20-F 1 velti20f123111.htm 2011 ANNUAL REPORT Velti 20F 12.31.11
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 20-F
____________________
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR 
R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2011
 OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ________ to ________
OR 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report ________________

Velti plc
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
Jersey
(Jurisdiction of incorporation or organization)
First Floor, 28-32 Pembroke Street Upper
Dublin 2, Republic of Ireland
Attn: Sally J. Rau, Chief Administrative Officer and General Counsel
353 (0) 1234 2676
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
 
Name of exchange on which registered
Ordinary Shares, £0.05 nominal value
 
NASDAQ

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the Company's classes of capital or ordinary stock as of the close of the period covered by the annual report: 61,790,985 ordinary shares




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No R
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934.  Yes  o No R
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.  Yes R No o

 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes      R No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
¨
Non-accelerated filer
þ

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP   R International Financial Reporting Standards as issued by the International Accounting Standards Board o

Other o

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Indicate by check mark which financial statement item the registrant has elected to follow: Item 17 o Item 18 R
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No R  

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes      R    No o    





Velti plc
FORM 20-F Annual Report
TABLE OF CONTENTS

 
 
Page
Part I
 
 
 
 
 
 
 
 
Part II
 
 
 
 
 
 
 
 
Part III
 
 
  
 
 


1


PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
 Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
 Not applicable.
ITEM 3. KEY INFORMATION
3.A.  Selected Financial Data
 
We have derived the consolidated statement of operations data for the years ended December 31, 2011, 2010 and 2009 and the consolidated balance sheet data as of December 31, 2011 and 2010 from our audited consolidated financial statements, which are included elsewhere in this annual report. We have derived the consolidated statements of operations data for the years ended December 31, 2008 and 2007 the consolidated balance sheet data as of December 31, 2008 and 2007 from our audited consolidated financial statements, which are not included in this annual report.
Our historical results are not necessarily indicative of the results to be expected in any future period and should be read in conjunction with “Operating and Financial Review and Prospects,” and our consolidated financial statements and related notes included elsewhere in this annual report.

2


 
Year Ended December 31,
 
2011
 
2010
 
2009
 
2008
 
2007
Consolidated Statements of Operations Data:
(in thousands)
Revenue
$
189,202

 
$
116,269

 
$
89,965

 
$
62,032

 
$
16,394

Costs and expenses:
 
 
 
 
 
 
 
 
 
Third‑party costs
53,901

 
36,658

 
27,620

 
32,860

 
2,437

Datacenter and direct project costs
17,952

 
6,312

 
4,908

 
8,660

 
2,863

General and administrative expenses
45,258

 
22,484

 
17,387

 
6,660

 
4,075

Sales and marketing expenses
37,733

 
23,049

 
15,919

 
8,245

 
5,812

Research and development expenses
13,060

 
7,840

 
3,484

 
1,884

 
1,662

Acquisition related and other charges
10,390

 
5,364

 

 

 

Depreciation and amortization
20,900

 
12,131

 
9,394

 
4,231

 
3,013

Total costs and expenses
199,194

 
113,838

 
78,712

 
62,540

 
19,862

Income (loss) from operations
(9,992
)
 
2,431

 
11,253

 
(508
)
 
(3,468
)
Interest expense, net
(7,389
)
 
(8,069
)
 
(2,370
)
 
(1,155
)
 
(338
)
Income (loss) from foreign currency transactions
6,200

 
(1,726
)
 
14

 
(1,665
)
 
(154
)
Other expenses
(49
)
 

 

 
(495
)
 

Income (loss) before income taxes, equity method investments and non-controlling interest
(11,230
)
 
(7,364
)
 
8,897

 
(3,823
)
 
(3,960
)
Income tax (expense) benefit
(3,808
)
 
(3,771
)
 
(410
)
 
26

 
198

Loss from equity method investments
(200
)
 
(4,615
)
 
(2,223
)
 
(2,456
)
 
(656
)
Net income (loss)
(15,238
)
 
(15,750
)
 
6,264

 
(6,253
)
 
(4,418
)
Income (loss) attributable to non-controlling interest
130

 
(81
)
 
(191
)
 
(123
)
 
(224
)
Net income (loss) attributable to Velti
$
(15,368
)
 
$
(15,669
)
 
$
6,455

 
$
(6,130
)
 
$
(4,194
)
Net income (loss) per share attributable to Velti(1):
 
 
 
 
 
 
 
 
 
Basic
$
(0.28
)
 
$
(0.41
)
 
$
0.18

 
$
(0.18
)
 
$
(0.14
)
Diluted
$
(0.28
)
 
$
(0.41
)
 
$
0.17

 
$
(0.18
)
 
$
(0.14
)
Weighted average number of shares outstanding for use in computing(1):
 
 
 
 
 
 
 
 
 
Basic net income per share
55,865

 
37,933

 
35,367

 
33,478

 
29,751

Diluted net income per share
55,865

 
37,933

 
37,627

 
33,478

 
29,751

 
 
 
 
 
 
 
 
 
 
(1) 
See Note 15 to our consolidated financial statements attached to this annual report for an explanation of the method used to calculate basic and diluted net income (loss) per share.
 
As of December 31,
 
2011
 
2010
 
2009
 
2008
 
2007
Consolidated Balance Sheet Data:
(in thousands)
Cash and cash equivalents
$
75,765

 
$
17,354

 
$
19,655

 
$
14,321

 
$
16,616

Working capital
180,259

 
(3,816
)
 
22,847

 
6,875

 
23,284

Total assets
481,531

 
209,168

 
122,058

 
72,474

 
49,786

Total debt
9,740

 
70,115

 
38,861

 
17,420

 
2,505

Total shareholders' equity
297,491

 
36,269

 
46,936

 
30,179

 
34,135

 
 
 
 
 
 
 
 
 
 
 
We present certain non-GAAP financial measures as a supplemental measure of our performance. These non-GAAP financial measures are not a measure of financial performance or liquidity calculated in accordance with accounting principles generally accepted in the U.S., referred to herein as GAAP, and should be viewed as a supplement to, not a substitute for, our results of operations presented on the basis of GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures are detailed in the table below.

3


 
Year ended December 31,
 
2011
 
2010
 
2009
Non-GAAP Measures:
(in thousands except per share amounts)
Adjusted net income
$
29,005

 
$
3,023

 
$
11,053

Adjusted EBITDA
$
53,077

 
$
27,198

 
$
24,727

 
 
 
 
 
 
Adjusted net income per share - basic
$
0.52

 
$
0.08

 
$
0.31

Adjusted net income per share - diluted
$
0.50

 
$
0.07

 
$
0.29

 
 
 
 
 
 
Our non-GAAP measures should be read in conjunction with the corresponding GAAP measures. These non-GAAP financial measures have limitations as an analytical tool and you should not consider them in isolation from, or as a substitute for, analysis of our results as reported in accordance with GAAP.
We define adjusted net income (loss) by excluding foreign exchange gains or losses, share-based compensation expense, non-recurring and acquisition related expenses, deferrals of net profits of our equity method investments related to transactions with us, and acquisition-related depreciation and amortization.
We define adjusted EBITDA by excluding from adjusted net income (loss), gains or losses from our equity method investments, the remaining depreciation and amortization, the provision for income taxes, net interest expense, and other income.
Adjusted net income (loss) and adjusted EBITDA are not necessarily comparable to similarly-titled measures reported by other companies.
Adjusted income (loss) per share is adjusted net income (loss) divided by diluted shares outstanding.
We believe these non-GAAP financial measures are useful to management, investors and other users of our financial statements in evaluating our operating performance because these financial measures are additional tools to compare business performance across companies and across periods. We believe that:
these non-GAAP financial measures are often used by investors to measure a company's operating performance without regard to items such as interest expense, taxes, depreciation and amortization and foreign exchange gains and losses, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and
investors commonly use these non-GAAP financial measures to eliminate the effect of restructuring and share-based compensation expenses, one-time non-recurring expenses, and acquisition-related expenses, which vary widely from company to company and impair comparability.
 We use these non-GAAP financial measures:
as a measure of operating performance to assist in comparing performance from period to period on a consistent basis;
as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations;
as a primary measure to review and assess the operating performance of our company and management team in connection with our executive compensation plan incentive payments; and
in communications with our board of directors, stockholders, analysts and investors concerning our financial performance.
The following is an unaudited reconciliation of adjusted EBITDA to net income (loss) before non-controlling interest, the most directly comparable GAAP measure, for the periods presented:

4


 
Year Ended December 31,
 
2011
 
2010
 
2009
Reconciliation to adjusted EBITDA:
(in thousands except per share amounts)
Net income (loss) before non-controlling interest
$
(15,238
)
 
$
(15,750
)
 
$
6,264

Adjustments:
 
 
 
 
 
Foreign exchange (gains) losses
(6,200
)
 
1,726

 
(14
)
Non-cash share based compensation (1)
27,627

 
6,272

 
1,292

Non-recurring and acquisition-related expenses (2)
16,321

 
6,364

 
2,788

Loss from equity method investments (3)
1,888

 
2,776

 

Depreciation and amortization - acquisition related
4,607

 
1,635

 
723

Adjusted net income
$
29,005

 
$
3,023

 
$
11,053

Loss (gain) from equity method investments - other
(1,688
)
 
1,839

 
2,223

Depreciation and amortization - other
16,293

 
10,496

 
8,671

Income tax expense
3,808

 
3,771

 
410

Interest expense, net
5,610

 
8,069

 
2,370

Other expense
49

 

 

Adjusted EBITDA
$
53,077

 
$
27,198

 
$
24,727

 
 
 
 
 
 
Adjusted net income per share - basic
$
0.52

 
$
0.08

 
$
0.31

 
 
 
 
 
 
Adjusted net income per share - diluted
$
0.50

 
$
0.07

 
$
0.29

 
 
 
 
 
 
Basic shares
55,865

 
37,933

 
35,367

 
 
 
 
 
 
Diluted shares
58,071

 
40,382

 
37,627

 
 
 
 
 
 
(1) In March 2011, certain performance-based deferred share awards granted to employees in 2009 were approved for vesting. The performance metrics of these awards were set at the time of grant based on then current projections of company performance under IFRS for 2009 and 2010. These metrics did not contemplate our conversion to US GAAP, the impact of acquisitions completed during 2009 and 2010, or the impact on our results of preparing for and completing our US public offering. Due to the judgment required to reconcile actual company performance with the original metrics, it was determined that any vesting would be required to be treated as a modification under the guidance in ASC 718. This required the fair value of the awards to be remeasured on the vesting approval date, with the incremental fair value charged to expense over the remaining vesting period. As a result, we recognized additional compensation expense of approximately $10.5 million during the year ended December 31, 2011. Similarly, in May 2010, we allowed for the vesting of certain deferred share awards granted to employees in 2008 under IFRS based on then current projections of company performance under IFRS for 2008 and 2009. As a result of this modification, we recognized additional compensation expense of approximately $1.1 million during year ended December 31, 2010. Share based expenses were included in the consolidated statements of operations as follows:
 
Year Ended December 31,
 
2011
 
2010
 
2009
 
(in thousands)
Datacenter and direct project
$
3,549

 
$
443

 
$
146

General and administrative
11,735

 
2,613

 
344

Sales and marketing
8,288

 
2,231

 
473

Research and development
4,055

 
985

 
329

 
$
27,627

 
$
6,272

 
$
1,292

 
 
 
 
 
 
(2) Non-recurring and acquisition-related expenses in 2011 included primarily expenses to complete acquisitions, impairment of certain intangible assets following acquisitions in the fourth quarter, interest expense to recognize the remaining debt discount upon repayment of certain loan facilities, interest expense related to a lender fee in connection with our IPO, and other non-recurring items offset by the reversal of a one-time tax liability related to pre-IPO performance share awards that were released to employees in 2010. Non-recurring and acquisition-related expenses in 2010 included primarily acquisition-related expenses

5


incurred related to our previous acquisitions in the amount of $5.4 million and a one-time tax liability accrual related to pre-public offering performance share awards that were released to employees in 2010 in the amount of $1.0 million. Non-recurring expenses in 2009 included general and administrative expenses with respect to our redomiciliation exercise and professional fees associated with our consideration of corporate opportunities.
(3) Loss (gain) from equity method investments represents deferral of our equity investments' net profits related to transactions with Velti.
3.B.  Capitalization and Indebtedness
 Not applicable.
3.C.  Reasons For The Offer And Use Of Proceeds
 Not applicable.
3.D.  Risk Factors
The following section provides an overview of the risks to which our business is exposed. Shareholders should carefully consider the risk factors described below and all other information contained in this annual report, including the financial statements and related notes. The occurrence of the risks described below could have a material adverse impact on our business, financial condition or results of operations. Various statements in this annual report, including the following risk factors, contain forward-looking statements. Please also refer to “Part I-Item 5. Operating and Financial Review and Prospects-G. Safe harbor”, elsewhere in this annual report.
Risks Related to Our Business
Acquisitions or investments may be unsuccessful and may divert our management's attention and consume significant resources.
We have made several acquisitions, including the acquisition of Casee in January 2012, Mobile Interactive Group Ltd., or MIG, in November 2011, and Air2Web, Inc., or Air2Web, in October 2011 . These, and any future acquisitions that we make, involve numerous risks, any of which could harm our business, including:
difficulties in integrating the operations, technologies, services and personnel of acquired businesses;
cultural challenges associated with integrating employees from the acquired business into our organization;
ineffectiveness or incompatibility of acquired technologies or services;
additional financing required to make contingent payments;
potential loss of key employees of acquired businesses;
inability to maintain the key business relationships and the reputations of acquired businesses;
diversion of management's attention from other business concerns;
inability to maintain our standards, controls, procedures and policies, which could affect our ability to receive an unqualified attestation from our independent accountants regarding management's required assessment of the effectiveness of our internal control structure and procedures for financial reporting;
litigation for activities of the acquired business, including claims from terminated employees, customers, former shareholders or other third parties;
in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;
failure to successfully further develop the acquired technologies; and
increased fixed costs.
 
We expect that in the future we will evaluate additional acquisitions or make investments in other businesses, or acquire individual products and technologies. Any future acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt.
We may fail to realize some or all of the anticipated benefits of our acquisitions which may adversely affect our financial performance and the value of our ordinary shares.
We continue to integrate our acquired companies, including CASEE, Mobclix, Air2Web, and MIG into our existing operations. These integrations have required and will continue to require significant efforts, including the coordination of future product

6


development and sales and marketing efforts, as well as resources and management's time and efforts. The success of each of these acquisitions will depend, in part, on our ability to realize the anticipated benefits from combining their products and services into ours, and expanding our customer base by increasing the products and services we can provide to our existing and new customers as well as to the customers of the acquired companies. We also must retain key employees from the acquired businesses, as well as retain and motivate our existing executives and other key employees. If we are not able to successfully combine the acquired businesses with our existing operations and integrate our respective operations, technologies and personnel within the anticipated time frame, or at all, the anticipated benefits of the acquisitions may not be realized fully or at all or may take longer to realize than expected and the value of our ordinary shares may be adversely affected. It is possible that the integration process could result in the loss of key employees and other senior management, result in the disruption of our business or adversely affect our ability to maintain relationships with customers, suppliers, distributors and other third parties, or to otherwise achieve the anticipated benefits of each acquisition.
We may need to raise additional capital to grow our business, and we may not be able to raise capital on terms acceptable to us or at all.
The operation of our business and our efforts to grow our business further will require significant cash outlays and commitments, and we may need to borrow additional funds to support our continued growth. We believe that our existing working capital will be sufficient to fund our working capital requirements, capital expenditures and operations for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and it is possible that we could utilize our available financial resources sooner than we currently expect. The timing and amount of our cash needs may vary significantly depending on numerous factors, including but not limited to:
market acceptance of our mobile marketing and advertising services;
the need to adapt to changing technologies and technical requirements;
the need to adapt to changing regulations requiring changes to our processes or platform; and
the existence of opportunities for expansion.
 
If our existing working capital, is not sufficient to meet our cash requirements, we will need to seek additional capital, potentially through debt, or other equity financings, to fund our growth. We may not be able to raise cash on terms acceptable to us or at all. Financings, if available, may be on terms that are dilutive to our shareholders, and the prices at which new investors would be willing to purchase our securities may be lower than the current price of our ordinary shares. The holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of our ordinary shares. If new sources of financing are required but are insufficient or unavailable, we would be required to modify our growth and operating plans to the extent of available funding, which could harm our ability to grow our business.
Our days sales outstanding, or DSOs, may fluctuate significantly from quarter to quarter. Deterioration in DSOs results in a delay in the cash flows we generate from our customers, which could have a material adverse impact on our financial condition and the results of our operations.
The mobile advertising and marketing industry has historically been subject to seasonal fluctuations in demand, with a significant amount of the activity occurring in the second half of the year. In addition, a significant amount of our business is conducted in emerging markets. Typically payment terms in these regions are longer than payment terms in our other markets. These emerging markets have under‑developed legal systems for securing debt and enforcing collection of debt. While we qualify customers that we do business with, their financial positions may change adversely over the longer time period given for payment.
The effect of the seasonality in our business and the longer payment terms, combined with differences in the timing of invoicing and revenue recognition, has in the past and may in the future result in an increase in our DSOs and in our accrued contract receivables. Any increase in our DSOs, or any delay in the conversion of our accrued contract receivables to trade receivables, could have a material adverse impact on our cash flows and working capital, as well as on our financial condition and the results of our operations.
Charges to earnings resulting from acquisitions may adversely affect our operating results.
For any business combination that we consummate, we will recognize the identifiable assets acquired, the liabilities assumed and any non-controlling interest in acquired companies generally at their acquisition date fair values and, in each case, separately from goodwill. Goodwill as of the acquisition date is measured as the excess amount of consideration transferred, which is also generally measured at fair value, and the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed. Our estimates of fair value are based upon assumptions believed to be reasonable but which are

7


inherently uncertain. Goodwill is tested for impairment on an annual basis and whenever there is an indication that goodwill may be impaired, relying on a number of factors including operating results, business plans and future cash flows. Impairment occurs when the carrying amount of a cash generating unit including the goodwill, exceeds the estimated recoverable amount of the cash generating unit. The recoverable amount of a cash generating unit is the higher of its fair value less cost to sell and its value-in-use. Value-in-use is the present value of future cash flows expected to be derived from the cash generating unit, based upon a discount rate estimated by management. After we complete an acquisition, the following factors could result in material charges and adversely affect our business, operating results and financial condition and may adversely affect our cash flows:
costs incurred to combine the operations of companies we acquire, such as employee retention; redeployment or relocation expenses;
impairment of goodwill or intangible assets;
amortization of intangible assets acquired;
a reduction in the useful lives of intangible assets acquired;
identification of assumed contingent liabilities after the measurement period (generally up to one year from the acquisition date) has ended;
charges to our operating results to eliminate certain duplicative pre-merger activities, to restructure our operations or to reduce our cost structure;
charges to our operating results due to changes in deferred tax asset valuation allowances and liabilities related to uncertain tax positions after the measurement period has ended;
charges to our operating results resulting from expenses incurred to effect the acquisition; and
charges to our operating results due to the expensing of certain equity awards assumed in an acquisition.
 
