GROUPON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (unaudited) | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 307,998 | | | $ | 498,726 | |
Accounts receivable, net | 42,589 | | | 36,755 | |
Prepaid expenses and other current assets | 52,663 | | | 52,570 | |
Total current assets | 403,250 | | | 588,051 | |
Property, equipment and software, net | 61,117 | | | 73,581 | |
Right-of-use assets - operating leases, net | 18,007 | | | 47,958 | |
Goodwill | 178,685 | | | 216,393 | |
Intangible assets, net | 18,795 | | | 24,310 | |
Investments | 119,541 | | | 119,541 | |
Deferred income taxes | 60,157 | | | 62,945 | |
Other non-current assets | 29,419 | | | 25,102 | |
Total assets | $ | 888,971 | | | $ | 1,157,881 | |
Liabilities and equity | | | |
Current liabilities: | | | |
Short-term borrowings | $ | 110,000 | | | $ | 100,000 | |
Accounts payable | 35,195 | | | 22,165 | |
Accrued merchant and supplier payables | 178,627 | | | 269,509 | |
Accrued expenses and other current liabilities | 198,308 | | | 239,313 | |
Total current liabilities | 522,130 | | | 630,987 | |
Convertible senior notes, net | 224,540 | | | 223,403 | |
Operating lease obligations | 14,636 | | | 58,747 | |
Other non-current liabilities | 30,551 | | | 34,448 | |
Total liabilities | 791,857 | | | 947,585 | |
Commitments and contingencies (see Note 6) | | | |
Stockholders' equity | | | |
Common stock, par value $0.0001 per share, 100,500,000 shares authorized; 40,693,600 shares issued and 30,399,483 shares outstanding at September 30, 2022; 40,007,255 shares issued and 29,713,138 shares outstanding at December 31, 2021 | 4 | | | 4 | |
Additional paid-in capital | 2,317,003 | | | 2,294,215 | |
Treasury stock, at cost, 10,294,117 shares at September 30, 2022 and December 31, 2021 | (922,666) | | | (922,666) | |
Accumulated deficit | (1,339,170) | | | (1,156,868) | |
Accumulated other comprehensive income (loss) | 41,657 | | | (4,813) | |
Total Groupon, Inc. stockholders' equity | 96,828 | | | 209,872 | |
Noncontrolling interests | 286 | | | 424 | |
Total equity | 97,114 | | | 210,296 | |
Total liabilities and equity | $ | 888,971 | | | $ | 1,157,881 | |
See Notes to Condensed Consolidated Financial Statements.
GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue: | | | | | | | |
Service | $ | 144,390 | | | $ | 198,976 | | | $ | 450,926 | | | $ | 577,761 | |
Product | — | | | 15,195 | | | — | | | 166,185 | |
Total revenue | 144,390 | | | 214,171 | | | 450,926 | | | 743,946 | |
Cost of revenue: | | | | | | | |
Service | 18,668 | | | 19,127 | | | 57,231 | | | 58,719 | |
Product | — | | | 13,605 | | | — | | | 142,862 | |
Total cost of revenue | 18,668 | | | 32,732 | | | 57,231 | | | 201,581 | |
Gross profit | 125,722 | | | 181,439 | | | 393,695 | | | 542,365 | |
Operating expenses: | | | | | | | |
Marketing | 37,897 | | | 53,159 | | | 106,685 | | | 130,545 | |
Selling, general and administrative | 119,243 | | | 119,494 | | | 369,601 | | | 384,606 | |
Goodwill impairment | — | | | — | | | 35,424 | | | — | |
Long-lived asset impairment | — | | | — | | | 8,811 | | | — | |
Restructuring and related charges | 4,912 | | | 12,483 | | | 8,163 | | | 34,150 | |
Total operating expenses | 162,052 | | | 185,136 | | | 528,684 | | | 549,301 | |
Income (loss) from operations | (36,330) | | | (3,697) | | | (134,989) | | | (6,936) | |
Other income (expense), net | (23,541) | | | 82,533 | | | (49,761) | | | 97,729 | |
Income (loss) from operations before provision (benefit) for income taxes | (59,871) | | | 78,836 | | | (184,750) | | | 90,793 | |
Provision (benefit) for income taxes | (4,328) | | | 135 | | | (4,605) | | | 773 | |
Net income (loss) | (55,543) | | | 78,701 | | | (180,145) | | | 90,020 | |
Net (income) loss attributable to noncontrolling interests | (680) | | | (594) | | | (2,157) | | | (737) | |
Net income (loss) attributable to Groupon, Inc. | $ | (56,223) | | | $ | 78,107 | | | $ | (182,302) | | | $ | 89,283 | |
| | | | | | | |
Net income (loss) per share: | | | | | | | |
Basic | $ | (1.86) | | | $ | 2.64 | | | $ | (6.06) | | | $ | 3.05 | |
Diluted | $ | (1.86) | | | $ | 2.36 | | | $ | (6.06) | | | $ | 2.80 | |
| | | | | | | |
Weighted average number of shares outstanding: | | | | | | | |
Basic | 30,307,734 | | | 29,567,802 | | | 30,070,598 | | | 29,282,932 | |
Diluted | 30,307,734 | | | 33,364,538 | | | 30,070,598 | | | 32,393,891 | |
| | | | | | | |
Comprehensive income (loss): | | | | | | | |
Net income (loss) | $ | (55,543) | | | $ | 78,701 | | | $ | (180,145) | | | $ | 90,020 | |
Other comprehensive income (loss): | | | | | | | |
Net change in unrealized gain (loss) on foreign currency translation adjustments | 22,283 | | | 6,770 | | | 46,470 | | | (46,353) | |
Reclassification of cumulative foreign currency translation adjustments (See Note 9) | — | | | (16) | | | — | | | 32,268 | |
Other comprehensive income (loss) | 22,283 | | | 6,754 | | | 46,470 | | | (14,085) | |
| | | | | | | |
Comprehensive income (loss) | (33,260) | | | 85,455 | | | (133,675) | | | 75,935 | |
Comprehensive (income) loss attributable to noncontrolling interest | (680) | | | (594) | | | (2,157) | | | (737) | |
Comprehensive income (loss) attributable to Groupon, Inc. | $ | (33,940) | | | $ | 84,861 | | | $ | (135,832) | | | $ | 75,198 | |
See Notes to Condensed Consolidated Financial Statements.
GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Groupon, Inc. Stockholders' Equity | | | | |
| Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Groupon, Inc. Stockholders' Equity | | Non-controlling Interests | | Total Equity |
| Shares | | Amount | Shares | | Amount | |
Balance at December 31, 2021 | 40,007,255 | | | $ | 4 | | | $ | 2,294,215 | | | (10,294,117) | | | $ | (922,666) | | | $ | (1,156,868) | | | $ | (4,813) | | | $ | 209,872 | | | $ | 424 | | | $ | 210,296 | |
Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (34,852) | | | 3,369 | | | (31,483) | | | 500 | | | (30,983) | |
Vesting of restricted stock units and performance share units | 308,152 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares issued under employee stock purchase plan | 30,022 | | | — | | | 591 | | | — | | | — | | | — | | | — | | | 591 | | | — | | | 591 | |
Tax withholdings related to net share settlements of stock-based compensation awards | (118,589) | | | — | | | (2,597) | | | — | | | — | | | — | | | — | | | (2,597) | | | — | | | (2,597) | |
Stock-based compensation on equity-classified awards | — | | | — | | | 8,349 | | | — | | | — | | | — | | | — | | | 8,349 | | | — | | | 8,349 | |
Distributions to noncontrolling interest holders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (814) | | | (814) | |
Balance at March 31, 2022 | 40,226,840 | | | $ | 4 | | | $ | 2,300,558 | | | (10,294,117) | | | $ | (922,666) | | | $ | (1,191,720) | | | $ | (1,444) | | | $ | 184,732 | | | $ | 110 | | | $ | 184,842 | |
Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (91,227) | | | 20,818 | | | (70,409) | | | 977 | | | (69,432) | |
Vesting of restricted stock units and performance share units | 407,426 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Tax withholdings related to net share settlements of stock-based compensation awards | (151,368) | | | — | | | (2,166) | | | — | | | — | | | — | | | — | | | (2,166) | | | — | | | (2,166) | |
Stock-based compensation on equity-classified awards | — | | | — | | | 9,784 | | | — | | | — | | | — | | | — | | | 9,784 | | | — | | | 9,784 | |
Distributions to noncontrolling interest holders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (943) | | | (943) | |
Balance at June 30, 2022 | 40,482,898 | | | $ | 4 | | | $ | 2,308,176 | | | (10,294,117) | | | $ | (922,666) | | | $ | (1,282,947) | | | $ | 19,374 | | | $ | 121,941 | | | $ | 144 | | | $ | 122,085 | |
Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (56,223) | | | 22,283 | | | (33,940) | | | 680 | | | (33,260) | |
Vesting of restricted stock units and performance share units | 230,186 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares issued under employee stock purchase plan | 53,529 | | | — | | | 514 | | | — | | | — | | | — | | | — | | | 514 | | | — | | | 514 | |
Tax withholdings related to net share settlements of stock-based compensation awards | (73,013) | | | — | | | (830) | | | — | | | — | | | — | | | — | | | (830) | | | — | | | (830) | |
Stock-based compensation on equity-classified awards | — | | | — | | | 9,143 | | | — | | | — | | | — | | | — | | | 9,143 | | | — | | | 9,143 | |
Distributions to noncontrolling interest holders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (538) | | | (538) | |
Balance at September 30, 2022 | 40,693,600 | | | $ | 4 | | | $ | 2,317,003 | | | (10,294,117) | | | $ | (922,666) | | | $ | (1,339,170) | | | $ | 41,657 | | | $ | 96,828 | | | $ | 286 | | | $ | 97,114 | |
See Notes to Condensed Consolidated Financial Statements.
GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Groupon, Inc. Stockholders' Equity | | | | |
| Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Groupon, Inc. Stockholders' Equity | | Non-controlling Interests | | Total Equity |
| Shares | | Amount | Shares | | Amount | |
Balance at December 31, 2020 | 39,142,896 | | | $ | 4 | | | $ | 2,348,114 | | | (10,294,117) | | | $ | (922,666) | | | $ | (1,320,886) | | | $ | 3,109 | | | $ | 107,675 | | | $ | (1) | | | $ | 107,674 | |
Cumulative effect of change in accounting principle due to adoption of ASU 2020-06, net of tax (see Note 1) | — | | | — | | | (64,319) | | | — | | | — | | | 45,350 | | | — | | | (18,969) | | | — | | | (18,969) | |
Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | 14,558 | | | (17,564) | | | (3,006) | | | (110) | | | (3,116) | |
Vesting of restricted stock units and performance share units | 308,954 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares issued under employee stock purchase plan | 23,418 | | | — | | | 349 | | | — | | | — | | | — | | | — | | | 349 | | | — | | | 349 | |
Tax withholdings related to net share settlements of stock-based compensation awards | (122,931) | | | — | | | (4,901) | | | — | | | — | | | — | | | — | | | (4,901) | | | — | | | (4,901) | |
Purchase of capped call transactions | — | | | — | | | (23,840) | | | — | | | — | | | — | | | — | | | (23,840) | | | — | | | (23,840) | |
Stock-based compensation on equity-classified awards | — | | | — | | | 8,387 | | | — | | | — | | | — | | | — | | | 8,387 | | | — | | | 8,387 | |
Receipts from noncontrolling interest holders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 36 | | | 36 | |
Balance at March 31, 2021 | 39,352,337 | | | $ | 4 | | | $ | 2,263,790 | | | (10,294,117) | | | $ | (922,666) | | | $ | (1,260,978) | | | $ | (14,455) | | | $ | 65,695 | | | $ | (75) | | | $ | 65,620 | |
Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (3,382) | | | (3,275) | | | (6,657) | | | 253 | | | (6,404) | |
Vesting of restricted stock units and performance share units | 707,372 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Tax withholdings related to net share settlements of stock-based compensation awards | (254,466) | | | — | | | (11,716) | | | — | | | — | | | — | | | — | | | (11,716) | | | — | | | (11,716) | |
Settlement of convertible note hedges | — | | | — | | | 3,061 | | | — | | | — | | | — | | | — | | | 3,061 | | | — | | | 3,061 | |
Settlement of warrants | — | | | — | | | (1,752) | | | — | | | — | | | — | | | — | | | (1,752) | | | — | | | (1,752) | |
Purchase of capped call transactions | — | | | — | | | (3,576) | | | — | | | — | | | — | | | — | | | (3,576) | | | — | | | (3,576) | |
Stock-based compensation on equity-classified awards | — | | | — | | | 10,501 | | | — | | | — | | | — | | | — | | | 10,501 | | | — | | | 10,501 | |
Receipts from noncontrolling interest holders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 102 | | | 102 | |
Balance at June 30, 2021 | 39,805,243 | | | $ | 4 | | | $ | 2,260,308 | | | (10,294,117) | | | $ | (922,666) | | | $ | (1,264,360) | | | $ | (17,730) | | | $ | 55,556 | | | $ | 280 | | | $ | 55,836 | |
Comprehensive income (loss) | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | 78,107 | | | $ | 6,754 | | | $ | 84,861 | | | $ | 594 | | | $ | 85,455 | |
Vesting of restricted stock units and performance share units | 72,851 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares issued under employee stock purchase plan | 25,981 | | | — | | | 779 | | | — | | | — | | | — | | | — | | | 779 | | | — | | | 779 | |
Tax withholdings related to net share settlements of stock-based compensation awards | (30,820) | | | — | | | (974) | | | — | | | — | | | — | | | — | | | (974) | | | — | | | (974) | |
Stock-based compensation on equity-classified awards | — | | | — | | | 9,071 | | | — | | | — | | | — | | | — | | | 9,071 | | | — | | | 9,071 | |
Distributions to noncontrolling interest holders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (670) | | | (670) | |
Balance at September 30, 2021 | 39,873,255 | | | $ | 4 | | | $ | 2,269,184 | | | (10,294,117) | | | $ | (922,666) | | | $ | (1,186,253) | | | $ | (10,976) | | | $ | 149,293 | | | $ | 204 | | | $ | 149,497 | |
See Notes to Condensed Consolidated Financial Statements.
GROUPON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Operating activities | | | |
Net income (loss) | $ | (180,145) | | | $ | 90,020 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization of property, equipment and software | 42,172 | | | 46,879 | |
Amortization of acquired intangible assets | 6,397 | | | 6,728 | |
Impairment of goodwill | 35,424 | | | — | |
Impairment of long-lived assets | 8,811 | | | — | |
Restructuring-related impairment | 2,949 | | | 7,651 | |
Stock-based compensation | 24,194 | | | 25,121 | |
Changes in fair value of investments | — | | | (95,533) | |
Foreign currency translation adjustments reclassified into earnings | — | | | (32,268) | |
Change in assets and liabilities: | | | |
Accounts receivable | (9,321) | | | 7,985 | |
Prepaid expenses and other current assets | (4,086) | | | (11,155) | |
Right-of-use assets - operating leases | 22,896 | | | 16,016 | |
Accounts payable | 13,222 | | | 3,996 | |
Accrued merchant and supplier payables | (80,436) | | | (175,079) | |
Accrued expenses and other current liabilities | (40,331) | | | (43,654) | |
Operating lease obligations | (36,671) | | | (24,614) | |
Other, net | 43,075 | | | 22,961 | |
Net cash provided by (used in) operating activities | (151,850) | | | (154,946) | |
Investing activities | | | |
Purchases of property and equipment and capitalized software | (30,495) | | | (37,865) | |
Proceeds from sale or divestment of investment | — | | | 6,859 | |
Acquisitions of intangible assets and other investing activities | (2,077) | | | (2,491) | |
Net cash provided by (used in) investing activities | (32,572) | | | (33,497) | |
Financing activities | | | |
Proceeds from borrowings under revolving credit agreement | 50,000 | | | — | |
Payments of borrowings under revolving credit agreement | (40,000) | | | (100,000) | |
Proceeds from issuance of 2026 convertible notes | — | | | 230,000 | |
Issuance costs for 2026 convertible notes and revolving credit agreement | — | | | (7,747) | |
Purchase of capped call transactions | — | | | (27,416) | |
Payments for the repurchase of Atairos convertible notes | — | | | (254,000) | |
Proceeds from the settlement of convertible note hedges | — | | | 2,315 | |
Payments for the settlement of warrants | — | | | (1,345) | |
Taxes paid related to net share settlements of stock-based compensation awards | (5,601) | | | (17,591) | |
Payments of finance lease obligations | (653) | | | (4,887) | |
Other financing activities | (1,238) | | | 203 | |
Net cash provided by (used in) financing activities | 2,508 | | | (180,468) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (9,240) | | | (4,894) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | (191,154) | | | (373,805) | |
Cash, cash equivalents and restricted cash, beginning of period (1) | 499,483 | | | 851,085 | |
Cash, cash equivalents and restricted cash, end of period (1) | $ | 308,329 | | | $ | 477,280 | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Supplemental disclosure of cash flow information: | | | |
Cash paid for interest | $ | 4,361 | | | $ | 13,166 | |
Income tax payments | 4,483 | | | 9,406 | |
Supplemental cash flow information on our leasing obligations: | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 22,640 | | | $ | 24,614 | |
Right-of-use assets obtained in exchange for lease liabilities: | | | |
Operating leases | $ | 2,669 | | | $ | — | |
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 Sheets as of September 30, 2022, December 31, 2021, September 30, 2021 and December 31, 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 | | September 30, 2021 | | December 31, 2020 |
Cash and cash equivalents | $ | 307,998 | | | $ | 498,726 | | | $ | 476,782 | | | $ | 850,587 | |
Restricted cash included in prepaid expenses and other current assets | 331 | | | 757 | | | 498 | | | 498 | |
Cash, cash equivalents and restricted cash | $ | 308,329 | | | $ | 499,483 | | | $ | 477,280 | | | $ | 851,085 | |
See Notes to Condensed Consolidated Financial Statements.
GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Company Information
Groupon, Inc. and its subsidiaries, which commenced operations in October 2008, is a global scaled two-sided marketplace that connects consumers to merchants by offering goods and services, generally at a discount. Consumers access those marketplaces through our mobile applications and our websites.
Our operations are organized into two segments: North America and International. See Note 13, Segment Information.
COVID-19 Pandemic and Macroeconomic Conditions
The COVID-19 pandemic has changed the environment that our business operates in, which includes changes in consumer behavior and macroeconomic impacts affecting both us and our merchants. Although global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time. Impacts to our operations may be caused by macroeconomic trends such as the ongoing COVID-19 pandemic, inflationary pressures, higher labor costs, labor shortages, supply chain challenges and resulting changes in consumer and merchant behavior. The full extent of the impact of both the COVID-19 pandemic and recent macroeconomic trends on our business, operations and financial results will depend on numerous evolving factors. We continue to monitor the pandemic and other macroeconomic trends and the potential impacts they may have on our future financial position, results of operations and cash flows. See Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information.
