S-1/A 1 d451503ds1a.htm AMENDMENT NO. 7 TO FORM S-1 Amendment No. 7 to Form S-1
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As filed with the Securities and Exchange Commission on March 20, 2014

Registration No. 333-192234

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 7

to

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

GLOBOFORCE GROUP PLC

(Exact name of registrant as specified in its charter)

 

Ireland   7371  

98-0376337

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

21 Beckett Way

Park West Business Park

Dublin 12

Ireland

+353 1 625 8800

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

 

 

Eric Mosley, Chief Executive Officer

Stephen Cromwell, Chief Financial Officer

Reservoir Corporate Center

144 Turnpike Road, Suite 310

Southborough, MA 01772

(508) 229-1500

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount

to be
Registered(1)

  Proposed
Maximum
Offering Price
Per Share(2)
 

Proposed
Maximum
Aggregate

Offering Price(2)

 

Amount of

Registration Fee(3)

Ordinary Shares, par value $0.01 per share

 

4,375,714

  $15.00  

$65,635,710

 

$8,454

 

 

(1)   Includes 570,745 shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3)   This amount was previously paid in connection with the initial filing of this Registration Statement on November 8, 2013 and the filing of Amendment No. 4 on March 10, 2014.

 

 

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

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated March 20, 2014

 

Prospectus

3,804,969 shares

 

LOGO

Ordinary shares

We are offering 2,941,177 of our ordinary shares and the selling shareholders identified in this prospectus are offering 863,792 of our ordinary shares. We will not receive any of the proceeds from the sale of the shares sold by the selling shareholders. This is our initial public offering, and no public market currently exists for our shares. We expect the initial public offering price to be between $14.00 and $15.00 per share.

Our ordinary shares are approved for listing on the NASDAQ Global Market under the symbol “THNX.”

 

      Per Share      Total  

 

  

 

 

    

 

 

 

Initial public offering price

   $                                $                            

Underwriting discounts and commissions(1)

   $         $     

Proceeds to us, before expenses

   $         $     

Proceeds to the selling shareholders, before expenses

   $         $     

 

  

 

 

    

 

 

 
(1)   

We have agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting.”

The selling shareholders have granted the underwriters an option for a period of 30 days to purchase up to an additional 570,745 of our ordinary shares solely to cover over-allotments. We will not receive any proceeds from the sale of shares by the selling shareholders. The selling shareholders include one of our principal shareholders and certain of our directors and officers, including our chief executive officer and chief financial officer.

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements. Investing in our ordinary shares involves a high degree of risk. Please read “Risk factors” beginning on page 13.

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

Delivery of the shares is expected to be made on or about         , 2014.

 

J.P. Morgan

  Credit Suisse   UBS Investment Bank  

Stifel

Raymond James

                , 2014


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Table of contents

 

     Page  

Prospectus summary

     1   

Risk factors

     13   

Special note regarding forward-looking statements

     41   

Market and industry data and forecasts

     43   

Use of proceeds

     44   

Dividend policy

     44   

Capitalization

     45   

Dilution

     47   

Selected consolidated financial data

     49   

Management’s discussion and analysis of financial condition and results of operations

     51   

Business

     77   

Management

     92   

Executive compensation

     99   

Certain relationships and related party transactions

     109   

Principal and selling shareholders

     111   

Description of share capital

     115   

Shares eligible for future sale

     142   

Taxation

     144   

Underwriting

     154   

Enforceability of civil liabilities

     160   

Legal matters

     160   

Experts

     160   

Where you can find more information

     160   

Index to consolidated financial statements

     F-1   

You should rely only on the information contained in this prospectus or in any free writing prospectus we file with the Securities and Exchange Commission. We, the selling shareholders and the underwriters have not authorized anyone to provide you with information different from that contained in this prospectus or any free writing prospectus. We, the selling shareholders and the underwriters are offering to sell, and seeking offers to buy, ordinary shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or other earlier date stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our ordinary shares.

Until         , 2014 (the 25th day after the date of this prospectus), all dealers that buy, sell, or trade our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

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


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This document has been prepared on the basis that any offer of shares in any relevant European Economic Area member state will be made pursuant to an exemption under European prospectus law from the requirement to publish a prospectus for offers of shares and does not constitute an offer or solicitation to anyone to purchase shares in any jurisdiction in which such offer or solicitation is not authorized nor to any person to whom it is unlawful to make such an offer or solicitation and this prospectus has not been drawn up in accordance with Directive 2003/71/EC.


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Prospectus summary

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our ordinary shares, you should carefully read this entire prospectus, including our financial statements and the related notes included elsewhere in this prospectus. You should also consider, among other things, the matters described under “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations,” in each case appearing elsewhere in this prospectus. Unless otherwise stated, all references to “us,” “our,” “Globoforce,” “we,” the “Company” and similar designations refer to Globoforce Group plc and its subsidiaries.

Company overview

We are a leading provider of a cloud-based, social recognition software solution that organizations use to engage their employees worldwide to create alignment with values and advance company goals and culture. We achieved this leadership position through our innovative technologies, our ability to deliver a comprehensive solution to large, multinational firms, and our experience operating in the social recognition industry. Our Software-as-a-Service, or SaaS, platform enables employee-to-employee recognition that is broadcast socially and made visible throughout the organization. Our clients leverage the widespread employee adoption of our social recognition solution to elevate recognition to a strategic imperative that drives business results. In addition, the interactions between employees using our social recognition solution generate data that provides our clients with deep management insights about their talent and culture. Our growth has been driven by our clients’ ability to use our social recognition solution to increase employee engagement, improve employee retention and strengthen company culture.

We have developed innovative technologies that power our full-service strategic solution and differentiate us from other recognition solution providers. We designed our social recognition solution to provide organizations with actionable intelligence about their talent and culture typically not found in traditional human resource solutions. We deliver this information through powerful enterprise social graphs, talent mapping and interactive info-graphics. These insights into employee performance complement the more traditional processes such as performance reviews, succession planning and career management, collectively referred to as human capital management, or HCM.

Through our SaaS platform, our clients benefit from a shorter implementation cycle, low total cost of ownership and access to the latest version of our software. Additionally, our social recognition solution has intuitive web and mobile-based user interfaces that are easy for employees to use across desktop and mobile computing environments. Our seamless employee adoption model and client-specific branding often leads to viral and organic adoption, and our SaaS platform scales to support large, global implementations.

Our social recognition solution has been successfully adopted in complex environments throughout the world. As of December 31, 2013, our client base consisted of more than 100 companies, with more than 1.9 million users located in more than 140 countries using our solution in 29 languages and dialects. Representative clients include: Abbott Laboratories, Celestica Inc., CitiCorp North America, Inc., Eaton Corporation, General Electric Company, IM Flash Technologies LLC, InterContinental Hotels Group, Intuit, Inc., JetBlue Airways Corporation, LSI Corporation, Premier Farnell Corporation, Quintiles, Inc. and Symantec Corporation. For the year ended December 31, 2013, only one of our clients, General Electric Company, represented more than 10% of our total revenue at 31%, and over 80% of our total revenue was derived from North America and the European Union, with a majority coming from the United States.

 

 

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Our solution reinforces the praise delivered through recognition and extends employees’ recognition moments by providing awards with economic value. Employees redeem their awards through our global e-commerce rewards network that has a broad array of locally relevant options including retail, online shopping, dining, travel and charitable giving.

We derive our billings primarily from recognition awards processed through our solution and associated transaction fees. The majority of our revenue is recognized when our clients’ employees redeem their awards through our global e-commerce rewards network, primarily for gift cards, and we deliver the redeemed item. In addition, the delivery of our social recognition solution includes various activities such as website configuration, hosting, upgrades, software functionality for award processing and call-center support. The billings for these various activities, which are derived primarily from our transaction fees, are recorded as solution and services revenue over the service period of the contractual arrangement with our clients. Our revenue increases as clients adopt and expand their usage of our social recognition solution. Our total revenue has grown from $100.0 million in 2010 to $135.8 million in 2011, to $157.7 million in 2012 and to $186.8 million in 2013, representing a three-year compound annual growth rate, or CAGR, of 23.2%. During the years ended December 31, 2010, 2011, 2012 and 2013, our net income (loss) was $3.1 million, $(0.8) million, $(1.8) million and $(6.5) million, respectively, and our free cash flow was $4.6 million, $7.4 million, $3.1 million and $2.0 million, respectively. During the years ended December 31, 2012 and 2013, our net loss increased and free cash flow decreased as we invested heavily in expansion of our sales and marketing team. For further explanation of our management’s use of free cash flow, limitations of its use, and a reconciliation of it to the most directly comparable GAAP measure, net cash provided by (used in) operating activities, please see “Summary consolidated financial data–Free cash flow.”

Industry background

Increasingly diverse and geographically-dispersed workforces combined with intense competition to hire and retain qualified employees have forced organizations to elevate their approach to employee engagement. The transformation of social recognition from ad hoc, informal practices into a strategic imperative enables organizations to drive business results and enhance their ability to attract, evaluate, develop and retain human capital. Gartner notes they are beginning to see organizations require tighter integration between recognition systems and talent management applications (particularly performance management and compensation). (1) For decades, companies have attempted to use employee recognition programs to engage and motivate employees and to strengthen employee dedication to company values. Traditionally, recognition solutions have included in-house or third-party solutions that are focused on gifts, and are limited in that they often focus only on top performers or a small segment of the employee base and do not reinforce a consistent culture or set of values across an organization. Furthermore, Gartner estimates that traditional recognition programs can account for as much as 2% of payroll costs, yet there is little direct correlation of this investment to improved employee performance, retention or improved business outcomes. (2) Traditional recognition programs are not strategic, as they do not use recognition awards to drive specific actions and behaviors across the organization. We therefore believe that traditional programs are not able to consistently measure impact on employee engagement or business results.

Strategic recognition-based programs, if designed correctly, are cost-effective and valuable tools that can help raise employee morale and lower stress, absenteeism and turnover. Taking a social approach to rewards and recognition programs can drive significant advantages over traditional models by improving

 

(1)    Gartner, Hype Cycle for Human Capital Management Software, 31 July 2013.
(2)    Gartner, IT Market Clock for Human Capital Management Software, 26 August 2013.

 

 

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workforce engagement, which has a proven impact on business outcomes, such as quality of service (QoS), customer retention, operational efficiency, revenue and profitability.(3) A study by Gallup Consulting indicates that companies in the top quartile of employee engagement generated 16% higher profits and 18% higher productivity than those in the bottom quartile, and those with “world-class engagement” have 3.9 times the earnings per share, or EPS, growth rate compared with organizations with lower engagement in the same industry.(4) Additionally, studies by Towers Watson found that recognizing employee performance can increase engagment by almost 60%,(5) and that companies with high sustainable engagement can have operating margins as much as three time higher than companies with low traditional engagement.(6) A culture of recognition can also have an even stronger impact on potential employee flight risks, and thus reduce costs.

We believe that to be most impactful, recognition solutions require innovative features to enable effective management of strategic recognition programs. Most traditional solutions have limited tools to inform strategic decision making and do not have technology or locally relevant reward options to provide full-service, global programs. They also typically do not have a social element to giving and communicating awards, which limits their impact with employees.

Market opportunity

In a July 2012 white paper that we commissioned, IDC estimated that the North America Recognition Market will grow from $22 billion in 2011 to $32 billion in 2016, an 8% CAGR.(7) In that same white paper, IDC also found that nearly 40% of study respondents expected to use a full-service third-party provider for all aspects of recognition in the twelve months ended July 31, 2013.(8)

There are several important secular trends that we believe are fueling the evolution of the recognition market.

 

 

The transformation of social recognition into a strategic business imperative.    Social recognition as a key business initiative not only improves organizations’ abilities to drive business results, but also enhances their abilities to successfully recruit, evaluate, train and retain qualified workforces.

 

 

The rise of social solutions as important communications tools in organizations.    The growth and penetration of social solutions has made it increasingly critical for enterprises to leverage employee collaboration and social platform technologies within their operations.

 

 

The continued adoption of SaaS solutions in the enterprise.    Ease and speed of deployment and a desire for low total cost of ownership continue to drive growth in the SaaS market.

 

 

The continued strength of e-commerce.    E-commerce continues to demonstrate strong growth, both in the United States and abroad.

Our solution

The key benefits of our social recognition solution include:

 

 

Social recognition drives engagement and aligns employees with cultural values.    Our solution enables employees across all levels of an organization to recognize each other for actions and behaviors that align with company values. This social employee-to-employee recognition is highly impactful as it originates from people who understand the value of the contribution, strengthens relationships within the organization, identifies important actions as they occur and is shared across a group or an entire organization.

 

(3)    Gartner, IT Market Clock for Human Capital Management Software, August 2013.
(4)    Gallup Consulting, Employee Engagement—What’s Your Engagement Ratio?, 2010.
(5)    Towers Watson, Perspectives: Turbocharging Employee Engagement — The Power of Recognition from Managers, 2010.
(6)    Towers Watson, Global Workplace Study—Engagement at Risk: Driving Strong Performance in a Volatile Global Environment, 2012.
(7)    IDC, White Paper—Employee Recognition Driving Business Results, July 2012.
(8)    IDC, White Paper—Employee Recognition Driving Business Results, July 2012.

 

 

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Facilitates viral and organic adoption among employees.    Our social recognition solution has intuitive web and mobile-based user interfaces that do not require special training, making it simple for employees to use. These interfaces allow employees and managers to easily nominate one another for awards and then subsequently approve and redeem awards.

 

 

Enables measurability and provides unique insights.    Our solution provides our clients with deep management insights through powerful social graphing and talent mapping tools. Organizations use our social recognition solution to capture, measure and gain actionable intelligence about their organization and talent.

 

 

Highly relevant rewards that perpetuate usage of our social recognition solution.    Our global e-commerce rewards network is an expansive set of both widely applicable and locally relevant reward choices. Employees may choose rewards that are meaningful to them, from both online and local suppliers, which include retail, online shopping, dining, travel and charitable giving.

 

 

Global capabilities.    Our solution allows our clients to provide a single recognition program available to all of its employees globally. Our social recognition solution supports multiple currencies and languages and includes locally relevant rewards, which facilitates adoption by both multinational firms and regional companies.

 

 

Highly scalable and configurable solution.    Our SaaS platform is built with enterprise-class scalability, reliability and uptime and is currently adopted by some of the world’s largest companies. Our SaaS platform is a true multi-tenant architecture, which allows for configuration to meet the needs of each client. Our SaaS platform enables fast and low cost global deployments through centralized administration that is designed to meet our clients’ IT and security demands.

Our business model strengths

We believe our key competitive strengths include:

 

 

Clients pay when their employees use our social recognition solution.    We generate our revenue primarily from the number and monetary value of the awards our clients provide to their employees through our social recognition solution as well as associated transaction fees. We therefore share in our clients’ successes, as they benefit from our solution and their employees increase adoption.

 

 

High client retention.    Our overall billings retention rate exceeded 100% for each of the years ended December 31, 2010, 2011, 2012 and 2013. This “stickiness” has resulted in a consistent, recurring revenue profile from our client base. As organizations scale our social recognition solution, which increases employee engagement, our solution becomes a strategic and operational platform from which clients draw valuable insights about their talent and culture. For further explanation of our management’s use of billings retention rate, please see “Management’s discussion and analysis of financial condition and results of operations–Key metrics–Billings retention rate.”

 

 

E-commerce rewards network benefits from economies of scale.    We seek to continually expand and diversify the items available on our global e-commerce rewards network to meet the demands of new and existing clients. This increases the value of our social recognition solution for each of our clients as the broad array of choices on our global e-commerce rewards network become available to them. In addition, as the volume of rewards increases across our client base, our ability to negotiate better terms with certain of our rewards suppliers improves.

 

 

Align recognition and rewards with full range of HR systems.    Our solution provides our clients with insights into their talent through our powerful social graphs, talent mapping and interactive info-graphic displays. We

 

 

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can also combine our recognition data with information from other human resources, or HR, systems to supplement the insights provided by our analytics and improve the feedback provided by other HR systems.

Our growth strategy

The principal elements of our growth strategy include:

 

 

Broaden existing client relationships.    We plan to increase the number of client employees using our social recognition solution and the number and value of awards granted and received by those employees. In many cases, as clients experience the benefits gained from implementation of our social recognition solution and improvements in employee engagement, they expand adoption of our social recognition solution within their organizations and increase their recognition budgets.

 

 

Attract new clients.    We intend to expand our solution throughout the global market, which we believe is largely underpenetrated by full-service strategic recognition solutions. Historically, we focused on the most complex and large global organizations. More recently, we have expanded our sales efforts to companies with an employee base of 2,500 or more that have corporate HR functions located in North America. We have recently hired additional salespeople to target these organizations. We plan to continue to invest in additional salespeople to expand our reach and further penetrate our potential client base and to expand our sales coverage to focus on companies that have corporate HR functions located in North America and Europe to grow our client base.

 

 

Continue to expand our product offering.    We intend to continue to add features and benefits to our core platform to drive increased adoption and penetration as well as maintain our competitive advantages in the industry. For example, we recently released Talent Maps (interactive charts and graphics that leverage recognition data to reveal the performance and culture of any team or department) and have also enhanced our social recognition solution with new language capabilities. Furthermore, the breadth of our technology platform has allowed us to expand our addressable client base into new geographies, new industries and new types of organizations. To bolster our broader relevance with clients, we intend to pursue adjacent markets such as sales incentive management and other employee-facing rewards programs such as safety, wellness and employee-referral.

 

 

Establish and maintain key strategic relationships.    We plan to continue to reach new clients and provide more robust solutions through bilateral referral and cross selling relationships or other strategic partnerships such as the relationship we have recently entered into with companies such as Workday, Inc. We also intend to strengthen our ties throughout the HR and social enterprise solutions market and believe that these relationship networks will enable us to reach a wider client base and enhance our opportunity with existing clients.

 

 

Pursue selective acquisitions.    We intend to pursue acquisitions of complementary businesses and technologies that will enable us to acquire targeted product and technology capabilities, as well as add new clients and further expand our geographic reach.

 

 

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Summary risk factors

Investing in our ordinary shares involves significant risks and uncertainties. You should carefully consider the risks and uncertainties discussed under the heading “Risk factors” and elsewhere in this prospectus before making an investment in our ordinary shares. Below is a summary of some of the principal risks we face:

 

 

we have experienced rapid growth in recent periods and if we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or successfully meet competitive challenges and may not be able to regain profitability in the future;

 

 

because our revenue is generated from a limited number of clients, the loss of one or more clients could adversely affect our revenue. If our efforts to attract new clients are not successful, our existing clients decrease, or do not increase, adoption of our social recognition solution, or if our existing clients decrease, or do not increase, the overall budget for employee recognition from year to year, our business will suffer and our business prospects may be harmed;

 

 

our financial results may fluctuate from period to period for a variety of reasons and may cause us to fail to meet expectations, which in turn may cause our share price to decline;

 

 

our clients have no obligation to spend a minimum amount on our social recognition solution, and our success therefore depends on our ability to maintain a high level of client satisfaction and a strong reputation in the rewards and recognition industry;

 

 

prior to completion of this offering, entities affiliated with Atlas Venture and Balderton Capital beneficially own an aggregate of more than 73% of our ordinary shares, and after completion of this offering, our directors, executive officers and principal shareholders will continue to have substantial control over us and could delay or prevent a change in corporate control;

 

 

if we fail to retain existing suppliers or add new suppliers to our global e-commerce rewards network, including suppliers who can provide widely available or locally relevant rewards, our business, results of operations and financial condition may be harmed;

 

 

we may experience long, variable and, therefore, unpredictable sales and implementation cycles, which could delay our ability to recognize revenue and otherwise negatively impact our business;

 

 

we may be subject to additional or unexpected regulation, including regulation of awards as gift cards in some jurisdictions, that could increase our costs and otherwise harm our business; and

 

 

security and privacy breaches may harm our business.

Our corporate information

The legal and commercial name of our company is Globoforce Group plc. We were incorporated in Ireland on April 11, 1997 as Habile Limited, and we changed our name to International Shopping Events & Enterprises Limited on July 12, 1997, to Globogift.com Limited on October 20, 1999 and to Globoforce Limited on October 23, 2002. On March 3, 2014, we effected a change to our corporate group structure whereby Globoforce Group plc (a public limited company) became the holding company of the Globoforce group by way of a share-for-share exchange in which the shareholders of Globoforce Limited exchanged their shares in Globoforce Limited for identical shares in Globoforce Group plc. Upon the exchange, the historical consolidated financial statements of Globoforce Limited included in this prospectus became the historical consolidated financial statements of Globoforce Group plc. Our registered and principal office is located at

 

 

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21 Beckett Way, Park West Business Park, Dublin 12, Ireland. Our U.S. headquarters office is located at Reservoir Corporate Center, 144 Turnpike Road, Suite 310, Southborough, MA 01772, and our telephone number is (508) 229-1500.

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

Globoforce, Talent Maps and other trademarks or service marks of Globoforce appearing in this prospectus are the property of Globoforce. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective owners.

 

 

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The offering

 

Ordinary shares offered by us

2,941,177 shares

 

Ordinary shares offered by selling shareholders

863,792 shares

 

Ordinary shares to be outstanding after this offering

26,859,517 shares

 

Underwriters’ option to purchase additional shares

The selling shareholders have granted a 30-day option to the underwriters to purchase up to an aggregate of 570,745 additional ordinary shares to cover over-allotments, if any.

 

Use of proceeds by us

We estimate that we will receive net proceeds from this offering of $32.0 million based upon an assumed initial public offering price of $14.50 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As of the date of this prospectus, we have no specific plans for the use of the net proceeds of this offering, or a significant portion thereof. We anticipate that we will use the net proceeds we will receive from this offering for working capital and other general corporate purposes, including funding of our sales and marketing activities and the costs of operating as a public company and further investment in the development of our proprietary technologies. We may use a portion of the net proceeds for the acquisition of businesses, products and technologies that we believe are complementary to our own, although we have no agreements or understandings with respect to any acquisition at this time. We will not receive any of the proceeds from sales of ordinary shares by the selling shareholders. See “Use of proceeds” for additional information.

 

Risk factors

You should carefully read “Risk factors” in this prospectus for a discussion of factors that you should consider before deciding to invest in our ordinary shares.

 

NASDAQ Global Market symbol

THNX”

 

 

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The number of ordinary shares to be outstanding after this offering is based on 23,918,340 ordinary shares outstanding as of December 31, 2013 and excludes:

 

 

1,012,110 ordinary shares issuable upon the exercise of share options outstanding as of December 31, 2013 with a weighted-average exercise price of $3.20 per share;

 

 

354,185 ordinary shares reserved for future issuance under our 2012 Stock Option and Incentive Plan, or the 2012 Plan, as of December 31, 2013;

 

 

an additional 1,053,450 ordinary shares reserved for future issuance under our 2012 Plan upon effectiveness of this registration statement to which this prospectus is a part;

 

 

share option grants and grants of restricted share units covering a total of 798,075 shares to certain employees, to be effective immediately after the effectiveness of this registration statement to which this prospectus is a part. The exercise price of the option grants will be equal to the initial public offering price set forth on the cover page of this prospectus; and

 

 

350,000 ordinary shares reserved for future issuance under our 2014 Employee Share Purchase Plan upon effectiveness of this registration statement to which this prospectus is a part.

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

 

 

the effectiveness of our amended and restated articles of association, which will be in effect upon completion of this offering;

 

 

the conversion of all of our outstanding 15,025,000 preferred shares into 15,025,000 ordinary shares on a 1:1 basis upon the closing of this offering;

 

 

no issuance or exercise of share options on or after December 31, 2013;

 

 

the effectiveness of a 5-for-1 split of our ordinary shares which became effective on March 3, 2014; and

 

 

no exercise by the underwriters of their option to purchase up to an additional 570,745 ordinary shares from the selling shareholders in this offering to cover over-allotments.

 

 

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Summary consolidated financial data

The following tables summarize the consolidated financial data for our business. You should read this summary consolidated financial data together with “Capitalization,” “Selected consolidated financial data,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes, all included elsewhere in this prospectus.

We derived the consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2013 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of results to be expected in any future period.

