Item 1. Business
Overview Brightcove Inc., or Brightcove, is a leading global provider of cloud-based services for video. Brightcove was incorporated in Delaware in August 2004 and our headquarters are in Boston, Massachusetts. Brightcove Video Cloud, or Video Cloud, our flagship product released in 2006, is the world’s leading online video platform. As of December 31, 2013, we had 6,318 customers in over 70 countries, including many of the world’s leading media, retail, technology and financial services companies, as well as governments, educational institutions and non-profit organizations. In 2013, our customers used Video Cloud to deliver an average of approximately 963 million video streams per month, which we believe is more video streams per month than any other professional solution.
Video Cloud enables our customers to publish and distribute video to Internet-connected devices quickly, easily and in a cost-effective and high-quality manner. Our innovative technology and intuitive user interface give customers control over a wide range of features and functionality needed to publish and deliver a compelling user experience, including content management, format conversion, video player styling, distributed caching, advertising insertion, content protection and distribution to diverse device types and multiple websites, including their own websites, partner websites and social media sites. Video Cloud also includes comprehensive analytics that allow customers to understand and refine their engagement with end users.
The Zencoder media processing service, or the Zencoder Service, is a cloud-based video encoding service. The Zencoder Service provides our customers with high-quality, reliable encoding of live and on-demand video and access to highly-scalable encoding power without having to pay for, manage and scale expensive hardware and software.
On January 31, 2014, we acquired substantially all of the assets Unicorn Media, Inc. and certain of its subsidiaries, or Unicorn, a provider of cloud-based video ad insertion technology. The Unicorn Once service, re-branded as Brightcove Once, is an innovative, cloud-based ad insertion and video stitching service which addresses the limitations of traditional online video ad insertion technology. Brightcove Once, or Once, reduces or eliminates the need for platform-specific ad technology and makes it possible for customers to reliably deliver live or on-demand video with dynamically customized programming and targeted advertising to the maximum range of Internet-connected devices. We plan to continue to develop, operate, support and promote Once in its current form in the near term. We also plan to integrate Once with our Video Cloud product over time.
We generate revenue by offering our products to customers on a subscription-based, software as a service, or SaaS, model. Our revenue grew from $88.0 million in the year ended December 31, 2012 to $109.9 million in the year ended December 31, 2013. As of December 31, 2012, we had 6,367 customers, of which 4,742 used our volume offerings and 1,625 used our premium offerings. As of December 31, 2013, we had 6,318 customers, of which 4,556 used our volume offerings and 1,762 used our premium offerings. To date, substantially all of our revenue has been attributable to our Video Cloud product. Our consolidated net loss was $10.2 million for the year ended December 31, 2013 compared to $12.5 million for the year ended December 31, 2012.
Our Solutions Our solutions provide our customers with the following key benefits:
• Comprehensive, highly configurable and scalable solutions. Video Cloud includes all of the features necessary to publish and distribute video online to a broad range of Internet-connected devices in a high-quality manner. Once further enables cloud-based video ad insertion for content distributed to almost any Internet-connected device. The Zencoder Service includes all of the functionality necessary to encode digital files and convert them into a wide range of formats in a high-quality manner. In addition, our multi-tenant architecture enables us to deliver each of our solutions across our customer base with a single version of our software for each product, making it easier to scale our solutions as our customer and end user base expands.
• Easy to use and low total cost of ownership. Video Cloud, the Zencoder Service and Once were designed to be intuitive and easy to use, empowering anyone within an organization to distribute video online and encode digital files. We provide reliable, cost-effective, on-demand solutions to our customers, relieving them of the cost, time and resources associated with in-house solutions and enabling them to be up and running quickly after signing with us.
• Open platform and extensive ecosystem. Video Cloud’s open and extensible platform enables our customers to customize standard features and functionality and easily integrate third-party technology to meet their own specific requirements and business objectives. We have an extensive ecosystem of technology and solution partners, which we refer to as the Brightcove Alliance. More than 150 Brightcove Alliance members have built solutions that rely upon, or are already integrated with, our Video Cloud platform. This ecosystem includes large technology service providers such as Adobe and Google, many providers of niche technology services, creative agencies and digital development shops. These integrated technologies provide our customers with enhanced flexibility, functionality and ease of use.
• Help customers grow their audience and generate revenue. Our customers use our products to achieve key business objectives such as driving site traffic, increasing viewer engagement on their sites, monetizing content, increasing conversion rates for transactions, increasing brand awareness and expanding their audiences. Video Cloud and Once provide our customers with video advertising features such as tools for ad insertion and built-in ad server and network integrations, which help our customers generate advertising revenue from their audience. We believe our customers view us as a strategic partner in part because our business model is not dependent on building our own audience or generating our own advertising revenue. Our business interests align with our customers’ interests as we each benefit from the success of our customers’ online strategy.
• Ongoing customer-driven development. Through our account managers, customer support teams, product managers and regular outreach from senior leadership, we solicit and capture feedback from our customer base for incorporation into ongoing enhancements to our solutions. We regularly provide our customers with enhancements to Video Cloud, the Zencoder Service and Once. Delivering cloud-based solutions allows us to serve additional customers with little incremental expense and to deploy innovations and best practices quickly and efficiently to our existing customers.
Our Business Strengths We believe that the following business strengths differentiate us from our competitors and are key to our success:
• We are the recognized online video platform market leader. In 2013, our customers used Video Cloud to deliver an average of approximately 963 million video streams per month, which we believe is more video streams per month than any other professional solution. Frost & Sullivan awarded us the Global Market Share Leadership Award in Online Video Platforms in 2011 and 2012. In 2013, we were recognized by Forrester Research as having the best enterprise track record and partner and support ecosystem in a competitive assessment of online video platforms, and we topped a similar assessment of online video platforms and CDNs by ABI Research in 2012. In 2012 and 2013, we were also selected to the Deloitte Technology Fast 500 list.
• We have a demonstrated track record of innovation and technology leadership. We pioneered the commercialization of online video platforms beginning with our first customer deployment in 2006. We have consistently released new features and functionality that have added to and improved our core technology. For example, although we initially built Video Cloud with a focus on delivering video to PCs via Adobe Flash technology, with the emergence of smartphones, we quickly adapted our platform’s capabilities to handle multi-device delivery using both Adobe Flash and HTML5 technologies. Also, in April 2011, we were issued a U.S. patent covering aspects of publishing and distributing digital media online. In addition, through the Unicorn transaction, we acquired fourteen issued U.S. patents and seven issued international patents covering various aspects of cloud-based stream delivery and ad insertion, among other things.
• We have established a global presence. We have established a global presence, beginning with our first non-U.S. customer in 2007, and continuing with the expansion of our operations into Europe, Japan, Asia Pacific and the Middle East. We built our solutions to be localized into almost any language and currently offer 24/7 customer support worldwide. Today, we have employees in nine countries. As of December 31, 2013, organizations throughout the world used Video Cloud to reach viewers in approximately 230 countries and territories.
• We have high visibility and predictability in our business. We sell our subscription and support services through monthly, quarterly or annual contracts and recognize revenue ratably over the committed term. The majority of our revenue comes from annual contracts. Our existing contracts provide us with visibility into revenue that has not yet been recognized. We have also achieved an overall recurring dollar retention rate of at least 84% in each of the last eight fiscal quarters, including 97%, 103%, 91% and 84% for the three months ended March 31, 2013, June 30, 2013, September 30, 2013 and December 31, 2013, respectively. Our business model and customer loyalty provide greater levels of recurring revenue and predictability compared to traditional, perpetual-license business models.
• We have customers of all sizes across multiple industries. We offer different editions of our products tailored to meet the needs of organizations of various sizes, from large global enterprises to small and medium-sized businesses, across industries. Our offerings range from self-service, entry-level editions to enterprise-level editions used by multiple departments in a single organization.
• Our management team has experience building and scaling software companies. Our senior leadership team has built innovative software platform businesses. Members of our senior leadership team have held senior product, business and technology roles at companies such as Adobe, Allaire, EMC, Lycos, Macromedia and Phase Forward.
Our Customers As of December 31, 2013, we had 6,318 customers of all sizes in over 70 countries. We provide our solutions to many of the world’s leading media, retail, technology and financial services companies, as well as governments, educational institutions and non-profit organizations. Our target markets are not confined to certain industries or geographies as we are focused on providing solutions that can benefit any organization with a website or digital content.
Our Products and Services Video Cloud Principal Features and Functionality
• Uploading and Encoding. Using Video Cloud, customers may upload videos and related metadata in various formats for adaptive video encoding that maximizes quality and minimizes file size. Video Cloud then automatically enables the content to be delivered to end users via a third-party CDN such as Akamai or Limelight Networks.
• Content Management. Whether a customer has a few short video clips or thousands of full-length episodes, Video Cloud makes it easy to organize a media library. Videos can be grouped together with drag-and-drop controls or smart playlists that automatically organize content. Customers can set rules for geographic access and schedules to define where and when their videos can be viewed.
