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, 2014

 

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

(Address of principal executive offices)

 

10010

(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, 2014, there were 51,080,730 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, 2014 (unaudited) and December 31, 2013

3

 

 

 

 

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited)

4

 

 

 

 

 

 

Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2014 and 2013 (unaudited)

5

 

 

 

 

 

 

Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2014 (unaudited)

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)

7

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

8

 

 

 

Item 2.

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

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

Item 3.

Defaults Upon Senior Securities

30

 

 

 

Item 4.

Mine Safety Disclosures

30

 

 

 

Item 5.

Other Information

30

 

 

 

Item 6.

Exhibits

30

 

 

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,

 

 

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

77,909

 

$

92,691

 

Accounts receivable, net of allowance for doubtful accounts of $871 and $959 as of September 30, 2014 and December 31, 2013, respectively

 

46,519

 

41,458

 

Prepaid expenses and other current assets

 

1,614

 

1,912

 

Total current assets

 

126,042

 

136,061

 

Long-term assets:

 

 

 

 

 

Restricted cash

 

600

 

600

 

Property and equipment, net of accumulated depreciation of $4,467 and $3,618 as of September 30, 2014 and December 31, 2013, respectively

 

4,730

 

3,388

 

Intangible assets, net of accumulated amortization of $18,940 and $15,313 as of September 30, 2014 and December 31, 2013, respectively

 

16,760

 

20,387

 

Goodwill

 

29,719

 

29,719

 

Deferred tax assets

 

189

 

189

 

Other assets

 

249

 

216

 

Total long-term assets

 

52,247

 

54,499

 

Total assets

 

$

178,289

 

$

190,560

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

33,157

 

$

32,312

 

Deferred rent and security deposits payable, short-term

 

 

14

 

Deferred revenue

 

314

 

271

 

Deferred tax liabilities, short-term

 

189

 

189

 

Total current liabilities

 

33,660

 

32,786

 

Deferred rent, long-term

 

763

 

742

 

Total liabilities

 

34,423

 

33,528

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.0001 par value: 250,000,000 shares authorized as of September 30, 2014 and December 31, 2013, respectively; 51,077,731 and 49,998,274 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively

 

5

 

5

 

Additional paid-in capital

 

272,734

 

267,767

 

Accumulated other comprehensive income

 

137

 

195

 

Accumulated deficit

 

(129,010

)

(110,935

)

Total stockholders’ equity

 

143,866

 

157,032

 

Total liabilities and stockholders’ equity

 

$

178,289

 

$

190,560

 

 

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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue

 

$

39,039

 

$

35,267

 

$

117,609

 

$

95,497

 

Cost of revenue

 

24,046

 

21,057

 

75,882

 

53,869

 

Gross profit

 

14,993

 

14,210

 

41,727

 

41,628

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Technology and development

 

4,270

 

2,833

 

12,583

 

8,348

 

Sales and marketing

 

10,761

 

9,477

 

31,118

 

28,263

 

General and administrative

 

3,724

 

2,681

 

11,037

 

8,069

 

Depreciation and amortization

 

1,673

 

1,581

 

4,902

 

4,576

 

Total operating expenses

 

20,428

 

16,572

 

59,640

 

49,256

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(5,435

)

(2,362

)

(17,913

)

(7,628

)

 

 

 

 

 

 

 

 

 

 

Interest and other income (expense), net:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(3

)

(14

)

(3

)

(127

)

Other income (expense), net

 

8

 

153

 

(15

)

323

 

Total interest and other income (expense), net

 

5

 

139

 

(18

)

196

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(5,430

)

(2,223

)

(17,931

)

(7,432

)

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

44

 

20

 

144

 

243

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(5,474

)

(2,243

)

(18,075

)

(7,675

)

 

 

 

 

 

 

 

 

 

 

Series F preferred stock deemed dividend

 

 

15,849

 

 

15,849

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(5,474

)

$

(18,092

)

$

(18,075

)

$

(23,524

)

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.11

)

$

(0.37

)

$

(0.36

)

$

(1.08

)

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares of common stock outstanding:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

50,751,303

 

49,115,766

 

50,485,734

 

21,686,759

 

 

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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net loss

 

$

(5,474

)

$

(2,243

)

$

(18,075

)

$

(7,675

)

Series F preferred stock deemed dividend

 

 

15,849

 

 

15,849

 

Net loss attributable to common stockholders

 

(5,474

)

(18,092

)

(18,075

)

(23,524

)

Other comprehensive (loss) gain:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(63

)

50

 

(58

)

(100

)

Comprehensive loss attributable to common stockholders

 

$

(5,537

)

$

(18,042

)

$

(18,133

)

$

(23,624

)

 

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

 

5



Table of Contents

 

Tremor Video, Inc.

Consolidated Statement of Changes in Stockholders’ Equity

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

Total

 

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Share

 

Amount

 

Capital

 

Income

 

Deficit

 

Equity

 

Balance as of December 31, 2013

 

49,998,274

 

$

5

 

$

267,767

 

$

195

 

$

(110,935

)

$

157,032

 

Exercise of stock options

 

745,807

 

 

727

 

 

 

727

 

Stock-based compensation expense

 

 

 

3,288

 

 

 

3,288

 

Common stock issued for settlement of restricted stock units (RSUs), net of 173,169 shares withheld to satisfy income tax withholding obligations

 

333,650

 

 

952

 

 

 

952

 

Net loss

 

 

 

 

 

(18,075

)

(18,075

)

Foreign current translation adjustment

 

 

 

 

(58

)

 

(58

)

Balance as of September 30, 2014

 

51,077,731

 

$

5

 

$

272,734

 

$

137

 

$

(129,010

)

$

(143,866

)

 

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)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(18,075

)

$

(7,675

)

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

 

 

 

 

 

Depreciation of property and equipment

 

1,275

 

919

 

Amortization of intangible assets

 

3,627

 

3,657

 

Bad debt recovery

 

(36

)

(26

)

Mark-to-market income

 

 

(313

)

Contingent stock grant to third party vendor

 

24

 

 

Stock-based compensation expense

 

3,294

 

2,419

 

Stock-based long-term incentive compensation

 

274

 

 

Net changes in operating assets and liabilities:

 

 

 

 

 

Increase in accounts receivable

 

(5,061

)

(3,376

)

Decrease (increase) in prepaid expenses and other long-term assets

 

292

 

(835

)

Increase in accounts payable and accrued expenses

 

2,039

 

8,998

 

Increase in deferred rent and security deposits payable

 

7

 

119

 

Increase (decrease) in deferred revenue

 

43

 

(16

)

Net cash (used in) provided by operating activities

 

(12,297

)

3,871

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(2,617

)

