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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-02-25 · 188 added, 211 removed, 352 unchanged (53% of the section changed)

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Groupon is a global scaled two-sided marketplace that connects consumers to merchants.

Consumers access our marketplace through our mobile applications and our websites, primarily localized groupon.com sites in many countries.

We operate in two segments:

North America and International and in three categories:

Local, Goods and Travel.

Consumers access our marketplace through our mobile applications and our websites.

We operate in two segments, North America and International, and in three categories, Local, Goods and Travel.

See Item 8, Note 19, Segment Information, for additional information.

Currently, we generate product and service revenue from the following business operations.

Currently, we generate service and product revenue from the following business operations.

Service Revenue from Local, Travel, and Goods Categories:

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Product Revenue from Goods Category:

We generate product revenue from our sales of first-party Goods inventory, which are direct sales of merchandise inventory.

For product revenue transactions, we are the primary party responsible for providing the good to the customer, we have inventory risk and we have discretion in establishing prices.

We generate product revenue from sales of our first-party Goods merchandise inventory.

For product revenue transactions, we are the primary party responsible for providing the merchandise to the customer, we have inventory risk and we have discretion in establishing prices.

As such, product revenue is reported on a gross basis as the purchase price received from the customer.

Product revenue, including associated shipping revenue, is recognized when title passes to the customer upon delivery of the product.

We have transitioned to a third-party marketplace in North America as of the end of 2020 and will begin to transition to a third-party marketplace in International in the second quarter 2021.

Following the International transition, we expect our Goods category to primarily generate revenue on a net basis within service revenue.

In 2020, the COVID-19 pandemic has led to significant disruption in our business.

See Strategy, Restructuring and Cost Reduction and Factors Affecting our Performance below, and Item 8, Note 3, COVID-19 Pandemic, for more information about the impacts of COVID-19 on our business.

In February 2020, we announced a strategic plan to focus on our local experiences marketplace, which included exiting our Goods category.

However, due to the significant disruption in our business due to the COVID-19 pandemic we continue to sell Goods on our platform.

In the third quarter 2020, we announced an updated strategy and plan to prioritize expanding our Local inventory and modernizing our marketplace by improving the merchant and customer experiences.

While both of these are important to building a successful marketplace, we believe the most critical of these is expanding Local inventory.

To validate our strategic priority of expanding Local inventory, early in the third quarter 2020 we launched a test in four markets in North America to determine if growing inventory would result in improved billings and units performance.

To grow Local supply, we focused on leveraging three types of inventory:

Deals with few restrictions, new, lower discount Offers, and Market Rate supply.

At the conclusion of our test in December 2020, we determined that we reached our test goals and we intend to scale elements of our inventory strategy more broadly throughout our marketplace in 2021.

We also intend to continue to make enhancements to the customer and merchant experiences in 2021.

Restructuring and Cost Reduction

During the year ended December 31, 2020 we took significant actions to improve our cash position and materially reduce our cost structure.

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 first phase of our restructuring actions included an overall reduction of approximately 1,200 positions globally and the exit or discontinuation of the use of certain leases and other assets by the end of 2020.

The majority of the first phase of workforce reductions and impairments of our right-of-use and other long-lived assets occurred during the second quarter 2020.

In the third quarter 2020, we initiated the second phase of our restructuring plan, which included additional workforce reductions and the exit of our operations in New Zealand and Japan.

We expect to incur total pre-tax charges of $75.0 million to $105.0 million in connection with our multi-phase restructuring plan through the end of 2021.

Once fully implemented, we expect our multi-phase restructuring plan to result in $225.0 million in annualized cost savings.

During the year ended December 31, 2020, we recorded $64.8 million in pre-tax charges in connection with our restructuring actions.

Product revenue, including associated shipping revenue, is recognized when the merchandise is delivered to the customer.

We fully transitioned to a third-party marketplace in North America in 2020 and in International in the fourth quarter of 2021.

In a third-party marketplace model, our merchants generally assume inventory and refund risk;

therefore, we expect our Goods category to primarily generate revenue on a net basis within service revenue in future periods.

Our mission is to be the destination for experiences where consumers discover fun things to do and local businesses thrive.

Our strategic priorities are to expand our Local inventory and modernize our marketplace by improving the merchant and customer experiences.

To grow Local supply, we are focused on leveraging three types of inventory:

deals with fewer restrictions, a lower discount inventory product called offers, and market rate supply.

We began scaling elements of our inventory strategy throughout our marketplace in 2021.

In North America, we scaled the removal of Deal repeat purchase restrictions to all merchants and as of December 31, 2021 over 80% of our Deal inventory is now repeatable.

We have also successfully launched offers to beauty and wellness merchants.

To support our strategic priority of improving the merchant and customer experience, we are focused on reducing marketplace friction by making it easier for our customers to find, buy, and redeem a Groupon.

To do this, we are exploring and launching new initiatives that we believe will improve engagement, conversion and customer purchase frequency over time.

For merchants, we are continuing to focus on being a better partner by offering self-service options, advertising products and booking capabilities.

Moving forward, we plan to build an even better understanding of the critical value propositions we must provide for our customers and merchants.

COVID-19, Restructuring and Cost Reduction

Since March 2020, the COVID-19 pandemic has led to a significant disruption in our business due to changes in consumer behavior and impacts on our merchants.

Recovery from the COVID-19 pandemic has been

and could continue to be volatile and prolonged given the unprecedented and continuously evolving nature of the situation and the emergence and spread of new variants.

See Item 8, Note 3, COVID-19 Pandemic , for more information about the impacts of COVID-19 on our business.

In response to the impact of COVID-19 on our business, during the year ended December 31, 2020 we took significant actions to improve our cash position and materially reduce our cost structure, including the Board approved multi-phase restructuring plan.

See Item 8, Note 14, Restructuring and Related Charges , for more information.

In addition to the actions described above, we took several steps to reduce costs, preserve cash in the near-term and improve liquidity, including, but not limited to:

furloughing staff;

continuing to sell Goods on our platform instead of quickly exiting the category;

reducing marketing expense by significantly shortening payback thresholds and delaying brand marketing investments;

transitioning merchants to redemption payment terms, instead of fixed payment terms;

implementing a hiring freeze;

eliminating broad-based merit increases for employees;

replacing cash compensation with equity compensation in 2020 for Board members;

and amending our Credit Agreement to, among other things, provide covenant relief through the first quarter of 2021.

See Liquidity and Capital Resources for further information.

How We Measure Our Business

We use several operating and financial metrics to assess the performance of our business and make decisions on where to allocate capital, time and technology investments.

We use several operating and financial metrics to assess the progress of our business and make decisions on where to allocate capital, time and technology investments.

Certain of the financial metrics are reported in accordance with U.S.

generally accepted accounting principles ("GAAP") and certain of those metrics are considered non-GAAP financial measures.

GAAP and certain of those metrics are considered non-GAAP financial measures.

As our business evolves, we may make changes to the key financial and operating metrics that we use to measure our business.

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For these transactions, gross billings differs from revenue reported in our consolidated statements of operations, which is presented net of the merchant's share of the transaction price.

For product revenue transactions, gross billings are equivalent to product revenue reported in our consolidated statements of operations.

For product revenue transactions, gross billings is equivalent to product revenue reported in our consolidated statements of operations.

