S-1/A 1 d364901ds1a.htm AMENDMENT NO. 1 TO FORM S-1 Amendment No. 1 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on February 1, 2013

Registration No. 333-185967

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Xoom Corporation

(Exact name of registrant as specified in its charter)

 

Delaware 

  7389   94-3401054
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

Xoom Corporation

100 Bush Street, Suite 300

San Francisco, CA 94104

(415) 777-4800

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

John Kunze

Xoom Corporation

President & Chief Executive Officer

100 Bush Street, Suite 300

San Francisco, CA 94104

(415) 777-4800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Anthony J. McCusker, Esq.

Richard A. Kline, Esq.

Goodwin Procter LLP

135 Commonwealth Drive

Menlo Park, CA 94025

(650) 752-3100

 

Christopher G. Ferro, Esq.

Vice President and General Counsel

Xoom Corporation

100 Bush Street, Suite 300

San Francisco, CA 94104

(415) 777-4800

  Douglas D. Smith, Esq.
Stewart L. McDowell, Esq.
Gibson, Dunn & Crutcher LLP
555 Mission Street, Suite 3000
San Francisco, CA 94105
(415) 393-8200

 

 

Approximate date of commencement of proposed sale to public: as soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering.    ¨

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. (Check one):

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount

to be

Registered(1)

 

Proposed Maximum

Aggregate Offering

Price Per Share(2)

 

Proposed Maximum

Aggregate

Offering Price(2)

 

Amount of

Registration Fee(3)

Common Stock, $0.0001 par value per share

  6,612,500   $15.00  

$99,187,500

 

$13,530

 

 

(1) Includes 862,500 shares of common stock that the underwriters may purchase to cover overallotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) of the Securities Act of 1933, as amended.
(3) The registrant previously paid $6,820 of the registration fee with the initial filing of this registration statement.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated February 1, 2013

PROSPECTUS

 

5,750,000 Shares

 

LOGO

Xoom Corporation

Common Stock

 

 

This is an initial public offering of shares of common stock of Xoom Corporation.

Xoom is offering 4,647,439 shares to be sold in this offering. The selling stockholders identified in this prospectus are offering an additional 1,102,561 shares. Xoom will not receive any proceeds from the sale of shares by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $13.00 and $15.00. Xoom has applied to list the common stock on the NASDAQ Global Market under the symbol “XOOM.”

Xoom is an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in the common stock involves risks. See “Risk Factors” on page 12 to read about factors you should consider before buying shares of the common stock.

 

     Per Share      Total  

Initial public offering price

   $                    $                    

Underwriting discount

   $         $     

Proceeds, before expenses, to Xoom

   $         $     

Proceeds, before expenses, to the selling stockholders

   $         $     

To the extent that the underwriters sell more than 5,750,000 shares of common stock, the underwriters have the option to purchase up to an additional 862,500 shares from Xoom at the initial public offering price less the underwriting discount.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares against payment in New York, New York on or about                     , 2013.

 

 

 

Barclays   Needham & Company

 

 

Raymond James   Baird

Prospectus dated                     , 2013


Table of Contents

 

LOGO


Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1   

Risk Factors

     12   

Special Note Regarding Forward-Looking Statements

     41   

Use of Proceeds

     42   

Dividend Policy

     42   

Capitalization

     43   

Dilution

     45   

Selected Consolidated Financial and Other Data

     47   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     50   

Business

     71   

Management

     85   

Compensation

     91   

Certain Relationships and Related Person Transactions

     103   

Principal and Selling Stockholders

     106   

Description of Capital Stock

     110   

Shares Eligible for Future Sale

     115   

Certain Material U.S. Federal Income Tax Considerations

     117   

Underwriting

     122   

Legal Matters

     127   

Experts

     127   

Where You Can Find More Information

     127   

Index to the Consolidated Financial Statements

     F-1   

Dealer Prospectus Delivery Obligation

Through and including             , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, governmental publications, reports by market research firms or other independent sources. Some data are also based on our good faith estimates.

 

 

Neither we, the selling stockholders, nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the information set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing at the end of this prospectus, before making an investment decision. Unless the context otherwise requires, we use the terms “Xoom,” “we,” “us,” “the company” and “our” in this prospectus to refer to Xoom Corporation and its subsidiary.

Company Overview

Xoom is a pioneer and leader in the online consumer-to-consumer international money transfer industry. Our customers use Xoom to send money to family and friends in 30 countries. Since January 1, 2008, our customers have used Xoom to send $6.6 billion, including $1.7 billion in 2011 and $3.2 billion in 2012. According to the World Bank, international consumer money transfer volume totalled $513 billion worldwide in 2011 and is forecasted to grow to approximately $685 billion by 2015. Our modern online and mobile platforms disrupt traditional forms of money transfer and deliver our customers a convenient, fast and cost-effective way to send money.

Our typical customers left their home countries and moved to the United States to seek better employment opportunities and to support their family and friends back home. Our customers represent a broad range of professions and education levels, but share common traits in that they have bank accounts and actively use the Internet or mobile devices. They maintain close ties to home and regularly use Xoom to help their family and friends in their home countries afford basic, and sometimes dire, needs for food, shelter, healthcare and other critical, non-discretionary expenses.

We earn and maintain our customers’ trust by providing a high level of service through convenient, fast and cost-effective money transfers. Xoom’s money transfers are initiated online or through a mobile device and can be sent at any time, from any Internet-enabled location. Recipients receive money in the manner they prefer and to which they are individually or culturally accustomed, at major banks and leading retailers. We believe we process and complete money transfer transactions as fast as, or faster than, our competitors, and our customers and their recipients can track the status of their transactions in real time, providing them peace of mind. Our business model allows us to provide our customers with cost-effective money transfers because we do not pay originating agent commissions and the majority of our transfers are funded directly from bank accounts, which lowers our cost of sales.

Our solutions are built on our proprietary technology which, combined with our risk management capabilities and global disbursement network, constitute our operating platform. Our technology enables easy-to-use online and mobile sender interfaces, effective risk management and seamless integration with our disbursement partners’ systems. We have developed extensive partnerships with major banks and leading retailers who form our global disbursement network across 30 countries and deliver a high quality of service through regionally-recognized, trusted brands.

We generate revenue from transaction fees charged to customers, and from foreign exchange spreads on transactions where the payout currency is other than U.S. dollars. Service fees vary by country, type of funding source, disbursement currency and send amount, but do not vary by method of disbursement, how the transaction was initiated (via computer or mobile device) or the location of the customer. Our foreign exchange revenue is derived from the difference between our cost to buy local currency and the price at which we sell the currency,

referred to as our foreign exchange spread. Our foreign exchange spread varies by country, but our target spreads range from approximately 1% to 3% of a transaction’s principal send amount.

 

 

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We believe our business model is often characterized by predictable and recurring revenue from our large and growing base of new and repeat customers. We have achieved significant revenue growth as our customer base has expanded. From 2008 to 2012, our revenue increased from $14.1 million to $80.0 million, representing a 54% CAGR. We incurred a net loss of $5.9 million in 2012 as we continued to invest in growing our revenue. We have incurred net losses primarily as a result of long-term investments in our service innovation, solutions and marketing programs to increase brand awareness.

Industry Overview

The market for global money transfer is large and growing. According to the World Bank’s Migration and Development Briefs, the worldwide remittance market grew at a 12% CAGR from $234 billion in 2004 to $513 billion in 2011 and is expected to continue to grow to $685 billion by 2015, a 7% CAGR. Traditionally, the global money transfer market has been served by a few large players, many small regional players, traditional banks and informal person-to-person money transfer service providers that evade regulation. The large industry players primarily service senders who fund with cash, which requires an extensive network of originating agents in the United States and significant infrastructure in receiving locations. This antiquated model of predominantly cash-to-cash money transfer has not evolved meaningfully in more than 100 years and has been plagued by one or more of the following problems: slow transaction processing; non-transparent fees; opaque exchange rates; and an inconvenient offline money transfer experience, including limited store hours, long wait times, complicated manual forms and sometimes unsafe locations. With the widespread adoption of online and mobile channels and a steady increase in the proportion of the banked population among the foreign-born community in the United States, we believe there is a significant opportunity to disrupt the traditional forms of money transfer and provide a better customer experience.

Our Solutions

Our solutions are designed to offer customers a convenient, fast and cost-effective way to send money to family and friends at any time, from any Internet-enabled location. Our operating platform allows us to provide innovative solutions to the challenge of transferring funds internationally, as described below.

 

   

Origination. All Xoom money transfers originate online, without the costs or inconvenience of initiating a transaction at a physical agent location or bank. Our money transfer services are available over the Internet or through a mobile device on our website at www.xoom.com and our co-branded website with Walmart.com.

 

   

Funding. Our customers have the option to fund a money transfer with a U.S.-based bank account, credit card or debit card. We do not have originating agents who accept cash. As a result, we do not incur the costs or commissions associated with physical agent-based origination and funding. Over 90% of our gross sending volume is funded by bank accounts through the Automated Clearinghouse system, or ACH. ACH transactions are less expensive to fund than credit or debit card transactions, as ACH does not include the variable fees associated with these transactions.

 

   

Disbursement. Our customers can transfer money from the United States to 30 countries, including many major recipient countries, such as India, Mexico and the Philippines. Our disbursement options include direct deposit into recipient bank accounts in all countries we serve, cash pick-up at our disbursement partner locations in most countries we serve or home delivery of cash in the Dominican Republic and the Philippines. These convenient options are made available through established partnerships with major banks and leading retailers that form our global disbursement network.

 

   

Transaction Processing. Throughout the entire money transfer process, we provide a high level of risk management, compliance and regulatory oversight and customer service. Our operating platform is

 

 

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built to track each of these requirements. From the inception of a transaction, our platform enables us to quickly and seamlessly assess the transaction’s risk profile without introducing undue friction into the customer experience. To minimize payment and fraud risk, we require several requirements to be satisfied in order for a prospective customer to use our services. We have built our technology to test each transaction for compliance, anti-money laundering, acceptable use, anti-fraud and funding risk within seconds.

Our Competitive Strengths

The majority of our employees are from first or second generation immigrant families and personally understand the importance and impact of our service on our customer base. Our first-hand knowledge of our customers’ needs enhances our ability to innovate and design solutions that solve their challenges. This customer-centric culture and mission-driven approach permeates our organization, defines the fabric of our company and drives our focus on serving our customers. We believe we have the following competitive strengths:

 

   

Compelling Value Proposition. We provide significant value to our customers through a unique combination of convenience, speed and cost-effective pricing of our services. We also provide transparency to our customers with simple fees and locked-in foreign exchange rates so our customers clearly understand the fee they will pay and the exact amount their recipients will receive before submitting a transaction. In general, we purchase each foreign currency once per business day, and we set our foreign exchange rates daily for our customers using historical customer transaction data and our quantitative models built over several years to balance internal target spreads of 1% to 3% with competitive pricing.

 

   

Proprietary Risk Management System. Our proprietary risk management system serves as the backbone of our technology platform, balancing a low-friction customer experience with low transaction loss rates, which have been 35 basis points or lower as a percentage of gross sending volume on an annual basis since 2010.

 

   

Online Origination Affords Valuable Customer Insight. Our customers initiate money transfers online or through mobile devices on www.xoom.com, creating a body of digital, transaction-related data that affords us deep insight into repeat customer behavior. This data provides us with revenue visibility, allows us to quantify the value of each customer and enables us to continually improve our overall customer experience.

 

   

Marketing Expertise. We believe our expertise in customizing our marketing to culturally diverse target markets provides us with a competitive advantage in attracting new customers to Xoom and retaining existing customers. In addition, the fact that our customers originate transfers online enables us to directly attribute new customers to specific marketing campaigns and optimize future marketing investment.

 

   

Established Global Disbursement Capabilities. Our network of major banks and leading retailers, assembled relationship by relationship over more than ten years, is comprised of trusted local brands who offer high-quality service. We believe our speed of deposit is superior to that of our competitors and it would be difficult for a new competitor to replicate the breadth and quality of service our disbursement network provides.

 

   

Efficient Regulatory Compliance. We have designed our technology platform to operate efficiently in a highly complex and continuously evolving regulatory environment. Our technology and compliance expertise enable a low-friction customer experience in a highly-regulated environment, which new market entrants would likely find difficult to replicate.

 

 

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Our Growth Strategy

Our growth strategy is focused primarily on attracting and retaining customers in the markets we currently serve. We intend to aggressively grow our business through the following strategies:

 

   

Attract and Retain Customers in the Markets We Currently Serve. Our customers tend to behave predictably, and we are therefore able to increase and optimize our marketing investment to acquire new customers at a cost that is a fraction of their estimated lifetime values. We will continue to selectively invest more in targeted marketing campaigns to acquire new customers. We will also focus on enhancing our service and continue developing new features, including expanding and enhancing our mobile capabilities, to improve our customers’ experience and further strengthen brand loyalty. We launched our mobile strategy in November 2011. In the three months ended December 31, 2012, 25% of our transactions were sent via mobile devices.

 

   

Establish New Partnerships and Improve Current Partnerships. We will continue to establish new marketing partnerships to improve awareness of our money transfer services with potential customers. For example, in November 2011, we announced an online retail partnership with Walmart.com. By increasing the number of disbursement partners and improving the quality of service from existing partners, we believe we can increase the relevance of our service and improve our value proposition for our target customers.

 

   

Expand into New International Markets. We will continue to leverage the experience and expertise gained from our success in current markets to identify attractive, new origination and recipient markets for our services.

 

   

Leverage Technology and Develop Services in Adjacent Markets. As part of our long-term strategic plan, we intend to explore opportunities to leverage our technology and money transfer network to unlock new revenue streams in adjacent markets.

Risks Affecting Us

Our business, financial condition, results of operations and prospects are subject to numerous risks and uncertainties. These risks include, among others, that:

 

   

We have incurred significant operating losses in the past, and we may not be able to sustain our recent revenue growth and generate sufficient revenue to achieve or maintain profitability.

 

   

We have a limited operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

 

   

If we fail to attract new customers or retain our existing customers, our business and revenue will be harmed.

 

   

Inaccurate forecasts of our new customer growth could result in our expenses exceeding our revenue and ultimately harm our business.

 

   

If the revenue generated by new customers differs significantly from our expectations, or if our customer acquisition costs or costs associated with servicing our customers increase, we may not be able to recover our customer acquisition costs or generate profits from this investment.

 

   

Our quarterly operating results fluctuate and may not predict our future performance accurately. Variability in our future performance could cause our stock price to fluctuate or decline.

 

   

Our cash balances are significantly affected by the day of the week on which a quarter ends. As a result, you should not rely on quarter-to-quarter comparisons of our cash balances.

 

 

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Failure to maintain sufficient capital could harm our business, financial condition and results of operations.

 

   

We may not be able to secure additional financing in a timely manner, or at all, to meet our future capital needs, which could impair our ability to execute on our business plan.

 

   

We generate a substantial portion of our revenue from money transfers to India and the Philippines, and the failure to continue to generate such revenue, due to economic, political or regulatory factors beyond our control, could harm our business, financial position and results of operations.

 

   

Our revenue could be harmed by fluctuations in foreign exchange rates and other risks related to foreign exchange.

 

   

We face intense competition and, if we are unable to compete effectively, our business, financial condition and results of operations could be harmed.

 

   

New or existing technologies could gain wide adoption and supplant our services and features and harm our revenue and financial results.

 

   

We face payment and fraud risks that could harm our business, financial condition and results of operations.

 

   

Our business is subject to a wide range of laws and regulations intended to help detect and prevent illegal or illicit activity and our failure, or the failure of one of our disbursement partners or payment processors, to comply with those laws and regulations could harm our business, financial condition and results of operations.

 

   

Our business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing, and many of which may contradict one another due to conflicting regulatory goals. Failure to comply with these laws could subject us to claims or otherwise harm our business.

Company Information

We were incorporated in California in June 2001 and reincorporated into Delaware in November 2012. Since our inception we have provided consumer-to-consumer online money transfers. From 2003 to 2005, we also offered other services within the money transfer business. In 2006, we chose to focus solely on our current business model, providing online consumer-to-consumer international money transfers.

Our principal executive office is located at 100 Bush Street, Suite 300, San Francisco, CA 94104. Our telephone number at our principal executive office is (415) 777-4800. Our website address is www.xoom.com. This is a textual reference only. We do not incorporate the information on, or accessible through, our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.

We use various trademarks and trade names in our business, including “Xoom” and XOOM®, which we have registered in the United States and in various other countries. This prospectus also contains trademarks and trade names of other businesses that are the property of their respective holders. We have omitted the ® and ™ designations, as applicable, for the trademarks we name in this prospectus.

 

 

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THE OFFERING

 

Common stock offered by us

 

4,647,439 shares

Common stock offered by the selling stockholders

 

1,102,561 shares

Common stock to be outstanding after this offering

 

31,263,916 shares

Option to purchase additional shares

 

We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional 862,500 shares of common stock from us.

Use of proceeds

 

We expect our net proceeds from this offering will be $57.5 million (or $68.7 million if the underwriters exercise their option to purchase additional shares in full), based on an assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholders.

We intend to use the net proceeds to us from this offering primarily for working capital and also for general corporate purposes. We may also use a portion of the net proceeds to acquire complementary businesses, products or technologies. However, we have not entered into agreements or commitments for any specific acquisitions at this time. For a more complete description of our intended use of proceeds from this offering, see “Use of Proceeds.”

Risk factors

 

You should read “Risk Factors” for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

Registration Rights

 

Upon the completion of this offering, the holders of an aggregate of 22,199,714 shares of our common stock are entitled to registration rights with respect to those shares. You should read “Description of Capital Stock—Registration Rights” for a further discussion of registration rights held by our existing investors.

Proposed NASDAQ Global Market trading symbol

 

“XOOM”

The number of shares of our common stock to be outstanding after this offering is based on 26,527,867 shares of our common stock outstanding as of December 31, 2012, including the automatic conversion of 21,444,251 outstanding shares of our preferred stock into common stock immediately prior to the closing of the offering, and excludes:

 

   

6,730,520 shares of common stock issuable upon exercise of stock options outstanding as of December 31, 2012 at a weighted-average exercise price of $5.10 per share (which includes

 

 

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65,201 shares of common stock that we expect to be sold in this offering by selling stockholders upon the exercise of vested options immediately prior to the closing of this offering);

 

   

35,778 shares of common stock issuable upon the exercise of outstanding warrants at a weighted-average exercise price of $4.84 per share (which we expect will be net exercised for 23,409 shares of common stock and sold by a selling stockholder immediately prior to the closing of this offering, assuming a fair market value for purposes of net exercising the warrant of $14.00 per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus); and

 

   

3,046,190 shares of our common stock reserved for future issuance under our stock-based compensation plans as of December 31, 2012, consisting of 46,190 shares of common stock reserved for issuance under our 2010 Stock Option and Grant Plan and, subject to and effective upon the closing of the offering, 3,000,000 shares of common stock reserved for issuance under our 2012 Stock Option and Incentive Plan, and any future increase in shares reserved for issuance under such plans.