(1,757

)

Changes in restricted cash

 

 

621

 

Net cash used in investing activities

 

(2,617

)

(1,136

)

 

 

 

 

 

 

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

 

727

 

492

 

Tax withholdings related to net share settlements of restricted stock units (RSUs)

 

(565

)

 

Net cash provided by financing activities

 

162

 

61,090

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(14,752

)

63,825

 

 

 

 

 

 

 

Effect of exchange rate changes in cash and cash equivalents

 

(30

)

(100

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

92,691

 

32,533

 

Cash and cash equivalents at end of period

 

$

77,909

 

$

96,258

 

 

 

 

 

 

 

Supplemental disclosure of cash flow activities:

 

 

 

 

 

Cash paid for income taxes

 

$

 

$

147

 

Cash paid for interest expense

 

$

3

 

$

127

 

 

 

 

 

 

 

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

 

Common stock issued for settlement of RSUs

 

$

952

 

$

 

 

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 an advertising technology company elevating brand performance across all screens for the world’s leading brands and publishers.  The Company offers brand advertisers and publishers a complete programmatic solution to reach and engage consumers while providing new insights into what drives the success of brand advertising performance across multiple screens, 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 licensed analytics solution, the Company provides advanced video analytic capabilities for advertisers and publishers, to measure, verify and evaluate the performance of video ad campaigns across multiple channels, both within and outside of its Tremor Video Network.

 

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 (“U.S. GAAP”) and applicable rules and regulations of the U.S. 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 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 or the results for any future periods due to seasonal and other factors.  Certain information and footnote disclosures normally included in the consolidated financial statements in accordance with U.S. 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 Form 10-K for the year ended December 31, 2013 filed with the SEC on March 28, 2014.

 

Principles of Consolidation

 

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

 

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 equivalents may exceed federally insured limits at times.  The Company has not experienced any losses on cash and cash equivalents to date.

 

The Company determines collectability by performing ongoing credit evaluations and monitoring its customers’ accounts receivable balances. For new customers and their agents, which may be advertising agencies or other third parties, the Company performs a credit check with an independent credit agency and may check credit references to determine creditworthiness. The Company only recognizes revenue when collection is reasonably assured.

 

During the three and nine months ended September 30, 2014, there were no advertisers that accounted for more than 10% of revenue.  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.

 

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)

 

As of September 30, 2014 and December 31, 2013, there were no advertisers that accounted for more than 10% of outstanding accounts receivable.

 

Recently Issued Accounting Pronouncements

 

FASB Accounting Standards Update No. 2014-09 — Revenue from Contracts with Customers

 

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standards update that provides a comprehensive model for recognizing revenue with customers.  This update clarifies and replaces all existing revenue recognition guidance within U.S. GAAP.  This update is effective for annual and interim periods beginning after December 15, 2016, with no early adoption permitted.  The Company is currently evaluating the adoption method to apply and the impact that the update will have on its consolidated financial statements and related disclosures.

 

FASB Accounting Standards Update No. 2013-11 — Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

 

In July 2013, the FASB issued new accounting guidance on the presentation of unrecognized tax benefits. This new guidance requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists, with limited exceptions. This new guidance is effective for annual and interim periods beginning after December 15, 2013.  The Company adopted this guidance in the first quarter of 2014.  The adoption of this new accounting guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

 

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:

 

·                  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.

 

9



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)

 

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 table summarizes the conclusions reached as of September 30, 2014 and December 31, 2013:

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

65,562

 

$

 

$

 

$

65,562

 

$

89,042

 

$

 

$

 

$

89,042

 

 

 

$

65,562

 

$

 

$

 

$

65,562

 

$

89,042

 

$

 

$

 

$

89,042

 

 


(1)         Money market funds are included within cash and cash equivalents in the Company’s consolidated balance sheets.  As short-term, highly liquid investments readily convertible to known amounts of cash, the Company’s money market funds have carrying values that approximates its fair value.  Amounts above do not include $12,347 and $3,649 of operating cash balances as of September 30, 2014 and December 31, 2013, respectively.

 

4.  Property and Equipment, Net

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Cost:

 

 

 

 

 

Computer hardware

 

$

5,505

 

$

3,908

 

Leasehold improvements

 

1,516

 

1,422

 

Furniture and fixtures

 

1,119

 

1,090

 

Computer software

 

881

 

482

 

Office equipment

 

176

 

104

 

 

 

9,197

 

7,006

 

Accumulated depreciation

 

(4,467

)

(3,618

)

Total property and equipment, net of accumulated depreciation

 

$

4,730

 

$

3,388

 

 

The depreciation expense related to property and equipment was $464 and $362 for the three months ended September 30, 2014 and 2013, respectively, and $1,275 and $919 for the nine months ended September 30, 2014 and 2013, respectively.

 

The Company recorded a reduction of $426 and $654 to the cost and accumulated depreciation of fully depreciated equipment and leasehold improvements no longer in use for the nine months ended September 30, 2014 and 2013, respectively.

 

10



Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

5.  Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

24,991

 

$

24,121

 

Accrued compensation, benefits and payroll taxes(1)

 

5,243

 

5,612

 

Accrued cost of sales

 

1,416

 

1,267

 

Other payables and accrued expenses

 

1,507

 

1,312

 

Total accounts payable and accrued expenses

 

$

33,157

 

$

32,312

 

 


(1)         At September 30, 2014 and December 31, 2013, accrued compensation, benefits and payroll taxes includes $367 and $1,614 of stock-based long-term incentive compensation expense, respectively, related to the Company’s long-term sales incentive compensation plan.  Payments earned under the long-term sales incentive compensation plan for the 2013 plan year were paid in stock-based awards in August 2014.  The Company issued an aggregate total of 293,650 shares to employees under its 2013 Plan on account of such payments, net of 173,169 shares withheld to satisfy income tax withholding obligations in the amount of $565, which were remitted to tax authorities.  Payments earned under the plan for the 2014 plan year will be made in stock-based awards to participants that remain employed with the Company through June 30, 2015, which will be paid in August 2015.

