Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x

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

 

For the quarterly period ended September 30, 2013

 

OR

 

o

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 001-375796

 

TREMOR VIDEO, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-5480343

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

53 West 23rd Street, New York, NY

 

10010

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (646) 723-5300

 

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

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x  No o

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

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

 

As of November 11, 2013, there were 49,657,777 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

 



Table of Contents

 

TREMOR VIDEO, INC.

FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

PAGE

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012

3

 

 

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 (unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2013 and 2012 (unaudited)

5

 

 

 

 

Consolidated Statements of Mandatorily Redeemable Convertible Preferred Stock and Changes in Stockholders’ Equity (Deficit) for the nine months ended September 30, 2013 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (unaudited)

7

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

8

 

 

 

Item 2.

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

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

36

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

Item 1A.

Risk Factors

37

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

 

 

 

Item 3.

Defaults Upon Senior Securities

60

 

 

 

Item 4.

Mine Safety Disclosures

60

 

 

 

Item 5.

Other Information

60

 

 

 

Item 6.

Exhibits

60

 

 

 

SIGNATURES

 

 

 

 

CERTIFICATIONS

 

 

2



Table of Contents

 

Part I — FINANCIAL INFORMATION

Item 1. — Financial Statements

 

Tremor Video, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

96,258

 

$

32,533

 

Restricted cash, short-term

 

 

21

 

Accounts receivable, net of allowance for doubtful accounts of $960 and $1,050 as of September 30, 2013 and December 31, 2012, respectively

 

39,413

 

36,011

 

Prepaid expenses and other current assets

 

1,801

 

953

 

Total current assets

 

137,472

 

69,518

 

Long-term assets:

 

 

 

 

 

Restricted cash, long-term

 

600

 

1,200

 

Property and equipment, net of accumulated depreciation of $3,342 and $3,077 as of September 30, 2013 and December 31, 2012, respectively

 

2,833

 

1,995

 

Intangible assets, net of accumulated amortization of $13,972 and $10,315 as of September 30, 2013 and December 31, 2012, respectively

 

21,728

 

25,385

 

Goodwill

 

29,719

 

29,719

 

Deferred tax assets, long-term

 

1,695

 

1,695

 

Other long-term assets

 

198

 

211

 

Total long-term assets

 

56,773

 

60,205

 

Total assets

 

$

194,245

 

$

129,723

 

 

 

 

 

 

 

Liabilities, mandatorily redeemable securities and stockholders’ equity (deficit)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

30,092

 

$

21,075

 

Deferred rent and security deposits payable

 

746

 

627

 

Deferred revenue

 

194

 

210

 

Deferred tax liabilities, short-term

 

1,695

 

1,695

 

Amount outstanding under credit facility and accrued interest expenses

 

 

6,019

 

Total current liabilities

 

32,727

 

29,626

 

Warrants for purchase of mandatorily redeemable convertible preferred stock

 

 

1,103

 

Total liabilities

 

32,727

 

30,729

 

Commitments and contingencies

 

 

 

 

 

Mandatorily redeemable convertible preferred stock

 

 

162,466

 

Stockholders’ equity (deficit):

 

 

 

 

 

Common stock, $0.0001 par value: 250,000,000 and 52,333,333 (includes 2,333,333 shares of Series II common stock) shares authorized as of September 30, 2013 and December 31, 2012, respectively; 49,638,808 and 7,722,262 (includes 1,047,357 shares of Series II common stock) shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively

 

5

 

1

 

Additional paid-in capital

 

266,362

 

17,752

 

Accumulated other comprehensive income

 

245

 

345

 

Accumulated deficit

 

(105,094

)

(81,570

)

Total stockholders’ equity (deficit)

 

161,518

 

(63,472

)

Total liabilities, mandatorily redeemable securities and stockholders’ equity (deficit)

 

$

194,245

 

$

129,723

 

 

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

 

3



Table of Contents

 

Tremor Video, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenue

 

$

35,267

 

$

30,174

 

$

95,497

 

$

72,652

 

Cost of revenue

 

21,057

 

16,704

 

53,869

 

43,453

 

Gross profit

 

14,210

 

13,470

 

41,628

 

29,199

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Technology and development

 

2,833

 

2,215

 

8,348

 

5,862

 

Sales and marketing

 

9,477

 

8,869

 

28,263

 

26,079

 

General and administrative

 

2,681

 

2,461

 

8,069

 

7,991

 

Depreciation and amortization

 

1,581

 

1,510

 

4,576

 

4,468

 

Total operating expenses

 

16,572

 

15,055

 

49,256

 

44,400

 

Loss from operations

 

(2,362

)

(1,585

)

(7,628

)

(15,201

)

 

 

 

 

 

 

 

 

 

 

Interest and other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(14

)

(57

)

(127

)

(169

)

Other income (expense)

 

153

 

37

 

323

 

(2

)

Total interest and other income (expense), net

 

139

 

(20

)

196

 

(171

)

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(2,223

)

(1,605

)

(7,432

)

(15,372

)

Income tax expense

 

(20

)

(70

)

(243

)

(210

)

Net loss

 

(2,243

)

(1,675

)

(7,675

)

(15,582

)

Series F preferred stock deemed dividend

 

(15,849

)

 

(15,849

)

 

Net loss attributable to common stockholders

 

$

(18,092

)

$

(1,675

)

$

(23,524

)

$

(15,582

)

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.37

)

$

(0.22

)

$

(1.08

)

$

(2.09

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

49,115,766

 

7,541,832

 

21,686,759

 

7,440,430

 

 

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

 

4



Table of Contents

 

Tremor Video, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net loss

 

$

(2,243

)

$

(1,675

)

$

(7,675

)

$

(15,582

)

Series F preferred stock deemed dividend

 

(15,849

)

 

(15,849

)

 

Net loss attributable to common stockholders

 

$

(18,092

)

$

(1,675

)

$

(23,524

)

$

(15,582

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Change in unrealized gain during the period on short-term investments available for sale

 

 

 

 

7

 

Foreign currency translation adjustments

 

50

 

(25

)

(100

)

(36

)

Comprehensive loss attributable to common stockholders

 

$

(18,042

)

$

(1,700

)

$

(23,624

)

$

(15,611

)

 

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

 

5



Table of Contents

 

Tremor Video, Inc.

Consolidated Statements of Mandatorily Redeemable Convertible Preferred Stock

and Changes in Stockholders’ Equity (Deficit)

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Preferred Stock(1)(3)

 

 

Common Stock(2)(3)(4)

 

Additional
Paid-in

 

Other
Comprehensive

 

Accumulated

 

Total
Stockholders’

 

 

 

Share

 

Amount

 

 

Share

 

Amount

 

Capital

 

Income

 

Deficit

 

Equity (Deficit)

 

Balance as of December 31, 2012

 

32,563,192

 

$

162,466

 

 

7,722,262

 

$

1

 

$

17,752

 

$

345

 

$

(81,570

)

$

(63,472

)

Accretion of issuance costs

 

 

191

 

 

 

 

(191

)

 

 

(191

)

Common stock issuance, net of $8,402 issuance costs

 

 

 

 

7,500,000

 

1

 

66,597

 

 

 

66,598

 

Conversion of preferred stock

 

(32,563,192

)

(162,657

)

 

32,587,453

 

3

 

162,654

 

 

 

162,657

 

Series F preferred stock deemed dividend

 

 

 

 

1,584,863

(5)

 

15,849

(5)

 

(15,849

)(5)

 

Reclassification of liability warrants to equity warrants

 

 

 

 

 

 

790

 

 

 

790

 

Exercise of warrants

 

 

 

 

64,067

 

 

 

 

 

 

Exercise of stock options

 

 

 

 

180,163

 

 

492

 

 

 

492

 

Stock-based compensation expense

 

 

 

 

 

 

2,419

 

 

 

2,419

 

Net loss

 

 

 

 

 

 

 

 

(7,675

)

(7,675

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

(100

)

 

(100

)

Balance as of September 30, 2013

 

 

$

 

 

49,638,808

 

$

5

 

$

266,362

 

$

245

 

$

(105,094

)

$

161,518

 

 


(1)       Preferred stock, as of December 31, 2012, included several series of preferred stock, refer to note 10.