Gross billings is an indicator of our growth and business performance as it measures the dollar volume of transactions generated through our marketplaces.

Tracking gross billings on service revenue transactions also allows us to monitor the percentage of gross billings that we are able to retain after payments to merchants.

However, we are focused on achieving long-term gross profit and Adjusted EBITDA growth.

However, we are focused on achieving long-term gross profit and Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") growth.

• Units are the number of purchases during the reporting period, before refunds and cancellations, made either through one of our online marketplaces or directly with a merchant for which we earn a commission.

We do not include purchases with retailers using digital coupons accessed through our websites or mobile applications in our units metric, nor do we include units purchased through third-party marketplaces with which we partner.

We consider units to be an important indicator of the total volume of business conducted through our marketplaces.

We report units on a gross basis prior to the consideration of customer refunds and therefore units are not always a good proxy for gross billings.

• Active customers are unique user accounts that have made a purchase during the trailing twelve months ("TTM") either through one of our online marketplaces or directly with a merchant for which we earned a commission.

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Some customers could establish and make purchases from more than one account, so it is possible that our active customer metric may count certain customers more than once in a given period.

For entities that we have acquired in a business combination, this metric includes active customers of the acquired entity, including customers who made purchases prior to the acquisition.

We do not include consumers who solely make purchases

with retailers using digital coupons accessed through our websites and mobile applications in our active customer metric, nor do we include consumers who solely make purchases of our inventory through third-party marketplaces with which we partner.

• Units are the number of purchases during the reporting period, before refunds and cancellations, made either through one of our online marketplaces, a third-party marketplace, or directly with a merchant for which we earn a commission.

We do not include purchases with retailers using digital coupons accessed through our websites and mobile applications in our units metric.

We consider units to be an important indicator of the total volume of business conducted through our marketplaces.

We do not include consumers who solely make purchases with retailers using digital coupons accessed through our websites or mobile applications in our active customer metric, nor do we include consumers who solely make purchases of our inventory through third-party marketplaces with which we partner.

Our gross billings, units and TTM active customers for the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands):

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We earn service revenue from transactions in which we generate commissions by selling goods or services on behalf of third-party merchants.

Service revenue from those transactions is reported on a net basis as the purchase price collected from the customer for the offering less an agreed upon portion of the purchase price paid to the third-party merchant.

Service revenue is reported on a net basis as the purchase price collected from the customer less the portion of the purchase price that is payable to the third-party merchant.

Service revenue also includes commissions we earn when customers make purchases with retailers using digital coupons accessed through our digital properties.

We generate product revenue from our sales of first-party Goods inventory.

We generate product revenue from our sales of first-party Goods merchandise inventory.

Our product revenue from these first-party transactions, which are direct sales of merchandise inventory, is the purchase price received from the customer.

We have transitioned to a third-party marketplace in North America as of the end of 2020 and will begin to transition in International in the second quarter 2021.

Following the International transition, we expect our Goods category to primarily generate revenue on a net basis within service revenue.

We fully transitioned to a third-party marketplace in North America in 2020 and in International in the fourth quarter of 2021.

In a third-party marketplace model, our merchants generally assume inventory and refund risk;

therefore, we expect our Goods category to primarily generate revenue on a net basis within service revenue in future periods.

• Gross profit reflects the net margin we earn after deducting our cost of revenue from our revenue.

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Operating Expenses

• Marketing expense consists primarily of online marketing costs, such as search engine marketing, advertising on social networking sites and affiliate programs, and offline marketing costs, such as television and radio advertising.

• Marketing expense consists primarily of online marketing costs, such as search engine marketing, advertising on social networking sites and affiliate programs, and to a lesser extent offline marketing costs, such as television and radio advertising.

Additionally, compensation expense for marketing employees is classified within marketing expense.

We record these costs within Marketing on the consolidated statements of operations when incurred.

From time to time, we have offerings from well-known national merchants for customer acquisition and activation purposes, for which the amount we owe the merchant for each voucher sold exceeds the transaction price paid by the customer.

From time to time, we have offerings from well-known national merchants for customer acquisition and activation purposes, for which the amount we owe the merchant for

each voucher sold exceeds the transaction price paid by the customer.

Our gross billings from those transactions generate no service revenue and our net cost (i.e., the excess of the amount owed to the merchant over the amount paid by the customer) is classified as marketing expense.

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Impact of COVID-19 .

During the COVID-19 pandemic, various government restrictions and changes in consumer behavior have had a negative impact on our business, which relies on customers' purchases of local experiences, including events and activities, beauty and wellness, travel and dining.

Recovery from the COVID-19 pandemic could be volatile and prolonged given the unprecedented and continuously evolving nature of the situation.

We continue to monitor the impact of COVID-19 on our business.

See Item 8, Note 3, COVID-19 Pandemic, for more information about the impacts of COVID-19 on our business and Item 1A, Risk Factors .

During the COVID-19 pandemic, protective measures taken to control the spread of COVID-19 and changes in consumer behavior have had and continue to have a negative impact on our business, which relies on customers' purchases of local experiences, including events and activities, beauty and wellness, travel and dining.

Recovery from the COVID-19 pandemic has been and could continue to be volatile and prolonged given the unprecedented and continuously-evolving nature of the situation and the emergence and spread of variants.

We also have been, and may continue to be, impacted by pandemic-related supply chain issues, staffing shortages and other transient issues that affect our merchants and continue to evolve during the pandemic recovery period.

We will continue to monitor the impact of COVID-19 on our business, particularly in our International segment where restrictions to date have been more prolonged and stricter than in North America.

Attracting and retaining local merchants.

As we focus on our local experiences marketplace, we depend on our ability to attract and retain merchants who are willing to offer their experiences on our platform.

Merchants can generally withdraw their offerings from our marketplace at any time, and their willingness to continue offering services through our marketplace depends on the effectiveness of our marketing and promotional services.

Since the widespread economic impacts of COVID-19 began in March 2020, we are prioritizing opportunities to help drive demand for our merchants and highlighting offers that customers can enjoy right now.

As we continue to navigate through the volatility of the COVID-19 recovery period, we intend to take a market-by-market approach to attracting and retaining local merchants.

Merchants can withdraw their offerings from our marketplace at any time, and their willingness to continue offering services through our marketplace depends on the effectiveness of our marketing and promotional services.

We are focused on prioritizing opportunities to help drive demand for our merchants by highlighting offers that customers want and that they can enjoy right now in light of any ongoing COVID-related restrictions.

As we navigate through the volatility of the COVID-19 recovery period, we intend to take a market-by-market approach to attracting and retaining local merchants.

Driving purchase frequency and re-engaging and retaining customers .

In light of significant declines in consumer demand for local and travel services due to COVID-19, we must highlight offers that customers can enjoy right now in order to drive purchase frequency and retain customers.

This includes surfacing the relevant Local inventory in each market depending on the government restrictions currently in place and continuing to leverage our Goods category in the near-term.

We must also continue to improve the customer experience on our websites and mobile applications, launch innovative products that remove friction from the customer journey and drive awareness to our supply, and grow our high-quality, bookable inventory.

Increasing traffic to our websites and mobile applications.

