Question 3

(a) Compute the 2014 inventory turnover ratio and the days in inventory ratio. Note: what Groupon calls finished goods inventory is really merchandise inventory. Further, these computations are appropriate only for the direct revenue transactions and not for the third-party transactions.

(b) Compute the 2014 cash paid to inventory vendors.

Question 4

(a) Break the account property, equipment and software, net into two accounts: property, equipment and software, gross and accumulated depreciation. Using T-accounts, recreate summary entries for both of these accounts explaining how they moved from their beginning to their ending balances. Hint: be sure to include the PES obtained through mergers and acquisitions.

(b) For both accounts, you will need a plug figure to make the accounts balances. What are the two leading candidates that constitute this plug?

Question 5

Give the journal entry for Groupon?s acquisition of Ticket Monster Inc.

Question 6

(a) Groupon has a number of operating leases. What is the present value of the obligations associated with these operating leases?

(b) If Groupon were to capitalize these operating leases, how much would be added to the firm?s current liabilities?

(c) If Groupon were to capitalize these operating leases, how much would be added to the firm?s long-term liabilities?

Question 7

(a) What is accumulated deficit?

(b) Give the journal entry for Groupon?s purchase of treasury stock in 2014?

(c) Suppose Groupon had issued 10 million shares of common stock in 2014 for $35 per share. Give the journal entry for this hypothetical transaction.

Question 8

Evaluate the liquidity and solvency of Groupon in 2013 and 2014 and rate the firm on a scale from 1 (weak) to 10 (strong).

Question 9

Evaluate the persistence of earnings of Groupon in 2013 and 2014 and rate the firm on a scale from 1 (weak) to 10 (strong).

Question 10

Evaluate the quality of earnings of Groupon in 2013 and 2014 and rate the firm on a scale from 1 (weak) to 10 (strong).