Unaudited Interim Financial Information
We have prepared the accompanying Condensed Consolidated Financial Statements pursuant to the rules and regulations of the SEC for interim financial reporting. These Condensed Consolidated Financial Statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the Condensed Consolidated Balance Sheets, Statements of Operations and Comprehensive Income (Loss), Cash Flows and Stockholders' Equity for the periods presented. These Condensed Consolidated Financial Statements and notes should be read in conjunction with the audited Consolidated Financial Statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of Groupon, Inc. and its wholly-owned subsidiaries, majority-owned subsidiaries over which we exercise control and variable interest entities for which we are the primary beneficiary. In July 2022, we extended our arrangement through July 2025 with the strategic partner in the variable interest entity that we consolidate. All intercompany accounts and transactions have been eliminated in consolidation. Outside stockholders' interests in subsidiaries are shown on the Condensed Consolidated Financial Statements as Noncontrolling interests. Investments in entities in which we do not have a controlling financial interest are accounted for at fair value as available-for-sale securities or at cost adjusted for observable price changes and impairments, as appropriate.
GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Estimates in our financial statements include, but are not limited to, the following: variable consideration from unredeemed vouchers; income taxes; leases; initial valuation and subsequent impairment testing of goodwill, other intangible assets and long-lived assets; investments; receivables; customer refunds and other reserves; contingent liabilities; and the useful lives of property, equipment and software and intangible assets. Actual results could differ materially from those estimates.
Reclassifications
Certain reclassifications have been made to the Condensed Consolidated Financial Statements of prior periods to conform to the current period presentation.
Adoption of New Accounting Standards
We early adopted the guidance in ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, on January 1, 2021. The ASU removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. Additionally, the ASU removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance related to the computation of income (loss) per share for convertible instruments and contracts in an entity’s own equity.
Prior to the adoption of ASU 2020-06, we separated the convertible senior notes due 2022 (the "Atairos Notes") into their liability and equity components. Following the adoption of ASU 2020-06, the previously bifurcated equity component of the Atairos Notes was recombined with the liability component, resulting in a single liability-classified instrument. The carrying value of the Atairos Notes at transition was determined by recalculating the basis of the Atairos Notes as if the conversion option had not been bifurcated at issuance. Transaction costs related to the issuance of the Atairos Notes that were allocated to the equity component were reclassified out of Additional paid-in-capital and the amortization and the related debt discount associated with these costs was recalculated through the transition date. The transaction costs were recorded as a debt discount in the Condensed Consolidated Balance Sheets and amortized to interest expense over the remaining term of the Atairos Notes. Together with the cash interest, this resulted in an effective interest rate of 3.76%. As a result of adopting ASU 2020-06, in the first quarter of 2021, we recorded a $67.0 million net reduction to additional paid-in capital, a $19.0 million increase to Convertible senior notes, net and a $48.0 million reduction to our opening accumulated deficit as of January 1, 2021. In the fourth quarter of 2021, we recorded an additional $2.7 million adjustment to our opening accumulated deficit and additional paid-in capital related to tax impacts of our bond hedges.
NOTE 2. GOODWILL AND LONG-LIVED ASSETS
During the three and nine months ended September 30, 2022 we evaluated goodwill and long-lived assets for impairment, due to the events described below, which indicated that the carrying amount of our assets or asset groups was not recoverable. In order to evaluate goodwill and long-lived assets for impairment, we compared the fair value of our two reporting units, North America and International, and our asset groups to their carrying values. In determining the fair values of our reporting units and asset groups, we used the discounted cash flow method under the income approach that uses Level 3 inputs.
During the third quarter of 2022, we determined that the carrying amount of one of our right-of-use assets related to our 2020 Restructuring Plan may not be fully recoverable due to collectability of sublease income, and recognized impairment within our North America segment. See details in the table below and Note 9, Restructuring and Related Charges, for more information.
GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
During the second quarter of 2022, we determined a downward revision of our forecast required us to evaluate our goodwill and long-lived assets for impairment. As a result of our interim quantitative assessment, we recognized goodwill impairment within our International reporting unit, representing a full impairment of goodwill for that reporting unit. We also recognized long-lived asset impairment related to certain asset groups within our International segment. We also determined that the carrying amount of certain right-of-use assets within our International segment related to our 2020 Restructuring Plan were not fully recoverable and recognized impairment. See details in the table below and Note 9, Restructuring and Related Charges, for more information.
During the first quarter of 2022, we determined the impact to our business from the new variant of COVID-19 required us to evaluate our goodwill and long-lived assets for impairment. Our interim quantitative assessment for the first quarter of 2022 did not identify any goodwill or long-lived asset impairment.
During the third quarter of 2021, we recognized impairment for our right-of-use assets and leasehold improvements under our 2020 Restructuring Plan. See details in the table below and Note 9, Restructuring and Related Charges, for more information.
Goodwill
The following table summarizes goodwill activity by segment for the nine months ended September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| North America | | International (1) | | Consolidated |
Balance as of December 31, 2021 | $ | 178,685 | | | $ | 37,708 | | | $ | 216,393 | |
Goodwill impairment | — | | | (35,424) | | | (35,424) | |
Foreign currency translation | — | | | (2,284) | | | (2,284) | |
Balance as of September 30, 2022 | $ | 178,685 | | | $ | — | | | $ | 178,685 | |
(1)As of December 31, 2021, the International reporting unit had a negative carrying value.
Long-Lived Assets
The following table summarizes impairment charges presented within the following line items on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Long-lived asset impairment | | | | | | | |
North America | $ | — | | | $ | — | | | $ | — | | | $ | — | |
International | — | | | — | | | 8,811 | | | — | |
Total Long-lived asset impairment | — | | | — | | | 8,811 | | | — | |
Restructuring and related charges | | | | | | | |
North America | 1,769 | | | 5,430 | | | 1,769 | | | 5,430 | |
International | — | | | 2,221 | | | 1,180 | | | 2,221 | |
Total Restructuring and related charges | 1,769 | | | 7,651 | | | 2,949 | | | 7,651 | |
Total impairment | $ | 1,769 | | | $ | 7,651 | | | $ | 11,760 | | | $ | 7,651 | |
GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table summarizes impairment for long-lived assets and restructuring and related charges by asset type for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Property, equipment and software, net | | | | | | | |
Leasehold improvements | $ | — | | | $ | 870 | | | $ | 1,632 | | | $ | 870 | |
Computer hardware | — | | | — | | | 1,323 | | | — | |
Other property, equipment and software, net | — | | | — | | | 416 | | | — | |
Total Property, equipment and software, net | — | | | 870 | | | 3,371 | | | 870 | |
Right-of-use assets - operating leases, net | 1,769 | | | 6,781 | | | 8,389 | | | 6,781 | |
Total long-lived asset impairment | $ | 1,769 | | | $ | 7,651 | | | $ | 11,760 | | | $ | 7,651 | |
The following table summarizes intangible assets as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Merchant relationships | $ | 16,512 | | | $ | 12,500 | | | $ | 4,012 | | | $ | 19,976 | | | $ | 12,554 | | | $ | 7,422 | |
Trade names | 9,160 | | | 8,211 | | | 949 | | | 9,604 | | | 8,215 | | | 1,389 | |
Patents | 13,303 | | | 6,502 | | | 6,801 | | | 12,455 | | | 5,712 | | | 6,743 | |
Other intangible assets | 17,479 | | | 10,446 | | | 7,033 | | | 17,573 | | | 8,817 | | | 8,756 | |
Total | $ | 56,454 | | | $ | 37,659 | | | $ | 18,795 | | | $ | 59,608 | | | $ | 35,298 | | | $ | 24,310 | |
Amortization of intangible assets is computed using the straight-line method over their estimated useful lives, which range from 1 to 10 years. Amortization expense related to intangible assets was $2.1 million for the three months ended September 30, 2022 and 2021 and $6.4 million and $6.7 million for the nine months ended September 30, 2022 and 2021. As of September 30, 2022, estimated future amortization expense related to intangible assets is as follows (in thousands):
| | | | | |
Remaining amounts in 2022 | $ | 2,047 | |
2023 | 7,205 | |
2024 | 3,877 | |
2025 | 2,469 | |
2026 | 1,622 | |
Thereafter | 1,575 | |
Total | $ | 18,795 | |
NOTE 3. INVESTMENTS
As of September 30, 2022 and December 31, 2021, our carrying value in other equity investments was $119.5 million and our available-for-sale securities and fair value option investments had a carrying value of zero. There were no changes in fair value of our investments for the three and nine months ended September 30, 2022.
GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table summarizes our percentage ownership in our investments as of the dates noted below:
| | | | | | | | | | | |
| September 30, 2022 and December 31, 2021 |
Other equity investments | 1% | to | 19% |
Available-for-sale securities - redeemable preferred shares | 1% | to | 19% |
Fair value option investments | 10% | to | 19% |
Other Equity Investments
Our non-controlling equity interest in SumUp Holdings S.a.r.l. ("SumUp") was 2.29% as of September 30, 2022.
During the third quarter of 2021, we adjusted the carrying value of SumUp due to an observable price change in an orderly transaction, which resulted in an unrealized gain of $89.1 million for the three and nine months ended September 30, 2021. We also sold 100% of our shares in an other equity investment for total cash consideration of $2.6 million and recognized a gain of $2.2 million. During the second quarter 2021, we sold our shares in an other equity investment and recognized a gain and total cash consideration of $4.2 million. The gains on our investments have been presented in Other income (expense), net in the Condensed Consolidated Statement of Operations for the applicable three and nine months ended September 30, 2021
NOTE 4. SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS INFORMATION
The following table summarizes Other income (expense), net for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Interest income | $ | 2,626 | | | $ | 1,336 | | | $ | 5,399 | | | $ | 3,818 | |
Interest expense | (3,760) | | | (3,534) | | | (9,849) | | | (14,123) | |
Changes in fair value of investments (1) | — | | | 91,288 | | | — | | | 95,533 | |
Loss on extinguishment of debt | — | | | — | | | — | | | (5,090) | |
Foreign currency gains (losses), net and other (2) | (22,407) | | | (6,557) | | | (45,311) | | | 17,591 | |
Other income (expense), net | $ | (23,541) | | | $ | 82,533 | | | $ | (49,761) | | | $ | 97,729 | |
(1)Includes an $89.1 million unrealized gain due to an upward adjustment for an observable price change of SumUp for the three and nine months ended September 30, 2021.
