Groupon, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under Part II, Item 1A, Risk Factors , and elsewhere in this Quarterly Report. See Part I , Forward-Looking Statements, for additional information. Overview Groupon is a global scaled two-sided marketplace that connects consumers to merchants. Consumers access our marketplace through our mobile applications and our websites. We operate in two segments, North America and International, and operate in three categories, Local, Goods and Travel. See Item 1, Note 13, Segment Information, for additional information. Our strategy is to be the trusted local marketplace where customers go to buy local services and experiences. We plan to unlock value by improving our expense structure and offering more differentiated inventory. To improve our expense structure, we plan to streamline our technology platform and operating processes throughout the organization. To differentiate our inventory, we plan to expand our inventory in two innovative ways: uniquely curated inventory collections and a standalone marketplace experience for premium Beauty & Wellness experiences. Currently, we generate service revenue from Local, Travel, and Goods categories. Service revenue primarily represents the net commissions earned from selling goods or services on behalf of third-party merchants. 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. We also earn commissions when customers make purchases with retailers using digital coupons accessed through our websites and mobile applications. In prior periods , we also generated product revenue from sales of our first-party Goods merchandise inventory. For product revenue transactions, we were the primary party responsible for providing the merchandise to the customer, we had inventory risk and we had discretion in establishing prices. As such, product revenue was reported on a gross basis as the purchase price received from the customer. Product revenue, including associated shipping revenue, was recognized when the merchandise was delivered to the customer. We completed the transition to a third-party marketplace in North America in 2020, and in International in 2021. COVID-19 Since March 2020, the COVID-19 pandemic has led to a significant decrease in consumer demand and active customers, a decrease in customer redemptions and elevated refund levels due to changes in consumer behavior and protective measures taken to control the spread of COVID-19. The COVID-19 pandemic has had an adverse impact on our financial condition, results of operations and cash flows, which has included impairments of our goodwill and long-lived assets. 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. The future impact of COVID-19 on our business, results of operations, financial condition and liquidity is highly uncertain and will ultimately depend on future developments and our ability to respond to the changing environment, including the magnitude and duration of the pandemic and the protective measures taken to reduce its spread. How We Measure Our Business 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 24 reported in accordance with U.S. GAAP and certain of those metrics are considered non-GAAP financial measures. As our business evolves, we may make changes to the key financial and operating metrics that we use to measure our business. For further information and reconciliations to the most applicable financial measures under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the Results of Operations section. Operating Metrics • Gross billings is the total dollar value of customer purchases of goods and services. Gross billings is presented net of customer refunds, order discounts and sales and related taxes. The substantial majority of our service revenue transactions are comprised of sales of vouchers and similar transactions in which we collect the transaction price from the customer and remit a portion of the transaction price to the third-party merchant who will provide the related goods or services. For these transactions, gross billings differs from revenue reported in our condensed consolidated statements of operations, which is presented net of the merchant's share of the transaction price. As noted above in Overview , beginning in 2021 for our North America segment and 2022 for our International segment, gross billings from our Goods category is primarily reported on a net basis within service revenue. 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. • 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 or 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 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. We consider this metric to be an important indicator of our business performance as it helps us to understand how the number of customers actively purchasing our offerings is trending. Some customers could establish and make purchases from more than one account, so it is possible that our active customer metric may count certain customers more than once in a given period. 