2014 ANNUAL REPORT Dear Stockholders -In 2008, Groupon sparked an entirely new form of commerce and created the daily deal industry, simultaneously giving unprecedented buying power to consumers and previously impossible reach to local businesses. We became one of the fastest growing companies in history in the process. Just six years later, we've reinvented the very category we founded by building one of the world's largest local commerce marketplaces. REFLECTING ON THE LAST TWO YEARS Two years ago, I stepped back into an operating role at Groupon, and I've been amazed at how much our team of nearly 11,000 employees worldwide has been able to accomplish. Two years ago, we were a lot smaller. Over the past two years our billings have grown by over $800 million dollars, and our revenues have grown by $700 million.1 In addition, the fundamental input variables that drive our results were up and to the right over the same period. We added approximately 400,000 new merchants to our platform and nearly 7 million new customers bought a Groupon, driving annual units from 176 million to 214 million in this period. Two years ago, we were not predominantly mobile. At the end of 2012, 35 million people had downloaded our apps globally. By the end of 2014, nearly 100 million people had downloaded our apps and mobile was well over 50 percent of our transactions, globally. Back then, our business was still highly reliant on daily deals as email accounted for nearly 50 percent of our transactions in North America. At the end of 2014, email represented less than a quarter of our North American transactions, as search and mobile have been elevated through our marketplace strategy. Two years ago, we were heavily reliant on marketing. Back then, we were coping with a shift in strategy that led us to cut our marketing investments in half from over $700 million in the year we went public. Today, our marketing spend is far more efficient which allowed us to add millions of new customers in 2014, on a marketing budget that is roughly 4 percent of our total billings, down from its peak of nearly 20 percent a few years ago. That same efficiency helped us sell more than $6.2 billion worth of Groupons last year and generate revenues over $3.0 billion. Two years ago, our marketplace was just being formed. Search on Groupon accounted for less than 5 percent of our business. In the fourth quarter of 2014, direct search represented 26 percent of our North American transactions. This wouldn't be possible but for the enormous strides we've made in growing our inventory from less than 40,000 North American deals a few years ago to approximately 330,000 globally at the end of last year. And yet we still have a long way to go. Despite our efforts, we still only had 135,000 deals in our largest market, North America, out of the millions of target merchants we would like to feature. With more than 160 million monthly unique visitors globally, we have significant opportunities to improve our users' experience as we continue to add more inventory over time. Two years ago, our international business was struggling. In the back half of 2012, EMEA was shrinking, suffering from poor operating fundamentals, and our Rest of World segment was losing more than $40 million dollars a year. Over the last two years, we have greatly improved the customer and merchant experience throughout Europe, stabilizing the region and allowing us to return EMEA to growth. In 1 All of the financial information and metrics we provide in this letter exclude Ticket Monster, as we have entered into an agreement to sell a majority stake in that business during 2015 and will present it as a discontinued operation for financial reporting purposes. addition, we reduced our losses in our Rest of World business dramatically throughout 2014, ending the year on track to generate positive segment operating income within the next few quarters. Two years ago, our Goods and Getaways categories were in their infancy. Together, they represented roughly $700 million in billings in North America in 2012. By the end of 2014, they were about 200 percent larger in North America alone and had expanded globally. In addition, some of our newest and most promising businesses were either just getting off the ground or had yet to even be born: Live, Home, Coupons, Snap, Payments, Stores, Basics - all representing future opportunities. The strength of our brand is a strategic advantage, and one that has allowed us to extend our value proposition into new and emerging categories. Finally, two years ago, our product and engineering organization was fragmented. Today, our technology team has never been stronger, as we continue to bring our global operations onto a unified platform. With roughly 1,400 people straddled across major development centers in Palo Alto, Seattle, Chicago, San Francisco, New York, Chennai, Berlin, Dublin and Chile, we are building and deploying features at an unprecedented pace. LOOKING AHEAD Our progress over the past few years, and especially in 2014, has been essential to writing Groupon's next chapter. Early in our history, many observers speculated that our business model would be overrun. The opposite has proven to be true. In 2015, we intend to continue the marketplace transformation we started a few years ago, adding more merchants to our platform and allowing our customers to buy, book, reserve, redeem and pay for local goods and services seamlessly through our app. As we aggregate more inventory and improve user experience, we believe conversion will rise, and we'll be able to invest more heavily in driving traffic and transactions, unlocking new pools of growth. As such, we now turn our attention to making our product truly indispensable to consumers looking to explore the world around them and save money while they're at it. We aspire to be the best kind of daily habit -- one of surprise and delight; a place you start when you're looking to do or buy just about anything locally. As we seek to connect local commerce and reward everyday curiosity, we're mindful of how far we've come and how far we have yet to go given the size of the opportunity before us. Six years ago, we invented a category. Two years ago, we reinvented it. Our goal is that two years from now, we'll have built an unrivaled and ubiquitous platform for local and mobile discovery. I wouldn't be able to say that but for the incredible work of our team over the past few years and the support of our stockholders along the way. Thank you again for joining us on this journey. Sincerely, Eric Lefkofsky CEO, Groupon, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 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: 1-35335 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 400 Chicago, Illinois 60654 (Address of principal executive offices) (Zip Code) 312-334-1579 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Class A Common Stock, par value $0.0001 Name of each exchange on which registered 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 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 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 No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 No 1 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. 