The traffic to our websites and mobile applications, including from consumers responding to our emails and search engine optimization ("SEO"), has declined in recent years, and we have experienced further declines in traffic due to the impacts of COVID-19.

As such, we must focus on improving the effectiveness of our emails, as well as developing sources of traffic in addition to email and SEO and optimizing the efficiency of our marketing spend.

As the global economy continues to recover from the pandemic, we are surfacing relevant inventory in order to drive purchase frequency and retain customers.

We also continue to focus on expanding inventory through our three inventory products:

deals with fewer restrictions, a lower discount inventory product called offers, and market rate supply.

On the customer experience side, we continue to improve our websites and mobile applications;

launch innovative products that remove friction from the customer journey and drive awareness to our supply;

and grow our high-quality, repeatable inventory.

Results of Operations

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Comparison of the Years Ended December 31, 2021 and 2020:

For the year ended December 31, 2020 North America gross billings declined by $1,360.4 million, units declined by 33.8 million and TTM active customers declined by 9.0 million.

These declines were primarily due to the significant decrease in consumer demand due to changes in consumer behavior and actions taken by governments to control the spread of COVID-19, including quarantines, travel restrictions, as well as business restrictions and shutdowns.

North America gross billings, units and TTM active customers decreased by $12.3 million, 13.7 million and 2.7 million for the year ended December 31, 2021 compared with the prior year.

These declines were primarily attributable to a decrease in consumer demand for our Goods category, partially offset by an increase in consumer demand for higher-priced offerings and lower customer refunds in the Local category.

Comparison of the Years Ended December 31, 2020 and 2019:

For the year ended December 31, 2019, North America gross billings declined by $437.1 million, units declined by 19.3 million and active customers declined by 4.1 million.

These declines were primarily due to the decline in traffic, including traffic from email and SEO, as well as our efforts to improve the efficiency of our marketing spend, which led to a decrease in the number of active customers.

North America gross billings, units and TTM active customers declined by $1,360.4 million, 33.8 million and 9.0 million for the year ended December 31, 2020 compared with the prior year.

These declines were primarily due to the significant decrease in consumer demand due to changes in consumer behavior and protective measures taken to control the spread of COVID-19.

Financial Metrics

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Comparison of the Years Ended December 31, 2021 and 2020:

North America revenue and gross profit decreased by $540.3 million and $332.1 million, for the year ended December 31, 2020.

North America revenue and cost of revenue decreased by $211.6 million and $271.6 million for the year ended December 31, 2021 compared with the prior year.

The decrease in revenue was primarily due to lower Goods gross billings, a shift in mix of consumer purchases to lower-margin offerings and the transition of Goods to a third-party marketplace model.

In a third-party marketplace model, we generate service revenue which is presented on a net basis.

These declines were partially offset by higher Local gross billings and higher variable consideration from unredeemed vouchers.

North America gross profit increased by $60.0 million for the year ended December 31, 2021 compared with the prior year, primarily due to higher Local gross billings and higher variable consideration from unredeemed vouchers, partially offset by lower Goods gross billings and a shift in mix to lower-margin offerings in the Local category.

Comparison of the Years Ended December 31, 2020 and 2019:

North America revenue, cost of revenue and gross profit decreased by $540.3 million, $208.2 million and $332.1 million for the year ended December 31, 2020 compared with the prior year.

Those declines were primarily driven by a decline in gross billings and transaction volume due to the impacts of COVID-19.

Revenue also declined due to the ongoing transition of our Goods category to a third-party marketplace model.

Additionally, these also declined due to the transition of our Goods category to a third-party marketplace model.

In a third-party marketplace model, we generate service revenue which is presented on a net basis.

The increase in service margin was due to a shift in mix of offerings sold and higher variable consideration from unredeemed vouchers due to our shift towards payment on redemption terms in North America.

North America cost of revenue decreased by $208.2 million for the year ended December 31, 2020 primarily due to the decrease in transaction volume and gross billings and the impacts of the ongoing transition of our Goods category to a third-party marketplace model.

Comparison of the Years Ended December 31, 2019 and 2018:

North America revenue and gross profit decreased by $280.5 million and $82.9 million for the year ended December 31, 2019.

Those declines were primarily driven by a decline in transaction volume due to fewer customers and lower customer traffic, including traffic from email and SEO, as discussed above.

The decrease in gross profit was partially offset by a $197.5 million decline in cost of revenue, which was primarily due to the decrease in transaction volume and gross billings.

Marketing and Contribution Profit

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Comparison of the Years Ended December 31, 2021 and 2020:

North America marketing expense and marketing expense as a percentage of gross profit declined for the year ended December 31, 2020 due to accelerated traffic declines, significantly shortened payback thresholds and lower investment in our offline marketing and brand spend in light of COVID-19.

The decline in our North America contribution profit for the year ended December 31, 2020 was primarily attributable to a $332.1 million decrease in gross profit, as discussed above, partially offset by a $118.0 million decrease in marketing.

North America marketing expense and marketing expense as a percentage of gross profit increased for the year ended December 31, 2021 compared with the prior year due to the launch of new brand campaigns in 2021 and increased marketing investment in an effort to capture consumer demand.

North America contribution profit increased for the year ended December 31, 2021 compared with the prior year primarily due to an increase in gross profit, partially offset by higher marketing expense.

Comparison of the Years Ended December 31, 2020 and 2019:

North America marketing expense and marketing expense as a percentage of gross profit declined for the year ended December 31, 2019 as compared with the prior year as we leveraged improved marketing analytics to drive efficiency in our marketing spend and maximize the lifetime value of our customer base.

The decline in our North America Contribution profit for the year ended December 31, 2019 was primarily attributable to a $82.9 million decrease in gross profit, as discussed above, partially offset by a $59.7 million decrease in marketing.

North America marketing expense and marketing expense as a percentage of gross profit declined for the year ended December 31, 2020 compared with the prior year due to accelerated traffic declines, significantly shortened payback thresholds and lower investment in our offline marketing and brand spend in light of COVID-19.

North America contribution profit decreased for the year ended December 31, 2020 compared with the prior year primarily due to a $332.1 million decrease in gross profit, partially offset by a $118.0 million decrease in marketing.

International

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Comparison of the Years Ended December 31, 2021 and 2020:

For the year ended December 31, 2020 International gross billings declined by $634.0 million, units declined by 17.9 million and active customers decreased by 5.0 million.

Those decreases were primarily due to the significant decrease in consumer demand due to changes in consumer behavior and actions taken by governments to control the spread of COVID-19, including quarantines, travel restrictions, as well as business restrictions and shutdowns.

The decline in gross billings was partially offset by a $11.9 million favorable impact from year-over-year changes in foreign currency exchange rates.

International gross billings, units and TTM active customers decreased by $271.6 million, 16.5 million and 3.6 million for the year ended December 31, 2021 compared with the prior year.

These declines were primarily attributable to a decrease in consumer demand in the Goods category, as well as a decrease in the Local category due to the impact of COVID-19 on our merchants and consumer behavior.

These declines were partially offset by a $28.6 million favorable impact from year-over-year changes in foreign currency exchange rates.

Comparison of the Years Ended December 31, 2020 and 2019:

For the year ended December 31, 2019 International gross billings declined by $152.2 million, units declined by 2.1 million and active customers decreased by 0.5 million.