Unless otherwise indicated, the information in this prospectus assumes the following:

 

   

a one-for-four reverse stock split of our stock to be effected on or about February 4, 2013;

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, which will occur immediately prior to the closing of this offering;

 

   

conversion of all of our shares of preferred stock into common stock, which we expect to occur immediately prior to the closing of this offering; and

 

   

no exercise by the underwriters of their option to purchase additional shares.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the summary consolidated statements of operations data for the years ended December 31, 2010, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2011 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31,  
     2010     2011     2012  

Revenue

   $ 32,837      $ 50,020      $ 80,016   

Cost of revenue

     12,231        18,075        26,779   
  

 

 

   

 

 

   

 

 

 

Gross profit

     20,606        31,945        53,237   
  

 

 

   

 

 

   

 

 

 

Marketing

     11,608        14,314        21,496   

Technology and development

     6,046        9,431        15,950   

Customer service and operations

     5,257        7,321        10,964   

General and administrative

     3,728        4,957        9,135   
  

 

 

   

 

 

   

 

 

 

Total operating expense

     26,639        36,023        57,545   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (6,033     (4,078     (4,308

Other income (expense):

      

Interest expense

     (108     (370     (1,504

Interest income

     44        29        85   

Other income (expense)

     140        49        (125
  

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (5,957     (4,370     (5,852

Provision for income taxes

     2        2        2   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,959   $ (4,372   $ (5,854
  

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share attributable to common stockholders

   $ (1.25   $ (0.88   $ (1.16
  

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute per share amounts – basic and diluted

     4,752        4,956        5,049   
  

 

 

   

 

 

   

 

 

 

Basic and diluted pro forma net loss per share attributable to common stockholders (unaudited)

       $ (0.22
      

 

 

 

Pro forma weighted-average shares used to compute pro forma net loss per share attributable to common stockholders amounts – basic and diluted (unaudited)(1)

         26,493   
      

 

 

 

 

(1) 

See Note 10 of the consolidated financial statements for weighted-average common shares outstanding for pro forma basic and diluted net loss per share.

 

 

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Stock-based compensation included in the accompanying statements of operations data above was as follows:

 

     Year Ended December 31,  
       2010          2011            2012      
     (in thousands)  

Stock-based compensation expense:

        

Marketing

   $ 72       $ 145       $ 282   

Technology and development

     93         235         727   

Customer service and operations

     107         118         256   

General and administrative

     278         451         1,180   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 550       $ 949       $ 2,445   
  

 

 

    

 

 

    

 

 

 

The following table presents our key operating and financial metrics for the years presented (unaudited):

 

    Year Ended December 31,  
    2010     2011     2012  

Other Financial and Operational Data:

     

Gross Sending Volume(1)

  $ 858,955,000      $ 1,706,659,000      $ 3,248,457,000   

Transactions(2)

    2,848,000        4,068,000        6,617,000   

Active Customers(3)

    392,666        516,597        776,426   

New Customers(4)

    225,949        291,532        405,304   

Cost Per Acquisition of a New Customer(5)

  $ 37      $ 38      $ 44   

Adjusted EBITDA (in thousands)(6)

  $ (5,067   $ (2,532   $ (493

 

(1) Reflects the total principal amount of funds sent, excluding our fees, during a given period.
(2) Reflects the aggregate number of transactions sent using our services during a given period.
(3) Reflects customers who have sent at least one transaction during the last twelve month trailing period.
(4) Reflects new customers added who have transacted at least once during a given period.
(5) Reflects direct marketing cost, a portion of which is reflected in our cost of revenue, divided by new customers added in a given period.
(6) See “Non-GAAP Financial Measures” below for how we define and calculate adjusted EBITDA, a reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP financial measure, and a discussion about the limitations of adjusted EBITDA.

 

     As of December 31,      As of December 31, 2012  
     2011      2012      Pro  Forma(1)      Pro Forma
As Adjusted(2)(3)
 
     (in thousands)  
                  

(unaudited)

 

Consolidated Balance Sheet Data:

           

Cash and cash equivalents

   $ 48,248       $ 45,077       $ 45,077       $ 102,587   

Disbursement prefunding

     9,004         15,070         15,070         15,070   

Customer funds receivable

     17,187         9,318         9,318         9,318   

Property, equipment and software, net

     2,185         3,884         3,884         3,884   

Working capital

     56,323         68,838         68,838         126,348   

Total assets

     100,190         113,093         113,093         170,603   

Convertible preferred stock

     2,144         2,144                   

Total stockholders’ equity

     60,361         57,320         57,320         114,830   

 

(1) The pro forma balance sheet data in the table above reflects the automatic conversion of all outstanding shares of convertible preferred stock into common stock immediately prior to the closing of this offering.

 

 

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(2) The pro forma as adjusted balance sheet data in the table above also reflects (i) the pro forma items described immediately above plus (ii) the sale of 4,647,439 shares of our common stock in this offering by us at an assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and does not take into consideration the impact of capitalized offering costs. We capitalized $2.3 million of our initial public offering expenses as of December 31, 2012 in connection with the preparation of the registration statement of which this prospectus forms a part, of which $0.7 million remains unpaid as of December 31, 2012.
(3) A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share would increase (decrease) cash and cash equivalents, working capital, total assets and total stockholders’ equity by $4.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions.

Non-GAAP Financial Measures

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed in the table above and within this prospectus adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below between adjusted EBITDA and net loss, the most directly comparable GAAP financial measure.

We have included adjusted EBITDA in this prospectus because it is a key measure used by our management to evaluate our operating performance, generate future operating plans and make strategic decisions. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for the related financial information prepared in accordance with GAAP. Some of these limitations are:

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;

 

   

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

adjusted EBITDA does not include the impact of stock-based compensation;

 

   

adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us; and

 

   

other companies, including companies in our industry, may calculate adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure.

We believe it is useful to exclude non-cash charges, such as depreciation and amortization and stock-based compensation, from our adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.

 

 

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Because of the aforementioned limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net loss, cash flow metrics and our financial results presented in accordance with GAAP. The following table presents a reconciliation of net loss to adjusted EBITDA for each of the years indicated (unaudited):

 

     Year Ended December 31,  
     2010     2011         2012      
    

(in thousands)

 

Reconciliation of Adjusted EBITDA:

      

Net loss

   $ (5,959   $ (4,372   $ (5,854

Provision for income taxes

     2        2        2   

Interest expense

     108        370        1,504   

Interest income

     (44     (29     (85

Depreciation and amortization

     276        548        1,495   

Stock-based compensation

     550        949        2,445   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (5,067   $ (2,532   $ (493
  

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all other information contained in this prospectus, including our consolidated financial statements and the related notes thereto, before investing in our common stock. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks Related to Our Business

We have incurred significant operating losses in the past, and we may not be able to sustain our recent revenue growth and generate sufficient revenue to achieve or maintain profitability.

Since our inception, we have incurred significant operating losses and, as of December 31, 2012, we had an accumulated deficit of $63.4 million. Although our revenue has grown rapidly, increasing from $14.1 million in 2008 to $80.0 million in 2012, we expect that our revenue growth rate will decline in the future as a result of a variety of factors, including the maturation of our business, increased competition and the gradual decline in the year-over-year percentage growth of new customers. You should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. We also expect our costs to increase in future periods as we continue to expend substantial financial resources on, among other things:

 

   

business development and marketing;

 

   

technology infrastructure;

 

   

service and feature development and enhancement;

 

   

international expansion efforts; and

 

   

general administration, including legal and accounting expenses related to being a public company.

These investments may not result in increased revenue or growth in our business. If we are unable to maintain adequate revenue growth and to manage our expenses, we may continue to incur significant losses in the future and may not be able to achieve or maintain profitability.

We have a limited operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

We have a limited operating history in an evolving market that may not grow as expected. This limited operating history makes it difficult to effectively assess our future prospects. You should consider our business and prospects in light of the risks and difficulties we encounter in this evolving market. These risks and difficulties include our ability to, among other things:

 

   

retain an active customer base and attract new customers;

 

   

avoid interruptions or disruptions in our service or slower-than-expected website load times;

 

   

improve the quality of the customer experience on our website and through mobile devices;

 

   

earn and preserve our customers’ trust with respect to the security of their online money transfers and personal financial information;

 

   

process, store and use personal customer data in compliance with governmental regulation and other legal obligations related to privacy;

 

   

comply with extensive existing and new laws and regulations;

 

   

effectively maintain a scalable, high-performance technology infrastructure that can efficiently and reliably handle increased online money transfers globally;

 

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successfully deploy new or enhanced features and services;

 

   

compete with other companies that are currently in, or may in the future enter, the online money transfer business;

 

   

hire, integrate and retain world-class talent; and

 

   

expand our business into new sending and receiving countries.

If the market for online money transfer does not develop as we expect, or if we fail to address the needs of this market, our business will be harmed. We may not be able to successfully address these risks and challenges, including those described elsewhere in these risk factors. Failure to adequately address these risks and challenges could harm our business and results of operations.

If we fail to attract new customers or retain our existing customers, our business and revenue will be harmed.

We must continually attract new customers and retain existing customers in order to grow our business. Our ability to do so depends in large part on the success of our marketing efforts, our ability to enhance our services and our overall customer experience, to keep pace with changes in technology and our competitors and to expand our marketing partnerships and disbursement network. We spent $21.5 million on marketing and $16.0 million on technology and development in 2012, and we expect to continue to spend significant amounts to acquire new customers and to keep existing customers loyal to our service. We cannot assure you that the revenue from customers we acquire will ultimately exceed the marketing and technology and development costs associated with acquiring these customers. We may not be able to acquire new customers in sufficient numbers to continue to grow our business due to macroeconomic factors including exchange rate fluctuations, increased competition, new regulations or other factors, or we may be required to incur significantly higher marketing expenses in order to acquire new customers. If the level of usage by our existing customers declines or does not continue as expected, we may suffer a decline in customer growth or revenue. A decrease in the level of usage or customer growth would harm our business and revenue.

Inaccurate forecasts of our new customer growth could result in our expenses exceeding our revenue and ultimately harm our business.

Our new customer growth forecast is a key driver in our business plan which affects our ability to accurately forecast revenue. If we overestimate new customer growth, our revenue will not grow as we forecast, our costs and expenses may continue to exceed our revenue and our profitability will be harmed. In addition, we plan our operating expenses, including marketing expenses, and our hiring needs in part on our forecasts of new customer growth and future revenue. If new customer growth or revenue for a particular period is lower than expected, we may not be able to proportionately reduce our operating expenses for that period, which would harm our results of operations for that period.

If the revenue generated by new customers differs significantly from our expectations, or if our customer acquisition costs or costs associated with servicing our customers increase, we may not be able to recover our customer acquisition costs or generate profits from this investment.

We spent $21.5 million on marketing to acquire new customers in 2012 and expect to continue to spend significant amounts to acquire additional customers, primarily through television advertising, online advertising and marketing promotions. Our decisions regarding investments in customer acquisition are based upon our analysis of the revenue we have historically generated per customer over the expected lifetime value of the customer. Our analysis of the revenue that we expect a new customer to generate over his or her lifetime depends upon several estimates and assumptions, including whether a customer will send a second transaction, whether a customer will send multiple transactions in a month, the amount of money that a customer sends in a transaction and the predictability of a customer’s sending pattern. Our experience in markets in which we presently have low penetration rates may differ from our more established markets.

 

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If our estimates and assumptions regarding the revenue we can generate from new customers prove incorrect, or if the revenue generated from new customers differs significantly from that of prior customers, we may be unable to recover our customer acquisition costs or generate profits from our investment in acquiring new customers. Moreover, if our customer acquisition costs or our operating costs increase, as they historically have, the return on our investment may be lower than we anticipate irrespective of the revenue generated from new customers. If we cannot generate profits from this investment, we may need to alter our growth strategy, and our growth rate and results of operations may be harmed.

Our quarterly operating results fluctuate and may not predict our future performance accurately. Variability in our future performance could cause our stock price to fluctuate or decline.

Although we have grown quickly in recent years, our quarterly operating results will fluctuate in the future as a result of a variety of factors, many of which are beyond our control. These factors include:

 

   

changes in our costs, including transaction fees charged by our payment processors and disbursement partners;

 

   

changes in our pricing policies or those of our competitors;

 

   

relative rates of acquisition of new customers;

 

   

the online money transfer sending behavior of our customers, including seasonal patterns;

 

   

the introduction of new or enhanced services and related features by us or our competitors and any delays in the introduction of such services or market acceptance of these features and services;

 

   

the number of customer transaction refunds in a given period;

 

   

the number of fraudulent transactions in a given period;

 

   

the success rate of recovering failed or insufficient transaction funding;

 

   

bank holidays in foreign markets;

 

   

exchange rate fluctuations;

 

   

draw downs on our line of credit; and

 

   

other changes in our operating expenses, personnel and general economic conditions.

As a result, period-to-period comparisons of our operating results may not be meaningful, and you should not rely on them as an indication of our future performance.

Our cash balances are significantly affected by the day of the week on which a quarter ends. As a result, you should not rely on quarter-to-quarter comparisons of our cash balances.

Our cash balances may be affected by the day of the week on which each quarter ends which may affect our quarterly operating results. There is a delay between when we release funds for disbursement and when we receive customer funds from our payment processors. For example, if a quarter closes on a Saturday, our analysis of cash flow statements will show a decreased cash balance because we will have wired out funds on Friday which will be available for disbursement on Saturday, Sunday and Monday but we will not receive customer funds from our payment processors until Monday. In addition, due to time zone differences, an additional day’s worth of funding is required for disbursements to certain markets. As a result, period-to-period comparisons of our statements of cash flows may not be meaningful, and you should not rely on them as an indication of our liquidity or capital resources.

 

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Failure to maintain sufficient capital could harm our business, financial condition and results of operations.

We have significant working capital requirements driven by:

 

   

the delay between when we release funds for disbursement and when we receive customer funds from our payment processors, exacerbated by time zone differences, bank holidays and weekends;

 

   

regulatory requirements;

 

   

collateral requirements imposed on our subsidiary by our Indian regulator; and

 

   

collateral requirements imposed on us by our payment processors.

This requires us to have access to significant amounts of capital, particularly at high volume sending times. Our need to access capital will increase as our number of customers and transactions processed increases. If we do not have sufficient capital, we may not be able to pursue our growth strategy, fund key strategic initiatives, such as feature development, or continue to transfer money to recipients before we receive the funds from our customers, which we refer to as instant ACH transactions. In addition, we may not be able to meet new capital requirements introduced or required by our regulators and payment processors. Increases in our transactions processed, even if short term in nature, can cause increases in our capital requirements. We currently have a line of credit but there can be no assurance that the line of credit will be sufficient or that we will have access to additional capital. Failure to meet capital requirements or to have access to sufficient capital could harm our business, financial condition and results of operations.

We may not be able to secure additional financing in a timely manner, or at all, to meet our future capital needs, which could impair our ability to execute on our business plan.

We believe that our existing cash, cash equivalents and short-term investments, available borrowing under our existing line of credit, expected cash flow from operations and net proceeds of this offering, will be sufficient to meet our operating and capital requirements for at least the next 12 months. However, we may require additional capital to respond to business opportunities (including increasing the number of customers acquired), challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings for other reasons. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to secure additional debt or equity financing in a timely manner, or at all, which could require us to scale back our business plan and operations.

We have substantial debt obligations that could restrict our operations.

As of December 31, 2012, we had $40.0 million in indebtedness outstanding, as well as $30.0 million available borrowing capacity under our line of credit and $10.0 million reserved under our standby letter of credit, and we may incur additional indebtedness in the future.

Our indebtedness could have adverse consequences on our business, including:

 

   

limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and the industry;

 

   

limiting our ability to borrow additional funds because our line of credit agreement contains financial and restrictive covenants that could significantly impact our ability to operate our business, and any failure to comply with them may result in an event of default, which could harm our business;

 

   

requiring us to dedicate a substantial portion of our cash flows from operations to repay our debt, thereby reducing funds available for working capital and other purposes;

 

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increasing our vulnerability to changing economic, regulatory and industry conditions; and

 

   

limiting our ability to pay dividends to our stockholders.

Actions by regulators could interfere with our business or require us to limit or cease money transfers, which could harm our business and results of operations.

Money transfers are regulated by state, federal and foreign governments. We, along with our payment processors and disbursement partners, are subject to an extensive set of legal and regulatory requirements, including licensing requirements in many U.S. states and in India. If federal, state or foreign regulators were to take actions that interfered with our ability to transfer money reliably, attempt to seize money transfer funds, or limit or prohibit us, our payment processors or our disbursement partners from transferring money in certain countries, this could harm our business. For example, we have in the past ceased to do business in South Korea as a result of regulatory scrutiny of our disbursement partner’s business in South Korea. If we are prevented from transferring money from particular states or jurisdictions that are significant to our business, it could harm our business and results of operations. For more information, see “—Regulatory Risks Faced by our Business.”

We generate a substantial portion of our revenue from money transfers to India and the Philippines, and the failure to continue to generate such revenue due to economic, political or regulatory factors beyond our control could harm our business, financial position and results of operations.

Approximately 56% and 60% of our total revenue in 2011 and 2012, respectively, were derived from money transfers to India and the Philippines. As a result, any limitations (regulatory or otherwise) on our ability to send money to these jurisdictions, or any economic or political instability, civil unrest, natural disasters or other similar circumstances localized in these countries could have a disproportionately harmful impact on our business, financial position and results of operations.

Our revenue could be harmed by fluctuations in foreign exchange rates and other risks related to foreign exchange.

We have seen increased money transfer volume if the U.S. dollar strengthens against certain currencies. Conversely, we have seen decreased money transfer volume if the U.S. dollar weakens against certain currencies. In particular, we experience abrupt changes in money transfer volume to India when the U.S. dollar strengthens or weakens against the Indian rupee. As foreign exchange rates vary, revenue and other results of operations may differ materially from expectations.

We generate a substantial portion of our revenue from foreign exchange spreads on transactions where the payout currency is other than U.S. dollars. We typically purchase foreign currency each business day on an as-needed basis and evaluate and reset our foreign exchange spread as necessary. Our revenue may be reduced if we incorrectly set our foreign exchange spread. Our revenue also could be reduced if the foreign exchange rate changes between when we purchase our foreign currency and when we sell the foreign currency. In that case, we may reduce our spread to remain competitive or keep our spread the same but lose transaction volume because our exchange rates are viewed as uncompetitive. In addition, foreign exchange rates could become regulated by either U.S. or foreign governments and such governments could implement new laws or regulations that limit our right to set foreign exchange spreads. We may not be able to comply with such regulations and such regulations could harm our business. We do not currently hedge our foreign currency exposure but may in the future.

Our business is subject to seasonal fluctuations which could result in volatility or have an adverse effect on the market price of our common stock.