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 (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 As of June 30, 2014, the aggregate market value of shares held by non-affiliates of the registrant was $3,340,614,720 based on the number of shares of Class A common stock held by non-affiliates as of June 30, 2014 and based on the last reported sale price of the registrant's Class A common stock on June 30, 2014. As of February 9, 2015, there were 672,963,103 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 2015, 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. 2 TABLE OF CONTENTS PART I Page Forward-Looking Statements ....................................................................................................................................... Item 1. Business............................................................................................................................................................ 4 4 Item 1A. Risk Factors ................................................................................................................................................... Item 1B. Unresolved Staff Comments.......................................................................................................................... 12 27 Item 2. Properties.......................................................................................................................................................... 27 Item 3. Legal Proceedings ............................................................................................................................................ Item 4. Mine Safety Disclosures................................................................................................................................... PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and 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 27 27 28 31 33 81 82 136 136 138 Item 10. Directors, Executive Officers and Corporate Governance............................................................................. Item 11. Executive Compensation................................................................................................................................ 139 139 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 Accountant Fees and Services......................................................................................................... Part IV 139 139 139 Item 15. Exhibits and Financial Statement Schedule ................................................................................................... 140 ______________________________________________________ 3 PART I FORW 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, as amended, 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. As used herein, "Groupon," "we," "our," and similar terms include Groupon, Inc. and its subsidiaries, unless the context indicates otherwise. ITEM 1: BUSINESS Overview Groupon is a global leader in local commerce, making it easy for people around the world to search and discover great businesses and merchandise. Our vision is to connect local commerce, increasing consumer buying power while driving more business to merchants through price and discovery. We want Groupon to be the destination that our customers check first when they are out and about; the place they start when they are looking to buy just about anything, anywhere, anytime. By leveraging our global relationships and scale, we offer consumers deals on things to eat, see, do and buy in 47 countries. We operate online local commerce marketplaces throughout the world that connect merchants to consumers by offering goods and services at a discount. Our operations are organized into three principal segments: North America, which represents the United States and Canada, EMEA, which is comprised of Europe, the Middle East and Africa, and the remainder of our international operations ("Rest of World"). We offer deals on goods and services in three primary categories: Local Deals ("Local"), Groupon Goods ("Goods") and Groupon Getaways ("Travel"). We act as a third party marketing agent by selling vouchers ("Groupons") that can be redeemed for products or services with a merchant. We also sell merchandise directly to customers in transactions for which we are the merchant of record. Customers access our deal offerings directly through our websites, mobile platforms and emails and may also access our offerings indirectly using search engines. Our results from 2014 include the following: Gross billings increased to $7.6 billion in 2014, as compared to $5.8 billion in 2013. In 2014, 43.6%, 27.0% and 29.4% of our gross billings were generated in North America, EMEA and Rest of World, respectively, as compared to 49.5%, 34.5% and 16.0% in 2013. Gross billings represent the total dollar value of customer purchases of goods and services, excluding applicable taxes and net of estimated refunds. Gross billings differs from our revenue, which is presented net of the merchant's share of the transaction price for transactions in which we act as a third party marketing agent. Gross billings and revenue are the same for transactions in which we sell merchandise directly to customers as the merchant of record. Revenue increased to $3.2 billion in 2014, as compared to $2.6 billion in 2013. In 2014, 57.2%, 30.1% and 12.7% of our revenue was generated in North America, EMEA and Rest of World, respectively, as compared to 59.1%, 28.9% and 12.0% in 2013. 4 Gross profit increased to $1,549.2 million in 2014, as compared to $1,501.5 million in 2013. Loss from operations was $14.8 million in 2014, compared to $75.8 million of income from operations in 2013. The number of active customers, which is defined as customers who have made a purchase on our platform within the last twelve months, increased to 53.9 million as of December 31, 2014 from 43.7 million as of December 31, 2013. As of December 31, 2014, we had approximately 370,000 active deals available to customers through our marketplaces. We are a Delaware corporation, incorporated on January 15, 2008 under the name "ThePoint.com, Inc." We started Groupon in October 2008 and officially changed our name to Groupon, Inc. by filing an amended certificate of incorporation on June 16, 2009. Our principal executive offices are located at 600 West Chicago Avenue, Suite 400, Chicago, Illinois 60654, and our telephone number at this address is (312) 334-1579. Our investor relations department can be reached through our investor relations hotline, which is (312) 999-3098. Our website is www.groupon.com. Information contained