 

6.  Changes in Accumulated Other Comprehensive Income

 

The following tables provide the components of accumulated other comprehensive income:

 

 

 

Foreign

 

 

 

Currency

 

 

 

Translation

 

 

 

Adjustment

 

Beginning balance at July 1, 2014

 

$

200

 

Other comprehensive loss before reclassifications

 

(63

)

Amounts reclassified from accumulated other comprehensive income

 

 

Ending balance at September 30, 2014

 

$

137

 

 

 

 

Foreign

 

 

 

Currency

 

 

 

Translation

 

 

 

Adjustment

 

Beginning balance at July 1, 2013

 

$

195

 

Other comprehensive gain before reclassifications

 

50

 

Amounts reclassified from accumulated other comprehensive income

 

 

Ending balance at September 30, 2013

 

$

245

 

 

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Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

6.  Changes in Accumulated Other Comprehensive Income (Continued)

 

 

 

Foreign

 

 

 

Currency

 

 

 

Translation

 

 

 

Adjustment

 

Beginning balance at January 1, 2014

 

$

195

 

Other comprehensive loss before reclassifications

 

(58

)

Amounts reclassified from accumulated other comprehensive income

 

 

Ending balance at September 30, 2014

 

$

137

 

 

 

 

Foreign

 

 

 

Currency

 

 

 

Translation

 

 

 

Adjustment

 

Beginning balance at January 1, 2013

 

$

345

 

Other comprehensive loss before reclassifications

 

(100

)

Amounts reclassified from accumulated other comprehensive income

 

 

Ending balance at September 30, 2013

 

$

245

 

 

7.  Stock-Based Compensation

 

The Company included stock-based compensation expense related to all of its stock-based awards in various operating expense categories for the three months ended September 30, 2014 and 2013 and for the nine months ended September 30, 2014 and 2013 as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(unaudited)

 

Technology and development

 

$

239

 

$

142

 

$

653

 

$

391

 

Sales and marketing

 

342

 

317

 

1,063

 

883

 

General and administrative

 

607

 

459

 

1,578

 

1,145

 

Total stock-based compensation expense

 

$

1,188

 

$

918

 

$

3,294

 

$

2,419

 

 

Stock-Based Incentive Plans

 

On June 26, 2013, the Company adopted the 2013 Equity Incentive Plan (the “2013 Plan”).  The Company has stock option awards outstanding under five stock-based incentive plans as of September 30, 2014 and December 31, 2013, including, in each case, two plans that were assumed as part of the acquisition of ScanScout, Inc.  The Company has restricted stock unit awards outstanding under its 2013 Plan.

 

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Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

7.  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 for the nine months ended September 30, 2014:

 

 

 

Number of
Stock Option

 

Weighted-Average

 

 

 

Awards

 

Exercise Price

 

 

 

Outstanding

 

Per Share

 

Stock option awards outstanding as of December 31, 2013

 

7,302,761

 

$

3.96

 

Stock option awards granted

 

1,006,094

 

$

3.88

 

Stock option awards forfeited

 

(614,013

)

$

5.27

 

Stock option awards exercised

 

(745,807

)

$

0.97

 

Stock option awards outstanding as of September 30, 2014

 

6,949,035

 

$

4.16

 

 

 

 

 

 

 

Stock option awards vested and exercisable as of September 30, 2014

 

4,446,692

 

$

3.66

 

 

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 weighted-average grant date fair value of stock option awards granted during the nine months ended September 30, 2014 was $1.84 per share.  The total intrinsic value of stock option awards exercised during the nine months ended September 30, 2014 and 2013 was $2,378 and $993, respectively.  Cash proceeds received from stock option awards exercised for the nine months ended September 30, 2014 and 2013 was $727 and $492, respectively.

 

There was $5,691 of total unrecognized compensation cost related to non-vested stock option awards granted under the Company’s equity incentive plans as of September 30, 2014.  This cost is expected to be recognized over a weighted-average period of 2.87 years.

 

Non-vested Restricted Stock Units (RSU)

 

The following table presents a summary of the Company’s non-vested restricted stock unit award activity under all plans and related information for the nine months ended September 30, 2014:

 

 

 

Number of
Shares of

 

Weighted-Average

 

 

 

Restricted

 

Grant Date

 

 

 

Stock Unit

 

Fair Value

 

 

 

Awards

 

Per Share

 

Non-vested restricted stock unit awards outstanding as of December 31, 2013

 

70,119

 

$

9.63

 

Restricted stock unit awards granted

 

1,499,405

 

$

3.94

 

Restricted stock unit awards forfeited

 

(137,347

)

$

5.37

 

Restricted stock unit awards exercised

 

(506,819

)

$

3.78

 

Non-vested restricted stock unit awards outstanding as of September 30, 2014

 

925,358

 

$

4.25

 

 

As of September 30, 2014, there was $3,346 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 3.55 years.

 

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Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

7.  Stock-Based Compensation (Continued)

 

Employee Stock Purchase Plan

 

On April 22, 2014, the Company’s board of directors adopted the 2014 Employee Stock Purchase Plan (“2014 ESPP”), which was approved by the Company’s stockholders at the 2014 annual meeting of stockholders on June 16, 2014.  The 2014 ESPP allows eligible participants to purchase shares of the Company’s common stock generally at six-month intervals, or offering periods, at a price equal to 85% of the lower of (i) the fair market value at the beginning of the offering period or (ii) the fair market value at the end of the offering period, or the purchase date.

 

Employees purchase shares of common stock through payroll deductions, which may not exceed 15% of their total base salary.  The 2014 ESPP imposes certain limitations upon an employee’s right to purchase shares, including the following: (1) no employee may purchase more than 5,000 shares on any one purchase date and (2) no employee may purchase shares with a fair market value in excess of $25 in any calendar year.

 

No more than 2,000,000 shares of common stock are reserved for future issuance under the 2014 ESPP.

 

The Company began its first offering period in August 2014 and will end in February 2015.

 

The fair value for each award under the 2014 ESPP was estimated at the beginning of the offering period using a Black-Scholes option pricing model and requires subjective assumptions, including, but not limited, to the expected term of the award and stock price volatility. The Company estimates the expected term of the shares of common stock granted under the 2014 ESPP based on the duration of the offering periods, which is six months.  The Company estimates the volatility of its common stock on the date of grant based on the historic volatility of comparable companies in its industry. The Company selected the risk-free interest rate based on yields from United States Treasury zero-coupon issues with a term consistent with the expected term of the awards in effect at the time of grant. The Company has never declared or paid any cash dividends and has no current plan to do so. Consequently, it used an expected dividend yield of zero.  For the nine months ended September 30, 2014, the following assumptions were used for awards issued under the 2014 ESPP:

 

 

 

2014

 

 

 

(unaudited)

 

Volatility

 

33.82

%

Risk-free interest rate

 

0.05

%

Expected term (in years)

 

0.50

%

Dividend yield

 

0.00

%

 

As of September 30, 2014, there was $122 of total unrecognized compensation cost related to awards under the 2014 ESPP. This cost is expected to be recognized over a weighted-average period of less than one year.

 

8.  Net Loss Attributable to Common Stockholders Per Share

 

Basic 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.

