1)Customer credits can be redeemed through the Company'sour online marketplaces for goods or services provided by a third-party merchant or for merchandise inventory sold by the Company.us. When customer credits are redeemed for goods or services provided by a third-party merchant, service revenue is recognized on a net basis as the difference between the carrying amount of the customer credit liability derecognized and the amount due to the merchant for the related transaction. When customer credits are redeemed for merchandise inventory sold by the Company,us, product revenue is recognized on a gross basis equal to the amount of the customer credit liability derecognized. Customer credits are primarilytypically used within one year of issuance.
Costs of Obtaining Contracts
12. RESTRUCTURING
In September 2015,Incremental costs to obtain contracts with third-party merchants, such as sales commissions, are deferred and recognized over the Company commenced a restructuring plan relating primarily to workforce reductions in its international operations. The Company has also undertaken workforce reductions in its North America segment. In addition to workforce reductions in its ongoing markets, the Company ceased operations in 17 countries within its International segment as partexpected period of the restructuring plan between September 2015 and March 2016.merchant arrangement, generally from 12 to 18 months. Those country exits, which generally comprised the Company's smallest international markets, resulted from a series of separate decisions made at different times during that period that were not part of an overall strategic shift. Costs related to the restructuring plancosts are classified as Restructuring charges on the condensed consolidated statements of operations. The actions under the Company's restructuring plan were completed as of September 30, 2017 and substantially all of the remaining cash payments for actions under that plan are expected to be disbursed through December 31, 2018.
The Company incurred cumulative costs for employee severance and benefits and other exit costs of $80.1 million under the plan since its inception in September 2015. In addition to those costs, the Company incurred cumulative long-lived asset impairment charges of $7.5 million resulting from its restructuring activities.




20

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





The following tables summarizeclassified within Selling, general and administrative expense in the condensed consolidated statements of operations. As of June 30, 2019 and December 31, 2018, we had deferred contract acquisition costs incurred by segment related to the Company’s restructuring plan forof $2.6 million and $2.9 million, respectively, recorded within Prepaid expenses and other current assets, and $10.2 million and $11.3 million, respectively, recorded within Other non-current assets. We amortized $5.1 million and $6.5 million of deferred contract acquisition costs during the three and six months ended June 30, 2019 and 2018, and 2017 (in thousands):
 Three Months Ended June 30, 2018
 
Employee Severance and Benefit Costs (1)
 
Other Exit Costs (1)
 Total Restructuring Charges (Credits)
North America$
 $177
 $177
International(576) 
 (576)
Consolidated$(576) $177
 $(399)
 Six Months Ended June 30, 2018
 
Employee Severance and Benefit Costs (1)
 
Other Exit Costs (1)
 Total Restructuring Charges (Credits)
North America$
 $177
 $177
International(346) 53
 (293)
Consolidated$(346) $230
 $(116)
 Three Months Ended June 30, 2017
 
Employee Severance and Benefit Costs (2)
 Other Exit Costs Total Restructuring Charges
North America$2,687
 $288
 $2,975
International86
 1,523
 1,609
Consolidated$2,773
 $1,811
 $4,584
 Six Months Ended June 30, 2017
 
Employee Severance and Benefit Costs (2)
 Other Exit Costs Total Restructuring Charges
North America$4,465
 $465
 $4,930
International609
 1,776
 2,385
Consolidated$5,074
 $2,241
 $7,315
(1)The $0.4$10.5 million and $13.3 million and $0.1 million of restructuring credits for the three and six months ended June 30, 2018, respectively, reflect changes in estimates related to prior actions.
(2)The employee severance and benefit costs for the three and six months ended June 30, 2017 related to the termination of approximately 150 and 350 employees, respectively.
The following table summarizes the restructuring liability activity for the six months ended June 30, 2019 and 2018. We did not recognize any impairment losses in relation to the deferred costs.
Variable Consideration for Unredeemed Vouchers
In our International segment and, to a lesser extent, in our North America segment, our merchant agreements have redemption payment terms, under which the merchant is not paid its share of the sale price for a voucher sold through one of our online marketplaces until the customer redeems the related voucher. If the customer does not redeem a voucher with such merchant payment terms, we retain all of the gross billings for that voucher, rather than retaining only our net commission. We estimate the variable consideration from vouchers that will not ultimately be redeemed using our historical voucher redemption experience and recognize that amount as revenue at the time of sale. We only recognize amounts in variable consideration when we believe it is probable that a significant reversal of revenue will not occur in future periods, which requires us to make significant estimates of future redemptions. If actual redemptions differ from our estimates, the effects could be material to the condensed consolidated financial statements. As of June 30, 2019 and December 31, 2018, (in thousands):
 Employee Severance and Benefit Costs Other Exit Costs Total
Balance as of December 31, 2017$3,817
 $304
 $4,121
Charges payable in cash(346) 230
 (116)
Cash payments(1,428) (53) (1,481)
Foreign currency translation(67) 
 (67)
Balance as of June 30, 2018$1,976
 $481
 $2,457
we constrained $15.3 million and $13.7 million in revenue from unredeemed vouchers that we may recognize in future periods when we determine it is probable that a significant amount of that revenue will not be subsequently reversed.
13.10. INCOME TAXES
The Company'sOur income tax provision for interim periods is determined using an estimate of itsour annual effective tax rate, adjusted for discrete items.
For the three months ended June 30, 2019, we recorded an income tax expense from continuing operations of $2.0 million on a pretax loss from continuing operations of $35.6 million. For the three months ended June 30, 2018, the Companywe recorded an income tax expense from continuing operations of $1.6 million on a pretax loss from continuing operations of $90.7 million. For the threesix months ended June 30, 2017, the Company2019, we recorded an income tax expensebenefit from continuing operations of $3.9$1.5 million on a pretax loss from continuing operations of $1.5$80.3 million. For the six months ended June 30, 2018, the Companywe recorded an income tax benefit from continuing operations of $0.8 million on a pretax loss from continuing operations of $95.8 million. For the six months ended June 30, 2017, the Company recorded an income tax expense from continuing operations of $8.5 million on a pretax loss from continuing operations of $17.8 million.
The Company'sOur U.S. Federal income tax rate is 21% for the three and six months ended June 30, 2018 and was 35% for the three and six months ended June 30, 2017.. The primary factor impacting the effective tax rate for the three and six months ended June 30, 20182019 and 20172018 was the pretax losses incurred in jurisdictions that have valuation allowances against their net deferred tax assets. We expect that our consolidated effective tax rate in future periods will continue to differ significantly from the U.S. federal income tax rate as a result of our tax obligations in jurisdictions with profits and valuation allowances in jurisdictions with losses. The effective tax rate for the six months ended June 30, 2019 also reflected the reversal of reserves for uncertain tax positions due to the closure of a tax audit. The effective tax rate for the six months ended June 30, 2018 also reflected a $6.4 million income tax benefit resulting from the impact of adoptingAccounting Standards Codification Topic 606,Revenue from Contracts with Customers ("Topic 606") on intercompany activity in certain foreign jurisdictions.
The Company isWe are currently undergoing income tax audits in multiple jurisdictions. It is likely that the examination phase of some of those audits will conclude in the next 12 months. There are many factors, including factors outside of the Company'sour control, which influence the progress and completion of those audits. During the fourth quarter 2017, the Company received an incomeWe are subject to claims for tax assessment andassessments by foreign jurisdictions, including a notification of proposed assessment from the tax authorities in two foreign jurisdictions, totaling $134.5 million in the aggregate. The Company believesfor $109.9 million. We believe that the assessments,assessment, which primarily relaterelates to transfer pricing on transactions occurring fromin 2011, to 2014, areis without merit and it intendswe intend to vigorously defend itselfourselves in those matters.that matter. In addition to any potential increases in itsour liabilities for uncertain tax positions from the ultimate resolution of those assessments, the Company believesthat assessment, we believe that it is reasonably possible that reductions of up to $40.6$21.0 million in unrecognized tax benefits may occur within the 12 months following June 30, 20182019 upon closing of income tax audits or the expiration of applicable statutes of limitations.
The Jobs Act was signed into law on December 22, 2017. The Company has made provisional estimates for the impact of the Jobs Act related to the re-measurement of deferred income taxes, valuation allowances, uncertain tax positions, and its assessment of permanently reinvested earnings. Those estimates may be impacted by the need for further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations and state tax conformity to federal tax changes. Additionally, while the Company does not expect to incur the deemed repatriation tax, it has not yet finalized the related calculations. The Jobs Act also establishes global intangible low-taxed income ("GILTI") provisions that impose a tax on foreign income in excess of a deemed return on intangible assets of foreign corporations. The Company is in the process of evaluating the impact of taxes on GILTI and has not yet determined whether its accounting policy will be to recognize deferred taxes for basis differences that are expected to affect the amount of GILTI inclusion upon reversal or to recognize taxes on GILTI as an expense in the period incurred.
In general, it is theour practice and intention of the Company to reinvest the earnings of itsour non-U.S. subsidiaries in those operations. Additionally, while the Company doeswe did not expect to incur the deemed repatriation tax, established by the Jobs Act, an actual repatriation from itsour non-U.S. subsidiaries could be subject to foreign and U.S. state income taxes. Aside from limited exceptions for which the related deferred tax liabilities recognized as of June 30, 20182019 and December 31, 20172018 are immaterial, the Company doeswe do not intend to distribute earnings of foreign subsidiaries for which it haswe have an excess of the financial reporting basis over the tax basis of itsour investments and therefore hashave not recorded any deferred taxes related to such amounts. The actual tax cost resulting from a distribution would depend on income tax laws and circumstances at the time of distribution. Determination of the amount of unrecognized deferred tax liability related to the excess of the financial reporting basis over the tax basis of the Company'sour foreign subsidiaries is not practical due to the complexities associated with the calculation.
Groupon uses a cost-sharing arrangement under which controlled members agree to share the costs and risks of developing intangible properties in accordance with their reasonably anticipated share of benefits from the intangibles. On July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to stock-based compensation. This opinion reversed an earlier decision of the United States Tax Court. On August 7, 2018, the Ninth Circuit Court of Appeals withdrew its July 24, 2018 opinion. On June 7, 2019, the United States Court of Appeals for the Ninth Circuit reversed the Tax Court decision and ruled that stock-based compensation must be included in the shared pool of expenses. We do not expect that the ruling will have a material net impact on our provision for income taxes for the year ending December 31, 2019 due to the valuation allowances against our net deferred tax assets in the related jurisdictions.
14.11. 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. Fair value is a market-based measurement that is 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:


21

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




Level 1 - Measurements that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Measurements that include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Measurements 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 useswe use various valuation approaches within the fair value measurement framework. The valuation methodologies used for the Company'sour assets and liabilities measured at fair value and their classification in the valuation hierarchy are summarized below:
Cash equivalents. Cash equivalents primarily consisted of AAA-rated money market funds. 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.
Fair value option investments and available-for-sale securities. To determine the fair value of itsour fair value option investments each period, the Companywe first estimatesestimate the fair value of each entity in its entirety. The CompanyWe primarily usesuse the discounted cash flow method, which is an income approach, to estimate the fair value of the investees.entities. The key inputs to determining fair values under that approach are cash flow forecasts and discount rates. As of June 30, 2018 and December 31, 2017, the Company applied discount rates of 21% and 22%, respectively, in its discounted cash flow valuations for Monster LP. The CompanyWe also usesuse a market approach valuation technique, which is based on market multiples of guideline companies, to determine the fair value of each entity. The discounted cash flow and market multiple valuations are then evaluated and weighted to determine the amount that is most representative of the fair value of each entity. Once the Company determineswe determine the fair value of each entity, itwe then determinesdetermine the fair value of itsour specific investments in those entities. The entities have complex capital structures, so the Company applieswe apply an option-pricing model that considers the liquidation preferences of each investee’sentity's respective classes of ownership interests to determine the fair value of the Company’sour investment in each entity.
The CompanyWe also hashave investments in redeemable preferred shares and had investments in convertible debt securities issued by nonpublic entities. The Company measuresWe measure the fair value of those available-for-sale securities using the


21

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

discounted cash flow method.
The Company hasWe have classified itsour fair value option investments and itsour investments in available-for-sale securities as Level 3 due to the lack of observable market data over fair value inputs such as cash flow projections and discount rates. Increases in projected cash flows and decreases in discount rates contribute to increases in the estimated fair values of the fair value option investments and available-for-sale securities, whereas decreases in projected cash flows and increases in discount rates contribute to decreases in their fair values.
Contingent consideration. The Company isWe are subject to a contingent consideration arrangement to transfer a maximum payout in cash of $2.6$2.5 million to the former owners of a business acquired on April 30, 2018. See Note 4, Business Combinations, for further discussion of that acquisition. Additionally, the Company had contingent obligations in prior periods to transfer cash to the former owners of a previous business acquisition if specified financial results were met (i.e. an earnout).
Liabilities for contingent consideration are measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred in the related business combination and subsequent changes in fair value recorded in earnings within Selling, general and administrative expense on the condensed consolidated statements of operations.
The Company usesWe use an income approach to value contingent consideration obligations based on the present value of probability-weighted future cash flows. The Company classifiesWe classify the contingent consideration liabilities as Level 3 due to the lack of relevant observable market data over fair value inputs such as probability-weighting of payment outcomes.


22

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





The following tables summarize the Company's assets that are measured at fair value on a recurring basis as of June 30, 20182019 and December 31, 20172018 (in thousands):
   Fair Value Measurement at Reporting Date Using
 June 30, 2018 Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 Significant Other
Observable Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
Assets:       
Fair value option investments$74,898
 $
 $
 $74,898
Available-for-sale securities:       
Convertible debt securities10,236
 
 
 10,236
Redeemable preferred shares9,961
 
 
 9,961
        
Liabilities:       
Contingent Consideration1,542
 
 
 1,542
   Fair Value Measurement at Reporting Date Using
 June 30, 2019 Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 Significant Other
Observable Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
Assets:       
Fair value option investments$4,917
 $
 $
 $4,917
Available-for-sale securities - redeemable preferred shares10,201
 
 
 10,201
        
Liabilities:       
Contingent consideration1,239
 
 
 1,239
   Fair Value Measurement at Reporting Date Using
 December 31, 2018 Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 Significant Other
Observable Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
Assets:       
Fair value option investments$73,902
 $
 $
 $73,902
Available-for-sale securities - redeemable preferred shares10,340
 
 
 10,340
        
Liabilities:       
Contingent consideration1,529
 
 
 1,529

   Fair Value Measurement at Reporting Date Using
 December 31, 2017 Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 Significant Other
Observable Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
Cash equivalents$137,975
 $137,975
 $
 $
Fair value option investments82,966
 
 
 82,966
Available-for-sale securities:       
Convertible debt securities11,354
 
 
 11,354
Redeemable preferred shares15,431
 
 
 15,431




2322

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





The following table provides a roll-forwardrollforward of the fair value of recurring Level 3 fair value measurements for the three and six months ended June 30, 20182019 and 20172018 (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Assets       
Fair value option investments:       
Beginning Balance$32,494
 $77,933
 $73,902
 $82,966
Total gains (losses) included in earnings(27,577) (3,035) (68,985) (8,068)
Ending Balance$4,917
 $74,898
 $4,917
 $74,898
Unrealized gains (losses) still held (1)
$(27,577) $(3,035) $(68,985) $(8,068)
Available-for-sale securities       
Convertible debt securities:       
Beginning Balance$
 $11,070
 $
 $11,354
Transfer to other equity investment upon conversion of convertible debt security
 (2,508) 
 (2,508)
Total gains (losses) included in other comprehensive income (loss)
 (541) 
 (1,042)
Total gains (losses) included in earnings (2)

 2,215
 
 2,432
Ending Balance$
 $10,236
 $
 $10,236
Unrealized gains (losses) still held (1)
$
 $2,599
 $
 $2,405
Redeemable preferred shares:       
Beginning Balance$10,394
 $14,576
 $10,340
 $15,431
Total gains (losses) included in other comprehensive income (loss)(193) 
 (139) 
Impairments included in earnings
 (4,615) 
 (5,470)
Ending Balance$10,201
 $9,961
 $10,201
 $9,961
Unrealized gains (losses) still held (1)
$(193) $(4,615) $(139) $(5,470)
Liabilities       
Contingent Consideration:       
Beginning Balance$1,586
 $
 $1,529
 $
Issuance of contingent consideration in connection with acquisition
 1,589
 
 1,589
Settlements of contingent consideration liabilities(312) 
 (312) 
Total losses (gains) included in earnings5
 14
 27
 14
Foreign currency translation(40) (61) (5) (61)
Ending Balance$1,239
 $1,542
 $1,239
 $1,542
Unrealized gains (losses) still held (1)
$5
 $(47) $27
 $(47)
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Assets       
Fair value option investments:       
Beginning Balance$77,933
 $82,887
 $82,966
 $82,584
Total gains (losses) included in earnings(3,035) (1,448) (8,068) (1,145)
Ending Balance$74,898
 $81,439
 $74,898
 $81,439
Unrealized gains (losses) still held (1)
$(3,035) $(1,448) $(8,068) $(1,145)
Available-for-sale securities       
Convertible debt securities:       
Beginning Balance$11,070
 $11,931
 $11,354
 $10,038
Purchase of convertible debt security
 
 
 1,612
Proceeds at maturity of convertible debt security
 (1,843) 
 (1,843)
Transfer to other equity investment upon conversion of convertible debt security(2,508) 
 (2,508) 
Total gains (losses) included in other comprehensive income (loss)(541) (575) (1,042) (533)
   Total gains (losses) included in earnings (2)
2,215
 1,355
 2,432
 1,594
Ending Balance$10,236
 $10,868
 $10,236
 $10,868
Unrealized gains (losses) still held (1)
$2,599
 $512
 $2,405
 $816
Redeemable preferred shares:       
Beginning Balance$14,576
 $17,788
 $15,431
 $17,444
Total gains (losses) included in other comprehensive income (loss)
 (1,865) 
 (1,521)
Impairments included in earnings(4,615) 
 (5,470) 
Ending Balance$9,961
 $15,923
 $9,961
 $15,923
Unrealized (losses) gains still held (1)
$(4,615) $(1,865) $(5,470) $(1,521)
   