(2)Includes a $32.3 million cumulative foreign currency translation adjustment gain for the nine months ended September 30, 2021 that was reclassified into earnings as a result of the substantial liquidation of our subsidiary in Japan as part of our restructuring actions.
The following table summarizes Prepaid expenses and other current assets as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Prepaid expenses | $ | 19,535 | | | $ | 28,550 | |
Income taxes receivable | 17,448 | | | 7,711 | |
Deferred cloud implementation cost | 7,420 | | | 6,476 | |
Other | 8,260 | | | 9,833 | |
Total prepaid expenses and other current assets | $ | 52,663 | | | $ | 52,570 | |
GROUPON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table summarizes Other non-current assets as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Deferred contract acquisition costs | $ | 5,377 | | | $ | 7,080 | |
Deferred cloud implementation costs | 18,596 | | | 11,986 | |
Other | 5,446 | | | 6,036 | |
Total other non-current assets | $ | 29,419 | | | $ | 25,102 | |
The following table summarizes Accrued expenses and other current liabilities as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Refund reserve | $ | 10,701 | | | $ | 19,601 | |
Compensation and benefits | 16,949 | | | 30,367 | |
Accrued marketing | 12,529 | | | 37,900 | |
Restructuring-related liabilities | 8,324 | | | 11,349 | |
Customer credits | 45,669 | | | 56,558 | |
Deferred revenue | 814 | | | 3,523 | |
Operating lease obligations | 38,788 | | | 32,062 | |
Other (1) | 64,534 | | | 47,953 | |
Total accrued expenses and other current liabilities | $ | 198,308 | | | $ | 239,313 | |
(1)Includes certain payroll taxes deferred under the Coronavirus Aid, Relief and Economic Security ("CARES") Act of $2.7 million as of September 30, 2022 and December 31, 2021. This amount is due by December 31, 2022.
The following table summarizes Other non-current liabilities as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Contingent income tax liabilities | $ | 23,594 | | | $ | 24,213 | |
Deferred income taxes | 2,346 | | | 2,802 | |
Other | 4,611 | | | 7,433 | |
Total other non-current liabilities | $ | 30,551 | | | $ | 34,448 | |
NOTE 5. FINANCING ARRANGEMENTS
3.25% Convertible Senior Notes due 2022
In April 2016, we issued $250.0 million in aggregate principal amount of convertible senior notes (the "Atairos Notes") in a private placement to A-G Holdings, L.P. In May 2021, we repurchased the Atairos Notes for an aggregate purchase price equal to $255.0 million, consisting of the $250.0 million outstanding principal amount, $1.0 million of accrued interest through the repurchase date and a $4.0 million prepayment penalty. In connection with the repurchase of the Atairos Notes, we recognized a $5.1 million loss on the early extinguishment, which is presented in Other income (expense), net in the Condensed Consolidated Statement of Operations.
Note Hedges and Warrants
In May 2016, we purchased convertible note hedges with respect to our common stock for a cost of $59.1 million from certain bank counterparties. The convertible note hedges were intended to reduce the potential economic dilution upon conversion of the Atairos Notes. In May 2016, we also sold warrants for total cash proceeds of $35.5 million to certain bank counterparties.
In connection with the repurchase of the Atairos Notes, we entered into agreements (collectively "the Unwind Agreements") with each of the bank counterparties in May 2021 to unwind the convertible note hedges and warrants. Pursuant to the terms of the Unwind Agreements, we received cash proceeds of $2.3 million for the settlement of the convertible note hedges and paid cash consideration of $1.3 million for the settlement of the warrants.
1.125% Convertible Senior Notes due 2026
In March and April 2021, we issued $230.0 million aggregate principal amount of convertible senior notes due 2026 (the "2026 Notes") in a private offering to qualified institutional buyers. The net proceeds from this offering were $222.1 million. The 2026 Notes bear interest at a rate of 1.125% per annum, payable semiannually in arrears on March 15 and September 15 of each year, which began on September 15, 2021. The 2026 Notes will mature on March 15, 2026, subject to earlier repurchase, redemption or conversion.
We used $27.4 million of the net proceeds from the offering to pay the cost of certain related capped call transactions and used the remaining net proceeds, together with cash on hand, to repurchase the Atairos Notes.
We account for the 2026 Notes as a single liability-classified instrument measured at amortized cost due to the adoption of ASU 2020-06. The carrying value of the 2026 Notes was determined by deducting transaction costs incurred in connection with the issuance of the 2026 Notes of $7.8 million from the principal amount. Those transaction costs were recorded as a debt discount in the Condensed Consolidated Balance Sheets and are amortized to interest expense. Together with the cash interest, this results in an effective interest rate of 1.83% over the term of the 2026 Notes. We have presented the 2026 Notes in Convertible senior notes, net in the accompanying Condensed Consolidated Balance Sheets.
The carrying amount of the 2026 Notes consisted of the following as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Principal amount | $ | 230,000 | | | $ | 230,000 | |
Less: debt discount | (5,460) | | | (6,597) | |
Net carrying amount of liability | $ | 224,540 | | | $ | 223,403 | |
We classified the fair value of the 2026 Notes as a Level 3 measurement due to the lack of observable market data over fair value inputs such as our stock price volatility over the term of the 2026 Notes and our cost of debt. The estimated fair value of the 2026 Notes as of September 30, 2022 and December 31, 2021 was $148.3 million and $183.3 million and was determined using a lattice model.
During the three and nine months ended September 30, 2022 and 2021, we recognized interest costs on the 2026 Notes and the Atairos Notes as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Contractual interest | $ | 646 | | | $ | 646 | | | $ | 1,940 | | | $ | 4,378 | |
Amortization of debt discount | 380 | | | 374 | | | 1,137 | | | 1,226 | |
Total | $ | 1,026 | | | $ | 1,020 | | | $ | 3,077 | | | $ | 5,604 | |
Capped Call Transactions
In March and April 2021, in connection with the offering of the 2026 Notes, we entered into privately-negotiated capped call transactions with each of Barclays Bank PLC, BNP Paribas and Mizuho Markets Americas LLC. The capped call transactions cover, subject to customary adjustments, the number of shares of common stock initially underlying the 2026 Notes. The capped call transactions are expected generally to reduce potential dilution to our common stock upon any conversion of the 2026 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes, with such reduction and/or offset subject to a cap initially equal to $104.80 (which represents a premium of 100% over the last reported sale price of our
common stock on The Nasdaq Global Select Market on March 22, 2021), subject to certain adjustments under the terms of the capped call transactions.
The capped call transactions are accounted for as freestanding derivatives and recorded at the initial fair value in Additional paid-in-capital in the Condensed Consolidated Balance Sheets with no recorded subsequent change to fair value as long as they meet the criteria for equity classification.
Under the if-converted method, the shares of common stock underlying the conversion option in the 2026 Notes are included in the diluted income (loss) per share denominator and the interest expense and amortization of the debt discount on the 2026 Notes, net of tax, are added to the numerator. However, upon conversion, there will be minimized economic dilution from the 2026 Notes, as exercise of the capped call transactions reduces dilution from the 2026 Notes that would have otherwise occurred when the price of our common stock exceeds the conversion price. The capped call transactions are intended to offset actual dilution from the conversion of the 2026 Notes and to effectively increase the overall conversion price from $68.12 to $104.80 per share.
Revolving Credit Agreement
In May 2019, we entered into a second amended and restated senior secured revolving credit agreement which provided for aggregate principal borrowings of up to $400.0 million (prior to the amendments described below) and matures in May 2024. In July 2020, we entered into an amendment to the revolving credit agreement (the "First Amendment") which permanently reduced borrowing capacity under our senior secured revolving credit facility from $400.0 million to $225.0 million. In March 2021, we entered into a second amendment (the "Second Amendment") to the revolving credit agreement (as amended by the First Amendment and the Second Amendment, the “Prior Credit Agreement”) to, among other things, permit the issuance of the 2026 Notes and related capped call transactions. The Second Amendment also permanently removed requirements that we maintain (i) a maximum senior secured indebtedness to Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") ratio and (ii) unrestricted cash of not less than $250.0 million. Further, the Second Amendment changed the requirement to maintain a minimum fixed charge coverage ratio to a requirement to maintain a minimum interest coverage ratio.
On September 28, 2022, we entered into a third amendment to the Prior Credit Agreement (the "Third Amendment" and the Prior Credit Agreement as amended, the "Amended Credit Agreement") to modify certain financial covenants and provide for additional flexibility in our operations, including certain modifications to our requirement to maintain (i) a maximum funded indebtedness to EBITDA ratio and (ii) a monthly minimum liquidity balance. In addition to the modifications described below, the Third Amendment reduced our borrowing capacity under our senior secured revolving credit facility from $225.0 million to $150.0 million.
We deferred debt issuance costs of $4.0 million in aggregate in connection with the Amended Credit Agreement. Deferred debt issuance costs are included within Other non-current assets on the Condensed Consolidated Balance Sheet as of September 30, 2022 and are amortized to interest expense over the term of the respective agreement.
In addition, under the Amended Credit Agreement, we are subject to various covenants, including customary restrictive covenants that limit our ability to, among other things: incur additional indebtedness; make dividend and other restricted payments, including limiting the amount of our 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 related parties and other affiliates. The Third Amendment further restricts certain existing negative covenants, including with respect to our ability to make share repurchases, acquisitions, investments and to incur additional indebtedness and liens.
