20-F 1 velti20f123112.htm 20-F Velti 20F 12.31.12
 
 
 
 
 
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 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2012
 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: 65,622,141 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 þ
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes o No þ
 
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 þ 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 þ 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
þ
Non-accelerated filer
o

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

U.S. GAAP   þ 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 o
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 þ  

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      þ    No o    





Velti plc
FORM 20-F Annual Report
TABLE OF CONTENTS

 
 
Page
Part I
 
 
 
 
 
 
 
 
Part II
 
 
 
 
 
  86
 
 
 
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, 2012, 2011 and 2010 and the consolidated balance sheet data as of December 31, 2012 and 2011 from our audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 20-F(Annual Report). We have derived the consolidated statements of operations data for the years ended December 31, 2009 and 2008 and the consolidated balance sheet data as of December 31, 2009 and 2008 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,
 
2012
 
2011
 
2010
 
2009
 
2008
Consolidated Statements of Comprehensive Loss Data:
(in thousands, except per share amounts )
Revenue
$
270,344

 
$
189,202

 
$
116,269

 
$
89,965

 
$
62,032

Costs and expenses:
 
 
 
 
 
 
 
 
 
Third‑party costs
91,404

 
53,901

 
36,658

 
27,620

 
32,860

Datacenter and direct project costs
29,966

 
17,952

 
6,312

 
4,908

 
8,660

General and administrative expenses
68,196

 
45,258

 
22,484

 
17,387

 
6,660

Sales and marketing expenses
54,507

 
37,733

 
23,049

 
15,919

 
8,245

Research and development expenses
21,236

 
13,060

 
7,840

 
3,484

 
1,884

Acquisition related and other charges
9,950

 
8,890

 
5,364

 

 

Impairment of intangible assets
16,902

 
1,500

 

 

 

Loss from disposal of assets
10,532

 

 

 

 

Depreciation and amortization
33,946

 
20,900

 
12,131

 
9,394

 
4,231

Total costs and expenses
336,639

 
199,194

 
113,838

 
78,712

 
62,540

Income (loss) from operations
(66,295
)
 
(9,992
)
 
2,431

 
11,253

 
(508
)
Interest expense, net
(1,830
)
 
(7,389
)
 
(8,069
)
 
(2,370
)
 
(1,155
)
Income (loss) from foreign currency transactions
1,995

 
6,200

 
(1,726
)
 
14

 
(1,665
)
Other income (expenses)
5,876

 
(49
)
 

 

 
(495
)
Income (loss) before income taxes, equity method investments and non-controlling interest
(60,254
)
 
(11,230
)
 
(7,364
)
 
8,897

 
(3,823
)
Income tax (expense) benefit
2,835

 
(3,808
)
 
(3,771
)
 
(410
)
 
26

Loss from equity method investments
(3,755
)
 
(200
)
 
(4,615
)
 
(2,223
)
 
(2,456
)
Net income (loss)
(61,174
)
 
(15,238
)
 
(15,750
)
 
6,264

 
(6,253
)
Income (loss) attributable to non-controlling interest
53

 
130

 
(81
)
 
(191
)
 
(123
)
Net income (loss) attributable to Velti
$
(61,227
)
 
$
(15,368
)
 
$
(15,669
)
 
$
6,455

 
$
(6,130
)
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to Velti(1):
 
 
 
 
 
 
 
 
 
Basic
$
(0.96
)
 
$
(0.28
)
 
$
(0.41
)
 
$
0.18

 
$
(0.18
)
Diluted
$
(0.96
)
 
$
(0.28
)
 
$
(0.41
)
 
$
0.17

 
$
(0.18
)
Weighted average number of shares outstanding for use in computing (1):
 
 
 
 
 
 
 
 
 
Basic net income per share
63,910

 
55,865

 
37,933

 
35,367

 
33,478

Diluted net income per share
63,910

 
55,865

 
37,933

 
37,627

 
33,478

 
 
 
 
 
 
 
 
 
 
(1)  
See Note 2 in the Notes to the 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.


3


 
As of December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Consolidated Balance Sheet Data:
(in thousands)
Cash and cash equivalents
$
36,571

 
$
75,765

 
$
17,354

 
$
19,655

 
$
14,321

Working capital
152,746

 
186,659

 
(3,816
)
 
22,847

 
6,875

Total assets
537,023

 
481,531

 
209,168

 
122,058

 
72,474

Total debt
28,193

 
9,740

 
70,115

 
38,861

 
17,420

Total equity
292,518

 
297,491

 
36,269

 
46,936

 
30,179

 
 
 
 
 
 
 
 
 
 
 
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 is detailed in the table below.
 
Year ended December 31,
 
2012
 
2011
 
2010
Non-GAAP Measures:
(in thousands except per share amounts)
Adjusted net income
$
17,345

 
$
29,005

 
$
3,023

Adjusted EBITDA
$
42,625

 
$
53,077

 
$
27,198

 
 
 
 
 
 
Adjusted net income per share - basic
$
0.27

 
$
0.52

 
$
0.08

Adjusted net income per share - diluted
$
0.26

 
$
0.50

 
$
0.07

 
 
 
 
 
 
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 from net income(loss), 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:

4


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, shareholders and analysts 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:
 
Year Ended December 31,
 
2012
 
2011
 
2010
Reconciliation to adjusted EBITDA:
(in thousands except per share amounts)
Net income (loss) before non-controlling interest
$
(61,174
)
 
$
(15,238
)
 
$
(15,750
)
Adjustments:
 
 
 
 
 
Foreign exchange (gains) losses
(1,995
)
 
(6,200
)
 
1,726

Non-cash share based compensation (1)
31,196

 
27,627

 
6,272

Non-recurring and acquisition-related expenses (2)
10,316

 
14,821

 
6,364

Impairment of intangible assets
16,902

 
1,500

 

Loss from equity method investments (3)
596

 
1,888

 
2,776

Loss from disposal of assets
10,532

 

 

Depreciation and amortization - acquisition related
10,972

 
4,607

 
1,635

Adjusted net income
$
17,345

 
$
29,005

 
$
3,023

Loss (gain) from equity method investments - other
3,159

 
(1,688
)
 
1,839

Depreciation and amortization - other
22,974

 
16,293

 
10,496

Income tax expense (benefit)
(2,835
)
 
3,808

 
3,771

Interest expense, net
1,830

 
5,610

 
8,069

Other expense
152

 
49

 

Adjusted EBITDA
$
42,625

 
$
53,077

 
$
27,198

 
 
 
 
 
 
Adjusted net income per share - basic
$
0.27

 
$
0.52

 
$
0.08

 
 
 
 
 
 
Adjusted net income per share - diluted
$
0.26

 
$
0.50

 
$
0.07

 
 
 
 
 
 
Basic shares
63,910

 
55,865

 
37,933

 
 
 
 
 
 
Diluted shares
65,475

 
58,071

 
40,382

 
 
 
 
 
 

(1)  
The quarter and year ended December 31, 2012 include accrual of annual bonuses that are expected to be paid in shares. The year ended December 31, 2011 includes additional compensation expense of approximately $10.5 million relating to deemed modifications of performance-based deferred share awards.
(2)
Non-recurring and acquisition-related expenses in 2012 resulted primarily from re-measurement of contingent consideration for our Mobile Interactive Group acquisition, as a result of our agreement to set the amount of the consideration and remove the contingency, and for acquisition related expenses for completed acquisitions. These expenses were partially offset by a first quarter gain on re-measurement to fair value, of our pre-acquisition ownership interest in CASEE. Non-recurring and acquisition-related expenses in 2011 included acquisition related expenses related to our acquisition of Mobclix, interest expense to recognize the remaining discount upon repayment of certain loan facilities, interest expense related to a lender fee in connection with our U.S. public offering, and other non-recurring items offset by the reversal of a one-time tax liability related to pre-public offering performance share awards that were released to employees in 2010.
(3)
Loss from equity method investments represents deferral of our equity method investments' net profits related to transactions with Velti.
Share based expenses included in the consolidated statements of comprehensive loss for the quarters and years ended December 31, 2012 and 2011 were as follows:

5


 
Year Ended December 31,
 
2012
 
2011
 
2010
 
(in thousands)
Datacenter and direct project costs
$
3,721

 
$
3,549

 
$
443

General and administrative expenses
11,923

 
11,735

 
2,613

Sales and marketing expenses
9,245

 
8,288

 
2,231

Research and development expenses
6,307

 
4,055

 
985

 
$
31,196

 
$
27,627

 
$
6,272

 
 
 
 
 
 

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
We will likely need to raise additional capital to meet our ongoing capital commitments and to fund our operations, and we may not be able to raise capital on terms acceptable to us or at all.
As of December 31, 2012, we had cash and cash equivalents of $36.6 million and working capital of approximately $152.7 million. In connection with the acquisition of MIG in November 2011, we will be required to make cash payments of approximately $16.5 million to the former shareholders and key employees of MIG in April 2013. Although we obtained a $50.0 million credit facility with HSBC in August 2012, as of March 31, 2013, we have substantially utilized this revolving credit facility. Accordingly, we anticipate that we will need additional financing in the next three months to meet our ongoing capital commitments and to fund our operations. In order to meet our ongoing capital commitments, we will need to seek additional capital, potentially through debt, or other equity financings. There can be no assurance that our efforts to find such financings will be successful or on terms favorable to us. 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 insufficient or unavailable, we may have to reduce substantially or eliminate expenditures or significantly modify our operating plans. See “Part I. Item 5.B. - Liquidity and Capital Resources.”
The report of our independent public accounting firm includes a reference raising a substantial doubt about our ability to continue as a going concern.
As a result of our existing cash balance as well as our acquisition payment obligations to MIG discussed above, substantial doubt about our ability to continue as a going concern is created.
Any substantial doubt about our ability to continue as a going concern could also affect our relationship with our partners and customers and their willingness to continue to conduct business with us on terms consistent with historical practice. Our partners might respond to an apparent weakening of our liquidity position and to address their own liquidity needs by

6


requesting faster payment of invoices, new or increased deposits or other assurances. If this were to happen, our need for cash would be intensified and we might be unable to make payments to our partners as they become due.