Those decreases were primarily due to weak consumer sentiment in Europe, especially in the United Kingdom, and intense competition in our Goods business.

The decline in gross billings was also driven by an $83.1 million unfavorable impact from year-over-year changes in foreign currency exchange rates.

International gross billings, units, and TTM active customers declined by $634.0 million, 17.9 million and 5.0 million for the year ended December 31, 2020 compared with the prior year.

Those decreases were primarily due to the significant decrease in consumer demand due to changes in consumer behavior and protective measures taken to control the spread of COVID-19.

The decline in gross billings was partially offset by a $11.9 million favorable impact from year-over-year changes in foreign currency exchange rates.

Financial Metrics

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Comparison of the Years Ended December 31, 2021 and 2020:

International revenue and gross profit decreased by $261.8 million and $176.7 million for the year ended December 31, 2020.

Those decreases were primarily driven by a decline in gross billings due to the impacts of COVID-19 as discussed above.

The decreases in revenue and gross profit were partially offset by favorable impacts of $9.5 million and $3.2 million from year-over-year changes in foreign currency exchange rates.

Cost of revenue decreased by $85.0 million for the year ended December 31, 2020 primarily due to the decrease in transaction volume and gross billings and a $6.3 million unfavorable impact from year-over-year changes in foreign currency exchange rates.

International revenue and cost of revenue decreased by $238.2 million and $238.0 million for the year ended December 31, 2021 compared with the prior year.

Those decreases were primarily due to lower Local and Goods gross billings and the transition of Goods to a third-party marketplace model.

In a third-party marketplace model, we generate service revenue which is presented on a net basis.

These declines were partially offset by higher variable consideration from unredeemed vouchers.

Revenue had a favorable impact of $19.0 million and cost of revenue had an unfavorable impact of $11.5 million from year-over-year changes in foreign currency exchange rates.

International gross profit remained largely flat for the year ended December 31, 2021 compared with the prior year.

International gross profit increased primarily due to higher variable consideration from unredeemed vouchers and a favorable impact of $7.4 million from year-over-year changes in foreign currency exchange rates.

Those increases were offset by lower Local and Goods gross billings.

Comparison of the Years Ended December 31, 2020 and 2019:

International revenue and gross profit decreased by $137.3 million and $51.5 million for the year ended December 31, 2019.

Those decreases were primarily driven by a decline in gross billings as a result of weak consumer sentiment in Europe, especially in the United Kingdom, and intense competition in our Goods business, as well as unfavorable impacts on revenue and gross profit of $45.3 million and $19.3 million from year-over-year changes in foreign currency exchange rates.

The decrease in gross profit was also driven by a customer shift toward lower margin offerings.

The decline in gross profit was partially offset by a decrease in cost of revenue of $85.8 million, which was primarily due to the decline in gross billings, as discussed above, a shift in our Goods category mix from product revenue transactions, which are reported on a gross basis, toward service revenue transactions, which are reported on a net basis, and a $26.0 million favorable impact from year-over-year changes in foreign currency exchange rates.

International revenue, cost of revenue and gross profit decreased by $261.8 million, $85.0 million and $176.7 million for the year ended December 31, 2020 compared with the prior year.

Those decreases were primarily driven by a decline in transaction volume and gross billings due to the impacts of COVID-19.

Additionally, the decrease in cost of revenue had a $6.3 million unfavorable impact from year-over-year changes in foreign currency exchange rates.

The decreases in revenue and gross profit were partially offset by favorable impacts of $9.5 million and $3.2 million from year-over-year changes in foreign currency exchange rates.

Marketing and Contribution Profit

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Comparison of the Years Ended December 31, 2021 and 2020:

International marketing expense and marketing expense as a percentage of gross profit decreased for the year ended December 31, 2020 due to accelerated traffic declines, significantly shortened payback thresholds and lower investment in our offline marketing and brand spend in light of COVID-19, partially offset by a $0.7 million unfavorable impact from year-over-year change in foreign currency exchange rates.

The decrease in international contribution profit for the year ended December 31, 2020 was primarily attributable to a $176.7 million decrease in gross profit, partially offset by a $66.8 million decrease in marketing.

International marketing expense and marketing expense as a percentage of gross profit decreased for the year ended December 31, 2021 compared with the prior year due to accelerated traffic declines and lower investments in our offline marketing and brand spend in light of COVID-19 in the first half of 2021.

Beginning in the third quarter 2021, we increased our marketing spend across various channels in an effort to capture consumer demand as COVID-19 restrictions began to lift.

The increase in our marketing spend during the second half of 2021 did not offset the lower spend from the first half of 2021.

International contribution profit increased for the year ended December 31, 2021 compared with the prior year primarily due to a $7.7 million decrease in marketing expense as described above.

Comparison of the Years Ended December 31, 2020 and 2019:

International marketing expense and marketing expense as a percentage of gross profit for the year ended December 31, 2019 increas ed as we continued to invest in the long-term potential of our International segment, partially offset by a $6.2 million favorable impact from year-over-year change in foreign currency exchange rates.

The decrease in our contribution profit for the year ended December 31, 2019 as compared with the prior year was primarily attributable to a $51.5 million decrease in Gross Profit.

Operating Expenses

International marketing expense and marketing expense as a percentage of gross profit decreased for the year ended December 31, 2020 compared with the prior year due to accelerated traffic declines, significantly shortened payback thresholds and lower investment in our offline marketing and brand spend in light of COVID-19.

International contribution profit decreased for the year ended December 31, 2020 compared with the prior year primarily due to a $176.7 million decrease in gross profit, partially offset by a $66.8 million decrease in marketing.

Consolidated Operating Expenses

Operating expenses for the years ended December 31, 2021, 2020 and 2019 were as follows (dollars in thousands):

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Comparison of the Years ended December 31, 2021 and 2020:

Marketing expense and marketing expense as a percentage of gross profit declined for the year ended December 31, 2020 due to accelerated traffic declines, significantly shortened payback thresholds and lower investment in our offline marketing and brand spend in light of COVID-19.

SG&A decreased for the year ended December 31, 2020 primarily due to lower payroll-related expenses due to furloughs and restructuring actions.

SG&A as a percentage of gross profit increased for the year ended December 31, 2020 due to the decline in demand and traffic as a result of COVID-19.

During the first quarter 2020, we performed an interim quantitative impairment assessment of goodwill and long-lived assets as a result of significant deterioration in our financial performance due to the impact of COVID-19.

As a result, we recognized goodwill impairment of $109.5 million, that represented the excess of the EMEA reporting unit's carrying value over its fair value, and long-lived asset impairment of $22.4 million for the year ended December 31, 2020.

See Item 8, Note 3, COVID-19 Pandemic, for additional information about goodwill and long-lived asset impairments.

Restructuring and related charges increased for the year ended December 31, 2020 related to severance and benefit costs for workforce reductions, impairments and other facilities-related charges, and professional advisory fees resulting from our restructuring activities.

Marketing expense and marketing expense as a percentage of gross profit increased for the year ended December 31, 2021 compared with the prior year due to the launch of new brand campaigns and an increase in marketing investment in an effort to capture consumer demand.

SG&A and SG&A as a percentage of gross profit decreased for the year ended December 31, 2021 compared with the prior year primarily due to lower payroll-related expenses, partially offset by a $8.4 million unfavorable impact from year-over-year changes in foreign currency rates.