 

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 mandatorily redeemable convertible preferred stock (“preferred stock”), warrants to purchase common stock, preferred stock, stock option awards and restricted stock unit awards.  Due to the Company’s net loss attributable to common stockholders: (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:

 

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Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

8.  Net Loss Attributable to Common Stockholders Per Share (Continued)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(unaudited)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(5,474

)

$

(2,243

)

$

(18,075

)

$

(7,675

)

Series F preferred stock deemed dividend(1)

 

 

15,849

 

 

15,849

 

Net loss attributable to common stockholders

 

$

(5,474

)

$

(18,092

)

$

(18,075

)

$

(23,524

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average number of shares of common stock outstanding for basic and diluted net loss attributable to common stockholders per share(1)

 

50,751,303

 

49,115,766

 

50,485,734

 

21,686,759

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss attributable to common stockholders per share

 

$

(0.11

)

$

(0.37

)

$

(0.36

)

$

(1.08

)

 


(1)         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 preferred stock automatically converted into 34,172,316 shares of common stock, which included a one-time $15,849 non-cash preferred stock deemed dividend related to 1,584,863 of additional shares of common stock issued to holders of the Company’s Series F preferred stock, in connection with the conversion terms of such preferred stock.

 

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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Warrants to purchase preferred stock(1)

 

 

140,933

 

 

140,933

 

Warrants to purchase common stock

 

39,824

 

39,824

 

39,824

 

39,824

 

Preferred stock(1)

 

 

32,563,192

 

 

32,563,192

 

Stock option awards

 

6,949,035

 

7,170,783

 

6,949,035

 

7,170,783

 

Restricted stock unit awards

 

925,358

 

70,119

 

925,358

 

70,119

 

Total anti-dilutive securities

 

7,914,217

 

39,984,851

 

7,914,217

 

39,984,851

 

 


(1)              On July 2, 2013, upon closing of the IPO, all of the Company’s outstanding preferred stock automatically converted into shares of common stock.  In addition, the outstanding warrants to purchase preferred stock automatically converted into warrants to purchase common stock.

 

9. Employee Benefit Plan

 

The Company maintains a defined contribution retirement plan available to all eligible U.S. employees pursuant to Section 401(k) of the U.S. Internal Revenue Code (the “401(k) Plan”).  Pursuant to the Company’s 401(k) Plan, participating U.S. employees may defer a portion of their pre-tax earnings, subject to annual IRS contribution limits. The Company began a

 

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Table of Contents

 

Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

9. Employee Benefit Plan (Continued)

 

discretionary contribution matching of employee’s contributions in February 2014. The Company will match 50% of each participant’s eligible contributions, up to a maximum employer matching contribution of 3% of each participant’s eligible base salary. Participants will vest in such discretionary employer matching contributions over a three-year graded vesting period.

 

Total employer matching contributions to the Company’s 401(k) Plan for the three and nine months ended September 30, 2014 were $133 and $340, respectively.

 

10.  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.

 

Substantially all assets were held in the United States as of September 30, 2014 and December 31, 2013 and substantially all revenue was generated through sales personnel in the United States for the three and nine months ended September 30, 2014 and 2013.

 

11.  Subsequent Events

 

Credit Facility

 

On October 20, 2014, the Company amended its existing Loan and Security Agreement, dated as of June 7, 2007, as amended (“Loan Agreement”), with Silicon Valley Bank (“SVB”).  The Loan Agreement was amended to, among other things: (i) increase the Company’s revolving credit facility from $25,000 to $32,500; (ii) add a letter of credit, foreign exchange and cash management facility in an aggregate amount of $2,500; (iii) reduce the Company’s interest rate from SVB’s prime rate plus 0.50% to SVB’s prime rate; (iv) increase the fee for unused capacity from 0.20% to 0.25% per year; (v) adjust the quick ratio financial covenant from 1.50 to 1.00 to 1.25 to 1.00; and (vi) extend the maturity date to December 30, 2016.  The Company had no outstanding borrowings under the Loan Agreement and was in compliance with all covenants as of September 30, 2014 and through October 20, 2014.

 

Office Lease

 

On October 28, 2014, the Company entered into a new lease (“Lease”) for its principal executive offices in New York, New York.  The Lease is for approximately 51,000 square feet of office space. The initial 10 year term of the Lease is estimated to commence on December 1, 2014, which is the date the Company expects to take possession of the leased premises. Pursuant to the Lease, the Company has the option to extend the Lease for one additional five-year term.

 

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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, 2013 included in the Annual Report on Form 10-K filed with the SEC on March 28, 2014.  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, including our Annual Report on Form 10-K filed with the SEC on March 28, 2014.  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., we or us, is an advertising technology company elevating brand performance across all screens for the world’s leading brands and publishers. We offer brand advertisers and publishers a complete programmatic solution to reach and engage consumers while providing new insights into what drives the success of brand advertising performance across multiple devices, including computers, smartphones, tablets and connected TVs. 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 across screens to achieve brand performance goals, while providing access to advanced analytics and measurement tools in real-time.  Our clients include some of the largest brand advertisers in the world including all of the top 10 automakers and top 10 consumer packaged goods companies. Our relationships with leading brand advertisers and their agencies have helped us create a robust online video ecosystem of premium websites and mobile applications, many of which partner with us on an exclusive basis.

 

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 generally offer the Tremor Video Network as a managed service, with our team of experts managing the execution and delivery of an advertising campaign according to specific campaign parameters and brand performance goals set by the advertiser.  These managed services are primarily contracted through insertion orders that we enter into with agencies and agency holding companies on behalf of their advertiser clients.  Advertisers are also able to access the Tremor Video Network through programmatic demand sources such as agency trading desks and DSPs that are either integrated directly with our technology or transact through an integrated exchange.  These programmatic demand sources often transact through master services agreements that govern the purchasing of inventory, eliminating the need for campaign-specific insertion orders.  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 on a managed service basis.

 

We are continuing to develop and invest in a complete programmatic solution for brand advertisers and premium publishers, including a self-service platform.  In the second quarter of 2014, we introduced to market a demand side platform, or DSP, for brand performance.  Through our DSP, advertisers and agencies are able to set campaign parameters and goals on a self-service basis through an intuitive and customizable interface, and our Videohub technology optimizes delivery of the campaign across inventory sources, while providing advanced analytics and measurement tools that track campaign performance.  We also recently introduced a self-service supply side platform, or SSP, for premium publishers, which helps publishers maximize the value of their video inventory by enabling their direct programmatic sales efforts and automating workflow.  We are continuing to integrate our technology with third party exchanges, SSPs and DSPs to bring additional demand sources to our publisher SSP clients and enable advertisers and agencies to programmatically connect with engaged consumers across a broad inventory pool.