As of September 30, 2022, we were in compliance with the covenants under our Amended Credit Agreement. Non-compliance with the covenants under the Amended Credit Agreement may result in termination of the commitments thereunder and then any outstanding borrowings may be declared due and payable immediately. We have the right to terminate the Amended Credit Agreement or reduce the available commitments at any time.
Borrowings under the Prior Credit Agreement bore (a) interest at a rate per annum equal to (i) an adjusted
LIBO rate or (ii) a customary base rate (with loans denominated in certain currencies bearing interest at rates specific to such currencies) plus an additional margin ranging between 0.50% and 2.00% and (b) commitment fees ranging from 0.25% to 0.35% on the daily amount of unused commitments. The Prior Credit Agreement also includes a replacement mechanism for the discontinuation of the adjusted LIBO rate.
The Third Amendment replaces LIBOR as a benchmark interest rate under the Prior Credit Agreement with Term Secured Overnight Financing Rate ("SOFR") plus a credit spread adjustment of 10 basis points. The Third Amendment also provides that, from the date of the Third Amendment through the fiscal quarter ending June 30, 2023, the Alternate Base Rate ("ABR") and Canadian prime spreads shall be raised to 1.50%, the fixed rate spreads to 2.50% and the commitment fee to 0.4% on the daily amount of the unused commitments under the Amended Credit Agreement. After June 30, 2023, the applicable spreads and commitment fee will revert to the levels set by the Prior Credit Agreement, with the addition of a new tier that is applicable when the ratio of funded indebtedness to EBITDA exceeds 3.00:1.00 and provides for ABR and Canadian prime spreads of 1.25%, fixed rate spreads of 2.25% and a commitment fee of 0.4% on the daily amount of the unused commitments under the Amended Credit Agreement.
In addition, the Amended Credit Agreement provides for the issuance of up to $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 $150.0 million.
The Amended Credit Agreement is secured by substantially all of our tangible and intangible assets, including a pledge of 100% of the outstanding capital stock of substantially all of our direct and indirect domestic subsidiaries and 65% of the shares or equity interests of first-tier foreign subsidiaries and each U.S. entity whose assets substantially consist of capital stock and/or intercompany debt of one or more foreign subsidiaries, subject to certain exceptions. Certain of our domestic and foreign subsidiaries are guarantors under the Amended Credit Agreement.
As of September 30, 2022, we had $110.0 million of outstanding borrowings and $24.5 million of outstanding letters of credit and as of December 31, 2021 we had $100.0 million of outstanding borrowings and $25.8 million of outstanding letters of credit under the Amended Credit Agreement.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Our contractual obligations and commitments and future sublease income under our contractually obligated operating subleases as of September 30, 2022 and through the date of this report, did not materially change from the amounts set forth in our 2021 Annual Report on Form 10-K.
During the third quarter of 2022, however, we reassessed the term of one of our operating leases in our North America segment and, as a result, our expected future minimum lease payments related to that lease have been modified. Our current quarter reassessment included an increase in our Accrued expenses and other current liabilities of $11.6 million, a decrease to our long-term Operating lease obligations of $25.6 million, a decrease to our Right-of-use assets - operating leases, net of $9.5 million in the Condensed Consolidated Balance Sheets and a gain of $4.5 million in Restructuring and related charges on the Condensed Consolidated Statements of Operations. Refer to Note 9, Restructuring and Related Charges for additional information on the gain recognized. In addition, the collectability of the sublease payments related to that lease is not reasonably assured. Refer to Note 2, Goodwill and Long-Lived Assets for additional information.
Legal Matters and Other Contingencies
From time to time, we are party to various legal proceedings incident to the operation of our business. For example, we currently are involved in proceedings brought by merchants, employment and related matters, intellectual property infringement suits, customer lawsuits, stockholder claims relating to U.S. securities law, consumer class actions and suits alleging, among other things, violations of state consumer protection or privacy laws.
On April 28, 2020, an individual plaintiff filed a securities fraud class action complaint in the United States District Court for the Northern District of Illinois, and in July 2020, another individual was appointed as lead plaintiff (the "Securities Lawsuit"). The lawsuit covers the time period from July 30, 2019 through February 18, 2020. The lead plaintiff alleges that Groupon and certain of its officers made materially false and/or misleading statements or omissions regarding its business, operations and prospects, specifically as it relates to reiterating its full year guidance on November 4, 2019 and the Groupon Select program. On May 6, 2022, the parties reached an agreement to settle this matter in its entirety for $13.5 million and signed a term sheet memorializing preliminary terms. On June 27, 2022, the District Court granted preliminary approval of the settlement. On October 28, 2022, the District Court granted final approval of the settlement class with no class members opting out and no objections. Now that the settlement class has been confirmed and the case is fully resolved with no opt outs, all class members must follow a claims process administered by a third party and will be barred from filing future lawsuits based on these events. The full amount of the $13.5 million settlement is covered under Groupon's insurance policies and was paid into an escrow fund by Groupon’s insurance carriers on July 26, 2022. The settlement accrual and insurance receivable are recorded in Accrued expenses and other current liabilities and Accounts receivable, net on the Condensed Consolidated Balance Sheets as of September 30, 2022.
In addition, four shareholders have filed separate shareholder derivative lawsuits in relation to the same events that are subject to the securities litigation described above (collectively, the "Derivative Lawsuits"). First, on September 9, 2021, a shareholder named Jonathan Frankel filed a federal derivative lawsuit in the United States District Court for District of Delaware. Second, on January 19, 2022, a shareholder named Alyssa Estreen filed a derivative lawsuit in the Court of Chancery in the State of Delaware. Third, on January 24, 2022, a shareholder named Saman Khoury filed a derivative lawsuit, also in the Court of Chancery in the State of Delaware. Finally, on May 9, 2022, a shareholder named Moriah Anders filed a lawsuit, also in the Court of Chancery in the State of Delaware. All four lawsuits name Groupon and certain of the Company's former and current officers and directors. The allegations in all four Derivative Lawsuits relate to the same time period and events that are the subject of the Securities Lawsuit and allege that the Company and its shareholders have sustained damages as a result of the conduct of certain current and former officers and directors. The Plaintiffs in each of these Derivative Lawsuits seek unspecified damages they allege were sustained by the Company, injunctive and equitable relief and attorneys’ fees. All four matters are stayed pending the outcome of the Securities Lawsuit. We intend to vigorously defend these matters, which we believe to be without merit.
In addition, third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to intellectual property disputes, including patent
infringement claims, and expect that we will continue to be subject to intellectual property infringement claims as our services expand in scope and complexity. In the past, we have litigated such claims, and we are presently involved in several patent infringement and other intellectual property-related claims, including pending litigation or trademark disputes relating to, for example, our Goods category, some of which could involve potentially substantial claims for damages or injunctive relief. We may also become more vulnerable to third-party claims as laws such as the Digital Millennium Copyright Act are interpreted by the courts, and we become subject to laws in jurisdictions where the underlying laws with respect to the potential liability of online intermediaries are either unclear or less favorable. We believe that additional lawsuits alleging that we have violated patent, copyright or trademark laws may be filed against us. Intellectual property claims, whether meritorious or not, are time consuming and often costly to resolve, could require expensive changes in our methods of doing business or the goods we sell, or could require us to enter into costly royalty or licensing agreements.
We also are subject to consumer claims or lawsuits relating to alleged violations of consumer protection or privacy rights and statutes, some of which could involve potentially substantial claims for damages, including statutory or punitive damages. Consumer and privacy-related claims or lawsuits, whether meritorious or not, could be time consuming, result in costly litigation, damage awards, fines and penalties, injunctive relief or increased costs of doing business through adverse judgment or settlement, or require us to change our business practices, sometimes in expensive ways.
We are also subject to, or in the future may become subject to, a variety of regulatory inquiries, audits, and investigations across the jurisdictions where we conduct our business, including, for example, inquiries related to consumer protection, employment matters and/or hiring practices, marketing practices, tax, unclaimed property and privacy rules and regulations. Any regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, damage awards, fines and penalties, injunctive relief or increased costs of doing business through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources, materially damage our brand or reputation, or otherwise harm our business.
We establish an accrued liability for loss contingencies related to legal and regulatory matters when the loss is both probable and reasonably estimable. Those accruals represent management's best estimate of probable losses and, in such cases, there may be an exposure to loss in excess of the amounts accrued. For certain of the matters described above, there are inherent and significant uncertainties based on, among other factors, the stage of the proceedings, developments in the applicable facts of law, or the lack of a specific damage claim. However, we believe that the amount of reasonably possible losses in excess of the amounts accrued for those matters would not have a material adverse effect on our business, Condensed Consolidated Financial Statements, results of operations or cash flows. Our accrued liabilities for loss contingencies related to legal and regulatory matters may change in the future as a result of new developments, including, but not limited to, the occurrence of new legal matters, changes in the law or regulatory environment, adverse or favorable rulings, newly discovered facts relevant to the matter, or changes in the strategy for the matter. Regardless of the outcome, litigation and other regulatory matters can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Indemnifications
In connection with the disposition of our operations in Latin America in 2017, we recorded $5.4 million in indemnification liabilities for certain tax and other matters upon the closing of the transactions as an adjustment to the net loss on the dispositions within discontinued operations at their fair value. We estimated the indemnification liabilities using a probability-weighted expected cash flow approach. Our remaining indemnification liabilities were $2.8 million as of September 30, 2022. We estimate that the total amount of obligations that are reasonably possible to arise under the indemnifications in excess of amounts accrued as of September 30, 2022 is approximately $11.7 million.
In the normal course of business to facilitate transactions related to our operations, we indemnify certain parties, including employees, lessors, service providers, merchants, and counterparties to investment agreements and asset and stock purchase agreements with respect to various matters. We have agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or other claims made against
those parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. We are also subject to increased exposure to various claims as a result of our divestitures and acquisitions, particularly in cases where we are entering into new businesses in connection with such acquisitions. We may also become more vulnerable to claims as we expand the range and scope of our services and are subject to laws in jurisdictions where the underlying laws with respect to potential liability are either unclear or less favorable. In addition, we have entered into indemnification agreements with our officers, directors and underwriters, and our bylaws contain similar indemnification obligations that cover officers, directors, employees and other agents.
