Groupon, Inc.
Groupon, Inc. (Form: 10-K, Received: 03/30/2012 16:18:32)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the fiscal year ended December 31, 2011
 
 
 
OR
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________              

Commission file number: 1-353335

Groupon, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
27-0903295
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
600 West Chicago Avenue, Suite 620
Chicago, Illinois
 
60654
(Address of principal executive offices)
 
(Zip Code)

312-676-5773
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Class A Common Stock, par value $0.0001
 
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes             No   x  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes             No   x  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   x          No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).         Yes   x              No


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer                          Accelerated filer         

Non-accelerated filer   x   (Do not check if a smaller reporting company)    Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                    Yes         No   x  

As of June 30, 2011, the last business day of the registrant's most recently completed second fiscal quarter, there was no public market for the registrant's Class A common stock. The registrant's Class A common stock began trading on the NASDAQ Global Select Market on November 4, 2011.

As of December 31, 2011, the aggregate market value of Class A and Class B shares of common stock held by non-affiliates of the registrant was $5,444,937,032 based on the number of shares held by non-affiliates as of December 31, 2011 and based on the last reported sale price of the registrant's Class A common stock on December 31, 2011.

As of March 27, 2012, there were 642,435,939 shares of the registrant's Class A Common Stock outstanding and 2,399,976 shares of the registrant's Class B Common Stock outstanding.


DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement relating to the Annual Meeting of Stockholders to be held in 2012, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.








TABLE OF CONTENTS

PART I
Page
Note About Forward-Looking Statements
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
 
 
PART II
 
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters ans Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
 
 
PART III
 
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
 
 
PART IV
 
Item 15. Exhibits, Financial Statement Schedules
______________________________________________________





PART I



FORWARD‑LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations. The words “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “continue” and other similar expressions are intended to identify forward-looking statements. We have based these forward looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations and objectives, and financial needs. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in “Item 1A: Risk Factors” of this Annual Report on Form 10-K, as well as in our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.


ITEM 1: BUSINESS
Overview
Groupon is a local commerce marketplace that connects merchants to consumers by offering goods and services at a discount. Traditionally, local merchants have tried to reach consumers and generate sales through a variety of methods, including the yellow pages, direct mail, newspaper, radio, television and online advertisements, promotions and the occasional guy dancing on a street corner in a gorilla suit. By bringing the brick and mortar world of local commerce onto the Internet, Groupon is creating a new way for local merchant partners to attract customers and sell goods and services. We provide consumers with savings and help them discover what to do, eat, see and buy in the places where they live and work.
We started Groupon in October 2008 and have continued to experience significant growth since inception. We believe the growth of our business over the past year demonstrates the power of our solution and the size of our market opportunity:
We increased our revenue from $172.2 million in the fourth quarter of 2010 to $492.2 million in the fourth quarter of 2011. We generated these revenues from gross billings of $415.3 million for the fourth quarter of 2010 as compared to gross billings of $1,230.9 million for the fourth quarter of 2011.
We expanded from 161 North American markets and 33 countries as of December 31, 2010 to 175 North American markets and 47 countries as of December 31, 2011. Revenue from our International and North American operations was $312.5 million and $179.7 million, respectively, in the fourth quarter of 2011.
We increased the number of active customers, who we define as unique individuals who have purchased Groupons during the trailing twelve months, from 8.9 million as of December 31, 2010 to 33.7 million as of December 31, 2011.
    
    
    

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Each day we email our subscribers discounted offers for goods and services that are targeted by location and personal preferences. Customers also access our deals directly through our websites and mobile applications. A Daily Deal might offer a $20 Groupon that can be redeemed for $40 in value at a restaurant, spa, yoga studio, car wash or other local merchant partner. Customers purchase Groupons from us and redeem them with our merchant partners. Our revenue is the purchase price paid by the customer for the Groupon less an agreed-upon percentage of the purchase price paid to the featured merchant partner, excluding any applicable taxes and net of estimated refunds. Our gross billings represent the gross amounts collected from customers for Groupons sold, excluding any applicable taxes and net of estimated refunds. We consider revenue to be the strongest top-line indication of our growth and business performance as it measures the total value to Groupon of transactions through our marketplace. Gross billings are not equivalent to revenues or any other metric presented in our consolidated financial statements.
Our Business
The following examples illustrate how our marketplace works and the benefits it can provide our merchant partners and consumers.
Wraps, Sandwiches and Salads at Cranberry Café, Philadelphia, Pennsylvania
After investing in different advertising platforms with very limited success and ways to measure a return on her investments, Cranberry Café owner Susan Han found success with Groupon. Cranberry ran Groupon Now! (real-time deals) in July 2011 and eventually ran a traditional Groupon daily deal feature. The revenue of the business increased more than 35 percent in just one quarter and Han estimates that 90 percent of Groupon customers have become repeat clientele. Cranberry Café is also one of the first merchants in the country to use Groupon's entire three-pronged marketing suite: traditional Groupon feature deals, Groupon Now! and Groupon Rewards, a customer retention and loyalty tool.  

Photography Workshop with Chimpsy, Denver, Colorado
Chimpsy co-founders Mark Cafiero and Shaun Worley were looking for a way to increase the visibility of their business and found it through Groupon. Once a small company offering photography workshop classes only in Denver, Chimpsy used Groupon's marketing platform to expand their reach and now offer classes in 30 markets across the country. Approximately 40 additional employees were hired to help support the company's growth.

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One or Two Night Getaway at Smithfield Station, Smithfield, Virginia
Located in a quaint river port town with a rich history, Vice President Randy Pack turned to Groupon Getaways to help bring in new customers and raise the profile of his family's historic hotel, restaurant and marina. After running a number of strategically placed deals through Groupon's travel platform, the waterfront oasis was able to successfully reach its target audience of consumers looking for a quick weekend getaway and living within four hours of the establishment. Pack estimates that 85 percent of the business they generated through Groupon was from first-time customers. In addition, the deals helped to spawn a number of positive online guest reviews.

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Our Opportunity
We have created a marketplace for connecting local merchants to consumers. Although there are many companies that have tried to replicate our approach, we believe that the customer experience and relevance of our deals, our merchant partner and customer scale and quality, our deep experience and knowledge base that we can draw upon to structure deals effectively, and our brand are sustainable competitive advantages.
Customer Experience and Relevance of Deals. We are committed to providing a great customer experience and maintaining the trust of our customers. Consistent with this commitment, our “Groupon Promise” is core to our customer service philosophy:
"We're confident in the businesses we feature on Groupon and back them with the Groupon Promise. If the experience using your Groupon ever lets you down, we'll make it right or return your purchase. Simple as that."

In addition, we use our technology and scale to target relevant deals based on individual customer preferences. As we increase the volume of transactions through our marketplace, we increase the amount of data that we have about deal performance and customer interests. This data allows us to continue to improve our ability to help merchant partners design the most effective deals and deliver deals to customers that better match their interests. We use information about our current and potential customers to select and send deals via email, and our mobile applications and website can also target deals to current and potential customers based on proximity to the sponsoring merchant partner. Increased relevancy enables us to offer several daily deals, which we believe results in increasing purchases by targeted subscribers, thereby driving greater demand for Groupons. We monitor the relevancy of deals by measuring purchasing rates among targeted subscribers.
Merchant Scale and Quality. Our sales force enables us to work with local, national and online merchant partners in

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175 North American markets and 47 countries. We believe that the size of our customer base allows us to attract merchant partners, because ultimately merchant partners want to be able to reach the largest possible audience for their product offerings. We draw on the experience and knowledge we have gained to evaluate prospective merchant partners based on quality, location and relevance to our growing customer base. We maintain a large base of prospective merchant partners interested in our marketplace, which enables us to be more selective and offer our subscribers higher quality deals. Increasing our merchant partner base also increases the number and variety of deals that we offer to customers, which we believe drives higher customer growth and user traffic, and in turn promotes greater merchant interest in offering deals through our marketplace, creating a network effect.
Brand. We believe we have built a trusted and recognizable brand by delivering a compelling value proposition to merchant partners and customers. A benefit of our brand is that a substantial portion of our customers are acquired through word-of-mouth, which we consider sources other than from a paid‑for link to our website. We believe our brand is trusted due to our dedication to our customers and our significant investment in customer satisfaction.
Our Strategy
Our objective is to become an essential part of everyday local commerce for consumers and merchants. Key elements of our strategy include the following:
Grow our subscriber and customer base. We have made significant investments to acquire subscribers through online marketing initiatives, such as search engine marketing, display advertisements, referral programs and affiliate marketing. In addition, our subscriber base has increased by word-of-mouth. We intend to continue to invest in acquiring subscribers so long as we believe the economics of our business support such investments, however we have continued to shift our efforts toward converting subscribers into customers who purchase Groupons. We do so by providing more targeted and real-time deals, delivering high quality customer service and expanding the number and categories of deals we offer. We intend to continue investing in the development of increased relevance of our service as the number and variety of the deals we offer our subscribers increase and we gain more information about our subscribers' interests. Our investment in the growth of our subscriber base and achieving optimal subscriber levels at any given time will be directly linked to the breadth and location of our base of merchant partners. As such, while total subscribers is a key metric to measure our progression over the long term, it is not a key operational metric in the same manner as is our active customer base, which we discuss below.
Grow the number of merchant partners we feature. To drive merchant partner growth, we have expanded the number of ways in which consumers can discover deals through our marketplace. We adjust the number and variety of products we offer merchant partners based on merchant demand in each market. We have also made significant investments in our sales force, which builds merchant partner relationships and local expertise. Our merchant partner retention efforts are focused on providing merchant partners with a positive experience by offering targeted placement of their deals to our subscriber base, high quality customer service and tools to manage deals more effectively. For example, we offer an array of tools for merchant partners, as described under "- Our Merchant Partners" below. We routinely solicit feedback from our merchant partners to ensure their objectives are met and they are satisfied with our services. Based on this feedback, we believe our merchant partners consider the profitability of the immediate deal, potential revenue generated by repeat customers and increased brand awareness for the merchant partner and the resulting revenue stream that brand awareness may generate over time. Some merchant partners view our deals as a marketing expense and may be willing to offer deals with little or no immediate profitability in an effort to gain future customers and increased brand awareness. As our suite of services for merchant partners continues to expand, we are constantly iterating our emphasis on either growing the merchant partner base or deepening our relationship with our existing merchant partner base, informed by a number of variables including category, customer and other market-specific conditions.
Position ourselves to benefit from technological changes that may affect consumer behavior. We believe that, as technological advances continue, particularly with the proliferation of affordable smartphones and tablet computers, the ways in which customers and local merchant partners interact will change significantly. For example, in December 2011, one quarter of all purchases in our North America segment were made through mobile devices. While we cannot predict all of the ways in which these changes will affect consumer behavior in the local marketplace, we believe that we are well positioned to benefit from, and to drive, these changes. We continue to invest heavily in technology, including through acquisitions.
Increase the number and variety of our products through innovation. We have launched a variety of new products in the past 12 months and we plan to continue to launch new products to increase the number of customers and merchant partners that transact business through our marketplace. For example, we launched Groupon Now!, real-time deals that consumers can use in the moment when they're hungry or bored. Groupon Now! enables merchant partners to manage the flow of customers into their business at specific times, such as when their business is slow. In 2011, we also launched Groupon Goods, which

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enables consumers to purchase vouchers for products directly from our website, Groupon Getaways, through which we offer deals on travel, and GrouponLive, through which we offer deals on concert tickets and other live events. As our local commerce marketplace grows, we believe consumers will use Groupon not only as a discovery tool for local merchant partners, but also as an ongoing connection point to their favorite merchants.
Expand with acquisitions and business development partnerships. Historically, the core assets we gained from acquisitions were local management teams and small subscriber and merchant partner bases, to which we then apply our expertise, resources and brand to scale the business. More recently, our focus has shifted to acquiring businesses with technology and technology talent that can help us expand our business. In addition to acquisitions, we have entered into agreements with local partners to expand our international presence. For example, in February 2011, we entered into a partnership with TCH Burgundy Limited, or Tencent, a Chinese Internet company, to operate a Chinese e-commerce website. In addition, in March 2012 we announced a partnership with Deutsche Telekom, pursuant to which our mobile application will be distributed as a standard feature with their smartphone devices throughout Europe. We have also entered into affiliate programs with companies such as eBay, Microsoft, Yahoo and Zynga, pursuant to which these partners display, promote and distribute our deals to their users in exchange for a share of the revenue generated from our deals. We intend to continue to expand our business with acquisitions and business development partnerships.
Marketing
We grow our subscriber and customer base through marketing initiatives and word-of-mouth. Online marketing consists of search engine marketing, display advertisements, referral programs and affiliate marketing and has historically represented our largest operating expense. Our offline marketing programs include traditional television, billboard and radio advertisements, public relations as well as sponsored events to increase our visibility and build our brand.
Since our inception, we have prioritized growth, and investments in our marketing initiatives have contributed to our losses. Our investments in subscriber growth are driven by the cost to acquire a subscriber as compared to the profits we expect to generate from that subscriber over time. Once acquired, subscribers have been relatively inexpensive to maintain because our interaction is largely limited to daily emails and our mobile applications. Over time, as our business continues to grow and we become more established in a greater percentage of our markets, we expect that our marketing expense will decrease as a percentage of revenue. For example, our marketing expense during the fourth quarter of 2011 was $155.3 million, a decrease of 22.7% in absolute dollars compared to the fourth quarter of 2010 and down 8.8% from the third quarter of 2011. In addition, marketing expense as a percentage of revenue was 31.5% in the fourth quarter of 2011, as compared to 39.6% in the third quarter of 2011 and 116.7% in the fourth quarter of 2010.
Our Merchant Partners
To drive merchant partner growth over the long term, we have expanded the number and variety of product offerings available through our marketplace and invested in our sales force. Our sales force includes over 5,000 inside and outside merchant sales representatives who build merchant partner relationships and provide local expertise. Our North American merchant sales representatives are primarily based in our offices in Chicago and our international merchant sales representatives work from our international offices. As of December 31, 2010, we employed 493 North American merchant sales representatives and 2,080 international merchant sales representatives. We have increased our sales force to 1,062 North American merchant sales representatives and 4,134 international sales representatives as of December 31, 2011.
Size of sales force
Mar. 31,
2010
June 30,
2010
Sept. 30,
2010
Dec. 31,
2010
Mar. 31,
2011
June 30,
2011
Sept. 30,
2011
Dec. 31, 2011
North America
128

201

348

493

661

990

1,004

1,062

International

1,080

1,224

2,080

2,895

3,860

3,849

4,134

Total
128

1,281

1,572

2,573

3,556

4,850

4,853

5,196

The number of sales representatives is higher as a percentage of revenue in our International segment due to the need to have separate sales organizations for most of the different countries in which we operate. Due to local economic conditions, however, the average cost of each sales representative is lower in most countries in our International segment as compared to the costs in our North America segment.
In October 2011, we launched Groupon Rewards, which is a free service to our merchant partners that enables their customers to “unlock” special Groupon deals through repeat visits. Consumers earn reward points at participating merchant

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partners by paying with the credit or debit card they have registered with us. Our merchant partners set the amount the consumer must spend to unlock a reward deal, and once a consumer is eligible to unlock a deal, we automatically notify them. Groupon Rewards launched in Philadelphia and has recently expanded to other North American markets.
Our standard contractual arrangements grant us the exclusive right to feature deals for a merchant's products and services for a limited time period and provide us with the discretion as to whether or not to offer the deal during such period.
Our Marketplace
As our operations have grown, we have transitioned from offering deals only through email to having a local commerce marketplace where customers can purchase Groupons for a variety of services and products from local, national and online merchants. This expansion has allowed us to serve more merchant partners each day by segmenting our current and potential customer base, offering more relevant, targeted deals and increasing the rate at which deals are purchased within each segment. We employ an algorithmic approach to deal targeting based on data we collected about our subscribers, merchant partners and deals. We launched our first targeted deals in June 2010 in our largest North American markets. In addition to targeted deals, instead of featuring one deal per city per day, we feature multiple deals per city per day matched to different groups of current and potential customers based on what we know about their personal preferences. We intend to continue to build our international infrastructure to enable us to offer targeted deals worldwide, as targeting increases the number of deals that we can offer across our marketplace.
Featured Daily Deals. We distribute featured daily deals by email on behalf of local merchant partners to subscribers using our targeting technology, which distributes deals to current and potential customers based on their location and personal preferences. Our targeting technology is also used to inform our search engine marketing and other transactional marketing spending that may attract potential customers who have not yet subscribed to our emails. We initially offered one daily deal to all subscribers in a given market but now offer several daily deals in most established markets, with many deals extending beyond the subscriber's closest market or buying preference. We can also target deals only to certain subscribers, where the deal can only be obtained through a hyperlink. Upon clicking the hyperlink, a subscriber is directed to a full description of the deal presented in the same format as the subscriber's featured daily deal. We launched this product in October 2008 and it is offered in all of our North American and international markets.
National Deals. National merchant partners also have used our marketplace as an alternative to traditional marketing and brand advertising. Although our primary focus continues to be on local deals, we use national deals from time to time to build our brand awareness, acquire new customers and generate additional revenue. We have featured deals from over 100 national merchant partners, including The Body Shop, Dominos Pizza, Jamba Juice, Lions Gate, Sony Electronics and Zipcar across our North American markets.
Groupon Now!. Groupon Now! is a deal initiated by a merchant on demand and offered instantly to current and potential customers through mobile devices and our website. Groupon Now! deals target current and potential customers within close proximity of the merchant and the purchased Groupons typically expire within a few hours of the deal launch. Merchants launch Groupon Now! deals from our platform and can use this product to attract customers when they have excess capacity. We launched Groupon Now! in the second quarter of 2011 in 25 North American markets.
Groupon Goods. Groupon Goods enables customers to purchase vouchers for products directly from our website. We email deals for Groupon Goods weekly to subscribers that have opted in to the Goods email list, and we display all Goods offers on our website and mobile applications, where non-subscribers can also access our offers. We have offered deals for a variety of product categories, including electronics, home and garden and toys. Groupon Goods was launched in September 2011 in select North American and International markets.
Groupon Getaways . Groupon Getaways was launched in July 2011. Through Groupon Getaways, we feature personally curated offers from top travel partners, including hotels, airfare and package deals covering both domestic and international travel. We email deals for Groupon Getaways weekly to subscribers that have opted in to the Getaways email list, and we display all Getaways offers on our website and mobile applications, where non-subscribers can also access our offers.
GrouponLive . Launched in May 2011, GrouponLive is a partnership with LiveNation whereby Groupon serves as a local resource for LiveNation events and clients of its global ticketing business, Ticketmaster. GrouponLive is offered as part of our featured daily deals and is available in all of our North American and International markets.
Distribution

