Quarterly Report


Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2017

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  ☒    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  ☒    No  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☒

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

As of July 21, 2017 there were 34,345,126 shares of the registrant’s common stock, $0.001 par value per share, outstanding.

 

 

 


Table of Contents

BRIGHTCOVE INC.

Table of Contents

 

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

  

Condensed Consolidated Balance Sheets as of June  30, 2017 and December 31, 2016

     3  

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016

     4  

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2017 and 2016

     5  

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016

     6  

Notes to Condensed Consolidated Financial Statements

     7  

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     13  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     29  

Item 4. Controls and Procedures

     30  

PART II. OTHER INFORMATION

     31  

Item 1. Legal Proceedings

     31  

Item 1A. Risk Factors

     31  

Item 5. Other Information

     31  

Item 6. Exhibits

     32  

Signatures

     33  

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Brightcove Inc.

Condensed Consolidated Balance Sheets

(unaudited)

 

     June 30, 2017     December 31, 2016  
    

(in thousands, except share

and per share data)

 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 28,351     $ 36,813  

Accounts receivable, net of allowance of $103 and $154 at June 30, 2017 and December 31, 2016, respectively

     23,153       21,575  

Prepaid expenses

     4,691       3,729  

Other current assets

     2,826       2,168  
  

 

 

   

 

 

 

Total current assets

     59,021       64,285  

Property and equipment, net

     9,065       9,264  

Intangible assets, net

     9,585       10,970  

Goodwill

     50,776       50,776  

Deferred tax asset

     135       121  

Other assets

     920       1,008  
  

 

 

   

 

 

 

Total assets

   $ 129,502     $ 136,424  
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 8,467     $ 5,327  

Accrued expenses

     13,538       15,705  

Capital lease liability

     404       489  

Equipment financing

     181       307  

Deferred revenue

     36,088       34,665  
  

 

 

   

 

 

 

Total current liabilities

     58,678       56,493  

Deferred revenue, net of current portion

     31       91  

Other liabilities

     1,378       1,644  
  

 

 

   

 

 

 

Total liabilities

     60,087       58,228  

Commitments and contingencies (Note 9)

    

Stockholders’ equity:

    

Undesignated preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued

     —         —    

Common stock, $0.001 par value; 100,000,000 shares authorized; 34,480,126 and 34,143,148 shares issued at June 30, 2017 and December 31, 2016, respectively

     34       34  

Additional paid-in capital

     234,698       230,788  

Treasury stock, at cost; 135,000 shares

     (871     (871

Accumulated other comprehensive loss

     (915     (1,172

Accumulated deficit

     (163,531     (150,583
  

 

 

   

 

 

 

Total stockholders’ equity

     69,415       78,196  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 129,502     $ 136,424  
  

 

 

   

 

 

 

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

 

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Table of Contents

Brightcove Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2017     2016     2017     2016  
     (in thousands, except share and per share data)  

Revenue:

        

Subscription and support revenue

   $ 35,528     $ 35,080     $ 69,770     $ 69,733  

Professional services and other revenue

     3,225       1,880       6,555       3,519  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     38,753       36,960       76,325       73,252  

Cost of revenue: (1) (2)

        

Cost of subscription and support revenue

     13,102       11,675       25,256       23,350  

Cost of professional services and other revenue

     3,476       1,778       6,540       3,367  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     16,578       13,453       31,796       26,717  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     22,175       23,507       44,529       46,535  

Operating expenses: (1) (2)

        

Research and development

     8,279       7,255       16,473       14,681  

Sales and marketing

     15,904       13,976       29,805       26,511  

General and administrative

     5,876       4,487       11,267       9,064  

Merger-related

     —         —         —         21  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     30,059       25,718       57,545       50,277  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (7,884     (2,211     (13,016     (3,742

Other income (expense), net

     314       (91     452       (122
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (7,570     (2,302     (12,564     (3,864

Provision for income taxes

     108       96       187       141  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (7,678   $ (2,398   $ (12,751   $ (4,005
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted

   $ (0.22   $ (0.07   $ (0.37   $ (0.12
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of common shares used in computing net loss per share

     34,247,058       32,794,274       34,152,109       32,759,561  
  

 

 

   

 

 

   

 

 

   

 

 

 

(1) Stock-based compensation included in above line items:

        

Cost of subscription and support revenue

   $ 89     $ 68     $ 191     $ 110  

Cost of professional services and other revenue

     59       32       119       89  

Research and development

     341       181       748       570  

Sales and marketing

     517       497       1,263       979  

General and administrative

     680       347       1,155       836  

(2) Amortization of acquired intangible assets included in above line items:

        

Cost of subscription and support revenue

   $ 508     $ 508     $ 1,015     $ 1,016  

Research and development

     —         32       11       63  

Sales and marketing

     166       244       359       470  

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

 

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Brightcove Inc.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
             2017                     2016                     2017                     2016          
     (in thousands)     (in thousands)  

Net loss

   $ (7,678   $ (2,398   $ (12,751   $ (4,005

Other comprehensive income:

        

Foreign currency translation adjustments

     77       (90     257       (231
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (7,601   $ (2,488   $ (12,494   $ (4,236
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Brightcove Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

     Six Months Ended June 30,  
             2017                     2016          
     (in thousands)  

Operating activities

    

Net loss

   $ (12,751   $ (4,005

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

    

Depreciation and amortization

     3,665       3,985  

Stock-based compensation

     3,476       2,584  

Provision for reserves on accounts receivable

     96       165  

Changes in assets and liabilities:

    

Accounts receivable

     (1,606     2,364  

Prepaid expenses and other current assets

     (2,421     (1,647

Other assets

     92       (231

Accounts payable

     3,959       881  

Accrued expenses

     (2,457     (1,067

Deferred revenue

     1,233       1,980  
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (6,714     5,009  

Investing activities

    

Cash paid for purchase of intangible asset

     —         (300

Purchases of property and equipment, net of returns

     (650     (1,026

Capitalized internal-use software costs

     (1,149     (1,677
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,799     (3,003

Financing activities

    

Proceeds from exercise of stock options

     277       188  

Payments of withholding tax on RSU vesting

     (118     (108

Proceeds from equipment financing

     —         604  

Payments on equipment financing

     (152     (122

Payments under capital lease obligation

     (278     (461
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (271     101  

Effect of exchange rate changes on cash and cash equivalents

     322       450  
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (8,462     2,557  

Cash and cash equivalents at beginning of period

     36,813       27,637  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 28,351     $ 30,194  
  

 

 

   

 

 

 

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

 

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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 June 30, 2017, 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, 2016.

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, 2016 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 six months ended June 30, 2017 and 2016. 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 June 30, 2017, 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, 2016, have not changed, except for the adoption of Accounting Standards Update (ASU) No. 2016-09, Compensation – Stock Compensation , which is discussed further in Note 7.

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. 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 June 30, 2017 and December 31, 2016, no individual customer accounted for 10% or more of net accounts receivable. For the three and six months ended June 30, 2017 and 2016, no individual customer accounted for 10% or more of total revenue.

 

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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.

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. Management determines the appropriate classification of investments at the time of purchase, and re-evaluates such determination at each balance sheet date. The Company did not have any short-term or long-term investments at June 30, 2017 or December 31, 2016.