• Video Players. Video Cloud allows for point-and-click styling and configuration of video players that can reflect the brand or design of the customer with tools for customizing colors and graphics. Our video players also include a set of standard features such as full-screen playback, sharing through social media and localized player controls. Developers can also take advantage of a set of tools to create completely custom video player experiences.
• Multi-platform video experiences. We have built Video Cloud to support numerous operating systems, formats and devices. In addition to web-based experiences, Video Cloud provides publishing and delivery services for cross-platform devices including smartphones, tablets and
Connected TVs. Our solution includes automated device detection and manages multiple renditions of the same video encoded in different forms with optimized delivery protocols for different target formats. Our native player SDKs extend the native video player capabilities of Apple iOS and Google Android devices with additional functionality and integrations that can accelerate the development of high-quality consumer experiences. These native player SDKs have built-in support for mixed video types and automatic buffering, and have been integrated with leading advertising, analytics, audience measurement and digital rights management providers.
• Live Video Streaming. In addition to on-demand video distribution, Video Cloud includes support for live video broadcasts. Video Cloud accepts multiple streams at different quality levels and delivers the rendition that attempts to best match each viewer’s available bandwidth, processor utilization and player size.
• Distribution and Syndication. Video Cloud supports a blended distribution strategy across the Internet, allowing customers to distribute videos on their own website, partner websites or video-sharing sites such as YouTube. These tools help content owners to drive site traffic, increase brand awareness and expand their audience.
• Social Media. Customers can expand their audience by leveraging the social network of their viewers. Through integrated Video Cloud capabilities, users can share videos through Facebook and other social media destinations.
• Advertising and Monetization. Video Cloud can help customers grow and monetize their audience with video advertising features such as tools for ad insertions and built-in ad server and network integrations. Video Cloud includes tools to support synchronized in-player advertising with embedded link functionality and overlays for persistent branding. Video Cloud also supports established video ad formats, and accommodates pre-, mid- and post-roll ads with tools to easily define insertion points.
• Analytics. Video Cloud’s integrated video analytics present information to optimize and support customers’ online video publishing and distribution strategy. Reports include audience metrics such as unique viewers, technology profile details about operating systems and devices, and engagement analytics such as viewed minutes and drop-off rates. Online publishers can also choose to integrate web analytics solutions such as Adobe Omniture or Google Analytics into their video experiences.
Editions Video Cloud is offered to customers on a subscription-based SaaS model in premium and volume editions, as described below, that include varying levels of functionality, usage entitlements and support. Our customers pay us a monthly, quarterly or annual subscription fee for access to Video Cloud. This model allows our customers to scale their level of investment and usage based on the size and complexity of their needs. We currently offer Video Cloud in the following editions:
• Video Cloud Express. Express is an entry-level volume edition of Video Cloud designed for small and medium-sized businesses or larger organizations looking to manage smaller projects. Customers may initiate a trial online and license Express entirely online using a credit card. Most of our Express customers are on month-to-month subscriptions. The Express edition includes functionality for basic professional online video publishing but excludes advanced customization and integration capabilities and is not eligible for advanced add-on services. The Express edition limits the volume of video that can be published and the viewership capacity for the content, but customers have the option of purchasing additional capacity.
• Video Cloud Pro. Pro is a premium edition of Video Cloud designed with functionality needed to customize a customer’s online video experience, advanced monetization features and more capacity for content libraries and viewership. Most of our Pro customers sign up for annual or longer subscriptions. These customers also have access to a broader range of add-on services as well as access to Brightcove Alliance member products and services.
• Video Cloud Enterprise. Enterprise is a premium edition of Video Cloud designed with all of the most advanced features of Video Cloud, including certain capabilities necessary for large organizations running many web properties, advanced security features and advanced reporting services. Most of our Enterprise customers sign up for annual subscriptions or for a longer period. Enterprise also includes significantly more capacity for larger content libraries.
Zencoder Service Principal Features and Functionality
• File Support. The Zencoder Service accepts files in an extensive range of formats and codecs and supports video output to a multitude of devices.
• Quality and Control. The Zencoder Service includes tools to support high quality video output and to adjust and edit video.
• Platform and Security. The Zencoder Service is scalable, globally distributed and includes advanced security features designed to protect content.
• Account and Integration. The Zencoder Service provides a simple API for streamlined integration, supports most major transfer protocols and accelerated file transfers and allows users to manage their accounts and encoding jobs from an intuitive, online dashboard.
Media processing for on-demand video transcoding begins with an API request from a customer to the Zencoder Service to begin an encoding job, along with the location of the files to be encoded and any optional encoding settings. The Zencoder Service responds with an encoding job identification number to allow a customer to track the progress of the encoding. The Zencoder Service then downloads the files and converts them into as many applicable formats as the customer has identified, with each file being processed concurrently. The Zencoder Service uploads the resulting files to the location identified by the customer, such as a designated server, CDN or syndication partner of the customer. The process ends with the Zencoder Service sending a notification to the customer confirming that the encoding is complete and the files have been uploaded.
Media processing for live transcoding begins with a customer sending an API request and publishing a RTMP stream. The Zencoder Service ingests the RTMP stream, converts it to multiple bitrate streams in RTMP or HLS, and publishes them to a CDN location specified in the API call. As streams become available for playback, the Zencoder Service sends HTTP notifications with published bitrates and formats.
Editions The Zencoder Service is offered to customers on a subscription-based SaaS model in premium and volume editions, as described below, that include varying levels of usage entitlements. Our customers pay us on a usage basis or pay us a monthly or annual subscription fee for access to the Zencoder Service. As with Video Cloud, this model allows our customers to scale their level of investment and usage based on the size and complexity of their needs.
We currently offer the Zencoder Service in the following volume editions for on-demand video transcoding: Pay-As-You-Go, Launch, Traction and Growth. Pay-As-You-Go edition customers pay fees based on the number of minutes of output video for video on demand transcoding. Launch, Traction and Growth edition customers pay a monthly subscription fee that includes a fixed number of minutes of output video per month, with additional fees per minute of output video above the number of minutes included in the respective edition. The volume edition for live transcoding is a pay-as-you-go offering based on the number of monthly hours of transcoding.
The Zencoder Service is also available in premium Enterprise editions for both on-demand video transcoding and live transcoding that includes a higher volume of entitlements and typically requires an annual or longer subscription.
Once Principal Features and Functionality Once is an innovative, cloud-based ad insertion and video stitching service which addresses the limitations of traditional online video ad insertion technology. Once reduces or eliminates the need for platform-specific ad technology and makes it possible for customers to reliably deliver live or on-demand video with dynamically customized programming and targeted advertising to the maximum range of devices.
There are currently three Once offerings. OnceVOD includes dynamic delivery and monetization for premium video-on-demand content. OnceLIVE includes dynamic delivery, linear ad replacement and ad insertion for live broadcasts, events and 24/7 linear channels. OnceUX includes dynamic ad insertion, with associated rich client and interactive ad capabilities delivered via an API method.
Editions Once is offered to customers on a subscription-based SaaS model, with varying levels of functionality, usage entitlements and support based on the size and complexity of a customer's needs.
Account Management A crucial component of our sales strategy is our account management organization. This organization is focused on ongoing customer success and engagement, as well as renewals of our customer contracts.
Professional Services While our products are easy for customers to use and deploy without any additional specialized services, we offer a range of professional services for customers who seek customization or assistance with their implementations. These professional services are priced on a per project basis and include projects such as content migrations from other vendors or in-house solutions, video player enhancements and the creation of web pages optimized for video.
Support All Video Cloud, Zencoder and Once editions receive free basic support for technical and operational issues. Our premium editions generally include telephone support during normal business hours. We also offer 24/7 global telephone support to customers paying for premium support packages.
Training We offer free basic online training to all registered users of Video Cloud. We also offer customized, onsite training for customers that is priced on a per engagement basis.
Sales and Marketing We sell our products primarily through our global direct sales organization. Our sales team is organized by the following geographic regions: Americas, Europe and the Middle East, Asia Pacific and Japan. We further organize our sales force into teams focused on selling to specific customer groups, based on the size of our prospective customers, such as small, medium-sized and enterprise, as well as vertical industry, to provide a higher level of service and understanding of our customers’ specific needs. A small but growing amount of sales are generated through referral partners, channel partners and resellers. We also sell some of our products online through our website.
We generate customer leads, accelerate sales opportunities and build brand awareness through our marketing programs. Our marketing programs target executives, technology professionals and senior business leaders. Like our sales teams, our marketing team and programs are organized by geography, organization size and industry segment. Our principal marketing programs include:
• public relations and social media;
• online event marketing activities, direct email, search engine marketing and display advertising and blogs;
• field marketing events for customers and prospects;
• participation in, and sponsorship of, user conferences, trade shows and industry events;
• use of our website to provide product and organization information, as well as learning opportunities for potential customers;
• cooperative marketing efforts with partners, including joint press announcements, joint trade show activities, channel marketing campaigns and joint seminars;
• telemarketing and lead generation representatives who respond to incoming leads to convert them into new sales opportunities; and
• customer programs, including user meetings and our online customer community.