Substantially all of these costs will be accounted for as expenses that will decrease our net income and earnings per share for the periods in which those costs are incurred. Charges to our operating results in any given period could differ substantially from other periods based on the timing and size of our future acquisitions and the extent of integration activities.
Our business involves the use, transmission and storage of confidential information, and the failure to properly safeguard such information could result in significant reputational harm and monetary damages.
Our business activities involve the use, transmission, transfer, sharing and storage of information as to which we may have various obligations, including information that may be considered confidential, personal or sensitive, and that may be subject to laws that apply to privacy, data protection and security breaches. Our efforts may not prove to be sufficient to protect the security, integrity and confidentiality of the information we collect and store, and there is no guarantee that inadvertent or unauthorized disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. If such unauthorized disclosure or access does occur, we may be required, under existing and proposed laws or contractual obligations, to notify parties whose information was disclosed or accessed and/or relevant government agencies. We may also be subject to claims of breach of contract or violation of privacy or data protection laws for such disclosure, investigation, penalties or fines by regulatory authorities; and potential claims by parties whose information was disclosed or accessed. The unauthorized disclosure of or access to information may result in the termination of one or more of our commercial relationships and/or a reduction in customer confidence and usage of our services. We may also be subject to litigation alleging the improper collection use, access, transfer, sharing, transmission or storage of confidential information, which could damage our reputation among our current and potential clients, require significant expenditures of capital and other resources and cause us to lose business and revenue.
The global nature of our business subjects us to additional costs and risks that can adversely affect our operating results.
We have offices in multiple countries around the world and we derive a substantial majority of our revenue from, and have a significant portion of our operations outside of the U.S. Compliance with U.S. and foreign country laws and regulations that apply to our international operations increases our cost of doing business. These laws and regulations include U.S. laws such as the Foreign Corrupt Practices Act, and local laws and guidance which also prohibit certain payments to governmental officials and other parties, data protection and security requirements, consumer privacy and protection laws, labor relations laws, tax laws, anti-competition regulations, import and trade restrictions and export requirements. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business. Any such violations could result in prohibitions on our ability to offer our products and services in one or more countries, could delay or prevent potential acquisitions and could also materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Our success depends, in part, on our ability to anticipate these risks and manage these compliance obligations and potential difficulties. We monitor our international operations and investigate allegations of improprieties relating to transactions and the way in which such transactions are recorded. Where circumstances warrant, we provide information and report our findings to government

8


authorities, but no assurance can be given that action will not be taken by such authorities.
We are also subject to a variety of other risks and challenges in managing an organization operating in various countries, including those related to:
challenges caused by distance, language and cultural differences;
general economic conditions in each country or region;
fluctuations in currency exchange rates;
regulatory changes;
political unrest, terrorism and the potential for other hostilities;
public health risks, particularly in areas in which we have significant operations;
longer payment cycles and difficulties in collecting accounts receivable;
overlapping tax regimes;
our ability to repatriate funds held by our international subsidiaries at favorable tax rates;
difficulties in transferring funds from certain countries; and
reduced protection for intellectual property rights in some countries.
 
If we are unable to manage the foregoing international aspects of our business, our operating results and overall business will be significantly and adversely affected.
We operate in an industry with extensive intellectual property litigation. Claims of infringement against us may cause our business, financial condition and operating results to suffer.
Our success depends, in part, upon us and our customers not infringing upon intellectual property rights owned by others and being able to resolve claims of intellectual property infringement without major financial expenditures or adverse consequences. The mobile telecommunications industry generally is characterized by extensive intellectual property litigation. Although our technology is relatively new and our industry is rapidly evolving, many participants that own, or claim to own, intellectual property historically have aggressively asserted their rights. For example, we recently were sued in the United States District Court for the District of Delaware by Augme Technologies, Inc. or Augme, alleging infringement of three patents held by Augme. We have also received letters on behalf of certain customers notifying us that the customer had received third party communications alleging that certain applications of the customer infringed the patent rights of the third party, and in turn, alleging that we are obligated to indemnify the customer relating to these matter as the claim allegedly relates to services that we provide to the customer. Each of these matters is in an early stage, and we cannot determine with certainty whether this or any other existing or future third party intellectual property rights would require us to alter our technologies, obtain licenses or cease certain activities.
Future litigation may be necessary to defend ourselves or our customers by determining the scope, enforceability and validity of third party proprietary rights or to establish our proprietary rights. Some of our competitors have substantially greater resources than we do and are able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. In addition, patent holding companies that focus solely on extracting royalties and settlements by enforcing patent rights may target us. Regardless of whether claims that we are infringing patents or other intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend and could:
adversely affect our relationships with our current or future customers;
cause delays or stoppages in providing our mobile marketing services;
divert management's attention and resources;
require technology changes to our platform that would cause us to incur substantial cost;
subject us to significant liabilities;
require us to enter into royalty or licensing agreements on unfavorable terms; and
require us to cease certain activities.
 
In addition to liability for monetary damages against us, which may be trebled and may include attorneys' fees, or, in certain circumstances, our customers, we may be prohibited from developing, commercializing or continuing to provide certain of our mobile marketing services unless we obtain licenses from the holders of the patents or other intellectual property rights. We cannot assure shareholders that we will be able to obtain any such licenses on commercially favorable terms, or at all. If we do not obtain such licenses, our business, operating results and financial condition could be materially adversely affected and we could, for example, be required to cease offering or materially alter our mobile marketing services in some markets.

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If we are unable to protect our intellectual property and proprietary rights, our competitive position and our business could be harmed.
We rely primarily on a combination of patent laws, trademark laws, copyright laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technology. As of March 31, 2012, we had five issued patents and 21 pending patent applications on file. However, any future patents that may issue may not survive a legal challenge to their scope, validity or enforceability, or provide significant protection for us. The failure of our patents, or our reliance upon copyright and trade secret laws to adequately protect our technology might make it easier for our competitors to offer similar products or technologies. In addition, patents may not issue from any of our current or any future applications.
Monitoring unauthorized use of our intellectual property is difficult and costly. Our efforts to protect our proprietary rights may not be adequate to prevent misappropriation of our intellectual property. Further, we may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Our competitors may also independently develop similar technology. In addition, the laws of many countries, including countries where we conduct business such as China and India, do not protect our proprietary rights to as great an extent as do the laws of European countries and the U.S. Further, the laws in the U.S. and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property. Any failure by us to meaningfully protect our intellectual property could result in competitors offering products that incorporate our most technologically advanced features, which could seriously reduce demand for our mobile marketing services. In addition, we may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination favorable to us. Further, litigation is inherently uncertain, and thus we may not be able to stop our competitors from infringing upon our intellectual property rights.
We may not be able to enhance our mobile marketing and advertising platform to keep pace with technological and market developments, or to remain competitive against potential new entrants in our markets.
The market for mobile marketing and advertising services is emerging and is characterized by rapid technological change, evolving industry standards, frequent new product introductions and short product life cycles. Our technology platform, Velti mGage, or future solutions we may offer, including technology platforms acquired from Mobclix, Air2Web or MIG, may not be acceptable to marketers and advertisers. To keep pace with technological developments, differentiate ourselves from our competitors, satisfy increasing customer requirements and achieve acceptance of our marketing and advertising campaigns, we will need to enhance our current mobile marketing and advertising solutions and continue to develop and introduce on a timely basis new, innovative mobile marketing and advertising services offering compatibility, enhanced features and functionality on a timely basis at competitive prices. Our inability, for technological or other reasons, to enhance, develop, introduce and deliver compelling mobile marketing services in a timely manner, or at all, in response to changing market conditions, technologies or customer expectations could have a material adverse effect on our operating results or could result in our mobile marketing and advertising platform becoming obsolete. Our ability to compete successfully will depend in large measure on our ability to maintain a technically skilled development and engineering staff and to adapt to technological changes and advances in the industry, including providing for the continued compatibility of our mobile marketing and advertising platform with evolving industry standards and protocols. In addition, as we believe the mobile marketing market is likely to grow substantially, other companies which are larger and have significantly more capital to invest than us may emerge as competitors. For example, in May 2010, Google, Inc. acquired Admob, Inc.; in January 2010, Apple, Inc. acquired Quattro Wireless, Inc.; in April 2011, Motricity, Inc. acquired Adenyo, Inc.; and Singapore Telecommunications Limited, or SingTel, announced its intention to acquire Amobee, Inc., in March 2012. New entrants could seek to gain market share by introducing new technology or reducing pricing. This may make it more difficult for us to sell our products and services, and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share or expected market share, any of which may significantly harm our business, operating results and financial condition. 
We do not have multi-year agreements with many of our customers and we may be unable to retain key customers, attract new customers or replace departing customers with customers that can provide comparable revenue.
Our success requires us to maintain and expand our current, and develop new, customer relationships. Most of our contracts with our customers do not obligate them to long-term purchasing of our services. We cannot assure shareholders that our customers will continue to use our products and services or that we will be able to replace, in a timely or effective manner, departing customers with new customers that generate comparable revenue. Further, we cannot assure shareholders that we will continue to generate consistent amounts of revenue over time. Although none of our customers represented 10% or more of our revenues in the year ended December 31, 2011, if a major customer represents a significant portion of our business, the decision by such customer to materially reduce or to cease purchasing our products and services could cause our revenue to be adversely affected. Our failure to develop and sustain long-term relationships with our customers could materially affect our

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operating results.
Our customer contracts lack uniformity and often are complex, which subjects us to business and other risks.
Our customers include some of the largest wireless carriers and brands which have substantial purchasing power and negotiating leverage. As a result, we typically negotiate contracts on a customer-by-customer basis and our contracts lack uniformity and are often complex. Sometimes short-form insertion orders, purchase orders or work orders are used to document business relationships and these short-form documents may lack some of the protections we might otherwise seek in more detailed forms of contracts. We frequently rely on third parties, such as mobile app publishers, to have the authority to meet their obligations to us, including without limitation the authority to share or transfer consumer data with or to us in compliance with applicable laws and self-regulatory rules and without liability to the consumer or third parties. It is possible that some of these third parties will fail to comply with law or self-regulatory rules, or their own policies or representations, or otherwise expose us to claims as a result of their acts or omissions. Further, we may lack a meaningful ability to be indemnified by some of them in such instances. If we are unable to effectively negotiate, document, enforce and account and bill in an accurate and timely manner for contracts with our key customers or obtain and enforce meaningful indemnities from those with whom we do business, that expose us to risk or liability, our business and operating results may be adversely affected. In addition, we could be unable to timely recognize revenue from contracts that are not managed effectively and this would further adversely impact our financial results.
We have contractual indemnification obligations to most of our customers. If we are required to fulfill our indemnification obligations (e.g. relating to third party content property, claims or operating systems or compliance with laws) that we provide to our customers, we intend to seek indemnification from our suppliers, vendors and content providers to the full extent of their responsibility. Even if the agreement with such supplier, vendor or content provider contains an indemnity provision, it may not cover a particular claim or type of claim or may be limited in amount or scope or the indemnifying party may lack the financial ability or insurance coverage to fulfill their indemnity obligations. As a result, we may not have sufficient indemnification from third parties to cover fully the amounts or types of claims that might be made against us. In addition, we have contractual indemnification obligations to most of our customers relating to the products and services that we provide, including indemnification for infringing technology and compliance with applicable law and self-regulatory rules, and we may have an obligation to our customers for damages under these indemnification provisions. Any significant indemnification obligation to our customers could have a material adverse effect on our business, operating results and financial condition.
Our sales efforts require significant time, expense and effort and could hinder our ability to expand our customer base and increase revenue.
Attracting new customers requires substantial time and expense and we cannot assure that we will be successful in establishing new relationships, or maintaining or advancing our current relationships. For example, it may be difficult to identify, engage and market to customers who do not currently perform mobile marketing or advertising or are unfamiliar with our current services or platform. Further, many of our customers typically require input from one or more internal levels of approval. As a result, during our sales effort, we must identify multiple people involved in the purchasing decision and devote a sufficient amount of time to presenting our products and services to those individuals. The newness and complexity of our services, and the flexibility of our pricing model, often requires us to spend substantial time and effort assisting potential customers in evaluating our products and services including providing demonstrations and benchmarking against other available technologies. This process can be costly and time consuming. We expect that our sales process will become less burdensome as our products and services become more widely known and used. However, if this change does not occur, we will not be able to expand our sales effort as quickly as anticipated and our sales will be adversely affected.
Our services are provided on mobile communications networks that are owned and operated by third parties who we do not control and the failure or security breach of any of these networks would adversely affect our ability to deliver our services to our customers.
Our mobile marketing and advertising platform is partially dependent on the reliability of mobile operators who maintain sophisticated and complex mobile networks. Such mobile networks have historically, and particularly in recent years, been subject to both rapid growth and technological change. If the network of a mobile operator with which we are integrated should fail, including because of new technology incompatibility, the degradation of network performance under the strain of increased mobile consumer use, or a general failure from natural disaster or political or regulatory shut-down, we will not be able provide our services to our customers through such mobile network. Should data that resides on or is transmitted over the network be breached, there may also be limitations on our providing such services. These events, in turn, could impair our reputation and business, potentially resulting in a material, adverse effect on our financial results.

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If our mobile marketing and advertising services platform does not scale as anticipated, our business will be harmed.
We must be able to continue to scale to support potential ongoing substantial increases in the number of users in our actual commercial environment, and maintain a stable service infrastructure and reliable service delivery for our mobile marketing and advertising solutions. In addition, we must continue to expand our service infrastructure to handle growth in customers and usage. If our mobile marketing and advertising platform, Velti mGage, and the technology platforms acquired from Mobclix, Air2Web and MIG, do not efficiently and effectively scale to support and manage a substantial increase in the number of users while maintaining a high level of performance, the quality of our services could decline and our business will be seriously harmed. In addition, if we are unable to secure data center space with appropriate power, cooling and bandwidth capacity, we may not be able to efficiently and effectively scale our business to manage the addition of new customers and overall mobile marketing and advertising solutions provided to our customers.
The success of our business depends, in part, on wireless carriers continuing to accept our customers' messages for delivery to their subscriber base.
In a portion of our business we depend on wireless carriers to deliver our customers' messages to their subscriber base. Wireless carriers often impose standards of conduct or practice that significantly exceed current legal requirements and potentially classify our messages as “spam,” even where we do not agree with that conclusion. In addition, the wireless carriers use technical and other measures to attempt to block non-compliant senders from transmitting messages to their customers; for example, wireless carriers block short codes or Internet Protocol addresses associated with those senders. There can be no guarantee that we, or short codes registered to us, will not be blocked or blacklisted or that we will be able to successfully remove ourselves from those lists. Although our services typically require customers to opt‑in to a campaign, minimizing the risk that our customers' messages will be characterized as spam, blocking of this type could interfere with our ability to market products and services of our customers and communicate with end users and could undermine the effectiveness of our customers' marketing campaigns. To date we have not experienced any material blocking of our messages by wireless carriers, but any such blocking could have an adverse effect on our business and results of operations.
Many of our customers require us to maintain specified levels of service commitments and failure to meet these levels would both adversely impact our customer relationship as well as our overall business.
Many of our customers require us to contractually commit to maintain specified levels of customer service under agreements commonly referred to as service level agreements. In particular, because of the importance that mobile consumers in general attach to the reliability of a mobile network, mobile operators are especially known for their rigorous service level requirements. We are a rapidly growing company and, although to date we have not experienced any significant interruption of service, if we were to be unable to meet our contractually committed service level obligations, we would both be subject to fees, penalties, civil liability as well as adverse reputational consequences. To date we have not had to pay any material penalties for failure to meet service level commitments. We recognize these penalties, if and when incurred, as a reduction to revenue. These in turn would materially harm our business and operating results.
Some of our programs are partially supported by government grants, which may be reduced, withdrawn, delayed or reclaimed.
We have received grants from European Union programs administered by the Government of Greece in order to aid our technology development efforts, and have been approved for an additional grant. The first of these grants was for a total of approximately $4.5 million that has been paid in full to us. The second grant is for a total of approximately $8.5 million. That has also been paid in full. In 2009, we applied for a third grant and received acceptance of eligibility for up to an additional $12.0 million over four years. In 2011, we also applied for a fourth grant and we are expecting to receive acceptance of eligibility for up to an additional $4.8 million over three years. Under the terms of these grants, we are required to list these grants under a separate, specific reserve account on our balance sheets that we maintain for our Greek subsidiary under generally accepted accounting principles in Greece. If we fail to maintain this accounting treatment for five years following the final disbursement by the Greek government under each respective grant, we will be required to refund the entire amount of such grant. If we fail to maintain this accounting treatment between the fifth and tenth anniversaries of receiving the final disbursement under each grant, we will be required to pay a tax penalty. We have to date been in compliance with this requirement and do not anticipate being unable to remain in compliance for the duration of the requirement. However, in the event that we are unable to remain in compliance, a payment of refund or tax penalty would adversely affect our operating results. Further, were the Government of Greece to abrogate its commitment to provide the final disbursement of funds for the last two grants, our development efforts and ability to meet our timing expectations for new marketing and advertising services would be adversely affected.

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Failure to adequately manage our growth may seriously harm our business.
We operate in an emerging technology market and have experienced, and may continue to experience, significant growth in our business. If we do not effectively manage our growth, the quality of our products and services may suffer, which could negatively affect our brand and operating results. Our growth has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational and financial resources and our infrastructure. Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. This will require us to, among other things:
implement additional management information systems;
further develop our operating, administrative, legal, financial and accounting systems and controls, including compliance programs globally;
hire additional personnel;
develop additional levels of management within our company;
locate additional office space in various countries; and
maintain close coordination among our engineering, operations, legal, finance, sales and marketing and customer service and support organizations.
 
Moreover, as our sales increase, we may be required to concurrently deploy our services infrastructure at multiple additional locations or provide increased levels of customization. As a result, we may lack the resources to deploy our services on a timely and cost-effective basis. Failure to accomplish any of these requirements would seriously harm our ability to deliver our mobile marketing and advertising platform in a timely fashion, fulfill existing customer commitments or attract and retain new customers.
We may be required to reduce our prices to compete successfully, or we may incur increased or unexpected costs, which could have a material adverse effect on our operating results and financial condition.
The intensely competitive market in which we conduct our business may require us to reduce our prices, which could negatively impact our operating results. Our market is highly fragmented with numerous companies providing one or more competitive offerings to our marketing and advertising platform. New entrants seeking to gain market share by introducing new technology, products or services may make it more difficult for us to sell our products and services, and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share or expected market share, any of which may significantly harm our business, operating results and financial condition.
Moreover, we may experience cost increases or unexpected costs which may also negatively impact our operating results, including increased or unexpected costs related to:
the implementation of new data centers and expansion of existing data centers, as well as increased data center rent, hosting and bandwidth costs;
the replacement of aging equipment;
acquiring key technologies to support or expand our mobile marketing services solution; and
acquiring new technologies to comply with newly implemented regulations.
 
Any unanticipated costs associated with the foregoing items would have a material adverse effect on our business, operating results and financial condition.
Mergers or other strategic transactions by our competitors or mobile operator partners could weaken our competitive position or reduce our revenue.
If two or more of our competitors were to merge or partner, the change in the competitive landscape could adversely affect our ability to compete effectively. In addition, consolidation could result in new, larger entrants in the market. For example, in May 2010, Google, Inc. acquired Admob, Inc.; in January 2010, Apple, Inc. acquired Quattro Wireless, Inc.; in April 2011, Motricity, Inc. acquired Adenyo, Inc.; and Singapore Telecommunications Limited, or SingTel, announced its intention to acquire Amobee, Inc. in March 2012. Although none of these companies directly compete with our full range of services, the transactions are indicative of the level of interest among potential acquirers in the mobile marketing and advertising industry. Our direct competitors may also establish or strengthen co-operative relationships with their mobile operator partners, sales channel partners or other parties with whom we have strategic relationships, thereby limiting our ability to promote our products and services. Disruptions in our business caused by these events could reduce revenue and adversely affect our business, operating results and financial condition.