We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.
In connection with the audit of our financial statements as of and for the year ended December 31, 2012, we concluded there is a material weakness in internal control over financial reporting related to deficiencies in the financial statement close process. Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. See “Part I. Item 15 - Controls and Procedures.”
We are working to remediate the material weakness. We have begun taking steps and plan to take additional measures to remediate the underlying causes of the material weakness, primarily through the continued development and implementation of formal policies, improved processes and documented procedures, as well as the continued hiring of additional finance personnel, such as our recent hiring of Jeffrey G. Ross as our new chief financial officer. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful in remediating this material weakness. If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.
We have in the past and may in the future fail to comply with our financial covenants under our credit facility with HSBC, enabling our lender to exercise one or more of its available remedies, including the right to require the immediate repayment of all outstanding indebtedness under such facility.
In August 2012, we entered into a $50.0 million credit facility with HSBC Bank USA, N.A., or HSBC. As of December 31, 2012, we had approximately $28.2 million of indebtedness with HSBC and subsequent to year-end we have substantially utilized the revolving credit facility. This indebtedness is secured by substantially all of our accounts and assets and is guaranteed by certain of our subsidiaries. Our loan agreement also includes financial covenants which require us to maintain compliance with certain financial ratios during the term of the loan agreement. Failure to comply with the financial covenants is an event of default under the loan agreement. In an event of default, HSBC has the right to declare immediately due and payable all outstanding principal indebtedness and any accrued interest thereon, and to exercise any and all rights it may have as a secured creditor.
In December 2012, we entered into an amendment to the loan agreement relating to a violation of financial covenants for the period ended September 30, 2012. Under the amendment, HSBC agreed to waive non-compliance by us with certain financial covenants under our original loan agreement for the period ended September 30, 2012.
Although we continue to be current with all principal and interest payments under the loan agreement, as of December 31, 2012 we were in violation of certain financial covenants contained in the amended loan agreement that require us to maintain certain ratios of actual earnings before interest, taxes, depreciation and amortization (EBITDA) to projected EBITDA. HSBC has agreed to waive non-compliance by us with this financial covenant. However, if we fail to comply with our financial covenants in future periods, there is no assurance that HSBC will give us a waiver or forbearance agreement in the future. Any future violations under this credit facility may result in an acceleration of our obligations under the amended loan agreement and HSBC may exercise other remedies for default.
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.

7


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. 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, and could prevent us from achieving positive free cash flow.
We depend on the services of key personnel to implement our strategy. If we change, or 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 and performance of a number of key management and operating personnel. We recently transitioned both our chief financial officer and chief operating officer positions and there is no assurance that such changes will be successful. In addition, we have reduced our overall headcount, which may prompt other key employees to reevaluate their continued employment with us. We also may need to make additional management changes in the future that could also result in potential further disruption to our business or adverse public perception. 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, particularly if we are unable to retain them or alternately need to transition certain of these 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. 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.
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 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 or in certain cases when the book value of a company's equity exceeds the market value for such entity. 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;

8


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.
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 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, and continue to integrate our acquired companies into our existing operations. These integrations have required and will continue to require significant efforts, including the coordination of future product 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.
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.
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.

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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 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.
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 ads 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. 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 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. 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 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 protection 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 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.

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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.
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.
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 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 and transfer pricing disputes;
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 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

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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. While we were able to settle the lawsuit with Augme, we cannot determine with certainty whether 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.
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, 2013, we had 10 granted patents and allowed applications and 17 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

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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, although the industry is still fragmented, a rising number of competitors, some of whom have significantly more capital to invest than us, are creating integrated platforms. For example, Google, Inc. acquired Admob, Inc., Apple, Inc. acquired Quattro Wireless, Inc., Singapore Telecommunications Limited, or SingTel, acquired Amobee, Inc., Intel Corporation acquired appMobi's HTML5 tools and NTT Docomo, Inc. acquired of Buongiorno. Additionally, larger companies such as Samsung, Sprint, Telefonica, Vodaphone, O2, Nokia, AOL, Microsoft and Yahoo! are entering the mobile marketing industry and 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 and many of our contracts are specific to particular advertising or marketing campaigns. In addition, under the terms of many of our customer agreements, including certain multi-year agreements, the customer can terminate the agreement at its discretion prior to its expiration, without significant disadvantage to the customer. 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, 2012, 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 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.
Our customer contracts often require us to agree to incur indemnification obligations to our customers.
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 would seek indemnification from our suppliers, vendors and content providers to the full extent of their

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responsibility. Even if the agreement with such supplier, vendor or content provider contains an indemnity provision, such provision 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 obtain 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 with 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 complexity of our different 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 may 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.
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

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requirements. 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. We recognize these penalties, if and when incurred, as a reduction to revenue. These in turn could 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. 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. To date, approximately $6.2 million of this amount has been paid. In addition, we have received a fourth grant in the amount of approximately $12 million, from the government of Greece to support our local capital expenditures. Under the terms of all but the grant supporting capitalized expenditures, 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 or meet the required criteria of these grants 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 or meet the required criteria of these grants between the fifth and tenth anniversaries of receiving the final disbursement under each grant, we will be required to pay a tax penalty. In October 2012, we successfully passed an audit by the Government of Greece and to date remain in compliance with these requirements. We 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.
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 globally. 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

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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, Google, Inc. acquired Admob, Inc., Apple, Inc. acquired Quattro Wireless, Inc., Singapore Telecommunications Limited, or SingTel, acquired Amobee, Inc., Intel Corporation acquired appMobi's HTML5 tools and NTT Docomo, Inc. acquired of Buongiorno. 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.
Acquisitions or investments may be unsuccessful and may divert our management's attention and consume significant resources.
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;
increased fixed costs; and
if any such acquisition include any earn out or contingent consideration, it may be difficult to determine in advance the amount of such contingent consideration. 

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In the event we are not able to meet our ongoing capital commitments and to fund our operations by seeking additional capital, potentially through debt, or other potentially dilutive equity financings, it will make it harder for us to evaluate additional acquisitions or make investments in other businesses, or acquire individual products and technologies.
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 2012, approximately 49% of our revenue was payable in Euros, and in 2011, approximately 66% of our revenue was payable in Euros. 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 substantial portion 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 U.S. 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.
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.

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Since our inception, we have operated campaigns or provided marketing or advertising solutions to customers in many countries globally 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.
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 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 maintain a mix of cloud, managed hosting, colocation and in-house hosting to deliver our platform and services. Disruption of service or data breach at these facilities could harm our business.
We currently maintain various datacenters around the world, including in the U.S., U.K., India, Russia and Greece, providing a mix of cloud, managed hosting, colocation and in-house hosting to deliver our platform and services. Managed hosting and cloud services are provided by third-party vendors whose operations are not controlled by us. Our hosting solutions 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 backups and have implemented business continuity plans for several of our services, a second datacenter implementation is not available for all of our services. 'Interruptions in those 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.

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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. We cannot assure shareholders that we would not be impacted by changes in the tax regime of any jurisdiction where we do business and that such changes would not materially impact our effective tax rates. '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.
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 have led to a global economic slowdown, with the economies of Europe showing continued signs of weakness. In particular, certain member countries of the EU including Greece have experienced financial and economic difficulties and have imposed or discussed financial and other restrictions as a result. Recently, for example, Cyprus has required a bail out from the EU, and as part of this bailout has agreed to impose a one-off levy on all deposits over the insurance threshold of 100,000 Euros. The amount of the one-off levy has not yet been determined. Although our exposure to Cyprus deposits is not material, there can be no assurance that future restrictions imposed by struggling economies may not have material impact on our financial results or results of operations. If these economies weaken further or fail to improve, our customers may reduce or postpone their marketing and advertising spending, or delay payments on amounts owed to us, which could materially adversely affect our business, operating results and financial condition.
Risks Related to the Mobile Communications Industry
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.

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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 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 advertising 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.
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.
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, 2012. We expect that we will continue to be a foreign private issuer as of June 30, 2013.