Restructuring and related charges decreased for the year ended December 31, 2021 compared with the prior year, as we completed our actions under the plan.

We recognized $7.7 million in impairment charges for leases and lease-related assets related to our restructuring plan for the year ended December 31, 2021 and $21.6 million during the year ended December 31, 2020.

See Item 8, Note 14, Restructuring and Related Charges , for more information.

Comparison of the Years ended December 31, 2020 and 2019:

Marketing expense and marketing expense as a percentage of gross profit for the year ended December 31, 2019 decreased as we leveraged marketing analytics to drive efficiency in our marketing spend and maximize the lifetime value of our customer base and decreased our offline marketing spend during the year.

SG&A decreased for the year ended December 31, 2019 primarily due to the absence of expense related to our patent litigation with IBM of $34.6 million recorded in 2018, lower facilities and payroll-related expenses and a $16.6 million favorable impact from year-over-year changes in foreign currency exchange rates.

Other Income (Expense), Net

Other income (expense), net includes interest income, interest expense, gains and losses on fair value option investments, adjustments for observable price changes of investments, impairments of investments and foreign currency gains and losses, primarily resulting from intercompany balances with our subsidiaries that are denominated in foreign currencies.

Marketing expense and marketing expense as a percentage of gross profit declined for the year ended December 31, 2020 compared with the prior year due to accelerated traffic declines, significantly shortened payback thresholds and lower investment in our offline marketing and brand spend in light of COVID-19.

SG&A decreased for the year ended December 31, 2020 compared with the prior year primarily due to lower payroll-related expenses due to furloughs and restructuring actions.

SG&A as a percentage of gross profit increased for the year ended December 31, 2020 due to the decline in demand and traffic as a result of COVID-19.

During the first quarter 2020, the significant deterioration in our financial performance due to the disruption in our operations from COVID-19 and the sustained decrease in our stock price required us to evaluate our goodwill and long-lived assets for impairment.

As a result, for the year ended December 31, 2020, we recognized $109.5 million of goodwill impairment and $22.4 million of long-lived asset impairment within our International segment related to our EMEA operations.

See Item 8, Note 3, COVID-19 Pandemic, for additional information about goodwill and long-lived asset impairments.

Consolidated Other Income (Expense), Net

Other income (expense), net includes interest income, interest expense, gains and losses on fair value option investments, impairments of investments, loss on extinguishment of debt and foreign currency gains and losses, primarily resulting from intercompany balances with our subsidiaries that are denominated in foreign currencies.

Other income (expense), net for the years ended December 31, 2021, 2020 and 2019 was as follows (dollars in thousands):

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2021 2020 2019

Interest income $ 6,351 $ 7,744 $ 6,420

Interest expense (33,192) (23,593) (21,909)

Changes in fair value of investments (1,405) (72,497) (9,064)

Foreign currency gains (losses), net 17,919 (5,960) (20,325)

Impairments of investments (6,684) (9,961) (10,156)

Upward adjustment for observable price changes of investment — 51,397 —

Other 43 (459) 2,026

Other income (expense), net $ 92,680 $ (16,968) $ (53,329)

Comparison of the Years Ended December 31, 2021, 2020, and 2019:

The change in Other income (expense), net for the year ended December 31, 2020 as compared with the prior year is primarily related to a $71.1 million decrease in losses from changes in fair value of investments, and a $23.9 million increase in foreign currency gains (losses), net, partially offset by a decrease in unrealized gain of $51.4 million as a result of an upward adjustment for observable price changes on an other equity investment.

The change in O ther income (expense), net for the year ended December 31, 2019 as compared with the prior year was primarily related to $69.4 million loss from changes in fair value of our investment in Monster LP, partially offset by an unrealized gain of $51.4 million as a result of an upward adjustment for observable price changes on an other equity investment.

See Item 8, Note 8, Investments, for additional information.

The change in Other income (expense) was partially offset by a $14.4 million decrease in foreign currency losses for the year ended December 31, 2019.

Foreign currency gains (losses) primarily result from intercompany balances with our subsidiaries that are denominated in foreign currencies.

The change in Other income (expense), net for the year ended December 31, 2021 compared with the prior year is primarily related to an unrealized gain of $89.1 million recorded as a result of an upward adjustment for an observable price change on an other equity investment and a change in foreign currency gains and losses, which includes a $32.3 million cumulative foreign currency translation adjustment gain that was reclassified into earnings as a result of the substantial liquidation of our subsidiary in Japan as part of our restructuring actions.

T he change in Other income (expense), net for the year ended December 31, 2020 compared with the prior year is primarily related to an increase in foreign currency gains in the year ended December 31, 2020 and a net loss from changes in fair value of investments for the year ended December 31, 2019.

Supplemental Consolidated Balance Sheets and Statements of Operations Information , for more information.

Provision (Benefit) for Income Taxes

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2021 2020 2019 2021 vs 2020 2020 vs 2019

Provision (benefit) for income taxes $ (7,504) $ 761 $ (957) 1,086.1 % 179.5 %

Provision (benefit) for income taxes $ (32,323) $ (7,504) $ 761 NM NM

Effective tax rate (36.7) % 2.6 % (5.6) %

Federal income tax rate was 21% for the years ended December 31, 2021, 2020 and 2019.

The primary factor impacting the effective tax rate for the years ended December 31, 2020, 2019 and 2018 was the pretax losses incurred in jurisdictions that have valuation allowances against their net deferred tax assets.

The primary factors impacting the effective tax rate for the year ended December 31, 2021 were the release of a portion of the U.S.

valuation allowance against our federal and state deferred tax assets, pretax losses incurred in jurisdictions that have a valuation allowance against their net deferred tax assets, and the non-taxable unrealized gain on the observable price change recorded on an other equity investment.

The effective tax rate for the years ended December 31, 2020 and 2019 were impacted by pretax losses incurred in jurisdictions that have a valuation allowance against their net deferred tax assets and the reversal of reserves for uncertain tax positions due to the closure of applicable statutes of limitations and closure of tax audits.

The year ended December 31, 2020 was also impacted by the carryback of federal net operating losses due to the income tax relief provided by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").

The year ended December 31, 2019 was also impacted by the non-taxable unrealized gain on the observable price change recorded on an other equity investment.

We expect that our consolidated effective tax rate in future periods will continue to differ significantly from the U.S.

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See Item 8, Note 15, Income Taxes , for additional information relating to tax audits and assessments and regulatory and legal developments that may impact our business and results of operations in the future.

The effective tax rate for the years ended December 31, 2020 and 2019 also reflected the reversal of reserves for uncertain tax positions due to the closure of tax audits and due to the closure of applicable statutes of limitation.

The effective tax rate for year ended December 31, 2018 also reflected a $6.4 million income tax benefit resulting from the impact of adopting Topic 606 on intercompany activity in certain foreign jurisdictions.

Income (Loss) from Discontinued Operations

In connection with a strategic initiative to optimize our global footprint, we sold or ceased our operations in 12 countries between November 2016 and March 2017.

The financial results of those operations have been presented as discontinued operations in the consolidated financial statements.

Non-GAAP Financial Measures

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Adjusted EBITDA .

