424B4 1 d350911d424b4.htm 424B4 424b4
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-183441

PROSPECTUS

7,812,500 Shares

LOGO

Ordinary Shares

 

 

This is Fleetmatics Group PLC’s initial public offering. We are offering 6,250,000 of our ordinary shares and the selling shareholders are selling 1,562,500 of our ordinary shares. We will not receive any proceeds from the sale of shares to be offered by the selling shareholders.

The initial public offering price is $17.00 per share. Currently, no public market exists for the shares. Our ordinary shares have been approved for listing on the New York Stock Exchange under the symbol “FLTX.”

We are a “controlled company” under the corporate governance rules for New York Stock Exchange-listed companies.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and have elected to adopt certain reduced public company reporting requirements. Investing in the ordinary shares involves risks that are described in the “Risk Factors” section beginning on page 12 of this prospectus.

 

 

 

      

Per Share

      

Total

 

Public offering price

     $ 17.00         $ 132,812,500   

Underwriting discount

     $ 1.19         $ 9,296,875   

Proceeds, before expenses, to us

     $ 15.81         $ 98,812,500   

Proceeds, before expenses, to the selling shareholders

     $ 15.81         $ 24,703,125   

The underwriters may also exercise their option to acquire up to an additional 1,171,875 ordinary shares from the selling shareholders at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus. The selling shareholders include our principal shareholder and certain of our directors and officers, including our chief executive officer and chief financial officer.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about October 11, 2012.

 

 

 

Barclays

    
BofA Merrill Lynch
  

 

 

 

RBC Capital Markets    Stifel Nicolaus Weisel      William Blair   

 

 

Prospectus dated October 4, 2012.


Table of Contents

TABLE OF CONTENTS

 

Prospectus Summary

     1   

The Offering

     6   

Summary Consolidated Financial Data

     8   

Risk Factors

     12   

Forward-Looking Statements

     36   

Use of Proceeds

     37   

Dividend Policy

     38   

Capitalization

     39   

Dilution

     41   

Corporate Structure

     43   

Selected Consolidated Financial Data

     44   

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

     46   

Business

     82   

Government Regulation

     96   

Management

     98   

Related Party Transactions

     113   

Principal and Selling Shareholders

     116   

Description of Share Capital

     119   

Shares Eligible for Future Sale

     140   

Taxation

     141   

Underwriting

     150   

Enforcement of Civil Liabilities

     156   

Legal Matters

     156   

Experts

     156   

Where You Can Find More Information

     156   

Index to Consolidated Financial Statements

     F-1   
 

 

Neither we, the selling shareholders, nor the underwriters have authorized anyone to provide you with any additional information or information that is different from the information contained in this prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus and any free writing prospectus prepared by us or on our behalf may only be used where it is legal to sell these securities. The information in this prospectus or any free writing prospectus prepared by us or on our behalf is only accurate as of the date of this prospectus or such free writing prospectus.

Until October 29, 2012 (25 days after the date of this prospectus), all dealers that buy, sell or trade our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Unless otherwise indicated, all references in this prospectus to “FleetMatics” or the “Company,” “we,” “our,” “us” or similar terms refer to Fleetmatics Group PLC and its subsidiaries.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our ordinary shares or possession or distribution of this prospectus in any such jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.

This document has been prepared on the basis that any offer of shares in any relevant European Economic Area member state will be made pursuant to an exemption under European prospectus law from the requirement to publish a prospectus for offers of shares and does not constitute an offer or solicitation to anyone to purchase shares in any jurisdiction in which such offer or solicitation is not authorized nor to any person to whom it is unlawful to make such an offer or solicitation.


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Prospectus Summary

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our ordinary shares. You should read this entire prospectus carefully, especially the “Risk Factors” section of this prospectus and our consolidated financial statements and related notes appearing elsewhere in this prospectus, before making an investment decision.

Overview

FleetMatics is a leading global provider of fleet management solutions delivered as software-as-a-service, or SaaS. Our mobile software platform enables businesses to meet the challenges associated with managing their local fleets of commercial vehicles and improve productivity by extracting actionable business intelligence from vehicle and driver behavioral data. We offer intuitive, cost-effective Web-based and mobile application solutions that provide fleet operators with visibility into vehicle location, fuel usage, speed and mileage and other insights into their mobile workforce, enabling them to reduce operating and capital costs, as well as increase revenue. As of June 30, 2012, we had more than 16,000 customers who collectively deployed our solutions in over 281,000 vehicles worldwide. The substantial majority of our customers are small and medium-sized businesses, or SMBs, each of which deploy our solutions in 1,000 or fewer vehicles. During the six months ended June 30, 2012, we collected an average of approximately 30 million data points per day from subscribers, and we have aggregated over 28 billion data points since our inception, which we believe provides valuable information that we may consider in the development of complementary solutions and additional sources of revenue.

We believe that the addressable market for our fleet management solutions is large, growing and underpenetrated. Frost and Sullivan, an independent research firm, reported that in 2010 there were approximately 18.5 million local commercial fleet vehicles in the U.S. and Canada, 11.3% of which utilized a fleet management solution. We believe that the global market opportunity is much larger and we estimate it to be in excess of 61 million vehicles. Our multi-tenant SaaS solutions are designed to meet the needs of SMBs, overcome existing barriers to adoption, and leverage the volumes of data transmitted to us from in-vehicle devices over cellular networks that we aggregate and analyze from our large and growing subscriber base.

We have grown our customer base, the number of vehicles using our solutions and our revenue in each year since our incorporation in 2004. We have developed a differentiated, cost-effective customer acquisition sales model based on leads sourced through both Web-based digital advertising and targeted outbound sales efforts. The following chart shows the aggregate number of vehicles under subscription for our fleet management solution as of December 31 for each of the years presented and as of June 30, 2012:

 

LOGO

The chart above includes the number of vehicles under subscription with our subsidiary SageQuest, Inc., or SageQuest, before and after our acquisition of SageQuest in July 2010.

 

 

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Our subscription revenue in 2011 grew 42.7% to $92.3 million compared to $64.7 million in 2010 and in the six months ended June 30, 2012 grew 37.1% to $58.4 million compared to $42.6 million in the six months ended June 30, 2011. We reported net income in 2011 of $2.9 million compared to a net loss in 2010 of $0.7 million, and we reported a net loss of $0.4 million in the six months ended June 30, 2012 compared to net income of $1.6 million in the six months ended June 30, 2011. Our Adjusted EBITDA in 2011 grew 94.7% to $21.7 million compared to $11.2 million in 2010 and in the six months ended June 30, 2012 grew 26.6% to $12.0 million compared to $9.5 million in the six months ended June 30, 2011. For a definition of Adjusted EBITDA and a reconciliation to net income (loss), see the section entitled “Summary Consolidated Financial Data—Adjusted EBITDA.”

Industry Background

Most small and medium-sized local service and distribution businesses rely on their fleet of commercial vehicles and mobile workforce to deliver products and services. These SMB fleet operators face significant operational challenges. Without knowing the location of each vehicle in a fleet, dispatchers often do not have the information necessary to optimally route their vehicles, resulting in lost time in route to a job location, increased fuel consumption, excessive vehicle mileage, and unnecessary wear and tear. Fleet operators lack oversight of their drivers which makes it more difficult for operators to validate hours worked, discourage unproductive worker behavior and incentivize greater efficiency.

Many fleet management alternatives do not adequately address the challenges faced by operators or are poorly suited for SMB adoption given their high up-front costs, technical complexity and difficulty of implementation and use. Fleet operators often use discrete point-to-point solutions, such as cellular phones, to monitor their fleet and mobile workers. These solutions do not enable continuous monitoring, making it difficult to validate hours worked and manage other day-to-day fleet activities. Additionally, paper-based techniques, spreadsheets and other manual processes used to manage fleet data tend to be inefficient and generate minimal business intelligence. Fleet management solutions targeting long-haul fleet carriers are not well-suited to SMB customers as these offerings typically feature complex functionality built into proprietary hardware devices and require high up-front costs associated with implementation.

Our Solutions

Our SaaS solutions enable businesses to meet the challenges associated with managing their local fleets by extracting actionable business intelligence from vehicle and driver behavioral data. We believe that our solutions benefit customers in the following ways:

Reduced operating costs. Businesses that use our solutions can monitor and manage route efficiency and reduce idle time, resulting in lower fuel costs and labor expenses, such as overtime pay. In addition, our software helps companies to monitor vehicle speeds, identify unauthorized usage, minimize fleet wear and tear as well as the likelihood of fines, and increase the prospects of recovering stolen vehicles.

Increased worker productivity and revenues. Our solutions enable our customers to enhance worker productivity by minimizing wasted time on and traveling to job sites, detecting extended breaks and unauthorized detours, and provide our customers with the ability to better align compensation with productivity.

Designed for SMBs. Our FleetMatics branded product is a competitively-priced solution that is easily accessed and used via a Web browser or mobile application and that can be quickly implemented with the assistance of our large network of third-party installers.

A robust platform for data aggregation. We aggregate data that is generated from the use of our solutions with data provided through partnerships, integration with third-party products, commercial or publicly

 

 

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available sources, and from our customers. This capability provides us with an opportunity to recognize trends and provide insights that complement our core product reports to help our customers optimize the performance of their fleet.

Highly scalable, reliable and cost-effective SaaS platform. We utilize a SaaS delivery model, which lowers operators’ costs by eliminating their need to own and support software or associated technology infrastructure. We have built our solutions to scale and support geographically-distributed fleets of any size as they grow.

Ability to integrate third-party products and services. Our software architecture facilitates integration with third-party applications and services, such as fuel cards, mapping and work order integration solutions, and other value-added software and services.

Device and network agnostic. Our fleet management solutions can be accessed over personal computers, tablets or smart phones, providing our customers with significant flexibility in how they access the business insights we provide.

Our Key Competitive Strengths

We believe that the following competitive strengths differentiate us from our competitors and are key to our success:

Efficient and scalable customer acquisition model. We have developed a scalable sales and marketing model that is focused on the efficient generation of a large number of customer leads, primarily through digital advertising, such as search engine marketing and optimization and email marketing as well as targeted outbound sales efforts. These techniques provide us with a flow of low-cost, qualified leads, both in the U.S. and internationally. We believe our marketing approach provides us with a cost-efficient and highly effective means of targeting and accessing the vast and geographically diverse SMB market and converting leads into paying subscribers.

Business intelligence approach to fleet management. Our approach to fleet management is based on our proprietary business intelligence software that enables our customers to analyze large volumes of complex vehicle and driver behavioral data by accessing over 40 pre-built reports online through an intuitive dashboard. Our technology platform enables users to consolidate large, disparate data sets and identify relationships and long-term historical trends within data through proactive prompts or when requested by the user. We believe that our solutions provide our customers with insights that help them make more informed and timely business decisions.

Software-as-a-Service model. Our SaaS-based solutions are offered through a subscription over the Internet and use a multi-tenant architecture, which enables us to run a single instance of our software code, add subscribers with minimal incremental expense and deploy new applications and upgrades quickly and efficiently.

Deep domain expertise. From inception, we have focused on small and medium-sized fleet markets. This focus enables us to understand the specific needs of SMB fleet operators as they evolve. We possess significant experience and expertise in fleet management solutions, which enable us to develop, implement and sell SaaS solutions purpose-built for our existing and prospective customers.

Large and growing ecosystem of fleets and vehicles. As of June 30, 2012, we had more than 16,000 customers who deployed our solutions in over 281,000 vehicles worldwide. In addition, our customers ran over 1.6 million reports and generated over one billion data points in June 2012. This vast amount of data not only

 

 

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provides valuable information for our business intelligence offerings, but also provides us with opportunities for increased revenue. Our large deployment footprint also provides us with an audience to whom we can market and sell incremental solutions, such as integration with fuel cards and global positioning system, or GPS, navigation devices, or third-party complementary products and services.

Our Growth Strategy

Our objective is to be the world’s leading provider of SaaS-based fleet management solutions. To accomplish this, we intend to:

Acquire new customers. We intend to acquire new customers by continuing to execute on our efficient sales model, leveraging our marketing efforts, capitalizing on word-of-mouth referrals and expanding our direct sales force.

Increase sales to existing customers. We believe that there are numerous opportunities to increase the penetration of our existing client base by selling our customers additional fleet management solutions, such as work order management, fuel card capabilities and GPS navigation device integration. We also expect our customers will acquire additional subscriptions as they add vehicles.

Continue to innovate and partner. We collaborate with our customers to build functionality that addresses their needs and requirements. We plan to continue to use our expertise in fleet management and strong relationships with our customers to invest in our software solutions and develop new applications, features and functionality which will enhance our solution and expand our addressable market. We also intend to pursue industry partnerships that can leverage our mobile platform to deliver increased value to our customers.

Capitalize on big data opportunity. During the six months ended June 30, 2012, we collected an average of approximately 30 million data points per day from customers’ vehicles and have aggregated over 28 billion data points since our inception. We believe this represents a significant asset from which we are developing complementary solutions and deriving incremental revenue opportunities.

Continue to expand internationally. In 2011 and in the first six months of 2012, 13.7% and 10.6%, respectively, of our revenue was generated outside of North America. We believe that a significant opportunity exists to increase our sales internationally.

Pursue strategic acquisitions. We may pursue acquisitions that complement our existing business, represent a strong strategic fit and are consistent with our overall growth strategy.

Risks That We Face

You should carefully consider the risks described under the “Risk Factors” section beginning on page 12, and elsewhere in this prospectus. Some of these risks are:

 

   

failure to effectively and efficiently attract, sell to and retain SMB customers would adversely affect our operating results;

 

   

we have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If we fail to remediate one or more of our material weaknesses or if we fail to establish and maintain effective control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected;

 

 

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we may not be able to retain and increase sales to our existing customers, which could negatively impact our financial results;

 

   

failure of local service and distribution businesses to adopt fleet management solutions could negatively impact our revenue;

 

   

our inability to adapt to rapid technological change in our industry and related industries could impair our ability to remain competitive and adversely affect our results of operations;

 

   

we face many risks associated with our plans to expand internationally, which could harm our business, financial condition, and operating results;

 

   

any significant disruption in service on our websites or in our computer systems could damage our reputation and result in a loss of customers, which would harm our business and operating results; and

 

   

our directors, executive officers, and holders of more than 5% of our ordinary shares prior to this offering, together with their affiliates, will continue to have substantial control over us after this offering and will beneficially own, in the aggregate, approximately 26,924,415 of our outstanding ordinary shares, which could delay or prevent a change in corporate control.

These risks could materially and adversely impact our business, financial condition, operating results and cash flow, which could cause the trading price of our ordinary shares to decline and could result in a loss of your investment.

Our Status as a Controlled Company

After this offering our largest shareholder will continue to control a majority of the voting power of our outstanding ordinary shares. As a result, we are a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirement that we have a compensation committee that is composed entirely of independent directors; the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors; and the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees. Accordingly, in the future you may not have the same protections afforded to shareholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.

Our Corporate Information

The legal and commercial name of our company is Fleetmatics Group PLC. We were incorporated in Ireland on October 28, 2004 as a private limited company. Before commencing this offering, we changed our corporate structure from a private limited company to a public limited company. A public limited company known as Fleetmatics Group PLC became the holding company of the FleetMatics group by way of a share-for-share exchange in which the shareholders of FleetMatics Group Limited exchanged their shares in FleetMatics Group Limited for identical shares in Fleetmatics Group PLC. Upon the exchange, the historical consolidated financial statements of FleetMatics Group Limited became the historical consolidated financial statements of Fleetmatics Group PLC included in this prospectus. Our registered and principal office is located at Block C, Cookstown Court, Belgard Road, Tallaght, Dublin 24, Ireland. Our U.S. headquarters office is located at 70 Walnut Street, Wellesley Hills, Massachusetts and our telephone number is (866) 844-2235.

Our website address is www.fleetmatics.com. Information contained on, or accessible through, our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference.

 

 

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THE OFFERING

 

Issuer

Fleetmatics Group PLC

 

Ordinary shares offered by FleetMatics

6,250,000 ordinary shares

 

Ordinary shares offered by selling shareholders

1,562,500 ordinary shares

 

Ordinary shares to be outstanding immediately after this offering

34,418,867 ordinary shares

 

Offering price

$17.00 per ordinary share

 

New York Stock Exchange symbol

“FLTX”

 

Option to acquire additional shares

The selling shareholders have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to acquire an aggregate of up to an additional 1,171,875 ordinary shares at the public offering price, less the underwriting discount. See “Underwriting” for more information.

 

Use of proceeds

We estimate that we will receive net proceeds from this offering of $94.3 million based upon the initial public offering price of $17.00 per ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. As of the date of this prospectus, we have no specific plans for the use for the net proceeds of this offering, or a significant portion thereof. We anticipate that we will use the net proceeds we will receive from this offering for working capital and other general corporate purposes, including funding of our marketing activities, repayment of indebtedness and the costs of operating as a public company and further investment in the development of our proprietary technologies. We may use a portion of the net proceeds for the acquisition of businesses, products and technologies that we believe are complementary to our own, although we have no agreements or understandings with respect to any acquisition at this time. We will not receive any of the proceeds from sales of ordinary shares by the selling shareholders. See “Use of Proceeds” for additional information.

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in our ordinary shares.

 

 

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The number of ordinary shares to be outstanding after this offering is based on 1,515,484 ordinary shares outstanding as of June 30, 2012 and excludes:

 

   

3,367,166 ordinary shares issuable upon the exercise of stock options outstanding as of June 30, 2012 at a weighted average exercise price of $4.84 per share;

 

   

1,417,537 additional ordinary shares reserved for future issuance of stock option and other share-based awards under our Amended and Restated 2004 Share Option Plan, which we refer to as the 2004 Plan, and under our 2011 Stock Option and Incentive Plan, which we refer to as the 2011 Plan; and

 

   

400,000 ordinary shares reserved for future issuance under our 2012 Employee Share Purchase Plan, which will become effective upon closing of this offering.

Except as otherwise indicated, the information in this prospectus:

 

   

gives effect to our amended and restated articles of association, which will be in effect upon the closing of this offering;

 

   

gives effect to the conversion of all of our outstanding redeemable convertible preferred shares into 26,653,383 ordinary shares upon the closing of this offering;

 

   

gives effect to a 1-for-1.5 reverse stock split of our ordinary shares and a proportional adjustment to the existing conversion ratio of each series of our preferred shares, which became effective on September 21, 2012; and

 

   

assumes no exercise by the underwriters of their option to acquire up to an additional 1,171,875 ordinary shares in this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize certain consolidated financial and other data for our business. You should read the following summary consolidated financial data in conjunction with “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

We derived the consolidated statements of operations data for the years ended December 31, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the consolidated statements of operations data for the year ended December 31, 2009 and the consolidated balance sheet data as of December 31, 2009 from our audited consolidated financial statements not included in this prospectus. The consolidated statement of operations data for the six months ended June 30, 2011 and 2012 and the consolidated balance sheet data as of June 30, 2012 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited financial data on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that should be expected in any future period, and our interim results are not necessarily indicative of results that should be expected for the full year.

 

     Year Ended December 31,     Six Months Ended
June 30,
 
         2009             2010             2011         2011     2012  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Subscription revenue

   $ 46,057      $ 64,690      $ 92,317      $ 42,587      $ 58,405   

Cost of subscription revenue

     16,161        22,941        28,631        13,466        17,332   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     29,896        41,749        63,686        29,121        41,073   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Sales and marketing

     16,113        20,447        33,391        15,948        20,199   

Research and development

     2,866        4,061        6,021        2,743        3,374   

General and administrative

     6,853        14,628        18,309        8,586        14,229   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     25,832        39,136        57,721        27,277        37,802   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     4,064        2,613        5,965        1,844        3,271   

Interest income (expense), net

     74        (1,012     (2,386     (1,156     (1,104

Foreign currency transaction gain (loss), net

     68        (907     155        642        (142

Loss on extinguishment of debt

                                 (934
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     4,206        694        3,734        1,330        1,091   

Provision for (benefit from) income taxes

     1,344        1,430        865        (266     1,457   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     2,862        (736     2,869        1,596        (366

Accretion of redeemable convertible preferred shares to redemption value

     (609     (418     (446     (220     (222

Modification of redeemable convertible preferred shares

            (6,542                     

Net income attributable to participating securities

     (873            (2,294     (1,302       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ordinary shareholders

   $ 1,380      $ (7,696   $ 129      $ 74      $ (588
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to ordinary shareholders(1):

          

Basic

   $ 0.13      $ (0.77   $ 0.09      $ 0.05      $ (0.39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.12      $ (0.77   $ 0.08      $ 0.05      $ (0.39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average ordinary shares outstanding (1):

          

Basic

     10,936        10,051        1,497        1,497        1,510   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     11,851        10,051        2,078        1,880        1,510   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     Year Ended December 31,      Six Months Ended
June 30,
 
         2009            2010            2011          2011    2012  
     (in thousands, except per share data)  

Pro forma net income (loss) per share attributable to ordinary shareholders (unaudited)(2):

              

Basic

         $ 0.10          $ (0.01
        

 

 

       

 

 

 

Diluted

         $ 0.10          $ (0.01
        

 

 

       

 

 

 

Pro forma weighted average ordinary shares outstanding (unaudited)(2):

              

Basic

           28,151            28,163   
        

 

 

       

 

 

 

Diluted

           28,731            28,163   
        

 

 

       

 

 

 

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2009     2010     2011       2011         2012    
     (dollars in thousands)  

Other Financial and Operating Data (unaudited):

          

Total vehicles under subscription(3)

     130,000        172,000        237,000        200,000        281,000   

Adjusted EBITDA(4)

   $ 10,867      $ 11,171      $ 21,748      $ 9,472      $ 11,988   

Net churn(5)

     1.4     (1.3 )%      3.2     1.0     1.8

 

     As of June 30, 2012  
     Actual     Pro Forma  As
Adjusted(6)
 
     (in thousands)  

Consolidated Balance Sheet Data:

    

Cash

   $ 8,151      $ 102,414   

Working capital (deficit)(7)

     (8,759     86,929   

Total assets

     111,788        204,625   

Total debt (net of discount), including capital lease obligations

     25,148        25,148   

Redeemable convertible preferred shares

     131,061        —     

Total shareholders’ equity (deficit)

     (110,618     114,706   

 

(1) See Note 16 to our consolidated financial statements for further details on the calculation of basic and diluted net income (loss) per share attributable to ordinary shareholders.

 

(2) See Note 16 to our consolidated financial statements for further details on the calculation of pro forma net income (loss) per share attributable to ordinary shareholders.

 

(3) This metric represents the number of vehicles under subscription by our customers utilizing one or more of our SaaS solutions at the end of the period presented. This number includes the number of vehicles under subscription with SageQuest before and after our acquisition of SageQuest in July 2010. Since our revenue is primarily driven by the number of vehicles under subscription to our SaaS solutions, we believe that total vehicles under subscription is an important metric to monitor.

 

(4) We present Adjusted EBITDA in this prospectus to provide investors with a supplemental measure of our operating performance. Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) before income taxes, interest income (expense), foreign currency transaction gain (loss), depreciation and amortization of property and equipment, amortization of capitalized in-vehicle devices owned by customers, amortization of intangible assets, share-based compensation, transaction costs related to acquired businesses, expenses incurred under our Management Services Agreement dated November 23, 2010, or Management Services Agreement, with Privia Enterprises Limited, or Privia (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Privia Management Services Agreement”), and loss on extinguishment of debt. See “—Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.

 

 

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(5) We calculate our net churn for a period by dividing (i) the number of vehicles under subscription added from existing customers less vehicles under subscription lost from existing customers over that period by (ii) the total vehicles under subscription at the beginning of that period. SageQuest vehicles under subscription and vehicles under subscription lost are not reflected as part of the churn calculation prior to July 2010 when we acquired it.

 

(6) Gives effect to the automatic conversion of all of our outstanding redeemable convertible preferred shares into 26,653,383 ordinary shares upon the closing of this offering and the receipt of the estimated net proceeds from this offering based on the initial public offering price of $17.00 per ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

(7) We define working capital (deficit) as current assets less current liabilities.

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed in the table above and within this prospectus Adjusted EBITDA, a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) before income taxes, interest income (expense), foreign currency transaction gain (loss), depreciation and amortization of property and equipment, amortization of capitalized in-vehicle devices owned by customers, amortization of intangible assets, share-based compensation, transaction costs related to acquired businesses, expenses incurred under our Management Services Agreement with Privia, and loss on extinguishment of debt. We have provided a reconciliation below of Adjusted EBITDA to net income (loss), the most directly comparable financial measure presented in accordance with GAAP.

We have included Adjusted EBITDA in this prospectus because it is a key measure used by our management and Board of Directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans, and to allocate resources to expand our business. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, Adjusted EBITDA is a key financial measure used by the compensation committee of our Board of Directors in connection with the payment of bonuses to our executive officers. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

   

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

 

   

Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;

 

   

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

 

   

Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest payments on our debt or any losses on the extinguishment of our debt;

 

 

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Adjusted EBITDA does not include foreign currency transaction gains and losses; and

 

   

other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following unaudited table presents a reconciliation from net income (loss) to Adjusted EBITDA for each of the periods indicated:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2009     2010     2011     2011     2012  
     (in thousands)  

Reconciliation of Net Income (Loss) to Adjusted EBITDA:

          

Net income (loss)

   $ 2,862      $ (736   $ 2,869      $ 1,596      $ (366

Provision for (benefit from) income taxes

     1,344        1,430        865        (266     1,457   

Interest (income) expense, net

     (74     1,012        2,386        1,156        1,104   

Foreign currency transaction (gain) loss, net

     (68     907        (155     (642     142   

Depreciation and amortization of property and equipment

     6,615        7,397        7,581        3,639        4,475   

Amortization of capitalized in-vehicle devices owned by customers

            36        344        138        308   

Amortization of intangible assets

     14        317        3,349        1,674        1,166   

Share-based compensation

     174        149        2,292        1,078        969   

Transaction costs related to acquired businesses

            428                        

Management Services Agreement expense

            231        2,217        1,099        1,799   

Loss on extinguishment of debt

                                 934   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (unaudited)

   $ 10,867      $ 11,171      $ 21,748      $ 9,472      $ 11,988   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus and any free writing prospectus we may provide you before deciding to invest in our ordinary shares. The risks and uncertainties described below and elsewhere in this prospectus, including in the section headed “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” could materially adversely affect our business. Any of the following risks could adversely affect our business, financial condition, cash flow and results of operations. In such case, the trading price of our ordinary shares could decline, and you could lose some or all of your investment.