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 June 30, 2017 consist of the following:

 

     June 30, 2017  

Description

   Contracted
Maturity
     Amortized Cost      Fair Market
Value
     Balance Per
Balance Sheet
 

Cash

     Demand      $ 15,434      $ 15,434      $ 15,434  

Money market funds

     Demand        12,917        12,917        12,917  
     

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

      $ 28,351      $ 28,351      $ 28,351  
     

 

 

    

 

 

    

 

 

 

Cash and cash equivalents as of December 31, 2016 consist of the following:

 

     December 31, 2016  

Description

   Contracted
Maturity
     Amortized Cost      Fair Market
Value
     Balance Per
Balance Sheet
 

Cash

     Demand      $ 23,942      $ 23,942      $ 23,942  

Money market funds

     Demand        12,871        12,871        12,871  
     

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

      $ 36,813      $ 36,813      $ 36,813  
     

 

 

    

 

 

    

 

 

 

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
June 30,
     Six Months Ended
June 30,
 
         2017              2016              2017              2016      

Options outstanding

     4,117        4,525        4,147        4,554  

Restricted stock units outstanding

     1,857        1,552        1,860        1,530  

Warrants

     —          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 June 30, 2017 and December 31, 2016:

 

     June 30, 2017  
     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

   $ 12,917      $ —        $ —        $ 12,917  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 12,917      $ —        $ —        $ 12,917  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     December 31, 2016  
     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

   $ 12,871      $ —        $ —        $ 12,871  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 12,871      $ —        $ —        $ 12,871  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30,     Six Months Ended June 30,  
             2017                     2016                     2017                     2016          

Expected life in years

     5.6       5.7       6.0       6.0  

Risk-free interest rate

     1.80     1.44     2.04     1.53

Volatility

     42     45     43     45

Dividend yield

     —         —         —         —    

Weighted-average fair value of stock options granted

   $ 2.45     $ 2.64     $ 3.13     $ 2.66  

The Company recorded stock-based compensation expense of $1,686 and $1,125 for the three months ended June 30, 2017 and 2016, respectively, and $3,476 and $2,584 for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, there was $17,030 of unrecognized stock-based compensation expense related to stock-based awards that is expected to be recognized over a weighted-average period of 2.21 years.

On January 1, 2017, the Company adopted ASU No. 2016-09. ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share based payments, including income tax consequences, classification of awards as either equity or liabilities, an option to make a policy election to recognize gross share based compensation expense with actual forfeitures recognized as they occur as well as certain classification changes on the statement of cash flows. In connection with the adoption of this standard, the Company changed its accounting policy to record actual forfeitures as they occur, rather than estimating forfeitures by applying a forfeiture rate. As this policy change was applied prospectively, prior periods have not been adjusted. The Company recorded a cumulative effect adjustment in the three months ended March 31, 2017, which increased accumulated deficit and additional paid-in-capital by $197.

The following is a summary of the status of the Company’s stock options as of June 30, 2017 and the stock option activity during the six months ended June 30, 2017.

 

     Number of
Shares
     Weighted-Average
Exercise Price
     Weighted-Average
Remaining
Contractual
Term (In Years)
     Aggregate
Intrinsic
Value (1)
 

Outstanding at December 31, 2016

     4,150,584      $ 7.17        

Granted

     221,452        7.15        

Exercised

     (174,894      1.59         $ 1,095  

Canceled

     (145,090      8.22        
  

 

 

          

Outstanding at June 30, 2017

     4,052,052      $ 7.37        6.92      $ 2,388  
  

 

 

          

Exercisable at June 30, 2017

     2,020,833      $ 7.12        5.40      $ 2,144  
  

 

 

          

 

(1) The aggregate intrinsic value was calculated based on the positive difference between the fair value of the Company’s common stock on June 30, 2017 of $6.20 per share, or the date of exercise, as appropriate, and the exercise price of the underlying options.

 

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The following table summarizes the restricted stock unit activity during the six months ended June 30, 2017:

 

     Shares      Weighted
Average Grant
Date Fair Value
 

Unvested by December 31, 2016

     1,902,577      $ 7.84  

Granted

     212,395        7.58  

Vested and issued

     (162,084      6.90  

Canceled

     (140,041      7.84  
  

 

 

    

 

 

 

Unvested by June 30, 2017

     1,812,847      $ 7.86  
  

 

 

    

 

 

 

8. Income Taxes

For the three months ended June 30, 2017 and 2016, the Company recorded income tax expense of $108 and $96, respectively. For the six months ended June 30, 2017 and 2016, the Company recorded income tax expense of $187 and $141, respectively. The income tax expense relates principally to the Company’s foreign operations.

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 Accounting Standards Codification (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 June 30, 2017 and December 31, 2016. Based on the level of historical income in Japan and future projections, the Company believes it is probable it will realize the benefits of its future deductible differences. As such, the Company has not recorded a valuation allowance against its net deferred tax assets in Japan as of June 30, 2017 and December 31, 2016. The Company’s income tax return reporting periods since December 31, 2012 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

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 July 8, 2016, a complaint was filed by Brand Technologies, Inc. naming the Company, along with several others, as a defendant in a case alleging copyright infringement, violations of the Lanham Act, unfair competition and related claims (Brand Technologies, Inc. v. Cox Enterprises, Inc., et al., United States District Court for the Central District of California). The complaint, subsequently amended twice by the plaintiff, alleges that Cox Media Group (CMG) engaged in the unlicensed provision of copyrighted videos owned by the plaintiff on CMG websites by using our technology. The amended complaint seeks actual and statutory damages, costs and injunctive relief. The defendants filed two separate motions to dismiss, both of which were granted and resulted in a narrowing of the claims in the amended complaint. The Company answered the amended complaint on April 21, 2017. On May 22, 2017, the plaintiff dismissed the case with prejudice; Brightcove did not incur a loss as a result of this matter.

On May 22, 2017, a lawsuit was filed against Brightcove and two individuals by Ooyala, Inc. (“Ooyala”) and Ooyala Mexico S. de R.L. de C.V. (“Ooyala Mexico”). The lawsuit, which was filed in the United States District Court for the District of Massachusetts, concerns allegations that the two individuals, who are former employees of Ooyala Mexico, misappropriated customer information and other trade secrets and used that information in working for Brightcove. The complaint was amended on June 1, 2017 to remove claims against the two former employees of Ooyala Mexico. The remaining claims against Brightcove are for violation of the Defend Trade Secrets Act of 2016 (18 U.S.C. §1836), violation of the Massachusetts trade secret statute (M.G.L. c. 93, §42), violation of Massachusetts Chapter 93A (M.G.L. c. 93A, §11), and tortious interference with advantageous business relationships. Ooyala and Ooyala Mexico also filed a motion for preliminary injunction (amended at the same time the complaint was amended), seeking to enjoin Brightcove and the two individuals from using any of the allegedly misappropriated information or communicating with customers whose information was taken, and seeking the return of any information that was taken. On June 16, 2017, Brightcove filed an opposition to the motion for preliminary injunction, and also moved to dismiss the lawsuit. 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 June 30, 2017, 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 November 19, 2015, the Company entered into an amended and restated loan and security agreement with a lender (the “Loan Agreement”) providing for up to a $20.0 million asset based line of credit (the “Line of Credit”). Under the Line of Credit, the Company can borrow up to $20.0 million. Borrowings under the Line of Credit are secured by substantially all of the Company’s assets, excluding our intellectual property. Outstanding amounts under the Line of Credit accrue interest at a rate equal to the prime rate or the LIBOR rate plus 2.5%. Under the Loan Agreement, the Company must comply with certain financial covenants, including maintaining a minimum asset coverage ratio. If the outstanding principal during any month is at least $15.0 million, the Company must also maintain a minimum net income threshold based on non-GAAP operating measures. Failure to comply with these covenants, or the occurrence of an event of default, could permit the lender 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. The Company was in compliance with all covenants under the Line of Credit as of June 30, 2017. As the Company has not drawn on the Line of Credit, there are no amounts outstanding as of June 30, 2017.

On December 31, 2015, the Company entered into an equipment financing agreement with a lender (the “December 2015 Equipment Financing Agreement”) to finance the purchase of $604 in computer equipment. In February 2016, the Company drew down $604 under the December 2015 Equipment Financing Agreement, and the liability was recorded at fair value using a market interest rate. The Company is repaying its obligation over a two year period through January 2018, and the amount outstanding was $181 as of June 30, 2017.