    
Liabilities       
Contingent Consideration:       
Beginning Balance$
 $14,600
 $
 $14,588
Issuance of contingent consideration in connection with acquisition1,589
 
 1,589
 
Settlements of contingent consideration liabilities
 (7,858) 
 (7,858)
Reclass to non-fair value liabilities when no longer contingent
 (6,778) 
 (6,778)
Total losses (gains) included in earnings14
 36
 14
 48
Foreign currency translation(61) 
 (61) 
Ending Balance$1,542
 $
 $1,542
 $
Unrealized losses (gains) still held (1)
$(47) $
 $(47) $

(1)Represents the unrealized gains or losses recorded in earnings and/or other comprehensive income (loss) during the period for assets and liabilities classified as Level 3 that are still held (or outstanding) at the end of the period.
(2)Represents a gain at maturity of a previously impaired convertible debt security, accretion of interest income and changes in the fair value of an embedded derivative.
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 CompanyWe did not record any significant nonrecurring fair value measurements after initial recognition for the three and six months ended June 30, 2019. During the three months ended June 30, 2018, we recorded a $4.6 million impairment of an other


24

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




equity investment for the three months ended June 30, 2018.investment. To determine the fair value of the investment, the Companywe considered the financial condition of the investee and applied a market approach. The Company hasWe classified the fair value measurement of that other equity investment as Level 3 because it involves significant unobservable inputs. The CompanyWe did not record any other nonrecurring fair value measurements after initial recognition for the three and six


23

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

months ended June 30, 2018 and 2017.2018.
Estimated Fair Value of Financial Assets and Liabilities Not Measured at Fair Value
The following table presents the carrying amount and fair value of equity securities that were classified as cost method investments as of December 31, 2017 (in thousands):
 December 31, 2017
 Carrying Amount Fair Value
Cost method investments (1)
$25,438
 $32,792
(1)
See Note 2, Adoption of New Accounting Standards, and Note 6, Investments, for information about the Company's adoption of ASU 2016-01 on January 1, 2018 and its impact on accounting for equity investments without readily determinable fair values that were previously subject to the cost method of accounting.
The fair values of the Company's 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 classified the fair value measurements of its cost method investments as Level 3 measurements within the fair value hierarchy as of December 31, 2017 because they involve significant unobservable inputs such as cash flow projections and discount rates.
The Company's otherOur financial instruments not carried at fair value consist primarily of accounts receivable, restricted cash, accounts payable, accrued merchant and supplier payables and accrued expenses. The carrying values of those assets and liabilities approximate their respective fair values as of June 30, 20182019 and December 31, 20172018 due to their short-term nature.
15.12. INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares and the effect of potentially dilutive securities outstanding during the period. Potentially dilutive securities include stock options, restricted stock units, performance share units, performance bonus awards, ESPP shares, warrants and convertible senior notes. If dilutive, those potentially dilutive securities are reflected in diluted net income (loss) per share by application of the treasury stock method, except for the convertible senior notes, which are subject to the if-converted method.


25

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




The following table sets forth the computation of basic and diluted net income (loss) per share of common stock for the three and six months ended June 30, 20182019 and 20172018 (in thousands, except share amounts and per share amounts):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Basic and diluted net income (loss) per share:       
Numerator       
Net income (loss) - continuing operations$(37,645) $(92,254) $(78,815) $(95,049)
Less: Net income (loss) attributable to noncontrolling interests2,601
 2,780
 6,080
 6,873
Net income (loss) attributable to common stockholders - continuing operations(40,246) (95,034) (84,895) (101,922)
Net income (loss) attributable to common stockholders - discontinued operations
 
 2,162
 
Net income (loss) attributable to common stockholders$(40,246) $(95,034) $(82,733) $(101,922)
Denominator       
Weighted-average common shares outstanding567,962,461
 565,284,705
 569,014,065
 563,502,954
        
Basic and diluted net income (loss) per share:       
Continuing operations$(0.07) $(0.17) $(0.15) $(0.18)
Discontinued operations0.00
 0.00
 0.01
 0.00
Basic and diluted net income (loss) per share$(0.07) $(0.17) $(0.14) $(0.18)

 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Basic and diluted net income (loss) per share:       
Numerator       
Net income (loss) - continuing operations$(92,254) $(5,403) $(95,049) $(26,272)
Less: Net income (loss) attributable to noncontrolling interests2,780
 2,547
 6,873
 6,579
Net income (loss) attributable to common stockholders - continuing operations(95,034) (7,950) (101,922) (32,851)
Net income (loss) attributable to common stockholders - discontinued operations
 (1,376) 
 (889)
Net income (loss) attributable to common stockholders$(95,034) $(9,326) $(101,922) $(33,740)
Denominator       
Weighted-average common shares outstanding565,284,705
 559,762,180
 563,502,954
 560,978,712
        
Basic and diluted net income (loss) per share (1):
       
Continuing operations$(0.17) $(0.01) $(0.18) $(0.06)
Discontinued operations0.00
 (0.01) 0.00
 0.00
Basic and diluted net income (loss) per share$(0.17) $(0.02) $(0.18) $(0.06)
(1)The potentially dilutive impacts of outstanding equity awards, warrants and convertible senior notes have been excluded from the calculation of dilutive net income (loss) per share for the three and six months ended June 30, 2018 and 2017 as their effect on net income (loss) per share from continuing operations was antidilutive.
The following weighted-average potentially dilutive instruments are not included in the diluted net income (loss) per share calculations above because they would have had an antidilutive effect on the net income (loss) per share from continuing operations:
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Restricted stock units37,031,941
 32,602,563
 32,060,396
 30,378,335
Other stock-based compensation awards1,581,255
 1,615,249
 1,667,000
 2,413,637
Convertible senior notes46,296,300
 46,296,300
 46,296,300
 46,296,300
Warrants46,296,300
 46,296,300
 46,296,300
 46,296,300
Total131,205,796
 126,810,412
 126,319,996
 125,384,572



24

GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Restricted stock units32,602,563
 30,134,808
 30,378,335
 27,247,728
Other stock-based compensation awards1,615,249
 3,437,075
 2,413,637
 3,667,440
Convertible senior notes46,296,300
 46,296,300
 46,296,300
 46,296,300
Warrants46,296,300
 46,296,300
 46,296,300
 46,296,300
Total126,810,412
 126,164,483
 125,384,572
 123,507,768

The CompanyWe had outstanding performance share units as of June 30, 20182019 and 20172018 that were eligible to vest into shares of common stock subject to the achievement of specified performance conditions. Contingently issuable shares are excluded from the computation of diluted earnings per share if, based on current period results, the shares would not be issuable if the end of the reporting period were the end of the contingency period. There were up to 7,706,47416,966,170 and 2,505,3467,706,474 shares of common stock issuable upon vesting of outstanding performance share units as of June 30, 20182019 and 2017, respectively,2018 that were excluded from the table above as the performance conditions were not satisfied as of the end of the respective periods.
16.13. SEGMENT INFORMATION
The segment information reported in the tables below reflects the operating results that are regularly reviewed by the Company'sour chief operating decision maker to assess performance and make resource allocation decisions. The Company'sOur operations are organized into two segments: North America and International.


26

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




The following table summarizes revenue by reportable segment and category for the three and six months ended June 30, 20182019 and 20172018 (in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 20172019 2018 2019 2018
North America              
Service revenue:              
Local$185,870
 $207,534
 $373,281
 $408,079
$177,082
 $185,870
 $357,459
 $373,281
Goods3,796
 4,112
 8,670
 5,816
3,714
 3,796
 6,841
 8,670
Travel19,888
 22,320
 39,972
 42,782
16,125
 19,888
 35,066
 39,972
Product revenue - Goods170,710
 217,946
 351,597
 468,592
127,739
 170,710
 282,459
 351,597
Total North America revenue (1)
380,264
 451,912
 773,520
 925,269
324,660
 380,264
 681,825
 773,520
              
International              
Service revenue:              
Local71,425
 66,108
 146,003
 129,683
69,995
 71,425
 143,185
 146,003
Goods4,967
 4,984
 8,381
 9,268
2,610
 4,967
 4,065
 8,381
Travel9,706
 10,796
 21,142
 21,798
8,077
 9,706
 16,814
 21,142
Product revenue - Goods151,034
 128,819
 294,890
 250,227
127,235
 151,034
 265,098
 294,890
Total International revenue (1)
$237,132
 $210,707
 $470,416
 $410,976
$207,917
 $237,132
 $429,162
 $470,416
(1)North America includes revenue from the United States of $371.1$319.2 million and $442.7$371.1 million for the three months ended June 30, 2019 and 2018 and 2017, respectively,$668.0 million and $756.5 million and $907.4 million for the six months ended June 30, 20182019 and 2017, respectively.2018. International includes revenue from the United Kingdom of $91.5$71.3 million and $74.4$91.5 million for the three months ended June 30, 2019 and 2018 and 2017, respectively,$152.4 million and $174.5 million and $139.9 million for the six months ended June 30, 20182019 and 2017, respectively.2018. There were no other individual countries that represented more than 10% of consolidated total revenue for the three and six months ended June 30, 20182019 and 2017.2018. Revenue is attributed to individual countries based on the location of the customer.


25

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

The following table summarizes gross profit by reportable segment and category for the three and six months ended June 30, 20182019 and 20172018 (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
North America       
Service gross profit:       
Local$157,673
 $165,285
 $318,755
 $332,041
Goods2,995
 2,990
 5,558
 6,931
Travel12,806
 16,303
 28,074
 32,305
Product gross profit - Goods25,110
 34,793
 55,999
 67,774
Total North America gross profit198,584
 219,371
 408,386
 439,051
        
International       
Service gross profit:       
Local65,780
 67,360
 134,758
 137,575
Goods2,384
 4,565
 3,652
 7,652
Travel7,370
 8,919
 15,411
 19,570
Product gross profit - Goods18,014
 23,443
 35,941
 44,695
Total International gross profit$93,548
 $104,287
 $189,762
 $209,492
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
North America       
Service gross profit:       
Local$165,285
 $179,609
 $332,041
 $348,951
Goods2,990
 3,207
 6,931
 4,514
Travel16,303
 17,755
 32,305
 32,920
Product gross profit - Goods34,793
 33,289
 67,774
 68,412
Total North America gross profit219,371
 233,860
 439,051
 454,797
        
International       
Service gross profit:       
Local67,360
 62,303
 137,575
 121,497
Goods4,565
 4,506
 7,652
 8,161
Travel8,919
 9,996
 19,570
 20,032
Product gross profit - Goods23,443
 17,402
 44,695
 33,031
Total International gross profit$104,287
 $94,207
 $209,492
 $182,721


27

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





The following table summarizes operating income (loss) by reportable segment for the three and six months ended June 30, 20182019 and 20172018 (in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 20172019 2018 2019 2018
Operating income (loss) (1) (2) (3) (4) :
       
Operating income (loss) (1) (2) (3):
       
North America
$(68,524) $(12,033) $(70,384) $(26,816)$(372) $(68,524) $4,964
 $(70,384)
International4,279
 4,635
 9,524
 7,738
(6,767) 4,279
 (9,908) 9,524
Total operating income (loss)$(64,245) $(7,398) $(60,860) $(19,078)$(7,139) $(64,245) $(4,944) $(60,860)
(1)Includes stock-based compensation of $15.0$24.1 million and $20.0$15.0 million for North America and $1.3$2.5 million and $1.3 million for International for the three months ended June 30, 2019 and 2018 and 2017, respectively,$38.9 million and $32.9 million and $38.3 million for North America and $2.7$4.1 million and $2.7 million for International for the six months ended June 30, 20182019 and 2017, respectively.2018.
(2)Includes acquisition-related (benefit) expense, net of $0.7 million for International for the three and six months ended June 30, 2018.
(3)Includes restructuring charges (credits) of $0.2a $75.0 million and $3.0 million for North America and $(0.6) million and $1.6 million for International for the three months ended June 30, 2018 and 2017, respectively, and $0.2 million and $4.9 million for North America and $(0.3) million and $2.4 million for International for the six months ended June 30, 2018 and 2017, respectively.
(4)
Includes a $75.0 million charge recognized in the second quarter of 2018 to increase the accrual for the IBM patent litigation matter for North America for the three and six months ended June 30, 2018. See Note 9, Commitments and Contingencies, for additional information.
The following table summarizes the Company's total assets by reportable segment as of June 30, 20182019 and December 31, 20172018 (in thousands):
June 30, 2018 December 31, 2017June 30, 2019 December 31, 2018
Total assets:      
North America (1)
$871,222
 $1,045,072
$895,928
 $958,412
International (1)
617,478
 632,433
543,280
 683,730
Consolidated total assets$1,488,700
 $1,677,505
$1,439,208
 $1,642,142
(1)North America contains assets from the United States of $846.3$870.6 million and $1,006.2$940.5 million as of June 30, 20182019 and December 31, 2017, respectively.2018. International contains assets from Ireland of $162.7$204.6 million and $219.7 millionas of December 31, 2018. Assets from Ireland were less than 10% of consolidated total assets as of June 30, 2018 and December 31, 2017, respectively.2019. There were no other individual countries that represented more than 10% of consolidated total assets as of June 30, 20182019 and December 31, 2017.2018.




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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. See Part I, Financial Information, Forward-Looking Statements, for additional information.
Overview
Groupon operates online local commerce marketplaces throughout the worldin 15 countries that connect merchants to consumers by offering goods and services, generally at a discount. Consumers access those marketplaces through our websites, primarily localized groupon.com sites in many countries, and our mobile applications. Traditionally, local merchants have tried to reach consumers and generate sales through a variety of methods, including online advertising, paid telephone directories, direct mail, newspaper, radio, television and other promotions. By bringing the brick and mortar world of local commerce onto the Internet, Groupon is helping local merchants to attract customers and sell goods and services. We provide consumers with savings and help them discover what to do, eat, see, buy and where to travel.
Our operations are organized into two segments: North America and International. For the six months ended June 30, 2019, we derived 61.4% of our revenue from our North America segment and 38.6% of our revenue from our International segment. See Item 1, Note 13, Segment Information, for additional information. We offer goods and services through our online marketplaces in three primary categories: Local, Goods and Travel. During 2017 and continuing in 2018, we are shifting more of the focus on our websites and mobile applications in North America to offerings in our Local category, which we believe provides us with the greatest opportunity for long-term gross profit growth. As part of our growth strategy, we have also been developing and testing a number of product enhancements that are intended to make our offerings easier to use for both customers and merchants, including voucherless offerings that are linked to customer credit cards.
We generate both product and service revenue from our business operations. In prior years, we referred to product revenue and service revenue as "direct revenue" and "third-party and other revenue," respectively. This terminology change did not impact amounts presented in the accompanying condensed consolidated financial statements.
We earnOur product revenue from direct sales oftransactions in which we sell merchandise inventory throughin our Goods category. Product revenuecategory is reported on a gross basis as the purchase price received from the customer. Product revenue, including associated shipping revenue, is recognized when title passes to the customer upon delivery of the product.
We primarily earnOur service revenue from transactions in which we earn commissions by selling goods or services on behalf of third-party merchants. Those transactions generally involve a customer's purchase of a voucher through one of our online marketplaces that can be redeemed with a third-party merchant for specified goods or services (or for discounts on specified goods or services). Service revenue from those transactionsmerchants is reported on a net basis as the purchase price collected from the customer less the portion of the purchase price paid to the merchant.
Our focus is on driving long-term gross profit growth by enhancing the customer experience, establishing Groupon as an open platform, continuing to realize our international potential and maintaining a culture of operational efficiency. We have developed and are testing a number of product enhancements intended to make our offerings easier to use for both customers and merchants and to improve purchase frequency, including cash back offers linked to customer credit cards, booking capabilities and a paid membership program in North America, Groupon Select, which offers greater discounts on our offerings and other benefits. We have also entered into commercial agreements with third parties that enable us to feature additional merchant offerings through our marketplaces and for our inventory to be distributed through other marketplaces. We maintain a long-term focus on driving International to achieve gross profit that is payablemore comparable to the third-party merchant. We recognize revenue from those transactions whenthat of North America. Our initiatives to grow International include increasing our commission has been earned, which occurs when a sale through onemarketing spend and leveraging enhanced marketing analytics, investing more technology resources toward expanding product and service offerings, and growing our inventory of deal offerings. While we expect to invest in our online marketplaces is completed and the related voucher has been made available to the customer. Service revenue also includes commissions thatkey initiatives, we earn when customers make purchases with retailers using digital coupons accessed through our websites and mobile applications and from voucherless merchant offerings in which customers earn cash back on their credit card statements when they transact with third-party merchants. We recognize those commissions as revenue when earned, which occurs when the underlying transactions between the customer and the third-party merchant are completed.
On April 30, 2018, we acquired 80% of the outstanding shares of Cloud Savings Company, Ltd. ("Cloud Savings"), for total consideration of $74.3 million, consisting of $64.1 million in cash, an $8.6 million financing obligation, and contingent consideration of $1.6 million. Cloud Savings is a UK-based business that operates online discount code and digital gift card platforms, and its results of operations are reported within our International segment.
On March 2, 2016, International Business Machines Corporation ("IBM") filed a complaint in the United States District Court for the District of Delaware against us (the "Delaware Action"), alleging that we have infringed andwill continue to willfully infringe certain IBM patents. Trial commenced in the Delaware Action on July 16, 2018do so as disciplined operators and on July 27, 2018 a jury returned a verdict finding the Company willfully infringed those patents and awarded damages of $82.5 millionseek opportunities to IBM. The court has the discretion to enhance this award for willfulness, impose interest, impose a continuing royalty for two unexpired patents or award injunctive relief. The court also has the discretion to reduce or vacate the damages award or enter judgment for us on some or all of the claims notwithstanding the jury verdict. We intend to seek to overturn the verdict and reduce the damages award through post-trial motions and appeal. For the three months ended June 30, 2018, we recorded a $75.0 million charge to increaseimprove our contingent liability for this matter. That charge is classified within Selling, general and administrative in the accompanying condensed consolidated statement of operations.efficiency.
How We Measure Our Business
We measure our business withuse several financial and operating metrics. We use those metrics to assess the progress of our business and make decisions on where to allocate capital, time and technology investments. Certain of the financial metrics are reported in accordance with U.S. GAAP and certain of those metrics are considered non-GAAP financial measures. As our business evolves, we may make changes in future periods to the key financial and operating metrics that we use to measure our business. For further information and reconciliations to the most applicable financial measures under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the Results of Operations section.