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The mobile advertising or marketing market may deteriorate or develop more slowly than expected, any of which could harm our business.
If the market for mobile marketing and advertising deteriorates, or develops more slowly than we expect, our business could suffer. Our future success is highly dependent on an increase in the use of mobile communications, the commitment of advertisers and marketers to mobile communications as an advertising and marketing medium, the willingness of our potential clients to outsource their mobile advertising and marketing needs, and our ability to sell our services to advertising agencies and brands. The mobile advertising and marketing market is relatively new and rapidly evolving. As a result, future demand and market acceptance for mobile marketing and advertising is uncertain. Many of our current or potential clients have little or no experience using mobile communications for advertising or marketing purposes and have allocated only a limited portion of their advertising or marketing budgets to mobile communications advertising or marketing, and there is no certainty that they will continue to allocate more funds in the future, if any. Also, we must compete with traditional advertising media, including television, print, radio and outdoor advertising, for a share of our clients' total advertising budgets.
Businesses, including current and potential clients, may find mobile advertising or marketing to be less effective than traditional advertising media or marketing methods or other technologies for promoting their products and services, and therefore the market for mobile marketing and advertising may deteriorate or develop more slowly than expected, or may develop using technology or functionality that we did not anticipate and may be unable to meet effectively and timely. Our current or potential customers may lose interest in our current or future solutions, or find that such solutions do not provide the benefits anticipated. These challenges could significantly undermine the commercial viability of mobile advertising and marketing and seriously harm our business, operating results and financial condition.
If we fail to detect click fraud or other invalid clicks on ads, we could lose the confidence of our advertiser clients, which would cause our business to suffer.
Our Exchange business relies on delivering positive results to our advertiser clients. We are exposed to the risk of fraudulent and other invalid clicks or conversions that advertisers may perceive as undesirable. Because of their smaller sizes as compared to personal computers, mobile device usage could result in a higher rate of accidental or otherwise inadvertent clicks by a user. Invalid clicks could also result from click fraud, where a mobile device user intentionally clicks on ads for reasons other than to access the underlying content of the ads. If fraudulent or other malicious activity is perpetrated by others, and we are unable to detect and prevent it, the affected advertisers may experience or perceive a reduced return on their investment. High levels of invalid click activity could lead to dissatisfaction with our advertising services, refusals to pay, refund demands or withdrawal of future business. Any of these occurrences could damage our brand and lead to a loss of advertisers and revenue.
Our business depends on our ability to collect, share, transfer, store, transmit and use data, and any limitation on our ability to collect, share, transfer, store, transmit and use this data could significantly diminish the value of our services and cause us to lose customers and revenue.
In our provision of mobile marketing and advertising services, we often collect or receive from publishers, advertisers and others, information about the mobile device user, including without limitation, interaction of the mobile device user with the content delivered, such as whether the user visited a landing page or watched a video. We may also be able to collect, or may be delivered, information about the user's mobile location and other information. As we collect and aggregate this data, including data provided by billions of ad impressions, we analyze it in order to optimize the services that we provide to customers.
The tracking of persistent and other identifiers, such as device identifiers, is important to our ability to optimize content and ad delivery and to track downloads and conversions and this ability is highly valued by our customers. The degree to which we will be able to continue doing so in compliance with third party carrier and platform rules and applicable laws and regulations may change.
Furthermore, even absent legal requirements, our customers and others in the mobile ecosystem might decide not to allow us to collect some or all of the data with respect to which we currently have access or might limit our use of this data. Any limitation on our ability to collect, share, transfer, store, transmit and use data about user behavior and interaction with mobile device content could make it more difficult for us to deliver effective mobile advertising and marketing programs that meet the demands of our customers and this could hurt our business. In addition, consumer advocacy groups and class action plaintiffs' lawyers are pursuing an array of theories challenging online and mobile behavioral advertising, as well as tracking of user behavior even without targeting of ads based thereon. If we become subject to such litigation the cost of defending such actions, and the potential of costly settlements or adverse judgments, could have a material negative impact on our business.
Interruptions, failures or defects in our data collection, mining, analysis and storage systems, as well as privacy, data protection

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and security concerns and regulatory restrictions regarding the collection, sharing, transfer, storage and use of consumer data, could also limit our ability to aggregate and analyze mobile device user data from our customers' marketing and advertising campaigns. If that happens, we may not be able to optimize our services for the benefit of our customers, which could make our services less valuable, and, as a result, we may lose customers and our revenue may decline.
Mobile connected device users may choose not to allow marketing or advertising on their devices.
The success of our business model depends on our ability to deliver content to consumers on their mobile connected devices. Targeted delivery is done primarily through analysis of data, much of which is collected on the basis of third parties such as mobile app publishers obtaining user-provided permissions. Users may elect not to allow data sharing for a number of reasons, such as privacy and security concerns. Third parties we rely on may elect to discontinue providing us data about their users as a result of users' concerns, or otherwise. Further, third parties we rely on, such as app publishers, might provide us data in a manner that is inconsistent with what they represented to their users or with applicable law and we could get brought into claims or controversies related thereto. In addition, the designers of mobile device operating systems are increasingly promoting features that allow device users to disable some of the functionality that facilitates tracking and targeting and content delivery, which may impair or disable our services on their devices, and device manufacturers may include these features as part of their standard device specifications. Companies may develop products that enable users to prevent ads from appearing on their mobile device screens. If any of these developments were to occur, our ability to deliver effective mobile advertising campaigns on behalf of our customers would suffer, which could adversely impact our operating results.
Our earnings may be adversely affected by fluctuations in foreign currency values.
The majority of the value of our revenue transactions is conducted using the euro, while the remaining is conducted using the U.S. dollar and currencies of other countries, and we incur costs in euro, British pound sterling, the U.S. dollar and other local currencies. Changes in the relative value of major currencies, particularly the U.S. dollar, euro and British pound sterling, can significantly affect revenue and our operating results. In 2010, approximately 77% of our revenue was payable in euros, and in 2011, approximately 66% of our revenue was payable in euros, although we expect this concentration to continue to decrease over time as the percentage of our U.S. dollar denominated revenue grows. This will likely result in euros comprising a smaller percentage of our revenue as we continue to increase sales to customers in geographies outside of Europe, with revenue payable in U.S. dollars or other currencies, as well as increase the number of contracts with European customers with revenue payable in U.S. dollars. As a majority of our costs and expenses are incurred in euros, any devaluation of the euro will positively impact our financial statements as reported in U.S. dollars, and any decline in the value of the dollar compared to the euro will result in foreign currency translation costs incurred by us. Unless the euro materially fluctuates, however, we do not expect fluctuations of the euro to have a material adverse effect on our results of operations or financial condition and the recent devaluation of the euro has not materially adversely impacted our financial results. Our foreign currency transaction gains and losses are charged against earnings in the period incurred. We currently do not enter into foreign exchange forward contracts to hedge certain transactions in major currencies and even if we wished to do so in the future, we may not be able, or it may not be cost-effective, to enter into contracts to hedge our foreign currency exposure.
Because of our revenue recognition policies, revenue may not be recognized in the period in which we contract with a customer, and downturns or upturns in sales may not be reflected in our operating results until future periods.
Our SaaS revenue consists of usage‑based fees recognized ratably over the period of the agreement and performance‑based fees recognized as transactions are completed, specific quantitative goals are met or a performance milestone is achieved. As a result, we may be unable to rapidly increase our revenue through additional sales in any period, as revenue for performance‑based fees will only be recognized if and when quantitative goals are met or a milestone is achieved. Revenue from our managed service arrangements is recognized either as the services are rendered for our time and material contracts or, for fixed price contracts, ratably over the term of the contract when accepted by the customer. Our license and software revenue is recognized when the license is delivered and on a percentage of completion basis for our services to customize and implement a specific software solution.
Because of these accounting policies, revenue generated during any period may result from agreements entered into during a previous period. A reduction in sales in any period therefore may not significantly reduce our revenue for that period, but could negatively affect revenue in future periods. In addition, since operating costs are generally recognized as incurred, we may be unable to quickly adjust our cost structure to match the impact of the reduction in revenue in future periods. Accordingly, the effect of significant downturns in our sales may not be fully reflected in our results of operations until future periods.

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Our geographically dispersed and historically rapidly growing business involves inherently complex accounting which if we fail to manage efficiently could adversely impact our financial reporting and business.
Since our inception, we have operated campaigns or provided marketing or advertising solutions to customers in over 50 countries and we have offices in multiple countries and we continue to expand our operations geographically. We must maintain internal accounting systems to quickly and accurately track our financial performance, including our complex revenue transactions. If we are unable to efficiently manage our accounting systems, our financial results could be materially misstated which in turn would impact both our financial reporting as well as have adverse reputational effects on our business.
We depend on the services of key personnel to implement our strategy. If we lose the services of our key personnel or are unable to attract and retain other qualified personnel, we may be unable to implement our strategy.
We believe that the future success of our business depends on the services of a number of key management and operating personnel, including Alex Moukas, our chief executive officer, Chris Kaskavelis, our chief operating officer, Sally J. Rau, our chief administrative officer, general counsel and corporate secretary, Menelaos Scouloudis, our chief commercial officer, and Wilson W. Cheung, our chief financial officer. We have at-will employment relationships with all of our management and other employees, and we do not maintain any key-person life insurance policies. Some of these key employees have strong relationships with our customers and our business may be harmed if these employees leave us. The loss of members of our key management and certain other members of our operating personnel could materially adversely affect our business, operating results and financial condition.
In addition, our ability to manage our growth depends, in part, on our ability to identify, hire and retain additional qualified employees, including a technically skilled development and engineering staff. We face intense competition for qualified individuals from numerous technology, marketing and mobile software and service companies. Competition for qualified personnel is particularly intense in many of the large, international metropolitan markets in which we have offices, including for example, London, New York and San Francisco. We require a mix of highly talented engineers as well as individuals in sales and support who are familiar with the marketing and advertising industry. In addition, new hires in sales positions require significant training and may, in some cases, take more than a year before they achieve full productivity. Our recent sales force hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business. Further, given the rapid pace of our expansion to date, we may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing, creative, operational and managerial requirements, or may be required to pay increased compensation in order to do so. If we are unsuccessful in attracting and retaining these key personnel, our ability to operate our business effectively would be negatively impacted and our business, operating results and financial condition would be adversely affected.
Activities of our customers and others in the mobile ecosystem we deal with could damage our reputation or give rise to legal claims against us.
The products, services and activities of our customers and others in the mobile ecosystem may not comply with federal, state and local laws, including, but not limited to, laws and regulations relating to mobile communications, privacy and/or data protection. Failure of these parties to comply with applicable laws or our policies or contract terms could damage our reputation and adversely affect our business, operating results or financial condition. We cannot predict whether our role in facilitating our customers' marketing or advertising activities would expose us to liability under these laws. Any claims made against us could be costly and time-consuming to defend. If we are exposed to this kind of liability, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of our services or otherwise expend resources to avoid liability.
We may potentially be subject to claims by third parties for content in the advertising we deliver on behalf of our customers if the music, artwork, text or other content involved violates the patent, copyright, trademark or other intellectual property rights of such third parties or if the content is defamatory, deceptive or otherwise violates applicable laws or regulations. Any claims or counterclaims could be time consuming, result in costly litigation or divert management's attention.
Software and components that we incorporate into our mobile marketing services may contain errors or defects, which could have an adverse effect on our business.
We use a combination of custom and third party software, including open source software, in building our mobile marketing and advertising platform. Although we test certain software before incorporating it into our platform, we cannot guarantee that all of the third party technology that we incorporate will not contain errors, defects or bugs. We continue to launch enhancements to Velti mGage, our integrated end-to-end mobile marketing and advertising platform, and we cannot guarantee

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any such enhancements will be free from errors, defects or bugs. If errors or defects occur in products and services that we utilize in our mobile marketing and advertising platform, it could result in damage to our reputation, lost revenue and diverted development resources.
Our use of open source software could limit our ability to provide our platform to our customers.
We have incorporated open source software into our platform. Although we closely monitor our use of open source software, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our platform to our customers. We may also face claims regarding ownership of, or demanding release of, source code, open source software and/or derivative works that were developed using such open source software. These claims could result in litigation, our could require us to seek licenses from third parties in order to continue offering our platform, to re-engineer our platform or discontinue use of portions of the functionality provided by our platform, any of which could have a material adverse effect on our business, operating results or financial condition.
We use data centers to deliver our platform and services. Any disruption of service or data breach at these facilities could harm our business.
We host our services and serve all of our customers from data center facilities located around the world, including in the U.K., India, China, the U.S., Russia and Greece. We also host a number of services via a vendor, such as the Amazon Web Services. We do not control the operations at these third party facilities. All of these facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, terrorist attacks, hackers, security failures, data breaches, power losses, telecommunications failures and similar events. They also could be subject to physical or electronic break-ins, computer viruses, denial of service attacks, sabotage, intentional acts of vandalism and other misconduct. The occurrence of a natural disaster or an act of terrorism, a decision to close the third party facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our services or the loss or compromise of data. Although we maintain off-site tape backups of our customers' data, we do not currently operate or maintain a backup data center for any of our services, which increases our vulnerability to interruptions or delays in our service or the loss or compromise of data. Interruptions in our services or data compromise or loss might harm our reputation, reduce our revenue, cause us to incur financial penalties, subject us to potential liability and cause customers to terminate their contracts.
We may have future exposure to greater than anticipated tax liabilities, and we could owe significant taxes even during periods when we experience low operating profit or operating losses.
Our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions where we have lower statutory tax rates and higher than anticipated in jurisdictions where we have higher statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities or changes in tax laws, regulations, accounting principles or interpretations thereof. For example, the Bailiwick of Jersey, our jurisdiction of organization, is currently conducting a review of its corporate tax regime in light of suggestions of some European Union member states that Jersey's corporate tax regime may be in conflict with the spirit of the European Union Code of Conduct on Business Taxation. While it is anticipated that any change in the Jersey corporate tax regime would not affect us due to our tax residency in Ireland, we cannot assure shareholders that we would not be impacted by changes in Jersey or Irish tax laws and that such changes would not materially impact our effective tax rates. In addition, Ireland, where we are tax resident, continues to review certain of its tax provisions, and there have been some concerns that Ireland's 12.5% corporate tax rate could rise as a result of recent economic and budgetary issues facing the Irish government. Any increase in the Irish corporate tax rate, if adopted, could have an adverse impact on our financial results. In addition, there is a risk that amounts paid or received under arrangements between our various international subsidiaries in the past and/or the future could be deemed for transfer tax purposes to be lower or higher than we previously recognized or expected to recognize. Our determination of our tax liability is always subject to review by applicable tax authorities. Any adverse outcome of such a review could have a negative effect on our operating results and financial condition. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment, and there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made. Certain combinations of these factors could cause us to owe significant taxes even during period when we experience low income before taxes or loss before taxes.
If we were classified as a passive foreign investment company, there would be adverse tax consequences to U.S. holders of our ordinary shares.
If we were classified as a “passive foreign investment company” or “PFIC” under section 1297 of the Internal Revenue Code,

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of 1986, as amended, or the Code, for any taxable year during which a U.S. holder holds ordinary shares, such U.S. holder generally would be taxed at ordinary income tax rates on any gain realized on the sale or exchange of the ordinary shares and on any “excess distributions” (including constructive distributions) received on the ordinary shares. Such U.S. holder could also be subject to a special interest charge with respect to any such gain or excess distribution.
We would be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which either (i) at least 75% of our gross income is passive income or (ii) on average, the percentage of our assets that produce passive income or are held for the production of passive income is at least 50% (determined on an average gross value basis). We were not classified as a PFIC for fiscal year 2011 or in any prior taxable year. Whether we will, in fact, be classified as a PFIC for any subsequent taxable year depends on our assets and income over the course of the relevant taxable year and, as a result, cannot be predicted with certainty. In particular, because the total value of our assets for purposes of the asset test will be calculated based upon the market price of our ordinary shares, a significant and sustained decline in the market price of our ordinary shares and corresponding market capitalization relative to our passive assets could result in our being classified as a PFIC. There can be no assurance that we will not be classified as a PFIC in the future or the Internal Revenue Service will not challenge our determination concerning PFIC status for any prior period.
Continuing unfavorable global economic conditions could have a material adverse effect on our business, operating results and financial condition.
Unfavorable economic conditions in the financial and credit markets in the U.S., Europe and Asia has led to a global economic slowdown, with the economies of the U.S. and Europe showing continued signs of weakness. If these economies weaken further or fail to improve, our customers may reduce or postpone their marketing and advertising spending, which could materially adversely affect our business, operating results and financial condition.
Risks Related to the Mobile Communications Industry
Changes in the wireless communications industry may adversely affect our business.
The wireless communications industry may experience significant growth and change which could adversely affect our business. Technologies such as 4G mobile broadband, Wi-Fi, worldwide interoperability for microwave access, or WiMAX, and voice over Internet protocol, or VOIP, are challenging existing wireless communication technologies. We believe we will be able to adapt to future technological changes; however, in order to do so, we may require significant investment in and time and effort in order to keep pace with such technological innovation. This could have an adverse effect on our business, operating results and financial condition.
Our business practices with respect to data could give rise to liabilities or reputational harm as a result of governmental regulation, legal requirements or industry standards relating to consumer privacy and data protection.
In the course of providing our services, we collect, share, transfer, use, transmit and store information related to mobile devices and their users, including sometimes a device's geographic location, for the purpose of delivering targeted lads to the user of the device. Federal, state and foreign laws and regulations govern the collection, use, retention, sharing and security of data, including personal data that we collect across our mobile marketing and advertising platform. We strive to comply with all applicable laws, regulations, policies and legal obligations relating to privacy and data protection. However, it is possible that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and/or may conflict with other rules or our practices. Furthermore, consumer data tracking and targeting is a developing business and the laws relating to it are also developing. It is unclear how existing laws that were passed before these practices and related technologies will be applied to us or what new laws and regulations may be passed. Any failure, or perceived failure, by us to comply with applicable U.S. federal, state, or laws in any other countries including laws and regulations regulating privacy, data protection or consumer privacy, could result in proceedings or actions against us by governmental entities or others.
The regulatory framework for privacy issues worldwide is evolving, and various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices, including some directed at the mobile industry in particular. It is possible that new laws and regulations will be adopted in the United States and/or in other countries, or existing laws and regulations may be interpreted in new ways, that would affect our business, particularly with regard to location-based services and collection, sharing or use of data to track users and/or target ads and communication with consumers via mobile devices.
The U.S. government, including the Federal Trade Commission and the Department of Commerce, has announced that it is reviewing the need for greater regulation of the collection of consumer information, including regulation aimed at restricting some