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
June 30,
     Six Months Ended
June 30,
 
     2017      2016      2017      2016  

Revenue:

           

North America

   $ 22,080      $ 22,627      $ 45,479      $ 45,667  

Europe

     6,113        6,354        12,080        12,431  

Japan

     4,518        3,738        8,287        7,204  

Asia Pacific

     5,906        3,960        10,127        7,359  

Other

     136        281        352        591  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 38,753      $ 36,960      $ 76,325      $ 73,252  
  

 

 

    

 

 

    

 

 

    

 

 

 

North America is comprised of revenue from the United States, Canada and Mexico. Revenue from customers located in the United States was $20,585 and $21,160 during the three months ended June 30, 2017 and 2016, respectively, and $42,613 and $30,430 during the six months ended June 30, 2017 and 2016, respectively. Other than the United States and Japan, no other country contributed more than 10% of the Company’s total revenue during the three and six months ended June 30, 2017 and 2016.

As of June 30, 2017 and December 31, 2016, property and equipment at locations outside the U.S. was not material.

12. Recently Issued and Adopted Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09,  Revenue from Contracts with Customers (Topic 606)  (“ASU 2014-09”), which modifies how all entities recognize revenue, and consolidates into one ASC Topic (ASC Topic 606,  Revenue from Contracts with Customers ) the current guidance found in ASC Topic 605 ,  and various other revenue accounting standards for specialized transactions and industries. ASU 2014-09 outlines a comprehensive five-step revenue recognition model based on the principle 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 or services. ASU 2014-09 may be applied using either a full retrospective approach, under which all years included in the financial statements will be presented under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the entity at the date of adoption.

 

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In August 2015, the FASB issued ASU 2015-14,  Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date , which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company has developed an implementation plan to adopt this new guidance. As part of this plan, the Company is currently assessing the impact of the new guidance on its results of operations. Based on the Company’s procedures performed to date, nothing has come to its attention that would indicate that the adoption of ASU 2014-09 will have a material impact on its revenue recognition on cloud offerings; however, further analysis is required and the Company will continue to evaluate this assessment throughout 2017. While the Company is still evaluating the impact that this guidance will have on its financial statements and related disclosures, the Company’s preliminary assessment is that there will be an impact relating to the accounting for costs to acquire a contract. Under the standard, the Company will be required to capitalize certain costs, primarily commission expense to sales representatives, on its consolidated balance sheet and amortize such costs over the period of performance for the underlying customer contracts. The Company is still evaluating the impact of capitalizing costs to execute a contract.

The Company intends to adopt ASU 2014-09 on January 1, 2018. The Company has elected to apply the modified retrospective method of adoption.

In February 2016, the FASB issued ASU 2016-02,  Leases (Topic 842), Amendments to the FASB Accounting Standards Codification , which replaces the existing guidance for leases. ASU 2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, lease arrangements exceeding a twelve month term must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. This guidance is effective for annual and interim periods beginning after December 15, 2018 and requires retrospective application. The Company is currently assessing the impact that adopting ASU 2016-02 will have on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , which reduces the diversity in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for public companies for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The guidance requires application using a retrospective transition method. The adoption of ASU 2016-15 is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash , which requires an entity to reconcile and explain the period-over-period change in total cash, cash equivalents and restricted cash within its statement of cash flows. ASU 2016-18 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments in ASU 2016-18 using a full retrospective approach. The adoption of ASU 2016-18 is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

 

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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, 2016.

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 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, 2016 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 Perform, or Perform, is a cloud-based service for creating and managing video player experiences. Brightcove Video Marketing Suite, or Video Marketing Suite, is a comprehensive suite of video technologies designed to address the needs of marketers to drive awareness, engagement and conversion. Brightcove Lift, or Lift, is a solution designed to defeat ad blockers, optimize ad delivery and deliver a premium TV-like viewing experience across connected platforms. Brightcove OTT Flow, powered by Accedo, or OTT Flow, is a service for media companies and content owners to rapidly deploy high-quality, direct-to-consumer, live and on-demand video services across platforms. Brightcove Enterprise Video Suite, or Enterprise Video Suite, is an enterprise-class platform for internal communications, employee training, live streaming, marketing and ecommerce videos.

Our philosophy for the next few years will continue to be to invest in our product strategy and development, sales, and go-to-market activities to support our long-term revenue growth. 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.

 

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As of June 30, 2017, we had 513 employees and 4,304 customers, of which 2,225 used our volume offerings and 2,079 used our premium offerings. As of June 30, 2016, we had 450 employees and 4,774 customers, of which 2,848 used our volume offerings and 1,926 used our premium offerings.

We generate revenue by offering our products to customers on a subscription-based, software as a service, or SaaS, model. Our revenue grew from $73.3 million in the six months ended June 30, 2016 to $76.3 million in the six months ended June 30, 2017, primarily related to an increase in revenue from professional services engagements. Our consolidated net loss was $12.8 million and $4.0 million for the six months ended June 30, 2017 and 2016, respectively. Included in consolidated net loss for the six months ended June 30, 2017 was stock-based compensation expense and amortization of acquired intangible assets of $3.5 million and $1.4 million, respectively. Included in consolidated net loss for the six months ended June 30, 2016 was stock-based compensation expense and amortization of acquired intangible assets of $2.6 million and $1.5 million, respectively.

For the six months ended June 30, 2017 and 2016, our revenue derived from customers located outside North America was 40% and 38%, respectively. We expect the percentage of total net revenue derived from outside North America to increase in future periods as we continue to expand our international operations.

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 at the end 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 (other than Zencoder customers on month-to-month contracts and pay-as-you-go contracts), our Once customers, our Perform customers, our Video Marketing Suite customers, our Lift customers, our OTT Flow customers and our Enterprise Video Suite customers. Our volume offerings include our Video Cloud Express customers and our Zencoder customers on month-to-month contracts and pay-as-you-go contracts.

As of June 30, 2017, we had 4,304 customers, of which 2,225 used our volume offerings and 2,079 used our premium offerings. As of June 30, 2016, we had 4,774 customers, of which 2,848 used our volume offerings and 1,926 used our premium offerings. During 2013, we shifted our go-to-market focus and growth strategy to expanding our premium customer base, as we believe our premium customers represent a greater opportunity for our solutions. Volume customers decreased since 2013 primarily due to our discontinuation of the promotional Video Cloud Express offering. As a result, we have experienced attrition of this base level offering without a corresponding addition of customers. We expect customers using our volume offerings to continue to decrease in 2017 as we continue to focus on the market for our premium solutions and adjust Video Cloud Express price levels.

 

  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. The recurring dollar retention rate decreased from 96% during the six months ended June 30, 2016 to 88% during the six months ended June 30, 2017. The decrease is primarily due to the loss of certain customers as well as a reduction in contract value, based on certain commodity elements being repriced within our media market.

 

  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. We began selling our Starter edition to customers in the second quarter of 2016. We consider Starter to be a premium offering and thus include Starter customers as premium customers. Our Starter edition has a price point of $199 or $499 per month, and as of the first quarter of 2017, sales of our Starter edition have reached such a level that we have determined that the overall average annual subscription revenue per premium customer is a more meaningful metric if we exclude revenue from Starter edition customers. As such, we now disclose the average annual subscription revenue per premium customer separately for Starter edition customers and all other premium customers.