Adjusted EBITDA is a non-GAAP performance measure that we define as net income (loss) from continuing operations excluding income taxes, interest and other non-operating items, depreciation and amortization, stock-based compensation, acquisition-related expense (benefit), net and other special charges and credits, including items that are unusual in nature or infrequently occurring.

Adjusted EBITDA is a non-GAAP performance measure that we define as Income (loss) from continuing operations excluding income taxes, interest and other non-operating items, depreciation and amortization, stock-based compensation, acquisition-related expense (benefit), net and other special charges and credits, including items that are unusual in nature or infrequently occurring.

Our definition of Adjusted EBITDA may differ from similar measures used by other companies, even when similar terms are used to identify such measures.

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The composition of our contingent consideration arrangements and the impact of those arrangements on our operating results vary over time based on a number of factors, including the terms of our business combinations and the timing of those transactions.

For the year ended December 31, 2020, special charges and credits also included charges related to our restructuring plan, goodwill and long-lived asset impairments and strategic advisor costs.

For the year ended December 31, 2018, special charges and credits also included a charge related to our patent litigation with IBM.

For the year ended December 31, 2021, special charges and credits included charges related to our restructuring plan and long-lived asset impairments.

For the year ended December 31, 2020, special charges and credits included charges related to our restructuring plan, goodwill and long-lived asset impairments and strategic advisor costs.

We exclude special charges and credits from Adjusted EBITDA because we believe that excluding those items provides meaningful supplemental information about our core operating performance and facilitates comparisons with our historical results.

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Strategic advisor costs — 3,626 —

IBM patent litigation — — 34,600

Other (income) expense, net (2)

(92,680) 16,968 53,329

Provision (benefit) for income taxes (32,323) (7,504) 761

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Adjusted EBITDA $ 143,228 $ 49,739 $ 227,248

(1) Restructuring and related charges includes $21.6 million of long-lived asset impairments and $1.7 million of additional stock compensation for the year ended December 31, 2020.

(1) Includes $7.7 million of right-of-use assets - operating leases and leasehold improvement impairments for the year ended December 31, 2021 and $21.6 million and $1.7 million of long-lived asset impairments and additional stock compensation for the year ended December 31, 2020.

(2) Includes a $32.3 million cumulative foreign currency translation adjustment gain that was reclassified into earnings for the year ended December 31, 2021 as a result of the substantial liquidation of our subsidiary in Japan as part of our restructuring actions and an $89.1 million unrealized gain due to an upward adjustment for an observable price change of an other equity investment.

Refer to Item 8, Note 14, Restructuring and Related Charges and Note 6, Investments, for additional information.

Free cash flow .

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Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures.

For example, free cash flow does not include cash payments for business acquisitions.

In addition, free cash flow reflects the impact of the timing difference between when we are paid by customers and when we pay merchants and suppliers.

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Foreign currency exchange rate neutral operating results .

Foreign currency exchange rate neutral operating results show current period operating results as if foreign currency exchange rates had remained the same as those in effect in the prior year period.

Foreign currency exchange rate neutral operating results show current period operating results as if foreign currency exchange rates had remained the same as those

in effect in the prior year period.

Those measures are intended to facilitate comparisons to our historical performance.

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Our principal sources of liquidity are cash flows from operations and cash balances, which primarily consist of bank deposits and government money market funds.

As of December 31, 2020, cash balances, including outstanding borrowings under our Amended Credit Agreement, were $850.6 million.

As of December 31, 2021, cash and cash equivalents, including outstanding borrowings under the Amended Credit Agreement, were $498.7 million.

Our net cash flows from operating, investing and financing activities from continuing operations for the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands):

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Free cash flow $ (173,588) $ (112,309) $ 3,955

Our revenue-generating transactions are primarily structured such that we collect cash up-front from customers and pay third-party merchants at a later date, either upon the customer's redemption of the related voucher or fixed payment terms, which are generally biweekly, throughout the term of the merchant's offering.

Our revenue-generating transactions are primarily structured such that we collect cash up-front from customers and pay third-party merchants at a later date, either based upon the customer's redemption of the related voucher or fixed payment terms, which are generally biweekly, throughout the term of the merchant's offering.

Historically, we have primarily paid merchants on fixed payment terms in North America and upon voucher redemption internationally.

In prior periods, we began to increase our use of redemption payment terms with our North America merchants, and we accelerated this transition in 2020 to improve liquidity as our business was impacted by COVID-19.

We largely completed the transition to redemption payment terms in the third quarter 2020.

Our cash balances fluctuate significantly throughout the year based on many variables, including gross billings growth rates, the timing of payments to merchants and suppliers, seasonality and the mix of transactions between Goods and Local.

We largely completed a transition to redemption payment terms in North America in the third quarter 2020.

Our cash balances fluctuate significantly throughout the year based on many variables, including gross billings growth rates, the timing of payments to merchants and suppliers and the mix of transactions between Goods and Local.

Net cash provided by (used in) operating activities

For the year ended December 31, 2021, our net cash used in operating activities from continuing operations was $124.0 million, as compared with our $120.3 million income from continuing operations.

That difference was primarily attributable to a $197.7 million net decrease from changes in working capital and other non-current assets and liabilities.

The working capital impact was largely related to a shortening of the customer purchase to redemption cycle relative to year-end 2020 when redemption patterns were more heavily impacted by COVID-19, resulting in higher merchant payment outflows for the year.

The difference between our net cash used in operating activities and our net income from continuing operations is also due to $46.6 million of non-cash items, including $95.6 million of changes in fair value of our investments, $50.7 million of changes in our valuation allowance and a $32.3 million foreign currency translation adjustment gain that was reclassified into earnings as a result of the substantial liquidation of our subsidiary in Japan, partially offset by depreciation and amortization and stock-based compensation.

For the year ended December 31, 2020, our net cash used in operating activities from continuing operations was $63.6 million, as compared with our $286.6 million loss from continuing operations.

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The working capital impact was primarily related to the decline of billings, and to a lesser extent seasonal timing of payments to inventory suppliers.

For the year ended December 31, 2018, our net cash provided by operating activities from continuing operations was $190.9 million, as compared with our $2.0 million income from continuing operations.

That difference was primarily attributable to $206.8 million of non-cash items, including depreciation and amortization, and stock-based compensation.

The difference between net cash provided by operating activities and our income from continuing operations due to non-cash items was partially offset by a $17.9 million net decrease from changes in working capital and other assets and liabilities.

The working capital impact was primarily related to the seasonal timing of payments to inventory suppliers and also includes $42.1 million of the payment to IBM related to the settlement of our patent litigation.

Our net cash used in investing activities from continuing operations was $21.3 million , $67.6 million and $136.0 million for the years ended December 31, 2020, 2019 and 2018.

For the year ended December 31, 2020, our net cash used in investing activities from continuing operations included purchases of property and equipment and capitalized software of $48.7 million, which was partially offset by proceeds from the sale of an investment of $31.6 million .

For the year ended December 31, 2019, our net cash used in investing activities from continuing operations included purchases of property and equipment and capitalized software of $67.3 million.

For the year ended December 31, 2018, our net cash used in investing activities from continuing operations included net cash paid for a business acquisition of $58.1 million, purchases of property and equipment and capitalized software of $69.7 million and net cash paid of $18.3 million for acquisitions of intangible assets, including $15.4 million related to the settlement of our IBM patent litigation.