 

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Table of Contents

 

In addition, we license VideoHub analytics to advertisers, agencies and publishers through our self-service platform.  This solution affords advertisers transparency and analytical tools to measure the effectiveness of video ad campaigns across all of their video ad buys, and provides Publishers with valuable insights into what is driving the performance of ad campaigns running on their content.  We generated $0.4 million and $0.9 million for the three months ended September 30, 2014 and 2013, respectively, and $1.2 million and $2.4 million for the nine months ended September 30, 2014 and 2013, respectively, of revenue from licensed analytics solutions.

 

To further align our solutions with the needs of brand advertisers, we offer a number of performance-based pricing models for in-stream video advertisements where we are compensated only when viewers take certain actions, such as engaging with an ad, or when certain campaign results are achieved, such as a positive shift in the consumer’s favorability or intent towards a brand. We believe our performance-based pricing models have higher gross margins than traditional 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 a percentage of total revenue, revenue attributable to performance-based pricing was 28.4% and 26.1% for the three months ended September 30, 2014 and 2013, respectively, and 26.1% and 31.5% for the nine months ended September 30, 2014 and 2013, respectively.  We continue to focus on increasing the sales of video ad campaigns with performance-based pricing to drive revenue growth and increase margins.

 

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 and nine months ended September 30, 2014, campaigns sold with demo guarantees had lower gross margins than CPM-priced campaigns that were sold without demo guarantees.

 

As viewers increase time spent viewing video on 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 performance based pricing models are well suited to address the growing market for mobile video ads.  In April 2014, we announced the launch of an all-screen automated optimization solution for in-stream video advertising.  Using this solution, brand advertisers can select a single campaign goal and VideoHub will optimize delivery of the campaign to find the right viewer wherever they may be watching video, whether on computers, tablets, smartphones or connected TVs, thus eliminating the need to allocate campaign budgets to a specific device.

 

For the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, our revenue increased to $39.0 million from $35.3 million, or 10.7%. Over the same period, our gross margin declined to 38.4% from 40.3% due primarily to our increased investment in premium video inventory and a decrease in revenue from our licensed analytics solutions.  Our net loss increased to $5.5 million from $2.2 million. Our adjusted EBITDA (refer to “Key Metrics”)  decreased to a loss of $2.3 million from a gain of $0.1 million, reflecting the decrease in gross margin described above as well as continued investment in our technology and development efforts, in particular as relates to our programmatic solutions.

 

For the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, our revenue increased to $117.6 million from $95.5 million, or 23.2%. Over the same period, our gross margin declined to 35.5% from 43.6% due in part to a decrease in the percentage of revenue derived from our performance based pricing models and an increase in the percentage of revenue derived from CPM-priced campaigns sold with demo guarantees, our increased investment in premium video inventory, and a decline in the effective CPM for campaigns running on the Tremor Video Network. Our net loss increased to $18.1 million from $7.7 million. Our adjusted EBITDA increased to a loss of $9.2 million from a loss of $0.6 million, reflecting the decrease in gross margin described above as well as continued investment in our technology and development efforts, in particular as relates to our programmatic solutions.

 

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.

 

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Table of Contents

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(dollars in thousands)

 

Revenue

 

$

39,039

 

$

35,267

 

$

117,609

 

$

95,497

 

Gross margin

 

38.4

%

40.3

%

35.5

%

43.6

%

Net loss

 

$

(5,474

)

$

(2,243

)

$

(18,075

)

$

(7,675

)

Adjusted EBITDA

 

$

(2,282

)

$

137

 

$

(9,164

)

$

(633

)

 

Gross margin is our gross profit expressed as a percentage of our total revenue.  Our gross margin is primarily impacted by video advertising inventory costs associated with delivering our advertisers campaigns relative to the revenue we generate from delivering such campaigns.  Historically, our gross margin has been positively affected by campaigns priced on a performance basis, while campaigns sold with demo guarantees have had lower overall gross margins than CPM-priced campaigns that were sold without demo guarantees.  If the relative mix of CPM-priced campaigns sold with demo guarantees increases, or the relative mix of campaigns priced on a performance basis decreases in future periods, our gross margin may be negatively affected.

 

Adjusted EBITDA represents our net loss before interest and other (income) expense, net, income tax expense, depreciation and amortization expense, and adjusted to eliminate the impact of stock-based compensation expense and stock-based long-term incentive compensation, both of which are non-cash items, and litigation costs associated with pending class action securities litigation.  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 the exclusion of the impact of non-cash stock-based compensation expense, non-cash stock-based long-term incentive compensation and litigation costs associated with pending class action securities litigation, excludes items 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 U.S. 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; (e) adjusted EBITDA does not reflect litigation costs associated with pending class action securities litigation; and (f) 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:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(dollars in thousands)

 

Net loss

 

$

(5,474

)

$

(2,243

)

$

(18,075

)

$

(7,675

)

Adjustments:

 

 

 

 

 

 

 

 

 

Interest and other (income) expense, net

 

(5

)

(139

)

18

 

(196

)

Income tax expense

 

44

 

20

 

144

 

243

 

Depreciation and amortization expense

 

1,673

 

1,581

 

4,902

 

4,576

 

Stock-based compensation expense

 

1,188

 

918

 

3,294

 

2,419

 

Stock-based long-term incentive compensation(1)

 

160

 

 

274

 

 

Litigation costs

 

132

 

 

279

 

 

Total net adjustments

 

3,192

 

2,380

 

8,911

 

7,042

 

Adjusted EBITDA

 

$

(2,282

)

$

137

 

$

(9,164

)

$

(633

)

 

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(1)         Reflects amounts accrued for the 2014 plan year, net of forfeitures from the 2013 plan year.

 

Components of Operating Results

 

We operate in one segment, online video advertising services.  The key elements of our operating results include:

 

Revenue

 

We generate revenue primarily by delivering in-stream video advertisements for brand advertisers and agencies through the Tremor Video Network on a managed service basis.  We also license our VideoHub analytics to advertisers, agencies and publishers through a self-service platform.