 

(2)       Common stock, as of December 31, 2012, included two series of common stock, refer to note 10.

 

(3)       All share amounts have been restated to reflect a 1-for-1.5 reverse stock split, refer to note 10.

 

(4)       All share amounts have been restated to reflect the renaming of the Company’s “Series I common stock” to “common stock”, refer to note 10.

 

(5)       Represents a one-time non-cash deemed dividend related to the Series F preferred stock ratchet provision, refer to note 10.

 

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

 

6



Table of Contents

 

Tremor Video, Inc.

Consolidated Statements of Cash Flows

(in thousands, except share and per share data)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(7,675

)

$

(15,582

)

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

 

 

 

 

 

Depreciation of property and equipment

 

919

 

849

 

Amortization of intangible assets

 

3,657

 

3,619

 

Bad debt (income) expense

 

(26

)

46

 

Mark-to-market (income) expense

 

(313

)

27

 

Stock-based compensation expense

 

2,419

 

2,219

 

Change in unrealized gain during the period on short-term investments available for sale

 

 

7

 

Net changes in operating assets and liabilities:

 

 

 

 

 

(Increase) decrease in accounts receivable

 

(3,376

)

641

 

Increase in prepaid expenses, other current assets and other long-term assets

 

(835

)

(101

)

Increase in accounts payable and accrued expenses

 

8,998

 

1,994

 

Increase in deferred rent and security deposits payable

 

119

 

139

 

(Decrease) increase in deferred revenue

 

(16

)

356

 

Net cash provided by (used in) operating activities

 

3,871

 

(5,786

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchase of property and equipment

 

(1,757

)

(902

)

Maturities of short-term investments

 

 

8,652

 

Change in restricted cash

 

621

 

36

 

Acquisition of InPlay

 

 

(1,800

)

Acquisition of Transpera, Inc., net of cash acquired

 

 

15

 

Net cash (used in) provided by investing activities

 

(1,136

)

6,001

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net proceeds from common stock issuance

 

66,598

 

 

Repayment of amount outstanding under credit facility

 

(6,000

)

 

Proceeds from the exercise of stock options

 

492

 

162

 

Net cash provided by financing activities

 

61,090

 

162

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

63,825

 

377

 

 

 

 

 

 

 

Effect of exchange rate changes in cash and cash equivalents

 

(100

)

(36

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

32,533

 

31,714

 

Cash and cash equivalents at end of period

 

$

96,258

 

$

32,055

 

 

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

 

7



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

1. Organization and Description of Business

 

Tremor Video, Inc. (the “Company”) was originally organized as Tremor Media, LLC in November 2005 and converted into a corporation named ‘‘Tremor Media, Inc.’’ under the laws of the State of Delaware in September 2006. The Company changed its name to Tremor Video, Inc. in June 2011. The Company is a provider of technology-driven video advertising solutions enabling brand advertisers to engage consumers across multiple internet-connected devices, including computers, smartphones, tablets and connected TVs.  Through its Tremor Video Network, the Company offers advertisers access to premium and often exclusive streaming video inventory and advanced real-time optimization capabilities at scale across multiple internet-connected devices in brand safe environments.  In addition, through its VideoHub for Advertisers (“VHA”) solution, the Company provides advanced video analytic capabilities for advertisers to measure, verify and evaluate the performance of their video ad campaigns across multiple channels, both within and outside of its Tremor Video Network.

 

On December 8, 2010, the Company acquired ScanScout, Inc. (“ScanScout”), an online video advertising network and the developer of the Company’s video analysis and optimization technology, which is referred to as VideoHub.  On February 11, 2011, the Company acquired all of the outstanding stock of Transpera, Inc. (“Transpera”), a company that operated a technology platform that enables video advertising formats to be served on mobile devices, such as phones and tablets.  On January 17, 2012, the Company acquired the assets for the InPlay video management platform (“InPlay”) from Tube Mogul, Inc., which enables publishers of online video content to manage and analyze the performance of advertisements displayed within their inventory of video content.

 

2.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements and footnotes have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commissions (the “SEC”) regarding unaudited interim financial information.  In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated balance sheets, statements of operations, comprehensive loss, mandatorily redeemable convertible preferred stock and changes in stockholders’ equity (deficit) and cash flows for the interim periods presented.  Operating results for the interim periods presented are not necessarily indicative of the results of operations to be expected for the full year due to seasonal and other factors.  Certain information and footnote disclosures normally included in the consolidated financial statements in accordance with US GAAP have been omitted in accordance with the rules and regulations of the SEC.  Accordingly, these unaudited interim consolidated financial statements and footnotes should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Company’s prospectus dated June 26, 2013, filed with the SEC on June 27, 2013 pursuant to Rule 424(b)(4) under the Securities Act (“Prospectus”).

 

Principles of Consolidation

 

The unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All inter-company balances and transactions have been eliminated in the accompanying unaudited interim consolidated financial statements.

 

Initial Public Offering

 

On July 2, 2013, the Company closed its initial public offering (“IPO”) of common stock in which the Company issued and sold 7,500,000 shares of common stock.  Upon closing of the IPO, all of the Company’s outstanding mandatorily redeemable convertible preferred stock (“preferred stock”) automatically converted into 34,172,316 shares of common stock, which includes a one-time $15,849 non-cash preferred stock deemed dividend related to 1,584,863 of additional shares of common stock in connection with to the Series F preferred stock ratchet provision (refer to note 10), and all of the Company’s outstanding Series II common stock automatically converted into 1,052,464 shares of common stock.  In addition, the outstanding warrants to purchase preferred stock automatically converted into warrants to purchase 142,534 shares

 

8



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

 (unaudited)

 

2.  Summary of Significant Accounting Policies (Continued)

 

of common stock, and the warrants to purchase preferred stock liability of $790, which includes a $136 adjustment for the change in fair value from July 1, 2013 through July 2, 2013, was reclassified to additional paid-in capital.

 

Recently Issued Accounting Pronouncements

 

FASB Accounting Standards Update No. 2013-02 — Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance requiring new disclosures about reclassifications from accumulated other comprehensive income to net loss. This new guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements where net loss is presented or in the notes thereto, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net loss but only if the amount reclassified is required under US GAAP to be reclassified to net loss in its entirety in the same reporting period.  For other amounts that are not required under US GAAP to be reclassified in their entirety to net loss, an entity is required to cross-reference to other disclosures required under US GAAP that provide additional detail about those amounts. The new guidance is effective prospectively for annual and interim periods beginning after December 15, 2012.  The Company adopted this guidance in its interim period beginning April 1, 2013. The adoption of this new guidance did not have a material impact on its unaudited interim consolidated financial statements and the required disclosures are provided in note 11.

 

Revenue Recognition and Deferred Revenue

 

The Company generates revenue primarily from the delivery of in-stream video advertisements for brand advertisers and agencies through the Tremor Video Network.  The Company also generates revenue from selling licenses to advertisers, agencies and publishers.  Revenue is recognized when the related services are delivered based on the specific terms of the contract, which are commonly based on the number of impressions delivered or by the actions of the viewers.  The Company recognizes revenue when four basic criteria are met: (1) persuasive evidence exists of an arrangement with the client reflecting the terms and conditions under which the services will be provided; (2) services have been provided or delivery has occurred; (3) the fee is fixed or determinable; and (4) collection is reasonably assured.  Collectability is assessed based on a number of factors, including the creditworthiness of a client and transaction history.  Amounts billed or collected in excess of revenue recognized are included as deferred revenue.