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 and units for the three months ended March 31, 2022 and 2021 were as follows (in thousands): Three Months Ended March 31, 2022 2021 Gross billings $ 460,684 $ 553,972 Units 12,666 17,803 Our active customers for the trailing twelve months ended March 31, 2022 and 2021 were as follows (in thousands): Trailing Twelve Months Ended March 31, 2022 2021 TTM Active Customers (in thousands) 22,159 25,754 25 Financial Metrics • Revenue is currently earned through service revenue transactions 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 also includes commissions we earn when customers make purchases with retailers using digital coupons accessed through our digital properties. In prior periods, we generated product revenue from our sales of first-party Goods inventory. Our historical product revenue from these first-party transactions, which were direct sales of merchandise inventory, was the purchase price received from the customer. As noted above in Overview , beginning in 2021 for our North America segment and 2022 for our International segment, revenue from our Goods category is primarily reported on a net basis within service revenue. • Gross profit reflects the net margin we earn after deducting our cost of revenue from our revenue. In prior periods for our International segment, there is a lack of comparability between product revenue, which is reported on a gross basis, and service revenue, which primarily consists of transactions reported on a net basis. Due to the lack of comparability of revenue generated from our Goods category in prior periods, we believe that gross profit is an important measure for evaluating our performance. • Adjusted EBITDA is a non-GAAP financial measure that we define as net income (loss) from continuing operations excluding income taxes, interest and other non-operating items, depreciation and amortization, stock-based compensation, acquisition-related expense (benefit), net and other special charges and credits, including items that are unusual in nature or infrequently occurring. For further information and a reconciliation to net income (loss) from continuing operations, refer to our discussion under Non-GAAP Financial Measures in the Results of Operations section. • Free cash flow is a non-GAAP financial measure that comprises net cash provided by (used in) operating activities from continuing operations less purchases of property and equipment and capitalized software. For further information and a reconciliation to Net cash provided by (used in) operating activities from continuing operations, refer to our discussion in the Liquidity and Capital Resources section. The following table presents the above financial metrics for the three months ended March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Revenue $ 153,320 $ 263,817 Gross profit 134,001 166,983 Adjusted EBITDA (6,960) 30,372 Free cash flow (91,165) (58,445) 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. Additionally, compensation expense for marketing employees is classified within marketing expense. We record these costs within Marketing on the condensed consolidated statements of operations when incurred. From time to time, we 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. We evaluate marketing expense as a percentage of gross profit because it gives us an indication of how well our marketing spend is driving gross profit performance. • Selling, general and administrative ("SG&A") expenses include selling expenses such as sales commissions and other compensation expenses for sales representatives, as well as costs associated with supporting the sales function such as technology, telecommunications and travel. General and 26 administrative expenses include compensation expense for employees involved in customer service, operations, technology and product development, as well as general corporate functions, such as finance, legal and human resources. Additional costs in general and administrative include depreciation and amortization, rent, professional fees, litigation costs, travel and entertainment, recruiting, office supplies, maintenance, certain technology costs and other general corporate costs. We evaluate SG&A expense as a percentage of gross profit because it gives us an indication of our operating efficiency. • Restructuring and related charges represent severance and benefit costs for workforce reductions, impairments and other facilities-related costs and professional advisory fees. See Item 1, Note 9, Restructuring and Related Charges , for additional information about our restructuring plan. Factors Affecting Our Performance Impact of COVID-19 . 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 various 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 markets where strict restrictions remain in place. 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 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 marketplace offering. Driving purchase frequency and re-engaging and retaining customers . 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. 27 Results of Operations North America Operating Metrics North America segment gross billings and units for the three months ended March 31, 2022 and 2021 were as follows (dollars in thousands): Three Months Ended March 31, 2022 2021 % Change Gross billings Service gross billings: Local $ 249,290 $ 281,296 (11.4) % Goods 36,608 69,142 (47.1) Travel 24,014 31,460 (23.7) Total service gross billings 309,912 381,898 (18.8) Product gross billings - Goods — 626 (100.0) Total gross billings $ 309,912 $ 382,524 (19.0) Units Local 6,181 8,266 (25.2) % Goods 1,450 3,081 (52.9) Travel 123 193 (36.3) Total units 7,754 11,540 (32.8) North America TTM active customers for the trailing twelve months ended March 31, 2022 and 2021 were as follows (in thousands): Trailing Twelve Months Ended March 31, 2022 2021 % Change TTM Active customers 13,991 15,204 (8.0) % Comparison of the Three Months Ended March 31, 2022 and 2021: North America gross billings, units, and TTM active customers decreased by $72.6 million, 3.8 million and 1.2 million for the three months ended March 31, 2022 compared with the prior year period. These declines were primarily attributable to a decrease in consumer demand in our Goods category and a decrease in consumer demand due to the new variant of COVID-19 in our Local category. 