 

We generally price delivery of our video ads through the Tremor Video Network on a CPM, CPE (cost per engagement), CPVC (cost per video completed), CPS (cost per brand-shift), CPQ (cost per conquest), or CPV&C (cost per ad completed and viewable) basis.  We recognize revenue for video ad delivery through the Tremor Video Network upon: (i) delivery of impressions served for CPM-priced ad campaigns without demo guarantees; (ii) delivery of each impression served to a target demographic for CPM-priced ad campaigns with demo guarantees; (iii) engagement by the consumer with a video ad for CPE-priced ad campaigns; (iv) completion of a video ad by the consumer for CPVC-priced ad campaigns; (v) positive shift in a consumer’s favorability towards a brand for CPS-priced ad campaigns; (vi) shift of a consumer’s intent away from a competing brand for CPQ-priced ad campaigns; and (vii) completion of a video ad by a consumer, which video ad is viewable for its duration, for CPV&C-priced ad campaigns.  The prices we charge our clients also vary depending upon the source of inventory, ad format chosen and the device type through which the campaign runs, but are generally consistent across computers, smartphones and tablets.  We primarily offer our Tremor Video Network solution to advertisers by entering into insertion orders with ad agencies on behalf of advertisers.  These insertion orders are generally cancellable upon short notice and without penalty consistent with standard terms and conditions for the purchase of internet advertising for media buys one year or less published by the Interactive Advertising Bureau.  For programmatic campaigns purchased on the Tremor Video Network by advertisers and agencies through third party DSPs or exchanges, we often enter into master services agreements with such DSPs or exchanges governing the purchase of inventory, eliminating the need for campaign-specific insertion orders.

 

We also generate revenue from licensing our VideoHub analytics through a self-service platform to advertisers, agencies and publishers.  The license fee varies depending upon the level of access to our video advertising analytics and the volume of impressions being analyzed by VideoHub.  We recognize revenue with respect to this solution on a CPM basis based upon the number of impressions being analyzed in a given month. In limited cases, we may charge a minimum monthly fee.  Typically, our license terms are for one year periods.

 

Cost of Revenue

 

Our cost of revenue primarily represents the video advertising inventory costs under our publisher contracts, research costs, third party hosting fees, licensing costs of third party data providers, and third party serving fees incurred to deliver ad campaigns.  Substantially all of our cost of revenue is attributable to video advertising inventory costs under our publisher contracts.  We recognize cost of revenue on a publisher-by-publisher basis at the same time as we recognize the associated advertising revenue.  Substantially all of our exclusive publisher contracts contain minimum percentage fill rates on qualified video ad requests, which effectively means that we must purchase this inventory from our exclusive publishers even if we lack a video advertising campaign to deliver.  We recognize the difference between our contractually required fill rate and the number of video ads actually delivered by us on the publisher’s website, if any, as a cost of revenue as of the end of each applicable monthly period.  Costs owed to publishers but not yet paid are recorded in our consolidated balance sheets as accounts payable and accrued expenses.

 

Operating Expenses

 

Operating expenses consist of technology and development, sales and marketing, general and administrative and depreciation and amortization expenses.  Salaries, incentive compensation, stock-based compensation and other personnel-related costs are the most significant components of each of these expense categories other than depreciation and amortization expenses.  We include stock-based compensation expense in connection with the grant of stock option awards or restricted stock unit awards in the applicable operating expense category based on the respective equity award recipient’s function.

 

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Table of Contents

 

Technology and Development Expense. Technology and development expense primarily consists of salaries, incentive compensation, stock-based compensation and other personnel-related costs for development, network operations and engineering personnel.  Additional expenses in this category include costs related to the development, quality assurance and testing of new technology and maintenance and enhancement of existing technology and infrastructure as well as consulting, travel and other related overhead.  We engage third-party consulting firms for various technology and development efforts, such as documentation, quality assurance and support.  Due to the rapid development and changes in our business, we have expensed technology and development expenses in the same period that the costs are incurred.  We intend to continue to invest in our technology and development efforts, in particular as relates to our self-service platform, by hiring additional personnel and by using outside consulting firms for various initiatives.  We believe continuing to invest in technology and development efforts is essential to maintaining our competitive position.

 

Sales and Marketing Expense.  Sales and marketing expense primarily consists of salaries, incentive compensation, stock-based compensation and other personnel-related costs for our marketing and creative employees and our advertiser focused, publisher focused and licensing solution focused sales and sales support employees.  Additional expenses in this category include marketing programs, consulting, travel and other related overhead.  We expect our sales and marketing expense to increase in the foreseeable future as we continue to grow our managed service business, further increase the number of our self-service platform focused sales and marketing professionals and expand our marketing activities.

 

General and Administrative Expense. General and administrative expense primarily consists of salaries, incentive compensation, stock-based compensation and other personnel-related costs for business operations, administration, finance and accounting, legal, information systems and human resources employees.  Included in general and administrative expenses are consulting and professional fees, including legal, accounting and investor relations fees, insurance, costs associated with compliance with the Sarbanes-Oxley Act and other public company corporate expenses, travel and other related overhead.  We expect our general and administrative expenses to increase in absolute dollars as a result of operating as a public company and the continuing growth of our business.

 

Depreciation and Amortization Expense. Depreciation and amortization expense primarily consists of our depreciation expense related to property, equipment and software as well as the amortization of certain intangible assets.

 

Interest and Other Income (Expense), Net

 

Interest and other income (expense), net, primarily consists of interest income, interest expense, foreign exchange transaction gains and losses, and mark-to-market expense.  Interest income is derived from interest received on our cash and cash equivalents.  Interest expense consists primarily of the interest incurred on our then-outstanding borrowings under our credit facility.  As of September 30, 2014 and December 31, 2013, we did not have any outstanding borrowings under our credit facility.  Mark-to-market expense consists primarily of expense related to our preferred stock warrant liability in 2013.  As of September 30, 2014 and December 31, 2013, we no longer have any preferred stock warrant liability outstanding.

 

Income Tax Expense

 

Income tax expense primarily consists of minimum U.S. state and local taxes, income taxes in foreign jurisdictions in which we conduct business and deferred income taxes.

 

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Table of Contents

 

Results Of Operations

 

Three and Nine Months Ended September 30, 2014 and 2013

 

The following table is a summary of our consolidated statements of operations data for each of the periods indicated.  The period-to-period comparisons of the results are not necessarily indicative of our results for future periods.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

Percentage

 

 

 

Percentage

 

 

 

Percentage

 

 

 

Percentage

 

Consolidated Statements of Operations Data:

 

Amount

 

of Revenue

 

Amount

 

of Revenue

 

Amount

 

of Revenue

 

Amount

 

of Revenue

 

 

 

(dollars in thousands)

 

Revenue

 

$

39,039

 

100.0

%

$

35,267

 

100.0

%

$

117,609

 

100.0

%

$

95,497

 

100.0

%

Cost of revenue

 

24,046

 

61.6

 

21,057

 

59.7

 

75,882

 

64.5

 

53,869

 

56.4

 

Gross profit

 

14,993

 

38.4

 

14,210

 

40.3

 

41,727

 

35.5

 

41,628

 

43.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology and development

 

4,270

 

10.9

 

2,833

 

8.0

 

12,583

 

10.7

 

8,348

 

8.7

 

Sales and marketing

 

10,761

 

27.6

 

9,477

 

26.9

 

31,118

 

26.5

 

28,263

 

29.6

 

General and administrative

 