 

The Company recognizes revenue from the delivery of video ads in the period in which the video ads are delivered.  Specifically, revenue is recognized for video ad delivery through the Tremor Video Network upon either the delivery of each impression served for CPM-priced ad campaigns, delivery of each impression served to a target demographic as validated by a third-party for ad campaigns priced on a CPM-basis with a guaranteed demographic reach, engagement by the viewer with a video ad for cost per engagement (“CPE”) priced ad campaigns, or the completion of a video ad by the viewer for cost per video completed (“CPVC”) priced ad campaigns.

 

In the normal course of business, the Company acts as an intermediary in executing transactions with third parties.  The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Company is acting as the principal or an agent in the Company’s transactions.  In determining whether the Company acts as the principal or an agent, the Company follows the accounting guidance for principal-agent considerations.  The determination of whether the Company is acting as a principal or an agent in a transaction involves judgment and is based on an evaluation of the terms of each arrangement.  While none of the factors individually are considered presumptive or determinative, because the Company is the primary obligor and is responsible for (1) identifying and contracting with third-party advertisers, (2) establishing the selling prices of the video ads sold, (3) performing all billing and collection activities, including retaining credit risk, and (4) bearing sole responsibility for fulfillment of the advertising, the Company acts as the principal in these arrangements and therefore reports revenue earned and costs incurred related to these transactions on a gross basis.

 

9



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

2.  Summary of Significant Accounting Policies (Continued)

 

The license fees for VHA and the Company’s publisher solutions are based on the number of impressions being analyzed through these solutions.  The Company recognizes revenue with respect to these solutions on a cost per impression basis based on the number of impressions being analyzed in a given month.  Typically, the Company’s license terms are for one year periods.  In limited cases, the Company charges a minimum monthly fee.

 

Deferred revenue arises as a result of differences between the timing of revenue recognition and receipt of cash from the Company’s clients.  As of September 30, 2013 and December 31, 2012  there were $194 and $210, respectively, of services for which cash payments were received in advance of the Company’s performance of the service under the arrangement and recorded as deferred revenue in the accompanying consolidated balance sheets.

 

Cost of Revenue

 

Cost of revenue primarily represents the video advertising inventory costs under the Company’s publisher contracts, third party hosting fees and third party serving fees incurred to deliver the video ads run through the Tremor Video Network.  Cost of revenue also includes costs of licenses from third party data providers utilized in the Company’s VHA solution.  Substantially all of the Company’s cost of revenue is attributable to video advertising inventory costs under its publisher contracts.  Cost of revenue is recognized on a publisher-by-publisher basis at the same time that the associated advertising revenue is recognized.  Substantially all of the Company’s exclusive publisher contracts contain minimum percentage fill rates on qualified video ad requests, which effectively means that the Company must purchase this inventory even if the Company lacks a video advertising campaign to deliver to these video ad impressions.  The Company recognizes the difference between the contractually required fill rate and the number of video ads actually delivered on the publisher’s website, if any, as a cost of revenue as of the end of each applicable monthly period.  Historically, the impact of the difference between the contractually required fill rate and the number of ads delivered has not been material. Costs owed to publishers but not yet paid are recorded in the consolidated balance sheets as accounts payable and accrued expenses.

 

Concentrations of Credit Risk

 

Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.  All of the Company’s cash and cash equivalents are held at financial institutions that management believes to be of high credit quality.  The Company’s cash and cash equivalent accounts exceed federally insured limits at times.  The Company has not experienced any losses on cash and cash equivalents to date.  To manage accounts receivable risk, the Company evaluates the creditworthiness of its clients and maintains an allowance for doubtful accounts.

 

During the three and nine months ended September 30, 2013, there was one advertiser that accounted for approximately 10.5% and 10.7% of revenue, respectively.  During the three and nine months ended September 30, 2012, there were no advertisers that accounted for more than 10% of revenue.

 

As of September 30, 2013 and December 31, 2012, there were no advertisers that accounted for more than 10% of outstanding accounts receivables.

 

3.  Fair Value Measurements

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement.  The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value.  If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.  The three-tiers are defined as follows:

 

10



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

3.  Fair Value Measurements (Continued)

 

· Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities;

 

· Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

 

· Level 3. Unobservable inputs for which there is little or no market data requiring the Company to develop its own assumptions.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period.  This determination requires significant judgments to be made.  The following tables summarize the conclusions reached as of December 31, 2012:

 

 

 

Balance at

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

2012

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Warrants to purchase preferred stock(1)

 

$

1,103

 

$

 

$

 

$

1,103

 

Total warrants to purchase preferred stock

 

$

1,103

 

$

 

$

 

$

1,103

 

 


(1)         The Company used an option pricing model to determine the fair value of the warrants to purchase preferred stock.  Significant inputs included an estimate of the fair value of the Company’s preferred stock as of December 31, 2012, the remaining contractual life of the warrant, a risk-free rate of interest, and an estimate of the Company’s stock volatility using the volatilities of guideline peer companies.  In connection with the Company’s IPO, these warrants to purchase preferred stock were adjusted to fair value through July 2, 2013 and were subsequently reclassified to additional paid-in capital (refer to note 8).

 

Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

 

The following table’s presents the changes in the Company’s Level 3 instruments measured at fair value on a recurring basis for the three and nine months ended September 30, 2013 and 2012:

 

 

 

Warrants to Purchase Preferred Stock

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

Beginning balance at July 1,

 

$

926

 

$

1,113

 

Mark-to-market income before reclassifications

 

(136

)

(5

)

Reclassification to additional paid-in capital

 

(790

)

 

Ending balance at September 30,

 

$

 

$

1,108

 

 

11



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

3. Fair Value Measurements (Continued)

 

 

 

Warrants to Purchase Preferred Stock

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

Beginning balance at January 1,

 

$

1,103

 

$

1,127

 

Mark-to-market income before reclassifications

 

(313

)

(19

)

Reclassification to additional paid-in capital

 

(790

)

 

Ending balance at September 30,

 

$

 

$

1,108

 

 

 

 

Contingent

 

 

 

Consideration on

 

 

 

Acquisition(1)

 

 

 

2012

 

 

 

(unaudited)

 

Beginning balance at January 1,

 

$

817

 

Mark-to-market expense before reclassifications

 

46

 

Settlement of contingent consideration

 

(863

)

Ending balance at September 30,

 

$

 

 


(1)         On February 11, 2011, the Company acquired all of the outstanding equity of Transpera. The purchase price included contingent consideration consisting of up to 169,131 shares of the Company’s common stock payable on the one year anniversary of the closing of the acquisition based on certain performance criteria being achieved. In arriving at the value of the contingent consideration, the Company used a valuation model based on future expectations combined with management’s judgment. In the then-absence of a public trading market, the Company exercised judgment and considered numerous objective and subjective factors to determine the fair value of the Company’s common stock.

 

4.  Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Prepaid expenses

 

$

856

 

$

790

 

Prepaid insurance

 

630

 

8

 

Prepaid taxes

 

314 3

 

155

 

Other current assets

 

1

 

 

Total prepaid expenses and other current assets

 

$

1,801

 

$

953

 

 

12



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

5.  Property and Equipment, Net

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

Cost:

 

 

 

 

 

Computer hardware

 

$

3,343

 

$

2,885

 

Leasehold improvements

 

1,219

 

849

 

Furniture and fixtures

 

1,077

 

765

 

Computer software

 

475

 

545

 

Office equipment

 

61

 

28

 

 

 

6,175

 

5,072

 

Accumulated depreciation

 

(3,342

)

(3,077

)

Total property and equipment, net of accumulated depreciation

 

$

2,833

 

$

1,995

 

 

The depreciation expense related to property and equipment was $362 and $342 for the three months ended September 30, 2013 and 2012, respectively, and $919 and $849 for the nine months ended September 30, 2013 and 2012, respectively.