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Financial Metrics
Revenue. Product revenue is earned from direct sales of merchandise inventory through our Goods category and is reported on a gross basis as the purchase price received from the customer. Service revenue is earned from transactions in which we earn commissions by selling goods or services on behalf of third-party merchants, primarily through sales of vouchers and similar transactions in which we collect the transaction price from the customer and remit a portion of that transaction price to the third-party merchant who will provide the related goods or services. Service revenue from those transactions is reported on a net basis as the purchase price collected from the customer less the portion of the purchase price that is payable to the third-party merchant. Service revenue also includes commissions we earn when customers make purchases with retailers using digital coupons accessed through our websites and mobile applications and from voucherless merchant offerings in which customers earn cash back on their credit card statements when they transact with third-party merchants.
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 product revenue, which is reported on a gross basis, and service revenue, which primarily consists of transactions reported on a net basis, we believe that gross profit is an important measure for evaluating our performance.
Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we define as net income (loss) from continuing operations excluding income taxes, interest and other non-operating items, depreciation and amortization, stock-based compensation, acquisition-related expense (benefit), net and other special charges and credits, including items that are unusual in nature or infrequently occurring. For further information and a reconciliation to Income (loss) from continuing operations, refer to our discussion under Non-GAAP Financial Measures in the Results of Operations section.
Free cash flow. Free cash flow is a non-GAAP financial measure that comprises net cash provided by (used in) operating activities from continuing operations less purchases of property and equipment and capitalized software from continuing operations. For further information and a reconciliation to Net cash provided by (used in) operating activities from continuing operations, refer to our discussion in the Liquidity and Capital Resources section.
Revenue is earned through product and service revenue transactions. We earn product revenue from direct sales of merchandise inventory in our Goods category and report product revenue on a gross basis as the purchase price received from the customer. We earn service revenue from transactions in which we generate commissions by selling goods or services on behalf of third-party merchants, primarily through sales of vouchers and similar transactions in which we collect the transaction price from the customer and remit a portion of that transaction price to the third-party merchant who will provide the related goods or services. We report service revenue from those transactions on a net basis as the purchase price collected from the customer less the portion of the purchase price that is payable to the third-party merchant. Service revenue also includes commissions we earn when customers make purchases with retailers using digital coupons accessed through our websites and mobile applications and from voucherless merchant offerings in which customers earn cash back on their credit card statements when they transact with third-party merchants.
Gross profit reflects the net margin we earn after deducting our cost of revenue from our revenue. Due to the lack of comparability between product revenue, which is reported on a gross basis, and service revenue, which primarily consists of transactions reported on a net basis, we believe that gross profit is an important measure for evaluating our performance.
Adjusted EBITDA is a non-GAAP financial measure that we define as net income (loss) from continuing operations excluding income taxes, interest and other non-operating items, depreciation and amortization, stock-based compensation, acquisition-related expense (benefit), net and other special charges and credits, including items that are unusual in nature or infrequently occurring. For further information and a reconciliation to Income (loss) from continuing operations, refer to our discussion under Non-GAAP Financial Measures in the Results of Operations section.
Free cash flow is a non-GAAP financial measure that comprises net cash provided by (used in) operating activities from continuing operations less purchases of property and equipment and capitalized software. For further information and a reconciliation to Net cash provided by (used in) operating activities from continuing operations, refer to our discussion in the Liquidity and Capital Resources section.
The following table presents the above financial metrics for the three and six months ended June 30, 20182019 and 20172018 (in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 20172019 2018 2019 2018
Revenue$617,396
 $662,619
 $1,243,936
 $1,336,245
$532,577
 $617,396
 $1,110,987
 $1,243,936
Gross profit323,658
 328,067
 648,543
 637,518
292,132
 323,658
 598,148
 648,543
Adjusted EBITDA56,231
 53,293
 108,838
 98,073
46,521
 56,231
 93,476
 108,838
Free cash flow (1)
26,802
 (34,775) (113,089) (186,937)(17,903) 26,802
 (182,863) (113,089)


29



Operating Metrics
(1)
Prior period free cash flow information has been updatedGross billings is the total dollar value of customer purchases of goods and services. Gross billings is presented net of customer refunds, order discounts and sales and related taxes. The substantial majority of our service revenue transactions are comprised of sales of vouchers and similar transactions in which we collect the transaction price from negative $36.1 millionthe customer and $186.4 million previouslyremit a portion of the transaction price to the third-party merchant who will provide the related goods or services. For these transactions, gross billings differs from revenue reported in our condensed consolidated statements of operations, which is presented net of the merchant's share of the transaction price. For product revenue transactions, gross billings are equivalent to product revenue reported in our condensed consolidated statements of operations. Gross billings is an indicator of our growth and business performance as it measures the dollar volume of transactions generated through our marketplaces. Tracking gross billings on service revenue transactions also allows us to monitor the percentage of gross billings that we are able to retain after payments to merchants. However, management is primarily focused on optimizing the business for long-term gross profit and Adjusted EBITDA growth.
Active customers areunique user accounts that have made a purchase during the three and sixtrailing twelve months ended June 30, 2017, respectively,("TTM") either through one of our online marketplaces or directly with a merchant for which we earned a commission. We consider this metric to reflect the adoptionbe an important indicator of ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, on January 1, 2018. See Note 2, Adoption of New Accounting Standards, for additional information on the adoption of ASU 2016-18.our business performance as it helps us
Operating Metrics
Gross Billings. This metric represents the total dollar value of customer purchases of goods and services. For sales of vouchers and similar transactions in which we collect the transaction price from the customer and remit a portion of the transaction price to the third-party merchant who will provide the related goods or services, which comprise a substantial majority of our service revenue transactions, gross billings differs from revenue reported in our condensed consolidated statements of operations, which is presented net of the merchant's share of the transaction price. For product revenue transactions, gross billings are equivalent to product 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 measures the dollar volume of transactions generated through our marketplaces. Tracking gross billings on service revenue transactions also allows us to monitor the percentage of gross billings that we are able to retain after payments to merchants.
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Active customers. We define active customers as unique user accounts that have made a purchase during the trailing twelve months ("TTM") either through one of our online marketplaces or directly with a merchant for which we earned a commission. 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 our offerings is trending. Some customers could establish and make purchases from more than one account, so it is possible that our active customer metric may count certain customers more than once in a given period. For entities that we have acquired in a business combination, this metric includes active customers of the acquired entity, including customers who made purchases prior to the acquisition. We do not include consumers who solely make purchases with retailers using digital coupons accessed through our websites and mobile applications in our active customerscustomer metric, so the acquisitionnor do we include consumers who solely make purchases of Cloud Savings on April 30, 2018 did not impact that metric.
our inventory through third-party marketplaces with which we partner.
While ourOur active customer metric increased on a year-over-year basis, that metric declined to 49.3 million for the trailing twelve months ended June 30, 2018, as compared to 49.7 million for2019 has declined both on a year-over-year basis and sequentially from the trailing twelve months ended March 31, 2018. That sequential2019. The decline is primarily attributable to a decline in part, totraffic, including traffic from email and search engine optimization ("SEO"), as well as our efforts to improve the efficiency of our marketing segmentationspend by focusing that spend on customers thatwho we believe towill have higher long-term value. That strategy has resulted in lower marketing spend on less engagedvaluable customers, which contributedparticularly in North America, and led to the sequentiala decrease in our active customer metric. We expect that trend to continue for the remainder of 2018.
Gross billings and gross profit per active customer. These metrics represent the TTM gross billings and gross profit generated per active customer. We use these metrics to evaluate trends in customer spend and in the average contribution to gross billings and gross profit on a per-customer basis. We updated the calculation of these metrics in the current year to reflect active customers as of the end of the period, rather than the average of active customers as of the beginning and end of the period, in the denominator of the calculations. Because our active customer metrics are based on purchases over a TTM period, we believe that this change improves the usefulness of these metrics. The prior period metrics presented below have been updated to reflect this change.
Units. This metric represents the number of purchases duringactive customers. We expect the reporting period, before refundstrend of declining active customers in North America to continue in 2019 and, cancellations, made either through one ofto some extent, into 2020 due to ongoing traffic declines and our online marketplaces or directly with a merchant for which we earnedcontinued focus on attracting and retaining high-quality customers.
Gross billings and gross profit per active customer are the TTM gross billings and gross profit generated per active customer. We use these metrics to evaluate trends in customer spend and in the average contribution to gross billings and gross profit on a per-customer basis.
Units is the number of purchases during the reporting period, before refunds and cancellations, made either through one of our online marketplaces, a third-party marketplace, or directly with a merchant for which we earn a commission. We do not include purchases with retailers using digital coupons accessed through our websites and mobile applications in our units metric. We consider unit growth to be an important indicator of the total volume of business conducted through our marketplaces.
Our total volume of business conducted through our marketplaces.


30



Our gross billingsunits sold declined by 12.0% for the three and six months ended June 30, 20182019 as compared with the prior year, primarily reflecting unit declines in our North America segment. The decline in total units sold in the current year was primarily attributable to fewer customers, lower customer traffic, including traffic from email and 2017SEO, and shifting impressions to support our strategic initiatives. We expect that trend to continue in 2019.
Our gross billings and units for the three and six months ended June 30, 2019 and 2018 were as follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Gross billings$1,264,263
 $1,364,233
 2,557,527
 2,722,209
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Gross billings$1,120,945
 $1,264,263
 $2,296,953
 $2,557,527
Units35,324
 39,950
 72,516
 82,374
Gross billings per unit$31.73
 $31.65
 $31.68
 $31.05

Our active customers, gross billings per active customer and gross profit per active customer for the TTM ended June 30, 20182019 and 20172018 were as follows:
 Trailing Twelve Months Ended June 30,
 2018 2017
TTM Active customers (in thousands)49,309
 48,346
TTM Gross billings per active customer (1)
$111.16
 $116.88
TTM Gross profit per active customer (1)
$27.27
 $26.53
(1)TTM Gross billings per active customer have been updated from $121.24 previously reported and TTM Gross profit per active customer has been updated from $27.52 previously reported for the trailing twelve months ended June 30, 2017 due to the change in the calculation discussed above.
Our units for the three and six months ended June 30, 2018 and 2017 were as follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Units39,950
 44,461
 82,374
 90,192
 Trailing Twelve Months Ended June 30,
 2019 2018
TTM Active customers (in thousands)46,175
 49,309
TTM Gross billings per active customer$107.03
 $111.16
TTM Gross profit per active customer$27.51
 $27.27
Factors Affecting Our Performance
Attracting and Retaining Local Merchants. As we seek to build a more complete online local commerce marketplace platform, we depend on our ability to attract and retain merchants who are willing to offer discounted products and services through our marketplaces. Additionally, merchants can generally withdraw their offerings from


29



our marketplaces at any time and their willingness to continue offering products and services through our platform depends on the effectiveness of our marketing and promotional services. We primarily source the deal offerings available on our marketplaces through our sales teams, which comprise a significant portion of our global employee base. We have also entered into commercial agreements with third parties that enable us to feature additional merchant offerings through our marketplaces. We continue to focus much of our sales efforts on sourcing local deal offerings in subcategories that we believe provide us with the best opportunities for high frequency customer purchase behavior. In connection with our efforts to grow our offerings in those high frequency subcategories, which include food and drink, health, beauty and wellness, and events and activities, and food and drink, we may be willing to offer more attractive terms to local merchants that could reduce our deal margins in future periods.
Growing our Active Customer Base and Customer Value. We must acquire and retain customers that we expect to have long-term value, and improveincrease gross profit per customer in order to grow our business. Our marketing spending is intended to attract and retain active customers and to promote increased purchase frequency. We have significantly increasedmade enhancements to our customer segmentation in recent periods that are intended to better focus our marketing spending in recent years in orderefforts on customers that we believe have a greater potential for long-term gross profit generation. In addition to drive customer growth. Ouronline marketing, such as search engine marketing ("SEM"), our marketing spending includes investments in offline campaigns intended to increase customer awareness and understanding of the Groupon brand and our product and service offerings. Additionally, we consider order discounts and certain other initiatives to drive customer acquisition and activation to be marketing-related activities, even though such activities may not be presented as marketing expense in our condensed consolidated statements of operations. The organic traffic to our websites and mobile applications including organic traffic from consumers responding to our emails has declined in recent years, such that an increasing proportion of our traffic is generated from SEM and other paid marketing channels,channels. We have also experienced declines from other sources of organic traffic, such as search engine marketing.email and SEO. As such, we are focused on developing sources of organic traffic other than email and optimizing the efficiency of our marketing spending, which is primarily guided by return on investment thresholds that are currently based on expected months-to-payback targets ranging from 12 to 18 months. Additionally, we consider order discountsour product and certain othersupply initiatives are intended to drive customer acquisitionincrease the rates at which visitors to our websites and activation to be marketing-related activities, even though such activities may not be presented as marketing expenses in our consolidated statements of operations.mobile applications complete a purchase.
Investing in Growth. We have invested significantly in product and technology enhancements intended to support the growth of our online marketplaces and we intend to continue to do so in the future. We have also invested in business acquisitions to grow our merchant and customer base and advance our product and technology capabilities. We are currently developing and testing a number of product enhancements intended to make our offerings easier to


31



use for both customers and merchants and to improve purchase frequency, including voucherless offerings that arecash back offers linked to customer credit cards, booking capabilities and a paid membership program in North America, Groupon Select, which we refer to as Groupon+,offers greater discounts on our offerings and functionality enabling appointment booking at the time an offering is purchased.other benefits. We believe that those initiatives may be important drivers for increasing customer purchase frequency and growing our business over time. We are currently focusing our efforts on growing customer awareness of thethose products and scaling the related merchant base. As such, our gross profit and operating income may be adversely impacted in the near term as we focus more on driving our strategic initiatives. Additionally, many of our marketing initiatives and related efforts on early stage voucherless offerings. Additionally, Groupon+ offerings provide cash back on the customer'soffers linked to customer credit card andcards involve Groupon collecting a net fee from the merchant, rather than selling a voucher to the customer and then remitting a portion of the proceeds to the merchant. As we report sales of vouchers to customers as gross billings, the growth of Groupon+voucherless cash back transactions in future periodswith this merchant payment structure could adversely impact our gross billings trends.trends in future periods. Mobile consumers, particularly those accessing our marketplaces through the mobile web, generally complete purchases at a lower rate and at lower average transaction prices than consumers accessing our marketplaces through desktop computers. As a substantial majority of our traffic comes from consumers on mobile devices, we are focused on improving the mobile experience in order to increase purchase rates. Our initiatives to improve the mobile experience include improving page speeds, enhancing our relevance algorithms, streamlining the checkout process and bringing our mobile web experience to parity with that of our mobile applications.
Managing Operating Efficiency. We are focused on effectively managing our cost structure as we seek to generate and grow our profitability in future periods. As a result of numerous divestitures and other exits from countries in which we previously operated, which were completed from 2015 through 2017, we reduced the global footprint of our operations from 47 countries to 15 countries. Additionally, we significantly reduced our global workforce over that period as a result of our restructuring actions. ThoseOur prior restructuring actions and our continuing efforts to automate internal processes have allowed us to centralize many of our back office activities in lower cost shared service centers resulting in significant reductions in our selling, general and administrative expensesexpense in recent periods. We have primarily used those savings to invest in marketing, people and product enhancements intended to drive the long-term growth of our business. We intend to continue to focus on maintainingdriving operating efficiency.


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Results of Operations
Gross Billings
Gross billings is an operating metric that represents the total dollar value of customer purchases of products and services. Gross billings is presented net of customer refunds, order discounts and sales and related taxes. In our Goods category, we generate gross billings from product revenue transactions in which we sell merchandise inventory directly to customers, as well as service revenue transactions in which we sell products on behalf of third-party merchants.
Three Months Ended June 30, 20182019 and 2017:2018:
Gross billings by category and segment for the three months ended June 30, 20182019 and 20172018 were as follows (dollars in thousands):
 Three Months Ended June 30,
 2018 2017 $ Change % Change
Gross billings:       
Service$942,519
 $1,017,468
 $(74,949) (7.4)%
Product321,744
 346,765
 (25,021) (7.2)
Total gross billings$1,264,263
 $1,364,233
 $(99,970) (7.3)
 Three Months Ended June 30,
 2019 2018 $ Change % Change
North America       
Service gross billings:       
Local$503,830
 $548,056
 $(44,226) (8.1)%
Goods19,615
 25,791
 (6,176) (23.9)
Travel84,029
 93,809
 (9,780) (10.4)
Total service gross billings607,474
 667,656
 (60,182) (9.0)
Product gross billings - Goods127,739
 170,710
 (42,971) (25.2)
Total North America gross billings735,213
 838,366
 (103,153) (12.3)
        
International       
Service gross billings:       
Local203,450
 203,248
 202
 0.1
Goods11,699
 22,849
 (11,150) (48.8)
Travel43,348
 48,766
 (5,418) (11.1)
Total service gross billings258,497
 274,863
 (16,366) (6.0)
Product gross billings - Goods127,235
 151,034
 (23,799) (15.8)
Total International gross billings385,732
 425,897
 (40,165) (9.4)
Total gross billings$1,120,945
 $1,264,263
 $(143,318) (11.3)
The effect on our gross billings for the three months ended June 30, 20182019 from changes in exchange rates versus the U.S. dollar was as follows (in thousands):
 Three Months Ended June 30, 2018
 
At Avg. Q2 2017 Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Gross billings$1,236,153
 $28,110
 $1,264,263
 Three Months Ended June 30, 2019
 
At Avg. Q2 2018 Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Gross billings$1,144,245
 $(23,300) $1,120,945
(1)Represents the financial statement balances that would have resulted had exchange rates in the reporting period been the same as those in effect in the prior year period.
(2)Represents the increase or decrease in the reported amount resulting from changes in exchange rates from those in effect in the prior year period.