 

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

 

     Six Months Ended
June 30,
 
     2017     2016  

Customers (at period end)

    

Volume

     2,225       2,848  

Premium

     2,079       1,926  
  

 

 

   

 

 

 

Total customers (at period end)

     4,304       4,774  
  

 

 

   

 

 

 

Recurring dollar retention rate

     88     96

Average annual subscription revenue per premium customer, excluding Starter edition customers (in thousands)

   $ 68.9     $ 69.9  

Average annual subscription revenue per premium customer for Starter edition customers only (in thousands)

   $ 5.1     $ 2.6  

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 and IP-restricted players. 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 (which includes storage). We also offer gold support or platinum support to our premium customers for an additional fee, which includes extended phone support. The pricing for our premium editions is based on the value of our software, as well as 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. We believe that our bundled pricing approach has made it easier for our customers to purchase all of the elements required to manage, store and deliver their video assets to their viewers. Pricing for some of the non-software elements of our products, however—such as bandwidth and managed content (primarily storage)—has been subject to moderate but consistent pricing pressure as a result of competition among bandwidth and cloud infrastructure providers. This pricing pressure has not historically had a meaningful impact on our results of operations. During the six months ended June 30, 2017, we experienced an unexpected, significant increase in the impact of the price competition among bandwidth and cloud infrastructure providers in the markets for these increasingly commoditized non-software services. As a result, our recurring dollar retention rate decreased in the six months ended June 30, 2017. We have taken steps to reduce the portion of our revenue that is subject to such pricing pressure by bringing new solutions, such as Dynamic Delivery (formerly known as Bolt), to market. We believe that these new solutions increase the value of our software platform to customers and allow us to retain a larger portion of the customers’ total contract value while reducing the revenue related to non-software elements. However, as a result of the impact of the commoditization of the non-software elements, we now expect that our subscription revenue growth rate will be impacted through the first quarter of 2018.

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 discontinued 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.

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. Zencoder customers are considered premium customers other than Zencoder customers on month-to-month contracts or pay-as-you-go contracts, which 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.

 

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Perform is offered to customers on a subscription basis. Customer arrangements are typically one-year contracts, which include a subscription to Perform, basic support and a pre-determined amount of video streams. We also offer gold support or platinum support to our Perform customers for an additional fee, which includes extended phone support. 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 and Enterprise Video Suite are offered to customers on a subscription basis in Starter, Pro and Enterprise editions. The Pro and Enterprise customer arrangements are typically one-year contracts, which typically include a subscription to Video Cloud, Gallery, Brightcove Social (for Video Marketing Suite customers) or Brightcove Live (for Enterprise Video Suite customers), basic support and a pre-determined amount of video streams or plays, bandwidth and managed content or videos. We also generally offer gold support or platinum support to these customers for an additional fee, which includes extended phone support. The pricing for our Pro and Enterprise editions is based on the number of users, accounts and usage, which is comprised of video streams or plays, bandwidth and managed content or videos. 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 Starter edition provides customers with the same basic functionality that is offered in our Pro and Enterprise editions but has been designed for customers who have lower usage requirements and do not typically seek advanced features and functionality. Customers who purchase the Starter edition may enter into one-year agreements or month-to-month agreements. Starter customers with month-to-month agreements are generally billed on a monthly basis and pay via a credit card.

Lift is offered to customers on a subscription basis. Customer arrangements are typically one year contracts, which include a subscription to Lift, basic support and a pre-determined amount of video streams. We also offer gold support or platinum support to our Lift customers for an additional fee, which includes extended phone support. The pricing for Lift 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.

OTT Flow 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. Customer arrangements are typically one-year contracts.

All Once, Perform, Video Marketing Suite, Enterprise Video Suite, Lift and OTT Flow customers are considered premium customers.

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.

Cost of revenue increased in absolute dollars from the first six months of 2016 to the first six months of 2017. 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 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 acquisition of substantially all of the assets of Unicorn Media, Inc. and certain of its subsidiaries, or Unicorn, as well as costs associated with the retention of key employees of Unicorn. Approximately $1.5 million was required to be paid to retain certain key employees from the Unicorn acquisition. The period in which these services were performed varies by employee. Given that the retention amount was related to a future service requirement, the related expense was recorded as merger-related compensation expense in the consolidated statements of operations over the expected service period.

Other Expense

Other expense consists primarily of interest income earned on our cash, cash equivalents, foreign exchange gains and losses and interest expense payable on our debt.

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 June 30, 2017, with the exception of the deferred tax assets related to Brightcove KK.

 

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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 June 30, 2017 and 2016, we recorded $1.7 million and $1.1 million, respectively, of stock-based compensation expense. For the six months ended June 30, 2017 and 2016, we recorded $3.5 million and $2.6 million, respectively, of stock-based compensation expense. We expect stock-based compensation expense to increase in absolute dollars in future periods.

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 June 30, 2017 and 2016, 47% and 43%, respectively, of our revenue was generated in locations outside the United States. For the six months ended June 30, 2017 and 2016, 44% and 42%, respectively, of our revenue was generated in locations outside the United States. During the three months ended June 30, 2017 and 2016, 29% and 28%, respectively, of our revenue was in currencies other than the U.S. dollar, as were some of the associated expenses. During each of the six months ended June 30, 2017 and 2016, 28% 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 revenue 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, 2016.

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, 2016, which we filed with the Securities and Exchange Commission on February 21, 2017.

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, 2016.

 

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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, 2016.

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2017      2016      2017      2016  
     (in thousands, except share and per share data)  

Revenue:

           

Subscription and support revenue

   $ 35,528      $ 35,080      $ 69,770      $ 69,733  

Professional services and other revenue

     3,225        1,880        6,555        3,519  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     38,753        36,960        76,325        73,252  

Cost of revenue:

           

Cost of subscription and support revenue

     13,102        11,675        25,256        23,350  

Cost of professional services and other revenue

     3,476        1,778        6,540        3,367  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenue

     16,578        13,453        31,796        26,717  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     22,175        23,507        44,529        46,535  

Operating expenses:

           

Research and development

     8,279        7,255        16,473        14,681  

Sales and marketing

     15,904        13,976        29,805        26,511  

General and administrative

     5,876        4,487        11,267        9,064  

Merger-related

     —          —          —          21  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     30,059        25,718        57,545        50,277  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations

     (7,884      (2,211      (13,016      (3,742

Other income (expense), net

     314        (91      452        (122
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss before income taxes

     (7,570      (2,302      (12,564      (3,864

Provision for income taxes

     108        96        187        141  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

   $ (7,678    $ (2,398    $ (12,751    $ (4,005
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss per share — basic and diluted

   $ (0.22    $ (0.07    $ (0.37    $ (0.12
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average number of common shares used in computing net loss per share

     34,247,058        32,794,274        34,152,109        32,759,561  
  

 

 

    

 

 

    

 

 

    

 

 

 

Overview of Results of Operations for the Three Months Ended June 30, 2017 and 2016

Total revenue increased by $1.8 million, or 5%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016 due to an increase in professional services and other revenue of 72%, or $1.3 million, and an increase in subscription and support revenue of 1%, or $448,000. The increase in professional services revenue was primarily related to the size and number of professional services engagements during the three months ended June 30, 2017 compared to the corresponding quarter in the prior year. The increase in subscription and support revenue was primarily related to the continued growth of our customer base for our premium offerings including sales to both new and existing customers. The increases are offset by the loss of a major customer, during the first quarter of 2017, and a $623,000 reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the three months ended June 30, 2016. In addition, our revenue from premium offerings grew by $2.2 million, or 6%, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016. 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 decreased by $1.3 million, or 6%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily due to increases in the cost of subscription and support revenue and the cost of professional services revenue without corresponding increases in revenue. Cost of subscription and support revenue increased due to additional costs incurred in order to support the launch of a major customer. Cost of professional services revenue increased due to a higher level of contractor costs during the three months ended June 30, 2017 compared to that of the three months ended June 30, 2016. Our ability to improve our overall gross profit will depend primarily on our ability to continue controlling our costs of delivery. Loss from operations was

 

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$7.9 million in the three months ended June 30, 2017 compared to $2.2 million in the three months ended June 30, 2016. Loss from operations in the three months ended June 30, 2017 included stock-based compensation expense and amortization of acquired intangible assets of $1.7 million and $674,000, respectively. Loss from operations in the three months ended June 30, 2016 included stock-based compensation expense and amortization of acquired intangible assets of $1.1 million and $784,000, respectively. In future periods, 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 June 30, 2017, we had $28.4 million of unrestricted cash and cash equivalents, a decrease of $8.4 million from $36.8 million at December 31, 2016, due primarily to $6.7 million of cash used in operating activities, $1.1 million in capitalized internal-use software costs, and $650,000 in capital expenditures. There were also cash outflows of $278,000 in payments under capital lease obligations, $152,000 for payments on equipment financing and $118,000 in payments of withholding tax on RSU vesting.