Our business is subject to some degree of seasonality. Historically, we have experienced increased money transfer volume during holiday periods such as Mother’s Day and Christmas and decreased money transfer volume during the first and third quarters. As the growth of our business stabilizes, these seasonal fluctuations

 

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may become more evident as our current growth may mask seasonality to some degree. 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 money transfers. These factors, among other things, make forecasting our future business results and needs 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 face intense competition and, if we are unable to continue to compete effectively, our business, financial condition and results of operations would be harmed.

The markets in which we compete are highly competitive and are highly fragmented. Our largest competitors are The Western Union Company and MoneyGram Payment Systems, Inc. We also compete against smaller, country-specific competitors, banks and informal person-to-person money transfer service providers that evade regulation. For example, in money transfers sent from the United States to India, we compete with ICICI Bank. In the future, new competitors or alliances among established companies may emerge. Some of these competitors have longer operating histories, significantly greater financial, technical, marketing, customer service and other resources, greater name recognition, exclusive agreements or a larger base of customers in affiliated businesses than us. Our competitors may respond to new or emerging technologies and changes in customer requirements faster and more effectively than us. Our competitors may devote greater resources to the development, promotion and sale of money transfer services, offer lower prices or better exchange rates and may negotiate exclusive deals which would reduce our opportunities. For example, our competitors have offered coupons for free money transfers and, in India, have established no fee services. Competing services tied to established banks and other financial institutions may offer greater liquidity or superior foreign exchange rates and engender greater consumer confidence in the safety and efficacy of their services than us. We expect competition to continue to intensify. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, our failure to increase market share, or our loss of market share, any of which could harm our business, results of operations and financial condition. There can be no assurance that growth in the online money transfer market will continue and that competitors would not decrease our market share. If we are unable to compete effectively and continue to grow our business, our business, financial condition and results of operations could be harmed.

New or existing technologies could gain wide adoption and supplant our services and features and harm our revenue and financial results.

The introduction of services embodying new technologies could render our existing services and features obsolete or less attractive to customers. Other similar technologies exist or could be developed in the future, and our business could be harmed if such technologies are widely adopted. We may not be able to successfully anticipate or adapt to changing technology or customer requirements on a timely basis, or at all. If we fail to keep up with technological changes or to convince our customers and potential customers of the value of our services even in light of new technologies, our business, results of operations and financial condition could be harmed.

Sustained financial market illiquidity, or illiquidity at our financial institutions, could harm our business, financial condition and results of operations.

We face risks in the event of a sustained deterioration of financial market liquidity, as well as in the event of sustained deterioration in the liquidity or failure of financial institutions where we deposit money, including financial institutions that hold prefunding accounts for our disbursement partners. In particular:

 

   

We may be unable to access funds in our investment portfolio, deposit accounts and clearing accounts on a timely basis to pay money transfers and receive settlement funds. Any resulting need to access other sources of liquidity or short-term borrowing would increase our costs. Any delay or inability to pay money transfers could harm our business, financial condition and results of operations;

 

   

Our payment processors, the commercial banks that hold our funds, our disbursement partners and the financial institutions that hold prefunding accounts for our disbursement partners or our disbursement

 

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collateral could fail or experience sustained deterioration in liquidity. This could lead to our inability to move funds on a global and timely basis as required to pay money transfers and receive settlement funds, loss of prefunded balances or a breach in our regulatory capital requirements if we are unable to recover our funds;

 

   

Our line of credit is one source of funding for our liquidity needs. If our lender was unable or unwilling to fulfill its lending commitment to us, our short-term liquidity and ability to operate our business could be harmed;

 

   

We may be unable to borrow from financial institutions or engage in equity or debt financings on favorable terms, or at all, which could harm our ability to operate our business and pursue our growth strategy; and

 

   

We maintain cash at commercial banks in the United States in amounts in excess of the Federal Deposit Insurance Corporation, or the FDIC, limit of $250,000. In the event of a failure at a commercial bank where we maintain our deposits, we may incur a loss to the extent such loss exceeds the insurance limitation.

If financial liquidity deteriorates, our business, financial condition and our ability to access capital may be harmed and we could become insolvent.

We face payment and fraud risks that could harm our business, financial condition and results of operations.

Individual customer transactions, making up, in aggregate, more than 90% of the volume of amounts sent through Xoom, which we refer to as gross sending volume, is released for disbursement prior to our receiving funds from our customers, which exposes us to repayment risk. If customers have insufficient funds in their bank accounts or have closed their bank accounts and we are unable to collect the funds from customers, our revenue will decline and our business may be harmed. We also offer our customers the ability to transfer money utilizing their credit or debit card. Because these are card-not-present transactions, they involve a greater risk of fraud. If we are unable to effectively manage our payment and fraud risks, our business may be harmed.

To minimize payment and fraud risk, several requirements must be satisfied in order for a prospective customer to use our services. A prospective customer must provide us with the following information: name, address, e-mail address, phone number, date of birth, U.S.-based payment source, name of recipient, recipient disbursement information and recipient address. The U.S.-based payment source may be a bank account, credit card or debit card, but we do not require that it be from any particular bank or banks. All of the transaction data is then evaluated by our proprietary risk management system, which assesses the transaction for regulatory compliance, anti-money laundering, acceptable use, anti-fraud and funding risk. If the transaction is deemed to be high risk by our risk management system, then we will either hold the transaction for further screening or cancel the transaction.

Criminals are using increasingly sophisticated methods to engage in illegal activities such as unauthorized use of credit or debit cards and bank account information. Because we are an online service provider, requirements relating to customer authentication and fraud detection are more complex. We may ultimately be held liable for the unauthorized use of a cardholder’s card number in an illegal activity and be required by card issuers to pay a charge-back fee. Charge-backs result not only in our loss of fees earned with respect to the payment, but also leave us liable for the underlying money transfer amount. If our charge-back rate becomes excessive, card associations also may require us to pay fines. In addition, we may be subject to additional fraud risk if third-party service providers or our employees fraudulently use customer information for their own gain or facilitate the fraudulent use of such information. In general, we have little recourse if we process a criminally fraudulent transaction.

For the year ended December 31, 2012, our transaction loss expense totaled $7.7 million, representing 0.24% of our gross sending volume. Our transaction loss expense may increase in future quarters if our fraud

 

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systems lose effectiveness. We have taken measures to detect and reduce the risk of fraud, but we cannot assure you of these measures’ effectiveness or our ability to update these measures to address future fraud risks. If these measures do not succeed, our business will be harmed.

The money transfer industry is under increasing scrutiny from federal, state and foreign regulators in connection with the potential for consumer fraud. Negative economic conditions may result in increased disbursement partner or consumer fraud. If consumer fraud levels involving our services were to rise, it could lead to regulatory intervention and reputational and financial damage to us. This, in turn, could lead to government enforcement actions and investigations, a reduction in the use and acceptance of our services or an increase in our compliance costs which may harm our business, financial condition and results of operations.

There has also been increased public attention regarding the use and disclosure of personal information, and regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning data protection and consumer privacy and other matters that may be applicable to our business. Our ability to prevent fraudulent transactions may conflict with the goal of protecting individual privacy. If federal, state or foreign governments or our disbursement partners changed the parameters regarding the customer or recipient information we are allowed to monitor and/or collect, our ability to prevent fraud might be negatively impacted, and our business could be harmed.

We are exposed to the risk of loss or insolvency if our disbursement partners fail to disburse funds according to our instructions.

We are exposed to the risk of loss in the event our disbursement partners fail, for any reason, to disburse funds to recipients according to our instructions. Such reasons could include mistakes by our disbursement partners, or insolvency or fraud by our disbursement partners. To the extent such funds are not disbursed correctly and cannot be recovered, we could be exposed to significant losses, which could harm our results of operations, cash flows and financial condition or potentially cause insolvency. Our funds held by our disbursement partners are not insured by any government or other insurance programs. We have in the past and may in the future suffer such losses. In the event such losses occur, they are not covered by our provision for transaction losses, but are instead characterized in our statements of operations as bad debt.

Our ability to continue to offer our services in the manner we currently offer them depends, in part, on our ability to contract with third-party vendors on commercially reasonable terms.

We currently contract with and obtain certain services from a number of third-party vendors. If these vendors’ services are interrupted, we may experience a disruption in our services. Further, if these agreements are terminated or we are unable to renegotiate acceptable arrangements with these vendors or find alternative sources of such services, we may experience a disruption in our services and our business may be harmed.

If we are unable to maintain our payment network under terms consistent with those currently in place, or if our disbursement partners encounter business difficulties, our business could be harmed.

Our payment network consists of payment processors and disbursement partners. Payment processors clear and process the funds from the customer to us. We rely on U.S. banks and card processors to provide clearing, processing and settlement functions for the funding of all of our transactions. Disbursement partners disburse funds to our customers’ recipients. We rely on a network of major banks and leading retailers to disburse funds to our customers’ recipients in 30 countries. In addition, our disbursement partners may operate their own network of disbursement partners, which we refer to as sub-disbursement partners, with which we do not have a direct relationship.

While we have entered into non-exclusive agreements with each of our payment processors and disbursement partners, our payment processors and disbursement partners could choose to terminate or not renew

 

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their agreements with us. Payment processor and disbursement partner attrition might occur for a number of reasons, including such payment processor’s or disbursement partner’s dissatisfaction with our relationship or the revenue derived from our relationship, changes in the law or changes or perceived changes in the regulatory environment that prohibit continuing the relationship or make the relationship less profitable for our payment processor or disbursement partner or, in the case of a disbursement partner, a competitor may engage a disbursement partner on an exclusive basis, offer greater financial incentives, or cause less attention to be provided to us. If we are unable to maintain our agreements with current payment processors and disbursement partners, or if our disbursement partners are unable to provide an adequate number of disbursement locations with satisfactory hours of operation in their network, our ability to disburse transactions and our revenue and business may be harmed.

Our payment processors and disbursement partners are critical components of our business. We have in the past experienced long business development periods before signing up both payment processors and disbursement partners. If we are unable to sign new payment processors and disbursement partners under terms consistent with, or better than, those currently in place, and if we are unable to sign new relationships or maintain our current relationships under terms consistent with those currently in place, our revenue and business may be harmed.

Payment processors and disbursement partners also engage in a variety of activities in addition to providing our services and may encounter business difficulties unrelated to our services. Such engagement could cause the affected payment processor or disbursement partner to reduce the services provided, cease to do business with us, or cease doing business altogether. This could lead to our inability to clear our payment instruments or move funds on a global and timely basis as required to settle our obligations. In addition, because we offer instant ACH transactions for the vast majority of our money transfers, if a disbursement partner experienced insufficient liquidity or ceased to do business, we may not be able to recover funds held with that disbursement partner which could lead to a breach of our capital requirements, our insolvency or otherwise harm our business.

We may also be forced to cease doing business with payment processors if card association operating rules, certification requirements and rules governing electronic funds transfers to which we are subject change or are 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 harmed.

If we fail to manage our growth effectively, our brand, results of operations and business could be harmed.

We have experienced rapid growth in our headcount and transaction volume, which places substantial demands on our management and operational infrastructure. Our headcount grew from 70 employees at December 31, 2010 to 150 employees at December 31, 2012. Additionally, we may not be able to hire new employees quickly enough to meet our needs. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, while maintaining the beneficial aspects of our company culture. If we fail, our efficiency and ability to meet our forecasts and our employee morale, productivity and retention could suffer, and our business and operating results could be harmed.

Our gross sending volume increased over 273% from $859.0 million in 2010 to $3.2 billion in 2012. We will need to continue to improve our operational, financial and management controls, and our reporting systems and procedures in order to manage this growth. If we do not manage the growth of our business and operations effectively, the quality of our services and efficiency of our operations could suffer, which could harm our brand, results of operations and business.

If we fail to expand effectively into new markets abroad, our future growth rates may be harmed.

We are exploring opportunities to expand our operations into new markets abroad by both increasing the number of countries that customers can send money to and also increasing the number of countries where

 

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transactions can originate. Any future expansion into new markets could place us in unfamiliar competitive environments and involve various risks, including incurring losses or failing to comply with applicable laws and regulations. Such expansion would also require significant resources and management time, and there is no guarantee that, after expending such resources and time, we will receive the necessary approvals to operate in such new markets. If we are ultimately granted authority to operate in such new markets, it is possible that returns on such investments will not be achieved for several years, if at all. There is no guarantee that our business model will be successful in a new market, that we could maintain profit margins in these new markets or that international expansion would help grow our business. If we are unable to successfully expand our operations into new markets, our future growth rates may be harmed.

Increases in transaction processing fees could increase our costs, affect our profitability, or otherwise limit our operations.

Our payment processors and disbursement partners charge us fees which may be increased from time to time. Banks currently determine the fees charged for ACH transactions and may increase the fees with little prior notice. Our card processors have in the past and may in the future increase the fees charged for each transaction using credit and debit cards which may be passed on to us. Our card processors currently assign us merchant category codes which may change from time to time. Any changes to these codes may affect the fees our customers are charged if they use a credit card, which could increase the overall cost to use our service.

Our disbursement partners charge us disbursement fees which they may renegotiate if they are dissatisfied with their revenue or if we are not providing them with enough transactions. U.S. and foreign governments could also mandate a payment processing tax or require additional taxes or fees to be imposed upon our customers, or otherwise impact the manner in which we provide our services. Any such taxes or increased fees could increase our operating costs, require us to provide additional disbursement collateral and reduce our profit margins.

The effectiveness of our marketing solutions depends in part on our relationships with media buying companies.

We rely, in part, on media buying companies to deliver our online and television marketing. We typically enter into short-term agreements with advertising companies for estimated levels of advertising. If we are not able to have our advertising orders fulfilled, if our agreements with these companies are not extended or renewed, or if we are not able to extend or renew our agreements on terms and conditions favorable to us and we are not able to enter into agreements with alternative companies on acceptable terms or on a timely basis, or both, our business could be harmed.

Our services might be used for illegal or improper purposes, which could expose us to additional liability and harm our business.

Our services remain susceptible to potentially illegal or improper uses as criminals are using increasingly sophisticated methods to engage in illegal activities involving Internet services and payment providers. Because our customers transfer money using bank accounts or credit and debit cards via the Internet, and these are not face-to-face transactions, these transactions involve a greater risk of fraud. Other illegal or improper uses of our services may include money laundering, terrorist financing, drug trafficking, human trafficking, illegal online gaming, romance and other online scams, illegal sexually-oriented services, prohibited sales of pharmaceuticals, fraudulent sale of goods or services, piracy of software, movies, music and other copyrighted or trademarked goods, unauthorized uses of credit and debit cards or bank accounts and similar misconduct. Users of our services may also encourage, promote, facilitate or instruct others to engage in illegal activities. If the measures we have taken are too restrictive and inadvertently screen proper transactions, this could diminish our customer experience which could harm our business. Despite measures we have taken to detect and lessen the risk of this kind of conduct, we cannot assure you that these measures will stop all illegal or improper uses of our services. Our business could be harmed if customers use our system for illegal or improper purposes.

 

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If our payment processors and disbursement partners experience an interruption in service, our business and revenue would be harmed.

Our payment processors and disbursement partners have experienced service outages or an inability to connect with our processing systems and this may reoccur in the future. If a payment processor experiences a service outage or service interruption that results in our being unable to collect funds from customers, our liquidity could be harmed and we may not meet our capital requirements.

We rely on our disbursement partners’ information systems to obtain transaction data. If a disbursement partner, or its sub-disbursement partner, experiences a significant disruption to its information system, is unable to synch its system to our system, or does not maintain the appropriate controls over its systems, we may lose our customers’ confidence and our reputation may be harmed. Specific problems that could arise include a disbursement partner could be unable to disburse funds in the time period that we communicated to our customers, we may be unable to confirm if a transaction has been disbursed or customer information could be compromised. We currently undergo an extensive integration process with each disbursement partner, but unforeseen bugs or services outages by either the disbursement partner or us could delay disbursement. Such outages have lasted from a couple of hours to a couple of days and may be unplanned. If we are unable to minimize service outages, our business and revenue would be harmed.

If our disbursement partners do not provide a positive recipient experience, our business would be harmed.

We rely on our disbursement partners to disburse funds to our customers’ recipients. If the experience delivered by our disbursement partners to a recipient is deemed unsatisfactory for any reason, including because our disbursement partners are not properly trained to disburse money or deliver poor customer service, if wait times at our disbursement partners’ pick up locations are too long, or if cash pick-up locations are not located in convenient and safe locations and open for business at convenient times, customers may choose to not use our services in the future and our business would be harmed.

Customer complaints or negative publicity could result in a decline in the use of our services and our business could suffer.

Customer complaints or negative publicity about our service could diminish consumer confidence in our services which could lead to a reduced use of our services. Breaches of our customers’ privacy and our security measures could have the same effect. Measures we take to combat risks of fraud and breaches of privacy and security, such as cancelling customer transactions or closing customer accounts, can damage relations with our customers by restricting or decreasing money transfers or restricting the activities of certain customers. These measures heighten the need for prompt and accurate customer service to resolve irregularities and disputes. Effective customer service requires significant personnel expense, and this expense, if not managed properly, could impact our profitability significantly. Any inability by us to manage or train our own or our outsourced customer service representatives properly could compromise our ability to handle customer complaints effectively. If we do not handle customer complaints effectively, our reputation may be harmed and we may lose our customers’ confidence.

If consumers’ confidence in our business or in money transfer providers generally deteriorates, our business could be harmed.

We rely on consumers’ confidence in our brand and our ability to provide a convenient, fast and cost-effective service to send money online to family and friends. Erosion in confidence in our business, or in money transfer providers as a means to transfer money, could adversely impact money transfer volumes, which would in turn harm our business, financial position and results of operations.

 

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A number of factors could adversely affect consumers’ confidence in our business, or in money transfer providers generally, many of which are beyond our control, and could have an adverse impact on our results of operations. These factors include:

 

   

changes or proposed changes in laws or regulations or system rules that make it more difficult for consumers to transfer money using traditional money transfer providers or require us to capture or handle data in a way that is more burdensome or expensive;

 

   

actions by federal, state or foreign regulators that interfere with our ability to transfer consumers’ money reliably, including, for example, attempts to seize money transfer funds;

 

   

federal, state or foreign legal requirements, including those that require us to provide consumer data to a greater extent than is currently required;

 

   

any significant interruption in our systems, including by fire, natural disaster, power loss, telecommunications failure, terrorism, vendor failure, unauthorized entry and computer viruses; and

 

   

any breach, or reported breach, of our security policies or legal requirements resulting in a compromise of consumer data.

We may be unable to continue to use the domain names that we use in our business, or prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks.

We have registered domain names for our website that we use in our business, such as www.xoom.com. If we lose the ability to use a domain name, whether due to trademark claims, failure to renew the applicable registration, or any other cause, we may be forced to market our services under a new domain name, which could diminish our brand or cause us to incur significant expenses in order to purchase rights to the domain name in question. In addition, our competitors and others could attempt to capitalize on our brand recognition by using domain names similar to ours. Domain names similar to ours have been registered in the United States and elsewhere. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks or service marks. Protecting and enforcing our rights in our domain names may require litigation, which could result in substantial costs and diversion of management’s attention, and we may not prevail.

If Internet search engines’ methodologies are modified or our search result page rankings decline for other reasons, our new customer growth could decline.

