UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)    
x  

Quarterly report pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2015

OR

  

¨  

Transition report pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the transition period from           to         

 

Commission File Number: 001-35429

 

BRIGHTCOVE INC.

(Exact name of registrant as specified in its charter)

  

Delaware   20-1579162

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

290 Congress Street

Boston, MA 02210

(Address of principal executive offices)

(888) 882-1880

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer ¨   Accelerated filer x
         
Non-accelerated filer ¨   (Do not check if a smaller Smaller reporting company ¨
            reporting company)      

 

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

 

As of October 26, 2015 there were 32,671,329 shares of the registrant’s common stock, $0.001 par value per share, issued and outstanding.

 

 

 

  

BRIGHTCOVE INC.

 

Table of Contents

 

    Page
PART I. FINANCIAL INFORMATION    
Item 1. Financial Statements (Unaudited)   3
Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014   3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014   4
Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2015 and 2014   5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014   6
Notes to Condensed Consolidated Financial Statements   8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   14
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   27
     
Item 4. Controls and Procedures   29
     
PART II. OTHER INFORMATION    
     
Item 1. Legal Proceedings   30
     
Item 1A. Risk Factors   30
     
Item 5. Other Information   30
     
Item 6. Exhibits   30
     
Signatures   31

 

2 

 

  

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Brightcove Inc. 

Condensed Consolidated Balance Sheets

(unaudited)

 

   September 30,
2015
   December 31,
2014
 
   (in thousands, except share
and per share data)
 
Assets          
Current assets:          
Cash and cash equivalents  $23,788   $22,916 
Accounts receivable, net of allowance of $310 and $181 at September 30, 2015 and December 31, 2014, respectively   20,110    21,463 
Prepaid expenses and other current assets   4,730    4,342 
Deferred tax asset   37    109 
Total current assets   48,665    48,830 
Property and equipment, net   10,519    10,372 
Intangible assets, net   14,545    16,898 
Goodwill   50,776    50,776 
Restricted cash, net of current portion   201    201 
Other assets   984    507 
Total assets  $125,690   $127,584 
           
Liabilities and stockholders’ equity          
Current liabilities:          
Accounts payable  $2,573   $1,618 
Accrued expenses   10,554    11,722 
Capital lease liability   918    1,159 
Equipment financing   704     
Deferred revenue   30,419    29,640 
Total current liabilities   45,168    44,139 
Deferred revenue, net of current portion   269    64 
Other liabilities   2,967    2,618 
Total liabilities   48,404    46,821 
Commitments and contingencies (Note 9)          
Stockholders’ equity:          
Undesignated preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued        
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,669,772 and 32,424,554 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively   33    32 
Additional paid-in capital   218,859    214,524 
Accumulated other comprehensive loss   (837)   (776)
Accumulated deficit   (140,769)   (133,017)
Total stockholders’ equity   77,286    80,763 
Total liabilities and stockholders’ equity  $125,690   $127,584 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3 

 

  

Brightcove Inc. 

Condensed Consolidated Statements of Operations

(unaudited)

 

   Three Months Ended
September 30,
  

Nine Months Ended

September 30,

 
   2015   2014   2015   2014 
   (in thousands, except share and per share data) 
Revenue:                    
Subscription and support revenue  $33,184   $30,450   $96,912   $89,754 
Professional services and other revenue   653    1,077    2,658    3,881 
Total revenue   33,837    31,527    99,570    93,635 
Cost of revenue: (1) (2)                    
Cost of subscription and support revenue   10,314    9,467    31,017    28,096 
Cost of professional services and other revenue   1,198    1,352    3,645    4,414 
Total cost of revenue   11,512    10,819    34,662    32,510 
Gross profit   22,325    20,708    64,908    61,125 
Operating expenses: (1) (2)                    
Research and development   7,233    7,187    22,320    20,548 
Sales and marketing   11,664    11,273    34,406    34,714 
General and administrative   4,391    4,735    14,761    14,597 
Merger-related   62    623    138    3,011 
Total operating expenses   23,350    23,818    71,625    72,870 
Loss from operations   (1,025)   (3,110)   (6,717)   (11,745)
Other expense, net   (127)   (614)   (780)   (1,020)
Loss before income taxes   (1,152)   (3,724)   (7,497)   (12,765)
Provision for income taxes   123    81    255    204 
Net loss  $(1,275)  $(3,805)  $(7,752)  $(12,969)
                     
Net loss per share - basic and diluted  $(0.04)  $(0.12)  $(0.24)  $(0.41)
                     
Weighted-average number of common shares used in computing net loss per share   32,636,084    32,247,453    32,560,478    31,814,570 
                     
(1) Stock-based compensation included in above line items:                    
Cost of subscription and support revenue  $30   $37   $101   $147 
Cost of professional services and other revenue   79    53    131    121 
Research and development   400    376    1,060    950 
Sales and marketing   843    533    1,764    1,678 
General and administrative   171    527    1,256    1,877 
                     
(2) Amortization of acquired intangible assets included in above line items:                    
Cost of subscription and support revenue  $508   $509   $1,523   $1,439 
Research and development   31    36    94    108 
Sales and marketing   235    282    736    863 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4 

 

  

Brightcove Inc. 

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

   

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
   (in thousands) 
Net loss  $(1,275)  $(3,805)  $(7,752)  $(12,969)
Other comprehensive income (loss):                    
Foreign currency translation adjustments   15    (239)   61    (42)
                     
Comprehensive loss  $(1,260)  $(4,044)  $(7,691)  $(13,011)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5 

 

  

Brightcove Inc. 

Condensed Consolidated Statements of Cash Flows

(unaudited)

  

  

Nine Months Ended

September 30,

 
   2015   2014 
   (in thousands) 
Operating activities          
Net loss  $(7,752)  $(12,969)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   6,898    6,114 
Stock-based compensation   4,312    4,773 
Provision for reserves on accounts receivable   317    122 
Amortization of premium on investments       1 
Loss on disposal of equipment   45    92 
Changes in assets and liabilities, net of effect of acquisition:          
Accounts receivable   1,050    2,399 
Prepaid expenses and other current assets   (441)   (1,005)
Other assets   (478)   1,185 
Accounts payable   1,001    (3,097)
Accrued expenses   (1,660)   (4,126)
Deferred revenue   957    4,861 
Net cash provided by (used in) operating activities   4,249    (1,650)
Investing activities          
Cash paid for acquisition, net of cash acquired       (9,100)
Maturities of investments       3,060 
Purchases of property and equipment   (2,479)   (2,500)
Capitalized internal-use software costs   (1,020)   (927)
Decrease in restricted cash       113 
Net cash used in investing activities   (3,499)   (9,354)
Financing activities          
Proceeds from exercise of stock options   72    584 
Payments of withholding tax on RSU vesting   (48)    
Proceeds from equipment financing   1,704     
Payments on equipment financing   (576)    
Payments under capital lease obligation   (988)   (860)
Net cash provided by (used in) financing activities   164    (276)
Effect of exchange rate changes on cash   (42)   (62)
Net increase (decrease) in cash and cash equivalents   872    (11,342)
Cash and cash equivalents at beginning of period   22,916    33,047 
Cash and cash equivalents at end of period  $23,788   $21,705 
           
Supplemental disclosure of non-cash investing activities          
Fair value of shares issued for acquisition of a business  $   $30,615 
           
Supplemental disclosure of non-cash financing activities          
Purchase of equipment and support under capital lease  $875   $ 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6 

 

  

Brightcove Inc. 

Condensed Consolidated Statements of Cash Flows - (continued)

(unaudited)

 

  

Nine Months Ended

September 30,

 
   2015   2014 
   (in thousands) 
Supplemental disclosure of cash flow related to asset purchase agreement          
In connection with the asset purchase agreement with Unicorn Media, Inc. on January 31, 2014, the following transactions occurred:          
Fair value of assets acquired  $   $44,373 
Liabilities assumed related to acquisition       (4,645)
Total purchase price       39,728 
Less fair value of common stock issued in connection with acquisition       (30,615)
Less cash and cash equivalents acquired       (13)
Cash paid for acquisition, net of cash acquired  $   $9,100 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7 

 

  

Brightcove Inc.  

Notes to Condensed Consolidated Financial Statements

(unaudited)

(in thousands, except share and per share data, unless otherwise noted)

 

1. Business Description and Basis of Presentation

 

Business Description

 

Brightcove Inc. (the Company) is a leading global provider of cloud services for video which enable its customers to publish and distribute video to Internet-connected devices quickly, easily and in a cost-effective and high-quality manner.

 

The Company is headquartered in Boston, Massachusetts and was incorporated in the state of Delaware on August 24, 2004. At September 30, 2015, the Company had nine wholly-owned subsidiaries: Brightcove UK Ltd, Brightcove Singapore Pte. Ltd., Brightcove Korea, Brightcove Australia Pty Ltd, Brightcove Holdings, Inc., Brightcove Kabushiki Kaisha (Brightcove KK), Zencoder Inc. (Zencoder), Brightcove FZ-LLC, and Cacti Acquisition LLC.

 

Basis of Presentation

 

The accompanying interim condensed consolidated financial statements are unaudited. These condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2014 contained in the Company’s Annual Report on Form 10-K and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position for the three and nine months ended September 30, 2015 and 2014. These interim periods are not necessarily indicative of the results to be expected for any other interim period or the full year.

 

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. The Company has evaluated all subsequent events and determined that there are no material recognized or unrecognized subsequent events requiring disclosure, other than those disclosed in this Report on Form 10-Q.

 

The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the condensed consolidated financial statements. As of September 30, 2015, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, have not changed.

 

2. Concentration of Credit Risk

 

The Company has no significant off-balance sheet risk, such as foreign exchange contracts, option contracts or other foreign hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and trade accounts receivable. The Company maintains its cash and cash equivalents principally with accredited financial institutions of high credit standing. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits. The Company routinely assesses the creditworthiness of its customers. The Company generally has not experienced any material losses related to receivables from individual customers, or groups of customers. The Company does not require collateral from its customers. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company’s accounts receivable.

 

At September 30, 2015 and December 31, 2014, no individual customer accounted for 10% or more of net accounts receivable. For the three and nine months ended September 30, 2015 and 2014, no individual customer accounted for 10% or more of total revenue.