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targeted advertising practices. The Federal Trade Commission has also proposed revisions to the Children's Online Privacy Protection Act, or COPPA, that could, if adopted, create greater compliance burdens on us and/or third parties we work with (e.g. publishers). In addition states may pass new laws or interpret existing laws that could create burdens on mobile advertising providers.
As we expand our operations globally, compliance with regulations that differ from country to country may also impose substantial burdens on our business. In particular, the European Union has traditionally taken a broader view as to what is considered personal information (e.g. device identifiers) and has imposed greater obligations under data protection laws and regulations. In addition, individual EU member countries and/or their regulatory bodies, including data protections authorities, have had discretion with respect to their interpretation and implementation of the regulations, which has resulted in variation of privacy standards from country to country. New EU proposals, if implemented, may result in a greater compliance burden if we deliver ads to mobile device users in Europe. Complying with any new regulatory requirements could force us to incur substantial costs or require us to change our business practices in a manner that could compromise our ability to effectively pursue our growth strategy.
In addition to compliance with government regulations, we voluntarily participate in several trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct addressing the provision of location-based services, delivery of promotional content to mobile devices, and tracking of device users or devices for the purpose of delivering targeted advertising. We comply with wireless carrier technological and other requirements for access to their customer's mobile devices. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices or in conflict with the laws and regulations of U.S. or international regulatory authorities.
Changes in government regulation of the wireless communications industry may adversely affect our business.
Depending on the products and services that they offer, mobile data service providers are or may be subject to regulations and laws applicable to providers of mobile, Internet and VOIP services both domestically and internationally. In addition, the application of existing domestic and international laws and regulations relating to issues such as user privacy and data protection, defamation, pricing, advertising, taxation, gambling, sweepstakes, promotions, billing, real estate, consumer protection, accessibility, content regulation, quality of services, telecommunications, mobile, television and intellectual property ownership and infringement to wireless industry providers and platforms in many instances is unclear or unsettled. Further, the application to us of existing laws regulating or requiring licenses for certain businesses of our advertisers can be unclear.
It is possible that a number of laws and regulations may be adopted in the countries where we operate that may be inconsistent and that could restrict the wireless communications industry, including laws and regulations regarding lawful interception of personal data, taxation, content suitability, content marketing and advertising, copyright, distribution and antitrust. Furthermore, the growth and development of the market for electronic storage of personal information may prompt calls for more stringent consumer protection laws that may impose additional burdens, including costs on companies such as ours that store personal information. We anticipate that regulation of our industry will increase and that we will be required to devote legal and other resources to address this regulation. Changes in current laws or regulations or the imposition of new laws and regulations regarding the media and wireless communications industries may lessen the growth of wireless communications services and may materially reduce our ability to increase or maintain sales of our mobile marketing services. We may incur substantial liabilities for expenses necessary to investigate or defend such litigation or to comply with these laws and regulations, as well as potential substantial penalties for any failure to comply. Compliance with these laws and regulations may also cause us to change or limit our business practices in a manner adverse to our business.
A number of studies have examined the health effects of mobile device use, and the results of some of the studies have been interpreted as evidence that mobile device use causes adverse health effects. The establishment of a link between the use of mobile devices and health problems, or any media reports suggesting such a link, could increase government regulation of, and reduce demand for, mobile devices and, accordingly, the demand for our mobile marketing services, which could harm our business, operating results and financial condition.
The gathering, transmission, storage and sharing or use of consumer data could give rise to liabilities or additional costs of operation as a result of governmental regulation, legal requirements, civil actions or differing views of personal privacy rights.
We collect, use, transfer, share, transmit and store a large volume of consumer data, including personal information, in the course of providing our services. Federal, state and iforeign laws and regulations govern the collection, use, retention, sharing and security of data that we receive from our customers, their users and third parties. Any failure, or perceived failure, by us to comply with applicable U.S. federal, state, European Union or other international privacy, data protection or consumer

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protection‑related laws, regulations or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business, operating results and financial condition. Additionally, we may also be contractually liable to indemnify and hold harmless our customers or others from the costs or consequences of inadvertent or unauthorized collection, use or disclosure of their customers' personal data which we store or handle as part of providing our services or otherwise relating to our data practices.
The interpretation and application of privacy, data protection and data retention laws and regulations are currently unsettled in the U.S. and internationally, particularly with regard to location‑based services, use of customer data to track users and/or target advertisements and communication with consumers via mobile devices. New laws such as the newly proposed European Data Protection Regulation have been proposed in various locations, further restricting the right to use personal data. Such laws may be interpreted and applied inconsistently from country to country and inconsistently with our current data protection policies and practices. Complying with these varying international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business, operating results or financial condition.
As privacy and data protection have become more sensitive issues, we may also become exposed to potential liabilities as a result of differing views on the privacy of personal information. These and other privacy concerns, including security breaches, could adversely impact our business, operating results and financial condition.
Risks Related to Our Ordinary Shares
Our ordinary shares are issued under the laws of Jersey, which may not provide the level of legal certainty and transparency afforded by incorporation in a U.S. state.
We are organized under the laws of the Bailiwick of Jersey, a British crown dependency that is an island located off the coast of Normandy, France. Jersey is not a member of the European Union. Jersey legislation regarding companies is largely based on English corporate law principles. However, there can be no assurance that Jersey law will not change in the future or that it will serve to protect investors in a similar fashion afforded under corporate law principles in the U.S., which could adversely affect the rights of investors.
A change in our tax residence could have a negative effect on our future profitability.
Although we are organized under the laws of Jersey, we are resident in Ireland for Irish and Jersey tax purposes. It is possible that in the future, whether as a result of a change in law or the practice of any relevant tax authority or as a result of any change in the conduct of our affairs following a review by our directors or for any other reason, we could become, or be regarded as having become, a resident in a jurisdiction other than Ireland. Should we cease to be an Irish tax resident, we may be subject to a charge to Irish capital gains tax on our assets and to unexpected tax charges in other jurisdictions on our income or net profit. Similarly, if the tax residency of any of our subsidiaries were to change from their current jurisdiction for any of the reasons listed above, we may be subject to a charge to local capital gains tax on the assets.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
We are a "foreign private issuer," as such term is defined in Rule 405 under the Securities Act, and therefore, we are not required to comply with all the periodic disclosure and current reporting requirements of the U.S. Securities Exchange Act of 1934, as amended, and related rules and regulations. Under Rule 405, the determination of foreign private issuer status is made annually on the last business day of an issuer's most recently completed second fiscal quarter and, accordingly, our most recent determination was made on June 30, 2011. We expect that we will continue to be a foreign private issuer as of June 30, 2012.
In the future, we would lose our foreign private issuer status if a majority of our shareholders and a majority of our directors or management are U.S. citizens or residents. If we were to lose our foreign private issuer status, we would have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders would become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. We would also be required to file periodic reports and registration statements on U.S. domestic issuer forms with the U.S. Securities and Exchange Commission, or SEC, which are more detailed and extensive than the forms available to a foreign private issuer. As a result, the regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs.

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U.S. shareholders may not be able to enforce civil liabilities against us.
A number of our directors and executive officers and a number of directors of each of our subsidiaries are not residents of the U.S., and all or a substantial portion of the assets of such persons are located outside the U.S. As a result, it may not be possible for investors to effect service of process within the U.S. upon such persons or to enforce against them judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the U.S. We have been advised by our Jersey solicitors that there is doubt as to the enforceability in Jersey of original actions, or in actions for enforcement of judgments of U.S. courts, of civil liabilities to the extent predicated upon the federal and state securities laws of the U.S.

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ITEM 4. INFORMATION ON THE COMPANY
4.A. History and Development of the Company
Velti plc's executive offices are located at:
First Floor, 28-32 Pembroke Street Upper
Dublin 2, Republic of Ireland
Attn: Sally J. Rau, Corporate Secretary
353 (0) 1234 2676
Our registered agent in the United States is:
Velti USA, Inc.
150 California Street
San Francisco, California 94111
Attn: Sally J. Rau, Chief Administrative Officer and General Counsel
(415) 315‑3400
Velti plc's Fiscal Year ends December 31.
Velti plc is incorporated under the laws of the Bailiwick of Jersey, the Channel Islands.
On May 3, 2006, Velti was first admitted and trading commenced in its ordinary shares on the Alternative Investment Market of the London Stock Exchange, or AIM. On January 28, 2011, our ordinary shares commenced trading on the NASDAQ Global Select Market, under the symbol “VELT.” We delisted and canceled our shares for trading on AIM as of May 3, 2011 and currently trade only on the NASDAQ Global Select Market. On June 14, 2011, we completed a follow on offering in the U.S. and issued an additional 9,474,275 shares for net proceeds of $136.8 million.
On October 4, 2011, we completed the acquisition of Air2Web, Inc. or Air2Web,  a provider of mobile customer relationship management (mCRM) solutions in the United States and India for many of the world's most trusted consumer brands. In connection with the merger, we paid approximately $19.0 million in cash for all the outstanding common stock of Air2Web.
On November 14, 2011, we completed the acquisition of Mobile Interactive Group Limited, or MIG, the UK's largest mobile marketing company. In connection with the acquisition, we will pay a minimum consideration of $35.2 million, including $25.2 million of cash that we paid at closing. We will pay $5.0 million in deferred consideration in April 2012, $2.5 million in November 2012 and $2.5 million in May 2013. Depending on MIG's performance, we may pay up to an additional $27.0 million in 2013. Payment may be made in cash or Velti ordinary shares.
On January 23, 2012 we completed the acquisition of the remaining equity interests of CASEE, the largest mobile ad exchange and mobile ad network in China. We paid approximately $8.4 million in cash for the remaining interest in CASEE. In addition, based upon the financial performance of CASEE, we may be required to pay total contingent consideration of up to $20.3 million during 2012 and 2013 in a mix of cash or shares at our discretion.

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4.B.  Business Overview
Description of the nature of the Company's operations and principal markets
Velti was founded 12 years ago to develop and execute highly interactive campaigns with subscribers for mobile operators. Our goal is to change how companies initiate, develop, and deliver advertising and marketing initiatives across the mobile channel. More than a decade later, our focus and reach have expanded dramatically.
We are the leading global provider of mobile marketing and advertising technology and solutions that enables brands, advertising agencies, mobile operators, and media to implement highly targeted, interactive, and measurable campaigns by communicating with and engaging consumers via their mobile devices. Our platform, called Velti mGage, allows our customers to use mobile and traditional media (such as television, print, radio and outdoor advertising) to target, reach, and engage consumers through mobile internet applications; convert consumers into their customers; and continue to actively manage the relationship through the mobile channel.    
Our customers have diverse needs - yet all have a common goal: reaching consumers with marketing and advertising on mobile devices. Our mGage platform provides agencies and companies a comprehensive set of tools including analytics and reporting, and business intelligence for consolidated media management, simplified mobile asset production, and highly engaging messaging campaigns. For those who want professional assistance in achieving mobile marketing and advertising objectives, our services organization offers expert help in developing strategies, programs, and hosting services. From account management to creative production to ad ops and technical support, we support our enterprise customers through a self-service or managed services model that augments customers' existing staff to support mobile initiatives.
With close to 1000 employees globally, we are able to provide a wide breadth of knowledge and best practices regarding different markets and environments and can support companies around the world in delivering innovative mobile advertising and marketing campaigns that reach their consumers and drive increased awareness, loyalty and engagement with their brand.
Corporate Highlights
During 2011 we continued to expand our presence across numerous geographies. We have had considerable success throughout the United States and Asia, diversifying our global business. Our revenue growth was characterized by a significant increase in customers across brands and advertising agencies, with existing customers spending 44% more dollars than in 2010 for Velti software solutions that allow the customer to access the mobile market in a targeted and measurable way. Our platforms now provide marketers the ability to reach more than 4.3 billion consumers in 67 countries and our customers have already connected with 1.4 billion consumers. During 2011, our 1,232 customers executed 4,114 campaigns on our platforms. The Americas is our fastest growing region with $41.1 million of 2011 revenue (compared to $9.2 million in 2010), representing 22% of our total revenues (compared to 8% in 2010). We increased our SaaS revenue contribution to 73% of total revenue for the fiscal year ended December 31, 2011, compared to 66% for the fiscal year ended December 31, 2010.
During the fourth quarter and fiscal year 2011, we:
Completed the acquisitions of both Air2Web, Inc., or Air2Web, and Mobile Interactive Group Ltd., or MIG, significantly expanding our geographic presence in the United Kingdom and India, and simultaneously expanding the mGage Platform's product offering with mobile customer relationship management, mobile commerce and mobile billing solutions;
Expanded our global presence, opening new offices in high growth markets, including, among others Brazil, Dubai, and Turkey;
Achieved numerous new customer wins, including many blue chip brands; facilitated, via our mGage platform a large scale mobile marketing campaign in the United States; further expanded our expertise in emerging and developing markets, successfully completing a 16 country mobile marketing campaign for a customer in Asia; and established a long-term partnership with the world's 3rd largest telecom operator by subscribers;
Launched a public beta of 5ml, an HTML5 authoring tool that enables simple, efficient creation of rich media enabled mobile ad units and landing pages utilizing the mobile device's native web browser functionality; and
Won the prestigious 2011 OMMA (Online Media, Marketing and Advertising) Global Award for our Integrated Online Campaign for National Geographic's documentary, "The Last Lions," resulting in over a quarter million mobile consumers engaged.


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Our Velti Solutions and Technology
We believe our integrated, easy-to-use, end-to-end software platform is the most extensive mobile marketing and advertising campaign management platform in the industry. Our platform further enables brands and their global advertising agencies to plan, execute, monitor, and measure mobile marketing and advertising campaigns in real time throughout the campaign lifecycle. We generate revenue from our software as a service (SaaS) model, from licensing our software to customers and from providing managed services to customers.
We believe that mobile is fundamentally altering advertising and marketing, providing companies with a tremendous opportunity to build brand awareness and reach customers in exciting new ways. The popularity of mobile devices has opened a critical channel for marketers, but has created challenges for companies and agencies supporting brands. We help solve these challenges by becoming a trusted partner for mobile initiatives. Some of these challenges include the following:
Continued Mobile fragmentation. Mobile is being re-defined to become any device that is internet enabled, allowing buyers with unprecedented reach. Unfortunately, that reach comes at a cost, with multiple operating system platforms, countless APIs, and thousands of devices, building an efficient mobile marketing strategy can be daunting.
Few Mobile Platforms will win. The mobile landscape is fragmented with multiple touch points and solutions. End to end platforms will lead the industry by creating the glue that solves the fragmentation issues and reduces the complexity of mobile to buyers. The Velti mGage Platform is in a unique market to solve these needs.
Limited visibility can be crippling. Mobile advertising and marketing initiatives often involve distributed teams, from media planners and creative resources to account executives. Being able to see what is happening across the campaign lifecycle and stages is critical for successful outcomes.

Our technology platform, Velti mGage, is a comprehensive technology platform that enables marketers to buy media, create mobile assets, measure results and drive engagement. With mGage, marketers gain vital insights that help to inform future mobile interactions and campaigns. Our capabilities include the following:
mGage for Mobile Advertising. Velti incorporates the activities related to buying ad inventory with the Media Console - a rich planning tool that allows marketers and their agencies to discover publishers, define audience segmentation, and build practical media plans for mobile. Both buyers and sellers can access the Velti Exchange to find the most optimal match for advertising inventory.
mGage for Mobile Marketing and Mobile CRM. Velti provides an innovative set of tools needed to produce assets and create highly interactive rich media campaigns. mGage includes more than 70 different templates for driving results in different vertical markets, helping brands engage with consumers, and manage a long-term relationship with them through the mobile channel.
mGage for Data & Analytics. Velti captures critical data about the performance of mobile campaigns, including anonymous data about individual consumer preferences, demographics, and behavioral characteristics. Dashboards and analytics provide key metrics that marketers can use to boost their efforts throughout the marketing cycle, while optimization and predictive analytics capabilities improve the performance of campaigns.

The Velti Solution
Our proprietary Velti mGage platform addresses the challenges in delivering global, comprehensive and cost-effective mobile marketing and advertising campaigns. We believe we are the largest independent, end-to-end mobile marketing and advertising campaign platform provider. We have made significant investments in our platform in order to integrate and manage multiple carrier platforms, multiple standards, and support for thousands of types of mobile devices, including smartphones and mobile tablet computers. Our open architecture allows third-party solutions to be seamlessly integrated into our platform, enabling the integration, comparison and analysis of user activity data from different providers. Our breadth of functionality and global reach enable us to be a leading one-stop-shop for brands, advertising agencies, mobile operators and media companies looking to deliver multi-national mobile marketing and advertising campaigns without requiring significant resources coordinating various, local single point solution providers.
For marketers and agencies, we provide media buying and conversion tracking tools, creative and campaign creation tools, and platforms for retention and loyalty campaigns.
Media Management. Sales of smartphones and tablets continue to skyrocket, causing a dramatic shift in consumer behavior. As more people spend more time on mobile devices, mobile advertising is now a vital part of every customer acquisition and retention program. Velti enables effective media set up and management for publishers and media outlets to integrate mobile into a broader media and advertising strategy. Our mGage platform enables customers who want to plan their own campaign to

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build and structure mobile campaigns more effectively using existing resources; and our expertise in mobile media research and planning enables us to provide managed services to customers who want us to do it for them. We help customers streamline media buying to improve efficiency by finding an optimal match between the customer's target audience and the right publishers for ads and media, and for agencies and media houses in need of a single platform to help manage the buying process, our software enables them to better manage publishers, create RFPs, and execute buys for their clients.
Our platform allows brands to reach the right person at the right time through targeting technology using the following attributes: location, language, mobile carrier, handset type, mobile operating platform, content type and other factors. To increase campaign effectiveness, we allow setting of frequency caps, targeting based on time of day, and planning for future campaigns utilizing historical data. Marketing efforts and mobile advertising campaigns can be tracked on one platform for comprehensive insight into activity and interactions.
Creative Creation. Adding mobile to a brand awareness strategy requires development for and support of multiple operating system platforms and devices, as well as development of different ad formats and interaction types on each platform. We enable the rapid development and deployment of landing pages and mobile sites with pre-designed templates and tools. Our 5ML interface is highly interactive, and enables the production of mobile sites, landing pages, and videos once, with delivery across HTML-compatible platforms and devices, reducing development costs, maintenance and effort.
Campaign Creation & Campaign Management. Our integrated campaign management tools provides customers with a comprehensive dashboard allowing incorporation of mobile sites, landing pages, videos, and other assets into a broader advertising and marketing campaign for a more natural, intuitive workflow and tailoring to pre-defined segments for greater impact. Further customization of campaigns is possible by configuring start/end dates and targeting interactions by time zones and countries.
Our mobile marketing campaign capabilities enable our customers to send messages that resonate with their customers using campaigns that are highly interactive and that engage the consumer. Campaigns can be developed quickly with templates that enable rapid set-up or with Velti's wizard-based UI they can be storyboarded and deployed almost immediately. We provide the ability to initiate cross-channel campaigns such as text-to-win contests, quizzes, and sweepstakes, as well as loyalty campaigns such as mobile coupons, specials deals, and mobile communities.
Data and Analytics
All of our customers benefit from our data and analytics reporting capabilities. Velti's main goal is to turn data into actionable business insights that allow our customers to increase the effectiveness of their mobile marketing and advertising campaigns. Getting the right metrics and insights at the right time can make all the difference in the success of our customers' campaigns and programs. Velti's mGage captures data and analytics across all marketing efforts, with a dashboard-driven interface that delivers marketing insights to enable customers to make informed, data-driven decisions. We allow customers to capture insights across traditional and mobile advertising and marketing programs and campaigns, and integrate all data into a single place, allowing customers to make strategic, informed decisions in their marketing efforts. We provide pre-defined reports as part of our self-service option as well as customized reporting solutions and alerts to ensure timely, repeatable insights that map to a campaign cycle. Customers can track the campaign as it progresses and make real time changes to correct under-performing media and enhance effective solutions.
Our Platform
The Velti technology platform, Velti mGage, addresses all aspects of mobile marketing, from granular targeting and optimization, buying media, building a dialogue with the target audience, and converting the target audience into customers. Our platform can then track and measure the performance of the entire interaction in order to continue the dialogue and secure the consumer's loyalty. Velti mGage is built on an extensible and component driven architecture designed to handle the full life-cycle of mobile marketing and advertising, including campaign and media optimization, ad serving and routing, mobile websites, marketing, CRM, analytics and reporting requirements, in one end-to-end platform.
Velti mGage Visualize (Mobile Media Conversion Reporting). The Velti mGage Visualize provides the ability to track the performance of all mobile, traditional, and Internet-based media campaigns and enables the execution and optimization of campaigns over the campaign lifecycle and across a variety of different mobile media, including text, mobile Internet, video, audio and mobile applications such as games. It can also track the effectiveness of each media buy to determine the cost per acquisition.
Velti mGage Reach.    Velti mGage Reach manages advertising inventories and targeted media buys for advertisers and

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publishers. Velti mGage Reach includes the mGage Mobclix Exchange:
Velti mGage Mobclix Exchange.    The Velti mGage Exchange allows brands, advertising agencies, mobile operators and media companies, as well as advertisers and publishers, to manage mobile advertising campaigns and advertising inventory on a high performance mobile ad server through an intuitive online graphical user interface. Our advertising insertion technology enables the delivery of targeted, personalized advertisements into any media format, including text, mobile websites, video, audio and mobile applications such as games, to any mobile device. Inventory management allows publishers to present their inventory to advertisers in the manner most likely to maximize revenue and enable advertisers to reach their target audience and achieve their campaign goals using the most effective content. The Velti mGage Mobclix Exchange enables our customers to optimize yield by managing mobile advertising inventory across multiple sales channels. It also manages the time, location and amount of inventory to be allocated from the publisher to an advertiser based on its selected criteria. It enables cross-medium services using the same content, thus facilitating convergence and optimizing content usage. It also enables management of inventory allocation and control of the acquisition and maintenance of advertising content, allowing the publisher to control terms and access to advertising inventory. Additionally, content owners and editors can easily add and update content. The Velti mGage Mobclix Exchange manages customer profiling data and provides the ability for the publisher to manage access to personalization data by the advertising networks.