We depend in part on various Internet search engines, such as Google and Yahoo!, to direct a significant amount of traffic to our website. Our ability to maintain the number of visitors directed to our website is not entirely within our control. Our competitors’ search engine optimization efforts may result in their websites receiving a higher search result page ranking than ours, or Internet search engines could revise their methodologies in an attempt to improve their search results, which could adversely affect the placement of our search result page ranking. As a result, links to our website may not be prominent enough to drive traffic to our website, and we may not be able to influence the results. If Internet search engines modify their search algorithms in ways that are detrimental to our new customer growth or in ways that make it harder for our customers to find or use our website, or if our competitors’ search engine optimization efforts are more successful than ours, overall growth in our customer base could slow, and we could lose existing customers. In addition, search engines that we use to advertise our brand have frequently changing rules that govern the pricing, availability and placement of online advertisements (e.g., paid search and keywords) and changes to these rules could harm our ability to use online advertising to promote our brands in a cost-effective manner. Our website has experienced fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of persons directed to our website would harm our business.

 

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Many people use smartphones and other mobile devices to access information on the Internet and if we are not successful in developing effective mobile solutions, or those solutions are not widely adopted, our business could be harmed.

The number of people who access the Internet through mobile devices, including smartphones and handheld tablets or computers, has increased significantly in the past few years and is expected to continue to increase. Mobile devices provide us an additional channel to offer our services to new and existing customers and offer a convenient solution to send money at any time, from any Internet-enabled location. We believe that mobile devices provide some customers with their first sustained Internet connection, which gives them access to our online money transfer services. Customers can currently access our services on our mobile site, but we are also in the process of developing a mobile application. If we are not able to drive customers to our mobile site, launch our mobile application in a timely manner or generate customer usage of our mobile website and mobile application, our ability to grow our business could be harmed.

Additionally, as new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing features for these alternative devices and platforms, and we may need to devote significant resources to the creation, support and maintenance of such features. In addition, if we experience difficulties in the future in integrating our mobile application into mobile devices or if problems arise with our relationships with providers of mobile operating systems or mobile application download stores or if we face increased costs to distribute our mobile application, our future growth and results of operations could suffer. In addition, we may face different fraud risks from transactions sent from mobile devices than we do from personal computers. If we are unable to effectively anticipate and manage these fraud risks, our business and results of operations may be harmed.

We may not timely and effectively scale and adapt our existing technology and network infrastructure to ensure that our services are accessible.

The ability to access our services at all times and at acceptable load times is important for our business. We have previously experienced, and may experience in the future, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, hardware failures, capacity constraints due to an overwhelming number of customers accessing our service simultaneously, denial of service, fraud or security attacks or failure of third-party service providers on whom we rely to perform data hosting and related services. In some instances, we may not be able to identify the cause of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve the availability and reliability of our services, especially during peak usage times and as our services become more complex and our customer traffic increases. If our service is unavailable when customers attempt to access it or it does not load as quickly as they expect, customers may believe that our services are unreliable or too slow. New or existing customers may seek other money transfer services and may not return to our services as often in the future, or at all. This would harm our ability to attract customers and could decrease the frequency with which they use our website, mobile website and mobile application. We expect to continue to make significant investments to maintain and improve the availability and reliability of our services and to enable rapid releases of new features. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and results of operations may be harmed.

Our disaster recovery program contemplates transitioning our website and data to a backup center in the event of a catastrophe, but we have not yet tested the procedure in full, and the transition procedure may take several months or more to complete. During this time, our services may be unavailable in whole or in part to our customers.

A breach of security of our systems could harm our business.

We obtain, transmit and store confidential customer information in connection with our services. These activities are subject to laws and regulations in the United States and other jurisdictions. The requirements

 

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imposed by these laws and regulations, which often differ materially among the many jurisdictions to which we are subject, are designed to protect the privacy of personal information and to prevent that information from being inappropriately disclosed. We rely on a variety of technologies to provide security for our systems. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments, including improper acts by third parties, may result in a compromise or breach of the security measures we use to protect our systems. We could also suffer from an internal security breach. If a third party or an employee were to misappropriate, misplace or lose corporate information, including our financial and account information, our customers’ personal information or our source code, our business may be harmed. We may be required to expend significant capital and other resources to protect against these security breaches or losses or to alleviate problems caused by these breaches or losses. Our disbursement partners and third-party contractors also may experience security breaches involving the storage and transmission of our data. If third parties gain improper access to our systems or databases or those of our disbursement partners or contractors, they may be able to steal, publish, delete or modify confidential customer information. A security breach could expose us to monetary liability, lead to inquiries and fines or penalties from regulatory or governmental authorities, lead to reputational harm and make our customers less confident in our services, which could harm our business, financial condition and results of operations.

If we are unable to adequately protect our brand and the intellectual property rights related to our existing and any new services, or if we infringe on the rights of others, our business, prospects, financial condition and results of operations could be harmed.

The XOOM brand is important to our business. Our business could be harmed if we were unable to adequately protect our brand and the value of our brand decreased as a result.

We rely on a combination of patent and trademark laws, trade secret protection and confidentiality and license agreements to protect the intellectual property rights related to our services, all of which offer only limited protection. While we have filed two patent applications, we have not been granted any patents for features of our electronic payment processing system. The process of obtaining patent protection is expensive and time consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. We may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. Furthermore, it is possible that our patent applications may not issue as granted patents, that the scope of our issued patents will be insufficient or not have the coverage originally sought, that our issued patents will not provide us with any competitive advantages, and that our patents and other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. In addition, issuance of a patent does not guarantee that we have an absolute right to practice the patented invention. As a result, we may not be able to obtain adequate patent protection or to enforce our issued patents effectively. We may be subject to claims by third parties alleging that we infringe their intellectual property rights or have misappropriated other proprietary rights.

We have in the past and may in the future bring a claim against third parties alleging infringement of our intellectual property rights. For example, in February 2011, we filed a lawsuit in federal court in the Northern District of California against Motorola Mobility, Inc. and other affiliated companies, alleging trademark infringement and other related claims, stemming from Motorola’s use of the name “XOOM” in connection with its wireless tablet devices and related accessories. If our lawsuit is unsuccessful, and one or more of Motorola’s Xoom-branded products is commercially successful, then this could diminish the value of our brand, adversely affect our ability to market our services, and our business could be harmed. We may be required to spend resources to defend such claims or to protect and police our own rights. Some of our intellectual property rights may not be protected by intellectual property laws, particularly in foreign jurisdictions. The loss of our intellectual property protection, the inability to secure or enforce intellectual property protection or to successfully defend against claims of intellectual property infringement could harm our business.

We also rely on our unpatented proprietary technology and trade secrets. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, reverse engineer or

 

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otherwise obtain and use them. The contractual provisions that we enter into with employees, consultants, disbursement partners, vendors and customers may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, services and intellectual property is difficult, expensive and time consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States, and where mechanisms for enforcement of intellectual property rights may be weak. We may be unable to determine the extent of any unauthorized use or infringement of our services, technologies or intellectual property rights.

From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, results of operations and financial condition. If we are unable to protect our intellectual property rights, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative services that have enabled us to be successful to date.

Assertions by third parties of infringement or other violations by us of their intellectual property rights could result in significant costs and substantially harm our business and operating results.

Patent and other intellectual property disputes are common in the payments and money transfer industries. Some companies in the money transfer industry, including some of our competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us. Third parties have asserted and may in the future assert claims of infringement, misappropriation or other violations of intellectual property rights against us. As the number of services and competitors in our market increase and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Any claim of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management.

The patent portfolios of our most significant competitors are larger than ours and this disparity may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. In addition, future assertions of patent rights by third parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore provide little or no deterrence or protection. We cannot assure you that we are not infringing or otherwise violating any third-party intellectual property rights.

An adverse outcome of a dispute may require us to pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights; cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to attempt to redesign our services or otherwise to develop non-infringing technology, which may not be successful; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and indemnify our disbursement partners and other third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Any of these events could harm our business, financial condition and results of operations.

 

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There are a number of risks associated with our international operations that could harm our business.

We provide money transfer services to 30 countries and territories and may expand into additional sending and receiving countries. Our ability to grow in international markets could be harmed by a number of factors, including:

 

   

changes in political and economic conditions and potential instability in certain regions;

 

   

restrictions on money transfers to or from certain countries;

 

   

currency control and repatriation issues;

 

   

changes in regulatory requirements or in foreign policy, including the adoption of domestic or foreign laws, regulations and interpretations detrimental to our business;

 

   

possible increased costs and additional regulatory burdens imposed on our business;

 

   

the implementation of U.S. sanctions, resulting in bank closures in certain countries and the freezing of our assets;

 

   

burdens of complying with a wide variety of laws and regulations;

 

   

fraud, theft or lack of compliance by disbursement partners in foreign legal jurisdictions where legal enforcement may be difficult or costly;

 

   

reduced protection of our intellectual property rights;

 

   

unfavorable tax rules or trade barriers;

 

   

inability to secure, train or monitor disbursement partners; and

 

   

failure to successfully manage our exposure to foreign exchange rates, in particular with respect to the Indian rupee.

In addition, we conduct certain functions, including customer operations, in regions outside of the United States. We are subject to both U.S. and local laws and regulations applicable to our offshore activities, and any factors which reduce the anticipated benefits associated with providing these functions outside of the United States, including cost efficiencies and productivity improvements, could harm our business.

We expect new remittance rules to take effect in the United States in 2013, which will impose additional disclosure and other responsibilities on us as described elsewhere in these risk factors.

A material slowdown or disruption in international migration patterns could harm our business.

A majority of our customers are from first or second generation immigrant families and our business relies in part on international migration patterns. A significant portion of money transfer transactions are initiated by immigrants who have moved from their home countries to the United States. These immigrants typically send money back to their home countries to their family and friends. Migration is affected by, among other factors, overall economic conditions, the availability of job opportunities, changes in immigration laws and political or other events such as war, terrorism or health emergencies that would make it more difficult for workers to migrate or work abroad. Changes to these factors could harm our online money transfer volume, our business, financial condition and results of operations.

Changes in U.S. immigration laws or changes in the emigration laws of other jurisdictions that discourage international migration, and political or other events, such as war, terrorism or health emergencies, that make it more difficult for individuals to immigrate to the United States or work in the United States, could adversely affect our gross sending volume or growth rate. Sustained weakness in U.S. or global economic conditions could reduce economic opportunities for immigrant workers and result in reduced or disrupted international migration patterns. Reduced or disrupted international migration patterns are likely to reduce money transfer volumes and harm our results of operations.

 

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Our use of open source and third-party technology could impose limitations on our ability to commercialize our software.

We use open source software in our services and, although we monitor our use of open source software to avoid subjecting our services to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts. As a result, there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to provide our services. In such an event, we could be required to seek licenses from third parties to continue offering our services, to make our proprietary code generally available in source code form, to re-engineer our services or to discontinue our services if re-engineering could not be accomplished on a timely basis, any of which could harm our business, results of operations and financial condition.

Our business is subject to the risks of earthquakes, fires, floods, other natural catastrophic events and to interruption by man-made problems such as computer viruses or terrorism which could result in system failures and interruptions which could harm our business.

Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, California rolling blackouts, telecommunication failures, terrorist attacks, cyber-attacks, computer viruses, computer denial-of-service attacks, human error, hardware or software defects or malfunctions (including defects or malfunctions of components of our systems that are supplied by third-party service providers), and similar events or disruptions. Our U.S. corporate offices and one of the facilities we lease to house our computer and telecommunications equipment are located in the San Francisco Bay Area, a region known for seismic activity. Our outsourced customer call centers are located in the Philippines and El Salvador, which are also known for seismic activity. Despite any precautions we may take, system interruptions and delays could occur if there is a natural disaster, if a third-party provider closes a facility we use without adequate notice for financial or other reasons, or if there are other unanticipated problems at our leased facilities. As we rely heavily on our servers, computer and communications systems and the Internet to conduct our business and provide high-quality customer service, such disruptions could harm our ability to run our business and cause lengthy delays which could harm our business, results of operations and financial condition. We currently are not able to switch instantly to our back-up center in the event of failure of the main server site. This means that an outage at one facility could result in our system being unavailable for a significant period of time. We do not carry business interruption insurance sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures. A system outage or data loss could harm our business, financial condition and results of operations.

Continued weakness in economic conditions, in both the United States and global markets, could harm our business.

Our business relies in part on the overall strength of global economic conditions as well as international migration patterns. Money transfer transactions and international migration patterns are affected by, among other things, employment opportunities and overall economic conditions. Poor economic conditions may result in reduced job opportunities for our customers, or other countries that may become important to our business, which could harm our results of operations.

If general market conditions in the United States were to deteriorate, our business could be harmed. Additionally, if the volume of our online money transfers declines or international migration patterns shift due to deteriorating economic conditions, we may be unable to timely and effectively reduce our operating costs or take other actions in response, which could harm our results of operations.

We enable money transfers through disbursement partners in some regions that are politically volatile.

We enable money transfers in some regions that are politically volatile. If a country experiences political instability that affects its economy or financial systems, our business could be harmed. It also is possible that our

 

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services could be used by wrongdoers in contravention of U.S. or foreign law or regulations. Such circumstances could result in increased compliance costs, regulatory inquiries, suspension or revocation of required licenses or registrations, seizure or forfeiture of assets and the imposition of civil and criminal fees and penalties. In addition to monetary fines or penalties that we could incur, we could be subject to reputational harm that could harm our business.

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 believe our success has depended, and continues to depend, on the efforts and talents of our employees, including John Kunze, our President and Chief Executive Officer, Ryno Blignaut, our Chief Financial Officer, and Julian King, our Senior Vice President of Marketing and Corporate Development. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and keep them. In addition, the loss of any of our senior management or key employees could harm our ability to execute our business plan, and we may not be able to find adequate replacements. All of our officers and other U.S. employees are at-will employees, which means they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business could be harmed.

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.

Acquisitions could disrupt our business and harm our financial condition and results of operations.

We may decide to acquire complementary businesses, products and technologies. Our ability as an organization to successfully make and integrate acquisitions is unproven. Acquisitions could require significant capital infusions and could involve many risks, including potential negative impact on our results of operations due to debt or liabilities incurred in connection with an acquisition, difficulties assimilating and integrating the acquired business, disruption of our ongoing business by diverting resources and distracting management, not realizing the expected benefits of the acquisition, and potential dilution of stockholders’ ownership in the event we issue equity securities to complete an acquisition. We cannot assure you that we will be able to identify or consummate any future acquisition on favorable terms, or at all. If we do pursue an acquisition, it is possible that we not realize the anticipated benefits from the acquisition or that the financial markets or investors will view the acquisition negatively. Even if we successfully complete an acquisition, it could harm our business, results of operations and financial condition.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified board members.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, the listing requirements of the NASDAQ Global Market and other applicable securities rules and regulations. Compliance with these rules and regulations

 

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will increase our legal and financial compliance costs, make some activities more difficult, time consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and results of operations.

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting, but we may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, either of which may harm investor confidence in us and the value of our common stock.

We will be required, pursuant to Section 404 of the Sarbanes–Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the year ended December 31, 2014. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.

We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and

 

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testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.

If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the Securities and Exchange Commission, or the SEC.

We will be required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company.” We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. If we choose not to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, our auditors will not be required to attest to the effectiveness of our internal control over financial reporting. As a result, investors may become less comfortable with the effectiveness of our internal controls and the risk that material weaknesses or other deficiencies in our internal controls go undetected may increase. If we choose to provide reduced disclosures in our periodic reports and proxy statements while we are an emerging growth company, investors would have access to less information and analysis about our executive compensation, which may make it difficult for investors to evaluate our executive compensation practices. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions and provide reduced disclosure. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Our revenue may be harmed if we are required to pay transaction taxes on all or a portion of our past and future transfers in jurisdictions where we are currently not collecting and reporting tax.

We currently only pay transaction taxes in certain jurisdictions in which we do business. We do not separately collect other transaction taxes. A successful assertion by any state, local jurisdiction or country in which we do not pay such taxes that we should be paying sales or other transaction taxes on our services, or the imposition of new laws requiring the payment of sales or other transaction taxes on our services, could result in substantial tax liabilities related to past transactions, create increased administrative burdens or costs, discourage consumers from using our services, decrease our ability to compete or otherwise harm our business and results of operations.

 

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New tax treatment of companies engaged in online money transfer may harm 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 money transfers 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 in general. 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 would likely increase the cost of doing business online and decrease the attractiveness of using our Internet services. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could harm our business and results of operations.

Our ability to use net operating loss carryforwards to reduce future tax payments may be limited by provisions of the Internal Revenue Code.

As of December 31, 2012, we had net operating loss carryforwards for federal and state income tax purposes of approximately $56.6 million and $54.2 million, respectively. The annual use of our net operating losses may be limited following certain ownership changes under provisions of the Internal Revenue Code of 1986, as amended, and applicable state tax law. We have not completed a study to assess whether an ownership change will occur as a result of this offering, or whether there have been one or more ownership changes since our inception, due to the costs and complexities associated with such study. Accordingly, our ability to use our net operating loss carryforwards to reduce future tax payments may be currently limited or may be limited as a result of this offering or any future issuance of shares of our stock.

Changes or modifications in financial accounting standards may harm our results of operations.

From time to time, the Financial Accounting Standards Board, or FASB, either alone or jointly with the International Accounting Standards Board, or IASB, promulgates new accounting principles that could have a material adverse impact on our results of operations. For example, the FASB is currently working together with the IASB to converge certain accounting principles and facilitate more comparable financial reporting between companies who are required to follow generally accepted accounting principles, or GAAP, and those who are required to follow International Financial Reporting Standards, or IFRS. These efforts may result in different accounting principles under GAAP, which may have a material impact on the way in which we report financial results in areas including, among others, revenue recognition and financial statement presentation. We expect the SEC to make a determination in the future regarding the incorporation of IFRS into the financial reporting system for U.S. companies. A change in accounting principles from GAAP to IFRS would be costly to implement and may have a material impact on our financial statements and may retroactively harm previously reported transactions.

Regulatory Risks Faced by Our Business

Our business is subject to a wide range of laws and regulations intended to help detect and prevent illegal or illicit activity and our failure, or the failure of one of our disbursement partners or payment processors to comply with those laws and regulations could harm our business, financial condition and results of operations.

Our services are subject to an increasingly strict set of legal and regulatory requirements intended to help detect and prevent money laundering, terrorist financing, fraud and other illicit activity. The interpretation of those requirements by judges, regulatory bodies and enforcement agencies is changing, often quickly and with little notice. Economic and trade sanctions programs that are administered by the U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC, prohibit or restrict transactions to or from or dealings with specified

 

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countries, their governments, and in certain circumstances, with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers and terrorists or terrorist organizations. As federal, state and foreign legislative regulatory scrutiny and enforcement action in these areas increase, we expect our costs to comply with these requirements will increase, perhaps substantially. Failure to comply with any of these requirements by us or our disbursement partners could result in the suspension or revocation of a money transmitter license, the limitation, suspension or termination of our services, the seizure and/or forfeiture of our assets and/or the imposition of civil and criminal penalties, including fines.