 

3. Concentration of Other Risks

 

The Company is dependent on certain content delivery network providers who provide digital media delivery functionality enabling the Company’s on-demand application service to function as intended for the Company’s customers and ultimate end-users. The disruption of these services could have a material adverse effect on the Company’s business, financial position, and results of operations. 

 

8 

 

  

4. Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Investments not classified as cash equivalents with maturities less than one year from the balance sheet date are classified as short-term investments, while investments with maturities in excess of one year from the balance sheet date are classified as long-term investments. Management determines the appropriate classification of investments at the time of purchase, and re-evaluates such determination at each balance sheet date.

 

Cash and cash equivalents primarily consist of cash on deposit with banks and amounts held in interest-bearing money market accounts. Cash equivalents are carried at cost, which approximates their fair market value.

 

Cash and cash equivalents as of September 30, 2015 consist of the following:

 

   September 30, 2015
Description  Contracted
Maturity
  Amortized Cost  

Fair Market

Value

  

Balance Per

Balance Sheet

 
Cash  Demand  $14,211   $14,211   $14,211 
Money market funds  Demand   9,577    9,577    9,577 
Total cash and cash equivalents     $23,788   $23,788   $23,788 

 

Cash and cash equivalents as of December 31, 2014 consist of the following:

 

   December 31, 2014
Description  Contracted
Maturity
  Amortized Cost  

Fair Market

Value

  

Balance Per

Balance Sheet

 
Cash  Demand  $13,342   $13,342   $13,342 
Money market funds  Demand   9,574    9,574    9,574 
Total cash and cash equivalents     $22,916   $22,916   $22,916 

  

5. Net Loss per Share

 

The following potentially dilutive common stock equivalent shares have been excluded from the computation of weighted-average shares outstanding as their effect would have been anti-dilutive (in thousands):

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
Options outstanding   4,181    3,979    4,133    3,731 
Restricted stock units outstanding   1,094    985    982    1,010 
Warrants   28    28    28    28 

 

6. Fair Value of Financial Instruments

 

The following tables set forth the Company’s financial instruments carried at fair value using the lowest level of input as of September 30, 2015 and December 31, 2014:

  

   September 30, 2015 
  

Quoted Prices in
Active

Markets for
Identical

Items (Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable Inputs

(Level 3)

   Total 
Assets:                    
Money market funds  $9,577   $   $   $9,577 
Restricted cash       201        201 
Total assets  $9,577   $201   $   $9,778 

 

   December 31, 2014 
  

Quoted Prices in
Active

Markets for
Identical

Items (Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable Inputs

(Level 3)

   Total 
Assets:                    
Money market funds  $9,574   $   $   $9,574 
Restricted cash       201        201 
Total assets  $9,574   $201   $   $9,775 

 

9 

 

  

7. Stock-based Compensation

 

The fair value of stock options granted was estimated at the date of grant using the following weighted-average assumptions:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
Expected life in years   6.3    6.3    6.2    6.2 
Risk-free interest rate   1.90%   2.19%   1.85%   2.18%
Volatility   46%   51%   47%   53%
Dividend yield                
Weighted-average fair value of stock options granted  $2.49   $3.06   $3.25   $4.41 

  

The Company recorded stock-based compensation expense of $1,523 and $1,526 for the three months ended September 30, 2015 and 2014, respectively, and $4,312 and $4,773 for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, there was $10,329 of unrecognized stock-based compensation expense related to stock-based awards that is expected to be recognized over a weighted-average period of 2.83 years. The following is a summary of the status of the Company’s stock options as of September 30, 2015 and the stock option activity during the nine months ended September 30, 2015.

 

  

Number of

Shares

 

Exercise Price

Per Share

 

Weighted

Average

Exercise

Price

Per Share

  

Weighted

Average

Remaining

Contractual

Term (Years)

  

Aggregate

Intrinsic

Value (1)

 
Outstanding at December 31, 2014   4,077,074 $ 0.31 - 16.88  $7.02           
Granted   695,749  4.92 - 8.13   6.83           
Exercised   (44,932)  0.31 - 7.21   1.60        $251 
Canceled   (479,919)  5.53 - 16.88   9.04           
Outstanding at September 30, 2015   4,247,972 $ 0.31 - 16.88  $6.82    6.55   $3,563 
Exercisable at September 30, 2015   2,309,676 $ 0.31 - 16.88  $6.07    4.75   $3,563 
Vested or expected to vest at September 30, 2015 (2)   3,726,242 $ 0.31 - 16.88  $6.74    6.24   $3,563 

 

(1) The aggregate intrinsic value was calculated based on the positive difference between the fair value of the Company’s common stock on September 30, 2015 of $4.92 per share, or the date of exercise, as appropriate, and the exercise price of the underlying options.
   
(2) This represents the number of vested options as of September 30, 2015 plus the number of unvested options expected to vest as of September 30, 2015 based on the unvested options outstanding at September 30, 2015 adjusted for an estimated forfeiture rate.

 

The following table summarizes the restricted stock unit award activity during the nine months ended September 30, 2015:

 

   Shares  

Weighted

Average Grant

Date Fair Value

 
Unvested by December 31, 2014   915,458   $8.61 
Granted   644,581    5.39 
Vested and issued   (200,286)   6.90 
Canceled   (105,464)   9.51 
Unvested by September 30, 2015   1,254,289   $7.13 

 

8. Income Taxes

 

For the three months ended September 30, 2015 and 2014, the Company recorded income tax expense of $123 and $81, respectively. For the nine months ended September 30, 2015 and 2014 the Company recorded income tax expense of $255 and $204, respectively. The income tax expense relates principally to the Company’s foreign operations.

 

10 

 

  

The Company has evaluated the positive and negative evidence bearing upon the realizability of its U.S. net deferred tax assets. As required by the provisions of ASC 740, Income Taxes, management has determined that it is more-likely-than-not that the Company will not utilize the benefits of federal and state U.S. net deferred tax assets for financial reporting purposes. Accordingly, the net deferred tax assets are subject to a valuation allowance at September 30, 2015 and December 31, 2014. The Company’s income tax return reporting periods since December 31, 2011 are open to income tax audit examination by the federal and state tax authorities. In addition, because the Company has net operating loss carryforwards, the Internal Revenue Service is permitted to audit earlier years and propose adjustments up to the amount of net operating losses generated in those years. There are currently no federal, state or foreign audits in progress.

 

9. Commitments and Contingencies

 

Leases

 

The Company’s contractual obligations as of December 31, 2014 are summarized in our Annual Report on Form 10-K for the year ended December 31, 2014. In addition to the obligations outlined in the Company’s Annual Report on Form 10-K, the Company entered into capital lease arrangements for computer equipment and support for a total obligation of $924. Amortization expense relating to assets acquired under capital lease is included within depreciation expense. Amortization expense related to assets acquired under capital lease was $58 and $88 in the three and nine months ended September 30, 2015, respectively. The lease arrangements expire June 2018. Future minimum rental commitments under these incremental capital leases at September 30, 2015 are as follows:

 

Year Ending December 31  Capital Lease
Commitments
 
2015  $78 
2016   311 
2017   311 
2018   137 
Less – interest on capital leases   45 
   $792 

 

At September 30, 2015, the gross book value of total assets, under these incremental capital leases, was $875 and related accumulated amortization was $116.

 

Legal Matters

 

The Company, from time to time, is party to litigation arising in the ordinary course of business. Management does not believe that the outcome of these claims will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company based on the status of proceedings at this time.

 

On August 27, 2012, a complaint was filed by Blue Spike, LLC naming the Company in a patent infringement case (Blue Spike, LLC v. Audible Magic Corporation, et al., United States District Court for the Eastern District of Texas). The complaint alleges that the Company has infringed U.S. Patent No. 7,346,472 with a listed issue date of March 18, 2008, entitled “Method and Device for Monitoring and Analyzing Signals,” U.S. Patent No. 7,660,700 with a listed issue date of February 9, 2010, entitled “Method and Device for Monitoring and Analyzing Signals,” U.S. Patent No. 7,949,494 with a listed issue date of May 24, 2011, entitled “Method and Device for Monitoring and Analyzing Signals” and U.S. Patent No. 8,214,175 with a listed issue date of July 3, 2012, entitled “Method and Device for Monitoring and Analyzing Signals.” The complaint seeks an injunction enjoining infringement, damages and pre- and post-judgment costs and interest. The Company answered and filed counterclaims against Blue Spike on December 3, 2012. The Company amended its answer and counterclaims on July 15, 2013. This complaint is subject to indemnification by one of the Company’s vendors. The Company cannot yet determine whether it is probable that a loss will be incurred in connection with this complaint, nor can the Company reasonably estimate the potential loss, if any.

 

Guarantees and Indemnification Obligations

 

The Company typically enters into indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies and agrees to reimburse the indemnified party for losses and costs incurred by the indemnified party, generally the Company’s customers, in connection with patent, copyright, trade secret, or other intellectual property or personal right infringement claim by third parties with respect to the Company’s technology. The term of these indemnification agreements is generally perpetual after execution of the agreement. Based on when customers first subscribe for the Company’s service, the maximum potential amount of future payments the Company could be required to make under certain of these indemnification agreements is unlimited, however, more recently the Company has typically limited the maximum potential value of such potential future payments in relation to the value of the contract. Based on historical experience and information known as of September 30, 2015, the Company has not incurred any costs for the above guarantees and indemnities. The Company has received requests for indemnification from customers in connection with patent infringement suits brought against the customer by a third party. To date, the Company has not agreed that the requested indemnification is required by the Company’s contract with any such customer.

 

In certain circumstances, the Company warrants that its products and services will perform in all material respects in accordance with its standard published specification documentation in effect at the time of delivery of the licensed products and services to the customer for the warranty period of the product or service. To date, the Company has not incurred significant expense under its warranties and, as a result, the Company believes the estimated fair value of these agreements is immaterial.

 

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10. Debt

 

On March 31, 2011, the Company entered into a loan and security agreement with a lender (the “Loan Agreement”) providing for up to an $8.0 million asset based line of credit (the “Line of Credit”). Under the Line of Credit, the Company can borrow up to the lesser of (i) $8.0 million or (ii) 80% of the Company’s eligible accounts receivable. Borrowing availability under the Line of Credit changes based upon the amount of eligible receivables, concentration of eligible receivables and other factors. The Company has the ability to obtain letters of credit. Borrowings under the Line of Credit are secured by substantially all of the Company’s assets. Outstanding amounts under the Line of Credit accrue interest at a rate equal to the prime rate plus 1.5%. Advances under the Line of Credit were due on March 31, 2013, and interest and related finance charges are payable monthly. On April 29, 2013, the Company amended the Line of Credit to increase the aggregate amount of borrowings that may be outstanding under the Company’s asset-based line of credit from $8.0 million to $10.0 million and to extend the maturity date to March 30, 2015.