 

The Company recorded a reduction of $654 and $229 to the cost and accumulated depreciation of fully depreciated equipment and leasehold improvements no longer in use for the nine months ended September 30, 2013 and 2012, respectively.

 

6.  Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

23,386

 

$

15,191

 

Accrued compensation, benefits and payroll taxes

 

3,772

 

3,627

 

Accrued cost of sales

 

1,084

 

1,058

 

Other payables and accrued expenses

 

1,850

(1)

1,199

 

Total accounts payable and accrued expenses

 

$

30,092

 

$

21,075

 

 


(1)         Includes approximately $1,782 of expenses incurred in connection with the Company’s IPO.

 

7.  Credit Facility and Accrued Interest Expense

 

On February 7, 2010, the Company amended its then existing loan and security agreement with Silicon Valley Bank (“SVB”). As amended, the loan and security agreement provided for a $7,000 revolving working capital credit facility. The credit facility includes customary conditions to borrowing, covenants and events of default. The credit facility also contains a financial covenant requiring that the ratio of current assets to current liabilities (excluding deferred revenue) be at least 1.25 to 1. As collateral for its obligations under the credit facility, the Company granted a first priority security interest to SVB in all assets of the Company other than intellectual property. The Company has agreed not to pledge its intellectual property as collateral without SVB’s prior written consent.

 

In February 2011, the credit facility was amended to, among other things, revise the interest rate to be equal to SVB’s prime rate plus 1.0% and provide for a fee of 0.20% for any unused portion of the revolving credit facility. Such fee is payable quarterly but no fee is charged for a particular quarter if the average principal amount of borrowings during such quarter is more than $10,000.

 

13



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

 (unaudited)

 

7.  Credit Facility and Accrued Interest Expense (Continued)

 

On December 31, 2011, the Company expanded the borrowing capacity under the credit facility to the lesser of $25,000 and a borrowing base equal to 80% of eligible accounts receivable.  Furthermore, on such date the credit facility was amended to, among other things, revise the interest rate to SVB’s prime rate plus 0.5% and provide for a termination date of December 30, 2014. The Company had $6,000 aggregate principal amount of borrowings outstanding under the facility as of December 31, 2012.

 

On July 30, 2013, the Company repaid $6,033, in principal borrowings and accrued interest expense.  As of September 30, 2013 the Company did not have any outstanding borrowings under the credit facility.  The Company was in compliance with all covenants under the credit facility as of each September 30, 2013 and December 31, 2012.

 

8.  Warrants to Purchase Preferred Stock and Common Stock

 

In connection with the Company’s entry into, and subsequent amendments of, its credit facility in 2010, 2008 and 2007, warrants to purchase preferred stock were issued to SVB.  In addition, with the acquisition of ScanScout in 2010, the Company exchanged ScanScout’s pre-acquisition preferred stock warrants into warrants for the new series of preferred stock that was issued as part of the acquisition.

 

The warrants are exercisable at any time prior to expiration.  Freestanding warrants and other similar instruments on shares that are redeemable (either put-able or mandatorily redeemable) are accounted for as liabilities, regardless of the timing of the redemption feature or price, even though the underlying shares may be classified as equity.

 

The following table summarizes the Company’s outstanding warrants to purchase preferred stock as of December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

as of

 

 

 

Grant

 

Expiration

 

Exercise

 

Warrants

 

December 31,

 

 

 

Date

 

Date

 

Price

 

Outstanding

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

 

June 7, 2007

 

June 7, 2017

 

$

1.27

 

35,520

 

$

299

 

Series B-1

 

December 8, 2008

 

December 7, 2018

 

$

4.86

 

33,930

 

246

 

Series C

 

February 8, 2010

 

February 8, 2020

 

$

3.79

 

31,659

 

245

 

Series 1

 

December 8, 2010

 

June 30, 2017

 

$

2.46

 

31,130

 

256

 

Series 3

 

December 8, 2010

 

February 6, 2015

 

$

5.75

 

8,694

 

57

 

Totals

 

 

 

 

 

 

 

140,933

 

$

1,103

 

 

Mark-to-market income related to the fair value measurement of the warrants were $136 and $5 for the three months ended September 30, 2013 and 2012, respectively, and $313 and $19 for the nine months ended September 30, 2013 and 2012, respectively.

 

On July 2, 2013, in connection with the closing of the Company’s IPO, these warrants to purchase preferred stock were converted into warrants to purchase 142,534 shares of common stock (refer to note 2), which includes an anti-dilution adjustment to the conversion ratio of the Series B-1 warrants to purchase preferred stock.  This conversion resulted in the warrants being reclassified to additional paid-in capital (refer to note 2).

 

On July 25, 2013, SVB exercised, in full, the following warrants to acquire common stock pursuant to a cashless net exercise: (i) warrants to acquire 17,607 shares of common stock, net of 14,052 shares of common stock tendered to the Company, at an exercise price of $3.79 per share, with an expiration date of February 8, 2020, (ii) warrants to acquire 16,210 shares of common stock, net of 19,321 shares of common stock tendered to the Company, at an exercise price of $4.64 per share, with an expiration date of December 7, 2018 and (iii) warrants to acquire 30,250 shares of common stock, net of 5,270

 

14



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

 (unaudited)

 

8.  Warrants to Purchase Preferred Stock and Common Stock (Continued)

 

shares of common stock tendered to the Company, at an exercise price of $1.27 per share, with an expiration date of June 7, 2017.  The number of shares tendered to the Company to satisfy the exercise price for the warrants was based on the closing price of the Company’s common stock on July 24, 2013.  In aggregate, the Company issued 64,067 shares of common stock to SVB in connection with these exercises.

 

The following table summarizes the Company’s outstanding warrants to purchase common stock as of September 30, 2013:

 

Grant

 

Expiration

 

Exercise

 

Warrants

 

Date

 

Date

 

Price

 

Outstanding

 

 

 

 

 

 

 

 

 

December 8, 2010

 

June 30, 2017

 

$

2.46

 

31,130

 

December 8, 2010

 

February 6, 2015

 

$

5.75

 

8,694

 

 

 

 

 

 

 

39,824

 

 

9.  Commitments and Contingencies

 

Letters of Credit

 

At September 30, 2013 and December 31, 2012, the Company had outstanding letters of credit of $600 and $1,221, respectively, related to two office spaces in New York, New York and Boston, Massachusetts.

 

Legal Contingencies

 

During the normal course of the business, the Company is occasionally involved with various claims and litigation.  Reserves are established in connection with such matters when a loss is probable and the amount of such loss can be reasonably estimated.  As of each September 30, 2013 and December 31, 2012, no material reserves were recorded.  No reserves are established for losses which are only reasonably possible.  The determination of probability and the estimation of the actual amount of any such loss are inherently unpredictable, and it is therefore possible that the eventual outcome of such claims and litigation could exceed the estimated reserves, if any.  Based upon the Company’s experience, current information and applicable law, it does not believe it is reasonably possible that any proceedings or possible related claims will have a material effect on its financial statements.

 

10.  Preferred Stock, Common Stock and Stockholders’ Equity (Deficit)

 

Reverse Stock Split

 

On June 13, 2013, the Company’s board of directors and stockholders approved an amendment and restatement of the Company’s amended and restated certificate of incorporation effecting a 1-for-1.5 reverse stock split of the Company’s issued and outstanding shares of common stock, preferred stock and the renaming of the Series I common stock to common stock.  The par value of the common stock was not adjusted as a result of the reverse stock split.  The original issue prices for all series of preferred stock were proportionately adjusted to reflect the reverse stock split.  All authorized, issued and outstanding shares of common stock, preferred stock and per share amounts presented in the unaudited interim consolidated financial statements have been retroactively adjusted to reflect this reverse stock split and the renaming of the “Series I common stock” to “common stock” for all periods presented.