Risks Related to Our Business

Failure to effectively and efficiently attract, sell to and retain SMB customers would adversely affect our operating results.

We primarily market and sell our solutions to SMBs. SMB customers are challenging to reach, acquire and retain in a cost-effective manner. To grow our revenue, we must add new customers, sell additional functionality to existing customers and encourage existing customers to renew their subscriptions. Selling to and retaining SMB customers is more difficult than selling to and retaining enterprise customers because SMB customers generally:

 

   

have high failure rates;

 

   

are price sensitive;

 

   

are difficult to reach with targeted sales campaigns;

 

   

have high churn rates in part because of the scale of their businesses and the ease of switching services; and

 

   

generate less revenue per customer and per transaction.

If we are unable to market and sell our solutions to SMBs with competitive pricing and in a cost-effective manner, our ability to grow our revenue and maintain and grow our profitability will be harmed.

We may not be able to retain and increase sales to our existing customers, which could negatively impact our financial results.

We generally license our solutions pursuant to customer agreements with an initial term of 36 months. Most agreements provide for renewal automatically for one-year intervals unless the customer elects otherwise, although our customers have no obligation to renew these agreements after their term expires. We also actively seek to sell additional solutions to our existing customers. If our efforts to satisfy our existing customers are not successful, we may not be able to retain them or sell additional functionality to them and, as a result, our revenue and ability to grow would be adversely affected. We track our historical data with respect to customer renewal rates, particularly by measuring the number of new subscriptions added, less the number of subscriptions terminated, divided by the total average customers during a period, which we refer to as churn. However, we may not be able to accurately predict future trends in customer renewals and the resulting churn. Customers may choose not to renew their subscriptions for many reasons, including the belief that our service is not required for

 

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their business needs or is otherwise not cost-effective, a desire to reduce discretionary spending, or a belief that our competitors’ services provide better value. Additionally, our customers may not renew for reasons entirely out of our control, such as the dissolution of their business, which is particularly common for SMB customers. A significant increase in our churn would have an adverse effect on our business, financial condition, and operating results.

A part of our growth strategy is to sell additional new features to our existing customers. Our ability to sell new features to customers will depend in significant part on our ability to anticipate industry evolution, practices and standards and to continue to enhance existing solutions, such as integration with fuel cards and GPS navigation devices, or introduce or acquire new solutions on a timely basis to keep pace with technological developments both within our industry and in related industries. However, we may prove unsuccessful either in developing new features or in expanding the third-party software and products with which our solutions integrate. In addition, the success of any enhancement or new feature depends on several factors, including the timely completion, introduction and market acceptance of the enhancement or feature. Any new solutions we develop or acquire might not be introduced in a timely or cost-effective manner and might not achieve the broad market acceptance necessary to generate significant revenue. If any of our competitors implements new technologies before we are able to implement them or better anticipates the innovation and integration opportunities in related industries, those competitors may be able to provide more effective or cheaper solutions than ours.

Another part of our growth strategy is to sell additional subscriptions to existing customers as their fleet sizes increase. We cannot be assured that our customers’ fleet sizes will continue to increase. A significant decrease in our ability to sell existing customers additional functionality or subscriptions would have an adverse effect on our business, financial condition, and operating results.

Adverse economic conditions or reduced spending on information technology solutions, particularly by small and medium-sized local service and distribution businesses, may adversely impact our revenue and profitability.

Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. We are unable to predict the likely duration and severity of the current adverse economic conditions in the U.S. and other countries, particularly in Europe, but the longer the duration, the greater risks we face in operating our business. Furthermore, our solutions are designed predominately for small and medium-sized local service and distribution businesses, which frequently have limited budgets and may be more likely to be significantly affected by economic downturns and other macroeconomic factors affecting spending behavior than larger enterprises. SMB customers may choose to spend the limited funds that they have on items other than our solutions and may experience higher failure and bankruptcy rates, which would negatively affect the overall demand for our products, increase customer attrition and could cause our revenue to decline. We cannot assure you that current economic conditions, worsening economic conditions or prolonged poor economic conditions will not have a significant adverse impact on the demand for our solutions, and consequently on our results of operations and prospects.

Failure of local service and distribution businesses to adopt fleet management solutions could negatively impact our revenue.

We derive, and expect to continue to derive, substantially all of our revenue from the sale of subscriptions to our fleet management solutions. As a result, widespread acceptance and use of fleet management solutions is critical to our future revenue growth and success. If the market for fleet management solutions fails to grow or grows more slowly than we currently anticipate, demand for our solutions could be negatively affected.

 

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Changes in customer preferences for fleet management solutions may have a disproportionately greater impact on us than if we offered multiple products and services. The market for fleet management solutions is subject to changing customer demand and trends in preferences. Some of the potential factors that could affect interest in and demand for our fleet management solutions include:

 

   

awareness of our brand and fleet management solutions generally;

 

   

the reliability of our solutions;

 

   

actual and perceived fuel and vehicle maintenance costs, including decreases in fuel prices;

 

   

assumptions regarding general mobile workforce inefficiency;

 

   

the price, performance, features, and availability of products and services that compete with ours;

 

   

our ability to maintain high levels of customer satisfaction; and

 

   

the rate of growth in online solutions generally.

Our dependence on various lead generation programs could adversely affect our operating results if we need to pay more for such programs or we are unable to attract new customers at the same rate.

We use a number of lead generation programs to promote our solutions. Significant increases in the pricing of one or more of our lead generation channels would increase our overall lead generation costs or cause us to choose less expensive and perhaps less effective channels. For example, a portion of our potential customers locate our website through search engines, such as Google, Bing, and Yahoo!, representing one of the most efficient means for generating cost-effective SMB customer leads. If search engine companies modify their search algorithms in a manner that reduces the prominence of our listing, or if our competitors’ search engine optimization efforts are more successful than ours, fewer potential customers may click through to our website. In addition, the cost of purchased listings has increased in the past and may continue to increase in the future. As we add to or change the mix of our lead generation strategies, we may need to expand into channels with significantly higher costs than our current programs, which could adversely affect our operating results. If we are unable to maintain effective advertising programs, our ability to attract new customers could be adversely affected, our advertising and marketing expenses could increase substantially, and our operating results may suffer.

If we are unable to successfully convert customer sales leads into customers on a cost-effective basis, our revenue and operating results would be adversely affected.

We generate substantially all of our revenue from the sale of subscriptions to our solutions. In order to grow, we must continue to efficiently convert customer leads, many of whom have not previously used fleet management solutions, into customers. Our Web-based sales team is the primary driver of cost-effective conversion of customer leads into customers, particularly in the case of SMB customers who are more difficult to reach with targeted sales campaigns and who tend to generate less revenue per transaction. Our Web-based sales team is able to sell our solutions to the geographically-disparate SMB market much more efficiently than a traditional field-based direct sales force. To execute our growth plan, we must continue to attract and retain highly qualified Web-based sales personnel. We may experience difficulty in hiring and retaining highly skilled Web-based sales and marketing employees. An inability to convert customer sales leads into customers on a cost-effective basis could adversely affect our revenue and operating results.

Our quarterly operating results have fluctuated in the past and may fluctuate in the future, which could cause declines or volatility in the price of our ordinary shares.

Our quarterly operating results have fluctuated in the past and may fluctuate in the future as a result of a variety of factors, many of which are outside of our control. If our quarterly operating results or guidance fall

 

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below the expectations of research analysts or investors, the price of our ordinary shares could decline substantially. The following factors, among others, could cause fluctuations in our quarterly operating results:

 

   

our ability to attract new customers and retain existing customers;

 

   

our ability to accurately forecast revenue and appropriately plan our expenses;

 

   

our ability to introduce new features, including integration of our existing solutions with third-party software and devices;

 

   

the actions of our competitors, including consolidation within the industry, pricing changes or the introduction of new services;

 

   

our ability to effectively manage our growth;

 

   

our ability to successfully manage any future acquisitions of businesses, solutions, or technologies;

 

   

the timing and cost of developing or acquiring technologies, services, or businesses;

 

   

the timing, operating costs, and capital expenditures related to the operation, maintenance, and expansion of our business;

 

   

service outages or security breaches and any related occurrences which could impact our reputation;

 

   

the impact of worldwide economic, industry, and market conditions, including disruptions in financial markets and the deterioration of the underlying economic conditions in some countries, and those conditions specific to Internet usage and online businesses;

 

   

trade protection measures (such as tariffs and duties) and import or export licensing requirements;

 

   

fluctuations in currency exchange rates;

 

   

costs associated with defending intellectual property infringement and other claims; and

 

   

changes in government regulation affecting our business.

We believe that our quarterly revenue and operating results may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of one quarter as an indication of future performance.

We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If we fail to remediate one or more of our material weaknesses or if we fail to establish and maintain effective control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.

 

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Prior to the completion of this offering, we have been a private company with limited accounting personnel and other resources to address our internal control over financial reporting. During the course of preparing for this offering, our independent registered public accounting firm undertook audits of our financial statements for the years ended December 31, 2010 and December 31, 2011, which were completed simultaneously. During the course of these audits, material adjustments to various accounts were necessary. These adjustments led our independent registered public accounting firm to communicate that we had material weaknesses as of December 31, 2010 and December 31, 2011 as follows:

 

   

we did not have sufficient formalized policies and procedures to ensure that complete and accurate, consolidated financial information was prepared and reviewed timely in accordance with U.S. GAAP;

 

   

we lacked sufficient integrated systems to consolidate multi-currency financial information in a complete, accurate and timely manner;

 

   

we lacked a sufficient number of resources to completely and accurately record accounting transactions in accordance with U.S. GAAP as well as resources with the technical accounting expertise to completely and accurately account for complex and unique transactions in a timely manner, and to prepare and review financial statements and footnote disclosures; and

 

   

we lacked sufficient and timely formalized monthly, quarterly and annual financial data reviews and analysis.

These material weaknesses contributed to multiple audit adjustments principally, but not limited to, the following areas: taxes; intercompany transactions, including foreign currency impacts; deferred revenue; equity accounting in connection with our issuance of Series B redeemable convertible preferred shares in 2010; share-based compensation; purchase accounting in connection with our acquisition of SageQuest in July 2010; the consolidation process; and period-end cutoffs for expenses.

We have begun remediation efforts. For a discussion of our remediation plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Controls and Procedures.” The actions we will take are subject to continued review supported by confirmation and testing by management as well as audit committee oversight. While we are implementing a plan to remediate these weaknesses, we cannot assure you that we will be able to remediate these weaknesses, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows. If we are unable to successfully remediate these material weaknesses, and if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with applicable stock exchange listing requirements.

Our failure to remediate the material weaknesses identified as of December 31, 2010 and December 31, 2011, or the identification of additional material weaknesses in the future, could adversely affect our ability to report financial information, including our filing of quarterly or annual reports with the Securities and Exchange Commission, or SEC, on a timely and accurate basis. Moreover, our failure to remediate the material weaknesses identified as of December 31, 2010 and December 31, 2011, or the identification of additional material weaknesses, could prohibit us from complying with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, such as (i) annual management assessments of the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering and (ii) a report by our independent registered public accounting firm regarding the effectiveness of such internal control for the first fiscal year beginning after the effective date of this offering if we do not take advantage of an exemption contained in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. If we do take advantage of this exemption contained in the JOBS Act, our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until the later of the year

 

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following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company.” At such time, which could begin as late as our annual report on Form 20-F for the year ending December 31, 2017, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. If we are unable to comply with Section 404 or otherwise are unable to produce timely and accurate financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with exchange listing requirements.

We are migrating to a new accounting system and, if this new system proves ineffective, we may be unable to timely or accurately prepare financial reports.

We are in the process of upgrading our accounting systems to provide us with the necessary accounting controls needed for our financial reporting requirements as a public company. Any problems associated with the implementation of our new and enhanced accounting platform or the failure to complete such implementation on a timely basis could adversely affect our ability to report financial information as our company grows, including the filing of our quarterly or annual reports with the SEC on a timely and accurate basis. After converting from prior systems and processes, we may discover data integrity problems or other issues that, if not corrected, could impact our business or financial results.

We incurred operating losses in recent fiscal periods and may be unable to regain profitability, which may negatively impact our ability to achieve our business objectives.

We incurred operating losses in certain recent fiscal periods. We reported net income of $2.9 million for 2009, a net loss of $0.7 million for 2010, net income of $2.9 million for 2011, and a net loss of $0.4 million for the first six months of 2012. We cannot predict if we will regain profitability in the near future or at all. We expect to continue making significant expenditures to develop and expand our business. In addition, as a public company, we will incur additional significant accounting, legal and other expenses that we did not incur as a private company. These increased expenditures will make it harder for us to regain profitability. The recent growth in our revenue and customer base may not be sustainable, and we may not generate sufficient revenue to regain profitability. We may incur significant losses in the future for a number of reasons, including the other risks described in this section, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, we may not be able to regain profitability and the failure to fund our capital requirements may negatively impact our ability to achieve our business objectives.

The market in which we participate is highly fragmented and competitive, with low barriers to entry. If we do not compete effectively, our operating results may be harmed.

The market for fleet management solutions is highly fragmented, consisting of a significant number of vendors, competitive and rapidly changing, with relatively low barriers to entry. Competition in our market is based primarily on the level of difficulty in installing, using and maintaining solutions, total cost of ownership, product performance, functionality, interoperability, brand and reputation, distribution channels, industries and the financial resources of the vendor. We expect competition to intensify in the future with the introduction of new technologies and market entrants. Mobile service and software providers, such as Google and makers of GPS navigation devices, such as Garmin, provide limited services at lower prices or no charge, such as basic GPS-based mapping, tracking and turn-by-turn directions that could be expanded or further developed to more directly compete with our solutions. We primarily compete with Teletrac, a Trafficmaster Plc Company, and Trimble Navigation Limited, and, to a lesser extent, other companies. Competition could result in reduced operating margins, increased sales and marketing expenses and the loss of market share, any of which would likely cause serious harm to our operating results.

 

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Industry consolidation may result in increased competition, which could result in a loss of customers or a reduction in revenue.

Some of our competitors have made or may make acquisitions or may enter into partnerships or other strategic relationships to offer more comprehensive services than they individually had offered or achieve greater economies of scale. In addition, new entrants not currently considered to be competitors may enter the market through acquisitions, partnerships or strategic relationships. We expect these trends to continue as companies attempt to strengthen or maintain their market positions. Many of the potential entrants, particularly those providing enterprise-level solutions and those who historically focused on the long-haul industry, may have competitive advantages over us, such as greater name recognition, longer operating histories, more varied services and larger marketing budgets, as well as greater financial, technical and other resources. The companies resulting from combinations or that expand their business to include the SMB market that we address may create more compelling service offerings and may offer greater pricing flexibility than we can or may engage in business practices that make it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs, technology or service functionality. These pressures could result in a substantial loss of our customers or a reduction in our revenue.

Our inability to adapt to rapid technological change in our industry and related industries could impair our ability to remain competitive and adversely affect our results of operations.

The industry in which we compete and related industries are characterized by rapid technological change, frequent introductions of new products and evolving industry standards. In addition to the fleet management solutions industry, we are subject to changes in the automotive, mobile handset, GPS navigation device and work flow software industries. As the technology used in each of these industries evolves, we will face new integration and competition challenges. For example, as automobile manufacturers evolve in-vehicle technology, GPS tracking devices may become standard equipment and compete against our solutions. Furthermore, major gains in fuel efficiency may lead to a relative decrease in the demonstrable return on investment of our solutions perceived by our customers. If we are unable to adapt to rapid technological change, it could adversely affect our results of operations and our ability to remain competitive.

An assertion by a third party that we are infringing its intellectual property could subject us to costly and time-consuming litigation or expensive licenses and our business could be harmed.

The fleet management and technology industries are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Much of this litigation involves patent holding companies or other adverse patent owners who have no relevant product revenues of their own, and against whom our own patent portfolio may provide little or no deterrence.

For example, on April 20, 2011, we were sued by PJC Logistics, LLC in a patent-infringement case (PJC Logistics, LLC v. Fleet Management Solutions, Inc. et al, Civil Action No. 03:11-cv-815) (United States District Court for the Northern District of Texas). The complaint alleges that we have infringed U.S. Patent No. 5,223,844 entitled “Vehicle Tracking and Security System.” PJC Logistics, LLC is seeking damages rather than an injunction. We believe that a loss in this claim is reasonably possible, but we are unable to estimate a range of loss as we are continuing to investigate the claim. While we do not believe that this litigation will have a material adverse effect on our business, financial condition, or operating results, we cannot assure you that this will be the case.

From time to time, in the ordinary course of business, we have been threatened with litigation, including litigation by employees, former employees, clients, or former clients. For example, on August 14, 2012, a putative class action complaint was filed in the Sixth Judicial Circuit in Pinellas County, Florida, entitled U.S. Prisoner Transport, et. al. v. Fleetmatics USA, LLC, et. al., Case No. 1200-9933 CI-20. The complaint alleges that we recorded thousands of telephone calls in violation of Florida Statutes Section 934.03. The complaint seeks certification of a putative class of all individuals and businesses residing in Florida who spoke with any representatives of our offices in Florida on the telephone and had their telephone conversations recorded without their consent or advance notice, from the date of the earliest recording by us through the present. The complaint

 

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seeks statutory damages, injunctive relief, attorney fees, costs and interest. Florida Statutes Section 934.10 permits an aggrieved person to recover “liquidated damages computed at the rate of $100 a day for each day of violation or $1,000, whichever is higher.” We removed the case to the United States District Court for the Middle District of Florida on September 13, 2012, U.S. Prisoner Transport, et. al. v. Fleetmatics USA, LLC, et. al., Case No. 8:12-CV-2079. We moved to dismiss the complaint on September 20, 2012. This matter is in its very early stages, but there can be no assurance that this matter will not have a material adverse effect on our business, financial condition and operating results.

We cannot assure you that we will prevail in any current or future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in such litigation. Defending such claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause development delays, or require us to enter into royalty or licensing agreements. In addition, we could be obligated to indemnify our customers against third parties’ claims of intellectual property infringement based on our solutions. If our solutions violate any third-party intellectual property rights, we could be required to withdraw those solutions from the market, re-develop those solutions or seek to obtain licenses from third parties, which might not be available on reasonable terms or at all. Any efforts to re-develop our solutions, obtain licenses from third parties on favorable terms or license a substitute technology might not be successful and, in any case, might substantially increase our costs and harm our business, financial condition and operating results. Withdrawal of any of our solutions from the market could harm our business, financial condition and operating results.

In addition, we incorporate open source software into our platform. Given the nature of open source software, third parties might assert copyright and other intellectual property infringement claims against us based on our use of certain open source software programs. The terms of many open source licenses to which we are subject have not been interpreted by U.S. or courts of other jurisdictions, and there is a risk that those licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our solutions. In that event, we could be required to seek licenses from third parties in order to continue offering our solutions, to re-develop our solutions, to discontinue sales of our solutions, or to release our proprietary software source code under the terms of an open source license, any of which could adversely affect our business.

If we are unable to protect our intellectual property and proprietary technologies, our business may be adversely affected.

Our future success and competitive position depend in large part on our ability to protect our intellectual property and proprietary technologies. We rely on a combination of trademark, patent, copyright, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our intellectual property rights, all of which provide only limited protection and may not currently or in the future provide us with a competitive advantage. We cannot assure you that any future trademark registrations will be issued for pending or future applications or that any registered trademarks will be enforceable or provide adequate protection of our proprietary rights. We have one issued U.S. patent, seven pending U.S. patent applications, and two pending U.S. trademark applications. We have one Irish patent and one European patent. We also have two pending international patent applications filed under the Patent Cooperation Treaty. We cannot assure you that any patents or trademarks will issue from any of our pending or future patent or trademark applications, that any patents or trademarks that issue from such applications will give us the protection that we seek, or that any such patents or trademarks will not be challenged, invalidated, or circumvented. Any patents or trademarks that may issue in the future from our pending or future patent and trademark applications may not provide sufficiently broad protection and may not be enforceable in actions against alleged infringers.

We cannot assure you that the steps we take will be adequate to protect our technologies and intellectual property, our patent and trademark applications will lead to issued patents or registered trademarks, others will not develop or patent similar or superior technologies or solutions, or that our patents, trademarks, and other intellectual property will not be challenged, invalidated, or circumvented by others. Furthermore, effective patent, trademark, copyright, and trade secret protection may not be available in every country in which our

 

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solutions are available or where we have employees or independent contractors. In addition, the legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving.

The steps we have taken and will take may not prevent unauthorized use, reverse engineering, or misappropriation of our technologies and we may not be able to detect any of the foregoing. Others may independently develop technologies that infringe on our intellectual property rights. Defending and enforcing our intellectual property rights may result in litigation, which can be costly and divert management attention and resources. Any such litigation may not be successful even if such rights have been infringed, and an adverse decision could limit the scope of such rights. If our efforts to protect our technologies and intellectual property are inadequate, the value of our intangible assets may be diminished and competitors may be able to replicate our solutions and methods of operations. Any of these events could have a material adverse effect on our business, financial condition, and operating results.

We depend in part on confidentiality agreements that may not adequately protect our trade secrets and proprietary information, which could adversely affect our business.

We have devoted substantial resources to the development of our proprietary technologies and related processes. In order to protect our proprietary technologies and processes, we rely in part on trade secret laws and confidentiality agreements with our employees, licensees, independent contractors, and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets or develop similar technologies and processes, and, in either event we would not be able to assert trade secret rights. Further, laws in certain jurisdictions may afford little or no trade secret protection, and any changes in, or unexpected interpretations of, the intellectual property laws in any country in which we operate may compromise our ability to enforce our intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our intellectual property rights, and failure or inability to obtain or maintain trade secret protection or otherwise protect our intellectual property rights could adversely affect our business.

We rely on third-party software and other intellectual property to develop and provide our solutions and significant increases in licensing costs or defects in third-party software could harm our business.

We rely on software and other intellectual property licensed from third parties to develop and offer our solutions, including mapping software and data from Google to provide solutions to our customers. In addition, we may need to obtain future licenses from third parties to use software or other intellectual property associated with our solutions. We cannot assure you that these licenses will be available to us on acceptable terms, without significant price increases or at all. Any loss of the right to use any such software or other intellectual property required for the development and maintenance of our solutions could result in delays in the provision of our solutions until equivalent technology is either developed by us, or, if available from others, is identified, obtained, and integrated, which could harm our business. Any errors or defects in third-party software could result in errors or a failure of our solutions, which could harm our business.

Our solutions integrate with third-party technologies and if our solutions become incompatible with these technologies, our solutions would lose functionality and our customer acquisition and retention could be adversely affected.

Our solutions integrate with third-party software and devices to allow our solutions to perform key functions. For example, we offer integration with work flow software products, such as ARRIS Solutions, Garmin GPS navigation devices and fuel card providers such as FleetCor, among others. Although to date this integration has been accomplished using open software interfaces and simple physical linkages, we cannot guarantee that this ease of integration will continue or that we will be able to integrate with other products as easily or without additional cost. Additionally, errors, viruses or bugs may also be present in third-party software

 

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that our customers use in conjunction with our solutions. Changes to third-party software that our customers use in conjunction with our solutions could also render our solutions inoperable. Customers may conclude that our software is the cause of these errors, bugs or viruses and terminate their subscriptions. The inability to easily integrate with, or any defects in, any third-party software could result in increased costs, or in delays in software releases or updates to our products until such issues have been resolved, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and future prospects and could damage our reputation.

We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately.

We increased our number of full-time employees from 187 at December 31, 2009 to 290 at December 31, 2010, to 408 at December 31, 2011 and to 446 at June 30, 2012. Our subscription revenue increased from $46.1 million in 2009 to $64.7 million in 2010 and to $92.3 million in 2011 and increased from $42.6 million in the six months ended June 30, 2011 to $58.4 million in the six months ended June 30, 2012. Our growth has placed, and may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to further expand our overall business, customer base, headcount and operations both domestically and internationally. Creating a global organization and managing a geographically dispersed workforce will require substantial management effort and significant additional investment in our infrastructure. We will be required to continue to improve our operational, financial and management controls and our reporting procedures and we may not be able to do so effectively. As such, we may be unable to manage our expenses effectively in the future, which may negatively impact our gross profit or operating expenses in any particular quarter.

The loss of one or more of our key personnel, or our failure to attract, train and retain other highly qualified personnel, could harm our business.

We depend on the continued service and performance of our key personnel, including our senior management. In addition, the sales and customer service-driven focus of our business and employees is vital to our growth plan. The loss of key personnel, including key members of our management team, as well as certain of our key marketing, sales, product development, or technology personnel, could disrupt our operations and have an adverse effect on our ability to grow our business. To execute our growth plan, we must attract and retain highly qualified personnel. Competition for these employees is intense, and we may not be successful in attracting and retaining qualified personnel. We may experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. New hires require significant training and, in most cases, take significant time before they achieve full productivity. Our recent hires and planned hires may not become as productive as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals. If we fail to attract and train new personnel, or fail to retain, focus and motivate our current personnel, our business and growth prospects could be severely harmed.