 

On October 3, 2014, the Company amended the Line of Credit and entered into the Third Loan Modification Agreement (the “Modification Agreement”) to (i) increase the aggregate amount of borrowings that may be outstanding under the Company’s Line of Credit from $10.0 million to $20.0 million, (ii) increase the aggregate Facility Amount (as defined in the Loan Agreement) available pursuant to the Loan Agreement from $12.5 million to $25.0 million, (iii) provide for an unused line fee of 0.25% of the average unused portion of the Maximum Availability Amount (as defined in the Loan Agreement) per year and (iv) extend the maturity date to October 3, 2016. The interest rate decreased from the prime rate plus 1.5% to the prime rate plus 0.75%. At September 30, 2015 and December 31, 2014, the Company had no amounts outstanding under the Line of Credit.

 

Under the Modification Agreement, the Company must comply with certain financial covenants, including maintaining a minimum asset coverage ratio, a minimum net income threshold based on non-GAAP operating measures and a minimum net cash balance at certain points throughout the year. The interest rate will increase to the prime rate plus 2.25% if the Company is not able to meet the minimum asset coverage ratio. Failure to comply with these covenants, or the occurrence of an event of default, could permit the Lenders under the Line of Credit to declare all amounts borrowed under the Line of Credit, together with accrued interest and fees, to be immediately due and payable. In addition, the Line of Credit is secured by substantially all of the Company’s assets and places limits on the Company and its subsidiaries ability to incur debt or liens and engage in sale-leaseback transactions, make loans and investments, incur additional indebtedness, engage in mergers, acquisitions and asset sales, transact with affiliates and alter its business. The Company was in compliance with all covenants under the Line of Credit as of September 30, 2015.

 

On June 1, 2015, the Company entered into an equipment financing agreement with a lender (the “Equipment Financing Agreement”) to finance the purchase of $1.7 million in computer equipment and support. The liability relating to the Equipment Financing Agreement was recorded at fair value using a market interest rate. The Company is repaying its obligation under the Equipment Financing Agreement over a two year period through May 31, 2017, and the amount outstanding was $1.1 million as of September 30, 2015.

 

11. Segment Information

 

Geographic Data

 

Total revenue from unaffiliated customers by geographic area, based on the location of the customer, was as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
Revenue:                    
North America  $22,118   $19,254   $63,636   $55,749 
Europe   6,049    7,451    19,235    23,808 
Japan   2,249    2,181    6,294    6,114 
Asia Pacific   3,035    2,383    9,144    7,259 
Other   386    258    1,261    705 
                     
Total revenue  $33,837   $31,527   $99,570   $93,635 

 

North America is comprised of revenue from the United States, Canada and Mexico. During the three months ended September 30, 2015 and 2014, revenue from customers located in the United States was $20,652 and $17,797, respectively, and $59,403 and $51,533, respectively, during the nine months ended September 30, 2015 and 2014. During the three and nine months ended September 30, 2015 and 2014, no other country contributed more than 10% of the Company’s total revenue.

 

As of September 30, 2015 and December 31, 2014, property and equipment at locations outside the U.S. was not material.

 

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12. Recently Issued and Adopted Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board jointly issued Accounting Standards Update (ASU) No. 2014-9, Revenue from Contracts with Customers, which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective application, with early adoption not permitted. Accordingly, the standard is effective for the Company on January 1, 2018. The Company is currently evaluating the adoption method it will apply and the impact that this guidance will have on its financial statements and related disclosures. Early adoption is permitted, but not before the original public organization effective date (that is, annual periods beginning after December 15, 2016).

 

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern.  ASU 2014-15 requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and earlier application is permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-15, but the adoption is not expected to have a material effect on our consolidated financial statements or disclosures.

 

In February 2015, the FASB issued updated accounting guidance on consolidation requirements. This update changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. The Company does not expect adoption of this guidance will have a material impact on our financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, which provides that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of the related debt liability, rather than classifying the costs separately in the balance sheet as a deferred charge. The ASU aims to reduce complexity. The standard is effective for the Company on January 1, 2017. The Company is currently evaluating the impact of the adoption of ASU 2015-03 on its consolidated financial statements, but does not expect the adoption of this standard to have any impact on its consolidated financial statements.

 

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ITEM 2. 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 in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Such forward-looking statements include any expectation of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements related to adding employees; statements related to potential benefits of the acquisition of substantially all of the assets of Unicorn Media, Inc. and certain of its subsidiaries; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2014 and the risks discussed in our other SEC filings. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

Company Overview

 

We are a leading global provider of cloud-based services for video. We were incorporated in Delaware in August 2004 and our headquarters are in Boston, Massachusetts. Our suite of products and services reduce the cost and complexity associated with publishing, distributing, measuring and monetizing video across devices.

 

Brightcove Video Cloud, or Video Cloud, our flagship product released in 2006, is the world’s leading online video platform. Video Cloud enables our customers to publish and distribute video to Internet-connected devices quickly, easily and in a cost-effective and high-quality manner. Brightcove Zencoder, or Zencoder, is a cloud-based video encoding service. Brightcove Once, or Once, is an innovative, cloud-based ad insertion and video stitching service that addresses the limitations of traditional online video ad insertion technology. Brightcove Gallery, or Gallery, released in May 2014, is a cloud-based service that enables customers to create and publish video portals. Brightcove Perform, or Perform, released in September 2014, is a cloud-based service for creating and managing video player experiences. Brightcove Video Marketing Suite, or Video Marketing Suite, released in May 2014, is a comprehensive suite of video technologies designed to address the needs of marketers to drive awareness, engagement and conversion.

 

Our philosophy for the next few years will continue to be to invest in our product strategy and development, sales and go-to-market to support our long-term revenue growth and profitability. We believe these investments will help us address some of the challenges facing our business such as demand for our products by existing and potential customers, rapid technological change in our industry, increased competition and resulting price sensitivity. These investments include support for the expansion of our infrastructure within our hosting facilities, the hiring of additional technical and sales personnel, the innovation of new features for existing products and the development of new products. We believe this strategy will help us retain our existing customers, increase our average annual subscription revenue per premium customer and lead to the acquisition of new customers. Additionally, we believe customer growth will enable us to achieve economies of scale which will reduce our cost of goods sold, research and development and general and administrative expenses as a percentage of total revenue.

 

As of September 30, 2015, we had 415 employees and 5,162 customers, of which 3,310 used our volume offerings and 1,852 used our premium offerings. As of September 30, 2014, we had 408 employees and 5,899 customers, of which 4,052 used our volume offerings and 1,847 used our premium offerings. We have decided to prioritize our premium product editions over our volume product editions. Our premium product editions have higher prices, the customers of our premium product editions use more of our solutions, and we believe that our premium customers represent a greater opportunity for our solutions.

 

We generate revenue by offering our products to customers on a subscription-based, software as a service, or SaaS, model. Our revenue grew from $93.6 million in the nine months ended September 30, 2014 to $99.6 million in the nine months ended September 30, 2015, primarily as a result of continued adoption of Video Cloud across our customer base. Our consolidated net loss was $7.8 million and $13.0 million for the nine months ended September 30, 2015 and 2014, respectively. Included in consolidated net loss for the nine months ended September 30, 2015 was stock-based compensation expense and amortization of acquired intangible assets of $4.3 million and $2.4 million, respectively. Included in consolidated net loss for the nine months ended September 30, 2014 was stock-based compensation expense, merger-related expenses and amortization of acquired intangible assets of $4.8 million, $3.0 million and $2.4 million, respectively.

 

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For the nine months ended September 30, 2015 and 2014, our revenue derived from customers located outside North America was 35% and 41%, respectively.

 

Key Metrics

 

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

 

  Number of Customers.  We define our number of customers at the end of a particular quarter as the number of customers generating subscription revenue during the final month of the quarter. We believe the number of customers is a key indicator of our market penetration, the productivity of our sales organization and the value that our products bring to our customers. We classify our customers by including them in either premium or volume offerings. Our premium offerings include our premium Video Cloud customers (Enterprise and Pro editions), our Zencoder customers on annual contracts, our Once customers, our Gallery customers, our Perform customers and our Video Marketing Suite customers. Our volume offerings include our Video Cloud Express customers, and our Zencoder customers on month-to-month contracts, pay-as-you-go contracts, or contracts for a period of less than one year.
     
    As of September 30, 2015, we had 5,162 customers, of which 3,310 used our volume offerings and 1,852 used our premium offerings. As of September 30, 2014, we had 5,899 customers, of which 4,052 used our volume offerings and 1,847 used our premium offerings. We have shifted our go-to-market focus and growth strategy to growing our premium customer base, as we believe our premium customers represent a greater opportunity for our solutions. Volume customers decreased during the nine months ended September 30, 2015 primarily due to our discontinuation of the promotional Video Cloud Express offering. As a result, we experienced attrition of this base level offering without a corresponding addition of customers. We expect customers using our volume offerings to continue to decrease during the remainder of 2015 as we continue to focus on the market for our premium solutions.

 

 

Recurring Dollar Retention Rate.  We assess our ability to retain customers using a metric we refer to as our recurring dollar retention rate. We calculate the recurring dollar retention rate by dividing the retained recurring value of subscription revenue for a period by the previous recurring value of subscription revenue for the same period. We define retained recurring value of subscription revenue as the committed subscription fees for all contracts that renew in a given period, including any increase or decrease in contract value. We define previous recurring value of subscription revenue as the recurring value from committed subscription fees for all contracts that expire in that same period. We typically calculate our recurring dollar retention rate on a monthly basis. Recurring dollar retention rate provides visibility into our ongoing revenue. During the nine months ended September 30, 2015 and 2014, the recurring dollar retention rate was 93% and 91%, respectively.

     
  Average Annual Subscription Revenue Per Premium Customer.  We define average annual subscription revenue per premium customer as the total subscription revenue from premium customers for an annual period, excluding professional services revenue, divided by the average number of premium customers for that period. We believe that this metric is important in understanding subscription revenue for our premium offerings in addition to the relative size of premium customer arrangements. Average annual subscription revenue per customer for the nine months ended September 30, 2015 and 2014 is presented in the table below.