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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.
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
The legal and commercial name of the company is Velti plc. 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 Inc.
Steuart Tower
One Market Street, Suite 600
San Francisco, California 94105
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. Our business was first organized in 2000 with the incorporation of Velti S.A., a company organized under the laws of Greece. On April 20, 2006, Velti plc, a company formed in England and Wales under the Companies Act 1985 on September 2, 2005, acquired all of the issued share capital of Velti S.A. As a result, Velti plc (England and Wales) became the holding company of the Velti group.
On May 3, 2006, Velti plc was first admitted and commenced trading in its ordinary shares on the Alternative Investment Market of the London Stock Exchange, or AIM. On December 18, 2009, Velti plc completed a scheme of arrangements under the laws of England and Wales whereby Velti plc, a new company incorporated under the laws of Jersey, the Channel Islands, became our ultimate parent company. The ordinary shares of our new Jersey-incorporated parent were admitted for trading on AIM on December 18, 2009.
On January 28, 2011, Velti's ordinary shares commenced trading on the NASDAQ Global Select Market, or NASDAQ, under the symbol “VELT.” We delisted and canceled our shares for trading on AIM as of May 3, 2011 and currently trade only on NASDAQ.
On September 30, 2010, we completed the acquisition of Mobclix, Inc., or Mobclix, an advertising exchange in the U.S. 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.
On November 14, 2011, we completed the acquisition of Mobile Interactive Group Limited, or MIG, the U.K.'s largest mobile marketing company. On January 23, 2012 we completed the acquisition of the remaining equity interests of CASEE, a mobile ad exchange and mobile ad network in China. 
In December 2012, we completed the divestiture of certain non-strategic assets focused on geographies and certain customers in Southeast and Eastern Europe, to Starcapital Limited (Starcapital), a Cyprus company owned by certain former non- management employees of Velti.


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4.B.  Business Overview
Description of the nature of the Company's operations and principal markets
Velti delivers mobile technology to transform communication, build connections and drive value for brands and consumers alike. The intimate, always-on mobile channel, combined with the power of today's data science, now makes it possible to unify advertising and marketing and deliver on the promise of individualized brand relationships spanning the full customer lifecycle.
Our mobile marketing and advertising technology and solutions help marketers reach new customers, drive consideration with interactive mobile marketing strategies, accelerate consumer actions using meaningful data, and nurture relationships through data-driven marketing programs. Powered by data, we enable brands to communicate more meaningfully, deliver greater customer value and inspire the behaviors and outcomes that matter to their business.
Our results-focused Velti mGage® platform allows marketers to execute highly personalized, enterprise mobile marketing programs across the marketing funnel including ad delivery and measurement, cross-channel messaging promotions, mobile site development, and cross-platform campaign data visualization. For businesses that want professional assistance in achieving mobile marketing and advertising objectives, our services organization offers expert assistance in developing strategies, programs, and hosting services. From account management to creative production to ad ops and technical resources, we support enterprise customers through a self-service or managed services model that augments customers' existing staff to support mobile initiatives.
With over 1,000 employees globally, Velti provides market-level expertise to help brands connect with consumers around the world, anywhere, any time, using the power of mobile technology to deliver better business results for brands and better experiences for consumers.
Velti Solutions and Technology
The Velti Technology Platform
Velti mGage is a software platform that enables brands to find, engage and convert customers into lifelong brand advocates. It enables marketers to harness the power of mobile to reach new customers, drive consideration with interactive mobile marketing strategies, accelerate consumer actions using meaningful data, and nurture relationships thru data-driven marketing programs. Our data and analytics engine enables marketers to optimize their digital spend with comprehensive insights that intelligently attributes media buys to actual conversions. We generate revenue from licensing our platform and by providing managed services to brands looking to mobilize their business.
With the huge number of mobile device types, platforms and screen resolutions, brands and agencies find it difficult to create and implement a cohesive, cross-channel mobile marketing strategy. Velti simplifies the most complex aspects of mobile marketing and advertising by providing a powerful, easy-to-use toolset for implementing cross-channel, personalized marketing campaigns. Whether it is ad delivery and measurement, cross-channel messaging campaigns, or simple mobile site development, our robust, secure and scalable platform enables brands and agencies to execute multi-channel campaigns across many device types and address every aspect of the mobile value chain.
Velti Platform Overview
Velti mGage
Velti mGage enables brands to build, plan, execute and measure integrated advertising and marketing campaigns across multiple channels. Velti mGage platform includes the following products:
mGage Advertise. mGage Advertise is Velti's enterprise grade ad server that simplifies conversion tracking to provide brands insight into campaign performance beyond the impression and click. This flexible and scalable ad serving product provides advanced device detection and precise ad unit delivery. With a single piece of code, it enables brands to understand channel attribution and influence, and link consumer site behavior to conversion data for unrivaled insight into campaign performance across publishers, networks and ad placements.
mGage Create. mGage Create is a mobile web development platform that enables brands and agencies to create deploy, host and measure mobile sites that can be dynamically rendered on many of the devices in the market. This web-based authoring platform simplifies the most complex aspects of mobile web development to quickly produce highly interactive rich media ad

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units, landing pages and mobile sites. mGage Create enables brands to create mobile web apps for the rapidly growing smart devices including smartphones, tablets and Smart TVs, and dynamically render feature rich sites for the lower-end, still dominant feature phones.
mGage Communicate. mGage Communicate is a mobile messaging and mobile community management platform that allows brands to implement personalized messaging campaigns. From simple message delivery to complex relationship management, mGage Communicate streamlines planning, execution and reporting of mobile messaging campaigns using workflow management tools. It allows multi-channel customer opt-ins via SMS, traditional web, mobile web, mobile applications, IVR, QR Codes and more. With Velti's direct connection to major carriers globally, brands can execute cross-carrier messaging campaigns reliably. It applies strong rules, processes, firewalls and encryptions to ensure privacy and security for a brand's customers.
mGage Inspire. mGage Inspire is a multi-channel loyalty platform that enables brands to implement Loyalty and CRM programs with highly specialized tactics and sophisticated personalization. The platform is based on an open architecture that enables set-up and management of complex business rules to support targeted multi-channel micro-campaigns at all stages of the customer engagement lifecycle. Designed to leverage data, the platform rewards and measures incremental behavior to ensure positive impact on Customer Lifetime Value (CLV). It allows brands to reach and engage customers through multiple channels and devices such as Mobile Web, Social Media, USSD, IVR, Text Messaging and traditional channels. mGage Inspire's predictive analytics and machine learning algorithms enable targeted promotions and rewards to increase customer participation and uptake.
mGage Excite. Velti mGage Excite is a comprehensive platform that enables operators, agencies, media groups and brands to conduct robust and scalable promotions on a massive scale. It allows management of the entire campaign lifecycle from inception to execution. It enables creation of customer segments to target communication based on participants' profiling attributes to encourage participation and generate incremental revenue. It provides tools to maximize the effectiveness of every campaign, and can automatically leverage the results to deploy a holistic marketing strategy for brands and operators worldwide. It enables brands to stimulate user engagement, loyalty and stickiness by using fun game mechanics with achievements, appointments, community collaboration, leaderboards, levels, loss aversion, points and status among others. The platform is built to automatically test, identify and serve the best performing messages whether they are teasers, base bulks, activities and questions to increase playability, facilitate intelligent targeting and improve relevancy, uptake and redemption. 
Mobclix
Mobclix, our mobile ad exchange, is where publishers and advertisers are able to connect the best apps with the best ads via Mobclix' sophisticated open marketplace platform, along with comprehensive account management for mobile application developers, advertisers, ad networks, and agencies. 
Mobclix for Publishers. Mobclix enables publishers and developers to monetize their mobile inventory on their apps and sites. With a single software development kit (SDK) integration, developers have instant access tonumerous ad networks for better performance. Its real-time bidding platform, backed by yield optimization technology, enables developers and publishers to get the highest paying ad for every impression served, helping them maximize their revenue potential. Mobclix also offers an intuitive dashboard that provides visibility into monetization tools, consolidated reporting and payments.
Mobclix for Advertisers. The Mobclix Exchange connects advertisers with the global inventory they need to reach their audience. Through a single integration with the Mobclix Exchange, advertisers have direct access to publishers, enabling them to make spot buys for successful targeting and optimized results. Using real-time bidding technology, advertisers are also able to reach the audience they want, at the price they want.
Velti Media
Velti Media,our mobile advertising network, connects brands and agencies to mobile web sites or mobile applications that host advertisements typically through an advertising network or exchange. With this offering, we combine mobile advertising and marketing solutions in a single technology platform across a unified data model, providing a comprehensive suite of capabilities for brands to reach consumers. In combining mobile advertising and marketing with performance data and predictive analytics, we are now able to make recommendations to brands on the best types of campaigns to run in order to achieve a specific set of goals. Velti Media partners with various supply side platforms and exchanges, including Mobclix, to aggregate advertiser demand and match it with mobile ad space supply, providing access to inventory in key geographies. Velti Media also works directly with premium publishers to secure inventory for advertisers.