 

      Year ended December 31,  
(in thousands, except per share data)    2011     2012     2013  

 

  

 

 

   

 

 

   

 

 

 

Consolidated statements of operations data

      

Revenue

      

Redemption revenue

   $ 123,015      $ 141,136      $ 167,841   

Solution and services revenue

     12,790        16,555        18,956   
  

 

 

   

 

 

   

 

 

 

Total revenue

     135,805        157,691        186,797   

Expenses

      

Cost of redemption revenue

     106,827        123,240        145,515   

Cost of solution and services revenue

     2,025        2,586        3,209   

Operations

     3,363        3,735        4,367   

Research and development

     8,933        9,285        10,160   

Sales and marketing

     11,097        16,862        21,924   

General and administrative

     3,241        4,186        6,198   
  

 

 

   

 

 

   

 

 

 

Total expenses

     135,486        159,894        191,373   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     319        (2,203     (4,576

Other (expense) income, net

     (827     828        (1,317
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (508     (1,375     (5,893

Provision for income taxes

     296        461        655   
  

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

   $ (804   $ (1,836   $ (6,548
  

 

 

   

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders—basic and diluted

   $ (0.09   $ (0.21   $ (0.74
  

 

 

   

 

 

   

 

 

 

Weighted-average number of ordinary shares used in computing net loss per share attributable to ordinary shareholders—basic and diluted

     8,741        8,754        8,815   
  

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to ordinary shareholders—basic and diluted(1)

       $ (0.24
      

 

 

 

Weighted-average number of ordinary shares used in computing pro forma net loss per share attributable to ordinary shareholders—basic and diluted(1)

         23,789   

 

  

 

 

   

 

 

   

 

 

 
(1)   Pro forma basic and diluted net loss per share has been computed to give effect to the conversion of all redeemable convertible preferred shares into ordinary shares and the conversion of all previously outstanding warrants to purchase redeemable convertible preferred shares into warrants to purchase ordinary shares, as if such conversion had occurred as of the date of original issuance. The impact of the accretion of unpaid and undeclared dividends has been excluded from the determination of net loss attributable to ordinary shareholders as the holders of the redeemable convertible preferred shares are not entitled to receive undeclared dividends upon such conversion. Additionally, the gains (losses) associated with the changes in the fair value of the previously outstanding warrants to purchase preferred shares has been excluded from the determination of net loss as these remeasurements would not be required when the warrants to purchase preferred shares would have become warrants to purchase ordinary shares upon the closing of this offering.

 

 

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The table below presents a summary of our consolidated balance sheet data as of December 31, 2013:

 

 

on an actual basis;

 

 

on a pro forma basis to reflect the automatic conversion of all of our outstanding 15,025,000 preferred shares into 15,025,000 ordinary shares, on a 1:1 basis, upon the closing of this offering; and

 

 

on a pro forma as adjusted basis to reflect (i) the pro forma adjustments described above, (ii) the effectiveness of our amended and restated articles of association, which will be in effect upon completion of this offering, and (iii) the sale by us of 2,941,177 ordinary shares offered by this prospectus at the assumed initial public offering price of $14.50 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

      As of December 31, 2013  
(in thousands)    Actual     Pro forma     Pro forma
as adjusted(1)
 

 

  

 

 

   

 

 

   

 

 

 

Consolidated balance sheet data

      

Cash and cash equivalents

   $ 17,636      $ 17,636      $ 54,504   

Property and equipment, net

     3,819        3,819        3,819   

Working capital (deficit)(2)

     (27,602     (27,602     10,564   

Total assets

     78,280        78,280        108,944   

Deferred revenue

     78,128        78,128        78,128   

Redeemable convertible preferred shares

     14,473                 

Total shareholders’ (deficit) equity

     (31,858     (17,385     14,577   

 

  

 

 

   

 

 

   

 

 

 
(1)   For purposes of the pro forma as adjusted amounts shown above, the net proceeds to be received by us from the sale of ordinary shares in this offering of $32.0 million has been increased by approximately $4.9 million to reflect the estimated offering expenses which had been paid by us as of December 31, 2013.
(2)   We define working capital as current assets less current liabilities.

A $1.00 increase (decrease) in the assumed initial public offering price of $14.50 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease), on a pro forma as adjusted basis, the amount of each of cash and cash equivalents, working capital (deficit), total assets and total shareholders’ (deficit) equity by approximately $2.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

Free cash flow

Free cash flow is used as a measure of our operating performance and for planning purposes, including the preparation of our annual operating budget. Management believes that free cash flow is useful to investors as a supplemental measure to evaluate our business over time.

Free cash flow is defined as net cash provided by (used in) operating activities less purchases of property and equipment. Management believes that the use of free cash flow provides consistency and comparability with our past financial performance, facilitates period to period comparisons of operating performance and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

 

 

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Free cash flow should not be considered a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do. Management compensates for the inherent limitations associated with measuring free cash flow through disclosure of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of free cash flow to the most directly comparable GAAP measure, net cash provided by (used in) operating activities. A reconciliation of net cash provided by operating activities to free cash flow is presented below:

 

                        
     Year ended December 31,  
(in thousands)    2011     2012     2013  

 

  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

   $ 8,260      $ 4,352      $ 3,658   

Less purchases of property and equipment

     (857     (1,225     (1,662
  

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 7,403      $ 3,127      $ 1,996   

 

  

 

 

   

 

 

   

 

 

 

 

 

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Risk factors

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks described below along with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes, before deciding whether to purchase our ordinary shares. If any of the adverse events described in the following risk factors, as well as other factors which are beyond our control, actually occurs, our business, results of operations and financial condition may suffer significantly. As a result, the trading price of our ordinary shares could decline, and you may lose all or part of your investment in our ordinary shares.

Risks related to our business and industry

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

We incurred operating losses in certain recent fiscal periods. We reported net income of $3.1 million for the year ended December 31, 2010 and net losses of $0.8 million, $1.8 million and $6.5 million for the years ended December 31, 2011, 2012 and 2013, respectively. We cannot predict if we will regain profitability in the near future or at all. We expect to continue making significant expenditures to develop and expand our business. In addition, as a public company, we will incur additional significant accounting, legal and other expenses that we did not incur as a private company. These increased expenditures will make it harder for us to regain profitability. The recent growth in our revenue and client base may not be sustainable, and we may not generate sufficient revenue to regain profitability. We may incur significant losses in the future for a number of reasons, including the other risks described in this “Risk factors” section, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, we may not be able to regain profitability and the failure to fund our capital requirements may negatively impact our ability to achieve our business objectives.

Our financial results may fluctuate from period to period and may fail to meet expectations, which in turn may cause our share price to decline.

Our financial results may fluctuate from period to period and may fail to meet market expectations for a variety of reasons, including:

 

 

reduction in recognition spending or a decrease in growth by existing clients, which directly impacts billings and revenue;

 

 

the extent to which new clients are attracted to our solution to satisfy their employee recognition goals;

 

 

the timing and rate at which we acquire new clients;

 

 

the timing between when a new client agreement is signed and when that client starts using our solution;

 

 

the extent to which existing clients renew their agreements and the timing of those renewals;

 

 

the extent to which existing clients purchase or discontinue use of additional services in our solution and increase or decrease their number of users;

 

 

the addition or loss of clients, including through acquisitions, consolidations, bankruptcies or otherwise;

 

 

changes in our pricing policies or those of our competitors;

 

 

changes in billing cycles or payment terms in client agreements relative to award redemption patterns;

 

 

seasonal factors affecting demand for our solution or potential clients’ purchasing decisions;

 

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the financial condition and creditworthiness of our clients;

 

 

the timing, success and related expenses of new products and services or enhancements introduced by us or by our competitors;

 

 

changes in our expense levels and any related impact on our results of operations;

 

 

other changes in the competitive dynamics of our industry, including consolidation among competitors, clients or strategic partners; and

 

 

various factors related to disruptions in our Software-as-a-Service, or SaaS, hosting network infrastructure, defects in our software, privacy and data security and exchange rate fluctuations, each of which is described elsewhere in this “Risk factors” section.

In light of the foregoing factors, we believe that our financial results, including our revenue and deferred revenue levels, may vary significantly from period-to-period. As a result, period-to-period comparisons of our operating results may not be meaningful and should not be relied on as an indication of future performance.

Fluctuations in our quarterly operating results could cause the price of our ordinary shares to decline rapidly and significantly, may lead research analysts to change their long-term models for valuing our ordinary shares, could cause short-term liquidity issues, may impact our ability to retain or attract key personnel or cause other unanticipated issues. If our quarterly operating results or guidance fall below the expectations of research analysts or investors, the price of our ordinary shares would likely decline substantially.

Certain of our operating results and financial metrics are difficult to predict as a result of seasonality.

We have experienced seasonality with respect to the timing of when awards are both awarded and subsequently redeemed. We have historically seen a higher percentage of awards and redemptions in the fourth quarter of each year. We expect this seasonality to continue, or possibly increase, in the future, which may cause additional fluctuations in certain of our operating results and financial metrics, and thus cause increased difficulties in predictability.

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

We increased our number of full-time employees from 106 at December 31, 2010 to 146 at December 31, 2011, to 194 at December 31, 2012 and to 240 at December 31, 2013, and our total revenue increased from $100.0 million in 2010 to $135.8 million in 2011, to $157.7 million in 2012 and to $186.8 million in 2013. Our growth has placed, and may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to further expand our overall business, client base, headcount and operations both domestically and internationally. Creating a global organization and managing a geographically-dispersed workforce will require substantial management effort and significant additional investment in our infrastructure. We will be required to continue to improve our operational, financial and management controls and our reporting procedures and we may not be able to do so effectively. As such, we may be unable to manage our expenses effectively in the future, which may negatively impact our operating expenses.

Our revenue is generated from a limited number of clients, and the loss of one or more significant clients could adversely affect our revenue.

Our client base is highly concentrated. For the years ended December 31, 2012 and 2013, our ten largest clients by revenue represented approximately 74% and 68%, respectively, of our total revenue, with one client, General Electric Company together with its affiliates, representing more than 10% of our total

 

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revenue at 32% and 31%, respectively. We expect that a relatively small number of clients will continue to account for a significant portion of our revenue for the foreseeable future. The loss of one or more of our clients, including the loss of any of our larger clients, whether through acquisitions, consolidations, bankruptcies or otherwise, or the failure to retain a significant amount of business from our clients, could harm our business, results of operations and financial condition.

Our clients have no obligation to spend a minimum amount on our solution, and if our existing clients decrease, or do not increase, adoption of our solution or if existing clients decrease, or do not increase, the overall spending for employee recognition from year to year, our business will suffer and our business prospects may be harmed.

We expect to continue to derive a significant portion of our revenue from our existing clients, and we expect our future revenue growth to be driven by expansion of existing clients’ employee recognition budgets from year to year or expansion of existing programs to wider populations of employees within existing clients. Despite such expectations, our clients have no obligation to spend a minimum amount on our solution. As a result, if existing clients do not maintain their current levels of use of our solution or decrease their employee recognition budget, our business, results of operation and financial condition will suffer. In addition, the rate at which clients expand their existing programs to additional employee populations is critical to our future growth. Factors that may affect the expansion rate for our solution include:

 

 

the price, performance and functionality of our solution;

 

 

the availability, price, performance and functionality of competing solutions;

 

 

the effectiveness of our client support services; and

 

 

our ability to continue to offer global rewards, including local suppliers.

There can be no assurance that any of our clients will increase or not decrease adoption of, or overall spending for, our solution. If our clients choose not to take advantage of our solution for any reason, our revenue will decline and our future revenue may be constrained.

Most of our major clients may terminate their agreements for any reason with limited notice or choose not to renew their agreements, and our success therefore depends on our ability to maintain a high level of client satisfaction and a strong reputation in the rewards and recognition industry.

Most of our major clients may terminate their agreements with us for any reason with typically 30 to 180 days prior notice. Additionally, most of our major clients have entered into master services agreements that continue for three years from the initial contract date and either renew upon mutual agreement, or automatically renew for additional one-year periods unless either party notifies the other of its desire not to renew. However, some of our agreements do not contain renewal provisions, which may require us to enter into new agreements with those clients. While few clients have terminated their agreements with us for convenience, some of our clients have elected not to renew their agreements with us. There can be no assurance that any of our clients will choose to renew their agreements with us, and our clients may negotiate terms less advantageous to us upon renewal. As a result, our continued success depends significantly on our ability to meet or exceed our clients’ expectations. If any of our largest clients or a significant number of clients seek to or actually terminate their agreement, fail to renew their agreement, renew their agreement upon less favorable terms or do not enter into a new agreement with us, our business, results of operations and financial condition would be adversely affected.

 

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If we fail to retain any of our largest existing suppliers or a significant number of our existing suppliers or add new suppliers to our global e-commerce rewards network, including suppliers who can provide widely available or locally relevant rewards, our business, results of operations and financial condition may be harmed.

We depend on our ability to attract and retain suppliers that are prepared to offer gift cards or merchandise on compelling terms to us that we sell through our global e-commerce rewards network. We believe the successful management of our supplier relationships is a key aspect of our business and our ability to compete successfully in the market for recognition solutions. We do not have long-term arrangements to guarantee the availability of variety to our clients’ employees or favorable pricing terms to us. Additionally, our current suppliers, including our largest suppliers, may not continue their relationships with us on favorable payment and other terms, if at all, and any change to the payment terms may affect our cash flows from operations. We must continue to attract and retain suppliers for our global e-commerce rewards network in order to increase revenue. We may experience attrition of suppliers in the ordinary course of business resulting from several factors, including changes in supplier contract requirements and terms and supplier closures and bankruptcies. We may fail to retain any of our largest suppliers or a significant number of our suppliers or fail to continue to attract new suppliers who can provide a wide range of compelling or locally relevant awards. If any of the foregoing occurs, our employee recognition solution may be less compelling to clients and our business, results of operations and financial condition may be harmed.

Our financial results may fluctuate due to our long, variable and, therefore, unpredictable sales cycle and our focus on large and mid-sized organizations.

We plan our expenses based on certain assumptions about the length and variability of our sales cycle. If our sales cycle becomes longer or more variable, our results may be adversely affected. Our sales cycle generally varies in duration between three months to over a year and, in some cases, even longer. The fluctuations that result from the length and variability of our sales cycle may be magnified by our focus on sales to large and mid-sized organizations. Factors that may influence the length and variability of our sales cycle include:

 

 

the need to educate potential clients about the uses and benefits of our solution;

 

 

the discretionary nature of potential clients’ purchasing and budget cycles and decisions;

 

 

the competitive nature of potential clients’ evaluation and purchasing processes;

 

 

evolving functionality demands of potential clients;

 

 

fluctuations in the employee recognition needs of potential clients;

 

 

announcements or planned introductions of new products by us or our competitors; and

 

 

lengthy purchasing approval processes of potential clients.

If we are unable to close an expected significant transaction with one or more of these companies in a particular period, or if an expected transaction is delayed until a subsequent period, our operating results for that period, and for any future periods in which revenue from such transaction would otherwise have been recognized, may be adversely affected.

If we experience delays in the client implementation process or fail to complete new client implementations successfully, it could delay our ability to recognize revenue, increase our costs and otherwise negatively impact our business.

After signing a contract with a new client, the first stage of a client program is implementation, where the look and feel of the website, award options and structure of the client’s recognition program is determined

 

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and the website is configured based on the client’s needs. It may be difficult for us to manage the timeliness of these implementations and the allocation of personnel and resources by us or our clients. We base resource allocations for implementations based on the size and complexity of the client organization along with the estimated annual spend indicated by the client typically during the sales or contract process. If our infrastructure capacity is insufficient to meet our needs, we may experience delays in deploying our solution to new clients, or expanding the solutions we offer to existing clients. We do not recognize revenue from clients until their recognition program is launched. If the launch of our solution with a new client is delayed or an expansion of our solution with an existing client is delayed due to complications in the implementation process caused by us or our clients, our recognition of revenue for the deployment or expansion with such client will be delayed. Therefore, failure to successfully manage client implementations could result in a delay in our ability to recognize revenue. If we do not successfully manage the launch process and rollout with a client, it may take several quarters or years before the client fully launches or expands its recognition program and attains its original anticipated spend amount, or it is possible the client may never reach this amount. Delays in implementation or failure to successfully implement new clients as a result of complications caused by us or our clients could also increase costs, harm our reputation, cause us to lose existing clients, lead to potential client disputes or limit the adoption rate of our solution, and our business, results of operations and financial condition could be materially and adversely affected.

If our efforts to attract new clients are not successful, our revenue growth will be adversely affected.

One of the key elements to growing our business is new client acquisition. Our ability to attract new clients will depend in large part on the success of our sales and marketing efforts, including our more recent focus on organizations with 2,500 or more employees, which may not be successful. Our prospective clients may not be familiar with our solution, or may have traditionally used other products and services for their employee recognition requirements. Our prospective clients may develop their own solutions to address their employee recognition goals, purchase competitive product offerings, or engage third-party providers of services that do not use our solution to provide their services. In addition, attracting new clients requires substantial time and expense. It may be difficult to identify, engage and market to clients who do not currently have recognition programs or are unfamiliar with our solution, and many of our clients typically require input from one or more internal levels of approval. This requires us to spend substantial time and effort assisting potential clients in evaluating our solution including providing demonstrations. We may also be required to invest or incur additional time and expense in connection with our increased focus on mid-sized organizations. Furthermore, the market’s demand for a SaaS platform for employee recognition may decrease or may not increase relative to the demand for solutions from traditional non-strategic recognition vendors, or an alternative form of employee recognition solution may emerge. If our prospective clients do not perceive our solution to be of sufficiently high value and quality, we may not be able to attract new clients and our business, results of operations and financial condition would be adversely affected.

We may be subject to additional or unexpected regulation, including regulation of awards as gift cards in some jurisdictions, that could increase our costs and otherwise harm our business.

The application of certain laws and regulations, including the U.S. Credit Card Accountability Responsibility and Disclosure Act of 2009, or the CARD Act, and unclaimed and abandoned property laws, to the unused value of awards is uncertain. In certain states and foreign jurisdictions, awards may be considered a gift card. Some of these states and foreign jurisdictions include gift cards under their unclaimed and abandoned property laws, which require companies to remit to the government the value of the unredeemed balance on the gift cards after a specified period of time (generally between one and five years) and impose certain reporting and recordkeeping obligations. The analysis of the potential application of the unclaimed and abandoned property laws to awards is complex, involving an analysis of constitutional and statutory

 

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provisions and factual issues, including our relationship with clients and their employees and our role as it relates to the issuance of awards and their redemption. In the event that one or more states or foreign jurisdictions successfully challenges our position on the application of its unclaimed and abandoned property laws to awards, our revenue previously recognized for awards that were sold but never redeemed, or breakage, could have a material adverse impact on our revenue and net income. We recognized redemption revenue related to breakage of $3.6 million, $3.2 million and $4.5 million for the years ended December 31, 2011, 2012 and 2013, respectively. Moreover, a successful challenge to our position could subject us to penalties or interest on unreported and unremitted sums, and any such penalties or interest would have a further material adverse impact on our net income.

In addition, from time to time, we may be notified of additional laws and regulations which governmental organizations or others may claim should be applicable to our business. We may also become subject to additional regulatory and compliance requirements as a result of changes in laws or regulations, or as a result of any expansion or enhancement of our existing solution or any new solutions we may offer in the future. If we are required to alter our business practices as a result of any laws or regulations, our revenue could decrease, our costs could increase and our business may be adversely affected. In addition, the costs and expenses associated with defending any actions related to such additional laws and regulations and any payments of related penalties, judgments or settlements could harm our profitability.

Security and privacy breaches may harm our business.

Our solution involves the storage and transmission of information over the Internet, and security breaches, unauthorized access, unauthorized usage, virus or similar breach or disruption could result in loss of this information, damage to our reputation, early termination of our contracts, litigation, regulatory investigations and liabilities. Although our solution is not designed or required to have access to personally identifiable employee information held by our clients, there is a risk of inadvertent access to such information since our software interacts with our clients’ platforms and other human resources software. For example, our controls may fail to prevent such access or access may be inadvertently permitted during the implementation of our solution. If our security measures are breached as a result of third-party action, employee or implementation error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to client or employee data, our reputation will be damaged, our business may suffer and we could incur significant liability. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose revenue and clients. Any significant violations of data privacy could result in the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and adversely impact our business, results of operations and financial condition. Moreover, if a high profile security breach occurs with respect to another SaaS provider, our clients and potential clients may lose trust in the security of the SaaS business model generally, which could adversely impact our ability to retain existing clients or attract new ones.

The U.S. and various state governments have adopted or proposed limitations on the collection, distribution and use of personally identifiable information. Several foreign jurisdictions, including all European Union member states, have adopted legislation (including directives or regulations) that increase or change the requirements governing data collection, storage, transfer, security and deletion in these jurisdictions. Within the EU there are proposals to increase these requirements and to impose significant penalties for non-compliance. If our privacy or data security measures fail to comply with current or future laws and regulations, we may be subject to litigation, regulatory investigations, fines or other liabilities. Moreover, if future laws and regulations limit our clients’ ability to use and share employee data or our ability to store,

 

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process and share data with our clients over the Internet, demand for our solution could decrease, our costs could increase, and our business, results of operations and financial condition could be harmed.

If we fail to develop or acquire new functionality or enhance our existing solution to meet the needs of our existing and future clients or if we fail to estimate the impact of developing and introducing new functionality and enhanced solutions on our business, our revenue will decline.

To keep pace with technological developments, satisfy increasingly sophisticated client requirements and achieve market acceptance, we must continue to enhance and improve our existing solution and we must also continue to introduce new solutions. Any new solutions we develop or acquire may not be introduced in a timely manner and may not achieve the broad market acceptance necessary to generate significant revenue. If we are unable to successfully develop or acquire new solutions or enhance our existing solutions or if we fail to price our solutions to meet market demand, our business and operating results will be adversely affected. To date, we have focused our business on providing rewards and recognition solutions for large and mid-sized organizations, but we may seek to expand into other offerings in the future such as sales incentive management and other employee-facing rewards programs including safety, wellness and employee-referral. Our efforts to expand our solution to new organization sizes or beyond rewards and recognition solutions may divert management resources from existing operations and require us to commit significant financial resources to an unproven business, which could in turn harm our existing business.

We expect to incur significant expense to develop additional solutions and functionalities and to integrate acquired solutions or functionalities into our existing platform to maintain our competitive position. These efforts may not result in commercially viable solutions. If we do not receive significant revenue from these investments, our business could be adversely affected. Additionally, we intend to maintain a single version of each release of our software applications that is configurable to meet the needs of our clients. Clients may require customized solutions, or features and functions that we do not yet offer and do not intend to offer in future releases, which may cause them to choose a competing solution, and our results of operations, financial condition, business and prospects could be materially adversely affected.

We may be forced to change our pricing levels, or our pricing model, as the market for recognition solutions evolves.

The market for rewards and recognition solutions is still evolving, and competitive dynamics may cause pricing levels, as well as pricing models generally, to change as the market matures and as existing and new market participants introduce new types of solutions and different approaches to enable organizations to address their talent management needs. As a result, we may be forced to change our pricing model, and we may be unable to renew existing client agreements or enter into new client agreements with the same or more favorable pricing and terms, which could have a material adverse effect on our revenue and other operating results.

The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.

The market for social recognition solutions is highly competitive. Some of our actual and potential competitors may enjoy competitive advantages over us, such as greater brand name recognition, longer operating histories, more varied services and larger operating budgets as well as greater financial, technical and other resources. If one or more of our competitors were to merge or partner with another of our competitors, if one or more of our competitors were to enter into strategic partnerships with companies in the human resources and compensation fields, or if new competitors enter into the market for recognition solutions, the change in the competitive landscape could materially adversely affect our ability to compete

 

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effectively. We expect competition to intensify in the future. If we fail to compete effectively, our business will be harmed. Some of our principal competitors have varying pricing models, which has resulted in pricing pressures. Similarly, some competitors offer different billing terms, which has resulted in pressures on our billing terms. If we are unable to maintain our pricing levels, billing terms and market share, our operating results would be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced revenue, reduced operating margins, losses or the failure of our solution to achieve or maintain more widespread market acceptance, any of which could harm our business.

We face competition from other incentive and recognition providers, as well as traditional non-strategic recognition solutions, internally developed solutions designed to support the needs of a single organization, as well as from third-party human resource application providers. We may also face competition from new market entrants. Our primary competition is from traditional incentive vendors such as, without limitation, BI Worldwide, Maritz and O.C. Tanner.

Many of our competitors are able to devote greater resources to the development, promotion and sale of their products and services. In addition, many of our competitors have established marketing relationships, access to larger client bases and major distribution agreements with consultants, system integrators and distributors. Moreover, many software vendors could bundle human resource products or offer such products at a lower price as part of a larger product offering. In addition, some competitors may offer software that addresses one, or a limited number, of rewards and recognition functions at a lower price point or with greater depth than our solution. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or client requirements. Further, some potential clients, particularly large organizations, may elect to develop their own internal solutions.

For all of these reasons, we may not be able to compete successfully against our current and future competitors. If we are unable to compete effectively with our competitors for any of the foregoing reasons or for any other reasons, our business, results of operations and financial condition could be materially and adversely affected.