We are subject to reporting, recordkeeping and anti-money laundering provisions of the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, or the Bank Secrecy Act, and to regulatory oversight. We are also subject to enforcement by the U.S. Department of the Treasury Financial Crimes Enforcement Network, or FinCEN, and U.S. state regulators, and to economic sanctions imposed by the United States which are overseen by OFAC.

Our subsidiary is also subject to regulations in India in addition to U.S. federal and state regulations. Pursuant to our Indian license, we must adhere to certain transaction limits for transfers to India, which are typically lower than our limits for transfers to other countries, and we are prohibited from sending funds to certain types of accounts, including certain accounts held by non-resident Indians. We believe transfers to such accounts constitute a material percentage of fund transfers from the United States to India by other money transfer providers. Additionally, Indian regulations require us to file reports relating to suspicious transactions that we are in the process of filing. If we are unable to file these reports in the required timeframes or in the appropriate manner, we may face penalties. We may also become subject to additional reporting, recordkeeping and anti-money laundering regulations as well as additional risks and obligations if we expand our business into new geographic regions.

We are also subject to regulations imposed by the Foreign Corrupt Practices Act, or the FCPA, in the United States and similar laws in other countries which generally prohibit companies and those acting on their behalf from making improper payments to foreign government officials for the purpose of obtaining or retaining business. Because our services are offered in 30 countries, we face a higher risk associated with FCPA compliance and similar statutes than many other companies. Any determination that we have violated these laws could harm our business, financial condition and results of operations.

The foregoing laws and regulations are constantly evolving, unclear and inconsistent across various jurisdictions, making compliance challenging. If we fail to update our compliance system to reflect legislative or regulatory developments, we could incur penalties. New legislation, changes in laws or regulations, implementing rules and regulations, litigation, court rulings, changes in industry practices or standards, changes in systems rules or requirements or other similar events could expose us to increased compliance costs, liability, reputational damage, and could reduce the market value of our services or render them less profitable or obsolete.

Our business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing, and many of which may contradict one another due to conflicting regulatory goals. Failure to comply with these laws could subject us to claims or otherwise harm our business.

The Xoom service is subject to a variety of laws in the United States and abroad that are continuously evolving and developing, including laws regarding data retention, privacy, anti-spam, consumer protection, payment processing and money transfers. The scope and interpretation of the various laws that are or may be applicable to us are often uncertain and may be conflicting, particularly regarding laws outside the United States. For example, we are subject to regulatory requirements to assist in the prevention of money laundering and terrorist financing, such as the Bank Secrecy Act and, pursuant to these legal obligations and authorizations, we make information available to certain U.S. federal, state and local, as well as foreign, government agencies when required by law. As a result of particular concern with respect to terrorist financing, these agencies have increased their requests for such information from money service businesses in recent years. At the same time, there has been increased public attention regarding the use and disclosure of personal information, and regulatory

 

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authorities around the world are considering a number of legislative and regulatory proposals concerning data protection and consumer privacy and other matters that may be applicable to our business. The regulatory goals of preventing illegal activity, such as money laundering and terrorist financing, may conflict with the goal of protecting individual privacy. If federal, state or foreign governments or our disbursement partners changed requirements regarding the customer or recipient information we are required to collect, we may be unable to comply with such changes, or such changes could interfere with our ability to assess fraud or other risks, and our business could be harmed as a result. New laws and regulations may be enacted in connection with mobile transactions, including money transfers that are performed via smartphones.

Failure to comply with existing and future laws could result in fines, sanctions, penalties or other adverse consequences and loss of consumer confidence, which could harm our results of operations, business and reputation. While we believe that we are compliant with our regulatory responsibilities, the legal, political and business environments in these areas are rapidly changing, and subsequent legislation, regulation, litigation, court rulings or other events could expose us to increased liability, increased operating costs to implement new measures to reduce our exposure to this liability and reputational damage.

Our business could be harmed if a government were to levy taxes on money transfers, as has occurred in the past. The current budget shortfalls in many jurisdictions could lead other states and jurisdictions to impose similar fees and taxes, as well as increase unclaimed property obligations. A tax or fee exclusively on money transfer companies could put us at a competitive disadvantage to other means of remittance or payment transfers which may not be subject to the same fees or taxes. A change in the unclaimed property obligations could increase our regulatory burdens and costs related to our obligation to escheat unclaimed property to the states.

It is possible that governments of one or more countries may seek to censor content available on our website and mobile applications or may even attempt to completely block access to our website. Adverse legal or regulatory developments could 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 harmed and we may not be able to maintain or grow our revenue as anticipated.

Consumer advocacy groups or governmental agencies could also seek to change laws and regulations to seek greater protections for our money transfer customers, which could result in enhanced consumer disclosure, impact fees or exchange spreads, or require other different customer treatment. If consumer advocacy groups are able to generate widespread support for positions that are detrimental to our business, then our business, financial position and results of operations could be harmed.

We are subject to licensing and other requirements imposed by U.S. state regulators, the U.S. federal government and the government of India. If we were found to be subject to or in violation of any laws or regulations governing money transmitters, we could lose our licenses, be subject to liability or be forced to change our business practices.

A number of states have enacted legislation regulating money transmitters. To date, we have obtained licenses to operate as a money transmitter in 43 U.S. states, the District of Columbia and Puerto Rico and have applied, or plan to apply, for money transmitter licenses in additional states. Our subsidiary holds a money transmitter license in India and a license in one U.S. state. Our subsidiary is a regulated entity in India, and we must renew our license to operate every two years, with our next renewal scheduled for January 2015. If regulators were to revoke or decline to renew our subsidiary’s license to operate in India, we may be required to stop doing business in India, which would harm our business and results of operations. We and our subsidiary are also registered as money services businesses with FinCEN. As a licensed money transmitter, we are subject to bonding requirements, liquidity requirements, restrictions on our investment of customer funds, reporting requirements and inspection by state and foreign regulatory agencies. If our pending applications were denied or if additional states or jurisdictions require us to apply for a license, we could be forced to change our business practice or required to bear substantial cost to comply with the requirements of the additional states or

 

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jurisdictions. If we were found to be subject to and in violation of any banking or money services laws or regulations, we could be subject to liability or additional restrictions, such as increased liquidity requirements. In addition, our licenses could be revoked or we could be forced to cease doing business or change our practices in certain states or jurisdictions, or be required to obtain additional licenses or regulatory approvals that could impose a substantial cost on us. Regulators could also impose other regulatory orders and sanctions on us. Any change to our business practices that makes our service less attractive to customers or prohibits use of our services by residents of a particular jurisdiction could decrease our transaction volume and harm our business.

The Dodd-Frank Act, as well as the regulations required by the Dodd-Frank Act, and the creation of the Consumer Financial Protection Bureau could harm us and the scope of our activities, and could harm our operations, results of operations and financial condition.

The Dodd-Frank Act, which became law in the United States on July 21, 2010, calls for significant structural reforms and new substantive regulation across the financial services industry. In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau, or the CFPB, whose purpose is to issue and enforce consumer protection initiatives governing financial products and services, including money transfer services. The CFPB will create additional regulatory oversight for us. The Dodd-Frank Act and actions by the CFPB could have a significant impact on us by, for example, requiring us to limit or change our business practices, limiting our ability to pursue business opportunities, requiring us to invest valuable management time and resources in compliance efforts, imposing additional costs on us, limiting fees we can charge for services, requiring us to meet more stringent capital requirements, impacting the value of our assets, delaying our ability to respond to marketplace changes, requiring us to alter our services in a manner that would make them less attractive to consumers and impair our ability to offer them profitably, or requiring us to make other changes that could harm our business.

The CFPB has recently issued regulations implementing the remittance provisions of the Dodd-Frank Act. These regulations, which we expect to become effective in 2013, will impact our business in a variety of areas as described elsewhere in these risk factors. These requirements and other potential changes under CFPB regulations could harm our operations and financial results and change the way we operate our business.

We may also be subject to examination by the CFPB, which has broad authority to enforce consumer financial laws. In July 2011, many consumer financial protection functions formerly assigned to the federal banking agency and other agencies were transferred to the CFPB. The CFPB has a large budget and staff and has broad authority with respect to our money transfer service and related business. It is authorized to collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. In addition, the CFPB may adopt other regulations governing consumer financial services, including regulations defining unfair, deceptive or abusive acts or practices, and new model disclosures. The CFPB’s authority to change regulations adopted in the past by other regulators, or to rescind or alter past regulatory guidance, could increase our compliance costs and litigation exposure.

The Dodd-Frank Act establishes a Financial Stability Oversight Counsel that is authorized to designate as “systemically important” non-bank financial companies and payment systems. Companies designated under either standard will become subject to new regulation and regulatory supervision. If we were designated under either standard, the additional regulatory and supervisory requirements could result in costly new compliance burdens or may require changes in the way we conduct business that could harm our business.

The effect of the Dodd-Frank Act and the CFPB on our business and operations will be significant, in part because some of the Dodd-Frank Act’s implementing regulations have not been issued and the function and scope of the CFPB, the reactions of our competitors and the responses of consumers and other marketplace participants are uncertain.

 

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New remittance rules adopted by the CFPB, which we expect to become effective in 2013, could harm us and the scope of our activities, and could harm our operations, results of operations and financial condition.

The CFPB has issued new remittance regulations that we expect to go into effect in 2013. Among other things, these regulations require money transmitters to disclose to customers, at the time of their transaction, certain transaction details, such as any fees charged, the foreign exchange rate and the amount of money to be disbursed to the recipient. Money transmitters must also provide the customer with a receipt, and inform the customer as to the date on which the money will be available to the recipient. In addition, the regulations require money transmitters to provide refunds to customers within certain timeframes and create a customer complaint process, according to which money transmitters must investigate certain notices of error according to certain timeframes. While we already comply with many of the new remittance regulations, we do not currently comply with all of them. For example, we do not currently provide a date when the funds will be available to the recipient. Additionally, our scheduled transfer product allows customers to set up a transaction for a date in the future, but we are not able to provide the foreign exchange rate for a future scheduled transfer. The CFPB rules may require money transmitters to provide an exchange rate for transactions scheduled fewer than five business days from authorization. As a result, we may need to alter our scheduled transfer product in 2013 to prohibit transactions that are scheduled within five business days of their authorization.

If we are unable to comply with all of the new remittance regulations by the date such regulations are effective, our business could be harmed. These regulations and other potential changes under CFPB regulations could harm our operations, results of operations and financial condition and change the way we operate our business.

Our disbursement partners generally are regulated institutions in their home jurisdiction, and money transfers are regulated by governments in both the United States and in the jurisdiction of the recipient. If our disbursement partners fail to comply with applicable laws, it could harm our business.

Money transfers are regulated by state, federal and foreign governments. Many of our disbursement partners are banks and are heavily regulated by their home jurisdictions. Our non-bank disbursement partners are also subject to money transfer regulations. We require regulatory compliance as a condition to our continued relationship, perform due diligence on our disbursement partners and monitor them periodically with the goal of meeting regulatory expectations. However, there are limits to the extent to which we can monitor their regulatory compliance. Any determination that our disbursement partners or their sub-disbursement partners have violated laws and regulations could seriously damage our reputation, resulting in diminished revenue and profit and increased operating costs. While our services are not directly regulated by governments outside the United States, except with respect to our subsidiary which is regulated by the Indian government, it is possible that in some cases we could be liable for the failure of our disbursement partners or their sub-disbursement partners to comply with laws, which also could harm our business, financial condition and results of operations.

We process, store and use personal information and other data, which subjects us to governmental regulation and other legal obligations related to privacy. Our actual or perceived failure to comply with such obligations could harm our business.

We receive, store and process personal information and other customer data, including bank account numbers, credit and debit card information, identification numbers and images of government identification cards. As a result, we are required to comply with the privacy provisions of the Gramm-Leach-Bliley Act of 1999, or the Gramm-Leach-Bliley Act, and the Payment Card Industry Data Security Standard. There are also numerous other federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other customer data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other applicable rules. It is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our business practices.

 

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Additionally, with advances in computer capabilities and data protection requirements to address ongoing threats, we may be required to expend significant capital and other resources to protect against potential security breaches or to alleviate problems caused by security breaches.

Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other customer data, may result in governmental enforcement actions, fines or litigation. If there is a breach of credit or debit card information that we store, we could also be liable to the issuing banks for their cost of issuing new cards and related expenses. In addition, a significant breach could result in our being prohibited from processing transactions for any of the relevant network organizations, such as Visa or MasterCard, which would harm our business. If any third parties with whom we work, such as marketing partners, vendors or developers, violate applicable laws or our policies, such violations may put our customers’ information at risk and could harm our business. Any negative publicity arising out of a data breach or failure to comply with applicable privacy requirements could damage our reputation and cause our customers to lose trust in us, which could harm our business, results of operations, financial position and potential for growth.

Public scrutiny of Internet privacy issues may result in increased regulation and different industry standards, which could deter or prevent us from providing our current services to our customers, thereby harming our business.

The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the Internet have recently come under increased public scrutiny. The U.S. government, including the Federal Trade Commission, or FTC, and the Department of Commerce, has announced that it is reviewing the need for greater regulation for the collection of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain targeted advertising practices. Various government and consumer agencies have also called for new regulation and changes in industry practices. These data protection laws may be interpreted and applied inconsistently.

While we do not sell or share personally identifiable information with third parties for direct marketing purposes, we do have relationships with third parties that may allow them access to customer information for other purposes. For example, when we outsource functions such as customer support, tracking and reporting, and payment processing to other companies, we make customer information available to those companies to the extent necessary for them to provide their services. We believe our policies and practices comply with the FTC privacy guidelines and other applicable laws and regulations. However, if our belief proves incorrect, if there are changes to the guidelines, laws or regulations or their interpretation, or if new regulations are enacted that are inconsistent with our current business practices, our business could be harmed. We may be required to change our business practices, services or privacy policy, reconsider any plans to expand internationally, or obtain additional consents from our customers before collecting or using their information, among other changes. Changes like these could increase our operating costs and make it more difficult for customers to use our services, resulting in less revenue. Additionally, data collection, privacy and security have become the subject of increasing public concern. If Internet users were to reduce their use of our services as a result, our business could be harmed.

Risks Related to this Offering and Ownership of our Common Stock

There is no existing market for our common stock and we do not know if one will develop to provide our stockholders adequate liquidity.

There has not been a public trading market for shares of our common stock prior to this offering. An active trading market may not develop or be sustained after this offering. The initial public offering price for the shares of our common stock sold in this offering will be determined by negotiations between us and representatives of the underwriters. This price may not be indicative of the price at which our common stock will trade after this offering.

 

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Our stock price may be volatile and you may be unable to sell your shares at or above the offering price.

The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this section of this prospectus, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us.

The stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may harm the market price of our common stock.

In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may become the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.

If research analysts do not publish research about our business or if they issue unfavorable commentary or downgrade our common stock, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that research analysts publish about us and our business. If we do not establish and maintain adequate research coverage or if one or more analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, the price of our common stock could decline. If one or more of the research analysts ceases to cover us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price or trading volume to decline.

Our principal stockholders, executive officers and directors own a significant percentage of our stock and will continue to have significant control of our management and affairs after the offering, and they can take actions that may be against your best interests.

Following the completion of this offering, and excluding any purchases of our common stock in this offering and after giving effect to the sale of shares by the selling stockholders, our executive officers and directors, and entities that are affiliated with them, will beneficially own an aggregate of 38.9% of our outstanding common stock. This significant concentration of stock ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, as a result, these stockholders, acting together, may be able to control our management and affairs and other matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change in control would benefit our other stockholders.

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

 

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Assuming completion of this offering, as of December 31, 2012, we would have had an aggregate of 31,263,916 shares of common stock outstanding, assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options or warrants, except for those to be exercised and sold in connection with this offering. The 5,750,000 shares sold pursuant to this offering will be immediately tradable without restriction. Of the remaining shares:

 

   

no shares will be eligible for sale immediately upon completion of this offering; and

 

   

25,513,916 shares will be eligible for sale upon the expiration of lock-up agreements, subject in some cases to volume and other restrictions of Rule 144 and Rule 701 under the Securities Act of 1933, as amended, or the Securities Act.

The number of shares eligible for sale upon expiration of lock-up agreements assumes the conversion of all outstanding shares of our preferred stock into an aggregate of 21,444,251 shares of common stock on a one-for-one basis.

The lock-up agreements expire 180 days after the date of this prospectus, subject to potential extension in the event we release earnings results or material news or a material event relating to us occurs near the end of the lock-up period. Barclays Capital Inc., as representative of the underwriters, may, in their discretion and at any time, release all or any portion of the securities subject to lock-up agreements. After the completion of this offering, we intend to register approximately 9,776,710 shares of our common stock that have been issued or reserved for future issuance under our equity incentive plans. Once we register the offer and sale of shares for the holders of registration rights and option holders, they can be freely sold in the public market upon issuance, subject to the lock-up agreements or unless they are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act.

We may also issue shares of our common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.

Because our initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock, new investors will incur immediate and substantial dilution.

The initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our common stock based on the expected total value of our total assets, less our goodwill and other intangible assets, less our total liabilities immediately following this offering. Our pro forma net tangible book value per share as of December 31, 2012 was $2.16 and our pro forma net tangible book value per share after this offering will be $3.68, assuming an initial public offering price of $14.00 per share. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of $10.32 per share in the price you pay for our common stock as compared to the pro forma as adjusted net tangible book value as of December 31, 2012. To the extent outstanding options or warrants to purchase common stock are exercised, there will be further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

Our management has broad discretion in the use of the net proceeds from this offering and our use of the net proceeds may not produce a positive rate of return.

Our management will have broad discretion in the application of the net proceeds of this offering. We cannot specify with certainty the uses to which we will apply the net proceeds we will receive from this offering and cannot assure you that our management will apply the net proceeds from this offering in ways that improve our results of operations or increase the value of your investment. The failure by our management to apply these funds in a manner that produces a positive rate of return could harm our ability to continue to maintain and expand our business, which could cause our stock price to decline.

 

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We currently do not intend to pay dividends on our common stock and, consequently, an investor’s only opportunity to achieve a return on the investment is if the price of our common stock appreciates.

We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. See “Dividend Policy” for more information. Consequently, an investor’s only opportunity to achieve a return on the investment in us will be if the market price of our common stock appreciates and the investor sells shares at a profit. There is no guarantee that the price of our common stock that will prevail in the market after this offering will ever exceed the price that an investor pays.

Certain provisions of our certificate of incorporation and bylaws and of Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

Our amended and restated certificate of incorporation and our amended and restated bylaws, which will be effective upon completion of this offering, contain provisions that could delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:

 

   

providing for a classified board of directors with staggered three-year terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

   

not providing for cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

   

authorizing our board of directors to issue, without stockholder approval, preferred stock rights senior to those of common stock, which could be used to significantly dilute the ownership of a hostile acquiror;

 

   

prohibiting stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

   

limiting the persons who may call special meetings of stockholders, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and

 

   

requiring advance notification of stockholder nominations and proposals, which 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 us.