Except as noted above, it is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, any payments that we have made under these agreements have not had a material impact on our operating results, financial position or cash flows.
NOTE 7. STOCKHOLDERS' EQUITY AND COMPENSATION ARRANGEMENTS
Groupon, Inc. Incentive Plan
In August 2011, we established the Groupon, Inc. 2011 Incentive Plan, as amended and restated (the "2011 Plan"), under which options, RSUs and performance stock units for up to 11,875,000 shares of common stock are authorized for future issuance to employees, consultants and directors. The 2011 Plan is administered by the Compensation Committee of the Board. As of September 30, 2022, 3,203,455 shares of common stock were available for future issuance under the 2011 Plan.
Restricted Stock Units
The restricted stock units granted under the Groupon, Inc. Stock Plans (the "Plans") generally have vesting periods between one and four years and are amortized on a straight-line basis over their requisite service period.
The table below summarizes restricted stock unit activity under the Plans for the nine months ended September 30, 2022:
| | | | | | | | | | | |
| Restricted Stock Units | | Weighted-Average Grant Date Fair Value (per unit) |
Unvested at December 31, 2021 | 2,205,235 | | | $ | 31.06 | |
Granted | 2,233,380 | | | 19.14 | |
Vested | (915,272) | | | 33.25 | |
Forfeited | (514,350) | | | 26.94 | |
Unvested at September 30, 2022 | 3,008,993 | | | $ | 22.20 | |
As of September 30, 2022, $52.2 million of unrecognized compensation costs related to unvested restricted stock units, excluding any impact of forfeitures, are expected to be recognized over a remaining weighted-average period of 1.19 years.
Performance Share Units
We have previously granted performance share units under the Plans that vest in shares of our common stock upon the achievement of financial and operational targets specified in the respective award agreement ("Performance Share Units"). We have also granted performance share units subject to a market condition ("Market-based Performance Share Units"). Our existing Performance Share Units and Market-based Performance Share Units are subject to continued employment through the performance period dictated by the award and certification by the Compensation Committee of the Board that the specified performance conditions have been achieved.
During the nine months ended September 30, 2022, 20,494 shares of our common stock were issued upon vesting of Performance Share Units granted in 2020 and prior based on the Board's certification of our financial and operational metrics for the year ended December 31, 2020. The weighted average grant date fair value of those shares was $31.97 per share. As of September 30, 2022, we have recognized substantially all expense related to the 17,269 unvested Performance Share Units and the 33,333 unvested Market-based Performance Share Units.
NOTE 8. REVENUE RECOGNITION
Refer to Note 13, Segment Information, for revenue summarized by reportable segment and category for the three and nine months ended September 30, 2022 and 2021.
Customer Credits
We issue credits to customers that can be applied to future purchases through our online marketplaces. Credits are primarily issued as consideration for refunds. To a lesser extent, credits are issued for customer relationship purposes. The following table summarizes the activity in the liability for customer credits for the nine months ended September 30, 2022 (in thousands):
| | | | | |
| Customer Credits |
Balance as of December 31, 2021 | $ | 56,558 | |
Credits issued | 105,044 | |
Credits redeemed (1) | (98,160) | |
Breakage revenue recognized | (16,459) | |
Foreign currency translation | (1,314) | |
Balance as of September 30, 2022 | $ | 45,669 | |
(1)Customer credits can be redeemed through our online marketplaces for goods or services provided by a third-party merchant and 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. Historically, customer credits have primarily been used within one year of issuance; however, usage patterns have been impacted from changes in customer behavior due to COVID-19.
Costs of Obtaining Contracts
Incremental costs to obtain contracts with third-party merchants, such as sales commissions, are deferred and recognized over the expected period of the merchant arrangement, generally from 12 to 18 months. Deferred contract acquisition costs are presented in Prepaid expenses and other current assets and Other non-current assets on the Condensed Consolidated Balance Sheets. As of September 30, 2022 and December 31, 2021, deferred contract acquisition costs were $6.2 million and $8.0 million.
The amortization of deferred contract acquisition costs is classified within Selling, general and administrative expense in the Condensed Consolidated Statements of Operations. We amortized $2.7 million and $2.6 million of deferred contract acquisition costs for the three months ended September 30, 2022 and 2021, and $8.3 million and $7.8 million for the nine months ended September 30, 2022 and 2021.
Allowance for Expected Credit Losses on Accounts Receivable
Accounts receivable primarily represents the net cash due from credit card and other payment processors and from merchants and performance marketing networks for commissions earned on consumer purchases. We establish an allowance for expected credit losses on accounts receivables based on identifying the following customer risk characteristics: size, type of customer, and payment terms offered in the normal course of business. Receivables with similar risk characteristics are grouped into pools. For each pool, we consider the historical credit loss experience, current economic conditions, bankruptcy filings, published or estimated credit default rates, age of the receivable and any recoveries in assessing the lifetime expected credit losses.
The following table summarizes the activity in the allowance for expected credit losses on accounts receivable for the nine months ended September 30, 2022 (in thousands):
| | | | | |
| Allowance for Expected Credit Losses |
Balance as of December 31, 2021 | $ | 7,974 | |
Change in provision | (896) | |
Write-offs | (1,254) | |
Foreign currency translation | (674) | |
Balance as of September 30, 2022 | $ | 5,150 | |
Variable Consideration for Unredeemed Vouchers
For merchant agreements with redemption payment terms, the merchant is not paid its share of the sale price for a voucher sold through one of our online marketplaces until the customer redeems the related voucher. If the customer does not redeem a voucher with such merchant payment terms, we retain all of the gross billings for that voucher, rather than retaining only our net commission. 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 apply a constraint to ensure it is probable that a significant reversal of revenue will not occur in future periods. We recognized variable consideration from unredeemed vouchers that were sold in a prior period of $7.4 million and $19.1 million for the three months ended September 30, 2022 and 2021, and $9.4 million and $31.8 million for the nine months ended September 30, 2022 and 2021. During the year ended December 31, 2021, the substantial majority of vouchers sold at the onset of the COVID-19 pandemic reached expiration at redemption rates lower than our historical estimates. Although redemption rates for vouchers sold in more recent periods have improved, the impact of COVID-19 on redemption behavior in future periods is still uncertain. When actual redemptions differ from our estimates, the effects could be material to the Condensed Consolidated Financial Statements.
NOTE 9. RESTRUCTURING AND RELATED CHARGES
In August 2022 and April 2020, we initiated Board-approved restructuring plans. Costs incurred related to the restructuring plan are classified as Restructuring and related charges on the Condensed Consolidated Statements of Operations. The restructuring activities are summarized by plan in the sections below.
2022 Restructuring Plan
In August 2022, we initiated a multi-phase cost savings plan designed to reduce our expense structure to align with our go-forward business and financial objectives (the “2022 Cost Savings Plan”). The 2022 Cost Savings Plan included a restructuring plan, approved by our Board on August 5, 2022 (the “2022 Restructuring Plan”). The first phase of the 2022 Restructuring Plan is expected to include an overall reduction of approximately 500 positions globally, with the majority of these reductions expected to occur by the end of 2022 and the remainder in early 2023. In connection with these actions, we expect to record total pre-tax charges of $10.0 million to $20.0 million. Substantially all of the pre-tax charges are expected to be paid in cash and will relate to employee severance and compensation benefits, with an immaterial amount of charges related to other exit costs. We expect to begin the next phase of our restructuring actions under this plan in 2023, and we anticipate these actions will include a focus on reducing our technology platform costs following the completion of our transition to the cloud. We have incurred total pretax charges of $6.2 million since the inception of the 2022 Restructuring Plan.
The following tables summarize costs incurred by segment related to the 2022 Restructuring Plan for the three and nine months ended September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three and Nine Months Ended September 30, 2022 |
| | Employee Severance and Benefit Costs (Credits) (1) | | Other Exit Costs | | Total Restructuring Charges (Credits) |
North America | | $ | 4,600 | | | $ | 158 | | | $ | 4,758 | |
International | | 1,436 | | | — | | | 1,436 | |
Consolidated | | $ | 6,036 | | | $ | 158 | | | $ | 6,194 | |
(1)The employee severance and benefits costs for the three and nine months ended September 30, 2022 are related to the termination of approximately 380 employees, of which 318 are still completing their notice period and legally-required severance and benefits have been recognized as of September 30, 2022. Additional severance and benefits costs related to the remaining 318 employees may be incurred in future periods.
The following table summarizes restructuring liability activity for the 2022 Restructuring Plan (in thousands):
| | | | | | | | | | | | | | | | | |
| Employee Severance and Benefit Costs | | Other Exit Costs | | Total |
Balance as of December 31, 2021 | $ | — | | | $ | — | | | $ | — | |
Charges payable in cash | 6,036 | | | 158 | | | 6,194 | |
Cash payments | (3,167) | | | — | | | (3,167) | |
Foreign currency translation | (29) | | | — | | | (29) | |
Balance as of September 30, 2022 (1) | $ | 2,840 | | | $ | 158 | | | $ | 2,998 | |
(1)Substantially all of the remaining cash payments for the 2022 Restructuring Plan costs are expected to be disbursed through 2023.