North America
North America gross billings were 65.6% and 66.3% of total gross billings for the three months ended June 30, 2019 and 2018. North America gross billings decreased for the three months ended June 30, 2019 compared with the prior year period due to fewer customers, lower customer traffic, including traffic from email and SEO, and shifting impressions to support our strategic initiatives. Those decreases were partially offset by higher gross billings per unit due to a shift in mix of offerings sold.
The above factors also resulted in lower gross billings per active customer, which was $113.02 for the TTM ended June 30, 2019, as compared with $114.52 in the corresponding prior year period and total units sold, which decreased to 21.9 million units for the three months ended June 30, 2019, as compared with 26.6 million units in the prior year period.



3231





Gross Billings by SegmentInternational
International gross billings were 34.4% and 33.7% of total gross billings for the three months ended June 30, 2019 and 2018. International gross billings decreased $40.2 million for the three months ended June 30, 2019 compared with the prior year period, primarily due to a $23.2 million unfavorable impact from year-over-year changes in foreign currency rates, weak consumer sentiment in Europe, particularly in the United Kingdom, and intensifying competition in home and garden offerings.
Six Months Ended June 30, 2019 and 2018:
Gross billings by category and segment for the threesix months ended June 30, 20182019 and 20172018 were as follows (dollars in thousands):
 Three Months Ended June 30,
 2018 2017 $ Change % Change
North America       
Service gross billings:       
Local$548,056
 $615,833
 $(67,777) (11.0)%
Goods25,791
 27,978
 (2,187) (7.8)
Travel93,809
 112,670
 (18,861) (16.7)
Product gross billings - Goods170,710
 217,946
 (47,236) (21.7)
Total North America gross billings838,366
 974,427
 (136,061) (14.0)
        
International       
Service gross billings:       
Local203,248
 189,408
 13,840
 7.3
Goods22,849
 25,598
 (2,749) (10.7)
Travel48,766
 45,981
 2,785
 6.1
Product gross billings - Goods151,034
 128,819
 22,215
 17.2
Total International gross billings425,897
 389,806
 36,091
 9.3
Total gross billings$1,264,263
 $1,364,233
 $(99,970) (7.3)

The percentages of gross billings by segment for the three months ended June 30, 2018 and 2017 were as follows:
Q2 2018Q2 2017
chart-d5c5dc37c1ac522aa83.jpgchart-65fbfe627d7a5fe79ea.jpg
North AmericaInternational
North America
North America gross billings for the three months ended June 30, 2018 decreased from the prior year, reflecting decreases of $67.8 million in our Local category and $49.4 million in our Goods category. Factors impacting North America gross billings included the following:
We continued to shift customer impressions from traditional voucher offerings with food and drink merchants toward Groupon+ voucherless offerings as we seek to scale that product. While we believe that voucherless offerings have the potential to ultimately drive long-term gross profit growth, the shift away from traditional food and drink vouchers is adversely impacting our gross billings in the near term;


33



We ceased most of our food delivery operations in the third quarter of 2017, which resulted in a $16.0 million decrease in Local gross billings as compared to the prior year period; and
A decrease in gross billings from our Goods category, which reflected our ongoing efforts to de-emphasize lower margin product offerings in connection with our strategic initiative to optimize for gross profit generation.
The above drivers adversely impacted gross billings per active customer, which was $114.52 for the trailing twelve months ended June 30, 2018, as compared to $124.37 in the corresponding prior year period. Additionally, the total number of units sold decreased to 26.6 million units for the three months ended June 30, 2018, as compared to 31.0 million units in the prior year period.
Order discounts, which are presented as a reduction of gross billings and revenue, decreased by $14.6 million to $32.1 million for the three months ended June 30, 2018, as compared to $46.7 million in the prior year period.
For the three months ended June 30, 2018, there was an $8.2 million unfavorable impact on gross billings as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting the ASU and its related amendments on the Company's accounting policies.
International
International gross billings increased during the three months ended June 30, 2018, reflecting increases of $13.8 million and $19.5 million in our Local and Goods categories. That increase was primarily driven by a $27.9 million favorable impact from year-over-year changes in foreign currency rates for the three months ended June 30, 2018.
Order discounts, which are presented as a reduction of gross billings and revenue, increased by $4.6 million to $13.7 million for the three months ended June 30, 2018, as compared to $9.1 million in the prior year period.
For the three months ended June 30, 2018, there was a $0.9 million unfavorable impact on gross billings as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting the ASU and its related amendments on the Company's accounting policies.

Six Months Ended June 30, 2018 and 2017:
Gross billings for the six months ended June 30, 2018 and 2017 were as follows (dollars in thousands):
 Six Months Ended June 30,
 2018 2017 $ Change % Change
Gross billings:       
Service$1,911,040
 $2,003,390
 $(92,350) (4.6)%
Product646,487
 718,819
 (72,332) (10.1)
Total gross billings$2,557,527
 $2,722,209
 $(164,682) (6.0)
 Six Months Ended June 30,
 2019 2018 $ Change % Change
North America       
Service gross billings:       
Local$1,006,139
 $1,091,077
 $(84,938) (7.8)%
Goods39,533
 54,380
 (14,847) (27.3)
Travel176,112
 196,308
 (20,196) (10.3)
Total service gross billings1,221,784
 1,341,765
 (119,981) (8.9)
Product gross billings - Goods282,459
 351,597
 (69,138) (19.7)
Total North America gross billings1,504,243
 1,693,362
 (189,119) (11.2)
        
International       
Service gross billings:       
Local410,846
 420,555
 (9,709) (2.3)
Goods21,479
 42,432
 (20,953) (49.4)
Travel95,287
 106,288
 (11,001) (10.4)
Total service gross billings527,612
 569,275
 (41,663) (7.3)
Product gross billings - Goods265,098
 294,890
 (29,792) (10.1)
Total International gross billings792,710
 864,165
 (71,455) (8.3)
Total gross billings$2,296,953
 $2,557,527
 $(260,574) (10.2)
The effect on our gross billings for the six months ended June 30, 20182019 from changes in exchange rates versus the U.S. dollar was as follows (in thousands):
 Six Months Ended June 30, 2018
 
At Avg. Q2 2017 Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Gross billings$2,477,373
 $80,154
 $2,557,527
 Six Months Ended June 30, 2019
 
At Avg. Q2 2018 YTD Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Gross billings$2,352,521
 $(55,568) $2,296,953
(1)Represents the financial statement balances that would have resulted had exchange rates in the reporting period been the same as those in effect in the prior year period.
(2)Represents the increase or decrease in the reported amount resulting from changes in exchange rates from those in effect in the prior year period.

North America

34



Gross Billings by Segment
Gross billings by category and segment for the six months ended June 30, 2018 and 2017 were as follows (dollars in thousands):
 Six Months Ended June 30,
 2018 2017 $ Change % Change
North America       
Service gross billings:       
Local$1,091,077
 $1,203,599
 $(112,522) (9.3)%
Goods54,380
 39,920
 14,460
 36.2
Travel196,308
 226,833
 (30,525) (13.5)
Product gross billings - Goods351,597
 468,592
 (116,995) (25.0)
Total North America gross billings1,693,362
 1,938,944
 (245,582) (12.7)
        
International       
Service gross billings:       
Local420,555
 380,627
 39,928
 10.5
Goods42,432
 53,269
 (10,837) (20.3)
Travel106,288
 99,142
 7,146
 7.2
Product gross billings - Goods294,890
 250,227
 44,663
 17.8
Total International gross billings864,165
 783,265
 80,900
 10.3
Total gross billings$2,557,527
 $2,722,209
 $(164,682) (6.0)

The percentages ofNorth America gross billings by segment for the six months ended June 30, 2018were 65.5% and 2017 were as follows:
Q2 2018 YTDQ2 2017 YTD
chart-bfb297616f78267a40d.jpgchart-37ed6ef36280e970c98.jpg
North AmericaInternational
North America
North America66.2% of total gross billings for the six months ended June 30, 2018 decreased from the prior year, reflecting decreases of $112.5 million in our Local category2019 and $102.5 million in our Goods category. Factors impacting2018. North America gross billings includeddecreased for the following:
We continued to shift customer impressions from traditional voucher offeringssix months ended June 30, 2019 compared with food and drink merchants toward Groupon+ voucherless offerings as we seek to scale that product. While we believe that voucherless offerings have the potential to ultimately drive long-term gross profit growth, the shift away from traditional food and drink vouchers is adversely impacting our gross billings in the near term;


35



We ceased most of our food delivery operations in the third quarter of 2017, which resulted in a $33.4 million decrease in Local gross billings as compared to the prior year period;period due to fewer customers, lower customer traffic, including traffic from email and
A decrease in SEO, and shifting impressions to support our strategic initiatives. Those decreases were partially offset by higher gross billings from our Goods category, which reflected our ongoing effortsper unit due to de-emphasize lower margin producta shift in mix of offerings in connection with our strategic initiative to optimize for gross profit generation.sold.
The above drivers adversely impactedfactors also resulted in lower gross billings per active customer, which was $114.52$113.02 for the trailing twelve monthsTTM ended June 30, 2018,2019, as compared to $124.37with $114.52 in the corresponding prior year period. Additionally, theperiod and total number of units sold, which


32



decreased to 45.0 million units for the six months ended June 30, 2019, as compared with 54.7 million units in the prior year period.
International
International gross billings were 34.5% and 33.8% of total gross billings for the six months ended June 30, 2019 and 2018. International gross billings decreased $71.5 million for the six months ended June 30, 2018 as2019 compared to 62.7 million units inwith the prior year period.
Order discounts, which are presented asperiod, primarily due to a reduction of gross billings and revenue, decreased by $25.7$55.3 million to $71.3 million for the six months ended June 30, 2018, as compared to $97.0 million in the prior year period.
For the six months ended June 30, 2018, there was a $6.3 million unfavorable impact on gross billings as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting the ASU and its related amendments on the Company's accounting policies.
International
International gross billings increased during the six months ended June 30, 2018, reflecting increases of $39.9 million, $33.8 million and $7.1 million in our Local, Goods and Travel categories, respectively. That increase was primarily driven by a $79.7 million favorable impact from year-over-year changes in foreign currency rates, weak consumer sentiment in Europe, particularly in the United Kingdom, and intensifying competition in home and garden offerings.
Revenue
Three Months Ended June 30, 2019 and 2018:
Revenue by category and segment for the three months ended June 30, 2018.
Order discounts, which are presented as a reduction of gross billings2019 and revenue, increased by $9.1 million to $27.5 million for the six months ended June 30, 2018 as compared to $18.4 million in the prior year period.
For the six months ended June 30, 2018, there was a $0.4 million unfavorable impact on gross billings as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting the ASU and its related amendments on the Company's accounting policies.
Revenue
We earn product revenue from direct sales of merchandise inventory through our Goods category. Product revenue is reported on a gross basis as the purchase price received from the customer. Service revenue is earned from transactions in which we earn commissions by selling goods or services on behalf of third-party merchants, primarily through sales of vouchers and similar transactions in which we collect the transaction price from the customer and remit a portion of that transaction price to the third-party merchant who will provide the related goods or services. Service revenue from those transactions is reported on a net basis as the purchase price collected from the customer less the portion of the purchase price that is payable to the third-party merchant. Service revenue also includes commissions we earn when customers make purchases with retailers using digital coupons accessed through our websites and mobile applications and from voucherless merchant offerings in which customers earn cash back on their credit card statements when they transact with third-party merchants.
Three Months Ended June 30, 2018 and 2017:
Revenue for the three months ended June 30, 2018 and 2017 was as follows (dollars in thousands):
 Three Months Ended June 30,
 2018 2017 $ Change % Change
Revenue:       
Service$295,652
 $315,854
 $(20,202) (6.4)%
Product321,744
 346,765
 (25,021) (7.2)
Total revenue$617,396
 $662,619
 $(45,223) (6.8)


36



 Three Months Ended June 30,
 2019 2018 $ Change % Change
North America       
Service revenue:       
Local$177,082
 $185,870
 $(8,788) (4.7)%
Goods3,714
 3,796
 (82) (2.2)
Travel16,125
 19,888
 (3,763) (18.9)
Total service revenue196,921
 209,554
 (12,633) (6.0)
Product revenue - Goods127,739
 170,710
 (42,971) (25.2)
Total North America revenue324,660
 380,264
 (55,604) (14.6)
        
International       
Service revenue:       
Local69,995
 71,425
 (1,430) (2.0)
Goods2,610
 4,967
 (2,357) (47.5)
Travel8,077
 9,706
 (1,629) (16.8)
Total service revenue80,682
 86,098
 (5,416) (6.3)
Product revenue - Goods127,235
 151,034
 (23,799) (15.8)
Total International revenue207,917
 237,132
 (29,215) (12.3)
Total revenue$532,577
 $617,396
 $(84,819) (13.7)
The effect on revenue for the three months ended June 30, 20182019 from changes in exchange rates versus the U.S. dollar was as follows (in thousands):
 Three Months Ended June 30, 2018
 
At Avg. Q2 2017 Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Revenue$600,314
 $17,082
 $617,396
 Three Months Ended June 30, 2019
 
At Avg. Q2 2018 Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Revenue$545,329
 $(12,752) $532,577
(1)Represents the financial statement balances that would have resulted had exchange rates in the reporting period been the same as those in effect in the prior year period.
(2)Represents the increase or decrease in the reported amount resulting from changes in exchange rates from those in effect in the prior year period.
Revenue by Segment
Revenue by category and segment for the three months ended June 30, 2018 and 2017 was as follows (dollars in thousands):

 Three Months Ended June 30,
 2018 2017 $ Change % Change
North America       
Service revenue:       
Local$185,870
 $207,534
 $(21,664) (10.4)%
Goods3,796
 4,112
 (316) (7.7)
Travel19,888
 22,320
 (2,432) (10.9)
Product revenue - Goods170,710
 217,946
 (47,236) (21.7)
Total North America revenue380,264
 451,912
 (71,648) (15.9)
        
International       
Service revenue:       
Local71,425
 66,108
 5,317
 8.0
Goods4,967
 4,984
 (17) (0.3)
Travel9,706
 10,796
 (1,090) (10.1)
Product revenue - Goods151,034
 128,819
 22,215
 17.2
Total International revenue237,132
 210,707
 26,425
 12.5
Total revenue$617,396
 $662,619
 (45,223) (6.8)


3733




The percentages of revenue by segment for the three months ended June 30, 2018 and 2017 were as follows:
Q2 2018Q2 2017

chart-45ca44de20d05f178d7.jpgchart-ea64d63ee7fe51f0abc.jpg
North AmericaInternational

The percentages of service gross billings that we retained after deducting the merchant's share for the three months ended June 30, 20182019 and 20172018 were as follows:
North America International
chart-9adf588fdd9c509f896.jpgchart-057a9b27f6415433a5a.jpgchart-026d9ba501d05bdd9a2.jpgchart-6dd25af84dc95487838.jpg
North America
The decrease in North America revenue was 61.0% and 61.6% of total revenue for the three months ended June 30, 2018 reflects decreases of $21.72019 and 2018. North America revenue decreased $55.6 million and $47.6 millionfor the three months ended June 30, 2019 compared with the prior year period, primarily driven by the decline in our Localtransaction volume and Goods categories, respectively. The decreases were attributable to the following:
decreases in Goods and Local gross billings, as discussed above;above, partially offset by a shift in mix of offerings sold.
International
International revenue was 39.0% and
an increase 38.4% of total revenue for the three months ended June 30, 2019 and 2018. International revenue decreased $29.2 million for the three months ended June 30, 2019 compared with the prior year period, primarily driven by lower gross billings as discussed above and a $12.7 million unfavorable impact from year-over-year changes in the proportion of service revenue transactionsforeign exchange rates. These declines were partially offset by a shift in our Goods category mix from service revenue transactions, which are reported on a net basis, with a corresponding decrease in the proportion oftoward product revenue transactions, which are reported on a gross basis.
The above decreases were partially offset by an increase in the percentage of gross billings that we retained after deducting the merchant’s share in service revenue transactions to 31.4% for the three months ended June 30, 2018, as compared to 30.9% in the prior year period. The percentage of gross billings that we retain after deducting the merchant's share reflects the overall results of individual deal-by-deal negotiations with merchants and can vary significantly from period-to-period.
For the three months ended June 30, 2018, there was a $1.7 million unfavorable impact on revenue as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting the ASU and its related amendments on the Company's accounting policies.