Velti mGage Create (Mobile Site Builder and Content Management).    The Velti mGage Create enables the design and development of mobile websites, mobile portals, rich media creation, landing pages and micro-sites via a drag and drop graphical user interface. Mobile website pages are designed once, and dynamically rendered to optimize pages for individual devices without the need to repeatedly optimize the same content across thousands of types of mobile devices and networks. Mobile sites can be developed to enable activities such as targeted views of customer product information on mobile applications, download mobile content, register to join a mobile club, click through promotional banners to find out about sponsored activities or engage in sponsored incentives and sweepstakes. In addition, content can be shared across various media channels and adapted for mobile use, and is easily integrated with Velti's ad serving and marketing products. Velti mGage Create is integrated with Velti mGage Measure to provide the customer with detailed information and metrics regarding consumer response to the website or portal.
Velti mGage Interact:    Velti mGage Interact provides core customer relationship management functionality to enable brands and advertising agencies to build engagement with their customers. Velti mGage Interact consists of the following components:
Communicate, which enables non-technical brand marketers or agency staff to quickly create, execute and monitor mobile marketing and advertising campaigns such as, communities and loyalty clubs, using a template-driven solution. It offers multiple ready-to-use campaign templates that enable the launch of different mobile campaign activities quickly. The Velti mGage Communicate supports key mobile channels and includes a suite of marketing activities.

mCRM, which allows global brands and advertising agencies, to create and manage a customer opt-in database for advertising, data mining and customer relationship management, or CRM, purposes. The Velti mGage Interact's CRM capability provides a mechanism for tracking customer information by enabling campaign management functions including:

identifying target groups within the customer base according to selected criteria or demographics;
sending mobile campaign-related material (such as information on special offers) to selected recipients; and
tracking, storing and analyzing campaign statistics, including tracking responses and analyzing trends.

Play. Velti Play enables brands, broadcasters and mobile operators to extend tried and tested mass-participation concepts to social media and mobile apps. The platform is fully integrated with Facebook and Apple's direct billing platforms and therefore provides instant global reach. mGage Play supports cross-platform functions including:
TV viewer participation;
Points-based loyalty campaigns;
Gamification of consumer CRM interaction and
Commercialization through Facebook Credits and Apple iTunes.
Velti mGage Measure.  Velti mGage Measure provides end-to-end tracking and reporting of consumer behavior and engagement across media platforms, including traditional, online and mobile. Customers are able to view the entire breadth of consumer engagement and then make data-driven decisions to refine their execution of marketing and advertising campaigns.

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Velti mGage Measure provides extensive reports in the form of personalized, dynamically configured dashboards, overview data and graphs in an intuitive display of key site metrics, regardless of the mobile website building tool used by the customer, designed to provide information on unique visitor identification, handset capabilities, geography and network recognition.
Customers
Velti's platforms provide marketers the ability to reach more than 4.3 billion consumers in 67 countries and our customers have already connected with 1.4 billion consumers. During 2011, our 1,232 customers executed 4,114 campaigns on our platforms. Our customers include agencies that belong to all of the 'big four' agency holding groups . Brands may engage us either directly, or through an advertising agency. In circumstances where an advertising agency is involved, the advertising agency may either be responsible for our engagement or the brand may have directed its advertising agency to use our services. We work with nearly all major advertising agencies and our relationships with advertising agencies generate projects for us worldwide and provide scalability to our sales effort. For our mobile operator customers, who tend to have more mature mobile marketing strategies, we enable the operator to create new areas of revenue growth, as well as work with the operator as a brand to reduce customer churn and increase their average revenue per user. We work with marketers, brands and agencies, financial institutions, publishers and media and mobile operators.
Geographic Revenue Concentration
We conduct our business primarily in three geographical areas: Europe, Americas, and Asia/Africa. The following table provides revenue by geographical area. Revenue from customers for whom we provide services in multiple locations is allocated according to the location of the respective customer's domicile. Revenue from customers for whom we provide services in a single or very few related locations is allocated according to the location of the respective customer's place of operations.
Revenue:
 
Year Ended December 31,
 
 
2011
 
2010
 
2009
 
 
(in thousands, except percentages)
Europe:
 
 
 
 
 
 
 
 
 
United Kingdom
 
$
37,758

20.0
%
 
$
34,105

29.3
%
 
$
14,655

16.3
%
All other European countries
 
86,318

45.6
%
 
55,299

47.6
%
 
53,446

59.4
%
Total Europe
 
124,076

65.6
%
 
89,404

76.9
%
 
68,101

75.7
%
Americas
 
41,114

21.7
%
 
9,150

7.9
%
 
4,049

4.5
%
Asia/Africa
 
24,012

12.7
%
 
17,715

15.2
%
 
17,815

19.8
%
Total revenue
 
$
189,202

100.0
%
 
$
116,269

100.0
%
 
$
89,965

100.0
%
 
 
 
 
 
 
 
 
 
 
We expect to continue to expand outside of Europe and anticipate that our geographic revenue concentration in Europe as a whole will decrease as a percentage of our total revenue.
Technology and Operations
Our proprietary technology platform is the cornerstone of our business and we believe it will continue to be a key differentiator for us. Our Velti mGage platform is built with a modular, distributed architecture which provides us considerable flexibility in deployment, and enables us to deploy individual software modules as a package or on a standalone basis. This in turn optimizes performance under various hardware and software configurations. Our highly scalable software solutions use a proprietary combination of commercially licensed, open source and custom programmed software, to optimize reliability, cost, efficiency, performance and scalability.
Hosting infrastructure.    Our information technology, or IT, infrastructure is based on a standard, commercially available hardware and includes virtualization technologies and enterprise class load balancers. We have designed and implemented a robust hosting infrastructure with a load-balanced cluster of application servers backed by redundant database servers to permit continuous uptime, and no downtime for maintenance and software upgrades. Our architecture allows components to be distributed between data centers for optimal performance and scalability, including cloud and traditional data-center configurations. Multiple database installations are segmented by geography, customer and application in order to provide additional scalability and flexibility, and to ensure compliance with applicable regulations and best practices regarding data collection and consumer privacy adopted by a number of countries that may restrict data collection and management.

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Data center facilities.    We outsource all of our data center facility management to third parties who host the actual servers and provide power and security in multiple data centers in each geographic location. This allows us to have redundant, duplicate systems without having to export personal consumer information across regulatory jurisdictions. We believe this is an important differentiator of our business. Not only do we maintain fully redundant hardware, but our data centers also have redundant power and connectivity. We contract with industry-recognized IT providers of enterprise-hosting solutions, customized managed-application services and remote operations services, including data centers in including data centers in Santa Clara, California; Secaucus, New Jersey; Dallas, Texas; London; and Athens. We also have data centers in Chennai, Mumbai and Beijing.
Competition
Although the market for mobile marketing and advertising solutions is relatively new, it is very competitive. We compete with companies of all sizes in select geographies that offer solutions that compete with single elements of our platform, such as mobile advertising networks, mobile ad serving and ad routing providers, mobile website and content creators, mobile payment providers, aggregators, providers of mobile publishing and application development, SMS aggregators or providers of mobile analytics. We compete at times with interactive and traditional advertising agencies that perform mobile marketing and advertising as part of their services to their customers.
As a result of industry developments, some of our competitors may in the future create an integrated platform with features similar to ours, for example, Google, Inc.'s acquisition of Admob, Inc., Apple, Inc.'s acquisition of Quattro Wireless, Inc., Motricity's acquisition of Adenyo, SingTel's announcement of its intention to acquire Amobee, and the entry of larger companies such as Nokia, AOL, Microsoft and Yahoo! into the mobile media markets. However, we do not directly compete with these companies as we believe we are the only provider of an integrated, end-to-end mobile marketing and mobile advertising platform with a significant global presence.
We believe that the key competitive factors that our customers use in selecting solutions include the availability of:
an integrated, scalable and relatively easy to implement platform that can expand the reach of their future campaigns;
solutions providing high quality functionality that meet their immediate marketing and advertising needs;
sophisticated analytics and reporting;
results or outcome-based pricing;
existing strategic relationships with customers globally;
high levels of quality service and support;
a sophisticated and financially stable provider with a proven track record; and
Over a decade of experience in mobile marketing and advertising.

We believe that we compete favorably on each of these factors. Our extensive experience managing global marketing and advertising campaigns, together with experienced professional services to implement and integrate these options globally, provides us with an advantage that many of our competitors lack.
The consolidation of our competitors offering point solutions into larger organizations with increased resources is a recent trend in the industry. The effects of such acquisitions on the market are still unclear.
Seasonality
Our business, as is typical of companies in our industry, is seasonal. This is primarily due to traditional marketing and advertising spending being heaviest during the holiday season while brands and advertising agencies often close out annual budgets towards the end of a given year. Seasonal trends have historically contributed to, and we anticipate will continue to contribute to fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.
Sales and Marketing
Our direct sales force is organized into two main customer categories, one selling to mobile operators and media, and the other selling to brands and advertising agencies, including financial institutions, as well as personnel focused on our bringing publishers into our global mobile media exchange. We are further organized along geographical regions for Europe, the Americas and the rest of the world. As of December 31, 2011, we had 288 employees engaged in sales, marketing and business development. As we evolve, in addition to continuing our focus on advertising agencies and mobile operators, we expect to further focus our sales efforts within brands by certain industry verticals, such as automotive, financial services and packaged goods, and to building a strong global sales force for advertising agencies and brands. Direct sales personnel are supported by pre-sales managers who provide technical expertise and in-depth product knowledge, as well as creative pre-sales teams.

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As part of our sales process, we typically explain the benefits of our platform and demonstrate our ability to deliver services to potential customers that meet their mobile marketing and advertising campaign goals. As a result, our sales cycle can be relatively long, and can vary significantly between different geographies and customer segments. Our customers may perform a pilot prior to full scale deployment, typically lasting one to three months. Major brands in particular generally have a rigorous, technology‑based sales process and complex decision‑making process, however, they are often less likely to switch incumbent vendors once one has been selected.
We have been able to cross-sell additional types of mobile marketing or advertising campaigns to existing customers, gradually implementing those campaigns that are successful on a global basis. We also developed a wide range of informal partnerships with global systems integrators and other local companies to increase our sales reach to new customers.
We conduct a variety of marketing programs, to enhance brand development and leverage our internal branding resources, and to create programs to educate customers. These activities include field marketing, product marketing and sales support through branding, trade advertisements, other online and print advertising, trade press, seminars and trade shows, and ongoing customer communications, as well as through our website, the Velti mGage portal and other print materials. Additionally, we participate in industry, customer and analyst events, and hold local events to better meet the needs of our customers, partners, and joint ventures, including speaking, exhibiting and sponsorship events with brands, agencies, mobile operators and media companies.
Government Regulation
Depending on the products and services that they offer, mobile data service providers are or may be subject to regulations and laws applicable to providers of mobile, Internet and voice over Internet protocol, or VOIP, services both domestically and internationally. In addition, the application of existing domestic and international laws and regulations relating to issues such as user privacy and data protection, defamation, pricing, advertising, taxation, gambling, sweepstakes, promotions, billing, real estate, consumer protection, accessibility, content regulation, quality of services, telecommunications, mobile, television and intellectual property ownership and infringement to wireless industry providers and platforms in many instances is unclear or unsettled. Further, the application to us of existing laws regulating or requiring licenses for certain businesses of our advertisers can be unclear.
It is possible that a number of laws and regulations may be adopted in the countries where we operate, which may be inconsistent and which could restrict the wireless communications industry, including laws and regulations regarding network management and device interconnection, lawful interception of personal data, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of the market for electronic storage of personal information may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours that store personal information. We anticipate that regulation of our industry generally will increase and that we will be required to devote legal and other resources to address this regulation.
We are subject to certain regulations and laws applicable to providers of Internet and mobile services both domestically and internationally. The application of existing domestic and international laws and regulations relating to issues such as user privacy and data protection, marketing, advertising, consumer protection and mobile disclosures in many instances is unclear or unsettled.
To date, we have earned a majority of our revenue in Europe and the U.S. However, we have the ability to conduct campaigns in over 60 countries and many of these have large economies outside of North America and Europe, including Brazil, Russia, India and China, or the so-called “BRIC” countries. Our revenue in countries outside of Europe and the U.S., both in an aggregate amount and as a percentage of our overall revenue, may grow substantially in the future. Each jurisdiction has unique regulatory bodies and levels of oversight. We anticipate that, while over time there may be a convergence of certain regulatory aspects, individual countries will continue to exercise substantial independent influence over mobile communications within their jurisdiction. The summary set forth below, while focusing in general on Europe and the U.S. is not intended to imply that regulation outside of these areas is not important to our business. Rather, we have found the issues that we present here to be generally applicable across jurisdictions, although the precise terminology and manner in which they are addressed may differ from country to country.
European Regulatory Environment
Member states of the EU regulate mobile marketing and advertising services both at the member state and EU levels. Member states generally need to transpose or apply legislation issued on the EU level (e.g. the Directives referred to below) in their national laws.

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At the EU level, there are various Directives which impact upon the regulation of mobile marketing and advertising generally and also Directives which control the use of electronic communications specifically.
European Marketing and Advertising. Directives which are applicable to the use of mobile advertising and marketing include the E-Commerce Directive (Directive 2000/31/EC) and the E-Privacy Directive (Directive 2002/58/EC).
The basic principle regarding direct marketing through electronic mail (such as e-mail, SMS, MMS, etc.) is the need to obtain the recipient's prior consent, i.e. the so-called "opt-in requirement." Furthermore, the Directives require advertisers to provide consumers with certain information, the scope of which may vary depending upon how a particular EU member state has implemented the Directive. Some member states have taken a strict approach in implementing the Directives, and require additional information to be provided when compared with the minimum requirements set out in the Directives.
European Electronic Communications. The EU has standardized regulatory practice further with Regulation 1211/2009 establishing the Body of European Regulators for Electronic Communications (or BEREC). BEREC became functional in 2010 and is tasked with the development and better functioning of the internal market for electronic communications networks and services by harmonizing and standardizing regulation of non-compliance with EU Electronic Communications Directives. BEREC has issued a Work Program for 2012, which includes tasks items such as international roaming, universal service provisions, access to special rate services, and next generation networks/access. BEREC's intent is to add transparency and clarity to the regulatory regime of the EU and ensure consistent application of EU Directives by the member states, while aiming to establish cooperation with regulatory authorities in regions outside the EU.
European e-Privacy. European standards can materially differ from those of the U.S. which may disproportionately affect us given that most of our business has historically been in Europe. For example, the use of data indicating the location of the user's mobile phone is strictly controlled by the E-Privacy Directive.
In addition, EU laws place restrictions on the use of cookies. These restrictions have been reviewed and amended by the European legislator with the Citizen's Rights Directive (Directive 2009/136/EC), which should be implemented into national law by member states by 25 May 2011. This Directive provides, among other things, that user consent (or an explicit opt-in) must be obtained before placing any cookie on a user's machine. An exception to the opt-in requirement exist for cookies which are solely used for carrying out the transmission of a communication over an electronic communications network, or which are strictly necessary to provide an information society service explicitly requested by the subscriber or user.
The Citizen's Rights Directive also introduced amendments to the E-Privacy Directive so as to ensure that member states would introduce criminal sanctions and increased fines for non-compliance by May 2011.
European Consumer Protection. Furthermore, the Unfair Commercial Practices Directive (Directive 2005/29/EC), which acts as a tool against aggressive or misleading business-to-consumer marketing, also has an impact on the mobile advertising and marketing sector. For example, "making persistent and unwanted solicitations by telephone, fax, e-mail or other remote media (except in circumstances and to the extent justified under national law to enforce a contractual obligation)" is considered as a commercial practice which is in all circumstances unfair. Implementation of the Unfair Commercial Practices Directive varies across member states.
In some cases self-regulating bodies impose codes for advertising, sales promotion and direct marketing to ensure that advertisements are legal, decent, honest and truthful. An example is the so-called “CAP Code” of the Advertising Standards Authority in the U.K., which ensures that advertisements are legal, decent, honest and truthful.
European Data Protection. European data privacy standards can materially differ from those of the U.S., which also may further disproportionately affect us. European data protection law defines “personal data” more broadly than in the U.S. In particular the European Data Protection Directive (Directive 95/46/EC), which serves as the foundation for each EU country's data protection law, does not require that an individual be named for data to qualify as “personal data” as “personal data” is defined as “any information relating to an identified or identifiable natural person” (“data subject”); an “identifiable person” is one who can be “identified, directly or indirectly, in particular by reference to an identification number or to one or more factors specific to his physical, physiological, mental, economic, cultural or social identity.”
These standards can be interpreted and applied in conflicting ways from country to country and in a manner inconsistent with our current data protection practices or specific U.S. regulations. In particular IP addresses and the use of cookies and beacons have been determined to be subject to EU data protection laws.
One of the requirements which is most relevant for the purposes of mobile marketing/advertising is that personal data shall be