Unfavorable conditions in our industry or the global economy could limit our ability to grow our business and negatively affect our operating results.

Our operating results may vary based on the impact of changes in our industry or the global economy on us or our clients. The revenue growth and potential profitability of our business depends on demand for and usage of employee rewards and recognition solutions in particular. We sell our solution primarily to large and mid-sized organizations whose businesses fluctuate based on general economic and business conditions. To the extent that weak economic conditions cause our clients and potential clients to freeze or reduce their headcount, demand for our solution may be negatively affected. Historically, economic downturns have resulted in overall reductions in spending on employee compensation, including employee rewards and recognition solutions as well as pressure for extended billing terms, as occurred during the recent recession. If economic conditions deteriorate or do not materially improve, our clients and potential clients may elect to decrease their employee recognition budgets or defer or reconsider new solution purchases or renewals, which would limit our ability to grow our business and negatively affect our operating results.

We use a third-party data center facility to deliver our solution. Any disruption of service at this facility could harm our business.

We manage our services and serve all of our clients from one third-party data center facility located in the United States and one back-up facility, which is owned and managed by us in our Dublin office. While we

 

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own and control the actual computer and storage systems upon which our platform runs and deploy them to the U.S. data center facility, we do not own, lease or control the operation of the U.S. facility.

The U.S. data center facility provider has no obligation to renew its agreement with us on commercially reasonable terms, or at all. If we are unable to renew this agreement on commercially reasonable terms, we may be required to transfer to a new facility, and we may incur significant costs and possible service interruption in connection with doing so. In addition, if our data centers fail to meet our capacity requirements, our service could be interrupted and our ability to scale our operations could be adversely affected.

Any changes in third-party service levels at the U.S. facility or any errors, defects, disruptions or other performance problems at or related to this facility that affect our services could harm our reputation and may damage our clients’ businesses. Interruptions in our services might reduce our revenue, cause us to issue credits to clients, subject us to potential liability, and cause clients to terminate their agreements with us or harm our renewal rates.

This facility is vulnerable to damage or service interruption resulting from human error, intentional bad acts, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. The occurrence of a natural disaster or an act of terrorism, or vandalism or other misconduct, or a decision to close the facility without adequate notice or other unanticipated problems could result in lengthy interruptions in our services.

Any significant disruption in our SaaS hosting network infrastructure could harm our reputation, require us to provide credits or refunds, result in early termination of client agreements or loss of clients, and negatively affect our business.

Our SaaS hosting network infrastructure is a critical part of our business operations. Our clients access our solution through a standard web browser or mobile device and depend on us for fast and reliable access to our solution. Our software is proprietary, and we rely on the expertise of members of our engineering and software development teams for the continued performance of our solution. We have experienced, and may in the future experience, disruptions in our computing and communications infrastructure. Factors that may cause such disruptions include:

 

 

human error;

 

 

security breaches;

 

 

telecommunications outages from third-party bandwidth, internet service, mobile network, electricity and other providers;

 

 

computer viruses;

 

 

acts of terrorism, sabotage or other intentional acts of vandalism;

 

 

unforeseen interruption or damages experienced in moving hardware to a new location;

 

 

fire, earthquake, flood and other natural disasters; and

 

 

power loss.

Although we generally back up our client databases daily and store our data in more than one geographically-distinct location, our infrastructure does not currently include the real-time mirroring of data. Thus, in the event of any of the factors described above, or certain other failures of our computing infrastructure, client data from recent transactions may be permanently lost. Moreover, some of our client agreements include performance guarantees and service level standards that obligate us to provide credits,

 

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refunds or termination rights in the event of a significant disruption in our SaaS hosting network infrastructure or other technical problems that relate to the functionality or design of our solution.

Defects in our software could affect our reputation, result in significant costs to us and impair our ability to sell our solution and related services.

Although we regularly test our software for defects and work with clients through our client support organization to identify and correct errors, defects in our software are likely to occur in the future. The costs incurred in correcting any software defects may be substantial and could adversely affect our operating results. Any defects that cause interruptions to the availability of our software could result in:

 

 

lost or delayed market acceptance and sales of our solution;

 

 

early termination of client or supplier agreements or loss of clients or our relationships with our suppliers;

 

 

credits or refunds to clients;

 

 

product liability suits against us;

 

 

diversion of development resources; and

 

 

injury to our reputation.

While our client agreements typically contain limitations and disclaimers that purport to limit our liability for damages related to defects in our solution, such limitations and disclaimers do not typically apply to data privacy breaches or indemnification issues and may not be enforced by a court or other tribunal or otherwise effectively protect us from such claims.

Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.

We are subject to laws specifically governing the Internet and e-commerce. Existing and future regulations and laws could impede the growth of the Internet or other online services. These regulations and laws may involve taxation, tariffs, participant privacy, data protection, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services and the characteristics and quality of services. It is not clear how existing laws governing issues such as property, ownership, sales and other taxes, libel and personal privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. In addition, it is possible that governments of one or more countries may seek to censor content available on our websites. Adverse legal or regulatory developments could substantially harm our business. In particular, in the event that we are restricted, in whole or in part, from operating in one or more countries, we may be unable to retain, expand within or increase our client base and we may not be able to maintain or grow our revenue.

If we fail to retain key employees and recruit qualified technical personnel, our business could be harmed.

We believe that our success depends on the continued employment of our senior management and other key employees, such as our chief executive officer. We have entered into employment agreements with each of our executive officers; however, none of them nor any of our other employees is obligated to continue his or her employment with us. We have no key-man insurance on any member of our senior management or other key employees.

In addition, because our future success is dependent on our ability to continue to enhance and introduce new solutions, we are heavily dependent on our ability to attract and retain qualified engineers with the requisite

 

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education, background and industry experience. As we expand our business, our continued success will also depend, in part, on our ability to attract and retain qualified sales and marketing and operational personnel capable of supporting a larger and more diverse client base. The loss of the services of a significant number of our engineers could be disruptive to our development efforts or business relationships. In addition, if any of our key employees joins a competitor or decides to otherwise compete with us, we may experience a material disruption of our operations and development plans, which may cause us to lose clients or increase operating expenses as the attention of our remaining senior managers is diverted to recruit replacements for the departed key employees. Competition for qualified personnel is intense, and we may not be successful in attracting and retaining such personnel on a timely basis, on competitive terms or at all. If we are unable to attract and retain qualified personnel, our business, results of operations and financial condition could suffer.

We may not be successful in managing our inventory.

Our inventory balance represented approximately 6% of our total assets as of December 31, 2013. We must maintain sufficient inventory levels to meet our clients’ demands while managing our costs to store and hold gift cards. If we do not accurately predict demand, we may have to dispose of excess inventory, which also can adversely impact our financial results. We also experience inventory shrinkage and cannot assure you that inventory loss and theft will remain the same or decrease in the future or that we will effectively address inventory shrinkage.

Under most of our current supplier agreements, we do not have the ability to return unsold items, and we have entered into and plan to continue to enter into purchase agreements with commitments to purchase larger quantities of inventory to secure more favorable business terms. If we are unable to correctly predict demand for gift cards, we may be responsible for covering the cost of unused inventory and our financial condition and results of operations may suffer.

In addition, our suppliers of goods may have difficulty adjusting to our changing demands and growing business and their failure to provide quality merchandise in a timely manner could damage our reputation and lead to litigation against us. We rely on outsourcers to procure merchandise and if they do not keep up with changing consumer preferences our ability to attract new, or expand existing clients could be harmed.

Failure to effectively expand our sales teams may impede our growth.

We will need to continue to expand our sales and marketing infrastructure in order to grow our client base and our business. Identifying, recruiting and training qualified sales and marketing personnel will require significant time, expense and attention. If we are unable to hire, develop and retain talented sales personnel or if our new direct sales personnel are unable to achieve expected productivity levels in a reasonable period of time, we may not be able to significantly increase our revenue and grow our business.

Because we recognize revenue over the contract term and estimate total contract value, a significant downturn in our business may not be immediately reflected in our operating results.

We recognize redemption revenue upon delivery of goods or gift cards to our clients’ employees and solution and services revenue from our client agreements over the contractual terms of these agreements, which is typically three years. As a result, a significant portion of the revenue we report in each quarter is generated from client agreements entered into during previous periods. Consequently, a decline in new or renewed client agreements in any one quarter may not impact our financial performance in that quarter, but will negatively affect our revenue in future quarters. If a number of contracts expire and are not renewed in the same quarter, or there is a reduction in the client’s recognition spend, our revenue will decline significantly in that quarter and subsequent quarters. In addition, we may be unable to adjust our

 

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fixed costs in response to reduced revenue. Accordingly, the effect of significant declines in sales and market acceptance of our solution may not be reflected in our short-term results of operations.

Integrated, comprehensive SaaS solutions such as ours represent a relatively new approach to addressing organizations’ recognition initiatives, and if demand for SaaS solutions such as ours does not increase, our business will suffer.

Providing organizations with rewards and recognition solutions through integrated, comprehensive SaaS solutions is a developing market, and we must improve the market awareness of our software-based recognition solution to increase our revenue. The widespread adoption of our solution depends not only on strong demand for rewards and recognition solutions generally, but also for solutions delivered via a SaaS business model in particular. There are still a significant number of organizations that have not adopted recognition programs at all, and it is unclear whether such organizations ever will adopt such programs and, if they do, whether they will desire a SaaS solution such as ours. As a result, we cannot assure you that our SaaS solution will achieve and sustain the high level of market acceptance that is critical for the success of our business.

If we fail to develop our brand cost-effectively, our business may suffer.

Developing and maintaining awareness of the Globoforce brand in a cost-effective manner is critical to achieving widespread acceptance of our existing and future solutions and is an important element in attracting new clients. Furthermore, the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful solutions at competitive prices, which we may not do effectively. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new clients or retain our existing clients to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.

Fluctuations in the exchange rate of foreign currencies could result in currency transactions losses.

We currently have accounts receivable denominated in U.S. dollars, British pounds, Canadian dollars, Australian dollars and Euro, and in the future we may have sales denominated in additional currencies depending on where our clients are located. While we invoice our clients in U.S. dollars, British pounds, Canadian dollars, Australian dollars and Euro, we incur a significant portion of our operating expenses in Euro and U.S. dollars, and our cost of redemption revenue is typically incurred in the supplier’s local currency. Any fluctuation in currency exchange rates may negatively impact our business, financial condition and results of operations. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exposure, we may not be able to hedge effectively due to a lack of experience, unreasonable costs or illiquid markets.

We have entered into outsourcing and other agreements with third parties related to certain call center and fulfillment services, and any difficulties experienced in these arrangements could result in additional expense, loss of revenue or an interruption of our solutions.

We have entered into outsourcing agreements with third parties to provide certain call center and fulfillment services to our clients and their employees. As a result, we rely on third parties over which we have limited control to perform certain of our operations. If these third parties are unable to perform to our requirements or to provide the level of service required or expected by our clients and their employees, our

 

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business, operating results and financial condition may be harmed and we may be forced to pursue alternatives to provide these services, which could result in delays, interruptions, additional expenses and loss of clients and related revenues.

We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our shareholders and otherwise disrupt our operations and harm our operating results.

We may seek to acquire or invest in businesses, products or technologies that we believe could complement or expand our solution, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of our management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are ultimately consummated.

As we have not historically engaged in significant acquisition activity, we have limited experience as a company in acquiring and integrating other businesses. If we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully or effectively manage the combined business following the acquisition. We may also not achieve the anticipated benefits from the acquired business due to a number of factors, including:

 

 

unanticipated costs or liabilities associated with the acquisition;

 

 

incurrence of acquisition-related costs;

 

 

our ability to integrate the combined products, services and technology;

 

 

our ability to migrate clients to our technology platform;

 

 

diversion of management’s attention from other business concerns;

 

 

harm to our existing relationships with clients and partners as a result of the acquisition;

 

 

the potential loss of key employees;

 

 

unanticipated or unknown liabilities that relate to the purchased business;

 

 

the use of resources that are needed in other parts of our business; and

 

 

the use of substantial portions of our available cash to consummate the acquisition.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could harm our results of operations.

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer.

If we fail to adequately protect our proprietary rights, our competitive advantage could be impaired and we may lose valuable assets, generate reduced revenue and incur costly litigation to protect our rights.

Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of patents, copyrights, trademarks, service marks, trade secret laws and contractual restrictions, such as confidentiality agreements and licenses to establish and protect our proprietary rights in our solution.

 

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However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect the unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our software and use information that we regard as proprietary to create software that competes with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our licensed software may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying and use of our software and proprietary information may increase. Our competitors could also independently develop solutions equivalent to ours, and our intellectual property rights may not be broad enough for us to prevent competitors from doing so. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it, which would significantly harm our business.

We may not be effective in policing unauthorized use of our intellectual property, and even if we do detect violations, litigation may be necessary to enforce our intellectual property rights. Any enforcement efforts we undertake, including litigation, could be time consuming and expensive, could divert our management’s attention and may result in a court determining that our intellectual property rights are unenforceable. If we are not successful in cost-effectively protecting our intellectual property rights, our business, results of operations and financial condition could be materially adversely affected.

We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our solution and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our solution.

Our use of and reliance on research and development resources in foreign countries and with third-party providers may expose us to unanticipated costs or events.

We have research and development centers in Ireland and Belarus and have significant numbers of contractors in Belarus. Since those contractors work for third parties who supply such contractors to us, our ability to retain them on our projects is limited. There can be no assurance that our reliance upon research and development resources in foreign countries will enable us to achieve meaningful cost reductions or greater resource efficiency. Further, our research and development efforts and other operations in foreign countries involve significant risks, including:

 

 

difficulty hiring and retaining appropriate engineering personnel because of intense competition for engineers and resulting wage inflation;

 

 

difficulties regarding the transfer of knowledge related to our technology and resulting exposure to misappropriation of intellectual property or information that is proprietary to us, our clients and other third parties;

 

 

heightened exposure to change in the economic, security and political conditions in foreign countries; and

 

 

fluctuations in currency exchange rates and difficulties of regulatory compliance in foreign countries.

Difficulties resulting from the factors above and other risks related to our operations in foreign countries could expose us to increased expense, impair our development efforts and harm our competitive position.

 

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We may be sued by third parties for alleged infringement of their proprietary rights.

There is considerable patent and other intellectual property development activity in our industry. Our success depends upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. Our process for controlling our own employees’ use of third-party proprietary information may not be sufficient to prevent assertions of intellectual property infringement claims against us. From time to time, third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. We have and may in the future obtain licenses from third parties to forestall or settle any potential claims of alleged infringement of our technology upon the intellectual property rights of others. Discussions and negotiations with such third parties, whether successful or unsuccessful, could result in substantial costs and diversion of management resources, either of which could seriously harm our business. In the future, we may receive claims that our technology infringe or violate the claimant’s intellectual property rights. However, we may be unaware of the intellectual property rights of others that may cover some or all of our technology. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our solution, or require that we comply with other unfavorable terms. If our technology violates any third-party intellectual property rights, we could be required to withdraw that technology from the market, re-develop that technology or seek to obtain licenses from third-parties, which might not be available on reasonable terms or at all.

We may also be obligated to indemnify our clients or distributors in connection with any such litigation and to obtain licenses, modify our solution, refund fees or pay substantial settlement costs, including royalty payments, in connection with any such litigation, any of which could further exhaust our resources. Even if we were to prevail, any litigation regarding our intellectual property could be costly and time consuming and divert the attention of our management and key personnel from our business operations.

We rely on technology and intellectual property licensed from other parties, the failure or loss of which could increase our costs and delay or prevent the delivery of our software solutions.

We depend, in part, on technology and intellectual property rights of third parties licensed to us for our software. Any errors or defects in any third-party technology could result in errors in our software. In addition, such technology and rights may not continue to be available on commercially reasonable terms, or at all. While we believe that there are currently adequate replacements, any loss of the right to use any of this technology on commercially reasonable terms, or at all, could result in delays in producing or delivering our solution until equivalent technology is identified and integrated, requiring us to either redesign our software or develop these components ourselves, which would result in increased costs or force us to limit the features available in our current or future software. Errors in the software we license or the loss or inability to maintain these licenses could result in increased costs, reduced service levels or delayed sales of our solution.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

Many of our client agreements include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, breach of confidentiality with respect to personal data, or other liabilities relating to or arising from our solution, services or other contractual obligations. The term of these indemnity provisions generally survives termination or expiration of the applicable agreement. Large indemnity payments could harm our business, operating results and financial condition. Although we look to contractually limit our liability with respect to indemnification and other requests, the existence of such a dispute with a client may have adverse effects on our client relationships and reputation.

 

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We use open source software in our technology, which could subject us to litigation or other actions.

We use open source software in our technology and may use more open source software in the future. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their technology. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our software. In addition, if we were to combine our proprietary technology with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software. If we inappropriately use open source software, we may be required to re-engineer our solution, discontinue providing our software solution or take other remedial actions, any of which could have a material adverse effect on our business, results of operations or financial condition.

The global nature of our business subjects us to additional costs and risks that can adversely affect our operating results.

Compliance with international and U.S. laws and regulations that apply to our international operations increases our cost of doing business. These laws and regulations include U.S. laws such as the Foreign Corrupt Practices Act, and local laws which also prohibit corrupt payments to governmental officials, data privacy requirements, labor relations laws, tax laws, anti-competition regulations, import and trade restrictions and export requirements. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business. Any such violations could result in prohibitions on our ability to offer our solution in one or more countries, could delay or prevent potential acquisitions and could also materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Our success depends, in part, on our ability to anticipate these risks and manage these difficulties. We monitor our international operations and investigate allegations of improprieties relating to transactions and the way in which such transactions are recorded. If we are unable to manage the foregoing international aspects of our business, our operating results and overall business will be significantly and adversely affected.

If we fail to maintain an effective system of internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

To comply with the requirements of being a public company, we may need to undertake various actions, including implementing new internal controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission, or the SEC, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Securities Exchange Act of 1934, or the Exchange Act, is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate and weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we may be required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act, harm our operating results, cause us to fail to meet our reporting obligations, or result in a restatement of our prior period financial statements. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal

 

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control over financial reporting is perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our ordinary shares could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ Global Market.

We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act, and are therefore not yet required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with certain of these rules, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report. This assessment will need to include the disclosure of any material weaknesses in our internal control over financial reporting identified by our management or our independent registered public accounting firm. We are just beginning the costly and challenging process of compiling the system and processing documentation needed to comply with such requirements. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective.

Our independent registered public accounting firm may not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, depending on whether we choose to rely on certain exemptions set forth in the JOBS Act. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on the price of our ordinary shares.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, particularly after we are no longer an “emerging growth company,” which could adversely affect our operating results.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the rules and regulations of the NASDAQ Stock Market and the Irish Companies Act of 1963–2012, in so far as such Acts apply to public limited companies, and we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. Despite recent reform made possible by the JOBS Act, which allows us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not “emerging growth companies,” compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. In addition, management and other personnel will need to devote substantial time to these public company requirements, diverting their attention from other business matters.

After we are no longer an “emerging growth company,” or sooner if we choose not to take advantage of certain exemptions set forth in the JOBS Act, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In that regard, we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.

As a public company, we also expect that it may be more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage

 

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or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers. The increased costs associated with operating as a public company, including after we cease to qualify as an “emerging growth company,” may decrease our net income or increase our net loss and may require us to change our cost structure and pricing model.

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

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act for an extended period of time, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are electing not to take advantage of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable.

We will remain an “emerging growth company” for up to five years, although if the market value of our ordinary shares 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.

We cannot predict if investors will find our ordinary shares less attractive because we may rely on these exemptions and transition periods. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.

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

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

Risks related to tax issues

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.

As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in

 

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these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and results of operations. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries. Furthermore, one or more jurisdictions in which we do not believe we are currently subject to tax payment, withholding, or filing requirements, could assert that we are subject to such requirements. Any of these claims or assertions could have a material impact on us and the results of our operations.

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

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

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

changes in available tax credits;

 

 

changes in the taxation of share-based compensation;

 

 

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

 

 

challenges to the transfer pricing policies related to our structure.

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

Such changes may be more likely or become more likely as a result of recent economic trends in the jurisdictions in which we operate, particularly if such trends continue. For example, Ireland has suffered

 

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from the consequences of worldwide adverse economic conditions and the credit ratings on its debt have been downgraded. A change in the Irish government’s stated policy of not increasing business taxation may increase the effective tax rates applicable to our Irish operations and such changes could cause a material and adverse change in our worldwide effective tax rate and we may have to take action, at potentially significant expense, to seek to mitigate the effect of such changes. In addition, any amendments to the current double taxation treaties between Ireland and other jurisdictions, including the United States, could subject us to increased taxation.

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

Our operating results may be harmed if we are required to collect sales and similar taxes for our solutions in jurisdictions where we have not historically done so.

Providers of goods or services are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar taxes, including in certain cases VAT. Each country and each U.S. state has different rules and regulations governing these taxes. We reserve estimated sales and use taxes on our financial statements, but we cannot be certain that we have made sufficient reserves to cover all such taxes. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our solutions, we may be liable for past taxes in addition to being required to collect sales or similar taxes in respect of our solutions going forward. Liability for past taxes may also include interest and penalty charges. Our client contracts provide that our clients must pay all applicable sales and similar taxes. Nevertheless, clients may be reluctant to pay back taxes and may refuse responsibility for interest or penalties associated with those taxes or we may determine that it would not be feasible to seek reimbursement. If we are required to collect and pay back taxes and the associated interest and penalties and if our clients do not reimburse us for all or a portion of these amounts, we will have incurred unplanned expenses that may be substantial. Moreover, imposition of such taxes on our solutions going forward will effectively increase the cost of such solutions to our clients.

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

Taxing authorities could reallocate our taxable income among our subsidiaries, which could increase our consolidated tax liability.

We conduct operations world-wide through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements between our parent company and subsidiaries. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be the same as those between unrelated companies dealing at arms’ length and that appropriate documentation is maintained to support the transfer prices. While we believe that we operate in compliance with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on applicable tax authorities. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arms’ length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which could result in a higher tax liability to us. In addition, if the country from which the income is reallocated does not agree with the reallocation, both countries could tax the same income, resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it would increase our

 

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consolidated tax liability, which could adversely affect our financial condition, results of operations and cash flows. Double taxation should be mitigated in these circumstances where the affiliated parties that are subject to the transfer pricing adjustment are able to benefit from any applicable double taxation agreement.

Our ability to use net operating loss carryforwards to reduce future tax payments may be limited if we experience a change in ownership, or if taxable income does not reach sufficient levels.

As of December 31, 2013, we had Irish net operating loss carryforwards of approximately $30.7 million and Irish research credit carryforwards of approximately $0.8 million. These Irish net operating loss carryforwards and research credit carryforwards do not expire, but may not be fully utilized unless we generate sufficient income in Ireland.

Under Irish law, where a company makes a loss in its trade, it can carry that loss forward to subsequent accounting periods and offset the loss against profits or gains of the same trade. The utilization of carried forward losses is disallowed where (i) the trade that gave rise to the losses is discontinued or (ii) within any period of three years, there is both a change in the ownership of a company and (whether earlier or later in that period or at the same time) a major change in the nature or conduct of a trade carried on by the company or (iii) at any time after the scale of the activities in a trade carried on by a company has become small or negligible and before any considerable revival of the trade, there is a change in ownership of the company. There are no legislative explanations of what constitutes a major change in the nature or conduct of a trade. Relevant case law indicates that there must be a difference in the kind of trade/goods (and not just a quantitative difference) or a major difference in client outlets or markets of the trade but whether there has been a major change in the nature or conduct of a trade is a qualitative matter, and one which is to be judged on the facts of any particular set of circumstances. We may experience ownership changes in the future as a result of this initial public offering and subsequent movements in our share ownership. If we also experience a major change in the nature or conduct of our trade or our trade becomes small or negligible, we may be limited in the amount of loss carryforwards that we can use in the future to offset taxable income for Irish corporation tax purposes. Furthermore, in the event we incur net income in certain jurisdictions but incur losses (or have loss carryforwards) in other jurisdictions, we cannot offset the income from one jurisdiction with the loss from another, which could increase our effective tax rate.

We may become or be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ordinary shares.

Based on the current and anticipated valuation of our assets and composition of our income and assets, we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our current taxable year or any future taxable year. A non-U.S. corporation is a PFIC in any taxable year in which, after taking into account certain look-through rules, either (i) at least 75% of its gross income is passive income (such as certain dividends, interest, rents, royalties and the excess of gains over losses from the disposition of assets that produce passive income) or (ii) at least 50% of the average quarterly value of its assets consists of assets producing or held to produce passive income. Changes in the composition of our income and assets or in the fair value of our assets may cause us to become a PFIC. Since the determination as to whether we are or have become a PFIC must be made on an annual basis, we cannot assure you that we will not become a PFIC in the current or any future taxable years. If we were treated as a PFIC for any taxable year, then U.S. holders generally would be subject to adverse U.S. federal income tax consequences. See “Taxation—Material U.S. federal income tax consequences to U.S. holders—Passive foreign investment company.”