 

The following table includes our key metrics for the periods presented:

 

   Nine Months Ended September 30, 
   2015   2014 
Customers (at period end)          
Volume   3,310    4,052 
Premium   1,852    1,847 
           
Total customers (at period end)   5,162    5,899 
           
Recurring dollar retention rate   93%   91%
Average annual subscription revenue per premium customer (in thousands)  $64.7   $60.2 

 

Components of Consolidated Statements of Operations

 

Revenue

 

Subscription and Support Revenue - We generate subscription and support revenue from the sale of our products.

 

Video Cloud is offered in two product lines. The first product line is comprised of our premium product editions, Pro and Enterprise. All Pro and Enterprise editions include functionality to publish and distribute video to Internet-connected devices. The Enterprise edition provides additional features and functionality such as a multi-account environment with consolidated billing, IP address filtering, the ability to produce live events with DVR functionality and advanced upload acceleration of content. Customer arrangements are typically one-year contracts, which include a subscription to Video Cloud, basic support and a pre-determined amount of video streams, bandwidth, and managed content. The pricing for our premium editions is based on the number of users, accounts and usage, which is comprised of video streams, bandwidth and managed content. Should a customer’s usage exceed the contractual entitlements, the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements. The second product line is comprised of our volume product edition, which we refer to as our Express edition. Our Express edition targets small and medium-sized businesses, or SMBs. The Express edition provides customers with the same basic functionality that is offered in our premium product editions but has been designed for customers who have lower usage requirements and do not typically seek advanced features and functionality. We have discontinued marketing the lower level pricing options for the Express edition and expect the total number of customers using the Express edition to continue to decrease. Customers who purchase the Express edition generally enter into month-to-month agreements. Express customers are generally billed on a monthly basis and pay via a credit card.

 

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Zencoder is offered to customers on a subscription basis, with either committed contracts or pay-as-you-go contracts. The pricing is based on usage, which is comprised of minutes of video processed. The committed contracts include a fixed number of minutes of video processed. Should a customer’s usage exceed the contractual entitlements, the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements. Customers of Zencoder on annual contracts are considered premium customers. Customers on month-to-month contracts, pay-as-you-go contracts, or contracts for a period of less than one year, are considered volume customers.

 

Once is offered to customers on a subscription basis, with varying levels of functionality, usage entitlements and support based on the size and complexity of a customer’s needs.

 

Gallery is offered to customers of our premium Video Cloud editions on a subscription basis. A customer’s usage of Gallery counts against the pre-determined amount of video streams, bandwidth and managed content included with their Video Cloud Pro or Enterprise contract. Should a customer’s usage exceed the contractual entitlements, the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements.

 

Perform is offered to customers on a subscription basis. Customer arrangements are typically one-year contracts, which include a subscription to Perform and a pre-determined amount of video streams. The pricing for Perform is based on the number of users, accounts and usage, which is comprised of video streams. Should a customer’s usage exceed the contractual entitlements, the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements.

 

Video Marketing Suite is offered to customers on a subscription basis. Customer arrangements are typically one-year contracts, which include a subscription to Video Cloud, the Video Cloud Live Module, Gallery and a pre-determined amount of video streams or plays, bandwidth and managed content. The pricing for Video Marketing Suite is based on the number of users, accounts and usage, which is comprised of video streams or plays, bandwidth and managed content. Should a customer’s usage exceed the contractual entitlements, the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements.

 

All Once, Gallery, Perform and Video Marketing Suite customers are considered premium customers. All volume and premium customers are entitled to basic support and premium customers may separately purchase gold or platinum support, which includes phone support, extended support hours and faster response times.

 

Professional Services and Other Revenue — Professional services and other revenue consists of services such as implementation, software customizations and project management for customers who subscribe to our premium editions. These arrangements are priced either on a fixed fee basis with a portion due upon contract signing and the remainder due when the related services have been completed, or on a time and materials basis.

 

Cost of Revenue

 

Cost of subscription, support and professional services revenue primarily consists of costs related to supporting and hosting our product offerings and delivering our professional services. These costs include salaries, benefits, incentive compensation and stock-based compensation expense related to the management of our data centers, our customer support team and our professional services staff. In addition to these expenses, we incur third-party service provider costs such as data center and content delivery network, or CDN, expenses, allocated overhead, depreciation expense and amortization of capitalized internal-use software development costs and acquired intangible assets. We allocate overhead costs such as rent, utilities and supplies to all departments based on relative headcount. As such, general overhead expenses are reflected in cost of revenue in addition to each operating expense category.

 

The costs associated with providing professional services are significantly higher as a percentage of related revenue than the costs associated with delivering our subscription and support services due to the labor costs of providing professional services. As such, the implementation and professional services costs relating to an arrangement with a new customer are more significant than the costs to renew a customer’s subscription and support arrangement.

 

Cost of revenue increased in absolute dollars from the first nine months of 2014 to the first nine months of 2015. In future periods we expect our cost of revenue will increase in absolute dollars as our revenue increases. We also expect that cost of revenue as a percentage of revenue will decrease over time as we are able to achieve economies of scale in our business. However, cost of revenue as a percentage of revenue could fluctuate from period to period depending on the growth of our professional services business and any associated costs relating to the delivery of subscription services and the timing of significant expenditures. To the extent that our customer base grows, we intend to continue to invest additional resources in expanding the delivery capability of our products and other services. The timing of these additional expenses could affect our cost of revenue, both in terms of absolute dollars and as a percentage of revenue, in any particular quarterly or annual period.

 

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Operating Expenses

 

We classify our operating expenses as follows:

 

Research and Development.   Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, incentive compensation and stock-based compensation, in addition to the costs associated with contractors and allocated overhead. We have focused our research and development efforts on expanding the functionality and scalability of our products and enhancing their ease of use, as well as creating new product offerings. We expect research and development expenses to increase in absolute dollars as we intend to continue to periodically release new features and functionality, expand our product offerings, continue the localization of our products in various languages, upgrade and extend our service offerings, and develop new technologies. Over the long term, we believe that research and development expenses as a percentage of revenue will decrease, but will vary depending upon the mix of revenue from new and existing products, features and functionality, as well as changes in the technology that our products must support, such as new operating systems or new Internet-connected devices.

 

Sales and Marketing.   Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, incentive compensation, commissions, stock-based compensation and travel costs, amortization of acquired intangible assets, in addition to costs associated with marketing and promotional events, corporate communications, advertising, other brand building and product marketing expenses and allocated overhead. Our sales and marketing expenses have increased in absolute dollars in each of the last three fiscal years. We intend to continue to invest in sales and marketing and increase the number of sales representatives to add new customers and expand the sale of our product offerings within our existing customer base, build brand awareness and sponsor additional marketing events. Accordingly, in future periods we expect sales and marketing expense to increase in absolute dollars and continue to be our most significant operating expense. Over the long term, we believe that sales and marketing expense as a percentage of revenue will decrease, but will vary depending upon the mix of revenue from new and existing customers and from small, medium-sized and enterprise customers, as well as changes in the productivity of our sales and marketing programs.

 

General and Administrative.   General and administrative expenses consist primarily of personnel and related expenses for executive, legal, finance, information technology and human resources functions, including salaries, benefits, incentive compensation and stock-based compensation, in addition to the costs associated with professional fees, insurance premiums, other corporate expenses and allocated overhead. In future periods we expect general and administrative expenses to increase in absolute dollars as we continue to incur additional personnel and professional services costs in order to support the growth of our business. Over the long term, we believe that general and administrative expenses as a percentage of revenue will decrease.

 

Merger-related.   Merger-related costs consisted of transaction expenses incurred as part of the Unicorn acquisition as well as costs associated with the retention of key employees of Unicorn and Zencoder. Approximately $1.5 million is required to be paid to retain certain key employees from the Unicorn acquisition over a two-year period from the date of acquisition of Unicorn as services are performed. The period in which these services are to be performed varies by employee. Additionally, approximately $2.5 million was required to be paid to retain certain key employees from the Zencoder acquisition over a two-year period from the date of acquisition of Zencoder as services were performed. Given that the retention amount is related to a future service requirement, the related expense is being recorded as merger-related compensation expense in the consolidated statement of operations over the expected service period.

 

Other Expense

 

Other expense consists primarily of interest income earned on our cash, cash equivalents and investments, foreign exchange gains and losses, interest expense payable on our debt, loss on disposal of equipment and changes in the fair value of the warrants issued in connection with a line of credit.

 

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. We have provided a valuation allowance against our existing net deferred tax assets at September 30, 2015, with the exception of the deferred tax assets related to Brightcove KK.

 

Stock-Based Compensation Expense

 

Our cost of revenue, research and development, sales and marketing, and general and administrative expenses include stock-based compensation expense. Stock-based compensation expense represents the fair value of outstanding stock options and restricted stock awards, which is recognized as expense over the respective stock option and restricted stock award service periods. For the three months ended September 30, 2015 and 2014, we recorded $1.5 million of stock-based compensation expense. For the nine months ended September 30, 2015 and 2014, we recorded $4.3 million and $4.8 million, respectively, of stock-based compensation expense. We expect stock-based compensation expense to increase in absolute dollars in future periods.

 

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Foreign Currency Translation

 

With regard to our international operations, we frequently enter into transactions in currencies other than the U.S. dollar. As a result, our revenue, expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British pound, Australian dollar, and Japanese yen. For the three months ended September 30, 2015 and 2014, 39% and 44%, respectively, of our revenue was generated in locations outside the United States. For the nine months ended September 30, 2015 and 2014, 40% and 45%, respectively, of our revenue was generated in locations outside the United States. During the three months ended September 30, 2015 and 2014, 25% and 30%, respectively, of our revenue was in currencies other than the U.S. dollar, as were some of the associated expenses. During the nine months ended September 30, 2015 and 2014, 27% and 32%, respectively, of our revenue was in currencies other than the U.S. dollar, as were some of the associated expenses. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we conduct business, our foreign currency-based revenues and expenses generally increase in value when translated into U.S. dollars. We expect our foreign currency-based revenue to increase in absolute dollars and as a percentage of total revenue.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted 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 the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue 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. Our actual results may differ from these estimates under different assumptions or conditions.