Operations We operate data center facilities in the greater Boston area, the greater Chicago area, Phoenix, Virginia, and Amsterdam, and also use third-party cloud computing platforms. We operate our own servers for systems that manage meta-data, business rules and archival storage of media assets. We take advantage of geographically dispersed, third-party, cloud computing capacity to improve the responsiveness of our service and lower network latency for our customers.
Media delivery to end users, including video, audio, images, JavaScript and Adobe Flash components, is served primarily through our CDN providers, Akamai Technologies, Inc., or Akamai, and Limelight Networks, Inc., or Limelight. We believe our agreements with Akamai and Limelight are based on competitive market terms and conditions, including service level commitments from these CDN providers.
We entered into our agreement with Akamai in July 2010. It enables us to use Akamai CDN services for our own benefit and to resell Akamai CDN services to our customers in every geographic location in which we offer our products. The current expiration date of the agreement is December 31, 2014.
We entered into our agreement with Limelight in March 2006. Our agreement with Limelight enables us to use Limelight CDN services for our own benefit and to resell Limelight CDN services to our customers in every geographic location in which we offer our products. The current expiration date of the agreement is March 31, 2014. We are engaged in renewal discussions with Limelight and believe the agreement will be renewed or the term of the agreement will be extended again prior to March 31, 2014 or prior to the expiration of the service continuation period described below.
Each agreement contains a service continuation period following expiration of the agreement which we believe is sufficient to enable transition to an alternative provider to avoid material disruption to our business or to our customers. Our agreement with Akamai provides that, upon termination for any reason, Akamai will continue to provide CDN services to our existing customers for up to twelve months. Our agreement with Limelight provides that, upon termination for any reason, Limelight will continue to provide CDN services for our benefit for up to six months.
Intellectual Property We rely principally on a combination of trademark, patent, copyright and trade secret laws in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, confidential information, business strategies and brands. We also believe that factors such as the technological and creative skills of our employees and personnel coupled with the creation of new features, functionality and products are essential to establishing and maintaining a technology leadership position. We enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties, and we rigorously control access to our proprietary technology.
We have one issued patent and four patent applications pending in the United States. Our issued patent expires in 2029 and covers aspects of publishing and distributing digital media online. We currently have patent applications pending in Europe, Hong Kong and Japan, and we may seek coverage in additional jurisdictions to the extent we determine such coverage is appropriate and cost-effective. Through the Unicorn transaction we acquired fourteen issued U.S. patents and seven issued international patents covering aspects of cloud-based stream delivery and ad insertion, among other things.
Our registered trademarks in the United States include “BRIGHTCOVE”, “BRIGHTCOVE.COM” and our logo. These trademarks are also registered in certain non-U.S. jurisdictions, including the European Union. We may apply for registrations for these and other marks in additional jurisdictions to the extent we determine such coverage is appropriate and cost-effective.
We also have a registered trademark for “ZENCODER” in the United States, Canada and the European Union.
Through the Unicorn transaction, we acquired certain trademarks of Unicorn, including “UNICORN” and “ONCE”, registered in the United States.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or obtain and use our technology to develop products with the same functionality as our solutions. Policing unauthorized use of our technology is difficult and expensive. Our competitors could also independently develop technologies equivalent to ours, and our intellectual property rights may not be broad enough for us to prevent competitors from selling products incorporating those technologies.
Competition We compete with video-sharing sites such as YouTube, in-house solutions, online video platforms, media processing services and certain niche technology providers. Some of our actual and potential competitors may enjoy competitive advantages over us, such as larger marketing budgets, as well as greater financial, technical and other resources. The overall markets for cloud-based solutions for media processing and publishing and distributing professional digital media are fragmented, rapidly evolving and highly competitive.
We expect that the competitive landscape will change as our markets consolidate and mature. We believe the principal competitive factors in our industry include the following:
• total cost of ownership;
• breadth and depth of product functionality;
• ability to innovate and respond to customer needs rapidly;
• level of resources and investment in sales, marketing, product and technology;
• ease of deployment and use of solutions;
• level of integration into existing workflows, configurability, scalability and reliability;
• customer service;
• brand awareness and reputation;
• ability to integrate with third-party applications and technologies;
• size and scale of provider; and
• size of customer base and level of user adoption.
The mix of factors relevant in any given situation varies with regard to each prospective customer. We believe we compete favorably with respect to all of these factors.
Some of our competitors have made or may make acquisitions or enter into partnerships or other strategic relationships to offer a more comprehensive service than we do. These combinations may make it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs, technology or service functionality. We expect these trends to continue as organizations attempt to strengthen or maintain their market positions.
Research and Development We have focused our research and development efforts on expanding the functionality and scalability of our products and enhancing their ease of use, as well as creating new product offerings. We expect research and development expenses to increase in absolute dollars as we intend to continue to regularly release new features and functionality, expand our product offerings, continue the localization of our products in
various languages, upgrade and extend our service offerings, and develop new technologies. Over the long term, we believe that research and development expenses as a percentage of revenue will decrease, but will vary depending upon the mix of revenue from new and existing products, features and functionality, as well as changes in the technology that our products must support, such as new operating systems or new Internet-connected devices.
Our research and development expenses were $21.1 million, $18.7 million and $15.3 million in 2013, 2012 and 2011, respectively, which included stock-based compensation expenses of $1.2 million, $687,000 and $367,000, respectively.
Employees As of December 31, 2013, we had 347 employees, of which 36 provided customer support services, 26 provided professional services, 95 were in research and development, 141 were in sales and marketing and 49 were in general and administrative positions. Of these employees, 276 were located in the United States and 71 were located outside of the United States. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.
Information about Segment and Geographic Revenue Information about segment and geographic revenue is set forth in Note 13 of the Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.
Available Information Our website address is www.brightcove.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the investor relations page of our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Alternatively, these reports may be accessed at the SEC’s website at www.sec.gov.
Item 1A.
Item 1A. Risk Factors
You should carefully consider the risks described below and the other information in this Annual Report on Form 10-K. Our business, prospects, financial condition, or operating results could be harmed by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. The trading price of our common stock could decline due to any of these risks, and, as a result, you may lose all or part of your investment.
We have a history of losses, we expect to continue to incur losses and we may not achieve or sustain profitability in the future. We have incurred significant losses in each fiscal year since our inception in 2004. We experienced a consolidated net loss of $17.3 million for the year ended December 31, 2011, a consolidated net loss of $12.5 million for the year ended December 31, 2012 and a consolidated net loss of $10.2 million for the year ended December 31, 2013. These losses were due to the substantial investments we made to build our products and services, grow and maintain our business and acquire customers. Key elements of our growth strategy include acquiring new customers and continuing to innovate and build our brand. As a result, we expect our operating expenses to increase in the future due to expected increased sales and marketing expenses, operations costs, research and development costs and general and administrative costs and, therefore, our operating losses will continue or even potentially increase for the foreseeable future. In addition, as a public company we incur significant legal, accounting and other expenses that we did not incur as a private company. Furthermore, to the extent that we are successful in increasing our customer base, we will also incur increased expenses because costs associated with generating and supporting customer agreements are generally incurred up front, while revenue is generally recognized ratably over the committed term of the
agreement. You should not rely upon our recent revenue growth as indicative of our future performance. We cannot assure you that we will reach profitability in the future or at any specific time in the future or that, if and when we do become profitable, we will sustain profitability. If we are ultimately unable to generate sufficient revenue to meet our financial targets, become profitable and have sustainable positive cash flows, investors could lose their investment.
Substantially all of our revenue comes from a single product, Video Cloud. We are currently substantially dependent on revenue from a single product, Video Cloud. Our business would be harmed by a decline in the market for Video Cloud, increased competition in the market for online video platforms, or our failure or inability to provide sufficient investment to support Video Cloud as needed to maintain or grow its competitive position.
If we are unable to retain our existing customers, our revenue and results of operations will be adversely affected. We sell our products pursuant to agreements that are generally for monthly or annual terms. Our customers have no obligation to renew their subscriptions after their subscription period expires, and these subscriptions may not be renewed on the same or on more profitable terms. As a result, our ability to retain our existing customers and grow depends in part on subscription renewals. We may not be able to accurately predict future trends in customer renewals, and our customers’ renewal rates have and may continue to decline or fluctuate because of several factors, including their satisfaction or dissatisfaction with our services, the cost of our services and the cost of services offered by our competitors, reductions in our customers’ spending levels or the introduction by competitors of attractive features and functionality. If our customer retention rate decreases, we may need to increase the rate at which we add new customers in order to maintain and grow our revenue, which may require us to incur significantly higher advertising and marketing expenses than we currently anticipate, or our revenue may decline. If our customers do not renew their subscriptions for our services, renew on less favorable terms, or do not purchase additional functionality or subscriptions, our revenue may grow more slowly than expected or decline, and our profitability and gross margins may be harmed.