2020 Restructuring Plan
In April 2020, the Board approved a multi-phase restructuring plan related to our previously-announced strategic shift and as part of the cost cutting measures implemented in response to the impact of COVID-19 on our business (the "2020 Restructuring Plan"). We have incurred total pretax charges of $108.7 million since the inception of the 2020 Restructuring Plan. Our actions under this plan were substantially completed by December 31, 2021, and our current and future charges or credits will be from changes in estimates. Our 2020 Restructuring Plan included workforce reductions of approximately 1,600 positions globally, the exit or discontinuation of the use of certain leases and other assets, impairments of our right-of-use and other long-lived assets, and the exit of our operations in New Zealand and Japan. In the first quarter 2021, we substantially liquidated our subsidiary in Japan and reclassified $32.3 million of cumulative foreign currency translation gains into earnings, which is presented in Other income (expense), net on the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021.
The following tables summarize costs incurred by segment related to the 2020 Restructuring Plan for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 |
| | Employee Severance and Benefit Costs (Credits) | | Legal and Advisory Costs | | Property, Equipment and Software Impairments | | Right-of-Use Asset Impairments and Lease-related Charges (Credits) | | Total Restructuring Charges (Credits) |
North America | | $ | — | | | $ | (1) | | | $ | — | | | $ | (1,578) | | | $ | (1,579) | |
International | | 121 | | | 28 | | | — | | | 148 | | | 297 | |
Consolidated | | $ | 121 | | | $ | 27 | | | $ | — | | | $ | (1,430) | | | $ | (1,282) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 |
| | Employee Severance and Benefit Costs (Credits) | | Legal and Advisory Costs | | Property, Equipment and Software Impairments | | Right-of-Use Asset Impairments and Lease-related Charges (Credits) | | Total Restructuring Charges (Credits) |
North America | | $ | 26 | | | $ | 251 | | | $ | 602 | | | $ | 5,610 | | | $ | 6,489 | |
International | | 2,600 | | | 571 | | | 268 | | | 2,555 | | | 5,994 | |
Consolidated | | $ | 2,626 | | | $ | 822 | | | $ | 870 | | | $ | 8,165 | | | $ | 12,483 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2022 |
| | Employee Severance and Benefit Costs (Credits) | | Legal and Advisory Costs | | Property, Equipment and Software Impairments | | Right-of-Use Asset Impairments and Lease-related Charges (Credits) | | Total Restructuring Charges (Credits) |
North America | | $ | 1 | | | $ | 129 | | | $ | — | | | $ | (404) | | | $ | (274) | |
International | | 305 | | | 89 | | | — | | | 1,849 | | | 2,243 | |
Consolidated | | $ | 306 | | | $ | 218 | | | $ | — | | | $ | 1,445 | | | $ | 1,969 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 |
| | Employee Severance and Benefit Costs (Credits) | | Legal and Advisory Costs | | Property, Equipment and Software Impairments | | Right-of-Use Asset Impairments and Lease-related Charges (Credits) | | Total Restructuring Charges (Credits) |
North America | | $ | 458 | | | $ | 1,482 | | | $ | 602 | | | $ | 6,974 | | | $ | 9,516 | |
International | | 21,665 | | | 599 | | | 268 | | | 2,102 | | | 24,634 | |
Consolidated | | $ | 22,123 | | | $ | 2,081 | | | $ | 870 | | | $ | 9,076 | | | $ | 34,150 | |
As a part of our 2020 Restructuring Plan, we terminated or modified several of our leases. In other cases we vacated our leased facilities, and some of those facilities are being actively marketed for sublease or we are in negotiations with the landlord to potentially terminate or modify those leases. We recognized impairment related to those leases for $1.8 million and $2.9 million during the three and nine months ended September 30, 2022 and $7.7 million during the three and nine months ended September 30, 2021. See Note 2, Goodwill and Long-Lived Assets, for additional information. In addition, during the three and nine months ended September 30, 2022, we recognized a gain of $4.5 million in Restructuring and related charges for one of our previously-impaired leases in our North America segment due to a reassessment of the term. Rent expense, including amortization of the right-of-use asset and accretion of the operating lease liability, sublease income, termination and modification gains and losses, and other variable lease costs related to the leased facilities vacated as part of our restructuring plan are presented within Restructuring and related charges in the Condensed Consolidated Statements of Operations. The current and non-current liabilities associated with these leases continue to be presented within Other current liabilities and Operating lease obligations in the Condensed Consolidated Balance Sheets.
The following table summarizes restructuring liability activity for the 2020 Restructuring Plan (in thousands):
| | | | | | | | | | | | | | | | | |
| Employee Severance and Benefit Costs | | Legal and Advisory Costs | | Total |
Balance as of December 31, 2021 | $ | 11,038 | | | $ | 311 | | | $ | 11,349 | |
Charges payable in cash | 306 | | | 218 | | | 524 | |
Cash payments | (5,390) | | | (170) | | | (5,560) | |
Foreign currency translation | (921) | | | (66) | | | (987) | |
Balance as of September 30, 2022 (1) | $ | 5,033 | | | $ | 293 | | | $ | 5,326 | |
(1)Substantially all of the remaining cash payments for the 2020 Restructuring Plan costs are expected to be disbursed by the end of 2023.
NOTE 10. INCOME TAXES
Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items.
Provision (benefit) for income taxes and income (loss) from operations before provision (benefit) for income taxes for the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Provision (benefit) for income taxes | $ | (4,328) | | | $ | 135 | | | $ | (4,605) | | | $ | 773 | |
Income (loss) from operations before provision (benefit) for income taxes | (59,871) | | | 78,836 | | | (184,750) | | | 90,793 | |
Our U.S. Federal income tax rate is 21%. The primary factor impacting the effective tax rate for the three and nine months ended September 30, 2022 and 2021 was the pretax losses incurred in jurisdictions that have valuation allowances against their net deferred tax assets. The three and nine months ended September 30, 2022 were also impacted by the reduction to our estimated annual tax rate due to an increase in expected annual losses. The three and nine months ended September 30, 2021 were also impacted by the benefit of non-taxable items, including the unrealized gain on the observable price change recorded in an other equity investment during the three months ended September 30, 2021, the U.S. research and development tax credit, and reversals of reserves for uncertain tax positions due to closing of applicable statutes of limitations. For the three and nine months ended September 30, 2021, we had a full valuation allowance recorded against the U.S. federal and state deferred tax assets. We recorded a partial valuation allowance release in Q4 2021. For the three and nine months ended September 30, 2022, we continue to maintain a valuation allowance in the U.S. against capital losses, deferred tax assets that will convert into capital losses upon reversal, and state credits that we are not expecting to be able to realize. 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 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 our control, which influence the progress and completion of those audits. We are subject to claims for tax assessments by foreign jurisdictions, including a proposed assessment for $105.7 million, inclusive of estimated incremental interest from the original assessment. We believe that the assessment, which primarily relates to transfer pricing on transactions occurring in 2011, is without merit and we intend to vigorously defend ourselves in that matter. There could be potential increases in our liabilities for uncertain tax positions from the ultimate resolution of that assessment. We believe it is reasonably possible that reductions of up to $26.2 million in unrecognized tax benefits may occur within the 12 months following September 30, 2022 upon closing of income tax audits or the expiration of applicable statutes of limitations.
In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. 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
September 30, 2022 and December 31, 2021 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. Determination of the amount of unrecognized deferred tax liability related to the excess of the financial reporting basis over the tax basis of our foreign subsidiaries is not practical due to the complexities associated with the calculation.
NOTE 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.
In determining fair value, we use various valuation approaches within the fair value measurement framework. The valuation methodologies used for our assets and liabilities measured at fair value and their classification in the valuation hierarchy are summarized below:
Fair value option investments and available-for-sale securities. We have fair value option investments and available-for-sale securities that we measure using the income approach. We have classified these investments as Level 3 due to the lack of observable market data over fair value inputs such as cash flow projections and discount rates.
Contingent consideration. During the first quarter 2021, we settled a contingent consideration arrangement to the former owners of a business previously acquired in 2018. We use the income approach to value contingent consideration obligations based on future financial performance. We have previously classified our contingent consideration as Level 3 due to the lack of relevant observable market data over fair value inputs such as probability-weighting of payment outcomes.
There was no material activity in the fair value of recurring Level 3 fair value measurements for the three and nine months ended September 30, 2022 and 2021.
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 or increased due to an observable price change in an orderly transaction.
We recognized $35.4 million in non-cash impairment charges related to goodwill for the nine months ended September 30, 2022. We recognized $1.8 million and $11.8 million in non-cash impairment charges related to long-lived assets for the three and nine months ended September 30, 2022, of which $1.8 million and $2.9 million are included in Restructuring and related charges on our Condensed Consolidated Statements of Operations. We recognized $7.7 million in non-cash impairment charges related to long-lived assets during the three and nine months ended September 30, 2021, which is included in Restructuring and related charges on our Condensed Consolidated Statements of Operations. See Note 2, Goodwill and Long-Lived Assets, and Note 9, Restructuring and Related Charges, for additional information.
We adjusted the carrying value of an other equity investment, which resulted in an unrealized gain of $89.1 million, and sold shares in an other equity investment for a gain of $2.2 million for the three and nine months ended September 30, 2021. During the second quarter 2021, we sold our shares in an other equity investment and recognized a gain of $4.2 million. See Note 3, Investments, for additional information.
We did not record any other significant nonrecurring fair value measurements for the three and nine months ended September 30, 2022 and 2021.
Estimated Fair Value of Financial Assets and Liabilities Not Measured at Fair Value
Our financial instruments not carried at fair value consist primarily of accounts receivable, restricted cash, short-term borrowings, 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 September 30, 2022 and December 31, 2021 due to their short-term nature.
NOTE 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 restricted stock units, performance share units, ESPP shares, warrants, capped call transactions and convertible senior notes. If dilutive, those potentially dilutive securities are reflected in diluted net income (loss) per share using the treasury stock method, except for the convertible senior notes, which are subject to the if-converted method.