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We distribute our deals directly through several platforms: a daily email, our websites, our mobile applications and social networks. We also utilize various online affiliates to display and promote Groupon deals on their websites, as well as agreements with several large online brands to distribute our deals. Our online affiliates include eBay, Microsoft, Yahoo and Zynga. Other partnerships allow us to distribute daily deals to a partner's user base.
In addition, we have partnered with thousands of smaller online affiliates. Affiliates can embed our widget onto their website and earn a commission when their website visitors purchase Groupons through the affiliate link. Our commission rate varies depending on whether the customer is new or existing and the website's overall sales volume. We also offer commissions to affiliates when they refer a customer to Groupon. We expect to continue to leverage affiliate relationships to extend the distribution of our deals.
We also use various customer loyalty and reward programs to build brand loyalty, generate traffic to the website and provide customers with incentives to buy Groupons. When customers perform qualifying acts, such as providing a referral to a new subscriber or participate in certain promotional offers, we grant the customer credits that can be redeemed for awards such as free or discounted goods or services in the future.
Email. The featured daily deal email contains one headline deal with a full description of the deal and often contains links to “More Great Deals Nearby,” all of which are available within a subscriber's market. A subscriber who clicks on a deal within the daily email is directed to our website to learn more about the deal and to purchase the Groupon.
Websites. Visitors are prompted to register as a subscriber when they first visit our website and thereafter use the website as a portal for our daily deals, including deals in the Now! Goods, Getaways, Live and categories. Our website also provides opportunities to engage with the Groupon community through the GrouBLOGpon, a blog maintained by our employees, Groupon Meetups, a forum for meeting with others to redeem Groupons at a particular location, Groupon Flickr, a collection of digital photos from subscribers, and rewards programs for referring new subscribers, such as our offer of $10 in Groupon Bucks to subscribers who refer someone who later buys a Groupon.
Mobile Applications. Consumers can also access our deals through our mobile applications, which are available at no additional cost on the iPhone, Android, Blackberry and Windows mobile operating systems. We launched our first mobile application in March 2010 and our applications have been downloaded over 26 million times since then. These applications enable consumers to browse, purchase, manage and redeem deals on their mobile devices as well as access Groupon Now! deals that are offered based on the location of the mobile user.
Social Networks. We publish our daily deals through various social networks, and our notifications are adapted to the particular format of each of these social networking platforms. Our website and mobile application interfaces enable our consumers to push notifications of our deals to their personal social networks. To date, social networks are not a material portion of our customer acquisition.
Operations
Our business operations are divided into the following core functions to address the needs of our merchant partners and customers.
City Planners. Our city planners identify merchant leads and manage deal scheduling to maximize deal quality and variety within our markets. In identifying leads, city planners rank local merchant partners based on reviews, local feedback and other data. In certain cases, city planners submit requests to merchant services representatives for certain deals based on a scoring system that considers past performance of similar deals, quality of merchant partner reviews, number of redemption locations and the postal code of the merchant partner. In scheduling deals, city planners review the inventory of deals that have been approved for sale but not yet featured and determine which deals to offer based on the viability of the deal as well as revenue and marketing goals. City planners also work with our sales force to establish sales quotas based on subcategory‑level performance in a particular city, such as addressable market size and scheduling diversity.
Editorial. Our editorial department is responsible for creating editorial content on the daily deals we offer, as well as additional content featured on our website. Each deal that we feature typically goes through several stages to ensure that the deal description meets our standards for accuracy, quality and editorial voice. After offer details are reviewed, our editorial staff verifies the accuracy of the deal and its value through independent research. Once a deal is vetted, our editorial staff drafts a full description of the deal, which is passed through voice editing and copy editing before being launched.
Merchant Services. Once a contract is signed, one of our merchant services representatives initiates the first of several

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communications with the merchant partner to introduce the merchant partner to the tools that we provide and plan for Groupon redemptions through expiration. Typically, a merchant services representative communicates with merchant partners before, during, and after a daily deal is featured. Before the deal is run, the representative works with the merchant partner to prepare staffing and inventory capacity in anticipation of increased customer traffic. The representative communicates with the merchant partner on the day the deal is featured to review deal performance. After the deal has closed, the representative maintains contact with the merchant partner to support the merchant partner's redemption efforts and to prepare the merchant partner for a potential spike in redemption near expiration. We also offer several merchant tools to help merchant partners manage their deals. These tools include status updates on deal performance, analytics that measure purchase traffic and demographic information of purchasers, a capacity calculator to estimate demand for the deal ahead of its feature date, and a return on investment calculator that estimates the return on investment that the merchant partner may receive from the deal. Each of these tools is accessible through an online account that is personal to the merchant partner and accessed through our website.
Customer Service Representatives. Our customer service representatives can be reached via phone or email 24 hours a day, seven days a week. Our Groupon Promise is core to our customer service philosophy. The customer service team also works with our information technology team to improve the customer experience on the website and mobile applications based on customer feedback.
Technology. We employ technology to improve the experience we offer to subscribers and merchant partners, increase the rate at which our customers purchase Groupons, and enhance the efficiency of our business operations. A component of our strategy is to continue developing and refining our technology.
We currently use a common information technology platform across our North American operations that includes business operations tools to track internal workflow, applications and infrastructure to serve content at scale, dashboards and reporting tools to display operating and financial metrics for historical and ongoing deals, and a publishing and purchasing system for consumers. Over time, we plan to merge our North American information technology platform with our international information technology platforms and we expect this to enable greater efficiencies and consistency across our global organization.
Our websites are hosted at U.S. data centers in Miami, Florida, Dallas, Texas and Santa Clara, California and international data centers in Asia and Europe. Our data centers host our public‑facing websites and applications, as well as our back-end business intelligence systems. We use commercial antivirus, firewall and patch‑management technologies to protect and maintain the systems located at our data centers. We have invested in intrusion detection and pattern detection tools to try to recognize intrusions to our website. We have also engaged a third‑party Internet security provider to test the security of our website and identify vulnerabilities. In financial transactions between our website and our customers, we use Secure Socket Layer to provide encryption in transferring data. We have designed our websites to be available, secure and cost-effective using a variety of proprietary software and freely available and commercially supported tools. We believe we can scale to accommodate increasing numbers of subscribers by adding relatively inexpensive industry‑standard hardware or using a third‑party provider of computing resources.
We devote a substantial portion of our resources to developing new technologies and features and improving our core technologies. Our technology team is focused on the design and development of new features and products, maintenance of our websites and development and maintenance of our internal operations systems.
Competition
Since our inception, a substantial number of competing group buying sites have emerged around the world attempting to replicate our business model, from very small startups to some of the largest companies in the world. Some of our competitors offer deals as an add-on to their core business, and others have adopted a business model similar to ours. As we expand our business into additional categories such as Goods and Getaways, we also compete with online and offline merchant partners offering those same products and services. We also compete with businesses that focus on particular merchant categories or markets. In addition, we compete with traditional offline coupon and discount services, as well as newspapers, magazines and other traditional media companies that provide coupons and discounts on products and services. We believe the principal competitive factors in our market include the following:
breadth of active customer base and merchant partner relationships;
local presence and understanding of local business trends;

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ability to structure deals to generate positive return on investment for merchant partners; and
strength and recognition of our brand.
Although we believe we compete favorably on the factors described above, we anticipate that larger, more established companies may directly compete with us as we continue to demonstrate the viability of a local e-commerce business model. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources and larger customer bases than we do. These factors may allow our competitors to benefit from their existing customer base with lower acquisition costs or to respond more quickly than we can to new or emerging technologies and changes in customer requirements. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to build a larger subscriber base or to monetize that subscriber base more effectively than we do. Our competitors may develop products or services that are similar to our products and services or that achieve greater market acceptance than our products and services. In addition, although we do not believe that merchant payment terms are a principal competitive factor in our market, they may become such a factor and we may be unable to compete effectively on such terms.
Seasonality
We expect that some of our offerings will experience seasonal buying trends mirroring that of the larger consumer market, including in particular an increase in holiday-related spending during the fourth quarter. For example, during the fourth quarter of 2011 we rolled out our second annual Grouponicus seasonal gifting promotion as a way of offering our customers opportunities targeted specifically at holiday-related gifting. We plan to continue to offer additional occasion-themed promotions, such as our Valentine's Day offering that we plan to debut in 2012.
Regulation
We are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet, many of which are still evolving and could be interpreted in ways that could harm our business. In the United States and abroad, laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims. These regulations and laws may involve taxation, tariffs, subscriber privacy, data protection, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services and the characteristics and quality of services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. In addition, it is possible that governments of one or more countries may seek to censor content available on our websites or may even attempt to completely block access to our websites. Accordingly, adverse legal or regulatory developments could substantially harm our business.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "CARD Act"), as well as the laws of most states, contain provisions governing product terms and conditions of gift cards, gift certificates, stored value or pre-paid cards or coupons (“gift cards”), such as provisions prohibiting or limiting the use of expiration dates on gift cards or the amount of fees charged in connection with gift cards or requiring specific disclosures on or in connection with gift cards. Groupons generally are included within the definition of “gift cards” in many of these laws. In addition, certain foreign jurisdictions have laws that govern disclosure and certain product terms and conditions, including restrictions on expiration dates and fees that may apply to Groupons. However, the CARD Act as well as a number of states and certain foreign jurisdictions also have exemptions from the operation of these provisions or otherwise modify the application of these provisions applicable to gift cards that are issued as part of a promotion or promotional program. If Groupons are subject to the CARD Act, and are not included in the exemption for promotional programs, it is possible that the purchase value, which is the amount equal to the price paid for the Groupon, or the promotional value, which is the add-on value of the Groupon in excess of the price paid, or both, may not expire before the later of (i) five years after the date on which the Groupon was issued or the date on which the customer last loaded funds on the Groupon if the Groupon has a reloadable feature; (ii) the Groupon's stated expiration date (if any), unless Groupons come within an exemption in the CARD Act for promotional programs; or (iii) a later date provided by applicable state law. In addition, regardless of whether an exemption for Groupons applies under the CARD Act, in those states that prohibit or otherwise restrict expiration dates on gift cards that are defined to include Groupons and that do not have exemptions that apply to the purchase value or the promotional value, or both, of Groupons, Groupons may be required to be honored for the full offer value (the total of purchase value and promotional value) until redeemed. Our terms of use and agreements with our merchant partners require merchant partners to continue to honor unredeemed Groupons that are past the stated expiration date of the promotional value of the Groupon to the extent required under the applicable law. In addition, in the United States and certain other jurisdictions, the purchase value of the Groupon, which is the amount equal to the purchase

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price that the consumer paid, typically will never expire unless redeemed or refunded. The promotional value of the Groupon will expire on the date stated on the Groupon, unless applicable law prohibits expiration of the promotional value. While we are attempting to comply with exemptions for promotional programs available under these laws so that our Groupons' promotional value can expire on the date stated on the Groupon, we continue to require that merchant partners with whom we partner honor Groupons under the provisions of all laws applicable to Groupons, including laws that prohibit expiration.
We and several of our merchant partners are currently co-defendants in over 16 purported class actions that have been filed in federal and state court claiming that Groupons are subject to the CARD Act and various state laws governing gift cards and that the defendants have violated these laws by issuing Groupons with expiration dates and other restrictions. Plaintiffs seek injunctive relief, restitution, damages and/or disgorgement in unspecified amounts as well as attorneys' fees and costs. Recently, all pending federal court actions have been ordered to be transferred to one federal court under rules governing multidistrict litigation and consolidated for certain pre-trial purposes. While Groupon intends to defend these actions vigorously, the outcome of these actions or the court rulings that they may entail may substantially harm our business.
In addition, some states and foreign jurisdictions also include gift cards under their unclaimed and abandoned property laws which require companies to remit to the government the value of the unredeemed balance on the gift cards after a specified period of time (generally between one and five years) and impose certain reporting and recordkeeping obligations. We do not remit any amounts relating to unredeemed Groupons based upon our assessment of applicable laws. The analysis of the potential application of the unclaimed and abandoned property laws to Groupons is complex, involving an analysis of constitutional and statutory provisions and factual issues, including our relationship with customers and merchant partners and our role as it relates to the issuance and delivery of a Groupon. We are currently subject to several actions claiming that Groupons are subject to various unclaimed and abandoned property laws. In addition, we have received inquiries from the attorneys general of various states regarding the operation of our business under state laws.
Many states have passed laws requiring notification to subscribers when there is a security breach of personal data. There are also a number of legislative proposals pending before the U.S. Congress, various state legislative bodies and foreign governments concerning data protection. In addition, data protection laws in Europe and other jurisdictions outside the United States may be more restrictive, and the interpretation and application of these laws are still uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have an adverse effect on our business. Furthermore, the Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, our liability for linking to third‑party websites that include materials that infringe copyrights or other rights, so long as we comply with the statutory requirements of this act. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
Various federal laws, such as the Bank Secrecy Act and the USA PATRIOT Act, impose certain anti-money laundering requirements on companies that are financial institutions or that provide financial products and services. For these purposes, financial institutions are broadly defined to include money services businesses such as money transmitters, check cashers and sellers or issuers of stored value. Examples of anti-money laundering requirements imposed on financial institutions include customer identification and verification programs, record retention policies and procedures and transaction reporting. We do not believe that we are a financial institution subject to these laws and regulations based, in part, on the characteristics of the Groupons and our role with respect to the distribution of the Groupons to customers. However, the Financial Crimes Enforcement Network, a division of the U.S. Treasury Department tasked with implementing the requirements of the Bank Secrecy Act, recently proposed amendments to the scope and requirements for parties involved in stored value or prepaid access, including a proposed expansion of the definition of financial institution to include sellers or issuers of prepaid access. In the event that this proposal is adopted as proposed, it is possible that a Groupon could be considered a financial product and that we could be a financial institution. In addition, foreign laws and regulations, such as the European Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, impose certain anti‑money laundering requirements on companies that are financial institutions or that provide financial products and services. Although we do not believe we are a financial institution or otherwise subject to these laws and regulations, it is possible that we could be considered a financial institution or provider of financial products.
We are or may be subject to similar laws and regulations in jurisdictions outside of the United States.
Intellectual Property
We protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with third parties.

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     In addition to these contractual arrangements, we also rely on a combination of trade secrets, copyrights, trademarks, service marks, trade dress, domain names and patents to protect our intellectual property.  As of December 31, 2011, we had approximately 250 trademarks registered or pending in approximately 65 countries or regions, including the United States, the European Union, and countries in the South America, Asia‑Pacific, Middle East and Africa regions. Our trademark registration efforts have focused on gaining protection of the following trademarks: GROUPON, the GROUPON logo, GROUPON NOW and other GROUPON‑formative marks. These marks are material to our business as they enable others to easily identify us as the source of the services offered under these marks and are essential to our brand identity. In addition, as of December 31, 2011, we owned a number of issued U.S. patents and have additional pending patent applications.
Circumstances outside our control could pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available in the United States or other countries in which we operate. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Also, protecting our intellectual property rights is costly and time-consuming. Any unauthorized disclosure or use of our intellectual property could make it more expensive to do business and harm our operating results.
Companies in the Internet, social media technology and other industries may own large numbers of patents, copyrights and trademarks and may frequently request license agreements, threaten litigation or file suit against us based on allegations of infringement or other violations of intellectual property rights. We are currently subject to, and expect to face in the future, allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including our competitors and non-practicing entities. As we face increasing competition and as our business grows, we will likely face more claims of infringement.
Employees
As of December 31, 2011, we had 2,689 employees in our North America segment, consisting of 1,062 sales representatives and 1,627 corporate, operational, and customer service representatives, and 8,782 employees in our International segment, consisting of 4,134 sales representatives and 4,648 corporate, operational, and customer service representatives.