3834




International
The increase in International revenue for the three months ended June 30, 2018 reflects increases of $5.3 million and $22.2 million in our Local and Goods categories, respectively. The increases were primarily attributable to the following:
a $17.0 million favorable impact on international revenue from year-over-year changes in foreign exchange rates for the three months ended June 30, 2018; and
a decrease in the proportion of service revenue transactions in our Goods category, which are reported on a net basis, with a corresponding increase in the proportion of product revenue transactions, which are reported on a gross basis.
The percentage of gross billings related to service revenue transactions that we retained after deducting the merchant’s share was substantially consistent with the prior year.
For the three months ended June 30, 2018, there was a $4.3 million unfavorable impact on revenue as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting the ASU and its related amendments on the Company's accounting policies.
Six Months Ended June 30, 20182019 and 2017:2018:
Revenue by category and segment for the six months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
 Six Months Ended June 30,
 2018 2017 $ Change % Change
Revenue:       
Service$597,449
 $617,426
 $(19,977) (3.2)%
Product646,487
 718,819
 (72,332) (10.1)
Total revenue$1,243,936
 $1,336,245
 $(92,309) (6.9)
 Six Months Ended June 30,
 2019 2018 $ Change % Change
North America       
Service revenue:       
Local$357,459
 $373,281
 $(15,822) (4.2)%
Goods6,841
 8,670
 (1,829) (21.1)
Travel35,066
 39,972
 (4,906) (12.3)
Total service revenue399,366
 421,923
 (22,557) (5.3)
Product revenue - Goods282,459
 351,597
 (69,138) (19.7)
Total North America revenue681,825
 773,520
 (91,695) (11.9)
        
International       
Service revenue:       
Local143,185
 146,003
 (2,818) (1.9)
Goods4,065
 8,381
 (4,316) (51.5)
Travel16,814
 21,142
 (4,328) (20.5)
Total service revenue164,064
 175,526
 (11,462) (6.5)
Product revenue - Goods265,098
 294,890
 (29,792) (10.1)
Total International revenue429,162
 470,416
 (41,254) (8.8)
Total revenue$1,110,987
 $1,243,936
 $(132,949) (10.7)
The effect on revenue for the six months ended June 30, 20182019 from changes in exchange rates versus the U.S. dollar was as follows (in thousands):
 Six Months Ended June 30, 2018
 
At Avg. Q2 2017 Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Revenue$1,197,565
 $46,371
 $1,243,936
 Six Months Ended June 30, 2019
 
At Avg. Q2 2018 YTD Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Revenue$1,141,453
 $(30,466) $1,110,987
(1)Represents the financial statement balances that would have resulted had exchange rates in the reporting period been the same as those in effect in the prior year period.
(2)Represents the increase or decrease in the reported amount resulting from changes in exchange rates from those in effect in the prior year period.




3935




Revenue by Segment
Revenue by category and segment for the six months ended June 30, 2018 and 2017 was as follows (dollars in thousands):
 Six Months Ended June 30,
 2018 2017 $ Change % Change
North America       
Service revenue:       
Local$373,281
 $408,079
 $(34,798) (8.5)%
Goods8,670
 5,816
 2,854
 49.1
Travel39,972
 42,782
 (2,810) (6.6)
Product revenue - Goods351,597
 468,592
 (116,995) (25.0)
Total North America revenue773,520
 925,269
 (151,749) (16.4)
        
International       
Service revenue:       
Local146,003
 129,683
 16,320
 12.6
Goods8,381
 9,268
 (887) (9.6)
Travel21,142
 21,798
 (656) (3.0)
Product revenue - Goods294,890
 250,227
 44,663
 17.8
Total International revenue470,416
 410,976
 59,440
 14.5
Total revenue$1,243,936
 $1,336,245
 (92,309) (6.9)
The percentages of revenue by segment for the six months ended June 30, 2018 and 2017 were as follows:
Q2 2018 YTDQ2 2017 YTD

chart-ae6063366979b1b472b.jpgchart-2e888eb8d2dfb20c1ad.jpg
North AmericaInternational


40




The percentages of service gross billings that we retained after deducting the merchant's share for the six months ended June 30, 20182019 and 20172018 were as follows:
North America International
chart-e9aa234c389de38cf35.jpgchart-84fbf8e6e22bfc1605d.jpgchart-a25d101583fcdbbfc19.jpgchart-d1d8809cda163c729b9.jpg
North America
The decrease in North America revenue was 61.4% and 62.2% of total revenue for the six months ended June 30, 2018 reflects decreases of $34.82019 and 2018. North America revenue decreased $91.7 million and $114.1 millionfor the six months ended June 30, 2019 compared with the prior year period, primarily driven by the decline in our Localtransaction volume and Goods categories, respectively. The decreases were attributable to the following:
decreases in Goods and Local gross billings, as discussed above;above, partially offset by a shift in mix of offerings sold.
International
International revenue was 38.6% and
an increase 37.8% of total revenue for the six months ended June 30, 2019 and 2018. International revenue decreased $41.3 million for the six months ended June 30, 2019 compared with the prior year period, primarily driven by a $30.4 million unfavorable impact from year-over-year changes in foreign exchange rates and lower gross billings as discussed above. These declines were partially offset by the proportionexpansion of service revenue transactionsour digital coupons offerings through our acquisition of Cloud Savings in April 2018 and a shift in our Goods category mix from service revenue transactions, which are reported on a net basis, with a corresponding decrease in the proportion oftoward product revenue transactions, which are reported on a gross basis.
The above decreases were partially offset by an increase in the percentage of gross billings that we retained after deducting the merchant’s share in service revenue transactions to 31.4% for the six months ended June 30, 2018, as compared to 31.1% in the prior year period. The percentage of gross billings that we retain after deducting the merchant's share reflects the overall results of individual deal-by-deal negotiations with merchants and can vary significantly from period-to-period.
For the six months ended June 30, 2018, there was a $2.2 million unfavorable impact on revenue as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting the ASU and its related amendments on the Company's accounting policies.
International
The increase in International revenue for the six months ended June 30, 2018 reflects increases of $16.3 million and $43.8 million in our Local and Goods categories, respectively. The increases were primarily attributable to the following:
a $46.3 million favorable impact on international revenue from year-over-year changes in foreign exchange rates for the six months ended June 30, 2018;
a decrease in the proportion of service revenue transactions in our Goods category, which are reported on a net basis, with a corresponding increase in the proportion of product revenue transactions, which are reported on a gross basis; and
an increase in the percentage of gross billings that we retained after deducting the merchant’s share in service revenue transactions to 30.8% for the six months ended June 30, 2018, as compared to 30.2% in the prior year period. The percentage of gross billings that we retain after deducting the merchant's share reflects the overall results of individual deal-by-deal negotiations with merchants and can vary significantly from period-to-period.


41



For the six months ended June 30, 2018, there was a $2.0 million unfavorable impact on revenue as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting the ASU and its related amendments on the Company's accounting policies.
Cost of Revenue
Cost of revenue is comprised of direct and certain indirect costs incurred to generate revenue. Costs incurred to generate revenue which includeincluding credit card processing fees, editorial costs, compensation expense for technology support personnel who are responsible for maintaining the infrastructure of our websites, amortization of internal-use software relating to customer-facing applications, web hosting and other processing fees are attributed to the cost of product and service revenue in proportion to gross billings during the period.fees. For product revenue transactions, cost of revenue also includes the cost of inventory, shipping and fulfillment costs and inventory markdowns. Fulfillment costs are comprised of third-party logistics provider costs, as well as rent, depreciation, personnel costs and other costs of operating our fulfillment center. 


36



Three Months Ended June 30, 20182019 and 2017:2018:
Cost of revenue by category and segment for the three months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
 Three Months Ended June 30,
 2018 2017 $ Change % Change
Cost of revenue:       
Service$30,230
 $38,478
 $(8,248) (21.4)%
Product263,508
 296,074
 (32,566) (11.0)
Total cost of revenue$293,738
 $334,552
 $(40,814) (12.2)
 Three Months Ended June 30,
 2019 2018 $ Change % Change
North America       
Service cost of revenue:       
Local$19,409
 $20,585
 $(1,176) (5.7)%
Goods719
 806
 (87) (10.8)
Travel3,319
 3,585
 (266) (7.4)
Total service cost of revenue23,447
 24,976
 (1,529) (6.1)
Product cost of revenue - Goods102,629
 135,917
 (33,288) (24.5)
Total North America cost of revenue126,076
 160,893
 (34,817) (21.6)
        
International       
Service cost of revenue:       
Local4,215
 4,065
 150
 3.7
Goods226
 402
 (176) (43.8)
Travel707
 787
 (80) (10.2)
Total service cost of revenue5,148
 5,254
 (106) (2.0)
Product cost of revenue - Goods109,221
 127,591
 (18,370) (14.4)
Total International cost of revenue114,369
 132,845
 (18,476) (13.9)
Total cost of revenue$240,445
 $293,738
 $(53,293) (18.1)
The effect on cost of revenue for the three months ended June 30, 20182019 from changes in exchange rates versus the U.S. dollar was as follows (in thousands):
 Three Months Ended June 30, 2018
 
At Avg. Q2 2017 Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Cost of revenue$283,397
 $10,341
 $293,738
 Three Months Ended June 30, 2019
 
At Avg. Q2 2018 Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Cost of revenue$247,526
 $(7,081) $240,445
(1)Represents the financial statement balances that would have resulted had exchange rates in the reporting period been the same as those in effect in the prior year period.
(2)Represents the increase or decrease in the reported amount resulting from changes in exchange rates from those in effect in the prior year period.

North America
North America cost of revenue was 52.4% and 54.8% of total cost of revenue for the three months ended June 30, 2019 and 2018. North America cost of revenue decreased $34.8 million for the three months ended June 30, 2019 compared with the prior year period, primarily due to the decrease in transaction volume and gross billings as described above.
International
International cost of revenue was 47.6% and 45.2% of total cost of revenue for the three months ended June 30, 2019 and 2018. International cost of revenue decreased $18.5 million for the three months ended June 30, 2019 compared with the prior year period, primarily due to a $7.1 million favorable impact from year-over-year changes in foreign exchange rates and lower product gross billings.



4237





Cost of Revenue by SegmentSix Months Ended June 30, 2019 and 2018:
Cost of revenue by category and segment for the threesix months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
 Three Months Ended June 30,
 2018 2017 $ Change % Change
North America       
Service cost of revenue:       
Local$20,585
 $27,925
 $(7,340) (26.3)%
Goods806
 905
 (99) (10.9)
Travel3,585
 4,565
 (980) (21.5)
Product cost of revenue - Goods135,917
 184,657
 (48,740) (26.4)
Total North America cost of revenue160,893
 218,052
 (57,159) (26.2)
        
International       
Service cost of revenue:       
Local4,065
 3,805
 260
 6.8
Goods402
 478
 (76) (15.9)
Travel787
 800
 (13) (1.6)
Product cost of revenue - Goods127,591
 111,417
 16,174
 14.5
Total International cost of revenue132,845
 116,500
 16,345
 14.0
Total cost of revenue$293,738
 $334,552
 $(40,814) (12.2)
The percentages of cost of revenue by segment for the three months ended June 30, 2018 and 2017 were as follows:
Q2 2018Q2 2017

chart-0867d91d21d8513e8cb.jpgchart-07dc6e4a803159be8ac.jpg
North AmericaInternational


43



North America
The decrease in North America cost of revenue for the three months ended June 30, 2018 was primarily attributable to the decrease in product revenue transactions as discussed above.
For the three months ended June 30, 2018, there was a $7.0 million favorable impact on cost of revenue as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting Topic 606 and its related amendments on the Company's accounting policies.
International
The increase in International cost of revenue for the three months ended June 30, 2018 was primarily attributable to a $10.3 million unfavorable impact from year-over-year changes in foreign exchange rates and the increase in product revenue transactions as discussed above.
Six Months Ended June 30, 2018 and 2017:
Cost of revenue for the six months ended June 30, 2018 and 2017 was as follows (dollars in thousands):
 Six Months Ended June 30,
 2018 2017 $ Change % Change
Cost of revenue:       
Service$61,375
 $81,351
 $(19,976) (24.6)%
Product534,018
 617,376
 (83,358) (13.5)
Total cost of revenue$595,393
 $698,727
 $(103,334) (14.8)
 Six Months Ended June 30,
 2019 2018 $ Change % Change
North America       
Service cost of revenue:       
Local$38,704
 $41,240
 $(2,536) (6.1)%
Goods1,283
 1,739
 (456) (26.2)
Travel6,992
 7,667
 (675) (8.8)
Total service cost of revenue46,979
 50,646
 (3,667) (7.2)
Product cost of revenue - Goods226,460
 283,823
 (57,363) (20.2)
Total North America cost of revenue273,439
 334,469
 (61,030) (18.2)
        
International       
Service cost of revenue:       
Local8,427
 8,428
 (1) 
Goods413
 729
 (316) (43.3)
Travel1,403
 1,572
 (169) (10.8)
Total service cost of revenue10,243
 10,729
 (486) (4.5)
Product cost of revenue - Goods229,157
 250,195
 (21,038) (8.4)
Total International cost of revenue239,400
 260,924
 (21,524) (8.2)
Total cost of revenue$512,839
 $595,393
 $(82,554) (13.9)
The effect on cost of revenue for the six months ended June 30, 20182019 from changes in exchange rates versus the U.S. dollar was as follows (in thousands):
 Six Months Ended June 30, 2018
 
At Avg. Q2 2017 Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Cost of revenue$568,181
 $27,212
 $595,393
 Six Months Ended June 30, 2019
 
At Avg. Q2 2018 YTD Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Cost of revenue$530,060
 $(17,221) $512,839
(1)Represents the financial statement balances that would have resulted had exchange rates in the reporting period been the same as those in effect in the prior year period.
(2)Represents the increase or decrease in the reported amount resulting from changes in exchange rates from those in effect in the prior year period.

North America

44



Cost of Revenue by Segment
Cost of revenue by category and segment for the six months ended June 30, 2018 and 2017 was as follows (dollars in thousands):
 Six Months Ended June 30,
 2018 2017 $ Change % Change
North America       
Service cost of revenue:       
Local$41,240
 $59,128
 $(17,888) (30.3)%
Goods1,739
 1,302
 437
 33.6
Travel7,667
 9,862
 (2,195) (22.3)
Product cost of revenue - Goods283,823
 400,180
 (116,357) (29.1)
Total North America cost of revenue334,469
 470,472
 (136,003) (28.9)
        
International       
Service cost of revenue:       
Local8,428
 8,186
 242
 3.0
Goods729
 1,107
 (378) (34.1)
Travel1,572
 1,766
 (194) (11.0)
Product cost of revenue - Goods250,195
 217,196
 32,999
 15.2
Total International cost of revenue260,924
 228,255
 32,669
 14.3
Total cost of revenue$595,393
 $698,727
 $(103,334) (14.8)
The percentages ofNorth America cost of revenue by segment for the six months ended June 30, 2018was 53.3% and 2017 were as follows:
Q2 2018 YTDQ2 2017 YTD

chart-1a7b2b65bd22ef184e5.jpgchart-b6bd957d70917c8b8c5.jpg
North AmericaInternational


45



North America
The decrease in North America56.2% of total cost of revenue for the six months ended June 30, 2018 was primarily attributable to the decrease in product2019 and 2018. North America cost of revenue transactions as discussed above.
Fordecreased $61.0 million for the six months ended June 30, 2018, there was a $13.3 million favorable impact on2019 compared with the prior year period, primarily due to the decrease in transaction volume and gross billings as described above.
International
International cost of revenue as a resultwas 46.7% and 43.8% of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting Topic 606 and its related amendments on the Company's accounting policies.
International
The increase in Internationaltotal cost of revenue for the six months ended June 30, 2018 was2019 and 2018. International cost of revenue decreased $21.5 million for the six months ended June 30, 2019 compared with the prior year period, primarily attributabledue to a $27.2$17.2 million unfavorablefavorable impact from year-over-year changes in foreign exchange rates and the increase inlower product revenue transactions as discussed above.gross billings.


38



Gross Profit
Three Months Ended June 30, 20182019 and 2017:2018:
Gross profit by category and segment for the three months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
 Three Months Ended June 30,
 2018 2017 $ Change % Change
Gross profit:       
Service$265,422
 $277,376
 $(11,954) (4.3)%
Product58,236
 50,691
 7,545
 14.9
Total gross profit$323,658
 $328,067
 $(4,409) (1.3)
 Three Months Ended June 30,
 2019 2018 $ Change % Change
North America       
Service gross profit:       
Local$157,673
 $165,285
 $(7,612) (4.6)%
Goods2,995
 2,990
 5
 0.2
Travel12,806
 16,303
 (3,497) (21.5)
Total service gross profit173,474
 184,578
 (11,104) (6.0)
Product gross profit - Goods25,110
 34,793
 (9,683) (27.8)
Total North America gross profit198,584
 219,371
 (20,787) (9.5)
     

  
International    

  
Service gross profit:    

  
Local65,780
 67,360
 (1,580) (2.3)
Goods2,384
 4,565
 (2,181) (47.8)
Travel7,370
 8,919
 (1,549) (17.4)
Total service gross profit75,534
 80,844
 (5,310) (6.6)
Product gross profit - Goods18,014
 23,443
 (5,429) (23.2)
Total International gross profit93,548
 104,287
 (10,739) (10.3)
Total gross profit$292,132
 $323,658
 $(31,526) (9.7)
The effect on gross profit for the three months ended June 30, 20182019 from changes in exchange rates versus the U.S. dollar was as follows (in thousands):
 Three Months Ended June 30, 2018
 
At Avg. Q2 2017 Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Gross profit$316,917
 $6,741
 $323,658
 Three Months Ended June 30, 2019
 
At Avg. Q2 2018 Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Gross profit$297,803
 $(5,671) $292,132
(1)Represents the financial statement balances that would have resulted had exchange rates in the reporting period been the same as those in effect in the prior year period.
(2)Represents the increase or decrease in the reported amount resulting from changes in exchange rates from those in effect in the prior year period.