The affirmative vote of the holders of at least 66 2/3% of our shares of capital stock entitled to vote is generally necessary to amend or repeal the above provisions that are contained in our amended and restated certificate of incorporation. Also, absent approval of our board of directors, our amended and restated by-laws may only be amended or repealed by the affirmative vote of the holders of at least 66 2/3% of our shares of capital stock entitled to vote.

In addition, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law upon completion of this offering. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding common stock, from engaging in certain business combinations without approval of substantially all of our stockholders for a certain period of time.

These and other provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions. See “Description of Capital Stock—Preferred Stock” and “Description of Capital Stock—Anti-takeover Effects of Our Certificate of Incorporation and Bylaws and Delaware Law.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. You can generally identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this prospectus. Accordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those projected in the forward-looking statements. Forward-looking statements contained in this prospectus include statements about:

 

   

our expectations related to the use of proceeds from this offering;

 

   

expected growth in the markets for money transfer services;

 

   

our ability to compete with other companies that are developing or selling services that are competitive with our services;

 

   

our expectations regarding mobile usage of our services;

 

   

our ability to grow our active customer base;

 

   

our plans to continue to invest in and develop technology and services for our markets;

 

   

our expectations regarding future expenditures, including targeted marketing campaigns;

 

   

our ability to establish new marketing partnerships;

 

   

our ability to expand into new markets;

 

   

our ability to acquire and integrate new businesses and technologies;

 

   

the timing of expected introductions of new or enhanced services;

 

   

our ability to attract and retain key personnel; and

 

   

other factors discussed elsewhere in this prospectus.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this prospectus may not occur.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

This prospectus also contains statistical data, estimates and forecasts that are based on independent industry publications or other publicly available information, while other information is based on our internal sources. Although we believe that these third-party sources referred to in this prospectus are reliable, neither we nor the underwriters have independently verified the information provided by these third parties. While we are not aware of any misstatements regarding any third-party information presented in this prospectus, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under “Risk Factors.”

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of 4,647,439 shares of our common stock that we are selling in this offering will be approximately $57.5 million, based on an assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares from us is exercised in full, we estimate that we will receive additional net proceeds of $11.2 million. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds we received from the offering by approximately $4.3 million, assuming the number of shares offered by us remains the same and after deducting the estimated underwriting discounts and commissions. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

The principal purposes of this offering are to obtain additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets. We plan to invest the net proceeds in short-term, investment-grade, interest-bearing securities such as money market accounts, certificates of deposit, commercial paper or guaranteed obligations of the U.S. government. We currently intend to use the net proceeds received by us from this offering primarily for working capital and also for general corporate purposes. We may also use a portion of the net proceeds received by us from this offering for acquisitions of complementary businesses, technologies or other assets. We have not entered into any agreements or commitments with respect to any specific acquisitions and have no understandings or agreements with respect to any such acquisition or investment at this time. We cannot specify with certainty the particular uses for the net proceeds to be received by us from this offering. Accordingly, our management team will have broad discretion in using the net proceeds to be received by us from this offering.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on a number of factors, including our earnings, capital requirements and overall financial condition.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, disbursement prefunding and short-term investments and capitalization as of December 31, 2012, on:

 

   

an actual basis;

 

   

on a pro forma basis to reflect the automatic conversion of all outstanding shares of our preferred stock on a one-for-one basis into 21,444,251 shares of our common stock, based on the terms of our certificate of incorporation as currently in effect and the filing of our amended and restated certificate of incorporation, each of which will occur immediately prior to the closing of this offering; and

 

   

on a pro forma as adjusted basis to reflect the conversion of our preferred stock and the filing of our amended and restated certificate of incorporation discussed in the prior bullet and the receipt of the net proceeds from the sale of 4,647,439 shares of common stock offered by us in this offering, at an assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table in conjunction with “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of December 31, 2012  
     Actual     Pro
Forma
    Pro Forma  As
Adjusted
 
     (in thousands except share data)  
           (unaudited)  

Cash and cash equivalents, disbursement prefunding and short-term investments

   $ 85,272      $ 85,272      $ 142,782   
  

 

 

   

 

 

   

 

 

 

Line of credit

   $ 40,000      $ 40,000      $ 40,000   

Stockholders’ equity:

      

Convertible preferred stock, $0.0001 par value. 86,726,665 shares authorized, issued and outstanding 21,444,251 shares, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     2,144                 

Preferred stock, $0.0001 par value actual and pro forma, $0.0001 par value, pro forma as adjusted; no shares authorized, issued or outstanding, actual; 25,000,000 shares authorized, no shares issued or outstanding, pro forma or pro forma as adjusted

                     

Common stock, $0.0001 par value actual and pro forma, $0.0001 par value, pro forma as adjusted. 135,000,000 shares authorized, issued and outstanding 5,083,616 shares, actual; 500,000,000 shares authorized, 26,527,867 shares issued and outstanding, pro forma; 500,000,000 shares authorized, 31,263,916 shares issued and outstanding, pro forma as adjusted

     508        2,652        3,126   

Additional paid-in capital

     118,035        118,035        175,071   

Accumulated other comprehensive income (loss)

     (1     (1     (1

Accumulated deficit

     (63,366     (63,366     (63,366
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     57,320        57,320        114,830   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 97,320      $ 97,320      $ 154,830   
  

 

 

   

 

 

   

 

 

 

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, which is the mid-point of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash and cash equivalents, disbursement prefunding and short-term investments, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $4.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions.

Each increase (decrease) of one million shares in the number of shares offered by us would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $13.0 million, assuming the initial public offering price remains the same and after deducting estimated underwriting discounts and commissions.

The number of shares of common stock issued and outstanding actual, pro forma and pro forma as adjusted in the table above excludes the following shares:

 

   

6,730,520 shares of common stock issuable upon exercise of stock options outstanding as of December 31, 2012 at a weighted-average exercise price of $5.10 per share (which includes 65,201 shares of common stock that we expect to be sold in this offering by selling stockholders upon the exercise of vested options immediately prior to the closing of this offering);

 

   

35,778 shares of common stock issuable upon the exercise of outstanding warrants at a weighted-average exercise price of $4.84 per share (which we expect will be net exercised for 23,409 shares of common stock and sold by a selling stockholder immediately prior to the closing of this offering, assuming a fair market value for purposes of net exercising the warrant of $14.00 per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus); and

 

   

3,046,190 shares of our common stock reserved for future issuance under our stock-based compensation plans as of December 31, 2012, consisting of 46,190 shares of common stock reserved for issuance under our 2010 Stock Option and Grant Plan and, subject to and effective upon the closing of the offering, 3,000,000 shares of common stock reserved for issuance under our 2012 Stock Option and Incentive Plan, and any future increase in shares reserved for issuance under such plans.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted immediately to the extent of the difference between the initial offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of December 31, 2012 was $57.3 million, or $2.16 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding, as of December 31, 2012, after giving effect to the conversion of all outstanding shares of our convertible preferred stock into 21,444,251 shares of our common stock, which we expect to occur immediately prior to the closing of this offering.

After giving effect to the sale by us of 4,647,439 shares of common stock in this offering at an assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2012 would have been $114.8 million, or $3.68 per share. This amount represents an immediate increase in pro forma net tangible book value of $1.52 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $10.32 per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price.

 

Assumed initial public offering price per share

      $ 14.00   

Pro forma net tangible book value per share as of December 31, 2012

   $ 2.16      

Increase per share attributable to this offering

     1.52      
  

 

 

    

Pro forma net tangible book value per share after this offering

        3.68   
     

 

 

 

Dilution per share to new investors

      $ 10.32   
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share would increase (decrease) our adjusted net tangible book value per share and increase (decrease) dilution per share to new investors by $0.14, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. In addition, to the extent any outstanding options or warrants are exercised, you will experience further dilution.

The following table presents on a pro forma as adjusted basis after giving effect to the conversion of all outstanding shares of preferred stock into common stock, which we expect to occur immediately prior to the closing of this offering, the difference between existing stockholders and new investors purchasing shares of our common stock in this offering, with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of common and preferred stock, cash received from the exercise of stock options and the value of any stock issued for services and the average price per share paid or to be paid to us at an assumed offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions.

 

     Shares Purchased     Total Consideration     Average
Price  Per
Share
 
     Number      Percent         Amount                Percent    

Existing stockholders

     26,527,867         85.1   $ 118,333,691         64.5   $ 4.46   

New investors

     4,647,439         14.9        65,064,146         35.5        14.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     31,175,306         100.0   $ 183,397,837         100.0     $ 5.88   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share would increase (decrease) the total consideration paid by new investors by $4.6 million and increase (decrease) the percent of total consideration paid by new investors by 2.5%, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and before deducting estimated underwriting discounts and commissions.

Assuming the underwriters’ option to purchase additional shares is exercised in full, sales by us in this offering will reduce the percentage of shares held by existing stockholders to 82.8% and will increase the number of shares held by our new investors to 5,509,939, or 17.2%, assuming no purchases of our common stock by existing stockholders in this offering.

The number of shares of our common stock to be outstanding after this offering is based on 26,527,867 shares of our common stock outstanding as of December 31, 2012 and excludes:

 

   

6,730,520 shares of common stock issuable upon exercise of stock options outstanding as of December 31, 2012 at a weighted-average exercise price of $5.10 per share (which includes 65,201 shares of common stock that we expect to be sold in this offering by selling stockholders upon the exercise of vested options immediately prior to the closing of this offering);

 

   

35,778 shares of common stock issuable upon the exercise of outstanding warrants at a weighted-average exercise price of $4.84 per share (which we expect will be net exercised for 23,409 shares of common stock and sold by a selling stockholder immediately prior to the closing of this offering, assuming a fair market value for purposes of net exercising the warrant of $14.00 per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus); and

 

   

3,046,190 shares of our common stock reserved for future issuance under our stock-based compensation plans as of December 31, 2012, consisting of 46,190 shares of common stock reserved for issuance under our 2010 Stock Option and Grant Plan and, subject to and effective upon the closing of the offering, 3,000,000 shares of common stock reserved for issuance under our 2012 Stock Option and Incentive Plan, and any future increase in shares reserved for issuance under such plans.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial and other data regarding our business should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. We derived the consolidated statement of operations data for 2010, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2011 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the audited consolidated statement of operations data for 2008 and 2009 and the audited consolidated balance sheet data at December 31, 2008, 2009 and 2010 from our audited consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of results to be expected in any future period.

 

     Year Ended December 31,  
     2008     2009     2010     2011     2012  
    

(in thousands, except per share data)

 

Consolidated Statements of Operations Data:

          

Revenue

   $ 14,144      $ 26,276      $ 32,837      $ 50,020      $ 80,016   

Cost of revenue

     7,527        12,856        12,231        18,075        26,779   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     6,617        13,420        20,606        31,945        53,237   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Marketing

     6,828        8,144        11,608        14,314        21,496   

Technology and development

     4,485        4,478        6,046        9,431        15,950   

Customer service and operations

     2,377        3,143        5,257        7,321        10,964   

General and administrative

     2,609        3,228        3,728        4,957        9,135   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

     16,299        18,993        26,639        36,023        57,545   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (9,682     (5,573     (6,033     (4,078     (4,308

Other income (expense):

          

Interest expense

     (1     (32     (108     (370     (1,504

Interest income

     510        72        44        29        85   

Other income (expense)

     99        39        140        49        (125
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (9,074     (5,494     (5,957     (4,370     (5,852

Provision for income taxes

     2        2       2       2       2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (9,076   $ (5,496   $ (5,959   $ (4,372   $ (5,854
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share

   $ (2.01   $ (1.18   $ (1.25   $ (0.88   $ (1.16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute per share amounts - basic and diluted

     4,521        4,643        4,752        4,956        5,049   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share - basic and diluted (unaudited)

           $ (0.22
          

 

 

 

Pro forma weighted-average shares used to compute pro forma net loss per share attributable to common stockholders amounts - basic and diluted (unaudited)(1)

             26,493   
          

 

 

 

 

(1) See Note 10 of the consolidated financial statements for weighted-average common shares outstanding for pro forma basic and diluted net loss per share.

 

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Stock-based compensation included in the accompanying statements of operations data above was as follows:

 

     Year Ended December 31,  
     2008      2009      2010      2011      2012  
    

(in thousands)

 

Stock-based compensation expense:

              

Marketing

   $ 7       $ 24       $ 72       $ 145       $ 282   

Technology and development

     34         48         93         235         727   

Customer service and operations

     22         11         107         118         256   

General and administrative

     19         167         278         451         1,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 82       $ 250       $ 550       $ 949       $ 2,445   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents our key operating and financial metrics for the years presented (unaudited):

 

    Year Ended December 31,  
    2008     2009     2010     2011     2012  

Other Financial and Operational Data:

         

Gross Sending Volume(1)

  $ 258,670,000      $ 500,549,000      $ 858,955,000      $ 1,706,659,000      $ 3,248,457,000   

Transactions(2)

    1,191,000        2,254,000        2,848,000        4,068,000        6,617,000   

Active Customers(3)

    185,968        301,840        392,666        516,597        776,426   

New Customers(4)

    136,559        205,317        225,949        291,532        405,304   

Cost Per Acquisition of a New Customer(5)

  $ 34      $ 29      $ 37      $ 38      $ 44   

Adjusted EBITDA (in thousands)(6)

  $ (9,213   $ (5,093   $ (5,067   $ (2,532   $ (493

 

(1) Reflects the total principal amount of funds sent, excluding our fees, during a given period.
(2) Reflects the aggregate number of transactions sent using our services during a given period.
(3) Reflects customers who have sent at least one transaction during the last twelve month trailing period.
(4) Reflects new customers added who have transacted at least once during a given period.
(5) Reflects direct marketing cost, a portion of which is reflected in our cost of revenue, divided by new customers added in a given period.
(6) See “Non-GAAP Financial Measures” below for how we define and calculate adjusted EBITDA, a reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP financial measure, and a discussion about the limitations of adjusted EBITDA.

 

     As of December 31,  
     2008      2009      2010      2011      2012  
     (in thousands)  

Consolidated Balance Sheet Data:

  

           

Cash and cash equivalents

   $ 8,565       $ 21,850       $ 20,694       $ 48,248       $ 45,077   

Disbursement prefunding

     3,528         6,106         6,723         9,004         15,070   

Customer funds receivable

     865         1,175         4,164         17,187         9,318   

Property, equipment and software, net

     477         427         1,051         2,185         3,884   

Working capital

     15,055         24,255         35,833         56,323         68,838   

Total assets

     21,542         33,148         47,557         100,190         113,093   

Convertible preferred stock

     1,607         1,738         1,926         2,144         2,144   

Total stockholders’ equity

     16,275         25,423         38,657         60,361         57,320   

Non-GAAP Financial Measures

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed in the table below and within this prospectus adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below between adjusted EBITDA and net loss, the most directly comparable GAAP financial measure.

 

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We have included adjusted EBITDA in this prospectus because it is a key measure used by our management to evaluate our operating performance, generate future operating plans and make strategic decisions. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for the related financial information prepared in accordance with GAAP. Some of these limitations are:

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;

 

   

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

adjusted EBITDA does not include the impact of stock-based compensation;

 

   

adjusted EBITDA does not reflect the impact of income taxes that may represent a reduction in cash available to us; and

 

   

other companies, including companies in our industry, may calculate adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure.

We believe it is useful to exclude non-cash charges, such as depreciation and amortization and stock-based compensation, from our adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.

Because of the aforementioned limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net loss, cash flow metrics and our financial results presented in accordance with GAAP. The following table presents a reconciliation of net loss to adjusted EBITDA for each of the years indicated (unaudited):

 

     Year Ended December 31,  
     2008     2009     2010     2011     2012  
     (in thousands)  

Reconciliation of Adjusted EBITDA:

          

Net loss

   $ (9,076   $ (5,496   $ (5,959   $ (4,372   $ (5,854

Provision for income taxes

     2        2        2        2        2   

Interest expense

     1        32        108        370        1,504   

Interest income

     (510     (72     (44     (29     (85

Depreciation and amortization

     288        191        276        548        1,495   

Stock-based compensation

     82        250        550        949        2,445   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (9,213   $ (5,093   $ (5,067   $ (2,532   $ (493
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Xoom is a pioneer and leader in the online consumer-to-consumer international money transfer industry. Our customers use Xoom to send money to family and friends in 30 countries. Since January 1, 2008, our customers have used Xoom to send $6.6 billion, including $1.7 billion in 2011 and $3.2 billion in 2012. We believe we are creating significant value for our customers by providing a convenient, fast and cost-effective solution for international money transfers.

We believe our business model is characterized by sustainable revenue from a growing base of active customers, creating attractive per unit economics and operating leverage. We expect to continue to grow this customer base through increased marketing investment.

Although we are not a traditional subscription business, we operate our business and forecast our revenue similar to a subscription-based business model. This similarity is demonstrated by the predictable and recurring revenue from our active customers. The following graph identifies the quarterly gross sending volume by the year in which we originally acquired the customer and demonstrates a meaningful amount of stable recurring sending volume from active customers:

Gross Sending Volume By Year of Customer Acquisition

 

LOGO

 

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Key Metrics

In addition to the line items in our financial statements, we regularly review the following key metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections, make strategic business decisions, and assess marketing program efficacy, market share trends and working capital needs. We believe information on these metrics is useful for investors to understand the underlying trends in our business. The following table presents our key operating and financial metrics for the years presented (unaudited):

 

     Year Ended December 31,  
     2010     2011     2012  

Gross Sending Volume

   $ 858,955,000      $ 1,706,659,000      $ 3,248,457,000   

Transactions

     2,848,000        4,068,000        6,617,000   

Active Customers

     392,666        516,597        776,426   

New Customers

     225,949        291,532        405,304   

Cost Per Acquisition of a New Customer

   $ 37      $ 38      $ 44   

Adjusted EBITDA (in thousands)

   $ (5,067   $ (2,532   $ (493

Gross Sending Volume. We define gross sending volume, or GSV, as the total principal amount of funds sent by our customers in a given period, which does not include our fees. A percentage of GSV does not ultimately get paid out to recipients due to customer cancellations, our risk management decisions and customer error. In the periods presented, this percentage has ranged from 2.75% to 3.50%. Our GSV increased 90% for 2012 compared to the same period in the prior year, 99% for 2011 and 72% for 2010. Some of our customers transact more depending on the value of the local currency relative to the U.S. dollar. For example, amongst our Indian customers, we saw an increase in activity in the three months ended June 30, 2012 due to a weakening Indian rupee and a decrease in activity in the three months ended September 30, 2012 due to a strengthening Indian rupee.

Transactions. This represents the total number of transactions sent by our customers in a given period. A small percentage of transactions do not ultimately get paid out to recipients due to customer cancellations, our risk management decisions and customer error. Our transactions increased 63% for 2012 compared to the same period in the prior year, 43% for 2011 and 26% for 2010.