 

15



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

 (unaudited)

 

10.  Preferred Stock, Common Stock and Stockholders’ Equity (Deficit) (Continued)

 

Amended and Restated Certificate of Incorporation

 

On July 2, 2013, the Company’s board of directors and stockholders approved an amendment and restatement of the Company’s amended and restated certification of incorporation to, among other things, (i) increase the total number of shares of the Company’s common stock which the Company is authorized to issue to 250,000,000 shares, (ii) eliminate all references to the various series of preferred stock that were previously authorized (including certain protective measures held by the various series of preferred stock), except for the reference to 10,000,000 shares of undesignated preferred stock that may be issued, and with terms to be set, by the Company’s board of directors, which rights could be senior to those of the Company’s common stock, and (iii) eliminate all references to the series II common stock.

 

Preferred Stock

 

As of December 31, 2012, the authorized capital stock of the Company consists of 32,742,929 shares of preferred stock, $0.0001 par value per share.

 

As of September 30, 2013, there were no outstanding shares of preferred stock, refer to note 2.

 

Preferred stock consists of the following as of December 31, 2012: 

 

Series

 

Issued

 

Authorized

 

Issued and
Outstanding

 

Original
Issue
Price

 

Liquidation
Preference

 

Carrying
Value
as of
December 31,
2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

 

September 2006

 

6,861,975

 

6,826,451

 

$

1.2669

 

$

8,648

 

$

8,402

 

Series B

 

December 2007

 

3,500,732

 

3,500,729

 

$

3.1422

 

$

11,000

 

10,949

 

Series B-1

 

May 2008

 

548,032

 

514,102

 

$

4.8629

 

$

2,500

 

2,479

 

Series C

 

February and

 

5,308,216

 

5,276,554

 

$

3.7904

 

$

20,000

 

19,932

 

Series D

 

April 2010

 

5,453,975

 

5,453,970

 

$

7.3341

 

$

40,000

 

39,931

 

Series E

 

December 2010

 

238,000

 

236,108

 

$

8.0051

 

$

1,890

 

1,890

 

Series 1

 

December 2010

 

979,333

 

947,711

 

$

2.4575

 

$

2,329

 

5,217

 

Series 2

 

December 2010

 

1,822,000

 

1,821,455

 

$

4.1387

 

$

7,538

 

12,404

 

Series 3

 

December 2010

 

937,333

 

928,054

 

$

5.7507

 

$

5,337

 

7,517

 

Series 4

 

December 2010

 

3,093,333

 

3,092,932

 

$

2.7548

 

$

8,520

 

17,722

 

Series F

 

September 2011

 

4,000,000

 

3,965,126

 

$

9.3314

 

$

37,000

 

36,023

 

 

 

 

 

32,742,929

 

32,563,192

 

 

 

 

 

$

162,466

 

 

16



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

 (unaudited)

 

10.  Preferred Stock, Common Stock and Stockholders’ Equity (Deficit) (Continued)

 

Dividends

 

The holders of preferred stock, which are no longer outstanding as of September 30, 2013, were entitled to receive, when and if declared by the Board of Directors out of funds legally available, dividends at the following annual rates:

 

Series

 

Dividend Rate

 

Series A

 

$

0.10140

 

Series B

 

$

0.25140

 

Series B-1

 

$

0.38910

 

Series C

 

$

0.30330

 

Series D

 

$

0.58680

 

Series E

 

$

0.64035

 

Series 1

 

$

0.19665

 

Series 2

 

$

0.33105

 

Series 3

 

$

0.46005

 

Series 4

 

$

0.22035

 

Series F

 

$

0.74655

 

 

The terms of the preferred stock, which are no longer outstanding as of September 30, 2013, provided that no dividends or other distributions would be made with respect to common stock until all declared dividends on the preferred stock had been paid.  No dividends have been declared or paid by the Company through the date of this report.

 

Conversion

 

All shares of preferred stock, which are no longer outstanding as of September 30, 2013, automatically converted into common stock upon the closing of the Company’s IPO on July 2, 2013 (refer to note 2).  Except for the Series B-1 and Series F preferred stock, all preferred stock converted on a one for one basis.  The Series B-1 preferred stock converted into common stock on a 1:1.04719 basis and the Series F preferred stock converted into common stock in accordance with the Series F preferred stock ratchet provision described below under the heading “Series F Preferred Stock Ratchet Provision.”

 

Liquidation Preferences

 

The preferred stock, which is no longer outstanding as of September 30, 2013, entitled its holders to a liquidation preferences over common stockholders based on the series of preferred stock held.  In the event of liquidation, dissolution, or winding up of the Company, each holder of preferred stock was entitled to be paid out of available assets on a pro-rata basis based on the liquidation preference of each series plus all declared but unpaid dividends.  After the preferential amounts had been distributed by the Company, the holders of preferred stock would then participate with the common stockholders in the distribution of remaining available assets.

 

Voting

 

Each holder of a share of outstanding preferred stock, which are no longer outstanding as of September 30, 2013, was entitled to the number of votes equal to the number of shares of common stock into which the shares of convertible preferred stock so held could be converted.

 

17



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

 (unaudited)

 

10.  Preferred Stock, Common Stock and Stockholders’ Equity (Deficit) (Continued)

 

Series F Preferred Stock Ratchet Provision

 

The terms of the Series F preferred stock, which are no longer outstanding as of September 30, 2013, provided that the ratio at which each share of such series automatically converted into shares of common stock would increase, from a 1:1 basis, if a qualified IPO price was below $13.997 per share, which represents the original issue price of $9.3314 (the “conversion price”) adjusted for other anti-dilution provisions pursuant to the terms of the Series F preferred stock.  The Company therefore concluded that such conversion ratio and conversion price are contingently adjustable based on a future event and such effects will not be recognized in earnings until such contingency has been resolved, in this case July 2, 2013.

 

Based on the Company’s IPO price of $10.00 per share, the conversion ratio automatically increased to a 1:1.3997 basis, with the conversion price automatically adjusting and decreasing to $6.6667 (the “adjusted conversion price”).  As a result, on July 2, 2013 upon the closing of the Company’s IPO, the outstanding shares of Series F preferred stock automatically converted into an aggregate total of 5,549,989 shares of common stock, which included 1,584,863 additional shares of common stock related to the ratchet provision described above.

 

As the fair value of the common stock to be received upon conversion (the IPO price of $10.00 per share) of the Series F preferred stock was greater than the adjusted conversion price, the conversion of the Series F preferred stock resulted in a beneficial conversion feature, analogous to a preferred stock dividend.  The beneficial conversion feature was calculated as the difference between the number of shares of common stock each holder of such series would receive upon the automatic conversion and the number of shares contingently issuable just prior to the automatic conversion based on the initial conversion price multiplied by the IPO price of $10.00 per share, which represents the fair value of the common stock on the date of conversion.  On July 2, 2013, the Company recorded a one-time $15,849 non-cash preferred stock deemed dividend related to the issuance of additional common shares resulting from the ratchet provision.  Such non-cash preferred stock deemed dividend results in an increase to net loss to arrive at net loss attributable to common stockholders and, consequently, results in an adjustment to the Company’s computation of net loss attributable to common stockholders per share.