North America

46



Gross Profit by Segment
GrossNorth America gross profit by categorywas 68.0% and segment67.8% of total gross profit for the three months ended June 30, 20182019 and 2017 was as follows (dollars in thousands):
 Three Months Ended June 30,
 2018 2017 $ Change % Change
North America       
Service gross profit:       
Local$165,285
 $179,609
 $(14,324) (8.0)%
Goods2,990
 3,207
 (217) (6.8)
Travel16,303
 17,755
 (1,452) (8.2)
Product gross profit - Goods34,793
 33,289
 1,504
 4.5
Total North America gross profit219,371
 233,860
 (14,489) (6.2)
     

  
International    

  
Service gross profit:    

  
Local67,360
 62,303
 5,057
 8.1
Goods4,565
 4,506
 59
 1.3
Travel8,919
 9,996
 (1,077) (10.8)
Product gross profit - Goods23,443
 17,402
 6,041
 34.7
Total International gross profit104,287
 94,207
 10,080
 10.7
Total gross profit$323,658
 $328,067
 $(4,409) (1.3)
The percentages of gross profit by segment for the three months ended June 30, 2018 and 2017 were as follows:
Q2 2018Q2 2017

chart-e7f23cd413a858cf95b.jpgchart-a3becff5b7625515a1d.jpg
North AmericaInternational
North America
2018. The decrease in North America gross profit for the three months ended June 30, 20182019 compared with the prior year period reflects a $14.3 million decreasedecline in transaction volume and gross profit from our Local category, which was attributable to the decrease in revenue,billings, as discussed above.
GrossInternational
International gross profit from product revenue transactions in our Goods category increased by 4.5%, as compared to the 21.7% decrease in revenue from those transactions. That difference was attributable to higher32.0% and 32.2% of total gross margins on product revenue transactions, which were 20.4%profit for the three months ended June 30, 2018 as compared to 15.3% in the prior


47



year period.2019 and 2018. The margin improvement resulted from our ongoing efforts to de-emphasize lower margin product offerings and reduce our shipping and fulfillment costs.
For the three months ended June 30, 2018, there was a $5.4 million favorable impact on gross profit as a result of adopting Topic 606 as compared to previous accounting guidance. That favorable impact was primarily driven by the change in the timing of recognition of variable consideration from redeemed vouchers. As a result of the Company’s increased use of pay-on-redemption terms with merchants in North America beginning in the third quarter 2017, we expect that the change to recognizing estimated variable consideration at the time of sale under Topic 606 will drive continued favorability in North America gross profit during the remainder of 2018, as compared to the gross profit that would have been reported in the current year under the previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting Topic 606 and its related amendments on the Company's accounting policies.
International
The increasedecrease in International gross profit for the three months ended June 30, 20182019 compared with the prior year period was primarily attributable to the following:
a $6.7$5.6 million favorableunfavorable impact on International gross profit from year-over-year changes in foreign exchange rates for the three months ended June 30, 2018; and lower gross billings as discussed above.
our ongoing efforts to de-emphasize lower margin product offerings in our Goods category and to reduce our shipping and fulfillment costs.
For the three months ended June 30, 2018, there was a $4.3 million unfavorable impact on gross profit as a result of adopting Topic 606 as compared to previous accounting guidance. That unfavorable impact primarily reflected $2.6 million related to the change in the timing of recognition of variable consideration from unredeemed vouchers and $1.8 million related to customer credits issued for relationship purposes, which are classified as a reduction of revenue under Topic 606. Our international segment continues to primarily use pay-on redemption terms with merchants and the impact of the change to recognizing variable consideration at the time of sale under Topic 606 could be favorable or unfavorable from period to period for that segment based on seasonal revenue levels, particularly in our Local category, and changes in redemption rates. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting Topic 606 and its related amendments on the Company's accounting policies.

39



Six Months Ended June 30, 20182019 and 2017:2018:
Gross profit by category and segment for the six months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
 Six Months Ended June 30,
 2018 2017 $ Change % Change
Gross profit:       
Service$536,074
 $536,075
 $(1)  %
Product112,469
 101,443
 11,026
 10.9
Total gross profit$648,543
 $637,518
 $11,025
 1.7
 Six Months Ended June 30,
 2019 2018 $ Change % Change
North America       
Service gross profit:       
Local$318,755
 $332,041
 $(13,286) (4.0)%
Goods5,558
 6,931
 (1,373) (19.8)
Travel28,074
 32,305
 (4,231) (13.1)
Total service gross profit352,387
 371,277
 (18,890) (5.1)
Product gross profit - Goods55,999
 67,774
 (11,775) (17.4)
Total North America gross profit408,386
 439,051
 (30,665) (7.0)
        
International       
Service gross profit:       
Local134,758
 137,575
 (2,817) (2.0)
Goods3,652
 7,652
 (4,000) (52.3)
Travel15,411
 19,570
 (4,159) (21.3)
Total service gross profit153,821
 164,797
 (10,976) (6.7)
Product gross profit - Goods35,941
 44,695
 (8,754) (19.6)
Total International gross profit189,762
 209,492
 (19,730) (9.4)
Total gross profit$598,148
 $648,543
 $(50,395) (7.8)
The effect on gross profit for the six months ended June 30, 20182019 from changes in exchange rates versus the U.S. dollar was as follows (in thousands):
 Six Months Ended June 30, 2018
 
At Avg. Q2 2017 Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Gross profit$629,384
 $19,159
 $648,543
 Six Months Ended June 30, 2019
 
At Avg. Q2 2018 YTD Rates (1)
 
Exchange Rate Effect (2)
 As Reported
Gross profit$611,393
 $(13,245) $598,148
(1)Represents the financial statement balances that would have resulted had exchange rates in the reporting period been the same as those in effect in the prior year period.
(2)Represents the increase or decrease in the reported amount resulting from changes in exchange rates from those in effect in the prior year period.

North America

48



Gross Profit by Segment
GrossNorth America gross profit by categorywas 68.3% and segment67.7% of total gross profit for the six months ended June 30, 20182019 and 2017 was as follows (dollars in thousands):
 Six Months Ended June 30,
 2018 2017 $ Change % Change
North America       
Service gross profit:       
Local$332,041
 $348,951
 $(16,910) (4.8)%
Goods6,931
 4,514
 2,417
 53.5
Travel32,305
 32,920
 (615) (1.9)
Product gross profit - Goods67,774
 68,412
 (638) (0.9)
Total North America gross profit439,051
 454,797
 (15,746) (3.5)
        
International       
Service gross profit:       
Local137,575
 121,497
 16,078
 13.2
Goods7,652
 8,161
 (509) (6.2)
Travel19,570
 20,032
 (462) (2.3)
Product gross profit - Goods44,695
 33,031
 11,664
 35.3
Total International gross profit209,492
 182,721
 26,771
 14.7
Total gross profit$648,543
 $637,518
 $11,025
 1.7
The percentages of gross profit by segment for the six months ended June 30, 2018 and 2017 were as follows:
Q2 2018 YTDQ2 2017 YTD

chart-d05373a3bad77467de4.jpgchart-24561b0bd867a69e953.jpg
North AmericaInternational
North America
2018. The decrease in North America gross profit for the six months ended June 30, 20182019 compared with the prior year period reflects a $16.9 million decreasedecline in transaction volume and gross billings, from our Local category, which was attributable to the decrease in revenue, as discussed above.
GrossInternational
International gross profit from product revenue transactions in our Goods category decreased by 0.9%, as compared to the 25.0% decrease in revenue from those transactions. That difference was attributable to higher31.7% and 32.3% of total gross margins on product revenue transactions, which were 19.3%profit for the six months ended June 30, 2018 as compared to 14.6% in


49



the prior year period.2019 and 2018. The margin improvement resulted from our ongoing efforts to de-emphasize lower margin product offerings and reduce our shipping and fulfillment costs.
For the six months ended June 30, 2018, there was an $11.1 million favorable impact on gross profit as a result of adopting Topic 606 as compared to previous accounting guidance. That favorable impact included $8.4 million related to the change in the timing of recognition of variable consideration from unredeemed vouchers and $2.6 million related to the change in the timing of recognition of revenue from hotel reservation offerings. The favorable impact from recognizing revenue from hotel reservation offerings at the time of booking was primarily driven by seasonal travel patterns and we do not expect a significant impact from that change for the full year 2018. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting Topic 606 and its related amendments on the Company's accounting policies.
International
The increasedecrease in International gross profit for the six months ended June 30, 20182019 compared with the prior year period was primarily attributable to the following:
a $19.1$13.2 million favorableunfavorable impact on International gross profit from year-over-year changes in foreign exchange rates forand lower gross billings as discussed above. These declines were partially offset by the six months ended June 30, 2018; andexpansion of our digital coupons offerings through our acquisition of Cloud Savings in April 2018.
our ongoing efforts to de-emphasize lower margin product offerings in our Goods category and to reduce our shipping and fulfillment costs.
For the six months ended June 30, 2018, there was a $2.0 million unfavorable impact on gross profit as a result of adopting Topic 606 as compared to previous accounting guidance. That unfavorable impact primarily reflected $2.9 million related to customer credits issued for relationship purposes, which are classified as a reduction of revenue under Topic 606. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting Topic 606 and its related amendments on the Company's accounting policies.

40



Marketing
Marketing expense consists primarily of online marketing costs, such as search engine marketing, advertising on social networking sites and affiliate programs, and offline marketing costs, such as television and radio advertising. Additionally, compensation expense for marketing employees is classified within marketing expense. We record these costs within Marketing on the condensed consolidated statements of operations when incurred. From time to time, we offer deals with well-known national merchants for customer acquisition and activation purposes, for which the amount we owe the merchant for each voucher sold exceeds the transaction price paid by the customer. Our gross billings from those transactions generate no service revenue and our net cost (i.e., the excess of the amount owed to the merchant over the amount paid by the customer) is classified as marketing expense. We evaluate marketing expense as a percentage of gross profit because it gives us an indication of how well our marketing spend is driving gross profit growth.performance.
Three Months Ended June 30, 20182019 and 2017:2018:
Marketing expense by segment as a percentage of gross profit for the three months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
 Three Months Ended June 30,
 2018 % of Gross Profit 2017 % of Gross Profit $ Change % Change
Marketing:           
North America$66,402
 30.3% $78,461
 33.6% $(12,059) (15.4)%
International27,776
 26.6
 22,197
 23.6
 5,579
 25.1
Total marketing$94,178
 29.1
 $100,658
 30.7
 $(6,480) (6.4)


50



Marketing by Segment
The percentages of marketing expense by segment for the three months ended June 30, 2018 and 2017 were as follows:
Q2 2018Q2 2017
chart-e9b573369d9f5fc5b0f.jpgchart-d44f634cc98759659cc.jpg
North AmericaInternational
 Three Months Ended June 30,
 2019 % of Gross Profit 2018 % of Gross Profit $ Change % Change
Marketing:           
North America$57,110
 28.8% $66,402
 30.3% $(9,292) (14.0)%
International31,813
 34.0
 27,776
 26.6
 4,037
 14.5
Total marketing$88,923
 30.4
 $94,178
 29.1
 $(5,255) (5.6)
North America
North America segment marketing expense was 64.2% and 70.5% of total marketing expense for the three months ended June 30, 2018 decreased from the prior year period, which was primarily attributable to a decrease in offline2019 and mobile marketing spend. Marketing expense as a percentage of gross profit for the three months ended June 30, 2018 decreased from the prior year period because we shifted a greater proportion of our global marketing spend to our International segment in the current year period.
International
International segment2018. North America marketing expense and marketing expense as a percentage of gross profit for the three months ended June 30, 20182019 decreased from the prior year period as we leveraged improved marketing analytics to drive efficiency in our marketing spend and maximize the lifetime value of our customer base.
International
International segment marketing expense was 35.8% and 29.5% of total marketing expense for the three months ended June 30, 2019 and 2018. International marketing expense and marketing expense as a percentage of gross profit for the three months ended June 30, 2019 increased from the prior year period, whichas we continue to invest in the long-term potential of the International segment. The increase in marketing expense was primarily attributable topartially offset by a $2.0$1.8 million unfavorablefavorable impact from year-over-year changes in foreign exchange rates and our ongoing strategic initiative to increase our marketing activities to drive customer growth.rates.
Six Months Ended June 30, 20182019 and 2017:2018:
Marketing expense by segment as a percentage of gross profit for the six months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
Six Months Ended June 30,Six Months Ended June 30,
2018 % of Gross Profit 2017 % of Gross Profit $ Change % Change2019 % of Gross Profit 2018 % of Gross Profit $ Change % Change
Marketing:                      
North America$137,853
 31.4% $142,004
 31.2% $(4,151) (2.9)%$116,909
 28.6% $137,853
 31.4% $(20,944) (15.2)%
International55,481
 26.5
 44,996
 24.6
 10,485
 23.3
65,411
 34.5
 55,481
 26.5
 9,930
 17.9
Total marketing$193,334
 29.8
 $187,000
 29.3
 $6,334
 3.4
$182,320
 30.5
 $193,334
 29.8
 $(11,014) (5.7)




5141




Marketing by Segment
The percentages of marketing expense by segment for the six months ended June 30, 2018 and 2017 were as follows:
Q2 2018 YTDQ2 2017 YTD
chart-b3ce7c0adafe0cac21b.jpgchart-628923b8a6caffdb5d0.jpg
North AmericaInternational

North America
North America segment marketing expense was 64.1% and 71.3% of total marketing expense for the six months ended June 30, 2018 decreased from the prior year period, which was primarily attributable to a decrease in offline marketing spend. Marketing expense as a percentage of gross profit for the six months ended June 30, 2018 was substantially consistent with the prior year period.
International
International segment2019 and 2018. North America marketing expense and marketing expense as a percentage of gross profit for the six months ended June 30, 20182019 decreased from the prior year period as we leveraged improved marketing analytics to drive efficiency in our marketing spend and maximize the lifetime value of our customer base.
International
International segment marketing expense was 35.9% and 28.7% of total marketing expense for the six months ended June 30, 2019 and 2018. International marketing expense and marketing expense as a percentage of gross profit for the six months ended June 30, 2019 increased from the prior year period, whichas we continue to invest in the long-term potential of the International segment. The increase in marketing expense was primarily attributable topartially offset by a $5.5$4.4 million unfavorablefavorable impact from year-over-year changes in foreign exchange rates and our ongoing strategic initiative to increase our marketing activities to drive customer growth.rates.
Selling, General, and Administrative
Selling expenses reported within Selling, general and administrative ("SG&A") on the condensed consolidated statements of operations consist of sales commissions and other compensation expenses for sales representatives, as well as costs associated with supporting the sales function such as technology, telecommunications and travel. General and administrative expenses include compensation expense for employees involved in customer service, operations, technology and product development, as well as general corporate functions, such as finance, legal and human resources. Additional costs included in general and administrative include depreciation and amortization, rent, professional fees, litigation costs, travel and entertainment, recruiting, office supplies, maintenance, certain technology costs and other general corporate costs. We evaluate SG&A expense as a percentage of gross profit because it gives us an indication of our operating efficiency.
Three Months Ended June 30, 20182019 and 2017:2018:
SG&A as a percentage of gross profit for the three months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
 Three Months Ended June 30,
 2018 % of Gross Profit 2017 % of Gross Profit $ Change % Change
Selling, general and administrative$294,124
 90.9% $230,223
 70.2% $63,901
 27.8%


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 Three Months Ended June 30,
 2019 % of Gross Profit 2018 % of Gross Profit $ Change % Change
Selling, general and administrative$210,348
 72.0% $293,725
 90.8% $(83,377) (28.4)%
The increasedecrease in SG&A and SG&A as a percentage of gross profit for the three months ended June 30, 20182019 as compared towith the prior year period was primarily attributable to to:
a $75.0 million charge recorded in the three months ended June 30, 2018 to increase our contingent liability related to a patent litigation case with IBM as a result of an adverse jury verdict in July 2018. Although Groupon cannot predict the ultimate outcome of this lawsuit, it currently intends to continue vigorously pursuing its position through post-trial motions and appeal. That increase was partially offset by our continued efforts to improve our cost structure, including the following:IBM;
a $5.7$4.9 million decrease in compensation-related costs; and
decreases in facilities costs and other general expenses.
There was a $5.2 million unfavorablefavorable impact from year-over-year changes in foreign currency exchange rates for the three months ended June 30, 2018.rates; and
decreases in facilities costs, system costs, litigation and other general expenses.
Six Months Ended June 30, 20182019 and 2017:2018:
SG&A as a percentage of gross profit for the six months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
 Six Months Ended June 30,
 2018 % of Gross Profit 2017 % of Gross Profit $ Change % Change
Selling, general and administrative$516,185
 79.6% $462,281
 72.5% $53,904
 11.7%
 Six Months Ended June 30,
 2019 % of Gross Profit 2018 % of Gross Profit $ Change % Change
Selling, general and administrative$420,772
 70.3% $516,069
 79.6% $(95,297) (18.5)%


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The increasedecrease in SG&A and SG&A as a percentage of gross profit for the six months ended June 30, 20182019 as compared towith the prior year period was attributable to the following:
a $75.0 million charge recorded in the second quartersix months ended June 30, 2018 to increase our contingent liability related to a patent litigation case with IBM. That increase was partially offset by our continued efforts to improve our cost structure, including the following:IBM;
a $10.1an $11.2 million decrease in compensation-related costs; and
decreases in facilities costs, systems costs, and other general expenses.
There was a $13.9 million unfavorablefavorable impact from year-over-year changes in foreign currency exchange rates for the six months ended June 30, 2018.rates; and
Restructuring Charges
Restructuring charges represent severance and benefitdecreases in compensation-related costs, for workforce reductionsincluding variable compensation, facilities costs, system costs, litigation and other exit costs resulting from our restructuring activities. See Note 12, Restructuring, for information about our restructuring plan.general expenses.
Income (Loss) from Operations
Three Months Ended June 30, 20182019 and 2017:2018:
Income (loss) from operations by segment for the three months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
Three Months Ended June 30,Three Months Ended June 30,
2018 2017 $ Change % Change2019 2018 $ Change % Change
Income (loss) from operations              
North America$(68,524) $(12,033) $(56,491) (469.5)%$(372) $(68,524) $68,152
 99.5 %
International4,279
 4,635
 (356) (7.7)(6,767) 4,279
 (11,046) (258.1)
Total income (loss) from operations$(64,245) $(7,398) $(56,847) (768.4)$(7,139) $(64,245) $57,106
 88.9
North America
The increase in our lossincome from operations was primarily attributable to a $14.5$79.6 million decrease in gross profitSG&A and the $75.0 million charge recorded in the second quarter 2018 related to a patent litigation case with IBM, partially offset by a decrease of $18.1 million in other SG&A costs, including compensation-related and facilities-related costs, a $12.1$9.3 million decrease in marketing expense, andpartially offset by a $2.8$20.8 million decrease in restructuring costs.