We may expand by acquiring or investing in other companies, which may divert our management’s attention, result in dilution to our shareholders, and consume resources that are necessary to sustain our business.

We may in the future acquire complementary products, services, technologies, or businesses. We also may enter into relationships with other businesses to expand our portfolio of solutions or our ability to provide our solutions in foreign jurisdictions. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to complete these transactions may often be subject to conditions or approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close.

An acquisition, investment, or new business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel, or operations of acquired companies, particularly if the key personnel of the acquired company choose not to work for us, the acquired company’s technology is not easily adapted to be

 

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compatible with ours, or we have difficulty retaining the customers of any acquired business due to changes in management or otherwise. Acquisitions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for the development of our business. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized or we may be exposed to unknown liabilities, including litigation against the companies we may acquire. For one or more of those transactions, we may:

 

   

issue additional equity securities that would dilute our shareholders;

 

   

use cash that we may need in the future to operate our business;

 

   

incur debt on terms unfavorable to us or that we are unable to repay or that may place burdensome restrictions on our operations;

 

   

incur large charges or substantial liabilities; or

 

   

become subject to adverse tax consequences, or substantial depreciation, deferred compensation or other acquisition-related accounting charges.

Any of these risks could harm our business and operating results.

We face many risks associated with our plans to expand internationally, which could harm our business, financial condition, and operating results.

We anticipate that our efforts to expand internationally will entail the marketing and advertising of our solutions and brand. While our software and websites are designed for ease of localization, we do not have substantial experience localizing our website and software into foreign languages. We also do not have substantial experience in selling our solutions in international markets outside of the U.S., Canada, the U.K. and Ireland or in conforming to the local cultures, standards, or policies necessary to successfully compete in those markets, and we may be required to invest significant resources in order to do so. We may not succeed in these efforts or achieve our customer acquisition or other goals. In some international markets, customer preferences and buying behaviors may be different, and we may use business or pricing models that are different from our traditional subscription model to provide fleet management solutions to customers in those markets or we may be unsuccessful in implementing the appropriate business model. Our revenue from new foreign markets may not exceed the costs of establishing, marketing, and maintaining our international offerings. In addition, the current instability in the eurozone could have many adverse consequences on our international expansion, including sovereign default, liquidity and capital pressures on eurozone financial institutions, reducing the availability of credit and increasing the risk of financial sector failures and the risk of one or more eurozone member states leaving the euro, resulting in the possibility of capital and exchange controls and uncertainty about the impact of contracts and currency exchange rates.

In addition, conducting expanded international operations subjects us to new risks that we have not generally faced in our current markets. These risks include:

 

   

localization of our solutions, including the addition of foreign languages and adaptation to new local practices and regulatory requirements;

 

   

lack of experience in other geographic markets;

 

   

strong local competitors;

 

   

the cost and burden of complying with, lack of familiarity with, and unexpected changes in, foreign legal and regulatory requirements;

 

   

difficulties in managing and staffing international operations;

 

   

fluctuations in currency exchange rates or restrictions on foreign currency;

 

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potentially adverse tax consequences, including the complexities of transfer pricing, value added or other tax systems, double taxation and restrictions and/or taxes on the repatriation of earnings;

 

   

dependence on third parties, including commercial partners with whom we do not have extensive experience;

 

   

increased financial accounting and reporting burdens and complexities;

 

   

political, social, and economic instability, terrorist attacks, and security concerns in general; and

 

   

reduced or varied protection for intellectual property rights in some countries.

Operating in international markets also requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.

Our software contains encryption technologies, certain types of which are subject to U.S. and foreign export control regulations and, in some foreign countries, restrictions on importation and/or use. Any failure on our part to comply with encryption or other applicable export control requirements could result in financial penalties or other sanctions under the U.S. export regulations, including restrictions on future export activities, which could harm our business and operating results. Regulatory restrictions could impair our access to technologies needed to improve our solutions and may also limit or reduce the demand for our solutions outside of the U.S.

Our solutions rely on cellular and GPS networks and any disruption, failure or increase in costs could impede our profitability and harm our financial results.

Two critical links in our current solutions are between in-vehicle devices and GPS satellites and between in-vehicle devices and cellular networks, which allow us to obtain location data and transmit it to our system. Increases in the fees charged by cellular carriers for data transmission or changes in the cellular networks, such as a cellular carrier discontinuing support of the network currently used by our in-vehicle devices, requiring retrofitting of our in-vehicle devices could increase our costs and impact our profitability. We have initiated activities to migrate new installations to the next generation of cellular network compatibility in order to maximize expected useful life of our in-vehicle devices, however, cellular carriers could in the future migrate allotted bandwidth from one network to another. Also, while we have included the ability to store GPS data in our in-vehicle devices in case of temporary cellular network connectivity failure, widespread disruptions or extended failures of the cellular networks would adversely affect our solutions’ functionality and utility and harm our financial results.

GPS is a satellite-based navigation and positioning system consisting of a constellation of orbiting satellites. These satellites and their ground support systems are complex electronic systems subject to electronic and mechanical failures and possible sabotage and it is not certain that the U.S. government will remain committed to the operation and maintenance of GPS satellites over a long period. In addition, technologies that rely on GPS depend on the use of radio frequency bands and any modification of the permitted uses of these bands may adversely affect the functionality of GPS and, in turn, our solutions. The satellites and their ground control and monitoring stations are maintained and operated by the U.S. Department of Defense. The Department of Defense does not currently charge users for access to the satellite signals, but we cannot assure you that they will not do so in the future.

Evolving regulation and changes in applicable laws relating to the Internet and data privacy may increase our expenditures related to compliance efforts or otherwise limit the solutions we can offer, which may harm our business and adversely affect our financial condition.

As Internet commerce continues to evolve, increased regulation by federal, state or foreign agencies becomes more likely. We are particularly sensitive to these risks because the Internet is a critical component of our SaaS business model. In addition, taxation of services provided over the Internet or other charges imposed by

 

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government agencies or by private organizations for accessing the Internet may be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business.

Our solutions and products enable us to collect, manage and store a wide range of data related to fleet management such as vehicle location and fuel usage, speed and mileage. A valuable component of our solutions is our ability to analyze this data to present the user with actionable business intelligence. We obtain our data from a variety of sources, including our customers and third-party providers. We cannot assure you that the data we require for our proprietary data sets will be available from these sources in the future or that the cost of such data will not increase. The United States and various state governments have adopted or proposed limitations on the collection, distribution and use of personal information. Several foreign jurisdictions, including the European Union and the United Kingdom, have adopted legislation (including directives or regulations) that increase or change the requirements governing data collection and storage in these jurisdictions. If our privacy or data security measures fail to comply, or are perceived to fail to comply, with current or future laws and regulations, we may be subject to litigation, regulatory investigations or other liabilities. Moreover, if future laws and regulations limit our clients’ ability to use and share this data or our ability to store, process and share data with our clients over the Internet, demand for our solution could decrease, our costs could increase, and our results of operations and financial condition could be harmed.

Our software may contain undetected errors, defects or software errors, which could result in damage to our reputation or harm to our operating results.

We warrant that our software will be free of defects for various periods of time. We must update our solutions quickly to keep pace with the rapidly changing market and the third-party software and devices with which our solutions integrate, and we have a history of frequently introducing new versions. Our solutions could contain undetected errors or defects, especially when first introduced or when new versions are released. In general, our software may not be free from errors or defects, which could result in damage to our reputation or harm to our operating results.

Any significant disruption in service on our websites or in our computer systems could damage our reputation and result in a loss of customers, which would harm our business and operating results.

Our brand, reputation, and ability to attract, retain, and serve our customers are dependent upon the reliable performance of our service and our customers’ ability to access our solutions at all times. Our customers rely on our solutions to make operating decisions related to their fleet, as well as to measure, store and analyze valuable data regarding their businesses. Our solutions are vulnerable to interruption and our data centers are vulnerable to damage or interruption from human error, intentional bad acts, computer viruses or hackers, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures, and similar events, any of which could limit our customers’ ability to access our solutions. Prolonged delays or unforeseen difficulties in connection with adding capacity or upgrading our network architecture may cause our service quality to suffer. Any event that significantly disrupts our service or exposes our data to misuse could damage our reputation and harm our business and operating results, including reducing our revenue, causing us to issue credits to customers, subjecting us to potential liability, harming our churn rates, or increasing our cost of acquiring new customers.

We host our solutions and serve all of our customers from our network servers, which are principally located at third-party data center facilities in the Denver, Colorado and Dublin, Ireland areas. While we control and have access to our servers and all of the components of our network that are located in our external data centers, we do not control the operation of these facilities. Problems faced by our third-party data center locations, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our third-party data centers operators could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our third-party data

 

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centers operators or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, if our data centers are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business. Our disaster recovery systems are located at our third-party hosting facilities. While we are increasing redundancy, our systems have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage. In the event of a disaster in which our disaster recovery systems are irreparably damaged or destroyed, we would experience interruptions in access to our products. Any changes in third-party service levels at our data centers or any errors, defects, disruptions, or other performance problems with our solutions could harm our reputation and may damage our data. Interruptions in our services might reduce our revenue, cause us to issue refunds to customers, subject us to potential liability, or harm our churn rates.

We provide minimum service level commitments to certain of our customers, and our failure to meet them could cause us to issue credits for future subscriptions or pay penalties, which could harm our results of operations.

Certain of our customer agreements currently, and may in the future, provide minimum service level commitments regarding items such as uptime, functionality or performance. If we are unable to meet the stated service level commitments for these customers or suffer extended periods of service unavailability, we are or may be contractually obligated to provide these customers with credits for future subscriptions, provide services at no cost or pay other penalties, which could adversely impact our revenue. We do not currently have any reserves on our balance sheet for these commitments.

We are exposed to fluctuations in currency exchange rates, which could expose us to losses.

A significant portion of our business is conducted outside the U.S., and as such, we face exposure to movements in non-U.S. currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results and cash flows. Fluctuation in currency exchange rates impacts our operating results. Currently, we do not actively hedge against these exposures. We intend to hedge only against those currency exposures associated with certain assets and liabilities denominated in non-functional currencies, which will be intended to offset the impact of currency exchange rate fluctuations on certain non-functional currency assets and liabilities. Our future attempts to hedge against these risks could be unsuccessful and expose us to losses.

Changes in our effective tax rate may reduce our net income in future periods.

While we believe that our organization as an Irish entity should improve our ability to maintain a competitive worldwide effective corporate tax rate, we cannot give any assurance as to what our effective tax rate will be because of, among other things, uncertainty regarding the tax policies of the jurisdictions where we operate. In general, under current Irish legislation, a company is regarded as resident for tax purposes in Ireland if it is centrally managed and controlled in Ireland, or, in certain circumstances, if it is incorporated in Ireland. Trading income of an Irish resident company is generally taxable at the Irish corporation tax rate of 12.5%. Non-trading income of an Irish resident company (e.g., interest income, rental income or other passive income) is taxable at a rate of 25%. It is possible that in the future, whether as a result of a change in law or the practice of any relevant tax authority or as a result of any change in the conduct of our affairs, we could become, or be regarded as having become tax resident in a jurisdiction other than Ireland. Should we cease to be an Irish tax resident, we may be subject to a charge to Irish capital gains tax as a result of a deemed disposal of our assets. Our actual effective tax rate may vary from our expectation and that variance may be material. Additionally, the tax laws of Ireland, the U.S. and other jurisdictions could change in the future, and such changes could cause a material change in our effective tax rate.

A number of factors may increase our future effective tax rates, including:

 

   

the jurisdictions in which profits are determined to be earned and taxed;

 

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the resolution of issues arising from tax audits with various tax authorities;

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

increases in expense not deductible for tax purposes, including transaction costs and impairments of goodwill in connection with acquisitions;

 

   

changes in available tax credits;

 

   

changes in share-based compensation;

 

   

changes in tax laws or the interpretation of such tax laws, and changes in generally accepted accounting principles; and

 

   

challenges to the transfer pricing policies related to our structure.

Our tax position could be adversely impacted by changes in tax rates generally, tax laws, tax treaties or tax regulations or changes in the interpretation of such laws, treaties or regulations by the tax authorities in Ireland, the U.S. and other jurisdictions.

Such changes may be more likely or become more likely as a result of recent economic trends in the jurisdictions in which we operate, particularly if such trends continue. For example, Ireland has suffered from the consequences of worldwide adverse economic conditions and the credit ratings on its debt have been downgraded. Such changes could cause a material and adverse change in our worldwide effective tax rate and we may have to take action, at potentially significant expense, to seek to mitigate the effect of such changes. In addition, any amendments to the current double taxation treaties between Ireland and other jurisdictions, including the U.S., could subject us to increased taxation. In the normal course of business, we are subject to examination by various taxing authorities in the United States, Ireland and the United Kingdom. As of December 31, 2011, we remain subject to examination in the United States for tax years 2004 through 2011, in Ireland for tax years 2007 through 2011, and in the United Kingdom for tax years 2004 through 2011.

Failure to manage the risks associated with such changes, or misinterpretation of the laws relating to taxation, could result in increased charges, financial loss, including penalties, and reputational damage and materially and adversely affect our results, financial condition and prospects.

Increases in credit card processing fees would increase our operating expenses and adversely affect our operating results.

A majority of our customers purchase our solutions with credit cards and electronic funds transfers, and our business depends upon our ability to offer credit card payment options, which we offer using third-party processing services. We cannot assure you that credit card issuers will not increase their credit card processing fees, which could in turn lead to increases in the fees charged by our third-party processors. In addition, our third-party processors, like any credit card issuer, could increase their credit card processing fees if we experience excessive chargebacks or for other reasons. Given the percentage of our revenue received from credit card purchases, any increase in processing fees could adversely affect our business and operating results.

If we are unable to detect and prevent unauthorized use of credit cards and bank account numbers, we could be subject to financial liability, our reputation could be harmed and customers may be reluctant to use our solutions.

We rely on third-party encryption and authentication technology to provide secure transmission of confidential information over the Internet, including customer credit card and bank account numbers. Advances in technological capabilities, new discoveries in the field of cryptography or other events or developments could

 

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result in a compromise or breach of the technology we use to protect sensitive transaction data. If any such compromise of our security, or the security of our customers, were to occur, it could result in misappropriation of proprietary information or interruptions in operations and have an adverse impact on our reputation or the reputation of our customers. If we are unable to detect and prevent unauthorized use of credit cards and bank account numbers, our business could suffer.

Our operating results may be harmed if we are required to collect sales, services or other related taxes for our solutions in jurisdictions where we have not historically done so.

We do not believe that we are required to collect sales, use, services or other similar taxes from our customers in certain jurisdictions. However, one or more countries or states may seek to impose sales, use, services, or other tax collection obligations on us, including for past sales. A successful assertion by one or more jurisdictions that we should collect sales or other taxes on the sale of our solutions could result in substantial tax liabilities for past sales and decrease our ability to compete for future sales. Each country and each state has different rules and regulations governing sales and use taxes and these rules and regulations are subject to varying interpretations that may change over time. We review these rules and regulations periodically and, when we believe sales and use taxes apply in a particular jurisdiction, voluntarily engage tax authorities in order to determine how to comply with their rules and regulations. We cannot assure you that we will not be subject to sales and use taxes or related penalties for past sales in jurisdictions where we presently believe sales and use taxes are not due. We reserve estimated sales and use taxes on our financial statements but we cannot be certain that we have made sufficient reserves to cover taxes.

Providers of goods or services are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar taxes. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our solutions, we may be liable for past taxes in addition to being required to collect sales or similar taxes in respect of our solutions going forward. Liability for past taxes may also include very substantial interest and penalty charges. Our client contracts provide that our clients must pay all applicable sales and similar taxes. Nevertheless, clients may be reluctant to pay back taxes and may refuse responsibility for interest or penalties associated with those taxes or we may determine that it would not be feasible to seek reimbursement. If we are required to collect and pay back taxes and the associated interest and penalties and if our clients do not reimburse us for all or a portion of these amounts, we will have incurred unplanned expenses that may be substantial. Moreover, imposition of such taxes on our solutions going forward will effectively increase the cost of such solutions to our clients.

Many states are also pursuing legislative expansion of the scope of goods and services that are subject to sales and similar taxes as well as the circumstances in which a vendor of goods and services must collect such taxes. Furthermore, legislative proposals have been introduced in Congress that would provide states with additional authority to impose such taxes. Accordingly, it is possible that either federal or state legislative changes may require us to collect additional sales and similar taxes from our clients in the future.

Risk Related to Offering and Ownership of Ordinary Shares

Our failure to raise additional capital or generate the cash flows necessary to expand our operations and invest in our business could reduce our ability to compete successfully.

We anticipate that our available funds, including the expected net proceeds of this offering, will be sufficient to meet our cash needs for at least the next 12 months. We may, however, need, or could elect to seek, additional financing at any time. Our ability to obtain financing will depend on, among other things, our development efforts, business plans, operating performance and condition of the capital markets at the time we seek financing. If we need to raise additional funds, we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our shareholders may experience significant dilution of their ownership interests, and the per share value of our ordinary shares could decline. If we engage in additional debt financing, we may be required to accept terms that further restrict our ability to

 

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incur additional indebtedness and force us to maintain specified liquidity or other ratios and limit the operating flexibility of our business. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

 

   

develop or enhance our solutions;

 

   

continue to expand our development, sales, and marketing teams;

 

   

acquire complementary technologies, products, or businesses;

 

   

expand our operations in the U.S. or internationally;

 

   

hire, train, and retain employees;

 

   

respond to competitive pressures or unanticipated working capital requirements; or

 

   

continue our operations.

An active, liquid, and orderly trading market for our ordinary shares may not develop, and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for our ordinary shares. Although our ordinary shares have been approved for listing on the New York Stock Exchange, an active, liquid, and orderly trading market for our shares may never develop or be sustained following this offering. The initial public offering price of our ordinary shares was determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price for our ordinary shares after this offering. Investors may not be able to sell their ordinary shares at or above the initial public offering price or at the time that they would like to sell.

Our share price may be volatile, and the market price of our ordinary shares after this offering may drop below the price you pay.

The market price for our ordinary shares could be subject to significant fluctuations after this offering, and it may decline below the initial public offering price. Market prices for securities of early stage companies have historically been particularly volatile in response to various factors, some of which are beyond our control. As a result of this volatility, you may not be able to sell your ordinary shares at or above the initial public offering price. Some of the factors that may cause the market price for our ordinary shares to fluctuate include:

 

   

fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

   

actual or anticipated fluctuations in our key operating metrics, financial condition, and operating results;

 

   

loss of existing customers or inability to attract new customers;

 

   

actual or anticipated changes in our growth rate;

 

   

announcements of technological innovations or new offerings by us or our competitors;

 

   

our announcement of actual results for a fiscal period that are lower than projected or expected or our announcement of revenue or earnings guidance that is lower than expected;

 

   

changes in estimates of our financial results or recommendations by securities analysts;

 

   

failure of any of our solutions to achieve or maintain market acceptance;

 

   

changes in market valuations of similar companies;

 

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success of competitive products or services;

 

   

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

 

   

announcements by us or our competitors of significant products or services, contracts, acquisitions, or strategic alliances;

 

   

regulatory developments in the U.S. or other countries;

 

   

actual or threatened litigation involving us or our industry;

 

   

additions or departures of key personnel;

 

   

general perception of the future of the fleet management market or our solutions;

 

   

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

   

further issuances of ordinary shares by us;

 

   

sales of ordinary shares by our shareholders;

 

   

repurchases of ordinary shares; and

 

   

changes in general economic, industry, and market conditions.

In addition, the stock market in general, and the market for Internet-related companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations may be even more pronounced in the trading market for our shares shortly following this offering. If the market price of our ordinary shares after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources, and harm our business, operating results, and financial condition. In addition, recent fluctuations in the financial and capital markets have resulted in volatility in securities prices.

A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our ordinary shares to drop significantly, even if our business is doing well.

Sales of a substantial number of our ordinary shares in the public market could occur at any time after the expiration or waiver of the lock-up agreements described in the “Underwriting” section of this prospectus. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our ordinary shares. After this offering, we will have 34,418,867 ordinary shares outstanding based on the number of shares outstanding as of June 30, 2012. This includes the 7,812,500 shares that we and the selling shareholders are selling in this offering, which may be resold in the public market immediately. The remaining 26,606,367 shares, representing 77.3% of our outstanding ordinary shares after this offering, are currently restricted as a result of securities laws or lock-up agreements but may be sold, subject to any applicable volume limitations under federal securities laws, in the near future as set forth below.

 

Number of Shares and

% of Total Outstanding

  

First Date Available for Sale into Public Market

0 shares, or 0%

   On the date of this prospectus

26,606,367 shares, or 77.3%

   180 days after the date of this prospectus, subject to extension in specified instances, due to lock-up agreements between the holders of these shares and the underwriters; however, the representatives of the underwriters can waive the provisions of these lock-up agreements and allow these shareholders to sell their shares at any time

 

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After this offering and the expiration or waiver of the lock-up agreements, holders of an aggregate of 25,090,883 of our ordinary shares will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other shareholders. In addition, as of June 30, 2012, there were 3,367,166 shares subject to outstanding options that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements, and Rules 144 and 701 under the Securities Act of 1933, as amended, or the Securities Act. We also intend to register all of our ordinary shares that we may issue under our equity incentive plans, including 1,417,537 shares reserved for future issuance under our equity incentive plans. Once we register and issue these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements.

Acquirers of ordinary shares in this offering will experience immediate and substantial dilution in the net tangible book value of their investment.

The initial public offering price of our ordinary shares will be substantially higher than the net tangible book value per share of our outstanding ordinary shares immediately after this offering. Therefore, if you acquire our ordinary shares in this offering, you will incur immediate dilution of $14.68 in net tangible book value per share from the price you paid for our shares of $17.00 per share. In addition, following this offering, acquirers of ordinary shares in this offering will have contributed 45.4% of the total consideration paid by our shareholders to acquire our ordinary shares, but only own 18.2% of our outstanding ordinary shares. Moreover, we issued options in the past to acquire ordinary shares at prices significantly below the initial public offering price of $17.00 per ordinary share. As of June 30, 2012, there were 3,367,166 of our ordinary shares issuable upon exercise of outstanding options with a weighted average exercise price of $4.84 per share. To the extent that these outstanding options are ultimately exercised, you will incur further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our shares adversely, our share price and trading volume could decline.

The trading market for our ordinary shares will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of our company, our share price and trading volume would likely be negatively impacted. If any of the analysts who may cover us change their recommendation regarding our shares adversely, or provide more favorable relative recommendations about our competitors, our share price would likely decline. If any of the analysts who may cover us were to cease coverage or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.

Our management will have broad discretion over the use of the net proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion in the use of our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply these proceeds in ways that increase the value of your investment. We intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters, and capital expenditures. We may also use a portion of the net proceeds to acquire, invest in, or obtain rights to complementary technologies, solutions, or businesses. Until we use the net proceeds to us from this offering, we plan to invest them, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds from this offering in ways that enhance shareholder value, we may fail to achieve expected financial results. You will not have the opportunity to influence our decisions on how we use our net proceeds from this offering.

 

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Our directors, executive officers, and holders of more than 5% of our ordinary shares prior to this offering together with their affiliates, will continue to have substantial control over us after this offering and will beneficially own, in the aggregate, approximately 26,924,415 of our outstanding ordinary shares, which could delay or prevent a change in corporate control.

After this offering, our directors, executive officers, and holders of more than 5% of our ordinary shares prior to this offering, together with their affiliates, will beneficially own, in the aggregate, approximately 78.2% of our outstanding ordinary shares and Fleetmatics Investor Holdings, L.P., which is controlled by its limited partners and Investcorp Technology Fund III Limited Partnership, its general partner, will beneficially own approximately 72.9% of our outstanding ordinary shares, assuming no exercise of the underwriters’ option to acquire additional ordinary shares in this offering. As a result, these shareholders, acting together, may have the ability to control the outcome of matters submitted to our shareholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all of our assets. In addition, these shareholders, acting together, may have the ability to control or influence the management and our affairs. These holders acquired their shares for substantially less than the price of the shares being acquired in this offering, and these holders may have interests, with respect to their shares, that are different from those of investors in this offering and the concentration of voting power among these holders may have an adverse effect on our share price.

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

We are an “emerging growth company,” as defined in the JOBS Act and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 for an extended period of time, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions until we are no longer an “emerging growth company.” We will remain an “emerging growth company” for up to five years, although if the market value of our ordinary shares that are held by non-affiliates exceeds $700 million as of any June 30 before that time and in certain other circumstances, we would cease to be an “emerging growth company” as of the following December 31. We cannot predict if investors will find our ordinary shares less attractive because we may rely on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are electing to not take advantage of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable.

We will be a “foreign private issuer” and a “controlled company” under the New York Stock Exchange rules, and as such we are entitled to exemption from certain New York Stock Exchange corporate governance standards, and you may not have the same protections afforded to shareholders of companies that are subject to all New York Stock Exchange corporate governance requirements, and you may not receive corporate and company information and disclosure that you are accustomed to receiving or in a manner in which you are accustomed to receiving it.