  

We consider the assumptions and estimates associated with revenue recognition, allowance for doubtful accounts, software development costs, income taxes, business combinations, intangible assets, goodwill and stock-based compensation to be our critical accounting policies and estimates. There have been no material changes to our critical accounting policies since December 31, 2014.

 

For a detailed explanation of the judgments made in these areas, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2014, which we filed with the Securities and Exchange Commission on March 5, 2015.

 

We believe that our significant accounting policies, which are more fully described in the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, have not materially changed from those described in the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Results of Operations

 

The following tables set forth our results of operations for the periods presented. The data has been derived from the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q which, in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for the interim periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results. This information should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
   (in thousands, except percentages and per share data) 
Revenue:                    
Subscription and support revenue  $33,184   $30,450   $96,912   $89,754 
Professional services and other revenue   653    1,077    2,658    3,881 
                     
Total revenue   33,837    31,527    99,570    93,635 
Cost of revenue:                    
Cost of subscription and support revenue   10,314    9,467    31,017    28,096 
Cost of professional services and other revenue   1,198    1,352    3,645    4,414 
                     
Total cost of revenue   11,512    10,819    34,662    32,510 
                     
Gross profit   22,325    20,708    64,908    61,125 
Operating expenses:                    
Research and development   7,233    7,187    22,320    20,548 
Sales and marketing   11,664    11,273    34,406    34,714 
General and administrative   4,391    4,735    14,761    14,597 
Merger-related   62    623    138    3,011 
                     
Total operating expenses   23,350    23,818    71,625    72,870 
                     
Loss from operations   (1,025)   (3,110)   (6,717)   (11,745)
Other expense, net   (127)   (614)   (780)   (1,020)
                     
Loss before income taxes   (1,152)   (3,724)   (7,497)   (12,765)
Provision for income taxes   123    81    255    204 
                     
Net loss   (1,275)   (3,805)   (7,752)   (12,969)
Net loss per share - basic and diluted  $(0.04)  $(0.12)  $(0.24)  $(0.41)
                     
Weighted-average number of common shares used in computing net loss per share   32,636,084    32,247,453    32,560,478    31,814,570 

 

18 

 

  

Overview of Results of Operations for the Three Months Ended September 30, 2015 and 2014

 

Total revenue increased by 7%, or $2.3 million, in the three months ended September 30, 2015 compared to the three months ended September 30, 2014 due to an increase in subscription and support revenue of 9%, or $2.7 million, offset partially by a decrease in professional services and other revenue of 39%, or $424,000. The increase in subscription and support revenue resulted primarily from an increase in revenue from existing customers as well as an increase in the number of our premium customers, which was 1,852 as of September 30, 2015, compared to 1,847 as of September 30, 2014. In addition, our revenue from premium offerings grew by $2.7 million, or 9%, in the three months ended September 30, 2015 compared to the three months ended September 30, 2014. These increases are offset by a $1.1 million reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the three months ended September 30, 2014. Our ability to continue to provide the product functionality and performance that our customers require will be a major factor in our ability to continue to increase revenue.

 

Our gross profit increased by $1.6 million, or 8%, in the three months ended September 30, 2015 compared to the three months ended September 30, 2014, primarily due to an increase in revenue. With the continued growth in our total revenue, our ability to maintain our overall gross profit will depend primarily on our ability to continue controlling our costs of delivery.

 

Loss from operations was $1.0 million in the three months ended September 30, 2015 compared to $3.1 million in the three months ended September 30, 2014. Loss from operations in the three months ended September 30, 2015 included stock-based compensation expense and amortization of acquired intangible assets of $1.5 million and $774,000, respectively. Loss from operations in the three months ended September 30, 2014 included stock-based compensation expense, amortization of acquired intangible assets and merger-related expenses of $1.5 million, $827,000 and $623,000, respectively. We expect operating income to improve from increased sales to both new and existing customers and from improved efficiencies throughout our organization as we continue to grow and scale our operations.

 

As of September 30, 2015, we had $23.8 million of unrestricted cash and cash equivalents, an increase of $900,000 from $22.9 million at December 31, 2014, due primarily to $4.2 million of cash provided by operating activities and $1.7 million in proceeds from an equipment financing. These increases were offset by $2.5 million in capital expenditures, $1.0 million in capitalization on internal-use software costs, $988,000 in payments under capital lease obligations and $576,000 in payments on an equipment financing.

 

Revenue

 

   Three Months Ended September 30,     
   2015   2014   Change 
Revenue by Product Line  Amount  

Percentage of

Revenue

   Amount  

Percentage of

Revenue

   Amount   % 
   (in thousands, except percentages) 
Premium  $31,688    94%  $28,950    92%  $2,738    9%
Volume   2,149    6    2,577    8    (428)   (17)
Total  $33,837    100%  $31,527    100%  $2,310    7%

 

During the three months ended September 30, 2015, revenue increased by $2.3 million, or 7%, compared to the three months ended September 30, 2014, primarily due to an increase in revenue from our premium offerings, which consist of subscription and support revenue, as well as professional services and other revenue. The increase in premium revenue of $2.7 million, or 9%, is partially the result of an 11% increase in the average annual subscription revenue per premium customer during the three months ended September 30, 2015 and an increase in the number of premium customers from 1,847 at September 30, 2014 to 1,852 at September 30, 2015. These increases are offset by a $1.1 million reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the three months ended September 30, 2014. In the three months ended September 30, 2015, volume revenue decreased by $428,000, or 17%, compared to the three months ended September 30, 2014, due primarily to the discontinuation of entry-level Video Cloud Express offerings.

 

19 

 

 

   Three Months Ended September 30,     
   2015   2014   Change 
Revenue by Type  Amount  

Percentage of

Revenue

   Amount  

Percentage of

Revenue

   Amount   % 
   (in thousands, except percentages) 
Subscription and support  $33,184    98%  $30,450    97%  $2,734    9%
Professional services and other   653    2    1,077    3    (424)   (39)
Total  $33,837    100%  $31,527    100%  $2,310    7%

 

In the three months ended September 30, 2015, subscription and support revenue increased by $2.7 million, or 9%, compared to the three months ended September 30, 2014. The increase was primarily related to the continued growth of our customer base for our premium offerings including sales to both new and existing customers and an 11% increase in the average annual subscription revenue per premium customer. These increases are offset by a $1.1 million reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the three months ended September 30, 2014. Professional services and other revenue decreased by 39%, or $424,000, due to a decrease in the number of professional service engagements that were related to projects and implementations supporting subscription sales. Professional services and other revenue will vary from period to period depending on the number of implementations and other projects that are in process.

 

   Three Months Ended September 30,     
   2015   2014   Change 
Revenue by Geography  Amount  

Percentage of

Revenue

   Amount  

Percentage of

Revenue

   Amount   % 
   (in thousands, except percentages) 
North America  $22,118    65%  $19,254    61%  $2,864    15%
Europe   6,049    18    7,451    23    (1,402)   (19)
Japan   2,249    7    2,181    7    68    3 
Asia Pacific   3,035    9    2,383    8    652    27 
Other   386    1    258    1    128    50 
International subtotal   11,719    35    12,273    39    (554)   (5)
Total  $33,837    100%  $31,527    100%  $2,310    7%

 

For purposes of this section, we designate revenue by geographic regions based upon the locations of our customers. North America is comprised of revenue from the United States, Canada and Mexico. International is comprised of revenue from locations outside of North America. Depending on the timing of new customer contracts, revenue mix from a geographic region can vary from period to period.

 

In the three months ended September 30, 2015, total revenue for North America increased $2.9 million, or 15%, compared to the three months ended September 30, 2014. The increase in revenue for North America resulted primarily from an increase in subscription and support revenue from our premium offerings. In the three months ended September 30, 2015, total revenue outside of North America decreased $554,000, or 5%, compared to the three months ended September 30, 2014. The decrease in revenue from International regions is primarily related to Europe, as we have experienced a decrease in sales in this region, combined with a $1.1 million reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the three months ended September 30, 2014. This decrease was offset by an increase in subscription and support revenue from our premium offerings.

 

Cost of Revenue

 

   Three Months Ended September 30,     
   2015   2014   Change 
Cost of Revenue  Amount   Percentage
of Related
Revenue
   Amount   Percentage
of Related
Revenue
   Amount   % 
   (in thousands, except percentages) 
Subscription and support  $10,314    31%  $9,467    31%  $847    9%
Professional services and other   1,198    183    1,352    126    (154)   (11)
Total  $11,512    34%  $10,819    34%  $693    6%

 

In the three months ended September 30, 2015, cost of subscription and support revenue increased $847,000, or 9%, compared to the three months ended September 30, 2014. The increase resulted primarily from an increase in network hosting services, content delivery network expenses and employee-related expenses of $487,000, $247,000 and $141,000, respectively.

 

In the three months ended September 30, 2015, cost of professional services and other revenue decreased $154,000, or 11%, compared to the three months ended September 30, 2014. The decrease resulted primarily from a decrease in employee-related expenses of $152,000.

 

20 

 

  

Gross Profit

 

   Three Months Ended September 30,     
   2015   2014   Change 
Gross Profit  Amount  

Percentage of

Related

Revenue

   Amount  

Percentage of

Related

Revenue

   Amount   % 
   (in thousands, except percentages) 
Subscription and support  $22,870    69%  $20,983    69%  $1,887    9%
Professional services and other   (545)   (83)   (275)   (26)   (270)   (98)
Total  $22,325    66%  $20,708    66%  $1,617    8%

 

The overall gross profit percentage was 66% for the three months ended September 30, 2015 and 2014. Subscription and support gross profit increased $1.9 million, or 9%, compared to the three months ended September 30, 2014. Professional services and other gross profit decreased $270,000, or 98%, compared to the three months ended September 30, 2014 primarily due to a reduction in revenue without a corresponding reduction in costs. It is likely that gross profit, as a percentage of revenue, will fluctuate quarter by quarter due to the timing and mix of subscription and support revenue and professional services and other revenue, and the type, timing and duration of service required in delivering certain projects.