Active Customers. We define active customers as the number of customers who have sent at least one transaction during a trailing twelve month period. A new customer with one transaction during a trailing twelve month period would also be included as an active customer in the same period. Our active customers increased 50% for 2012 compared to the same period in the prior year, 32% for 2011 and 30% for 2010.

New Customers. We define new customers as those customers who have sent their first transaction in a given period. Our new customers increased 39% for 2012 compared to the same period in the prior year, 29% for 2011 and 10% for 2010.

Cost Per Acquisition of a New Customer. We calculate cost per acquisition of a new customer, or CPA, in a reporting period as direct marketing cost, a portion of which is reflected in our cost of revenue, divided by new customers added in a given period. Our direct marketing cost does not include certain indirect marketing costs that are included in our marketing expense line item in our consolidated statements of operations. Examples of our indirect marketing costs include personnel-related costs, including stock-based compensation, and creative production costs.

Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we calculate as net loss adjusted for provision for income taxes, interest expense, interest income, depreciation and amortization and stock-based compensation. For a reconciliation of adjusted EBITDA to net loss and an explanation of how management uses this metric, see “Selected Consolidated Financial And Other Data.”

 

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Basis of Presentation

Revenue. We generate revenue from transaction fees charged to customers, and foreign exchange spreads on transactions where the payout currency is other than U.S. dollars. Our revenue is derived from each transaction and may vary based on the size of the transaction, the funding method used, the currency to ultimately be disbursed and the countries to which the funds are transferred. Revenue is recognized net of cancellations and refunds. Revenue growth will depend on our ability to retain active customers and attract new customers.

Cost of Revenue. Our cost of revenue includes fees to our disbursement partners for paying funds to the recipient, fees to our payment processors for funding our transactions, a provision for transaction losses and the promotional expenses to acquire new customers that are referees described below under “—Marketing Expense.” We expect our cost of revenue to increase on an absolute basis for the foreseeable future as we continue to grow our business.

Marketing Expense. Our marketing expense consists of business development costs, television, print, online and promotional advertising costs to acquire new customers, employee compensation and related costs to support the marketing process and allocated facilities and other supporting overhead costs. During 2011, we introduced a new Refer-A-Friend incentive program where the referrer receives either a cash-type or non-cash award and the referee receives a non-cash award. Cash-type awards are considered to be cash-type because the referrer could use them as cash. The amount related to the referee is classified as cost of revenue for non-cash awards. Awards provided to the referrer are recorded in marketing expense as these payments are a reward for bringing a new customer to Xoom. We anticipate our marketing expense will vary from period to period due to the timing of when such programs occur.

Technology and Development Expense. Our technology and development expense consists of employee compensation and related costs for our engineers and developers, professional services and consulting, costs related to the development of new technologies, costs associated with the enhancements of existing technologies, amortization of capitalized internally-developed software and allocated facilities and other supporting overhead costs. Internally-developed software costs are a combination of internal compensation costs of engineering time and costs of outside consultants and primarily relate to the development of specific enhancements such as the development of our mobile application. We intend to continue to invest in technology and development efforts to further improve our customer experience and to continue expanding our operating platform. As a result, we expect technology and development expense to increase on an absolute basis for the foreseeable future.

Customer Service and Operations Expense. Our customer service and operations expense consists of outsourced customer call centers, employee compensation for our employees who support customer service calls, costs incurred for fraud detection, compliance operations, maintenance costs related to our outsourced customer call centers and allocated facilities and other supporting overhead costs. We expect customer service and operations expense to increase on an absolute basis for the foreseeable future to support the anticipated growth of our business.

General and Administrative Expense. Our general and administrative expense consists of employee compensation and related costs for our executives, finance, legal, compliance policy, human resources and other administrative employees, outside consulting, legal and accounting services and facilities and other supporting overhead costs not allocated to other departments. We expect to incur additional expenses associated with being a public company, including increased legal and accounting costs, compliance costs in connection with the Sarbanes-Oxley Act and investor relations costs.

Interest Expense. Interest expense represents interest incurred in connection with outstanding borrowings under our line of credit.

Interest Income. Interest income represents interest earned on our short-term investments.

 

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Other Income (Expense). Other income (expense) consists of gains or losses on foreign currency balances held at month end.

Provision for Income Taxes. Provision for income taxes consists of federal and state income taxes in the United States. We have not been required to pay U.S. federal income taxes to date because of our current and accumulated net operating losses which totaled $56.6 million as of December 31, 2012. Since inception, we have only been required to pay minimal state income taxes. In the event we expand our operations outside the United States, we will become subject to foreign taxes and our effective tax rate could change accordingly.

Results of Operations

The following tables set forth our results of operations in dollars and as a percentage of revenue for the years presented. The year-to-year comparison of financial results is not necessarily indicative of future results.

 

     Year Ended December 31,  
     2010     2011     2012  
     (in thousands)  

Consolidated Statements of Operations Data:

      

Revenue

   $ 32,837      $ 50,020      $ 80,016   

Cost of revenue

     12,231        18,075        26,779   
  

 

 

   

 

 

   

 

 

 

Gross profit

     20,606        31,945        53,237   
  

 

 

   

 

 

   

 

 

 

Marketing

     11,608        14,314        21,496   

Technology and development

     6,046        9,431        15,950   

Customer service and operations

     5,257        7,321        10,964   

General and administrative

     3,728        4,957        9,135   
  

 

 

   

 

 

   

 

 

 

Total operating expense

     26,639        36,023        57,545   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (6,033     (4,078     (4,308

Other income (expense):

      

Interest expense

     (108     (370     (1,504

Interest income

     44        29       
85
  

Other income (expense)

     140        49        (125
  

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (5,957     (4,370     (5,852

Provision for income taxes

     2        2        2   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,959   $ (4,372   $ (5,854
  

 

 

   

 

 

   

 

 

 

 

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     Year Ended December 31,  
     2010     2011     2012  

Consolidated Statements of Operations Data:(1)

      

Revenue

     100     100     100

Cost of revenue

     37        36        33   
  

 

 

   

 

 

   

 

 

 

Gross profit

     63        64        67   
  

 

 

   

 

 

   

 

 

 

Marketing

     35        29        27   

Technology and development

     18        19        20   

Customer service and operations

     16        15        14   

General and administrative

     11        10        11   
  

 

 

   

 

 

   

 

 

 

Total operating expense

     81        72        72   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (18     (8     (5

Other income (expense):

      

Interest expense

            (1     (2

Interest income

                     

Other income (expense)

                     
  

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (18     (9     (7

Provision for income taxes

                     
  

 

 

   

 

 

   

 

 

 

Net loss

     (18 )%      (9 )%      (7 )% 
  

 

 

   

 

 

   

 

 

 

 

(1) 

Certain items may not foot due to rounding.

Years ended December 31, 2010, 2011 and 2012

Revenue

 

     Year Ended December 31,      2010 to 2011     2011 to 2012  
     2010      2011      2012      % Change     % Change  
     (in thousands)               

Revenue

   $ 32,837       $ 50,020       $ 80,016         52     60

2011 Compared to 2012. Revenue increased $30.0 million, or 60%, in 2012 as compared to 2011. The increase was primarily due to a 50% increase in active customers, which included 405,304 new customers added during 2012. Revenue grew at a faster rate than the increase in our active customers because the annual revenue per average active customer increased from $110 in 2011 to $124 in 2012, or 13%. This increase was due to changes in the mix of countries we serve toward those with a higher average transaction amount.

2010 Compared to 2011. Revenue increased $17.2 million, or 52%, in 2011 as compared to 2010. The increase was primarily due to a 32% increase in active customers, which included 291,532 new customers added during 2011. Revenue grew at a faster rate than the increase in our active customers because the annual revenue per average active customer increased from $95 in 2010 to $110 in 2011, or 16%. This increase was due to changes in the mix of countries we serve toward those with a higher average transaction amount.

Cost of Revenue

 

     Year Ended December 31,     2010 to 2011     2011 to 2012  
     2010     2011     2012     % Change     % Change  
     (dollars in thousands)              

Cost of revenue

   $ 12,231      $ 18,075      $ 26,779        48     48

Percentage of revenue

     37     36     33    

 

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2011 Compared to 2012. Cost of revenue increased $8.7 million, or 48%, in 2012 as compared to 2011. The increase in cost of revenue was driven by a $4.4 million increase to $16.3 million in processing and disbursement costs to support the 63% increase in transactions, a $2.3 million increase to $7.7 million in the provision for transaction losses due to the increase in our GSV and an additional $1.8 million in costs related to the Refer-A-Friend and other incentive programs. The decrease in cost of revenue as a percentage of revenue and corresponding increase in gross profit for 2012 was primarily a result of a reduction in processing costs due to more active customers funding their money transfers via bank account, which is less costly to us than if they fund via credit or debit card. Further, we experienced a reduction in our processing costs per transaction as a result of the Durbin Amendment to the Dodd-Frank Act, which resulted in lower debit card fees beginning in the fourth quarter of 2011.

2010 Compared to 2011. Cost of revenue increased $5.8 million, or 48%, in 2011 as compared to 2010. The increase in cost of revenue was primarily driven by a $2.7 million increase to $5.4 million in the provision for transaction losses due to the increase in our GSV, a $1.4 million increase to $11.9 million in processing and disbursement costs to support the 43% increase in transactions and an additional $0.8 million in costs related to the Refer-A-Friend incentive program. During 2010, we reduced the provision for transaction losses by $0.9 million due to lower than expected transaction losses, which further contributed to the increase in cost of revenue for 2011. Processing and disbursement costs did not increase at the same rate as the increase in revenue as more of our active customers funded their money transfers via bank accounts, which is less costly to us than if they fund via credit or debit card. Further, we experienced a reduction in our processing costs as a result of the Durbin Amendment to the Dodd-Frank Act, which resulted in lower debit card fees, beginning in the fourth quarter of 2011.

Marketing Expense

 

     Year Ended December 31,     2010 to 2011     2011 to 2012  
     2010     2011     2012     % Change     % Change  
     (dollars in thousands)              

Marketing

   $ 11,608      $ 14,314      $ 21,496        23     50

Percentage of revenue

     35     29     27    

2011 Compared to 2012. Marketing expense increased $7.2 million, or 50%, in 2012 as compared to 2011. The increase was primarily due to an increase in our marketing programs to drive increased customer acquisition, including television, online and incentive promotions of $6.3 million to $17.9 million in 2012. Our Refer-A-Friend incentive program contributed $2.0 million of this $6.3 million increase. As stated in “—Cost of Revenue” above, marketing expenses in this line item do not reflect certain marketing expenses related to our Refer-A-Friend incentive program that we recognize under cost of revenue. The remaining increase was due to personnel-related costs (including stock-based compensation).

2010 Compared to 2011. Marketing expense increased $2.7 million, or 23%, in 2011 as compared to 2010. The increase was primarily due to an expansion of our marketing programs to drive increased customer acquisition, including television, print, online and incentive promotions, of $1.7 million to $11.6 million. During 2011, we hired additional headcount to support our marketing initiatives which resulted in an additional $0.5 million of marketing expense. Our Refer-A-Friend incentive program contributed $0.3 million of the increase for 2011. As stated in “—Cost of Revenue” above, marketing expenses in this line item do not reflect certain marketing expenses related to our Refer-A-Friend incentive program that we recognize under cost of revenue.

Technology and Development Expense

 

     Year Ended December 31,     2010 to 2011     2011 to 2012  
     2010     2011     2012     % Change     % Change  
     (dollars in thousands)              

Technology and development

   $ 6,046      $ 9,431      $ 15,950        56     69

Percentage of revenue

     18     19     20    

 

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2011 Compared to 2012. Technology and development expense increased $6.5 million, or 69%, in 2012 as compared to 2011. The increase was primarily the result of an increase in personnel-related costs of $5.0 million to $12.9 million (including stock-based compensation) due to an increase in headcount from 58 to 78 employees to expand and improve our service. The remaining increase was due to an increase in depreciation and amortization expense of $0.5 million, an increase in the investment of additional technology infrastructure of $0.5 million and an increase in allocated overhead costs.

2010 Compared to 2011. Technology and development expense increased $3.4 million, or 56%, in 2011 as compared to 2010. The increase was primarily the result of an increase in personnel-related costs of $2.7 million to $7.9 million (including stock-based compensation) due to an increase in headcount from 28 to 58 employees to expand and improve our service.

Customer Service and Operations Expense

 

     Year Ended December 31,     2010 to 2011     2011 to 2012  
     2010     2011     2012     % Change     % Change  
     (dollars in thousands)              

Customer service and operations

   $ 5,257      $ 7,321      $ 10,964        39     50

Percentage of revenue

     16     15     14    

2011 Compared to 2012. Customer service and operations expense increased $3.6 million, or 50%, in 2012 as compared to 2011. The increase was primarily due to an increase in the volume of transactions we processed, resulting in higher costs of $2.5 million to $6.1 million associated with our outsourced customer call centers and personnel-related costs of $0.8 million to $3.0 million (including stock-based compensation) due to an increase in headcount.

2010 Compared to 2011. Customer service and operations expense increased $2.1 million, or 39%, in 2011 as compared to 2010. The increase was primarily due to an increase in the volume of transactions we processed, resulting in higher costs of $1.4 million to $3.6 million associated with our outsourced customer call centers, customer verifications of $0.3 million and personnel-related costs of $0.2 million to $2.2 million (including stock-based compensation) due to an increase in headcount.

General and Administrative Expense

 

     Year Ended December 31,     2010 to 2011     2011 to 2012  
     2010     2011     2012     % Change     % Change  
     (dollars in thousands)              

General and administrative

   $ 3,728      $ 4,957      $ 9,135        33     84

Percentage of revenue

     11     10     11    

2011 Compared to 2012. General and administrative expense increased $4.2 million, or 84%, in 2012 as compared to 2011. The increase was primarily the result of an increase in personnel-related costs of $2.4 million to $5.5 million (including stock-based compensation) due to an increase in headcount from 18 to 32 employees to support our overall growth and an increase in consulting and professional services of $0.9 million. The remaining increase was due to an increase in allocated overhead costs.

2010 Compared to 2011. General and administrative expense increased $1.2 million, or 33%, in 2011 as compared to 2010. The increase was primarily due to an increase in personnel-related costs of $0.6 million to $3.1 million (including stock-based compensation) due to an increase in headcount and an increase in consulting and professional services of $0.3 million.

Interest Expense

2011 Compared to 2012. Interest expense increased $1.1 million as a result of the increase in average outstanding balances during 2012 on our line of credit.

 

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2010 Compared to 2011. Interest expense increased $0.3 million as a result of average higher outstanding balances during 2011 on our line of credit.

Quarterly Results of Operations Data

The following tables set forth our unaudited quarterly consolidated statements of operations data in dollars and as a percentage of revenue and our key metrics for each of the eight quarters ended December 31, 2012. We have prepared the quarterly data on a consistent basis with the audited consolidated financial statements included in this prospectus. In the opinion of management, the financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 

    Three Months Ended,  
    March 31,
2011
    June 30,
2011
    September 30,
2011
    December 31,
2011
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December  31,
2012
 
    (in thousands, except per share data)  
    (unaudited)  

Revenue

  $ 9,878      $ 11,364      $ 13,204      $ 15,574      $ 16,945      $ 21,008      $ 19,901      $ 22,162   

Cost of revenue

    3,717        4,128        4,558        5,672        5,461        7,381        6,533        7,404   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    6,161        7,236        8,646        9,902        11,484        13,627        13,368        14,758   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Marketing

    2,962        3,280        3,537        4,535        4,288        6,129        5,648        5,431   

Technology and development

    1,687        1,921        2,635        3,188        3,623        4,031        4,015        4,281   

Customer service and operations

    1,605        1,710        1,937        2,069        2,197        2,780        2,885        3,102   

General and administrative

    1,313        1,230        1,121        1,293        1,678        2,194        2,357        2,906   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

    7,567        8,141        9,230        11,085        11,786        15,134        14,905        15,720   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (1,406     (905     (584     (1,183     (302     (1,507     (1,537     (962

Other income (expense):

               

Interest expense

    (34     (39     (96     (201     (247     (355     (387     (515

Interest income

    6        5        5        13        21        23        23        18   

Other income (expense)

    32        116        (92     (7     36        227        (374     (14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (1,402     (823     (767     (1,378     (492     (1,612     (2,275     (1,473

Provision for income taxes

    2                            2                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (1,404   $ (823   $ (767   $ (1,378   $ (494   $ (1,612   $ (2,275   $ (1,473
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share

  $ (0.29   $ (0.17   $ (0.15   $ (0.27   $ (0.10   $ (0.32   $ (0.45   $ (0.29
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute per share amounts - basic and diluted

    4,893        4,929        4,975        5,024        5,030        5,041        5,056        5,071   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Stock-based compensation included in the above line items was as follows:

 

    Three Months Ended,
    March 31,   June 30,   September 30,   December 31,   March 31,   June 30,   September 30,   December 31,
    2011   2011   2011   2011   2012   2012   2012   2012
    (in thousands)
    (unaudited)

Stock-based compensation expense:

                               

Marketing

    $ 35       $ 35       $ 38       $ 37       $ 51       $ 66       $ 81       $ 84  

Technology and development

      29         52         74         80         148         170         200         209  

Customer service and operations

      29         27         31         31         42         67         74         73  

General and administrative

      107         132         107         105         183         281         349         367  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total stock-based compensation

    $ 200       $ 246       $ 250       $ 253       $ 424       $ 584       $ 704       $ 733  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

    Three Months Ended,(1)
    March 31,   June 30,   September 30,   December 31,   March 31,   June 30,   September 30,   December 31,
    2011   2011   2011   2011   2012   2012   2012   2012
    (unaudited)

Revenue

      100 %       100 %       100 %       100 %       100 %       100 %       100       100 %

Cost of revenue

      38         36         35         36         32         35        
33
 
     
33
 
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Gross profit

      62         64         65         64         68         65        
67
 
     
67
 
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Marketing

      30         29         27         29         25         29         28        
25
 

Technology and development

      17         17         20         20         21         19         20         19  

Customer service and operations

      16         15         15         13         13         13         14         14  

General and administrative

      13         11         8         8         10         10         12         13  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total operating expense

      77         72         70         71         70         72         75         71  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Loss from operations

      (14 )       (8 )       (4 )       (8 )       (2 )       (7 )       (8 )       (4 )

Other income (expense):

                               

Interest expense

                      (1 )       (1 )       (1 )       (2 )       (2 )       (2 )

Interest income

                                                               

Other income (expense)

              1         (1 )                       1         (2 )        
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Loss before provision for income taxes

      (14 )       (7 )       (6 )       (9 )       (3 )       (8 )       (11 )    

 

(7

)

Provision for income taxes

                                                               
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net loss

      (14 )%       (7 )%       (6 )%       (9 )%       (3 )%       (8 )%       (11 )%       (7 )%
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

(1) 

Certain items may not foot due to rounding.