Officers
The following table sets forth information about our officers as of December 31, 2011:
Name
 
Age
 
 
 
 
 
Position
 
 
 
 
 
 
 
 
Andrew D. Mason
31
Co-Founder, Chief Executive Officer and Director
Jason E. Child
43
Chief Financial Officer
Joseph M. Del Preto II
36
Chief Accounting Officer
Jason D. Harinstein
36
Senior Vice President-Corporate Development
Jeffrey Holden
43
Senior Vice President-Product Management
David R. Schellhase
48
General Counsel
Brian J. Schipper
51
Senior Vice President-Human Resources
Brian K. Totty
45
Senior Vice President-Engineering and Operations

Andrew D. Mason is a co-founder of the Company and has served as our Chief Executive Officer and a director since our inception. In 2007, Mr. Mason co‑founded ThePoint, a web platform that enables users to promote collective action to support social, educational and civic causes, from which Groupon evolved. Prior to co‑founding ThePoint, Mr. Mason worked as a computer programmer with InnerWorkings, Inc. (NASDAQ: INWK). Mr. Mason received his Bachelor of Arts from Northwestern

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University. Mr. Mason brings to our Board the perspective and experience as one of our founders and as Chief Executive Officer. Mr. Mason was elected to the Board pursuant to voting rights granted to the former holders of our common stock and preferred stock under our voting agreement, which terminated as a result of our initial public offering.
Jason E. Child has served as our Chief Financial Officer since December 2010. From March 1999 through December 2010, Mr. Child held several positions with Amazon.com, Inc. (NASDAQ: AMZN), including Vice President of Finance, International from April 2007 to December 2010, Vice President of Finance, Asia from July 2006 to July 2007, Director of Finance, Amazon Germany from April 2004 to July 2006, Director of Investor Relations from April 2003 to April 2004, Director of Finance, Worldwide Application Software from November 2001 to April 2003, Director of Finance, Marketing and Business Development from November 2000 to November 2001 and Global Controller from October 1999 to November 2000. Prior to joining Amazon.com, Mr. Child spent more than seven years as a C.P.A. and a consulting manager at Arthur Andersen. Mr. Child received his Bachelor of Arts from the Foster School of Business at the University of Washington.
Joseph M. Del Preto II has served as our Chief Accounting Officer since April 2011. From January 2011 to April 2011, Mr. Del Preto served as our Global Controller. Prior to joining Groupon, Mr. Del Preto served as Controller and Vice President, Finance of Echo Global Logistics, Inc. (NASDAQ: ECHO) from April 2009 to December 2010. From January 2006 to March 2009, Mr. Del Preto served as Controller of InnerWorkings, Inc. (NASDAQ: INWK). Mr. Del Preto began his career at PricewaterhouseCoopers LLP. Mr. Del Preto received his Bachelor of Science from Indiana University.
Jason D. Harinstein has served as our Senior Vice President-Corporate Development since March 2011. From June 2005 to February 2011, Mr. Harinstein served in several capacities at Google, Inc. (NASDAQ: GOOG), including most recently as Director of Corporate Development. From July 2003 to June 2005, Mr. Harinstein worked as an Equity Research Associate at Deutsche Bank Securities, Inc. where he covered Internet advertising, online search, eCommerce and video game companies. Previously, Mr. Harinstein served as a strategy consultant at iXL, Inc. (now part of Razorfish) from June 1999 to June 2001, and at Andersen Consulting Strategic Services (now Accenture) from September 1997 to June 1999. Mr. Harinstein received his Bachelor of Arts in Economics from Northwestern University and his Masters in Business Administration from the University of Chicago.
Jeffrey Holden has served as our Senior Vice President-Product Management since April 2011. In 2006, Mr. Holden co-founded Pelago, Inc. and served as its Chief Executive Officer until Groupon acquired Pelago in April 2011. Prior to co-founding Pelago, Mr. Holden held several positions at Amazon.com, Inc. (NASDAQ: AMZN), including Senior Vice President, Worldwide Discovery, from March 2005 to January 2006, Senior Vice President, Consumer Applications, from April 2004 to March 2005, Vice President, Consumer Applications, from April 2002 to April 2004, and Director, Automated Merchandising and Discovery from February 2000 to April 2002. Mr. Holden joined Amazon.com in May 1997 as Director, Supply Chain Optimization Systems. Mr. Holden received his Bachelor of Science and Master of Science degrees in Computer Science from the University of Illinois at Urbana‑Champaign.
David R. Schellhase has served as our General Counsel since June 2011. From March 2010 to May 2011, Mr. Schellhase served as Executive Vice President, Legal of salesforce.com, inc. (NYSE: CRM). From December 2004 to March 2010, Mr. Schellhase served as the Senior Vice President and General Counsel of salesforce.com, and he served as Vice President and General Counsel of salesforce.com from July 2002 to December 2004. From December 2000 to June 2002, Mr. Schellhase was an independent legal consultant and authored a treatise entitled Corporate Law Department Handbook. Previously, he served as General Counsel at Linuxcare, Inc., The Vantive Corporation and Premenos Technology Corp. Mr. Schellhase received a Bachelor of Arts from Columbia University and a Juris Doctor from Cornell University.
Brian J. Schipper has served as our Senior Vice President-Human Resources since June 2011. From October 2006 to May 2011, Mr. Schipper served as Senior Vice President and Chief Human Resources Officer of Cisco Systems, Inc. (NASDAQ: CSCO). From November 2003 to October 2006, Mr. Schipper served as the Corporate Vice President, Human Resources of Microsoft Corporation (NASDAQ: MSFT). From February 2002 to March 2003, Mr. Schipper was Partner and Head of Human Resources and Administration for Andor Capital Management LLC. From March 2000 to February 2002, Mr. Schipper served as Senior Vice President of Human Resources and Administration at DoubleClick, Inc. Prior to joining DoubleClick, Mr. Schipper served as Vice President, Human Resources at PepsiCo, Inc. (NYSE: PEP) from May 1995 to March 2000. Prior to joining PepsiCo, Mr. Schipper worked at Compaq Computer Corporation, where he was global head of compensation and benefits and head of Human Resources for North America. Mr. Schipper received his Bachelors Degree from Hope College and his Masters in Business Administration from Michigan State University.
Brian K. Totty, Ph.D., has served as our Senior Vice President-Engineering and Operations since November 2010. Dr. Totty was the Chief Executive Officer of Ludic Labs, Inc., a startup venture developing a new class of software applications from January 2006 through November 2007. We acquired Ludic Labs in November 2010. Dr. Totty also was a co-founder and Senior Vice President of Research and Development of Inktomi Corporation from February 1996 to August 2002. Dr. Totty received his Ph.D.

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in computer science from the University of Illinois at Urbana‑Champaign, his Master of Public Administration from Harvard's Kennedy School and his Bachelor of Science from the Massachusetts Institute of Technology.
Available Information

The Company electronically files reports with the Securities and Exchange Commission (SEC). The public may read and copy any materials the Company has filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also available free of charge through the Company’s website (www.groupon.com), as soon as reasonably practicable after electronically filing with or otherwise furnishing such information to the SEC, and are available in print to any stockholder who requests it. The Company's Code of Conduct, Corporate Governance Guidelines and committee charters are also posted on the site.






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ITEM 1A: RISK FACTORS
Our business, prospects, financial condition, operating results and the trading price of our Class A common stock could be materially adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. In assessing the risks described below, you should also refer to the other information contained in this Annual Report on Form 10-K, including Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and the consolidated financial statements and the related notes in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Risks Related to Our Business
We may not maintain the revenue growth that we have experienced since inception.
Although our revenue has increased substantially since inception , we may not be able to maintain our historical rate of revenue growth. We believe that our continued revenue growth will depend, among other factors, on our ability to:
 
acquire new customers and retain existing customers;

attract new merchant partners and retain existing merchant partners who wish to offer deals through the sale of Groupons;

expand the number, variety and relevance of products and deals we offer;

increase the awareness of our brand domestically and internationally;

provide a superior customer service experience for our customers and merchant partners;

respond to changes in consumer and merchant access to and use of the Internet and mobile devices; and

react to challenges from existing and new competitors.
 
We cannot assure you that we will be able to manage the growth of our organization effectively.
We have experienced rapid growth in demand for our services since our inception. Our employee headcount and number of customers have increased significantly since our inception, and we expect this growth to continue for the foreseeable future. The growth and expansion of our business and service offerings places significant demands on our management and our operational and financial resources. We are required to manage multiple relations with various merchant partners, customers, technology licensors and other third parties. In the event of further growth of our operations or in the number of our third-party relationships, our information technology systems or our internal controls and procedures may not be adequate to support our operations. To effectively manage our growth, we must continue to implement operational plans and strategies, improve and expand our infrastructure of people and information systems, and train and manage our employee base.
We have experienced rapid growth over a short period in a new market that we have created and we do not know whether this market will continue to develop or whether it can be maintained. If we are unable to successfully respond to changes in the market, our business could be harmed.
Our business has grown rapidly as merchants and consumers have increasingly used our marketplace. However, this is a new market which we only created in late 2008 and which has operated at a substantial scale for only a limited period of time. Given the limited history, it is difficult to predict whether this market will continue to grow or whether it can be maintained. For example, as a result of our limited operating history in a new industry, it is difficult to discern meaningful or established trends with respect to the purchase activity of our subscribers or customers. We expect that the market will evolve in ways which may be difficult to predict. For example, we anticipate that over time we will reach a point in most markets where we have achieved a market penetration such that investments in new customer acquisition are less productive and the continued growth of our revenue will require more focus on increasing the rate at which our existing customers purchase Groupons. It is also possible that merchant partners or customers could broadly determine that they no longer believe in the value of our current services or marketplace. In the event of these or any other changes to the market, our continued success will depend on our ability to successfully adjust our strategy to meet the changing market dynamics. If we are unable to successfully adapt to changes in our markets, our business, financial condition and results of operations could suffer a material negative impact.
We base our decisions regarding investments in customer acquisition primarily on our analysis of the profits generated from

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customers that we acquired in prior periods. If the estimates and assumptions we use are inaccurate, we may not be able to recover our customer acquisition costs and our growth rate and financial results will be adversely affected.

Our decisions regarding investments in customer acquisition substantially depend upon our analysis of the profits generated from customers we acquired in earlier periods. Our analysis includes several assumptions, including:
 
Because the costs of offering or distributing deals to existing customers are not significant, our analysis focuses on the online marketing costs incurred during the quarter in which the customers are originally acquired and makes various assumptions with respect to the level of additional marketing or other expenses necessary to maintain customer loyalty and generate purchase activity in subsequent periods. If our assumptions regarding such expenses in subsequent periods are incorrect, our results could be less favorable than we had anticipated.

We conduct surveys of merchant partner and customer satisfaction, and we also engage third parties to conduct these surveys for us. Results of these surveys inherently reflect a distinct group of merchant partners, customers and geographies and may not be representative of our current or future composite group of merchant partners, customers and geographies.
 
If our assumptions relating to the effectiveness of our marketing spend prove incorrect, our ability to generate profits from our investments in new customer acquisitions may be less than we have assumed. In such case, we may need to increase expenses or otherwise alter our strategy and our results of operations could be negatively impacted.
We have incurred net losses since inception and we expect our operating expenses to increase significantly in the foreseeable future.
We incurred net losses of $413.4 million and $ 297.8 million in 2010 and 2011, respectively, and had an accumulated deficit of $694.7 million as of December 31, 2011. We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to invest to increase our customer base, increase the number and variety of deals we offer each day, expand our marketing channels, expand our operations, hire additional employees and develop our technology platform. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. Many of our efforts to generate revenue from our business are new and unproven, and any failure to increase our revenue could prevent us from attaining or increasing our profitability. We cannot be certain that we will be able to attain or increase profitability on a quarterly or annual basis. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition and results of operations may suffer.
If we fail to retain our existing customers or acquire new customers, our revenue and business will be harmed.
We spent $768.5 million on marketing initiatives during 2011 and expect to continue to spend significant amounts to acquire additional customers. We must continue to retain and acquire customers that purchase Groupons in order to increase revenue and achieve profitability. As our customer base continues to evolve, it is possible that the composition of our customers may change in a manner that makes it more difficult to generate revenue to offset the costs associated with acquiring new customers. If customers do not perceive our Groupon offers to be of high value and quality or if we fail to introduce new and more relevant deals, we may not be able to acquire or retain customers. If we are unable to acquire new customers who purchase Groupons in numbers sufficient to grow our business, or if customers cease to purchase Groupons, the revenue we generate may decrease and our operating results will be adversely affected.
We believe that many of our new customers originate from word-of-mouth and other non-paid referrals from existing customers, and therefore we must ensure that our existing customers remain loyal to our service in order to continue receiving those referrals. If our efforts to satisfy our existing customers are not successful, we may not be able to acquire new customers in sufficient numbers to continue to grow our business or we may be required to incur significantly higher marketing expenses in order to acquire new customers. Further, we believe that our success is influenced by the level of communication and sharing among customers. If the level of usage by our customer base declines or does not grow as expected, we may suffer a decline in customer growth or revenue. A significant decrease in the level of usage or customer growth would have an adverse effect on our business, financial condition and results of operations.
Our future success depends upon our ability to retain existing merchant partners and add new merchant partners.
We depend on our ability to attract and retain merchant partners that are prepared to offer products or services on compelling terms through our marketplace. We do not have long-term arrangements to guarantee the availability of deals that offer attractive quality, value and variety to customers or favorable payment terms to us. We must continue to attract and retain merchant partners in order to increase revenue and achieve profitability. If new merchants do not find our marketing and promotional services effective, or if existing merchant partners do not believe that utilizing our products provides them with a long-term increase in

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customers, revenues or profits, they may stop making offers through our marketplace. In addition, we may experience attrition in our merchant partners in the ordinary course of business resulting from several factors, including losses to competitors and merchant partner closures or bankruptcies. If we are unable to attract new merchant partners in numbers sufficient to grow our business, or if too many merchant partners are unwilling to offer products or services with compelling terms through our marketplace or offer favorable payment terms to us, we may sell fewer Groupons and our operating results will be adversely affected.
If our efforts to market, advertise and promote products and services from our existing merchant partners are not successful, or if our existing merchant partners do not believe that utilizing our services provides them with a long-term increase in customers, revenues or profits, we may not be able to retain or attract merchant partners in sufficient numbers to grow our business or we may be required to incur significantly higher marketing expenses or accept lower margins in order to attract new merchant partners. A significant increase in merchant partner attrition or decrease in merchant partner growth would have an adverse effect on our business, financial condition and results of operation.
We operate in a highly competitive industry with relatively low barriers to entry, and must compete successfully in order to grow our business.
We expect competition in e-commerce generally, and group buying in particular, to continue to increase because there are no significant barriers to entry. A substantial number of group buying sites that attempt to replicate our business model have emerged around the world. In addition to such competitors, we expect to increasingly compete against other large businesses who offer deals similar to ours as an add-on to their core business. We also expect to compete against other Internet sites that serve niche markets and interests. In addition, we compete with traditional offline coupon and discount services, as well as newspapers, magazines and other traditional media companies who provide coupons and discounts on products and services.

We believe that our ability to compete successfully depends upon many factors both within and beyond our control, including the following:
 
the size and composition of our customer base and the number of merchant partners we feature;

the timing and market acceptance of deals we offer, including the developments and enhancements to those deals offered by us or our competitors;

customer and merchant service and support efforts;

selling and marketing efforts;

ease of use, performance, price and reliability of services offered either by us or our competitors;

our ability to generate large volumes of sales, particularly with respect to merchandise and travel deals;

our ability to cost-effectively manage our operations; and

our reputation and brand strength relative to our competitors.
 
Many of our current and potential competitors have longer operating histories, significantly greater financial, marketing and other resources and larger customer bases than we do. These factors may allow our competitors to benefit from their existing customer base with lower customer acquisition costs or to respond more quickly than we can to new or emerging technologies and changes in consumer habits. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to build larger customer bases or generate revenue from their customer bases more effectively than we do. Our competitors may offer deals that are similar to the deals we offer or that achieve greater market acceptance than the deals we offer. This could attract customers away from our websites and applications, reduce our market share and adversely impact our gross margin. We also have seen that some competitors will accept lower margins, or negative margins, to attract attention and acquire new customers. If competitors engage in group buying initiatives in which merchants receive a higher percentage of the revenue than we currently offer, we may be forced to pay a higher percentage of the gross proceeds from each Groupon sold than we currently offer, which may reduce our revenue. In addition, we are dependent on some of our existing or potential competitors for banner advertisements and other marketing initiatives to acquire new customers. Our ability to utilize their platforms to acquire new customers may be adversely affected if they choose to compete more directly with us.
If we are unable to maintain favorable terms with our merchant partners, our revenue may be adversely affected.

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The success of our business depends in part on our ability to retain and increase the number of merchant partners who use our service. Currently, when a merchant partner works with us to offer a deal for its products or services, it receives an agreed-upon percentage of the total proceeds from each Groupon sold, and we retain the rest. If merchant partners decide that utilizing our services no longer provides an effective means of attracting new customers or selling their goods and services, they may demand a higher percentage of the total proceeds from each Groupon sold. This could adversely affect our revenue.
In addition, we expect to face increased competition from other Internet and technology-based businesses. We also have seen that some competitors will accept lower margins, or negative margins, to attract attention and acquire new customers. If competitors engage in group buying initiatives in which merchants receive a higher percentage of the revenue than we currently offer, we may be forced to take a lower percentage of the gross billings, which would reduce our revenue.
Our operating cash flow and results of operations could be adversely impacted if we change our merchant payment terms or our revenues do not continue to grow.
Our merchant payment terms and revenue growth have provided us with operating cash flow to fund our working capital needs. Our merchant partner arrangements are generally structured such that we collect cash up front when our customers purchase Groupons and make payments to our merchant partners at a subsequent date. In North America, we typically pay our merchant partners in installments within sixty days after the Groupon is sold. In our International segment, merchant partners are not paid until the customer redeems the Groupon. Our accrued merchant payable, which primarily consists of payment obligations to our merchant partners, has grown, both nominally and as a percentage of gross billings, as our gross billings have increased, particularly the gross billings from our International segment. Our accrued merchant payable balance increased from $162.4 million as of December 31, 2010 to $520.7 million as of December 31, 2011. We use the operating cash flow provided by our merchant payment terms and revenue growth to fund our working capital needs. If we offer our merchant partners more favorable or accelerated payment terms or our revenue does not continue to grow in the future, our operating cash flow and results of operations could be adversely impacted and we may have to seek alternative financing to fund our working capital needs.
Our business relies heavily on email and other messaging services, and any restrictions on the sending of emails or messages or a decrease in subscriber willingness to receive messages could adversely affect our revenue and business.
Our business is highly dependent upon email and other messaging services. Deals offered through emails and other messages sent by us, or on our behalf by our affiliates, generate a substantial portion of our revenue. Because of the importance of email and other messaging services to our businesses, if we are unable to successfully deliver emails or messages to our subscribers or potential subscribers, or if subscribers decline to open our emails or messages, our revenue and profitability would be adversely affected. Actions by third parties to block, impose restrictions on, or charge for the delivery of, emails or other messages could also materially and adversely impact our business. From time to time, Internet service providers block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to third parties. In addition, our use of email and other messaging services to send communications about our website or other matters may result in legal claims against us, which if successful might limit or prohibit our ability to send emails or other messages. Any disruption or restriction on the distribution of emails or other messages or any increase in the associated costs would materially and adversely affect our revenue and profitability.
We have a rapidly evolving business model and our new product and service offerings could fail to attract or retain customers or generate revenue.
We have a rapidly evolving business model and are regularly exploring entry into new market segments and the introduction of new products and features with respect to which we may have limited experience. In addition, our customers may not respond favorably to our new products and services. These products and services may present new and significant technology challenges, and we may be subject to claims if customers of these offerings experience service disruptions or failures or other quality issues. If products or services we introduce, such as changes to our websites and applications, the introduction of social networking and location-based marketing elements to our websites, or entirely new lines of business that we may pursue, fail to engage customers or merchant partners, we may fail to acquire or retain customers or generate sufficient revenue or other value to justify our investment, and our business may be materially and adversely affected. Our ability to retain or increase our customer base and revenue will depend heavily on our ability to innovate and to create successful new products and services. In addition, the relative profitability, if any, of our new activities may be lower than that of our historical activities, and we may not generate sufficient revenue from new activities to recoup our investments in them. If any of this were to occur, it could damage our reputation, limit our growth and negatively affect our operating results.
We purchase and sell some products from indirect suppliers, which increases our risk of litigation and other losses.   