Our net cash provided by financing activities was $176.8 million for the year ended December 31, 2020.

Our net cash used in financing activities was $92.6 million and $84.4 million for the years ended December 31 2019 and 2018.

For the year ended December 31, 2020, net cash provided by financing activities included $200.0 million of borrowings under our revolving credit facility, partially offset by $10.6 million in taxes paid related to net share settlements of stock-based compensation awards and $8.9 million in payments of finance lease obligations.

For the year ended December 31, 2019, net cash used in financing activities included $45.6 million in repurchases of common stock under our share repurchase program, $19.7 million in payments of finance lease obligations and $18.1 million in taxes paid related to net share settlements of stock-based compensation awards.

For the year ended December 31, 2018, net cash used in financing activities included $33.0 million in payments of finance lease obligations, $24.1 million in taxes paid related to net share settlements of stock-based compensation awards, $9.6 million in repurchases of common stock under our share repurchase program and an $8.4 million payment of a financing obligation related to a business acquisition.

In April 2016, we issued convertible notes with an aggregate principal amount of $250.0 million, due April 2022.

We received net proceeds of $243.2 million from the issuance of the Notes.

We have used the proceeds from the Notes for general corporate purposes, including repurchases of shares of our common stock.

Additionally, we entered into note hedge and warrant transactions with certain bank counterparties that are designed to offset, in

part, the potential dilution from conversion of the Notes.

See Item 8, Note 10, Financing Arrangements , for additional information.

The amendment to the revolving credit agreement (the "Amendment" and the revolving credit agreement as amended, the "Amended Credit Agreement") provides for aggregate principal borrowings of up to $225.0 million.

Net cash provided by (used in) investing activities

For the year ended December 31, 2021, our net cash used in investing activities from continuing operations was $45.8 million, which included purchases of property and equipment and capitalized software of $49.6 million, partially offset by proceeds from the sale of an other equity investment of $7.0 million.

For the year ended December 31, 2020, our net cash used in investing activities from continuing operations was $21.3 million, which included purchases of property and equipment and capitalized software of $48.7 million, partially offset by proceeds from the sale of an investment of $31.6 million.

For the year ended December 31, 2019, our net cash used in investing activities from continuing operations was $67.6 million, which included purchases of property and equipment and capitalized software of $67.3 million.

Net cash provided by (used in) financing activities

For the year ended December 31, 2021, our net cash used in financing activities was $183.9 million.

Our net cash used in financing activities included payments of $254.0 million for the repurchase of the Atairos Notes, $100.0 million of repayments of borrowings under our revolving credit facility, $27.4 million related to the purchase of capped call transactions, $19.8 million in taxes paid related to net share settlements of stock-based compensation awards and $7.7 million in cash paid for issuance costs for the 2026 Notes, as discussed below, partially offset by $230.0 million of proceeds received from the issuance of the 2026 Notes.

For the year ended December 31, 2020, our net cash provided by financing activities was $176.8 million, which included $200.0 million of borrowings under our revolving credit facility, partially offset by $10.6 million in taxes paid related to net share settlements of stock-based compensation awards and $8.9 million in payments of finance lease obligations.

For the year ended December 31, 2019, our net cash used in financing activities was $92.6 million, which included $45.6 million in repurchases of common stock under our share repurchase program, $19.7 million in payments of finance lease obligations and $18.1 million in taxes paid related to net share settlements of stock-based compensation awards.

The amendment to the revolving credit agreement (the "First Amendment" and the revolving credit agreement as amended, the "Amended Credit Agreement") provides for aggregate principal borrowings of up to $225.0 million.

As of December 31, 2021, we had $100.0 million of borrowings and $25.8 million of letters of credit outstanding under the Amended Credit Agreement and were in compliance with all covenants.

In July 2020, we entered into an amendment of our Credit Agreement in order to, among other things, provide us operational flexibility and covenant relief through the end of the first quarter 2021 in light of the ongoing impacts of COVID-19 on our business.

We may need to seek additional covenant relief in the future depending on the timing and volatility of the recovery of our business from COVID-19.

In addition, the Amended Credit Agreement matures in May 2024.

If we do not redeem or refinance the Notes at least 91 days prior to their maturity, the maturity date of our Amended Credit Agreement will spring forward to January 2022, subject to certain exceptions.

We continue to evaluate our long-term capital structure, and may need to seek additional financing in the future.

In July 2020, we entered into the First Amendment of our Credit Agreement in order to, among other things, provide us operational flexibility and covenant relief in light of the ongoing impacts of COVID-19 on our business.

In March 2021, we entered into the Second Amendment to, among other things, extend the covenant relief through the fourth quarter 2021.

We voluntarily elected to early terminate this covenant relief as of the third quarter 2021 and are subject to the ordinary course covenants under the Amended Credit Agreement as of the third quarter 2021.

We were in compliance with the applicable covenants as of December 31, 2021.

In the future, these covenants could restrict our ability to access the full capacity of our credit facility or require us to repay amounts borrowed.

In addition, if we are not able to comply with these covenants, we may need to seek additional covenant relief in the future.

In March and April 2021, we also issued convertible senior notes due 2026 (the "2026 Notes") and used a portion of the net proceeds from the 2026 Notes to purchase the capped call transactions and, together with cash on hand, we repurchased the Atairos Notes in May 2021.

See Item 1, Risk Factors and Item 8, Note 8, Financing Arrangements , for additional information.

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We plan to continue to actively manage and optimize our cash balances and liquidity, working capital and operating expenses, although there can be no assurances that we will be able to do so.

In 2020, we took several steps to reduce costs and preserve cash in the near-term as described in Item 8, Note 3, COVID-19 Pandemic .

As of December 31, 2020, we had $267.5 million in cash held by our international subsidiaries, which is primarily denominated in Euros, British Pounds Sterling, Canadian dollars, and, to a lesser extent, Australian dollars and Japanese yen.

As of December 31, 2021, we had $66.6 million in cash held by our international subsidiaries, which is primarily denominated in Euros, British Pounds Sterling, Canadian dollars, and, to a lesser extent, Australian dollars.

In general, it is our practice and intention to re-invest the earnings of our non-U.S.

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We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business.

In May 2018, the Board of Directors authorized us to repurchase up to $300.0 million of our common stock under our share repurchase program.

In May 2018, the Board authorized us to repurchase up to $300.0 million of our common stock under our share repurchase program.

As of December 31, 2021, up to $245.0 million of common stock remained available for purchase under our program.

The timing and amount of share repurchases, if any, will be determined based on market conditions, limitations under the Amended Credit Agreement, share price, available cash and other factors, and the program may be terminated at any time.

Repurchases will be made in compliance with SEC rules and other legal requirements and may be made, in part, under a Rule 10b5-1 plan, which permits share repurchases when we might otherwise be precluded from doing so.

Contractual Obligations and Commitments

The following table summarizes (in thousands) our future contractual obligations and commitments as of December 31, 2020.

The table below excludes $25.6 million of non-current liabilities for unrecognized tax benefits, including interest and penalties, as of December 31, 2020.

We cannot make a reasonable estimate of the period of cash settlement for the tax positions classified as non-current liabilities.