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obtained only for one or more specified and lawful purposes, and shall not be further processed in any manner incompatible with that purpose or those purposes. This means that where a 'data controller' wishes to use customer information for a purpose other than originally intended (for example, to send them marketing information), then the consent of the individual will be required. For the avoidance of doubt, these rules are without prejudice to the general opt-in requirement for direct marketing imposed by the e-Privacy Directive.
Enforcement of EU data protection laws vary widely between member states.  Fines of millions of Euros have been imposed in Spain, and in the U.K. the legislation was changed in 2010 to introduce more severe fines for serious breaches.
In January 2012 the European Commission announced a comprehensive reform of the EU's 1995 data protection rules to strengthen online privacy rights and boost Europe's digital economy through the adoption of a single Regulation, which will have the effect of law in all member states and which will aim to do away with the current fragmentation caused by the Data Protection Directive and the costly administrative burdens assumed by businesses within the EU to comply with. The Regulation, according to the European Commission, will aim, among others, to reinforce individuals' rights, ensure a high level of data protection in all areas, ensuring proper enforcement of the rules and setting global data-protection standards.
While the Regulation will be automatically applicable to all 27 member states equally and will consequently reduce our costs of compliance, we anticipate that data protection rules will become stricter on businesses and more data subject friendly (i.e. the right of data subjects to be forgotten/have their personal data deleted from data bases, consent being explicit when required and not assumed, obligation of companies/organizations to report serious security breaches within 24 hours of occurrence, responsibility and accountability for those processing personal data etc.), which may have an impact on our ability to make use of our advertising and marketing solutions' to their full capacity and thus reduce their attractiveness to our customers within the EU and/or our ability to generate as much performance based revenue as anticipated.
Furthermore, the European Commission intends the Regulation to also apply to the processing of personal data of data subjects residing in the EU by data controllers established outside the EU, where the processing activities are related to the offering of goods or services to such data subjects in the EU or the monitoring of their behavior. This means that if our products and services are offered from countries outside the EU to consumers located within the EU, we will need to comply with the EU data protection laws nevertheless.
EU data protection laws restrict the transfer of data from within the EEA to territories outside the EEA that do not offer an adequate level of protection (the U.S. is not considered adequate for these purposes). There are a number of options for complying with this restriction including obtaining consent, the use of model clauses and the use of safe harbor.  To date, we addressed this by using redundant data centers within the EU which avoids needing to share EU-originated data outside the EEA.
United States Regulatory Environment
Regulatory Environment
Generally. In addition to its regulation of wireless telecommunications providers generally, the U.S. Federal Communications Commission, or FCC, has shown interest in at least three areas that impact our business: research and development with regards to innovation, competition in the wireless industry and consumer protection with an emphasis on truth-in-billing. The FCC has examined, or is currently examining, how and when consumers enroll in mobile services, what types of disclosures consumers receive, what services consumers are purchasing and how much consumers are charged. In addition, the Federal Trade Commission, or FTC, has been examining how mobile marketers can collect, share, transfer, use and store consumers data, including personal information, and what kind of notice, choice and consent should be required to do so. Consumer advocates claim that many consumers do not know when their information is being collected from cell phones, mobile apps or online services and how such information is retained, used and shared with or transferred to other companies. Consumer groups have asked the FTC to identify practices that may compromise privacy and consumer welfare; examine opt-in or opt-out procedures to ensure consumers are aware of what data is at issue and how it will be used; investigate tactics that target children and create policies to regulate consumer data practices, particularly regarding tracking and targeting. The FTC has expressed interest in particular in the mobile environment and services that collect sensitive data, such as location-based information and has recently issues a report outlining what it thinks are best-practices, including development of don not track mechanisms that would give consumers tool to opt-out of tracking and targeting, and calling on Congress to pass baseline consumer data privacy and security legislation. The White House has also recently issued a similar report, which outlines a framework for increased industry self-regulation. In addition, there are currently pending in Congress several proposed bills that would materially burden companies wishing to collect, share, transfer, use and store consumer data, particularly for tracking and targeting. Similar legislative and regulatory challenges exist in the European Union and other countries where we operate or may seek to

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operate.
Deceptive Trade Practice Law. In the U.S. the FTC and state attorneys general are given broad powers by legislatures to curb unfair and deceptive trade practices. These laws and regulations apply to mobile marketing campaigns and behavioral advertising, and in particular consumer data privacy practices. The general guideline is that all material terms and conditions of the offer must be “clearly and conspicuously” disclosed to the consumer prior to the buying decision. In practice, the definition of clear and conspicuous disclosure is often a subjective determination. The balancing of the desire to capture a potential customer's attention, while providing adequate disclosure, can be even more challenging in the mobile context due to the lack of space. State Attorney Generals may interpret existing laws and regulations, such as those applying to websites and online services, to mobile apps and mobile services, and this may materially burden our or third parties' ability to engage in activities that are crucial to our current business (e.g., tracking mobile user activities and targeting them with relevant ads). In many instances, we must rely on third parties that provide user data to us, such as app publishers, to provide adequate notice and have the requisite authority to collect and share consumer data with or transfer it to us. It is possible that we may receive consumer data from app publishers or others who are accused or found to have not had sufficient authority to share the data with, or transfer it to, us or that have otherwise engaged in acts or omissions that put us at risk of claims.
Behavioral Advertising. Behavioral advertising is a technique used by online and mobile publishers and advertisers to increase the effectiveness of their campaigns. Behavioral advertising uses information collected from an individual online or mobile behavior, such as the pages they have visited or the searches they have made, to select which advertisements to display to that individual. This data can be valuable for marketers looking to personalize advertising initiatives, including without limitation by providing geo-tags through mobile devices. Currently, behavioral advertising is not specifically regulated by the government in the U.S., but in the online space many businesses adhere to industry self-governing principles, including an opt-out regime whereby information may be collected until an individual indicates that he or she no longer agrees to have this information collected. Such an industry self-regulatory notice and choice program has not yet been developed for mobile, but there are calls for such a program. In addition, laws and regulations in the U.S. of a more general nature, such as those concerning false, misleading or unfair advertising or business practices, may be interpreted in ways that could burden our ability to track and target consumers.
Consumer Privacy Regulation. Our business is affected by U.S. federal and U.S. state, as well as EU member state and foreign country, laws and regulations governing the collection, use, retention, sharing and security of data that we receive from and about consumers. In recent years, regulation has focused on the collection, use, disclosure and security of information that may be used to identify or that actually identifies an individual, such as an Internet Protocol address or a name. Although the mobile and Internet advertising privacy practices are currently largely self-regulated in the U.S., the FTC has conducted numerous discussions on this subject and issued reports suggesting that more rigorous privacy self-regulation and legislation is appropriate, possibly including more burdensome regulation of non-personally identifiable information. Within the EU, member state data protection authorities typically regard IP addresses and other persistent identifiers (such as mobile devise identifiers) as personal information, and legislation adopted recently in the EU requires consent for the placement of a cookie on a user device. In addition, EU data protection authorities are following with interest the FTC's discussions regarding behavioral advertising and may follow suit by imposing additional privacy requirements for mobile advertising practices
Marketing Regulation. In addition, there are U.S. federal and state laws and EU member state and other country laws that govern SMS and telecommunications-based marketing, generally requiring senders to transmit messages (including those sent to mobile devices) only to recipients who have specifically consented to receiving such messages. U.S. federal, EU member state and other country laws also govern e-mail marketing, generally imposing an opt-out requirement for emails sent within an existing business relationship. One of our subsidiaries has been threatened with a class action lawsuit for alleged involvement in a U.S. campaign where its vendor is alleged to have failed to follow applicable law in implementing the campaign.
SMS and Location-Based Marketing Best Practices and Guidelines. We are a member of the Mobile Marketing Association, or MMA, a global association of 700 agencies, advertisers, mobile device manufacturers, wireless operators and service providers and others interested in the potential of marketing via the mobile channel. The MMA has published a code of conduct and best practices guidelines for use by those involved in mobile messaging activities. The guidelines were developed by a collaboration of the major carriers and they require adherence to them as a condition of service. We voluntarily comply with the MMA code of conduct. In addition, the Cellular Telephone Industry Association, or CTIA, has developed Best Practices and Guidelines to promote and protect user privacy regarding location-based services. We also voluntarily comply with those guidelines, which generally require notice and user consent for delivery of location-based services. If we are alleged to have failed to follow these self-regulatory guidelines, we could be subject to false advertising or unfair business practices claims and could be denied access by carriers whom we rely on in order to facilitate campaigns.
TCPA. The United States Telephone Consumer Protection Act, or TCPA, prohibits unsolicited voice and text calls to cell

32


phones by use of an auto-dialing system unless the recipient has given prior consent. The statute also prohibits companies from initiating telephone solicitations to individuals on the national Do-Not-Call list, unless the individual has given prior express consent or has an established business relationship with the company, and restricts the hours when such messages may be sent. In the case of text messages, a company must obtain opt-in consent to send messages to a mobile device. Violations of the TCPA can result in statutory damages of $500 per violation (i.e., for each individual text message). U.S. state laws impose additional regulations on voice and text calls. One of our subsidiaries has been threatened with a class action lawsuit for alleged involvement in a U.S. campaign where its vendor is alleged to have failed to follow applicable law in implementing the campaign.
CAN-SPAM. The U.S. Controlling the Assault of Non-Solicited Pornography and Marketing Act, or CAN SPAM, prohibits all commercial e-mail messages, as defined in the law, to mobile phones unless the device owner has given “express prior authorization.” Recipients of such messages must also be allowed to opt-out of receiving future messages the same way they opted-in. Senders have ten days to honor opt-out requests. The FCC has compiled a list of domain names used by wireless service providers to which marketers may not send commercial e-mail messages. Senders have 30 days from the date the domain name is posted on the FCC site to stop sending unauthorized commercial e-mail to addresses containing the domain name. Violators are subject to fines of up to $6.0 million and up to one year in jail for some spamming activities. Carriers, the FTC, the FCC, and State Attorneys General may bring lawsuits to enforce alleged violations of the Act and if fraud or deception are alleged, consumers can bring a private action.
Communications Privacy Acts. U.S. federal and state laws, and in some instances foreign laws, impose consent requirements for disclosures of contents of electronic communications or customer record information in some instances. To the extent that we knowingly receive this information without the consent of customers or unless other exclusions apply, we could be subject to class action lawsuits for statutory damages or criminal penalties under these laws, which could impose significant additional costs and reputational harm. Some EU member state laws also require consent for our receiving certain information, and if our carrier customers fail to obtain such consent we could be subjected to civil or even criminal penalties.
Security Breach Notification Requirements. In the U.S., almost all states have enacted data breach notification laws, which require notification of individuals and sometimes state regulatory bodies in the event of data breaches involving certain defined categories of personal information. There are proposals at the federal level for a uniform data breach notification law. Some EU member state laws require notice to the affected individual and/or state data protection authority of a data security breach involving personal data, especially if the breach poses a severe risk to individuals. Germany recently enacted a broad requirement to notify individuals in the event of a data security breach that is likely to be followed by notification requirements to data subjects in other EU member states. Austria and other countries have breach notification laws. Japan and Uruguay have also recently enacted security breach notice requirements. This new trend suggests that breach notice statutes may be enacted in other jurisdictions, as well. Additional enforcement actions with fines, penalties and regulatory or civil litigation may result from current or future laws of this sort.
Children. U.S. federal privacy regulations implementing the Children's Online Privacy Protection Act prohibit the knowing collection of personal information from children under the age of 13 without verifiable parental consent, and strictly regulate the transmission of requests for personal information to such children. Other countries do not recognize the ability of children to consent to the collection of personal information. In addition, it is likely that behavioral advertising regulations will impose special restrictions on use of information collected from minors for this purpose.


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4.C. Organization Structure

We conduct our business globally through various local subsidiaries.
As of December 31, 2011, the following are our significant subsidiaries that we included in our consolidated financial statements:
Subsidiary name
 
Proportion
held
 
Country of operation
 
Nature of activities
Velti Limited
 
100
%
 
U.K.
 
Holding company
Velti DR Limited
 
100
%
 
U.K.
 
Mobile marketing and advertising
Velti USA, Inc. 
 
100
%
 
U.S.
 
Mobile marketing and advertising
Mobclix, Inc.
 
100
%
 
U.S.
 
Mobile marketing and advertising
Velti S.A. 
 
100
%
 
Greece
 
Mobile marketing and advertising
Velti Platforms and Services Limited
 
100
%
 
Cyprus
 
Mobile marketing and advertising
Velti Mobile Platforms Limited
 
100
%
 
British Virgin Islands
 
Mobile marketing and advertising
Mobile Interactive Group Limited
 
100
%
 
U.K.
 
Mobile marketing and advertising
Velti Mobile Marketing Technology LLC
 
100
%
 
Russia
 
Mobile marketing and advertising
 
 
 
 
 
 
 
4.D. Property, Plant and Equipment
 
We own no real estate. Our registered office is located in the Bailiwick of Jersey, the Channel Islands and our corporate headquarters are located in the Republic of Ireland. As of December 31, 2011, our leased facilities include our:
corporate, sales, marketing, product development, professional services, support and administrative facilities in San Francisco, California where we lease approximately 48,000 square feet, Palo Alto, California where we lease approximately 4,000 square feet, Atlanta, GA where we lease approximately 14,000 square feet, and New York City, New York where we lease approximately 7,000 square feet;
sales, marketing, professional services, support and administrative facilities in London where we lease approximately 11,000 square feet;
research and development, sales, marketing, consulting and support facilities in Athens where we lease approximately 53,000 square feet;
sales, marketing, product development, professional services, support and administrative facilities in Chennai where we lease approximately 10,000 square feet; and
an executive office in Dublin where we lease approximately 108 square feet.
We and our subsidiaries also lease additional office space in various other locations in the U.S., Europe, and Asia used primarily for local sales, services, support and administrative services. We believe that our premises are sufficient for our needs in the near future and that additional space will be available on commercially reasonable terms as needed.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

34


ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Shareholders should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere in this annual report. In addition to historical consolidated financial information, the following discussion contains forward‑looking statements that reflect our plans, estimates and opinions. Our actual results could differ materially from those discussed in the forward‑looking statements. Factors that could cause or contribute to these differences or cause our actual results or the timing of selected events to differ materially from those anticipated in these forward‑looking statements include those set forth under “Risk Factors” and elsewhere in this annual report.
Overview
Velti is a leading global provider of mobile marketing and advertising technology and solutions that enable brands, advertising agencies, mobile operators and media to implement highly targeted, interactive and measurable campaigns by communicating with and engaging consumers via their mobile devices. The Velti platform, called Velti mGage™, allows customers to use mobile and traditional media to target, reach, and engage consumers through mobile internet and applications; convert consumers into customers; and continue to actively manage the relationship through the mobile channel.
We believe our integrated, easy‑to‑use, end‑to‑end software platform is the most extensive mobile marketing and advertising campaign management platform in the industry. Our platform further enables brands, advertising agencies, mobile operators and media companies to plan, execute, monitor and measure mobile marketing and advertising campaigns in real time throughout the campaign lifecycle. We generate revenue from our software‑as‑a‑service (SaaS) model, from licensing our software to customers and from providing managed services to customers.
Our business, as is typical of companies in our industry, is seasonal. This is primarily due to relatively heavy traditional marketing and advertising spending occurring during the holiday season in part because brands, advertising agencies, mobile operators and media companies often close out annual budgets towards the end of a given year. Seasonal trends have historically contributed to, and we anticipate will continue to contribute to fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.
Corporate Highlights
During 2011 we continued to expand our presence across numerous geographies. We have had considerable success throughout the United States and Asia, diversifying our global business. Our revenue growth was characterized by a significant increase in customers across brands and advertising agencies, with existing customers spending 44% more dollars in 2011 than in 2010 for Velti software solutions. Our platforms now provide marketers the ability to reach more than 4.3 billion consumers in 67 countries and our customers have already connected with 1.4 billion consumers. During 2011, 1,232 customers executed 4,114 campaigns on our platforms. The Americas is our fastest growing region with $41.1 million of our 2011 revenue (compared to $9.2 million in 2010), representing 22% of our total revenues (compared to 8% in 2010). We increased our SaaS revenue contribution to 73% of total revenue for the year ended December 31, 2011, compared to 66% for the year ended December 31, 2010.
During the fourth quarter and fiscal year 2011, we:
Completed the acquisitions of both Air2Web, Inc., or Air2Web, and Mobile Interactive Group Ltd., or MIG, significantly expanding our geographic presence in the United States, the United Kingdom and India, and simultaneously expanding the mGage platform's product offering with mobile CRM, mobile commerce and mobile billing solutions;
Expanded our global presence, opening new offices in high growth markets, including, among others Brazil, Dubai, and Turkey; and
Achieved numerous new customer wins including many blue chip brands; facilitated, via our mGage platform, a large scale mobile marketing campaign in the United States; further expanded our expertise in emerging and developing markets, successfully completing a 16 country mobile marketing campaign for a customer in the Asia; and established a long-term partnership with the world's 3rd largest telecom operator by subscribers.
Components of Results of Operations
Revenue
We derive our revenue from customers who use our platform to create, execute and measure mobile marketing and advertising

35


campaigns. Our platform is based upon a modular, distributed architecture, allowing our customers to use the whole or any part of the functionality of the platform, depending upon the needs of each campaign. Our fees vary by contract, depending upon a number of factors, including the scope of the services that we provide to the campaign, and the range of functionality deployed by the customer on our technology platform. For our engagements with brands, our contracts may be directly with the brand, or with an advertising agency who manages the mobile marketing or advertising campaign on a brand's behalf.
We generate revenue as follows:
Software as a Service (SaaS) Revenue: Fees from customers who subscribe to our hosted mobile marketing and advertising platform, generally referred to as “usage‑based” services, and incremental fees from customers who utilize our software solutions to measure the progress of their transaction‑based mobile marketing and advertising campaigns, generally referred to as “performance‑based” services.
SaaS revenue generated from our “performance‑based” services is generally based on specified metrics, typically relating to the number of transactions performed during the campaign multiplied by the cost per action in accordance with the terms of the related contracts. Some of our performance‑based contracts include performance incentive provisions that link a portion of revenue that we may earn under the contract to the performance of the customer's campaign relative to quantitative or other milestones, such as the growth in the consumer base, reduced consumer churn, or the effectiveness of the end-user response. We consider the performance‑based fees to be contingent fees. We recognize this revenue monthly based on actual performance, which is when the fees are earned and the amount of the fee can be reliably measured. Our performance‑based arrangements are typically invoiced monthly.
License and Software Revenue: Fees from customers who license our mobile marketing and advertising platform provided on a perpetual or term based license and fees for customized software solutions delivered to and installed on the customers' server, including fees to customize the platform for use with different media used by the customer in a campaign.
Managed Services Revenue: Fees charged to customers for professional services related to the implementation, execution and monitoring of customized mobile marketing and advertising solutions.
The fees associated with our managed services revenue are typically paid over a fixed period corresponding with the duration of the campaign or the consumer acquisition and retention program. An initial, one-time setup fee may also be charged for the development of mobile marketing and advertising campaigns. We may also charge fees to procure third‑party mobile and integrated advertising services, such as content, media booking and direct booking across multiple mobile advertising networks on behalf of our customers.
Due to the nature of the services that we provide, our customer contracts may include service level requirements that may require us to pay financial penalties if we fail to meet the required service levels. We recognize any such penalties, when incurred, as a reduction to revenue.
Costs and Expenses
We classify our costs and expenses into seven categories: third‑party, datacenter and direct project, general and administrative, sales and marketing, research and development, acquisition related charges, and depreciation and amortization. We charge share‑based compensation expense resulting from the amortization of the fair value of deferred share and share option grants to each employee's principal functional area. We allocate certain facility‑related and other common expenses such as rent, office and information technology to functional areas based on headcount.
Third‑Party Costs. Our third‑party costs are fees paid to third parties to secure advertising space or content, or to obtain media inventory for the placement of advertising and media messaging services, primarily in connection with mGage Exchange, as well as fees paid to third parties for services in connection with the creation and execution of marketing and advertising campaigns. Third‑party costs also include the costs of certain content, media, or advertising that we acquire for a campaign, and costs associated with incentives provided to consumers in order to participate in the campaigns as well as certain computer hardware or software that we might acquire for a customer. Third‑party costs also include costs paid to third parties for technology and local integration that is not performed by our personnel, and primarily relate to our SaaS revenue.
Datacenter and Direct Project Costs. Datacenter and direct project costs consist primarily of personnel and outsourcing costs for operating our datacenters, which host our Velti mGage platform on behalf of our customers. Additional expenses include costs directly attributable to specific campaigns as well as allocated facility rents, power, bandwidth capacity, IT maintenance and support. In addition, direct project costs include personnel costs to customize our software solutions for specific customer contracts.