We are a “foreign private issuer,” as such term is defined in Rule 405 under the Securities Act, and we may follow certain home country corporate governance practices instead of the corporate governance

 

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requirements of the New York Stock Exchange. For example, we intend to follow Irish practice with respect to the quorum requirements for meetings of our shareholders as set forth in our amended and restated articles of association (which we will adopt substantially in the form attached as Exhibit 3.2 to the registration statement prior to the closing of this offering), which are different from the requirements of the New York Stock Exchange. The quorum required for a general meeting of shareholders is at least two qualifying persons present at a meeting and entitled to vote on the business to be dealt with. See “Description of Share Capital.” Under Irish law, there is no general statutory requirement for equity compensation plans to be approved by way of shareholder resolution, which is different than the requirements of the New York Stock Exchange. As such, while we may choose to seek shareholder approval for any equity compensation plans, we do not intend to adopt any requirements for shareholder approval of such plans in our amended and restated memorandum and articles of association. Other than the foregoing, we do not intend to follow home country corporate governance practices instead of the requirements of the New York Stock Exchange.

Additionally, after the closing of this offering, our largest shareholder will continue to control a majority of the voting power of our outstanding ordinary shares. As a result, we are a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including: the requirement that we have a compensation committee that is composed entirely of independent directors; the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors; and the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees. In addition, we will rely on the phase-in rules of the SEC and the New York Stock Exchange with respect to the independence of our audit committee. These rules permit us to have an audit committee that has one member that is independent by the date that our ordinary shares first trade on the New York Stock Exchange, a majority of members that are independent within 90 days of the effectiveness of the registration statement of which this prospectus forms a part, which we refer to as the effective date, and all members that are independent within one year of the effective date. Following this offering, we intend to utilize some or all of those exemptions. Accordingly, you will not be similarly situated to shareholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.

Further, as a “foreign private issuer” the rules governing the information that we disclose differ from those governing U.S. corporations pursuant to the Securities and Exchange Act of 1934, which, as amended, we refer to as the Exchange Act. We are not required to file quarterly reports on Form 10-Q or provide current reports on Form 8-K disclosing significant events within four days of their occurrence. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchase and sales of our securities. Our exemption from the rules of Section 16 of the Exchange Act regarding sales of ordinary shares by insiders means that you will have less data in this regard than shareholders of U.S. companies that are subject to the Exchange Act. Moreover, we are exempt from the proxy rules, and proxy statements that we distribute will not be subject to review by the SEC. Accordingly there may be less information concerning our company publicly available than there is for other U.S. public companies.

We may lose our foreign private issuer status which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting and other expenses.

We are a foreign private issuer and therefore we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers. In order to maintain our current status as a foreign private issuer, either (a) a majority of our ordinary shares must be either directly or indirectly owned of record by non-residents of the United States or (b) (i) a majority of our executive officers or directors may not be United States citizens or residents, (ii) more than 50 percent of our assets cannot be located in the United States and (iii) our business must be administered principally outside the United States. If we lost this status, we would be required to comply with the Exchange Act reporting and other

 

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requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC and New York Stock Exchange rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs and would make some activities highly time consuming and costly. We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers, it would make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our Board of Directors.

We do not currently intend to pay dividends on our ordinary shares and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our ordinary shares.

We have never declared or paid any cash dividends on our ordinary shares and do not intend to do so for the foreseeable future. We currently intend to retain all available funds and any future earnings to support the operation of, and to finance the growth and development of, our business. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors, subject to compliance with applicable laws (including the Irish Companies Acts which require Irish companies to have “profits available for distribution” before they can pay dividends) and covenants under current or future credit facilities, which may restrict or limit our ability to pay dividends and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our Board of Directors may deem relevant. As a result, a return on your investment may only occur if our share price appreciates.

Provisions contained in our articles of association, as well as provisions of Irish law, could impair a takeover attempt.

Our articles of association that will come into effect immediately prior to the closing of this offering and certain provisions of the Irish Companies Acts contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our Board of Directors. In addition, our articles of association will establish that our Board of Directors is divided into three classes, class I, class II and class III, with each class serving three-year staggered terms so that only one third of our Board of Directors will be subject to re-election in any one year.

There are a number of mechanisms for acquiring an Irish public limited company, including a court-approved scheme of arrangement under the Irish Companies Acts, through a tender offer by a third party and by way of a merger with a company incorporated in the European Economic Area under the European Communities (Cross-Border Mergers) Regulations 2008. Each method requires shareholder approval or acceptance and different thresholds apply.

In addition, following this offering, we will become subject to the Irish Takeover Rules, which will govern a takeover or attempted takeover of the company by means of a court-approved scheme of arrangement or a tender offer. These Rules contain detailed provisions for takeovers including as to disclosure, dealing and timetable.

The Irish Takeover Rules could discourage an investor from acquiring 30% or more of the outstanding ordinary shares of the company unless such investor were prepared to make a bid to acquire all outstanding ordinary shares.

Our Board of Directors may be limited by the Irish Takeover Rules in its ability to defend an unsolicited takeover attempt.

After this offering, we will become subject to the Irish Takeover Rules, under which the Company will not be permitted to take certain actions which might “frustrate” an offer for our ordinary shares once our Board

 

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of Directors has received an offer, or has reason to believe an offer is or may be imminent, without the approval of more than 50% of shareholders entitled to vote at a general meeting of our shareholders and/or the consent of the Irish Takeover Panel. This could limit the ability of our Board of Directors to take defensive actions even if it believes that such defensive actions would be in the best interests of our company and shareholders.

Please see “Description of Share Capital” for further detail.

Irish law differs from the laws in effect in the U.S. and may afford less protection to holders of our securities.

It may not be possible to enforce court judgments obtained in the U.S. against us in Ireland based on the civil liability provisions of the U.S. federal or state securities laws. In addition, there is some uncertainty as to whether the courts of Ireland would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on the civil liabilities provisions of the U.S. federal or state securities laws or hear actions against us or those persons based on those laws. We have been advised that the U.S. currently does not have a treaty with Ireland providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any U.S. federal or state court based on civil liability, whether or not based solely on U.S. federal or state securities laws, would not automatically be enforceable in Ireland.

As an Irish company, we are governed by the Irish Companies Acts, which differ in some material respects from laws generally applicable to U.S. corporations and shareholders, including, among others, differences relating to interested director and officer transactions and shareholder lawsuits. Likewise, the duties of directors and officers of an Irish company generally are owed to the company only. Shareholders of Irish companies generally do not have a personal right of action against directors or other officers of the company and may exercise such rights of action on behalf of the company only in limited circumstances. Accordingly, holders of Fleetmatics Group PLC shares may have more difficulty protecting their interests than would holders of shares of a corporation incorporated in a jurisdiction of the U.S.

The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation and these differences may make our ordinary shares less attractive to investors.

We are incorporated under Irish law and, therefore, certain of the rights of holders of our shares are governed by Irish law, including the provisions of the Irish Companies Acts, and by our articles of association. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations and these differences may make our ordinary shares less attractive to investors. The principal differences include the following:

 

   

under Irish law, dividends may only be declared if we have, on an individual entity basis, profits available for distribution, within the meaning of the Irish Companies Acts;

 

   

under Irish law, each shareholder present at a meeting has only one vote unless a poll is called, in which case each holder gets one vote per share owned. Under U.S. law, each shareholder typically is entitled to one vote per share at all meetings. Under Irish law, it is only on a poll that the number of shares determines the number of votes a holder may cast;

 

   

under Irish law, each shareholder generally has preemptive rights to subscribe on a proportionate basis to any issuance of shares. Under U.S. law, shareholders generally do not have preemptive rights unless specifically granted in the certificate of incorporation or otherwise. Pre-emption rights may be disapplied under Irish law for renewable five year periods by Irish companies by way of a provision in their articles of association or special resolution of their shareholders, which is an option we expect to avail ourselves of prior to the consummation of this offering;

 

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under Irish law, certain matters require the approval of 75% of the shareholders, including amendments to our articles of association. This may make it more difficult for us to complete corporate transactions deemed advisable by our Board of Directors. Under U.S. law, generally only majority shareholder approval is required to amend the certificate of incorporation or to approve other significant transactions;

 

   

under Irish law, a bidder seeking to acquire us would need, on a tender offer to receive shareholder acceptance in respect of 80% of our outstanding shares. If this 80% threshold is not achieved in the offer, under Irish law, the bidder cannot complete a “second step merger” to obtain 100% control of us. Accordingly, tender of 80% of our outstanding shares will be a condition in a tender offer to acquire us, not 50% as is more common in tender offers for corporations organized under U.S. law; and

 

   

under Irish law, shareholders may be required to disclose information regarding their equity interests upon our request, and the failure to provide the required information could result in the loss or restriction of rights attaching to the shares, including prohibitions on the transfer of the shares, as well as restrictions on voting, dividends and other payments. Comparable provisions generally do not exist under U.S. law.

A future transfer of your ordinary shares, other than one effected by means of the transfer of book entry interests in DTC, may be subject to Irish stamp duty.

Transfers of ordinary shares effected by means of the transfer of book entry interests in the Depositary Trust Company, or DTC, should not be subject to Irish stamp duty. It is anticipated that the majority of ordinary shares will be traded through DTC, either directly or through brokers who hold such ordinary shares on behalf of customers through DTC. However, if you hold your ordinary shares directly rather than beneficially through DTC (or through a broker that holds your ordinary shares through DTC), any transfer of your ordinary shares could be subject to Irish stamp duty (currently at the rate of 1% of the higher of the price paid or the market value of the ordinary shares acquired). Payment of Irish stamp duty is generally a legal obligation of the transferee. The potential for stamp duty to arise could adversely affect the price of our ordinary shares.

U.S. Holders of our shares could be subject to material adverse tax consequences if we are considered a “passive foreign investment company” for U.S. federal income tax purposes.

We do not believe that we are a passive foreign investment company, and we do not expect to become a passive foreign investment company. However, our status in any taxable year will depend on our assets and activities in each year, and because this is a factual determination made annually after the end of each taxable year, there can be no assurance that we will not be considered a passive foreign investment company for the current taxable year or any future taxable year. If we were a passive foreign investment company while a taxable U.S. holder held our shares, such U.S. holder would generally be subject to an interest charge on any deferred taxation and any “excess distributions” and gain upon the sale of our stock would generally be taxed as ordinary income to such U.S. holder. See “Taxation—Material United States federal income tax consequences to U.S. Holders—Passive foreign investment company.”

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. Words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “will,” “may,” “potential,” “continue,” or the negative of these terms, and similar expressions intended to identify future events or outcomes indicate such forward-looking statements. Not all forward-looking statements contain these identifying words. Forward-looking statements in this prospectus may include statements about:

 

   

our ability to attract, sell to and retain customers on a cost-effective basis;

 

   

our anticipated growth strategies, including our ability to increase sales to existing customers, the introduction of new solutions and international expansion;

 

   

our future business development, results of operations and financial condition;

 

   

expected changes in our profitability and certain cost or expense items as a percentage of our revenue;

 

   

the use of proceeds from this offering;

 

   

our ability to remediate material weaknesses in our internal controls; and

 

   

the effectiveness of our marketing and sales programs.

The forward-looking statements included in this prospectus are subject to risks, uncertainties and assumptions. Our actual results of operations may differ materially from those stated in or implied by such forward-looking statements as a result of a variety of factors, including those described under “Risk Factors” and elsewhere in this prospectus.

We operate in an evolving environment. New risks emerge from time to time, and it is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Forward-looking statements speak only as of the date of this prospectus. You should not rely upon forward-looking statements as predictions of future events. Except as required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of $94.3 million based upon the initial public offering price of $17.00 per ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from sales of ordinary shares by the selling shareholders.

The principal reasons for this offering are to increase our capitalization and financial flexibility, increase our visibility in the marketplace and create a public market for our ordinary shares. As of the date of this prospectus, we have no specific plans for the use for the net proceeds of this offering, or a significant portion thereof. We anticipate that we will use the net proceeds we receive from this offering for working capital and other general corporate purposes, including funding of our marketing activities, repayment of indebtedness and the costs of operating as a public company and further investment in the development of our proprietary technologies. We may use a portion of the net proceeds for the acquisition of businesses, products and technologies that we believe are complementary to our own, although we have no agreements or understandings with respect to any acquisition at this time. We have not allocated any specific portion of the net proceeds to any particular purpose, and our management will have the discretion to allocate the proceeds as it determines. Pending these uses, we intend to invest the net proceeds to us from the offering in short-term, investment-grade, interest-bearing instruments.

 

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DIVIDEND POLICY

We do not have any present plan to pay dividends on our shares. Additionally, our ability to pay dividends on our ordinary shares is limited by restrictions on the ability of our subsidiaries and us to pay dividends or make distributions, including restrictions under the terms of the agreements governing our indebtedness and under Irish law. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our Board of Directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our Board of Directors may deem relevant.

Cash dividends on our shares, if any, will be paid in U.S. dollars. As we are an Irish company, dividend withholding tax, or DWT, currently at a rate of 20%, will arise in respect of dividends or other distributions to our shareholders unless an exemption applies. Where DWT does arise, we are responsible for deducting DWT at source and accounting for the relevant amount to the Irish Revenue Commissioners. See “Taxation—Taxation in Ireland—Dividend Withholding Tax” and “Description of Share Capital—Dividends.”

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2012:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the conversion of all of our outstanding redeemable convertible preferred shares into 26,653,383 ordinary shares upon the closing of this offering; and

 

   

on a pro forma as adjusted basis to give effect to:

 

   

the conversion of all of our outstanding redeemable convertible preferred shares into 26,653,383 ordinary shares upon the closing of this offering; and

 

   

the issuance by us of 6,250,000 ordinary shares in this offering at the initial public offering price of $17.00 per ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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

 

     June 30, 2012  
       Actual         Pro Forma         Pro Forma As  
Adjusted
 
     (in thousands, except share and per share data)  

Long-term debt, including current maturities:

      

Senior Secured Credit Facility:

      

Revolving Credit Facility(1)

   $      $      $   

Term Loan, net of discount of $632

    
24,368
  
   
24,368
  
    24,368   

Capital lease obligations

     780        780        780   
  

 

 

   

 

 

   

 

 

 

Total debt

    
25,148
  
    25,148        25,148   

Redeemable convertible preferred shares, €0.01375178 par value for Series A and B shares, €0.01 par value for Series C shares; 34,634,734 shares authorized; 34,634,734 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted

     131,061                 

Shareholders’ equity (deficit):

      

Ordinary shares, €0.015 par value; 43,961,737 shares authorized; 1,515,484 shares issued and outstanding, actual; 28,168,867 shares issued and outstanding, pro forma; 34,418,867 shares issued and outstanding, pro forma as adjusted

     20        523        642   

Deferred shares, €0.01 par value; 2,230,330 shares authorized; 2,230,330 shares issued and outstanding, actual, pro forma and pro forma as adjusted

     29        29        29   

Additional paid-in capital

     2,795        133,353        227,497   

Accumulated other comprehensive income

     595        595        595   

Accumulated deficit

     (114,057     (114,057     (114,057
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity (deficit)

     (110,618     20,443        114,706   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 45,591      $ 45,591      $ 139,854   
  

 

 

   

 

 

   

 

 

 

 

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(1) Our revolving credit facility provides for up to $25.0 million of borrowings to fund our working capital needs.

The number of shares shown as outstanding in the table above is based on 1,515,484 ordinary shares outstanding as of June 30, 2012 and excludes:

 

   

3,367,166 ordinary shares issuable upon the exercise of stock options outstanding as of June 30, 2012 at a weighted average exercise price of $4.84 per share;

 

   

1,417,537 additional ordinary shares reserved for future issuance of stock options and other share-based awards under the 2004 Plan and the 2011 Plan; and

 

   

400,000 ordinary shares reserved for future issuance under our 2012 Employee Share Purchase Plan, which will become effective upon closing of this offering.

 

 

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DILUTION

If you invest in our ordinary shares in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our ordinary shares and the pro forma as adjusted net tangible book value per share of our ordinary shares immediately after this offering.

Our historical net tangible book value (deficit) as of June 30, 2012 was $(14.5) million, or $(9.54) per share. The historical net tangible book value per ordinary share represents the amount of our total tangible assets less our total liabilities, divided by the number of our ordinary shares outstanding as of December 31, 2011.

Our pro forma net tangible book value (deficit) as of June 30, 2012 was $(14.5) million, or $(0.51) per share. Pro forma net tangible book value (deficit) per share represents the amount of our total tangible assets less our total liabilities, divided by the number of our ordinary shares outstanding as of June 30, 2012, after giving effect to the automatic conversion of all of our outstanding redeemable convertible preferred shares into 26,653,383 ordinary shares in connection with our initial public offering.

After giving effect to the sale by us of ordinary shares in this offering at the initial public offering price of $17.00 per ordinary share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2012 would have been $79.8 million, or $2.32 per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $2.83 per share to our existing shareholders and an immediate dilution in pro forma as adjusted net tangible book value of $14.68 per share to new investors purchasing ordinary shares in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for an ordinary share. The following table illustrates this dilution on a per share basis:

 

Initial public offering price per share

     $ 17.00   

Pro forma net tangible book value (deficit) per share as of June 30, 2012

   $ (0.51  

Increase in pro forma as adjusted net tangible book value per share attributable to new investors purchasing shares in this offering

     2.83     
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

       2.32   
    

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

     $ 14.68   
    

 

 

 

The following table summarizes, as of June 30, 2012, on a pro forma as adjusted basis as described above, the number of our ordinary shares, the total consideration and the average price per share (a) paid to us by existing shareholders and (b) to be paid by new investors acquiring our ordinary shares in this offering at the initial public offering price of $17.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

    

 

Shares Acquired

    Total Consideration     Average
Price  per

Share
 
     Number      Percent     Amount      Percent    

Existing shareholders

     28,168,867         81.8 %   $ 127,929,980         54.6   $ 4.54   

New investors

     6,250,000         18.2        106,250,000         45.4      $ 17.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Totals

     34,418,867         100   $ 234,179,980         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

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The total number of shares reflected in the discussion and tables above is based on 1,515,484 ordinary shares outstanding as of June 30, 2012. The discussion and tables above assume no exercise of any outstanding stock options. As of June 30, 2012, there were 3,367,166 shares issuable upon exercise of outstanding options at a weighted average exercise price of $4.84 per share. In addition, there are 1,417,537 ordinary shares available for future issuance upon the exercise of future grants under our 2004 Plan and our 2011 Plan. To the extent that any of these options are granted and exercised, there will be further dilution to new investors.

The sale of 1,562,500 ordinary shares to be sold by the selling shareholders in this offering will reduce the number of ordinary shares held by existing shareholders to 26,606,367, or 77.3% of the total ordinary shares outstanding after this offering, and will increase the number of ordinary shares held by new investors participating in this offering to 7,812,500 ordinary shares, or 22.7% of the total ordinary shares outstanding after this offering. In addition, if the underwriters’ option to acquire additional ordinary shares is exercised in full from the selling shareholders, the number of shares held by the existing shareholders after this offering would be reduced to 73.9% of the total number of shares outstanding after this offering, and the number of shares held by new investors would increase to 8,984,375 shares, or 26.1% of the total number of shares outstanding after this offering.

 

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CORPORATE STRUCTURE

We were incorporated in Ireland on October 28, 2004 as a private limited company. Before commencing this offering, a public limited company known as Fleetmatics Group PLC became the holding company of the FleetMatics group by way of a share-for-share exchange in which the shareholders of FleetMatics Group Limited exchanged their shares in FleetMatics Group Limited for identical shares in Fleetmatics Group PLC.

Our registered and principal office is located at Block C, Cookstown Court, Belgard Road, Tallaght, Dublin 24, Ireland. Our U.S. headquarters’ office is located at 70 Walnut Street, Wellesley Hills, Massachusetts and our telephone number is (866) 844-2235. We have additional offices in Rolling Meadows, Illinois, Charlotte, North Carolina, Clearwater, Florida, Tempe, Arizona, and Solon, Ohio in the United States, Reading, Berkshire in the United Kingdom, and in Dublin, Ireland.

We are a holding company and conduct substantially all of our business through our direct, wholly-owned operating subsidiaries, FleetMatics IRL Limited, FleetMatics UK Limited, FleetMatics USA, LLC and SageQuest LLC.

We have other non-operating, wholly-owned entities in our group, including Fleetmatics Patents Limited, an Irish company, which holds certain group intellectual property.

Additionally, we may, from time to time, incorporate subsidiaries for specific purposes or to carry out particular functions.

The following chart shows our current corporate structure:

 

LOGO

 

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SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus.

The consolidated statements of operations data for the years ended December 31, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010 and 2011 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2008 and 2009 and the consolidated balance sheet data as of December 31, 2008 and 2009 are derived from our audited consolidated financial statements not included in this prospectus. The consolidated statement of operations data for the six months ended June 30, 2011 and 2012 and the consolidated balance sheet data as of June 30, 2012 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and our interim results are not necessarily indicative of results that should be expected for the full year.

 

    Year Ended December 31,     Six Months Ended
June 30,
 
    2008     2009     2010     2011     2011     2012  
    (in thousands, except per share data)  

Consolidated Statements of Operations Data:

           

Subscription revenue

  $ 32,014      $ 46,057      $ 64,690      $ 92,317      $ 42,587      $ 58,405   

Cost of subscription revenue

    13,193        16,161        22,941        28,631        13,466        17,332   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    18,821        29,896        41,749        63,686        29,121        41,073   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

Sales and marketing

    12,379        16,113        20,447        33,391        15,948        20,199   

Research and development

    5,724        2,866        4,061        6,021        2,743        3,374   

General and administrative

    5,949        6,853        14,628        18,309        8,586        14,229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    24,052        25,832        39,136        57,721        27,277        37,802   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (5,231     4,064        2,613        5,965        1,844        3,271   

Interest income (expense), net

    (330     74        (1,012     (2,386     (1,156     (1,104

Foreign currency transaction gain (loss), net

    (313     68        (907     155        642        (142

Loss on extinguishment of debt

                                       (934
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (5,874     4,206        694        3,734        1,330        1,091   

Provision for (benefit from) income taxes

    1,783        1,344        1,430        865        (266     1,457   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (7,657     2,862        (736     2,869        1,596        (366

Accretion of redeemable convertible preferred shares to redemption value

    (290     (609     (418     (446     (220     (222

Modification of redeemable convertible preferred shares

                  (6,542                     

Net income attributable to participating securities

           (873            (2,294     (1,302       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ordinary shareholders

  $ (7,947   $ 1,380      $ (7,696   $ 129      $ 74      $ (588
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to ordinary shareholders(1):

  

         

Basic

  $ (0.64   $ 0.13      $ (0.77   $ 0.09      $ 0.05      $ (0.39
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.64   $ 0.12      $ (0.77   $ 0.08      $ 0.05      $ (0.39
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average ordinary shares outstanding(1):

           

Basic

    12,465        10,936        10,051        1,497        1,497        1,510   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    12,465        11,851        10,051        2,078        1,880        1,510   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to ordinary shareholders (unaudited)(2):

           

Basic

        $ 0.10        $ (0.01
       

 

 

     

 

 

 

Diluted

        $ 0.10        $ (0.01
       

 

 

     

 

 

 

Pro forma weighted average ordinary shares outstanding (unaudited)(2):

  

         

Basic

          28,151          28,163   
       

 

 

     

 

 

 

Diluted

          28,731          28,163   
       

 

 

     

 

 

 

 

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     As of December 31,     As of June 30,
2012
 
     2008     2009     2010     2011    
     (in thousands)  

Consolidated Balance Sheet Data:

          

Cash

   $ 14,844      $ 11,606      $ 23,054      $ 8,615      $ 8,151   

Working capital (deficit)(3)

     (7,554     (7,193     (368     (8,858     (8,759

Total assets

     51,003        51,484        104, 352        99,576        111,788   

Total debt (net of discount), including capital lease obligations

     182               16,881        17,986        25,148   

Redeemable convertible preferred shares

     37,169        37,778        130,393        130,839        131,061   

Total shareholders’ deficit

     (57,264     (55,946     (115,514     (111,065     (110,618

 

(1) See Note 16 to our consolidated financial statements for further details on the calculation of basic and diluted net income (loss) per share attributable to ordinary shareholders.

 

(2) See Note 16 to our consolidated financial statements for further details on the calculation of pro forma net income (loss) per share attributable to ordinary shareholders.

 

(3) We define working capital (deficit) as current assets less current liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

FleetMatics is a leading global provider of fleet management solutions delivered as software-as-a-service, or SaaS. Our mobile software platform enables businesses to meet the challenges associated with managing their local fleets of commercial vehicles and improve productivity by extracting actionable business intelligence from vehicle and driver behavioral data. We offer intuitive, cost-effective Web-based and mobile application solutions that provide fleet operators with visibility into vehicle location, fuel usage, speed and mileage and other insights into their mobile workforce, enabling them to reduce operating and capital costs, as well as increase revenue. As of June 30, 2012, we had more than 16,000 customers who collectively deployed our solutions in over 281,000 vehicles worldwide. The substantial majority of our customers are small and medium-sized businesses, or SMBs, each of which deploy our solutions in 1,000 or fewer vehicles. During the six months ended June 30, 2012, we collected an average of approximately 30 million data points per day from these vehicles, and we have aggregated over 28 billion data points since our inception, which we believe provides valuable information that we may consider in the development of complementary solutions and additional sources of revenue.

We were founded in 2004 in Dublin, Ireland through a combination of two fleet management companies, WebSoft Ltd. and Moviltec Ltd. Since inception, our software has been designed to be delivered as a hosted, multi-tenant offering, accessed through a Web browser utilizing broadly available in-vehicle devices to transmit vehicle and driver behavioral data to our databases over cellular networks. In July 2010, we completed the acquisition of SageQuest, Inc., or SageQuest, in exchange for a cash payment of approximately $37.0 million. Through our SageQuest branded product, we provide configurable SaaS-based fleet management solutions to customers requiring integration capabilities with third-party workflow solutions or that require advanced levels of administrative flexibility.