 

Operating Expenses

 

   Three Months Ended September 30,     
   2015   2014   Change 
Operating Expenses  Amount  

Percentage of

Revenue

   Amount  

Percentage of

Revenue

   Amount   % 
   (in thousands, except percentages) 
Research and development  $7,233    21%  $7,187    22%  $46    1%
Sales and marketing   11,664    35    11,273    36    391    3 
General and administrative   4,391    13    4,735    15    (344)   (7)
Merger-related   62        623    2    (561)   (90)
Total  $23,350    69%  $23,818    75%  $(468)   (2)%

 

Research and Development.    In the three months ended September 30, 2015, research and development expense increased by $46,000, or 1%, compared to the three months ended September 30, 2014 primarily due to increases in rent and employee-related expenses of $73,000 and $59,000, respectively. These increases were partially offset by a decrease in contractor expenses of $67,000. In future periods, we expect that our research and development expense will continue to increase in absolute dollars as we continue to add employees, develop new features and functionality for our products, introduce additional software solutions and expand our product and service offerings.

 

Sales and Marketing. In the three months ended September 30, 2015, sales and marketing expense increased by $391,000, or 3%, compared to the three months ended September 30, 2014 primarily due to increases in employee-related, stock-based compensation and commission expenses of $576,000, $310,000 and $120,000, respectively. These increases were partially offset by a decrease in marketing programs of $504,000. We expect that our sales and marketing expense will increase in absolute dollars along with our revenue, as we continue to expand sales coverage and build brand awareness through what we believe are cost-effective channels. We expect that such increases may fluctuate from period to period, however, due to the timing of marketing programs.

 

General and Administrative. In the three months ended September 30, 2015, general and administrative expense decreased by $344,000, or 7%, compared to the three months ended September 30, 2014 primarily due to decreases in stock-based compensation expense and outside accounting and legal fees of $356,000 and $161,000, respectively. These decreases were offset by an increase in contractor expenses of $171,000. In future periods, we expect general and administrative expense will increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and operations.

  

Merger-related. In the three months ended September 30, 2015, merger-related expenses decreased $561,000, or 90%, compared to the three months ended September 30, 2014 primarily due to a decrease in the costs associated with the retention of certain employees of Unicorn.

 

21 

 

 

Other Expense, Net

 

   Three Months Ended September 30,     
   2015   2014   Change 
Other Expense  Amount  

Percentage of

Revenue

   Amount  

Percentage of

Revenue

   Amount   % 
   (in thousands, except percentages) 
Interest income, net  $2    %  $1    %  $1    100%
Interest expense   (31)       (22)       (9)   (41)
Other expense, net   (98)       (593)   (2)   495    83 
Total  $(127)   %  $(614)   (2)%  $487    79%

  

In the three months ended September 30, 2015, interest income, net, increased by $1,000 compared to the corresponding period of the prior year. The increase is primarily due to a higher average cash balance as interest income is generated from the investment of our cash balances, less related bank fees.

 

The interest expense during the three months ended September 30, 2015 is primarily comprised of interest paid on capital leases and an equipment financing. The decrease in other expense, net during the three months ended September 30, 2015 was primarily due to a decrease of $500,000 in foreign currency exchange losses that are recorded upon collection of foreign denominated accounts receivable.

 

Provision for Income Taxes

 

   Three Months Ended September 30,     
   2015   2014   Change 
Provision for Income Taxes  Amount  

Percentage of

Revenue

   Amount  

Percentage of

Revenue

   Amount   % 
   (in thousands, except percentages) 
Provision for income taxes  $123    %  $81    %  $42    52%

 

In the three months ended September 30, 2015, provision for income taxes increased by $42,000 or 52%, compared to the three months ended September 30, 2014 primarily due to an increase in income tax expenses related to foreign jurisdictions.

 

Overview of Results of Operations for the Nine Months Ended September 30, 2015 and 2014

 

Total revenue increased by 6%, or $5.9 million, in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 due to an increase in subscription and support revenue of 8%, or $7.2 million, offset partially by a decrease in professional services and other revenue of 32%, or $1.2 million. The increase in subscription and support revenue resulted primarily from an increase in revenue from existing customers as well as an increase in the number of our premium customers, which was 1,852 as of September 30, 2015, compared to 1,847 as of September 30, 2014. In addition, our revenue from premium offerings grew by $6.7 million, or 8%, in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. These increases are offset by a $3.0 million reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the nine months ended September 30, 2014. Our ability to continue to provide the product functionality and performance that our customers require will be a major factor in our ability to continue to increase revenue.

 

Our gross profit increased by $3.8 million, or 6%, in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, primarily due to an increase in revenue. Our ability to continue to maintain our overall gross profit will depend primarily on our ability to continue controlling our costs of delivery. Loss from operations was $6.7 million in the nine months ended September 30, 2015 compared to $11.7 million in the nine months ended September 30, 2014. Loss from operations in the nine months ended September 30, 2015 included stock-based compensation expense and amortization of acquired intangible assets of $4.3 million and $2.4 million, respectively. Loss from operations in the nine months ended September 30, 2014 included stock-based compensation expense, amortization of acquired intangible assets and merger-related expenses of $4.8 million, $2.4 million and $3.0 million, respectively. We expect operating income to improve from increased sales to both new and existing customers and from improved efficiencies throughout our organization as we continue to grow and scale our operations.

 

Revenue

 

   Nine Months Ended September 30,     
   2015   2014   Change 
Revenue by Product Line  Amount  

Percentage of

Revenue

   Amount  

Percentage of

Revenue

   Amount   % 
   (in thousands, except percentages) 
Premium  $92,677    93%  $86,010    92%  $6,667    8%
Volume   6,893    7    7,625    8    (732)   (10)
Total  $99,570    100%  $93,635    100%  $5,935    6%

 

22 

 

  

During the nine months ended September 30, 2015, revenue increased by $5.9 million, or 6%, compared to the nine months ended September 30, 2014, primarily due to an increase in revenue from our premium offerings, which consist of subscription and support revenue, as well as professional services and other revenue. The increase in premium revenue of $6.7 million, or 8%, is partially the result of a 7% increase in the average annual subscription revenue per premium customer during the nine months ended September 30, 2015 and an increase in the number of premium customers from 1,847 at September 30, 2014 to 1,852 at September 30, 2015. These increases are offset by a $3.0 million reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the nine months ended September 30, 2014. In the nine months ended September 30, 2015, revenue from our volume offerings decreased by $732,000, or 10%, compared to the nine months ended September 30, 2014, due primarily to the discontinuation of marketing for entry-level Video Cloud Express offerings.

 

   Nine Months Ended September 30,     
   2015   2014   Change 
Revenue by Type  Amount  

Percentage of

Revenue

   Amount  

Percentage of

Revenue

   Amount   % 
   (in thousands, except percentages) 
Subscription and support  $96,912    97%  $89,754    96%  $7,158    8%
Professional services and other   2,658    3    3,881    4    (1,223)   (32)
Total  $99,570    100%  $93,635    100%  $5,935    6%

 

In the nine months ended September 30, 2015, subscription and support revenue increased by $7.2 million, or 8%, compared to the nine months ended September 30, 2014. The increase was primarily related to the continued growth of our customer base for our premium offerings including sales to both new and existing customers and an 7% increase in the average annual subscription revenue per premium customer during the nine months ended September 30, 2015. Professional services and other revenue decreased by 32%, or $1.2 million, compared to the nine months ended September 30, 2014. Professional services and other revenue will vary from period to period depending on the number of implementations and other projects that are in process.

 

   Nine Months Ended September 30,     
   2015   2014   Change 
Revenue by Geography  Amount  

Percentage of

Revenue

   Amount  

Percentage of

Revenue

   Amount   % 
   (in thousands, except percentages) 
North America  $63,636    65%  $55,749    59%  $7,887    14%
Europe   19,235    19    23,808    25    (4,573)   (19)
Japan   6,294    6    6,114    7    180    3 
Asia Pacific   9,144    9    7,259    8    1,885    26 
Other   1,261    1    705    1    556    79 
International subtotal   35,934    35    37,886    41    (1,952)   (5)
Total  $99,570    100%  $93,635    100%  $5,935    6%

 

For purposes of this section, we designate revenue by geographic regions based upon the locations of our customers. North America is comprised of revenue from the United States, Canada and Mexico. International is comprised of revenue from locations outside of North America. Depending on the timing of new customer contracts, revenue mix from a geographic region can vary from period to period.

 

In the nine months ended September 30, 2015, total revenue for North America increased $7.9 million, or 14%, compared to the nine months ended September 30, 2014. The increase in revenue for North America resulted primarily from an increase in subscription and support revenue from our premium offerings. In the nine months ended September 30, 2015, total revenue outside of North America decreased $2.0 million, or 5%, compared to the nine months ended September 30, 2014. The decrease in revenue from International regions is primarily related to Europe, as we have experienced a decrease in sales in this region , combined with a $3.0 million reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the nine months ended September 30, 2014. These decreases were offset by an increase in subscription and support revenue from our premium offerings. 

 

Cost of Revenue

 

   Nine Months Ended September 30,     
   2015   2014   Change 
Cost of Revenue  Amount  

Percentage of

Related

Revenue

   Amount  

Percentage of

Related

Revenue

   Amount   % 
   (in thousands, except percentages) 
Subscription and support  $31,017    32%  $28,096    31%  $2,921    10%
Professional services and other   3,645    137    4,414    114    (769)   (17)
Total  $34,662    35%  $32,510    35%  $2,152    7%

 

23 

 

 

In the nine months ended September 30, 2015, cost of subscription and support revenue increased $2.9 million, or 10%, compared to the nine months ended September 30, 2014. The increase resulted primarily from an increase in the network hosting services, employee-related expenses, depreciation expense and content delivery network expenses of $1.2 million, $513,000, $414,000 and $267,000, respectively. There were also increases in the cost of third-party software integrated with our service offering and maintenance expenses of $246,000 and $169,000, respectively.

 

In the nine months ended September 30, 2015, cost of professional services and other revenue decreased $769,000, or 17%, compared to the nine months ended September 30, 2014. The decrease resulted primarily from decreases in contractor and employee-related expenses of $427,000 and $421,000, respectively.