36


General and Administrative Expenses. Our general and administrative expenses primarily consist of personnel costs for our executive, finance and accounting, legal, human resource and information technology personnel. Additional general and administrative expenses include consulting and professional fees and other corporate and travel expenses. While we expect that our general and administrative expenses will increase in absolute dollars, we expect the expenses as a percentage of revenue to decline as we grow revenue.
Sales and Marketing Expenses. Our sales and marketing expenses primarily consist of salaries and related costs for personnel engaged in sales and sales support functions, customer services and support, as well as marketing and promotional expenditures. Marketing and promotional expenditures include the direct costs attributable to our sales and marketing activities, such as conference and seminar hosting and attendance, travel, entertainment and advertising expenses. In order to continue to grow our business, we expect to continue to commit resources to our sales and marketing efforts, and accordingly, we expect that our selling expenses will increase in future periods as we continue to expand our sales force in order to add new customers, expand our relationship with existing customers and expand our global operations.
Research and Development. Research and development expenses primarily consist of personnel‑related expenses including payroll expenses, share‑based compensation expense and engineering costs related principally to the design of our new products and services.
Depreciation and Amortization. Depreciation and amortization expenses primarily consist of depreciation on computer hardware and leasehold improvements in our datacenters, amortization of purchased intangibles and of our capitalized software development costs and amortization of purchased intangibles, offset by allocation of government grant income.
Acquisition Related and Other Charges. Acquisition related and other charges consist primarily of changes in the fair value of contingent payments for acquisitions, other acquisition related charges and during 2011, impairment charges related to our intangible assets.
Interest Expense
Interest expense includes interest we incur as a result of our borrowings and factoring obligations. For a description of our borrowing and factoring obligations see Note 11 to notes to consolidated financial statements. During the year ended December 31, 2011 we repaid approximately $60 million of debt outstanding as of December 31, 2010.
Gain (Loss) from Foreign Currency Transactions
Gain (loss) from foreign currency transactions are a result of realized and unrealized gains and losses from transactions denominated in currencies other than the functional currency of the respective subsidiary, as well as the gain or loss resulting from remeasuring assets and liabilities denominated in a currency other than the functional currency into the functional currency on each balance sheet date.
Loss from Equity Method Investments
Our equity method investments include all investments in entities over which we have significant influence, but not control, generally including a beneficial interest of between 20% and 50% of the voting rights. Our share of our equity method investments' post acquisition profits or losses is recognized in the consolidated statement of operations. For a discussion of our equity method investments see Note 10 to notes to consolidated financial statements.
Income Tax Expense
We are subject to tax in jurisdictions or countries in which we conduct business. Earnings are subject to local country income tax and may be subject to current income tax in other jurisdictions.
Our deferred income tax assets represent temporary differences between the financial statement carrying amount and the tax basis of existing assets and liabilities that will result in deductible amounts in future years, including net operating loss carry‑forwards. Based on estimates, the carrying value of our net deferred tax assets assumes that it is more likely than not that we will be able to generate sufficient future taxable income in certain tax jurisdictions. Our judgments regarding future profitability may change due to future market conditions, changes in tax laws and other factors.
Geographic Concentration
We conduct our business primarily in three geographical areas: Europe, Americas, and Asia/Africa. The following table provides revenue by geographic area. Revenue from customers for whom we provide services in multiple locations is allocated according to the location of the respective customer's domicile. Revenue from customers for whom we provide services in a

37


single or very few related locations is allocated according to the location of the respective customer's place of operations.
Revenue:
 
Year Ended December 31,
 
 
2011
 
2010
 
2009
 
 
(in thousands, except percentages)
Europe:
 
 
 
 
 
 
 
 
 
United Kingdom
 
$
37,758

20.0
%
 
$
34,105

29.3
%
 
$
14,655

16.3
%
All other European countries
 
86,318

45.6
%
 
55,299

47.6
%
 
53,446

59.4
%
Total Europe
 
124,076

65.6
%
 
89,404

76.9
%
 
68,101

75.7
%
Americas
 
41,114

21.7
%
 
9,150

7.9
%
 
4,049

4.5
%
Asia/Africa
 
24,012

12.7
%
 
17,715

15.2
%
 
17,815

19.8
%
Total revenue
 
$
189,202

100.0
%
 
$
116,269

100.0
%
 
$
89,965

100.0
%
 
 
 
 
 
 
 
 
 
 
We expect to continue to increase the amount of revenue that we generate from customers located outside of Europe and anticipate that our geographic revenue concentration in Europe as a whole will decrease as a percentage of our total revenue.
Customer Concentration
No customer accounted for more than 10% of our revenues during 2011. One customer accounted for 14% of our revenues during 2010. A different customer accounted for 15% of our revenues during 2009.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
The following discussion addresses our critical accounting policies and reflects those areas that require more significant judgments and use of estimates and assumptions in the preparation of our consolidated financial statements. See Note 2 in the notes to the consolidated financial statements included elsewhere in this annual report for additional information about these critical accounting policies.
Revenue Recognition
We derive our revenue from three sources:
software as a service (SaaS) revenue, which consists of fees from customers who subscribe to our hosted mobile marketing and advertising platform, generally referred to as “usage‑based” services, and fees from customers who utilize our software solutions to measure the progress of their transaction‑based mobile marketing and advertising campaigns, generally referred to as “performance‑based” services;
license and software revenue, which consists of revenue from customers who license our mobile marketing and advertising platform and fees for customized software solutions delivered to and installed on the customers' server either in perpetual or term licenses; and
managed services revenue, which consists of fees charged to customers for professional services related to the implementation, execution, and monitoring of customized mobile marketing and advertising solutions.
We account for revenue for these services and licenses in accordance with Accounting Standards Codification (ASC) Topic 605 - Revenue Recognition and ASC Topic 985-605 - Certain Revenue Arrangements that Include Software Elements. We recognize revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement; (ii) the service has been rendered or delivery has occurred; (iii) the fee to be paid by the customer is fixed or determinable; and (iv) collectability of the fee is reasonably assured.
SaaS revenue generated from our “usage‑based” services, including subscription fees for use of individual software modules

38


and our automated mobile marketing campaign creation templates, and fees charged for access to our technology platform, are recognized ratably over the period of the agreement as the fees are earned.
SaaS revenue generated from our “performance‑based” services is generally based on specified metrics, typically relating to the number of transactions performed during the campaign multiplied by the cost per action in accordance with the terms of the related contracts. Some of our performance‑based contracts include performance incentive provisions that link a portion of revenue that we may earn under the contract to the performance of the customer's campaign relative to quantitative or other milestones, such as the growth in the consumer base, reduced consumer churn, or the effectiveness of the end-user response. We consider the performance‑based fees to be contingent fees. We recognize this revenue monthly based on actual performance, which is when the fees are earned and the amount of the fee can be reliably measured. Our performance‑based arrangements are typically invoiced monthly, which can occur in a period subsequent to revenue being recognized.
License and software revenue consists of fees charged for our mobile marketing and advertising technology provided on a perpetual or term-based license. These types or arrangements do not typically include any ongoing support arrangements or rights to upgrades or enhancements and therefore revenue related to perpetual licensing arrangements is recognized upon the delivery of the license. Revenue from term based licenses are recognized over the related term. Fees charged to customize our software solution are recognized using the completed contract or percentage-of-completion method according to ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts, based on the ratio of costs incurred to the estimated total costs at completion.
Managed services revenue, when sold with software and support offerings, are accounted for separately when these services (i) have value to the customer on a standalone basis, (ii) are not essential to the functionality of the software and (iii) there is objective and reliable evidence of the selling price of each deliverable. When accounted for separately, revenue is recognized as the services are rendered for time and material contracts, and ratably over the term of the contract when accepted by the customer for fixed price contracts. For revenue arrangements with multiple deliverables, such as an arrangement that includes license, support and professional services, we allocate the total amount the customer will pay to the separate units of accounting based on their relative selling prices, as determined by the price of the undelivered items when sold separately.
The timing of revenue recognition in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of our deliverables and obligations, and the existence of evidence to support recognition of our revenue as of the reporting date. For contracts with extended payment terms for which we have not established a successful pattern of collection history, we recognize revenue when all other criteria are met and when the fees under the contract are due and payable. Fees that have been invoiced are recorded in trade receivables and in revenue when all revenue recognition criteria have been met. Fees that have not been invoiced as of the reporting date but for which all revenue recognition criteria are met are reported as accrued contract receivables on the balance sheets.
We present revenue net of value‑added tax, sales tax, excise tax and other similar assessments. Our revenue arrangements do not contain general rights of return.
Government Grants
From time to time, we receive grants from the European Union for the development and roll-out of mobile and broadband services and various m-commerce related services. We recognize grant income as an offset to costs and expenses in our consolidated statements of operations in the period when the costs that are reimbursed by the grant are recognized. Receivables from government grants are recognized when there is reasonable assurance that the grant will be received and we are able to comply with all of the conditions imposed on the grant, which is generally upon receiving notification of grant eligibility.  Each grant provides income in the form of reimbursement of capital expenditures or of the costs incurred in the development of technology subject to the terms of the grant. Grants that reimburse costs related to depreciable assets, including our capitalized software development costs, are recognized as income in the periods, and in the proportions, in which amortization and depreciation on these assets is charged. Grant income is allocated among costs and expenses according to the allocation of the amortization of the capitalized software costs reimbursed by the grant.
Intangible Assets
Intangible assets that we acquire or develop are carried at historical cost less accumulated amortization and impairment loss, if any.
Acquired Intangible Assets.    Intangible assets acquired through business combinations are reported at allocated purchase cost less accumulated amortization and accumulated impairment loss, if any. Amortization is expensed on a straight-line basis over the estimated economic lives of the assets acquired, as determined on the acquisition date.

39


Currently, our acquired intangible assets consist of customer relationships, developed technology, and trademark and trade name. Customer relationships are estimated to provide benefits over four to five years, developed technology acquired is estimated to provide benefits over four to five years, and trademark and trade name is estimated to provide benefits over 18 months.
Internal Software Development Costs.    Internal software development costs consist primarily of internal salaries and consulting fees for developing software platforms for sale to or use by customers in mobile marketing and advertising campaigns. We capitalize such costs as they are integral parts of a product or process to be sold or leased. Such software is primarily related to our Velti mGage platform, including underlying support systems.
We capitalize costs related to software developed for new products and significant enhancements of existing products once technological feasibility has been reached and all research and development for the components of the product have been completed. Such costs are amortized on a straight-line basis over the estimated useful life of the related product, not to exceed three years, commencing with the date the product becomes available for general release to our customers.
Computer Software.    Computer software costs generally represent costs incurred to purchase software programs and packages that are used to develop and ultimately deliver our platforms sold to customers. Generally, costs associated with maintaining computer software programs are expensed as incurred. We capitalize the cost of software licenses that are complementary to or enhance the functionality of our existing technology platform and amortize such costs over the shorter of the contract term or the useful life of the license, but not to exceed five years.
Licenses and Intellectual Property.    We acquire know-how, intellectual property, and technical expertise generally through licensing arrangements with development partners. We capitalize the cost of the know-how and intellectual property licenses when the in-license expertise compliments and/or enhances our existing technology platform. Software licenses are amortized over the shorter of the contract term of the license agreement or the useful life of the license but not to exceed five years.
Valuation of Long-lived and Intangible Assets
We evaluate long-lived assets such as property and equipment, and identifiable intangible assets that are subject to amortization for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount. When undiscounted future cash flows are not expected to be sufficient to recover an asset's carrying amount, the asset is written down to its fair value. Where available, quoted market prices are used to determine fair value. When quoted market prices are not available, various valuation techniques, including the discounted value of estimated future cash flows, are utilized. During 2011 we completed a comprehensive evaluation of our technology portfolio in connection with the integration of Air2Web and MIG following their acquisitions and determined certain legacy intangible assets were obsolete. As result we recorded an impairment charge of $1.5 million during 2011. There were no such impairment charges recorded during 2010 and 2009.
Share‑Based Compensation Expense
We measure and recognize share-based compensation expense related to share-based transactions, including employee and director equity awards, in the financial statements based on fair value. We use the Black-Scholes valuation model to calculate the grant date fair value of share options and deferred share awards, using various assumptions. We recognize compensation expense over the service period of the award using the "graded vesting attribution method" which allocates expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
We account for equity instruments issued to non-employees as expense at their fair value over the related service period and periodically revalue the equity instruments as they vest, using a fair value approach. The value of equity instruments issued for consideration other than employee services is determined on the earlier of (i) the date on which there first exists a firm commitment for performance by the provider of goods or services, or (ii) on the date performance is complete, using the Black-Scholes valuation model.
Goodwill
Goodwill is generated when the consideration paid for an acquisition exceeds the fair value of net assets acquired. Goodwill is recognized as an asset and reviewed for impairment at least annually, or whenever events or circumstances indicate that the carrying amount of goodwill may not be recoverable. We have selected December 31 as the date to perform the annual impairment testing of goodwill. We have determined that no goodwill impairment charge was necessary for 2011, 2010 and 2009.

40


Income Tax Expense
The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities and net operating loss and credit carry-forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized.
Tax positions for the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions throughout the world. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its tax provision.
Undistributed earnings of our Foreign Subsidiaries are indefinitely reinvested in the respective operations. No provision has been made for taxes that might be payable upon remittance of such earnings, nor is it practicable to determine the amount of this liability.
Our effective tax rate varies based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions in which we operate, restructuring and other one-time charges, as well as discrete events, such as tax settlements.
Fair Value Measurements
The Company reports its financial and non-financial assets and liabilities that are re-measured and reported at fair value at each reporting period. The Company established a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: 
Level 1.
  
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2.
  
Include other inputs that are directly or indirectly observable in the marketplace.
Level 3.
  
Unobservable inputs which are supported by little or no market activity.
Our financial assets and liabilities consist principally of cash and cash equivalents, accounts payable, accrued liabilities, current and non-current notes payable. Cash and cash equivalents are stated at cost, which approximates fair value. As of December 31, 2011 and 2010, we do not have readily marketable securities that are classified as cash equivalents. Accounts payable and accrued liabilities are carried at cost that approximates fair value due to their expected short maturities. Our long-term debt bears interest at variable rates which approximate the interest rates at which we believe we could refinance the debt. Accordingly, the carrying amount of long-term debt as of December 31, 2011 and 2010 approximates its fair value. As of December 31, 2011, we did not have any financial assets or liabilities for which Level 1 or Level 2 inputs were required to be disclosed. See Note 7 of our notes to consolidated financial statements for our disclosure of Level 3 inputs used to revalue our contingent payments related to certain of our acquisitions.
The fair value of our contingent payments associated with our recent acquisitions is determined based on an internal cash flow model using inputs based on estimates and assumptions developed by us and is remeasured on each reporting date. The rates used to discount net cash flows to their present value were based on our weighted average cost of capital for similar transactions and an assessment of the relative risk inherent in the associated cash flows. The inputs were current as of the measurement date. These inputs tend to be unobservable and, as such, are considered Level 3 in the fair value hierarchy.
On May 1, 2011 we amended our agreement with Mobclix to fix the contingent payment at $18.1 million, payable in cash or shares at our discretion. We estimated the fair value of the amended minimum deferred consideration utilizing a present value factor based on the cost of capital and the timing of the payments, which resulted in us recording an additional $6.1 million of acquisition related charges. As this became a fixed liability it is no longer considered a Level 3 fair value measurement as of December 31, 2011. In addition, we agreed an additional contingent amount based solely upon the EBITDA performance of Mobclix for the period from January 1 to December 31, 2011. This contingent payment has been set at a minimum of zero and a maximum of $5.0 million. After reviewing the actual results as of December 31, 2011, we determined that no payment related to the 2011 EBITDA performance was due.
As part of the purchase consideration for our acquisition of MIG, we have agreed to pay, on March 31, 2013, an amount contingent upon the financial performance of MIG for the period from January 1, 2011 to December 31, 2012, payable in cash

41


or shares at our discretion. The contingent payment is based upon MIG achieving certain EBITDA targets during the period, with no minimum and a maximum of $27.0 million. We determined that the acquisition-date estimated fair value of the contingent payment is $15.3 million and recorded this amount as a component of the consideration transferred in exchange for the equity interests of MIG. The acquisition-date fair value was measured based on the probability-adjusted present value of the consideration expected to be transferred. The fair value of the contingent payments are revalued on each reporting date.
The following table provides a summary of changes in fair value of the contingent payments measured using significant unobservable inputs (Level 3):
 
Fair Value
 
(in thousands)
Balance as of January 1, 2010
$
41

Additions to contingent payment liability for Mobclix acquisition
5,135

Change in fair value of contingent payment liabilities
4,440

Settlement of contingent payment
(500
)
Balance as of December 31, 2010
9,116

Reclassified to deferred consideration (not measured at fair value)
(10,290
)
Additions to contingent payment liability for Mobile Interactive Group acquisition
15,290

Change in fair value of contingent payment liabilities
2,155

Balance as of December 31, 2011
$
16,271

 
 

42


5.A. Operating Results.
The following table sets forth our consolidated results of operations for the years ended December 31, 2011, 2010 and 2009:
 
Year Ended December 31,
 
2011
 
2010
 
2009
 
(in thousands)
Revenue:
 
 
 
 
 
Software as a service (SaaS) revenue
$
139,024

 
$
77,202

 
$
30,965

License and software revenue
36,705

 
26,586

 
45,811

Managed services revenue
13,473

 
12,481

 
13,189

Total revenue
189,202

 
116,269

 
89,965

Cost and expenses:
 
 
 
 
 
Third-party costs
53,901

 
36,658

 
27,620

Datacenter and direct project costs
17,952

 
6,312

 
4,908

General and administrative expenses
45,258

 
22,484

 
17,387

Sales and marketing expenses
37,733

 
23,049

 
15,919

Research and development expenses
13,060

 
7,840

 
3,484

Acquisition related and other charges
10,390

 
5,364

 

Depreciation and amortization
20,900

 
12,131

 
9,394

Total cost and expenses
199,194

 
113,838

 
78,712

Income (loss) from operations
(9,992
)
 
2,431

 
11,253

Interest expense, net
(7,389
)
 
(8,069
)
 
(2,370
)
Gain (loss) from foreign currency transactions
6,200

 
(1,726
)
 
14

Other expenses
(49
)
 

 

Income (loss) before income taxes, equity method investments and non-controlling interest
(11,230
)
 
(7,364
)
 
8,897

Income tax expense
(3,808
)
 
(3,771
)
 
(410
)
Loss from equity method investments
(200
)
 
(4,615
)
 
(2,223
)
Net income (loss)
(15,238
)
 
(15,750
)
 
6,264

Net income (loss) attributable to non-controlling interest
130

 
(81
)
 