3,724

 

9.5

 

2,681

 

7.6

 

11,037

 

9.3

 

8,069

 

8.5

 

Depreciation and amortization

 

1,673

 

4.3

 

1,581

 

4.5

 

4,902

 

4.2

 

4,576

 

4.8

 

Total operating expenses

 

20,428

 

52.3

 

16,572

 

47.0

 

59,640

 

50.7

 

49,256

 

51.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(5,435

)

(13.9

)

(2,362

)

(6.7

)

(17,913

)

(15.2

)

(7,628

)

(8.0

)

Interest and other income (expense), net

 

5

 

0.0

 

139

 

0.4

 

(18

)

0.0

 

196

 

0.2

 

Loss before income taxes

 

(5,430

)

(13.9

)

(2,223

)

(6.3

)

(17,931

)

(15.2

)

(7,432

)

(7.8

)

Income tax expense

 

44

 

0.1

 

20

 

0.1

 

144

 

0.2

 

243

 

0.2

 

Net loss

 

$

(5,474

)

(14.0

)%

$

(2,243

)

(6.4

)%

$

(18,075

)

(15.4

)%

(7,675

)

(8.0

)%

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

September 30,

 

Increase / (Decrease)

 

September 30,

 

Increase / (Decrease)

 

 

 

2014

 

2013

 

Amount

 

Percentage

 

2014

 

2013

 

Amount

 

Percentage

 

 

 

(dollars in thousands)

 

Revenue

 

$

39,039

 

$

35,267

 

$

3,772

 

10.7

%

$

117,609

 

$

95,497

 

$

22,112

 

23.2

%

 

Revenue

 

The increase in revenue during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily attributable to a $4.4 million increase in our video advertising revenue, representing 12.6% growth period-over-period. The increase in revenue was partially offset by a $0.6 million reduction in revenue from our licensing solutions.

 

The increase in revenue during the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, was primarily attributable to a $23.3 million increase in our video advertising revenue, representing 25.1% growth period-over-period. The increase in revenue was partially offset by a $1.2 million reduction in revenue from our licensing solutions due, in part, to the discontinuation of certain licensing products that we acquired in January 2012.

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

September 30,

 

Increase / (Decrease)

 

September 30,

 

Increase / (Decrease)

 

 

 

2014

 

2013

 

Amount

 

Percentage

 

2014

 

2013

 

Amount

 

Percentage

 

 

 

(dollars in thousands)

 

Cost of revenue

 

$

24,046

 

$

21,057

 

$

2,989

 

14.2

%

$

75,882

 

$

53,869

 

$

22,013

 

40.9

%

Gross profit

 

14,993

 

14,210

 

783

 

5.5

 

41,727

 

41,628

 

99

 

0.2

 

Gross margin

 

38.4

%

40.3

%

 

 

 

 

35.5

%

43.6

%

 

 

 

 

 

Cost of Revenue, Gross Profit and Gross Margin

 

The increase in cost of revenue during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was driven primarily by $2.4 million of increased video advertising inventory costs, resulting from our revenue increase, and $0.6 million of increased data, ad serving, hosting and research costs.  The increase in our gross profit during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was driven by a $3.8 million increase in revenue, partially offset by a $3.0 million increase in our cost of revenue.

 

The increase in cost of revenue during the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, was driven primarily by $20.3 million of increased video advertising inventory costs, resulting from our

 

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Table of Contents

 

revenue increase, and $1.7 million of increased data, ad serving, hosting and research costs.  The increase in our gross profit during the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, was driven by a $22.1 million increase in revenue, partially offset by a $22.0 million increase in our cost of revenue.

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

September 30,

 

Increase / (Decrease)

 

September 30,

 

Increase / (Decrease)

 

 

 

2014

 

2013

 

Amount

 

Percentage

 

2014

 

2013

 

Amount

 

Percentage

 

 

 

(dollars in thousands)

 

Technology and development expense

 

$

4,270

 

$

2,833

 

$

1,437

 

50.7

%

$

12,583

 

$

8,348

 

$

4,235

 

50.7

%

% of total revenue

 

10.9

%

8.0

%

 

 

 

 

10.7

%

8.7

%

 

 

 

 

 

Technology and Development Expense

 

The increase in technology and development expense during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily attributable to a $1.3 million increase in salaries, incentive compensation, stock-based compensation costs, overhead costs, and other personnel-related costs primarily associated with an increase in headcount and, to a lesser extent, costs associated with existing personnel, and a $0.1 million increase in consulting fees, professional fees and travel and entertainment costs.

 

The increase in technology and development expense during the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, was primarily attributable to a $4.0 million increase in salaries, incentive compensation, stock-based compensation, overhead costs, and other personnel-related costs primarily associated with an increase in headcount and, to a lesser extent, costs associated with existing personnel, and a $0.2 million increase in consulting fees, professional fees and travel and entertainment costs.

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

September 30,

 

Increase / (Decrease)

 

September 30,

 

Increase / (Decrease)

 

 

 

2014

 

2013

 

Amount

 

Percentage

 

2014

 

2013

 

Amount

 

Percentage

 

 

 

(dollars in thousands)

 

Sales and marketing expense

 

$

10,761

 

$

9,477

 

$

1,284

 

13.5

%

$

31,118

 

$

28,263

 

$

2,855

 

10.1

%

% of total revenue

 

27.6

%

26.9

%

 

 

 

 

26.5

%

29.6

%

 

 

 

 

 

Sales and Marketing Expense

 

The increase in sales and marketing expense during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily attributable to a $1.2 million increase in salaries, incentive compensation, stock-based compensation, overhead costs and other personnel-related costs, primarily associated with an increase in the number of sales and marketing personnel to support our expanding advertiser base and, to a lesser extent, costs associated with existing personnel, and a $0.2 million increase in consulting fees, professional fees, and travel and entertainment costs. These increases were partially offset by a $0.1 million decrease in marketing costs.

 

The increase in sales and marketing expense during the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, was primarily attributable to a $2.9 million increase in salaries, incentive compensation, stock-based compensation, overhead costs and other personnel-related costs, primarily associated with an increase in the number of sales and marketing personnel to support our expanding advertiser base and, to a lesser extent, costs associated with existing personnel, and a $0.5 million increase in sales management software costs, consulting fees, professional fees, and travel and entertainment costs.  These increases were partially offset by $0.5 million decrease in marketing costs.