The actual market for our solutions could be significantly smaller than our estimates of our total potential market opportunity, and if customer demand for our services does not meet expectations, our ability to generate revenue and meet our financial targets could be adversely affected. While we expect strong growth in the markets for our products, it is possible that the growth in some or all of these markets may not meet our expectations, or materialize at all. The methodology on which our estimate of our total potential market opportunity is based includes several key assumptions based on our industry knowledge and customer experience. If any of these assumptions proves to be inaccurate, then the actual market for our solutions could be significantly smaller than our estimates of our total potential market opportunity. If the customer demand for our services or the adoption rate in our target markets does not meet our expectations, our ability to generate revenue from customers and meet our financial targets could be adversely affected.
Our business is substantially dependent upon the continued growth of the market for on-demand software solutions. We derive, and expect to continue to derive, substantially all of our revenue from the sale of our on-demand solutions. As a result, widespread acceptance and use of the on-demand business model is critical to our future growth and success. Under the perpetual or periodic license model for software procurement, users of the software would typically install and operate the applications on their hardware. Because many companies are generally predisposed to maintaining control of their information technology, or IT, systems and infrastructure, there may be resistance to the concept of accessing software as a service provided by a third party. In addition, the market for on-demand software solutions is still evolving, and competitive dynamics may cause pricing levels to change as the market matures and as existing and new market participants introduce new types of solutions and different approaches to enable organizations to address their technology needs. As a result, we may be forced to reduce the prices we charge for our products and may be unable to renew existing customer agreements or enter into new customer agreements at the same prices and
upon the same terms that we have historically. If the market for on-demand software solutions fails to grow, grows more slowly than we currently anticipate or evolves and forces us to reduce the prices we charge for our products, our revenue, gross margin and other operating results could be materially adversely affected.
Our operating results may fluctuate from quarter to quarter, which could make them difficult to predict. Our quarterly operating results are tied to certain financial and operational metrics that have fluctuated in the past and may fluctuate significantly in the future. As a result, you should not rely upon our past quarterly operating results as indicators of future performance. Our operating results depend on numerous factors, many of which are outside of our control. In addition to the other risks described in this “Risk Factors” section, the following risks could cause our operating results to fluctuate:
• our ability to retain existing customers and attract new customers;
• the rates at which our customers renew;
• the mix of annual and monthly customers at any given time;
• the timing and amount of costs of new and existing marketing and advertising efforts;
• the timing and amount of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure;
• the cost and timing of the development and introduction of new product and service offerings by us or our competitors; and
• system or service failures, security breaches or network downtime.
We have a relatively short operating history, which makes it difficult to evaluate our business and future prospects. Our business has a relatively short operating history, which makes it difficult to evaluate our business and future prospects. We have been in existence since 2004, and much of our growth has occurred in recent periods. We have encountered, and will continue to encounter, risks and difficulties frequently experienced by growing companies in rapidly changing industries, including those related to:
• market acceptance of our current and future products and services;
• customer renewal rates;
• our ability to compete with other companies that are currently in, or may in the future enter, the market for our products;
• our ability to successfully expand our business, especially internationally;
• our ability to control costs, including our operating expenses;
• the amount and timing of operating expenses, particularly sales and marketing expenses, related to the maintenance and expansion of our business, operations and infrastructure;
• network outages or security breaches and any associated expenses;
• foreign currency exchange rate fluctuations;
• write-downs, impairment charges or unforeseen liabilities in connection with acquisitions;
• our ability to successfully manage acquisitions; and
• general economic and political conditions in our domestic and international markets.
If we do not manage these risks successfully, our business will be harmed.
Our long-term success depends, in part, on our ability to expand the sales of our products to customers located outside of the United States, and thus our business is susceptible to risks associated with international sales and operations. We currently maintain offices and have sales personnel in Australia, France, Japan, Singapore, South Korea, Spain, the United Arab Emirates and the United Kingdom, and we intend to expand our international
operations. Any international expansion efforts that we may undertake may not be successful. In addition, conducting international operations subjects us to new risks that we have not generally faced in the United States. These risks include:
• unexpected costs and errors in the localization of our products, including translation into foreign languages and adaptation for local practices and regulatory requirements;
• lack of familiarity with and burdens of complying with foreign laws, legal standards, regulatory requirements, tariffs, and other barriers;
• unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;
• difficulties in managing systems integrators and technology partners;
• differing technology standards;
• longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
• difficulties in managing and staffing international operations and differing employer/employee relationships;
• fluctuations in exchange rates that may increase the volatility of our foreign-based revenue;
• potentially adverse tax consequences, including the complexities of foreign value added tax (or other tax) systems and restrictions on the repatriation of earnings;
• uncertain political and economic climates; and
• reduced or varied protection for intellectual property rights in some countries.
These factors may cause our costs of doing business in these geographies to exceed our comparable domestic costs. Operating in international markets also requires significant management attention and financial resources. Any negative impact from our international business efforts could negatively impact our business, results of operations and financial condition as a whole.
We must keep up with rapid technological change to remain competitive in a rapidly evolving industry. Our market is characterized by rapid technological change, frequent new product and service introductions and evolving industry standards. Our future success will depend on our ability to adapt quickly to rapidly changing technologies, to adapt our services and products to evolving industry standards and to improve the performance and reliability of our services and products. To achieve market acceptance for our products, we must effectively anticipate and offer products that meet changing customer demands in a timely manner. Customers may require features and functionality that our current products do not have. If we fail to develop products that satisfy customer preferences in a timely and cost-effective manner, our ability to renew our contracts with existing customers and our ability to create or increase demand for our products will be harmed.
We may experience difficulties with software development, industry standards, design or marketing that could delay or prevent our development, introduction or implementation of new products and enhancements. The introduction of new products by competitors, the emergence of new industry standards or the development of entirely new technologies to replace existing offerings could render our existing or future products obsolete.
If we are unable to successfully develop or acquire new features and functionality, enhance our existing products to anticipate and meet customer requirements or sell our products into new markets, our revenue and results of operations will be adversely affected.
We face significant competition and may be unsuccessful against current and future competitors. If we do not compete effectively, our operating results and future growth could be harmed. We compete with video sharing sites, in-house solutions, online video platforms, media processing services and certain niche technology providers, as well as larger companies that offer multiple services, including those that may be used as substitute services for our products. Competition is already intense in
these markets and, with the introduction of new technologies and market entrants, we expect competition to further intensify in the future. In addition, some of our competitors may make acquisitions, be acquired, or enter into strategic relationships to offer a more comprehensive service than we do. These combinations may make it more difficult for us to compete effectively. We expect these trends to continue as competitors attempt to strengthen or maintain their market positions.
Demand for our services is sensitive to price. Many factors, including our advertising, customer acquisition and technology costs, and our current and future competitors’ pricing and marketing strategies, can significantly affect our pricing strategies. There can be no assurance that we will not be forced to engage in price-cutting initiatives, or to increase our advertising and other expenses to attract and retain customers in response to competitive pressures, either of which could have a material adverse effect on our revenue, operating results and resources.
We will likely encounter significant, growing competition in our business from many sources, including portals and digital media retailers, search engines, social networking and consumer-sharing services companies, broadband media distribution platforms, technology suppliers, direct broadcast satellite television service companies and digital and traditional cable systems. Many of our present and likely future competitors have substantially greater financial, marketing, technological and other resources than we do. Some of these companies may even choose to offer services competitive with ours at no cost as a strategy to attract or retain customers of their other services. If we are unable to compete successfully with traditional and other emerging providers of competing services, our business, financial condition and results of operations could be adversely affected.
We depend on the experience and expertise of our executive officers, senior management team and key technical employees, and the loss of any key employee could have an adverse effect on our business, financial condition and results of operations. Our success depends upon the continued service of our executive officers, senior management team and key technical employees, as well as our ability to continue to attract and retain additional highly qualified personnel. Each of our executive officers, senior management team, key technical personnel and other employees could terminate his or her relationship with us at any time. The loss of any member of our senior management team or key personnel might significantly delay or prevent the achievement of our business objectives and could materially harm our business and our customer relationships. In addition, because of the nature of our business, the loss of any significant number of our existing engineering, project management and sales personnel could have an adverse effect on our business, financial condition and results of operations.
Our business and operations have experienced rapid growth and organizational change in recent periods, which has placed, and may continue to place, significant demands on our management and infrastructure. If we fail to manage our growth effectively and successfully recruit additional highly-qualified employees, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately. We increased our number of full-time employees from 312 as of December 31, 2011, to 335 as of December 31, 2012 and to 347 as of December 31, 2013, and our revenue grew from $63.6 million in 2011 to $88.0 million in 2012 and to $109.9 million in 2013. Our headcount and operations have grown, both domestically and internationally, since our inception. This growth has placed, and will continue to place, a significant strain on our management, administrative, operational and financial infrastructure. We anticipate further growth will be required to address increases in our product and service offerings and continued international expansion. Our success will depend in part upon the ability of our senior management team to manage this growth effectively. To do so, we must continue to recruit, hire, train, manage and integrate a significant number of qualified managers, technical personnel and employees in specialized roles within our company, including in technology, sales and marketing. If our new employees perform poorly, or if we are unsuccessful in recruiting, hiring, training, managing and integrating these new employees, or retaining these or our existing employees, our business may suffer.