We derive substantially all of our revenues from subscription agreements to our solutions, which include the use of our SaaS fleet management solution and an in-vehicle device. We generate sales through lead-generating Web-based advertising and targeted outbound sales efforts, which we then work to convert into paying customers. Our in-vehicle devices are installed by our network of installation partners. Initial customer contracts are typically 36 months in duration with renewal automatically for one-year intervals thereafter, unless the customer elects not to renew. These contract terms provide us with a high degree of visibility into future revenue. Our customer contracts are non-cancelable, and our customers generally are billed on a monthly basis.

We have achieved significant revenue growth historically. Our growth has been driven through a combination of selling to new customers, selling additional vehicle subscriptions to existing customers, as their number of vehicles under management increases, as well as selling additional features to our existing customers. Our customer acquisition model is designed to be efficient and scalable by focusing on acquiring large volumes of leads primarily through Web-based sales and marketing efforts. Through these efforts, we have successfully driven strong growth in sales among a relatively diverse and distributed SMB customer base. In 2011 and in the first six months of 2012, our largest customer accounted for approximately 4% and 3%, respectively, of our subscription revenue and our top 25 customers represented approximately 11% and 13%, respectively, of our subscription revenue.

 

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As we pursue our growth strategy, we will have many opportunities and challenges. One of our key initiatives is to expand our business internationally, primarily in Europe in the near term, and we expect to hire additional personnel as we pursue this expansion. We may also complete strategic acquisitions to help us expand our sales and operations internationally. We will have to address additional risks as we pursue this international expansion, including the difficulties of localizing our solutions, competing with local companies as well as the challenge of managing and staffing international operations. We also intend to explore opportunities to capitalize on the approximately 30 million data points per day we accumulate from our customers’ vehicles as we seek ways to monetize this valuable information. Over time, we may experience pressure on pricing as our products become more mature and as competition intensifies in various markets. Each of our strategic initiatives will require expenditure of capital and management focus and we may be unsuccessful as we execute our strategy.

In each quarter since our inception, we have increased our number of customers and the number of vehicles subscribed to our solutions. As of June 30, 2012, we had approximately 281,000 vehicles under subscription, an increase of 18.1% from approximately 237,000 as of December 31, 2011, which was an increase of 38.3% from approximately 172,000 as of December 31, 2010. Our subscription revenue in 2011 grew 42.7% to $92.3 million compared to $64.7 million in 2010 and in the six months ended June 30, 2012 grew 37.1% to $58.4 million compared to $42.6 million in the six months ended June 30, 2011. As the business has grown, we have leveraged our scale to negotiate improved pricing associated with application hosting, procurement of in-vehicle devices, telecommunication services and third-party data subscription services. We reported net income in 2011 of $2.9 million, despite our significant investment in expanding our sales capabilities, as compared to a $0.7 million net loss in 2010. We reported a net loss of $0.4 million in the six months ended June 30, 2012 compared to net income of $1.6 million in the six months ended June 30, 2011. Our Adjusted EBITDA in 2011 grew 94.7% to $21.7 million compared to $11.2 million in 2010 and in the six months ended June 30, 2012 grew 26.6% to $12.0 million compared to $9.5 million in the six months ended June 30, 2011.

Key Financial and Operating Metrics

In addition to traditional financial metrics, we monitor the ongoing operation of our business using a number of financially and non-financially derived metrics that are not included in our consolidated financial statements.

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2010     2011     2011     2012  
     (dollars in thousands)  

Total vehicles under subscription

     172,000        237,000        200,000        281,000   

Adjusted EBITDA

   $ 11,171      $ 21,748      $ 9,472      $ 11,988   

Net churn

     (1.3 )%      3.2     1.0     1.8

Total vehicles under subscription. This metric represents the number of vehicles managed by our customers utilizing one or more of our SaaS solutions at the end of the period. Since our revenue is primarily driven by the number of vehicles that subscribe to our SaaS solutions, we believe that total vehicles under subscription is an important metric to monitor.

Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before income taxes, interest income (expense), foreign currency transaction gain (loss), depreciation and amortization of property and equipment, amortization of capitalized in-vehicle-devices owned by customers, amortization of intangible assets, share-based compensation, transaction costs related to acquired businesses, costs associated with our Management Services Agreement with Privia, and loss on extinguishment of debt.

We have included Adjusted EBITDA in this prospectus because it is a key measure used by our management and Board of Directors to understand and evaluate our core operating performance and trends; to prepare and approve our annual budget and to develop short- and long-term operational plans; and to allocate

 

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resources to expand our business. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. For further explanation of our management’s use of this measure, limitations of its use, and a reconciliation of our Adjusted EBITDA to our net income (loss), please see “Summary Consolidated Financial Data—Adjusted EBITDA.”

Net churn. We calculate our net churn for a period by dividing (i) the number of vehicles under subscription added from existing customers less vehicles under subscription lost from existing customers over that period by (ii) the total vehicles under subscription at the beginning of that period. This provides us an appropriate measure of churn as it reflects the stability of our existing customer base before taking into account new customers as existing customers may remain a customer, but decrease the total number of subscribed vehicles at their contractual point of renewal, and conversely, may increase the number of vehicles under subscription at any point of time. SageQuest vehicles under subscription and vehicles under subscription lost are not reflected as part of the churn calculation prior to July 2010 when we acquired it.

Privia Management Services Agreement

Concurrent with our Series C redeemable convertible preferred shares financing in November 2010, we entered into a consulting and non-compete agreement, or the Management Services Agreement, with Privia Enterprises Limited, or Privia, a company controlled by certain of our former shareholders, one of whom continued to serve as a member of our Board of Directors through February 2012. Pursuant to this agreement, in exchange for consulting services to be performed by Privia, we agreed to pay Privia up to $15.0 million in three separate installments if we sell a specified number of subscriptions, measured by unit installation, during each of the twelve months ending March 31, 2012, 2013 and 2014. These payments would be made after the conclusion of each measurement period and are scheduled to be paid as follows: $3.0 million for the period ending March 31, 2012, $5.0 million for the period ending March 31, 2013 and $7.0 million for the period ending March 31, 2014. For the years ended December 31, 2010 and 2011 and the six months ended June 30, 2011 and 2012, we accrued and recorded expense of approximately $0.2 million, $2.2 million, $1.1 million and $1.8 million, respectively, for these future payments. No payments under this agreement were made as of June 30, 2012. On August 20, 2012, we paid Privia an aggregate of $7.8 million in full satisfaction of all present and future amounts that are payable by us under the Management Services Agreement.

Components of Results of Operations

Subscription Revenue

We derive substantially all of our revenue from subscription fees for our solutions, which include the use of our SaaS fleet management solution and an in-vehicle device. Our revenue is driven primarily by the number of vehicles under subscription and the price per vehicle under subscription. In addition, we generate revenue by selling our customers additional subscriptions, such as our fuel card integration and integration with GPS navigation devices. To a much lesser extent, we sell aggregated, anonymous data to traffic subscription service providers.

Our contract terms generally are 36 months for their initial term with automatic annual renewals thereafter, unless the customer elects not to renew. We collect fees from our customers for a ratable portion of the contract on a periodic basis, generally on a monthly basis in advance. Prior to 2011, some customer contracts were paid in advance for the full, multiple-year term. Since that time, our payment terms are typically monthly in advance; however, we continue to enable our customers to prepay all or part of their contractual obligations quarterly, annually or for the full contract term in exchange for a prepayment discount that is reflected in the pricing of the contract.

 

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Cost of Subscription Revenue

Cost of subscription revenue consists primarily of costs related to communications, third-party data and hosting costs (which include the cost of telecommunications charges for data; subscription fees paid to third-party providers of Internet maps; posted speed limit and other data; and costs of hosting of our software applications underlying our product offerings); third-party costs related to the maintenance and repair of installed in-vehicle devices, which we refer to as field service costs; depreciation of in-vehicle devices (including installation and shipping costs related to these devices); amortization of capitalized in-vehicle devices owned by customers; personnel costs (including share-based compensation) of our customer support activities and related to configuration of our solutions to interface with the customers’ workflow or other internal systems where necessary; amortization expense for internal-use capitalized software costs; amortization of developed technology acquired as part of our SageQuest acquisition in 2010; amortization of the patent for our vehicle tracking system; and an allocation of occupancy and general office related expenses, such as rent and utilities, based on headcount. We allocate a portion of customer support costs related to assisting in the sales process to sales and marketing expense.

We capitalize the cost of installed in-vehicle devices (including installation and shipping costs related to these devices) and depreciate these costs over the estimated useful life of the devices, which is currently six years, or over the estimated average customer relationship period, which is currently six years. If a customer subscription agreement is canceled or expires prior to the end of the expected useful life of the device under contract, the depreciation period is accelerated resulting in the carrying value being expensed in the then-current period. Should an installed in-vehicle device require replacement because it has become defective, we record as expense the cost of the replacement part or device when provided.

The expenses related to our hosted software applications are only modestly affected by the number of customers who subscribe to our products because of the scalability of our software applications, data expansion and hosting infrastructure. However, many of the other components of our cost of subscription revenue, such as depreciation of in-vehicle devices and installation and shipping costs related to these devices, communications expense and subscription fees paid to our Internet map providers and for other third-party data are variable costs affected by the number of vehicles subscribed by customers.

We expect that the cost of subscription revenue in absolute dollars may increase in the future depending on the growth rate of subscription sales to new and existing customers and our resulting need to service and support those customers. We also expect that cost of subscription revenue as a percentage of subscription revenue will fluctuate from period to period.

Sales and Marketing

Sales and marketing expenses consist primarily of wages and benefits (including share-based compensation) for sales and marketing personnel, including the amortization of deferred commissions and travel related expenses; advertising and promotional costs; and an allocation of occupancy and general office related expenses, such as rent and utilities, based on headcount. Also included in our sales and marketing expenses is the amortization of the value of customer relationships and trademarks acquired as part of our SageQuest acquisition in 2010. Advertising costs consist primarily of pay-per-click advertising with search engines, other online and offline advertising media, as well as the costs to create and produce these advertisements. Advertising costs are expensed as incurred. We capitalize commission costs that are incremental and directly related to the acquisition of new customer contracts or renewals. We pay commissions in full when we receive the initial customer payment for a new subscription or a renewal subscription. Commission costs are capitalized upon payment and are amortized as expense ratably over the term of the related non-cancelable customer contract, in proportion to the recognition of the subscription revenue. If a subscription agreement is terminated, the unamortized portion of any deferred commission cost is recognized as an expense immediately upon such termination.

 

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We plan to continue to invest in sales and marketing in order to drive growth in our sales and continue to build brand and category awareness. We expect sales and marketing expenses to increase in absolute dollars and to continue to be our largest operating expense in absolute dollars and as a percentage of subscription revenue, although they may fluctuate as a percentage of subscription revenue.

Research and Development

Research and development expenses consist primarily of wages and benefits (including share-based compensation) for product management and development personnel, costs of external consultants, and, to a lesser extent, an allocation of occupancy and general office related expenses, such as rent and utilities, based on headcount. We have focused our research and development efforts on improving ease of use, functionality and technological scalability of our existing products as well as on expanding and developing new offerings. The majority of our research and development employees are located in our development center in Ireland. Therefore, a majority of research and development expense is subject to fluctuations in foreign exchange rates. Research and development costs are expensed as incurred, except for certain internal-use software development costs that qualify for capitalization, such as costs related to software enhancements that add functionality, which are capitalized and amortized over their estimated useful life.

We believe that continued investment in our technology is important for our future growth, and as a result, we expect research and development expenses to increase in absolute dollars, although they may fluctuate as a percentage of subscription revenue.

General and Administrative

General and administrative expenses consist primarily of wages and benefits (including share-based compensation) for administrative services, human resources, internal information technology support, executive, finance and accounting personnel; professional fees; expenses for business application software licenses; non-income related taxes; other corporate expenses, such as insurance; bad debt expenses; and an allocation of occupancy and general office related expenses, such as rent and utilities, based on headcount. Also included within our general and administrative expenses are costs related to the Management Services Agreement we entered into in November 2010 with Privia.

We expect that general and administrative expenses will increase as we continue to add personnel in connection with the anticipated growth of our business and as a result of payments required under the Management Services Agreement with Privia. In addition, we anticipate that we will also incur additional personnel expenses, professional service fees, including auditing and legal fees, and insurance costs related to operating as a public company.

Interest Income (Expense), net

Interest income (expense), net consists primarily of interest expense on our outstanding debt, including our capital lease obligations.

Foreign Currency Transaction Gain (Loss), net

Foreign currency transaction gain (loss), net consists primarily of the net unrealized gains and losses recognized upon revaluing the foreign currency-denominated intercompany payables and receivables of our various subsidiaries at each balance sheet date. To a lesser extent, foreign currency transaction gain (loss), net also consists of the transaction gains and losses recorded to revalue the foreign currency-denominated customer accounts receivable and vendor payables recorded by our subsidiaries that transact in currencies other than their functional currency. We currently do not engage in hedging activities related to our foreign currency-denominated intercompany balances or our customer receivables and other payables; as such, we cannot predict the impact of future foreign currency transaction gains and losses on our operating results. See “—Quantitative and Qualitative Disclosures about Market Risk.”

 

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Provision for Income Taxes

Provision for income taxes consists primarily of taxes in Ireland, the United States and the United Kingdom. There are two main drivers of our annual effective tax rate. First, as a multi-national company, we are subject to tax in various jurisdictions which apply various statutory rates of tax to our income. Each of these jurisdictions has its own tax law which is subject to interpretation on a jurisdiction by jurisdiction basis. In Ireland, our operating entity is subject to tax at a 12.5% tax rate and our non-operating entities are subject to tax at a 25% tax rate, while our foreign subsidiaries in the United States and the United Kingdom are subject to tax rates of approximately 40% and 26%, respectively. Second, as a result of our global business model, we engage in a significant number of cross-border intercompany transactions. As a result of these transactions, we have recorded reserves for uncertain tax positions related to how the different jurisdictions may conclude on the tax treatment of the transaction and how we might settle those exposures. There is no guarantee that how one jurisdiction might view a particular transaction will be respected by another jurisdiction. Additionally, there may be instances where our income is subject to taxation in more than one jurisdiction.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. 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 believe that the estimates, assumptions and judgments involved in the accounting policies described below may have the greatest potential impact on our financial statements and, therefore, consider these to be our critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. See also Note 2 of our consolidated financial statements included elsewhere in this prospectus for information about these critical accounting policies as well as a description of our other significant accounting policies.

JOBS Act

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing to not take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable. In addition, we are in the process of evaluating the benefits of relying on the other exemptions and reduced reporting requirements provided by the JOBS Act.

Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation, which would not apply to us in any event so long as we remain a foreign private issuer. These exemptions will apply for a period of five years following the completion of our initial public offering or until we no longer meet the requirements of being an “emerging growth company,” whichever is earlier.

 

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Revenue Recognition

We provide access to our software through subscription arrangements whereby our customers are charged a per subscribed-vehicle fee for access for a specified term. Subscription agreements contain multiple service elements and deliverables, including installation of in-vehicle devices, access to our on-demand software via our website, and support services delivered over the term of the arrangement. Agreements do not provide customers the right to take possession of the software at any time. We have determined that the elements of our subscription agreements do not have value to the customer on a standalone basis. As a result, the multiple elements within our subscription agreements do not qualify for treatment as separate units of accounting. Accordingly, we account for all fees received under our subscription agreements as a single unit of accounting and, except for any up-front fees, recognize the total fee amount ratably on a daily basis over the term of the subscription agreement. We only commence recognition of revenue when there is persuasive evidence of an arrangement, the fee is fixed or determinable, collectibility is deemed reasonably assured, and recurring services have commenced. Our initial subscription agreements typically have contract terms of 36 months.

For the limited number of customer arrangements in which title to the in-vehicle devices transfers to the customer upon delivery or installation of the in-vehicle device, we receive an up-front fee from the customer. As the in-vehicle devices do not have value to the customer on a standalone basis, the delivery or installation of the in-vehicle devices does not represent the culmination of a separate earning process associated with the payment of the up-front fee. Accordingly, we record the amount of the up-front fee as deferred revenue upon invoicing and recognize that amount as revenue ratably on a daily basis over the estimated average customer relationship period of six years, which is longer than the typical subscription agreement term of 36 months. If a customer permanently ceases use of our subscription service at any point when a balance of deferred revenue from this up-front payment exists, we recognize the remaining balance of the deferred revenue in the period of notification. Changes in the typical customer contractual term, customer behavior, competition or economic conditions could affect our estimates of the average customer relationship period. We review the estimated average customer relationship period on an annual basis and account for changes prospectively.

Deferred revenue represents amounts billed to customers or payments received from customers for which revenue has not yet been recognized. Deferred revenue primarily consists of prepayments made by customers for future periods and, to a lesser extent, the unearned portion of monthly billed subscription fees and up-front payments from customers for in-vehicle devices whose ownership transfers to them upon delivery or installation.

Allowance for Doubtful Accounts

Accounts receivable are carried at their original invoice amounts less an allowance for doubtful collections based on estimated losses resulting from the inability or unwillingness of customers to make required payments. We estimate the allowance at each reporting period based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with specific delinquent accounts. We also consider any changes to the financial condition of our customers and any other external market factors that could impact the collectibility of our receivables in the determination of our allowance for doubtful accounts.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to calculate our income tax expense based on taxable income by jurisdiction. There are many transactions and calculations about which the ultimate tax outcome is uncertain; as a result, our calculations involve estimates by management. Some of these uncertainties arise as a consequence of transfer pricing arrangements among our related entities and the differing tax treatment of revenue and cost items across various jurisdictions. If we were compelled to revise or to account differently for our arrangements, that revision could affect our tax liability.

 

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We account for uncertainty in income taxes recognized in our financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon examination by the taxing authorities, based on the technical merits of the position. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Our provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact, either favorable or unfavorable, on our consolidated financial condition and operating results. At December 31, 2010 and 2011 and June 30, 2012, the balances recorded as liabilities for unrecognized tax benefits in our consolidated balance sheets totaled $18.8 million, $17.8 million and $18.9 million, respectively, including accrued interest and penalties.

The income tax accounting process also involves estimating our actual current tax liability, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. Our net deferred tax assets currently are comprised of net operating loss carryforwards in the United States, Ireland and the United Kingdom as well as deductible temporary differences. As of December 31, 2011, our net operating loss carryforwards in the United States available to reduce future federal taxable income totaled $22.5 million, and our net operating loss carryforwards in Ireland and the United Kingdom available to reduce future taxable income totaled $3.9 million and $3.1 million, respectively. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe, based upon the weight of available evidence, that it is more likely than not that all or a portion of deferred tax assets will not be realized, we establish a valuation allowance as a charge to income tax expense. We evaluate valuation allowances for deferred tax assets at the individual subsidiary level or consolidated tax group level in accordance with the tax law in the specific jurisdiction. In estimating future taxable profits, we consider all current contracts and assets of the business, including intercompany transfer pricing agreements, as well as a reasonable estimation of future taxable profits achievable by us. With respect to our subsidiaries in the United States, which file a consolidated group tax return for federal and state tax purposes and are in a three-year cumulative pre-tax loss position as a result of losses incurred in recent years, we have concluded that there is sufficient positive evidence to overcome the three-year cumulative pre-tax loss position given our future forecasted income and the relatively long carryforward periods permitted for net operating losses in the United States. In arriving at this conclusion, we forecasted future income in the United States using fiscal year 2011 results as a base, then adjusted for (i) verifiable evidence of known reductions in certain future expenses, including amortization expense from acquired intangible assets and interest expense, which will be lower in the future due to lower borrowing rates as a result of our new credit facility entered into in May 2012 and (ii) income from a newly executed customer contract. We believe that the future earnings forecasts combined with the lengthy carryforward period of the net operating loss carryforwards would produce sufficient taxable income in our subsidiaries in the United States to fully realize the deferred tax assets before expiration of the U.S. federal and state carryforward periods, which expire from 2026 through 2031 for federal purposes and from 2017 to 2031 for state purposes. Accordingly, we have not recorded a valuation allowance for the net operating loss carryforwards in the United States as of December 31, 2011. Our net deferred tax assets at December 31, 2010 totaled $14.4 million, comprised of deferred tax assets of $19.6 million, partially offset by deferred tax liabilities of $4.6 million and a valuation allowance of $0.6 million. Our net deferred tax assets at December 31, 2011 totaled $12.6 million, comprised of

 

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deferred tax assets of $20.7 million, partially offset by deferred tax liabilities of $7.0 million and a valuation allowance of $1.0 million.

Internal-Use Software

We expense research and development costs as incurred, except for certain costs which are capitalized in connection with our internal-use software and website. These capitalized costs are primarily related to the application software that is hosted by us and accessed by our customers through our website. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing performed to ensure the product is ready for its intended use. We also capitalize costs related to specific upgrades and enhancements of this application software when it is probable that the expenditures will result in additional functionality. Maintenance and training costs are expensed as incurred. Capitalized internal-use software costs are recorded as part of property and equipment and are amortized on a straight-line basis over an estimated useful life of three years. At December 31, 2010 and 2011 and June 30, 2012, the carrying value of our internal-use software was $0.7 million, $1.0 million and $1.2 million, respectively.

Business Combinations

In an acquisition of a business, we recognize separately from goodwill the fair value of assets acquired and liabilities assumed. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition-date fair values of the assets acquired and liabilities assumed. In determining the fair value of assets acquired and liabilities assumed in a business combination, we primarily use recognized valuation methods such as an income approach or a cost approach and apply present value modeling. Our significant estimates in the income or cost approach include identifying business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples in estimating the fair value. Further, we make certain assumptions within present value modeling valuation techniques including risk-adjusted discount rates, future price levels, rates of increase in operating expenses, weighted average cost of capital, rates of long-term growth and effective income tax rates. We believe that the estimated fair value assigned to the assets acquired and liabilities assumed are based on reasonable assumptions that marketplace participants would use. While we use our best estimates and assumptions as a part of the process to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and actual results could differ from those estimates.

In addition, uncertain tax positions assumed and valuation allowances related to the net deferred tax assets acquired in connection with a business combination are estimated as of the acquisition date and recorded as part of the purchase. Thereafter, any changes to these uncertain tax positions and valuation allowances are recorded as part of the provision for income taxes in our consolidated statement of operations.

Impairment of Goodwill

We record goodwill when the consideration paid in a business acquisition exceeds the fair value of the net tangible assets acquired, identifiable intangible assets acquired and liabilities assumed. Goodwill is not amortized, but rather is tested for impairment annually or more frequently if events or circumstances occur that indicate an impairment may exist. Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in our use of the acquired assets in a business combination or the strategy for our overall business, and significant negative industry or economic trends. We perform our annual assessment for impairment of goodwill on October 31 and have determined that we have a single reporting unit for testing goodwill for impairment. For purposes of assessing potential impairment, we first estimate the fair value of the reporting unit (based on the fair value of our outstanding ordinary shares on an as-converted basis) and compare that amount to the carrying value

 

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of the reporting unit (as reflected by the total carrying values of our redeemable convertible preferred shares and shareholders’ deficit). If we determine that the carrying value of the reporting unit exceeds its fair value, then we determine the implied fair value of the goodwill in the same manner used to determine the amount of goodwill in a business combination. If the carrying value of goodwill exceeds the implied fair value of the goodwill, an impairment charge is recognized in the amount equal to that excess. No goodwill impairment charges were recorded by us during the years ended December 31, 2010 and 2011 and during the six months ended June 30, 2012.

Impairment of Long-Lived Assets

Long-lived assets include property and equipment and definite-lived intangible assets subject to amortization, including customer relationships, trademarks, acquired developed technology and a patent for our vehicle tracking system. We amortize customer relationships, trademarks and acquired developed technology over their estimated useful lives, which range from three to nine years, based on the pattern over which we expect to consume the economic benefit of each asset, which in general reflects the expected cash flow from each asset. We amortize our patent over its useful life of 20 years on a straight-line basis, as the pattern of consumption of the economic benefit of the asset cannot be reliably determined. We amortize property and equipment, inclusive of internal-use software, on a straight-line basis over their useful lives, which range from three to six years, as the pattern of consumption of the economic benefit of the assets cannot be reliably determined. We evaluate our long-lived assets for recoverability whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant underperformance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. To evaluate a long-lived asset for recoverability, we compare forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. If the carrying value exceeds the sum of the expected undiscounted cash flows, an impairment loss on the long-lived asset to be held and used is recognized based on the excess of the asset’s carrying value over its fair value, determined based on discounted cash flows. Long-lived assets to be disposed of are reported at the lower of carrying value or fair value less cost to sell.

Deferred Commissions

We capitalize commission costs that are incremental and directly related to the acquisition of customer contracts. We pay commissions in full when we receive the initial customer payment for a new subscription or a renewal subscription. Commission costs are capitalized upon payment and are amortized as expense ratably over the term of the related non-cancelable customer contract in proportion to the recognition of the subscription revenue. If a subscription agreement is terminated, the unamortized portion of any deferred commission costs is recognized as expense immediately. We believe that capitalizing commission costs is the preferable method of accounting as the commission charges are so closely related to the revenue from the non-cancelable customer contracts that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized. Deferred commission costs are included in other current and long-term assets in our consolidated balance sheets and totaled $5.1 million, $6.8 million and $7.7 million at December 31, 2010 and 2011 and June 30, 2012, respectively. Amortization of deferred commissions is included in sales and marketing expense in our consolidated statements of operations.