The following table sets forth the computation of basic and diluted net income (loss) per share of common stock for the three and nine months ended September 30, 2022 and 2021 (in thousands, except share amounts and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Basic and diluted net income (loss) per share: | | | | | | | |
| | | | | | | |
Numerator | | | | | | | |
Net income (loss) | $ | (55,543) | | | $ | 78,701 | | | $ | (180,145) | | | $ | 90,020 | |
Less: Net income (loss) attributable to noncontrolling interests | 680 | | | 594 | | | 2,157 | | | 737 | |
Basic net income (loss) attributable to common stockholders | (56,223) | | | 78,107 | | | (182,302) | | | 89,283 | |
| | | | | | | |
Diluted net income (loss) attributable to common stockholders | (56,223) | | | 78,107 | | | (182,302) | | | 89,283 | |
Plus: Interest expense from assumed conversion of convertible senior notes | — | | | 700 | | | — | | | 1,392 | |
Net income (loss) attributable to common stockholders plus assumed conversions | (56,223) | | | 78,807 | | | (182,302) | | | 90,675 | |
| | | | | | | |
Denominator | | | | | | | |
Shares used in computation of basic net income (loss) per share | 30,307,734 | | | 29,567,802 | | | 30,070,598 | | | 29,282,932 | |
Weighted-average effect of diluted securities | | | | | | | |
Restricted stock units | — | | | 351,720 | | | — | | | 712,866 | |
Performance share units and other stock-based compensation awards | — | | | 68,616 | | | — | | | 89,981 | |
Convertible senior notes due 2026 | — | | | 3,376,400 | | | — | | | 2,308,112 | |
Shares used in computation of diluted net income (loss) per share | 30,307,734 | | | 33,364,538 | | | 30,070,598 | | | 32,393,891 | |
| | | | | | | |
Basic net income (loss) per share: | $ | (1.86) | | | $ | 2.64 | | | $ | (6.06) | | | $ | 3.05 | |
| | | | | | | |
Diluted net income (loss) per share: | $ | (1.86) | | | $ | 2.36 | | | $ | (6.06) | | | $ | 2.80 | |
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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Restricted stock units | 2,223,826 | | | 854,304 | | | 2,448,348 | | | 410,856 | |
Performance share units and other stock-based compensation awards | 94,690 | | | — | | | 102,406 | | | — | |
Convertible Senior notes due 2022 (1) | — | | | — | | | — | | | 1,144,689 | |
Convertible Senior notes due 2026 (1) | 3,376,400 | | | — | | | 3,376,400 | | | — | |
Warrants | — | | | — | | | — | | | 1,170,126 | |
Capped call transactions | 3,376,400 | | | 3,376,400 | | | 3,376,400 | | | 2,308,112 | |
Total | 9,071,316 | | | 4,230,704 | | | 9,303,554 | | | 5,033,783 | |
(1)We apply the if-converted method in computing the effect of our convertible senior notes on diluted net income (loss) per share, whereby the numerator of our diluted net income (loss) per share computations is adjusted for interest expense, net of tax, and the denominator is adjusted for the number shares into which the convertible senior notes could be converted. The effect is only included in the calculation of income (loss) per share for those instruments for which it would reduce income (loss) per share. See Note 5, Financing Arrangements, for additional information.
We had outstanding Market-based Performance Share Units as of September 30, 2022 and 2021 that were eligible to vest into shares of common stock subject to the achievement of specified performance or market conditions. Contingently-issuable shares are excluded from the computation of diluted income (loss) 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. As of September 30, 2022, there were up to 33,333 shares of common stock issuable upon vesting of outstanding Market-based Performance Share Units that were excluded from the table above as the performance or market conditions were not satisfied as of the end of the period.
NOTE 13. SEGMENT INFORMATION
The segment information reported in the tables below reflects the operating results that are regularly reviewed by our chief operating decision maker to assess performance and make resource allocation decisions. Our operations are organized into two segments: North America and International. Our measure of segment profitability is contribution profit, defined as gross profit less marketing expense, which is consistent with how management reviews the operating results of the segments. Contribution profit measures the amount of marketing investment needed to generate gross profit. Other operating expenses are excluded from contribution profit as management does not review those expenses by segment. We completed a transition to a third-party goods marketplace in International in 2021, and therefore we no longer generate product revenue in our Goods category. For the three and nine months ended September 30, 2022, adjustments to accruals previously established in our Goods category related to product are presented within service.
The following table summarizes revenue by reportable segment and category for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
North America | | | | | | | |
Service revenue: | | | | | | | |
Local | $ | 97,843 | | | $ | 129,131 | | | $ | 296,233 | | | $ | 394,358 | |
Goods | 5,978 | | | 9,189 | | | 20,476 | | | 37,266 | |
Travel | 4,065 | | | 4,791 | | | 13,465 | | | 18,893 | |
Total service revenue | 107,886 | | | 143,111 | | | 330,174 | | | 450,517 | |
Product revenue - Goods | — | | | — | | | — | | | 626 | |
Total North America revenue (1) | 107,886 | | | 143,111 | | | 330,174 | | | 451,143 | |
| | | | | | | |
International | | | | | | | |
Service revenue: | | | | | | | |
Local | 30,089 | | | 46,071 | | | 95,350 | | | 109,589 | |
Goods | 4,459 | | | 5,879 | | | 16,986 | | | 9,429 | |
Travel | 1,956 | | | 3,915 | | | 8,416 | | | 8,226 | |
Total service revenue | 36,504 | | | 55,865 | | | 120,752 | | | 127,244 | |
Product revenue - Goods | — | | | 15,195 | | | — | | | 165,559 | |
Total International revenue (1) | $ | 36,504 | | | $ | 71,060 | | | $ | 120,752 | | | $ | 292,803 | |
(1)North America includes revenue from the United States of $105.0 million and $140.2 million for the three months ended September 30, 2022 and 2021, and $323.9 million and $444.2 million for the nine months ended September 30, 2022 and 2021. International includes revenue from the United Kingdom of $21.4 million and $100.4 million for the three and nine months ended September 30, 2021. There were no other individual countries that represented more than 10% of consolidated total revenue for the three and nine months ended September 30, 2022 and 2021. Revenue is attributed to individual countries based on the location of the customer.
The following table summarizes cost of revenue by reportable segment and category for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
North America | | | | | | | |
Service cost of revenue: | | | | | | | |
Local | $ | 13,388 | | | $ | 13,947 | | | $ | 40,428 | | | $ | 41,927 | |
Goods | 1,142 | | | 1,325 | | | 3,849 | | | 5,577 | |
Travel | 1,008 | | | 1,029 | | | 3,399 | | | 3,801 | |
Total service cost of revenue | 15,538 | | | 16,301 | | | 47,676 | | | 51,305 | |
Product cost of revenue - Goods | — | | | — | | | — | | | 458 | |
Total North America cost of revenue | 15,538 | | | 16,301 | | | 47,676 | | | 51,763 | |
| | | | | | | |
International | | | | | | | |
Service cost of revenue: | | | | | | | |
Local | 2,674 | | | 2,195 | | | 7,946 | | | 6,094 | |
Goods | 125 | | | 292 | | | 521 | | | 537 | |
Travel | 331 | | | 339 | | | 1,088 | | | 783 | |
Total service cost of revenue | 3,130 | | | 2,826 | | | 9,555 | | | 7,414 | |
Product cost of revenue - Goods | — | | | 13,605 | | | — | | | 142,404 | |
Total International cost of revenue | $ | 3,130 | | | $ | 16,431 | | | $ | 9,555 | | | $ | 149,818 | |
The following table summarizes contribution profit by reportable segment for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
North America | | | | | | | |
Revenue | $ | 107,886 | | | $ | 143,111 | | | $ | 330,174 | | | $ | 451,143 | |
Cost of revenue | 15,538 | | | 16,301 | | | 47,676 | | | 51,763 | |
Marketing | 26,376 | | | 38,302 | | | 73,996 | | | 94,247 | |
Contribution profit | 65,972 | | | 88,508 | | | 208,502 | | | 305,133 | |
| | | | | | | |
International | | | | | | | |
Revenue | 36,504 | | | 71,060 | | | 120,752 | | | 292,803 | |
Cost of revenue | 3,130 | | | 16,431 | | | 9,555 | | | 149,818 | |
Marketing | 11,521 | | | 14,857 | | | 32,689 | | | 36,298 | |
Contribution profit | 21,853 | | | 39,772 | | | 78,508 | | | 106,687 | |
| | | | | | | |
Consolidated | | | | | | | |
Revenue | 144,390 | | | 214,171 | | | 450,926 | | | 743,946 | |
Cost of revenue | 18,668 | | | 32,732 | | | 57,231 | | | 201,581 | |
Marketing | 37,897 | | | 53,159 | | | 106,685 | | | 130,545 | |
Contribution profit | 87,825 | | | 128,280 | | | 287,010 | | | 411,820 | |
Selling, general and administrative | 119,243 | | | 119,494 | | | 369,601 | | | 384,606 | |
Goodwill impairment | — | | | — | | | 35,424 | | | — | |
Long-lived asset impairment | — | | | — | | | 8,811 | | | — | |
Restructuring and related charges | 4,912 | | | 12,483 | | | 8,163 | | | 34,150 | |
Income (loss) from operations | $ | (36,330) | | | $ | (3,697) | | | $ | (134,989) | | | $ | (6,936) | |
The following table summarizes total assets by reportable segment as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Total assets: | | | |
North America (1) | $ | 763,838 | | | $ | 964,523 | |
International (1) | 125,133 | | | 193,358 | |
Consolidated total assets | $ | 888,971 | | | $ | 1,157,881 | |
(1)North America contains assets from the United States of $751.7 million and $951.8 million as of September 30, 2022 and December 31, 2021. International contained assets from the United Kingdom of $126.0 million as of December 31, 2021. There were no other individual countries that represented more than 10% of consolidated total assets as of September 30, 2022 and December 31, 2021.