 

Common Stock

 

As of December 31, 2012, the Company had two classes of $0.0001 par value common stock as follows:

 

 

 

Authorized

 

Outstanding

 

 

 

as of

 

as of

 

Series

 

December 31, 2012

 

December 31, 2012

 

 

 

 

 

 

 

Common stock

 

50,000,000

 

6,674,905

 

Series II

 

2,333,333

 

1,047,357

 

Total common stock

 

52,333,333

 

7,722,262

 

 

The Company’s two classes of common stock were identical in all significant respects.  Each share was entitled to one vote and both classes of shares were subordinate to the preferred stock in the payment of dividends and liquidation preferences.  The Series II common stock automatically converted into common stock upon the closing of the Company’s IPO on July 2, 2013 (refer to note 2).  Following the Company’s IPO, the Company has one class of common stock.

 

As of September 30, 2013, the authorized capital stock of the Company consists of 250,000,000 shares of common stock, with 49,638,808 shares of common stock outstanding as of such date.

 

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Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

 (unaudited)

 

11.  Changes in Accumulated Other Comprehensive Income

 

The following table provides the components of accumulated other comprehensive income:

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Gain On

 

 

 

 

 

Foreign

 

Short-term

 

 

 

 

 

Currency

 

Investments

 

 

 

 

 

Translation

 

Available

 

 

 

 

 

Adjustment

 

For Sale

 

Total

 

Beginning Balance at July 1, 2013

 

$

195

 

$

 

$

195

 

Other comprehensive income before reclassifications

 

50

 

 

50

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

 

Ending Balance at September 30, 2013

 

$

245

 

$

 

$

245

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Gain On

 

 

 

 

 

Foreign

 

Short-term

 

 

 

 

 

Currency

 

Investments

 

 

 

 

 

Translation

 

Available

 

 

 

 

 

Adjustment

 

For Sale

 

Total

 

Beginning Balance at July 1, 2012

 

$

392

 

$

 

$

392

 

Other comprehensive loss before reclassifications

 

(25

)

 

(25

)

Amounts reclassified from accumulated other comprehensive income

 

 

 

 

Ending Balance at September 30, 2012

 

$

367

 

$

 

$

367

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Gain On

 

 

 

 

 

Foreign

 

Short-term

 

 

 

 

 

Currency

 

Investments

 

 

 

 

 

Translation

 

Available

 

 

 

 

 

Adjustment

 

For Sale

 

Total

 

Beginning Balance at January 1, 2013

 

$

345

 

$

 

$

345

 

Other comprehensive loss before reclassifications

 

(100

)

 

(100

)

Amounts reclassified from accumulated other comprehensive income

 

 

 

 

Ending Balance at September 30, 2013

 

$

245

 

$

 

$

245

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Gain On

 

 

 

 

 

Foreign

 

Short-term

 

 

 

 

 

Currency

 

Investments

 

 

 

 

 

Translation

 

Available

 

 

 

 

 

Adjustment

 

For Sale

 

Total

 

Beginning Balance at January 1, 2012

 

$

403

 

$

(7

)

$

396

 

Other comprehensive loss before reclassifications

 

(36

)

 

(36

)

Amounts reclassified from accumulated other comprehensive income

 

 

7

 

7

 

Ending Balance at September 30, 2012

 

$

367

 

$

 

$

367

 

 

19



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

12.  Stock-Based Compensation

 

The Company included stock-based compensation expense related to all of the Company’s stock- based awards in various operating expense categories for the three and nine months ended September 30, 2013 and 2012 as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

Technology and development

 

$

142

 

$

106

 

$

391

 

$

312

 

Sales and marketing

 

317

 

247

 

883

 

776

 

General and administrative

 

459

 

375

 

1,145

 

1,131

 

Total stock-based compensation expense

 

$

918

 

$

728

 

$

2,419

 

$

2,219

 

 

Stock-Based Incentive Plans

 

On June 26, 2013, the Company adopted the 2013 Equity Incentive Plan (“2013 Plan”).  The Company has stock option awards outstanding under four stock-based incentive plans as of December 31, 2012 and under five stock-based incentive plans as of September 30, 2013, including, in each case, two plans that were assumed as part of the acquisition of ScanScout.  The Company has restricted stock unit awards outstanding under its 2013 Plan.

 

Plan Provisions Under the 2013 Equity Incentive Plan

 

Upon the effectiveness of the Company’s IPO, the Board of Directors determined that the 2013 Plan would be the only plan under which stock-based awards will be issued by the Company on a going-forward basis.  The 2013 Plan provides for the awards of incentive stock options, non-qualified stock options, restricted stock, restricted stock units and other stock-based awards; however, only incentive and non-qualified stock option awards and restricted stock unit awards have been issued through September 30, 2013 under the 2013 Plan.  The 2013 Plan states that awards may be granted to such non-employee directors, officers, employees and consultants as the Board of Directors shall in its discretion select.  Only employees of the Company are eligible to receive grants of incentive stock option awards.  Stock option awards are generally granted at the fair market value of the Company’s common stock on the date of grant.  Stock option grants generally vest over periods up to four years, with the first 25% of the grant vesting after one year, and monthly vesting thereafter.  Stock option grants generally have a term not to exceed a total of 10 years.  Restricted stock unit awards are generally granted at the fair market value of the Company’s common stock on the date of grant.  Restricted stock unit awards granted to our non-employee directors generally vest after a period of one year, with 100% vesting on the vesting date.  As of September 30, 2013, there were 972,139 shares of common stock that may be issued pursuant to stock-based awards available for issuance under the 2013 Plan.

 

20



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

12.  Stock-Based Compensation (Continued)

 

Stock Option Awards Outstanding

 

The following table presents a summary of the Company’s stock option award activity under all plans and related information, without regard for estimated forfeitures, for the nine months ended September 30, 2013:

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Average

 

 

 

Average

 

 

 

 

 

Exercise

 

 

 

Exercise

 

 

 

Exercise

 

 

 

 

 

Price

 

 

 

Price

 

 

 

Price

 

 

 

Exercisable

 

Per Share

 

Non-vested

 

Per Share

 

Outstanding

 

Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option awards outstanding as of December 31, 2012

 

3,895,442

 

$

2.36

 

2,984,477

 

$

4.55

 

6,879,919

 

$

3.30

 

Stock option awards granted

 

 

$

 

860,380

 

$

7.52

 

860,380

 

$

7.52

 

Stock option awards forfeited

 

(69,162

)

$

4.06

 

(320,191

)

$

4.96

 

(389,353

)

$

4.80

 

Stock option awards exercised

 

(180,163

)

$

2.73

 

 

$

 

(180,163

)

$

2.73

 

Stock option awards vested

 

918,653

 

$

3.98

 

(918,653

)

$

3.98

 

 

$

 

Stock option awards outstanding as of September 30, 2013

 

4,564,770

 

$

2.64

 

2,606,013

 

$

5.67

 

7,170,783

 

$

3.74

 

 

The weighted average grant date fair value of stock option awards granted during the nine months ended September 30, 2013 was $3.76 per share.  As previously discussed, stock option awards are generally granted at the fair market value of the Company’s common stock on the date of grant, generally vest over periods up to four years, have a one year cliff with monthly vesting thereafter, and have terms not to exceed 10 years.  The total intrinsic value of stock option awards exercised during the nine months ended September 30, 2013 was $993.  Cash proceeds received from stock option awards exercised for the nine months ended September 30, 2013 was $492.

 

The total fair value of stock option awards that vested during the nine months ended September 30, 2013 was $1,930.  There was $5,896 of total unrecognized compensation cost related to non-vested stock option awards granted under the Company’s equity incentive plans as of September 30, 2013.  This cost is expected to be recognized over a weighted-average period of 2.68 years.