Revenue

 

     Three Months Ended June 30,              
     2017     2016     Change  

Revenue by Product Line

   Amount      Percentage of
Revenue
    Amount      Percentage of
Revenue
    Amount     %  
     (in thousands, except percentages)  

Premium

   $ 37,295        96   $ 35,073        95   $ 2,222       6

Volume

     1,458        4       1,887        5       (429     (23
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 38,753        100   $ 36,960        100   $ 1,793       5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

During the three months ended June 30, 2017, revenue increased by $1.8 million, or 5%, compared to the three months ended June 30, 2016, primarily due to an increase in revenue from our premium offerings, which consists of subscription and support revenue, as well as professional services and other revenue. The increase in premium revenue of $2.2 million, or 6%, is partially the result of an 8% increase in the number of premium customers from 1,926 at June 30, 2016 to 2,079 at June 30, 2017, in addition to a $1.3 million, or 72%, increase in professional services revenue. The increases are offset in part by the loss of a major customer and a $623,000 reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the three months ended June 30, 2016. In the three months ended June 30, 2017, volume revenue decreased by $429,000, or 23%, compared to the three months ended June 30, 2016, as we continue to focus on the market for our premium solutions.

 

     Three Months Ended June 30,               
     2017     2016     Change  

Revenue by Type

   Amount      Percentage of
Revenue
    Amount      Percentage of
Revenue
    Amount      %  
     (in thousands, except percentages)  

Subscription and support

   $ 35,528        92   $ 35,080        95   $ 448        1

Professional services and other

     3,225        8       1,880        5       1,345        72  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 38,753        100   $ 36,960        100   $ 1,793        5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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In the three months ended June 30, 2017, subscription and support revenue increased by $448,000, or 1%, compared to the three months ended June 30, 2016. 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. These increases are offset in part by the loss of a major customer and a $623,000 reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the three months ended June 30, 2017. In addition, professional services and other revenue increased by $1.3 million, or 72%, primarily related to the size and number of professional services engagements during the three months ended June 30, 2017 compared to the corresponding quarter in the prior year. During the three months ended June 30, 2017, the increase in professional services revenue was primarily related to an increase in OTT application development projects. 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 June 30,              
     2017     2016     Change  

Revenue by Geography

   Amount      Percentage of
Revenue
    Amount      Percentage of
Revenue
    Amount     %  
     (in thousands, except percentages)  

North America

   $ 22,080        57   $ 22,627        61   $ (547     (2 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Europe

     6,113        16       6,354        17       (241     (4

Japan

     4,518        12       3,738        10       780       21  

Asia Pacific

     5,906        15       3,960        11       1,946       49  

Other

     136        0       281        1       (145     (52
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

International subtotal

     16,673        43       14,333        39       2,340       16  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 38,753        100   $ 36,960        100   $ 1,793       5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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 June 30, 2017, total revenue for North America decreased $547,000, or 2%, compared to the three months ended June 30, 2016. The reduction in revenue for North America is primarily related to the loss of a major customer in the first quarter of 2017 partially offset by increases in sales to new and existing customers. In the three months ended June 30, 2017, total revenue outside of North America increased $2.3 million, or 16%, compared to the three months ended June 30, 2016. The increase in revenue from international regions is primarily related to an increase in revenue in Asia Pacific and Japan. The increase in revenue from Asia Pacific and Japan is primarily related to an increase in revenue from professional services engagements related to OTT application development. These increases were partially offset by a $623,000 reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the three months ended June 30, 2016.

Cost of Revenue

 

     Three Months Ended June 30,               
     2017     2016     Change  

Cost of Revenue

   Amount      Percentage of
Related
Revenue
    Amount      Percentage of
Related
Revenue
    Amount      %  
     (in thousands, except percentages)  

Subscription and support

   $ 13,102        37   $ 11,675        33   $ 1,427        12

Professional services and other

     3,476        108       1,778        95       1,698        96  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 16,578        43   $ 13,453        36   $ 3,125        23
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

In the three months ended June 30, 2017, cost of subscription and support revenue increased $1.4 million, or 12%, compared to the three months ended June 30, 2016. The increase resulted primarily from increases in content delivery network, depreciation of capitalized software and maintenance expenses of $949,000, $394,000, and $148,000, respectively. There were also increases in partner commissions and contractor expenses of $113,000 and $103,000 respectively. These increases were partially offset by a decrease in depreciation expense of $291,000.

In the three months ended June 30, 2017, cost of professional services and other revenue increased $1.7 million, or 96%, compared to the three months ended June 30, 2016. This increase corresponds to the increase in professional services revenue and resulted primarily from increases in contractor and employee-related expenses of $1.1 million and $375,000, respectively.

 

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Gross Profit

 

     Three Months Ended June 30,              
     2017     2016     Change  

Gross Profit

   Amount     Percentage of
Related
Revenue
    Amount      Percentage of
Related
Revenue
    Amount     %  
     (in thousands, except percentages)  

Subscription and support

   $ 22,426       63   $ 23,405        67   $ (979     (4 )% 

Professional services and other

     (251     (8     102        5       (353     (346
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 22,175       57   $ 23,507        64   $ (1,332     (6 )% 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

The overall gross profit percentage was 57% and 64% for the three months ended June 30, 2017 and 2016, respectively. The decrease is primarily due to a shift in the mix of revenue as there was an increase in revenue from professional services engagements, which has a lower gross margin than subscription and support revenue. Subscription and support gross profit decreased $979,000, or 4%, compared to the three months ended June 30, 2016 due to additional costs incurred in order to support the launch of a major customer. Professional services and other gross profit decreased $353,000, or 346% compared to the three months ended June 30, 2016 due to the increase in mix of contractor expenses versus internal expenses in order to support various professional services projects. 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 June 30,               
     2017     2016     Change  

Operating Expenses

   Amount      Percentage of
Revenue
    Amount      Percentage of
Revenue
    Amount      %  
     (in thousands, except percentages)  

Research and development

   $ 8,279        21   $ 7,255        10   $ 1,024        14

Sales and marketing

     15,904        41       13,976        19       1,928        14  

General and administrative

     5,876        15       4,487        6       1,389        31  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 30,059        78   $ 25,718        35   $ 4,341        17
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Research and Development .  In the three months ended June 30, 2017, research and development expense increased by $1.0 million, or 14%, compared to the three months ended June 30, 2016 primarily due to increases in employee-related and stock-based compensation expenses of $947,000 and $160,000 respectively, offset by a decrease in recruiting and relocation expense of $116,000. In future periods, we expect that our research and development expense will 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 June 30, 2017, sales and marketing expense increased by $1.9 million, or 14%, compared to the three months ended June 30, 2016 primarily due to employee-related expense, marketing programs, and commission expense of $1.0 million, $575,000 and $261,000 respectively. There were also increases in computer maintenance and support and travel expenses of $123,000 and $114,000, respectively. 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 June 30, 2017, general and administrative expense increased by $1.4 million, or 31%, compared to the three months ended June 30, 2016 primarily due to increases in outside legal fees, stock-based compensation, and employee-related expenses of $455,000, $333,000 and $331,000 respectively. There were also increases in travel and contractor expenses of $109,000, and $104,000 respectively. These increases were offset by a decrease in bad debt expense of $202,000. In future periods, we expect general and administrative expense to remain relatively unchanged.