 

Gross Profit

 

   Nine Months Ended September 30,     
   2015   2014   Change 
Gross Profit  Amount  

Percentage of

Related

Revenue

   Amount  

Percentage of

Related

Revenue

   Amount   % 
   (in thousands, except percentages) 
Subscription and support  $65,895    68%  $61,658    69%  $4,237    7%
Professional services and other   (987)   (37)   (533)   (14)   (454)   (85)
Total  $64,908    65%  $61,125    65%  $3,783    6%

 

The overall gross profit percentage was 65% for the nine months ended September 30, 2015 and 2014. Subscription and support gross profit increased $4.2 million, or 7%, compared to the nine months ended September 30, 2014. Professional services and other gross profit decreased $454,000, or 85%, compared to the nine months ended September 30, 2014 primarily due to a reduction in revenue without a corresponding reduction in costs. It is likely that gross profit, as a percentage of revenue, will fluctuate quarter by quarter due to the timing and mix of subscription and support revenue and professional services and other revenue, and the type, timing and duration of service required in delivering certain projects.

 

Operating Expenses

   

   Nine Months Ended September 30,     
   2015   2014   Change 
Operating Expenses  Amount  

Percentage of

Revenue

   Amount  

Percentage of

Revenue

   Amount   % 
   (in thousands, except percentages) 
Research and development  $22,320    22%  $20,548    22%  $1,772    9%
Sales and marketing   34,406    35    34,714    37    (308)   (1)
General and administrative   14,761    15    14,597    15    164    1 
Merger-related   138        3,011    3    (2,873)   (95)
Total  $71,625    72%  $72,870    77%  $(1,245)   (2)%

 

Research and Development.   In the nine months ended September 30, 2015, research and development expense increased by $1.8 million, or 9%, compared to the nine months ended September 30, 2014 primarily due to increases in employee-related expenses, rent expense, stock-based compensation and recruiting expenses of $1.2 million, $356,000, $110,000 and $96,000, respectively.

 

Sales and Marketing.   In the nine months ended September 30, 2015, sales and marketing expense decreased $308,000, or 1%, compared to the nine months ended September 30, 2014 primarily due to decrease in marketing programs of $1.1 million. This decrease was partially offset by increases in employee-related expenses and contractor expenses of $365,000 and $232,000, respectively.

 

General and Administrative.   In the nine months ended September 30, 2015, general and administrative expense increased by $164,000, or 1%, compared to the nine months ended September 30, 2014 primarily due to an increase in depreciation, contractor, outside accounting and legal fees, and bad debt expenses of $408,000, $384,000, $204,000 and $195,000, respectively. These expenses were offset by decreases in stock-based compensation and employee-related expenses of $621,000 and $222,000, respectively.

 

24 

 

  

Merger-related. In the nine months ended September 30, 2015, merger-related expenses decreased $2.9 million, or 95%, compared to the nine months ended September 30, 2014. The decrease is primarily due to $1.7 in costs incurred in connection with the closing of the acquisition of substantially all of the assets of Unicorn, during the nine months ended September 30, 2014, without corresponding costs during the nine months ended September 30, 2015. There was also a decrease in the costs associated with the retention of certain employees of Unicorn of $1.1 million.

 

Other Expense, Net

 

   Nine Months Ended September 30,     
   2015   2014   Change 
Other Expense  Amount  

Percentage of

Revenue

   Amount  

Percentage of

Revenue

   Amount   % 
   (in thousands, except percentages) 
Interest income, net  $4    %  $10    %  $(6)   (60)%
Interest expense   (71)       (67)       (4)   (6)
Other expense, net   (713)   (1)%   (963)   (1)%   250    26 
Total  $(780)   (1)%  $(1,020)   (1)%  $240    24%

 

In the nine months ended September 30, 2015, interest income, net, decreased by $6,000 compared to the corresponding period of the prior year. The decrease is primarily due to the maturity of certain investments in marketable securities during the second quarter of 2014 as interest income is generated from investments of our cash balances, less related bank fees.

 

The interest expense during the nine months ended September 30, 2015 is primarily comprised of interest paid on capital leases and an equipment financing. The decrease in other expense, net during the nine months ended September 30, 2015 was primarily due to a decrease of $250,000 in foreign currency exchange losses that are recorded upon collection of foreign denominated accounts receivable.

  

Provision for Income Taxes

 

   Nine Months Ended September 30,     
   2015   2014   Change 
Provision for Income Taxes  Amount  

Percentage of

Revenue

   Amount  

Percentage of

Revenue

   Amount   % 
   (in thousands, except percentages) 
Provision for income taxes  $255    %  $204    %  $51    25%

 

In the nine months ended September 30, 2015, provision for income taxes increased by $51,000, or 25%, compared to the nine months ended September 30, 2014 primarily due to an increase in income tax expenses related to foreign jurisdictions.

 

Liquidity and Capital Resources

 

In connection with our initial public offering in February 2012, we received aggregate proceeds of approximately $58.8 million, including the proceeds from the underwriters’ exercise of their overallotment option, net of underwriters’ discounts and commissions, but before deducting offering expenses of approximately $4.3 million. Prior to our initial public offering, we funded our operations primarily through private placements of preferred and common stock, as well as through borrowings of $7.0 million under our bank credit facilities. In February 2012, we repaid the $7.0 million balance under our bank credit facilities. All of the preferred stock was converted into shares of our common stock in connection with our initial public offering.

 

  

Nine Months Ended

September 30,

 
Condensed Consolidated Statements of Cash Flow Data  2015   2014 
   (in thousands) 
Purchases of property and equipment  $(2,479)  $(2,500)
Depreciation and amortization   6,898    6,114 
Cash flows provided by (used in) operating activities   4,249    (1,650)
Cash flows used in investing activities   (3,499)   (9,354)
Cash flows provided by (used in) financing activities   164    (276)

 

Cash, cash equivalents and investments.

 

Our cash and cash equivalents at September 30, 2015 were held for working capital purposes and were invested primarily in money market funds. We do not enter into investments for trading or speculative purposes. At September 30, 2015 and December 31, 2014, restricted cash was $201,000 and was held in certificates of deposit as collateral for letters of credit related to the contractual provisions of our corporate credit cards and the contractual provisions with a customer. At September 30, 2015 and December 31, 2014, we had $4.6 million and $3.3 million, respectively, of cash and cash equivalents held by subsidiaries in international locations, including subsidiaries located in Japan and the United Kingdom. It is our current intention to permanently reinvest unremitted earnings in such subsidiaries or to repatriate the earnings only when tax effective. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated working capital and capital expenditure needs over at least the next 12 months.

 

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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, cash collections, and changes to our allowance for doubtful accounts. In many instances we receive cash payment from a customer prior to the time we are able to recognize revenue on a transaction. We record these payments as deferred revenue, which has a positive effect on our accounts receivable balances. 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, net of allowance for doubtful accounts, divided by total revenue for the most recent quarter, multiplied by (b) the number of days in that quarter. DSO was 55 days at September 30, 2015 and 63 days at December 31, 2014.

 

Cash flows provided by (used in) operating activities.

 

Cash provided by operating activities consists primarily of net loss adjusted for certain non-cash items including depreciation and amortization, stock-based compensation expense, the provision for bad debts and the effect of changes in working capital and other activities. Cash provided by operating activities during the nine months ended September 30, 2015 was $4.2 million and consisted of $7.8 million of net loss offset by non-cash expenses of $6.9 million for depreciation and amortization expense and $4.3 million for stock-based compensation expense. Uses of cash included a decrease in accrued expenses of $1.7 million and an increase in prepaid expenses and other current assets of $441,000. These outflows were offset in part by a decrease in accounts receivable of $1.1 million and an increase in accounts payable and deferred revenue of $1.0 million and $957,000, respectively.

 

Cash flows used in investing activities.

 

Cash used in investing activities during the nine months ended September 30, 2015 was $3.5 million, consisting primarily of $2.5 million in capital expenditures to support the business and $1.0 million for the capitalization of internal-use software costs.

 

Cash flows provided by (used in) financing activities.

 

Cash provided by financing activities for the nine months ended September 30, 2015 was $164,000, consisting of proceeds received from an equipment financing and the exercise of common stock options of $1.7 million and $72,000, respectively, offset partially by payments under capital lease and the equipment financing of $988,000 and $576,000, respectively.

 

Credit facility borrowings.

 

On March 30, 2011, we entered into a loan and security agreement with Silicon Valley Bank, or SVB, providing for an asset-based line of credit. Under this loan and security agreement, we could borrow up to the lesser of (i) $8.0 million or (ii) 80% of our eligible accounts receivable. The amounts owed under the loan and security agreement are secured by substantially all of our assets, excluding our intellectual property. Amounts owed under the loan and security agreement were due on March 31, 2013, and interest and related finance charges were payable monthly.

 

On April 29, 2013, we amended our loan and security agreement with SVB to increase the aggregate amount of borrowings that may be outstanding under our asset-based line of credit from $8.0 million to $10.0 million and to extend the maturity date to March 30, 2015.

 

On October 3, 2014, we further amended our loan and security agreement with SVB pursuant to the Third Loan Modification Agreement (the “Modification Agreement”) to (i) increase the aggregate amount of borrowings that may be outstanding under our asset-based line of credit from $10.0 million to $20.0 million, (ii) increase the aggregate Facility Amount (as defined in the loan and security agreement) available pursuant to the loan and security agreement from $12.5 million to $25.0 million, (iii) provide for an unused line fee of 0.25% of the average unused portion of the Maximum Availability Amount (as defined in the loan and security agreement) per year and (iv) extend the maturity date to October 3, 2016. The interest rate decreased from the prime rate plus 1.5% to the prime rate plus 0.75%. Under the Modification Agreement, we must comply with certain financial covenants, including maintaining a minimum asset coverage ratio, a minimum net income threshold based on non-GAAP operating measures and a minimum net cash balance at certain points throughout the year. The interest rate will increase to the prime rate plus 2.25% if we are not able to meet the minimum asset coverage ratio. We had no outstanding borrowings under this line of credit at September 30, 2015. We were in compliance with all covenants under the loan and security agreement as of September 30, 2015.

 

On June 1, 2015, we entered into an equipment financing agreement with a lender (the “Equipment Financing Agreement”) to finance the purchase of $1.7 million in computer equipment and support. The liability relating to the Equipment Financing Agreement was recorded at fair value using a market interest rate. We are repaying our obligation under the Equipment Financing Agreement over a two year period through May 31, 2017, and the amount outstanding was $1.1 million as of September 30, 2015.

 

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Net operating loss carryforwards.