We have recently begun selling Groupons to buy merchandise both directly from brand owners and indirectly from retailers and third party distributors, and we also sometimes take title to the goods before we offer them for sale to our

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customers.  By selling Groupons for merchandise coming from parties other than the brand owners, we are subject to an increased risk that the merchandise may be damaged or non-authentic, which could result in potential liability under applicable laws, regulations, agreements and orders, and increase the amount of returned merchandise. In addition, brand owners may take legal action against us, which could result in costly litigation, generate bad publicity for us, and have a material adverse impact on our business, financial condition and results of operations.
We are subject to inventory management and order fulfillment risk as a result of our Groupon Goods business.
As we continue to expand our business model, we may purchase some of the merchandise that we offer for sale to our customers. The demand for products can change for a variety of reasons, including customer preference, seasonality, and the perceived value from customers of purchasing the product through us. In addition, this is a new business for us, and therefore we have a limited historical basis upon which to predict customer demand for the products. If we are unable to adequately predict customer demand and efficiently manage our inventory, we could either have an excess or a shortage of inventory, either of which would have a material adverse effect on our business.
Purchasing the goods ourselves prior to the sale also means that we will be required to fulfill orders on an efficient and cost-effective basis. Many other online retailers have significantly larger inventories and therefore are able to rely on past experience and economies of scale to optimize their order fulfillment. Delays or inefficiencies in our processes could subject us to additional costs, as well as customer dissatisfaction, which would adversely affect our business.
If we are unable to retain the services of certain individuals involved in the operations of our International segment, our international expansion may suffer.
Our international expansion has been rapid and our international business has become critical to the growth in our revenue and our ability to maintain and increase our profitability. In 2010 and 2011, 36.0% and 60.6% , respectively, of our revenue was generated from our International segment. We began our international operations in May 2010 with the acquisition of CityDeal Europe GmbH, or CityDeal, which was founded by Oliver Samwer and Marc Samwer. Since the CityDeal acquisition, Messrs. Samwer have served as consultants and been extensively involved in the development and operations of our International segment. The agreements under which Oliver and Marc Samwer provide us with consulting services will expire in October 2012 and October 2013, respectively. In the event Messrs. Samwer do not continue to provide us with consulting services after the respective termination dates of their agreements, we can make no assurances that the loss of their services will not disrupt our international operations or have an adverse effect on our ability to grow our international business.
Our international operations are subject to increased challenges, and our inability to adapt to the varied commercial and regulatory landscapes of our international markets may adversely affect our business.
Further expansion into international markets requires management attention and resources and requires us to localize our services to conform to a wide variety of local cultures, business practices, laws and policies. The different commercial and Internet infrastructure in other countries may make it more difficult for us to replicate our business model. In many countries, we compete with local companies that understand the local market better than we do, and we may not benefit from first-to-market advantages. We may not be successful in expanding into particular international markets or in generating revenue from foreign operations. As we continue to expand internationally, we are increasingly subject to risks of doing business internationally, including the following:
 
strong local competitors, many of whom have been in the market longer than us;

different regulatory requirements, including regulation of gift cards and coupon terms, Internet services, professional selling, distance selling, bulk emailing, privacy and data protection, banking and money transmitting, that may limit or prevent the offering of our services in some jurisdictions or limit our ability to enforce contractual obligations;

difficulties in integrating with local payment providers, including banks, credit and debit card networks and electronic funds transfer systems;

different employee/employer relationships and the existence of workers' councils and labor unions;

shorter payment cycles, different accounting practices and greater problems in collecting accounts receivable;

higher Internet service provider costs;

seasonal reductions in business activity;

expenses associated with localizing our products, including offering customers the ability to transact business in

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the local currency; and

differing intellectual property laws.
 
We are subject to complex foreign and U.S. laws and regulations that apply to our international operations, including data privacy and protection requirements, the Foreign Corrupt Practices Act and similar local laws prohibiting certain payments to government officials, banking and payment processing regulations, and anti-competition regulations, among others. The costs of complying with these various and sometimes conflicting laws and regulations could be substantial. We have implemented policies and procedures to ensure compliance with these laws and regulations, however, we cannot assure you that our employees, contractors, or agents will not violate our policies.

If, as we continue to expand internationally, we are unable to successfully replicate our business model due to these and other commercial and regulatory constraints in our international markets, our business may be adversely affected.

The integration of our international operations with our North American technology platform may result in business interruptions.
We currently use a common technology platform in our North America segment to operate our business and are in the process of migrating our operations in our International segment to the same platform. Such changes to our technology platform and related software carry risks such as cost overruns, project delays and business interruptions and delays. If we experience a material business interruption as a result of this process, it could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.
An increase in the costs associated with maintaining our international operations could adversely affect our results of operations.
Certain factors may cause our international costs of doing business to exceed our comparable costs in North America. For example, in some countries, expansion of our business may require a close commercial relationship with one or more local banks, a shared ownership interest with a local entity or registration as a bank under local law. Such requirements may reduce our revenue, increase our costs or limit the scope of our activities in particular countries.
Further, as we expand our international operations and have additional portions of our international revenue denominated in foreign currencies, we could become subject to increased difficulties in collecting accounts receivable and repatriating money without adverse tax consequences and increased risks relating to foreign currency exchange rate fluctuations. Further, we could be subject to the application of U.S. tax rules to acquired international operations and local taxation of our fees or of transactions on our websites.
We conduct certain functions, including product development, customer support and other operations, in regions outside of North America. Any factors which reduce the anticipated benefits, including cost efficiencies and productivity improvements, associated with providing these functions outside of North America, including increased regulatory costs associated with our international operations, could adversely affect our business.
An increase in our refund rates could reduce our liquidity and profitability.
Our Groupon Promise states that we will provide our customers with a refund of the purchase price of a Groupon if they believe that we have let them down. As we increase our revenue and expand our product offerings, our refund rates may exceed our historical levels. For example, as a result of the fourth quarter 2011 shift in our deal mix and higher price point offers, our refund rates in the first quarter of 2012 were higher than historical levels. See "Management's Discussion and Analysis of Financial Condition and Results of Operations- Critical Accounting Policies and Estimates- Refunds." A downturn in general economic conditions may also increase our refund rates. An increase in our refund rates could significantly reduce our liquidity and profitability.
Because we do not have control over our merchant partners and the quality of products or services they deliver, we rely on a combination of our historical experience with each merchant partner and online and offline research of customer reviews of merchant partners for the development of our estimate for refund claims. Our actual level of refund claims could prove to be greater than the level of refund claims we estimate. If our refund reserves are not adequate to cover future refund claims, this inadequacy could have a material adverse effect on our liquidity and profitability.
Our standard agreements with our merchant partners generally limit the time period during which we may seek reimbursement for customer refunds or claims. Our customers may make claims for refunds with respect to which we are unable to seek reimbursement from our merchant partners. Our inability to seek reimbursement from our merchant partners for refund claims could have an adverse effect on our liquidity and profitability.

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If our merchant partners do not meet the needs and expectations of our customers, our business could suffer.
Our business depends on our reputation for providing high-quality deals, and our brand and reputation may be harmed by actions taken by merchant partners that are outside our control. Any shortcomings of one or more of our merchant partners, particularly with respect to an issue affecting the quality of the deal offered or the products or services sold, may be attributed by our customers to us, thus damaging our reputation, brand value and potentially affecting our results of operations. In addition, negative publicity and customer sentiment generated as a result of fraudulent or deceptive conduct by our merchant partners could damage our reputation, reduce our ability to attract new customers or retain our current customers, and diminish the value of our brand.
The loss of one or more key members of our management team, or our failure to attract, integrate and retain other highly qualified personnel in the future, could harm our business.
We currently depend on the continued services and performance of the key members of our management team, including Andrew D. Mason, our Chief Executive Officer, and Jason E. Child, our Chief Financial Officer. Mr. Mason is one of our founders and his leadership has played an integral role in our growth. The loss of key personnel, including key members of management as well as our marketing, sales, product development and technology personnel, could disrupt our operations and have an adverse effect on our ability to grow our business. Moreover, many members of our management are new to our team or have been recently promoted to new roles.
Eric P. Lefkofsky is one of our founders and has served as the Executive Chairman of our Board of Directors since our inception. Although Mr. Lefkofsky historically has devoted a significant amount of his business time to Groupon, he is under no contractual or other obligation to do so and may not do so in the future. Mr. Lefkofsky invests his business time and financial resources in a variety of other businesses, including Lightbank LLC, a private investment firm that Mr. Lefkofsky co-founded with Bradley A. Keywell. Such investments may be in areas that present conflicts with, or involve businesses related to, our operations. If Mr. Lefkofsky devotes less time to our business in the future, our business may be adversely affected.
As we become a more mature company, we may find our recruiting and retention efforts more challenging. We are seeking to hire a significant number of personnel in 2012, including certain key management personnel. If we do not succeed in attracting, hiring and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively.
We may be subject to additional unexpected regulation which could increase our costs or otherwise harm our business.
The application of certain laws and regulations to Groupons, as a new product category, is uncertain. These include laws and regulations such as the CARD Act, and unclaimed and abandoned property laws. In addition, from time to time, we may be notified of additional laws and regulations which governmental organizations or others may claim should be applicable to our business. For example, we were recently notified by the Massachusetts Alcoholic Beverages Control Commission that Groupon discounts for some Massachusetts restaurants may not be in compliance with Massachusetts liquor laws and regulations. If we are required to alter our business practices as a result of any laws and regulations, our revenue could decrease, our costs could increase and our business could otherwise be harmed. In addition, the costs and expenses associated with defending any actions related to such additional laws and regulations and any payments of related penalties, judgments or settlements could adversely impact our profitability.
We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.

In connection with the audit of our financial statements as of and for the year ended December 31, 2011, we concluded there is a material weakness in internal control over financial reporting related to deficiencies in the financial statement close process. Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. See " Item 9A. Controls and Procedures ".

We are working to remediate the material weakness. We have begun taking steps and plan to take additional measures to remediate the underlying causes of the material weakness, primarily through the continued development and implementation of formal policies, improved processes and documented procedures, as well as the continued hiring of additional finance personnel. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful in remediating this material weakness. If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we

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could be required to restate our financial results. In addition, if we are unable to successfully remediate this material weakness and if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with applicable stock exchange listing requirements.

We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, and are therefore not currently required to make an assessment of the effectiveness of our internal controls. However, we will need to evaluate our internal controls over financial reporting in connection with Section 404 of the Sarbanes Oxley Act for the year ending December 31, 2012, and our auditors will be required to attest to our internal controls over financial reporting starting with our annual report for the year ending December 31, 2012. This assessment will need to include disclosure of any material weaknesses in our internal control over financial reporting identified by our management, as well as our auditors' attestation report on our internal controls over financial reporting. We are in the early phases of compiling the system and processing documentation needed to comply with such requirements. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing processes, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on the price of our Class A common stock.

We may have exposure to greater than anticipated tax liabilities.
 
Our income tax obligations are based on our corporate operating structure, including the manner in which we develop, value, and use our intellectual property and the scope of our international operations. The tax laws applicable to our international business activities, including the laws of the United States and other jurisdictions, are subject to interpretation. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, which could increase our worldwide effective tax rate and harm our financial position and results of operations. In addition, our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, or accounting principles. We are subject to regular review and audit by both U.S. federal and state and foreign tax authorities. Any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
 
The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies could materially affect our financial position and results of operations.
 
The current administration has made public statements indicating that it has made international tax reform a priority, and key members of the U.S. Congress have conducted hearings and proposed a wide variety of potential changes. Certain changes to U.S. tax laws, including limitations on the ability to defer U.S. taxation on earnings outside of the United States until those earnings are repatriated to the United States, could affect the tax treatment of our foreign earnings, as well as cash and cash equivalent balances we currently maintain outside of the United States. Due to the large and expanding scale of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and harm our financial position and results of operations.
The implementation of the CARD Act and similar state and foreign laws may harm our business and results of operations.
Groupons may be considered gift cards, gift certificates, stored value cards or prepaid cards and therefore governed by, among other laws, the CARD Act, and state laws governing gift cards, stored value cards and coupons. Other foreign jurisdictions have similar laws in place, in particular European jurisdictions where the European E-Money Directive regulates the business of electronic money institutions. Many of these laws contain provisions governing the use of gift cards, gift certificates, stored value cards or prepaid cards, including specific disclosure requirements and prohibitions or limitations on the use of expiration dates and the imposition of certain fees. For example, if Groupons are subject to the CARD Act and are not included in the exemption for promotional programs, it is possible that the purchase value, which is the amount equal to the price paid for the Groupon, or the promotional value, which is the add-on value of the Groupon in excess of the price paid, or both, may not expire before the later of (i) five years after the date on which the Groupon was issued or the date on which the customer last loaded funds on the Groupon if the Groupon has a reloadable feature; (ii) the Groupon's stated expiration date (if any); or (iii) a later date provided by applicable state law. We and several merchant partners with whom we have partnered are currently defendants in 16 purported class actions that have been filed in federal and state court claiming that Groupons are subject to the CARD Act and various state

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laws governing gift cards and that the defendants have violated these laws by issuing Groupons with expiration dates and other restrictions. We are also the defendant to a purported class action in the Canadian province of Ontario in which similar violations of provincial legislation governing gift cards are alleged. In the event that it is determined that Groupons are subject to the CARD Act or any similar state or foreign law or regulation, and are not within various exemptions that may be available to Groupon under the CARD Act or under some of the various state or foreign jurisdictions, our liabilities with respect to unredeemed Groupons may be materially higher than the amounts shown in our financial statements and we may be subject to additional fines and penalties. In addition, if federal or state laws require that the face value of Groupons have a minimum expiration period beyond the period desired by a merchant partner for its promotional program, or no expiration period, this may affect the willingness of merchant partners to issue Groupons in jurisdictions where these laws apply. If we are required to materially increase the estimated liability recorded in our financial statements with respect to unredeemed gift cards, our net income could be materially and adversely affected.
If we are required to materially increase the estimated liability recorded in our financial statements with respect to unredeemed Groupons, our net income could be materially and adversely affected.
In certain states and foreign jurisdictions, Groupons may be considered a gift card. Some of these states and foreign jurisdictions include gift cards under their unclaimed and abandoned property laws which require companies to remit to the government the value of the unredeemed balance on the gift cards after a specified period of time (generally between one and five years) and impose certain reporting and recordkeeping obligations. We do not remit any amounts relating to unredeemed Groupons based on our assessment of applicable laws. The analysis of the potential application of the unclaimed and abandoned property laws to Groupons is complex, involving an analysis of constitutional and statutory provisions and factual issues, including our relationship with customers and merchant partners and our role as it relates to the issuance and delivery of a Groupon. In the event that one or more states or foreign jurisdictions successfully challenges our position on the application of its unclaimed and abandoned property laws to Groupons, or if the estimates that we use in projecting the likelihood of Groupons being redeemed prove to be inaccurate, our liabilities with respect to unredeemed Groupons may be materially higher than the amounts shown in our financial statements. If we are required to materially increase the estimated liability recorded in our financial statements with respect to unredeemed gift cards, our net income could be materially and adversely affected. Moreover, a successful challenge to our position could subject us to penalties or interest on unreported and unremitted sums, and any such penalties or interest would have a further material adverse impact on our net income.
Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future regulations and laws could impede the growth of the Internet or other online services. These regulations and laws may involve taxation, tariffs, subscriber privacy, anti-spam, data protection, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services and the characteristics and quality of services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. In addition, it is possible that governments of one or more countries may seek to censor content available on our websites and applications or may even attempt to completely block access to our websites. Adverse legal or regulatory developments could substantially harm our business. In particular, in the event that we are restricted, in whole or in part, from operating in one or more countries, our ability to retain or increase our customer base may be adversely affected and we may not be able to maintain or grow our revenue as anticipated.
New tax treatment of companies engaged in Internet commerce may adversely affect the commercial use of our services and our financial results.
Due to the global nature of the Internet, it is possible that various states or foreign countries might attempt to regulate our transmissions or levy sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in Internet commerce. New or revised international, federal, state or local tax regulations may subject us or our customers to additional sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet. New or revised taxes and, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over the Internet. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.
Failure to comply with federal, state and international privacy laws and regulations, or the expansion of current or the enactment of new privacy laws or regulations, could adversely affect our business.