28 Financial Metrics North America segment revenue, cost of revenue and gross profit for the three months ended March 31, 2022 and 2021 were as follows (dollars in thousands): Three Months Ended March 31, 2022 2021 % Change Revenue Service revenue Local $ 96,921 $ 125,374 (22.7) % Goods 8,294 15,285 (45.7) Travel 4,949 5,959 (16.9) Total service revenue 110,164 146,618 (24.9) Product revenue - Goods — 626 (100.0) Total revenue $ 110,164 $ 147,244 (25.2) Cost of revenue Service cost of revenue Local $ 13,163 $ 12,948 1.7 % Goods 1,459 2,229 (34.5) Travel 1,295 1,241 4.4 Total service cost of revenue 15,917 16,418 (3.1) Product cost of revenue - Goods — 458 (100.0) Total cost of revenue $ 15,917 $ 16,876 (5.7) Gross profit Service gross profit Local $ 83,758 $ 112,426 (25.5) % Goods 6,835 13,056 (47.6) Travel 3,654 4,718 (22.6) Total service gross profit 94,247 130,200 (27.6) Product gross profit - Goods — 168 (100.0) Total gross profit $ 94,247 $ 130,368 (27.7) Service margin (1) 35.5 % 38.4 % % of Consolidated revenue 71.9 % 55.8 % % of Consolidated cost of revenue 82.4 17.4 % of Consolidated gross profit 70.3 78.1 (1) Represents the percentage of service gross billings that we retained after deducting the merchant's share from revenue. Comparison of the Three Months Ended March 31, 2022 and 2021: North America revenue, cost of revenue and gross profit decreased by $37.1 million, $1.0 million and $36.1 million for the three months ended March 31, 2022 compared with the prior year period. The revenue and gross profit declines were primarily attributable to lower Local and Goods gross billings. 29 Marketing and Contribution Profit We define contribution profit as gross profit less marketing expense. North America contribution profit for the three months ended March 31, 2022 and 2021 was as follows (dollars in thousands): Three Months Ended March 31, 2022 2021 % Change Marketing $ 27,991 $ 22,768 22.9 % % of Gross profit 29.7 % 17.5 % Contribution profit $ 66,256 $ 107,600 (38.4) % Comparison of the Three Months Ended March 31, 2022 and 2021: North America marketing expense and marketing expense as a percentage of gross profit increased for the three months ended March 31, 2022 compared with the prior year period driven primarily by increased investment in an effort to drive both consumer awareness and demand. North America contribution profit decreased for the three months ended March 31, 2022 compared with the prior year period primarily due to a decrease in gross profit and higher marketing expense. International Operating Metrics International segment gross billings and units for the three months ended March 31, 2022 and 2021 were as follows (in thousands): Three Months Ended March 31, 2022 2021 % Change Gross billings Service gross billings: Local $ 99,660 $ 69,674 43.0 % Goods 35,350 7,748 NM Travel 15,762 3,459 NM Total service gross billings 150,772 80,881 86.4 Product gross billings - Goods — 90,567 (100.0) Total gross billings $ 150,772 $ 171,448 (12.1) Units Local 3,329 2,091 59.2 % Goods 1,471 4,121 (64.3) Travel 112 51 119.6 Total units 4,912 6,263 (21.6) International TTM active customers for the trailing twelve months ended March 31, 2022 and 2021 were as follows (in thousands): Trailing Twelve Months Ended March 31, 2022 2021 % Change TTM Active customers 8,168 10,550 (22.6) % Comparison of the Three Months Ended March 31, 2022 and 2021: International gross billings, units and TTM active customers decreased by $20.7 million, 1.4 million and 2.4 million for the three months ended March 31, 2022 compared with the prior year period. These declines were primarily attributable to a de-emphasis on our Goods category, partially offset by higher demand in our Local 30 category and improved customer refund levels. In addition, there was a $9.3 million unfavorable impact from year-over-year changes in foreign currency exchange rates. Financial Metrics International segment revenue, cost of revenue and gross profit for the three months ended March 31, 2022 and 2021 were as follows (dollars in thousands): Three Months Ended March 31, 2022 2021 % Change Revenue Service revenue: Local $ 33,150 $ 23,189 43.0 % Goods 6,779 1,970 NM Travel 3,227 847 NM Total service revenue 43,156 26,006 65.9 Product revenue - Goods — 90,567 (100.0) Total revenue $ 43,156 $ 116,573 (63.0) Cost of revenue Service cost of revenue: Local $ 2,596 $ 1,762 47.3 % Goods 396 111 NM Travel 410 134 NM Total service cost of revenue 3,402 2,007 69.5 Product cost of revenue - Goods — 77,951 (100.0) Total cost of revenue $ 3,402 $ 79,958 (95.7) Gross profit Service gross profit: Local $ 30,554 $ 21,427 42.6 % Goods 6,383 1,859 NM Travel 2,817 713 NM Total service gross profit 39,754 23,999 65.6 Product gross profit - Goods — 12,616 (100.0) Total gross profit $ 39,754 $ 36,615 8.6 Service margin (1) 28.6 % 32.2 % % of Consolidated revenue 28.1 % 44.2 % % of Consolidated cost of revenue 17.6 82.6 % of Consolidated gross profit 29.7 21.9 (1) Represents the percentage of service gross billings that we retained after deducting the merchant's share from revenue. Comparison of the Three Months Ended March 31, 2022 and 2021 International revenue and cost of revenue decreased by $73.4 million and $76.6 million for the three months ended March 31, 2022 compared with the prior year period. Those decreases were primarily due to the transition of Goods to a third-party marketplace model. This decline was partially offset by an increase Local gross billings and improved customer refund levels. Revenue also had an unfavorable impact of $2.6 million from year-over-year changes in foreign currency exchange rates. International gross profit increased by $3.1 million for the three months ended March 31, 2022 compared with the prior year period primarily driven by an increase in Local gross billings and improved customer refund levels, partially offset by lower Goods gross billings. 