 

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Risks related to this offering and ownership of our ordinary shares

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

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

Our share price is likely to be volatile and could decline following this offering, resulting in a substantial loss on your investment.

Prior to this offering, there has not been a public market for our ordinary shares. An active trading market for our ordinary shares may never develop or be sustained, which could affect your ability to sell your shares and could depress the market price of your shares. In addition, the initial public offering price has been determined through negotiations among us, the selling shareholders and the representatives of the underwriters and may bear no relationship to the price at which our ordinary shares will trade upon the completion of this offering. The price of our ordinary shares could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk factors” section of this prospectus and others, such as:

 

 

our operating performance and the performance of other similar companies;

 

 

the overall performance of the equity markets;

 

 

publication of research reports about us or our industry or changes in research coverage by securities analysts;

 

 

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

 

 

speculation in the press or investment community;

 

 

the size of our public float;

 

 

actual or perceived lack of publicly traded companies similar to ours;

 

 

sales or expected sales of additional ordinary shares;

 

 

terrorist acts or natural disasters;

 

 

developments with respect to intellectual property rights;

 

 

announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments; and

 

 

global economic, legal and regulatory factors.

Furthermore, the stock markets in general and the market for technology-related stocks in particular have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations may be unrelated or disproportionate to the

 

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operating performance of those companies and may be exacerbated with respect to companies that are perceived to have fewer publicly traded comparable companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations may cause the market price of our ordinary shares to decline. If the market price of our ordinary shares after this offering does not exceed the initial public offering price, you may not realize any return on your investment and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their equity securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

If securities or industry analysts do not publish or cease publishing research or reports or publish misleading or unfavorable research or reports about us, our business or our market, our share price and trading volume could decline.

The trading market for our ordinary shares will be influenced by the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. Securities and industry analysts do not currently, and may never, publish research on us. If no or few securities or industry analysts cover our company, the trading price for our ordinary shares and trading volume would likely be negatively impacted. If one or more of the analysts who covers us downgrades our ordinary shares or publishes incorrect or unfavorable research about our business, or provides more favorable relative recommendations about our competitors, our share price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our ordinary shares could decrease, which could cause our share price or trading volume to decline.

Substantial future sales of our ordinary shares in the public market could cause our share price to fall.

Additional sales of our ordinary shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ordinary shares to decline. Upon the completion of this offering, we will have 26,859,517 ordinary shares outstanding based on the number of shares outstanding as of December 31, 2013. This includes the 3,804,969 shares that we and the selling shareholders are selling in this offering. All shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. All of the remaining ordinary shares outstanding after this offering will be eligible for sale at various times beginning 180 days after the date of this prospectus upon the expiration of lock-up agreements as described below and subject to vesting requirements and the requirements of Rule 144 or Rule 701.

Our directors, executive officers and holders of substantially all of our outstanding ordinary shares (on a fully-diluted basis as of December 31, 2013 without giving effect to this offering) have agreed with limited exceptions that they will not sell any ordinary shares owned by them without the prior written consent of J.P. Morgan Securities LLC, on behalf of the underwriters, for a period of 180 days from the date of this prospectus.

At any time and without public notice, J.P. Morgan Securities LLC may, in its sole discretion, release some or all of the securities from these lock-up agreements prior to the expiration of the lock-up period; provided, however, that if the release is granted for one of our officers or directors, (i) J.P. Morgan Securities LLC, on behalf of the underwriters, agrees that at least three business days before the effective date of the release or waiver, J.P. Morgan Securities LLC, on behalf of the Underwriters, will notify us of the impending release or waiver, and (ii) we are obligated to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver. As resale

 

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restrictions end, the market price of our ordinary shares could decline if the holders of those shares sell them or are perceived by the market as intending to sell them.

After this offering and the expiration or waiver of the lock-up agreements, holders of an aggregate of 15,025,000 of our ordinary shares as of December 31, 2013, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other shareholders. All of these shares are subject to the 180-day lock-up. In addition, as of December 31, 2013, there were 1,012,110 shares subject to outstanding options that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act. We also intend to register all of our ordinary shares that we may issue under our equity incentive plans, including 354,185 shares reserved for future issuance under our 2012 Plan as of December 31, 2013, an additional 1,053,450 ordinary shares reserved for future issuance under our 2012 Plan upon effectiveness of the registration statement to which this prospectus is a part and an additional 350,000 ordinary shares reserved for future issuance under our 2014 Employee Share Purchase Plan upon effectiveness of this registration statement to which this prospectus is a part. Once we register and issue these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements. For more information, see “Shares eligible for future sale.”

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

The initial public offering price of our ordinary shares will be substantially higher than the net tangible book value per share of our outstanding ordinary shares immediately after this offering. Therefore, if you acquire our ordinary shares from us in this offering, you will incur immediate dilution of $13.96 in net tangible book value per share from the price you paid assuming we offer our shares at $14.50 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus. In addition, following this offering, acquirers of ordinary shares in this offering will have contributed 74.0% of the total consideration paid by our shareholders to acquire our ordinary shares, but only own 11.0% of our outstanding ordinary shares. Moreover, we issued options and warrants in the past to acquire ordinary shares at prices significantly below the assumed initial public offering price of $14.50 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus. As of December 31, 2013, there were 1,012,110 of our ordinary shares issuable upon the exercise of outstanding options, with a weighted-average exercise price of $3.20 per share. To the extent that these outstanding options are ultimately exercised, you will incur further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.” In addition, we may raise additional capital through public or private equity or debt offerings, subject to market conditions. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance could result in further dilution to our shareholders.

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

Our management will have broad discretion in the use of our net proceeds from this offering. You will not have the opportunity to influence our decisions on how we use our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply these proceeds in ways that increase the value of your investment. We intend to use the net proceeds from this offering primarily for general corporate purposes, which may include working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds to acquire, invest in, or obtain rights to complementary technologies, solutions or businesses.

 

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Until we use the net proceeds of this offering, we plan to invest them, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds of this offering in ways that enhance shareholder value, we may fail to achieve expected financial results, which could cause our share price to decline.

Your rights as a shareholder will be governed by Irish law and differ from the rights of shareholders under U.S. law.

Following the completion of this offering, we will be a public limited company incorporated under the laws of Ireland. Therefore, the rights of holders of ordinary shares are governed by Irish law and by our memorandum of association and articles of association. These rights differ from the typical rights of shareholders in U.S. corporations. In certain cases, facts that, under U.S. law, would entitle a shareholder in a U.S. corporation to claim damages may not give rise to a cause of action under Irish law entitling a shareholder in an Irish company to claim damages. For example, the rights of shareholders to bring proceedings against us or against our directors or officers in relation to public statements are more limited under Irish law than the civil liability provisions of the U.S. securities laws.

You may have difficulties enforcing, in actions brought in courts in jurisdictions located outside the United States, liabilities under the U.S. securities laws. In particular, if you sought to bring proceedings in Ireland based on U.S. securities laws, the Irish court might consider:

 

 

that it did not have jurisdiction;

 

 

that it was not the appropriate forum for such proceedings;

 

 

that, applying Irish conflict of laws rules, U.S. law (including U.S. securities laws) did not apply to the relationship between you and us or our directors and officers; or

 

 

that the U.S. securities laws were of a public or penal nature and should not be enforced by the Irish court.

You should also be aware that Irish law does not allow for any form of legal proceedings directly equivalent to the class action available in U.S. courts.

For further information with respect to your rights as a holder of our ordinary shares, see “Description of share capital.”

You may have difficulty in effecting service of process within the United States or enforcing judgments obtained in the United States.

We and several members of our senior management and board of directors are residents of countries other than the United States. As a result, it may not be possible for you to:

 

 

effect service of process within the United States upon certain members of our senior management and board of directors and certain of the experts named in this prospectus or on us; or

 

 

obtain discovery of relevant documents and/or the testimony of witnesses.

You may also have difficulties enforcing in courts outside the United States judgments obtained in the U.S. courts against any members of our senior management and board of directors and certain of the experts named in this prospectus or us (including actions under the civil liability provisions of the U.S. securities laws). In particular, there is doubt as to the enforceability in Ireland of U.S. civil judgments predicated purely on U.S. securities laws.

 

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In any event, there is no system of reciprocal enforcement in Ireland of judgments obtained in the U.S. courts.

Accordingly, a judgment against any of those persons or us may only be enforced in Ireland by the commencement of a new action before the Irish court based on the judgment of the U.S. court. Summary judgment against any of those persons or us, as the case may be, may be granted by the Irish court without requiring the issues in the U.S. litigation to be reopened on the basis that those matters have already been decided by the U.S. court provided that the Irish court is satisfied that:

 

 

the judgment is final and conclusive;

 

 

the U.S. court had jurisdiction to determine the claim(s) (which is a matter of Irish law);

 

 

the U.S. judgment is not impeachable for fraud and is not contrary to Irish rules of natural or substantial justice;

 

 

the enforcement of the judgment will not be contrary to public policy or statute in Ireland;

 

 

the judgment is for a definite sum of money;

 

 

the Irish proceedings were commenced within the relevant limitation period;

 

 

the judgment is not directly or indirectly for the payment of taxes or other charges of a like nature or a fine or other penalty (for example, punitive or exemplary damages);

 

 

the judgment remains valid and enforceable in the court in which it was obtained unless and until it is set aside; and

 

 

before the date on which the U.S. court gave judgment, the issues in question had not been the subject of a final judgment of an Irish court or of a court of another jurisdiction whose judgment is enforceable in Ireland.

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

Based on our current operating plan, in the absence of this offering, we believe our existing cash and cash equivalents combined with our future cash generated from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 18 months. We may, however, need, or could elect to seek, additional financing at any time. Our ability to obtain financing will depend on, among other things, our development efforts, business plans, operating performance and condition of the capital markets at the time we seek financing. If we need to raise additional funds, we may not be able to obtain debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our shareholders may experience significant dilution of their ownership interests, the newly-issued securities may have rights, preferences or privileges senior to those of existing shareholders, including those acquiring ordinary shares in this offering and the per share value of our ordinary shares could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or other ratios that limit the operating flexibility of our business and would also require us to incur interest expense. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

 

 

develop or enhance our solution;

 

 

continue to expand our development, sales and marketing teams;

 

 

acquire complementary technologies, products, or businesses;

 

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expand our operations in the United States or internationally;

 

 

hire, train and retain employees;

 

 

respond to competitive pressures or unanticipated working capital requirements; or

 

 

continue our operations.

If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our solution, or otherwise respond to competitive pressures could be significantly limited.

Our directors, executive officers and principal shareholders will continue to have substantial control over us after this offering and could delay or prevent a change in corporate control.

Immediately following the completion of this offering, our directors, executive officers and holders of more than 5% of our ordinary shares prior to this offering, together with their affiliates, will beneficially own, in the aggregate, approximately 81.6% of our outstanding ordinary shares, assuming no exercise of the underwriters’ option to acquire additional ordinary shares in this offering. As a result, these shareholders, acting together, may have the ability to control the outcome of matters submitted to our shareholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all of our assets. In addition, these shareholders, acting together, may have the ability to control or influence the management and our affairs through their ability to elect directors. These holders acquired their shares for substantially less than the price of the shares being acquired in this offering, and these holders may have interests, with respect to their shares, that are different from those of investors in this offering and the concentration of voting power among these holders may have an adverse effect on our share price. In addition, this concentration of ownership might harm the market price of our ordinary shares by:

 

 

delaying, deferring or preventing a change of control of us;

 

 

impeding a merger, consolidation, takeover or other business combination involving us; or

 

 

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

Please see “Principal and selling shareholders” in this prospectus for more information regarding the ownership of our outstanding ordinary shares by our executive officers and directors, together with their affiliates.

Our ability to pay dividends, or repurchase or redeem our ordinary shares, is limited by law and contract and is dependent on the availability of distributable reserves and the prior written consent of certain parties and, therefore, you may never receive dividends on our ordinary shares and we may never be able to repurchase or redeem our shares.

As a matter of Irish law, we can only pay dividends to the extent that we have distributable reserves and, for cash dividends, cash resources available for this purpose. In addition, we can only repurchase or redeem our shares to the extent that we have either distributable reserves or the proceeds of a new issue of shares as well as, in the case of a redemption or repurchase for cash, cash resources available for this purpose. Under Irish law, dividends and distributions may only be made from distributable reserves. Distributable reserves generally mean accumulated realized profits less accumulated realized losses and include reserves created by way of capital reduction. Upon completion of this offering, we may not have sufficient distributable reserves available to pay dividends. Additionally, our ability to pay dividends and our ability to repurchase or redeem our ordinary shares is restricted by our need to obtain shareholder approval. We do

 

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not currently intend to pay dividends on, repurchase or redeem our ordinary shares, and we intend to retain any future earnings to finance the operations of our business. You may never receive any dividends on our ordinary shares and we may never be able to repurchase or redeem our ordinary shares. For a discussion of our dividend policy, see “Dividend policy.”

Our existing shareholders may be entitled to preemptive rights under Irish law, which could limit our ability to raise funds through future issuances of our ordinary shares.

Subject to specified exceptions, including the opt-out described in our amended and restated articles of association, Irish law grants statutory preemptive rights to existing shareholders to subscribe for new issuances of shares for cash. The opt-out described in our amended and restated articles of association must be renewed every five years by a resolution approved by not less than 75% of the votes of our shareholders cast at a general meeting. We expect that we will seek renewal of the opt-out at an annual general meeting within five years from the date our articles of association are adopted in substantially the form attached as Exhibit 3.1. However, we cannot guarantee that the opt-out of preemptive rights will always be approved. If this opt-out is not renewed, it can make our equity fundraising more cumbersome, costly and time consuming.

Irish law could prevent a takeover that shareholders consider favorable and could also reduce the market price of our shares.

Irish law could discourage potential takeover attempts, reduce the price that investors might be willing to pay in the future for our ordinary shares and result in the market price of our ordinary shares being lower than it would be without these provisions. For a description of certain takeover provisions applicable to us, see “Description of share capital—Takeover provisions” and “Description of share capital—Acquisitions.”

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

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

 

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Special note regarding forward-looking statements

This prospectus, including the sections entitled “Prospectus summary,” “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and “Business,” contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

 

our ability to regain profitability;

 

 

our competitive position and the effect of competition in our industry;

 

 

our ability to penetrate existing markets and develop new markets for our services;

 

 

our ability to retain or hire qualified accounting and other personnel;

 

 

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

 

our ability to maintain the security and reliability of our systems;

 

 

our estimates with regard to our addressable markets and future performance;

 

 

our estimates regarding our anticipated results of operations, future revenue, capital requirements and our needs for additional financing;

 

 

our expectations regarding our ability to improve our loss from operations and cash flow from operations over time;

 

 

our plan to continue to reach new clients and provide more robust solutions through bilateral referral and cross selling relationships;

 

 

our use of proceeds from this offering; and

 

 

our goals and strategies.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus and the documents that we reference in this prospectus and have filed with the Securities and Exchange Commission as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

 

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The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should therefore not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

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Market and industry data and forecasts

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, including a white paper by International Data Corporation, or IDC, that we commissioned. In presenting this information, we have also made assumptions based on such data and other similar sources, and on our knowledge of, and our experience to date in, the markets for our solution. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although neither we nor the underwriters have independently verified the accuracy or completeness of any third-party information, we believe the market position, market opportunity and market size information included in this prospectus is reliable. Projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described under “Risk factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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Use of proceeds

We estimate that the net proceeds to us from the sale of the 2,941,177 ordinary shares in this offering will be approximately $32.0 million based upon an assumed initial public offering price of $14.50 per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of ordinary shares by the selling shareholders.

A $1.00 increase (decrease) in the assumed initial public offering price of $14.50 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $2.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of ordinary shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $13.5 million, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal reasons for this offering are to obtain additional capital, to create a public market for our ordinary shares and to facilitate our future access to public equity markets. We currently have no specific plans for the use of the net proceeds of this offering, or a significant portion thereof. We anticipate that we will use the net proceeds we receive from this offering, including any net proceeds we receive from the exercise of the underwriters’ option to acquire additional ordinary shares in the offering, for working capital and other general corporate purposes, including the funding of our sales and marketing activities and the costs of operating as a public company, as well as further investment in the development of our proprietary technologies. We have not quantified or allocated any specific portion of the net proceeds or range of the net proceeds to any particular purpose, and our management will have the discretion to allocate the proceeds as it determines. We may use a portion of the net proceeds for the acquisition of businesses, products and technologies that we believe are complementary to our own, although we have no agreements or understandings with respect to any acquisition at this time.

The amount of what, and timing of when, we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations and the other factors described under “Risk factors” in this prospectus. Accordingly, our management will have broad discretion in applying a portion of the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds in high quality, investment grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government, or hold as cash.

Dividend policy

We have never declared or paid any dividends on our ordinary shares. We currently intend to retain any future earnings and do not intend to declare or pay cash dividends on our ordinary shares in the foreseeable future. Any future determination to pay dividends will be, subject to Irish law, at the discretion of our board of directors and subject to shareholder approval, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements.

 

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2013:

 

 

on an actual basis;

 

 

on a pro forma basis to reflect the automatic conversion of all of our outstanding 15,025,000 preferred shares into 15,025,000 ordinary shares, on a 1:1 basis, upon the closing of this offering; and

 

 

on a pro forma as adjusted basis to reflect (i) the pro forma adjustments described above, (ii) the effectiveness of our amended and restated articles of association, which will be in effect upon completion of this offering and (iii) the sale by us of 2,941,177 ordinary shares offered by this prospectus at the assumed initial public offering price of $14.50 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the following table together with “Management’s discussion and analysis of financial condition and results of operations,” “Description of share capital,” and the consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

December 31, 2013

(in thousands, except share and per share data)

   Actual     Pro forma     Pro forma
as adjusted(1)
 

 

 

Cash and cash equivalents

   $ 17,636      $ 17,636      $ 54,504   
  

 

 

   

 

 

   

 

 

 

Redeemable convertible preferred shares, 0.00002 par value; 5,000,000,000 shares authorized, actual and pro forma; 15,025,000 shares issued and outstanding, actual and pro forma; No shares authorized, issued or outstanding, pro forma as adjusted

   $ 14,473      $      $   

Shareholders’ (deficit) equity:

      

Deferred shares, No shares authorized, issued or outstanding, actual and pro forma; 1.00 par value, pro forma as adjusted; 40,000 shares authorized and no shares issued and outstanding, pro forma as adjusted

                     

Ordinary shares, 0.00002 par value, actual and pro forma; 5,000,000,000 shares authorized, actual and pro forma; 9,043,045 shares issued, actual; 24,068,045 shares issued, pro forma; $0.01 par value pro forma as adjusted; 200,000,000 shares authorized, pro forma as adjusted; 27,009,222 shares issued, pro forma as adjusted

                   270   

Preferred shares, No shares authorized, issued or outstanding, actual and pro forma; $0.01 par value, pro forma as adjusted; 25,000,000 shares authorized and no shares issued and outstanding, pro forma as adjusted

                     

Additional paid-in capital

     956        15,429        47,121   

Treasury shares, at cost; 149,705 shares

     (2,500     (2,500     (2,500

Accumulated other comprehensive income

     898        898        898   

Accumulated deficit

     (31,212     (31,212     (31,212
  

 

 

 

Total shareholders’ (deficit) equity

     (31,858     (17,385     14,577   
  

 

 

 

Total capitalization

   $ (17,385   $ (17,385   $ 14,577   

 

 
(1)   For purposes of the pro forma as adjusted amounts shown above, the net proceeds to be received by us from the sale of ordinary shares in this offering of $32.0 million has been increased by approximately $4.9 million to reflect the estimated offering expenses which had been paid by us as of December 31, 2013.

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $14.50 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the amount of cash and cash equivalents, additional paid-in capital, total shareholders’ (deficit) equity and total capitalization by approximately $2.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

The actual, pro forma and pro forma as adjusted information set forth in the table excludes (a) 1,012,110 ordinary shares issuable upon the exercise of share options outstanding as of December 31, 2013 with a weighted-average exercise price of $3.20 per share, which will remain outstanding after this offering, unless earlier exercised, (b) 354,185 ordinary shares reserved for future issuance under our 2012 Plan as of December 31, 2013, (c) an additional 1,053,450 ordinary shares reserved for future issuance under our 2012 Plan upon effectiveness of this registration statement to which this prospectus is a part; (d) share option grants and grants of restricted share units covering a total of 798,075 shares to certain employees, to be effective immediately after the effectiveness of this registration statement to which this prospectus is a part (with the exercise price of such option grants being equal to the initial public offering price set forth on the cover page of this prospectus); and (e) 350,000 ordinary shares reserved for future issuance under our 2014 Employee Share Purchase Plan upon effectiveness of this registration statement to which this prospectus is a part.

 

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Dilution

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

The net tangible book value of our ordinary shares as of December 31, 2013 was a deficit of $17.4 million, or $1.95 per share. Net tangible book value per share represents our total tangible assets less our total tangible liabilities, divided by the number of ordinary shares outstanding before giving effect to the conversion of all outstanding redeemable convertible preferred shares into ordinary shares upon the completion of this offering. The pro forma net tangible book value of our ordinary shares as of December 31, 2013 was a deficit of $17.4 million, or $0.73 per share. Pro forma net tangible book value per share gives effect to the conversion of all outstanding preferred shares into ordinary shares upon the closing of this offering.

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of ordinary shares sold by us in this offering and the pro forma net tangible book value per share of our ordinary shares immediately after the completion of this offering. After giving effect to (a) the pro forma adjustments described above and (b) our sale of 2,941,177 ordinary shares in this offering at an assumed initial public offering price of $14.50 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2013 would have been $0.54 per share. This represents an immediate increase in net tangible book value of $1.27 per share to existing shareholders and an immediate dilution in net tangible book value of $13.96 per share to purchasers of ordinary shares sold by us in this offering, as illustrated in the following table:

 

    

Assumed initial public offering price per share

     $ 14.50   

Pro forma net tangible book value per share as of December 31, 2013

   $ (0.73  

Increase per share attributable to new investors

     1.27     
  

 

 

   

Pro forma as adjusted net tangible book value per share as of December 31, 2013 after giving effect to the offering

     $ 0.54   
    

 

 

 

Dilution per share to new investors

     $ 13.96   

 

  

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $14.50 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value by $0.10 per share and the dilution to new investors by $0.90 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The following table summarizes, on a pro forma as adjusted basis as described above, as of December 31, 2013, the difference between the number of ordinary shares purchased from us, the total consideration paid to us and the average price per share paid by existing shareholders and by new investors at an assumed initial public offering price of $14.50 per share, the mid-point of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

                  Shares  purchased              Total consideration      Average price
per share
 
     Number      Percent      Amount      Percent     

 

 

Existing shareholders

     23,918,340         89.0%       $ 15,008,458         26.0%       $ 0.63   

New investors

     2,941,177         11.0         42,647,067         74.0         14.50   
  

 

 

 

Total

     26,859,517         100.0%       $ 57,655,525         100.0%       $ 2.15   

 

 

The above discussion and tables exclude:

 

 

1,012,110 ordinary shares issuable upon the exercise of share options outstanding as of December 31, 2013, with a weighted-average exercise price of $3.20 per share;

 

 

354,185 ordinary shares reserved for future issuance under our 2012 Plan as of December 31, 2013;

 

 

an additional 1,053,450 ordinary shares reserved for future issuance under our 2012 Plan upon effectiveness of this registration statement to which this prospectus is a part;

 

 

share option grants and grants of restricted share units covering a total of 798,075 shares to certain employees, to be effective immediately after the effectiveness of this registration statement to which this prospectus is a part. The exercise price of the option grants will be equal to the initial public offering price set forth on the cover page of this prospectus; and

 

 

350,000 ordinary shares reserved for future issuance under our 2014 Employee Share Purchase Plan upon effectiveness of this registration statement to which this prospectus is a part.

Sales by selling shareholders in this offering will reduce the number of ordinary shares held by existing shareholders to approximately 85.8% of the total number of ordinary shares outstanding after this offering and will increase the number of ordinary shares held by new investors to approximately 14.2% of the total number of ordinary shares outstanding after this offering. In addition, if the underwriters’ option to acquire additional ordinary shares is exercised in full from the selling shareholders, the number of shares held by the existing shareholders after this offering would be reduced to 83.7% of the total number of shares outstanding after this offering, and the number of shares held by new investors would increase to 16.3% of the total number of shares outstanding after this offering.