 

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Table of Contents

Other Income (Expense), Net

 

     Three Months Ended June 30,               
     2017     2016     Change  

Other Income (Expense)

   Amount     Percentage of
Revenue
    Amount     Percentage of
Revenue
    Amount      %  
     (in thousands, except percentages)  

Interest income, net

   $ 32       —     $ 24       —     $ 8        33

Interest expense

     (7     —         (17     —         10        (59

Other income (expense), net

     289       1       (98     —         387        (395
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 314       1     $ (91     —     $ 405        (445 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

In the three months ended June 30, 2017, interest income, net, increased by $8,000, or 33%, 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 June 30, 2017 is primarily comprised of interest paid on capital leases and an equipment financing. The increase in other income (expense), net during the three months ended June 30, 2017 was primarily due to foreign currency exchange gains recorded during the three months ended June 30, 2017 upon collection of foreign denominated accounts receivable, compared to losses recorded in the corresponding period of the prior year.

Provision for Income Taxes

 

     Three Months Ended June 30,               
     2017     2016     Change  

Provision for Income Taxes

   Amount      Percentage of
Revenue
    Amount      Percentage of
Revenue
    Amount      %  
     (in thousands, except percentages)  

Provision for income taxes

   $ 108        —     $ 96        —     $ 12        13
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

In the three months ended June 30, 2017 and 2016, the provision for income taxes was primarily comprised of income tax expenses related to foreign jurisdictions.

Overview of Results of Operations for the Six Months Ended June 30, 2017 and 2016

Total revenue increased by $3.1 million, or 4%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016 due to an increase in professional services and other revenue of 86%, or $3.0 million. The increase in professional services revenue was primarily related to the size and number of professional services engagements during the six months ended June 30, 2017, compared to the corresponding period in the prior year. Subscription and support revenue remained relatively unchanged during the six months ended June 30, 2017, compared to the corresponding period in the prior year. In addition, our revenue from premium offerings grew by $4.0 million, or 6%, in the six months ended June 30, 2017, compared to the six months ended June 30, 2016 primarily due to an 8% increase in the number of premium customers from 1,926 at June 30, 2016 to 2,079 at June 30, 2017. These increases are offset by a $1.4 million reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the six months ended June 30, 2016.

Our gross profit decreased by $2.0 million, or 4%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to increases in the cost of subscription and support revenue and the cost of professional services revenue without corresponding increases in revenue. Cost of subscription and support revenue increased due to additional costs incurred in order to support the launch of a major customer. Cost of professional services revenue increased due to a higher level of contractor costs during the six months ended June 30, 2017 compared to that of the six months ended June 30, 2016. Our ability to improve our overall gross profit will depend primarily on our ability to continue controlling our costs of delivery. Loss from operations was $13.0 million in the six months ended June 30, 2017 compared to $3.7 million in the six months ended June 30, 2016. Loss from operations in the six months ended June 30, 2017 included stock-based compensation expense and amortization of acquired intangible assets of $3.5 million and $1.4 million, respectively. Loss from operations in the six months ended June 30, 2016 included stock-based compensation expense and amortization of acquired intangible assets of $2.6 million and $1.5 million, respectively.

 

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Table of Contents

Revenue

 

     Six Months Ended June 30,              
     2017     2016     Change  

Revenue by Product Line

   Amount      Percentage of
Revenue
    Amount      Percentage of
Revenue
    Amount     %  
     (in thousands, except percentages)  

Premium

   $ 73,357        96   $ 69,381        95   $ 3,976       6

Volume

     2,968        4       3,871        5       (903     (23
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 76,325        100   $ 73,252        100   $ 3,073       4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

During the six months ended June 30, 2017, revenue increased by $3.1 million, or 4%, compared to the six months ended June 30, 2016, primarily due to an increase in revenue from our premium offerings, which consists of subscription and support revenue, as well as professional services and other revenue. The increase in premium revenue of $4.0 million, or 6%, is partially the result of an 8% increase in the number of premium customers from 1,926 at June 30, 2016 to 2,079 at June 30, 2017, in addition to a $3.0 million, or 86%, increase in professional services revenue. The increases are offset by the loss of a major customer and a $1.4 million reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the six months ended June 30, 2016. In the six months ended June 30, 2017, volume revenue decreased by $903,000, or 23%, compared to the six months ended June 30, 2016, as we continue to focus on the market for our premium solutions.

 

     Six Months Ended June 30,               
     2017     2016     Change  

Revenue by Type

   Amount      Percentage of
Revenue
    Amount      Percentage of
Revenue
    Amount      %  
     (in thousands, except percentages)  

Subscription and support

   $ 69,770        91   $ 69,733        95   $ 37        0

Professional services and other

     6,555        9       3,519        5       3,036        86  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 76,325        100   $ 73,252        100   $ 3,073        4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

In the six months ended June 30, 2017, subscription and support revenue was relatively unchanged compared to the six months ended June 30, 2016. In addition, professional services and other revenue increased by $3.0 million, or 86%, primarily related to the size and number of professional services engagements during the six months ended June 30, 2017 compared to the corresponding quarter in the prior year. During the six months ended June 30, 2017, the increase in professional services revenue was primarily related to an increase in OTT application development projects.

 

     Six Months Ended June 30,              
     2017     2016     Change  

Revenue by Geography

   Amount      Percentage of
Revenue
    Amount      Percentage of
Revenue
    Amount     %  
     (in thousands, except percentages)  

North America

   $ 45,479        60   $ 45,667        62   $ (188     0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Europe

     12,080        16       12,431        17       (351     (3

Japan

     8,287        11       7,204        10       1,083       15  

Asia Pacific

     10,127        13       7,359        10       2,768       38  

Other

     352        —         591        1       (239     (40
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

International subtotal

     30,846        40       27,585        38       3,261       12  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 76,325        100   $ 73,252        100   $ 3,073       4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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 six months ended June 30, 2017, total revenue for North America decreased $188,000, compared to the six months ended June 30, 2016. The reduction in revenue for North America is primarily related to the loss of a major customer in the first quarter of 2017 partially offset by increases in sales to new and existing customers. In the six months ended June 30, 2017, total revenue outside of North America increased $3.3 million, or 12%, compared to the six months ended June 30, 2016. The increase in revenue from international regions is primarily related to an increase in revenue in Asia Pacific and Japan. The increase in revenue from Asia Pacific and Japan is primarily related to an increase in revenue from professional services engagements related to OTT application development. These increases were partially offset by a $1.4 million reduction in revenue due to changes in foreign exchange rates compared to the exchange rates that were in effect during the six months ended June 30, 2016.

 

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Cost of Revenue

 

     Six Months Ended June 30,               
     2017     2016     Change  

Cost of Revenue

   Amount      Percentage of
Related
Revenue
    Amount      Percentage of
Related
Revenue
    Amount      %  
     (in thousands, except percentages)  

Subscription and support

   $ 25,256        36   $ 23,350        33   $ 1,906        8

Professional services and other

     6,540        100       3,367        96       3,173        94  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 31,796        42   $ 26,717        36   $ 5,079        19
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

In the six months ended June 30, 2017, cost of subscription and support revenue increased $1.9 million, or 8%, compared to the six months ended June 30, 2016. The increase resulted primarily from increases in content delivery network, amortization and network hosting expenses of $981,000, $501,000, and $355,000, respectively. There were also increases in partner commissions, maintenance and employee-related expenses of $270,000, $204,000, and $190,000, respectively. These increases were partially offset by decreases in depreciation and bandwidth expenses of $651,000 and $117,000 respectively.