 

Restricted Stock Unit (RSU) Awards Outstanding

 

The following table presents a summary of the Company’s restricted stock unit award activity under all plans and related information, without regard for estimated forfeitures, for the nine months ended September 30, 2013:

 

 

 

 

 

Weighted Average

 

 

 

Restricted

 

Grant Date

 

 

 

Stock Unit

 

Fair Value

 

 

 

Awards

 

Per Share

 

Restricted stock unit awards outstanding as of December 31, 2012

 

 

$

 

Restricted stock unit awards granted

 

80,119

 

$

9.67

 

Restricted stock unit awards forfeited

 

(10,000

)

$

10.00

 

Restricted stock unit awards restriction lapses

 

 

$

 

Restricted stock unit awards outstanding as of September 30, 2013

 

70,119

 

$

9.63

 

 

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Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

12.  Stock-Based Compensation (Continued)

 

 

 

Restricted

 

 

 

Stock Unit

 

 

 

Awards

 

 

 

 

 

Aggregate grant date fair value of restricted stock unit awards outstanding as of September 30, 2013

 

$

675

 

 

 

 

 

Number of restricted stock unit awards vested during the nine months ended September 30, 2013

 

 

 

 

 

 

Number of restricted stock unit awards non-vested as of September 30, 2013

 

70,119

 

 

There was $566 of total unrecognized compensation cost related to non-vested restricted stock unit awards.  This cost is expected to be recognized over a weighted-average period of one year.

 

13.  Net Loss Attributable to Common Stockholders Per Share of Common Stock

 

Basic net loss attributable to common stockholders per share excludes dilution and is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period.

 

Diluted net loss attributable to common stockholders per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period, adjusted to reflect potentially dilutive securities using the treasury stock method for warrants to purchase preferred stock, warrants to purchase common stock, preferred stock, stock option awards and restricted stock unit awards.  Due to the Company’s net loss, (i) warrants to purchase preferred stock, (ii) warrants to purchase common stock, (iii) preferred stock, (iv) stock option awards, and (v) restricted stock unit awards were not included in the computation of diluted net loss attributable to common stockholders per share, as the effects would be anti-dilutive.  Accordingly, basic and diluted net loss attributable to common stockholders per share is equal for the following periods presented:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,243

)

$

(1,675

)

$

(7,675

)

$

(15,582

)

Series F preferred stock deemed dividend

 

(15,849

)

 

(15,849

)

 

Net loss attributable to common stockholders

 

$

(18,092

)

$

(1,675

)

$

(23,524

)

$

(15,582

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding for basic and diluted net loss attributable to common stockholders per share

 

49,115,766

 

7,541,832

 

21,686,759

 

7,440,430

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss attributable to common stockholders per share

 

$

(0.37

)

$

(0.22

)

$

(1.08

)

$

(2.09

)

 

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Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

13.  Net Loss Attributable to Common Stockholders Per Share of Common Stock (Continued)

 

The following securities were outstanding during the periods presented below and have been excluded from the calculation of diluted net loss attributable to common stockholders per share because the effect is anti-dilutive:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Warrants to purchase preferred stock

 

 

140,933

 

 

140,933

 

Warrants to purchase common stock

 

39,824

 

 

39,824

 

 

Preferred stock

 

 

32,563,192

 

 

32,563,192

 

Stock option awards

 

7,170,783

 

6,800,481

 

7,170,783

 

6,800,481

 

Restricted stock unit awards

 

70,119

 

 

70,119

 

 

Total anti-dilutive securities

 

7,280,726

 

39,504,606

 

7,280,726

 

39,504,606

 

 

14.  Supplemental Disclosure of Cash Flow Information

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

Supplemental disclosure of cash flow activities

 

 

 

 

 

Cash paid for income taxes

 

$

147

 

$

108

 

Cash paid for interest expense

 

$

127

 

$

169

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities

 

 

 

 

 

Common stock issued in connection with the acquisition of Transpera, Inc.

 

$

 

$

863

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities

 

 

 

 

 

Common stock issued in connection with the conversion of preferred stock

 

$

162,657

 

$

 

Common stock issued in connection with the Series F preferred stock deemed dividend

 

$

15,849

 

$

 

Reclassification of liability warrants to equity warrants

 

$

790

 

$

 

 

15.  Segment and Geographic Information

 

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, in deciding how to allocate resources and assess performance.  The Company’s chief operating decision maker is its Chief Executive Officer (“CEO”).  The CEO reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.  As such, the Company has concluded that its operations constitute one operating and reportable segment.

 

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Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

15.  Segment and Geographic Information (Continued)

 

Substantially all assets were held in the United States as of September 30, 2013 and December 31, 2012.  The following table summarizes revenue generated through sales personnel employed by the Company’s U.S. and non-U.S. subsidiaries for the three and nine months ended September 30, 2013 and 2012:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

Revenue

 

 

 

 

 

 

 

 

 

Domestic

 

$

34,517

 

$

29,224

 

$

93,221

 

$

69,480

 

International

 

750

 

950

 

2,276

 

3,172

 

Total

 

$

35,267

 

$

30,174

 

$

95,497

 

$

72,652

 

 

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Table of Contents

 

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

 

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with (1) the unaudited interim consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2012 included in our prospectus dated June 26, 2013, filed with the SEC on June 27, 2013 pursuant to Rule 424(b)(4) under the Securities Act (File No. 333-188813).  This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.  These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations.  Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings.  You should not rely upon forward-looking statements as predictions of future events.  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.  We will disclose material non-public information through one or more of the following channels: our investor relations website (http://investor.tremorvideo.com), the social media channels identified on our investor relations website, press releases, SEC filings, public conference calls and webcasts.

 

Overview

 

Tremor Video, Inc., or Tremor, we or us, is a leading provider of technology-driven video advertising solutions enabling brand advertisers to engage consumers across multiple internet-connected devices including computers, smartphones, tablets and connected TVs.  Our clients include some of the largest brand advertisers in the world including all of the top 10 automakers and 9 of the top 10 consumer packaged goods companies.  Our relationships with leading brand advertisers and their agencies have helped us create a robust online video ecosystem that includes close to 500 premium websites and mobile applications, nearly 200 of which partner with us on an exclusive basis.  Our proprietary technology, VideoHub, analyzes in-stream video content, detects viewer and system attributes, and leverages our large repository of stored data to optimize video ad campaigns for brand-centric metrics.  VideoHub also provides advertisers and agencies with advanced analytics and measurement tools enabling them to understand why, when and where viewers engage with their video ads.

 

Our VideoHub technology is the backbone of the Tremor Video Network through which we offer advertisers access to engaged consumers at scale in brand safe environments across multiple devices.  We derive substantially all of our revenue by delivering in-stream video advertising on behalf of a diversified base of brand advertisers in the United States through the Tremor Video Network.  For the three months ended September 30, 2013 and 2012, our in-stream video advertising revenue increased to $34.4 million from $28.9 million, or 19.0%, and for the nine months ended September 30, 2013 and 2012, our in-stream video advertising revenue increased to $92.8 million from $68.3 million, or 35.9%.

 

To further align the Tremor Video Network with the needs of brand advertisers, we offer a number of performance-based pricing models for in-stream video advertisements.  These models include cost per engagement, or CPE, pricing where we are compensated only when viewers actively engage with advertisers’ campaigns, such as by interacting with the elements of the video ad through clicks or screen touches or by rolling over certain elements of the video ad for at least three seconds, and cost per video completion, or CPVC, pricing where we are compensated only when a viewer completes the video ad.  We believe our performance-based pricing models have higher gross margins than traditional cost per thousand impressions, or CPM, pricing models, which are based solely on the number of ad impressions delivered, because we are often able to serve our advertisers’ performance goals with a lower number of purchased impressions.  As viewers increase time spent viewing video on internet-connected devices such as smartphones and tablets, we expect brand advertisers to devote increasing amounts of advertising spend to these channels.  Smartphones and tablets are inherently interactive and we believe that our in-stream advertising capabilities and higher margin CPE pricing model is well suited to address the growing market for mobile video ads.  As a percentage of total revenue, revenue attributable to performance-based pricing, such as CPE and CPVC, for the three months ended September 30, 2013 and 2012 was 26.1% and 27.3%, respectively, and revenue attributable to performance-based pricing for the nine months ended September 30, 2013 and 2012 was 31.5% and 21.7%, respectively.  We are focused on increasing the sales of video ad campaigns with performance-based pricing to drive revenue growth and increased margins.