Capitalization of In-Vehicle Device Costs

For customer arrangements in which we retain ownership of the in-vehicle devices installed in a customer’s fleet, we capitalize the cost of the in-vehicle devices (including installation and shipping costs) as a component of property and equipment in our consolidated balance sheets, and we depreciate these assets on a straight-line basis over their estimated useful life, which is currently six years. If a customer subscription agreement is canceled or expires prior to the end of the expected useful life of the in-vehicle device, the carrying

 

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value of the asset is depreciated in full with expense immediately recorded as cost of subscription revenue. The carrying value of these installed in-vehicle devices (including installation and shipping costs) was $16.4 million, $22.5 million and $27.8 million at December 31, 2010 and 2011 and June 30, 2012, respectively. Depreciation expense of these installed in-vehicle devices is included in cost of subscription revenue in our consolidated statements of operations.

In addition, for the limited number of customer arrangements in which title to the in-vehicle devices transfers to the customer upon delivery or installation of the in-vehicle device (for which we receive an up-front fee from the customer), we defer the costs of the in-vehicle devices (including installation and shipping costs) as they are directly related to the revenue that we derive from the sale of the devices and that we recognize ratably over the estimated average customer relationship period of six years. We capitalize these in-vehicle device costs and amortize the deferred costs as expense ratably over the estimated average customer relationship period, in proportion to the recognition of the up-front fee revenue. Capitalized costs related to these in-vehicle devices of which title has transferred to customers are included in other current and long-term assets in our consolidated balance sheets and totaled $1.0 million, $2.6 million and $3.1 million at December 31, 2010 and 2011 and June 30, 2012, respectively. Amortization of these capitalized costs is included in cost of subscription revenue in our consolidated statements of operations.

Share-Based Compensation

We measure stock options granted to employees and directors at fair value on the date of grant and recognize the corresponding compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. The straight-line method is applied to all awards with service conditions, while the graded-vesting method is applied to all awards with both service and performance conditions.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. We have historically been a private company and lack company-specific historical and implied volatility information. Therefore, we estimate our expected volatility based on the historical volatility of our publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded stock price. The expected term of options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future. The assumptions we used to determine the fair value of stock options granted are as follows, presented on a weighted average basis:

 

     Year Ended December 31,     Six Months Ended June 30,  
             2010                     2011                2011           2012     

Risk-free interest rate

     2.08     0.97     1.65     0.64

Expected term (in years)

     4.6        4.7        4.3        4.2   

Expected volatility

     49     56     51     56

Expected dividend yield

     0     0     0     0

These assumptions represented our best estimates, but the estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use significantly different assumptions or estimates, our share-based compensation expense could be materially different. We recognize compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate, we have considered our historical experience to estimate pre-vesting forfeitures for awards with service conditions. For awards with performance conditions, we estimate the probability that the performance condition will be met. If our actual forfeiture rate is materially different from the estimate, our share-based compensation expense could be significantly different from what we have recorded in the current period.

 

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Valuations of ordinary shares

The fair value of our ordinary shares is determined by our Board of Directors, with input from management, and taking into account our most recently available valuation of ordinary shares and our assessment of additional objective and subjective factors we believed were relevant and which may have changed from the date of the most recent contemporaneous valuation through the date of the grant. Because there has been no public market for our ordinary shares and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our Board of Directors determined the fair value of our ordinary shares by considering a number of objective and subjective factors, including the following:

 

   

peer group trading multiples;

 

   

historical results and forecasted profitability;

 

   

the composition of, and changes to, our management team and Board of Directors;

 

   

the rights and preferences of our redeemable convertible preferred shares relative to our ordinary shares;

 

   

the likelihood of achieving a discrete liquidity event, such as an initial public offering, or IPO, sale or dissolution; and

 

   

external market and economic conditions impacting our industry group.

We believe our estimates of the fair value of our ordinary shares were reasonable.

Commencing on December 31, 2008, we moved to performing annual contemporaneous ordinary share valuations, and, on June 30, 2011, to performing contemporaneous ordinary share valuations at least semi-annually, with the assistance of a third-party valuation firm. Ordinary share valuations were prepared utilizing averages of the “guideline public company” method, or GPCM, and the “discounted future cash flow” method, or DCFM. We estimated our enterprise value under the GPCM by comparing our company to publicly traded companies in our industry group. The companies used for comparison under the GPCM were selected based on a number of factors, including but not limited to, the similarity of their industry, business model, and financial risk to those of ours. We also estimated our enterprise value under the DCFM, which involves applying appropriate discount rates to estimated cash flows that are based on forecasts of revenue, costs and capital requirements. The discount rate reflects the risks inherent in the cash flows and the market rates of return available from alternative investments of similar type and quality as of the valuation date. Our assumptions underlying the estimates were consistent with the plans and estimates that we use to manage the business. The risks associated with achieving our forecasts were assessed in selecting the appropriate discount rates. The valuations considered numerous factors, including peer group trading multiples, the amount of liquidation preferences associated with our preferred shares, the illiquid nature of our ordinary shares, the size of our company, and the redemption rights of the holders of our redeemable convertible preferred shares.

Commencing June 30, 2011, our valuations were prepared utilizing the probability-weighted expected return method, or PWERM. Under this methodology, the fair market value of ordinary shares was estimated based upon an analysis of future values for us assuming various outcomes. The share value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available to us as well as the rights of each share class.

In connection with the PWERM analysis as of June 30, 2011, four types of future-event scenarios were considered: an IPO, a private sale, remaining private, and dissolution of the company (no value to ordinary shareholders). The “remaining private” scenario includes the weighted averages of the enterprise values derived from the GPCM, the DCFM, and the “prior transaction” method, or PTM. The PTM considers prior transactions

 

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involving our shares in arriving at a current enterprise value. The PTM weighting is based on factors such as the volume and timing of transactions during the period. Six total scenarios were contemplated in order to reflect a range of possible values: one IPO, one dissolution, one private company sale, and three remaining private scenarios. Management and our Board of Directors determined that the total probability for the IPO scenario was 60%, for the private sale scenario was 20%, for the dissolution scenario was 5% and for the three remaining private scenarios was 15%. Management and our Board of Directors made these allocations based on an analysis of current market conditions, including then-current IPO valuations of similarly situated companies, and their expectations as to the timing of these future-event scenarios.

In connection with the PWERM analysis as of December 31, 2011, three types of future-event scenarios were considered: an IPO, a private sale and remaining private. Four total scenarios were contemplated in order to reflect a range of possible values: one IPO, one private company sale and two remaining private scenarios. Management and our Board of Directors determined that the total probability of the IPO scenario was 75%, for the private sale scenario was 10% and for the two remaining private scenarios were 15%. Management and the Board of Directors did not consider a dissolution scenario for this valuation as they believed that the likelihood of this scenario occurring was remote, given the performance of the business throughout fiscal year 2011. Management and our Board of Directors made these allocations based on an analysis of current market conditions, including then-current IPO valuations of similarly situated companies, and their expectations as to the timing of these future-event scenarios.

In connection with the PWERM analyses as of March 31, 2012 and June 30, 2012, three types of future-event scenarios were considered: an IPO, a private sale and remaining private. Four total scenarios were contemplated in order to reflect a range of possible values: one IPO, one private company sale, and two remaining private scenarios. Management and our Board of Directors determined that the total probability of the IPO scenario was 90%, for the private sale scenario was 5% and for the two remaining private scenarios was 5%. Management and the Board of Directors did not consider a dissolution scenario for these valuations as they believed that the likelihood of this scenario occurring continued to be remote, given the continued performance of the business in each of the first two quarters of 2012. Management and our Board of Directors made these allocations based on an analysis of current market conditions, including then-current IPO valuations of similarly situated companies, and their expectations as to the timing of these future-event scenarios.

To derive the value of the ordinary shares for each scenario, the proceeds to the ordinary shareholders were calculated based on the preferences and priorities between the preferred and ordinary shares. The valuations from June 30, 2011 through March 31, 2012 also applied a discount for lack of marketability of 15% to account for the lack of access to an active public market for the ordinary shares and the fact that our ordinary shares represent a minority interest in our company. The valuation as of June 30, 2012 applied a discount for lack of marketability of 10%.

Option Grants

The following table summarizes by grant date the number of shares subject to options granted between January 1, 2010 and June 30, 2012, the per share exercise price of the options, the revised fair value of ordinary shares underlying the options on date of grant, and the per share estimated fair value of the options:

 

Grant Date

   Number of Shares
Subject to Options
Granted
     Per Share
Exercise Price
of Option(1)
     Revised Fair Value
of Ordinary Shares
on Date of Grant
     Per Share
Estimated Fair
Value of Option(2)
 

December 28, 2010

     1,798,611       $ 3.08       $ 5.25       $ 3.08   

January 27, 2011

     33,333       $ 3.08       $ 5.25       $ 3.05   

May 6, 2011

     2,333       $ 3.08       $ 5.25       $ 3.12   

September 7, 2011

     212,667       $ 7.97       $ 7.97       $ 3.80   

May 9, 2012

     54,000       $ 7.97       $ 10.01       $ 4.98   

May 25, 2012

     802,222       $ 10.01       $ 10.01       $ 4.43   

 

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(1) The Per Share Exercise Price of Option represents the determination by our Board of Directors of the fair market value of our ordinary shares on the date of grant, as determined taking into account our most recently available valuation of ordinary shares as well as additional factors which may have changed since the date of the most recent contemporaneous valuation through the date of grant.

 

(2) The Per Share Estimated Fair Value of Option was estimated at the date of grant using the Black-Scholes option-pricing model. This model estimates the fair value using as inputs the exercise price of the option and assumptions of the risk-free interest rate, expected term of the option, expected share price volatility of the underlying ordinary shares and expected dividends on the underlying ordinary shares. Additional information regarding our valuation of ordinary shares and option awards is set forth in Note 15 to our consolidated financial statements included elsewhere in this prospectus.

As discussed more fully in Note 15 to our consolidated financial statements included elsewhere in this prospectus, during December 2010 and the first half of 2011, we granted stock options with a weighted average exercise price of $3.08 per share based on our determination of the fair value of our ordinary shares. As discussed more fully in Note 12 to our consolidated financial statements included elsewhere in this prospectus, in November 2010, certain holders of our ordinary shares converted 10,193,347 ordinary shares into Series C preferred shares, or Series C, on a 1-for-1.5 basis and immediately sold those Series C shares to an outside investor at $3.50 per share. Based on this transaction and solely for the purposes of accounting for share-based compensation for financial statement purposes, in mid-2011, we reassessed the fair value of our ordinary shares and determined it to be $5.25 per share as of November 2010 (and through June 2011). As a result, the grant-date fair value of each of the awards granted in December 2010 and the first half of 2011 was revalued to reflect an underlying ordinary share fair value of $5.25. The difference between the original estimated fair value of $3.08 and the reassessed fair value of $5.25 of our ordinary shares resulted in an increase of $3.2 million and $0.1 million in the aggregate fair value of stock options granted on December 28, 2010 and in the first six months of 2011, respectively, which is being and will continue to be recorded as additional compensation expense in our consolidated statements of operations over the requisite service periods of between one and four years. Unrecognized compensation expense associated with all of our stock options outstanding at December 31, 2011 was $4.0 million, which is expected to be recognized over a weighted average period of 3.1 years.

We determined that the fair value of our ordinary shares increased from $3.36 per share on January 1, 2010 to $10.49 on June 30, 2012. The following discussion describes the reasons for the increases of the fair value of our ordinary shares over this period and the midpoint of the estimated price range for this offering of $16.00 per share.

During the year ended December 31, 2010, we continued to operate our business in the ordinary course. We experienced increases in our number of customers and subscription revenue as well as increases in our operating expenses in support of growing the business, primarily due to increased sales and marketing expenditures and the hiring of additional personnel. We released our semi-annual update to our product in March 2010, which included the addition of Garmin turn-by-turn dispatch integration and panoramic reporting capabilities. We raised additional capital with two private placements during the year and entered into a $17.5 million debt agreement. Net proceeds of the debt agreement and Series B preferred shares offering were used to acquire SageQuest, a SaaS provider of comparable fleet management solutions. Proceeds from our Series C preferred shares offering in November 2010 are being used for general corporate purposes to grow the business. We generated a net loss of $0.7 million during the year ended December 31, 2010. During the year, we had no plans for an initial public offering in the near term because we did not believe that the public markets presented a favorable environment at that time. In the fourth quarter of 2010, we determined that the fair value of our ordinary shares per share was equivalent to the price per share at which the Series C shares were sold in November 2010. Based on this determination, the fair value of our ordinary shares increased from $3.36 as of January 1, 2010 to $5.25 per share as of November 23, 2010 and through December 31, 2010.

 

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During the quarter ended March 31, 2011, we continued to operate our business in the ordinary course. Both our number of customers and subscription revenue continued to grow. We continued to expend resources on innovation and improving functionality and increasing our lead generation efforts and sales resources to close deals. We grew and expanded our sales offices and related personnel. We evaluated the public market environment and determined that the markets were recovering in such a manner to permit us to successfully initiate an initial public offering at an appropriate valuation. As a result, management and our Board of Directors began to consider the possibility of a potential initial public offering, although there were only preliminary discussions with third parties regarding an offering. In calculating the fair value of our ordinary shares, we adjusted for this probability accordingly. The fair value of our ordinary shares remained at $5.25 per share as of March 31, 2011.

During the quarter ended June 30, 2011, our company moved from the early stages of considering the possibility of a potential initial public offering to estimating a 60% likelihood of completing an initial public offering in the next 12 to 18 months based on the improvement of market conditions, discussions with and engagement of investment banks and lawyers, and our readiness to successfully complete the initial public offering filing process, including external audits and interim reviews. In that quarter, we also held our initial organizational meeting. We assumed a 20% likelihood of a private sale scenario based on our market share and growth, balance sheet strength and expansion goals. We assumed a 15% likelihood of remaining private based on our growth projections and capital needs. Under this scenario, in order to estimate the enterprise value of remaining private, we assumed that (i) the DCFM received a weighting of 50% and used our forecasted cash flow data; (ii) the PTM received a weighting of 10%; and (iii) the GPCM received a weighting of 40% and reflects multiples realized, as of the valuation date, by public companies in a similar industry and with characteristics similar to our company, and reflects the similarity of our company to the guideline public companies identified and utilized. Finally, we assigned a 5% likelihood to the dissolution scenario based on an increase in our balance sheet strength, profitability and growth. We determined that the fair value of our ordinary shares increased to $7.97 per share as of June 30, 2011.

For the quarter ended September 30, 2011, although our number of customers and subscription revenue continued to grow, we believed it did so reasonably close to our forecasted results used in the prior ordinary share valuation. Also, the markets appeared to be more unfavorable during this quarter than in the prior quarter ended June 30, 2011. As a result, we held our likelihoods of all four types of future-event scenarios consistent with those of the June 30, 2011 ordinary share valuation. Based on our strong results which were consistent with expectations used in the prior valuation, we determined that the fair value of our ordinary shares remained at $7.97 per share as of September 30, 2011.

For the quarter ended December 31, 2011, we believed that the public markets were gathering strength; and we believed they would continue to improve. Additionally, we had made progress in the process of preparing for an initial public offering, therefore increasing the likelihood of going public from 60% to 75% in our PWERM analysis. Consequently, we decreased the likelihood of the private sale scenario from 20% to 10%, of the remaining private scenarios from 15% to 10%, and of the dissolution scenario from 5% to 0%. In order to estimate the enterprise value under the remaining private scenario, we assumed that (i) the DCFM received a 50% weighting; (ii) the GPCM received a 50% weighting; and (iii) the PTM received a 0% weighting as no recent transactions involving our ordinary shares had occurred. The value from the DCFM increased significantly from the June 30, 2011 and September 30, 2011 valuations as re-forecasted operating results and cash flow as of December 31, 2011 were much greater than at the prior quarter ends as both our number of subscribed vehicles and subscription revenues continued to grow in excess of our original expectations. We, therefore, determined that the fair value of our ordinary shares increased to $9.36 as of December 31, 2011.

During the quarter ended March 31, 2012, the public markets strengthened compared to their prior quarter performance. We also continued to make progress in preparing for our initial public offering and, at that time, anticipated completing our IPO within the following six months. Given these factors, we increased the likelihood of going public from 75% to 90% in our PWERM analysis. Consequently, we decreased the likelihood of the private sale scenario from 10% to 5% and of the remaining private scenarios from 10% to 5%. In order to estimate the enterprise value under the remaining private scenario, we continued to assume that the DCFM and

 

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the GPCM both received a 50% weighting and that the PTM received a 0% weighting, as no recent transactions involving our ordinary shares had occurred. During the quarter ended March 31, 2012, we entered into a subscription agreement resulting in our largest customer account to date, continued to grow our business and exceeded our forecasted quarterly results in both our financial and unit-based metrics. We, therefore, determined that the fair value of our ordinary shares increased to $10.01 as of March 31, 2012.

During the quarter ended June 30, 2012, we held our likelihoods of all three types of future-event scenarios consistent with those used in our March 31, 2012 ordinary share valuation in our PWERM analysis, with the going public scenario weighted at 90%, the private sale scenario weighted at 5% and the remaining private scenarios weighted at 5%. During the quarter, we released version 9.0 of our software solution and continued to grow our business in line with forecasted quarterly results. We also submitted a registration statement with the SEC for an initial public offering of our ordinary shares, commencing our registration process. Given the progress made toward completing our IPO, we reduced the estimated time to complete our IPO from six months as of the March 31, 2012 valuation date to three months as of the June 30, 2012 valuation date, and we decreased the discount for lack of marketability from 15% to 10% in our PWERM analysis. We, therefore, determined that the fair value of our ordinary shares increased to $10.49 per share as of June 30, 2012.

On September 11, 2012, we and our underwriters determined the estimated price range for this offering. The midpoint of that price range was $16.00 per share. In comparison, our estimate of the fair value of our ordinary shares as of June 30, 2012 was $10.49 per share. We note that, as is typical in IPOs, the estimated price range for this offering was not derived using a formal determination of fair value, but was determined based upon discussions between us and the underwriters. Among the factors that were considered in setting this range were the following:

 

   

the general condition of the securities markets and the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies;

 

   

an analysis of valuation ranges in initial public offerings for generally comparable companies in our industry during the past year;

 

   

the recent performance of initial public offerings of generally comparable companies;

 

   

estimates of business potential and earnings prospects for our company and the industry in which we operate; and

 

   

our financial position.

We believe that the difference between the fair value of our ordinary shares as of June 30, 2012 and the midpoint of the estimated price range for this offering is primarily the result of the following factors:

 

   

We determined the fair value of our ordinary shares as of June 30, 2012 using a probability-weighted expected return method, in which we weighted the probabilities of four possible future-event scenarios, including an IPO, a private sale and two remaining private scenarios, to determine the enterprise value of the company. In contrast, the midpoint of the estimated price range for this offering contemplated only an IPO.

 

   

Historically, and we believe it is reasonable to expect that, the completion of an IPO increases the value of an issuer’s ordinary shares as a result of the increase in the liquidity and ability to trade such securities in the public market. As such, the midpoint of the estimated price range of this offering excluded any discount for lack of marketability for our ordinary shares, which was appropriately taken into account in our Board of Directors’ determination of the fair value of our ordinary shares as of June 30, 2012 and was estimated to be 10%.

 

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The midpoint of the estimated price range for this offering necessarily assumed that the IPO had occurred, that a public market for our ordinary shares had been created, and that all of our preferred shares had converted into ordinary shares in connection with the IPO. In contrast, our Board of Directors’ determination of the fair value of our ordinary shares as of June 30, 2012 assumed that an IPO would occur in three months and appropriately discounted the IPO scenario to present value using a 20% discount rate. In addition, holders of our redeemable convertible preferred shares had then, and will have until the IPO, substantial economic rights and preferences over holders of our ordinary shares, which were appropriately considered in our Board of Directors’ determination of the fair value of our ordinary shares as of June 30, 2012.

 

   

Equity markets in general improved modestly during the recent period, resulting in an increase in our market comparables. For example, in the period from July 2, 2012 to September 11, 2012, the Dow Jones Industrial Average increased 3.5%, the S&P 500 index increased 5.0% and the NYSE Composite index increased 5.3%.

 

   

The proceeds of a successful IPO would substantially strengthen our balance sheet by increasing our cash position. Additionally, the completion of this offering would provide us with access to the public debt and equity markets. These projected improvements in our financial position influenced the increased ordinary share valuation indicated by the midpoint of the estimated price range of this offering.

In addition, since June 30, 2012, we had several developments in our business, which had a positive impact on the fair value of our ordinary shares, including:

 

   

In July 2012, we entered into a subscription agreement with our first SageQuest customer in Europe and commenced creation of a dedicated SageQuest sales team in Europe through the hiring of two full-time employees;

 

   

In July 2012, we received an order to increase, by a sizable amount, the number of vehicles under subscription from our largest customer;

 

   

In August 2012, we negotiated a termination of our Management Services Agreement with Privia and a reduction in the payments due under the agreement from up to $15.0 million to $7.8 million, and we made the $7.8 million payment, resulting in the full settlement of this liability;

 

   

In August 2012, we publicly filed a registration statement with the SEC, evidencing continued progress toward completing our IPO; and

 

   

In late August 2012, we further revised our forecasted operating model for 2012 and 2013, reflecting higher forecasted revenue, net income and EBITDA than were reflected in the version of the forecast used in the IPO scenario of our Board of Directors’ valuation of our ordinary shares as of June 30, 2012, and we used this revised forecast to estimate the price range of this offering. The revised forecast resulted in an increase in the range of our implied enterprise value.

Based on the initial public offering price of $17.00 per share, the aggregate intrinsic value of stock options outstanding as of June 30, 2012 was $40.9 million, of which $20.7 million related to vested options and $20.2 million related to unvested options.

 

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Results of Operations

The following table presents our results of operations in thousands of dollars and as a percentage of subscription revenue for each of the periods indicated (certain items may not foot due to rounding).

 

    Year Ended December 31,     Six Months Ended June 30,  
    2010     2011     2011     2012  
    Amount     Percent of
Revenue
    Amount     Percent of
Revenue
    Amount     Percent of
Revenue 
    Amount     Percent of
Revenue 
 
    (dollars in thousands)  

Subscription revenue

  $ 64,690        100.0   $ 92,317        100.0   $ 42,587        100.0   $ 58,405        100.0

Cost of subscription revenue

    22,941        35.5        28,631        31.0        13,466        31.6        17,332        29.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    41,749        64.5        63,686        69.0        29,121        68.4        41,073        70.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

               

Sales and marketing

    20,447        31.6        33,391        36.2        15,948        37.4        20,199        34.6   

Research and development

    4,061        6.3        6,021        6.5        2,743        6.4        3,374        5.8   

General and administrative

    14,628        22.6        18,309        19.8        8,586        20.2        14,229        24.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    39,136        60.5        57,721        62.5        27,277        64.1        37,802        64.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    2,613        4.0        5,965        6.5        1,844        4.3        3,271        5.6   

Interest income (expense), net

    (1,012     (1.6     (2,386     (2.6     (1,156     (2.7     (1,104     (1.9

Foreign currency transaction gain (loss), net

    (907     (1.4     155        0.2        642        1.5        (142     (0.2

Loss on extinguishment of debt

                                              (934     (1.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    694        1.1        3,734        4.0        1,330        3.1        1,091        1.9   

Provision for (benefit from) income taxes

    1,430        2.2        865        0.9        (266     (0.6     1,457        2.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (736     (1.1 )%    $ 2,869        3.1   $ 1,596        3.7   $ (366     (0.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of Six Months Ended June 30, 2011 and 2012

Subscription Revenue

 

     Six Months Ended June 30,         
     2011      2012      % Change  
     (dollars in thousands)         

Subscription revenue

   $ 42,587       $ 58,405         37.1

Subscription revenue increased by $15.8 million, or 37.1%, from the six months ended June 30, 2011 to the six months ended June 30, 2012. This revenue growth was primarily driven by the increase in the average number of vehicles under subscription, which grew by approximately 39.6% from the six months ended June 30, 2011 to the six months ended June 30, 2012. As of the period-ends, the number of vehicles under subscription increased from approximately 200,000 as of June 30, 2011 to approximately 281,000 as of June 30, 2012. The increase in vehicles under subscription was due in large part to our investment in sales and marketing of our branded solutions, including the addition of 46 sales and marketing personnel from period-end to period-end. Our average selling prices generally remained stable, while volume increased in the six months ended June 30, 2012 as compared to the six months ended June 30, 2011.

 

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Cost of Subscription Revenue

 

     Six Months Ended June 30,        
     2011     2012     % Change  
     (dollars in thousands)        

Cost of subscription revenue

   $ 13,466      $ 17,332        28.7

Percentage of subscription revenue

     31.6     29.7  

Cost of subscription revenue increased by $3.9 million from the six months ended June 30, 2011 to the six months ended June 30, 2012. The increase was primarily due to an increase in variable expenses resulting from an increase in the average number of vehicles under subscription, which grew approximately 39.6% from the six months ended June 30, 2011 to the six months ended June 30, 2012. Communications, third-party data and hosting costs increased by $1.5 million due to the increase in the number of installed in-vehicle devices, which drove an increase in data communications costs of $1.0 million, an increase of $0.3 million in third-party data subscription fees, and an increase of $0.2 million in hosting costs for our software applications. Field service costs for maintenance and repair of installed in-vehicle devices increased by $1.6 million primarily due to the increase in number of vehicles under subscription. Depreciation and amortization of installed in-vehicle devices increased by $0.5 million primarily due to the increase in the number of vehicles under subscription. Payroll and related expense increased by $0.2 million primarily due to an increase of six employees in our customer support and configuration groups from period-end to period-end.