on our website is not a part of this Annual Report on Form 10-K. We completed our initial public offering in November 2011 and our Class A common stock is listed on the Nasdaq Global Select Market under the symbol "GRPN." GROUPON, the GROUPON logo and other GROUPON-formative marks are trademarks of Groupon, Inc. in the United States or other countries. This Annual Report on Form 10-K also includes other trademarks of Groupon and trademarks of other persons. Our Strategy Our primary objective is to become an essential part of everyday local commerce for consumers and merchants. Key elements of our strategy include the following: Become the starting point for mobile commerce. We believe that Groupon is well positioned to be a leader in the world of mobile commerce. During 2014, we continued to invest in our mobile technology in order to attempt to capitalize on the growing trend of consumers making purchases through smartphones and tablets. In the fourth quarter of 2014, over 50% of our global transactions were completed on mobile devices. Additionally, almost 110 million people have downloaded our mobile applications worldwide as of January 31, 2015. We intend to continue making investments in mobile technology and marketing to improve the customer experience, help grow our mobile transaction volume and help increase customer awareness of their ability to access our offerings on mobile devices. Redefine local commerce. Groupon seeks to bring the power of the Internet to local commerce, serving as an important source of customer acquisition for local merchants. To accomplish this, we are focused on growing our base of active customers by offering a variety of quality deals and focusing on customer satisfaction. We believe customer dissatisfaction primarily occurs when we offer deals that our customers do not consider relevant and when the promotional value of a voucher expires before redemption. Our efforts to improve relevance and reduce expirations include building our online commerce marketplaces where merchants generally have a continuous presence for an extended period of time. In our online commerce marketplaces, customers can provide feedback on which merchants they would like to offer deals who are not currently offering deals, which can be used to improve the relevance of future deals. With extended availability of deal offerings through our marketplaces customers can purchase a voucher when they have plans to redeem it, rather than purchasing the voucher earlier in response to a limited-time offer. We have also launched a tablet-based platform for merchants to streamline the voucher redemption process. Grow our local commerce marketplaces. We continue to transition our business from primarily a "push" model that generates demand by emailing offers to customers to more of a demand fulfillment, or "pull," model that enables customers to search for goods and services through online local marketplaces that they can access through our websites and mobile applications and by using search engines. By continuing to develop and expand our marketplaces and improve the search functionality of our websites and mobile applications, we are seeking to provide customers in each of our markets with a single place where they can go to search for and discover great deals on local merchant offerings, merchandise and travel. We remain focused on growing the supply of active deals available through our marketplaces to achieve this objective. We have increased our average active deal counts from approximately 1,000 deals available worldwide at the time of our initial public offering in November 2011 to approximately 370,000 deals available worldwide as of the end of the fourth quarter of 2014. We have implemented a self-serve process whereby merchants have the ability to construct deals that can be offered on-demand through our websites and we believe that this process provides merchants with an easier way to improve their web presence and reach new customers. We have also begun adding additional content about local merchants to our websites, 5 including merchants who have not offered deals through our marketplaces. This new content, which we refer to as "Pages," is intended to give customers the ability to discover more local businesses and deal offerings through our websites. Enhance the email experience. While an increasing proportion of transactions on our platform are occurring on mobile devices and our websites, email still generates significant transaction volume and we expect that it will continue to do so in the future. We continue to refine our use of targeting technology that enables us to distribute deal offerings to current and potential customers based on their location and personal preferences. In addition to email, we use this targeting technology for push notifications on mobile devices. 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, downloaded our mobile applications or purchased a Groupon. Continue to build out our categories. Although Groupon began by offering only daily deals from local merchants, our platform has evolved over time into three primary categories: Local, Goods and Travel. Within those primary deal categories are a variety of subcategories, such as food and drink, events and activities, health and beauty, household items, jewelry, electronics and apparel. We intend to continue to build out our categories and subcategories by actively pursuing opportunities that would enable us to expand our deal offerings. See the "Categories" section below for additional information. Globalize our platforms and processes. Because our international expansion was accomplished primarily through acquisitions, we inherited different technology platforms and business processes. We have undertaken a company-wide program that has streamlined many of our technology platforms and processes and we have rolled out a number of internal tools to increase our efficiency, including, for example, internal tools used by our salespeople to support their efforts in obtaining quality deal offerings for our marketplaces. In addition, we are increasingly automating our support functions in order to improve the overall efficiency of our business operations. Our Business Groupon operates online local commerce marketplaces throughout the world that connect 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 online advertising, paid telephone directories, direct mail, newspaper, radio, television and other promotions. By bringing the brick and mortar world of local commerce onto the Internet, Groupon is helping local merchants to attract customers and sell goods and services. We provide consumers with savings and help them discover what to do, eat, see, buy and where to travel. We earn revenue from deals where we act as a third party marketing agent by selling vouchers that can be redeemed for goods or services with a merchant. Our third party revenue from those transactions