To the extent that outstanding options are exercised, you will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our shareholders.

 

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Selected consolidated financial data

You should read the following selected historical consolidated financial data below together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

The consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2012 and 2013 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2009 and 2010 and the consolidated balance sheet data as of December 31, 2010 and 2011 are derived from our audited consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of the results to be expected in any future period.

 

   
     Year ended December 31,  
(in thousands, except per share data)    2009     2010     2011     2012     2013  

 

   

 

 

 

Consolidated statements of operations data

          

Revenue

          

Redemption revenue

   $ 65,239      $ 90,991      $ 123,015      $ 141,136      $ 167,841   

Solution and services revenue

     7,817        9,019        12,790        16,555        18,956   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     73,056        100,010        135,805        157,691        186,797   

Expenses

          

Cost of redemption revenue

     56,584        77,872        106,827        123,240        145,515   

Cost of solution and services revenue

     1,148        1,475        2,025        2,586        3,209   

Operations

     2,573        2,562        3,363        3,735        4,367   

Research and development

     3,025        4,177        8,933        9,285        10,160   

Sales and marketing

     6,178        7,805        11,097        16,862        21,924   

General and administrative

     2,247        2,578        3,241        4,186        6,198   
  

 

 

   

 

 

 

Total expenses

     71,755        96,469        135,486        159,894        191,373   
  

 

 

   

 

 

 

Income (loss) from operations

     1,301        3,541        319        (2,203     (4,576

Other (expense) income, net

     (376     (215     (827     828       
(1,317

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     925        3,326        (508     (1,375     (5,893

Provision for income taxes

     194        230        296        461        655   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     731        3,096        (804     (1,836     (6,548

Net income (loss) attributable to participating securities

     731        2,406                        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ordinary shareholders

   $      $ 690      $ (804   $ (1,836   $ (6,548
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to ordinary shareholders

          

Basic

   $      $ 0.08      $ (0.09   $ (0.21   $
(0.74

  

 

 

   

 

 

 

Diluted

   $      $ 0.08      $ (0.09   $ (0.21   $ (0.74
  

 

 

   

 

 

 

Weighted-average number of ordinary shares used in computing net income (loss) per share attributable to ordinary shareholders

          

Basic

     8,665        8,711        8,741        8,754        8,815   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     8,665        9,353        8,741        8,754        8,815   
  

 

 

   

 

 

 

Pro forma net loss per share attributable to ordinary shareholders—basic and diluted(1)

           $ (0.24

Weighted-average number of ordinary shares used in computing pro forma net loss per share attributable to ordinary shareholders—basic and diluted(1)

                                     23,789   

 

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(1)   Pro forma basic and diluted net loss per share has been computed to give effect to the conversion of all redeemable convertible preferred shares into ordinary shares and the conversion of all previously outstanding warrants to purchase redeemable convertible preferred shares into warrants to purchase ordinary shares, as if such conversion had occurred as of the date of original issuance. The impact of the accretion of unpaid and undeclared dividends has been excluded from the determination of net loss attributable to ordinary shareholders as the holders of the redeemable convertible preferred shares are not entitled to receive undeclared dividends upon such conversion. Additionally, the gains (losses) associated with the changes in the fair value of the previously outstanding warrants to purchase preferred shares has been excluded from the determination of net loss as these remeasurements would not be required when the warrants to purchase preferred shares would have become warrants to purchase ordinary shares upon the closing of this offering.

 

      As of December 31,  
(in thousands)    2010     2011     2012     2013  

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated balance sheet data

        

Cash and cash equivalents

   $ 14,012      $ 19,331      $ 20,078      $ 17,636   

Property and equipment, net

     1,283        1,710        2,420        3,819   

Working capital (deficit)(1)

     (7,245     (9,892     (16,022     (27,602

Total assets

     45,790        58,098        65,382        78,280   

Deferred revenue(2)

     42,361        53,154        60,337        78,128   

Current and long-term debt

     351        219        95          

Warrants to purchase redeemable convertible preferred shares

     391        1,195        476          

Redeemable convertible preferred shares

     13,095        13,095        13,095        14,473   

Total shareholders’ deficit

     (19,622     (22,384     (23,878     (31,858

 

  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   We define working capital as current assets less current liabilities.
(2)   The change in deferred revenue was $2,694, $10,802, $10,793, $7,183 and $17,791 for the years ended December 31, 2009, 2010, 2011, 2012 and 2013, respectively.

Free cash flow

We believe that free cash flow is a key indicator of our operating results. Presented below is a reconciliation of our free cash flow to the most directly comparable GAAP measure, net cash provided by (used in) operating activities. For further explanation of our management’s use of this measure and limitations of its use, please see “Summary consolidated financial data–Free cash flow.”

 

   
     Year ended December 31,  
(in thousands)    2009     2010     2011     2012     2013  

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

   $ 3,812      $ 5,795      $ 8,260      $ 4,352      $ 3,658   

Less purchases of property and equipment

     (54     (1,177     (857     (1,225     (1,662
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 3,758      $ 4,618      $ 7,403      $ 3,127      $ 1,996   

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read together with our “Selected consolidated financial data” and our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed above in the section entitled “Risk factors.” Dollars in tabular formats are presented in thousands, except per share data or as otherwise indicated.

Company overview

We are a leading provider of a cloud-based, social recognition software solution that organizations use to engage their employees worldwide to create alignment with values and advance company goals and culture. We achieved this leadership position through our innovative technologies, our ability to deliver a comprehensive solution to large, multinational firms, and our experience operating in the social recognition industry. Our Software-as-a-Service, or SaaS, platform enables employee-to-employee recognition that is broadcast socially and made visible throughout the organization. We grant our clients the right to access our SaaS platform over the term of their agreements to administer their recognition programs, including the issuance of recognition awards to their employees. Our clients leverage the widespread employee adoption of our solution to elevate recognition to a strategic business imperative that drives business results. In addition, the interactions between employees using our social recognition solution generate data that provides our clients with deep management insights about their talent and culture. Our growth has been driven by our clients’ ability to use our solution to increase employee engagement, improve employee retention and strengthen company culture.

We started operations in 1999, and our headquarters are in Dublin, Ireland. Our social recognition solution has been successfully adopted in complex environments throughout the world. As of December 31, 2013, our client base consisted of more than 100 companies, with more than 1.9 million users located in more than 140 countries using our solution in 29 languages and dialects. We had 240 employees as of December 31, 2013.

We derive our billings primarily from recognition awards processed through our solution and associated transaction fees. The majority of our revenue is recognized when our clients’ employees redeem their awards through our global e-commerce rewards network, primarily for gift cards, and we deliver the redeemed item. In addition, the delivery of our social recognition solution includes various activities such as website configuration, hosting, upgrades, software functionality for award processing and call-center support. The billings for these various activities, which are derived primarily from our transaction fees, are recorded as solution and services revenue over the service period of the contractual arrangement with our clients. We tend to have multi-year contracts, however, billings and revenue are contingent upon the issuance of awards, as our agreements with our clients typically do not contain minimum commitments.

We have historically experienced seasonal variations in our revenues as a result of increased recognition award issuances and redemptions in the fourth calendar quarter. As a result, revenue in the fourth quarter is generally higher than in other quarters. We generally expect this seasonal trend to continue into the future, which may cause quarterly fluctuations in our results of operations and certain key metrics. Historically, we focused on the most complex and large global organizations. More recently, we have expanded our sales efforts to companies with an employee base of 2,500 or more who have corporate human resources, or HR, functions located in North America. We have recently hired additional salespeople

 

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to target these organizations. We have generated the majority of our revenue from several large clients, with our top client representing 35%, 32% and 31% of our total revenue for the years ended December 31, 2011, 2012 and 2013, respectively.

We believe that the growth of our business is dependent on many factors, including our ability to expand our customer base, increase adoption of our solution within existing clients and continue to invest in product innovation. To date, we have derived significant revenue from a relatively small number of large clients. We have the opportunity to increase the use of our solution within these existing clients, for example, through product innovation or an increase in the number of employees able to issue awards, however, the loss of any of these key clients or a reduction in the use of our solution by any of these clients could have a significant negative impact on our revenue and results of operations. The expansion of our sales efforts targeting smaller sized organizations provides significant opportunity for us to expand our customer base; however, there are risks as we seek to target and support these customers in a cost efficient manner. See “Risk Factors – Risks related to our business and industry – If our efforts to attract new clients are not successful, our revenue growth will be adversely affected.”

We have experienced significant revenue increases in recent periods. Our total revenue has grown from $135.8 million in 2011 to $157.7 million in 2012 and to $186.8 million in 2013. This growth mainly resulted from the increased issuance and redemption of recognition awards by the employees of existing clients along with new client additions. For the years ended December 31, 2011, 2012 and 2013, our total revenue derived outside the United States was 40%, 41% and 41%, respectively.

We generated income from operations from 2009 to 2011 and loss from operations in 2012 and 2013. Our total expenses were 98%, 96%, 100%, 101% and 102% of total revenue for 2009, 2010, 2011, 2012 and 2013, respectively. The increase in expenses as a percentage of total revenue reflected our decision in 2011 to make significant investments in product development and sales and marketing to add new clients and expand the reach of our social recognition solution within our existing clients. We subsequently increased general and administrative expenses as we commenced preparations to become a public company. These decisions resulted in a significant increase in total expenses in absolute dollars and as a percentage of total revenue during 2011, 2012 and 2013 as compared to prior periods. Specifically:

 

 

During 2011 we decided to substantially increase our investment in research and development personnel and third-party contractors to accelerate our development efforts, which resulted in a 114% increase in research and development expense. Although we have continued to increase our investment in product innovation, our research and development costs have decreased as a percentage of total revenue since 2011.

 

 

During the last three years, we expanded our sales and marketing personnel and marketing program costs at a more rapid pace than associated revenue growth. This significant investment resulted in a 42%, 52% and 30% increase in sales and marketing expense over the previous year for 2011, 2012 and 2013, respectively.

 

 

During 2012 and 2013, we hired additional general and administrative personnel and incurred additional professional fees expense in 2013 as we prepared to become a public company. This resulted in an increase in general and administrative expense of 29% in 2012 compared to 2011 and 48% in 2013 compared to 2012.

These investments resulted in an increase in loss from operations and decrease in cash flow from operations in 2012 and 2013. We intend to continue our focus on product innovation and investing for long-term growth. This will result in increased investments in research and development and direct sales and marketing personnel, which we believe will expand our client base and increase revenue from existing

 

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clients. We will also experience an increase in general and administrative expenses as a result of being a public company in the near term. In addition, we expect to incur significant additional non-cash expense as a result of the share option grants and grants of restricted share units covering a total of 798,075 shares to certain employees immediately after the effectiveness of this registration statement, although we are unable to quantity the specific impact at this time since certain significant assumptions used to determine the fair value of the underlying share option grants and grants of restricted share units are not currently known. As a result of these investments in research and development, sales and marketing as well as the expected increases in general and administrative expense, we expect to have increased losses from operations and decreased cash flow from operations through at least 2014. However, the majority of our expenses, other than cost of redemption revenue, are costs for personnel, third-party costs and marketing program expenses. We believe that that these investments will support revenue growth in our business over time, and that we can adjust our investments in these expense categories as appropriate relative to revenue growth, as we have done in 2012 and 2013 with our research and development expense, which would result in an improvement in our loss from operations and cash flow from operations over time.

Key metrics

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

 

 

Number of billable awards

 

 

Free cash flow

 

 

Billings retention rate

Number of billable awards

We believe that the number of billable awards is a key indicator of our revenue and the client adoption of our social recognition solution and growth in our business. An increase in the number of billable awards will drive additional billings as clients process additional awards through our solution and incur associated transaction fees. Our redemption revenue, which historically accounts for the vast majority of our total revenue each year, is derived from billable awards that have been redeemed for items on our global e-commerce rewards network. The number of billable awards in the years ended December 31, 2011, 2012 and 2013 was approximately 1.3 million, 1.4 million and 1.8 million, respectively.

Free cash flow

We believe that free cash flow is a key indicator of our operating results. We calculate free cash flow as net cash provided by (used in) operating activities, less purchases of property and equipment. For further explanation of our management’s use of this measure, limitations of its use, and a reconciliation of our free cash flow to the most directly comparable GAAP measure, net cash provided by (used in) operating activities, please see “Summary consolidated financial data—Free cash flow.” Free cash flow was approximately $7.4 million, $3.1 million and $2.0 million the years ended December 31, 2011, 2012 and 2013, respectively.

 

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Billings retention rate

We believe that our ability to retain clients is an indicator of the stability of our revenue base and the long-term value of our client relationships. We assess our performance in this area using a metric we refer to as our billings retention rate. We measure our billings retention rate by assessing, on a dollar basis, the amounts billed for awards issued and the related transaction fees for the same client in a given period versus the prior year period. Our retained clients have increased their award issuance in the aggregate year over year, resulting in an overall billings retention rate over 100% for the years ended December 31, 2011, 2012 and 2013.

Components of consolidated statements of operations

Revenue

We derive our revenue from contractual agreements for the delivery of our social recognition solution. We grant our clients rights to access our SaaS platform over the term of their agreements to administer their recognition programs, including the issuance of recognition awards to their employees. We primarily invoice our clients in U.S. dollars even though their employees are located around the world. The delivery of our social recognition solution includes various activities such as website configuration, hosting, upgrades, software functionality for award processing and call-center support. Our social recognition solution also includes the supply of gift cards and other e-commerce items selected from our global e-commerce rewards network. Additionally, in certain cases, the agreements may include other professional services. As discussed further in “Critical accounting policies and estimates – Revenue recognition” below, our revenue is comprised of the following:

Redemption revenue

Redemption revenue is primarily derived from the supply of gift cards from our global e-commerce rewards network. The award amount and related shipping fees are recognized as revenue after an award is redeemed and the e-commerce item is delivered to the recipient. If an award is not redeemed, we recognize revenue when the likelihood of its redemption becomes remote, which we have determined to be three years after its original issuance.

Solution and services revenue

Solution and services revenue is primarily derived from the transaction fees associated with recognition award issuances. The social recognition solution is available to clients throughout their contractual period and is presumed to be delivered ratably over the service period. Accordingly, we recognize contract consideration allocable to the social recognition solution on a straight-line basis over the estimated service period based on the lesser of the straight-line amount or the amount that has become fixed or determinable at the end of the accounting period. The estimated service period includes both the stated contractual period plus a typical wind-down period of six months to allow for the redemption of awards after the end of a contract. In addition, solution and services revenue consists of consulting services, implementation and other fees. These services are typically priced on a fixed fee basis with a portion due upon contract signing and the remainder due when the related services have been completed.

 

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Expenses

Cost of redemption revenue

Cost of redemption revenue primarily consists of costs of gift cards from suppliers, inbound freight, outbound shipping charges, warranty costs and related packaging supplies. We typically purchase gift cards in the supplier’s local currency, and the cost of similarly denominated gift cards varies by supplier. As a result, our cost of redemption revenue as a percentage of redemption revenue will fluctuate based on the mix of supplier gift cards that are selected when a client’s employee redeems his or her award. It will also fluctuate depending on the change in the exchange rate of the currency in which we purchased the inventory from the supplier to the U.S. dollar from the time of client invoicing to its eventual redemption and reduction in our inventory. We currently expect our cost of redemption revenue to increase in absolute dollars as our redemption revenue increases. Cost of redemption revenue as a percentage of redemption revenue may fluctuate, but over time, we expect it to eventually decrease as we add clients with expanded redemption options that are also accompanied by higher redemption award amounts required relative to the cost of the redeemed item.

Cost of solution and services revenue

Cost of solution and services revenue primarily consists of personnel and related costs, hosting costs, third-party costs, depreciation and allocated overhead. Our cost of solution and services revenue is expensed as costs are incurred while the related revenue is recognized as noted above. Therefore, costs are not always expensed in the same period as revenue is recognized. We currently expect our cost of solution and services revenue to increase in absolute dollars over time.

Operations

Operations expenses consist primarily of personnel and related costs incurred in operating and staffing our fulfillment and customer service centers. These costs include amounts paid to third parties that assist us in fulfillment and customer service operations, allocated overhead and depreciation expense. We expect operations expense to increase in absolute dollars, but, over time, to eventually decrease as a percentage of total revenue.

Research and development

Research and development expenses consist primarily of personnel and related costs, third-party contractors, depreciation and allocated overhead. Research and development costs are expensed as incurred. We have focused our efforts on developing new versions of our social recognition solution with expanded features. Our technology is constantly being refined and, as such, we do not capitalize development costs. We believe that continued investment in our technology is important for our future growth. As a result, we currently expect research and development expenses to increase in absolute dollars. Research and development expenses as a percentage of total revenue may fluctuate on a quarterly basis, but over time, we expect it to decrease as a percentage of total revenue.

Sales and marketing

Sales and marketing expenses consist primarily of personnel and related costs for our sales and marketing staff, including salaries, benefits, incentive compensation, commissions and travel costs, in addition to costs associated with marketing and promotional events, corporate communications, advertising, other brand building and product marketing expenses and allocated overhead.

 

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We intend to continue to invest in sales and marketing and increase the number of sales representatives to add new clients and expand the reach of our social recognition solution within our existing clients, build brand awareness and sponsor additional marketing events. Accordingly, we currently expect sales and marketing expenses in future periods to increase in absolute dollars and in the near term continue to increase as a percentage of total revenue but, over time, to eventually decrease as a percentage of total revenue.

General and administrative

General and administrative expenses consist primarily of personnel and related expenses for administrative, finance, information technology, legal and human resources staff, in addition to the costs associated with professional fees, travel expenses, other corporate expenses and allocated overhead. In future periods, we expect general and administrative expenses to increase in absolute dollars, and in the near term, continue to increase as a percentage of total revenue, as we continue to incur additional personnel and professional services costs to meet the compliance requirements of operating as a public company. However, over time, we believe that general and administrative expenses as a percentage of total revenue will eventually decrease.

Other income (expense)

Other income (expense) is comprised of the following items:

Interest income (expense), net

Interest income (expense), net, includes interest income earned on our cash and cash equivalents balances. We expect interest income to vary each reporting period depending on our average cash and cash equivalents balances during the period and market interest rates. This amount is offset, in part, by interest expense associated with our previously outstanding equipment term loans.

Other income (expense), net

Other income (expense), net, consists primarily of foreign currency exchange gains and losses and fair value adjustments related to previously outstanding warrants to purchase our redeemable convertible preferred shares. Our foreign currency exchange gains and losses relate to transactions and asset and liability balances denominated in currencies other than the U.S. dollar. The functional currency of the Company and all of its subsidiaries is the U.S. dollar, as the majority of the Company’s financial transactions are denominated in U.S. dollars. Accordingly, all operating assets and liabilities denominated in foreign currencies are remeasured into U.S. dollars using the exchange rates in effect at the balance sheet date or historical rates, as appropriate. Revenue and expenses denominated in foreign currencies are remeasured into U.S. dollars at the average rates in effect during the period. Any differences resulting from the remeasurement of assets, liabilities, and operations are recorded within other income (expense) in the consolidated statements of operations and comprehensive income (loss). We expect our foreign currency exchange gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.

The previously outstanding warrants to purchase our redeemable convertible preferred shares were classified as a liability on our consolidated balance sheets and were remeasured to fair value at each balance sheet date, with the corresponding gain or loss from the adjustment recorded in other income (expense), net, until they were exercised on August 1, 2013.

 

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Provision for income taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our taxes in each of the jurisdictions in which we operate. We account for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. In addition, this method requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2013, we had Irish net operating loss carryforwards of approximately $30.7 million and Irish research credit carryforwards available of approximately $0.8 million. These Irish net operating loss and research credit carryforwards do not expire. Based upon our historical and forecasted future Irish losses, we have provided a full valuation allowance against our Irish net deferred tax assets at December 31, 2012 and 2013.

We have U.S. federal and state net operating loss carryforwards available at December 31, 2013 of $5.8 million and $3.6 million, respectively. These amounts were not recorded as tax assets as these net operating losses relate to excess share-based compensation deductions that may not be recorded as tax assets under generally accepted accounting principles until the amounts have been utilized to reduce our tax liability. To the extent these assets are used to reduce future taxes, the benefit will be recorded as an equity adjustment to additional paid-in capital. The federal net operating losses begin expiring in 2033 and the state net operating losses begin expiring in 2023.

JOBS Act

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

Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), or (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of our chief executive officer’s compensation to median employee compensation.

These exemptions will apply for a period of five years following the completion of our initial public offering or until we no longer meet the requirements of being an “emerging growth company,” whichever is earlier.

 

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Critical accounting policies and estimates

Our consolidated financial statements and the related notes thereto included elsewhere in this prospectus are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe that the following significant accounting policies, which are more fully described in the notes to our consolidated financial statements included elsewhere in this prospectus, involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Revenue recognition

We derive our revenue primarily from contractual agreements for the delivery of our social recognition solution. We grant our clients rights to access our SaaS platform over the term of their agreements to administer their recognition programs, including the issuance of recognition awards to their employees. Our social recognition solution also provides the recipient of the award, who is an employee of our client, the ability to redeem the award using our global e-commerce rewards network. The majority of our revenue is recognized when our clients’ employees redeem their awards and we deliver the e-commerce item.

We recognize revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been provided to the client; (3) the amount of fees to be paid by the client is fixed or determinable; and (4) collectability is reasonably assured.

Our agreements include multiple deliverables, which comprise the delivery of the overall solution provided to our clients. The delivery of this solution includes various activities such as website configuration, hosting, upgrades, software functionality for award processing and call-center support, which represents one deliverable, or the Social Recognition Solution. The supply of gift cards and other e-commerce items selected from our global e-commerce rewards network represents a separate deliverable, or the Redemption of Rewards, and is presented as redemption revenue in our consolidated statements of operations and comprehensive income (loss). Additionally, in certain cases, the agreements may include other professional services.

Clients do not have the right to take possession of our software during the hosting arrangement. Thus, we recognize revenue in accordance with Accounting Standards Codification (ASC) 605, Revenue Recognition. Additionally, in accordance with the provisions of ASC 605-45, we have considered certain factors, specifically, the inventory risk borne by us (both general inventory risk and the risk of physical loss), the latitude in pricing, the discretion in supplier selection, the credit risk borne by us and the customer service functions performed by us related to the supply of gift cards and other e-commerce items, and we have determined that we are acting as the principal in the majority of our transactions and, as such, revenue for these transactions is presented in our consolidated statements of operations and comprehensive income (loss)

 

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based upon the gross amount billed to the client. For transactions where we have determined that we are not acting as the principal, which is primarily due to the lack of inventory risk for the e-commerce item redeemed, revenue is presented on a net basis.

In accordance with ASC 605-25, Revenue Recognition, Multiple-element arrangements, in order to treat deliverables in a multiple-deliverable arrangement as separate units of accounting, the deliverables must have stand-alone value upon delivery. In determining whether the elements in the arrangements have stand-alone value, we have considered the availability of the services included in the Social Recognition Solution and the Redemption of Rewards from other vendors and the nature of the products and services. To date, we have concluded that both of these deliverables have stand-alone value.

In accordance with ASC 605-25, the total estimated arrangement consideration is allocated at the inception of the arrangement to the identified separate units of accounting based on a relative selling price allocation. We determine the relative selling price for a deliverable based on its vendor-specific objective evidence of fair value, or VSOE, if available, or its best estimate of selling price, or BESP, if VSOE is not available.

We have not established VSOE for our offerings to date as the Social Recognition Solution has historically been sold in conjunction with the Redemption of Rewards. Additionally, we have determined that third-party evidence of selling price, or TPE, is not a practical alternative due to differences in its service offerings compared to other parties and the unavailability of relevant third party pricing information. Accordingly, we use our BESP to determine the relative selling price. We determine BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken into consideration include our discounting practices, the size and volume of our transactions, the geographic area where services are sold, price lists, our go-to-market strategy, historic contractually stated prices and prior relationships with certain classes of our clients.

The determination of BESP is made through consultation with and approval by our management, taking into consideration the go-to-market strategy. As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in selling prices. We plan to analyze the selling prices used in our allocation of arrangement consideration, at a minimum, on an annual basis. Selling prices will be analyzed on a more frequent basis if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices.