 

As of December 31, 2014, we had federal and state net operating losses of approximately $132.6 million and $63.8 million, respectively, which are available to offset future taxable income, if any, through 2034. Included in the federal and state net operating losses are deductions attributable to excess tax benefits from the exercise of non-qualified stock options of $12.1 million and $7.7 million, respectively. The tax benefits attributable to these net operating losses are credited directly to additional paid-in capital when realized. The Company has not realized any such tax benefits through December 31, 2014. We had research and development tax credits of $4.6 million and $2.8 million, respectively, which expire in various amounts through 2034. Our net operating loss and tax credit amounts are subject to annual limitations under Section 382 change of ownership rules of the U.S. Internal Revenue Code of 1986, as amended. In 2013, we completed an assessment to determine whether there may have been a Section 382 ownership change and determined that it is more likely than not that our net operating and tax credit amounts as disclosed are not subject to any material Section 382 limitations.

 

In assessing our ability to utilize our net deferred tax assets, we considered whether it is more likely than not that some portion or all of our net deferred tax assets will not be realized. Based upon the level of our historical U.S. losses and future projections over the period in which the net deferred tax assets are deductible, at this time, we believe it is more likely than not that we will not realize the benefits of these deductible differences. Accordingly, we have provided a valuation allowance against our net deferred tax assets as of September 30, 2015 and December 31, 2014.

 

Contractual Obligations and Commitments

 

Our principal commitments consist primarily of obligations under our leases for our office space and contractual commitments for capital leases and equipment financing as well as content delivery network services, hosting and other support services. Other than these lease obligations and contractual commitments, we do not have commercial commitments under lines of credit, standby repurchase obligations or other such debt arrangements.

 

Our contractual obligations as of December 31, 2014 are summarized in our Annual Report on Form 10-K for the year ended December 31, 2014. In addition to the obligations outlined in our Annual Report on Form 10-K, we had $792,000 of capital lease obligations and $1.1 million of equipment financing obligations as of September 30, 2015.

 

Recent Accounting Pronouncements

 

For information on recent accounting pronouncements, see Recently Issued and Adopted Accounting Standards in the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

 

Off-Balance Sheet Arrangements

 

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

 

Anticipated Cash Flows

 

We expect to incur significant operating costs, particularly related to services delivery costs, sales and marketing and research and development, for the foreseeable future in order to execute our business plan. We anticipate that such operating costs, as well as planned capital expenditures will constitute a material use of our cash resources. As a result, our net cash flows will depend heavily on the level of future sales, changes in deferred revenue and our ability to manage infrastructure costs. 

 

We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditures for at least the next 12 months. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new products and enhancements, and our expansion of sales and marketing and product development activities. To the extent that our cash and cash equivalents, short and long-term investments and cash flow from operating activities are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to acquire businesses, technologies and products that will complement our existing operations. In the event funding is required, we may not be able to obtain bank credit arrangements or equity or debt financing on terms acceptable to us or at all.

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Quantitative and Qualitative Disclosures 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 exchange risks, interest rate and inflation.

 

Financial instruments

 

Financial instruments meeting fair value disclosure requirements consist of cash equivalents, accounts receivable and accounts payable. The fair value of these financial instruments approximates their carrying amount.

 

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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 changes in the euro, British pound, Australian dollar and Japanese yen. Except for revenue transactions in Japan, we enter into transactions directly with substantially all of our foreign customers.

 

Percentage of revenues and expenses in foreign currency is as follows:

 

   Three Months Ended September
30,
 
   2015   2014 
Revenues generated in locations outside the United States   39%   44%
Revenues in currencies other than the United States dollar (1)   25%   30%
Expenses in currencies other than the United States dollar (1)   14%   15%

  

   Nine Months Ended September
30,
 
   2015   2014 
Revenues generated in locations outside the United States   40%   45%
Revenues in currencies other than the United States dollar (1)   27%   32%
Expenses in currencies other than the United States dollar (1)   14%   15%

   

(1)Percentage of revenues and expenses denominated in foreign currency for the three and nine months ended September 30, 2015 and 2014:

 

  

Three Months Ended

September 30, 2015

  

Three Months Ended

September 30, 2014

 
   Revenues   Expenses   Revenues   Expenses 
Euro   6%   3%   11%   3%
British pound   8    6    8    7 
Japanese Yen   7    3    7    3 
Other   4    2    4    2 
Total   25%   14%   30%   15%

 

  

Nine Months Ended

September 30, 2015

  

Nine Months Ended

September 30, 2014

 
   Revenues   Expenses   Revenues   Expenses 
Euro   7%   2%   13%   2%
British pound   9    6    8    7 
Japanese Yen   6    3    6    3 
Other   5    3    5    3 
Total   27%   14%   32%   15%

 

As of September 30, 2015 and December 31, 2014, we had $5.1 million and $6.9 million, respectively, of receivables denominated in currencies other than the U.S. dollar. We also maintain cash accounts denominated in currencies other than the local currency, which exposes us to foreign exchange rate movements.

 

In addition, although our foreign subsidiaries have intercompany accounts that are eliminated upon consolidation, these accounts expose us to foreign currency exchange rate fluctuations. Exchange rate fluctuations on short-term intercompany accounts are recorded in our consolidated statements of operations under “other income (expense), net”, while exchange rate fluctuations on long-term intercompany accounts are recorded in our consolidated balance sheets under “accumulated other comprehensive income” in stockholders’ equity, as they are considered part of our net investment and hence do not give rise to gains or losses.

 

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. Relative to foreign currency exposures existing at September 30, 2015, a 10% unfavorable movement in foreign currency exchange rates would expose us to significant losses in earnings or cash flows or significantly diminish the fair value of our foreign currency financial instruments. For the nine months ended September 30, 2015, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have decreased revenues by $2.7 million, decreased expenses by $1.5 million and decreased operating income by $1.2 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 September 30, 2015 and 2014.

 

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Interest rate risk

 

We had unrestricted cash and cash equivalents totaling $23.8 million at September 30, 2015. Cash and cash equivalents were invested primarily in money market funds and are held for working capital purposes. We do not use derivative financial instruments in our investment portfolio. Declines in interest rates, however, would reduce future interest income. We incurred $31,000 and $71,000 of interest expense during the three and nine months ended September 30, 2015, respectively, related to interest paid on capital leases and an equipment financing. While we continue to incur interest expense in connection with our capital leases and equipment financing, the interest expense is fixed and not subject to changes in market interest rates. In the event that we borrow under our line of credit, which bears interest at the prime rate plus 0.25%, the related interest expense recorded would be subject to changes in the prime rate of interest.

 

Inflation risk

 

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. 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.

 

ITEM 4.CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of September 30, 2015, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2015, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated by and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION 

 

ITEM 1.LEGAL PROCEEDINGS

 

On August 27, 2012, a complaint was filed by Blue Spike, LLC naming us in a patent infringement case (Blue Spike, LLC v. Audible Magic Corporation, et al., United States District Court for the Eastern District of Texas). The complaint alleges that we have infringed U.S. Patent No. 7,346,472 with a listed issue date of March 18, 2008, entitled “Method and Device for Monitoring and Analyzing Signals,” U.S. Patent No. 7,660,700 with a listed issue date of February 9, 2010, entitled “Method and Device for Monitoring and Analyzing Signals,” U.S. Patent No. 7,949,494 with a listed issue date of May 24, 2011, entitled “Method and Device for Monitoring and Analyzing Signals” and U.S. Patent No. 8,214,175 with a listed issue date of July 3, 2012, entitled “Method and Device for Monitoring and Analyzing Signals.” The complaint seeks an injunction enjoining infringement, damages and pre- and post-judgment costs and interest. We answered and filed counterclaims against Blue Spike on December 3, 2012. We amended our answer and counterclaims on July 15, 2013. This complaint is subject to indemnification by one of our vendors. We cannot yet determine whether it is probable that a loss will be incurred in connection with this complaint, nor can we reasonably estimate the potential loss, if any.

 

In addition, we are, from time to time, party to litigation arising in the ordinary course of our business. Management does not believe that the outcome of these claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows based on the status of proceedings at this time.

 

ITEM 1A.RISK FACTORS

 

You should carefully consider the risks described in our annual report on Form 10-K for the fiscal year ended December 31, 2014, under the heading “Part I — Item 1A. Risk Factors”, together with all of the other information in this Quarterly Report on Form 10-Q. Our business, prospects, financial condition, or operating results could be harmed by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. The trading price of our common stock could decline due to any of these risks, and, as a result, you may lose all or part of your investment.

 

ITEM 5.OTHER INFORMATION

 

Our policy governing transactions in our securities by directors, officers and employees permits our officers, directors and certain other persons to enter into trading plans complying with Rule 10b5-1 under the Exchange Act. We have been advised that our Chief Executive Officer, David Mendels has entered into a trading plan in accordance with Rule 10b5-1 and our policy governing transactions in our securities. Generally, under these trading plans, the individual relinquishes control over the transactions once the trading plan is put into place. Accordingly, sales under this plan may occur at any time, including possibly before, simultaneously with, or immediately after significant events involving our company.

 

We anticipate that, as permitted by Rule 10b5-1 and our policy governing transactions in our securities, some or all of our officers, directors and employees may establish trading plans in the future. We intend to disclose the names of executive officers and directors who establish a trading plan in compliance with Rule 10b5-1 and the requirements of our policy governing transactions in our securities in our future quarterly and annual reports on Form 10-Q and 10-K filed with the Securities and Exchange Commission. However, we undertake no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan.

 

ITEM 6.EXHIBITS

 

Exhibits    
  3.1 (1)   Eleventh Amended and Restated Certificate of Incorporation.
  3.2 (2)   Amended and Restated By-Laws.
  4.1 (3)   Form of Common Stock certificate of the Registrant.
 31.1^   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 31.2^   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 32.1^   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document.
101.SCH   XBRL Taxonomy Extension Schema Document.
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.

 

(1) Filed as Exhibit 3.2 to Amendment No. 5 to Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012, and incorporated herein by reference.
(2) Filed as Exhibit 3.3 to Amendment No. 5 to Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012, and incorporated herein by reference.
(3) Filed as Exhibit 4.1 to Amendment No. 5 to Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012, and incorporated herein by reference.
^ Furnished herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    BRIGHTCOVE INC.
    (Registrant)
     
Date: October 29, 2015   By:
      /s/ David Mendels
       
      David Mendels
      Chief Executive Officer
      (Principal Executive Officer)
       
Date: October 29, 2015   By:
      /s/ Kevin R. Rhodes
       
      Kevin R. Rhodes
      Chief Financial Officer
      (Principal Financial Officer)

 

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