is the purchase price paid by the customer for the voucher less an agreed upon portion of the purchase price paid to the featured merchants, excluding applicable taxes and net of estimated refunds for which the merchant's share is recoverable. We also earn revenue by selling merchandise directly to customers in transactions for which we are the merchant of record. Our direct revenue from those transactions is the purchase price paid by the customer, excluding applicable taxes and net of estimated refunds. Our business model has evolved from primarily an email-based "push" model with a limited number of deals offered at any given time to more extensive online "pull" marketplaces, particularly in North America, where customers can come to Groupon and search for deals on goods and services. Our marketplaces are accessible through our websites and mobile applications, including through localized groupon.com sites in many countries. We also recently launched Pages in North America, a platform that we use to publish ratings and helpful tips from customers to highlight the unique aspects of local merchants, including merchants that have not offered deals through our marketplaces. In addition, Pages provide merchants with an additional online presence to connect with potential customers and drive more sales in the form of exclusive offers, everyday specials, coupons and other promotions. On January 2, 2014, we acquired LivingSocial Korea, Inc. ("LS Korea"), a Korean corporation and holding company of Ticket Monster Inc. ("Ticket Monster"), for total consideration of $259.4 million, consisting of $96.5 million cash and 13,825,283 shares of Class A common stock with an acquisition date fair value of $162.9 million. Ticket Monster, which has approximately 1,000 employees, is an e-commerce company based in the Republic of Korea that connects merchants to consumers by offering goods and services at a discount. The operations of Ticket Monster are reported within our Rest of World segment in 2014. We have hired advisers to help us explore a range of financing and strategic alternatives for Ticket Monster and certain other Asian markets. As part of that process, multiple parties have expressed preliminary interest in Ticket Monster. However, we cannot provide any assurance as to the pricing, timetable or structure of any transaction, or the likelihood of any transaction being completed. 6 On January 13, 2014, we acquired Ideeli, Inc. (d/b/a "Ideel"), a fashion flash site based in the United States for $42.7 million. Ideel is focused on women's fashion apparel, accessories and home dcor, and the operations of Ideel are reported within our North America segment in 2014. Categories Local. Our Local category includes deals with local merchants, deals with national merchants and local events. Local also includes other revenue sources such as advertising revenue, payment processing revenue, point of sale revenue and commission revenue as these revenue sources are primarily generated through the our relationships with local and national merchants. We offer deals for local merchants across multiple subcategories, including food and drink, events and activities, beauty and spa, health and fitness, home and garden and automotive. In the United States, customers can book reservations at selected restaurants through our website and mobile applications. National merchants also have used our marketplaces as an alternative to traditional marketing and brand advertising. Although our business today is weighted toward deals from local merchants, we continue to feature national deals to build our brand awareness, acquire new customers and generate additional revenue. In 2014, we featured deals from a number of well-known national merchants across our North American markets, including Starbucks, Rosetta Stone, Whole Foods, and Sam's Club. In addition to national deals, Coupons, our coupon offering that was launched in 2013, and Snap, our mobile application launched in 2014 that offers customers cash-back for buying featured grocery and consumer-packaged goods, gives customers the ability to access coupons from thousands of retailers. Additionally, GrouponLive is a partnership with LiveNation through which Groupon offers deals on concerts, sports, theater and other live entertainment events. Goods. Our Goods category offers customers the ability to find deals on merchandise across multiple product lines, including electronics, sporting goods, jewelry, toys, household items and apparel. As the Goods category continues to grow, we expect that we will continue to add new brands to our platform in order to expand our offerings. In our Goods category, we earn direct revenue from transactions in which we sell products directly to customers and serve as the merchant of record, as well as third party revenue from transactions in which we act as a third party marketing agent and sell vouchers that can be redeemed for products with a merchant. Our Goods transactions in North America are primarily direct revenue deals and, beginning in September 2013, a significant portion of our Goods transactions in EMEA have been direct revenue deals as well. Goods transactions in EMEA prior to September 2013 and in our Rest of World segment have primarily been third party revenue deals. In order to attempt to reduce costs and improve the customer experience, we continue to be focused on streamlining our order fulfillment process for Goods. Although we currently outsource a majority of our inventory fulfillment activities in the United States to third party logistics providers, we expect to reduce our usage of those third parties in future periods by transitioning additional inventory fulfillment work in the United States to internal resources. We launched our own fulfillment center in the fourth quarter of 2013 and have increased our use of arrangements in which the suppliers of our product offerings ship merchandise directly to our customers to further reduce the involvement of third party logistics providers. We are also refining our inventory management practices to better allocate inventories among warehouses in different geographic regions throughout the United States to reduce shipping distances to customers and increase units per transaction. Getaways. Through our Getaways category, we feature travel offers at both discounted and market rates, including hotels, airfare and package deals covering both domestic and international travel. For many of our travel deals, the customer must contact the merchant directly to make a travel reservation after purchasing the travel voucher from us. However, for some of our hotel deals, we take room reservations directly through our websites. Distribution We distribute our deal offerings to customers primarily through three channels: our mobile platform, our websites and email. Customers can also access our deal offerings indirectly through search engines. Our mobile platform consists of apps and mobile websites, which we currently offer on iPhones, iPads, Android, Blackberry and Windows devices. Mobile Applications. Consumers are increasingly accessing our deals through our mobile applications, as well as through mobile browsers. These applications enable consumers to browse, purchase, manage and redeem deals on their mobile devices. In addition, in our North American markets, consumers have a "Nearby" tab, which shows the deals that are closest to the consumer's location. In the fourth quarter of 2014, over 50% of our global transactions were completed on mobile devices. Additionally, almost 110 million people have downloaded our mobile applications worldwide as of January 31, 2015. 