Groupon 2011 Annual Report Download - page 98

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GROUPON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company recognized stock compensation expense of $13.5 million and $10.2 million during the years ended December 31, 2010 and 2011,
respectively, related to subsidiary awards, none of which provided the Company with a tax benefit. The Company also settled certain liability-
based awards by
paying $11.1 million in cash and issuing 628,171 shares of Groupon Class A common stock. As of December 31, 2011, a total of $10.8 million of unrecognized
compensation costs related to unvested subsidiary awards are expected to be recognized over the remaining weighted-
average period of two years. The amount
of unrecognized compensation costs is management's best estimate based on the current fair market values of each of the subsidiaries and could change
significantly based on future valuations.
Common Stock Valuations
The Company determined the fair value per share of the common stock underlying the stock-
based awards through the contemporaneous application of
a discounted future earnings model initially and then a discounted cash flow methodology going forward, which was approved by the Board. Stock-
based awards
were granted to employees in the form of stock options, restricted stock units and restricted stock. All such awards granted were exercisable at a price per share
equal to the per share fair value of the Company's common stock on the date of grant. Determining the fair value of the Company's common stock required
making complex and subjective judgments. The assumptions used in the valuation models were based on future expectations combined with management
estimates.
The discounted future earnings method calculates the present value of future economic benefits using a discount rate based on the nature of the business,
the level of overall risk and the expected stability of the estimated future economic benefits. The future economic benefits are estimated over a period of years
sufficient to reach stability of the business, and management expects the Company to grow substantially for several years before revenue stabilizes. The
discounted cash flow method valued the business by discounting future available cash flows to present value at an approximate rate of return. The cash flows
were determined using forecasts of revenue, net income and debt-
free future cash flow. The discount rate was derived using a Capital Asset Pricing Model for
companies in the “expansion”
stage of development. The Company also applied a lack of marketability discount to its enterprise value, which took into account
that investments in private companies are less liquid than similar investments in public companies. There is inherent uncertainty in all of these estimates.
Summarized below are the significant factors the Board considered in determining the fair value of the common stock underlying the Company's stock-
based awards granted to its employees through its initial public offering on November 4, 2011.
First Quarter 2011
In the first quarter of 2011, the following significant events occurred: (1) the Company raised $492.5 million in net proceeds from the issuance of
Series G Preferred in January 2011; (2) the Company expanded its presence into new and expanding markets in India, Malaysia, South Africa and the Middle
East through a series of acquisitions; and (3) the number of subscribers increased to approximately 83.1 million as of March 31, 2011 and the Company launched
its services in 21 additional markets across North America.
Second Quarter 2011
In the second quarter of 2011, the following significant events occurred: (1) the number of subscribers increased to approximately 115.7 million as of
June 30, 2011; (2) the Company acquired a technology company and established its presence in Indonesia through an acquisition; (3) the Company launched
“Groupon Now!” and established partnerships with Expedia, Inc. and Live Nation Entertainment Inc.
Third Quarter 2011
In the third quarter of 2011, the following significant events occurred: (1) the number of subscribers increased to approximately 142.9 million as of
September 30, 2011; (2) the Company acquired two technology companies to improve its in-
house technological capabilities; and (3) the Company launched
“Groupon Goods”.
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