As a percentage of subscription revenue, our cost of subscription revenue decreased from 31.6% in the six months ended June 30, 2011 to 29.7% in the six months ended June 30, 2012. As our business and subscription revenue has grown, the decrease in cost of subscription revenue as a percentage of subscription revenue has resulted from leveraging our scale to negotiate improved pricing for our subscriber-based costs, such as the cost of in-vehicle devices, data communication charges and third-party data subscription fees, including those for mapping and posted speed limit data. In addition, we achieved improved economies of scale from our hosting activities and configuration personnel as these components of our costs result in minimal incremental cost per vehicle under subscription.

Sales and Marketing Expense

 

     Six Months Ended June 30,        
     2011     2012     % Change  
     (dollars in thousands)        

Sales and marketing expense

   $ 15,948      $ 20,199        26.7

Percentage of subscription revenue

     37.4     34.6  

Sales and marketing expense increased by $4.3 million from the six months ended June 30, 2011 to the six months ended June 30, 2012. This increase was primarily due to our investment in building brand and category awareness in our market to drive customer adoption of our solutions. We incurred increased payroll-related costs of $3.4 million, inclusive of commissions, primarily related to the expansion of our sales and marketing teams. These increases were the result of an increase of 46 in the number of sales and marketing personnel from period-end to period-end. Those 46 new employees were added to further pursue the opportunity provided by the SageQuest product line and to further grow the Web sales teams for the FleetMatics product line. We also increased the number of our marketing personnel to focus on lead generation, brand awareness and search engine optimization. Advertising and promotional expenditures increased by $1.2 million due to additional marketing and advertising efforts. In addition, facilities expense increased by $0.2 million primarily as a result of additional office space requirements for our newly hired employees. These increases were partially offset by decreased amortization expense of $0.4 million related to customer relationships and trademarks acquired in the SageQuest acquisition.

 

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As a percentage of subscription revenue, sales and marketing expense decreased from 37.4% in the six months ended June 30, 2011 to 34.6% in the six months ended June 30, 2012 primarily due to the 26.7% increase in expenses noted above being more than offset by the impact of the 37.1% growth in our subscription revenue period over period.

Research and Development Expense

 

     Six Months Ended June 30,        
     2011     2012     % Change  
     (dollars in thousands)        

Research and development expense

   $ 2,743      $ 3,374        23.0

Percentage of subscription revenue

     6.4     5.8  

Research and development expense increased by $0.6 million from the six months ended June 30, 2011 to the six months ended June 30, 2012. The increase was primarily due to additional payroll-related costs of $0.6 million resulting from an increase of five in the number of product management and development personnel as well as additional travel-related expenses of $0.1 million incurred related to additional employees hired to further enhance and develop our products.

Research and development expense for the six months ended June 30, 2011 and 2012 of $2.7 million and $3.4 million, respectively, was recorded net after capitalization of $0.4 million and $0.5 million, respectively, of costs related to our internal-use software applications accessed by our customers through our website.

As a percentage of subscription revenue, research and development expense decreased from 6.4% in the six months ended June 30, 2011 to 5.8% in the six months ended June 30, 2012. This decrease is attributable to the increased expenses noted above being more than offset by the impact of the percentage growth in our subscription revenue period over period.

General and Administrative Expense

 

     Six Months Ended June 30,        
     2011     2012     % Change  
     (dollars in thousands)        

General and administrative expense

   $ 8,586      $ 14,229        65.7

Percentage of subscription revenue

     20.2     24.4  

General and administrative expense increased by $5.6 million from the six months ended June 30, 2011 to the six months ended June 30, 2012. This increase was primarily due to an increase of $1.4 million in payroll-related costs and an increase of $2.9 million in professional fees. The increase in payroll-related costs was due primarily to the transition from clerk and administrative-level personnel to professionals with public company and managerial experience, which resulted in only a slight net increase in general and administrative headcount from period-end to period-end. Professional fees in the six months ended June 30, 2011 and 2012 included $1.1 million and $1.8 million, respectively, of expenses accrued for consulting fees under our Management Services Agreement with Privia and also reflected an increase period over period of $2.1 million in accounting, tax and audit fees related to the audits of our financial statements. Also contributing to the increase in general and administrative expense period over period was an increase of $0.8 million of office-related costs associated with our additional employees, an increase of $0.4 million in bad debt expense, and an increase of $0.3 million in merchant and bank fees due to the increase in customer subscriptions. These increases were partially offset by a decrease of $0.3 million period over period in share-based compensation expense. We granted performance-based options at the end of 2010 with a one-year vesting period, which increased the share-based compensation expense in the six months ended June 30, 2011.

 

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As a percentage of subscription revenue, general and administrative expense increased from 20.2% in the six months ended June 30, 2011 to 24.4% in the six months ended June 30, 2012 primarily due to the increase of $2.1 million period over period in accounting, tax and audit fees and the $0.7 million increase in expense period over period related to our Management Services Agreement with Privia. Other cost increases in general and administrative expense were in line with the percentage growth in subscription revenue period over period.

Interest Income (Expense), net

 

     Six Months Ended June 30,        
     2011     2012     % Change  
     (dollars in thousands)        

Interest income (expense), net

   $ (1,156   $ (1,104     (4.5 )% 

Interest income (expense), net remained consistent in the six months ended June 30, 2011 as compared with the six months ended June 30, 2012 and primarily reflects the interest expense incurred on our long-term debt as well as amortization expense of related debt discounts and deferred financing costs. In conjunction with the SageQuest acquisition in July 2010, we entered into a credit agreement with D.E. Shaw Direct Capital Portfolios, LLC, or DE Shaw, for $17.5 million of senior secured notes, which we refer to as the Senior Secured Notes. The outstanding principal amount of the Senior Secured Notes bore interest at a floating rate of one-month LIBOR plus 9.5% per annum (based on actual days), but not less than 12.5%. In May 2012, we repaid the Senior Secured Notes in full and we entered into a credit facility with Wells Fargo Capital Finance, LLC consisting of a $25.0 million Term Loan and a $25.0 million Revolving Credit Facility. The interest rate on the Term Loan and borrowings under the Revolving Credit Facility is either (a) LIBOR plus 3.5% per annum, but not less than 4.5% per annum, or (b) at our option, subject to certain conditions, base rate plus 2.5% per annum, but not less than 5.5% per annum. Interest income netted against interest expense was immaterial in the six months ended June 30, 2011 and 2012.

Foreign Currency Transaction Gain (Loss), net

 

     Six Months Ended June 30,        
     2011      2012     % Change  
     (dollars in thousands)        

Foreign currency transaction gain (loss), net

   $ 642       $ (142     NM   

Foreign currency transaction gain (loss), net primarily reflects the foreign currency transaction gains or losses arising from exchange rate fluctuations on intercompany payables and receivables denominated in currencies other than the functional currencies of the legal entities in which the transactions are recorded. For the six months ended June 30, 2011, we recognized $0.6 million in foreign currency transaction gains attributable to the strengthening of the euro and the British pound against the U.S. dollar in the period. For the six months ended June 30, 2012, we recognized $0.1 million in foreign currency transaction losses attributable to the weakening of the euro and the British pound against the U.S. dollar in the period.

Loss on Extinguishment of Debt

In May 2012, we used proceeds from the $25.0 million Term Loan of our Senior Secured Credit Facility with Wells Fargo Capital Finance, LLC to pay in full the amounts due under the Senior Secured Notes with DE Shaw. The repayment of the DE Shaw debt was accounted for as a debt extinguishment. For the six months ended June 30, 2012, we recognized a loss on extinguishment of debt of $0.9 million, which was primarily comprised of the write-off of unamortized debt discount of $0.4 million and the prepayment premium of $0.5 million we paid in cash.

 

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Provision for Income Taxes

 

     Six Months Ended June 30,         
     2011     2012      % Change  
     (dollars in thousands)         

Provision for (benefit from) income taxes

   $ (266   $ 1,457         NM   

Our provision for income taxes consists primarily of taxes in Ireland, the United States and the United Kingdom. We are subject to tax in various jurisdictions that apply various statutory rates of tax to our income. Each of these jurisdictions has its own tax law, which is subject to interpretation on a jurisdiction-by-jurisdiction basis. In Ireland, our operating entity is subject to tax at a 12.5% tax rate on its trading income and 25% on its non-trading income and our non-operating entities are subject to tax at a 25% tax rate, while our foreign subsidiaries in the United States and the United Kingdom are subject to tax rates of approximately 40% and 26%, respectively.

Our effective income tax rate for the six months ended June 30, 2011 and 2012 was (20.0)% and 133.5%, respectively, on pre-tax income of $1.3 million and $1.1 million, respectively. Our effective tax rate for the six months ended June 30, 2011 was lower than the statutory Irish rate of 12.5% due primarily to losses being generated in jurisdictions that have a higher tax rate than the statutory Irish rate for which no valuation allowance was required as well as the release of certain reserves for uncertain tax positions in non-Irish jurisdictions, due to the expiration of a statute of limitations. Those benefits were partially offset by the recording of reserves for uncertain tax positions along with related interest and penalties as well as an increase to our valuation allowance related to certain Irish net operating loss carryforwards. Our effective tax rate for the six months ended June 30, 2012 was higher than the statutory Irish rate of 12.5% primarily due to the recording of interest and penalties associated with our uncertain tax positions and an increase in the valuation allowance related to certain Irish net operating loss carryforwards. The increase associated with these items was partially offset by the release of reserves for uncertain tax positions due to the expiration of a statute of limitations in the United Kingdom.

Our provision for income taxes may change from period to period based on non-recurring events, such as the settlement of income tax audits and changes in tax laws including enacted statutory rates, as well as recurring factors, including changes in the mix of earnings in countries with differing statutory tax rates. As a result of our global business model and cross-border intercompany transactions, a change in uncertain tax positions or a change in statutory rates, particularly in Ireland, could have a significant effect on our overall effective tax rate.

Comparison of Years Ended December 31, 2010 and 2011

Subscription Revenue

 

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

Subscription revenue

   $ 64,690       $ 92,317         42.7

Subscription revenue increased by $27.6 million, or 42.7% from 2010 to 2011. This revenue growth was primarily driven by the increase in the average number of vehicles under subscription, which grew by approximately 35.7% from the year ended December 31, 2010 to the year ended December 31, 2011. As of the year-ends, the number of vehicles under subscription increased from approximately 130,000 as of December 31, 2009, to approximately 172,000 as of December 31, 2010, to approximately 237,000 as of December 31, 2011. The increase in vehicles under subscription was due in large part to our investment in sales and marketing of our branded solutions, including the addition of 87 sales and marketing personnel, and the inclusion, for a full year in 2011, of SageQuest, which was acquired in July 2010. Our average selling prices generally remained stable, while volume increased in 2011 compared to 2010.

 

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Cost of Subscription Revenue

 

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

Cost of subscription revenue

   $ 22,941      $ 28,631        24.8

Percentage of subscription revenue

     35.5     31.0  

Cost of subscription revenue increased by $5.7 million from 2010 to 2011. The increase was primarily due to an increase in variable expenses resulting from an increase in the average number of vehicles under subscription, which grew approximately 35.7% from year ended December 31, 2010 to the year ended December 31, 2011, as well as the effect of a full year of SageQuest cost of subscription revenue included for 2011 versus five months of such costs being included in for 2010. Communications, third-party data and hosting costs increased by $2.2 million due to the increase in the number of installed in-vehicle devices, which drove an increase in data communications costs of $1.6 million, an increase of $0.4 million in third-party data subscription fees, and an increase of $0.2 million in hosting costs for our software applications. The increase in hosting costs was also the result of incurring a full year of costs in 2011 from the use of two new third-party hosting facilities, one of which we began to use upon the acquisition of SageQuest in July 2010 and the other of which we began to use in April 2010. Field service costs for maintenance and repair of installed in-vehicle devices increased by $1.6 million from 2010 to 2011 primarily due to the increase in number of vehicles under subscription. Payroll and related expense increased by $1.0 million primarily due to an increase of seven employees in our customer support and configuration groups as well as a full year versus only five months of expense related to 32 employees added as a result of the SageQuest acquisition in 2010.

As a percentage of subscription revenue, our cost of subscription revenue decreased from 35.5% to 31.0% from 2010 to 2011. As our business and subscription revenue has grown, the decrease in cost of subscription revenue as a percentage of subscription revenue has resulted from leveraging our scale to negotiate improved pricing for our subscriber-based costs, such as the cost of in-vehicle devices, data communication charges and third-party data subscription fees, including those for mapping and posted speed limit data. In addition, we achieved improved economies of scale from our hosting activities and configuration personnel as these components of our costs result in minimal incremental cost per vehicle under subscription.

Sales and Marketing Expense

 

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

Sales and marketing expense

   $ 20,447      $ 33,391        63.3

Percentage of subscription revenue

     31.6     36.2  

Sales and marketing expense increased by $12.9 million from 2010 to 2011 as we invested heavily in building brand and category awareness in our market to drive customer adoption of our solutions. We incurred increased payroll-related costs of $5.4 million, inclusive of commissions, primarily related to the expansion of our sales and marketing teams. These increases were the result of an increase of 87 in the number of sales and marketing personnel as well as a full year versus only five months of expense related to 27 employees added as a result of the SageQuest acquisition in 2010. Those 87 new employees were added to further pursue the opportunity provided by the SageQuest product line and to further grow the Web sales teams for the FleetMatics product line. We also increased the number of our marketing personnel to focus on lead generation, brand awareness and search engine optimization. Amortization expense related to customer relationships and trademarks acquired in the SageQuest acquisition increased by $2.8 million as a result of incurring a full year of amortization of in 2011 versus five months of amortization in 2010. Advertising and promotional expenditures increased by $1.5 million due to additional marketing and advertising efforts, and travel expenses increased by $0.7 million due to the growth in personnel and the addition of two new sales offices. Recruiting expense increased by $1.0 million as a result of our additional hiring efforts, and facilities expense increased by $1.0 million as a result of additional office space requirements for our newly hired employees. In addition, share-based compensation expense increased by $0.6 million resulting from stock options granted to employees at the end of 2010.

 

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As a percentage of subscription revenue, sales and marketing expense increased from 31.6% to 36.2% from 2010 to 2011 primarily due to our investment in sales and marketing efforts, including adding additional personnel, and the increase in amortization expense related to customer relationships and trademarks acquired in the SageQuest acquisition. The other expense increases noted above were generally consistent with the percentage growth in subscription revenue year over year.

Research and Development Expense

 

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

Research and development expense

   $ 4,061      $ 6,021        48.3

Percentage of subscription revenue

     6.3     6.5  

Research and development expense increased by $2.0 million from 2010 to 2011. The increase was primarily due to additional payroll-related costs of $1.4 million resulting from an increase of 16 in the number of product management and development personnel as well as a full year versus only five months of expense related to 11 employees added as a result of the SageQuest acquisition in 2010, additional travel-related expenses of $0.2 million, and office-related expense of $0.3 million incurred related to additional employees hired to further enhance and develop our products. Most of this growth in our research and development workforce was the result of hiring the SageQuest research and development employees as part of the acquisition in July 2010.

Research and development expense for the years ended December 31, 2010 and 2011 of $4.1 million and $6.0 million, respectively, was recorded net after capitalization of $0.4 million and $0.7 million, respectively, of costs related to our internal-use software applications accessed by our customers through our website. The increase in the amounts capitalized year over year was due to two major product releases in April and November 2011.

As a percentage of subscription revenue, research and development expense remained relatively constant from 2010 to 2011.

General and Administrative Expense

 

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

General and administrative expense

   $ 14,628      $ 18,309        25.2

Percentage of subscription revenue

     22.6     19.8  

General and administrative expense increased by $3.7 million from 2010 to 2011. This increase was primarily due to an increase of $2.5 million in payroll-related costs as a result of hiring eight additional employees to support our overall growth as well as a full year versus only five months of expense related to 13 employees added as a result of the SageQuest acquisition in 2010; additional share-based compensation expense of $1.3 million resulting from stock options granted to employees at the end of 2010; and an increase of $2.6 million in professional fees. Professional fees in 2010 and 2011 included $0.2 million and $2.2 million, respectively, of expenses accrued for consulting fees that are to be paid under our Management Services Agreement with Privia. Also contributing to the increase in general and administrative expense year over year was an increase of $0.4 million of office-related costs associated with our additional employees and an increase of $0.3 million in merchant and bank fees due to the increase in customer subscriptions. These increases were partially offset by a decrease of $3.9 million year over year in accounting, tax and audit fees related to the audits of our financial statements.

 

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As a percentage of subscription revenue, general and administrative expense decreased from 22.6% to 19.8% from 2010 to 2011 primarily due to the decrease of $3.9 million year over year in accounting, tax and audit fees, partially offset by the $2.0 million increase in expense year over year related to our Management Services Agreement with Privia. Other cost increases in general and administrative expense were in line with the percentage growth in subscription revenue year over year.

Interest Income (Expense), net

 

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

Interest income (expense), net

   $ (1,012 )   $ (2,386     135.8

In conjunction with the SageQuest acquisition in July 2010, we entered into a credit agreement with DE Shaw for $17.5 million of Senior Secured Notes. Interest expense increased by $1.4 million from 2010 to 2011 primarily due to incurring a full year of interest expense in 2011 versus five months of interest expense in 2010 related to this debt. The outstanding principal amount of the Senior Secured Notes bore interest at a floating rate of one-month LIBOR plus 9.5% per annum (based on actual days), but not less than 12.5%. As of December 31, 2011, the actual interest rate was 12.5%. Interest income netted against interest expense was immaterial in 2010 and 2011.

Foreign Currency Transaction Gain (Loss), net

 

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

Foreign currency transaction gain (loss), net

   $ (907   $ 155         NM   

Foreign currency transaction gain (loss), net primarily reflects the foreign currency transaction gains or losses arising from exchange rate fluctuations on intercompany payables and receivables denominated in currencies other than the functional currencies of the legal entities in which the transactions are recorded. For the year ended December 31, 2011, we recognized $0.2 million in foreign currency transaction gains attributable to the weakening of the euro and the British pound against the U.S. dollar in the period.

Provision for Income Taxes

 

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

Provision for income taxes

   $ 1,430       $ 865         (39.5 )% 

Our provision for income taxes consists primarily of taxes in Ireland, the United States and the United Kingdom. We are subject to tax in various jurisdictions that apply various statutory rates of tax to our income. Each of these jurisdictions has its own tax law, which is subject to interpretation on a jurisdiction-by-jurisdiction basis. In Ireland, our operating entity is subject to tax at a 12.5% tax rate on its trading income and 25% on its non-trading income and our non-operating entities are subject to tax at a 25% tax rate, while our foreign subsidiaries in the United States and the United Kingdom are subject to tax rates of approximately 40% and 26%, respectively. For the years ended December 31, 2010 and 2011, our domestic pre-tax income in Ireland was $0.5 million and $6.5 million, respectively, and our foreign pre-tax income (loss) was $0.2 million and $(2.8) million, respectively, primarily in the United States and the United Kingdom. See Note 11 to our consolidated financial statements for additional information related to the foreign and domestic income tax expense (benefit) we recorded and the effect that foreign taxes had on our overall effective tax rate. In addition to the pre-tax income (loss) of each jurisdiction taxed at the different tax rates noted above, our effective income tax rates for each year were affected by the items noted below.

 

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Our effective income tax rate for the years ended December 31, 2010 and 2011 was 205.9% and 23.2%, respectively, on pre-tax income of $0.7 million and $3.7 million, respectively. Our effective tax rate for the year ended December 31, 2010 was higher than the statutory Irish rate of 12.5% due primarily to the recording of reserves for uncertain tax positions along with related interest and penalties, an increase to our valuation allowance related to certain Irish net operating loss carryforwards, and 22.9% of our income being earned outside of Ireland at higher income tax rates. The impact of these increases was partially offset by the release of certain reserves for uncertain tax positions in non-Irish jurisdictions due to the expiration of a statute of limitations as well as Irish tax credits being claimed. Our effective tax rate for the year ended December 31, 2011 was higher than the statutory Irish rate of 12.5% primarily due to the recording of reserves for uncertain tax positions, along with related interest and penalties, and an increase in the valuation allowance related to certain Irish net operating loss carryforwards. The increase associated with these items was partially offset by the release of reserves for uncertain tax positions due to the expiration of a statute of limitations in the United Kingdom and losses being generated in jurisdictions that have a higher tax rate than the statutory Irish rate for which no valuation allowance was required.

The decrease in our effective tax rate from 2010 to 2011 was primarily the result of us earning a greater proportion of our taxable income overall in lower tax-rate jurisdictions in 2011 than in 2010 and a decrease in the reserves recorded for uncertain tax positions as a result of the lapse of statute of limitations and other changes in potential tax liabilities of prior years.

Our provision for income taxes may change from period to period based on non-recurring events, such as the settlement of income tax audits and changes in tax laws including enacted statutory rates, as well as recurring factors, including changes in the mix of earnings in countries with differing statutory tax rates. As a result of our global business model and cross-border intercompany transactions, a change in uncertain tax positions or a change in statutory rates, particularly in Ireland, could have a significant effect on our overall effective tax rate.

 

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Quarterly Results of Operations

The following table sets forth our unaudited consolidated statements of operations data and other financial data for each of the eight quarters in the period ended June 30, 2012 (certain items may not foot due to rounding). We have prepared the consolidated statement of operations for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, each consolidated statement of operations includes all adjustments, consisting solely of normal recurring adjustments, necessary for a fair statement of this data for the periods presented. This information should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of the results to be expected in future periods.

 

    Three Months Ended  
    Sep 30,
2010
    Dec 31,
2010
    Mar 31,
2011
    Jun 30,
2011
    Sep 30,
2011
    Dec 31,
2011
    Mar 31,
2012
    Jun 30,
2012
 
    (in thousands)  

Consolidated Statements of Operations Data:

               

Subscription revenue

  $ 17,336      $ 20,662      $ 20,170      $ 22,417      $ 23,865      $ 25,865      $ 27,839      $ 30,566   

Cost of subscription revenue

    6,122        6,928        6,426        7,040        7,469        7,696        8,443        8,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    11,214        13,734        13,744        15,377        16,396        18,169        19,396        21,677   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sales and marketing

    5,403        5,807        7,864        8,084        8,548        8,895        9,934        10,265   

Research and development

    1,036        1,382        1,344        1,399        1,630        1,648        1,617        1,757   

General and administrative

    3,030        7,713        3,753        4,833        4,539        5,183        5,696        8,533   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    9,469        14,902        12,961        14,316        14,717        15,727        17,247        20,555   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    1,745        (1,168     783        1,061        1,679        2,442        2,149        1,122   

Other income (expense), net

    699        (895 )     25        (539     (1,013     (704 )     (407     (1,773

Provision for (benefit from) income taxes

    1,822        (1,020     (642     376        463        668        718        739   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 622      $ (1,043 )   $ 1,450      $ 146      $ 203      $ 1,070      $ 1,024      $ (1,390
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Three Months Ended  
    Sep 30,
2010
    Dec 31,
2010
    Mar 31,
2011
    Jun 30,
2011
    Sep 30,
2011
    Dec 31,
2011
    Mar 31,
2012
    Jun 30,
2012
 
    (as a percentage of subscription revenue)  

Consolidated Statements of Operations Data:

               

Subscription revenue

    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0     100.0

Cost of subscription revenue

    35.3        33.5        31.9        31.4        31.3        29.8        30.3        29.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    64.7        66.5        68.1        68.6        68.7        70.2        69.7        70.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sales and marketing

    31.2        28.1        39.0        36.1        35.8        34.4        35.7        33.6   

Research and development

    6.0        6.7        6.7        6.2        6.8        6.4        5.8        5.7   

General and administrative

    17.5        37.3        18.6        21.6        19.0        20.0        20.5        27.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    54.6        72.1        64.3        63.9        61.7        60.8        62.0        67.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    10.1        (5.7     3.9        4.7        7.0        9.4        7.7        3.7   

Other income (expense), net

    4.0        (4.3     0.1        (2.4     (4.2     (2.7     (1.4     (5.9

Provision for (benefit from) income taxes

    10.5        (4.9     (3.2     1.7        1.9        2.6        2.6        2.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    3.6     (5.0 )%      7.2     0.7     0.9     4.1 %     3.7     (4.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In July 2010, we completed the acquisition of SageQuest which favorably impacted revenue beginning in the three months ended September 30, 2010. Subscription revenue increased sequentially in each of the quarters presented due to increases in the number of total vehicles under subscription in each quarter. The increase in

 

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subscription revenue for the three months ended December 31, 2010 was unusually large because it included an accelerated recognition of subscription revenue totaling $1.0 million associated with a prepaid customer who ceased business operations, resulting in the immediate recognition of all unrecognized revenue under GAAP.

Gross profit, in absolute dollars, increased sequentially for all quarters presented primarily due to revenue growth and efficiencies in our costs, driven by leveraging our scale to negotiate improved pricing on third-party costs coupled with improved economies of scale for certain infrastructure costs, including hosting costs and internal configuration personnel costs.

Total operating expenses, in absolute dollars, increased over time in the periods presented primarily due to increased sales and marketing and general and administrative expenses, which resulted from increased marketing and advertising efforts, increased number of personnel to support the business, and increased professional fees, including those related to accounting, tax and audit services and those related to our Management Services Agreement with Privia. During the three months ended December 31, 2010, general and administrative expenses increased from $3.0 million during the three months ended September 30, 2010 to $7.7 million, primarily as a result of an increase in accounting, tax and audit fees. During the three months ended June 30, 2012, general and administrative expenses increased from $5.7 million during the three months ended March 31, 2012 to $8.5 million, primarily as a result of increases of $1.0 million in accounting, tax and audit fees; $0.7 million in expense recorded related to our Management Services Agreement with Privia; and $0.5 million in health insurance expense. During the three months ended June 30, 2012, other income (expense), net increased from $(0.4) million during the three months ended March 31, 2012 to $(1.8) million, primarily as a result of a one-time loss of $0.9 million on extinguishment of our debt.