In addition, to manage the expected continued growth of our headcount, operations and geographic expansion, we will need to continue to improve our information technology infrastructure, operational, financial and management systems and procedures. Our expected additional headcount and capital investments will increase our costs, which will make it more difficult for us to address any future revenue shortfalls by
reducing expenses in the short term. If we fail to successfully manage our growth we will be unable to successfully execute our business plan, which could have a negative impact on our business, financial condition or results of operations.
Our recent transaction with Unicorn Media, and/or potential future acquisitions, could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results. As part of our business strategy, we intend to consider acquisitions of companies, technologies and products that we believe could accelerate our ability to compete in our core markets or allow us to enter new markets. For example, in January 2014 we completed our acquisition of substantially all of the assets of Unicorn Media, Inc., or Unicorn, a leading provider of cloud video ad insertion technology. Acquisitions, including the Unicorn transaction, involve numerous risks, any of which could harm our business, including:
• difficulties in integrating the technologies, products, operations and existing contracts of a target company and realizing the anticipated benefits of the combined businesses;
• difficulties in integrating the personnel of a target company, including the onboarding of approximately 60 Unicorn employees whom we hired in connection with the Unicorn transaction;
• difficulties in supporting and transitioning customers, if any, of a target company;
• diversion of financial and management resources from existing operations;
• the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;
• risks of entering new markets in which we have limited or no experience;
• potential loss of key employees, customers and strategic alliances from either our current business or a target company’s business; and
• inability to generate sufficient revenue to offset acquisition costs.
Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results. In addition, if we finance acquisitions by issuing equity securities, our existing stockholders may be diluted. As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.
We may experience delays in product and service development, including delays beyond our control, which could prevent us from achieving our growth objectives and hurt our business. Many of the problems, delays and expenses we may encounter may be beyond our control. Such problems may include, but are not limited to, problems related to the technical development of our products and services, problems with the infrastructure for the distribution and delivery of online media, the competitive environment in which we operate, marketing problems, consumer and advertiser acceptance and costs and expenses that may exceed current estimates. Problems, delays or expenses in any of these areas could have a negative impact on our business, financial conditions or results of operations.
Delays in the timely design, development, deployment and commercial operation of our product and service offerings, and consequently the achievement of our revenue targets and positive cash flow, could result from a variety of causes, including many causes that are beyond our control. Such delays include, but are not limited to, delays in the integration of new offers into our existing offering, changes to our products and services made to correct or enhance their features, performance or marketability or in response to regulatory developments or otherwise, delays encountered in the development, integration or testing of our products and services and the infrastructure for the distribution and delivery of online media and other systems, unsuccessful commercial launches of new products and services, delays in our ability to obtain financing,
insufficient or ineffective marketing efforts and slower-than-anticipated consumer acceptance of our products. Delays in any of these matters could hinder or prevent our achievement of our growth objectives and hurt our business.
There is no assurance that the current cost of Internet connectivity and network access will not rise with the increasing popularity of online media services. We rely on third-party service providers for our principal connections to the Internet and network access, and to deliver media to consumers. As demand for online media increases, there can be no assurance that Internet and network service providers will continue to price their network access services on reasonable terms. The distribution of online media requires delivery of digital content files and providers of network access and distribution may change their business models and increase their prices significantly, which could slow the widespread adoption of such services. In order for our services to be successful, there must be a reasonable price model in place to allow for the continuous distribution of digital media files. We have limited or no control over the extent to which any of these circumstances may occur, and if network access or distribution prices rise, our business, financial condition and results of operations would likely be adversely affected.
Failure of our infrastructure for the distribution and delivery of online media could adversely affect our business. Our success as a business depends, in large part, on our ability to provide a consistently high-quality digital experience to consumers via our relationships and infrastructure for the distribution and delivery of online media generally. There is no guarantee that our relationships and infrastructure will not experience problems or other performance issues, which could seriously impair the quality and reliability of our delivery of digital media to end users. For example, we primarily use two content delivery networks, or CDNs, to deliver content to end users. If one or both of these CDNs were to experience sustained technical failures, it could cause delays in our service and we could lose customers. If we do not accurately predict our infrastructure capacity requirements, our customers could experience service outages or service degradation that may subject us to financial penalties and liabilities and result in customer losses. In the past we have, on limited occasions, suffered temporary interruptions of certain aspects of our service, including our customers’ ability to upload new content into our system, our customers’ ability to access administrative control of their accounts, and our ability to deliver content to end users in certain geographic locations. These service interruptions were the results of human error, hardware and software failures or failures of third-party networks. On a limited number of occasions, these service interruptions have required us to provide service credits to customers. We cannot guarantee that service interruptions will not occur again or predict the duration of interruptions of our service or the impact of such interruptions on our customers. Failures and interruptions of our service may impact our reputation, result in our payment of compensation or service credits to our customers, result in loss of customers and adversely affect our financial results and ability to grow our business. In addition, if our hosting infrastructure capacity fails to keep pace with increased sales or if our delivery capabilities fail, customers may experience delays as we seek to obtain additional capacity or enable alternative delivery capability, which could harm our reputation and adversely affect our revenue growth.
We may have difficulty scaling and adapting our existing infrastructure to accommodate increased traffic and storage, technology advances or customer requirements. In the future, advances in technology, increases in traffic and storage, and new customer requirements may require us to change our infrastructure, expand our infrastructure or replace our infrastructure entirely. Scaling and adapting our infrastructure is likely to be complex and require additional technical expertise. If we are required to make any changes to our infrastructure, we may incur substantial costs and experience delays or interruptions in our service. These delays or interruptions may cause customers and partners to become dissatisfied with our service and move to competing service providers. Our failure to accommodate increased traffic and storage, increased costs, inefficiencies or failures to adapt to new technologies or customer requirements and the associated adjustments to our infrastructure could harm our business, financial condition and results of operations.
We rely on software and services licensed from other parties. The loss of software or services from third parties could increase our costs and limit the features available in our products and services. Components of our service and product offerings include various types of software and services licensed from unaffiliated parties. For example, some of our products incorporate software licensed from Adobe. If any of the software or services we license from others or functional equivalents thereof were either no longer available to us or no longer offered on commercially reasonable terms, we would be required to either redesign our services and products to function with software or services available from other parties or develop these components ourselves. In either case, the transition to a new service provider or an internally-developed solution could result in increased costs and could result in delays in our product launches and the release of new service and product offerings. Furthermore, we might be forced to temporarily limit the features available in our current or future products and services. If we fail to maintain or renegotiate any of these software or service licenses, we could face significant delays and diversion of resources in attempting to license and integrate functional equivalents.
If our software products contain serious errors or defects, then we may lose revenue and market acceptance and may incur costs to defend or settle claims. Complex software applications such as ours often contain errors or defects, particularly when first introduced or when new versions or enhancements are released. Despite internal testing and testing by our customers, our current and future products may contain serious defects, which could result in lost revenue, lost customers, slower growth or a delay in market acceptance.
Since our customers use our products for critical business applications, such as online video, errors, defects or other performance problems could result in damage to our customers. They could seek significant compensation from us for the losses they suffer. Although our customer agreements typically contain provisions designed to limit our exposure to claims, existing or future laws or unfavorable judicial decisions could negate these limitations. Even if not successful, a claim brought against us would likely be time-consuming and costly and could seriously damage our reputation in the marketplace, making it harder for us to sell our products.
Unauthorized disclosure of data or unauthorized access to our service could adversely affect our business. Any security breaches, unauthorized access, unauthorized usage, virus or similar breach or disruption could result in loss of confidential information, personal data and customer content, damage to our reputation, early termination of our contracts, litigation, regulatory investigations or other liabilities. If our security measures, or those of our partners or service providers, are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to confidential information, personal data or customer content, our reputation will be damaged, our business may suffer or we could incur significant liability.
Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose sales and customers. Any significant violations of data privacy or unauthorized disclosure of information could result in the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and adversely impact our results of operations and financial condition. Moreover, if a security breach occurs with respect to another software as a service, or SaaS, provider, our customers and potential customers may lose trust in the security of the SaaS business model generally, which could adversely impact our ability to retain existing customers or attract new ones.
We use a limited number of data centers and cloud computing services facilities to deliver our services. Any disruption of service at these facilities could harm our business. We manage our services and serve all of our customers from a limited number of third-party data center facilities and cloud computing services facilities. While we control the actual computer and storage systems upon which our software runs, and deploy them to the data center facilities, we do not control the operation of these facilities.
The owners of these facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we may be required to transfer to new facilities, and we may incur significant costs and possible service interruption in connection with doing so.
Any changes in third-party service levels at these facilities or any errors, defects, disruptions or other performance problems at or related to these facilities that affect our services could harm our reputation and may damage our customers’ businesses. Interruptions in our services might reduce our revenue, cause us to issue credits to customers, subject us to potential liability, and cause customers to terminate their subscriptions or harm our renewal rates.
These facilities are vulnerable to damage or service interruption resulting from human error, intentional bad acts, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. The occurrence of a natural disaster or an act of terrorism, or vandalism or other misconduct, or a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our services.