(191
)
Net income (loss) attributable to Velti
$
(15,368
)
 
$
(15,669
)
 
$
6,455

 
 
 
 
 
 
Revenue
 
Year Ended December 31,
 
Variance
 
2011 vs 2010
 
2010 vs 2009
 
2011
 
2010
 
2009
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Software as a service (SaaS) revenue
$
139,024

 
$
77,202

 
$
30,965

 
$
61,822

 
80
%
 
$
46,237

 
149
 %
License and software revenue
36,705

 
26,586

 
45,811

 
10,119

 
38
%
 
(19,225
)
 
(42
)%
Managed services revenue
13,473

 
12,481

 
13,189

 
992

 
8
%
 
(708
)
 
(5
)%
Total revenue
$
189,202

 
$
116,269

 
$
89,965

 
$
72,933

 
63
%
 
$
26,304

 
29
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our total revenue for 2011 increased by $72.9 million, or 62.7%, compared to 2010. This increase was primarily the result of growth in the number of campaigns from existing customers, the addition of new customers and revenue generated from our acquisitions of Mobclix in September 2010, Air2Web in October 2011 and MIG in November 2011. For 2011, our revenue from existing customers was $145.2 million and from new customers was $44.0 million, compared to $90.2 million and $26.1 million, respectively, for the same period in 2010. During 2011, we generated revenue of $41.1 million from the Americas, compared to $9.2 million during 2010, primarily as a result of the expansion of our U.S. operations following our recent acquisitions.
The increase in our SaaS revenue was driven by the revenue contribution from our recent acquisitions, combined with significant growth in revenues generated from performance‑based advertising campaigns based upon our achievement of

43


certain performance metrics and the overall shift in our focus to deliver our platform utilizing the SaaS model.
Operating Costs and Expenses
 
Year Ended December 31,
 
Variance
 
2011 vs 2010
 
2010 vs 2009
 
2011
 
2010
 
2009
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Third-party costs
$
53,901

 
$
36,658

 
$
27,620

 
$
17,243

 
47
%
 
$
9,038

 
33
%
Datacenter and direct project costs
17,952

 
6,312

 
4,908

 
11,640

 
184
%
 
1,404

 
29
%
General and administrative expenses
45,258

 
22,484

 
17,387

 
22,774

 
101
%
 
5,097

 
29
%
Sales and marketing expenses
37,733

 
23,049

 
15,919

 
14,684

 
64
%
 
7,130

 
45
%
Research and development expenses
13,060

 
7,840

 
3,484

 
5,220

 
67
%
 
4,356

 
125
%
Acquisition related and other charges
10,390

 
5,364

 

 
5,026

 
94
%
 
5,364

 
100
%
Depreciation and amortization
20,900

 
12,131

 
9,394

 
8,769

 
72
%
 
2,737

 
29
%
Total cost and expenses
$
199,194

 
$
113,838

 
$
78,712

 
$
85,356

 
75
%
 
$
35,126

 
45
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Third-party Costs
Third‑party costs increased by $17.2 million, or 47%, from 2010 to 2011. The increase was primarily due to $20.0 million associated with revenue generated from our advertising business and the inclusion of Air2Web and MIG results from the acquisition dates offset by decreases in the amount of incentives and promotional costs incurred for mobile marketing campaigns during 2011.
Third‑party costs increased $9.0 million, or 33%, from 2009 to 2010. The increase was primarily due to $5.0 million associated with revenue generated from our advertising business, and an increase in the number of campaigns that we ran for our customers that included incentives and promotional costs.
Datacenter and Direct Project Costs
Datacenter and direct project costs increased by $11.6 million, or 184%, from 2010 to 2011. This increase was primarily due to a $3.1 million increase in share‑based compensation expense, a $3.8 million increase in personnel‑related expense due to an increase in headcount to support growth in our business, and a $4.7 million increase in datacenter and direct project costs as we have scaled to support the growth in revenue.
Datacenter and direct project costs increased by $1.4 million, or 29% from 2009 to 2010 as we scaled to support the growth in revenue.
General and Administrative Expenses
General and administrative expenses increased by $22.8 million, or 101%, from 2010 to 2011. This increase was primarily due to a $9.1 million increase in share‑based compensation expense, an $9.4 million increase in personnel‑related expense due to an increase in headcount to support growth in our business, and a $3.1 million increase in professional services and other administrative expenses to support our growth.
General and administrative expenses increased by $5.1 million, or 29%, from 2009 to 2010. This increase was primarily due to a $3.0 million increase in personnel related expense worldwide and to additional expenses associated with our expansion in the U.S, $2.5 million of incremental costs incurred related to becoming a U.S. listed company that were not directly related to our recent U.S. public offering, as well as $2.4 million of additional share-based compensation expense. These increases were offset by a decrease of $0.9 million in executive salaries during 2010 due to three executives reducing their salary to $1 each for 2010. In addition, there was $2.1 million of non-recurring expenses during 2009 associated with professional services relating to our redomiciliation.
Sales and Marketing Expenses
Sales and marketing expenses increased by $14.7 million, or 64%, from 2010 to 2011. This increase was primarily due to a $6.1 million increase in share‑based compensation expense, $6.6 million increase in personnel‑related expense due to an increase in headcount to support growth in our business, and a $2.0 million increase in other sales and marketing expenses primarily due to our growth.

44


Sales and marketing expenses increased by $7.1 million, or 45%, from 2009 to 2010. This increase was primarily due to a $1.8 million increase in share‑based compensation expense and an expense of $5.3 million related to additional professional services, pre‑sale marketing expenses and travel expenses incurred in connection with the expansion of our global operations and the development of new markets, as well as additional sales and marketing expenses associated with our U.S. expansion.
Research and Development Expenses
Research and development expenses increased by $5.2 million, or 67%, from 2010 to 2011. This increase was primarily due to a $3.1 million increase in share‑based compensation expense, $2.5 million increase in personnel‑related expense due to an increase in headcount to support growth in our business, offset by $0.4 million reduction in research and development expenses due to more effective cost management.
Research and development expenses increased by $4.4 million, or 125%, from 2009 to 2010. This increase was primarily due to a $2.4 million increase in development activities undertaken in the US to integrate acquired technologies and increased overall spending to enhance our mGage mobile marketing platform to drive growth and competitiveness in our products. We also incurred an additional $0.7 million in share base compensation expense resulting from equity awards to our employees during 2010.
Acquisition-Related and Other Charges
Acquisition-related and other charges for 2011 were $10.4 million. This includes $2.2 million related to the valuation of contingent payments for Mobclix and MIG, $6.1 million related to the amendment of the Mobclix purchase agreement, and $0.3 million in other acquisition-related expenses. In addition, during 2011 we completed a comprehensive evaluation of our technology portfolio in connection with the integration of Air2Web and MIG following their acquisitions, and determined certain legacy intangible assets were obsolete, resulting in an impairment charge of $1.5 million. See Note 6 and Note 7 to the notes to consolidated financial statements.
Acquisition-related and other charges for 2010 were $5.4 million, primarily related to the valuation of contingent payments for Mobclix acquisition. See Note 7 in the notes to the consolidated financial statements.
Depreciation and Amortization
Depreciation and amortization expense increased by $8.8 million, or 72%, from 2010 to 2011. This increase was primarily due to higher capitalized software development costs related to the development of our mGage platform, as well as an increase in amortized intangible assets from our acquisitions.
Depreciation and amortization expense increased by $2.7 million, or 29%, from 2009 to 2010. This increase was primarily due to higher capitalized software development costs related to the development of our mGage platform, as well as an increase in amortized intangible assets from our acquisitions.
Other Income Expense
 
Year Ended December 31,
 
Variance
 
2011 vs 2010
 
2010 vs 2009
 
2011
 
2010
 
2009
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Interest expense, net
$
(7,389
)
 
$
(8,069
)
 
$
(2,370
)
 
$
(680
)
 
(8
)%
 
$
5,699

 
240
 %
Gain (loss) from foreign currency transactions
6,200

 
(1,726
)
 
14

 
(7,926
)
 
(459
)%
 
$
1,740

 
(12,429
)%
Other expenses
(49
)
 

 

 
49

 
100
 %
 
$

 
 %
Income tax (expense) benefit
(3,808
)
 
(3,771
)
 
(410
)
 
37

 
1
 %
 
$
3,361

 
820
 %
Loss from equity method investments
(200
)
 
(4,615
)
 
(2,223
)
 
(4,415
)
 
(96
)%
 
$
2,392

 
108
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense, net
Interest expense, net decreased by $0.7 million, or 8%, from 2010 to 2011, primarily due to a decrease in our outstanding debt balances.
Interest expense, net increased by $5.7 million, or 240%, from 2009 to 2010, primarily due to an increase in our borrowings and factoring of additional receivables. For a description of our borrowing and factoring obligations see Note 11 to the notes to consolidated financial statements. We did not earn a significant amount of interest income in any of the periods.

45


Gain (loss) from Foreign Currency Transactions
Gain (loss) from foreign currency transactions, a non-cash item, changed by $7.9 million, or 459%, from 2010 to 2011. This change from a loss to a gain was primarily due to translation adjustments on cash balances denominated in currencies other than the functional currency during 2011, mostly from the decline of the euro and pound against the US dollar.
Gain (loss) from foreign currency transactions changed by $1.7 million, or 12,429%, from 2009 to 2010. This decrease was primarily due to foreign currency transactions related to intercompany loans that resulted from changes in exchange rates in Russian rubles and Ukrainian hryvnia. Our intercompany loans are loans that we made to subsidiaries in euros to fund costs and expenses incurred in local currencies.
Income Tax Expense
We recorded income tax expense of $3.8 million on a worldwide pre-tax loss of $11.4 million for 2011 compared to an income tax expense of $3.8 million on a world-wide pre-tax loss of $12.0 million for 2010. We recorded income tax expense of $0.4 million on a worldwide pre-tax income of $6.7 million for 2009. For a description of the changes in our effective tax rates see Note 12 to the notes to consolidated financial statements.
Loss from Equity Method Investments
Our share of loss from equity method investments decreased $4.4 million, or 96%, from 2010 to 2011, primarily due to improved results from our equity method investments.
Our share of loss from equity method investments increased $2.4 million, or 108%, from 2009 to 2010, primarily due to elimination of $2.8 million of unrealized profit on sales transactions with certain of our equity method investees during 2010. For a discussion of our equity method investments, see Note 10 to the notes to consolidated financial statements.
5.B. Liquidity and Capital Resources.
Since our inception we have financed our operations and acquisitions primarily through the public offerings and borrowings under our bank credit facilities. As of December 31, 2011, we had $75.8 million in cash and cash equivalents. We generally deposit our excess cash in interest bearing bank accounts, and did not have investments in marketable securities as of December 31, 2011.
As of December 31, 2011, we had $9.9 million in outstanding long‑term debt and short‑term financings. The effective interest rates to finance our borrowings as of December 31, 2011 ranged from 4.0% to 15.5%.
As of December 31, 2011, our current assets exceeded our current liabilities by $180.3 million. Based on our current business plan, we believe that our existing cash balances and any cash generated from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.
If our estimates of revenues, expenses or capital or liquidity requirements change or are inaccurate or if cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional shares or arrange debt financing. Further, we may seek to sell additional ordinary shares or arrange for additional debt financing, to the extent it is available, in order to provide us financial flexibility or to pursue investment opportunities that may arise.
 
Year Ended December 31,
 
2011
 
2010
 
2009
 
(in thousands)
Cash generated from (used in):
 
 
 
 
 
Operating activities
$
(67,321
)
 
$
(9,870
)
 
$
(3,277
)
Investing activities
(80,845
)
 
(23,734
)
 
(20,911
)
Financing activities
209,037

 
32,186

 
28,016

Effect of exchange rate fluctuations
(2,460
)
 
(883
)
 
1,506

Increase (decrease) in cash and cash equivalents
$
58,411

 
$
(2,301
)
 
$
5,334

 
 
 
 
 
 
Operating Activities. Net cash used in operating activities for 2011 was $67.3 million, compared to $9.9 million for 2010. The increase in cash used in operating activities is attributable to higher prepaid third‑party costs, both organically and related to our acquisition of MIG. In addition, much of our business is in emerging markets where payment terms on amounts due to us

46


may be longer than on our contracts with customers in other markets.
Investing Activities. Net cash used in investing activities for 2011 was $80.8 million compared to $23.7 million for 2010. This was primarily due to our investment in property and equipment, software development, which we capitalized, and investment in subsidiaries, including the acquisition of Mobile Interactive Group and Air2Web during 2011.
Financing Activities. Net cash generated from financing activities for 2011 was $209.0 million compared to $32.2 million for 2010. The cash generated from financing activities was primarily due to the proceeds from our public offerings completed during 2011, offset by the repayment of a significant amount of the debt outstanding as of December 31, 2010.
For further information about our outstanding long‑term debt and short‑term financings, see Note 11 to the notes to consolidated financial statements.
Although we have an overall accumulated deficit of $34.7 million, we have unremitted positive earnings in certain jurisdictions of approximately $84.6 million. Management has assessed the requirements for indefinite reinvestment of these earnings, and has not provided for related taxes on such earnings for the following reasons: (1) based upon financial forecasts and budgets, we intend to permanently reinvest such earnings in the local geographies where the earnings are located to fund expansion and growth in the local markets, as well as retain sufficient working capital and fund other capital needs locally and (2) we will engage in intercompany financing as necessary for purposes of providing sufficient cash flow to non-income producing jurisdictions. There may also be local jurisdiction restrictions on our ability to remit dividends, including: (1) each company with positive unremitted earnings may not have sufficient distributable reserves to make such a distribution in the foreseeable future and (2) each company with unremitted earnings may not have sufficient cash available to make such a distribution.
5.C. Research and Development, Patents and Licenses, etc.
Research and Development
We have built a strong internal software development team that has many years of experience in the technology and mobile advertising and marketing industries. We have 443 engineers and software developers in our development centers located in Palo Alto and San Francisco, California; Atlanta, Georgia; New York, New York; London and Manchester, England; Amsterdam, Netherlands; Athens, Greece; Kiev, Ukraine; Chennai and Mumbai, India; and Beijing, China.
Our recent research and development activities have been focused on enhancements to our platform, including adding functionality to the activities related to multichannel conversion tracking and multivariate testing. We are also adding functionality to our mobile marketing platform, providing an innovative set of tools needed to produce assets and create highly interactive communication and messaging campaigns. We continue to innovate in our data and analytics capabilities, allowing marketers to capture critical data about the performance of mobile campaigns. Dashboards and analytics provide key metrics that marketers can use to boost their efforts throughout the marketing cycle.
Current research and development initiatives are also focused on the integration of technology platforms acquired from Air2Web and MIG with Velti platforms, including additional advertising capabilities, as well as planning and content solutions. In addition, we have an internal advanced projects team that is focused on the development of new applications and next generation technologies. We believe that having a dedicated, highly-trained advanced projects team enables us to effectively address the rapidly evolving mobile marketing and advertising services market.
Intellectual Property
We regard the protection of our developed technologies and intellectual property rights as an important element of our business operations and as crucial to our success. We rely primarily on a combination of patent laws, trademark laws, copyright laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technology. We generally require our employees, consultants and advisors to enter into confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except under specific circumstances. In the case of our employees, the agreements provide that all of the technology which is conceived by the individual during the course of employment is our exclusive property. The development of our technology and many of our processes are dependent upon the knowledge, experience and skills of key scientific and technical personnel.
We have five issued patents and have 21 pending patent applications. We cannot be sure that any additional patents will issue or that any future patents that may issue will survive a legal challenge to their scope, validity or enforceability, or provide significant protection for us. The failure of our patents, or our reliance upon copyright and trade secret laws to adequately

47


protect our technology might make it easier for our competitors to offer similar products or technologies. In addition, patents may not be issued for any of our current or future applications.

48


5.D. Trend Information.
 Selected Quarterly Results of Operation
The following table sets forth our selected unaudited consolidated quarterly statements of operations for the eight quarters ended December 31, 2011. The following information should be read in conjunction with our audited financial statements and related notes thereto included elsewhere in this annual report. We have prepared the selected unaudited consolidated quarterly financial information on the same basis as our audited consolidated financial statements included in this annual report, and reflect all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of this data. Our financial results for the eight quarters ended December 31, 2011 may not be indicative of our financial results for any future quarterly periods.
 
For the three months ended
 
Dec 31,
2011
 
Sep 30,
2011
 
Jun 30,
2011
 
Mar 31,
2011
 
Dec 31,
2010
 
Sep 30,
2010
 
Jun 30,
2010
 
Mar 31,
2010
 
 
 
(unaudited, in thousands)
Selected quarterly statement of operations data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software as a service (SaaS) revenue
$
62,650

 
$
25,545

 
$
27,550

 
$
23,279

 
$
40,854

 
$
14,987

 
$
13,788

 
$
7,573

License and software revenue
19,746

 
10,091

 
4,077

 
2,791

 
12,282

 
3,883

 
5,540

 
4,881

Managed services revenue
4,710

 
2,552

 
2,731

 
3,480

 
4,351

 
1,752

 
2,601

 
3,777

Total revenue
87,106

 
38,188

 
34,358

 
29,550

 
57,487

 
20,622

 
21,929

 
16,231

Cost and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Third-party costs
18,805

 
13,746

 
10,717

 
10,633

 
18,578

 
4,997

 
9,059

 
4,024

Datacenter and direct project costs
5,734

 
4,127

 
5,140

 
2,951

 
1,942

 
1,570

 
1,467

 
1,333

General and administrative expenses
11,121

 
10,260

 
14,409

 
9,468

 
7,322

 
5,882

 
3,909

 
5,371

Sales and marketing expenses
10,369

 
7,785

 
11,586

 
7,993

 
5,918

 
6,179

 
6,263

 
4,689

Research and development expenses
3,853

 
2,814

 
3,563

 
2,830

 
3,201

 
1,656

 
1,701

 
1,282

Acquisition related and other charges
2,787

 

 
6,142

 
1,461

 
5,364

 

 

 

Depreciation and amortization
7,250

 
5,788

 
4,108

 
3,754

 
4,035

 
2,843

 
2,684

 
2,569

Total cost and expenses
59,919

 
44,520

 
55,665

 
39,090

 
46,360

 
23,127

 
25,083

 
19,268

Income (loss) from operations
27,187

 
(6,332
)
 
(21,307
)
 
(9,540
)
 
11,127

 
(2,505
)
 
(3,154
)
 
(3,037
)
Interest expense, net
(1,026
)
 
(1,482
)
 
(1,398
)
 
(3,483
)
 
(2,876
)
 
(2,826
)
 
(1,305
)
 
(1,062
)
Gain (loss) from foreign currency transactions
(774
)
 
8,777

 
(2,181
)
 
378

 
(674
)
 
1,004

 
(1,195
)
 
(861
)
Other income (expense)
(15
)
 
(120
)
 
162

 
(76
)
 

 

 

 

Income (loss) before income taxes, equity method investments and non-controlling interest
25,372

 
843

 
(24,724
)
 
(12,721
)
 
7,577

 
(4,327
)
 
(5,654
)
 
(4,960
)
Income tax (expense) benefit
(368
)
 
(482
)
 
(721
)
 
(2,237
)
 
(3,101
)
 
(1,110
)
 
228

 
212

Loss from equity method investments
183

 
262

 
320

 
(965
)
 
(2,508
)
 
(630
)
 
(978
)
 
(499
)
Net income (loss)
25,187

 
623

 
(25,125