Provision for income taxes fluctuated over time in the periods presented primarily due to changes in the jurisdictions in which the income or loss was generated, changes in the valuation allowances for deferred tax assets, the expiration of certain statutes of limitations, and the recording of interest and penalties related to our tax contingencies.

Liquidity and Capital Resources

 

     Year Ended December 31,     Six Months Ended June 30,  
             2010                     2011                   2011                 2012        
     (in thousands)  

Cash flows provided by (used in) operating activities

   $ 8,663      $ 1,805      $ (1,887   $ 2,925   

Cash flows used in investing activities

     (46,285 )     (16,156 )     (5,917     (9,550

Cash flows provided by (used in) financing activities

     49,236        13        (8     6,239   

Effect of exchange rate changes on cash

     (166 )     (101 )     (12     (78
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

   $ 11,448      $ (14,439 )   $ (7,824   $ (464
  

 

 

   

 

 

   

 

 

   

 

 

 

We have funded our operations, capital expenditures and the acquisition of SageQuest primarily through sales of our fleet management solutions to customers, the net proceeds of approximately $54.2 million from the issuance of shares of our capital stock since our inception, and the net proceeds of $23.2 million from debt issued in 2010 and in the first six months of 2012. At June 30, 2012, our principal sources of liquidity were our cash balance of $8.2 million and borrowings of up to $25.0 million available under our revolving credit facility.

Operating Activities

Operating activities provided $2.9 million of cash in the six months ended June 30, 2012. The cash flow provided by operating activities resulted primarily from our net loss of $0.4 million, net non-cash charges of $10.9 million, and net uses of cash of $7.6 million from changes in our operating assets and liabilities. Our non-cash charges primarily consisted of $8.3 million of depreciation and amortization expense, $0.8 million of provisions for accounts receivable, $1.0 million of share-based compensation expense, and $0.4 million of loss

 

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on extinguishment of debt. Net uses of cash from changes in our operating assets and liabilities primarily consisted of a $1.2 million decrease in our deferred revenue balance, $6.0 million increase in prepaid expenses and other assets, and $2.8 million increase in our accounts receivable from customers, all offset by increases in our accounts payable and accrued expenses of $1.3 million and an increase in accrued income taxes of $1.1 million. The decrease in deferred revenue was attributable to a greater number of customers in 2012 than in 2011 paying for their subscriptions on a monthly basis rather than prepaying the full amount or an annual amount due under their subscription agreement. The increase in our accounts receivable was due to the increase in subscription revenue from the six months ended June 30, 2011 to the six months ended June 30, 2012 resulting from the increased number of vehicles under subscription. The increase in our prepaid expenses and other assets in the six months ended June 30, 2012 was due to increases in deferred commissions and capitalized costs of in-vehicle devices owned by customers due to the growth in our business as well as deferred financing costs related to our Senior Secured Credit Facility and deferred IPO costs.

Operating activities used $1.9 million of cash in the six months ended June 30, 2011. The cash flow used in operating activities resulted primarily from our net income of $1.6 million, net non-cash charges of $8.7 million, and net uses of cash of $12.1 million from changes in our operating assets and liabilities. Our non-cash charges primarily consisted of $7.2 million of depreciation and amortization expense, $0.5 million of provisions for accounts receivable, and $1.1 million of share-based compensation expense. Net uses of cash from changes in our operating assets and liabilities primarily consisted of a $6.6 million decrease in our deferred revenue balance, $3.3 million increase in prepaid expenses and other assets, $1.8 million increase in our accounts receivable from customers, and $0.5 million increase in our accrued income taxes. The decrease in deferred revenue was attributable to a greater number of customers in 2011 than in 2010 paying for their subscriptions on a monthly basis rather than prepaying the full amount or an annual amount due under their subscription agreement. The increases in our accounts receivable and prepaid expenses and other assets were due to the increase in our subscription revenue from the six months ended June 30, 2010 to the six months ended June 30, 2011 resulting from the increased number of vehicles under subscription and an increase in our subscription fees paid to third-party providers of Internet maps and other data. The decrease in our accrued taxes was due to net decreases in our prior-year tax reserves.

Operating activities provided $1.8 million of cash in 2011. The cash flow provided by operating activities primarily resulted from our net income of $2.9 million, net non-cash charges of $21.0 million, and net uses of cash of $22.0 million from changes in our operating assets and liabilities. Our non-cash charges primarily consisted of $15.1 million of depreciation and amortization expense, $2.8 million of provisions for accounts receivable and deferred tax assets, and $2.3 million of share-based compensation expense. Net uses of cash from changes in our operating assets and liabilities primarily consisted of a $12.5 million decrease in our deferred revenue balance, $7.2 million increase in prepaid expenses and other assets, $3.5 million increase in our accounts receivable from customers, and $1.0 million decrease in accrued income taxes, all offset by increases in our accounts payable and accrued expenses of $2.2 million. The decrease in deferred revenue was attributable to a greater number of customers in 2011 than in 2010 paying for their subscriptions on a monthly basis rather than prepaying the full amount or an annual amount due under their subscription agreement. The increases in our accounts receivable and prepaid expenses and other assets were due to the increase in our subscription revenue from 2010 to 2011 resulting from the increased number of vehicles under subscription and an increase in our subscription fees paid to third-party providers of Internet maps and other data. The decrease in accrued income taxes was due to net decreases in our prior-year tax reserves. The increase in our accounts payable and accrued expenses resulted from our increased spending due to the growth of our business.

Operating activities provided $8.7 million of cash in 2010. The cash flow provided by operating activities primarily resulted from our net loss of $0.7 million, net non-cash charges of $12.1 million, and net uses of cash of $2.7 million from changes in our operating assets and liabilities. Our non-cash charges primarily consisted of $10.6 million of depreciation and amortization expense and $0.9 million of unrealized net foreign currency transaction losses. Net uses of cash from changes in our operating assets and liabilities primarily consisted of a $7.5 million decrease in our deferred revenue balance, $3.5 million increase in prepaid expenses

 

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and other assets, and $1.2 million increase in accounts receivable from customers, all offset by increases in our accounts payable and accrued expenses of $7.7 million and accrued income taxes of $1.8 million. The decrease in deferred revenue was attributable to a greater number of customers in 2010 than in 2009 paying for their subscriptions on a monthly basis rather than prepaying the full amount or an annual amount due under their subscription agreement. The other changes in our operating assets and liabilities were primarily driven by the increase in our subscription revenue from 2009 to 2010 resulting from the increased number of vehicles under subscription and increased spending due to the growth of our business.

Investing Activities

Net cash used in investing activities was $5.9 million and $9.6 million for the six months ended June 30, 2011 and 2012, respectively. Net cash used in investing activities consisted primarily of cash paid to purchase property and equipment of $5.1 million and $9.0 million in the six months ended June 30, 2011 and 2012, respectively, as well as costs capitalized for internal-use software of $0.4 million and $0.5 million in the six months ended June 30, 2011 and 2012, respectively.

Net cash used in investing activities was $46.3 million and $16.2 million for the years ended December 31, 2010 and 2011, respectively. Net cash used in investing activities consisted primarily of cash paid to purchase property and equipment of $9.4 million and $15.1 million in 2010 and 2011, respectively; costs capitalized for internal-use software of $0.4 million and $0.7 million in 2010 and 2011, respectively; and cash paid to acquire SageQuest of $36.4 million in 2010. Property and equipment purchased in 2010 and 2011 included computer equipment for our employees, software used by our research and development team, and furniture for our offices.

Financing Activities

Net cash provided by financing activities was $6.2 million for the six months ended June 30, 2012, as compared to no cash being used in or provided by financing activities for the six months ended June 30, 2011. Net cash provided by financing activities for the six months ended June 30, 2012 consisted of net proceeds of $23.9 million from our borrowing under the Term Loan, offset by the repayment of our Senior Secured Notes of $17.5 million and payments of our capital lease obligations of $0.2 million.

Net cash provided by financing activities was $49.2 million and $0.0 million for the years ended December 31, 2010 and 2011, respectively. Net cash provided by financing activities in 2010 consisted primarily of net proceeds of $32.1 million from the issuance of our Series B and Series C redeemable convertible preferred shares and net proceeds of $16.8 million from the issuance of $17.5 million senior secured notes. Net cash provided by financing activities in 2011 consisted of the repayment in full of the principal and interest of $0.1 million due on the note receivable from our Chief Executive Officer, offset partially by the payment of our capital lease obligations of $0.1 million.

Indebtedness and Liquidity

We believe that our cash, borrowings available under our Senior Secured Credit Facility and the net proceeds of this offering will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

On May 10, 2012, we entered into a credit facility with Wells Fargo Capital Finance, LLC, as administrative agent and lender, consisting of a $25 million term loan, or the Term Loan, and a $25 million revolving line of credit, or the Revolving Credit Facility, which expires on May 10, 2017 and which we refer to collectively as the Senior Secured Credit Facility. The Senior Secured Credit Facility is collateralized by a senior first-priority lien on all of our assets and property, subject to certain customary exclusions. The purpose of the Senior Secured Credit Facility was to repay the outstanding principal of the Senior Secured Notes, which was

 

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repaid on May 10, 2012 with proceeds of the $25 million Term Loan, and to provide us with an additional source of liquidity. Borrowings under the Revolving Credit Facility are subject to drawdown limitations based on financial ratios. To date, we have borrowed no amounts under the Revolving Credit Facility.

The interest rate on the Term Loan and borrowings under the Revolving Credit Facility is either (a) LIBOR plus 3.5% per annum, but not less than 4.5% per annum, or (b) at our option, subject to certain conditions, base rate plus 2.5% per annum, but not less than 5.5% per annum. Principal due under the Term Loan is payable quarterly commencing on December 31, 2012, with $0.3 million due in 2012, $1.3 million due in 2013, $1.4 million due in 2014, $2.0 million due in 2015, $2.5 million due in 2016 and $17.5 million due in 2017. All amounts borrowed under the Revolving Credit Facility are due and payable on May 10, 2017. Borrowings under the Senior Secured Credit Facility require a 1% prepayment penalty if the facility is terminated within the first twelve months of the agreement.

The Senior Secured Credit Facility contains financial covenants that, among other things, require us to maintain liquidity of at least $10 million, comprised of cash plus availability under borrowings, and limits our maximum total leverage ratio (total indebtedness with a maturity greater than twelve months to earnings before interest, taxes, depreciation and amortization and certain other adjustments, as defined by the terms of the Senior Secured Credit Facility agreement). The leverage ratio becomes more restrictive in each of 2012, 2013 and 2014. The Senior Secured Credit Facility also requires us to maintain other affirmative and negative covenants. We were in compliance with all such covenants as of June 30, 2012.

As of December 31, 2011, we had net operating loss carryforwards in the United States available to reduce future federal taxable income of $22.5 million, and we had net operating loss carryforwards in Ireland and the United Kingdom available to reduce future taxable income of $3.9 million and $3.1 million. If unused, our net operating loss carryforwards in the United States expire at various dates through 2031, while those in Ireland and the United Kingdom may be carried forward indefinitely. In certain circumstances, usage of our net operating loss carryforwards in the United States and Ireland may be limited.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities, which include special purpose entities and other structured finance entities.

Contractual Obligations and Commitments

Our principal commitments consist of obligations under our outstanding debt facilities, leases for our office space, computer equipment, furniture and fixtures, and contractual commitments for hosting and other support services. Our Term Loan bears interest at a rate of either (a) LIBOR plus 3.5% per annum, but not less than 4.5% per annum, or (b) at our option, subject to certain conditions, base rate plus 2.5% per annum, but not less than 5.5% per annum. We have a lease for 11,600 square feet of office space in Wellesley, Massachusetts for our U.S. headquarters which is effective through March 2017. We lease approximately 31,200 square feet of office and warehouse space in Ohio under operating leases that expire in November 2017 with a five-year extension option. We lease office space in Ireland for our registered office and for our research and development and sales teams under operating leases that expire in May 2022. We lease office space in Rolling Meadows, Illinois, Clearwater, Florida, Charlotte, North Carolina, Tempe, Arizona and Atlanta, Georgia for our sales teams and Reading, U.K. for a customer care center under lease agreements that expire at various dates through 2019.

We have non-cancelable purchase commitments related to telecommunications, mapping and subscription software services that are payable through 2015.

We have agreements with various vendors to provide specialized space and equipment and related services from which we host our software application. The agreements include payment commitments that expire at various dates through 2014.

 

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The following table summarizes our contractual obligations at June 30, 2012:

 

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

Term Loan(1)

   $ 29,831       $ 2,052       $ 5,031       $ 22,748       $   

Capital lease obligations(2)

     826         390         436                   

Operating lease obligations(3)

     8,516         1,360         2,378         1,980         2,798   

Management Services Agreement obligations(4)

     15,000         8,000         7,000                   

Outstanding purchase obligations(5)

     1,938         1,385         553                   

Data center commitments(6)

     1,110         1,110                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(7)

   $ 57,221       $ 14,297       $ 15,398       $ 24,728       $ 2,798   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the contractually required principal and interest payments on our Term Loan in existence at June 30, 2012 in accordance with the required payment schedule. Cash flows associated with future interest payments to be made were calculated using the interest rate in effect as of June 30, 2012, which was 4.5%.

 

(2) Represents the contractually required payments under our capital lease obligations in existence as of June 30, 2012 in accordance with the required payment schedule. No assumptions were made with respect to renewing the lease terms at the expiration date of their initial terms.

 

(3) Represents the contractually required payments under our operating lease obligations in existence as of June 30, 2012 in accordance with the required payment schedule. No assumptions were made with respect to renewing the lease terms at the expiration date of their initial terms.

 

(4) Represents the required payments under our Management Services Agreement with Privia if specified targets were achieved. The targets for fiscal year 2013 and 2014 were considered probable to be achieved as of June 30, 2012, and as such, the amounts have been included in this table. On August 20, 2012, we paid Privia an aggregate of $7.8 million in full satisfaction of all present and future amounts that are payable by us under the Management Services Agreement. Refer to Note 19 to our consolidated financial statements included elsewhere in this prospectus for further discussion on the Management Services Agreement.

 

(5) Represents the contractually required payments under the various purchase obligations in existence as of June 30, 2012. No assumptions were made with respect to renewing the purchase obligations at the expiration date of their initial terms, no amounts are assumed to be prepaid and no assumptions were made for early termination of any obligations.

 

(6) Represents the contractually required payments for our data center agreements in existence as of June 30, 2012 in accordance with the required payment schedule. No assumptions were made with respect to renewing the lease term at its expiration date.

 

(7) This table does not include $18.9 million recorded as liabilities for unrecognized tax benefits (inclusive of $6.8 million of accrued interest and penalties) as of June 30, 2012 as we are unable to make reasonably reliable estimates of when cash settlement, if any, will occur with a tax authority because the timing of the examination and the ultimate resolution of the examination is uncertain. Refer to Note 11 to our consolidated financial statements included elsewhere in this prospectus for further discussion on income taxes.

Quantitative and Qualitative Disclosures about Market Risk

We face exposure to adverse movements in foreign currency exchange rates and changes in interest rates. Portions of our revenues, expenses, assets and liabilities are denominated in currencies other than the U.S.

 

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dollar, primarily the euro, the British pound, and the Canadian dollar with respect to revenues, expenses and intercompany payables and receivables. These exposures may change over time as business practices evolve.

Foreign Currency Exchange Risk

Foreign currency transaction exposure results primarily from intercompany transactions and transactions with customers or vendors denominated in currencies other than the functional currency of the legal entity in which the transaction is recorded by us. Assets and liabilities arising from such transactions are translated into the legal entity’s functional currency using the exchange rate in effect at the balance sheet date. Any gain or loss resulting from currency fluctuations is recorded on a separate line in our consolidated statements of operations. Net foreign currency transaction losses of $0.1 million were recorded for the six months ended June 30, 2012.

Foreign currency translation exposure results from the translation of the financial statements of our subsidiaries whose functional currency is not the U.S. dollar into U.S. dollars for consolidated reporting purposes. The balance sheets of these subsidiaries are translated into U.S. dollars using period-end exchange rates and their income statements are translated into U.S. dollars using the average exchange rate over the period. Resulting currency translation adjustments are recorded in accumulated other comprehensive income (loss) in our consolidated balance sheets. Net foreign currency translation gains of $0.0 million were recorded for the six months ended June 30, 2012.

For the six months ended June 30, 2012, approximately 10.6% of our revenues and approximately 15.1% of our operating expenses were generated by subsidiaries whose functional currency is not the U.S. dollar and therefore are subject to foreign currency translation exposure. In addition, 8.0% of our assets and 6.5% of our liabilities were subject to foreign currency translation exposure as of June 30, 2012 as compared to 8.6% of our assets and 8.6% of our liabilities as of December 31, 2011.

Currently, our largest foreign currency exposures are those with respect to the euro and British pound. Relative to foreign currency exposures existing at June 30, 2012, a 10% unfavorable movement in foreign currency exchange rates would expose us to losses in earnings. For the six months ended June 30, 2012, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have decreased pre-tax income by $0.7 million. The estimates used assume that all currencies move in the same direction at the same time. The potential change noted above is based on a sensitivity analysis performed on our financial position as of June 30, 2012. We have experienced and we will continue to experience fluctuations in our net income (loss) as a result of revaluing our assets and liabilities that are not denominated in the functional currency of the entity that recorded the asset or liability. At this time, we do not hedge our foreign currency risk.

Interest Rate Fluctuation Risk

As we only hold cash, our cash balances are not subject to market risk due to changes in interest rates. The Term Loan under our Senior Secured Credit Facility, which earns variable rates of interest, exposes us to interest rate risk. Based on the $25.0 million outstanding principal amount of our variable-rate indebtedness at June 30, 2012 under the Term Loan, a one percentage point change in the interest rates above the floor of 4.5% would have impacted our future annual interest expense due under the debt by an aggregate of approximately $0.2 million. However, interest cannot decrease from the 4.5% rate we were paying as of June 30, 2012 as our Senior Secured Credit Facility does not allow for us to pay interest at a rate of less than 4.5% on our principal balances.

Inflation Risk

We do not believe that inflation had a material effect on our business, financial condition or results of operations in the last two fiscal years. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

 

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Recently Issued and Adopted Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements, as authoritative guidance on revenue arrangements with multiple deliverables that are not covered by software revenue guidance. This guidance modifies the fair value requirements of FASB Accounting Standards Codification (ASC) subtopic 605-25, Revenue Recognition—Multiple Element Arrangements, by allowing the use of the “best estimate of selling price” for establishing fair value for a deliverable when vendor-specific objective evidence and third-party evidence for determining the selling price of a deliverable in an arrangement cannot be determined. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence or (c) estimated selling price. In addition, the residual method of allocating arrangement consideration is no longer permitted. This guidance is effective for fiscal years beginning on or after June 15, 2010. This guidance was effective for us on January 1, 2011. The adoption of this guidance had no impact on our consolidated financial position, results of operations or cash flows.

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. This guidance reflects the consensus-for-exposure in the Emerging Issues Task Force, or EITF, Issue No. 10-G, Disclosure of Supplementary Pro Forma Information for Business Combinations. The guidance relates to disclosures about supplementary pro forma information for business combinations and amends existing disclosure criteria, specifying that if a public entity presents comparative financial statements, it should disclose revenue and earnings of the combined entity as though the business combination(s) during the current year had occurred as of the beginning of the comparable prior year annual reporting period only. The guidance also expands the supplemental pro forma disclosures under ASC Topic 805, Business Combinations, to include descriptions of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings for the period. The guidance was effective for business combinations consummated on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, which was January 1, 2011 for us. As the guidance relates only to disclosure, its adoption did not have an effect on our consolidated financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which provides companies with two options for presenting comprehensive income. Companies can present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In December 2011, the FASB indefinitely deferred the requirement of the guidance to present reclassification adjustments of other comprehensive income by line item on the face of the income statement. However, all other requirements of the guidance were effective for us on January 1, 2012. As the new guidance relates only to how comprehensive income is disclosed and does not change the items that must be reported as comprehensive income, adoption did not have an effect on our consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which simplifies how companies test goodwill for impairment. This guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in the goodwill accounting standard. This guidance is effective for years beginning after December 15, 2011, with early adoption permitted. We have not early adopted this guidance and as such it will be effective for us on January 1, 2012. The new guidance will not have an effect on our consolidated financial position, results of operations or cash flows.

In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, or ASU 2012-02. ASU 2012-02 is intended to reduce the cost and complexity of performing an impairment test

 

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for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test described in ASC 350. In accordance with ASU 2012-02, an entity will have an option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that the asset is impaired. ASU 2012-02 will become effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. As we do not intend to early adopt, the standard will become effective for us on January 1, 2013 and the adoption is not expected to have a significant impact on our consolidated financial position, results of operations or cash flows.

Controls and Procedures

A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. As a private company, we have designed our internal control over financial reporting to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

In connection with the audits of our financial statements as of and for the years ended December 31, 2010 and 2011, which were completed simultaneously, we and our independent registered public accounting firm identified certain material weaknesses and other significant deficiencies in our internal control over financial reporting. A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following four material weaknesses were communicated to us by our independent registered public accounting firm in connection with their audit of our financial statements as of and for the years ended December 31, 2010 and 2011:

 

   

we did not have sufficient formalized policies and procedures to ensure that complete and accurate, consolidated financial information was prepared and reviewed timely in accordance with U.S. GAAP;

 

   

we lacked sufficient integrated systems to consolidate multi-currency financial information in a complete, accurate and timely manner;

 

   

we lacked a sufficient number of resources to completely and accurately record accounting transactions in accordance with U.S. GAAP as well as resources with the technical accounting expertise to completely and accurately account for complex and unique transactions in a timely manner and to prepare and review financial statements and footnote disclosures; and

 

   

we lacked sufficient and timely formalized monthly, quarterly and annual financial data reviews and analysis.

We have concurred with the findings of our independent registered public accounting firm and have begun remediation efforts. Our efforts to date have included the following:

 

   

Implementation of Formalized Policies and Procedures – We are implementing standardized consolidation and financial reporting policies and procedures as well as a more structured close process to improve the completeness, timeliness and accuracy of our financial reporting and

 

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disclosures including, but not limited to, those regarding proper financial statement classification, share-based compensation, recognition of accruals and income taxes. We are creating a uniform set of standards and guidelines for our finance and accounting personnel across our subsidiaries. This approach will allow us to streamline and enhance consistency of our reporting processes across multiple subsidiaries in the U.S. and Europe, and to strengthen our processes for year-end and quarter-end reporting.

 

   

Implementation of Accounting Systems We are in the process of completing the implementation of the NetSuite general ledger package and several other supporting accounting modules. The implementation of this system will enable us to report financial information in a more complete, accurate and timely manner.

 

   

Addition of Employee ResourcesWe have hired additional senior accounting and finance employees to facilitate accurate and timely accounting closes and to accurately prepare and review financial statements and related footnote disclosures. Our finance team has increased from 16 employees in 2010 to 26 employees in 2011, including the addition of a corporate controller and a director of financial operations. Additionally, in January 2012 we added a global accounting and financial systems manager. We plan to hire additional accounting and finance personnel.

 

   

Implementation of Financial Data Reviews As a result of the additional employees added to the finance function as well as the implementation of the new general ledger system, we are allowing for greater lead times between consolidation and reporting of financial information, which will provide additional time for the review and analysis of monthly, quarterly and annual financial data and information.

The actions we will take are subject to continued review supported by confirmation and testing by management as well as audit committee oversight. While we are implementing a plan to remediate these weaknesses, we cannot assure you that we will be able to remediate these weaknesses, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows. See “Risk Factors—Risk Relating to Our Business—We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If we fail to remediate one or more material weaknesses or if we fail to establish and maintain effective control over financial reporting, our ability to accurately report our financial results could be adversely affected.”

 

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BUSINESS

Overview

FleetMatics is a leading global provider of fleet management solutions delivered as software-as-a-service, or SaaS. Our mobile software platform enables businesses to meet the challenges associated with managing their local fleets of commercial vehicles and improve productivity by extracting actionable business intelligence from vehicle and driver behavioral data. We offer intuitive, cost-effective Web-based and mobile application solutions that provide fleet operators with visibility into vehicle location, fuel usage, speed and mileage and other insights into their mobile workforce, enabling them to reduce operating and capital costs, as well as increase revenue. As of June 30, 2012, we had more than 16,000 customers who collectively deployed our solutions in over 281,000 vehicles worldwide. The substantial majority of our customers are small and medium-sized businesses, or SMBs, each of which deploy our solutions in 1,000 or fewer vehicles. During the six months ended June 30, 2012, we collected an average of approximately 30 million data points per day from subscribers and have aggregated over 28 billion data points since our inception, which we believe provides a valuable data set that we may consider in the development of complementary business intelligence solutions and additional sources of revenue.

We believe that the addressable market for our fleet management solutions is large, growing and underpenetrated. Frost and Sullivan, an independent research firm, reported that in 2010 there were approximately 18.5 million local commercial fleet vehicles in the U.S. and Canada, 11.3% of which utilized a fleet management solution. We believe that the global market opportunity is much larger and we estimate it to be in excess of 61 million vehicles.

Many SMBs manage their local fleet by using manual processes, such as entering data on time sheets and communicating with mobile employees using cellular phones, which generate minimal actionable business intelligence. Furthermore, existing technology-based solutions, including long haul-focused solutions, can be cost-prohibitive and difficult for SMBs to implement and use. Our multi-tenant SaaS solutions are designed to meet the needs of SMBs, overcome existing barriers to adoption, and leverage the volumes of d