31 Marketing and Contribution Profit International marketing and contribution profit for the three months ended March 31, 2022 and 2021 were as follows (dollars in thousands): Three Months Ended March 31, 2022 2021 % Change Marketing $ 11,425 $ 10,898 4.8 % % of Gross profit 28.7 % 29.8 % Contribution profit $ 28,329 $ 25,717 10.2 % Comparison of the Three Months Ended March 31, 2022 and 2021: International marketing expense increased for the three months ended March 31, 2022 compared with the prior year period primarily due to an increase in investment in an effort to drive both consumer awareness and demand. Marketing expense as a percentage of gross profit remained largely flat. The increase in International contribution profit for the three months ended March 31, 2022 compared with the prior year period was primarily attributable to a $3.1 million increase in gross profit as described above, partially offset by higher marketing expense. Consolidated Operating Expenses Operating expenses for the three months ended March 31, 2022 and 2021 were as follows (dollars in thousands): Three Months Ended March 31, 2022 2021 % Change Marketing $ 39,416 $ 33,666 17.1 % Selling, general and administrative 126,420 127,143 (0.6) Restructuring and related charges 312 7,422 (95.8) Total operating expenses $ 166,148 $ 168,231 (1.2) % of Gross profit: Marketing 29.4 % 20.2 % Selling, general and administrative 94.3 % 76.1 % Comparison of the Three Months Ended March 31, 2022 and 2021: Marketing expense and marketing expense as a percentage of gross profit increased for the three months ended March 31, 2022 compared with the prior year period due to an increase in investment in an effort to drive both consumer awareness and demand. SG&A remained largely flat and SG&A as a percentage of gross profit increased for the three months ended March 31, 2022 compared with the prior year. SG&A as a percentage of gross profit increased primarily due to consolidated gross profit decreasing, as discussed above. Restructuring and related charges decreased for the three months ended March 31, 2022 compared with the prior year period as the actions from our restructuring plan were substantially completed by December 31, 2021. See Item 1, Note 9, Restructuring and Related Charges , for additional information. 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. 32 Other income (expense), net for the three months ended March 31, 2022 and 2021 was as follows (dollars in thousands): Three Months Ended March 31, 2022 2021 Other income (expense), net $ (4,880) $ 18,123 Comparison of the Three Months Ended March 31, 2022 and 2021: The change in Other income (expense), net for the three months ended March 31, 2022 as compared with the prior year period is primarily related to a $25.4 million change in foreign currency gains and losses. Consolidated Provision (Benefit) for Income Taxes Provision (benefit) for income taxes for the three months ended March 31, 2022 and 2021 was as follows (dollars in thousands): Three Months Ended March 31, 2022 2021 % Change Provision (benefit) for income taxes $ (2,675) $ 2,427 NM Effective tax rate 7.2 % 14.4 % Comparison of the Three Months Ended March 31, 2022 and 2021: The effective tax rates for the three months ended March 31, 2022 and 2021 were impacted by pretax losses incurred in jurisdictions that have valuation allowances against their net deferred tax assets. The three months ended March 31, 2021 were also impacted by the benefit of non-taxable items and the U.S. research and development tax credit. For the three months ended March 31, 2021, we had a full valuation recorded against the U.S. federal and state deferred tax assets. We recorded a partial valuation allowance release in Q4 2021. For the three months ended March 31, 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. See Item 1, Note 10, 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. 33 Non-GAAP Financial Measures In addition to financial results reported in accordance with U.S. GAAP, we have provided the following non-GAAP financial measures: Adjusted EBITDA, free cash flow and foreign currency exchange rate neutral operating results. Those non-GAAP financial measures, which are presented on a continuing operations basis, are intended to aid investors in better understanding our current financial performance and prospects for the future as seen through the eyes of management. We believe that those non-GAAP financial measures facilitate comparisons with our historical results and with the results of peer companies who present similar measures (although other companies may define non-GAAP measures differently than we define them, even when similar terms are used to identify such measures). However, those non-GAAP financial measures are not intended to be a substitute for those reported in accordance with U.S. GAAP. Adjusted EBITDA . Adjusted EBITDA is a non-GAAP performance measure that we define as Income (loss) from continuing operations excluding income taxes, interest and other non-operating items, depreciation and amortization, stock-based compensation and other special charges and credits, including items that are unusual in nature or infrequently occurring. Our definition of Adjusted EBITDA may differ from similar measures used by other companies, even when similar terms are used to identify such measures. Adjusted EBITDA is a key measure used by our management and Board of Directors to evaluate operating performance, generate future operating plans and make strategic decisions for the allocation of capital. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. However, Adjusted EBITDA is not intended to be a substitute for Income (loss) from continuing operations. We exclude stock-based compensation expense and depreciation and amortization because they are primarily non-cash in nature and we believe that non-GAAP financial measures excluding those items provide meaningful supplemental information about our operating performance and liquidity. For the three months ended March 31, 2022 and 2021, special charges and credits included charges related to our restructuring plan. 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. The following is a reconciliation of Adjusted EBITDA to the most comparable U.S. GAAP financial measure, Net income (loss), for the three months ended March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Net income (loss) $ (34,352) $ 14,448 Adjustments: Stock-based compensation 7,506 7,179 Depreciation and amortization 17,369 17,019 Restructuring and related charges 312 7,422 Other (income) expense, net (1) 4,880 (18,123) Provision (benefit) for income taxes (2,675) 2,427 Total adjustments 27,392 15,924 Adjusted EBITDA $ (6,960) $ 30,372 (1) Includes a $32.2 million cumulative foreign currency translation adjustment gain that was reclassified into earnings for the three months ended March 31, 2021 as a result of the substantial liquidation of our subsidiary in Japan as part of our restructuring actions. Refer to Item 1, Note 9, Restructuring and Related Charges. Free cash flow . Free cash flow is a non-GAAP liquidity measure that comprises net cash provided by operating activities from continuing operations less purchases of property and equipment and capitalized software. We use free cash flow to conduct and evaluate our business because, although it is similar to cash flow from continuing operations, we believe that it typically represents a more useful measure of cash flows because purchases of fixed assets, software developed for internal use and website development costs are necessary components of our ongoing operations. Free cash flow is not intended to represent the total increase or decrease in our cash balance for the applicable period. 34 Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. In addition, free cash flow reflects the impact of the timing difference between when we are paid by customers and when we pay merchants and suppliers. Therefore, we believe it is important to view free cash flow as a complement to our condensed consolidated statements of cash flows. For a reconciliation of free cash flow to the most comparable U.S. GAAP financial measure, see Liquidity and Capital Resources below. Foreign currency exchange rate neutral operating results . Foreign currency exchange rate neutral operating results show current period operating results as if foreign currency exchange rates had remained the same as those in effect in the prior year period. Those measures are intended to facilitate comparisons to our historical performance. The following table represents the effect on our condensed consolidated statements of operations from changes in exchange rates versus the U.S. dollar for the three months ended March 31, 2022 (in thousands): Three Months Ended March 31, 2022 At Avg. Q1 2021 Rates (1) Exchange Rate Effect (2) As Reported Gross billings $ 470,014 $ (9,330) $ 460,684 Revenue 155,965 (2,645) 153,320 Cost of revenue 19,531 (212) 19,319 Gross profit 136,434 (2,433) 134,001 Marketing 40,189 (773) 39,416 Selling, general and administrative 129,442 (3,022) 126,420 Restructuring and related charges 289 23 312 Income (loss) from operations (33,486) 1,339 (32,147) (1) Represents the financial statement balances that would have resulted had exchange rates in the reporting period been the same as those in effect in the prior year period. (2) Represents the increase or decrease in the reported amount resulting from changes in exchange rates from those in effect in the prior year period. Liquidity and Capital Resources 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 March 31, 2022, cash and cash equivalents, including outstanding borrowings under the Amended Credit Agreement, were $403.0 million. Our net cash flows from operating, investing and financing activities from continuing operations for the three months ended March 31, 2022 and 2021 were as follows (in thousands): Three Months Ended March 31, 2022 2021 Cash provided by (used in): Operating activities $ (78,164) $ (46,405) Investing activities (13,916) (12,744) Financing activities (2,964) 62,618 Our free cash flow for the three months ended March 31, 2022 and 2021 and a reconciliation to the most comparable U.S. GAAP financial measure, Net cash provided by (used in) operating activities from continuing operations, for those periods were as follows (in thousands): Three Months Ended March 31, 2022 2021 Net cash provided by (used in) operating activities from continuing operations $ (78,164) $ (46,405) Purchases of property and equipment and capitalized software (13,001) (12,040) Free cash flow $ (91,165) $ (58,445) 35 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. 