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gross profit.
Income (loss) from operations includes stock-based compensation of $15.0$24.1 million and $20.0$15.0 million for the three months ended June 30, 20182019 and 2017, respectively.
For the three months ended June 30, 2018, there was a $4.7 million favorable impact on income (loss) from operations as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting Topic 606 and its related amendments on the Company's accounting policies.2018.
International
The decrease in our income from operations was primarily attributable to a $7.0 million increase in SG&A and a $5.6$4.0 million increase in marketing expense and a $10.7 million decrease in gross profit, partially offset by a $10.1 million increase in gross profit and a $2.1$3.7 million decrease in restructuring costs.SG&A.
Income (loss) from operations includes stock-based compensation of $2.5 million and $1.3 million for the three months ended June 30, 20182019 and 2017.
For the three months ended June 30, 2018, there was a $2.7 million unfavorable impact on income (loss) from operations as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting Topic 606 and its related amendments on the Company's accounting policies.2018.
Six Months Ended June 30, 20182019 and 2017:2018:
Income (loss) from operations by segment for the six months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
Six Months Ended June 30,Six Months Ended June 30,
2018 2017 $ Change % Change2019 2018 $ Change % Change
Income (loss) from operations              
North America$(70,384) $(26,816) $(43,568) (162.5)%$4,964
 $(70,384) $75,348
 107.1 %
International9,524
 7,738
 1,786
 23.1
(9,908) 9,524
 (19,432) (204.0)
Total income (loss) from operations$(60,860) $(19,078) $(41,782) (219.0)$(4,944) $(60,860) $55,916
 91.9
North America
The increase in our lossincome from operations was primarily attributable to a $15.7an $85.1 million decrease in gross profitSG&A and the $75.0 million charge recorded in the second quarter 2018 related to a patent litigation case with IBM, partially offset by a decrease of $38.2 million in other SG&A costs, including compensation-related and facilities-related costs, a $4.2$20.9 million decrease in marketing expense, andpartially offset by a $4.7$30.7 million decrease in restructuring costs.gross profit.
Income (loss) from operations includes stock-based compensation of $32.9$38.9 million and $38.3$32.9 million for the six months ended June 30, 20182019 and 2017, respectively.
For the six months ended June 30, 2018, there was a $9.9 million favorable impact on income (loss) from operations as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting Topic 606 and its related amendments on the Company's accounting policies.2018.
International
The improvementdecrease in our income from operations was primarily attributable to a $26.8$9.9 million increase in gross profitmarketing expense and a $2.7$19.7 million decrease in restructuring costs,gross profit, partially offset by a $17.2$10.2 million increasedecrease in SG&A and a $10.5 million increase in marketing expense.&A.
Income (loss) from operations includes stock-based compensation of $4.1 million and $2.7 million for the six months ended June 30, 20182019 and 2017.


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For the six months ended June 30, 2018, there was a $0.4 million favorable impact on income (loss) from operations as a result of adopting Topic 606 as compared to previous accounting guidance. See Note 2, Adoption of New Accounting Policies, and Note 11, Revenue Recognition, for additional information on the impact of adopting Topic 606 and its related amendments on the Company's accounting policies.2018.
Other Income (Expense), Net
Other income (expense), net includes interest income, interest expense, gains and losses on fair value option investments, impairments of investments and foreign currency gains and losses, primarily resulting from intercompany balances with our subsidiaries that are denominated in foreign currencies.
Three Months Ended June 30, 20182019 and 2017:2018:
Other income (expense), net for the three months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
 Three Months Ended June 30,
 2018 2017 $ Change % Change
Other income (expense), net$(26,457) $5,878
 $(32,335) (550.1)%
 Three Months Ended June 30,
 2019 2018 $ Change % Change
Other income (expense), net$(28,494) $(26,457) $(2,037) (7.7)%
Other income (expense), net for the three months ended June 30, 2019 primarily consisted of the following:
$27.6 million of net losses on our fair value option investments. See Item 1, Note 3, Investments, for additional information; and
$5.4 million of interest expense primarily related to interest on our convertible notes. See Item 1, Note 5, Financing Arrangements, for additional information.
Those items were partially offset by $1.9 million in interest income and $2.6 million in foreign currency gains, which primarily resulted from intercompany balances with our subsidiaries that are denominated in foreign currencies.
Other income (expense), net for the three months ended June 30, 2018 primarily consisted of the following:
$12.5 million in foreign currency losses, which primarily resulted from intercompany balances with our subsidiaries that are denominated in foreign currencies. The foreign currency losses on those intercompany balances were primarily driven by the decline of the Euro against the U.S. dollar from an exchange rate of 1.2321 on March 31, 2018 to 1.1683 on June 30, 2018;currencies;
$9.2 million of impairments of minority investments. See Note 6, Investments, for additional information;
$5.2 million of interest expense; and
$3.0 million of losses on our fair value option investments. See Note 6, Investments, for additional information.
$9.2 million of impairment charges for available-for-sale and other equity investments. See Item 1, Note 3, Investments, for additional information;
$5.2 million of interest expense primarily related to interest on our convertible notes. See Item 1, Note 5, Financing Arrangements, for additional information; and
$3.0 million of net losses on our fair value option investments. See Item 1, Note 3, Investments, for additional information.
Those items were partially offset by $1.8 million in interest income and a $1.7 million gain on an embedded derivative related to an available-for-sale security.
Other income (expense), net for the three months ended June 30, 2017 primarily consisted of $10.8 million in foreign currency gains, partially offset by $4.9 million of interest expense.

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Six Months Ended June 30, 20182019 and 2017:2018:
Other income (expense), net for the six months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
 Six Months Ended June 30,
 2018 2017 $ Change % Change
Other income (expense), net$(34,972) $1,276
 $(36,248) (2,840.8)%
 Six Months Ended June 30,
 2019 2018 $ Change % Change
Other income (expense), net$(75,349) $(34,972) $(40,377) (115.5)%
Other income (expense), net for the six months ended June 30, 2019 primarily consisted of the following:
$69.0 million of net losses on our fair value option investments. See Item 1, Note 3, Investments, for additional information; and
$11.1 million of interest expense primarily related to interest on our convertible notes. See Item 1, Note 5, Financing Arrangements, for additional information.
Those items were partially offset by $3.9 million in interest income and $0.9 million in foreign currency gains, which primarily resulted from intercompany balances with our subsidiaries that are denominated in foreign currencies.
Other income (expense), net for the six months ended June 30, 2018 primarily consisted of the following:
$11.1 million in foreign currency losses, which primarily resulted from intercompany balances with our subsidiaries that are denominated in foreign currencies. The foreign currency losses on those intercompany balances were primarily driven by the decline of the Euro against the U.S. dollar from an exchange rate of 1.1996 on December 31, 2017 to 1.1683 on June 30, 2018;currencies;
$10.7 million of interest expense;
$10.0 million of impairments of minority investments. See Note 6, Investments, for additional information; and


55



$8.1 million of losses on our fair value option investments. See Note 6, Investments, for additional information.
$10.7 million of interest expense primarily related to interest on our convertible notes. See Item 1, Note 5, Financing Arrangements, for additional information;
$10.0 million of impairment charges for available-for-sale and other equity investments. See Item 1, Note 3, Investments, for additional information; and
$8.1 million of net losses on our fair value option investments. See Item 1, Note 3, Investments, for additional information.
Those items were partially offset by $3.3 million in interest income and a $1.7 million gain on an embedded derivative related to an available-for-sale security.
Other income (expense), net for the six months ended June 30, 2017 primarily consisted of $10.9 million in foreign currency gains, partially offset by $10.3 million of interest expense.
Provision (Benefit) for Income Taxes
Three Months Ended June 30, 20182019 and 2017:2018:
Provision (benefit) for income taxes for the three months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
Three Months Ended June 30,Three Months Ended June 30,
2018 2017 $ Change % Change2019 2018 $ Change % Change
Provision (benefit) for income taxes$1,552
 $3,883
 $(2,331) (60.0)%$2,012
 $1,552
 $460
 29.6%
Effective tax rate(1.7)% (255.5)%    (5.6)% (1.7)%    
The Company'sOur U.S. Federal income tax rate is 21% for the three and six months ended June 30, 2018 and was 35% for the three and six months ended June 30, 2017.. The primary factor impacting the effective tax rate for the three months ended June 30, 20182019 and 20172018 was the pretax losses incurred in jurisdictions that have valuation allowances against their net deferred tax assets. We expect that our consolidated effective tax rate in future periods will continue to differ significantly from the U.S. federal income tax rate as a result of our tax obligations in jurisdictions with profits and valuation allowances in jurisdictions with losses.
We are currently undergoing income See Item 1, Note 10, Income Taxes, for additional information relating to tax audits in multiple jurisdictions. It is likelyand assessments and regulatory and legal developments that the examination phasemay impact our business and results of some of those audits will concludeoperations in the next 12 months. There are many factors, including factors outside of our control, which influence the progress of and completion of those audits. During the fourth quarter 2017, we received an income tax assessment and a notification of proposed assessment from the tax authorities in two foreign jurisdictions, totaling $134.5 million in the aggregate. We believe that the assessments, which primarily relate to transfer pricing on transactions occurring from 2011 to 2014, are without merit and we intend to vigorously defend ourselves in those matters. In addition to any potential increases in our liabilities for uncertain tax positions from the ultimate resolution of those assessments, we believe that it is reasonably possible that reductions of up to $40.6 million in unrecognized tax benefits may occur within the 12 months following June 30, 2018 upon closing of income tax audits or the expiration of applicable statutes of limitations.future.
The Tax Cuts and Jobs Act (the "Jobs Act") was signed into law on December 22, 2017. In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. Additionally, while we do not expect to incur the deemed repatriation tax established by the Jobs Act, an actual repatriation from our non-U.S. subsidiaries could be subject to foreign and U.S. state income taxes. Aside from limited exceptions for which the related deferred tax liabilities recognized as of June 30, 2018 and December 31, 2017 are immaterial, we do not intend to distribute earnings of foreign subsidiaries for which we have an excess of the financial reporting basis over the tax basis of our investments and therefore have not recorded any deferred taxes related to such amounts. The actual tax cost resulting from a distribution would depend on income tax laws and circumstances at the time of distribution.
On July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to stock-based compensation. This opinion reversed an earlier decision of the United States Tax Court. We are currently evaluating the impact of that opinion; however, we currently do not expect that it will have a material impact on our provision for income taxes for the year ending December 31, 2018 due to the valuation allowances against our net deferred tax assets in the related jurisdictions. 




5644





Six Months Ended June 30, 20182019 and 2017:2018:
Provision (benefit) for income taxes for the six months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):
Six Months Ended June 30,Six Months Ended June 30,
2018 2017 $ Change % Change2019 2018 $ Change % Change
Provision (benefit) for income taxes$(783) $8,470
 $(9,253) (109.2)%$(1,478) $(783) $(695) (88.8)%
Effective tax rate0.8% (47.6)%    1.8% 0.8%    
Our U.S. Federal income tax rate is 21%. The primary factor impacting the effective tax rate for the six months ended June 30, 20182019 and 20172018 was the pretax losses incurred in jurisdictions that have valuation allowances against their net deferred tax assets. The effective tax rate for the six months ended June 30, 2019 also reflected the reversal of reserves for uncertain tax positions due to the closure of a tax audit. The effective tax rate for the six months ended June 30, 2018 also reflected a $6.4 million income tax benefit resulting from the impact of adopting Topic 606 on intercompany activity in certain foreign jurisdictions.
We expect that our consolidated effective tax rate in future periods will continue to differ significantly from the U.S. federal income tax rate as a result of our tax obligations in jurisdictions with profits and valuation allowances in jurisdictions with losses. See Item 1, Note 10, Income (Loss) from Discontinued Operations
From November 2016 through March 2017, we exited our operations in 11 non-core countries and their results have been presented as discontinued operations. See Note 3, Discontinued Operations and Other Business DispositionsTaxes, for additional information aboutrelating to tax audits and assessments and regulatory and legal developments that may impact our business and results of operations in the dispositions and see Note 9, Commitments and Contingencies, for information about indemnification obligations related to discontinued operations.future.


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Non-GAAP Financial Measures
In addition to financial results reported in accordance with U.S. GAAP, we have provided the following non-GAAP financial measures: Adjusted EBITDA, free cash flow and foreign currency exchange rate neutral operating results. Those non-GAAP financial measures, which are presented on a continuing operations basis, are intended to aid investors in better understanding our current financial performance and prospects for the future as seen through the eyes of management. We believe that those non-GAAP financial measures facilitate comparisons with our historical results and with the results of peer companies who present similar measures (although other companies may define non-GAAP measures differently than we define them, even when similar terms are used to identify such measures). However, those non-GAAP financial measures are not intended to be a substitute for those reported in accordance with U.S. GAAP.
Adjusted EBITDA. Adjusted EBITDA is a non-GAAP performance measure that we define as net income (loss) from continuing operations excluding income taxes, interest and other non-operating items, depreciation and amortization, stock-based compensation, acquisition-related expense (benefit), net and other special charges and credits, including items that are unusual in nature or infrequently occurring. Our definition of Adjusted EBITDA may differ from similar measures used by other companies, even when similar terms are used to identify such measures. Adjusted EBITDA is a key measure used by our management and Board of Directors to evaluate operating performance, generate future operating plans and make strategic decisions for the allocation of capital. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. However, Adjusted EBITDA is not intended to be a substitute for income (loss) from continuing operations.
We exclude stock-based compensation expense and depreciation and amortization because they are primarily non-cash in nature and we believe that non-GAAP financial measures excluding those items provide meaningful supplemental information about our operating performance and liquidity. Acquisition-related expense (benefit), net is comprised of the change in the fair value of contingent consideration arrangements and external transaction costs related to business combinations, primarily consisting of legal and advisory fees. The composition of our contingent consideration arrangements and the impact of those arrangements on our operating results vary over time based on a number of factors, including the terms of our business combinations and the timing of those transactions. For the three and six months ended June 30, 20182019 and 2017,2018, special charges and credits included charges related to our restructuring plan. For the three and six months ended June 30, 2018, special charges and credits also included the $75.0 million charge recorded in the second quarter 2018 related to a patent litigation case with IBM. We exclude special charges and credits from Adjusted EBITDA because we believe that excluding those items provides meaningful supplemental information about our core operating performance and facilitates comparisons with our historical results.


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The following is a reconciliation of Adjusted EBITDA to the most comparable U.S. GAAP financial measure, Income (loss) from continuing operations for the three and six months ended June 30, 20182019 and 20172018 (in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 20172019 2018 2019 2018
Income (loss) from continuing operations$(92,254) $(5,403) $(95,049) $(26,272)$(37,645) $(92,254) $(78,815) $(95,049)
Adjustments:

 

      

    
Stock-based compensation (1)
16,266
 21,392
 35,544
 41,042
26,563
 16,266
 42,974
 35,544
Depreciation and amortization28,954
 34,679
 58,615
 68,746
27,116
 28,954
 55,532
 58,615
Acquisition-related expense (benefit), net655
 36
 655
 48
28
 655
 28
 655
Restructuring charges(399) 4,584
 (116) 7,315
(47) (399) (114) (116)
IBM patent litigation75,000
 
 75,000
 

 75,000
 
 75,000
Other (income) expense, net26,457
 (5,878) 34,972
 (1,276)28,494
 26,457
 75,349
 34,972
Provision (benefit) for income taxes1,552
 3,883
 (783) 8,470
2,012
 1,552
 (1,478) (783)
Total adjustments148,485
 58,696
 203,887
 124,345
84,166
 148,485
 172,291
 203,887
Adjusted EBITDA$56,231
 $53,293
 $108,838
 $98,073
$46,521
 $56,231
 $93,476
 $108,838
(1)Represents stock-based compensation expense recorded within Selling, general and administrative, Cost of revenue and Marketing. Other income (expense), net includes $0.05 million and $0.05 million for the three months ended June 30, 2018, and 2017, respectively. Other income (expense), net includes $0.1 million and $0.1 million for the six months ended June 30, 2018 and 2017, respectively.
Free cash flow. Free cash flow is a non-GAAP liquidity measure that comprises net cash provided by operating activities from continuing operations less purchases of property and equipment and capitalized software from continuing operations.software. We use free cash flow to conduct and evaluate our business because, although it is similar to cash flow from continuing operations,


46



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 our cash balance for the applicable period.
Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. For example, free cash flow does not include cash payments for business acquisitions. In addition, free cash flow reflects the impact of the timing difference between when we are paid by customers and when we pay merchants and suppliers. Therefore, we believe it is important to view free cash flow as a complement to our entire condensed consolidated statements of cash flows. For a reconciliation of free cash flow to the most comparable U.S. GAAP financial measure, see Liquidity and Capital Resources below.
Foreign currency exchange rate neutral operating results. Foreign currency exchange rate neutral operating results show current period operating results as if foreign currency exchange rates had remained the same as those in effect in the prior year period. Those measures are intended to facilitate comparisons to our historical performance. For a reconciliation of foreign currency exchange rate neutral operating results to the most comparable U.S. GAAP financial measures, see Results of Operations above.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows from operations, cash balances, which totaled $662.9$596.8 million as of June 30, 2018,2019, and available borrowing capacity under our Amended and Restated2019 Credit Agreement.


58



Our net cash flows from operating, investing and financing activities from continuing operations for three and six months ended June 30, 20182019 and 20172018 were as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 20172019 2018 2019 2018
Cash provided by (used in):              
Operating activities (1)
$44,175
 $(19,390) $(75,572) $(157,476)$(1,219) $44,175
 $(148,702) $(75,572)
Investing activities(75,714) (13,782) (96,096) (27,802)(17,235) (75,714) (35,350) (96,096)
Financing activities(18,729) (47,924) (39,628) (93,650)(31,581) (18,729) (59,358) (39,628)
(1)
Prior period net cash used in operating activities from continuing operations has been updated from negative $20.7 million and negative $156.9 million previously reported for the three and six months ended June 30, 2017, respectively, to reflect the adoption of ASU 2016-18 on January 1, 2018. See Note 2, Adoption of New Accounting Standards, for additional information on the adoption of ASU 2016-18.
Free cash flow is a non-GAAP liquidity measure that comprises net cash provided by operating activities from continuing operations, less purchases of property and equipment and capitalized software from continuing operations. Our free cash flow for the three and six months ended June 30, 20182019 and 20172018 and reconciliations to the most comparable U.S. GAAP financial measure, Net cash provided by (used in) operating activities from continuing operations, for those periods are as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 20172019 2018 2019 2018
Net cash provided by (used in) operating activities from continuing operations (1)
$44,175
 $(19,390) $(75,572) $(157,476)$(1,219) $44,175
 $(148,702) $(75,572)
Purchases of property and equipment and capitalized software from continuing operations(17,373) (15,385) (37,517) (29,461)(16,684) (17,373) (34,161) (37,517)
Free cash flow (1)
$26,802
 $(34,775) $(113,089) $(186,937)$(17,903) $26,802
 $(182,863) $(113,089)
(1)
Net cash used in operating activities from continuing operations and free cash flow have been updated from negative $20.7 million and negative $36.1 million previously reported, respectively, for the three months ended June 30, 2017, and from negative $156.9 million and negative $186.4 million previously reported, respectively, for the six months ended June 30, 2017 to reflect the adoption of ASU 2016-18 on January 1, 2018. See Note 2, Adoption of New Accounting Standards, for additional information on the adoption of ASU 2016-18.
Our revenue-generating transactions are primarily structured such that we collect cash up-front from customers and pay third-party merchants at a later date, either based on a fixed payment schedule or upon the customer's redemption of the related voucher. For merchants on fixed payment terms, we remit payments on an ongoing basis, generally bi-weekly, throughout the term of the merchant's offering. For purchases of merchandise inventory, our supplier payment terms generally range from net 30 to net 60 days. We have primarily paid merchants on fixed payment terms in North America and upon voucher redemption internationally. In the third quarter of 2017, we began to increase our use of redemption payment terms with our North America merchants as well and we expect that trend to continue.
Our cash balances fluctuate significantly throughout the year based on many variables, including gross billings growth rates, the timing of payments to merchants and suppliers, seasonality and the mix of transactions between Goods and Local. For example, we typically generate strong cash inflows during the fourth quarter holiday season, driven primarily by our Goods category, followed by significant cash outflows in the following period when payments are made to inventory suppliers. We are currently developing and testing voucherless offerings that are linked to customer credit cards, which we refer to as Groupon+.cards. For Groupon+ deals,our card-linked offerings, we offer cash back on customers' credit card statements based


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on qualifying purchases with participating merchants. For many of those offerings, we typically remit payment to a card brand network within two weeks of the qualifying purchase for the customer's cash back incentive and then we collect from the merchant both our commission and reimbursement for the customer's cash back incentive, usually on a monthly basis. The working capital impact of Groupon+card-linked offerings with this merchant payment structure is less favorable to us than voucher transactions, for which we collect payment from customers at the time of sale and remit payment to merchants at a later date. As such, we expect that our cash flows will initially be adversely impacted to the extent that Groupon+we scale these types of card-linked offerings begin to scale in future periods.
For the six months ended June 30, 2018,2019, our net cash used in operating activities from continuing operations was $75.6$148.7 million, as compared to our $95.0 million net loss from continuing operations. That difference was primarily attributable to $111.6 million of non-cash items, including depreciation and amortization and stock-based compensation,


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partially offset bywith a $92.1 million net decrease from changes in working capital and other assets and liabilities. The working capital impact was primarily related to the seasonal timing of payments to inventory suppliers.
For the six months ended June 30, 2017, our net cash used in operating activities from continuing operations was $157.5 million, as compared to a $26.3$78.8 million net loss from continuing operations. That difference was primarily due to $174.3 million of non-cash items, including depreciation and amortization, stock-based compensation and a $248.2$69.4 million loss from changes in fair value of our investment in Monster LP, partially offset by a $244.2 million decrease from changes in working capital and other assets and liabilities. The working capital impact was primarily related to the seasonal timing of payments to inventory suppliers and payments related to our restructuring activities. The difference betweena lesser extent a reduction in gross billings.
For the six months ended June 30, 2018, our net cash provided byused in operating activities and our net income from continuing operations was $75.6 million, as compared with a $95.0 million net loss from continuing operations. That difference was primarily due to changes in working capital was partially offset by $117.0$111.6 million of non-cash items, including depreciation and amortization and stock-based compensation.compensation, partially offset by a $92.1 million decrease from changes in working capital and other assets and liabilities. The working capital impact was primarily related to the seasonal timing of payments to inventory suppliers and to a lesser extent a reduction in gross billings.
Our net cash used in investing activities from continuing operations was $96.1$35.4 million and $27.8$96.1 million for the six months ended June 30, 20182019 and 2017, respectively. For the six months ended June 30, 2018 and 2017, our2018. Our net cash used in investing activities from continuing operations included $37.5 million and $29.5 million, respectively, in purchases of property and equipment and capitalized software.software of $34.2 million and $37.5 million for the six months ended June 30, 2019 and 2018. For the six months ended June 30, 2018, net cash used in investing activities also included net cash paid of $57.8 million related to the acquisition of Cloud Savings.
Our net cash used in financing activities was $39.6$59.4 million and $93.7$39.6 million for the six months ended June 30, 20182019 and 2017, respectively.2018. For the six months ended June 30, 2019, net cash used in financing activities included $29.6 million in purchases of treasury stock under our share repurchase program, $12.6 million in payments of finance lease obligations and $10.2 million in taxes paid related to net share settlements of stock-based compensation awards. For the six months ended June 30, 2018, net cash used in financing activities included $17.2 million in payments of capitalfinance lease obligations and $16.1 million in taxes paid related to net share settlements of stock-based compensation awards. For
In May 2019, we entered into the six months ended June 30, 2017, net cash used in financing activities included $51.5 million in purchases of treasury stock under our share repurchase program, $16.7 million in payments of capital lease obligations and $15.4 million in taxes paid related to net share settlements of stock-based compensation awards.
Our Amended and Restated2019 Credit Agreement which provides for aggregate principal borrowings of up to $250.0$400.0 million and matures in JulyMay 2024. The 2019 Credit Agreement replaced our previous $250.0 million amended and restated credit agreement that was scheduled to mature in June 2019. As of June 30, 2018,2019, we had no borrowings outstanding under our Amended and Restatedthe 2019 Credit Agreement and were in compliance with all covenants. See Item 1, Note 8, 5, Financing Arrangements, for additional information.
As of June 30, 2018,2019, we had $259.5$231.1 million in cash held by our international subsidiaries, which is primarily denominated in Euros, British Pounds Sterling, Canadian dollars, and, to a lesser extent, Australian dollars and Japanese yen. In general, it is our practice and intention to re-invest the earnings of our non-U.S. subsidiaries in those operations. We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business.
In May 2018, the Board of Directors authorized us to repurchase up to $300.0 million of our common stock under a new share repurchase program. The Company's prior share repurchase program expired in April 2018. Upon its expiration, up to $135.2 million of our common stock remained available for purchase under that prior share repurchase program. During the three and six months ended June 30, 2018,2019, we did notrepurchased 4,228,148 and 8,636,143 shares for an aggregate purchase price of $15.1 million and $30.1 million (including fees and commissions) under our repurchase any sharesprogram. As of June 30, 2019, up to $260.0 million of common stock remained available for purchase under our common stock.program. The timing and amount of share repurchases, if any, will be determined based on market conditions, limitations under our Amended and Restated2019 Credit Agreement, share price and other factors, and the share repurchase program may be terminated at any time. Repurchases will be made in compliance with SEC rules and other legal requirements and may be made, in part, under a Rule 10b5-1 plan, which permits share repurchases when we might otherwise be precluded from doing so.
Our cash and cash equivalentsbalances and cash flows generated from our operations may be used to fund strategic investments, business acquisitions, working capital needs, investments in technology, marketing and share repurchases and litigation-related payments, including any payments related to the IBM patent litigation matter. repurchases.


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Additionally, we have the ability to borrow funds under our Amended and Restated2019 Credit Agreement. We could also seek to raise additional financing, if available on terms that we believe are favorable, to increase the amount of liquid funds that we can access for acquisitions, share repurchases or other strategic investment opportunities. Although we can provide no assurances, we believe that our cash and cash equivalents balancebalances and cash generated from operations and available borrowings under our Amended and Restated Credit Agreement should be sufficient to meet our working capital requirements and capital expenditures for at least the next twelve months.
Contractual Obligations and Commitments
Our contractual obligations and commitments as of June 30, 20182019 did not materially change from the amounts set forth in our 20172018 Annual Report on Form 10-K, except as disclosed in Item 1, Note 9, Commitments and Contingencies.


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6, Leases.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2018.2019.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenue and expenses, and related disclosuresdisclosure of contingent liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our significant accounting policies are discussed in Item 2, Note 2, Summary of Significant Accounting Policies, and in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017, as amended.2018. In addition, refer to the critical accounting policies and estimates under Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2017, as amended.2018.
The changes to our revenuelease recognition policies upon the adoption of Topic 606842 on January 1, 2018 represents2019 represent a material change to our critical accounting policies and estimates during the six months ended June 30, 2018.2019. See Item 1, Note 2, Adoption of New Accounting Standards, and Note 11, Revenue Recognition6, Leases, for additional information related to our revised revenuenew lease recognition policies.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU will require the recognition of lease assets and liabilities for operating leases with terms of more than 12 months, in addition to the capital lease assets and liabilities currently recorded on our consolidated balance sheets. Presentation of leases within the consolidated statements of operations and cash flows will be substantially consistent with current accounting guidance. The ASU is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods. We are continuing to evaluate the impact of the ASU and expect that it will have a material impact on our consolidated balance sheets. See Note 10, Commitments and Contingencies, in our Annual Report on Form 10-K, for the year ended December 31, 2017, as amended, and Note 9, Commitments and Contingencies, in this Quarterly Report on Form 10-Q for information about our lease commitments.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses of Financial Instruments. This ASU requires entities to measure credit losses for financial assets measured at amortized cost based on expected losses rather than incurred losses. For available-for-sale debt securities with unrealized losses, entities will be required to recognize credit losses through an allowance for credit losses. The ASU will be effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods. While we are still assessing the impact of ASU 2016-13, we currently believe that the adoption of this guidance will not have a material impact on our condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 of the goodwill impairment test and requires a goodwill impairment to be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill. The ASU is effective for annual or any interim goodwill impairment tests


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in fiscal years beginning after December 15, 2019. We believe that the adoption of this guidance will not have a material impact on our condensed consolidated financial statements.
In JuneAugust 2018, the FASB issued ASU 2018-07, Compensation2018-13, Fair Value Measurement (Topic 820) - Stock Compensation (Topic 718)Disclosure Framework - ImprovementsChanges to Nonemployee Share-Based Payment Accounting. the Disclosure Requirements for Fair Value Measurement. This ASU expandsmodifies the scope ofdisclosure requirements in Topic 718 to make the guidance to share-based payment awards to nonemployees consistent with the guidance for share-based payment awards to employees.820, Fair Value Measurement, by removing, modifying, or adding certain disclosures. The ASU will be effective for annual reporting periods beginning after December 15, 20182019 and interim periods within those annual periods. We believe that theEarly adoption is permitted, and entities are permitted to early adopt any removed or modified disclosures and delay adoption of this guidance will not have a materialthe additional disclosures until the effective date. We are still assessing the impact of ASU 2018-13 on our condensed consolidated financial statements.


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There are no other accounting standards that have been issued but not yet adopted that are expected to have a material impact on our condensed consolidated financial position or results of operations.




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business, including the effect of foreign currency fluctuations, interest rate changes and inflation. Information relating to quantitative and qualitative disclosures about those market risks is set forth below.
Foreign Currency Exchange Risk
We transact business in various foreign currencies other than the U.S. dollar, principally the euro, British pound sterling, Canadian dollar and Australian dollar, which exposes us to foreign currency risk. For the three and six months ended June 30, 2018,2019, we derived approximately 38.4%39.0% and 37.8%, respectively,38.6% of our revenue from our International segment. Revenue and related expenses generated from our international operations are generally denominated in the local currencies of the corresponding countries. The functional currencies of our subsidiaries that either operate or support those markets are generally the same as the corresponding local currencies. However, the results of operations of, and certain of our intercompany balances associated with, our international operations are exposed to foreign currency exchange rate fluctuations. Upon consolidation, as exchange rates vary, our revenue and other operating results may differ materially from expectations, and we may record significant gains or losses on the re-measurement of intercompany balances.
We assess our foreign currency exchange risk based on hypothetical changes in rates utilizing a sensitivity analysis that measures the potential impact on working capital based on a 10% change (increase and decrease) in currency rates. We use a current market pricing model to assess the changes in the value of the U.S. dollar on foreign currency denominated monetary assets and liabilities. The primary assumption used in this model is a hypothetical 10% weakening or strengthening of the U.S. dollar against those currency exposures as of June 30, 20182019 and December 31, 2017.2018.
As of June 30, 2018,2019, our net working capital deficitsurplus (defined as current assets less current liabilities) from subsidiaries that are subject to foreign currency translation risk was $2.4$12.7 million. The potential increase in this working capital deficitsurplus from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be $0.2$1.3 million. This compares towith a $21.5$20.8 million working capital deficitsurplus subject to foreign currency exposure as of December 31, 2017,2018, for which a 10% adverse change would have resulted in a potential increase in this working capital deficitsurplus of $2.2$2.1 million.
Interest Rate Risk
Our cash balance as of June 30, 20182019 consists of bank deposits, so exposure to market risk for changes in interest rates is limited. In April 2016, we issued convertible notes with an aggregate principal amount of $250.0 million (see Item 1, Note 8, 5, Financing Arrangements). The convertible notes bear interest at a fixed rate, so we have no financial statement impact from changes in interest rates. However, changes in market interest rates impact the fair value of the convertible notes along with other variables such as our credit spreads and the market price and volatility of our common stock. In June 2016,May 2019, we entered into the Amended and Restated2019 Credit Agreement thatwhich provides for aggregate principal borrowings of up to $250.0$400.0 million. As of June 30, 2018, there were2019, we had no borrowings outstanding under the Amended and Restated2019 Credit Agreement. Because the Amended and Restated2019 Credit Agreement bears interest at a variable rate, we are exposed to market risk relating to changes in interest rates if we borrow under the Amended and Restated2019 Credit Agreement. We also have $36.8$174.0 million of capital lease obligationsobligations. Interest rates on existing leases typically do not change unless there is a modification to a lease agreement and $10.2 million of investments in convertible debt securities issued by nonpublic entities that are classified as available-for-sale. Wesuch, we do not believe that the interest rate risk on the long-term capital lease obligations and investments is significant.
Impact of Inflation
We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material effect on our business, financial condition or results of operations for the three and six months ended June 30, 2018.2019.




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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our management concluded that, as of June 30, 2018,2019, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.




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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of our material pending legal proceedings, please see Item 1, Note 9, 7, Commitments and Contingencies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2017, as amended,2018, and Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
During the three months ended June 30, 2018,2019, we did not issue any unregistered equity securities.
Issuer Purchases of Equity Securities
On May 7, 2018, the Board authorized us to repurchase up to $300.0 million of our common stock under a newour share repurchase program. The Company's prior share repurchase program expired in April 2018. During the three and six months ended June 30, 2018, the Company did not2019, we repurchased 4,228,148 and 8,636,143 shares for an aggregate purchase price of $15.1 million and $30.1 million (including fees and commissions) under our repurchase any sharesprogram. As of itsJune 30, 2019, up to $260.0 million of common stock.stock remained available for purchase under our program. The timing and amount of any share repurchases, if any, will be determined based on market conditions, limitations under the amended and restated credit agreement,2019 Credit Agreement, share price and other factors, and the share purchase program may be terminated at any time. We will fund the repurchases, if any, through cash on hand, future cash flows and borrowings under our credit facility. Repurchases will be made in compliance with SEC rules and other legal requirements and may be made in part under a Rule 10b5-1 plan, which permits stock repurchases when the Companywe might otherwise be precluded from doing so. See Note 10, Stockholders' Equity and Compensation Arrangements, for discussion regarding
A summary of our common stock repurchases during the three months ended June 30, 2019 under our share repurchase program.program is set forth in the following table:
Date Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under Program
April 1-30, 2019 
 $
 
 $275,000,002
May 1-31, 2019 1,221,792
 3.54
 1,221,792
 270,685,687
June 1-30, 2019 3,006,356
 3.57
 3,006,356
 260,000,005
Total 4,228,148
 $3.56
 4,228,148
 $260,000,005
The following table provides information about purchases of shares of our common stock during the three months ended June 30, 20182019 related to shares withheld upon vesting of restricted stock units for minimum tax withholding obligations:
Date 
Total Number of Shares Purchased (1)
 Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under Program
April 1-30, 2018 265,788
 $4.29
 
 
May 1-31, 2018 184,591
 4.58
 
 
June 1-30, 2018 700,880
 4.51
 
 
Total 1,151,259
 $4.47
 
 
Date 
Total Number of Shares Purchased (1)
 Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under Program
April 1-30, 2019 271,025
 $3.51
 
 
May 1-31, 2019 208,786
 3.52
 
 
June 1-30, 2019 1,044,591
 3.54
 
 
Total 1,524,402
 $3.53
 
 
(1)Total number of shares delivered to us by employees to satisfy the mandatory tax withholding requirement upon vesting of stock-based compensation awards.


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ITEM 5. OTHER INFORMATION
None.On July 29, 2019, Joey Levin resigned as a director of the Company. The departure of Mr. Levin was not the result of any disagreement with the Company, and we thank him for his dedicated service to Groupon.


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ITEM 6. EXHIBITS
Exhibit
Number
 Description
10.1
10.2
10.3
31.1 
31.2 
32.1 
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document


** Management contract or compensatory plan or arrangement



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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 3rd30th day of August 2018.July 2019.
GROUPON, INC.
By: /s/ Michael Randolfi
  Name:Michael Randolfi
  Title:Chief Financial Officer






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