 

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Table of Contents

 

In October 2013, we introduced additional performance-based pricing models where we are compensated only when a campaign results in a positive shift in the consumer’s favorability or intent towards a brand (which we refer to as cost per brand-shift, or CPS) or when a consumer’s intent is shifted away from a competing brand (which we refer to as cost per conquest, or CPQ).  Building on our CPVC offering, we also announced a new pricing model where we are only compensated when a video ad is both completed and viewable by the viewer for the duration of the ad (which we refer to as CPV&C).  We will continue to offer our CPE-priced and CPVC-priced offerings in addition to these newly announced performance-based pricing models.

 

In addition to our performance-based pricing models, we also offer advertisers the ability to purchase campaigns on a CPM-basis with a guaranteed demographic reach, or demo guarantees, where an advertiser pays based on the number of impressions that are delivered to a target demographic.  For the three months ended September 30, 2013, campaigns sold with demo guarantees had lower gross margins than CPM-priced campaigns that were sold without demo guarantees.

 

In 2012, we also began licensing VideoHub technology to advertisers and agencies through an intuitive, customizable user interface, which we call VideoHub for Advertisers, or VHA.  VHA affords advertisers transparency and analytical tools to measure the effectiveness of video ad campaigns across all of their video ad buys, whether or not those campaigns are run through the Tremor Video Network.  During the three and nine months ended September 30, 2013, we generated $0.9 million and $2.4 million, respectively, of licensing revenue from VHA and our publisher solutions, and we expect licensing revenue to increase in future periods.  We believe that our margins on our licensing revenue will be higher than those for the Tremor Video Network. We are also continuing to invest in the development of programmatic buying solutions for brand advertisers. We recently introduced a buying platform, which we are currently testing with select partners, through which brand advertisers can programmatically buy video ad inventory on brand-centric metrics.

 

For the three months ended September 30, 2013, as compared to the same period of 2012, our revenue increased to $35.3 million from $30.2 million, or 16.9%, our gross margin decreased to 40.3% from 44.6% due in part to a decrease in the percentage of revenue derived from CPE and CPVC sales and an increase in the percentage of revenue derived from CPM-priced campaigns sold with demo guarantees, our net loss increased to $2.2 million from $1.7 million and our Adjusted EBITDA (refer to “Key Metrics-Adjusted EBITDA”) decreased to a gain of $0.1 million from a gain of $0.7 million due in part to an increase in personnel-related costs and technology and development costs associated with expansion of our operations to facilitate our continued growth as well as costs of operating as a public company. For the nine months ended September 30, 2013 as compared to the same period of 2012, our revenue increased to $95.5 million from $72.7 million, or 31.4%, our gross margin improved to 43.6% from 40.2% due in part to the contribution of revenue derived from CPE and CPVC sales, our net loss decreased to $7.7 million from $15.6 million and our Adjusted EBITDA improved to a loss of $0.6 million from a loss of $8.5 million due to improvements in operating leverage in our business.

 

On July 2, 2013, we issued and sold 7,500,000 shares of common stock in our initial public offering, or IPO.  The net offering proceeds to us, after deducting underwriting discounts and commissions totaling approximately $5.3 million and offering expenses totaling approximately $3.1 million, were approximately $66.6 million.

 

Key Metrics

 

We monitor the key metrics set forth in the table below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(dollars in thousands)

 

Revenue

 

$

35,267

 

$

30,174

 

$

95,497

 

$

72,652

 

Gross margin

 

40.3

%

44.6

%

43.6

%

40.2

%

Net loss

 

$

(2,243

)

$

(1,675

)

$

(7,675

)

$

(15,582

)

In-stream advertising revenue(1)

 

$

34,357

 

$

28,895

 

$

92,770

 

$

68,289

 

Adjusted EBITDA

 

$

137

 

$

653

 

$

(633

)

$

(8,514

)

 


(1)         In-stream advertising revenue is revenue we generate solely from the sale of in-stream video ads.

 

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Revenue and Gross Margin

 

In the past, we generated a significant portion of revenue from the delivery of video display and banner ads, or in-banner video ads.  Beginning in 2011, we decided to focus our business on in-stream video advertising and to move away from in-banner video advertising.  We believe in-stream video ads are better suited for brand advertisers because they can be served to viewers immediately prior to or during the publisher’s content commanding attention when viewers are most engaged as opposed to in-banner video ads, which are served on the periphery of publisher content where viewers may not direct their attention.  As a result, revenue from the delivery of in-stream video ads has increased year over year as a percentage of our total revenue, and revenue from the delivery of in-banner video ads has decreased.  For the three months ended September 30, 2013 and 2012, our in-banner video advertising revenue was less than $0.1 million and $0.8 million, respectively, and for the nine months ended September 30, 2013 and 2012, our in-banner video advertising revenue was $0.3 million and $3.2 million, respectively.  On July 30, 2013, we announced that we would no longer sell in-banner video advertising and will focus solely on in-stream video advertising.  Accordingly, we do not expect to generate meaningful revenue from in-banner video ads in future periods. For the three months ended September 30, 2013, we believe that our revenue was negatively impacted by an increase in the prevalence of programmatic video ad buying. If there is a delay in, or failure to adopt, our programmatic buying solutions our revenue may be negatively impacted.

 

Historically, gross margin has been positively affected by campaigns priced on a performance basis.  As a percentage of total revenue, revenue attributable to performance-based pricing, such as CPE and CPVC, for the three months ended September 30, 2013 and 2012 was 26.1% and 27.3%, respectively, and for the nine months ended September 30, 2013 and 2012 was 31.5% and 21.7%, respectively.   For the three months ended September 30, 2013, CPM-priced campaigns sold with demo guarantees have lower gross margins than CPM-priced campaigns that were sold without demo guarantees, and our gross margin was negatively affected by an increase in the relative mix of CPM-priced campaigns sold with demo guarantees during such period compared to the prior year period. If the relative mix of CPM-priced campaigns sold with demo guarantees increases, our gross margin may be negatively affected.

 

In 2012, we also began to license VideoHub technology to advertisers and agencies through VHA.  In the near-term, we are investing in the further development of our programmatic buying solution, the enhancement of our VHA solution, and the expansion of our sales and support for these solutions.  Over time we expect the licensing portion of our business to become a more significant contributor to our operating results, which we believe would have a positive impact on our gross margin.

 

Adjusted EBITDA

 

Adjusted EBITDA represents our net loss before net interest and other (expense) income, taxes, and depreciation and amortization, and adjusted to eliminate the impact of stock-based compensation expense, which is a non-cash item.  Adjusted EBITDA is a key measure used by management to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital.  In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis and, in the case of exclusion of the impact of stock-based compensation, excludes an item that we do not consider to be indicative of our core operating performance.

 

Adjusted EBITDA is a non-GAAP financial measure.  Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP.  Some of these limitations are: (a) although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash and capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.  Because of these and other limitations, you should consider Adjusted EBITDA alongside our other GAAP-based financial performance measures, net loss and our other GAAP financial results.  The following table presents a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP measure, for each of the periods indicated:

 

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Three Months Ended
September 30,

 

Nine Months Ended

September 30,

 

 

 

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