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A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of consumer data. The existing privacy-related laws and regulations are evolving and subject to potentially differing interpretations. In addition, various federal, state and foreign legislative and regulatory bodies may expand current or enact new laws regarding privacy matters. For example, recently there have been Congressional hearings and increased attention to the capture and use of location-based information relating to users of smartphones and other mobile devices. We have posted privacy policies and practices concerning the collection, use and disclosure of subscriber data on our websites and applications. Several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies and practices. In addition, several states have adopted legislation that requires businesses to implement and maintain reasonable security procedures and practices to protect sensitive personal information and to provide notice to consumers in the event of a security breach. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, Federal Trade Commission requirements or orders or other federal, state or international privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in claims, proceedings or actions against us by governmental entities or others or other liabilities, which could adversely affect our business. In addition, a failure or perceived failure to comply with industry standards or with our own privacy policies and practices could result in a loss of subscribers or merchant partners and adversely affect our business. Federal, state and international governmental authorities continue to evaluate the privacy implications inherent in the use of third-party web "cookies" for behavioral advertising. The regulation of these cookies and other current online advertising practices could adversely affect our business.
We may suffer liability as a result of information retrieved from or transmitted over the Internet and claims related to our service offerings.
We may be, and in certain cases have been, sued for defamation, civil rights infringement, negligence, patent, copyright or trademark infringement, invasion of privacy, personal injury, product liability, breach of contract, unfair competition, discrimination, antitrust or other legal claims relating to information that is published or made available on our websites or service offerings we make available (including provision of an application programming interface platform for third parties to access our website, mobile device services and geolocation applications). This risk is enhanced in certain jurisdictions outside the United States, where our liability for such third-party actions may be less clear and we may be less protected. In addition, we could incur significant costs in investigating and defending such claims, even if we ultimately are not found liable. If any of these events occurs, our net income could be materially and adversely affected.
We are subject to risks associated with information disseminated through our websites and applications, including consumer data, content that is produced by our editorial staff and errors or omissions related to our product offerings. Such information, whether accurate or inaccurate, may result in our being sued by our merchant partners, subscribers or third parties and as a result our revenue and goodwill could be materially and adversely affected.
Our business depends on our ability to maintain and scale the network infrastructure necessary to operate our websites and mobile applications, and any significant disruption in service on our websites or applications could result in a loss of subscribers, customers or merchant partners.
Subscribers access our deals through our websites and mobile applications. Our reputation and ability to acquire, retain and serve our subscribers and customers are dependent upon the reliable performance of our websites and mobile applications and the underlying network infrastructure. As our subscriber base and the amount of information shared on our websites and applications continue to grow, we will need an increasing amount of network capacity and computing power. We have spent and expect to continue to spend substantial amounts on data centers and equipment and related network infrastructure to handle the traffic on our websites and applications. The operation of these systems is expensive and complex and could result in operational failures. In the event that our subscriber base or the amount of traffic on our websites and applications grows more quickly than anticipated, we may be required to incur significant additional costs. Interruptions in these systems, whether due to system failures, computer viruses or physical or electronic break-ins, could affect the security or availability of our websites and applications, and prevent our subscribers from accessing our services. A substantial portion of our network infrastructure is hosted by third-party providers. Any disruption in these services or any failure of these providers to handle existing or increased traffic could significantly harm our business. Any financial or other difficulties these providers face may adversely affect our business, and we exercise little control over these providers, which increases our vulnerability to problems with the services they provide. If we do not maintain or expand our network infrastructure successfully or if we experience operational failures, we could lose current and potential subscribers and merchant partners, which could harm our operating results and financial condition.
We may be subject to breaches of our information technology systems, which could harm our relationships with our customers and merchant partners, subject us to negative publicity and litigation, and cause substantial harm to our business.

Our business model requires us to obtain confidential information about our customers and merchant partners, including names, email addresses and credit card and other payment account information. Because of our high profile and the

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amount of customer information that we store, we may be at an increased risk of attacks on our system, notwithstanding the fact that we have invested heavily in systems to protect such information.

We, like other e-commerce businesses, use encryption and authentication technology to help provide the security and authentication to effectively secure transmission of confidential information, including credit card numbers. While these techniques are effective in maintaining confidentiality, we cannot guarantee that this will prevent all potential breaches of our system, including by means of technologies developed to bypass these securities measures. In addition, outside parties may attempt to fraudulently induce employees, merchant partners or customers to disclose sensitive information in order to gain access to our information or our merchant partners’ or customers’ information.

Because the techniques used to gain access to, or sabotage, systems often are not recognized until launched against a target, we may be unable to anticipate the correct methods necessary to defend against these types of attacks. Any breach, or the perceived threat of a breach, could cause our customers and merchant partners to cease doing business with us, subject us to lawsuits, regulatory fines or other action or liability, which would harm our business, financial condition and results of operations.
Any reduction in the availability of Internet access, including through the use of mobile devices, could adversely affect our business.
The success of our services will depend largely on sufficient network availability for us, our customers and our merchant partners. The Internet has experienced, and is likely to continue to experience, significant growth in the number of users and amount of traffic, including a significant increase in bandwidth demands as a result of the use of smartphones and other mobile devices. The Internet infrastructure may be unable to support such demands. In addition, increasing numbers of users, increasing bandwidth requirements or problems caused by viruses, worms, malware and similar programs may harm the performance of the Internet. The backbone computers of the Internet have been the targets of such programs.These outages and delays could reduce the level of Internet usage generally as well as the level of usage of our services, which could adversely impact our business.
We may not be able to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of third parties.
We regard our subscriber list, trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology and similar intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements with our employees and others to protect our proprietary rights. Effective intellectual property protection may not be available in every country in which our deals are made available. We also may not be able to acquire or maintain appropriate domain names or trademarks in all countries in which we do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring and using domain names that are similar to, infringe upon or diminish the value of our trademarks and other proprietary rights. We may be unable to prevent third parties from using and registering our trademarks, or trademarks that are similar to, or diminish the value of, our trademark in some countries.
We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Third parties that license our proprietary rights also may take actions that diminish the value of our proprietary rights or reputation. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We are currently subject to multiple litigations and disputes related to our intellectual property and service offerings. We may in the future be subject to additional litigation and disputes. The costs of supporting such litigation and disputes are considerable, and there can be no assurances that favorable outcomes will be obtained.
We are currently subject to third-party claims that we infringe their proprietary rights or trademarks and expect to be subject to additional claims in the future. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us or the payment of damages by us. We may need to obtain licenses from third parties who allege that we have infringed their rights, but such licenses may not be available on terms acceptable to us or at all. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims.
Our business depends on a strong brand, and if we are not able to maintain and enhance our brand, or if we receive unfavorable media coverage, our ability to expand our base of customers and merchant partners will be impaired and our business and operating results will be harmed.
We believe that the brand identity that we have developed has significantly contributed to the success of our business. We also believe that maintaining and enhancing the "Groupon" brand is critical to expanding our base of customers and merchant partners. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not be

27



successful. If we fail to promote and maintain the "Groupon" brand, or if we incur excessive expenses in this effort, our business, operating results and financial condition will be materially and adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Maintaining and enhancing our brand will depend largely on our ability to be a group buying leader and to continue to provide reliable, trustworthy and high quality deals, which we may not do successfully.
We receive a high degree of media coverage around the world. Unfavorable publicity or consumer perception of our websites, applications, practices or service offerings, or the offerings of our merchant partners, could adversely affect our reputation, resulting in difficulties in recruiting, decreased revenue and a negative impact on the number of merchant partners we feature and the size of our customer base, the loyalty of our customers and the number and variety of deals we offer each day. As a result, our business, financial condition and results of operations could be materially and adversely affected.
Acquisitions, joint ventures and strategic investments could result in operating difficulties, dilution and other harmful consequences.
We expect to continue to evaluate and consider a wide array of potential strategic transactions, including acquisitions and dispositions of businesses, joint ventures, technologies, services, products and other assets and strategic investments. W may not realize the anticipated benefits of any or all of our acquisitions, or we may not realize them in the time frame expected. In addition, the integration of an acquisition could divert management's time and the company's resources. If we pay for an acquisition in cash, it would reduce our cash available for operations or cause us to incur debt, and if we pay with our stock it could be dilutive to our stockholders.
Our business may be subject to seasonal sales fluctuations which could result in volatility or have an adverse effect on the market price of our common stock.
Our business, like that of our merchant partners, may be subject to some degree of sales seasonality. As the growth of our business stabilizes, these seasonal fluctuations may become more evident. Seasonality may cause our working capital cash flow requirements to vary from quarter to quarter depending on the variability in the volume and timing of sales. These factors, among other things, make forecasting more difficult and may adversely affect our ability to manage working capital and to predict financial results accurately, which could adversely affect the market price of our common stock.
We depend on the continued growth of online commerce.
The business of selling goods and services over the Internet, particularly through coupons, is dynamic and relatively new. Concerns about fraud, privacy and other problems may discourage additional consumers and merchants from adopting the Internet as a medium of commerce. In countries such as the U.S., Germany, the United Kingdom, France and Japan, where our services and online commerce generally have been available for some time and the level of market penetration of our services is high, acquiring new customers for our services may be more difficult and costly than it has been in the past. In order to expand our customer base, we must appeal to and acquire customers who historically have used traditional means of commerce to purchase goods and services and may prefer Internet analogues to our offerings, such as the retailer's own website. If these customers prove to be less active than our earlier customers, or we are unable to gain efficiencies in our operating costs, including our cost of acquiring new customers, our business could be adversely impacted.
Our business is subject to interruptions, delays or failures resulting from earthquakes, other natural catastrophic events or terrorism.
Our services, operations and the data centers from which we provide our services are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. A significant natural disaster, such as an earthquake, fire or flood, could have a material adverse impact on our business, financial condition and results of operations and our insurance coverage may be insufficient to compensate us for losses that may occur. Acts of terrorism could cause disruptions to the Internet, our business or the economy as a whole. We may not have sufficient protection or recovery plans in certain circumstances, such as natural disasters affecting areas where data centers upon which we rely are located, and our business interruption insurance may be insufficient to compensate us for losses that may occur. Such disruptions could negatively impact our ability to run our websites, which could harm our business.
Our results of operations may be negatively impacted by investments we make as we enter new product and service categories.
We have offered Groupons in over 190 different types of businesses, services and activities that fall into six broad categories. We intend to continue to invest in the development of our existing categories and to expand into new categories. We may make substantial investments in such new categories in anticipation of future revenue. We may also face greater competition in specific categories from Internet sites that are more focused on such categories. If the launch of a new category requires investments greater than we expect, if we are unable to generate sufficient merchant partner offers which are of high quality, value and variety or if

28



the revenue generated from a new category grows more slowly or produces lower revenue than we expect, our results of operations could be adversely impacted.
Failure to deal effectively with fraudulent transactions and customer disputes would increase our loss rate and harm our business.
Groupons are issued in the form of redeemable coupons with unique identifiers. It is possible that consumers or other third parties will seek to create counterfeit Groupons in order to fraudulently purchase discounted goods and services from our merchant partners. While we use advanced anti-fraud technologies, it is possible that technically knowledgeable criminals will attempt to circumvent our anti-fraud systems using increasingly sophisticated methods. In addition, our service could be subject to employee fraud or other internal security breaches, and we may be required to reimburse customers and/or merchant partners for any funds stolen or revenue lost as a result of such breaches. Our merchant partners could also request reimbursement, or stop using Groupon, if they are affected by buyer fraud or other types of fraud.
We may incur significant losses from fraud and counterfeit Groupons. We may incur losses from claims that the customer did not authorize the purchase, from merchant partner fraud, from erroneous transmissions, and from customers who have closed bank accounts or have insufficient funds in them to satisfy payments. In addition to the direct costs of such losses, if they are related to credit card transactions and become excessive, they could potentially result in our losing the right to accept credit cards for payment. If we were unable to accept credit cards for payment, we would suffer substantial reductions in revenue, which would cause our business to suffer. While we have taken measures to detect and reduce the risk of fraud, these measures need to be continually improved and may not be effective against new and continually evolving forms of fraud or in connection with new product offerings. If these measures do not succeed, our business will suffer.
We are subject to payments-related risks.
We accept payments using a variety of methods, including credit card, debit card and gift certificates. As we offer new payment options to customers, we may be subject to additional regulations, compliance requirements and fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards and debit cards and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from customers or facilitate other types of online payments, and our business and operating results could be adversely affected.
We are also subject to or voluntarily comply with a number of other laws and regulations relating to money laundering, international money transfers, privacy and information security and electronic fund transfers. If we were found to be in violation of applicable laws or regulations, we could be subject to civil and criminal penalties or forced to cease our payments services business.
Federal laws and regulations, such as the Bank Secrecy Act and the USA PATRIOT Act and similar foreign laws, could be expanded to include Groupons.
Various federal laws, such as the Bank Secrecy Act and the USA PATRIOT Act and foreign laws and regulations, such as the European Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, impose certain anti-money laundering requirements on companies that are financial institutions or that provide financial products and services. For these purposes, financial institutions are broadly defined to include money services businesses such as money transmitters, check cashers and sellers or issuers of stored value cards. Examples of anti-money laundering requirements imposed on financial institutions include subscriber identification and verification programs, record retention policies and procedures and transaction reporting. We do not believe that we are a financial institution subject to these laws and regulations based, in part, upon the characteristics of Groupons and our role with respect to the distribution of Groupons to subscribers. However, the Financial Crimes Enforcement Network, a division of the U.S. Treasury Department tasked with implementing the requirements of the Bank Secrecy Act, recently proposed amendments to the scope and requirements for parties involved in stored value or prepaid access cards, including a proposed expansion of financial institutions to include sellers or issuers of prepaid access cards. In the event that this proposal is adopted as proposed, it is possible that a Groupon could be considered a financial product and that we could be a financial institution. In the event that we become subject to the requirements of the Bank Secrecy Act or any other anti-money laundering law or regulation imposing obligations on us as a money services business, our regulatory compliance costs to meet these obligations would likely increase which could reduce our net income.
State and foreign laws regulating money transmission could be expanded to include Groupons.

29



Many states and certain foreign jurisdictions impose license and registration obligations on those companies engaged in the business of money transmission, with varying definitions of what constitutes money transmission. We do not currently believe we are a money transmitter given our role and the product terms of Groupons. However, a successful challenge to our position or expansion of state or foreign laws could subject us to increased compliance costs and delay our ability to offer Groupons in certain jurisdictions pending receipt of any necessary licenses or registrations.
Current uncertainty in global economic conditions could adversely affect our revenue and business.
Our operations and performance depend on worldwide economic conditions, which deteriorated significantly in the United States and other countries in late 2008 and through 2009. The current economic environment continues to be uncertain. These conditions may make it difficult for our merchant partners to accurately forecast and plan future business activities, and could cause our merchant partners to terminate their relationships with us or could cause our customers to slow or reduce their spending. Furthermore, during challenging economic times, our merchant partners may face issues gaining timely access to sufficient credit, which could result in their unwillingness to continue with our service or impair their ability to make timely payments to us. If that were to occur, we may experience decreased revenue, be required to increase our allowance for doubtful accounts and our days receivables outstanding would be negatively impacted. If we are unable to finance our operations on acceptable terms as a result of renewed tightening in the credit markets, we may experience increased costs or we may not be able to effectively manage our business. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, in the United States or in our industry. These and other economic factors could have a material adverse effect on our financial condition and operating results.
Our management team has a limited history of working together and may not be able to execute our business plan.
Our management team has worked together for only a limited period of time and has a limited track record of executing our business plan as a team. We have recently filled a number of positions in our senior management and finance and accounting staff. Accordingly, certain key personnel have only recently assumed the duties and responsibilities they are now performing. In addition, certain of our executives have limited experience managing a large global business operation. Accordingly, it is difficult to predict whether our management team, individually and collectively, will be effective in operating our business.
Our management team has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business.
The individuals who now constitute our management team have limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company that will be subject to significant regulatory oversight and reporting obligations under the federal securities laws. In particular, these new obligations will require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business, which could materially and adversely impact our business operations.
We will incur increased costs as a result of being a public company.
We face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, including the requirements of Section 404, as well as new rules and regulations subsequently implemented by the Securities and Exchange Commission, or the SEC, the Public Company Accounting Oversight Board and the exchange on which our Class A common stock is listed, impose additional reporting and other obligations on public companies. We expect that compliance with these public company requirements will increase our costs and make some activities more time-consuming. A number of those requirements will require us to carry out activities we have not done previously. For example, we will adopt new internal controls and disclosure controls and procedures. In addition, we will incur additional expenses associated with our SEC reporting requirements. For example, under Section 404 of the Sarbanes-Oxley Act, for our annual report on Form 10-K for our fiscal year ending December 31, 2012, we will need to document and test our internal control procedures, our management will need to assess and report on our internal control over financial reporting and our independent registered public accounting firm will need to issue an opinion on the effectiveness of those controls. In connection with the preparation of our financial statements for the year ended December 31, 2011, our independent registered accounting firm identified a material weakness in the design and operating effectiveness of our internal control over financial reporting, and as a result we expect to incur additional costs remediating this material weakness. In addition, the existence of this issue could adversely affect us, our reputation or investor perceptions of us. It also may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Advocacy efforts by stockholders and third-parties may also prompt even more changes in corporate governance and reporting requirements. We expect that the additional reporting and other obligations imposed on us by these rules and regulations will increase our legal and financial compliance costs and the costs of our related legal, accounting and administrative activities significantly. These increased costs will require us to divert a significant amount of money that we could otherwise use to expand our business and achieve our strategic objectives.

30



Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.
We may in the future be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Additional equity financing may dilute the interests of our common stockholders, and debt financing, if available, may involve restrictive covenants and could reduce our profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures.
Risks Related to Ownership of Our Class A Common Stock
The trading price of our Class A common stock is highly volatile
Our Class A common stock began trading on the NASDAQ Global Select Market on November 4, 2011 and between that date and December 31, 2011 has fluctuated from a high of $31.14 per share to a low of $14.85 per share. We expect that the trading price of our stock will continue to be volatile due to variations in our operating results and also may change in response to other factors, including factors specific to technology companies, many of which are beyond our control. Among the factors that could affect our stock price are:
 
our earnings announcements, including any financial projections that we may choose to provide to the public, any changes in these projections or our failure for any reason to meet these projections or projections made by research analysts;

the amount of shares of our Class A common stock that are available for sale;

the relative success of competitive products or services;

the public's response to press releases or other public announcements by us or others, including our filings with the SEC and announcements relating to litigation;

speculation about our business in the press or the investment community;

future sales of our Class A common stock by our significant stockholders, officers and directors;

changes in our capital structure, such as future issuances of debt or equity securities;

our entry into new markets;

regulatory developments in the United States or foreign countries;

strategic actions by us or our competitors, such as acquisitions, joint ventures or restructurings; and

changes in accounting principles.
 
We expect the stock price volatility to continue for the foreseeable as a result of these and other factors.

The concentration of our capital stock ownership with our founders, executive officers, employees and directors and their affiliates will limit your ability to influence corporate matters.

Our Class B common stock has 150 votes per share and our Class A common stock has one vote per share. As of December 31, 2011, our founders, Eric P. Lefkofsky, Bradley A. Keywell and Andrew D. Mason control 100% of our outstanding Class B common stock and approximately 33.5% of our outstanding Class A common stock, representing approximately 57.4% of the voting power of our outstanding capital stock. Messrs. Lefkofsky, Keywell and Mason will therefore have significant influence over management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future. This concentrated control will limit your ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. As a result, the market price of our Class A common stock could be adversely affected.
We do not intend to pay dividends for the foreseeable future.
We intend to retain all of our earnings for the foreseeable future to finance the operation and expansion of our business and

31



do not anticipate paying cash dividends. As a result, you can expect to receive a return on your investment in our Class A common stock only if the market price of the stock increases.
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.
Provisions in our certificate of incorporation and bylaws, as amended and restated upon the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

Our certificate of incorporation provides for a dual class common stock structure. As a result of this structure, our founders will have significant influence over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets. This concentrated control could discourage others from initiating any potential merger, takeover or other change of control transaction that other stockholders may view as beneficial.

Our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors.

Special meetings of our stockholders may be called only by our Executive Chairman of the Board, our Chief Executive Officer, our board of directors or holders of not less than the majority of our issued and outstanding capital stock. This limits the ability of minority stockholders to take certain actions without an annual meeting of stockholders.

Our stockholders may not act by written consent unless the action to be effected and the taking of such action by written consent is approved in advance by our board of directors. As a result, a holder, or holders, controlling a majority of our capital stock would generally not be able to take certain actions without holding a stockholders' meeting.

Our certificate of incorporation prohibits cumulative voting in the election of directors. This limits the ability of minority stockholders to elect director candidates.

Stockholders must provide timely notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon an annual meeting of stockholders. These provisions may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror's own slate of directors or otherwise attempting to obtain control of our company.

Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock. The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.



32




ITEM 1B: UNRESOLVED STAFF COMMENTS

None.

ITEM 2: PROPERTIES

Our principal executive offices in North America are located in Chicago, Illinois, and our principal international executive offices are located in Berlin, Germany and Schaffhausen, Switzerland. As of December 31, 2011, the properties listed below represented our principal executive facilities. Other facilities are located throughout the world and largely represent local operating facilities. We believe that our properties are generally suitable to meet our needs for the foreseeable future; however, we will continue to seek additional space as needed to satisfy our growth.
Description of Use
Square Footage
Operating Segment
Lease Expiration
Corporate office facilities
550,000
North America
From 2012 through 2018
Corporate office facilities
30,000
International
From 2012 through 2022

 
ITEM 3: LEGAL PROCEEDINGS

For a description of our material pending legal proceedings, please see Note 8 “Commitments and Contingencies—Legal Matters” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.


ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

33





PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Class A common stock has been listed on the NASDAQ Global Select Market under the symbol “GRPN” since November 4, 2011. Prior to that time, there was no public market for our Class A common stock. The following table sets forth the high and low sales price for our Class A common stock as reported by the NASDAQ Global Select Market for each of the periods listed.

2011
High
Low
Fourth Quarter (from November 4, 2011)
$31.14
$14.85
 
 
 
2012
High
Low
First Quarter (through March 27, 2012)
$25.84
$16.25

Holders

As of March 27, 2012, there were 343 holders of record of our Class A common stock and 3 holders of record of our Class B common stock. Each share of our Class A common stock is entitled to one vote per share. Each share of our Class B common stock is entitled to 150 votes per share and is convertible at any time into one share of Class A common stock.

Dividend Policy

We currently do not anticipate paying dividends on our Class A common stock or Class B common stock in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

Equity Compensation Plan Information

Information about the securities authorized for issuance under our compensation plans is incorporated by reference from the Company's Proxy Statement for the 2012 Annual Meeting of Stockholders


Recent Sales of Unregistered Securities

        Prior to our initial public offering and the conversion of our shares of capital stock into Class A Common and Class B common stock, we sold shares of our Series D preferred stock, Series E preferred stock, Series F preferred stock, Series G preferred stock, voting common stock and non-voting common stock and following our initial public offering, we sold shares of our Class A common stock in transactions that were deemed to be exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act as transactions not involving a public offering. The information set forth below reflects such sales since January 1, 2009 and, with respect to our voting common stock and non-voting common stock, gives effect to (i) the three-for-one forward stock split of our voting common stock and non-voting common stock that was completed in August 2010; (ii) the two-for-one forward stock split of our voting common stock and non-voting common stock that was completed in January 2011; and (iii) the two-for-one forward stock split of our voting common stock and non-voting common stock that was completed in October 2011.





34



Name of Stockholder
Series E
Preferred
Stock (1)
Series F
Preferred
Stock (2)
Voting
Common
Stock (3)
Non-Voting
Common
Stock (4)
Series G
Preferred
Stock (5)
Class A Common Stock
Date of
Purchase
Total
Purchase
Price
Andrew D. Mason
 
 
 
3,600,000

 
 
11/1/2009
$
144,000

Entities affiliated with Accel Growth Fund L.P.
2,932,552

 
 
 
 
 
11/17/2009
$
20,000,005

Entities affiliated with New Enterprise Associates
1,466,276

 
 
 
 
 
11/17/2009
$
10,000,002

The Board of Trustees of Leland Stanford Junior University
7,332

 
 
 
 
 
11/17/2009
$
50,004

Entities affiliated with Digital Sky Technologies
 
3,113,080

 
 
 
 
4/16/2010
$
100,000,000

Entities affiliated with Battery Ventures
 
1,089,578

 
 
 
 
4/16/2010
$
35,000,000

Goodrec, Inc. stockholders
 
 
 
714,704

 
 
5/6/2010
(6)
CityDeal Management UG (haftungsbeschraenkt) & Co. Beteiligungs KG
 
 
3,960,000

 
 
 
5/15/2010
(7)
CD‑Inv Holding UG (haftungsbeschraenkt) & Co. Beteiligungs KG
 
 
11,878,812

 
 
 
5/15/2010
(7)
Entities Affiliated with Oliver and Marc Samwer (8)
 
 
23,761,188

 
 
 
5/15/2010
(7)
Goodrec, Inc. stockholders
 
 
 
240,000

 
 
11/6/2010
(9)
Ludic Labs Inc. stockholders
 
 
 
2,460,000

 
 
11/30/2010
(10)
CityDeal Management UG (haftungsbeschraenkt) & Co. Beteiligungs KG
 
 
4,020,000

 
 
 
12/1/2010
(11)
CD‑Inv Holding UG (haftungsbeschraenkt) & Co. Beteiligungs KG
 
 
12,058,800

 
 
 
12/1/2010
(11)
Entities Affiliated with Oliver and Marc Samwer (8)
 
 
27,121,200

 
 
 
12/1/2010
(11)
Entities affiliated with The Growth Fund of America, Inc.
 
 
 
 
5,539,730

 
12/17/2010
$
175,000,071

Entities affiliated with Fidelity Investments
 
 
 
 
3,165,559

 
12/17/2010
$
100,000,009

Entities affiliated with Morgan Stanley Investment Management
 
 
 
 
2,374,170

 
12/17/2010
$
75,000,030

Entities affiliated with T. Rowe Price
 
 
 
 
3,165,559

 
12/17/2010
$
100,000,009

Allen & Company, LLC
 
 
 
 
126,622

 
1/11/2011
$
3,999,989

Entities affiliated with DST Global Limited
 
 
 
 
1,614,436

 
1/11/2011
$
51,000,033

Andreessen Horowitz Fund II, L.P.
 
 
 
 
1,266,223

 
1/11/2011
$
39,999,985

Entities affiliated with Battery Ventures VIII, L.P.
 
 
 
 
728,079

 
1/11/2011
$
23,000,016

Entities affiliated with Greylock XIII Limited Partnership
 
 
 
 
2,057,613

 
1/11/2011
$
64,999,995


35



Guy Oseary Family Trust
 
 
 
 
63,311

 
1/11/2011
$
1,999,994

KPCB Holdings, Inc.
 
 
 
 
2,057,614

 
1/11/2011
$
65,000,026

Entities affiliated with Maverick Fund Private Investments, Ltd.
 
 
 
 
1,582,780

 
1/11/2011
$
50,000,020

SLP Green Holdings, L.L.C.
 
 
 
 
1,582,779

 
1/11/2011
$
49,999,989

Entities affiliated with TCV Member Fund, L.P.
 
 
 
 
4,748,339

 
1/11/2011
$
150,000,029

Entities affiliated with Howard Schultz
 
 
 
1,899,336

 
 
2/10/2011
$
15,000,006

Matt McCutchen
 
 
 
29,040

 
 
2/10/2011
$
229,343

Placido Arango
 
 
 
126,622

 
 
2/10/2011
$
999,997

Theodore J. Leonsis
 
 
 
126,662

 
 
2/10/2011
$
1,000,313

Pelago Stockholders
 
 
 
380,300

 
 
4/18/2011
(12)
Zappedy Stockholders
 
 
 
426,184

 
 
7/15/2011
(13)
Entities Affiliated with Oliver and Marc Samwer (14)
 
 
 
 
2,908,856

 
7/29/2011
(15)
Darberry Ltda. stockholders

 
 
 
 
 
296,394

11/4/2011
(16)
Groupon Servicos Digitais Ltda. stockholders

 
 
 
 
 
266,668

11/15/2011
(17)
__________________
(1)
Each share of Series E preferred stock was converted into 12 shares of Class A common stock on October 31, 2011.
(2)
Each share of Series F preferred stock was converted into 12 shares of Class A common stock on October 31, 2011.
(3)
Each share of voting common stock was converted into one share of Class A common stock on October 31, 2011.
(4)
Each share of non-voting common stock was converted into one share of Class A common stock on October 31, 2011.
(5)
Each share of Series G preferred stock was converted into four shares of Class A common stock on October 31, 2011.
(6)
These shares were issued as partial consideration in connection with the merger of Goodrec, Inc. d/b/a Mobly with and into Groupon Mobly, Inc.
(7)
These shares were issued as consideration in connection with acquisition the of CityDeal Europe GmbH by Groupon Germany GbR.
(8)
Shares issued to CD‑Rocket Holdings UG (haftungsbeschraenkt) & Co. Beteiligungs KG is owned by Rocket Internet GmbH, 83.34% of which is owned by European Founders Fund GmbH. European Founders Fund is owned by Oliver Samwer (33.33%), Marc Samwer (33.33%) and Alexander Samwer (33.33%).
(9)
These shares were issued as contingent consideration in connection with the merger of Goodrec, Inc. d/b/a Mobly with and into Groupon Mobly, Inc.
(10)
These shares were issued as partial consideration in connection with the merger of Ludic Labs, Inc. with and into Groupon Ludic, Inc.
(11)
These shares were issued as contingent consideration in connection with the acquisition of CityDeal Europe GmbH by Groupon Germany GbR.
(12)
These shares were issued as partial consideration in connection with the acquisition of Pelago, Inc.
(13)
These shares were issued as consideration in connection with the acquisition of Zappedy, Inc. by Groupon.
(14)
Shares issued to Rocket Asia GmbH & Co. KG is owned by Rocket Internet GmbH, 83.34% of which is owned by European Founders Fund GmbH. European Founders Fund is owned by Oliver Samwer (33.33%), Marc Samwer (33.33%) and Alexander Samwer (33.33%).
(15)
These shares were issued as consideration in connection with an increase in Groupon's interest in E‑Commerce King Limited.
(16)
These shares were issued as consideration in connection with an increase in Groupon's interest in Darberry Ltda.
(17)
These shares were issued as consideration in connection with an increase in Groupon's interest in Groupon Servicos Digitais Ltda.
Since January 1, 2008, we have granted options to 667 of our employees or consultants to purchase an aggregate of

36



34,398,400 shares of our common stock, of which 8,575,538 have been exercised, 8,308,118 have been forfeited or expired and 17,514,744 remain either unvested or unexercised. The weighted average exercise price for the unvested and/or unexercised options is $1.12 per share. In addition, since January 1, 2008, we have granted 15,202,745 restricted stock units to 8,339 of our employees or consultants, 11,944,844 of which remain unvested. Each of the option and restricted stock unit grants were awarded under either the Company's 2011 Incentive Plan, 2010 Stock Plan or 2008 Stock Option Plan and, subject to the terms of those plans, vest and allow for exercise, as applicable, in accordance with the terms of each individual grant.

Other than the transactions listed immediately above, we have not issued and sold any unregistered securities in the past three years.


Use of Proceeds from Sales of Registered Securities

In connection with our initial public offering, we offered and sold 40,250,000 shares of Class A common stock at a price of $20.00 per share. The offer and sale of the shares in the initial public offering were registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (File No. 333-174661), which was declared effective by the Securities and Exchange Commission on November 3, 2011. The underwriters in offering were Morgan Stanley & Co. LLC, Goldman, Sachs & Co., Credit Suisse Securities (USA) LLC, Allen & Company LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc., J.P. Morgan Securities LLC, Wells Fargo Securities, LLC, William Blair & Company, L.L.C., Loop Capital Markets, Inc., RBC Capital Markets, LLC and The Williams Capital Group, L.P.

After deducting underwriting discounts and commissions and offering related expenses, our net proceeds from the initial public offering were approximately $744.2 million. In connection with the offering, we paid underwriting discounts and commissions of approximately $48.3 million and paid approximately $12.5 million in offering expenses.

We used the proceeds from the offering for working capital and other general purposes, which included the acquisition of other businesses, products or technologies. We invested the remaining proceeds in investment-grade, interest bearing instruments, pending their use to fund working capital and other general corporate purposes.

Issuer Purchases of Equity Securities

None.    

37





ITEM 6: SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the accompanying notes thereto in Item 8 of this Annual Report on Form 10-K, and the information contained in Item 7 of this Annual Report on Form 10-K "M anagement's Discussion and Analysis of Financial Condition and Results of Operations". Historical results are not necessarily indicative of future results.

 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
 
 
2008
 
2009
 
2010
 
2011
 
 
 
(dollars in thousands, except share data)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
Revenue (gross billings of $94, $34,082, $745,348 and $3,985,501 respectively)
 
$
5

 
$
14,540

 
$
312,941

 
$
1,610,430

Costs and expenses:
 
 
 
 
 
 
 
 

Cost of revenue
 
88

 
4,716

 
42,896

 
258,879


Marketing
 
163

 
5,053

 
290,569

 
768,472


Selling, general and administrative
 
1,386

 
5,848

 
196,637

 
821,002


Acquisition-related
 

 

 
203,183

 
(4,537
)

  Total operating expenses
 
1,637

 
15,617

 
733,285

 
1,843,816

Loss from operations
 
(1,632
)
 
(1,077
)
 
(420,344
)
 
(233,386
)
Interest and other income (expense), net
 
90

 
(16
)
 
284

 
5,973

Equity-method investment activity, net of tax
 

 

 

 
(26,652
)
Loss before provision for income taxes
 
(1,542
)
 
(1,093
)
 
(420,060
)
 
(254,065
)
Provision (benefit) for income taxes
 

 
248

 
(6,674
)
 
43,697

Net loss
 
(1,542
)
 
(1,341
)
 
(413,386
)
 
(297,762
)
Less: Net loss attributable to noncontrolling interests
 

 

 
23,746

 
18,335

Net loss attributable to Groupon, Inc.
 
(1,542
)
 
(1,341
)
 
(389,640
)
 
(279,427
)
Dividends on preferred shares
 
(277
)
 
(5,575
)
 
(1,362
)
 

Redemption of preferred stock in excess of carrying value
 

 

 
(52,893
)
 
(34,327
)
Adjustment of redeemable noncontrolling interests to redemption value
 

 

 
(12,425
)
 
(59,740
)
Preferred stock distributions
 
(339
)
 

 

 

Net loss attributable to common stockholders
 
$
(2,158
)
 
$
(6,916
)
 
$
(456,320
)
 
$
(373,494
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per share of common stock
 
 
 
 
 
 
 
 

Basic
 
$
(0.01
)
 
$
(0.04
)
 
$
(2.66
)
 
$
(1.03
)

Diluted
 
$
(0.01
)
 
$
(0.04
)
 
$
(2.66
)
 
$
(1.03
)


 
 
 
 
 
 
 
 
Weighted average number of shares outstanding
 
 
 
 
 
 
 
 

Basic
 
333,476,258

 
337,208,284

 
342,698,772

 
362,261,324


Diluted
 
333,476,258

 
337,208,284

 
342,698,772

 
362,261,324

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




38



 
 
 
 
 
 
 
 
 
As of December 31,
 
2008
 
2009
 
2010
 
2011 (1)
 
(in thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
Cash and cash equivalents
2,966

 
12,313

 
118,833

 
1,122,935

Working capital (deficit)
2,643

 
3,988

 
(196,564
)
 
328,165

Total assets
3,006

 
14,962

 
381,570

 
1,774,476

Total long-term liabilities

 

 
1,621

 
78,194

Redeemable preferred stock
4,747

 
34,712

 

 

Cash dividends per common share

 
0.063

 

 

Total Groupon, Inc. stockholders' (deficit) equity
(2,091
)
 
(29,969
)
 
8,077

 
702,541

___________________________________________
(1) Cash in 2011 includes cash from the initial public offering of $744.2 million, net of underwriter fees and other issuance costs


39



ITEM 7: 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 consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under "Risk Factors" and elsewhere in this Annual Report.
Overview
Groupon is a local commerce marketplace that connects merchant partners to consumers by offering goods and services at a discount. Traditionally, local merchants have tried to reach consumers and generate sales through a variety of methods, including the yellow pages, direct mail, newspaper, radio, television and online advertisements, promotions and the occasional guy dancing on a street corner in a gorilla suit. By bringing the brick and mortar world of local commerce onto the Internet, Groupon is creating a new way for local merchant partners to attract customers and sell goods and services. We provide consumers with savings and help them discover what to do, eat, see and buy in the places where they live and work.
Each day we email our subscribers discounted offers for goods and services that are targeted by location and personal preferences. Current and potential customers access our deals directly through our websites and mobile applications. Our revenue is the purchase price paid by the customer for the Groupon less an agreed upon percentage of the purchase price paid to the featured merchant partners excluding any applicable taxes and net of estimated refunds. In 2011, we generated revenue of $1,610.4 million, compared to $312.9 million in 2010 and $14.5 million in 2009. The increases in revenue were partially due to our rapid international expansion during 2010. Revenue from our international operations was $112.5  million and $975.5  million in 2010 and 2011, respectively.
We have organized our operations into two principal segments: North America, which represents the United States and Canada, and International, which represents the rest of our global operations. For the year ended December 31, 2010, we derived 36.0% of our revenue from our International segment, compared to 60.6% for the year ended December 31, 2011. We expect the percentage of revenue derived from outside North America to continue to increase in future periods as we continue to expand globally and increase our penetration of the marketing opportunities in countries outside of North America, including those where we are already established.
We incurred a net loss of $297.8  million for the year ended December 31, 2011 and have an accumulated deficit of $698.7  million as of December 31, 2011. Since our inception, we have driven our growth through substantial investments in infrastructure and marketing to increase customer acquisition. In particular, our net loss for the year ended December 31, 2011 was driven primarily by the rapid expansion of our International segment during the year, which involved investing heavily in upfront marketing, sales and infrastructure related to the build out of our operations in South Korea, Australia, Japan and Brazil. We intend to continue to pursue a strategy of significant investment in these regions and elsewhere in the future, consistent with the strategy we previously employed in North America and Europe.
How We Measure Our Business
We measure our business with several financial and operating metrics. We use these metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the long‑term performance of our marketplace. The key metrics are as follows:
Financial Metrics
Revenue. Our revenue is the purchase price paid by the customer for the Groupon less an agreed upon percentage of the purchase price paid to the featured merchant partner, excluding any applicable taxes and net of estimated refunds. We believe revenue is an important indicator for our business because it is a reflection of the cash retained by Groupon excluding payment processing fees, and the value of our service to our merchant partners. Revenue as a percentage of gross billings is influenced by the mix of national and local deals we offer.
Consolidated segment operating (loss) income (CSOI). CSOI is the consolidated operating (loss) income of our two segments, North America and International, adjusted for acquisition-related costs and stock-based compensation expense. Acquisition-related costs are non-recurring, non-cash items related to certain of our acquisitions. Stock-based compensation expense is a non-cash item. As reported under U.S. GAAP, we do not allocate stock‑based

40



compensation and acquisition‑related expense to our segments. We use CSOI to allocate resources and evaluate performance internally. CSOI is a non‑GAAP financial measure. For further information and a reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the " Results of Operations " section.
Free cash flow. Free cash flow, which is reconciled to "Net cash provided by operating activities," is cash flow from operations reduced by "Purchases of property and equipment." We use free cash flow, and ratios based on it, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it typically will present a more appropriate measure of cash flows as purchases of fixed assets, software developed for internal use and website development costs are a necessary component of ongoing operations. Free cash flow is a non-GAAP financial measure. For further information and a reconciliation to the most applicable financial measure under U.S. GAAP, refer to our discussion under Non-GAAP Financial Measures in the " Results of Operations " section.
Operating Metrics
Gross billings. This metric represents the gross amounts collected from customers for Groupons sold, excluding any applicable taxes and net of estimated refunds. We consider this metric to be an important indicator of our growth and business performance as it is a proxy for the dollar volume of transactions through our marketplace, net of tax and reserves. Tracking gross billings also allows us to track changes in the percentage of gross billings that we are able to retain after payments to our merchant partners. Gross billings are not equivalent to revenues or any other financial metric presented in our consolidated financial statements.
Active Customers. We define active customers as unique individuals that have purchased Groupons during the trailing twelve months. We consider this metric to be an important indicator of our business performance as it helps us to understand how the number of individuals purchasing Groupons is trending.
Gross billings per average active customer. This metric represents the trailing twelve months gross billings generated per average active customer. This metric is presented as the total gross billings generated in the trailing twelve months, divided by the average number of active customers in such time period. Although we believe total gross billings, not trailing twelve months gross billings per average active customer, is a better indication of the overall growth of our marketplace over time, trailing twelve months gross billings per average active customer provides an opportunity to evaluate whether our growth is primarily driven by growth in total customers or in spend per customer in any given period.
Revenue per average active customer. This metric represents the trailing twelve months revenue generated per average active customer. This metric is presented as the total revenue generated in the trailing twelve months, divided by the average number of active customers in such time period. Although we believe total revenue, not trailing twelve months revenue per average active customer, is a better indication of the overall growth of our business, trailing twelve month revenue per average active customer provides an opportunity to evaluate whether our average customer is purchasing deals with a higher or lower commission profile to Groupon.
 
Year Ended December 31,
 
2008
 
2009
 
2010
 
2011
Operating Metrics:
 
 
 
 
 
 
 
Gross billings (in thousands) (1)
$
94

 
$
34,082

 
$
745,348

 
$
3,985,501

Active customers (in thousands)  (2)
 *

 
374

 
8,940

 
33,742

Gross billings per average active customer (3)
 *

 
 *

 
$
160.05

 
$
186.75

Revenue per average active customer (4)
 *

 
 *

 
$
67.20

 
$
75.46

___________________________________________

*
Not available

(1)
Reflects the gross amounts collected from customers for Groupons sold, excluding any applicable taxes and net of estimated refunds, in the applicable period.
(2)
Reflects the total number of unique customers who have purchased Groupons during the trailing twelve months.
(3)
Reflects the total gross billings generated in the trailing twelve months per average active customer in the applicable period.

41



(4)
Reflects the total revenue generated in the trailing twelve months per average active customer in the applicable period.

Factors Affecting Our Performance

Customer acquisition costs. We must continue to acquire and retain customers who purchase Groupons in order to increase revenue and achieve profitability. If consumers do not perceive our Groupon offerings to be of high value and quality, or if we fail to introduce new or more relevant deals, we may not be able to acquire or retain customers. In our limited operating history, we have not incurred significant marketing or other expense on initiatives designed to re-activate customers or increase the level of purchases by our existing customers. If such expenditures or initiatives become necessary to maintain a desired level of activity in our marketplace, our business and profitability could be adversely affected.
Deal sourcing and quality. We consider our merchant partner relationships to be a vital part of our business model. We depend on our ability to attract and retain merchants that are prepared to offer products or services on compelling terms. We do not have long-term arrangements to guarantee availability of deals that offer attractive quality, value and variety to consumers or favorable payment terms to us. In light of our objective to promote variety in our daily deals, our general practice to date has been to limit repeat merchants. If new merchants do not find our marketing and promotional services effective, or if our existing merchants do not believe that utilizing our services provides them with a long-term increase in customers, revenue or profit, they may stop making offers through our marketplace.
Competitive pressure. Our growth and geographical expansion have drawn a significant amount of attention to our business model. As a result, a substantial number of group buying sites that attempt to replicate our business model have emerged around the world. While there has been a lot of documented consolidation of competition in recent months globally, we still expect new competitors to emerge. In addition to such competitors, we expect to increasingly compete against other large Internet and technology‑based businesses which have launched initiatives which are directly competitive to our business. We also expect to compete against other internet sites that are focused on specific communities or interests and offer coupons or discount arrangements related to such communities or interests.
Investment in growth. We are a high-growth company and have aggressively invested, and intend to continue to invest, to support this growth. As a result, we have incurred net losses in the majority of quarters since our inception. We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to increase the number and variety of deals we offer each day, broaden our customer base, expand our marketing channels, expand our operations, hire additional employees and develop our technology.
Pace and effectiveness of expansion. We have grown our business rapidly since inception, adding new customers and markets both domestically and internationally. Our international operations have become critical to our revenue growth and our ability to achieve profitability. For the years ended December 31, 2010 and 2011, 36.0% and 60.6% , respectively, of our revenue was generated from our international operations. Expansion into international markets requires management attention and resources and requires us to localize our services to conform to a wide variety of local cultures, business practices, laws and policies. International acquisitions also expose us to a variety of execution risks. The different commercial and Internet infrastructure in other countries may make it more difficult for us to replicate our traditional business model.
Basis of Presentation
Revenue
Revenue primarily consists of the net amount we retain from the sale of Groupons after paying an agreed upon percentage of the purchase price to the featured merchant, excluding any applicable taxes and net of estimated refunds.
Cost of Revenue
Cost of revenue is composed of direct and indirect costs incurred to generate revenue, including costs related to credit card processing fees, refunds which are not recoverable from the merchant, certain technology costs, editorial costs and other processing fees. Credit card and other processing fees are expensed as incurred. At the time of sale, we record a liability for estimated costs to provide refunds which are not recoverable from the merchant based upon historical experience. Technology costs in cost of revenue consist of payroll and stock‑based compensation expense related to our technology personnel. Such technology costs also include website hosting and email distribution costs. Editorial costs consist of the payroll and stock‑based compensation expense related to our editorial personnel, as such staff is primarily dedicated to drafting and promoting merchant deals.

42



Marketing
Marketing expense consists primarily of targeted online marketing costs, such as sponsored search, advertising on social networking sites, email marketing campaigns, loyalty programs, affiliate programs and, to a lesser extent, offline marketing costs such as television, radio and print advertising. Marketing payroll costs, including related stock‑based compensation expense, are also classified as marketing expense. We record these costs in marketing expense in our consolidated statements of operations when incurred. No costs included in marketing expense are incurred in connection with the fulfillment of our obligations to our merchants. Marketing is the primary method by which we acquire customers, and as such, is a critical part of our growth strategy.
Selling, General and Administrative
Selling expenses reported within selling, general and administrative on the consolidated statements of operations consist of payroll and sales commissions for inside and outside sales representatives as well as costs associated with supporting the sales function such as technology, telecommunications and travel. General and administrative expenses consist of payroll and related expenses for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources, among others. Additional costs included in general and administrative include subscriber service and operations, amortization and depreciation expense, rent, professional fees and litigation costs, travel and entertainment, stock compensation expense, charitable contributions, recruiting, office supplies, maintenance and other general corporate costs.
Acquisition‑Related
In May 2010, we acquired CityDeal, a European‑based collective buying power business launched in January 2010 that provided daily deals and online marketing services substantially similar to the Company. As part of the overall consideration paid, we were obligated to issue additional shares of our common stock in December 2010 due to the achievement of financial and performance earn-out targets. We recorded a liability on our consolidated balance sheet as of the original acquisition date for this consideration and subsequently remeasured the liability on a periodic basis until final settlement. As a result of this remeasurement, we recorded a total charge of $204.2 million in acquisition‑related expenses in 2010, which was partially offset by other nominal acquisition‑related items.
Similarly, in 2011, as part of the overall consideration payable in connection with certain acquisitions, we may be obligated to issue additional shares of our Class A common stock and make cash payments if certain financial and performance earn-out targets are achieved. We recorded a liability on our consolidated balance sheet as of the original acquisition date for this consideration and subsequently remeasured the liability as of December 31, 2011. As a result of this remeasurment, we recorded a net gain of $4.5  million in 2011 due to the change in fair value measurements from updated management forecasts, see Note 12 " Fair Value Meausrements ". These liabilities have not yet been settled and are subject to future remeasurement.
Interest and Other Income (Expense)
Interest and other income (expense) primarily consists of foreign currency gains and losses resulting from foreign currency transactions, which are denominated in currencies other than our functional currencies and interest expense on our loans from related parties.



43




Results of Operations
Comparison of the Years Ended December 31, 2009, 2010 and 2011:

 
 
 
Year Ended December 31,
 
 
 
2009
 
2010
 
2011
 
 
 
(in thousands)
Revenue (gross billings of $34,082, $745,348 and $3,985,501 respectively)
 
$
14,540

 
$
312,941

 
$
1,610,430

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
 
4,716

 
42,896

 
258,879

 
Marketing
 
5,053

 
290,569

 
768,472

 
Selling, general and administrative
 
5,848

 
196,637

 
821,002

 
Acquisition-related
 

 
203,183

 
(4,537
)
 
  Total operating expenses
 
15,617

 
733,285

 
1,843,816

Loss from operations
 
(1,077
)
 
(420,344
)
 
(233,386
)
Interest and other (expense) income, net
 
(16
)
 
284

 
5,973

Equity-method investment activity, net of tax
 

 

 
(26,652
)
Loss before provision for income taxes
 
(1,093
)
 
(420,060
)
 
(254,065
)
Provision (benefit) for income taxes
 
248

 
(6,674
)
 
43,697

Net loss
 
(1,341
)
 
(413,386
)
 
(297,762
)
Less: Net loss attributable to noncontrolling interests
 

 
23,746

 
18,335

Net loss attributable to Groupon, Inc.
 
(1,341
)
 
(389,640
)
 
(279,427
)
Dividends on preferred shares
 
(5,575
)
 
(1,362
)
 

Redemption of preferred stock in excess of carrying value
 

 
(52,893
)
 
(34,327
)
Adjustment of redeemable noncontrolling interests to redemption value
 

 
(12,425
)
 
(59,740
)
Net loss attributable to common stockholders
 
$
(6,916
)
 
$
(456,320
)
 
$
(373,494
)
 
 
 
 
 
 
 
 
Operating Expenses
Operating expenses with and without stock-based compensation are follows (in thousands):
 
Year Ended December 31,
 
2009
 
2010
 
2011
 
As reported
 
Stock-based compensation
 
Net
 
As reported
 
Stock-based compensation
 
Net
 
As reported
 
Stock-based compensation
 
Net
 
(in thousands)
Cost of revenue
$
4,716

 

 
$
4,716

 
$
42,896

 
$
(157
)
 
$
42,739

 
$
258,879

 
$
(1,130
)
 
$
257,749

Marketing
5,053

 

 
5,053

 
290,569

 
(129
)
 
290,440

 
768,472

 
(2,531
)
 
765,941

Selling, general and administrative
5,848

 
(115
)
 
5,733

 
196,637

 
(35,882
)
 
160,755

 
821,002

 
(89,929
)
 
731,073

Acquisition-related

 

 

 
203,183

 

 
203,183

 
(4,537
)
 

 
(4,537
)
Total operating expenses
$
15,617

 
$
(115
)
 
$
15,502

 
$
733,285

 
$
(36,168
)
 
$
697,117

 
$
1,843,816

 
$
(93,590
)
 
$
1,750,226

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



44



Foreign exchange rate neutral operating results

The effect on the Company's consolidated statements of operations from changes in exchange rates versus the U.S. dollar is as follows:

 
 
Year Ended December 31, 2011
 
 
At Avg.
 
Exchange
 
 
 
 
2010
 
Rate
 
As
 
 
Rates  (1)
 
Effect (2)
 
Reported
 
 
(in thousands)
Revenue
$
1,566,450

 
$
43,980

 
$
1,610,430

Costs and expenses
1,786,847

 
56,969

 
1,843,816

Loss from operations
$
(220,397
)
 
$
(12,989
)
 
$
(233,386
)
___________________________________________

(1)
Represents the outcome that would have resulted had exchange rates in the reported period been the same as those in effect in the comparable prior year period for operating results.

(2)
Represents the increase or decrease in reported amounts resulting from changes in exchange rates from those in effect in the comparable prior year period for operating results.
Gross Billings
For the years ended December 31, 2009, 2010 and 2011, our gross billings were $34.1  million, $745.3 million and $3,985.5  million, respectively, reflecting growth rates of 2,086.9% and 434.7% , respectively. Gross billings have increased due to an increase in the volume of transactions related to both global expansion and a deeper penetration of addressable market in the countries in which are already established. We have seen strong growth in our daily deals business in addition to our travel and entertainment channels.
Revenue
For the years ended December 31, 2009, 2010 and 2011, our revenue was $14.5 million, $312.9 million and $1,610.4 million, respectively. Revenue for each of the years presented by segment was as follows:

       
 
Year Ended December 31,
 
2009
 
% of total
 
2010
 
% of total
 
2011
 
% of total
 
(dollars in thousands)
North America
$
14,540

 
100.0%
 
$
200,412

 
64.0%
 
$
634,980

 
39.4%
International

 
 
112,529

 
36.0%
 
975,450

 
60.6%
Revenue
$
14,540

 
100.0%
 
$
312,941

 
100.0%
 
$
1,610,430

 
100.0%
      
2011 compared to 2010. Revenue increased by $1,297.5  million to $1,610.4 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. In addition to expanding the scale of our business domestically and internationally through acquiring businesses and entering new markets, several other initiatives have driven revenue growth over the last year. We increased our total marketing spend significantly, focusing on acquiring customers through online channels such as social networking websites and search engines. We also added substantially to our salesforce, allowing us to increase the number of merchant partner relationships, the volume of deals we offer on a daily basis on our websites and the quality of deals we offer to our customers. The favorable impact on revenue from year-over-year changes in foreign exchange rates for December 31, 2011 was $ 44.0 million.
North America
North America segment revenue increased by $434.6  million to $635.0  million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The increase in revenue is reflective of strong growth in our daily deals business domestically, which was largely attributable to an increase in active customers. As of the year ended December 31,

45



2011, we had operations in 175 North American markets.
International
International segment revenue increased by $862.9 million to $975.5 million for the year ended December 31, 2011 as compared to a partial year of operations for the year ended December 31, 2010. We ended the year with operations in 47 international countries, an increase from 38 international countries as of December 31, 2010. As a result of the entry into these new markets and growth in existing markets, we were able to grow our daily deals business significantly from December 31, 2010 through December 31, 2011.
2010 compared to 2009. Revenue increased by $298.4 million to $312.9 million for the year ended December 31, 2010 as compared to the year ended December 31, 2009.
North America
North America segment revenue increased by $185.9 million to $200.4 million for the year ended December 31, 2010 as compared to the year ended December 31, 2009. As the average revenue per Groupon remained relatively consistent year‑to‑year, the overall increase in revenue was directly attributable to the increase in the number of Groupons that we sold.
International
International segment revenue was $112.5 million for the year ended December 31, 2010. In 2010 we began our international expansion.
Cost of Revenue

For the years ended December 31, 2009, 2010 and 2011, our cost of revenue was $4.7 million, $42.9 million and $258.9 million, respectively. The increases in cost of revenue were directly related to growth in revenues.
2011 compared to 2010. Cost of revenue increased by $216.0 million to $258.9  million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The increase in cost of revenue was primarily driven by a $76.5  million increase in credit card processing fees, a $59.9  million increase in refunds which are not recoverable from the merchant, a $33.8 million increase in editorial salary costs and a $25.9 million increase in internet processing fees. Increases in credit card processing fees, refunds and internet processing fess are driven by higher merchant partner transaction volumes. Cost of revenue also increased due to significant additions to our editorial staff and increased email distribution costs as a result of our larger subscriber base.
2010 compared to 2009. Cost of revenue increased by $38.2 million to $42.9 million for the year ended December 31, 2010 as compared to the year ended December 31, 2009. The increase in cost of revenue was primarily driven by a $19.6 million increase in credit card processing fees and an $8.6 million increase in refunds which are not recoverable from the merchant. Increases in these refunds and credit card processing and other fees are both driven by higher merchant partner transaction volumes. Cost of revenue also increased due to significant additions to our editorial staff and increased email distribution costs as a result of our larger subscriber base.
Marketing

For the years ended December 31, 2009, 2010 and 2011 , our marketing expense was $5.1 million, $290.6 million and $768.5 million, respectively. Marketing expense as a percentage of revenue for each of the years presented is as follows:

 
Year Ended December 31,
 
2009
 
% of Revenue
 
2010
 
% of Revenue
 
2011
 
% of Revenue
 
(dollars in thousands)
North America
$5,053
 
34.8%
 
$123,590
 
61.7%
 
$254,746
 
40.1%
International
 
 
166,979
 
148.4%
 
513,726
 
52.7%
Marketing
$5,053
 
34.8%
 
$290,569
 
92.9%
 
$768,472
 
47.7%



46



Marketing expense as a percentage of revenue for the years ended December 31, 2009, 2010 and 2011 was 34.8% , 92.9% , and 47.7% respectively. We evaluate our marketing expense as a percentage of revenue because it gives us an indication of how well our marketing spend is driving volume. We invested heavily in customer acquisition in 2010. Therefore, marketing as a percentage of revenue for the year ended 2010 is higher than in comparable periods. Marketing expense as a percentage of revenue for the year ended December 31, 2011 has decreased due to efficiencies we have seen from the investments we made in 2010. Improved execution, word-of-mouth customer marketing benefits and mix shift from customer acquisition spend to direct marketing spend are all contributors to the improvement.
Marketing expense for each of the years presented is as follows:
 
Year Ended December 31,
 
2009
 
% of total
 
2010
 
% of total
 
2011
 
% of total
 
(dollars in thousands)
North America
$
5,053

 
100.0%
 
$
123,590

 
42.5%
 
$
254,746

 
33.1%
International

 
 
166,979

 
57.5%
 
513,726

 
66.9%
Marketing
$
5,053

 
100.0%
 
$
290,569

 
100.0%
 
$
768,472

 
100.0%
2011 compared to 2010. Our marketing expense increased by $477.9 million to $768.5  million, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. Marketing expense increased as we continued to focus on subscriber acquisition. For the year ended December 31, 2011, subscriber acquisition costs still represented the primary portion of our marketing spend. Through the course of the year an increasing portion of marketing was incurred for customer acquisition which includes conversion of subscribers that were not previously paying customers and customer acquisitions outside of our email subscriber base.
North America
North America segment marketing expense increased from $123.6 million to $254.7 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The significant increase was primarily attributable to an increase in online marketing spend, particularly on display advertising networks as part of our new customer acquisition strategy. Our customer loyalty and rewards program also contributed significantly to our increase in marketing expense as we continued to implement these programs in new markets that we entered into in 2011. In addition, we continued to increase our marketing resources to support our strategy. For the year ended December 31, 2011, marketing expense as a percentage of revenue for the North America was 40.1% as compared to 61.7% for the year ended December 31, 2010. The decrease in marketing expenses as a percentage revenue is due to efficiencies we have seen from the investments we made in 2010.
International
International segment marketing expense increased from $167.0 million to $513.7 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. Online marketing spend attributed to 73.0% of the marketing expense increase, particularly spend on display advertising networks as part of our new customer acquisition strategy. Our customer loyalty and rewards program also contributed to 17.6% of our increase in marketing expense as we continued to implement these programs in new markets that we entered into in 2011. In addition, we continued to increase our marketing resources to support our strategy, which attributed to 5.6% of the increase. For the year ended December 31, 2011, marketing expense as a percentage of revenue for the International segments was 52.7% as compared to 148.4% for the year ended December 31, 2010. The decrease in marketing expenses as a percentage revenue is due to efficiencies we have seen from the investments we made in 2010.
2010 compared to 2009. In 2010, our marketing expense increased by $285.5 million to $290.6 million, an increase of 5,650%.
The significant increase was primarily attributable to an increase in online marketing spend, particularly on display advertising networks as part of our new subscriber acquisition strategy. Our customer loyalty and rewards program also contributed significantly to our increase in marketing expense as many of these programs were not put in place until the second half of 2010. In addition, we increased our marketing staff to support our global marketing efforts. For the year ended December 31, 2010, marketing expense as a percentage of revenue for the North America and International segments was 61.7% and 148.4% , respectively. In 2010, we made significant marketing investments in our International segment to accelerate growth and establish our presence in new markets. As a result, we experienced much larger operating losses for our International segment than we did

47



for our North America segment.
Selling, General and Administrative

For the years ended December 31, 2009, 2010 and 2011, our selling general and administrative expense was $5.8  million, $196.6 million and $821.0 million, respectively. The increases in selling, general and administrative expense were principally related to the build out of our global salesforce, investments in technology and investments in our corporate infrastructure necessary to support our current and anticipated growth. For the year ended December 31, 2011, selling, general and administrative expense as a percentage of revenue was 51.0% , as compared to 62.8% for the year ended December 31, 2010. Selling, general and administrative expense as a percentage of revenue has decreased from the prior year as the productivity of our sales force continues to improve. We are continuously refining our sales management and selling processes and additionally we are introducing new products and services facilitating deeper customer and merchant partner engagement. Over time, as our operations mature in a greater percentage of our markets, we expect that our selling, general and administrative expense will continue to decrease as a percentage of revenue.
2011 compared to 2010. In 2011, our selling, general and administrative expense increased by $624.4 million to $821.0  million, an increase of 317.5% . The increase in selling, general and administrative expense for the year ended December 31, 2011 compared to the year ended December 31, 2010 was due to increases in wages and benefits, consulting and professional fees and depreciation and amortization expenses. Additionally, selling, general and administrative expenses as a percentage of revenue for our International segment were significantly higher than for our North America segment, which contributed to larger operating losses in our International segment. This was primarily a result of the build out of our international operations, including our salesforce, to support future revenue growth.
Wages and benefits (excluding stock‑based compensation) increased by $354.9  million to $433.4  million in the year ended December 31, 2011 as we continued to add sales force and administrative staff to support our business. Stock‑based compensation costs also increased to $89.9  million for the year ended December 31, 2011 from $35.9  million for the year ended December 31, 2010 due to awards issued to retain key employees and awards issued in connection with our acquisitions. Our consulting and professional fees increased in 2011 primarily related to higher legal and technology‑related costs. Depreciation and amortization expense increased in 2011 primarily because we recorded $9.9 million of intangible assets in connection with our acquisitions in 2011, resulting in an increase of amortization expense of $2.8  million. In addition, recognizing a full year of amortization for intangibles recorded in 2010 in connections with acquisitions resulted in an additional $10.5 million of amortization.
2010 compared to 2009. In 2010, our selling, general and administrative expense increased by $190.8 million to $196.6 million, an increase of 3,262%. The increase in selling, general and administrative expense for the year ended December 31, 2010 compared to the year ended December 31, 2009 was due to increases in wages and benefits, consulting and professional fees and depreciation and amortization expenses. Additionally, the selling, general and administrative expenses as a percentage of gross billings for our International segment were significantly higher than for our North America segment, which contributed to larger operating losses in our International segment. This was primarily a result of the build out of our international operations, including our sales force, to support future revenue growth. We expect that over time selling, general and administrative expenses for our International segment will decline as a percentage of gross billings for the segment.
Wages and benefits (excluding stock‑based compensation) increased by $75.2 million to $78.6 million in the year ended December 31, 2010 as we continued to add sales and administrative staff to support our business. Stock‑based compensation costs also increased to $35.9 million for the year ended December 31, 2010 from $0.1 million for the year ended December 31, 2009 due to awards issued to retain key employees and awards issued in connection with our acquisitions. Our consulting and professional fees increased in 2010 primarily related to higher legal and technology‑related costs. Depreciation and amortization expense increased in 2010 primarily because we recorded $47.3 million of intangible assets in connection with our acquisitions, resulting in $11.0 million of amortization expense.
Acquisition‑Related
For the years ended December 31, 2010 and 2011, our acquisition-related costs were $203.2 million net expense and $4.5 million net gain, respectively. There were no acquisition related costs for the year ended December 31, 2009. The fluctuation in the costs were directly related to acquisitions in the period.
During 2011, we acquired several companies that were either technology‑based companies or other group buying companies in an effort to increase our competitive advantage both domestically and internationally. As part of the overall consideration paid in connection with these acquisitions, we may be obligated to issue additional shares of our common stock and

48



make cash payments if certain financial and performance earn-out targets are achieved. We recorded a liability on our consolidated balance sheet of $17.8 million as of the original acquisition date for this consideration and subsequently remeasured the liability as of December 31, 2011. As a result of this remeasurment, we recorded a net gain of $4.5  million for the year ended December 31, 2011. These liabilities have not yet been settled and are subject to future remeasurement.
In May 2010, we acquired CityDeal, a European‑based collective buying power business similar to ours. As part of the overall consideration paid, we were obligated to issue additional shares of our common stock in December 2010 due to the achievement of financial and performance earn-out targets. We recorded a liability on our consolidated balance sheet as of the original acquisition date for this consideration and subsequently remeasured the liability on a periodic basis until final settlement. As a result of this remeasurement, we recorded a total expense of $204.2 million for the year ended December 31, 2010 as acquisition‑related expenses, which was partially offset by other nominal acquisition‑related items. This liability is settled and is no longer subject to future remeasurement.
Loss from Operations
For the years ended December 31, 2009, 2010 and 2011, our loss from operations was $1.1  million, $420.3 million and $233.4 million, respectively. The increases in loss from operations from 2009 to 2010 were primarily related to global expansion. Loss from operations decreased from 2010 to 2011 as the Company was able to continue to generate revenue on subscribers and customers acquired in prior periods using upfront marketing, sales and infrastructure investments. Additionally, we have consistently seen that once a customer is active, his or her purchasing behavior is consistent over time, and therefore reduces our incremental marketing costs to drive repeat purchases, which leads us to achieve higher profitability. The unfavorable impact on operating loss from year-over-year changes in foreign exchange rates for the year ended December 31, 2011 was $ 13.0 million.
2011 compared to 2010. Loss from operations decreased by $187.0  million to $233.4  million for the year ended December 31, 2011 as compared to the year ended December 31, 2010.
North America
Segment operating income for our North America segment increased by $15.2  million to $4.8  million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The increase in the segment operating income was primarily attributable to our expansion within North America. We invested heavily in upfront marketing, sales and infrastructure related to the build out of our operations.
International
Segment operating loss for our International segment decreased by $21.4  million to $149.1 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The International segment operating loss was driven by our rapid expansion in the segment during the year. In 2011, we made significant marketing investments in our International segment to accelerate growth and establish our presence in new markets. As a result, we experienced much larger operating losses for our International segment than we did for our North America segment.
2010 compared to 2009. Loss from operations increased by $419.3 million to $420.3 million for the year ended December 31, 2010 as compared to the year ended December 31, 2009.
North America
Segment operating loss for our North America segment increased by $9.5 million to $10.4 million for the year ended December 31, 2010 as compared to the year ended December 31, 2009. The increase in the loss from operations was primarily attributable to our expansion within North America. We invested heavily in upfront marketing, sales and infrastructure related to the build out of our operations in the domestic markets.
International
Segment operating loss for our International segment was $170.6 million for the year ended December 31, 2010. We entered into the international market in 2010. The International segment operating loss was driven by our rapid expansion in the segment during the period. We invested heavily in upfront marketing, sales and infrastructure related to the build out of our operations in the international markets.
Interest and Other Income (Expense), net

49




Interest and other income (expense), net, consists of foreign currency transaction gains or losses, interest earned on cash and cash equivalents and other non-operational gains and losses.

For the years ended December 31, 2010 and 2011, our interest and other income (expense), net was $0.3 million net gain and $6.0 million net expense, respectively. For the year ended December 31, 2011, we recognized approximately $4.9 million in other income related to the return of 400,000 shares of non-voting common stock from a former executive officer.
We recorded $0.4 million of interest expense for the year ended December 31, 2010 related to interest on loans from related parties. We did not incur any foreign currency gains or losses for the years ended December 31, 2009 as we did not have any international operations until 2010.
Provision (Benefit) for Income Taxes

For the years ended December 31, 2009, 2010 and 2011, the Company recorded a provision (benefit) for income taxes of $ 0.2 million, $ (6.7) million and $ 43.7 million, respectively.
2011 compared to 2010. We recorded a provision for income taxes of $ 43.7  million for the year ended December 31, 2011 compared to a benefit of $ 6.7 million in 2010. The effective tax rate from continuing operations for 2011 and 2010 was (17.2)% and 1.6% , respectively. The provision for income taxes for 2011 included amounts related to establishing our international headquarters. We recorded deferred charges during 2011 related to the deferral of income tax expense on intercompany profits resulting from the sale of our intellectual property rights, including intellectual property that was acquired in 2011, between various subsidiaries. The deferred charges are included in the other current assets and the other non-current assets lines on the consolidated balance sheets in the amounts of $33.3 million and $78.4 million respectfully. The deferred charges are amortized as a component of income tax expense over the life of the intellectual property. We anticipate making additional transfers in 2012.
2010 compared to 2009. We recorded a benefit for income taxes of $ 6.7  million for the year ended December 31, 2010, as we were able to record benefit for income taxes related to operating losses in certain foreign jurisdictions, compared to a $ 0.2 million provision for income taxes for the year ended December 31, 2009.
Non-GAAP Financial Measures

We use free cash flow and consolidated segment operating (loss) income, or CSOI, as key non-GAAP financial measures. Free cash flow and CSOI used in addition to and in conjunction with results presented in accordance with U.S. GAAP and should not be relied upon to the exclusion of U.S. GAAP financial measures.

Free cash flow. Free cash flow, which is reconciled to "Net cash provided by operating activities," is cash flow from operations reduced by "Purchases of property and equipment." We use free cash flow, and ratios based on it, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it typically will present a more conservative measure of cash flows as purchases of fixed assets, software developed for internal use and website development costs are a necessary component of ongoing operations.
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 the 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 merchant partners. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows.
The following is a reconciliation of free cash flow to the most comparable GAAP measure, "Net cash provided by operating activities," for the years ended December 31, 2009, 2010 and 2011:
 
 
Year Ended December 31,
 
 
2009
 
2010
 
2011
 
 
(in thousands)
Net cash provided by operating activities
 
$
7,510

 
$
86,885

 
$
290,447

Purchases of property and equipment
 
(290
)
 
(14,681
)
 
(43,811
)
Free cash flow
 
$
7,220

 
$
72,204

 
$
246,636


50



Consolidated segment operating (loss) income (CSOI). CSOI is the consolidated operating (loss) income of our two segments, North America and International, adjusted for acquisition-related costs and stock-based compensation expense. Acquisition-related costs are non-recurring, non-cash items related to certain of our acquisitions. Stock-based compensation expense is a non-cash item. As reported under U.S. GAAP, we do not allocate stock‑based compensation and acquisition‑related expense to our segments. We use CSOI to allocate resources and evaluate performance internally.
We consider CSOI to be an important measure for management to evaluate the performance of our business as it excludes certain non-cash expenses. We believe it is important to view CSOI as a complement to our entire consolidated statements of operations. When evaluating our performance, you should consider CSOI as a complement to other financial performance measures, including various cash flow metrics, net loss and our other U.S. GAAP results.

The following is a reconciliation of CSOI to the most comparable U.S. GAAP measure, ‘‘Loss from operations,’’ for the years ended December 31, 2009, 2010 and 2011.

 
 
Year Ended December 31,
 
 
2009
 
2010
 
2011
 
 
(in thousands)
Loss from operations
 
$
(1,077
)
 
$
(420,344
)
 
$
(233,386
)
Adjustments:
 
 
 
 
 
 
Stock-based compensation (1)
 
115

 
36,168

 
93,590

Acquisition-related (2)
 

 
203,183

 
(4,537
)
Total adjustments
 
115

 
239,351

 
89,053

CSOI
 
$
(962
)
 
$
(180,993
)
 
$
(144,333
)
___________________________________________

(1)
Represents non-cash stock-based compensation expense recorded within selling, general and administrative expense, cost of revenue and marketing expense.
(2)
Primarily represents non-cash charges for remeasurement of the fair value of contingent consideration related to acquisitions made by the Company in 2010 and 2011.

    
    


51



Quarterly Results of Operations
The following table represents data from our unaudited statements of operations for our most recent eight quarters. You should read the following table in conjunction with our consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. This quarterly information has been prepared on the same basis as the Consolidated Financial Statements and includes all adjustments necessary to fairly state the information for periods presented. The results of operations of any quarter are not necessarily indicative of the results that may be expected for any future period.

 
 
Three Months Ended
 
 
Mar. 31,
 
June 30,
 
Sept. 30,
 
Dec. 31,
 
Mar. 31,
 
June 30,
 
Sept. 30,
 
Dec. 31,
 
 
2010
 
2010
 
2010
 
2010
 
2011
 
2011
 
2011
 
2011
 
 
(unaudited)
 
 
(dollars in thousands, except per share amounts)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
20,272

 
$
38,666

 
$
81,779

 
$
172,224

 
$
295,523

 
$
392,582

 
$
430,161

 
$
492,164

Income (loss) income from operations
 
$
8,571

 
$
(36,819
)
 
$
(55,967
)
 
$
(336,129
)
 
$
(117,148
)
 
$
(101,027
)
 
$
(239
)
 
$
(14,972
)
Net income (loss) attributable to Groupon, Inc.
 
$
8,551

 
$
(35,929
)
 
$
(49,032
)
 
$
(313,230
)
 
$
(102,668
)
 
$
(101,240
)
 
$
(10,573
)
 
$
(64,946
)
Net income (loss) per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.02

 
$
(0.11
)
 
$
(0.14
)
 
$
(0.89
)
 
$
(0.33
)
 
$
(0.33
)
 
$
(0.03
)
 
$
(0.12
)
Diluted
 
$
0.01

 
$
(0.11
)
 
$
(0.14
)
 
$
(1.08
)
 
$
(0.33
)
 
$
(0.33
)
 
$
(0.03
)
 
$
(0.12
)
Weighted average number of shares outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
345,933,658

 
330,346,145

 
342,867,899

 
351,494,664

 
307,849,412

 
303,414,676

 
307,605,060

 
528,421,712

Diluted
 
491,925,142

 
330,346,145

 
342,867,899

 
351,494,664

 
307,849,412

 
303,414,676

 
307,605,060

 
528,421,712

Stock-based compensation income statement presentation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
 
$
11

 
$
12

 
$
30

 
$
104

 
$
212

 
$
212

 
$
56

 
$
650

Marketing
 
12

 
12

 
48

 
57

 
493

 
493

 
53

 
1,492

Selling, general and administrative
 
93

 
3,936

 
4,585