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The Velti Solution
Mobile is transforming businesses worldwide. It is always on, highly personal-and exceptionally effective. Consumers are using mobile at every stage of purchasing, from product research to purchase, making it a powerful channel for brands to connect with consumers.
Our solutions help brands mobilize their consumer engagement funnel, transforming browsing into buying, communication into loyalty and behavioral insight into purchase influence. From strategic planning to cross-platform digital campaign execution, we help brands establish a cross-channel strategic framework based on a solid understanding of their customers' behavior.
Awareness. With device and location targeting, mobile presents a unique opportunity for brands to be highly efficient with their marketing spend. We help brands make the most of customer acquisition efforts. From mobile media and creative destination development to real-time tracking and optimization, our solutions take advantage of mobile's unique attributes and puts mobile acquisition tactics to work for brands. With access to highly targeted mobile advertising inventory through Velti owned Mobclix, we are able to drive volume and reach customers across multiple touch points to acquire customers and drive results.
Engagement. With consumers accessing mobile at every stage of the purchase funnel - from product research to purchase, the right mobile landing experience helps drive conversions, generate repeat visits and enhance customer loyalty. We help brands deliver an optimized mobile experience. From a simple product catalog to complex multi-channel interactive messaging, we help brands give their customers what they need, when they need it, to win their business and keep them coming back. The Velti mGage platform can be easily integrated into a brand's existing CRM, CMS and payment systems, allowing us to enable the brand to provide a seamless and cohesive experience to the customer across multiple touch points and devices while improving operational efficiency.
Mobile Sites & Applications: From a simple campaign landing experience to a rich, fully integrated, HTML5-enabled enterprise mobile site, we help brands develop highly interactive mobile sites and applications that can be rendered on devices including feature phones, smartphones, tablets, desktops and even Smart TVs.
Mobile Messaging: We make it simple for brands to execute cross-carrier messaging and large scale push notification programs. From short codes and keywords to carrier connectivity and program approval, we allow brands to configure and execute effective mobile messaging campaigns seamlessly around the world.
Mobilize Customer Care: Velti's mobilized customer care solution helps brands deliver added value for customer care and after-sales services while reducing operational expenses. This solution provides advanced mobile technology to address evolving customer services challenges and is engineered to handle the needs of large enterprises with large customer care operations.
Retention. Mobile can give new life to loyalty programs, capturing new kinds of customer interactions and enabling more valuable rewards to win repeat business. We have unique expertise in customer loyalty from capturing customer data to increasing engagement and reducing churn. We create, implement and manage mobile led cross-channel loyalty programs that incorporate both rewards and personalized experiences to increase retention. Our programs which utilize our Velti mGage platform use a variety of interactive channels to stimulate consumer interaction, including SMS, web, mobile web, app, interactive voice response (IVR) and other channels to turn unknown customers into clearly defined brand advocates. Our performance-based programs have helped brands around the world not only enhance customer loyalty but also gain deep understanding of their customers.
Customers
We work with major brands and agencies, and many of the top operators around the world. Brands engage with us directly or through their digital marketing agencies. We work with many major agencies globally who use our proprietary mGage platform to plan, execute, manage and measure mobile marketing and advertising strategies and campaigns for their customers. We work with leading brands across a variety of verticals including automotive, financial services, retail, consumer packaged goods, operators, technology and more, to mobilize their marketing and advertising campaigns. Brands license our platform or purchase our fully managed solutions to acquire, engage, monetize and retain their customers. We work closely with CMOs, digital marketers and customer relationship management executives to understand their marketing and business objectives, develop a cohesive mobile marketing strategy to augment their marketing mix and execute cross-platform campaigns to drive results.

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Geographic 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,
 
 
2012
 
2011
 
2010
 
 
(in thousands, except percentages)
Europe:
 
 
 
 
 
 
 
 
 
United Kingdom
 
$
74,731

27.6
%
 
$
37,758

20.0
%
 
$
34,105

29.3
%
All other European countries
 
97,799

36.2
%
 
86,318

45.6
%
 
55,299

47.6
%
Total Europe
 
172,530

63.8
%
 
124,076

65.6
%
 
89,404

76.9
%
Americas
 
63,597

23.5
%
 
41,114

21.7
%
 
9,150

7.9
%
Asia/Africa
 
34,217

12.7
%
 
24,012

12.7
%
 
17,715

15.2
%
Total revenue
 
$
270,344

100.0
%
 
$
189,202

100.0
%
 
$
116,269

100.0
%
 
 
 
 
 
 
 
 
 
 
We expect to continue to expand outside of Europe and anticipate that our geographic revenue concentration in Europe as a whole will continue to decrease as a percentage of our total revenue, with primary growth occurring in the Americas.
Technology and Operations
Our proprietary technology platform is the cornerstone of our business and 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 deployed utilizing solutions from industry leaders including Cisco, HP, Oracle, Microsoft, VMWare, Amazon, Redhat. We have designed and implemented a robust hosting infrastructure with a load-balanced cluster of application servers backed by redundant database servers to optimize uptime, and efficiently plan 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.
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, which includes data centers in New Jersey, Atlanta, London and Athens. We also have data centers in Chennai, Mumbai, Moscow and Beijing. Every data center's HVAC (Heating Ventilation Air Conditioning) system is N+1 redundant with advanced fire suppression systems. All data centers' power systems are designed to run uninterrupted, with every server receiving conditioned UPS (Uninterruptible Power Supply) power. Daily backups of source and data files are performed on a timely basis and stored at appropriate offsite locations.
Compliance & Security. Our focus in maintaining compliance with information security management standards & practices is illustrated by specific regional/global requirements satisfied by data centers. All of the hosting providers are compliant/certified against ISO 27001 or SSAE-16 type II. Velti data centers (hosting customer facing production systems) incorporate keycard

26


protocols, biometric scanning protocols and round-the-clock interior and exterior surveillance monitor access to every one of our data centers. Only authorized data center personnel are granted access.
Support Operations. Our operations and customer service team is comprises high caliber, specially trained engineers providing support on a 24 x 7 basis. The team is responsible all maintenance-related customer communications, request submission, analysis and follow up, as well as incident handling, escalation and reporting. A centralized system monitors infrastructure and services on a 24 x7 basis, enabling timely detection, troubleshooting, recovery and reporting of failures with real-time status views and historic trend reporting.
Competition
The market for mobile marketing and advertising solutions is very competitive. There are many companies we consider competitors, from companies offering individual point solutions to companies who deliver a breadth of mobile marketing or advertising capabilities. Velti competes against 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, mobile CRM and loyalty solutions providers, and providers of mobile analytics. We compete at times with interactive and traditional advertising agencies who offer mobile marketing and advertising as part of their services to their customers.
Although the industry is still fragmented, we are seeing consolidation in this constantly-evolving space. A rising number of competitors are looking to create integrated platforms with features similar to ours, e.g., Google, Inc.'s acquisition of Admob, Inc., Apple, Inc.'s acquisition of Quattro Wireless, Inc., Opera's expansion of its mobile offering through AdMarvel and Mobile Theory, Augme's acquisition of Hipcricket, SingTel's acquisition of Amobee, Intel Corporation's acquisition of appMobi's HTML 5 developer tools, NTT Docomo, Inc.'s acquisition of Buongiorno s.P.a., and the entry of larger companies such as Samsung, Sprint, Telefonica, Vodafone, O2, Nokia, AOL, Microsoft and Yahoo! into the mobile media markets. Although we are increasingly viewing the above-mentioned companies as competitors, we believe we are still the only provider of an integrated, end-to-end mobile marketing and advertising platform with a significant global presence.
Our key competitive factors used by our customers when 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 24-hour support;
a sophisticated provider with a proven track record; and
over a decade of experience in mobile marketing and advertising.
Seasonality
Our business, as is typical of companies in our industry, is seasonal. This is primarily due to traditional marketing and advertising spend being heaviest during the holiday season with brands and advertising agencies often closing out annual budgets at the end of a given year. Seasonal trends have historically contributed, 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 three main customer categories, one selling to mobile operators TV broadcasters, another selling to media, publishers and ad agencies, and the other selling to brands. We are further organized along geographical regions for Europe, the Americas and the rest of the world. As of December 31, 2012, we had 314 employees engaged in sales, marketing and business development. As we evolve, in addition to continuing our focus on mobile operators and media (especially as they are tied to our global mobile advertising exchange), we expect to further focus our sales efforts within brands by certain industry verticals, such as retail, financial services and packaged goods, and to building a strong U.S. sales force for publishers and media customers. 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.

27


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.
Velti has both corporate and product and solution-focused marketing support to reinforce the corporate image and brand, and help sales with demand and lead generation. From a corporate perspective, we are focused on leading the mobile marketing and advertising industry through thought-leadership initiatives including public relations, trade show representation and speaking opportunities, analyst events, social media presence and industry dialogue creation. Sales support includes developing cross-channel collateral packages for all products and solutions, delivering lead generating ad campaigns, webinars and promotions and ushering prospects through the marketing funnel via continuous engagement with the Velti e-newsletter, website and/or blog.
Government Regulation
Depending on the products and services that they offer, mobile data service providers are or may be subject to regulations, codes of practice 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, micropayments, 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 numerous countries and many of these have large economies outside of North America and Europe, including Brazil, Russia, India and China, or the “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.If, however, the legislation is in the form of a regulation (e.g. the data protection Regulation referred to below), the regulations have a direct effect on the member states and do not need to be transposed into the member states' national laws.
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.

28


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 the general regulatory framework applicable to electronic communications and privacy 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 and similar technologies, which may affect our ability to implement behavioral advertising. These restrictions have been reviewed and amended by the European legislator with the Citizen's Rights Directive (Directive 2009/136/EC), which member states have implemented (or are implementing). 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. The EU member states have not implemented the law in a uniform manner, which some countries permitting an opt-out approach, while others mandate opt-in consent. 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”. Under the current framework as set out in the European Data Protection Directive, these principles of data protection do not apply to data that has been rendered anonymous in such a way that its data subject is no longer identifiable. However, it is unclear what process would satisfy the requirement for this anonymization criteria.