7 Websites. In 2014, we launched website enhancements in many of our international markets in an effort to improve the overall customer experience. The enhancements were based on the 2013 redesign of our North American website that included improved search capabilities and personalized offerings each day tailored to the user's preferences. Email. In North America and most of our international markets, we use targeting technology to distribute deals to current and potential customers based on their locations and personal preferences. A subscriber who clicks on a deal within an email is directed to our website or mobile application to learn more about the deal and make a purchase. Search Engines and Other. Customers can access our deal offerings indirectly through third party search engines. We use search engine optimization ("SEO") and marketing ("SEM") to increase the visibility of our offerings in web search results. We have established an affiliate program that utilizes third parties to promote our deals online. Affiliates earn commissions when customers access our deals through links on their websites and make purchases. We expect to continue to leverage affiliate relationships to extend the distribution of our deals to a broad base of potential customers. We also publish our 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. Marketing Marketing is the primary method by which we acquire customers and promote awareness of our marketplaces and deal offerings and, as such, is an important part of our growth strategy. Our marketing spend increased, both in absolute dollars and as a percentage of revenue, during the year ended December 31, 2014, as compared to the prior year, and remains a key element of our business operations. Online marketing consists of search engine marketing, television, billboard and radio advertisements, public relations and sponsored events to increase our visibility and build our brand. Our marketing activities also include elements that are not presented as "Marketing" on our consolidated statements of operations, such as order discounts and free shipping on merchandise sales. Sales and Operations Our sales force includes approximately 5,000 merchant sales representatives and sales support staff, who build merchant relationships and provide local expertise. Our North American merchant sales representatives and support staff are primarily based in our offices in Chicago, and our international merchant sales representatives and support staff are based in our international offices, although many of our international merchant sales representatives conduct business using a door-to-door sales strategy. Our global sales and sales support headcount by segment as of December 31, 2014 was as follows: North America.................................................................................................................... EMEA ................................................................................................................................ Rest of World..................................................................................................................... Total ................................................................................................................................... 1,369 1,896 1,719 4,984 The number of sales representatives is higher as a percentage of revenue in our EMEA and Rest of World segments 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 EMEA and Rest of World segments as compared to the costs in our North America segment. Other key operational functions include city planners, editorial, merchant services, customer service, technology and logistics. City planners work with sales teams to optimize deal structure and pricing and manage the category, discount and geographic mix, as well as the cadence of deals in their respective markets. Our editorial department is responsible for creating the written and visual content on the deals we offer. Merchant services representatives work with merchants to plan for increased customer traffic before a deal is offered and serve as an ongoing point of contact for the merchant over the term of a deal. Our customer service department is responsible for answering questions received via phone, email and on public discussion boards regarding purchases, shipping status, returns and other areas of customer inquiry. 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. Logistics personnel are responsible for managing the flow of merchandise inventory from suppliers to our customers. 8 Our websites are hosted at a U.S. data center in 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 employ security practices to protect and maintain the systems located at our data centers. We have invested in intrusion and anomaly detection tools to try to recognize intrusions to our websites. We engage independent third-party Internet security firms to regularly test the security of our websites and identify vulnerabilities. In financial transactions between our websites and our customers, we use data encryption protocols to secure information while in transit. Competition Our business is rapidly evolving and we face competition from a variety of current and potential competitors. 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 and subcategories, we will compete with online and offline merchants offering similar products and services. We also compete with businesses that focus on our payment processing and point-of-sale merchant offerings. 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: size of active customer base and breadth merchant relationships; mobile penetration; understanding of local business trends; ability to structure deals to generate positive return on investment for merchants; and strength and recognition of brand. Although we believe that we compete favorably on the factors described above and benefit from scale, we anticipate that larger, more established companies may directly compete with us over time. 