Payments due by period

Total 2021 2022 2023 2024 2025 Thereafter

Finance lease obligations (1)

$ 5,444 $ 4,717 $ 715 $ 12 $ — $ — $ —

Operating lease obligations (2)

138,641 38,690 35,451 27,025 19,599 16,175 1,701

Convertible senior notes (3)

266,250 8,125 258,125 — — — —

Purchase obligations (4)

82,567 27,365 27,452 27,730 20 — —

Total $ 492,902 $ 78,897 $ 321,743 $ 54,767 $ 19,619 $ 16,175 $ 1,701

(1) Finance lease obligations include both principal and interest components of future minimum finance lease payments.

(2) Operating lease obligations are primarily for office facilities and are noncancelable.

Certain leases contain periodic rent escalation adjustments and renewal and expansion options.

Operating lease obligations expire at various dates with the latest maturity in 2027.

(3) Represents the principal amount and related interest on our convertible senior notes.

(4) Purchase obligations primarily represent noncancelable contractual obligations related to cloud computing and other information technology services.

For additional information on our commitments for other financing arrangements, future lease payments and purchase obligations, see Item 8, Note 8, Financing Arrangements, Note 9, Leases and Note 10, Commitments and Contingencies for additional information.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2021.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S.

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Actual results may differ from those estimates under different assumptions or conditions.

We believe that the estimates and assumptions related to revenue recognition, lease recognition and measurement, impairment assessments of goodwill and long-lived assets, income taxes and fair value option investments have the greatest potential impact on our consolidated financial statements.

Therefore, we consider these to be our critical accounting policies and estimates.

We believe that the estimates and assumptions related to revenue recognition, impairment assessments, income taxes and fair value option investments have the greatest potential impact on our consolidated financial statements.

Therefore, we consider these to be our critical accounting estimates.

Revenue Recognition

See Item 8, Note 2, Summary of Significant Accounting Policies and Item 8, Note 15, Revenue Recognition , for information about our revenue recognition accounting policies, including estimates of our refund liabilities and estimates of variable consideration from unredeemed vouchers.

See Item 8, Note 2, Summary of Significant Accounting Policies for information about our lease recognition and measurement accounting policies.

Impairment Assessments of Goodwill and Long-Lived Assets

See Item 8, Note 2, Summary of Significant Accounting Policies for information about our accounting policies relating to impairment of goodwill and long-lived assets.

Additional information about those accounting policies and estimates is set forth in the following paragraphs.

We make significant estimates related to revenue recognition including estimates for refund reserve, variable consideration from vouchers that will not ultimately be redeemed, and breakage income from customer credits that are not expected to be used.

We estimate future refunds, voucher redemptions, and customer credit redemptions using historical refund and redemption experience.

We also consider trends, such as changes to our policies or in general economic conditions that may impact customer behavior, when making those estimates.

We reevaluate our estimate as facts and circumstances change.

These estimates rely on judgments regarding future expectations of customer behavior.

While the basis of our estimates is historical data, customer behavior may not always be predictable.

If actual refunds or redemptions differ from our estimates, the effects could be material to the consolidated financial statements.

See Item 8, Note 2, Summary of Significant Accounting Policies and Item 8, Note 13, Revenue Recognition , for information about our revenue recognition accounting policies.

Impairment Assessments

Impairment assessment estimates applies to goodwill, long-lived assets, right-of-use assets and investments.

Goodwill is allocated to our reporting units at the date the goodwill is initially recorded.

We evaluate goodwill for impairment annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable.

We review our long-lived assets, such as property, equipment and software, intangible assets, right-of-use assets and investments for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

Significant judgment and estimates are required when determining the fair value of these assets for impairment tests.

When determining fair values in impairment tests, we use one of the following recognized valuation methods:

the income approach (including discounted cash flows), the market approach and the cost approach.

Our significant estimates in those fair value measurements include identifying business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and earnings multiples.

the income approach (including discounted cash flows), the market approach or the cost approach.

Our significant estimates in those fair value measurements may include identifying business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and earnings multiples.

Further, when measuring fair value based on discounted cash flows, we make assumptions about risk-adjusted discount rates;

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However, such assumptions are inherently uncertain and actual results could differ from those estimates.

During the first quarter 2020, we determined a triggering event occurred that required us to evaluate our goodwill and long-lived assets for impairment, and we recorded impairment charges as a result of that assessment.

During the third quarter 2020, we exited our operations in Japan and New Zealand, which represents the majority of the countries in our Asia Pacific reporting unit.

As a result, we combined the remainder of the Asia Pacific reporting unit and the EMEA reporting unit into a single International reporting unit, consistent with how management reviews the operating results of the business.

Our two reporting units as of our October 1, 2020 annual goodwill impairment test were North America and International.

See Item 8, Note 4, Property, Equipment and Software, Net, Note 5, Goodwill and Other Intangible Assets, Note 6, Investments and Note 9, Leases for more information about our impairment assessments.

Future changes in our assumptions or the interrelationship of the assumptions described above may negatively impact future valuations.

In future measurements of fair value, adverse changes in assumptions could result in impairments of goodwill or long-lived assets that would require non-cash charges to the consolidated statements of operations and may have a material effect on our financial condition and operating results.

See Item 8, Note 2, Summary of Significant Accounting Policies for information about our accounting policies relating to impairment of goodwill and long-lived assets.

We account for income taxes using the asset and liability method and assess whether it is more likely than not that the deferred tax assets will be realized.

We are also subject to taxation in the United States, various states and foreign jurisdictions.

Significant judgment is required in determining the worldwide provision for income taxes and recording the related income tax assets and liabilities.

To assess whether it is more likely than not that deferred tax assets will be realized and whether a valuation allowance needs to be recorded against them, we consider the following four sources of taxable income for each tax jurisdiction:

(a) future reversals of existing taxable temporary differences, (b) projected future earnings, (c) taxable income in carryback years, and (d) tax planning strategies.

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain.

For example, our effective tax rate could be adversely affected by earnings being lower than anticipated in countries where it has lower statutory rates and higher than anticipated in countries where it has higher statutory rates, by changes in foreign currency exchange rates, by changes in the valuation of deferred tax assets and liabilities, by changes in the measurement of uncertain tax positions, by changes affecting transfer pricing or by changes in the relevant laws, regulations, principles and interpretations.

See Item 8, Note 2, Summary of Significant Accounting Policies , and Note 15, Income Taxes , for information about our income tax accounting policies.

Fair Value Option Investments

See Item 8, Note 8, Investments , for information about the fair value measurements of our fair value option investments.

Estimating the fair values of our investments requires significant judgment regarding the assumptions that market participants would use in pricing those assets.

We have investments in common stock or in-substance common stock for which we have the ability to exercise significant influence and we have made an irrevocable election to account for those investments at fair value.

Estimating the fair values of our investments requires significant judgment regarding of the assumptions that market participants would use in pricing those assets.

As the fair value measurements involve significant unobservable inputs, such as cash flow projections and discount rates, they are classified as Level 3 within the fair value hierarchy.

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Our election to apply fair value accounting to those investments has and may continue to cause fluctuations in our earnings from period to period.

See Item 8, Note 6, Investments , for information about the fair value measurements of our fair value option investments.

Recently Issued Accounting Standards

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis