10-K 1 xoom-20141231x10k.htm 10-K xoom_12312014-10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K


 

(Mark one)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                 .

Commission file number: 001-35801


Xoom Corporation

(Exact name of registrant as specified in its charter)


 

 

 

 

 

 

Delaware

7389

94-3401054

(State or other jurisdiction of
Incorporation or organization)

(Primary Standard Industrial
Classification Code Number)

(I.R.S. Employer

Identification No.)

 

425 Market Street, 12th Floor, San Francisco, CA 94105

(Address of principal executive offices, including zip code)

(415) 777-4800

(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Common Stock, $0.0001 par value

 

The NASDAQ Stock Market LLC

(Title of class)

 

(Name of exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act:

None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K.    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

  

Accelerated filer

Non-accelerated filer

 (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The aggregate market value of common stock held by non-affiliates of the registrant, computed by reference to the closing price at which the common stock was sold on June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the NASDAQ Global Select Market, was approximately $652.3 million. Shares of common stock held by each executive officer, director and holder of 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status does not reflect a determination that such persons are affiliates of the registrant for any other purpose.

On February 9, 2015, the registrant had  38,699,042 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement relating to its 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

 


 

Xoom Corporation

Table of Contents

 

 

 

 

 

PART I 

 

 

 

ITEM 1.

Business

 

ITEM 1A.

Risk Factors

14 

 

ITEM 1B.

Unresolved Staff Comments

45 

 

ITEM 2.

Properties

45 

 

ITEM 3.

Legal Proceedings

46 

 

ITEM 4.

Mine Safety Disclosures

46 

PART II 

 

 

47 

 

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

47 

 

ITEM 6.

Selected Financial Data

49 

 

ITEM 7.

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

53 

 

ITEM 7A.

Quantitative and Qualitative Disclosures about Market Risk

72 

 

ITEM 8.

Financial Statements and Supplementary Data

73 

 

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

99 

 

ITEM 9A.

Controls and Procedures

99 

 

ITEM 9B.

Other Information

101 

PART III 

 

 

102 

 

ITEM 10.

Directors, Executive Officers and Corporate Governance

102 

 

ITEM 11.

Executive Compensation

102 

 

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

102 

 

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

102 

 

ITEM 14.

Principal Accounting Fees and Services

102 

PART IV 

 

 

103 

 

ITEM 15.

Exhibits and Financial Statement Schedules

103 

 

 

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FORWARD-LOOKING STATEMENTS

The Business section and other parts of this Annual Report on Form 10-K contain forward-looking statements within the meaning of the Securities Exchange Act of 1934, which are subject to risks and uncertainties. The forward-looking statements include statements concerning, among other things, our business strategy (including anticipated trends and developments in, and management plans for, our business and the markets in which we operate), financial results, operating results, revenues, gross margins, operating expenses, products and services, projected costs and capital expenditures, research and development programs, sales and marketing initiatives and competition. In some cases, you can identify these statements by forward-looking words, such as “anticipate,” “believe,” “consider,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan” or “will,” and similar expressions or variations. Actual events or results may differ materially from those expressed or implied by these statements due to various factors, including but not limited to the matters discussed below, in the section titled “Item 1A. Risk Factors,” and elsewhere in this Annual Report on Form 10-K. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Examples of forward-looking statements include statements regarding:

·

any expectation of earnings, revenues or other financial items;

·

any statements of the plans, strategies and objectives of management for future operations;

·

any statements related to our ability to forecast demand for our services;

·

statements related to competition;

·

factors that may affect our operating results and business;

·

statements related to security of our product offerings and customer information;

·

statements related to enhancements of existing services and our growth;

·

our anticipated cash needs and our estimates regarding our operating and capital requirements and our needs for additional financing;

·

our disclosure controls and procedures;

·

statements related to intellectual property;

·

statements related to legal proceedings;

·

statements related to recruiting and retaining employees;

·

statements related to future capital expenditures;

·

statements related to future economic conditions or performance;

·

statements as to industry trends;

·

statements related to our and our disbursement partners’ ability to comply with current and future regulations;

·

statements related to the impacts of the business e-mail compromise fraud loss we experienced in December 2014;

·

statements related to our stock; and

·

other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing.

We caution you that the foregoing list may not contain all the forward-looking statements made in this Annual Report on Form 10-K.

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Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-looking statements contained in this Annual Report on Form 10-K are based on information available to us as of the filing date of this Annual Report on Form 10-K and our current expectations about future events, which are inherently subject to change and involve risks and uncertainties. You should not place undue reliance on these forward-looking statements.

We do not undertake any obligation to update any forward-looking statements in this report or in any of our other communications, except as required by law. All such forward-looking statements should be read as of the time the statements were made and with the recognition that these forward-looking statements may not be complete or accurate at a later date.


Unless the context requires otherwise, we are referring to Xoom Corporation and its subsidiaries when we use the terms “Xoom,” the “Company,” “we,” “our” or “us.”

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PART I

Item 1.Business

Company Overview

Xoom is a leader in the digital consumer-to-consumer international money transfer industry. Our customers use Xoom to send money to and pay bills for family and friends around the world. We offer money transfer services from the United States to 32 countries and our cross-border bill payment services from the United States to five countries. 

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

At Xoom, we earn and maintain our customers’ trust by providing a high level of service through convenient, fast and cost-effective money transfer and bill payment services. Xoom’s services are initiated online or through a mobile device and can be sent at any time, from any Internet-enabled location. Our service is accessible in multiple languages and both new and repeat customers enjoy a fast and easy transaction process, with the ability to sign up and send transactions within minutes.

Our ability to provide our customers with convenient, fast and cost-effective services relies on our proprietary technology which, combined with our risk management capabilities and global disbursement network, constitute our operating platform. Our technology enables easy-to-use online and mobile sender interfaces, effective risk management and seamless integration with our disbursement partners’ systems. Our risk management capabilities allow us to proactively balance a low-friction customer experience with effective loss mitigation and regulatory compliance. We have built extensive partnerships with major banks, leading retailers, utility providers and aggregators that form our global disbursement network across 32 countries and deliver a high quality of service through regionally recognized, trusted brands.

During 2014, we enhanced our customer experience and expanded our reach in the communities we serve, including with the following initiatives:

·

Business Acquisition – We acquired BlueKite, LTD, a  British Virgin Island business company, which is a Guatemala-based developer of solutions and applications for cross-border bill payment and mobile phone reload services. We launched a development center in Guatemala City to augment our San Francisco product and development teams.

·

New Market Expansion – We introduced our money transfer service to Vietnam, a market that is relatively underserved in online money transfer services, to enable our customers to send bank deposits in a secure, fast and cost-effective way. In January 2015, we introduced our money transfer service to China, one of the top four remittance-receiving countries globally, according to the World Bank.

·

New Product Expansion – We introduced Xoom Bill Pay, our cross-border bill payment service through which our customers can pay their family and friends’ bills online. We launched Xoom Bill Pay to major utility providers in five countries.

·

Mobile Product Enhancement – We introduced a major upgrade to the Xoom App which now allows Xoom customers, including new users, to sign up and send money to both new and existing money transfer recipients from their mobile devices.

·

New and Enhanced Services to India – We launched a partnership with HDFC Bank Limited to provide instant deposit services to rupee-denominated HDFC Bank accounts in India. We also introduced 

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instant bank deposit services to Punjab National Bank accounts in India, and enhanced our partnership with Punjab National Bank to provide instant bank deposit services to many prominent banks in India using the Immediate Payment Service platform: Punjab National Bank, ICICI Bank, Kotak Mahindra Bank, Union Bank of India, Bank of Baroda, Federal Bank and Yes Bank.

·

New and Enhanced Partnerships – We introduced instant deposit to all Metrobank and Philippine National Bank accounts in the Philippines, which, in addition to Xoom’s instant bank deposit service to Banco de Oro, or BDO, provides Xoom customers the ability to instantly send money directly into their recipients’ accounts at three of the top five banks in the Philippines. We also launched our partnership with Banco Popular Dominicano, a Dominican Republic bank, through which Xoom customers can deposit to the bank’s accounts, usually in less than 15 minutes. The partnership also expands Xoom’s cash pickup network on the island to 576 locations.

We believe we are changing the way consumers transfer money and pay bills around the globe by changing their habits and preferences. The value proposition we offer our customers has allowed us to reach over one million active customers in 2014. The quality of service provided by our operating platform has driven customer loyalty, resulting in a meaningful increase in gross sending volume, or GSV. GSV increased from $1.7 billion for 2011 to $6.9 billion for 2014, representing a 59% CAGR. GSV increased from $301.7 million for the three months ended March 31, 2011 to $1.8 billion for the three months ended December 31, 2014. We experience seasonal fluctuations in our business, as described elsewhere in this report.

In prior reporting periods, we have disclosed both our “active customers,” defined as the number of customers who have sent at least one transaction through Xoom during a trailing twelve month period; and “new customers,” defined as those customers who have sent their first ever transaction with Xoom in a given period. We have also disclosed cost per acquisition of a new customer, calculated as our direct marketing cost divided by the number of new customers in a given period.

Our business strategy and marketing efforts are designed to drive growth among all customers within our customer base, which includes investment to attract new customers, retain active customers, increase the number of transactions sent by active customers and re-activate inactive customers. We forecast revenue based on projected growth of our active customer base and our marketing spend targets our entire customer base and is designed to attract new customers and previously inactive customers, and to retain current customers.

As we launch new products and services, such as Xoom Bill Pay, a new customer in any given period may have sent their first transaction with us through any of our then-current product offerings. In addition, previously inactive customers who transacted with us at least once and then return to transact with us for the first time in more than twelve months are steadily contributing to the growth of our active customer base, and are therefore increasingly important to our business. Because such customers have transacted with us before, they do not fall within our definition of “new customers.” These customers are referred to as “win-backs” in the graph below. Due to the importance of this segment within our active customer base, and to properly reflect the importance of both new customers across products and win-backs to our business, we refer to the sum of these two groups of customers as “gross additional customers.”

Management views the number of gross additional customers as a key driver of business growth and revenue, and believes that disclosing the number of our gross additional customers provides an accurate reflection of our business strategy and marketing efforts. We have therefore also disclosed the cost per acquisition of a gross additional customer in this Annual Report on Form 10-K, and will report both gross additional customers and cost per acquisition of a gross additional customer in subsequent reporting periods. New customers will be included within the number of gross additional customers, and new customers and cost per acquisition of a new customer will no longer be disclosed separately. These changes are more fully described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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Picture 1    Picture 7

We generate revenue from transaction fees charged to customers, and from foreign exchange spreads on transactions where the payout currency is other than U.S. dollars. We charge a $2.99 transaction fee for bill payments and our money transfer service fees generally vary by country, type of funding source, disbursement currency and send amount, but do not vary by method of disbursement, how the transaction was initiated (via computer or mobile device) or the location of the customer. Our foreign exchange revenue is derived from the difference between our cost to buy local currency and the price at which we sell the currency, referred to as our foreign exchange spread. Our foreign exchange spreads vary by country, but have typically ranged from approximately 1% to 3% of a transaction’s principal send amount. We believe our business model is often characterized by predictable and recurring revenue from our large and growing base of new and repeat customers. In addition, our business model yields attractive per unit economics; over a 36 month period we estimate that, for a gross additional customer acquired today for $47 in marketing expense, we will generate $270 of revenue and $193 of gross profit.

Industry Overview

The market for global money transfer is large and growing. Developing countries largely remain the top recipients of global remittances. The top four remittance-receiving countries – India, China, the Philippines and Mexico – are projected to collectively receive an estimated annual volume of over $187 billion in 2014 according to the World Bank.

Traditionally, the global money transfer market has been highly fragmented. It is served by a few large players, many small regional players, traditional banks and informal person-to-person money transfer providers that evade regulation. The large industry players primarily service senders who fund with cash, which requires maintaining an extensive network of agents in the United States and the associated physical infrastructure, including significant infrastructure in receiving locations. We consider ourselves a leader in the cross-border bill payment services market. Our business model allows us to provide our customers with cost-effective money transfers and bill payments because we do not pay originating agent commissions and the majority of our transactions are funded directly from bank accounts, which lowers our cost of sales.

With the widespread consumer adoption of digital channels and a steady proportion of the banked population among the foreign-born community in the United States, we believe we are disrupting the traditional forms of money transfer and cross-border bill payment with our services which provide a convenient, fast and cost-effective way to send money.

Our Solutions

Our solutions are designed to offer customers a convenient, fast and cost-effective way to send money to and pay bills for family and friends at any time, from any Internet-enabled location. Our operating platform

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allows us to provide innovative solutions to the challenge of transferring funds internationally, as described below.

Origination. All Xoom transactions originate online, without the costs or inconvenience of initiating a transaction at a physical agent location or bank. Our services are available over the Internet or through a mobile device on our website at www.xoom.com or through our mobile application.

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

Disbursement. Our money transfer service is offered from the United States to 32 countries, including many major recipient countries, such as India, Mexico and the Philippines. Our customers can pay bills in five countries, including Mexico. Our bill payment service facilitates electronic payments to utility providers, allowing our customers to pay bills owed by their family and friends. Money transfer recipients accept money in the manner they prefer and to which they are individually or culturally accustomed. Xoom’s money transfer disbursement options include direct deposit into a recipient’s bank account in all countries we serve, cash pick-up at our disbursement partner locations in most countries we serve or home delivery of cash in the Dominican Republic and the Philippines. Direct deposit recipients enjoy fast deposits through the direct integration of Xoom’s platform with each of its bank-to-bank partners and cash pick-up recipients can pick up cash at retail outlets and banks generally within seconds or minutes. With home delivery, recipients can enjoy the convenience of receiving cash directly at their doorstep. The quality of our disbursement partners make us a trusted source of money transfers in particular because money transfer customers are typically already familiar with their chosen disbursement partner and recipients feel comfortable receiving money where they regularly bank or shop.

Transaction Processing. We provide a high level of risk management, compliance and regulatory oversight and customer service. From the inception of a transaction, our platform enables us to quickly and seamlessly assess the transaction’s risk profile without introducing undue friction into the customer experience. We test each transaction for compliance, anti-money laundering, acceptable use, anti-fraud and funding risk within seconds. We also have 24/7 expert human oversight to monitor transaction traffic and identify and mitigate risks as they develop. Additionally, our multi-lingual customer service operations provide 24/7 support for both our customers and disbursement partners. Online and telephone support addresses customer inquiries, real-time transaction status updates, technical issue resolution, social media support, information verification, collections, internal processing monitoring and complaint resolution. We believe our strong risk management, combined with our high level of customer service, is reflected in our consistently low transaction loss rates and compelling value proposition. Our transaction loss rates have been 35 basis points or lower as a percentage of GSV on an annual basis since 2010.

Technology and Development

We intend to aggressively grow our business by continuing to invest in our technology platform and enhancing our services. We develop many of our products and services internally. We have been granted one patent for a feature of our electronic payment processing system and have four patent applications and one provisional patent application on file with the U.S. Patent and Trademark Office that relate to various aspects of our products and technology. We continue to make substantial investments in updating our technology platforms. We expect to focus our future research and development efforts on enhancing existing products and services and on developing new products and services, including enhanced mobile capabilities, introduction of a mobile phone reload service through which senders can add value to their recipients’ prepaid mobile phones

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and expansion into new international markets for all products. Our research and development expense, which is included in technology and development expense in our consolidated financial statements was $28.5 million, $17.6 million and $12.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Our Technology Platform

Our technology platform, developed over the last twelve years, enables us to process transactions safely and securely, while complying with applicable money transfer regulations and minimizing fraud. We use a combination of proprietary technology and open source solutions. Our technology platform includes:

·

A customer interface which allows customers to send transactions from our website, mobile website, or mobile application quickly and easily, using a computer, a tablet or a mobile phone;

·

A proprietary risk management system that helps us manage the primary risk challenges our business confronts, including ACH returns on instant ACH transactions, payment and fraud risk, anti-money laundering and regulatory compliance and acceptable use concerns by using predictive artificial intelligence models, inline real-time rules engines, granular controls, 24/7 expert oversight, sending limits, and comprehensive searching to link related accounts;

·

A proprietary transaction processing platform which allows us to send money seconds after our customer has authorized a transaction, either from a customer’s bank account through the ACH network, or from a customer’s credit or debit card; and

·

A proprietary disbursement integration platform which securely integrates our systems directly with those of our disbursement partners, so that we can deliver money quickly to a utility provider, a recipient’s bank account or to one of our disbursement partners for cash pick-up or delivery. 

 

We will continue to invest in delivering technologies that improve our customer experience and the safety and security of our customers’ transactions. We designed our technology platform to handle traffic well in excess of expected peaks and to scale efficiently and easily with the addition of new servers. We incurred $37.0 million, $22.5 million and $16.0 million in technology and development expenses for the years ended December 31, 2014, 2013 and 2012, respectively.   

Our Mobile Strategy

We launched our mobile strategy in November 2011 and our mobile application in mid-2013. We believe that, on average, customers sending money transfer transactions with mobile devices typically send more money in a given period as compared to similar customers who send money transfer transactions using only desktop computers. We also believe that our mobile solutions help us retain active customers. In 2014, 50% of our transactions were sent via mobile devices compared to 35% in 2013. In the fourth quarter of 2014, 55% of our transactions were sent via mobile devices. We believe this percentage will continue to increase over time as mobile devices become more popular, particularly among people whose only Internet access is via mobile device. During 2014, approximately $2.3 billion of our gross sending volume was sent from mobile devices which represented growth of approximately 90% compared to 2013. Our mobile application, the “Xoom App,” is simple to use and allows customers to sign up and send money and track the status of their transactions. Existing customers are able to send money in seconds with “one tap and one swipe.” We will continue to optimize our services for mobile devices to capitalize on the continued and growing trend in mobile usage. Our quarterly mobile device usage as a percentage of overall transactions since we launched our mobile strategy in November 2011 was as follows:

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Transactions

Picture 4


*We launched our mobile strategy in November 2011.

Marketing and Corporate Development 

We market our services to customers through a variety of channels including television, radio, online and mobile advertisements, social networks and incentive programs such as our Refer-A-Friend program and other targeted promotions. Our marketing program has been fine-tuned through years of continuous improvement and experience, yielding an attractive return on investment and customer lifetime value, or CLV.

Our corporate development team identifies and works with disbursement partners that will allow us to offer our customers the most convenient network of prominent banks, retailers with well-recognized brands and utility providers in the countries we serve. We continuously work with our disbursement partners to improve quality and reduce costs.

Customer Support

We believe that effective customer support is critical to attracting new customers and retaining existing customers. Our customer operations group handles a range of customer experience management areas, including inbound customer calls and emails, partner and internal processing system monitoring, complaint resolution, customer verification and collections.

Our customer support organization provides support to customers including by email, telephone and via a comprehensive set of frequently asked questions on our website. We have two outsourced support centers, one in the Philippines and one in El Salvador, allowing us to serve our customers around the clock in multiple languages.

Regulation

Our services are subject to a wide range of laws and regulations enacted by the U.S. federal government, each of the states in the United States, many localities and many other countries and jurisdictions. These include international, federal and state anti-money laundering laws and regulations; financial services regulations;

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currency control regulations; anti-bribery laws; regulations of the U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC; money transfer and payment instrument licensing laws; escheatment laws; privacy, data protection and information security laws; consumer disclosure and consumer protection laws; and rules, laws and regulations including those governing credit and debit cards, electronic payments and competition. We process all transactions to India via the Reserve Bank of India’s rupee drawing arrangement, or RDA, and are therefore also subject to applicable Indian regulations and reporting requirements.

We continually enhance our business practices and strategies and compliance programs, including our anti-money laundering program, which comprises policies, procedures, systems and internal controls to monitor and to address various legal and regulatory requirements and evolving industry practices. Our programs include dedicated compliance personnel, training and monitoring programs, suspicious activity reporting, regulatory outreach and education, and support and guidance to our disbursement partners concerning regulatory compliance. Our money transfer and bill payment networks operate through third-party disbursement partners in most countries, and, therefore, there are limitations on our legal and practical ability to manage those disbursement partners’ compliance programs. See “Risk Factors” for additional discussion regarding potential impacts of our disbursement partners’ failure to comply.

Anti-Money Laundering Compliance. Our services are subject to anti-money laundering laws and regulations of the United States, including the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, or the Bank Secrecy Act, as well as similar state laws and regulations and the anti-money laundering laws and regulations in many of the countries in which we or our disbursement partners operate.

U.S. Sanctions. We are required to remain in compliance with the sanctions laws and regulations administered by OFAC and may be required to remain in compliance with sanctions regimes established in certain countries in which we or our disbursement partners operate.

Money Transfer Licensing. Most states in the United States require us to be licensed to process transactions for their residents. To date, we have obtained money transmitter licenses in 46 U.S. states, the District of Columbia and Puerto Rico, and have applied, or plan to apply, for money transmitter licenses in additional jurisdictions. Our subsidiary, buyindiaonline.com Inc., was previously licensed in both India under the Money Transfer Service Scheme, or MTSS, and in the state of Delaware and retired its license in both jurisdictions as of September 30, 2014 and December 31, 2014, respectively. We and buyindiaonline.com Inc. are also registered as money services businesses with the U.S. Department of the Treasury Financial Crimes Enforcement Network, or FinCEN, although we do not expect to renew buyindiaonline.com Inc.’s license upon its expiration in 2015.

Recent Federal Legislation in the United States. Regulations implementing the Dodd-Frank Act have imposed additional regulatory requirements upon us. The Dodd-Frank Act created the Consumer Financial Protection Bureau, or the CFPB, which issues and enforces consumer protection initiatives governing financial products and services, including money transfer services, in the United States.

Privacy Regulations. In the ordinary course of our business, we collect certain types of data that subject us to privacy laws in the United States and abroad. In the United States, we are subject to the Gramm-Leach-Bliley Act, which requires that financial institutions have in place policies regarding the collection, processing, storage and disclosure of information considered nonpublic personal information. Many states in the U.S. and other countries where we operate have adopted similar laws.

Competition & Our Competitive Strengths

The markets in which we compete are highly competitive and are highly fragmented. However, we believe we have competitive strengths that position us favorably in our markets, including the convenience, speed and competitive cost of our services; our proprietary risk management system which balances a low-friction customer experience with low transaction loss rates; an online transaction origination model which

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affords us valuable insight into customer behavior as a result of the transaction-related data we collect for each transaction; our marketing expertise; our established global disbursement capabilities; and our efficient regulatory compliance.

Our largest competitors are The Western Union Company and MoneyGram Payment Systems, Inc. We also compete against country-specific money transfer and cross-border bill payment players, banks and informal person-to-person money transfer service providers that evade regulation. In the future, new competitors or alliances among established companies may emerge.

Intellectual Property

The Xoom brand is important to our business. We utilize trademark registrations in the United States and internationally to protect our brand. We rely on a combination of patent and trademark laws, trade secret protection and confidentiality and license agreements to protect the intellectual property rights related to our services, all of which offer only limited protection. In addition, we have been granted one patent for a feature of our electronic payment processing system and have four patent applications and one provisional patent application on file with the U.S. Patent and Trademark Office.

We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with employees, consultants, partners, vendors and customers. However, policing unauthorized use of our technologies, services and intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. We may be unable to determine the extent of any unauthorized use or infringement of our services, technologies or intellectual property rights.

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

Employees

As of December 31, 2014, we had 295 full-time employees. We also rely on outsourcing for our support centers and other operational support. None of our employees is represented by a labor union or covered by a collective bargaining agreement. We have not experienced any work stoppages and we consider our relations with our employees to be good.

Geographic Information

For a description of our revenue and long-lived assets by geographic location, see Note 3 of the Notes to our consolidated financial statements included elsewhere in this Annual Report.

Corporate Information

We were incorporated in California in June 2001 and reincorporated into Delaware in November 2012. Since our inception we have provided digital consumer-to-consumer money transfers. From 2003 to 2005, we also offered other services within the money transfer business. From 2006 to 2014, we chose to focus solely on providing digital consumer-to-consumer international money transfers. In 2014, we introduced our cross-border bill payment service. Our principal executive office is located at 425 Market Street, 12th Floor, San Francisco, CA 94105. Our telephone number at our principal executive office is (415) 777-4800.

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

Available Information

We are subject to the information and periodic reporting requirements of the Exchange Act, and, in accordance with such requirements, file periodic reports, proxy statements, and other information with the Securities and Exchange Commission, or the SEC. These periodic reports, proxy statements, and other information are available for inspection and copying at the regional offices, public reference facilities, and web site of the SEC referred to below. We also maintain a website at http://www.xoom.com. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

A copy of any materials filed by us with the SEC may be inspected without charge at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549, and copies of all such materials may be obtained from the SEC, upon payment of the prescribed fee. Information on the operation of the public reference facilities may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov.

The contents of the websites referred to above are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only.

 

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Item 1A.Risk Factors

A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider such risks and uncertainties, together with the other information contained in this report, and in our other public filings. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.

Risks Related to Our Business

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

Since our inception, we have incurred significant operating losses and, as of December 31, 2014, we had an accumulated deficit of $83.4 million. Although our revenue has grown rapidly, increasing from $32.8 million in 2010 to $159.1 million in 2014, we expect that our revenue growth rate will decline in the future as a result of a variety of factors, including the maturation of our business, increased competition and the gradual decline in the year-over-year percentage growth of gross additional customers. You should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. We also expect our costs to increase in future periods as we continue to expend substantial financial resources on, among other things:

·

business development and marketing;

·

technology infrastructure;

·

service and feature development and enhancement;

·

international expansion efforts; and

·

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

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

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

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

·

retain an active customer base and attract new customers;

·

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

·

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

·

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

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·

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

·

comply with extensive existing and new laws and regulations;

·

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

·

successfully deploy new or enhanced features and services;

·

compete with other companies that are currently in, or may in the future enter, the digital money transfer or cross-border bill payment business;

·

hire, integrate and retain world-class talent; and

·

expand our business into new sending and receiving countries.

If the market for our services does not develop as we expect, or if we fail to address the needs of this market, our business will be harmed. We may not be able to successfully address these risks and challenges, including those described elsewhere in these risk factors. In the event that demand for our services weakens, including due to declines in customer transactions or the amount of money sent by customers per transaction, our business and results of operations may be harmed. Failure to adequately address these risks and challenges could harm our business and results of operations.

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

We must continually attract new customers and retain existing customers in order to grow our business. Our ability to do so depends in large part on the success of our marketing efforts, our ability to enhance our services and our overall customer experience, to keep pace with changes in technology and our competitors and to expand our marketing partnerships and disbursement network. If we are unable to continue to adapt our services in ways that improve customer experience, meet our customers’ expectations and attract new customers, our revenue and business may be negatively impacted.

We believe that continuing to strengthen the XOOM brand is critical to achieving and maintaining widespread acceptance of our services, and will require a continued focus on active marketing efforts. We will continue to spend substantial amounts of money on, and devote substantial resources to, advertising, marketing and other efforts to create and maintain brand loyalty among users. Brand promotion activities may not yield increased revenues immediately or at all, and even if they do, any increased revenues may not offset the expenses incurred in building our brand. If we fail to promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, our business would be harmed.

We spent $32.7 million on marketing and $37.0 million on technology and development in 2014, and we expect to continue to spend significant amounts to acquire new customers and to keep existing customers loyal to our service. We cannot assure you that the revenue from customers we acquire will ultimately exceed the marketing and technology and development costs associated with acquiring these customers. We may not be able to acquire new customers in sufficient numbers to continue to grow our business due to macroeconomic factors including exchange rate fluctuations, increased competition, new regulations or other factors, or we may be required to incur significantly higher marketing expenses in order to acquire new customers. In the event that we reduce our marketing in any given period, whether in response to higher marketing expenses or otherwise, we may suffer a decline in new customer growth in that period or subsequent periods. For example, we reduced our television advertising during the 2014 World Cup due to increased advertising costs during that time, which reduction may have impacted new customer growth in the third quarter of 2014. If the level of usage by our existing customers declines or does not continue as expected, we may suffer a decline in customer growth or revenue. In addition, our marketing efforts may fail to attract or retain customers. As we continue to

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work with endorsers to promote our business, negative publicity about our endorsers or a failure to enter into cost-effective endorsement arrangements could harm our reputation. A decrease in the level of usage or customer growth would harm our business and revenue.

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

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

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

We spent $32.7 million on marketing in 2014 and expect to continue to spend significant amounts to acquire additional customers and keep existing customers loyal to our service, primarily through offline and online advertising and marketing promotions. Our decisions regarding investments in customer acquisition are based upon our analysis of the revenue we have historically generated per customer over the expected lifetime value of the customer. Our analysis of the revenue that we expect a customer to generate over his or her lifetime depends upon several estimates and assumptions, including whether a customer will send a second transaction, whether a customer will send multiple transactions in a month, the amount of money that a customer sends in a transaction and the predictability of a customer’s sending pattern. Our experience in markets in which we presently have low penetration rates may differ from our more established markets.

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

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

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

·

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

·

relative rates of customer acquisition;

·

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

·

exchange rate fluctuations;

·

changes in our pricing policies or those of our competitors;

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·

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

·

the number of customer transaction refunds in a given period;

·

the number of fraudulent transactions in a given period;

·

the success rate of recovering failed or insufficient transaction funding;

·

bank holidays in foreign markets;

·

draw downs on our line of credit; and

·

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

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

Our revenue and profitability could be harmed and fluctuate period-to-period due to changes in foreign exchange rates and other risks related to foreign exchange.

We have seen increased money transfer volume if the U.S. dollar strengthens against certain currencies. Conversely, we have seen decreased money transfer volume if the U.S. dollar weakens against certain currencies. In particular, we experience abrupt changes in money transfer volume to India when the U.S. dollar strengthens or weakens against the Indian Rupee. As foreign exchange rates vary, revenue and other results of operations may differ materially from expectations. We have in the past and may in the future experience significant volatility in foreign exchange rates which we believe has resulted in short-term increases in transactions and gross sending volume. We may not be able to predict how perceptions of foreign exchange rates will influence customer behavior. It is possible that customers may choose not to send transactions, or not to send as much money per transaction, after a period of particularly high sending activity. This uncertainty may make it more difficult to forecast revenue and results of operations.

We generate a substantial portion of our revenue from foreign exchange spreads on transactions where the payout currency is other than U.S. dollars. We typically purchase foreign currency each business day on an as-needed basis and evaluate and reset our foreign exchange spread as necessary. Our revenue may be reduced if we incorrectly set our foreign exchange spread. Our revenue also could be reduced in certain instances when customers initiate transactions in a foreign currency that we have not yet purchased. In such instances, if the foreign exchange rate changes materially between the time that a customer initiates a transaction and the time that we purchase the foreign currency, then our revenue could be reduced and our profitability harmed. Our revenue also could be reduced and our profitability harmed if the foreign exchange rate changes between when we purchase our foreign currency and when we sell the foreign currency. In that case, we may reduce our spread to remain competitive or keep our spread the same but lose transaction volume because our exchange rates are viewed as uncompetitive. In addition, foreign exchange rates could become regulated by either U.S. or foreign governments and such governments could implement new laws or regulations that limit our right to set foreign exchange spreads. We may not be able to comply with such regulations and such regulations could harm our business. For example, regulations implemented in 2014 by the Central Bank of Honduras, or the CBH, require that purchases of foreign exchange be made at the rates established by the CBH, thereby restricting our ability to generate revenue from foreign exchange spreads on money transfers sent to Honduras. We do not currently hedge our foreign currency exposure but may in the future.

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

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

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fluctuations may become more evident as our current growth may mask seasonality to some degree. Seasonality may cause our working capital cash flow requirements to vary from quarter to quarter depending on the variability in the volume and timing of money transfers. These factors, among other things, make forecasting our future business results and needs more difficult and may adversely affect our ability to manage working capital and to predict financial results accurately, which could adversely affect the market price of our common stock.

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

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

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

We have significant working capital requirements driven by:

·

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

·

regulatory requirements;

·

collateral requirements imposed on us by our Indian regulator;

·

collateral requirements imposed on us by our payment processors; and

·

collateral requirements imposed on us by our disbursement partners.

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

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

We believe that our existing cash, cash equivalents and short-term investments, available borrowing under our existing line of credit and expected cash flow from operations will be sufficient to meet our operating and capital requirements for at least the next 12 months. However, we may require additional capital to respond

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to business opportunities (including increasing the number of customers acquired or during high volume sending periods), challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings for other reasons. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to secure additional debt or equity financing in a timely manner, or at all, which could require us to scale back our business plan and operations.

We have debt obligations that could restrict our operations.

As of December 31, 2014, we had $103.1 million available borrowing capacity under our $150 million line of credit, reflecting $28.0 million outstanding under the line of credit and $18.9 million reserved under two standby letters of credit, and we may incur additional indebtedness in the future.

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

·

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

·

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

·

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

·

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

·

limiting our ability to pay dividends to our stockholders.

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

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

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

More than 70% of our total revenue in 2014 was derived from money transfers to India, the Philippines and Mexico. As a result, any limitations (regulatory or otherwise) on our ability to send money to these jurisdictions, or any economic or political instability, civil unrest, natural disasters or other similar circumstances localized in these countries could have a disproportionately harmful impact on our business, financial position and results of operations.

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

The markets in which we compete are highly competitive and are highly fragmented. Our largest competitors are The Western Union Company and MoneyGram Payment Systems, Inc. We also compete against smaller, country-specific competitors, banks and informal person-to-person money transfer service providers that evade regulation. In the future, new competitors, alliances, or consolidation among established companies may emerge, or competitors may leave the market, resulting in a changed competitive environment. Some of our competitors have longer operating histories, significantly greater financial, technical, marketing, customer service and other resources, greater name recognition, exclusive agreements or a larger base of customers in affiliated businesses than us. Our competitors may respond to new or emerging technologies, legal or regulatory changes and changes in customer requirements faster and more effectively than we do, and they could be perceived to effectively improve their products and services relative to ours. If we fail to successfully develop and timely introduce new or enhanced products and services or if we make substantial investments in an unsuccessful new product, service or infrastructure change, our business, prospects, financial condition and results of operations could be harmed. Our competitors may devote greater financial and other resources to acquire customers and to the development, promotion and sale of money transfer services, offer lower prices or better exchange rates and may negotiate exclusive deals which would reduce our opportunities. For example, our competitors have offered coupons for free money transfers and, in India, have offered better exchange rates than we have in certain periods and established no fee services. As a result, we have experienced attrition of rate-sensitive customers, particularly those customers who send money transfers to India. Competing services tied to established banks and other financial institutions may offer greater liquidity or superior foreign exchange rates and engender greater consumer confidence in the safety and efficacy of their services than ours. We expect competition to continue to intensify. This competition could result in increased pricing pressure, increased customer acquisition costs, reduced profit margins, increased sales and marketing expenses, a failure to increase our market share, or a loss of our market share, any of which could harm our business, results of operations and financial condition. There can be no assurance that growth in the digital money transfer market will continue and that competitors would not decrease our market share. We also cannot assure you that new competitors will not emerge with cross-border bill payment services that are as competitive as or more competitive than our service. If we are unable to compete effectively and continue to grow our business, our business, financial condition and results of operations could be harmed.

We may not realize the anticipated benefits of pricing adjustments, which could harm our business.

We have made, and may continue to make, periodic fee or foreign exchange pricing adjustments in response to competition, in order to better meet our customers’ needs, maximize market opportunity or strengthen our overall competitive position. The anticipated benefits of such pricing adjustments may not be realized within a certain time period or at all. If we fail to realize the anticipated benefits of pricing adjustments, our business, financial condition and results of operations could be harmed.

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

The introduction of services embodying new technologies could render our existing services and features obsolete or less attractive to customers. Other similar technologies exist or could be developed in the future, and our business could be harmed if such technologies are widely adopted. For example, widespread adoption and acceptance of new payment services and/or digital currencies by consumers, retailers, banks and national governments could threaten the relevance of our services and features to our customers and have a significant negative impact on the growth of the digital money transfer industry as a whole and our ability to be successful. In addition, new competitors may emerge in the cross-border bill payment services market that render our service less attractive to customers. We may not be able to successfully anticipate or adapt to changing technology or customer requirements on a timely basis, or at all. If we fail to keep up with technological changes

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or to convince our customers and potential customers of the value of our services even in light of new technologies, our business, results of operations and financial condition could be harmed.

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

The number of people who access the Internet through mobile devices, including mobile phones and tablets has increased significantly in the past few years and is expected to continue to increase. We believe that mobile devices provide some customers with their first sustained Internet connection, which gives them access to our digital services. Mobile devices provide us an additional channel to offer our services to new and existing customers and offer a convenient solution to send money at any time, from any Internet-enabled location. Customers can currently access our services on a mobile device through our mobile site or our mobile application. If we are not able to drive customers to our mobile solutions or acquire new customers via our mobile solutions at a rate commensurate with our historical acquisition rates on personal computers, our ability to grow our business could be harmed.

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

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

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

We have implemented a disaster recovery program, which allows us to transition our websites and data to a backup center in the event of a catastrophe. Although this program has been tested and is functional, it does not yet provide a real-time back-up data center, so if our primary data center shuts down, there will be a period of time that our websites will remain shut down while the transition to the back-up data center takes place.

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Further, some of our systems are not fully redundant, and our disaster recovery program is not sufficient for all eventualities.

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

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

·

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

·

Our funds are held by banks in the United States and abroad. During high volume sending periods, a significant portion of our available cash may be held in an account or accounts outside of the United States. Our payment processors, the commercial banks that hold our funds, our disbursement partners and the financial institutions that hold prefunding accounts for our disbursement partners or our disbursement collateral could fail or experience sustained deterioration in liquidity. This could lead to our inability to move funds on a global and timely basis as required to pay transactions and receive settlement funds, loss of prefunded balances or a breach in our regulatory capital requirements if we are unable to recover our funds;

·

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

·

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

·

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

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

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

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

If general market conditions in the United States were to deteriorate, our business could be harmed. Any uncertainty with regard to U.S. financial stability could result in credit and financial market disruptions, adversely affect our ability to access capital markets on favorable terms and harm our business and our financial results and condition. Additionally, macroeconomic or market concerns may diminish the demand for our products and services compared to historical growth rates, including due to low consumer confidence, high unemployment, or reduced global trade. If the volume of our transactions declines or international migration patterns shift due to deteriorating economic conditions, we may be unable to timely and effectively reduce our operating costs or take other actions in response, which could harm our results of operations.

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We face payment and fraud risks from our prospective customers and service providers that could harm our business, financial condition and results of operations.

More than 90% of the volume of amounts sent through Xoom in the aggregate, which we refer to as gross sending volume, is funded by bank accounts through the Automated Clearinghouse system, or ACH. Over 95% of our ACH-funded transactions are released for disbursement prior to our receiving funds from our customers, which exposes us to repayment risk. If customers have insufficient funds in their bank accounts or have closed their bank accounts and we are unable to collect the funds from customers, our revenue will decline and our business may be harmed. We also offer our customers the ability to fund transactions utilizing their credit or debit card. Because these are card-not-present transactions, they involve a greater risk of fraud. If we are unable to effectively manage our payment and fraud risks, our business may be harmed.

To minimize payment and fraud risk, several requirements must be satisfied in order for a prospective customer to use our services. A prospective customer must provide us with certain personal information, recipient information and a U.S.-based payment source which may be a bank account, credit card or debit card. All of the transaction data is then evaluated by our proprietary risk management system, which assesses the transaction for regulatory compliance, anti-money laundering, acceptable use, anti-fraud and funding risk. If the transaction is deemed to be high risk by our risk management system, then we will either hold the transaction for further screening or cancel the transaction.

Criminals are using increasingly sophisticated methods to engage in illegal or fraudulent activities. Such activity may take many forms, including unauthorized use of credit or debit cards and bank account information, check fraud, electronic fraud, wire fraud, phishing, social engineering and other illicit acts. Information security breaches may include fraudulent or unauthorized access to systems used by us or our customers, denial or degradation of service attacks, and malware or other cyber-attacks. Because we are a digital service provider, requirements relating to customer authentication and fraud detection are more complex. We may ultimately be held liable for the unauthorized use of a cardholder’s card number in an illegal activity and be required by card issuers to pay a charge-back fee. Charge-backs result not only in our loss of fees earned with respect to the payment, but also leave us liable for the underlying transaction amount. If our charge-back rate becomes excessive, card associations also may require us to pay fines. In addition, we may be subject to additional fraud risk if third-party service providers or our employees fraudulently use customer information for their own gain or facilitate the fraudulent use of such information. In general, we have little recourse if we process a criminally fraudulent transaction.

We have been in the past, and may be again in the future, the target of fraudulent activity. For the year ended December 31, 2014, our transaction loss expense totaled $13.3 million, representing 0.19% of our gross sending volume. Our transaction loss expense may increase in future quarters if our fraud systems lose effectiveness. We have taken measures to detect and reduce the risk of fraud and will continue to do so. However, as the methods and schemes utilized by perpetrators of fraud are constantly evolving or, in some cases, are not immediately detectable, we cannot assure you of these measures’ continuing effectiveness or our ability to update these measures to address future fraud risks. If these measures do not succeed, our business will be harmed.

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

There has also been increased public attention regarding the use and disclosure of personal information, and regulatory authorities around the world are considering a number of legislative and regulatory proposals

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concerning data protection and consumer privacy and other matters that may be applicable to our business. Our ability to prevent fraudulent transactions may conflict with the goal of protecting individual privacy. If federal, state or foreign governments or our disbursement partners changed the parameters regarding the customer or recipient information we are allowed to monitor and/or collect, our ability to prevent fraud might be negatively impacted, and our business could be harmed.

A failure in or breach of our operational or security systems, including cyber attacks, or those of our disbursement partners and other service providers, could harm our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.

We obtain, transmit and store confidential customer information in connection with our services. These activities are subject to laws and regulations in the United States and other jurisdictions. The requirements imposed by these laws and regulations, which often differ materially among the many jurisdictions to which we are subject, are designed to protect the privacy of personal information and to prevent that information from being inappropriately disclosed. We accordingly rely heavily on our information systems for the secure processing, storage and transmission of confidential customer and company information. Although we have developed and continue to invest in technologies, systems and processes that are designed to detect and prevent security breaches and cyber attacks and periodically test our security, we may still not be able to prevent or remedy the effects of any failure or breach. Threats to our operational and security systems may originate externally from third parties, such as foreign governments, organized crime and other hackers, outsourced or infrastructure-support providers, application developers, or the threats may originate from within our company. If a third party or an employee were to misappropriate, misplace or lose corporate information, including our financial and account information, our customers’ personal information, remittance information or our source code, our business may be harmed.

Despite any defensive measures we take to manage threats to our system, our risk and exposure to these matters remain heightened because of, among other things, the evolving nature of such threats in light of advances in computer capabilities, new discoveries in the field of cryptography, new and sophisticated methods used by criminals including phishing, social engineering or other illicit acts, or other events or developments that we may be unable to anticipate or fail to adequately mitigate. In December 2014, we determined that we were the victim of a criminal fraud known to law enforcement authorities as business e-mail compromise fraud which involved employee impersonation and fraudulent requests targeting our finance department, which resulted in the transfer of $30.8 million in corporate cash to overseas accounts. While we do not expect the fraud to have a material impact on our business, we have also borne additional expenses in connection with the remediation and investigation of the fraud. In addition, following our announcement of the fraud in January 2015, we and certain of our officers were sued in a putative class action lawsuit alleging that we violated federal securities laws by misrepresenting and/or omitting information in the offering materials distributed in connection with our initial public offering.

Threats to our systems may also increase as we expand our products and services, including our mobile services. Given the increasingly high volume of our transactions, certain errors or fraudulent transactions may be repeated or compounded before they are discovered and rectified. We may be required to expend significant capital and other resources to protect against any future security breaches or losses or to alleviate problems caused by these breaches or losses. Our disbursement partners and third-party contractors also may experience security breaches involving the storage and transmission of our data. If third parties gain improper access to our systems or databases or those of our disbursement partners or contractors, they may be able to steal, publish, delete or modify confidential customer information. A security breach could result in monetary losses to us or our customers, our inability to expand our business, additional scrutiny and fines or penalties from regulatory or governmental authorities, damage to our reputation, loss of customers and customer confidence in our services, exposure to civil litigation, including as discussed above, a breach of our contracts with lenders or

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other third parties, a decline in our stock price, loss of investors, or may subject us to liquidity risks, or jeopardize our relationships with our financial services providers including payment processors and disbursement partners, and other third parties, all which could harm our business, financial condition and results of operations.

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

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

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

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

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

Our payment network consists of payment processors and disbursement partners. Payment processors clear and process the funds from the customer to us. We rely on U.S. banks and card processors to provide clearing, processing and settlement functions for the funding of all of our transactions. Disbursement partners disburse funds to our customers’ recipients, and, in the case of our bill payment service, to utility providers. We also rely on a network of major banks and leading retailers to disburse funds to our customers’ recipients in 32 countries. In addition, our disbursement partners may operate their own network of disbursement partners, which we refer to as sub-disbursement partners, with which we may not have a direct relationship.

While we have entered into non-exclusive agreements with each of our payment processors and disbursement partners, our payment processors and disbursement partners could choose to terminate or not renew their agreements with us or disbursement partners could choose to terminate sub-disbursement partners. A sub-disbursement partner could also choose to terminate its relationship with our disbursement partner or with us. In addition, our payment processors and disbursement partners may require amendments to the terms of the agreements we currently have in place, which may increase our costs and affect our profitability. Payment processor, disbursement partner and sub-disbursement partner attrition or contractual amendments might occur for a number of reasons, including such payment processor’s, disbursement partner’s or sub-disbursement partner’s dissatisfaction with the relationship or the revenue derived from the relationship, changes in the law or changes or perceived changes in the regulatory environment. In the case of a disbursement partner, a competitor may engage a disbursement partner on an exclusive basis, offer greater financial incentives, or cause less attention to be provided to us. If we are unable to maintain our agreements with current payment processors and disbursement partners, or if our disbursement partners are unable to provide satisfactory hours of operation in their network or an adequate number of money transfer disbursement locations, our ability to disburse transactions and our revenue and business may be harmed. In India, for example, in the event that our or our disbursement partner’s use of the Immediate Payment Service, or IMPS, platform to process money transfer 

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transactions were curtailed or hindered, for regulatory reasons or otherwise, our ability to process bank deposits to accounts in India at desired service levels may be negatively impacted and our business may be harmed.

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

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

We may also be forced to either amend the terms under which we do business, or cease doing business with payment processors if card association operating rules, certification requirements and rules governing electronic funds transfers to which we are subject change or are reinterpreted to make it difficult or impossible for us to comply. Such amendments to the terms under which we currently do business may increase our costs and adversely affect our profitability. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from customers or facilitate other types of online payments, and our business and operating results could be harmed.

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

We have experienced rapid growth in our headcount and transaction volume, which places substantial demands on our management and operational infrastructure. Our headcount grew from 150 employees at December 31, 2012 to 295 employees at December 31, 2014. Additionally, we may not be able to hire new employees quickly enough to meet our needs. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, while maintaining the beneficial aspects of our company culture. If we fail, our efficiency and ability to meet our forecasts and our employee morale, productivity and retention could suffer, and our business and operating results could be harmed. 

Our gross sending volume increased over 302% from $1.7 billion in 2011 to $6.9 billion in 2014. We will need to continue to improve our operational, financial and management controls, and our reporting systems and procedures in order to manage this growth. If we do not manage the growth of our business and operations effectively, the quality of our services and efficiency of our operations could suffer, which could harm our brand, results of operations and business.

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

We are exploring opportunities to expand our operations into new markets abroad by both increasing the number of countries to which customers can send transactions and also increasing the number of countries where transactions can originate. As described elsewhere in these risk factors, we face intense and continuing competition. Our continued growth depends on our ability to expand into new origination and recipient markets. If we encounter difficulties or delays in doing so, but our competitors are successful early entrants into new markets, our competitors may obtain a competitive advantage that could lead to our inability to increase market share and/or preclude us from entering those markets at all, which could harm our business, financial condition

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and results of operations. In addition, any future expansion into new markets could place us in unfamiliar competitive environments and involve various risks, including incurring losses or failing to comply with applicable laws and regulations. Such expansion would also require significant resources and management time, and there is no guarantee that, after expending such resources and time, we will receive the necessary approvals to operate in such new markets. If we are ultimately granted authority to operate in such new markets, it is possible that returns on such investments will not be achieved for several years, if at all. There is no guarantee that our business model will be successful in a new market, that we could maintain profit margins in these new markets or that international expansion would help grow our business. For example, we recently launched money transfer services to China and may face unanticipated obstacles which may render our China services ineffective, unprofitable, or vulnerable to fraud and payment risks at levels that are unacceptable. As described elsewhere in these risk factors, we may also face unanticipated regulatory scrutiny, including scrutiny of our disbursement partners, which may thwart our success in China, or in any other new market. We have offered money transfer services to China in the past but ceased to do business there due to unanticipated challenges, and we cannot assure you of a successful re-entry into the market. If we are unable to successfully expand our operations into new markets, our future growth rates may be harmed.

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

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

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

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

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

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

Our payment processors and disbursement partners have experienced service outages or an inability to connect with our processing systems and this may reoccur in the future. If a payment processor experiences a service outage or service interruption that results in our being unable to collect funds from customers, our liquidity could be harmed and we may not meet our capital requirements. We do not directly access the ACH system or payment card networks such as Visa and MasterCard, which systems enable our acceptance of bank account-funded transactions, credit cards and debit cards. As a result, we rely on banks and other payment processors and disbursement partners to process transactions. In the event of service outages in the payment card or ACH networks, or if our payment processors or disbursement partners were unable to access the payment card or ACH networks, our business would be harmed.

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

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

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

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

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

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

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

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

·

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

·

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

·

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

·

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

·

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

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

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

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

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

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jeopardize our ability to use online advertising to promote our brands in a cost-effective manner, or at all, would harm our business. Our website has experienced fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of persons directed to our website would harm our business.

We market certain levels of service to our customers, including advertisements regarding the speed of our service. If we fail to meet the advertised levels of service, our business could be harmed.

Our direct-to-consumer marketing may include certain claims, both direct and implied, regarding the quality of our services. For example, we have deployed advertising for our India business in which we say we are able, within certain timeframes, to deposit money into recipients’ accounts within four hours, and in some cases, instantly. If we are unable to meet the claims made in our advertisements and our marketing, or if those claims are found to be misleading, we may alienate or lose credibility with our customers, and we may attract legal or regulatory scrutiny, including under the Federal Trade Commission Act, and/or the CFPB Final Remittance Rule, as described elsewhere in these risk factors. New or existing customers may seek other services and may not return to our services as often in the future, or at all. This would harm our ability to attract new customers and could decrease the frequency with which current customers use our service, which would be harmful to our business and our revenue.

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

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

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

We have in the past and may in the future bring a claim against third parties alleging infringement of our intellectual property rights. If any of our future claims are unsuccessful, and one or more infringing products are commercially successful, then this could diminish the value of our brand, adversely affect our ability to market our services, and our business could be harmed. We may be required to spend resources to defend such claims or to protect and police our own rights. Some of our intellectual property rights may not be protected by intellectual property laws, particularly in foreign jurisdictions. The loss of our intellectual property protection, the inability to secure or enforce intellectual property protection or to successfully defend against claims of intellectual property infringement could harm our business.

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

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

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

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

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

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

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

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

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

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

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

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

We provide money transfer services to 32 countries and territories and cross-border bill payment services to five countries and may expand into additional sending and receiving countries. Our ability to grow in international markets could be harmed by a number of factors, including:

·

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

·

restrictions on transactions to or from certain countries;

·

currency control and repatriation issues;

·

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

·

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

·

the implementation of U.S. sanctions, which could result in, among other things, prohibitions against doing business in certain countries or with certain financial institutions abroad, bank closures in certain countries and the freezing of our assets;

·

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

·

failure to manage fraud or payment risks at acceptable levels;

·

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

·

reduced protection of our intellectual property rights;

·

unfavorable tax rules, additional taxes to which we are or may become subject or trade barriers;

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inability to secure, train or monitor disbursement partners; and

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

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

The CFPB’s Final Remittance Rule became effective in the United States in October 2013 and it imposes additional disclosure and other responsibilities on us as described elsewhere in these risk factors.

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

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

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

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

Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, California rolling blackouts, telecommunication failures, terrorist attacks, cyber attacks, computer viruses, computer denial-of-service attacks, human error, hardware or software defects or malfunctions (including defects or malfunctions of components of our systems that are supplied by third-party service providers), and similar events or disruptions. Our U.S. corporate offices and one of the facilities we lease to house our computer and telecommunications equipment are located in the San Francisco Bay Area, a region known for seismic activity. Our outsourced support centers, at which a variety of business activities are conducted including providing customer support, customer verification and collections, are located in the Philippines and El Salvador, which locations are also known for seismic activity and natural disasters. Despite any precautions we may take, system interruptions and delays could occur if there is a natural disaster, if a third-party provider closes a facility we use without adequate notice for financial or other reasons, or if there are other unanticipated problems at our leased facilities. As we rely heavily on our servers, computer and communications systems and the Internet to conduct our business and provide high-quality customer service, such disruptions could harm our ability to run our business, impede our employees’ ability to conduct business activities whether at our leased facilities or from a remote location, and cause lengthy delays which could harm our business, results of operations and financial condition. We currently are not able to switch instantly to our

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back-up center in the event of failure of the main server site. This means that an outage at one facility could result in our system being unavailable for a significant period of time. We do not carry business interruption insurance sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures. A system outage or data loss could harm our business, financial condition and results of operations.

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

We enable transactions in some regions that are politically volatile. If a country experiences political instability that affects its economy or financial systems, our business could be harmed. It also is possible that our services could be used by wrongdoers in contravention of U.S. or foreign law or regulations. Such circumstances could result in increased compliance costs, regulatory inquiries, suspension or revocation of required licenses or registrations, seizure or forfeiture of assets and the imposition of civil and criminal fees and penalties. In addition to monetary fines or penalties that we could incur, we could be subject to reputational harm that could harm our business.

The inability to integrate our recent acquisition and any future acquisitions, joint ventures or strategic investments successfully could disrupt our business and harm our financial condition and results of operations.

We have in the past, and may again in the future, seek to grow our business by acquiring complementary businesses, products, services and technologies. For example, in January 2014, we acquired all of the outstanding equity of BlueKite, LTD, a Guatemala-based developer of solutions and applications for cross-border bill payment and mobile phone reload services. In addition, we may evaluate and consider a wide array of potential strategic transactions as part of our overall business strategy, including business combinations, strategic investments and joint ventures. Any of these transactions involve significant challenges and risks, and may harm our business, results of operations and financial condition. Acquisitions in particular could require significant capital infusions and could involve many risks, including potential negative impact on our results of operations due to debt or other liabilities and costs incurred in connection with an acquisition, difficulties assimilating and integrating the acquired business, disruption of our ongoing business by diverting resources and distracting management, not realizing the expected benefits of the acquisition, announcements of operating results, revenue or guidance that are lower than expected and potential dilution of stockholders’ ownership in the event we issue equity securities to complete an acquisition. Integration of our recently-acquired business may be complex and costly, including risks and costs associated with complying with additional regulatory requirements and combining operations and employees. In addition, we may begin operations in countries in which the application of laws and regulations in the online or mobile context is subject to greater uncertainty and where there may be a higher incidence of corruption and fraudulent or unethical business practices than countries in which we are historically accustomed to operating. We may also enter new markets where we have no or limited direct prior experience or where competitors may have stronger market positions. It may take us longer than expected to fully realize the anticipated benefits of our acquisition of BlueKite, LTD, or future acquisitions or strategic transactions, and it is possible that those benefits will be smaller than anticipated, may not be realized at all or that the financial markets or investors will view the transactions negatively. We cannot assure you that we will be able to identify or consummate any future acquisition or strategic transaction on favorable terms, or at all.

The loss of one or more key members of our management team, or our failure to attract, integrate and retain other highly qualified personnel in the future, could harm our business.

We believe our success has depended, and continues to depend, on the efforts and talents of our employees, including our senior management team which includes John Kunze, our President and Chief Executive Officer, Ryno Blignaut, our Acting Chief Financial Officer and Chief Risk Officer, and Julian King, our Senior Vice President of Marketing and Corporate Development. Our future success depends on our

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continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and keep them. Recent changes in our Chief Financial Officer position may adversely impact our ability to attract a suitable candidate to fill the role of a permanent Chief Financial Officer or retain our current key personnel. Any changes in our key employees could also adversely affect our ability to attract suitable candidates to join our Board of Directors. In addition, any future loss of any of our directors, senior management or key employees could harm our ability to execute our business plan, and we may not be able to find adequate replacements. All of our officers and other U.S. employees are at-will employees, which means they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. We cannot ensure that we will be able to retain the services of any members of our Board of Directors, senior management or other key employees. If we do not succeed in attracting well-qualified directors or employees or retaining and motivating existing employees, our business could be harmed.

Our management team has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business.

The individuals who now constitute our management team have limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage a public company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws. In particular, these new obligations continue to require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business.

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

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, the listing requirements of the NASDAQ Stock Market LLC and other applicable securities rules and regulations. Compliance with these rules and regulations have increased our legal and financial compliance costs, may make some activities more difficult, time consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to continue to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and

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a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

In addition, each of the various jurisdictions in which we are licensed impose reporting and other obligations on us, our management team and our Board of Directors. As a public company and licensed money transmitter subject to these rules and regulations, we may find it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

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

We are obligated to develop and maintain proper and effective internal control over financial reporting, but we cannot assure you that the systems we use to evaluate our internal control over financial reporting will withstand regulatory scrutiny, and the determination by management that our internal controls are not effective are both factors which may harm investor confidence in us and the value of our common stock.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the year ended December 31, 2014. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.

Although we have developed the systems and processes required to perform the evaluation needed to comply with Section 404, we cannot assure you that those systems and processes will withstand regulatory scrutiny.

In addition, because we identified a material weakness as of December 31, 2014 in our internal control over financial reporting during the evaluation and testing process, we are unable to assert that our internal control over financial reporting is effective. As a result, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC.

We will be required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the date we are no longer an “emerging growth company.” We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31. The aggregate market value of common stock held by non-affiliates will be computed by reference to the closing price at which the common stock was sold on the last business day of our most recently completed second fiscal quarter, as reported on the NASDAQ Global Select Market. Shares of common stock held by each executive officer, director and holder of 10% or more of the outstanding common stock will be excluded in that such persons may be deemed to be affiliates. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

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

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

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

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

New tax treatment of companies engaged in online money transfer may harm the commercial use of our services and our financial results.

Due to the global nature of the Internet, it is possible that various states or foreign countries might attempt to regulate our transactions or levy sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in Internet commerce in general and remittances in particular. New or revised international, federal, state or local tax regulations may subject us or our customers to additional sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet. New or revised taxes would likely increase the cost of doing business online and decrease the attractiveness of using our Internet services. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could harm our business and results of operations.

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

From time to time, the Financial Accounting Standards Board, or FASB, either alone or jointly with the International Accounting Standards Board, or IASB, promulgates new accounting principles that could have a material adverse impact on our results of operations. For example, the FASB is currently working together with the IASB to converge certain accounting principles and facilitate more comparable financial reporting between companies who are required to follow generally accepted accounting principles, or GAAP, and those who are required to follow International Financial Reporting Standards, or IFRS. These efforts may result in different

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accounting principles under GAAP, which may have a material impact on the way in which we report financial results in areas including, among others, revenue recognition, estimating valuation allowances and financial statement presentation. We expect the SEC to make a determination in the future regarding the incorporation of IFRS into the financial reporting system for U.S. companies. A change in accounting principles from GAAP to IFRS would be costly to implement and may have a material impact on our financial statements and may retroactively harm previously reported transactions.

Regulatory Risks Faced by Our Business

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

Our services are subject to an increasingly strict set of legal and regulatory requirements intended to help detect and prevent money laundering, terrorist financing, fraud and other illicit activity. The interpretation of those requirements by judges, regulatory bodies and enforcement agencies is changing, often quickly and with little notice. Economic and trade sanctions programs that are administered by OFAC prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers and terrorists or terrorist organizations. As federal, state and foreign legislative regulatory scrutiny and enforcement action in these areas increase, we expect our costs to comply with these requirements will increase, perhaps substantially. Failure to comply with any of these requirements by us or our disbursement partners could result in the suspension or revocation of a money transmitter license, the limitation, suspension or termination of our services, the seizure and/or forfeiture of our assets and/or the imposition of civil and criminal penalties, including fines.

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

Indian regulations may require us to file reports relating to suspicious transactions. If we are unable to file these reports in the required timeframes or in the appropriate manner, we may face penalties. Additionally, our subsidiary, buyindiaonline.com Inc., is also subject to U.S. federal regulations and has been subject to U.S. state regulations and to regulation in India in the past.  We may also become subject to additional reporting, recordkeeping and anti-money laundering regulations as well as additional risks and obligations if we expand our business into new geographic regions.

We are also subject to regulations imposed by the FCPA in the United States and similar laws in other countries which generally prohibit companies and those acting on their behalf from making improper payments to foreign government officials for the purpose of obtaining or retaining business. Because our services are offered in 32 countries and we have non-U.S. employees, we face a higher risk associated with FCPA compliance and similar statutes than many other companies. Any determination that we have violated these laws could harm our business, financial condition and results of operations.

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

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

Our service is subject to a variety of laws in the United States and abroad that are continuously evolving and developing, including laws regarding data retention, privacy, anti-spam, consumer protection, payment processing and money transfers. The scope and interpretation of the various laws that are or may be applicable to us are often uncertain and may be conflicting, particularly regarding laws outside the United States. For example, we are subject to regulatory requirements to assist in the prevention of money laundering and terrorist financing, such as the Bank Secrecy Act and, pursuant to these legal obligations and authorizations, we make information available to certain U.S. federal, state and local, as well as foreign, government agencies when required by law. As a result of particular concern with respect to terrorist financing, these agencies have increased their requests for such information from money service businesses in recent years. At the same time, there has been increased public attention regarding the use and disclosure of personal information, and regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning data protection and consumer privacy and other matters that may be applicable to our business. The regulatory goals of preventing illegal activity, such as money laundering and terrorist financing, may conflict with the goal of protecting individual privacy. If federal, state or foreign governments or our disbursement partners changed requirements regarding the customer or recipient information we are required to collect, we may be unable to comply with such changes, or such changes could interfere with our ability to assess fraud or other risks, and our business could be harmed as a result. New laws and regulations may be enacted in connection with mobile transactions, including money transfers or bill payments that are performed via mobile phones.

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

Our business could be harmed if a local, state, federal or foreign government were to levy taxes on money transfers, as has occurred in the past, or on bill payments. The current budget shortfalls in many jurisdictions could lead other states and jurisdictions to impose similar fees and taxes, as well as increase unclaimed property obligations. Similar circumstances in foreign countries could invoke similar consequences. Such fees or taxes, and any related regulatory initiatives, may be implemented in a manner in which conflicts with other laws to which we are bound or in a manner with which we are unable to comply, and non-compliance could harm our business. A tax or fee exclusively on money transfer companies could put us at a competitive disadvantage to other means of remittance or payment transfers which may not be subject to the same fees or taxes. A change in the unclaimed property obligations could increase our regulatory burdens and costs related to our obligation to escheat unclaimed property to the states.

It is possible that governments of one or more countries may seek to censor content available on our website and mobile solutions or may even attempt to completely block access to our website or mobile solutions. Adverse legal or regulatory developments could harm our business. In particular, in the event that we are restricted, in whole or in part, from operating in one or more countries, our ability to retain or increase our customer base may be harmed and we may not be able to maintain or grow our revenue as anticipated.

Consumer advocacy groups or governmental agencies could also seek to change laws and regulations to seek greater protections for our customers, which could result in enhanced consumer disclosure, impact fees or exchange spreads, or require other different customer treatment. If consumer advocacy groups are able to

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generate widespread support for positions that are detrimental to our business, then our business, financial position and results of operations could be harmed.

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

 A number of states have enacted legislation regulating money transmitters. To date, we have obtained licenses to operate as a money transmitter in 46 U.S. states, the District of Columbia and Puerto Rico and have applied, or plan to apply, for money transmitter licenses in additional jurisdictions. Because our subsidiary, buyindiaonline.com Inc., was previously a regulated entity in both India and the State of Delaware, if regulators were to find buyindiaonline.com Inc. in violation of any applicable money services laws and regulations during the period in which it held such licenses, or find that it continues to be subject to and not compliant with applicable regulations, such liability would harm our business. We and buyindiaonline.com Inc. are also registered as money services businesses with FinCEN, although we do not expect to renew buyindiaonline.com Inc.’s FinCEN registration upon its expiration in 2015. As a licensed money transmitter, we are subject to bonding requirements, liquidity requirements, restrictions on our investment of customer funds, reporting requirements and inspection by state and foreign regulatory agencies. If our pending applications were denied or if additional states or jurisdictions require us to apply for a license, we could be forced to change our business practice or required to bear substantial cost to comply with the requirements of the additional states or jurisdictions. If we were found to be subject to and in violation of any banking or money services laws or regulations, we could be subject to liability or additional restrictions, such as increased liquidity requirements. In addition, our licenses could be revoked or we could be forced to cease doing business or change our practices in certain states or jurisdictions, or be required to obtain additional licenses or regulatory approvals that could impose a substantial cost on us. Regulators could also impose other regulatory orders and sanctions on us. Any change to our business practices that makes our service less attractive to customers or prohibits use of our services by residents of a particular jurisdiction could decrease our transaction volume and harm our business.

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

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

The CFPB’s adoption of the Final Remittance Rule, which became effective in October 2013, implemented the remittance provisions of the Dodd-Frank Act. These regulations have impacted our business in a variety of areas as described elsewhere in these risk factors. These requirements and other potential changes under CFPB regulations could harm our operations and financial results and change the way we operate our business.

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

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

The effect of the Dodd-Frank Act and the CFPB on our business and operations has been and will continue to be significant, in part because the function and scope of the CFPB, the reactions of our competitors and the responses of consumers and other marketplace participants are uncertain.

Remittance rules adopted by the CFPB, which became effective in October 2013, could harm us and the scope of our activities, and could harm our operations, results of operations and financial condition.

The CFPB’s Final Remittance Rule, among other things, requires money transmitters to disclose to customers, at the time of their transaction, certain transaction details, such as any fees charged, the foreign exchange rate and the amount of money to be disbursed to the recipient. Money transmitters must also provide the customer with a receipt, and inform the customer as to the date on which the money will be available to the recipient. In addition, the regulations require money transmitters to provide refunds to customers in certain circumstances within certain timeframes, and to create a customer complaint process, according to which money transmitters must investigate certain notices of error according to certain timeframes. We believe we are in compliance with these new remittance regulations but if we were found to be in violation of any of the regulations, our business could be harmed. These regulations and other potential changes under CFPB regulations could harm our operations, results of operations and financial condition and change the way we operate our business.

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

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

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disbursement partners or their sub-disbursement partners to comply with laws, which also could harm our business, financial condition and results of operations.

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

We receive, store and process personal information and other customer and recipient data, including bank account numbers, credit and debit card information, identification numbers and images of government identification cards. As a result, we are required to comply with the privacy provisions of the Gramm-Leach-Bliley Act of 1999 and the Payment Card Industry Data Security Standard. There are also numerous other federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other customer and recipient data, the scope of which are changing, subject to differing interpretations, and may be inconsistent among different jurisdictions or conflict with other applicable rules. Any expansion of our products and services over time, including the growth of our international operations, our recently launched cross-border bill payment service or any future introduction of mobile phone reload services, may subject us to additional regulatory exposure, including but not limited to the application of foreign consumer privacy laws, as described elsewhere in these risk factors. It is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our business practices.

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

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

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

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

While we do not sell or share personally identifiable information with third parties for direct marketing purposes, we do have relationships with third parties that may allow them access to customer information for

42


 

other purposes. For example, when we outsource functions such as customer support, tracking and reporting, fraud prevention, and payment processing to other companies, we make customer information available to those companies to the extent necessary for them to provide their services. We believe our policies and practices comply with the FTC privacy guidelines and other applicable laws and regulations. However, if our belief proves incorrect, if there are changes to the guidelines, laws or regulations or their interpretation, or if new regulations are enacted that are inconsistent with our current business practices, our business could be harmed. We may be required to change our business practices, services or privacy policy, reconsider any plans to expand internationally, or obtain additional consents from our customers before collecting or using their information, among other changes. Changes like these could increase our operating costs and make it more difficult for customers to use our services, resulting in less revenue. Additionally, data collection, privacy and security have become the subject of increasing public concern. If Internet users were to reduce their use of our services as a result, our business could be harmed.

Risks Related to Ownership of our Common Stock

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

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

Our stock price has been and will likely continue to be volatile, which could result in the decline of the value of an investment in our common stock or class action litigation against us and our management which could cause us to incur substantial costs and divert management’s attention and resources.

An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock. The price of our common stock has been, and is likely to continue to be, volatile, which means that it could decline substantially within a short period of time. For example, since shares of our common stock were sold in our initial public offering in February 2013 at a price of $16.00 per share, our closing stock price has ranged from $13.79 to $35.27 through February 20, 2015. The trading price of our common stock may be subject to wide fluctuations in response to various factors, some of which are beyond our control, including:

·

actual or anticipated fluctuations in our financial condition and results of operations;

·

our operating performance and the operating performance of similar companies;

·

our announcement of operating results, revenue or earnings guidance that is higher or lower than expected;

·

changes in laws or regulations relating to our services;

·

any major change in our Board of Directors or management;

·

loss of a significant amount of business from current customers;

·

the overall performance of the equity markets;

·

the number of shares of our common stock publicly owned and available for trading;

·

fluctuations in the valuation of companies perceived by investors to be comparable to us;

·

publication of research reports about us or our industry or positive or negative recommendations   or withdrawal of research coverage by securities analysts;

·

large volumes of sales of our shares of common stock; and

43


 

·

general political and economic conditions in the United States or the countries in which we or our disbursement partners or service providers operate.

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. 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. Securities litigation against us, including as discussed elsewhere in these risk factors, could result in very substantial costs, divert our management's attention and resources and harm our business, operating results and financial condition.

Our business could be negatively affected as a result of actions of activist stockholders.

Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors through various corporate actions, including proxy contests. We may become subject to one or more campaigns by stockholders who desire to increase stockholder value in the short term. We have recently seen some investors increase their ownership positions in our common stock and initiate communications with us. As a general matter, if we become engaged in a proxy contest with an activist stockholder in the future, our business could be adversely affected as responding to such contests or other activist stockholder actions could be costly and time-consuming, disrupt our operations and divert the attention of management and our employees from executing our strategic plan. In addition, if individuals are elected to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plans. Any perceived uncertainties as to our future direction as a result of stockholder activism or changes to the composition of our Board of Directors may lead to the perception of a change in the direction of our business, instability or lack of continuity which may be exploited by our competitors, decline of our stock price, the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners.

Our executive officers, directors and significant stockholders own a significant percentage of our stock, have significant control of our management and affairs, and can take actions that may be against your best interests.

As of December 31, 2014, our executive officers, directors and holders of more than 10% of our voting securities beneficially owned a significant percentage of our outstanding common stock. This significant concentration of stock ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, as a result, these stockholders, acting together, may be able to control our management and affairs and other matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change in control would benefit our other stockholders.

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

We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. Consequently, an investor’s only opportunity to achieve a return on the investment in us will be if the market price of our common stock appreciates and the investor sells shares at a profit. There is no guarantee that the price of our common stock in the market will ever exceed the price that an investor paid.

44


 

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

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

·

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

·

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

·

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

·

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

·

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

·

requiring advance notification of stockholder nominations and proposals, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

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

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

These and other provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.

 

Item 1B.Unresolved Staff Comments

None.

 

Item 2.Properties

We lease 53,017 square feet of office space located at 425 Market Street, San Francisco, California. Pursuant to the terms of the lease, we will lease an additional 26,870 square feet of office space in the same

45


 

building, which is expected to commence in July 2015. We moved our corporate headquarters to this location in August 2014. Prior to that, we leased 35,552 square feet of space in San Francisco, California pursuant to leases that expire in October 2016, which we sub-let to multiple tenants in the third and fourth quarters of 2014. We also lease our data centers in the United States and an office facility in Guatemala under operating leases.  We believe our facilities are adequate for our foreseeable needs.

 

Item 3.Legal Proceedings

On January 6, 2015, we, John Kunze and Ryno Blignaut were sued in a putative class action lawsuit, captioned Alexander Liu v. Xoom Corporation, et al., Case No. CGC-15-543531, filed in San Francisco Superior Court by purported stockholders of the Company, in connection with our January 5, 2015 announcement that we were the victim of criminal fraud resulting in the transfer of $30.8 million in corporate cash to overseas accounts. On February 6, 2015, the lawsuit was removed to federal court in the Northern District of California, and assigned the case number 5:15-cv-00602-LHK. The lawsuit alleges that we and Messrs. Kunze and Blignaut violated federal securities laws by misrepresenting and/or omitting information in the offering materials distributed in connection with our February 2013 initial public offering.  The lawsuit seeks unspecified damages and attorneys’ fees and costs.  Although the ultimate outcome of litigation cannot be predicted with certainty, we believe that this lawsuit is without merit and intend to defend against the action vigorously. We believe that any liability resulting from this lawsuit will not have a material adverse effect on our business, financial condition or results of operations.

 

We are not a party to any other material pending legal proceedings. We may be involved from time to time in various other legal proceedings in the normal course of business.

 

 

Item 4.Mine Safety Disclosures

Not applicable.

 

46


 

PART II

ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock has been listed on the NASDAQ Global Select Market under the symbol “XOOM” since February 15, 2013. Prior to that date, there was no public trading market for our common stock. The following table sets forth for the periods indicated the intra-day high and low sales prices per share of our common stock as reported on the NASDAQ Global Select Market:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

    

High

    

Low

 

High

    

Low

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter*

 

$

29.82 

 

$

18.80 

 

$

26.00 

 

$

20.00 

Second Quarter

 

$

27.50 

 

$

16.90 

 

$

23.74 

 

$

17.68 

Third Quarter

 

$

28.20 

 

$

20.61 

 

$

36.46 

 

$

22.21 

Fourth Quarter

 

$

23.45 

 

$

13.14 

 

$

36.07 

 

$

23.38 

 


* The first quarter of fiscal year 2013 is from February 15, 2013 through March 31, 2013.

As of February 9, 2015, we had approximately 57 holders of record of our common stock. The actual number of stockholders is significantly greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

We have never declared or paid cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will be dependent on a number of factors, including our earnings, capital requirements and overall financial condition. Currently, our line of credit prohibits the payment of any dividends without obtaining our lenders’ prior written consent, other than dividends payable solely in our common stock.

Equity Compensation Plan Information

The table below presents information as of December 31, 2014 for our equity compensation plans approved by our stockholders. We do not have any equity compensation plans that have not been approved by our stockholders.

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Number of shares of

 

 

 

 

 

 

 

 

common stock remaining

 

 

 

 

 

 

 

 

available for future

 

 

 

 

 

 

 

 

issuance under equity

 

 

 

Number of common stock

 

Weighted-average

 

compensation plans

 

  

 

to be issued upon exercise

 

exercise price of

 

(excluding shares

 

Plan Category

 

of outstanding options (a)

 

outstanding options

 

reflected in column (a))

 

Equity compensation plans approved by stockholders

 

6,132,641 

 

$

11.62 

 

2,471,172 

 

Equity compensation plans not approved by stockholders

 

 —

 

 

 —

 

 —

 

Total

 

6,132,641 

 

$

11.62 

 

2,471,172 

 

 

Our 2012 Stock Option and Incentive Plan provides that the number of shares of stock reserved and available for issuance under the plan shall be cumulatively increased by up to 4% of the number of shares of our common stock issued and outstanding on the immediately preceding December 31. 

 

47


 

Stock Performance Graph

This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act.

The following graph shows the cumulative total return to our stockholders during the period from February 15, 2013 (the date our common stock commenced trading on the NASDAQ Global Select Market) through December 31, 2014, in comparison to the NASDAQ Composite Index and the NASDAQ-100 Technology Sector Index. All values assume a $100 initial investment and data for the NASDAQ Composite Index and the NASDAQ-100 Technology Sector Index assume reinvestment of dividends. Such returns are based on historical results and are not intended to suggest future performance. 

COMPARISON OF CUMULATIVE TOTAL RETURN

Among Xoom Corporation, the NASDAQ Composite Index and the NASDAQ-100 Technology Sector Index

Picture 5

Recent Sales of Unregistered Securities

On January 10, 2014, in connection with our acquisition of BlueKite, LTD, we issued 76,602 shares of unregistered, restricted common stock to the selling stockholders of BlueKite, LTD. The shares were issued in reliance on the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. The shares were not issued by any underwriters and did not involve any underwriting discounts or commissions or any public offering.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

There were no repurchases of our equity securities during the year ended December 31, 2014.

 

48


 

Item 6.Selected Financial Data

The following selected financial data regarding our business should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this report. We derived the consolidated statement of operations data for 2014, 2013 and 2012 and the consolidated balance sheet data as of December 31, 2014 and 2013 from our audited consolidated financial statements included elsewhere in this report. We derived the audited consolidated statement of operations data for 2011 and 2010 and the audited consolidated balance sheet data at December 31, 2012, 2011 and 2010 from our audited consolidated financial statements not included in this report. Our historical results are not necessarily indicative of results to be expected in any future period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

    

2014

    

2013

    

2012

    

2011

    

2010

 

 

 

(in thousands, except per share data)

Consolidated Statements of Operations Data:

 

 

                   

 

 

                   

 

 

                   

 

 

                   

 

 

                   

Revenue

 

$

159,084 

 

$

122,206 

 

$

80,016 

 

$

50,020 

 

$

32,837 

Cost of revenue

 

 

45,415 

 

 

38,082 

 

 

26,779 

 

 

18,075 

 

 

12,231 

Gross profit

 

 

113,669 

 

 

84,124 

 

 

53,237 

 

 

31,945 

 

 

20,606 

Marketing

 

 

32,667 

 

 

25,926 

 

 

21,496 

 

 

14,314 

 

 

11,608 

Technology and development

 

 

36,981 

 

 

22,451 

 

 

15,950 

 

 

9,431 

 

 

6,046 

Customer service and operations

 

 

17,314 

 

 

13,552 

 

 

10,964 

 

 

7,321 

 

 

5,257 

General and administrative

 

 

20,902 

 

 

13,145 

 

 

9,135 

 

 

4,957 

 

 

3,728 

Business e-mail compromise ("BEC") fraud loss

 

 

30,774 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total operating expense

 

 

138,638 

 

 

75,074 

 

 

57,545 

 

 

36,023 

 

 

26,639 

Income (loss) from operations

 

 

(24,969)

 

 

9,050 

 

 

(4,308)

 

 

(4,078)

 

 

(6,033)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,363)

 

 

(1,837)

 

 

(1,504)

 

 

(370)

 

 

(108)

Interest income

 

 

278 

 

 

203 

 

 

85 

 

 

29 

 

 

44 

Other income (expense):

 

 

(215)

 

 

(1,051)

 

 

(125)

 

 

49 

 

 

140 

Income (loss) before income taxes

 

 

(26,269)

 

 

6,365 

 

 

(5,852)

 

 

(4,370)

 

 

(5,957)

Provision for income taxes

 

 

45 

 

 

37 

 

 

 

 

 

 

Net income (loss)

 

$

(26,314)

 

$

6,328 

 

$

(5,854)

 

$

(4,372)

 

$

(5,959)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.69)

 

$

0.20 

 

$

(1.16)

 

$

(0.88)

 

$

(1.25)

Diluted

 

$

(0.69)

 

$

0.17 

 

$

(1.16)

 

$

(0.88)

 

$

(1.25)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used to compute per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

38,195 

 

 

30,906 

 

 

5,049 

 

 

4,956 

 

 

4,752 

Diluted

 

 

38,195 

 

 

37,912 

 

 

5,049 

 

 

4,956 

 

 

4,752 

 

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

 

 

 

49


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

    

2014

    

2013

    

2012

    

2011

    

2010

 

 

 

(in thousands)

Stock-based compensation expense:

 

 

                   

 

 

                   

 

 

                   

 

 

                   

 

 

                   

Marketing

 

$

1,038 

 

$

417 

 

$

282 

 

$

145 

 

$

72 

Technology and development

 

 

3,223 

 

 

1,294 

 

 

727 

 

 

235 

 

 

93 

Customer service and operations

 

 

844 

 

 

415 

 

 

256 

 

 

118 

 

 

107 

General and administrative*

 

 

4,311 

 

 

1,943 

 

 

1,180 

 

 

451 

 

 

278 

Total stock-based compensation

 

$

9,416 

 

$

4,069 

 

$

2,445 

 

$

949 

 

$

550 

* Note: 2014 stock-based compensation expense excludes $60,074 of issued unrestricted stock as annual retainer to certain non-employee directors of the company for their 2015 services.

We were the victim of a criminal fraud during the latter half of December 2014, which we detected on December 30, 2014. The fraud, known to law enforcement authorities as business e-mail compromise, or BEC, fraud involved employee impersonation and fraudulent requests targeting our finance department, which resulted in the transfer of $30.8 million in corporate cash to overseas accounts. As a result, we recorded an expense of $30.8 million in the fourth quarter of 2014. While the fraud will result in some additional near-term expenses, we do not expect it to otherwise have a material impact on our business. This matter is more fully described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

We have previously reported only those customers who have sent their first ever transaction in a given period as “New Customers,” along with the “Cost Per Acquisition of a New Customer.” Management views the number of gross additional customers as a key component of our active customer base, and as a key driver of business growth and revenue. In order to properly reflect the growth of our business, we will therefore report the number of gross additional customers and cost per acquisition of a gross additional customer going forward. Beginning in the first quarter of 2015, we will no longer separately disclose new customers or cost per acquisition of a new customer in any given reporting period. These changes are more fully described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

    

2014

    

2013

    

2012

    

2011

    

2010

 

 

 

(unaudited)

Other Financial and Operational Data:

 

 

                   

 

 

                   

 

 

                   

 

 

                   

 

 

                   

Gross Sending Volume (in thousands)(1)

 

$

6,859,397 

 

$

5,544,755 

 

$

3,248,457 

 

$

1,706,659 

 

$

858,955 

Transactions(2)

 

 

12,763,407 

 

 

9,988,000 

 

 

6,617,000 

 

 

4,068,000 

 

 

2,848,000 

Active Customers(3)

 

 

1,278,646 

 

 

1,059,689 

 

 

776,426 

 

 

516,597 

 

 

392,666 

Gross Additional Customers(4)

 

 

554,543 

 

 

543,555 

 

 

443,756 

 

 

311,051 

 

 

NA(9)

New Customers(5)

 

 

465,339 

 

 

481,110 

 

 

405,304 

 

 

291,532 

 

 

225,949 

Cost Per Acquisition of a Gross Additional Customer(6) 

 

$

47 

 

$

38 

 

$

40 

 

$

36 

 

$

NA(9)

Cost Per Acquisition of a New Customer(7) 

 

$

56 

 

$

43 

 

$

44 

 

$

38 

 

$

37 

Adjusted EBITDA (in thousands)(8) 

 

$

20,081 

 

$

14,378 

 

$

(493)

 

$

(2,532)

 

$

(5,067)

 


(1)

Reflects the total principal amount of funds sent, excluding our fees, during a given period.

(2)

Reflects the aggregate number of transactions sent using our services during a given period.

(3)

Reflects customers who have sent at least one transaction during the last twelve month trailing period.

(4)

Reflects gross additional customers added who have transacted at least once during a given period. Gross additional customers include both new customers and win-back customers.

(5)

Reflects new customers added who have sent their first ever transaction during a given period.

(6)

Reflects direct marketing cost, a portion of which is reflected in our cost of revenue, divided by gross additional customers added in a given period.

50


 

(7)

Reflects direct marketing cost, a portion of which is reflected in our cost of revenue, divided by new customers added in a given period. The direct marketing costs are used to acquire both new customers and win-back customers.

(8)

See “Non-GAAP Financial Measures” below for how we define and calculate adjusted EBITDA, a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure, and a discussion about the limitations of adjusted EBITDA.

(9)

Data for gross additional customers in 2010 is not available. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

    

2014

    

2013

    

2012

    

2011

    

2010

 

 

 

(in thousands)

Consolidated Balance Sheet Data:

 

 

                   

 

 

                   

 

 

                   

 

 

                   

 

 

                   

Cash and cash equivalents

 

$

67,216 

 

$

110,979 

 

$

45,077 

 

$

48,248 

 

$

20,694 

Disbursement prefunding

 

 

71,167 

 

 

33,799 

 

 

15,070 

 

 

9,004 

 

 

6,723 

Customer funds receivable

 

 

18,590 

 

 

16,381 

 

 

9,318 

 

 

17,187 

 

 

4,164 

Property, equipment and software, net

 

 

15,670 

 

 

4,855 

 

 

3,884 

 

 

2,185 

 

 

1,051 

Working capital

 

 

220,094 

 

 

250,938 

 

 

68,838 

 

 

56,323 

 

 

35,833 

Total assets

 

 

315,724 

 

 

284,079 

 

 

113,093 

 

 

100,190 

 

 

47,557 

Total stockholders’ equity

 

 

255,766 

 

 

264,844 

 

 

57,320 

 

 

60,361 

 

 

38,657 

 

Non-GAAP Financial Measures

Adjusted EBITDA

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

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

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

·

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect 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 include the impact of stock-based compensation;

·

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

·

adjusted EBITDA does not include the business e-mail compromise fraud loss which represents a reduction in cash available to us; and

·

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

We believe it is useful to exclude non-cash charges, such as amortization of acquired intangible asset, depreciation and other amortization expense and stock-based compensation, from our adjusted EBITDA

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because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. Depreciation and other amortization expense includes impairment charges primarily related to long-lived assets due to the relocation of our corporate headquarters during the third quarter of 2014. We also excluded the business e-mail compromise fraud loss of $30.8 million which occurred in December 2014 since it is expected to be a nonrecurring item and we believe such exclusion provides investors normalized business results upon which to evaluate and understand our operating results this period and by which to compare our results against prior periods.  

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

    

2014

    

2013

    

2012

    

2011

    

2010

 

 

 

(in thousands)

Reconciliation of Adjusted EBITDA:

 

 

                   

 

 

                   

 

 

                   

 

 

                   

 

 

                   

Net income (loss)

 

$

(26,314)

 

$

6,328 

 

$

(5,854)

 

$

(4,372)

 

$

(5,959)

Provision for income taxes

 

 

45 

 

 

37 

 

 

 

 

 

 

Interest expense

 

 

1,363 

 

 

1,837 

 

 

1,504 

 

 

370 

 

 

108 

Interest income

 

 

(278)

 

 

(203)

 

 

(85)

 

 

(29)

 

 

(44)

Amortization of acquired intangible

 

 

814 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Depreciation and other amortization expense

 

 

4,261 

 

 

2,310 

 

 

1,495 

 

 

548 

 

 

276 

Stock-based compensation

 

 

9,416 

 

 

4,069 

 

 

2,445 

 

 

949 

 

 

550 

Business e-mail compromise ("BEC") fraud loss

 

 

30,774 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Adjusted EBITDA

 

$

20,081 

 

$

14,378 

 

$

(493)

 

$

(2,532)

 

$

(5,067)

 

 

 

 

 

 

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ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors.”

Xoom is a leader in the digital consumer-to-consumer international money transfer industry. Our customers use Xoom to send money to and pay bills for family and friends around the world. We offer money transfer services from the United States to 32 countries and our cross-border bill payment services from the United States to five countries.  Since January 1, 2010, our customers have used Xoom to send $18.2 billion, including $3.2 billion in 2012, $5.5 billion in 2013 and $6.9 billion in 2014. We believe we create significant value for our customers by providing a convenient, fast and cost-effective solution for international money transfers and cross-border bill payments. 

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

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

 

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Picture 8


Note: data for win-back customers in 2010 is not available.

Key Metrics

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

As we launch new products and services, such as Xoom Bill Pay, a new customer in any given period may have sent their first transaction with us through any of our then-current product offerings. In addition, as our business grows, previously inactive customers who transacted with us at least once and then return to transact with us for the first time in more than twelve months are steadily contributing to the growth of our active customer base, and are therefore increasingly important to our business. Because such customers have transacted with us before, they do not fall within our definition of “new customers.” We refer to these customers as “win-backs.” Due to the importance of this segment within our active customer base, and to properly reflect the importance of both new customers across products and win-backs to our business, we refer to the sum of these two groups of customers as gross additional customers. We believe win-backs and new customers respond similarly to our marketing efforts, and our marketing spend therefore targets both of these segments. In addition,

54


 

we forecast our revenue based on projected growth of our active customer base, which includes both win-backs and new customers.

As a result, management views the number of gross additional customers as a key driver of business growth and revenue, and believes that disclosing the number of our gross additional customers provides an accurate reflection of our business strategy and marketing efforts. We have therefore also disclosed the cost per acquisition of a gross additional customer in this report. We have provided the number of gross additional customers, along with the Cost per Acquisition of a Gross Additional Customer, in the table below in addition to the previously disclosed key metrics. Beginning in the first quarter of 2015, we will no longer separately disclose new customers or cost per acquisition of a new customer in any given period.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

    

2014

    

2013

    

2012

 

Gross Sending Volume (in thousands)

 

$

6,859,397 

 

$

5,544,755 

 

$

3,248,457 

 

Transactions

 

 

12,763,407 

 

 

9,988,000 

 

 

6,617,000 

 

Active Customers

 

 

1,278,646 

 

 

1,059,689 

 

 

776,426 

 

Gross Additional Customers

 

 

554,543 

 

 

543,555 

 

 

443,756 

 

New Customers

 

 

465,339 

 

 

481,110 

 

 

405,304 

 

Cost Per Acquisition of a Gross Additional Customer

 

$

47 

 

$

38 

 

$

40 

 

Cost Per Acquisition of a New Customer

 

$

56 

 

$

43 

 

$

44 

 

Adjusted EBITDA (in thousands)

 

$

20,081 

 

$

14,378 

 

$

(493)

 

 

Gross Sending Volume. We define gross sending volume, or GSV, as the total principal amount of funds sent by our customers in a given period for money transfers and bill payments, excluding our fees. A percentage of GSV does not ultimately get paid out to recipients due to a variety of reasons, most notably customer cancellations, our risk management decisions and customer error. In the periods presented, this percentage has ranged from 2.37% to 3.16%. Our GSV increased 24% for 2014 compared to the prior year, 71% for 2013 and 90% for 2012. Some of our customers transact more depending on the value of the local currency relative to the U.S. dollar. For example, amongst our Indian customers, we saw an increase in activity in the three months ended June 30, 2013 and September 30, 2013 due to a weakening Indian Rupee and a decrease in activity in the three months ended December 31, 2013 due to a strengthening Indian Rupee. The Indian Rupee volatility in 2014 was not as significant as compared to 2013.

Transactions. This represents the total number of transactions sent by our customers in a given period. A small percentage of transactions do not ultimately get paid out to recipients due to a variety of reasons, most notably customer cancellations, our risk management decisions and customer error. Our transactions increased 28% for 2014 compared to the prior year, 51% for 2013 and 63% for 2012. The increase in GSV in 2014 was lower than the increase in number of transactions due to a  higher percentage of transactions to countries with a lower average transaction amount. 

Active Customers. We define active customers as the number of customers who have sent at least one transaction during a trailing twelve month period. A gross additional customer with one transaction during a trailing twelve month period would also be included as an active customer in the same period. The number of active customers increased 21% for 2014 compared to the prior year, 36% for 2013 and 50% for 2012.

Gross Additional Customers. We define gross additional customers as customers who, during a given period,  have sent their first transaction in a trailing twelve month period. A gross additional customer can only be counted as a gross additional customer once in twelve months. Our gross additional customer growth increased by 2% for 2014 compared to the prior year, 22% for 2013 and 43% for 2012.

New Customers. We define new customers as those customers who have sent their first ever transaction in a given period. Our new customer growth decreased by 3% for 2014 compared to the prior year, and increased

55


 

by 19% for 2013 and 39% for 2012. The decrease of 3% in 2014 was primarily due to the reduction of new customers in the third quarter of 2014, which was due to various factors, including our planned reduction in marketing spend in the second and third quarters of 2014 during the 2014 World Cup, which adversely impacted our new customer conversion rates for longer than we estimated. In addition, the weakening Indian Rupee during the six months ended September 30, 2013 resulted in higher rates of new customer growth in the same period in the prior year as compared to the current year. In the third quarter of 2014, we also faced new and aggressive pricing competition in our major recipient countries.

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

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

Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss) adjusted for provision for income taxes, interest expense, interest income, amortization of acquired intangible, depreciation and other amortization, stock-based compensation and business e-mail compromise fraud loss.  Depreciation and other amortization expense includes impairment charges related to long-lived assets primarily due to the relocation of our corporate headquarters during the third quarter of 2014.  For a reconciliation of adjusted EBITDA to net income (loss) and an explanation of how management uses this metric, see “Selected Financial Data.”

Basis of Presentation

Revenue. We generate revenue from transaction fees charged to customers, and foreign exchange spreads on transactions where the payout currency is other than U.S. dollars. Our revenue is derived from each transaction and may vary based on the size of the transaction, the funding method used, the currency to ultimately be disbursed and the country to which the funds are transferred. Revenue is recognized when we accept the transaction for processing, net of cancellations and refunds. Revenue growth will depend on our ability to retain existing active customers and grow our active customer base by attracting more gross additional customers. 

Cost of Revenue. Our cost of revenue includes fees paid to disbursement partners for paying funds to the recipient or for paying bills to utility providers, provision for transaction losses, fees paid to payment processors for funding transactions and the costs of certain promotional activities to acquire gross additional customers,  including referees as described below under “—Marketing Expense.” We expect our cost of revenue to increase on an absolute basis for the foreseeable future as we continue to grow our business. 

Marketing Expense. Our marketing expense is comprised of business development, offline, online and promotional advertising costs to acquire and retain customers, employee compensation and related costs to support the marketing process and allocated facilities and other supporting overhead costs. We have a Refer-A-Friend incentive program where the referrer receives either a cash-type or non-cash award and the referee receives a non-cash award. Cash-type awards are considered to be cash-type because the referrer could use them as cash and are classified as marketing expense. The amount related to the referee is classified as cost of revenue for non-cash awards. Awards provided to the referrer are recorded in marketing expense as these payments are

56


 

a reward for bringing a new customer to Xoom. We anticipate our marketing expense will vary from period to period due to the timing and nature of such programs.

Technology and Development Expense. Our technology and development expense consists of employee compensation and related costs for our engineers and developers based in the United States and Guatemala, costs associated with professional services and consulting, development of new technologies, enhancements of existing technologies, amortization of capitalized internally-developed software and the intangible asset (developed technology) acquired in the acquisition of BlueKite, LTD, or the Acquisition, and allocated facilities and other supporting overhead costs. Internally-developed software costs, which primarily relate to the development of new services such as Xoom Bill Pay and enhancements to products such as the Xoom App, are a combination of internal compensation costs of engineering time and costs of outside consultants. We intend to continue to invest in technology and development efforts to further improve our customer experience and to continue expanding our operating platform. As a result, we expect technology and development expense to increase on an absolute basis for the foreseeable future.

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

General and Administrative Expense. Our general and administrative expense consists of employee compensation and related costs for our executives, finance, legal, compliance policy, human resources and other administrative employees, outside consulting, legal and accounting services and facilities and other supporting overhead costs not allocated to other departments. We expect to incur additional expenses for the foreseeable future to support our continuing growth. 

Business E-mail Compromise Fraud Loss.  We were the victim of a criminal fraud during the latter half of December 2014, which we detected on December 30, 2014. The fraud, known to law enforcement authorities as business e-mail compromise, or BEC, fraud involved employee impersonation and fraudulent requests targeting our finance department, which resulted in the transfer of $30.8 million in corporate cash to overseas accounts. As a result, we recorded an expense of $30.8 million in the fourth quarter of 2014. Our Board of Directors authorized an independent investigation into the matter, led by outside legal counsel. The investigation concluded on February 17, 2015. The investigation uncovered no evidence that our systems, including our operational, security and proprietary risk management systems were penetrated or that any corporate information, including our financial and account information, was accessed. In addition, there was no evidence of any impact to any customer data or customer funds. The investigation found no evidence of employee criminal involvement in the fraud. We have implemented enhanced internal control procedures as a result of the fraud and are in the process of implementing additional procedures and controls pursuant to recommendations from the investigation. While the fraud will result in some additional near-term expenses, we do not expect it to otherwise have a material impact on its business. We continue to work with federal law enforcement authorities who are actively pursuing a multi-agency criminal investigation.

Interest Expense. Interest expense represents interest incurred in connection with our line of credit and amortization of commitment and arrangement fees.

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

Other Income (Expense). Other income (expense) consists of gains and/or losses on foreign currency balances due to fluctuations in exchange rates between the initiation of a transaction and the settlement of the transaction (usually a period of no longer than 24 hours).

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Provision for Income Taxes. Provision for income taxes consists of state income taxes in the United States and foreign taxes.  We have not been required to pay U.S. federal income taxes to date because of our current and accumulated net operating losses which totaled $94.9 million as of December 31, 2014.  Since inception, we have only been required to pay minimal state income taxes. As of December 31, 2014, we have a full valuation allowance against our deferred tax assets. We continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist. Significant judgment is required in making this assessment, and it is very difficult to predict when our assessment may conclude that the deferred tax assets are realizable. Based on historical and projected operating performance, we believe that it is more likely than not that the deferred tax assets will not be realized in subsequent quarters. We may partially or fully release the deferred tax valuation allowance in a future period to the extent we expect that our operations will generate sufficient taxable income in future periods. Any adjustment to the deferred tax asset valuation allowance will be recorded in the income statement of the period in which the adjustment is determined to be required.

For 2014, tax expense was $44,769, which consisted of $15,364 of U.S. state income taxes and $29,405 of foreign income taxes.  For 2013, tax expense was $37,000, which consisted of U.S. state income taxes.

Results of Operations

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

Consolidated Statements of Operations Data:

 

 

             

 

 

 

 

 

 

 

Revenue

 

$

159,084 

 

$

122,206 

 

$

80,016 

 

Cost of revenue

 

 

45,415 

 

 

38,082 

 

</