Our business may be adversely affected by third-party claims, including by governmental bodies, regarding the content and advertising distributed through our service. We rely on our customers to secure the rights to redistribute content over the Internet, and we do not screen the content that is distributed through our service. There is no assurance that our customers have licensed all rights necessary for distribution, including Internet distribution. Other parties may claim certain rights in the content of our customers.
In the event that our customers do not have the necessary distribution rights related to content, we may be required to cease distributing such content, or we may be subject to lawsuits and claims of damages for infringement of such rights. If these claims arise with frequency, the likelihood of our business being adversely affected would rise significantly. In some cases, we may have rights to indemnification or claims against our customers if they do not have appropriate distribution rights related to specific content items, however there is no assurance that we would be successful in any such claim.
We operate an “open” publishing platform and do not screen the content that is distributed through our service. Content may be distributed through our platform that is illegal or unlawful under international, federal, state or local laws or the laws of other countries. We may face lawsuits, claims or even criminal charges for such distribution, and we may be subject to civil, regulatory or criminal sanctions and damages for such distribution. Any such claims or investigations could adversely affect our business, financial condition and results of operations.
We could incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. Companies providing Internet-related products and services are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights, particularly patent rights. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims, some of whom have sent letters to and/or filed suit alleging infringement against some of our customers. From time to time, third parties claim that we are infringing upon their intellectual property rights. For information regarding these claims, see Part I, Item 3, “Legal Proceedings.” We could incur substantial costs in prosecuting or defending any intellectual property litigation. Additionally, the defense or prosecution of claims could be time-consuming, and could divert our management’s attention away from the execution of our business plan.
Moreover, any settlement or adverse judgment resulting from a claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. There can be no assurance that we would be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all, that we would be able to develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers to continue using,
our affected product or service. In addition, we may be required to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us. An adverse determination could also prevent us from offering our products or services to others. Infringement claims asserted against us may have an adverse effect on our business, financial condition and results of operations.
Our agreements with customers often include contractual obligations to indemnify them against claims that our products infringe the intellectual property rights of third parties. The results of any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may force us to do one or more of the following:
• cease selling or using products or services that incorporate the challenged intellectual property;
• make substantial payments for costs or damages;
• obtain a license, which may not be available on reasonable terms, to sell or use the relevant technology; or
• redesign those products or services to avoid infringement.
If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our customers for such claims, such payments or costs could have a material adverse effect upon our business and financial results.
Failure to adequately protect our intellectual property could substantially harm our business and operating results. Because our business depends substantially on our intellectual property, the protection of our intellectual property rights is important to the success of our business. We rely upon a combination of trademark, patent, trade secret and copyright law and contractual restrictions to protect our intellectual property. These afford only limited protection. Despite our efforts to protect our property rights, unauthorized parties may attempt to copy aspects of our products, service, software and functionality or obtain and use information that we consider proprietary. Moreover, policing our proprietary rights is difficult and may not always be effective. In addition, we may need to enforce our rights under the laws of countries that do not protect proprietary rights to as great an extent as do the laws of the United States.
Litigation or proceedings before the U.S. Patent and Trademark Office or other governmental authorities and administrative bodies in the United States and abroad may be necessary in the future to enforce our intellectual property rights, to protect our patent rights, trade secrets, trademarks and domain names, and to determine the validity and scope of the proprietary rights of others. Such litigation or proceedings may be very costly and impact our financial performance. We may also incur substantial costs defending against frivolous litigation or be asked to indemnify our customers against the same. Our efforts to enforce or protect our proprietary rights may prove to be ineffective and could result in substantial costs and diversion of resources and could substantially harm our operating results.
Our exposure to risks associated with the use of intellectual property may increase as a result of acquisitions, as we have less opportunity to have visibility into the development process with respect to acquired technology or the care taken to safeguard against infringement risks. Third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition.
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information. We have devoted substantial resources to the development of our technology, business operations and business plans. In order to protect our trade secrets and proprietary information, we rely in significant part on confidentiality agreements with our employees, licensees, independent contractors, advisers and customers. These agreements may not be effective to prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we would not be able to assert trade secret rights against such parties. To the extent that our
employees and others with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Laws regarding trade secret rights in certain markets in which we operate may afford little or no protection to our trade secrets. The loss of trade secret protection could make it easier for third parties to compete with our products by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Our use of “open source” software could negatively affect our ability to sell our services and subject us to possible litigation. A portion of the technology licensed by us incorporates “open source” software, and we may incorporate open source software in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses. If we fail to comply with these licenses, we may be subject to certain conditions, including requirements that we offer our services that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or alterations under the terms of the particular open source license. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of our services that contained the open source software and required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our services.
Fluctuations in the exchange rate of foreign currencies could result in currency transactions losses. We currently have foreign sales denominated in Australian dollars, British pound sterling, euros, Japanese yen and New Zealand dollars and may, in the future, have sales denominated in the currencies of additional countries in which we establish or have established sales offices. In addition, we incur a portion of our operating expenses in euros and, to a lesser extent, other foreign currencies. Any fluctuation in the exchange rate of these foreign currencies may negatively impact our business, financial condition and operating results. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs or illiquid markets.
We may be required to collect sales and use taxes on the services we sell in additional jurisdictions in the future, which may decrease sales, and we may be subject to liability for sales and use taxes and related interest and penalties on prior sales. State and local taxing jurisdictions have differing rules and regulations governing sales and use taxes and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales and use taxes to our subscription services in various jurisdictions is unclear. We cannot assure you that we will not be subject to sales and use taxes or related penalties for past sales in states where we presently believe sales and use taxes are not due. We reserve estimated sales and use taxes in our financial statements but we cannot be certain that we have made sufficient reserves to cover all taxes that might be assessed.
If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our services, we may be liable for past taxes in addition to being required to collect sales or similar taxes in respect of our services going forward. Liability for past taxes may also include substantial interest and penalty charges. Our client contracts typically provide that our clients must pay all applicable sales and similar taxes. Nevertheless, clients may be reluctant to pay back taxes and may refuse responsibility for interest or penalties associated with those taxes or we may determine that it would not be feasible to seek reimbursement. If we are required to collect and pay back taxes and the associated interest and penalties and if our clients do not reimburse us for all or a portion of these amounts, we will incur unplanned expenses that may be substantial. Moreover, imposition of such taxes on our services going forward will effectively increase
the cost of such services to our clients and may adversely affect our ability to retain existing clients or to gain new clients in the areas in which such taxes are imposed.
Government and industry regulation of the Internet is evolving and could directly restrict our business or indirectly affect our business by limiting the growth of our markets. Unfavorable changes in government regulation or our failure to comply with regulations could harm our business and operating results. Federal, state and foreign governments and agencies have adopted and could in the future adopt regulations covering issues such as user privacy, content, and taxation of products and services. Government regulations could limit the market for our products and services or impose burdensome requirements that render our business unprofitable. Our products enable our customers to collect, manage and store a wide range of data. The United States and various state governments have adopted or proposed limitations on the collection, distribution and use of personal information. Several foreign jurisdictions, including the European Union and the United Kingdom, have adopted legislation (including directives or regulations) that increase or change the requirements governing data collection and storage in these jurisdictions. If our privacy or data security measures fail to comply with current or future laws and regulations, we may be subject to litigation, regulatory investigations or other liabilities, or our customers may terminate their relationships with us.
In addition, although many regulations might not apply to our business directly, we expect that laws regulating the solicitation, collection or processing of personal and consumer information could affect our customers’ ability to use and share data, potentially reducing demand for our services. The Telecommunications Act of 1996 and the European Union Data Protection Directive along with other similar laws and regulations prohibit certain types of information and content from being transmitted over the Internet. The scope of this prohibition and the liability associated with a violation are currently unsettled. In addition, although substantial portions of the Communications Decency Act were held to be unconstitutional, we cannot be certain that similar legislation will not be enacted and upheld in the future. Legislation like the Telecommunications Act and the Communications Decency Act could dampen the growth in web usage and decrease its acceptance as a medium of communications and commerce. Moreover, if future laws and regulations limit our customers’ ability to use and share consumer data or our ability to store, process and share data with our customers over the Internet, demand for our products could decrease, our costs could increase, and our results of operations and financial condition could be harmed.
In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business and operating results.
Our stock price has been volatile and is likely to be volatile in the future. The market price of our common stock has been and is likely to be highly volatile and could be subject to significant fluctuations in response to, among other things, the risk factors described in this report and other factors beyond our control. Market prices for securities of early stage companies have historically been particularly volatile. Some, but not all, of the factors that may cause the market price of our common stock to fluctuate include:
• fluctuations in our quarterly or annual financial results or the quarterly or annual financial results of companies perceived to be similar to us or relevant for our business;
• changes in estimates of our financial results or recommendations by securities analysts;
• failure of our products to achieve or maintain market acceptance;
• changes in market valuations of similar or relevant companies;
• success of competitive service offerings or technologies;
• changes in our capital structure, such as the issuance of securities or the incurrence of debt;
• announcements by us or by our competitors of significant services, contracts, acquisitions or strategic alliances;
• regulatory developments in the United States, foreign countries, or both;
• litigation;
• additions or departures of key personnel;
• investors’ general perceptions; and
• changes in general economic, industry or market conditions.