29


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 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. The European Commission aims to do away with the current fragmentation caused by the Data Protection Directive and the costly administrative burdens businesses undertake to comply with that Directive. 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, which may result in the reduction of certain compliance costs, 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 breadth and scope of the Regulation might impose additional regulatory and compliance burdens on us. The European Commission intends to apply the Regulation to data controllers that process personal data of EU data subjects, even if that data controller is established outside of the EU, where the processing activities are related to the offering of goods or services to such EU data subjects. 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 consumer data, including personal information, and what kind of notice, choice and consent should be required to do so. In 2012, the FTC issued a report containing best practices in the children's mobile marketplace, and, in 2013, issued a report setting forth best practice recommendations for entities in the mobile marketplace (including, among others, platform providers and app developers)mobile app providers. 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 do 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. In addition,

30


several proposed bills currently are pending in Congress and in the states, which if enacted 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 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 is actively being addressed for the mobile marketplace. 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. There are also numerous pending bills at both the U.S. federal and state level on a myriad of issues, which, if enacted, might impose additional regulatory burdens on us. 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 a 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

31


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 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 written 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 a 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. In addition, outside of the US, 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 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 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. In 2013, the FTC strengthened and broadened its COPPA rules, which might impose additional costs if we were to direct any of our services to 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, 2012, 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, 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
Velti India Private Limited
 
100%
 
India
 
Mobile marketing and advertising
Velti FZ LLC
 
100%
 
UAE
 
Mobile marketing and advertising
Velti Istanbul Mobil Teknolojileri
 
100%
 
Turkey
 
Mobile marketing and advertising
Velti North America Inc.
 
100%
 
U.S
 
Holding Company
Velti Ukraine Mobile Marketing Services LLC
 
100%
 
Ukraine
 
Mobile marketing and advertising
Velti do Brasil Marketing Eletronico Ltda
 
100%
 
Brazil
 
Mobile marketing and advertising
Casee (Beijing) Information Technology Company Limited
 
100%
 
China
 
Mobile marketing and advertising
Velti Netherlands B.V.
 
100%
 
Netherlands
 
Holding Company
Mobile Interactive Group Blgm N.V.
 
100%
 
Belgium
 
Mobile marketing and advertising
ZayPay International B.V.
 
100%
 
Netherlands
 
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, 2012, 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 10,800 square feet;
sales, marketing, professional services, support and administrative facilities in London where we lease approximately 12,000 square feet;
research and development, sales, marketing, consulting and support facilities in Athens where we lease approximately 36,000 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.

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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
We are 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 reach targeted consumers, engage the consumer through mobile Internet and applications, convert them into customers and continue to actively manage the relationship through the mobile channel.
Our solutions help brands mobilize their consumer engagement funnel, transforming browsing into buying, communication into loyalty and behavioral insight into purchase influence. From strategic planning to cross-platform digital campaign execution, we help brands establish a cross-channel strategic framework based on a solid understanding of their customers' behavior. Our mGage platform allows marketers to execute highly personalized, enterprise mobile marketing programs across the marketing funnel including ad delivery and measurement, cross-channel messaging promotions, mobile site development, and cross-platform campaign data visualization. For businesses that want professional assistance in achieving mobile marketing and advertising objectives, our services organization offers expert assistance in developing strategies, programs, and hosting services. From account management to creative production to ad ops and technical resources, we support enterprise customers through a self-service or managed services model that augments customers' existing staff to support mobile initiatives.
Corporate Highlights
During 2012 we continued to expand our presence across numerous geographies. We have had success in the United States and Asia, diversifying our global business. Our business in the U.K. grew substantially, in large part due to our acquisition of MIG in late 2011. Revenue in the U.K. in 2012 was 28% of total revenue (compared to 20% in 2011), and in the Americas was 24% of total revenue (compared to 22% in 2011).
Our full year 2012 results showed a 43% increase in revenue over 2011, despite a difficult operating environment in the fourth quarter, during which we saw delays in campaign launches and other challenges that negatively impacted our business. In the fourth quarter, revenue came in at the low end of our expectations, which, in conjunction with higher third party costs and other operating expenses, contributed to significantly lower adjusted EBITDA.
In the fourth quarter of 2012, we completed the divestiture of certain non-strategic assets focused on geographies and certain customers in Southeast and Eastern Europe to Starcapital Limited (Starcapital), a Cyprus company owned by certain former non-management employees of Velti. As part of this divestiture, approximately 75 employees transferred from Velti to subsidiaries of Starcapital. The divested assets were characterized by long revenue collection cycles, are located in troubled economies, and have heavy capital expenditure requirements. We recorded a loss of $10.5 million on the sale of those assets. The consideration for the sale of assets was a $23.5 million non-interest bearing receivable, which is payable in cash in three installments through 2014. We received the first installment in December 2012.
Following the divestiture of these assets to Starcapital, we have been continuing to evaluate other customers and opportunities that we are pursuing in various geographies. We have decided not to pursue certain business opportunities or potential customers that do not meet our more rigorous cash investment requirements, and requirements for improved cash collections and reductions in business in economically challenged regions.
We expect to generate substantial negative cash flow in the first quarter of 2013, both inclusive and exclusive of certain cash acquisition-related liabilities that became payable in the quarter. In addition, as of the end of the first quarter of 2013, we have substantially utilized our revolving credit facility with HSBC. Based on our current business plan, we believe that we will, in the next three months, need to raise additional capital to supplement our existing cash balance and any cash generated from

34


operations, in order to meet our anticipated cash needs for working capital and capital expenditures. There is no assurance that such additional capital will be available to us or on terms acceptable to us.
Basis of Presentation
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Certain prior year balances have been reclassified to conform to the current year presentation. Such reclassifications did not affect total revenues, operating income or net income.
The accompanying consolidated financial statements include the results of Velti plc and all subsidiaries that we control. The statements also include the accounts of an entity in which we are deemed to have a “controlling interest” that is not based on voting rights or control. Intercompany accounts and transactions have been eliminated.
We evaluate our ownership, contractual rights and other interests in entities to determine if they are variable interest entities (VIEs), if we have a variable interest in those entities and the nature and extent of those interests. These evaluations are highly complex and involve judgment and the use of estimates and assumptions based on available historical information and management's judgment, among other factors. Based on our evaluations, if we determine we are the primary beneficiary of such VIEs we consolidate such entities into our financial statements.
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. Significant estimates and assumptions made by management include revenue recognition, recognition of government grant income, income taxes, the allowance for doubtful accounts, intangible assets, goodwill and long-lived assets, contingent payments related to our recent acquisitions and the assumptions used to determined share-based compensation expense. 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 subscription fees from customers who utilize our mobile marketing and advertising platforms, generally referred to as “usage‑based” services, and fees from customers who utilize our software solutions to manage and measure the progress of their transaction‑based mobile marketing and advertising campaigns, which we refer 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; 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 as well as other client driven projects.
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) collectibility of the fee is reasonably assured.

35


SaaS revenue is generated from our “usage‑based” services, including subscription fees for use of individual software modules and our automated mobile marketing campaign creation templates, and fees charged for access to our technology platform. These fees are recognized ratably over the contract term beginning on the commencement date of each contract as services are rendered.
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 transaction in accordance with the terms of the related contracts. Transactions can include SMS messages sent by participants in customer campaigns or advertisement impressions placed on mobile applications, among other types of performance-based transactions. Certain 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 license fees charged for our mobile marketing and advertising technology. We provide licenses on a perpetual or term basis. These types of 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 is recognized over the related term of an arrangement. Fees charged to customize our software solution are, generally, 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 provided 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 number 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 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 become due. Fees that have been invoiced are recorded in trade receivables and in revenue when all revenue recognition criteria have been met. When fees have been invoiced but not all revenue recognition criteria have been met, the invoice is recorded in trade receivables and in deferred revenue. When all revenue recognition criteria are met, but fees have not been invoiced as of the reporting date, such fees are reported in accrued contract receivables and in revenue. 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.
Certain arrangements entered into by us are revenue sharing arrangements. As a result, we complete an analysis of the facts and circumstances to determine whether revenue earned from these arrangements should be recorded gross with the company performing as a principle, or recorded net of third party costs with the company performing as an agent, as required by ASC 605-45 Principal Agent Consideration. When we are a principal in a transaction, we include all amounts paid on behalf of our customers in both revenue and costs.
We present revenue net of tax, sales tax, excise tax and other similar assessments. Our revenue arrangements do not contain general rights of return.
Government Grant Income Recognition
From time to time, we receive grants from the European Union for the development and roll-out of mobile and broadband services and m-commerce related services. We recognize grant income as an offset to costs and expenses in our consolidated statements of comprehensive loss in the period when the costs to be reimbursed by the grant are recognized as expense. When those costs are incurred, receivables from government grants are recognized, if 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. We believe we have reasonable