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

September 30,

 

Increase / (Decrease)

 

September 30,

 

Increase / (Decrease)

 

 

 

2014

 

2013

 

Amount

 

Percentage

 

2014

 

2013

 

Amount

 

Percentage

 

 

 

(dollars in thousands)

 

General and administrative expense

 

$

3,724

 

$

2,681

 

$

1,043

 

38.9

%

$

11,037

 

$

8,069

 

$

2,968

 

36.8

%

% of total revenue

 

9.5

%

7.6

%

 

 

 

 

9.4

%

8.5

%

 

 

 

 

 

General and Administrative Expense

 

The increase in general and administrative expense during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily attributable to a $0.5 million increase in salaries, incentive

 

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Table of Contents

 

compensation, stock-based compensation and other personnel-related costs, and a $0.5 million increase in legal fees, accounting fees, recruiting fees, professional fees, administrative software costs and other franchise taxes.

 

The increase in general and administrative expense during the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, was primarily attributable to a $1.2 million increase in salaries, incentive compensation, stock-based compensation costs and other personnel-related costs, and a $2.1 million increase in costs associated with becoming a public company, legal and accounting fees, recruiting fees, consulting fees, professional fees, administrative software costs and software support costs.  These increases were partially offset by $0.3 million decrease in other franchise taxes.

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

September 30,

 

Increase / (Decrease)

 

September 30,

 

Increase / (Decrease)

 

 

 

2014

 

2013

 

Amount

 

Percentage

 

2014

 

2013

 

Amount

 

Percentage

 

 

 

(dollars in thousands)

 

Depreciation and amortization expense

 

$

1,673

 

$

1,581

 

$

92

 

5.8

%

$

4,902

 

$

4,576

 

$

326

 

7.1

%

% of total revenue

 

4.3

%

4.5

%

 

 

 

 

4.2

%

4.8

%

 

 

 

 

 

Depreciation and Amortization Expense

 

The increase in depreciation and amortization expense during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, and the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, was primarily attributable to the increase in depreciation related to additional leasehold improvements to our office spaces, purchases of computer hardware as a result of an increase in headcount and purchases of computer hardware and software related to our third party data center hosting facilities.

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

September 30,

 

Increase / (Decrease)

 

September 30,

 

Increase / (Decrease)

 

 

 

2014

 

2013

 

Amount

 

Percentage

 

2014

 

2013

 

Amount

 

Percentage

 

 

 

(dollars in thousands)

 

Interest and other income (expense), net

 

$

5

 

$

139

 

$

(134

)

N/A

 

$

(18

)

$

196

 

$

(214

)

N/A

 

% of total revenue

 

0.0

%

0.4

%

 

 

 

 

0.0

%

0.2

%

 

 

 

 

 

Interest and Other Income (Expense), Net

 

The decrease in interest and other income (expense), net, during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily attributable a $0.1 million reduction in mark-to-market gains related to our preferred stock warrant liability.

 

The decrease in interest and other income (expense), net, during the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, was primarily attributable to a $0.3 million reduction in mark-to-market gains related to our preferred stock warrant liability in 2013, partially offset by $0.1 million decrease in interest expense in connection with the repayment of amounts outstanding under our credit facility.

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

September 30,

 

Increase / (Decrease)

 

September 30,

 

Increase / (Decrease)

 

 

 

2014

 

2013

 

Amount

 

Percentage

 

2014

 

2013

 

Amount

 

Percentage

 

 

 

(dollars in thousands)

 

Income tax expense

 

$

44

 

$

20

 

$

24

 

120.0

%

$

144

 

$

243

 

$

(99

)

(40.7

)%

% of total revenue

 

0.1

%

0.1

%

 

 

 

 

0.1

%

0.2

%

 

 

 

 

 

Income Tax Expense

 

During interim periods, our income tax expense, which consists of minimum U.S. state and local taxes and income taxes in foreign jurisdictions in which we conduct business, is determined using an estimate of our annual effective tax rate and is applied to our pre-tax loss.  Our quarterly tax provision is subject to significant volatility due to several factors that includes, among other factors, our ability to accurately predict our income (loss) before income taxes and the basis of taxable amounts in multiple jurisdictions.

 

The increase in income tax expense during the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily attributable to an increase in pre-tax loss incurred during the quarter when applying the estimated annual effective tax rate.

 

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Table of Contents

 

The decrease in income tax expense during the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, was primarily attributable to a decrease in our estimated annual effective tax rate.

 

Liquidity and Capital Resources

 

Working Capital

 

The following table summarizes our cash and cash equivalents, accounts receivable, net of allowance for doubtful accounts and working capital for the periods indicated:

 

 

 

As of

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

(dollars in thousands)

 

Cash and cash equivalents

 

$

77,909

 

$

96,258

 

Accounts receivable, net of allowance for doubtful accounts

 

46,519

 

39,413

 

Working capital

 

92,382

 

104,745

 

 

Our cash and cash equivalents at September 30, 2014 were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts and money market funds that are currently providing only a minimal return.

 

Sources of Liquidity

 

To date, we have funded our operations principally through private placements of our capital stock, bank borrowings and our initial public offering (“IPO”), which closed on July 2, 2013.

 

Credit Facility

 

We are party to a loan and security agreement, which we refer to as our credit facility, with Silicon Valley Bank, which we refer to as our lender.  Pursuant to the credit facility, which was recently amended in October 2014, we can incur revolver borrowings up to the lesser of $32.5 million and a borrowing base equal to 80.0% of eligible accounts receivable.  Any outstanding principal amount must be paid at maturity. Interest accrues at a floating rate equal to the lender’s prime rate and is payable monthly.  We are charged a fee of 0.25% of any unused borrowing capacity.  This 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 $10.0 million.  The credit facility also includes a letter of credit, foreign exchange and cash management facility in an aggregate amount of $2.5 million.  The credit facility matures in December 2016.  As of September 30, 2014 and December 31, 2013, we had no outstanding borrowings under the credit facility.

 

The credit facility contains customary conditions to borrowings, events of default and negative covenants, including covenants that restrict our ability to dispose of assets, merge with or acquire other entities, incur indebtedness, incur encumbrances, make distributions to holders of our capital stock, make investments or engage in transactions with our affiliates.  We are also subject to a financial covenant with respect to minimum monthly working capital levels.  Our obligations under the credit facility are secured by substantially all of our assets other than our intellectual property, although we have agreed not to encumber any of our intellectual property without the lender’s prior written consent.  We were in compliance with all covenants as of September 30, 2014 and through the date of this filing.

 

Operating and Capital Expenditure Requirements

 

We believe our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months.  If our available cash balances and available borrowings under our credit facility are insufficient to satisfy our liquidity requirements, we will need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all.  If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected.  We may seek to raise additional funds through equity, equity-linked or debt financings.  If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations.  Any additional equity financing may be dilutive to our stockholders.

 

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Table of Contents

 

Components of Liquidity and Capital Resources

 

The following table summarizes our historical cash flows for the periods indicated:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

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