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. Seasonality We believe that some of our offerings experience seasonal buying patterns mirroring that of the larger consumer and ecommerce markets, where demand declines during customary summer vacation periods and increases during the fourth quarter holiday season. We believe that this seasonality pattern has affected, and we expect will continue to affect, our business and quarterly sequential revenue growth rates. We recognized 29.0%, 29.9% and 27.3% of our annual revenue during the fourth quarter of 2014, 2013 and 2012, respectively. Regulation We are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet. Additionally, these laws and regulations may be interpreted differently across domestic and foreign jurisdictions. As a company in a new and rapidly innovating industry, we are exposed to the risk that many of these laws may evolve or be interpreted by regulators or in the courts in ways that could materially affect our business. These laws and regulations may involve taxation, unclaimed property, intellectual property, product liability, travel, distribution, electronic contracts and other communications, competition, consumer protection, the provision of various online payment and point of sale services, employee, merchant and customer privacy and data security or other areas. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "CARD Act"), as well as the laws of most states, contain provisions governing gift cards, gift certificates, stored value or pre-paid cards or coupons ("gift cards"). Groupon vouchers may be included within the definition of "gift cards" under many 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 9 apply to Groupon vouchers as well as warranty requirements. There are also a number of legislative proposals pending before the U.S. Congress, various state legislative bodies and foreign governments that could affect us, and our global operations may be constrained by regulatory regimes and laws in Europe and other jurisdictions outside the United States that may be more restrictive and adversely impact our business. Various U.S. laws and regulations, such as the Bank Secrecy Act, the Dodd-Frank Act, the USA PATRIOT Act and the CARD Act impose certain anti-money laundering requirements on companies that are financial institutions or that provide financial products and services. These laws and regulations broadly define financial institutions to include money services businesses such as money transmitters, check cashers and sellers or issuers of stored value. Requirements imposed on financial institutions under these laws 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. 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. 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. Groupon and its related entities own a number of trademarks and servicemarks registered or pending in the United States and internationally. In addition, we own a number of issued U.S. patents, have additional pending patent applications and own copyright registrations. Circumstances outside our control could pose a threat to our intellectual property rights and 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 or other intellectual property rights and may 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, lawsuits and allegations that we have infringed the 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, and may experience an adverse result which could impact our business and/or our operating results. Employees As of December 31, 2014, there were 3,525 employees in our North America segment, consisting of 1,369 sales representatives and 2,156 corporate, operational and customer service representatives, 3,591 employees in our EMEA segment, consisting of 1,896 sales representatives and 1,695 corporate, operational and customer service representatives, and 4,727 employees in our Rest of World segment, consisting of 1,719 sales representatives and 3,008 corporate, operational and customer service representatives. Executive Officers The following table sets forth information about our executive officers as of December 31, 2014: 10 Name Age Position Eric Lefkofsky Jason Child 45 46 Co-Founder, Chief Executive Officer and Director Chief Financial Officer Dane Drobny 47 General Counsel and Corporate Secretary Sri Viswanath Brian Stevens 39 40 Chief Technology Officer Chief Accounting Officer Eric Lefkofsky is a co-founder of the Company, has served as the Company's Executive Chairman since its inception until August 5, 2013, and served in the Office of the Chief Executive from February 28, 2013 until his appointment as Chief Executive Officer on August 5, 2013. Mr. Lefkofsky is a co-founder of Echo Global Logistics, Inc. (NASDAQ: ECHO) and served on its board of directors from February 2005 to December 2012. Mr. Lefkofsky is a co-founder of InnerWorkings, Inc. (NASDAQ: INWK) and served on its board of directors from August 2008 to October 2012. In 2008, Mr. Lefkofsky co-founded Lightbank LLC, a private investment firm specializing in information technology companies, and has served as a manager since that time. In April 2006, Mr. Lefkofsky co-founded MediaBank, LLC (now Media Ocean), an electronic exchange and database that automates the procurement and administration of advertising media, and has served as a director or manager since that time. Mr. Lefkofsky also serves on the board of directors of Children's Memorial Hospital, the board of trustees of the Steppenwolf Theatre, the board of trustees of the Art Institute of Chicago and the board of trustees of the Museum of Science and Industry. Mr. Lefkofsky also serves on the board of directors of World Business Chicago. Mr. Lefkofsky is an Adjunct Professor at the University of Chicago Booth School of Business. Mr. Lefkofsky holds a bachelor's degree from the University of Michigan and a Juris Doctor degree from the University of Michigan Law School. Jason 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. Dane Drobny has served as our General Counsel and Corporate Secretary since July 2014. Prior to joining Groupon, Mr. Drobny was Senior Vice President, General Counsel and Corporate Secretary at Sears Holdings Corporation (NASDAQ: SHLD) from May 2010 to June 2014. Prior to joining Sears Holdings, he spent 17 years at the international law firm of Winston & Strawn LLP, most recently as a partner. Mr. Drobny holds a bachelor's degree from Colgate University and a Juris Doctor degree from Washington University School of Law. Sri Viswanath has served as our Chief Technology Officer since October 2014 and our Senior Vice President of Engineering and Operations from April 2013 to October 2014. Prior to joining Groupon, he was Vice President of research and development for mobile computing at VMware, Inc. (NYSE: VMW) from September 2012 to April 2013. Prior to VMware, Mr. Viswanath was Senior Vice President of Engineering at Glam Media, Inc. and general manager of its publisher products group from November 2011 to August 2012. He also worked at Ning, Inc. from July 2008 to November 2011, most recently as Senior Vice President of Engineering. Before that, he