36


assurance 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 capitalized software development costs, are recognized as income in the periods in which amortization and depreciation on these assets is charged.
Income Taxes - Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowance
Income taxes are accounted for using the asset and liability method. Significant judgment is required in determining our worldwide income tax provision. We are subject to income taxes in multiple jurisdictions and we use estimates in determining our provision for income taxes. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of the process of identifying items of revenues and expenses that qualify for preferential tax treatment and the segregation of earnings and expenses between jurisdictions to avoid double taxation. Compliance with income tax regulations requires us to make decisions relating to the transfer pricing of revenue and expenses between our legal entities that are located in a variety of tax jurisdictions. Our determinations include many decisions based on our knowledge of the underlying assets of the business and the beneficial ownership of these assets. Although we believe that our estimates are reasonable, the final tax outcome of these matters could be different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such determination is made.
Deferred tax assets, related valuation allowances and deferred tax liabilities are determined separately by tax jurisdiction. This process involves estimating actual current tax liabilities together with assessing temporary differences of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are recorded on the balance sheet. Our deferred tax assets consist primarily of net operating loss and tax credit carry forwards and temporary differences related to intangible assets and accrued expenses.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not (a likelihood of more than 50%) to be realized. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located. Our valuation allowance relates primarily to certain U.S. federal tax loss carryfowards. We evaluate our valuation allowance based on factors such as the mix of earnings in the jurisdictions in which we operate, prudent and feasible tax planning strategies, current taxable income and forecasted taxable income. Forecasts of future taxable income are further refined as a result of each year's corporate budget and goal setting process, which generally occurs in the fourth quarter. Based on our evaluation of these factors, we reduced our valuation allowances in 2012. The portion credited to income tax benefit was approximately $0.8 million. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period in which we make such a determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple tax jurisdictions. The amount of income tax we pay is subject to ongoing audits by the jurisdictions in which we operate. These audits include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We account for our uncertain tax issues using a two-step approach to recognize and measure uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not (a likelihood of more than 50 percent) that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. In this step, we assume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, refinement of estimates or realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate and also include the related interest and penalties.
As a part of our accounting for business combinations, some of the purchase price is allocated to goodwill and intangible assets. Impairment charges associated with goodwill are generally not tax deductible and will result in an increased effective income tax rate in the period that any impairment is recorded. Amortization expenses associated with acquired intangible assets are generally

37


not tax deductible pursuant to our existing tax structure; however, deferred taxes have been recorded for non-deductible amortization expenses as a part of the purchase price allocation process. We have taken into account the allocation of these identified intangibles among different taxing jurisdictions, including those with nominal or zero percent tax rates, in establishing the related deferred tax liabilities.
Allowance for Doubtful Accounts
We record revenue for fees that have been invoiced to customers, for which payments have not been received in trade receivables. Our receivables are not interest bearing. 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.
We evaluate the collectability of accounts receivable based on a combination of factors. We exercise judgment when determining the adequacy of these reserves as we evaluate historical bad debt trends, general economic conditions in the U.S. and internationally, and changes in customer financial conditions. An allowance for doubtful accounts is provided based on estimates developed using standard quantitative measures, which include historical write offs and current economic conditions. We also make a specific allowance if there is strong evidence indicating that the amounts due are unlikely to be collectible. Additional allowances might be required if deteriorating economic conditions or other factors affect our customers' ability to make timely payments. Our allowances have generally been adequate to cover our actual credit losses. However, since we cannot reliably predict future changes in the financial stability of our customers, we cannot guarantee that our allowance will continue to be adequate.
Capitalized Software
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 products or processes to be sold or leased. 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.
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 three 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 three years.
Our total net capitalized software, including licenses and intellectual property acquired, totaled $70.6 million at December 31, 2012. Capitalized development costs are then amortized over the product's estimated life, not to exceed three years, beginning upon general release of the product. Annually, we compare a product's unamortized capitalized cost to the product's net realizable value. To the extent unamortized capitalized cost exceeds net realizable value based on the product's estimated future gross revenues the excess is written off. This analysis requires us to estimate future gross revenues associated with certain products and the future costs of completing and selling certain products. Significant judgment is required in determining when a product becomes “technologically feasible” and its net realizable value. Changes in these estimates could result in write-offs of capitalized software costs.
Impairment of Long-Lived Assets and Amortizable 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.

38


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 adopted ASU No. 2011-08 in 2012, which amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, prior to performing the second step of the goodwill impairment assessment.
We completed our annual impairment test for fiscal 2012 and determined that there was no impairment. Based on fourth-quarter 2012 testing, our estimated fair value totals approximately $324.8 million, including a conservative control premium of approximately 10% percent, when compared to our market value of approximately $295.3 million at December 31, 2012. The control premium is defined as the value that may arise from an acquiring company's ability to take advantage of synergies and other benefits that flow from control over another entity. An acquiring entity is often willing to pay more for equity securities that give it a controlling interest than an investor would pay for equity securities representing less than a controlling interest. Our fair value at December 31, 2012 was in excess of our book equity of approximately $292.4 million.
Our shares price remains extremely volatile and such activity is not unusual. If our market capitalization falls below our book value and remains at or below that price for a period of time indicating permanent impairment, then we will treat this data as an impairment indicator and will perform the required analysis to determine the amount of the impairment under ASC 350-20.
Fair Value Measurements
We report our financial and non-financial assets and liabilities that are remeasured and reported at fair value at each reporting period. We 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 include time deposits and readily marketable securities with original maturities of 90 days or less. Cash and cash equivalents are stated at cost, which approximates fair value. As of December 31, 2012 and 2011, 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. The carrying amount of long-term debt as of December 31, 2012 and 2011 approximates its fair value. As of December 31, 2012, we did not have any financial assets or liabilities for which Level 1 or Level 2 inputs were required to be disclosed. See Note 6 in the Notes to the Consolidated Financial Statements for our disclosure of Level 3 inputs used to revalue our contingent payments related to certain of our acquisitions.
Share-Based Payments
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-

39


Scholes valuation model. Changes in the subjective input assumptions can materially affect the fair value estimates determined under the Black-Scholes option valuation model. In the future, changes in the assumptions under the Black-Scholes valuation model, or our election to use a different valuation model, could result in a significantly different impact on our net income or loss.
Purchase Accounting
We have made estimates of the fair values of purchased intangible and other assets acquired in conjunction with our purchase of companies after considering valuations prepared by independent third-party appraisers and certain internally generated information.
Purchased intangible assets, excluding goodwill, totaled $39.6 million at December 31, 2012. If the subsequent actual and updated projections of the underlying business activity are less as compared to the underlying assumptions and projections used to develop these values, then we could experience impairment losses, as described above. In addition, we have estimated the economic lives of certain of these assets and these lives were used to calculate depreciation and amortization expense. If our estimates of the economic lives change, then additional depreciation or amortization expense could be incurred on an annual basis. Historically, we have not made any changes in these areas.
Contingencies and Liabilities
We are involved from time to time in various proceedings, lawsuits and claims involving our customers, products, intellectual property, shareholders and employees. We routinely review the status of each significant matter and assess our potential financial exposure. When we reasonably determine that a loss associated with any of these matters is probable, and can reasonably estimate the loss, we record a reserve to provide for such loss contingencies. If we are unable to record a reserve because we are not able to estimate the amount of a potential loss in a matter, or if we determine that a loss is not probable, we are nevertheless required to disclose certain information regarding such matter if we determine that there is a reasonable possibility that a loss has been incurred. Because of the inherent uncertainties related to these types of matters, we base our loss reserves on the best information available at the time. As additional information becomes available, we may reevaluate our assessment regarding the probability of a matter or its expected loss. Our financial position, results of operations or cash flows could be materially and adversely affected by such revisions in our estimates. For further discussion of contingencies and liabilities, see the various risks described under “Risk Factors -- Risks Related to Our Business,” above.

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5.A. Operating Results.
The following table sets forth our consolidated results of operations for the years ended December 31, 2012, 2011 and 2010:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
(in thousands)
Revenue:
 
 
 
 
 
Software as a service (SaaS) revenue
$
204,210

 
$
139,024

 
$
77,202

License and software revenue
22,213

 
36,705

 
26,586

Managed services revenue
43,921

 
13,473

 
12,481

Total revenue
270,344

 
189,202

 
116,269

Cost and expenses:
 
 
 
 
 
Third-party costs
91,404

 
53,901

 
36,658

Datacenter and direct project costs
29,966

 
17,952

 
6,312

General and administrative expenses
68,196

 
45,258

 
22,484

Sales and marketing expenses
54,507

 
37,733

 
23,049

Research and development expenses
21,236

 
13,060

 
7,840

Acquisition related and other charges
9,950

 
8,890

 
5,364

Impairment of intangible assets
16,902

 
1,500

 

Loss from disposal of assets
10,532

 

 

Depreciation and amortization
33,946

 
20,900

 
12,131

Total cost and expenses
336,639

 
199,194

 
113,838

Income (loss) from operations
(66,295
)
 
(9,992
)
 
2,431

Interest expense, net
(1,830
)
 
(7,389
)
 
(8,069
)
Gain (loss) from foreign currency transactions
1,995

 
6,200

 
(1,726
)
Other income (expense)
5,876

 
(49
)
 

Loss before income taxes, equity method investments and non-controlling interest
(60,254
)
 
(11,230
)
 
(7,364
)
Income tax benefit (expense)
2,835

 
(3,808
)
 
(3,771
)
Loss from equity method investments
(3,755
)
 
(200
)
 
(4,615
)
Net loss
(61,174
)
 
(15,238
)
 
(15,750
)
Net income (loss) attributable to non-controlling interest
53

 
130

 
(81
)
Net loss attributable to Velti
$
(61,227
)
 
$
(15,368
)
 
$
(15,669
)
 
 
 
 
 
 
Revenue
 
Year Ended December 31,
 
Variance
 
2012 vs 2011
 
2011 vs 2010
 
2012
 
2011
 
2010
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Software as a service (SaaS) revenue
$
204,210

 
$
139,024

 
$
77,202

 
$
65,186

 
47
 %
 
$
61,822

 
80
%
License and software revenue
22,213

 
36,705

 
26,586

 
(14,492
)
 
(39
)%
 
10,119

 
38
%
Managed services revenue
43,921

 
13,473

 
12,481

 
30,448

 
226
 %
 
992

 
8
%
Total revenue
$
270,344

 
$
189,202

 
$
116,269

 
$
81,142

 
43
 %
 
$
72,933

 
63
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our total revenue for 2012 increased by $81.1 million, or 43%, compared to 2011. The increase was primarily the result of growth in SaaS revenue of $65.2 million; of which $53.0 million was from revenue generated from our recent acquisitions (MIG, Air2Web and CASEE), including revenue generated through these entities of sales of Velti products, and $12.2 million was from new and existing customers. License revenue decreased by $14.5 million or 39% for the year ended December 31, 2012, due to fewer license deals generating revenue as compared to the prior year as we encouraged more customers to utilize our hosted programs. Managed services revenue increased by $30.4 million or 226% compared to the prior year. The increase was due to organic growth.