In the six months ended June 30, 2017, cost of professional services and other revenue increased $3.2 million, or 94%, compared to the six months ended June 30, 2016. This increase corresponds to the increase in professional services revenue and resulted primarily from increases in contractor, employee-related and travel expenses of $2.1 million, $755,000, and $113,000 respectively.

Gross Profit

 

     Six Months Ended June 30,              
     2017     2016     Change  

Gross Profit

   Amount      Percentage of
Related
Revenue
    Amount      Percentage of
Related
Revenue
    Amount     %  
     (in thousands, except percentages)  

Subscription and support

   $ 44,514        64   $ 46,383        67   $ (1,869     (4 )% 

Professional services and other

     15        0       152        4       (137     (90
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 44,529        58   $ 46,535        64   $ (2,006     (4 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

The overall gross profit percentage was 58% and 64% for the six months ended June 30, 2017 and 2016, respectively. The decrease is primarily due to a shift in the mix of revenue as there was an increase in revenue from professional services engagements, which has a lower gross margin than subscription and support revenue. Subscription and support gross profit decreased $1.9 million, or 4%, compared to the six months ended June 30, 2016 due to additional costs incurred in order to support the launch of a major customer. In addition, professional services and other gross profit decreased $137,000, or 90% compared to the six months ended June 30, 2016 due to the increase in mix of contractor expenses versus internal expenses in order to support various professional services projects.

Operating Expenses

 

     Six Months Ended June 30,              
     2017     2016     Change  

Operating Expenses

   Amount      Percentage of
Revenue
    Amount      Percentage of
Revenue
    Amount     %  
     (in thousands, except percentages)  

Research and development

   $ 16,473        22   $ 14,681        20   $ 1,792       12

Sales and marketing

     29,805        39       26,511        36       3,294       12  

General and administrative

     11,267        15       9,064        12       2,203       24  

Merger-related

     —          —         21        —         (21     (100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 57,545        75   $ 50,277        69   $ 7,268       14
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Research and Development . In the six months ended June 30, 2017, research and development expense increased by $1.8 million, or 12%, compared to the six months ended June 30, 2016 primarily due to increases in employee-related, contractor, stock-based compensation and maintenance expenses of $1.6 million, $228,000, $179,000, and $145,000 respectively. These increases were partially offset by a decrease in recruiting expense of $216,000.

Sales and Marketing . In the six months ended June 30, 2017, sales and marketing expense increased by $3.3 million, or 12%, compared to the six months ended June 30, 2016 primarily due to employee-related, marketing programs, and commission expenses of $1.7 million, $603,000 and $394,000 respectively. There were also increases in travel, stock-based compensation, and computer maintenance and support expenses of $372,000, $284,000, and $261,000 respectively. These increases were partially offset by decreases in contractor, intangible amortization and recruiting and relocation expenses of $241,000, $111,000, and $104,000 respectively.

General and Administrative . In the six months ended June 30, 2017, general and administrative expense increased by $2.2 million, or 24%, compared to the six months ended June 30, 2016 primarily due to increases in outside legal fees, employee-related expense and stock-based compensation expense of $806,000, $652,000 and $319,000, respectively. There were also increases in travel, commission, and computer maintenance and support expenses of $153,000, $142,000, and $114,000 respectively.

Merger-related . In the six months ended June 30, 2016, merger-related expenses of $21,000 related to costs associated with the retention of certain employees of Unicorn. No such expense was incurred during the six months ended June 30, 2017.

Other Income (Expense), Net

 

     Six Months Ended June 30,               
     2017     2016     Change  

Other Income (Expense)

   Amount     Percentage of
Revenue
    Amount     Percentage of
Revenue
    Amount      %  
     (in thousands, except percentages)  

Interest income, net

   $ 62       —     $ 50       —     $ 12        24

Interest expense

     (17     —         (36     —         19        (53

Other income (expense), net

     407       1       (136     —         543        (399
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 452       1     $ (122     —     $ 574        (470 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

In the six months ended June 30, 2017, interest income, net, increased by $12,000, or 24%, 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 six months ended June 30, 2017 is primarily comprised of interest paid on capital leases and an equipment financing. The increase in other income (expense), net during the six months ended June 30, 2017 was primarily due to foreign currency exchange gains recorded during the six months ended June 30, 2017 upon collection of foreign denominated accounts receivable, compared to losses recorded in the corresponding period of the prior year.

Provision for Income Taxes

 

     Six Months Ended June 30,               
     2017     2016     Change  

Provision for Income Taxes

   Amount      Percentage of
Revenue
    Amount      Percentage of
Revenue
    Amount      %  
     (in thousands, except percentages)  

Provision for income taxes

   $ 187        —     $ 141        —     $ 46        33
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

In the six months ended June 30, 2017 and 2016, the provision for income taxes was primarily comprised of 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

 

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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.

 

     Six Months Ended June 30,  

Condensed Consolidated Statements of Cash Flow Data

   2017      2016  
     (in thousands)  

Purchases of property and equipment

   $ (650    $ (1,026

Depreciation and amortization

     3,665        3,985  

Cash flows (used in) provided by operating activities

     (6,714      5,009  

Cash flows used in investing activities

     (1,799      (3,003

Cash flows (used in) provided by financing activities

     (271      101  

Cash and cash equivalents.

Our cash and cash equivalents at June 30, 2017 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 June 30, 2017 and December 31, 2016, we had $8.3 million and $5.9 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.

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 54 days at June 30, 2017 and 53 days at December 31, 2016.

Cash flows (used in) provided by operating activities.

Cash (used in) 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 used in operating activities during the six months ended June 30, 2017 was $6.7 million. The cash flow used in operating activities resulted from net losses of $12.8 million and changes in our operating assets and liabilities of $1.2 million, partially offset by net non-cash charges of $7.3 million. Uses of cash included a decrease in accrued expense of $2.5 million and increases in prepaid expenses and accounts receivable of $2.4 million and $1.6 million, respectively. These outflows were offset in part by increases in accounts payable and deferred revenue of $4.0 million and $1.2 million, respectively. Net non-cash expenses consisted primarily of $3.7 million for depreciation and amortization expense and $3.5 million for stock-based compensation expense.

Cash flows used in investing activities.

Cash used in investing activities during the six months ended June 30, 2017 was $1.8 million consisting primarily of $1.1 million for the capitalization of internal-use software costs and $650,000 in capital expenditures to support the business.

Cash flows (used in) provided by financing activities.

Cash (used in) provided by financing activities for the six months ended June 30, 2017 was $271,000, consisting of payments under capital lease obligation, equipment financing and withholding tax on RSU vesting of $278,000, $152,000 and $118,000, respectively, offset in part by the proceeds received on the exercise of common stock options of $277,000.

Credit facility borrowings.

On November 19, 2015, we entered into an amended and restated loan and security agreement with a lender (the “Loan Agreement”) providing for up to a $20.0 million asset based line of credit (the “Line of Credit”). Under the Line of Credit, we can borrow up to $20.0 million. Borrowings under the Line of Credit are secured by substantially all of our assets, excluding our

 

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intellectual property. Outstanding amounts under the Line of Credit accrue interest at a rate equal to the prime rate or the LIBOR rate plus 2.5%. Under the Loan Agreement, we must comply with certain financial covenants, including maintaining a minimum asset coverage ratio. If the outstanding principal during any month is at least $15.0 million, the Company must also maintain a minimum net income threshold based on non-GAAP operating measures. 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. We were in compliance with all covenants under the Line of Credit as of June 30, 2017.

On December 31, 2015, the Company entered into an equipment financing agreement with a lender (the “December 2015 Equipment Financing Agreement”) to finance the purchase of $604,000 in computer equipment. In February 2016, the Company drew down $604,000 under the December 2015 Equipment Financing Agreement, and the liability was recorded at fair value using a market interest rate. The Company is repaying its obligation over a two year period through January 2018, and the amount outstanding was $181,000 as of June 30, 2017.