The Social Recognition Solution is available to our clients throughout the term of the contractual agreement and is presumed to be delivered ratably over the estimated service period. The estimated service period includes both the stated term of the contractual agreement plus a typical wind-down period of six months to allow for the redemption of outstanding awards after the end of a contract. Accordingly, we recognize arrangement consideration allocable to the Social Recognition Solution on a straight-line basis over the estimated service period based on the lesser of the straight-line amount, or the amount that has become fixed or determinable at the end of the accounting period based upon amounts invoiced to date. Each accounting period we review, and if necessary, adjust the estimated total arrangement consideration to be received under a client arrangement over the contractual term and, accordingly, adjust the amount recognized for the Social Recognition Solution under the contract based on changes in the estimated total arrangement consideration. The arrangement consideration allocable to the Redemption of Rewards is recognized as revenue after an award is redeemed and the e-commerce item is delivered to the recipient. If an award is not redeemed, we recognize revenue when the likelihood of its redemption becomes remote, which we have determined to be three years after its original issuance based upon an analysis of historical actual redemption data. Breakage amounts are subject to the consideration of the relevant jurisdictional escheatment regulations. We recognized redemption revenue related to breakage of $3.6 million, $3.2 million and $4.5 million for the years ended December 31, 2011, 2012 and 2013, respectively.

 

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We typically invoice our clients monthly for the recognition awards processed through our solution and the associated transaction fees. We record amounts that have been invoiced to clients in accounts receivable and in either deferred revenue or revenue depending on whether the revenue recognition criteria described above have been met.

Deferred revenue includes amounts billed to clients, for which revenue has not been recognized, and primarily consists of the value of awards that have not been redeemed and the unearned portion of the Social Recognition Solution fees. Amounts in deferred revenue related to the Redemption of Rewards are classified as a current liability, as the amounts are subject to immediate redemption by our client’s employees.

Professional and other services sold on a stand-alone basis are recognized as the services are performed under the proportionate performance method to the extent that we can adequately track time incurred and can reasonably estimate efforts to complete the project. If adequate documentation does not exist, revenue recognition is deferred until the contract is completed. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenues are deferred until the uncertainty is resolved. If acceptance provisions exist within a professional services arrangement, revenues are deferred until client acceptance occurs. Professional and other services revenue recognized is included in solution and services revenue in the consolidated statements of operations and comprehensive income (loss).

We occasionally offer sales rebates to certain clients based on the volume of awards issued. We treat sales rebates as a reduction of revenue and classify the corresponding liability as current. We estimate sales rebates when there is sufficient historical information available to predict the volume of expected future rebates. If we are unable to estimate the expected rebates reasonably, the maximum rebate percentage offered is recorded as a liability.

Shipping and handling fees billed to clients are recognized as redemption revenue and the related costs are recognized in cost of redemption revenue.

Revenue is presented net of any taxes collected from our clients. We offer a standard limited warranty on our services to replace any item that is lost during shipment. We estimate the costs we may incur under the warranty program based on the number of units sold, historical and anticipated rates of warranty claims and cost per claim and record a liability equal to these estimated costs as cost of redemption revenue at the time the sale occurs. We assess the adequacy of the recorded warranty liability on a quarterly basis and adjust the amount as necessary. To date, the warranty liability has not been significant.

Income taxes

We are subject to income tax in Ireland, the United States and other international jurisdictions, and we use estimates in determining our provision for income taxes. We account for income taxes under the asset and liability method for accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax basis of assets and liabilities using statutory rates. This process requires us to project our current tax liability and estimate our deferred tax assets and liabilities, including net operating losses and tax credit carryforwards. In assessing the need for a valuation allowance, we considered our recent operating results, future taxable income projections and prudent and feasible tax planning strategies.

We account for uncertain tax positions recognized in the consolidated financial statements by prescribing a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

 

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Accounting for share-based compensation arrangements

Accounting guidance requires employee share-based payments to be accounted for under the fair value method. Under this method, we are required to record compensation cost based on the estimated fair value of share-based awards granted over the requisite service periods of the individual awards, which generally equals the vesting periods. We use the straight-line amortization method for recognizing share-based compensation expense.

We estimate the fair value of employee share options on the date of grant using the Black-Scholes option-pricing model, which requires the use of highly subjective estimates and assumptions. Historically, as a private company, we lacked company-specific historical and implied volatility information. Therefore, we estimate our expected volatility from the historical volatility of selected publicly-traded peer companies and expect to continue to do so until we have adequate historical data regarding the volatility of our traded share price. The expected life assumption is based on the simplified method for estimating the expected term as we do not have sufficient share option exercise experience to support a reasonable estimate of the expected term. The simplified method is based on the average of the vesting tranches and contractual life of each grant. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with terms approximately equal to the expected life of the share option. We use an expected dividend rate of zero as we currently have no history or expectation of paying dividends on our ordinary shares. In addition, we have estimated expected forfeitures of share options based on our historical forfeiture rate and used these rates in developing a future forfeiture rate. If our actual forfeiture rate varies from our historical rates and estimates, additional adjustments to compensation expense may be required in future periods. The weighted-average assumptions for expected dividend yield, expected volatility, average risk-free interest rate and expected life, for the year ended December 31, 2012 are presented in the following table:

 

       

Year ended December 31,

2012

 
      

 

    

 

 

 

Expected dividend yield

         

Expected volatility

       51%   

Average risk-free interest rate

       0.68%   

Expected term (in years)

       4.75   

 

    

 

 

 

The Company did not grant any share options during the year ended December 31, 2013.

The fair value of our ordinary shares was determined by our board of directors, which intended all share-based awards granted to be done so at a price per share not less than the per share fair value of our ordinary shares underlying those awards on the date of grant. Our board of directors determined the fair value of our ordinary shares, with input from management, taking into account our most recently available valuation of ordinary shares and our assessment of additional objective and subjective factors we believe are relevant and may have changed from the date of the most recent contemporaneous valuation through the date of the grant. Because there has been no public market for our ordinary shares and in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors determined the fair value of our ordinary shares by considering a number of objective and subjective factors, including the following:

 

 

our historical financial results and estimated trends and prospects for our future financial performance;

 

 

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

 

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our performance and market position relative to our competitors and/or similar publicly traded companies;

 

 

contemporaneous or other valuations of our ordinary shares performed by an independent valuation specialist;

 

 

the economic and competitive environment, including the industry in which we operate;

 

 

the lack of liquidity for our non-publicly traded ordinary shares; and

 

 

the likelihood of achieving a discrete liquidity event, such as an initial public offering, or IPO.

The following table summarizes share options granted to employees from April 1, 2012 through December 31, 2013:

 

Grant period (three months
ended)
   Number of
shares
underlying
options
granted
     Per share
exercise
price of
options,
Euro
     Per share
exercise
price of
options(1),
USD
    

Per share
fair value of
underlying
ordinary
share(1),

USD

     Per share
estimated
fair value of
options(1)(2),
USD
     Aggregate
estimated
fair value
of options
(1)(2), (in
thousands)
 

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2012

     310,285       4.77       $ 6.05       $ 6.05       $ 2.62       $ 814   

September 30, 2012

                                               

December 31, 2012

     212,560       4.77       $ 6.18       $ 6.18       $ 2.61       $ 556   

March 31, 2013

                                               

June 30, 2013

                                               

September 30, 2013

                                               

December 31, 2013

                                               

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
(1)   Converted at the exchange rate as of the date of the grant.
(2)   As described above, the estimated fair value of options was estimated on the date of grant using the Black-Scholes option-pricing model.

Based upon the assumed initial public offering price of $14.50 per share, which is the mid-point of the price range set forth on the cover page of this prospectus, the aggregate intrinsic value of share options outstanding as of December 31, 2013 was $11.4 million, of which $7.9 million related to vested share options and $3.5 million related to unvested share options.

As discussed above, in order to determine the fair value of our ordinary shares underlying share option grants, our board of directors considered numerous objective and subjective factors, including arm’s length transactions in our ordinary shares whenever those transactions were considered contemporaneous with the valuation date of our ordinary shares. If contemporaneous transactions were not available, in addition to considering the objective and subjective factors listed above, our board of directors considered valuations provided by management from an independent third-party valuation specialist. These valuations estimated the fair value of a minority interest in our ordinary shares, determined based on our business enterprise value, or BEV. Our BEV was estimated using a combination of generally accepted approaches: the income approach using the discounted cash flow method, or DCF method, the market approach using the guideline public company method, and the market approach using the guideline transaction method. The DCF method estimates the enterprise value based on the estimated present value of future net cash flows the business is expected to generate over a forecasted period and an estimate of the present value of cash flows beyond that period, which is referred to as the terminal value. The estimated present value is calculated using a discount rate known as the weighted-average cost of capital, which accounts for the time value of money and the appropriate degree of risks inherent in the business. The market approach considers multiples of financial metrics based on guideline transactions and trading multiples of guideline public companies. These multiples are then applied to our financial metrics to derive a range of indicated values. Once calculated, the DCF method and guideline company methods are then weighted. Our indicated BEV was allocated to the preferred shares, ordinary shares, warrants and share options, using the option pricing method, or OPM, or the probability weighted expected return method, or PWERM. Estimates of the

 

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volatility of our ordinary shares were based on available information on the volatility of common stock of comparable, publicly traded companies. We applied a discount for lack of marketability to our ordinary shares based on a put option model.

Significant factors considered by our board of directors in determining the fair value of our ordinary shares at each grant date in the table above are as follows:

June 21, 2012 grants

On June 21, 2012, we granted share options to purchase 310,285 ordinary shares with an exercise price of €4.77 per share. In addition to considering the objective and subjective factors listed above, our board of directors considered the contemporaneous valuation of a minority interest in our ordinary shares as of May 1, 2012 provided by management from an independent third-party valuation specialist. We concluded that it was appropriate to rely on the May 1, 2012 valuation analysis for purposes of the June 21, 2012 grants because there were no significant changes to the business, including our forecasted financial results, and no significant changes to market conditions, between May 1, 2012 and the date of the grants.

The May 1, 2012 contemporaneous valuation took into account the factors described above and used a combination of financial and market-based methodologies to determine our business enterprise value, or BEV. Based on this valuation, the board of directors determined that the fair value of our ordinary share was 4.77 as of May 1, 2012.

The valuation was based on the market approach, specifically the guideline public company method, or the GPCM. The GPCM assumes that businesses operating in the same industry will share similar characteristics and that the subject business’s value will correlate to those characteristics. Therefore, a comparison of the subject business to similar businesses whose financial information and public market value are available may provide a reasonable basis to estimate the subject business’s value. The GPCM provides an estimate of value using multiples derived from, among other things, the share prices of publicly traded companies. In selecting guideline public companies for this analysis, we focused primarily on quantitative considerations, such as financial performance and other quantifiable data, as well as qualitative considerations, such as industry and economic drivers. Our indicated BEV was then allocated to the preferred shares, ordinary shares, warrants and options using the option pricing method, or OPM.

The allocation of value was based on the PWERM, which evaluates the probability of a continued operations scenario and an IPO.

We performed both methodologies as of May 1, 2012, and weighted the methodologies based on the facts and circumstances as of that date. We assigned 60% weighting to the IPO exit price approach because we were considering raising equity capital through a public offering and it was considered probable that this liquidity event would occur in 2013. We applied a 15% discount for lack of marketability to the value of our ordinary shares based on an at the money put option analysis.

November 30, 2012 grants

On November 30, 2012, we granted share options to purchase 212,560 ordinary shares with an exercise price of €4.77 per share, which was determined to be the fair market value of our ordinary shares on the date of grant, based in part on the contemporaneous third-party valuation as of May 1, 2012, which is discussed above. Our board of directors concluded that it was appropriate to rely on the May 1, 2012 valuation analysis for purposes of the November 30, 2012 grants because there were no significant changes to the business, including our forecasted financial results, and no significant changes to market conditions, between May 1, 2012 and the date of the grants.

 

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January 23, 2014 grants

In January 2014, the compensation committee of the Board of Directors approved share option grants and grants of restricted share units covering a total of 798,075 shares to certain employees, to be effective immediately after the effectiveness of this registration statement to which this prospectus is a part. The exercise price of the option grants will be equal to the initial public offering price set forth on the cover page of this prospectus. Of these awards, share option grants and grants of restricted share units covering a total of 308,813 shares were issued to named executive officers, including our chief executive officer. For additional information on these awards see “Executive Compensation—Outstanding equity awards at fiscal year-end table—2013.”

Initial public offering price

On March 20, 2014, we and our underwriters determined the estimated price range for this offering,

as set forth on the cover page of this prospectus. The mid-point of that price range is $14.50 per share. In

comparison, our estimate of the fair value of our ordinary shares as of November 30, 2012 was $6.18 per share. As is typical in initial public offerings, the estimated price range for this offering was not derived using a formal determination of fair value, but was determined based upon discussions between us and the underwriters. Among the factors that were considered in setting this range were the following:

 

 

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

 

 

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

 

 

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

 

 

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

 

 

our financial position.

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

 

 

The fair value of our ordinary shares as of November 30, 2012 was determined based in part on the contemporaneous third-party valuation as of May 1, 2012, which is discussed below. The contemporaneous valuation prepared as of May 1, 2012 determined the fair value of our ordinary shares as of that date using a PWERM analysis, in which we weighted the probabilities of two possible future event scenarios, an IPO or a continued operations scenario, to determine the enterprise value of the company. In contrast, the midpoint of the estimated price range for this offering contemplates only an IPO. Our board of directors concluded that it was appropriate to rely on the May 1, 2012 valuation analysis for purposes of the November 30, 2012 grants because there were no significant changes to the business, including our forecasted financial results, and no significant changes to market conditions, between May 1, 2012 and November 30, 2012.

 

 

Historically, and we believe it is reasonable to expect that, the completion of an IPO increases the value of an issuer’s ordinary shares as a result of the increase in the liquidity and ability to trade such securities in the public market. As such, the midpoint of the estimated price range of this offering excludes any discount for lack of marketability for our ordinary shares, which discount was appropriately taken into account in our board of directors’ determination of the fair value of our ordinary shares as of November 30, 2012 and was estimated to be 15%.

 

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The estimated price range for this offering necessarily assumes that this offering has occurred, that a public market for our ordinary shares has been created, and that all of our preferred shares have converted into ordinary shares in connection with this offering, and, therefore, excludes the marketability or illiquidity discounts associated with the timing or likelihood of an initial public offering, the superior rights and preferences of our preferred shareholders and the alternative scenarios considered in the previous contemporaneous valuations. In contrast, our board of directors’ determination of the fair value of our ordinary shares as of November 30, 2012 was based in part on the contemporaneous valuation from May 1, 2012 which assumed that an IPO would not occur for eight months and appropriately discounted the IPO scenario to present value using a 14% discount rate. In addition, holders of our redeemable convertible preferred shares had then, and will have until the IPO, substantial economic rights and preferences over holders of our ordinary shares, which were appropriately considered in our board of directors’ determination of the fair value of our ordinary shares as of November 30, 2012.

 

 

Equity markets in general improved significantly during the recent period, resulting in an increase in our market comparables. For example, in the period from November 30, 2012 to February 28, 2014, the NASDAQ Composite index increased 43.1%, the Dow Jones Industrial Average increased 25.3% and the S&P 500 index increased 31.3%.

 

 

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

 

 

The price that investors are willing to pay in this offering, for which the price range is intended to serve as an estimate, may take into account other things that have not been expressly considered in our prior valuations, are not objectively determinable and that valuation models are not able to quantify.

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

 

 

In August 2013, we entered into a renewal amendment to our service agreement with our largest client;

 

 

In 2013, we achieved growth in our annual anticipated spend from agreements with new and existing clients; and

 

 

In November 2013, we publicly filed a registration statement with the SEC, evidencing continued progress toward completing our IPO.

There are significant additional judgments and estimates inherent in the determination of these valuations. These judgments and estimates include assumptions regarding our future performance, including our ability to expand our client base, increase adoption of our solution within existing clients and continue to invest in product innovation, as well as the determination of the appropriate valuation methods. If we had made different assumptions, our share-based compensation expense could have been different. The foregoing valuation methodologies are not the only methodologies available and they will not be used to value our ordinary shares once this offering is complete. We cannot make assurances as to any particular valuation for our ordinary shares. Accordingly, investors are cautioned not to place undue reliance on the foregoing valuation methodologies as an indicator of future share prices.

 

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Results of operations

The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.

 

   
     Year ended December 31,  
(in thousands)    2011     2012     2013  

 

  

 

 

   

 

 

   

 

 

 

Consolidated statements of operations:

      

Revenue

      

Redemption revenue

   $ 123,015      $ 141,136      $ 167,841   

Solution and services revenue

     12,790        16,555        18,956   
  

 

 

   

 

 

   

 

 

 

Total revenue

     135,805        157,691        186,797   
  

 

 

   

 

 

   

 

 

 

Expenses

      

Cost of redemption revenue

     106,827        123,240        145,515   

Cost of solution and services revenue

     2,025        2,586        3,209   

Operations

     3,363        3,735        4,367   

Research and development

     8,933        9,285        10,160   

Sales and marketing

     11,097        16,862        21,924   

General and administrative

     3,241        4,186        6,198   
  

 

 

   

 

 

   

 

 

 

Total expenses

     135,486        159,894        191,373   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     319        (2,203     (4,576

Other (expense) income, net

     (827     828        (1,317
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (508     (1,375     (5,893

Provision for income taxes

     296        461        655   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (804   $ (1,836   $ (6,548

 

  

 

 

   

 

 

   

 

 

 

Comparison of Years Ended December 31, 2012 and 2013

 

      Year ended December 31,                  
     2012      2013                
(in thousands, except for percentages)    Amount      Percentage
of total
revenue
     Amount      Percentage
of total
revenue
     $ Change      % Change  

 

 

Redemption revenue

   $ 141,136         90%       $ 167,841         90%       $ 26,705         19%   

Solution and services Revenue

     16,555         10         18,956         10         2,401         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total revenue

   $ 157,691         100%       $ 186,797         100%       $ 29,106         18%   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue increased by $29.1 million, or 18%, from 2012 to 2013. Redemption revenue increased by $26.7 million, or 19%, from 2012 to 2013. This revenue growth was primarily driven by a higher volume of billable awards issued and subsequent redemption of awards by employees of existing clients and volume from new clients added during the last twelve months. The number of billable awards increased from 1.4 million in 2012 to 1.8 million in 2013. In addition, breakage revenue included in redemption revenue increased by $1.3 million, or 39%, in 2013 compared to 2012.

Solution and services revenue increased by $2.4 million, or 15%, from 2012 to 2013. This revenue growth was primarily associated with transaction fees resulting from the increased issuance of awards from new and existing clients.

 

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Expenses

 

      Year ended December 31,                  
     2012      2013                
(in thousands, except for percentages)    Amount      Percentage
of total
revenue
     Amount      Percentage
of total
revenue
     $ Change      % Change  

 

 

Cost of redemption revenue

   $ 123,240         78%       $ 145,515         78%       $ 22,275         18%   

Cost of solution and services revenue

     2,586         2            3,209         2            623         24      

Operations

     3,735         2            4,367         2            632         17      

Research and development

     9,285         6            10,160         5            875         9      

Sales and marketing

     16,862         11            21,924         12            5,062         30      

General and administrative

     4,186         2            6,198         4            2,012         48      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total expenses

   $ 159,894         101%       $ 191,373         102%       $ 31,479         20%   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cost of redemption revenue

Cost of redemption revenue increased by $22.3 million, or 18%, from 2012 to 2013. This increase was primarily due to an increase in gift card purchases resulting from the 19% increase in redemption revenue.

Cost of redemption revenue as a percentage of redemption revenue fluctuates based on the mix of supplier gift cards that are selected when a client’s employee redeems his or her award, as the cost of similarly denominated gift cards varies by supplier. It will also fluctuate depending on the change in the exchange rate of the currency in which we purchased the inventory from the supplier to the U.S. dollar from the time of client invoicing to its eventual redemption and reduction in inventory.

Cost of solution and services revenue

Cost of solution and services revenue increased by $0.6 million, or 24%, from 2012 to 2013. The increase was primarily due to increased third-party web-site translation fees of $0.3 million and increased employee related expenses of $0.2 million as we increased our consulting employee headcount by two employees.

Operations

Operations expense increased by $0.6 million, or 17%, from 2012 to 2013. This increase was primarily due to a $0.3 million increase in employee related expenses as we increased our operations headcount by two employees, as well as $0.2 million in increased consulting expense.

Research and development

Research and development expense increased by $0.9 million, or 9%, from 2012 to 2013. This increase was primarily due to a $1.0 million increase in employee related expenses as we increased our research and development employee headcount by six employees as well as $0.3 million in increased overhead expenses allocated to research and development and $0.1 million in increased travel expense. This increase was partially offset by a $0.4 million decrease in consulting fees as we replaced external contractors with employees and a $0.1 million research and development expense reimbursement received from Enterprise Ireland.

Sales and marketing

Sales and marketing expense increased by $5.1 million, or 30%, from 2012 to 2013. This increase is primarily attributable to the expansion of our headcount within sales and marketing by 20 employees. We added

 

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employees within our direct sales, marketing and account management teams, which contributed to $3.8 million of employee related expenses. Additionally, we incurred $0.9 million of increased marketing program expense and $0.6 million of increased travel expense. This increase was partially offset by a $0.3 million decrease in consulting expense.

General and administrative

General and administrative expense increased by $2.0 million, or 48%, from 2012 to 2013. We increased our general and administrative employee headcount by seven employees, which contributed to an increase of employee related expenses of $1.0 million. We also incurred $0.5 million of increased professional fees, $0.2 million of increased share-based compensation expense and $0.1 million of increased travel expense.

Other income (expense), net

 

      Year ended December 31,                  
     2012      2013                
(in thousands, except for percentages)    Amount     Percentage
of total
revenue
     Amount      Percentage
of total
revenue
     $ Change      % Change  

 

  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest Income

   $ 68        —%       $ 55         —%         (13)         (19)%   

Interest Expense

     (17             (13)                 4         (24)   

Foreign exchange gain (loss)

     58                (590)                 (648)         NM   

Change in the fair value of the warrants

     719        1         (769)         (1)         (1,488)         (207)   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other income (expense), net

   $ 828        1%       $ (1,317)         (1)%         (2,145)         (259)%   

 

  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other income (expense), net was $(1.3) million for 2013, as compared to $0.8 million for 2012. The difference year-over-year is primarily a result of a $1.1 million gain recorded on the expiration of warrants to purchase 175,500 redeemable convertible preferred shares in September 2012. The remainder of the change in the fair value of the warrants was due to the increased charge associated with the change in the fair value of the warrants as a result of the increase in the estimated fair value of our preferred shares year-over-year. Additionally, the foreign exchange loss increased by $(0.6) million as a result of fluctuations in foreign currency exchange rates in relation to the U.S. dollar.

Provision for income taxes

 

      Year ended December 31,                  
     2012      2013                
     Amount      Percentage
of total
revenue
     Amount      Percentage
of total
revenue
     $ Change      % Change  

Provision for income taxes

   $ 461         —%       $ 655         —%         194         42%   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our total tax provision was $0.7 million for 2013, representing an effective tax rate of 11.1%, as compared to a tax provision of $0.5 million for 2012, which represented an effective tax rate of 33.5%. The higher tax provision in 2013 was mainly attributable to an increase in income before taxes in our U.S. subsidiary.

As our parent entity is domiciled in Ireland, our earnings are subject to a statutory tax rate of 12.5%. Our effective tax rate differs from the statutory rate each year primarily due to the jurisdictional mix of earnings (profits are earned in the United States, the United Kingdom and Canada and are taxed at a rate higher than the statutory rate of 12.5%), the valuation allowance maintained against net Irish deferred tax assets and the impact of permanent differences (primarily related to non-deductible expenses and Irish research credits).

 

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Comparison of Years Ended December 31, 2011 and 2012

Revenue

 

      Year ended December 31,                  
     2011      2012                
(in thousands, except for percentages)    Amount      Percentage
of total
revenue
     Amount      Percentage
of total
revenue
     $ Change      % Change  

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Redemption revenue

     $123,015         91%         $141,136         90%         $18,121         15%   

Solution and services revenue

     12,790         9         16,555         10         3,765         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total revenue

     $135,805         100%         $157,691         100%         $21,886         16%   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue increased by $21.9 million, or 16%, from 2011 to 2012. Redemption revenue increased by $18.1 million, or 15%, from 2011 to 2012. This revenue growth was primarily driven by a higher volume of billable awards issued and subsequent redemption of the awards by employees of existing clients and volume from new clients added during the year. The number of billable awards issued increased from 1.3 million in 2011 to 1.4 million in 2012. Solution and services revenue increased by $3.8 million, or 29%, from 2011 to 2012. This revenue growth was primarily associated with transaction fees resulting from the increased issuance of awards from new and existing clients.