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For 2012, our revenue from existing customers was $173.0 million and from new customers was $97.4 million, compared to $145.2 million and $44.0 million, respectively, for the same period in 2011.
Our total revenue for 2011 increased by $72.9 million, or 63%, 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.
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 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,
 
 
2012
 
2011
 
2010
 
 
(in thousands, except percentages)
Europe:
 
 
 
 
 
 
 
 
 
United Kingdom
 
$
74,731

27.6
%
 
$
37,758

20.0
%
 
$
34,105

29.3
%
All other European countries
 
97,799

36.2
%
 
86,318

45.6
%
 
55,299

47.6
%
Total Europe
 
172,530

63.8
%
 
124,076

65.6
%
 
89,404

76.9
%
Americas
 
63,597

23.5
%
 
41,114

21.7
%
 
9,150

7.9
%
Asia/Africa
 
34,217

12.7
%
 
24,012

12.7
%
 
17,715

15.2
%
Total revenue
 
$
270,344

100.0
%
 
$
189,202

100.0
%
 
$
116,269

100.0
%
 
 
 
 
 
 
 
 
 
 
During 2012, we generated revenue of $63.6 million from the Americas, compared to $41.1 million during 2011. The $22.5 million increase is primarily the result of our expansion in the U.S. partly attributable to our 2011 acquisition of Air2Web. We also benefited from $48.5 million in increased revenue from the U.K. and other European countries as well as a $10.2 million increase from Asia/Africa. These increases were primarily due to the MIG acquisition and organic growth and revenue generated through the sale of legacy Velti products.
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.
Operating Costs and Expenses
 
Year Ended December 31,
 
Variance
 
2012 vs 2011
 
2011 vs 2010
 
2012
 
2011
 
2010
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Third-party costs
$
91,404

 
$
53,901

 
$
36,658

 
$
37,503

 
70
%
 
$
17,243

 
47
%
Datacenter and direct project costs
29,966

 
17,952

 
6,312

 
12,014

 
67
%
 
11,640

 
184
%
General and administrative expenses
68,196

 
45,258

 
22,484

 
22,938

 
51
%
 
22,774

 
101
%
Sales and marketing expenses
54,507

 
37,733

 
23,049

 
16,774

 
44
%
 
14,684

 
64
%
Research and development expenses
21,236

 
13,060

 
7,840

 
8,176

 
63
%
 
5,220

 
67
%
Acquisition related and other charges
9,950

 
8,890

 
5,364

 
1,060

 
12
%
 
3,526

 
66
%
Impairment of intangible assets
16,902

 
1,500

 

 
15,402

 
1,027
%
 
1,500

 
100
%
Loss from disposal of assets
10,532

 

 

 
10,532

 
100
%
 

 

Depreciation and amortization
33,946

 
20,900

 
12,131

 
13,046

 
62
%
 
8,769

 
72
%
Total cost and expenses
$
336,639

 
$
199,194

 
$
113,838

 
$
137,445

 
69
%
 
$
85,356

 
75
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
We incur certain operating costs that directly relate to revenue. These costs are classified into two categories: third-party, and datacenter and direct project.

42


Third-party Costs
Third party costs are paid to third parties to secure advertising space or content to obtain media inventory for the placement of advertising and media messaging services and for creative development and other 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 and promotional costs 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 relate primarily to SaaS revenue.
Third‑party costs increased by $37.5 million, or 70%, from 2011 to 2012. These costs were 34% of revenue in 2012 compared to 28% of revenue in 2011. This increase was primarily due to $17.6 million in costs related to acquired companies including costs associated with the sale of Velti products through these acquired entities and the remaining $19.9 million related to overall revenue increase.
Third‑party costs increased $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 costs associated with the acquisition of Air2Web and MIG. These increased costs were partially offset by lower incentive and promotional costs used by our mobile marketing campaigns in 2011.
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 a specific campaign 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. These costs may relate to SaaS revenue and/or license and software revenue. To date, the vast majority of these costs are related to SaaS revenue and the amount attributable to license and software revenue was immaterial.
Datacenter and direct project costs increased by $12.0 million, or 67%, from 2011 to 2012. This increase was primarily due to $9.1 million of expense related to acquisitions, particularly MIG, which has significant direct costs for its project business, as well as higher costs for delivery efforts in the U.S. and U.K. entities. The datacenter and direct costs as a percentage of SaaS revenue was 15% and 13% in 2012 and 2011, respectively. Share based compensation expense also increased slightly from the prior year.
Datacenter and direct project costs increased by $11.6 million, or 184% from 2010 to 2011. The 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 necessary to support growth.
General and Administrative Expenses
General and administrative expenses increased by $22.9 million, or 51%, from 2011 to 2012. This increase was due to a $6.9 million increase in costs associated with newly acquired entities and increased overhead, a $6.8 million increase in bad debt expense, $6.1 million associated with the build out of our support team as well as increased facilities costs and a $3.1 million increase in facilities expenses due to our global office expansion.
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, a $9.4 million increase in personnel related expense due to an increase in headcount to support growth in our business and as a result of our U.S. public offering, and a $3.1 million increase in professional services and other administrative expenses to support our growth.
Sales and Marketing Expenses
Sales and marketing expenses increased by $16.8 million, or 44%, from 2011 to 2012. This increase was due to a $10.4 million increase in expenses associated with our acquisitions and was consistent with the revenue growth of the business. The remaining $6.4 million related to growing both the sales and marketing team to support year over year revenue growth.
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

43


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.
Research and Development Expenses
Research and development expenses increased by $8.2 million, or 63%, from 2011 to 2012. This increase consisted of approximately $5.1 million related to expenses for entities we acquired in 2011 and approximately $2.2 million in our share based compensation expense including bonuses expected to be paid in shares.
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, a $2.5 million increase in personnel‑related expense due to an increase in headcount to support growth in our business, offset by a $0.4 million reduction in research and development expenses due to more effective cost management.
Acquisition-Related and Other Charges
Acquisition-related and other charges increased by $1.1 million or 12% from 2011 to 2012 primarily due to re-measurement of acquisition related costs.
Acquisition-related and other charges for 2011 were $8.9 million and $5.4 million in 2010, primarily related to the valuation of contingent payments for Mobclix acquisition. See Note 5 to the Consolidated Financial Statements.
Impairment of Intangible Assets
Impairment of intangible assets increased by $15.4 million from 2011 to 2012.The increase was primarily related to write-downs of certain capitalized software. The impairment in 2012 of $16.9 million is for certain software utilized in business activities which are no longer being pursued by us, in accordance with our strategic direction. For additional information, see Note 7 in the Notes to the Consolidated Financial Statements.
The impairment in 2011 of $1.5 million was related to the write-down of obsolete intangible assets related to the integration of Air2Web and MIG following their acquisitions. There were no impairments in 2010.
Loss from Disposal of Assets
The loss from disposal of assets of $10.5 million relates to the loss incurred by us upon the sale of certain assets to Starcapital Limited in the fourth quarter of 2012. For additional information refer to Note 8 in the Notes to the Consolidated Financial Statements. There were no such transactions in prior years.
Depreciation and Amortization
Depreciation and amortization expense increased by $13.0 million, or 62%, from 2011 to 2012. The increase primarily related to $8.4 million from acquisitions and the remaining due to continued software purchases, leasehold improvements on our U.S. facilities, as well as significant capital expenditures associated with our U.S. and European operations.
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.

44


Other Income Expense
 
Year Ended December 31,
 
Variance
 
2012 vs 2011
 
2011 vs 2010
 
2012
 
2011
 
2010
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Interest expense, net
$
(1,830
)
 
$
(7,389
)
 
$
(8,069
)
 
$
(5,559
)
 
(75
)%
 
$
(680
)
 
(8
)%
Gain (loss) from foreign currency transactions
1,995

 
6,200

 
(1,726
)
 
(4,205
)
 
(68
)%
 
$
7,926

 
459
 %
Other expenses
5,876

 
(49
)
 

 
5,925

 
12,092
 %
 
$
49

 
100
 %
Income tax (expense) benefit
2,835

 
(3,808
)
 
(3,771
)
 
6,643

 
174
 %
 
$
37

 
1
 %
Loss from equity method investments
(3,755
)
 
(200
)
 
(4,615
)
 
3,555

 
1,778
 %
 
$
(4,415
)
 