Net operating loss carryforwards.

As of December 31, 2016, we had federal and state net operating losses of approximately $155.5 million and $57.4 million, respectively, which are available to offset future taxable income, if any, through 2035. 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 $16.9 million and $10.2 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, 2016. We had federal and state research and development tax credits of $5.4 million and $3.5 million, respectively, which expire in various amounts through 2035. 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. 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 U.S. deferred tax assets as of June 30, 2017 and December 31, 2016.

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, 2016 are summarized in our Annual Report on Form 10-K for the year ended December 31, 2016. In addition to the obligations outlined in our Annual Report on Form 10-K, we entered into an agreement with a non-cancelable commitment in January 2017, primarily for content delivery and network storage service, with obligations of $15.8 million through December 31, 2018. As of June 30, 2017, our obligation was $8.3 million in connection with this agreement. In July 2017, we also entered into an agreement with a non-cancelable commitment effective July 1, 2017, primarily for content delivery and network storage service, with obligations of $2.5 million through September 30, 2018.

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.

 

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Anticipated Cash Flows

We expect to incur significant operating costs, particularly related to service 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 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.

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 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 June 30,  
     2017     2016  

Revenues generated in locations outside the United States

     47     43

Revenues in currencies other than the United States dollar (1)

     29     28

Expenses in currencies other than the United States dollar (1)

     14     15

 

     Six Months Ended June 30,  
     2017     2016  

Revenues generated in locations outside the United States

     44     42

Revenues in currencies other than the United States dollar (1)

     28     28

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 six months ended June 30, 2017 and 2016:

 

     Three Months Ended June 30, 2017     Three Months Ended June 30, 2016  
     Revenues     Expenses     Revenues     Expenses  

Euro

     6     2     7     2

British pound

     7       5       7       6  

Japanese Yen

     11       3       10       4  

Other

     5       4       4       3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     29     14     28     15

 

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     Six Months Ended June 30, 2017     Six Months Ended June 30, 2016  
     Revenues     Expenses     Revenues     Expenses  

Euro

     6     1     7     2

British pound

     7       5       7       6  

Japanese Yen

     10       4       10       4  

Other

     5       4       4       3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     28     14     28     15

As of June 30, 2017 and December 31, 2016, we had $7.0 million and $5.6 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, British pound and Japanese yen, primarily because our European and Japanese operations have a higher proportion of our local currency denominated expenses. Relative to foreign currency exposures existing at June 30, 2017, 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 six months ended June 30, 2017, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have decreased revenues by $2.2 million, decreased expenses by $1.3 million and decreased operating income by $877,000. 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 June 30, 2017 and 2016.

Interest rate risk

We had unrestricted cash and cash equivalents totaling $28.4 million at June 30, 2017. 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 $7,000 and $17,000 of interest expense during the three months ended June 30, 2017 and 2016, respectively, and $17,000 and $36,000 of interest expense during the six months ended June 30, 2017 and 2016, 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 or the LIBOR rate plus the LIBOR rate margin, the related interest expense recorded would be subject to changes in the 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 June 30, 2017, 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

 

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relationship of possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2017, 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.

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

On July 8, 2016, a complaint was filed by Brand Technologies, Inc. naming us, along with several others, as a defendant in a case alleging copyright infringement, violations of the Lanham Act, unfair competition and related claims (Brand Technologies, Inc. v. Cox Enterprises, Inc., et al., United States District Court for the Central District of California). The complaint, subsequently amended twice by the plaintiff, alleges that Cox Media Group (CMG) engaged in the unlicensed provision of copyrighted videos owned by the plaintiff on CMG websites by using our technology. The amended complaint seeks actual and statutory damages, costs and injunctive relief. The defendants filed two separate motions to dismiss, both of which were granted and resulted in a narrowing of the claims in the amended complaint. We answered the amended complaint on April 21, 2017. On May 22, 2017, the plaintiff dismissed the case with prejudice; Brightcove did not incur a loss as a result of this matter.

On May 22, 2017, a lawsuit was filed against us and two individuals by Ooyala, Inc. (“Ooyala”) and Ooyala Mexico S. de R.L. de C.V. (“Ooyala Mexico”). The lawsuit, which was filed in the United States District Court for the District of Massachusetts, concerns allegations that the two individuals, who are former employees of Ooyala Mexico, misappropriated customer information and other trade secrets and used that information in working for Brightcove. The complaint was amended on June 1, 2017 to remove claims against the two former employees of Ooyala Mexico. The remaining claims against us are for violation of the Defend Trade Secrets Act of 2016 (18 U.S.C. §1836), violation of the Massachusetts trade secret statute (M.G.L. c. 93, §42), violation of Massachusetts Chapter 93A (M.G.L. c. 93A, §11), and tortious interference with advantageous business relationships. Ooyala and Ooyala Mexico also filed a motion for preliminary injunction (amended at the same time the complaint was amended), seeking to enjoin us and the two individuals from using any of the allegedly misappropriated information or communicating with customers whose information was taken, and seeking the return of any information that was taken. On June 16, 2017, we filed an opposition to the motion for preliminary injunction, and also moved to dismiss the lawsuit. 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, under the heading “Part II — 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.

There have been no material changes to the information set forth in Part I. Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, except for the additional risk factor set forth below:

If we do not successfully manage the transition associated with the resignation of our former Chief Executive Officer (“CEO”) and the appointment of a new CEO, it could be viewed negatively by our customers and shareholders and could have an adverse impact on our business.

David Mendels resigned from his position as the Company’s CEO and resigned from the Board effective July 24, 2017. Andrew Feinberg, the Company’s President of Chief Operations Officer, is serving as the Company’s acting CEO. The Board has an active search process underway to select the next CEO from internal and external candidates. Such leadership transitions can be inherently difficult to manage, and an inadequate transition of our CEO may cause disruption to our business, including to our relationships with customers and employees. In addition, if we are unable to attract and retain a qualified candidate to become our permanent CEO in a timely manner, our ability to meet our financial and operational goals and strategic plans may be adversely impacted, as well as our financial performance. It may also make it more difficult to retain other key employees.

 

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 acting Chief Executive Officer, Andrew Feinberg, 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 these plans 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.

 

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Table of Contents
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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Table of Contents

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: July 26, 2017     By:   /s/ Andrew Feinberg
     

Andrew Feinberg

      Chief Executive Officer
      (Principal Executive Officer)

 

Date: July 26, 2017     By:   /s/ Kevin R. Rhodes        
      Kevin R. Rhodes
      Chief Financial Officer
      (Principal Financial Officer)

 

33

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Andrew Feinberg, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Brightcove Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 26, 2017

    By:   /s/ Andrew Feinberg
     

Andrew Feinberg

      Chief Executive Officer
      (Principal Executive Officer)

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Kevin R. Rhodes, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Brightcove Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 26, 2017

    By:   /s/ Kevin R. Rhodes
      Kevin R. Rhodes
      Chief Financial Officer
      (Principal Financial Officer)

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Brightcove Inc. for the quarterly period ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Andrew Feinberg, as Chief Executive Officer of Brightcove Inc., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Brightcove Inc.

 

Date: July 26, 2017

    By:   /s/ Andrew Feinberg
     

Andrew Feinberg

      Chief Executive Officer
      (Principal Executive Officer)

In connection with the Quarterly Report on Form 10-Q of Brightcove Inc. for the quarterly period ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Kevin R. Rhodes, as Chief Financial Officer of Brightcove Inc., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Brightcove Inc.

 

Date: July 26, 2017

    By:   /s/ Kevin R. Rhodes
      Kevin R. Rhodes
      Chief Financial Officer
      (Principal Financial Officer)