Expenses

 

      Year ended December 31,                  
     2011      2012                
(in thousands, except for percentages)    Amount      Percentage
of total
revenue
     Amount      Percentage
of total
revenue
     $ Change      % Change  

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cost of redemption revenue

   $ 106,827         79%       $ 123,240         78%       $ 16,413         15%   

Cost of solution and services revenue

     2,025         1         2,586         2         561         28   

Operations

     3,363         2         3,735         2         372         11   

Research and development

     8,933         7         9,285         5         352         4   

Sales and marketing

     11,097         8         16,862         11         5,765         52   

General and administrative

     3,241         3         4,186         3         945         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total expenses

   $ 135,486         100%       $ 159,894         101%       $ 24,408         18%   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cost of redemption revenue

Cost of redemption revenue increased by $16.4 million, or 15%, from 2011 to 2012. This increase was primarily due to an increase in gift card purchases resulting from the 15% increase in redemption revenue.

Cost of redemption revenue as a percentage of redemption revenue fluctuates based on the mix of supplier gift cards that are selected when a client’s employee redeems his or her award, as the cost of similarly denominated gift cards varies by supplier. It will also fluctuate depending on the change in the exchange rate of the currency in which we purchased the inventory from the supplier to the U.S. dollar from the time of client invoicing to its eventual redemption and reduction in our inventory.

Cost of solution and services revenue

Cost of solution and services revenue increased by $0.6 million, or 28%, from 2011 to 2012. This increase was primarily due to a $0.2 million increase in employee-related costs related to our services organization, as we hired an additional two employees, as well as $0.2 million in infrastructure related costs.

 

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Operations

Operations expense increased by $0.4 million, or 11%, from 2011 to 2012. This increase was driven primarily by $0.2 million of increased employee-related costs, as we hired seven additional employees, and $0.2 million related to third-party fulfillment and customer service fees to support our growing business.

Research and development

Research and development expense increased by $0.4 million, or 4%, from 2011 to 2012. We increased our research and development employee headcount by an additional 14 employees, which contributed to an increase in employee-related expenses of $1.5 million. This increase was partially offset by a decrease in consulting fees of $1.1 million as we replaced external contractors with employees.

Sales and marketing

Sales and marketing expense increased by $5.8 million, or 52%, from 2011 to 2012. This increase was primarily attributable to the expansion of our headcount within sales and marketing by 19 employees. We added employees within our direct sales, marketing and account management teams, which contributed to $2.8 million of personnel and related expenses. We incurred $1.1 million of increased commissions expense primarily due to amounts earned related to new customer agreements entered into during 2012. Additionally, we incurred $1.0 million of increased marketing programs expense, $0.2 million of increased consulting fees, and $0.2 million of increased share-based compensation expense.

General and administrative

General and administrative expense increased by $0.9 million, or 29%, from 2011 to 2012. This increase was primarily due to the addition of six employees resulting in $0.8 million of additional employee-related costs.

Other (expense) income, net 

 

      Year ended December 31,                 
     2011     2012               
(in thousands, except for percentages)    Amount     Percentage
of total
revenue
    Amount     Percentage
of total
revenue
     $ Change     % Change  

 

  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest Income

   $ 57        —%      $ 68        —%       $ 11        19%   

Interest Expense

     (16            (17             (1     6   

Foreign exchange gain (loss)

     (64            58                122        (191

Change in the fair value of the warrants

     (804     (1     719        1         1,523        (189
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

Other (expense) income, net

   $ (827     (1)%      $ 828        1%       $ 1,655        (200)%   

 

  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other (expense) income, net was $(0.8) million for 2011 as compared to $0.8 million for 2012. The difference year over year is mainly a result of $1.1 million gain recorded on the expiration of warrants to purchase 175,500 redeemable convertible preferred shares in September 2012. The remainder of the change in the fair value of the warrants is a result of a lower charge due to the lower number of warrants outstanding and less of an increase in the estimated fair value of our preferred shares year-over-year. Additionally, foreign exchange gain (loss) was $(0.1) million in 2011 as compared to $0.1 million for 2012. The change is a result of the fluctuations in the foreign currency exchange rates in relation to the U.S. dollar.

 

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Provision for income taxes

 

      Year ended December 31,                  
     2011      2012                
     Amount      Percentage
of total
revenue
     Amount      Percentage
of total
revenue
     $ Change      % Change  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Provision for income taxes

   $ 296         —%       $ 461         —%       $ 165         56%   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our total tax provision was $0.5 million for 2012, representing an effective tax rate of 33.5%, as compared to a tax provision of $0.3 million for 2011, which represented an effective tax rate of 58.5%. The higher tax provision in 2012 was mainly attributable to an increase in income before taxes in our U.S. subsidiary.

As our parent entity is domiciled in Ireland, our earnings are subject to a statutory tax rate of 12.5%. Our effective tax rate differs from the statutory rate each year primarily due to the jurisdictional mix of earnings (profits are earned in the United States, the United Kingdom and Canada that are taxed at a rate higher than the statutory rate of 12.5%), the valuation allowance maintained against net Irish deferred tax assets and the impact of permanent differences (primarily related to non-deductible expenses and Irish research credits).

Quarterly results of operations data

The following table sets forth our unaudited consolidated statements of operations data and other financial data for each of the eight quarters in the period ended December 31, 2013. We have prepared the consolidated statement of operations data for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this prospectus. In our opinion, the financial information includes all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of this data for the periods presented. This information should be read together with our audited consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of the results to be expected in future periods.

 

     Quarter ended  
    Mar. 31,
2012
    Jun. 30,
2012
    Sep. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    June 30,
2013
    Sep. 30,
2013
   

Dec. 31,

2013

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

               

Redemption revenue

  $ 32,112      $ 31,563      $ 33,012      $ 44,449      $ 37,296      $ 38,073      $ 38,907      $ 53,565   

Solution and services revenue

    3,925        3,764        4,291        4,575        4,163        4,729        4,757        5,307   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    36,037        35,327        37,303        49,024        41,459        42,802        43,664        58,872   

Expenses

               

Cost of redemption revenue

    28,091        27,457        28,910        38,782        32,117        33,302        33,586        46,510   

Cost of solution and services revenue

    657        651        653        625        699        743        809        958   

Operations

    931        927        916        961        942        940        1,106        1,379   

Research and development

    2,467        2,380        2,121        2,317        2,288        2,435        2,698        2,739   

Sales and marketing

    3,412        4,066        4,194        5,190        4,628        5,533        5,539        6,224   

General and administrative

    913        1,061        1,058        1,154        1,320        1,384        1,490        2,004   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    36,471        36,542        37,852        49,029        41,994        44,337        45,228        59,814   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (434     (1,215     (549     (5     (535     (1,535     (1,564     (942

Other (expense) income, net

    (179     (9     998        18        (109     (722     (213     (273
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (613     (1,224     449        13        (644     (2,257     (1,777     (1,215

Provision for Income taxes

    93        85        175        108        148        137        187        183   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (706   $ (1,309   $ 274      $ (95   $ (792   $ (2,394   $ (1,964   $ (1,398

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Quarter ended  
As % of revenue   Mar. 31,
2012
    Jun. 30,
2012
    Sep. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
   

Dec. 31,

2013

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Redemption revenue

    89%        89%        88%        91%        90%        89%        89%        91%   

Solution and services revenue

    11        11        12        9        10        11        11        9%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

    100        100        100        100        100        100        100        100   

Expenses

               

Cost of redemption revenue

    78        78        78        79        77        78        77        79   

Cost of solution and services revenue

    2        2        2        1        2        2        2        2   

Operations

    3        3        2        2        2        2        3        2   

Research and development

    7        7        6        5        6        6        6        5   

Sales and marketing

    9        11        11        11        12        13        13        11   

General and administrative

    3        3        3        2        3        3        3        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    102        104        102        100        102        104        104        102   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (2     (4     (2            (2)        (4)        (4)        (2)   

Other (expense) income, net

                  3                      (2)                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (2     (4     1               (2)        (6)        (4)        (2)   

Provision for income taxes

                                                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (2)%        (4)%        1%        —%        (2)%        (6)%        (4)%        (2)%   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our redemption revenue fluctuates as a result of seasonal variations in our business, principally due to the peak in award issuances and redemptions during the fourth quarter. Solution and services revenue has primarily increased related to transaction fees resulting from the growth in award issuance over the periods.

Cost of redemption revenue fluctuates due to the peak in award redemptions during the fourth quarter. The increase in gift card purchases is related to the increase in redemption revenue and fluctuation of exchange rates for gift cards purchased in foreign currencies.

The increase in cost of solution and services revenue primarily relates to increased headcount and related expenses along with third party costs to service our clients.

Operations expense fluctuates as we increase staffing in our operations organization and utilize our outsource partners during peak redemption periods.

Research and development expense has remained relatively stable as an increase in headcount and related expenses has been offset by a reduction in consulting fees as we have replaced external consultants with employees.

The increase in sales and marketing expense is primarily the result of increasing headcount in our sales and marketing teams, as well as increased marketing programs and events.

The increase in general and administrative expense relates to an increase in headcount to support the growth of our business and as we continued to build our internal infrastructure in preparation for an initial public offering of our ordinary shares.

Along with the seasonally higher revenue we experience in the fourth quarter, we also experience lower overall loss from operations in the fourth quarter as the majority of our operating expenses, other than the cost of redemptions, is personnel and related expenses which is less impacted by the growth of redemption revenue. We also experienced a reduction in operating cash flow and increase in accounts receivable in the fourth quarter associated with the higher revenue growth.

 

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Liquidity and capital resources

 

                        
     Year ended December 31,  
(in thousands)    2011     2012    

2013

 

 

  

 

 

   

 

 

   

 

 

 

Consolidated statements of cash flow data

      

Net cash provided by operating activities

   $ 8,260      $ 4,352      $ 3,658   

Net cash used in investing activities

     (2,811     (1,237     (1,662

Net cash used in financing activities

     (130     (2,368     (4,438

 

  

 

 

   

 

 

   

 

 

 

We have funded our operations since inception primarily with cash flows from operations and approximately $14.7 million of net proceeds from issuances of preferred shares and ordinary shares. In addition we entered into a senior secured credit facility of $5.3 million, which was drawn down from 2005 to 2007 and repaid in full as of July 1, 2010. Based on our current operating plan, which includes the growth strategies described in “Use of Proceeds” and “Business—our growth strategy”, other than acquisitions of complementary business, products and technologies, in the absence of this offering, we believe our existing cash and cash equivalents combined with our future cash generated from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 18 months. If we do acquire any such complementary businesses, products or technologies, we may use a portion of the net proceeds from this offering to do so. Our future capital requirements may vary materially from those planned and will depend on certain factors, such as, among other things, our growth and our operating results. If we require additional capital resources to grow our business or to acquire complementary technologies and businesses in the future, we may seek to sell additional equity or raise funds through debt financing or other sources. The sale of additional equity could result in additional dilution, and the terms of any financing arrangements may include restrictions on our business that could impair our operating flexibility and would cause us to incur interest expense. We cannot provide assurance that additional financing will be available at all or on terms favorable to us. We had no material commitments for capital expenditures as of December 31, 2013.

Cash and cash equivalents

Our cash and cash equivalents at December 31, 2013 were held for working capital purposes and were invested primarily in bank money market accounts. We do not enter into investments for trading or speculative purposes. At December 31, 2013, restricted cash was approximately $55,000.

Accounts receivable, net

Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. The fluctuations vary depending on the timing of our billing activity and cash collections. We use days’ sales outstanding, or DSO, calculated on a quarterly basis, as a measurement of the quality and status of our receivables. We define DSO as (a) accounts receivable, less the change in deferred revenue for the quarter, divided by total revenue for the most recent quarter, multiplied by (b) the number of days in that quarter. DSO was 57,62 and 64 days at December 31, 2011, 2012 and 2013, respectively.

Operating activities

Cash provided by operating activities consists primarily of net income (loss) adjusted for certain non-cash items including depreciation, the change in the fair value of outstanding warrants to purchase our redeemable convertible preferred shares, share-based compensation expense and the effect of changes in working capital and other activities.

 

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Cash generated by operating activities for the year ended December 31, 2013 was $3.7 million and consisted of a $6.5 million net loss, which included non-cash expenses of $0.7 million for depreciation and amortization, $0.5 million for share-based compensation, and a $0.8 million non-cash charge for the change in the fair value of the warrants to purchase redeemable convertible preferred shares. Sources of cash from operating activities included a $17.8 million increase in deferred revenue and a $2.2 million increase in accounts payable and accrued expenses. These sources of cash were offset in part by an $8.2 million increase in accounts receivable, primarily related to higher billings, a $1.2 million increase in inventory, a $1.4 million tax benefit from share option exercises and a $0.8 million increase in prepaid expenses and other current assets.

Cash generated by operating activities for the year ended December 31, 2012 was $4.4 million and consisted of a $1.8 million net loss, which included non-cash expenses of $0.5 million for depreciation and amortization expense and $0.4 million of share-based compensation, and was offset in part by a $0.7 million non-cash gain for the change in the fair value of the warrants to purchase redeemable convertible preferred shares. Sources of cash from operating activities included a $7.2 million increase in deferred revenue, a $2.0 million decrease in inventory, and a $1.7 million increase in accounts payable and accrued expenses. These sources of cash were offset in part by a $4.4 million increase in accounts receivable, primarily related to an increase in DSO, and an increase of $0.3 million in prepaid expenses and other current assets.

Cash generated by operating activities for the year ended December 31, 2011 was $8.3 million and consisted of a $0.8 million net loss, which included non-cash expenses of $0.4 million for depreciation and amortization expense and $0.8 million for the change in the fair value of the warrants to purchase redeemable convertible preferred shares. Sources of cash from operating activities included a $10.8 million increase in deferred revenue, primarily related to an increase in billings, and a $3.4 million increase in accounts payable and accrued expenses. These sources of cash were offset in part by a $5.0 million increase in accounts receivable, primarily related to higher billings, an increase in inventory of $1.1 million and an increase of $0.3 million in prepaid expenses and other assets.

Investing activities

Cash used in investing activities for year ended December 31, 2013 was $1.7 million, consisting of capital expenditures for computer equipment and software to support our growing business and leasehold improvements for our office in Ireland.

Cash used in investing activities for the year ended December 31, 2012 was $1.2 million, consisting primarily of capital expenditures for equipment.

Cash used in investing activities for the year ended December 31, 2011 was $2.8 million and was mainly comprised of $2.0 million advanced to our chief executive officer under certain agreements. During the year ended December 31, 2011, we also incurred $0.9 million of capital expenditures for equipment to support the business and leasehold improvements as we expanded our office in Ireland, partially offset by lower restricted cash requirements.

Financing activities

Cash used for financing activities for the year ended December 31, 2013 was $4.4 million and was mainly comprised of $2.7 million of professional services costs associated with our planned initial public offering and $3.2 million of minimum withholding tax paid on behalf of employees who exercised their share-based awards on a net basis, offset in part by a $1.4 million income tax benefit from these share option exercises. Additionally, we received $0.1 million of proceeds from the exercise of warrants to purchase convertible redeemable preferred shares.

 

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Cash used for financing activities for the year ended December 31, 2012 was $2.4 million and was mainly comprised of $2.2 million of professional services costs associated with our planned initial public offering.

Cash used for financing activities for the year ended December 31, 2011 was $0.1 million and was primarily comprised of the repayment of amounts borrowed under our equipment financing from a third party vendor.

Net operating loss carryforwards

As of December 31, 2012 and 2013, we had Irish net operating loss carryforwards of approximately $19.3 million and $30.7 million, respectively, and Irish research credit carryforwards available of approximately $0.7 million and $0.8 million, respectively. These Irish net operating loss and research credit carryforwards do not expire.

In assessing our ability to realize our net deferred tax assets, we considered various factors including taxable income in carryback years, future reversals of existing taxable temporary differences, tax planning strategies and projections of future taxable income, to determine whether it is more likely than not that some portion or all of our net deferred tax assets will not be realized. Based upon our historical and forecasted future Irish losses, we have determined that the uncertainty regarding the realization of these assets is sufficient to warrant the need for a full valuation allowance against our Irish net deferred tax assets.

We have U.S. federal and state net operating loss carryforwards available at December 31, 2013 of $5.8 million and $3.6 million, respectively. These amounts were not recorded as tax assets as these net operating losses relate to excess share-based compensation deductions that may not be recorded as tax assets under generally accepted accounting principles until the amounts have been utilized to reduce our tax liability. To the extent these assets are used to reduce future taxes, the benefit will be recorded as a equity adjustment to additional paid-in capital. The federal net operating losses begin expiring in 2033 and the state net operating losses begin expiring in 2023.

Contractual obligations and commitments

Our principal commitments consist of obligations under our operating leases for our office space and our outstanding debt facility. The following table summarizes our contractual obligations at December 31, 2013:

 

      Payment due by period  
(in thousands)    Total      Less than
1 year
     1-3
years
     3-5
years
    

More than

5 years

 

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating lease obligations

   $ 2,431       $ 523       $ 1,090       $ 521       $ 297   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,431       $ 523       $ 1,090       $ 521       $ 297   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We lease our facilities under non-cancelable operating leases. These operating leases expire at various dates through February 2020.

Off-balance sheet arrangements

We do not have any special purpose entities or off-balance sheet arrangements.

Quantitative and qualitative disclosure about market risk

We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks include primarily foreign currency exchange risks, interest rate risk and inflation risk.

 

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Foreign currency exchange risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly in the Euro and British pound.

We maintain cash accounts, accounts receivable and accounts payable and accrued expenses denominated in currencies other than the U.S. dollar, which exposes us to foreign currency exchange rate movements. As of December 31, 2012, we had $1.5 million, $2.1 million and $5.8 million, respectively, of cash, accounts receivable and accounts payable and accrued expenses denominated in currencies other than the U.S. dollar. As of December 31, 2013, we had $0.9 million, $2.2 million and $4.7 million, respectively, of cash, accounts receivable and accounts payable and accrued expenses denominated in currencies other than U.S. dollar.

Currently, our largest foreign currency exposures are the Euro and British pound, primarily because our European operations have a higher proportion of our local currency denominated expenses. For the year ended December 31, 2011, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have decreased revenues by $5.4 million, decreased expenses by $5.3 million and decreased operating income by $0.1 million. For the year ended December 31, 2012, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have decreased revenues by $6.4 million, decreased expenses by $6.2 million, and decreased operating income by $0.2 million. For the year ended December 31, 2013, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have increased revenues by $7.6 million, increased expenses by $7.5 million and decreased operating income by $0.1 million. The estimates used assume that all currencies move in the same direction at the same time and the ratio of non-U.S. dollar denominated revenue and expenses to U.S. dollar denominated revenue and expenses does not change from current levels. Since a portion of our revenue is deferred revenue that is recorded at different foreign currency exchange rates, the impact to revenue of a change in foreign currency exchange rates is recognized over time, and the impact to expenses is more immediate, as expenses are recognized at the current foreign currency exchange rate in effect at the time the expense is incurred. All of the potential changes noted above are based on sensitivity analyses performed on our financial results as of December 31, 2012 and 2013.

Interest rate risk

We had unrestricted cash and cash equivalents totaling $17.6 million at December 31, 2013 held for working capital purposes. Approximately $6.6 million was invested in bank money market accounts. We do not use derivative financial instruments in our investment portfolio. We did not hold any short-term or long-term investments at December 31, 2013 and were not subject to significant interest rate risk.

Inflation risk

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

 

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Business

Overview

We are a leading provider of a cloud-based, social recognition software solution that organizations use to engage their employees worldwide to create alignment with values and advance company goals and culture. We achieved this leadership position through our innovative technologies, our ability to deliver a comprehensive solution to large, multinational firms, and our experience operating in the social recognition industry. Our Software-as-a-Service, or SaaS, platform enables employee-to-employee recognition that is broadcast socially and made visible throughout the organization. Our clients leverage the widespread employee adoption of our social recognition solution to elevate recognition to a strategic imperative that drives business results. In addition, the interactions between employees using our social recognition solution generate data that provides our clients with deep management insights about their talent and culture. Our growth has been driven by our clients’ ability to use our social recognition solution to increase employee engagement, improve employee retention and strengthen company culture.

We have developed innovative technologies that power our full-service strategic solution and differentiate us from other recognition solution providers. We designed our social recognition solution to provide organizations with actionable intelligence about their talent and culture typically not found in traditional human resource solutions. We deliver this information through powerful enterprise social graphs, talent mapping and interactive info-graphics. These insights into employee performance complement the more traditional processes such as performance reviews, succession planning and career management, collectively referred to as human capital management, or HCM.

Through our SaaS platform, our clients benefit from a shorter implementation cycle, low total cost of ownership and access to the latest version of our software. Additionally, our social recognition solution has intuitive web and mobile-based user interfaces that are easy for employees to use across desktop and mobile computing environments. Our seamless employee adoption model and client-specific branding often leads to viral and organic adoption, and our SaaS platform scales to support large, global implementations.

Our social recognition solution has been successfully adopted in complex environments throughout the world. As of December 31, 2013, our client base consisted of more than 100 companies, with more than 1.9 million users located in more than 140 countries using our solution in 29 languages and dialects. Representative clients include: Abbott Laboratories, Celestica Inc., CitiCorp North America, Inc., Eaton Corporation, General Electric Company, IM Flash Technologies LLC, InterContinental Hotels Group, Intuit, Inc., JetBlue Airways Corporation, LSI Corporation, Premier Farnell Corporation, Quintiles, Inc. and Symantec Corporation.

Our solution reinforces the praise delivered through recognition and extends employees’ recognition moments by providing awards with economic value. Employees redeem their awards through our global e-commerce rewards network that has a broad array of locally relevant options including retail, online shopping, dining, travel and charitable giving.

We derive our billings primarily from recognition awards processed through our solution and associated transaction fees. The majority of our revenue is recognized when our clients’ employees redeem their awards through our global e-commerce rewards network, primarily for gift cards, and we deliver the redeemed item. In addition, the delivery of our social recognition solution includes various activities such as website configuration, hosting, upgrades, software functionality for award processing and call-center support. The billings for these various activities, which are derived primarily from our transaction fees, are recorded as solution and services revenue over the service period of the contractual arrangement with our clients. Our revenue increases as clients adopt and expand their usage of our social recognition solution. Our overall billings retention rate exceeded 100% for each of the years ended December 31, 2010, 2011, 2012 and 2013.

 

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Our total revenue has grown from $100.0 million in 2010 to $135.8 million in 2011, to $157.7 million in 2012 and to $186.8 million in 2013, representing a three-year compound annual growth rate, or CAGR, of 23.2%. During the years ended December 31, 2010, 2011, 2012 and 2013 our net income (loss) was $3.1 million, $(0.8) million, $(1.8) million and $(6.5) million, respectively, and our free cash flow was $4.6 million, $7.4 million, $3.1 million and $2.0 million, respectively. During the years ended December 31, 2012 and 2013, our net loss increased and free cash flow decreased as we invested heavily in expansion of our sales and marketing team. For further explanation of our management’s use of free cash flow, limitations of its use, and a reconciliation of our free cash flow to the most directly comparable GAAP measure, net cash provided by (used in) operating activities, please see “Summary consolidated financial data—Free cash flow.”

Industry background

Increasingly diverse and geographically-dispersed workforces combined with intense competition to hire and retain qualified employees have forced organizations to elevate their approach to employee engagement. The transformation of social recognition from ad hoc, informal practices into a strategic imperative enables organizations to drive business results and enhance their ability to attract, evaluate, develop and retain human capital. Gartner notes they are beginning to see organizations require tighter integration between recognition systems and talent management applications (particularly performance management and compensation).(9)

For decades, companies have attempted to use employee recognition programs to engage and motivate employees. Recognition programs are intended to build goodwill between the organization and employees and ultimately strengthen employee dedication to company values. Traditionally, recognition solutions have included in-house, do-it-yourself programs that are time consuming and expensive to create and maintain or third-party solutions from legacy vendors that are focused on gifts. These solutions are limited in that they often focus only on top performers or a small segment of the employee base through initiatives such as length-of-service awards or “employee of the month” programs. In addition, since those solutions frequently focus on gifts rather than actions they do not reinforce a consistent culture or set of values across an organization. Furthermore, Gartner estimates that traditional recognition programs can account for as much as 2% of payroll costs, yet there is little direct correlation of this investment to improved employee performance, retention or improved business outcomes.(10) Traditional recognition programs are not strategic, as they do not use recognition awards to drive specific actions and behaviors across the organization. We believe that they therefore are not able to consistently measure impact on employee engagement or business results.