In addition, if the market for technology stocks, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition, or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well. Sales of up to 1,536,261 shares of our common stock in the public market could occur at any time after the expiration of the lock-up agreement entered into in connection with our acquisition of substantially all of the assets of Unicorn. Following the expiration of the lock-up period 180 days following the closing date of the acquisition, these shares will be eligible for resale in compliance with Rule 144. These sales or the market perception that the holder or holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.
If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they adversely change their recommendations regarding our stock, our stock price and trading volume could decline. The trading market for our common stock will be influenced by research and reports that industry or security analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us adversely change their recommendations regarding our stock, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors. We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
We do not expect to declare any dividends in the foreseeable future. We do not anticipate declaring any dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking dividends should not purchase our common stock.
We may be unable to meet our future capital requirements, which could limit our ability to grow. We believe our existing cash and cash equivalents will be sufficient to meet our anticipated working capital and capital expenditure needs over at least the next 12 months. We may, however, need, or could elect to seek, additional funding at any time. To the extent that existing resources are insufficient to fund our business operations, our future activities for the expansion of our service and our product offerings, developing and sustaining our relationships and infrastructure for the distribution and delivery of digital media online, marketing, and supporting our office facilities, we may need to raise additional funds through equity or debt financing. Additional funds may not be available on terms favorable to us or our stockholders. Furthermore, if we issue equity securities, our stockholders may experience additional dilution or the new equity securities may have rights, preferences and privileges senior to those of our existing classes of stock. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements.
Failure to achieve and maintain effective internal control over financial reporting could result in our failure to accurately report our financial results. Any inability to report and file our financial results accurately and timely could harm our business and adversely impact investor confidence in our company and, as a result, the value of our common stock. We will need to continue to evaluate our internal control over financial reporting in connection with Section 404 of the Sarbanes-Oxley Act going forward, and our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. This assessment includes the disclosure of any material weaknesses in our internal control over financial reporting identified by our management, as well as our independent registered public accounting firm’s attestation report on our internal control over financial reporting. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on the price of our common stock.
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt. Our amended and restated certificate of incorporation and bylaws, and Delaware law, contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:
• authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend, and other rights superior to our common stock;
• limiting the liability of, and providing indemnification to, our directors and officers;
• limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;
• requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;
• controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings;
• providing our board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings;
• establishing a classified board of directors so that not all members of our board are selected at one time;
• limiting the determination of the number of directors on our board of directors and the filling of vacancies or newly created seats on the board to our board of directors then in office; and
• providing that directors may be removed by stockholders only for cause.
These provisions, alone or together, could delay hostile takeovers and changes in control of our company or changes in our management.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. Any provision of our amended and restated certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
We record substantial expenses related to our issuance of stock options that may have a material adverse impact on our operating results for the foreseeable future. We expect our stock-based compensation expenses will continue to be significant in future periods, which will have an adverse impact on our operating results. The model used by us requires the input of highly subjective assumptions, including the price volatility of the option’s underlying stock. If facts and circumstances change and we employ different assumptions for estimating stock-based compensation expense in future periods, or if we decide to use a different valuation model, the future period expenses may differ significantly from what we have recorded in the current period and could materially affect the fair value estimate of stock-based payments, our operating income, net income and net income per share.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Item 2. Properties
Our corporate headquarters are located in Boston, Massachusetts. We lease 82,184 square feet pursuant to a lease that terminates March 31, 2022. We have sales and marketing offices in New York, New York; London, England; Paris, France; Barcelona, Spain; Tokyo, Japan; Sydney, Australia; Seoul, South Korea; Singapore; and Dubai, United Arab Emirates. We have a research and development office in Middleton, Wisconsin. Our offices in Seattle, Washington, San Francisco, California and Tempe, Arizona are used for sales and marketing as well as research and development. We believe our facilities are adequate for our current needs.
The Company’s primary office lease has the option to renew the lease for two successive periods of five years each. In connection with the office lease, the Company entered into a letter of credit in the amount of $2,404.
Item 3.
Item 3. Legal Proceedings
On August 27, 2012, a complaint was filed by Blue Spike, LLC naming us in a patent infringement case (Blue Spike, LLC v. Audible Magic Corporation, et al., United States District Court for the Eastern District of Texas). The complaint alleges that we have infringed U.S. Patent No. 7,346,472 with a listed issue date of March 18, 2008, entitled “Method and Device for Monitoring and Analyzing Signals,” U.S. Patent No. 7,660,700 with a listed issue date of February 9, 2010, entitled “Method and Device for Monitoring and Analyzing Signals,” U.S. Patent No. 7,949,494 with a listed issue date of May 24, 2011, entitled “Method and Device for Monitoring and Analyzing Signals” and U.S. Patent No. 8,214,175 with a listed issue date of July 3, 2012, entitled “Method and Device for Monitoring and Analyzing Signals.” The complaint seeks an injunction enjoining infringement, damages and pre- and post-judgment costs and interest. We answered and filed counterclaims against Blue Spike on December 3, 2012. We amended our answer and counterclaims on
July 15, 2013. This complaint is subject to indemnification by one of our vendors. We cannot yet determine whether it is probable that a loss will be incurred in connection with this complaint, nor can we reasonably estimate the potential loss, if any.
On September 10, 2013, a complaint was filed by Cinsay Inc. naming us in a patent infringement case (Cinsay Inc. v. Brightcove Inc. and Joyus Inc., United States District Court for the Northern District of Texas). The complaint alleges that we have infringed U.S. Patent No. 8,312,486 with a listed issue date of November 13, 2012, entitled “Interactive Product Placement and Method Therefor” and U.S. Patent No. 8,533,753 with a listed issue date of September 10, 2013, entitled “Interactive Product Placement and Method Therefor.” On October 1, 2013, Cinsay filed an amended complaint against us in which it reasserted the allegations of infringement of U.S. Patent No. 8,312,486 and U.S. Patent No. 8,533,753 and added allegations that we infringed U.S. Patent No. 8,549,555 with a listed issue date of October 1, 2013, entitled “Interactive Product Placement and Method Therefor.” The amended complaint seeks an injunction enjoining infringement, damages and pre- and post-judgment costs and interest. We answered the amended complaint on November 12, 2013. We cannot yet determine whether it is probable that a loss will be incurred in connection with this complaint, nor can we reasonably estimate the potential loss or range of a possible loss, if any.
In addition, we are, from time to time, party to litigation arising in the ordinary course of our business. Management does not believe that the outcome of these claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows based on the status of proceedings at this time.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock has been traded on the NASDAQ Global Market under the symbol “BCOV” since our initial public offering on February 17, 2012. Prior to this time, there was no public market for our common stock. The following table shows the high and low sale prices per share of our common stock as reported on the NASDAQ Global Market for the periods indicated:
On February 28, 2014, the last reported sale price for our common stock on the NASDAQ Global Market was $9.70 per share.
Dividend Policy We have never paid or declared any cash dividends on our common stock. We currently intend to retain any cash flow to finance the growth and development of our business, and we do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments and other factors our board of directors deems relevant.
Stockholders As of February 28, 2014, there were approximately 49 holders of record of our common stock (not including beneficial holders of stock held in street name).
Stock Performance Graph The graph set forth below compares the cumulative total stockholder return on our common stock between February 17, 2012 (the date of our initial public offering) and December 31, 2013, with the cumulative total return of (a) the NASDAQ Computer & Data Processing Index and (b) the NASDAQ Composite Index, over the same period. This graph assumes the investment of $100 on February 17, 2012 in our common stock, the NASDAQ Computer & Data Processing Index and the NASDAQ Composite Index and assumes the reinvestment of dividends, if any. The graph assumes our closing sales price on February 17, 2012 of $14.30 per share as the initial value of our common stock and not the initial offering price to the public of $11.00 per share.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from the NASDAQ Stock Market LLC, a financial data provider and a source believed to be reliable. The NASDAQ Stock Market LLC is not responsible for any errors or omissions in such information.
Sales of Unregistered Securities Not applicable.
Use of Proceeds from Public Offering of Common Stock On February 16, 2012, our registration statement on Form S-1 (File No. 333-176444) was declared effective for our initial public offering. On February 23, 2012, we closed our initial public offering of 5,750,000 shares of common stock, including 750,000 shares pursuant to the underwriters’ overallotment option, at an offering price of $11.00 per share. The managing underwriters of the offering were Morgan Stanley & Co. LLC, and Stifel, Nicolaus & Company, Incorporated. Following the sale of the shares in connection with the closing of our initial public offering, the offering terminated.
As a result of the offering, including the underwriters’ option to purchase additional shares, we received net proceeds of approximately $54.5 million, after deducting total expenses of approximately $8.7 million, consisting of underwriting discounts and commissions of $4.4 million and offering-related expenses reasonably estimated to be $4.3 million. None of such payments were direct or indirect payments to any of our directors or officers or their associates, to persons owning 10% or more of our common stock, or to any of our affiliates.