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 three months ended March 31, 2022, our net cash used in operating activities was $78.2 million, as compared with $34.4 million net loss. That difference is primarily attributable to a $68.7 million net decrease from changes in working capital, which was primarily related to seasonal timing of payments to merchants and suppliers and the impact of COVID-19 of lower cash inflows from bookings, and other non-current assets and liabilities, partially offset by non-cash items, including depreciation and amortization and stock-based compensation. For the three months ended March 31, 2021, our net cash used in operating activities was $46.4 million, as compared with a $14.4 million net income. That difference is primarily due to a $53.1 million net decrease from changes in working capital and other assets and liabilities. The working capital impact was related to seasonal timing of payments to inventory suppliers and the impact of COVID-19. The difference between our net cash used in operating activities and our net income from continuing operations is also due to $7.7 million of non-cash items, including a $32.2 million foreign currency translation gain that was reclassified into earnings due to our substantial liquidation of our subsidiary in Japan partially offset by depreciation and amortization and stock-based compensation. Net cash provided by (used in) investing activities For the three months ended March 31, 2022, our net cash used in investing activities was $13.9 million, which included purchases of property and equipment and capitalized software of $13.0 million. For the three months ended March 31, 2021, our net cash used in investing activities was $12.7 million, which included purchases of property and equipment and capitalized software of $12.0 million. Net cash provided by (used in) financing activities For the three months ended March 31, 2022, our net cash used in financing activities was $3.0 million, which included $2.5 million in taxes paid related to net share settlements of stock-based compensation awards. For the three months ended March 31, 2021, our net cash provided by financing activities was $62.6 million. Our net cash provided by financing activities included $200.0 million of proceeds received from the issuance of the 2026 Notes, partially offset by $6.6 million in cash paid for issuance costs for the 2026 Notes and the revolving credit agreement, $23.8 million related to the purchase of capped call transactions, and $100.0 million in payments under our revolving credit agreement. In July 2020, we entered into an amendment to the revolving credit agreement (the "First Amendment") which permanently reduces 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 to the revolving credit agreement (the "Second Amendment" and the revolving credit agreement as amended, the "Amended Credit Agreement") to, amongst other things, permit the issuance of the 2026 Notes and related capped call transactions. We were in compliance with the applicable covenants as of March 31, 2022 based on the borrowings outstanding under our Amended Credit Agreement. However, our access to the full capacity of our Amended Credit Agreement is partially restricted and our liquidity is impacted accordingly. In the future, we may be required to repay amounts borrowed, which could further impact our liquidity. In addition, if we are not able to comply with these covenants, we may need to seek covenant relief in the future. See Item 1, Note 5, Financing Arrangements for additional information. 36 We believe that our cash balances, excluding borrowings under the Amended Credit Agreement, and cash generated from operations will be sufficient to meet our working capital requirements and capital expenditures for at least the next 12 months. 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. As of March 31, 2022, we had $69.7 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. subsidiaries in those operations. We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business. In May 2018, the Board authorized us to repurchase up to $300.0 million of our common stock under our share repurchase program. As of March 31, 2022, $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 share repurchase program may be terminated at any time. Repurchases will be made in compliance with SEC rules and other legal requirements and may be made, in part, under a Rule 10b5-1 plan, which permits share repurchases when we might otherwise be precluded from doing so. 37 Contractual Obligations and Commitments Our contractual obligations and commitments as of March 31, 2022 did not materially change from the amounts set forth in our 2021 Annual Report on Form 10-K. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of March 31, 2022. Significant Accounting Policies and Critical Accounting Estimates The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenue and expenses, and related disclosure of contingent liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our significant accounting policies are discussed in Part II, Item 8, Note 2, Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2021. In addition, refer to the critical accounting estimates under Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021. 38 Recently Issued Accounting Standards There are no accounting standards that have been issued but not yet adopted that are expected to have a material impact on our condensed consolidated financial statements. 39