Strategic recognition-based programs, if designed correctly, are cost-effective and valuable tools that can help raise employee engagement, which is generally defined to measure employees who are involved in or enthusiastic about their work and contributing to their employer’s goals or values. They can therefore increase productivity and competitiveness, and can positively impact the bottom line. Taking a social approach to rewards and recognition programs can drive significant advantages over traditional models by improving workforce engagement, which has a proven impact on business outcomes, such as quality of service (QoS), customer retention, operational efficiency, revenue and profitability.(11) Several studies have been conducted to assess the impact of employee engagement on business results, as measured by profitability. The following demonstrate some of these benefits:

 

 

A study by Gallup Consulting indicates that companies in the top quartile of employee engagement generated 16% higher profits and 18% higher productivity than those in the bottom quartile(12)

 

(9)    Gartner, Hype Cycle for Human Capital Management Software, 31 2013 July 2013.
(10)    Gartner, IT Market Clock for Human Capital Management Software, 26 August 2013.
(11)    Gartner, IT Market Clock for Human Capital Management Software, 26 August 2013.
(12)    Gallup Consulting, Employee Engagement—What’s Your Engagement Ratio?, 2010.

 

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The same Gallup Consulting study found that companies with “world-class engagement” have 3.9 times the EPS growth rate compared with organizations with lower engagement in the same industry(13)

 

 

Towers Watson reached similar conclusions in its three-year study of 41 global companies, which found that operating margins improved nearly 4% on average in organizations with high employee engagement levels(14)

 

 

Additional studies by Towers Watson found that recognizing employee performance can increase engagement by almost 60%(15), and that companies with high sustainable engagement can have operating margins as much as three times higher than companies with low traditional engagement.(16)

In addition, industry research analysts have evaluated the relationship between employee engagement and employee turnover. A culture of recognition can also have an even stronger impact on potential flight risks, and thus reduce costs, as illustrated by the following:

 

 

A 2012 study by analyst firm Bersin & Associates found that companies with highly effective recognition programs have 31% lower voluntary turnover than organizations with ineffective recognition programs(17)

 

 

According to Hay Group, Inc., estimates show that the cost of replacing employees can be between 50% and 150% of the departing employee’s salary(18)

We believe that to be most impactful, recognition solutions require innovative features to enable effective management of strategic recognition programs. Most traditional solutions have limited tools to inform strategic decision making and do not have technology or locally relevant reward options to enable full- service, global programs. They also typically do not have a social element to giving and communicating awards, which limits their impact with employees. In addition, traditional recognition solutions frequently do not have mobile capabilities that enable recognition to be a regular part of the day for employees and do not interoperate well with other HR systems, which limit their utility and adoption.

Our opportunity

We believe the recognition market is poised for substantial growth and fundamental change as companies increasingly shift to outsourced, full-service providers and strategic solutions powered by social interactions. In a July 2012 white paper that we commissioned, IDC estimated that the North America Recognition Market will grow from $22 billion in 2011 to $32 billion in 2016, an 8% CAGR.(19) In that same white paper, IDC also found that nearly 40% of study respondents expected to use a full-service third-party provider for all aspects of recognition in the twelve months ended July 31, 2013.(20)

There are several important secular trends that we believe are fueling the evolution of the recognition market.

 

 

The transformation of social recognition into a strategic business imperative.    Social recognition as a key business initiative not only improves organizations’ abilities to drive business results, but also enhances their abilities to successfully recruit, evaluate and train qualified workforces.

 

 

The rise of social solutions as important communications tools in organizations.    The growth and penetration of social solutions has made it increasingly critical for enterprises to leverage employee collaboration and social platform technologies within their operations. IDC forecasts that the global market for enterprise social software will increase from approximately $1.1 billion in 2012 to $4.5 billion in 2016, representing a 43% CAGR.(21)

 

(13)    Gallup Consulting, Employee Engagement—What’s Your Engagement Ratio?, 2010.
(14)    Towers Watson, Perspectives: The Power of Three: Taking Engagement to New Heights, 2011.
(15)    Towers Watson, Perspectives: Turbocharging Employee Engagement – The Power of Recognition from Managers, 2010.
(16)    Towers Watson, Global Workplace Study—Engagement at Risk: Driving Strong Performance in a Volatile Global Environment, 2012.
(17)    Bersin & Associates, The State of Employee Recognition in 2012, June 2012.
(18)    Hay Group, Inc., Lighting the Path to Success, 2012.
(19)    IDC, White Paper—Employee Recognition Driving Business Results, July 2012.
(20)    IDC, White Paper—Employee Recognition Driving Business Results, July 2012.
(21)    (IDC, IDC Worldwide Enterprise Social Software 2012-2016 Forecast, June 2012.

 

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The continued adoption of SaaS solutions in the enterprise.    Ease and speed of deployment and a desire for a lower total cost of ownership continue to drive growth in the SaaS market. IDC estimates that worldwide SaaS revenue will grow from $20.4 billion in 2011 to $57.4 billion in 2016, representing a 23% CAGR.(22)

 

 

The continued strength of e-commerce.    E-commerce continues to demonstrate strong growth, both in the United States and abroad. According to eMarketer, U.S. retail e-commerce sales are expected to grow from $224 billion in 2012 to $362 billion in 2016, a 13% CAGR.(23)

Our solution

Through our years of experience and research, we have developed an innovative solution that helps organizations elevate employee engagement, manage company culture and discover actionable insights about their talent, all of which can drive and improve business results.

The key benefits of our social recognition solution include:

 

 

Social recognition drives engagement and aligns employees with cultural values.    Our solution enables employees across all levels of an organization to recognize each other for actions and behaviors that align with company values. This social employee-to-employee recognition is highly impactful as it originates from

  people who understand the value of the contribution, strengthens relationships within the organization, identifies important actions as they occur and is shared across a group or an entire organization.

 

 

Facilitates viral and organic adoption among employees.    Our social recognition solution has intuitive web and mobile-based user interfaces that do not require special training, making it simple for employees to use. These interfaces allow employees and managers to easily nominate one another for awards with economic value and then subsequently approve and redeem awards. We work with our clients to tailor the solution to their needs, resulting in a configured program including branding, award approvals, user access, reporting and communications, which are aligned with our client’s own culture and values.

 

 

Enables measurability and provides unique insights.    Our solution provides our clients with deep management insights through powerful social graphing and talent mapping tools. Organizations use our social recognition solution to capture, measure and gain actionable intelligence about their organization and talent. For managers, our social recognition solution features dashboard reporting that includes an interactive info-graphics tool that visualizes progress against goals and overall adoption of company values.

 

 

Highly relevant rewards that perpetuate usage of our social recognition solution.    Our globally adopted e-commerce rewards network is an expansive set of both widely applicable and locally relevant reward choices. Employees may choose rewards that are meaningful to them, from both online and local suppliers, which include retail, online shopping, dining, travel and charitable giving. The breadth of available choices improves the impact of our social recognition solution by providing memorable rewards.

 

 

Global capabilities.    Our solution allows our clients to provide a single recognition program available to all of its employees globally. Our social recognition solution supports multiple currencies and languages and includes locally relevant rewards, which facilitates adoption by both multinational firms and regional companies. As a result, we are able to provide solutions that fit the unique cultural tastes, preferences and budgets of regional economies. As of December 31, 2013, we had more than 1.9 million users located in more than 140 countries using our solution in 29 languages and dialects. Our global capabilities give our clients visibility and control over their entire global recognition program.

 

(22)    IDC, IDC Worldwide SaaS and Cloud Software 2012-2016 Forecast and 2011 Vendor Report, August 2012.
(23)    eMarketer, U.S. Retail Ecommerce Sales, 2010-2016, March 2012.

 

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Highly scalable and configurable solution.    Our SaaS platform is built with enterprise-class scalability, reliability and uptime and is currently adopted by some of the world’s largest companies. We believe we have deployed one of the largest and most geographically-dispersed single SaaS implementations for one of our clients, General Electric, that spans more than 300,000 employees. Our solution enables fast and low cost global deployments through centralized administration that is designed to meet our clients’ IT and security demands. Our SaaS platform is a multi-tenant architecture, which allows for configuration to meet the needs of each client. This allows organizations to reduce the time required to launch and implement their recognition program and increases the program’s effectiveness and impact.

Our business model strengths

We have established a leadership position in the social recognition market as evidenced by our global reach, scale and growth. We believe our key competitive strengths include:

 

 

Clients pay when their employees use our social recognition solution.    We generate our revenue primarily from the number and monetary value of the awards our clients provide to their employees through our social recognition solution as well as associated transaction fees. We therefore share in our clients’ successes, as they benefit from our solution and their employees increase adoption. Accordingly, our interests are aligned with our client’s interests in growing and maintaining a strong recognition program.

 

 

High client retention.    Our overall billings retention rate exceeded 100% for each of the years ended December 31, 2010, 2011, 2012 and 2013. This billings retention rate reflects a consistent, recurring revenue profile from our client base. Our ability to easily interact with other HR systems also facilitates adoption by clients. As organizations scale our solution, which increases employee engagement, our social recognition solution becomes a strategic and operational platform from which clients draw valuable insights about their talent and culture.

 

 

E-commerce rewards network benefits from economies of scale.    We seek to continually expand and diversify the items available on our global e-commerce rewards network to meet the demands of new and existing clients. This increases the value of our social recognition solution for each of our clients as the broad array of choices on our global e-commerce rewards network become available to them. In addition, as the volume of rewards increases across our client base, our ability to negotiate better terms with certain of our rewards suppliers improves.

 

 

Align recognition and rewards with full range of HR systems.    Our solution provides our clients with insights into their talent through our powerful social graphs, talent mapping and interactive info-graphic displays. We can also combine our recognition data with information from other HR systems to supplement the insights provided by our analytics and improve the feedback provided by other HR systems.

Our growth strategy

We intend to enhance and extend our industry leadership position in the evolving social recognition market. The principal elements of our growth strategy include:

 

 

Broaden existing client relationships.    We plan to increase the number of client employees using our social recognition solution and the number and value of awards granted and received by those employees. In many cases, as clients experience the benefits gained from implementation of our social recognition solution and improvements in employee engagement, they expand adoption of our social recognition solution within their organizations and increase their recognition budgets. We will continue to focus on demonstrating the benefits of increased recognition and awards in an effort to drive adoption and penetration of our solution within our existing client base.

 

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Attract new clients.    We intend to expand our social recognition solution throughout the global market, which we believe is largely underpenetrated by full-service strategic recognition solutions. Historically, we focused on the most complex and large global organizations. More recently, we have expanded our sales efforts to companies with an employee base of 2,500 or more that have corporate human resources, or HR, functions located in North America. We have recently hired additional salespeople to target these organizations. We plan to continue to invest in additional salespeople to expand our reach and further penetrate our potential client base and to expand our sales coverage to focus on companies who have corporate HR functions located in North America and Europe to grow our client base.

 

 

Continue to expand our product offering.    We intend to continue to add features and benefits to our core platform to drive increased adoption and penetration as well as maintain our competitive advantages in the industry. For example, we recently released Talent Maps (interactive charts and graphics that leverage recognition data to reveal the performance and culture of any team or department) and have also enhanced our social recognition solution with new language capabilities. Furthermore, the breadth of our technology platform has allowed us to expand our addressable client base into new geographies, new industries and new types of organizations. To bolster our broader relevance with clients, we intend to pursue adjacent markets such as sales incentive management and other employee-facing rewards programs such as safety, wellness and employee-referral.

 

 

Establish and maintain key strategic relationships.    We plan to continue to reach new clients and provide more robust solutions through bilateral referral and cross selling relationships. We are currently a member of the Workday Software Partner Ecosystem and have developed a product integration to Workday that provides our joint customers a more efficient deployment process for our solution. We also intend to strengthen our ties throughout the HR and social enterprise solutions market by forging relationships with leading HR consultancy, HR technology and HR outsourcing firms. We plan to continue to design our social recognition solution to easily integrate with existing HR management software solutions. We believe that these relationship networks will enable us to reach a wider client base and enhance our opportunity with existing clients.

 

 

Pursue selective acquisitions.    We intend to pursue acquisitions of complementary businesses and technologies that will enable us to acquire targeted product and technology capabilities, as well as add new clients and further expand our geographic reach.

Case studies

We generally sell our social recognition solution through our global sales organization directly to businesses and other enterprises. Our client base consisted of more than 100 companies as of December 31, 2013, in diverse industries, including technology and communications, hospitality and transportation, diversified/manufacturing, financial services, consumer products and services and biotech/pharmaceutical. For the years ended December 31, 2012 and 2013, our ten largest clients by revenue represented approximately 74% and 68%, respectively, of our total revenue, with only one client, General Electric Company together with its affiliates, representing more than 10% of our total revenue at 32% and 31%, respectively.

We believe that the following case studies provide a representative sample of how our clients achieve quantifiable results from implementing our recognition solution:

 

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This global leader in consumer and enterprise software created a stronger culture post acquisition.

Challenge

This multi-billion dollar consumer and enterprise software company struggled to build a unified global culture following an acquisition whereby it added 6,500 employees to its workforce. It had an existing internal, cash-based recognition program which was not aligned to its culture and was not able to reach all employees.

Solution and results

The global software leader partnered with Globoforce to create a unified, global strategic recognition solution, which was implemented in 2008. Our solution offered more effective meaningful rewards and created a stronger, unified culture. This client also reported:

 

 

Higher employee engagement – engagement scores, as measured by the client’s internal survey measurements, increased by 14% within nine months after program launch in 2008; and

 

 

Effective budget allocation – without increasing its budget, the client processed through our solution twice as many recognition awards in the first year after program launch in 2008, as compared to the prior year.

This leading provider of financial management solutions saw a significant increase in employee adoption.

Challenge

This leading provider of financial management solutions sought to replace its existing merchandise catalog program which presented significant operational challenges with delivery, award selection, and employee adoption. It needed a new solution that could help it achieve, on a global scale, greater program adoption and provide employees with more relevant, memorable rewards.

Solution and results

We developed a strategic recognition solution for this client that leverages the social nature of employee-to-employee interactions to bolster participation by employees, which was implemented in 2004. Through our global e-commerce rewards network, this client is able to deliver a broad array of awards, enabling employees to choose from thousands of locally relevant options including retail, online shopping, dining, travel, and charitable giving. This client also reported:

 

 

Higher levels of participation – within the first year of program launch in 2004, more than 20,000 awards were given (up from approximately 5,500 the previous year), and within the first two years of program launch, 85-90% of all eligible employees received an award (up from 50% over the prior three years combined); and

 

 

Employees feeling valued – recent employee surveys conducted by the company since implementing our solution in 2004 show that 89% of employees believe their manager appreciates their contributions, 90% are proud to work at the company and 94% agree that the company’s recognition program helps motivate sustained high performance. We do not have access to comparable employee surveys conducted prior to implementation of our solution.

 

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This leading global manufacturer saw a marked rise in employee satisfaction levels.

Challenge

This leading global manufacturer had more than 40 discrete recognition programs, including home-grown efforts, and lacked a strategic platform that could enable employee-to-employee recognition and advance the company’s goals, values and culture.

Solution and results

The company selected Globoforce to build a global recognition solution to manage global logistics and offer locally relevant languages, currencies and rewards for its 30,000+ employees. Through our social recognition solution, the company gained global visibility of results through intuitive easy-to-use tracking and reporting features. Six months after our solution for this client was launched in 2009, the client reported:

 

 

Higher levels of recognition satisfaction – the number of employees satisfied with the level of recognition for a job-well-done rose 13%;

 

 

Greater internal recognition – the number of employees who say people are rewarded according to job performance rose 14%; and

 

 

Strategic recognition as core competency – the company’s recognition program manager and her team were nominated for the company’s President’s Award, a first for the HR department at the company.

This leading consumer manufacturer’s rapid program adoption created new data insights about talent

Challenge

This leading high tech manufacturer sought a modern technology solution for recognition. The company’s existing program was ad hoc and manual, resulting in low reach, visibility and integration to other HR processes. They needed a new solution that could empower broader employee participation, align with their performance management philosophy, and attract and retain the right talent to continue to drive their strong values-based culture and technology leadership.

Solution and results

Through their partnership with Globoforce that was implemented in 2012, this client built a social recognition program that recognizes and rewards exemplary behaviors and performance tied to their values. Backed by Globoforce’s global technology and operations, this company has created a unified culture of recognition across its diverse workforce. The client also reported:

 

 

Rapid, viral employee adoption – Within just three months of launch in 2012, the program nearly doubled its reach (going from 45% reach in the previous program to 86% of employees). The reach figure rose to 97% during the first year of the program;

 

 

Measurable impact on team member satisfaction and engagement – Within the first year of launch in 2012, the number of employees who indicated that they felt recognized for improving the work they do increased by 20%; and

 

 

Greater visibility into top performers and influencers – Integrating crowdsourced recognition data with its talent management processes has provided new talent insights for executives and managers.

 

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The Globoforce solution

Our social recognition solution provides comprehensive functional, technical and operational capabilities for a full-service approach to recognition. Our solution has intuitive web and mobile-based user interfaces that are easy for employees to use across desktop and mobile computing environments.

 

LOGO

Recognition applications

Our applications provide employees, managers and HR professionals all the tools they need to interact with their recognition programs. Managers and colleagues can nominate an employee for any recognition award type based on their organization’s pre-set and configured eligibility criteria built into our application. This act of recognition is updated real-time on the recognition newsfeed and shared socially, which all employees can then see and to which they can add their own congratulations. Recognition award recipients can accrue program points or redeem immediately, choosing from a diverse set of locally relevant reward options around the globe.

Program administrators can easily manage their recognition programs with virtually no manual work required. Reporting is accessible online through our easy-to-use interface and is updated real-time, keeping program data current.

Our applications also provide managers deep management insights through powerful social graphing and talent mapping tools such as Talent Maps. Our dashboard reporting feature includes an interactive info-graphics tool that managers and executives use to visualize overall adoption of company values and employee performance.

Award types

We are able to fulfill the full spectrum of our clients’ recognition program needs, be it employee-to-employee, anniversary, sales incentives, wellness, safety or any other company-specific award type. Employee-to-employee awards are generally dynamic and not time or frequency bound, leading to a more immediate gratification tied directly to a performance in recent history. Anniversary awards reward employees on their achieving a certain number of years of service with their company, typically commemorating a multiple-of-five-year (5, 10, 15, etc.) milestones. The recipient of any of these types of awards will receive a recognition award through our solution, which he or she can then redeem only through our global e-commerce rewards network. Given the configurability

 

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of our platform, our clients can easily design programs that meet their unique needs. Our platform is designed to support multiple, disparate programs, and run them concurrently for our clients.

Global e-commerce, operations and support

Our global capabilities give our clients visibility and control over their global recognition programs. Our social recognition solution supports multiple currencies and languages, and our global e-commerce rewards network includes locally relevant rewards, which drives adoption for both multinational firms and regional companies. These rewards include gift cards from local retailers and merchandise from distributors in the United States and Europe which we purchase for resale. We form relationships with these vendors primarily through our in-house marketing and operations teams. In addition, we offer global customer support in several languages around the world, accessible via our website, phone or email.

Cloud infrastructure

Our cloud infrastructure forms the technology foundation of our social recognition solution. Our platform offers enterprise-class scalability, reliability and uptime, data privacy, security, data interchange and other technology features required to meet the technical and operational needs of our clients. We believe our clients benefit from fast and low-cost global deployments, centralized administration and easy access to future enhancements as a result of this SaaS model.

Our platform is a multi-tenant architecture and highly configurable to meet the unique needs of each of our clients. We work with our clients to tailor the solution so that it aligns with their requirements for branding, award approvals, user access, reporting and communications. Our social recognition solution is also designed to meet our clients’ IT and security requirements. Our SaaS platform is designed with a multi-tier client/server architecture that separates data, applications and user interfaces.

With clients running centralized programs on a SaaS platform, we are able to aggregate and analyze all data associated with clients’ recognition programs. As a result, our clients can easily create reports on anything from overall program spend to award activity in certain regions to top recognition recipients in the company. We are also able to use this data to deliver valuable insights to managers and executives about performance and culture within specific teams, departments, business units and entire companies.

Our cloud infrastructure provides our clients the capability to deploy their recognition programs across desktop as well as mobile environments that enable recognition to be a regular part of the day for their employees.

Sales, marketing and professional services

We sell our social recognition solution through our sales organization based in the United States, Canada, Ireland and the United Kingdom, which includes field sales representatives, business development representatives, account management representatives and sales and services management. Our global sales organization is focused on adding new clients and expanding relationships with existing clients.

Direct sales force.    Our direct sales force is organized by geographic regions. Historically, we focused on the most complex and large global organizations. More recently, we have expanded our sales efforts to companies with an employee base of 2,500 or more who have corporate HR functions located in North America. We have recently hired additional salespeople to target these organizations.

Account management.    Globoforce account management is responsible for the implementation, ongoing management and growth of existing client relationships. All client accounts are assigned to specific account managers according to a variety of factors and the specifics of the client solution. Account management engages with new clients during the initial implementation and maintains the client relationship thereafter.

 

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Business development.    The link between lead generation, marketing and sales activity is managed by our business development representatives. This team is responsible for the initial qualification of inbound leads and for scheduling direct sales representatives with prospective clients.

Our global marketing team complements our sales organization through lead generation, brand building, analyst relations and industry research. Our marketing department targets HR and other executives responsible for strategic HR programs. Our principal marketing programs include:

 

 

use of our website to provide product and company information, as well as learning opportunities for potential clients;

 

 

field marketing events for clients and prospects;

 

 

participation in, and sponsorship of, user conferences, trade shows and industry events;

 

 

online marketing activities, including online web advertising, blogs and webinars;

 

 

public relations and social networking initiatives including mobile and social media marketing; and

 

 

client programs, including user meetings.

Our marketing team also conducts primary research that serves as the foundation for industry thought leadership and our lead-generation activities. Our marketing team also directly supports our sales organization through collaborative initiatives, including the creative development and execution of sales proposals, personalized and targeted prospecting campaigns and managing large prospective client pursuits.

As part of signing a contract with a new client, the client typically provides us with its own estimate for the anticipated annual dollar amount of employee awards once their recognition program is fully launched and ramped. This is only an estimate provided and is not a commitment by the client to actually spend any amount with us on an annual basis. The client’s anticipated amount provides us with an indication of our sales and marketing effectiveness in new client acquisition or expansion within an existing client that has used our solution for only a portion of their employee base. Our account management team works with the client during implementation to understand the client’s employee rollout strategy for use of our solution, and account management effectiveness is measured on the usage of the solution compared to the client’s anticipated spend. Billings and revenue are contingent upon the issuance of awards, and our clients typically take some period of time to communicate and increase employee adoption of our solution. As of December 31, 2011, 2012 and 2013, the anticipated annual spend indicated by clients that had not launched was approximately $15.0 million, approximately $41.6 million and approximately $56.0 million, respectively. See “Risk Factors – Risks related to our business and industry – Our clients have no obligation to spend a minimum amount on our solution, and if our existing clients decrease, or do not increase, adoption of our solution or if existing clients decrease, or do not increase, the overall spending for employee recognition from year to year, our business will suffer and our business prospects may be harmed; If we experience delays in the client implementation process or fail to complete new client implementation successfully, it could delay our ability to recognize revenue, increase our costs and otherwise negatively impact our business”.

Professional services.    We provide our clients strategy, advice and training to help them make key decisions about their recognition program. Our services include:

 

 

business case and program definition: shape the program based on proven best practices and strategies for program success;

 

 

benchmark and audit: remove project and program risk by defining the path to future program success; and

 

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training, branding and communications: generate and sustain excitement and engagement among program participants.

Technology

We have a standardized, Java-based development environment with the majority of our software written in industry standard software programming languages. We also use Web 2.0 technologies like AJAX and HTML that give users an intuitive and familiar experience that runs on popular computing and mobile devices. Our data center primarily consists of industry standard servers and networking components. Our standard operating system and database are Red Hat Enterprise Linux and Oracle 11g, respectively.

We operate a multi-tenant architecture that provides a single code engine that simultaneously provides for all clients’ individual configurations. This architecture reduces risk associated with system scalability and security and allows for ease of upgrade of functionality across the entire client base.

We physically host our SaaS platform for our clients principally on servers owned and controlled by us in one secure, third-party data center located in the United States. We believe that our third-party hosting facility is adequate for our current needs and that suitable additional capacity will be available as needed to accommodate planned expansion of our operations. In addition, we maintain a disaster recovery site owned, operated and managed by us and located in Dublin, Ireland.

Client support and operations

We utilize a combination of both in-house and outsourced fulfillment providers to process redemption orders in key geographic regions based on where our clients’ employees are located. These fulfillment sites are located in the United States, Ireland, India, Hong Kong and China.

Clients and their employees can call or email us at any time to report issues with or ask questions regarding our solution. We provide customer support through phone, email and online documentation. Our support included multi-lingual capabilities in eight languages as of December 31, 2013. We offer this support to our clients’ employees from our offices in Ireland as well as through two third party outsourcers located in Ireland and Hong Kong.

Intellectual property

We rely upon a combination of patents, copyrights, trademarks, service marks and trade secret laws and contractual restrict