(96
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense, net
Interest expense, net decreased by $5.6 million, or 75%, from 2011 to 2012. Interest expense decreased by $2.6 million as a result of repaying the majority of our outstanding debt towards the end of the first quarter of 2011, $1.7 million as a result of less accretion of debt discounts and $1.2 million from lower finance costs associated with factoring of receivables. The remaining decrease was the result of changes in interest income.
Interest expense, net decreased by $0.7 million, or 8%, from 2010 to 2011, primarily due to a decrease in our outstanding debt balances.
Gain (loss) from Foreign Currency Transactions
Gain (loss) from foreign currency transactions, a non-cash item, decreased by $4.2 million, or 68%, from 2011 to 2012. The reduction in 2012 was primarily due to less volatility in foreign exchange rates, primarily those between the U.S. dollar and the Euro and to a decline in gains from foreign currency adjustments on smaller cash balances as compared to higher balances maintained in 2011, which were the result of our initial public offering in the U.S.
Gain (loss) from foreign currency transactions 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 British pound sterling against the U.S. dollar.
Other Income (Expense)
Other income (expense) increased by $5.9 million from 2011 to 2012 as a result of our remeasuring our previously held interest in Casee during 2012. There were no other income (expense) items recorded in 2010 and only minimal amounts recorded in 2011.
Income Tax Expense
We recorded income tax benefit of $2.8 million on a worldwide pre-tax loss of $64.0 million for 2012 compared to an income tax expense of $3.8 million on a world-wide pre-tax loss of $11.4 million for 2011.
We recorded income tax expense of $3.8 million on a worldwide pre-tax loss of $12.0 million for 2010.
For a description of the changes in our effective tax rates see Note 10 in the Notes to the Consolidated Financial Statements.
Our effective income tax rate was 4.3%, 32.9% and 31.5% for fiscal 2012, 2011 and 2010, respectively. The fiscal 2012 provision for taxes include certain tax benefits that caused the effective tax rates for the years to be less than the effective tax rate in fiscal years 2011 and 2010. During fiscal 2012, we recorded certain tax benefits totaling $4.9 million, primarily from net operating losses, reduction in our valuation allowance, and other deferred tax assets. We expect the fiscal 2013 annual effective tax rate to be similar to the 2012 tax rate.
Tax law requires items to be included in our tax returns at different times than the items are reflected in our financial statements. As a result, our annual tax rate reflected in our financial statements is different than that reported in our tax returns (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and

45


some differences reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax returns in future years for which we have already recorded the tax benefit in our income statement. We establish valuation allowances for our deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred, or expense for which we have already taken a deduction in our tax return but have not yet recognized as expense in our financial statements.
The benefits of uncertain tax positions are recorded in our financial statements only after determining under a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, we reassess these probabilities and record any changes in the financial statements as appropriate. We account for uncertain tax positions by determining the minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. This determination requires the use of judgment in assessing the timing and amounts of deductible and taxable items.
Loss from Equity Method Investments
Our share of loss from equity method investments increased by $3.6 million, or 1778%, from 2011 to 2012, primarily due to less favorable results from our 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.
5.B. Liquidity and Capital Resources.
Since our inception we have financed our operations and acquisitions primarily through the public offerings of equity in the U.S. and the U.K. and borrowings under our bank credit facilities. As of December 31, 2012, we had $36.6 million in cash and cash equivalents. In connection with the acquisition of MIG in November 2011, we will be required to make cash payments of approximately $16.5 million to the former shareholders of MIG by mid April 2013. We generally deposit our excess cash in interest bearing bank accounts, and did not have investments in marketable securities as of December 31, 2012.
As of December 31, 2012, we had approximately $28.2 million indebtedness to HSBC. The effective interest rates to finance our borrowings as of December 31, 2012 ranged from 2.7% to 17.3%. Subsequent to December 31, 2012, we have substantially utilized our credit facility with HSBC. The weighted average effective interest rate for our outstanding debt with HSBC as of December 31, 2012 was 5.3%.
As of December 31, 2012, we had working capital of $152.7 million.  A significant portion of our current assets, however, are represented by trade receivables where the typical payment cycle is beyond one year. We expect to generate negative cash flow in the three months ended March 31, 2013, further eroding our cash position with increasing cash flow generation in the second half of the year.
Based on our current business plan, we believe that we will need to raise additional capital in the next three months to supplement our existing cash balances and any cash generated from operations, in order to meet our anticipated cash needs for working capital and capital expenditures as well as to pay our obligations to MIG. If we are unable to obtain financing, we may be unable to pay our MIG obligations when they come due. There is no assurance that MIG will waive or agree to a delay of our payment obligations if we are unable to obtain financing. As a result, the report of our independent public accounting firm includes a statement raising substantial doubt as to our ability to continue as a going concern, which may adversely affect our ability to conduct business with third parties, as well as our ability to attract new financing.
We intend to overcome any substantial doubt concerning our ability to continue as a going concern by continuing to pursue and execute our strategic operating goals and by obtaining new financing. However, there can be no assurance that our efforts to find such financings will be successful or on terms favorable to us. In addition, the terms of any financing may adversely affect the holdings or the rights of our shareholders.

46


 
Year Ended December 31,
 
2012
 
2011
 
2010
 
(in thousands)
Net cash generated from (used in):
 
 
 
 
 
Operating activities
$
10,648

 
$
(67,321
)
 
$
(9,870
)
Investing activities
(69,894
)
 
(80,845
)
 
(23,734
)
Financing activities
17,521

 
209,037

 
32,186

Effect of exchange rate fluctuations
2,531

 
(2,460
)
 
(883
)
Increase (decrease) in cash and cash equivalents
$
(39,194
)
 
$
58,411

 
$
(2,301
)
 
 
 
 
 
 
Operating Activities. Net cash generated from operating activities for 2012 was $10.6 million, compared to net cash used in operating activities of $67.3 million for 2011. The increase in cash is attributable to increased sales and improved cash collection efforts over 2011, and lower prepaid balances and other cash management initiatives.
Comprehensive DSOs based on trailing 12 months' revenue were:
 
Year Ended December 31,
 
2012
 
2011
 
(in thousands)
Comprehensive DSO
311

 
261

 
 
 
 
Comprehensive DSO is calculated as follows: comprehensive receivables (consisting of trade receivables and accrued contract receivables, with reduction for agreements where we recognize revenue net of third party costs) divided by trailing twelve month revenue (which includes estimated revenue of acquired companies as though they had been consolidated for the entire twelve month period) multiplied by 360 days.
Investing Activities. Net cash used in investing activities for 2012 was $69.9 million compared to $80.8 million for 2011. This was primarily due a decline in our investment in property and equipment, software development, which we capitalized, and investment in subsidiaries, including the acquisition of MIG and Air2Web during 2011.
Financing Activities. Net cash generated from financing activities for 2012 was $17.5 million compared to $209.0 million for 2011. The cash generated from financing activities in 2012 was primarily from borrowings on our credit facility, partially offset by repayment of borrowings. The cash generated from financing activities in 2011 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 9 in the Notes to the Consolidated Financial Statements.
Although we have an overall accumulated deficit of $96.0 million, we have unremitted positive earnings in certain jurisdictions of approximately $67.8 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: (a) each company with positive unremitted earnings may not have sufficient distributable reserves to make such a distribution in the foreseeable future and (b) 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

47


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 451 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. The core competence of the advanced projects team is mathematics and data science. This has enabled the implementation of consumer behavior models that can steer mobile marketing campaign execution towards specific outcomes to achieve business goals and KPIs. 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.
As of March 31, 2013, we had 10 granted patents and allowed applications and 17 pending patent applications on file. 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 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, 2012. 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, 2012 may not be indicative of our financial results for any future quarterly periods.

49


 
For the three months ended
 
Dec 31,
2012
 
Sep 30,
2012
 
Jun 30,
2012
 
Mar 31,
2012
 
Dec 31,
2011
 
Sep 30,
2011
 
Jun 30,
2011
 
Mar 31,
2011
 
 
 
(unaudited, in thousands)
Selected quarterly statement of operations data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software as a service (SaaS) revenue
$
59,956

 
$
48,540

 
$
48,946

 
$
46,768

 
$
62,650

 
$
25,545

 
$
27,550

 
$
23,279

License and software revenue
12,581

 
5,229

 
2,898

 
1,505

 
19,746

 
10,091

 
4,077

 
2,791

Managed services revenue
24,930

 
8,624

 
6,847

 
3,520

 
4,710

 
2,552

 
2,731

 
3,480

Total revenue
97,467

 
62,393

 
58,691

 
51,793

 
87,106

 
38,188

 
34,358

 
29,550

Cost and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Third-party costs
30,862

 
22,701

 
20,979

 
16,862

 
18,805

 
13,746

 
10,717

 
10,633

Datacenter and direct project costs
7,595

 
6,894

 
7,585

 
7,892

 
5,734

 
4,127

 
5,140

 
2,951

General and administrative expenses
21,408

 
15,516

 
16,140

 
15,132

 
11,121

 
10,260

 
14,409

 
9,468

Sales and marketing expenses
16,041

 
13,193

 
12,520

 
12,753

 
10,369

 
7,785

 
11,586

 
7,993

Research and development expenses
6,492

 
5,724

 
4,336

 
4,684

 
3,853

 
2,814

 
3,563

 
2,830

Acquisition related and other charges

 
5,622

 
2,131

 
2,197

 
2,787

 

 
6,142

 
1,461

Loss on assets held for sale

 
9,626

 

 

 

 

 

 

Impairment of other assets
16,902

 

 

 

 

 

 

 

Loss from disposal of assets
906

 

 

 

 

 

 

 

Depreciation and amortization
9,948

 
8,707

 
8,022

 
7,269

 
7,250

 
5,788

 
4,108

 
3,754

Total cost and expenses
110,154

 
87,983

 
71,713

 
66,789

 
59,919

 
44,520

 
55,665