worked at Sun Microsystems Inc. where he led the development of a number of open-source and business-to-business products from March 1999 to July 2008. Mr. Viswanath received his bachelors degree from Bangalore University in India, his Masters in Computer Science from Clemson University, and Masters in Management from Stanford University. Brian Stevens has served as our Chief Accounting Officer since September 2012. Prior to joining Groupon, Mr. Stevens spent 16 years with KPMG LLP, most recently as an audit partner from October 2007 through August 2012. Mr. Stevens spent five years in KPMG's Department of Professional Practice (April 2003 to June 2006 and July 2008 to June 2010) and was a practice fellow at the Financial Accounting Standards Board from July 2006 through June 2008. Mr. Stevens is a member of the American Institute of Certified Public Accountants and serves on its Financial Reporting Executive Committee (FinREC). Mr. Stevens received his Bachelor of Science from the University of Illinois at Urbana-Champaign. Available Information 11 The Company electronically files reports with the 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. The Company uses its Investor Relations website (investor.groupon.com) as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD. 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 Our revenue and operating results may continue to be volatile. Our revenue and operating results will continue to vary from quarter to quarter due to the rapidly evolving nature of our business. We believe that our revenue growth and ability to achieve and maintain profitability will depend, among other factors, on our ability to: acquire new customers and retain existing customers; attract new merchants and retain existing merchants who wish to offer deals through the sale of Groupons; effectively address and respond to challenges in international markets; expand the number, variety and relevance of products and deals we offer, particularly as we attempt to build a more complete local marketplace; continue to achieve mobile adoption as customer usage continues to shift toward mobile devices; increase the awareness of our brand domestically and internationally; successfully achieve the anticipated benefits of business combinations or acquisitions; provide a superior customer service experience for our customers and merchants; avoid interruptions to our services, including as a result of cybersecurity breaches; respond to changes in consumer and merchant access to and use of the Internet and mobile devices; react to challenges from existing and new competitors; and respond to seasonal changes in supply and demand. In addition, our margins and profitability may depend on our product sales mix, our geographic revenue mix and merchant pricing terms. For example, sales in our Goods category, which typically carry lower margins than sales in our Local category, have grown faster in recent periods, which has resulted in lower margins and profitability during those periods. Accordingly, our profitability may vary significantly from quarter to quarter. 12 Our strategy to grow our local commerce marketplaces may not be successful and may expose us to additional risks. One of our key objectives is to expand upon our traditional daily deals business by building out more extensive local commerce marketplaces. This strategy has required us to devote significant resources to attracting and retaining merchants who are willing to run deals on a continuous basis with us in order to build a significant inventory for our customers, as well as continuing management focus and attention. We have accepted, and expect to continue to accept, a lower portion of the gross billings from some of our merchants as we expand our marketplaces. In addition, we are continuously refining our process for presenting the most relevant deals to our customers based on their personal preferences. If we are not successful in pursuing these objectives, our business, financial position and results of operations could be harmed. 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. Our ability to grow our business in our 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 are subject to risks of doing business internationally, including the following: our ability to maintain merchant and customer satisfaction such that our marketplace will continue to attract high quality merchants; our ability to successfully respond to macroeconomic challenges, including by optimizing our deal mix to take into account consumer preferences at a particular point in time; political, economic and civil instability and uncertainty (including acts of terrorism, civil unrest, labor unrest, violence and outbreaks of war); currency exchange rate fluctuations; strong local competitors, many of whom have been in the market longer than us or have greater resources in the local market; 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, cause unanticipated compliance expenses 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 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 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, the UK Anti-Bribery Act and similar local laws prohibiting certain payments to government officials, banking and payment processing regulations, and anti-competition regulations, among others. The cost of complying with these various and sometimes conflicting laws and regulations is substantial. We have implemented policies and procedures to ensure compliance with these laws and regulations, however, we cannot assure 13 you that our employees, contractors, or agents will not violate our policies. Changing laws, regulations and enforcement actions in the U.S. and throughout the world could harm our business. If commercial and regulatory constraints in our international markets restrict our ability to conduct our operations or execute our strategic plan, our business may be adversely affected. Our financial results will be adversely affected if we are unable to execute on our marketing strategy. Our marketing strategy is primarily focused on customer activation and mobile application downloads, as well as increasing awareness of our shift to offer more complete local commerce marketplaces. We increased our marketing expense to $269.0 million during 2014 as compared to $214.8 million during 2013. Additionally, our marketing activities also include elements that are not presented as "Marketing" on our consolidated statements of operations, such as order discounts and free shipping on merchandise sales. If our assumptions regarding our marketing activities and strategies prove incorrect, our ability to generate profits from our investments 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. If we fail to retain our existing customers or acquire new customers, our revenue and business will be harmed. We must continue to retain and acquire customers that make purchases on