 

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The following table presents our key operating and financial metrics for the periods presented (unaudited):

 

    Three Months Ended,  
    March 31,
2011
    June 30,
2011
    September 30, 
2011
    December 31,
2011
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
 

Other Financial and Operational Data:(1)

               

Gross Sending Volume

  $ 301,726,000      $ 371,978,000      $ 450,183,000      $ 582,772,000      $ 646,041,000      $ 884,357,000      $ 777,905,000      $ 940,154,000   

Transactions

    816,000        955,000        1,051,000        1,246,000       
1,354,000
  
    1,648,000       
1,680,000
  
    1,935,000   

Active Customers

    399,365        425,581        458,604        516,597        576,446        658,233        718,064        776,426   

New Customers

    62,776        65,370        69,351        94,035        92,316        116,100        94,043        102,845   

Cost Per Acquisition of a New Customer

  $ 34      $ 37      $ 37      $ 42      $ 40      $ 45      $ 50      $ 41   

Adjusted EBITDA (in thousands)

  $ (1,075   $ (435   $ (286   $ (736   $ 420      $ (345   $ (828   $ 260   

 

(1) 

For information on how we define these operational and financial metrics see “—Key Metrics.”

 

    Three Months Ended,  
    March 31,     June 30,     September 30,     December 31,     March 31,     June 30,     September 30,     December 31,  
    2011     2011     2011     2011     2012     2012     2012     2012  
    (in thousands)  
    (unaudited)  

Reconciliation of Adjusted EBITDA:

               

Net loss

  $ (1,404   $ (823   $ (767   $ (1,378   $ (494   $ (1,612   $ (2,275   $ (1,473

Provision for income taxes

    2                             2                     

  

Interest expense

    34        39        96        201        247        355        387        515   

Interest income

    (6     (5     (5     (13     (21     (23     (23     (18

Depreciation and amortization

    99        108        140        201        262        351        379        503   

Stock-based compensation

    200        246        250        253        424        584        704        733   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (1,075   $ (435   $ (286   $ (736   $ 420      $ (345   $ (828   $ 260   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With the exception of the three months ended September 30, 2012, we have experienced sequential revenue growth in all periods presented as a result of attracting new customers and retaining our active customers. The sequential decline in revenue in the three months ended September 30, 2012 was due to the increased activity we experienced during the three months ended June 30, 2012. We experience some seasonal trends in our business. Generally, revenue in our second and fourth quarters is stronger due to Mother’s Day and Christmas when we tend to have an increased rate of activity from our active customers. In addition, some of our customers transact more depending on the value of the local currency relative to the U.S. dollar. We see this trend most clearly among our Indian customers, a subset of which is highly influenced by the value, or the perceived value, of the Indian rupee relative to the U.S. dollar. For example, we saw an increase in activity in the three months ended June 30, 2012 due to a weakening Indian rupee, or the perception of a weakening Indian rupee. Conversely, during the three months ended September 30, 2012 we saw a decrease in activity to India due to a strengthening Indian rupee, or the perception of a strengthening Indian rupee. We believe our business may become more seasonal in the future in terms of absolute dollars.

Our cost of revenue has increased in absolute dollars but has remained generally flat as a percentage of revenue. Our operating expenses have increased in absolute dollars as we continue to invest in service innovation and technology by hiring additional employees, and we continue to introduce new marketing programs to increase brand awareness. We continue to look for innovative and efficient marketing efforts and anticipate our marketing expense will vary from period to period due to the timing of when the programs occur. Marketing will continue to be our largest operating expense as a percentage of revenue as we seek to attract new customers.

 

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Liquidity and Capital Resources

Since inception, we have financed our operations and capital expenditures through the sale of preferred stock and, to a lesser extent, from borrowings. Our principal uses of cash are funding our operations and capital expenditures.

As of December 31, 2012, we had cash, cash equivalents, disbursement prefunding and short-term investments of $85.3 million, which consisted of cash, money market funds, U.S. government securities, commercial paper, certificates of deposit, corporate bonds and prefunded balances with some of our disbursement partners. All of our short-term investments are held at U.S. financial institutions.

The following table summarizes our cash and cash equivalents and disbursement prefunding as of the dates presented (in millions):

 

     December 31,  
     2011      2012  

Domestic institutions

   $ 27.2       $ 26.7   

Foreign institutions

     30.1        
33.4
  

We hold cash at foreign financial institutions in order to prefund our disbursement partners. Our policy is generally to have relationships with multiple foreign institutions in each of our major markets so that our institutional risk is diversified. For example, we hold balances in the Philippines at eight different institutions. In India, all of our balances are held at one institution, Punjab National Bank, which is a large, state-owned bank. We generally review financial statements of our disbursement partners before commencing a business relationship with them, and annually thereafter, though such reviews may not mitigate all risk of loss. Certain of our balances in domestic and all of our balances in foreign institutions are uninsured. Our institutional losses of pre-funded balances have totaled less than $150,000 since our inception.

We experience significant day-to-day fluctuations in our cash and cash equivalents, disbursement prefunding and line of credit balances. These fluctuations are primarily due to:

 

   

Fluctuations in daily GSV. As daily GSV increases, our cash and cash equivalents and disbursement prefunding amounts will increase in addition to an increase in our line of credit to fund these balances. Typically our cash, cash equivalents and disbursement prefunding balances at period end represent one to four days of disbursements to be made in the subsequent period; and

 

   

Timing of period end. For periods that end on a weekend or a bank holiday, our cash and cash equivalents and prefunding amounts typically will be more than for periods ending on a weekday as we fund these balances five days a week, but we disburse funds seven days a week.

If a period ends on a weekend or holiday, our cash, cash equivalents and disbursement prefunding is generally higher than if the period ends on a business day, because we will then prefund our disbursement partners for the entire weekend or through the holiday instead of for one business day. As a result, we would need to draw down on our line of credit discussed below under “—Our Indebtedness,” which would increase our cash, cash equivalents and disbursement prefunding balances.

We believe that our existing cash and cash equivalents, cash flow from operations, availability under our line of credit and the net proceeds we expect to receive from this offering will be sufficient to meet our working capital needs and planned capital expenditures for at least the next 12 months. From time to time, we may explore additional financing sources which could include equity, equity-linked and debt financing arrangements. We cannot assure you that any additional financing will be available to us on acceptable terms or at all.

 

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Our Indebtedness

In October 2009, we entered into a line of credit agreement, or the Loan Agreement, with Silicon Valley Bank, or SVB, which was most recently amended in September 2012 to add a second lender and increase the available borrowing amount. The Loan Agreement allows for borrowings up to $80.0 million, bearing interest at the greater of prime plus 1.25% or 4.50%. The line of credit is scheduled to mature on September 19, 2014, at which time all outstanding borrowings would be due and payable. As part of the line of credit, we have a $10.0 million standby letter of credit which reduces the $80.0 million that we are allowed to borrow. At December 31, 2012, we were allowed to borrow up to $80.0 million. We had $30.0 million available under this facility, reflecting $40.0 million outstanding under our line of credit and $10.0 million outstanding under our letter of credit as of December 31, 2012. We were in compliance with all of our debt covenants as of December 31, 2012.

Cash Flows

We typically prefund our disbursement partners on each business day which allows the funds to be made available to our disbursement partners seconds or minutes after a customer’s transaction is processed. Our prefunding estimates are based on historical experiences with our customers and disbursement partners which vary depending on factors such as seasonality, the timing of bank holidays, weekends and paydays. These estimates incorporate assumptions surrounding the timing in which the customer funds receivables are settled and the customer liabilities are paid out. We often utilize our line of credit to satisfy short-term capital requirements over weekends or during bank holiday periods. We typically pay down the outstanding amount on the line of credit the first business day after the weekend or bank holiday period. Given these factors, we believe it is useful to review our cash flow in the aggregate to better understand the short-term flow of funds which can vary greatly depending on the timing of a weekend or bank holiday.

The following table summarizes our cash flows for the years presented:

 

     Year Ended December 31,  
     2010     2011     2012  
     (in thousands)  

Net cash used in operating activities

   $ (8,312   $ (12,060   $ (750

Net cash used in investing activities

     (12,387     (10,274     (16,061

Net cash provided by financing activities

     19,543        49,888        13,640   

Operating Activities

Our use of cash for 2012 was attributable to our net loss of $5.9 million partially offset by $4.5 million in adjustments for non-cash items and changes in our working capital of $0.6 million. Adjustments for non-cash items primarily consisted of stock-based compensation, depreciation and amortization expense and discounts and premiums on marketable securities. The decrease in cash resulting from changes in our working capital primarily consisted of a decrease in customer funds receivable of $7.9 million relating to the timing of transactions in process, partially offset by an increase in disbursement prefunding of $6.1 million related to money that had not yet been disbursed.

Our use of cash for 2011 was attributable to changes in our working capital of $9.5 million and our net loss of $4.4 million, partially offset by $1.8 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of stock-based compensation, depreciation and discounts and premiums on short-term investments. The decrease in cash resulting from changes in our working capital primarily consisted of an increase in customer funds receivable of $13.0 million relating to the timing of transactions in process, partially offset by an increase in customer liabilities of $4.1 million related to money that had not yet been disbursed.

 

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Our use of cash for 2010 was attributable to our net loss of $6.0 million and to changes in our working capital of $3.5 million, partially offset by $1.2 million in adjustments for non-cash items. Adjustments for non-cash item primarily consisted of stock-based compensation, depreciation and amortization expense and discounts and premiums on short-term investments. The decrease in cash resulting from changes in our working capital primarily consisted of an increase in customer funds receivable of $3.0 million relating to the timing of transactions.

Investing Activities

Our primary investing activities have consisted of purchases, sales and maturities of short-term investments, purchases of property, equipment and software and changes in our restricted cash. Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and website and internal-use software development. We expect to continue to invest in property and equipment and development of software during 2013 and thereafter.

We used $10.5 million, $8.4 million and $5.2 million in 2010, 2011 and 2012, respectively, in net purchases of short-term investments.

We used $0.9 million, $1.7 million and $3.2 million for purchases of property, equipment and the development of software in 2010, 2011 and 2012, respectively.

In addition, we had an increase in our restricted cash of $1.0 million and $0.2 million during 2010 and 2011 due to higher collateral requirements under our license to disburse funds in India due to our increased sending volume to India. During 2012, we had an increase in our restricted cash of $7.6 million due to the integration of a new payment processor, increase in our GSV with an existing ACH payment processor and higher collateral requirements under our license to operate in India.

Financing Activities

Our financing activities have primarily consisted of net proceeds from the issuance of preferred stock and exercise of preferred stock warrants and common stock options and repayments and borrowings under our line of credit.

Cash provided by financing activities in 2012 was $13.6 million consisting primarily of net borrowings of $13.5 million on our line of credit.

Cash provided by financing activities in 2011 was $49.9 million consisting of $25.0 million of net proceeds from the issuance of 2.2 million shares of our Series F preferred stock and $24.8 million of net borrowing under our line of credit.

Cash provided by financing activities in 2010 was $19.5 million consisting primarily of net proceeds of $17.5 million from the issuance of 1.6 million shares of our Series F preferred stock.

Off-Balance Sheet Arrangements

As described in “—Our Indebtedness” above, SVB issued a standby letter of credit which satisfies the additional collateral requirement to maintain our subsidiary’s license to operate in India. As of December 31, 2012, we had $10.0 million reserved under our standby letter of credit.

 

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Contractual Obligations and Commitments

The following table describes our contractual obligations as of December 31, 2012:

 

     Payments Due by Period  
            Less Than      1 -3      4 -5  
     Total      1 Year      Years      Years  
     (in thousands)  

Line of credit

   $ 40,000       $ 15,000       $ 25,000       $   

Operating lease obligations

     4,952         1,233         2,616         1,103   

The contractual obligations in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above. We have no material long-term purchase obligations outstanding with any vendors or third parties.

For a description of our line of credit see “—Our Indebtedness.”

We lease our office facilities for our corporate headquarters in San Francisco, California, under operating leases which expire in 2016. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods. We do not have any material capital lease obligations and all of our property, equipment and software have been purchased with cash.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with our reserve for transaction losses, income taxes and stock-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, please see Note 2 of the accompanying notes to our consolidated financial statements.

We are choosing to “opt out” of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Reserve for Transaction Losses

On a quarterly basis, the reserve for estimated transaction losses is calculated based on our historical trends and data specific to each reporting period. We review the actual transaction losses evidenced in prior quarters as a percent of GSV to determine a historical loss rate. We then apply the historical rate to the current period GSV as a basis for estimating future transaction losses. When necessary, we also provide a specific transaction loss reserve for specific risks identified in processing customer transactions. Recoveries are reflected as a reduction in

 

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the reserve for transaction losses when the recovery occurs. We evaluate the adequacy of the provision every reporting period and adjust the reserve accordingly. The following table summarizes our reserve for transaction losses for the following years (in thousands):

 

     Balance at
Beginning of
Year
     Additions
to Expense
     Losses
Incurred
    Balance at
End of Year
 

December 31, 2010

   $ 1,084       $ 1,823       $ (2,611   $ 296   

December 31, 2011

     296         5,372         (4,894     774   

December 31, 2012

     774         7,722         (7,949     547   

Income Taxes

We use the asset and liability method to account for income taxes, which requires the recognition of deferred tax assets and liabilities for the expected future income tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized based on temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. Valuation allowances are established for deferred tax assets to the extent of the likelihood that the deferred tax assets may not be realized.

We also provide reserves as necessary for uncertain tax positions taken on our tax filings. First, we determine if a tax position is more likely than not to be sustained upon audit solely based on technical merits, including resolution of related appeals or litigation processes, if any. Second, based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement, we recognize any such differences as a liability. We include in income tax expense any interest and penalties related to uncertain tax positions. For all years presented, there are no uncertain tax positions.

Stock-Based Compensation

Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is the vesting period of the respective award.

Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of our common stock, our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:

 

   

Fair value of our common stock. Because our stock is not publicly-traded, we must estimate the fair value of our common stock, as discussed in “Common Stock Valuations” below.

 

   

Expected Term. The expected term was estimated using the simplified method allowed under the authoritative guidance.

 

   

Volatility. As we do not have a trading history for our common stock, the expected stock price volatility for our common stock was estimated by taking the average of the historical volatilities of an index fund and industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. We did not rely on implied volatilities of traded options in our industry peers’ common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available.

 

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Risk-free rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for zero-coupon U.S. Treasury notes with remaining terms similar to the expected term of the options.

 

   

Dividend yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.

The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the years presented:

 

     Year Ended December 31,  
         2010             2011             2012      

Expected term (in years)

     6.2       5.8       6.3   

Risk-free interest rate

     2.90     1.73     1.26

Dividend yield

     None        None        None   

Volatility rate

     47     39     42

Common Stock Valuations

The fair value of the common stock underlying our stock options was determined by our board of directors, which intended all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions we use in the valuation model are based on future expectations combined with management judgment. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:

 

   

independent third-party valuations of our common stock performed as of February 2011, December 2011, April 2012 and July 2012;

 

   

the prices, rights, preferences and privileges of our preferred stock relative to the common stock;

 

   

our operating and financial performance;

 

   

current business conditions and projections;

 

   

our stage of development;

 

   

the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of our company, given prevailing market conditions;

 

   

any adjustment necessary to recognize a lack of marketability for our common stock;

 

   

the market performance of comparable publicly-traded money transfer and technology companies; and

 

   

the U.S. and global capital market conditions.

In valuing our common stock, the board of directors determined the equity value of our business by taking a combination of the value indications under two valuation approaches, an income approach and a market approach.

 

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The income approach estimates the fair value of a company based on the present value of the company’s future estimated cash flows and the residual value of the company beyond the forecast period. These future values are discounted to their present values to reflect the risks inherent in the company achieving these estimated cash flows. Significant inputs of the income approach (in addition to our estimated future cash flows themselves) include the long-term growth rate assumed in the residual value, discount rate, terminal value and normalized long-term operating margin. The terminal value was calculated to estimate our value beyond the forecast period by applying a multiple to the terminal year.

The market approach estimates the fair value of a company by applying market multiples of comparable publicly-traded companies in the same industry or similar lines of business. The market multiples are based on key metrics implied by the enterprise or acquisition values of comparable publicly-traded companies. Given our significant focus on investing in and growing our business, we primarily utilized the revenue multiple when performing our valuation assessment under the market approach. When considering which companies to include in our comparable industry peer companies, we focused on U.S.-based publicly-traded companies with businesses similar to ours. The selection of our comparable industry peer companies requires us to make judgments as to the comparability of these companies to us. We considered a number of factors including business description, business size, market share, revenue model, development stage and historical operating results. We then analyzed the business and financial profiles of the selected companies for relative similarities to us and, based on this assessment, we selected our comparable industry peer companies. Several of the comparable industry peer companies are our competitors and are generally larger than us in terms of total revenue and assets. We believe that the comparable industry peers selected are a representative group for purposes of performing contemporaneous valuations. The same comparable industry peers were also used in determining various other estimates and assumptions in our contemporaneous valuations.

For each valuation, the enterprise value determined by the income and market approach was then allocated to the common stock using either the Option Pricing Method, or OPM, or Probability Weighted Expected Return Method, or PWERM.

The OPM treats common stock and preferred stock as call options on an enterprise value, with exercise prices based on the liquidation preference of the preferred stock. Therefore, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the liquidation preference at the time of a liquidity event such as a merger, sale or initial public offering, assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the stockholders. The common stock is modeled to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred stock is liquidated. The OPM uses the Black-Scholes option pricing model to price the call option. The OPM is appropriate to use when the range of possible future outcomes is so difficult to predict that forecasts would be highly speculative.

The PWERM involves a forward-looking analysis of the possible future outcomes of the enterprise. This method is particularly useful when discrete future outcomes can be predicted at a high confidence level with a probability distribution. Discrete future outcomes considered under the PWERM included non-initial public offering market based outcomes as well as initial public offering scenarios. In the non-initial public offering scenarios, a large portion of the equity value is allocated to the preferred stock to reflect the preferred stock liquidation preferences. In the initial public offering scenarios, the equity value is allocated pro rata among the shares of common stock and each series of preferred stock, which causes the common stock to have a higher relative value per share than under the non-initial public offering scenario. The fair value of the enterprise determined using the initial public offering and non-initial public offering scenarios was weighted according to the board of directors’ estimate of the probability of each scenario.

Over time, as certainty developed regarding possible discrete events, including an initial public offering, or IPO, the allocation methodology utilized to allocate our enterprise value to our common stock transitioned away from the OPM, which was utilized for grants through December 31, 2011, to PWERM, which we utilized for grants after December 31, 2011.

 

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We granted stock options with the following terms between January 1, 2011 and the date of this prospectus:

 

                   Common Stock         
     Number of      Exercise      Fair Value Per         
     Options      Price Per      Share at      Fair Value  
     Granted      Share      Grant Date      Per Option  

Option Grant Dates:

           

May 12, 2011

     374,019       $ 4.48       $ 4.48       $ 1.72   

July 15, 2011

     116,250         4.48         4.48         1.72   

September 15, 2011

     263,750         4.48         4.48         1.84   

January 18, 2012

     335,571         6.84         6.84         2.88   

March 8, 2012

     27,500         6.84         6.84         2.84   

March 22, 2012