We have used $7.0 million of the net proceeds from our initial public offering to repay certain indebtedness. None of such payments were direct or indirect payments to any of our directors or officers or their associates, to persons owning 10% or more of our common stock, or to any of our affiliates. We also used approximately $27.4 million of the net proceeds from our initial public offering as consideration for the purchase of Zencoder in August 2012. On January 31, 2014, we acquired substantially all of the assets of Unicorn for total consideration of approximately $40.1 million, which was funded by approximately $9.5 million of the net proceeds from our initial public offering and 2,850,547 shares of our common stock.
There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on February 17, 2012 pursuant to Rule 424(b) under the Securities Act.
Purchases of Equity Securities by the Issuer or Affiliated Purchasers There were no repurchases of shares of common stock made during the year ended December 31, 2013.
Item 6.
Item 6. Selected Consolidated Financial Data The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements and related notes, and other financial information included in this Annual Report on Form 10-K.
We derived the consolidated financial data for the years ended December 31, 2013, 2012 and 2011 and as of December 31, 2013 and 2012 from our audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. We derived the consolidated financial data for the years ended December 31, 2010 and 2009 and as of December 31, 2011, 2010 and 2009 from audited consolidated financial statements which are not included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results to be expected in future periods.
(1) The results of operations for Zencoder have been included in our consolidated financial statements since the date of acquisition on August 14, 2012.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors.”
We are a leading global provider of cloud services for video. Brightcove Video Cloud, or Video Cloud, our flagship product released in 2006, is the world’s leading online video platform. As of December 31, 2013, we had 6,318 customers in over 70 countries, including many of the world’s leading media, retail, technology and financial services companies, as well as governments, educational institutions and non-profit organizations. In 2013, our customers used Video Cloud to deliver an average of approximately 963 million video streams per month, which we believe is more video streams per month than any other professional solution.
Video Cloud enables our customers to publish and distribute video to Internet-connected devices quickly, easily and in a cost-effective and high-quality manner. Our innovative technology and intuitive user interface give customers control over a wide range of features and functionality needed to publish and deliver a compelling user experience, including content management, format conversion, video player styling, distributed caching, advertising insertion, content protection and distribution to diverse device types and
multiple websites, including their own websites, partner websites and social media sites. Video Cloud also includes comprehensive analytics that allow customers to understand and refine their engagement with end users.
As of December 31, 2012, we had 335 employees and 6,367 customers, of which 4,742 used our volume offerings and 1,625 used our premium offerings. As of December 31, 2013, we had 347 employees and 6,318 customers, of which 4,556 used our volume offerings and 1,762 used our premium offerings.
We have generated substantially all of our revenue to date by offering our Video Cloud product to customers on a subscription-based, software-as-a-service, or SaaS, model. Our revenue grew from $88.0 million in the year ended December 31, 2012 to $109.9 million in the year ended December 31, 2013. Our consolidated net loss was $12.5 million and $10.2 million for the years ended December 31, 2012 and 2013, respectively. Included in consolidated net loss for the year ended December 31, 2013 was stock-based compensation expense and amortization of acquired intangible assets of $6.4 million and $1.7 million, respectively. Included in consolidated net loss for the year ended December 31, 2012 was stock-based compensation and amortization of acquired intangible assets of $5.8 million and $644,000, respectively.
For the years ended December 31, 2013 and 2012, our revenue derived from customers located outside North America was 41% and 37%, respectively. We expect the percentage of total net revenue derived from outside North America to increase in future periods as we continue to expand our international operations.
Our philosophy for the next few years will continue to be to invest for long-term growth. We believe these investments will help us address some of the challenges facing our business such as demand for our products by customers and potential customers, rapid technological change in our industry, increased competition and resulting price sensitivity. These investments include support for the expansion of our infrastructure within our hosting facilities, the hiring of additional technical and sales personnel, and the innovation of new features for Video Cloud, the Zencoder media processing service, or the Zencoder Service, Brightcove Once, or Once, and the development of new products. We believe these investments will help us retain our existing customers and lead to the acquisition of new customers. Additionally, we believe customer growth will enable us to achieve economies of scale which will reduce our cost of goods sold, research and development and general and administrative expenses as a percentage of total revenue.
Acquisitions On August 14, 2012, we acquired Zencoder, a cloud-based media processing service and HTML5 video player technology provider, for total consideration of approximately $27.4 million. This transaction was accounted for under the purchase method of accounting. Accordingly, the results of operations of Zencoder have been included in our consolidated financial statements since the date of acquisition. All of the assets acquired and liabilities assumed in the transaction have been recognized at their acquisition date fair values, which were finalized at December 31, 2012. The acquisition did not result in the addition of any reportable segments.
On January 8, 2013, we acquired the remaining 37% interest of our majority-owned subsidiary, Brightcove Kabushiki Kaisha, or Brightcove KK, a Japanese joint venture which was formed on July 18, 2008. The purchase price of the remaining equity interest was approximately $1.1 million and was funded by cash on hand. Given that we now own 100% of Brightcove KK, we will continue to consolidate Brightcove KK for financial reporting purposes, however, commencing on January 8, 2013, we no longer record a non-controlling interest in the consolidated statements of operations.
On January 31, 2014, we acquired substantially all of the assets of Unicorn Media, Inc. and certain of its subsidiaries, or Unicorn, a provider of cloud video ad insertion technology, for total consideration of approximately $40.1 million, which was funded by cash on hand of $9.5 million and 2,850,547 shares of our common stock. The results of operations of Unicorn will be consolidated with our results of operations beginning on January 31, 2014, the closing date of the transaction.
Key Metrics We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
• Number of Customers. We define our number of customers at the end of a particular quarter as the number of customers generating subscription revenue at the end of the quarter. We believe the number of customers is a key indicator of our market penetration, the productivity of our sales organization and the value that our products bring to both large and small organizations. We classify our customers by including them in either premium or volume offerings. Our premium offerings include our premium Video Cloud customers (Enterprise and Pro editions) and our Zencoder customers who are on annual contracts. Our volume offerings include our Video Cloud Express customers and our Zencoder customers on month-to-month and pay-as-you-go contracts.
During 2013, the number of customers remained relatively consistent, and during 2012, the number of customers increased 64%. As of December 31, 2013, we had 6,318 customers, of which 4,556 used our volume offerings and 1,762 used our premium offerings. As of December 31, 2012, we had 6,367 customers, of which 4,742 used our volume offerings and 1,625 used our premium offerings. Volume customers decreased during 2013 primarily due to our discontinuation of the promotional Video Cloud Express offering. As a result, we experienced attrition of this base level offering without a corresponding addition of customers. We expect customers using our volume offerings to continue to decrease in 2014 as we discontinue additional Video Cloud Express price levels.
• Average Monthly Streams. We define average monthly streams as the year-to-date average number of monthly stream starts on Video Cloud. We believe the average number of monthly streams is a key indicator of both the adoption of Video Cloud as an online video platform and the growth of video content across the Internet.
During the year ended December 31, 2013, the average number of monthly streams was approximately 963 million, an increase of 38% from approximately 699 million during the year ended December 31, 2012.
• Recurring Dollar Retention Rate. We assess our ability to retain customers using a metric we refer to as our recurring dollar retention rate. We calculate the recurring dollar retention rate by dividing the retained recurring value of subscription revenue for a period by the previous recurring value of subscription revenue for the same period. We define retained recurring value of subscription revenue as the committed subscription fees for all contracts that renew in a given period. We define previous recurring value of subscription revenue as the recurring value from committed subscription fees for all contracts that expire in that same period. We typically calculate our recurring dollar retention rate on a monthly basis. Recurring dollar retention rate provides visibility into our ongoing revenue.
During both the years ended December 31, 2013 and 2012, the recurring dollar retention rate was 94%.
The following table includes our key metrics for the periods presented:
Components of Consolidated Statements of Operations Revenue Subscription and Support Revenue - We generate subscription and support revenue from the sale of Video Cloud and the Zencoder Service.
Video Cloud is offered in two product lines. The first product line is comprised of our premium product editions, Enterprise and Pro. The Enterprise edition provides additional features and functionality such as a multi-account environment with consolidated billing, IP address filtering, the ability to produce live events with DVR functionality and advanced upload acceleration of content. Customer arrangements are typically one year contracts, which include a subscription to our platform, basic support and a pre-determined amount of video streams, bandwidth, and managed content. We also offer gold support to our premium customers for an additional fee, which includes extended phone support. The pricing for our premium editions is based on the number of users, accounts and usage, which is comprised of video streams, bandwidth and managed content. Should a customer’s usage of this service exceed the contractual entitlements, the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements. The second product line is comprised of our volume product edition, which we refer to as our Express edition. Our Express edition targets small and medium-sized businesses, or SMBs. The Express edition provides customers with the same basic functionality that is offered in our premium product editions but has been designed for customers who have lower usage requirements and do not typically seek advanced features and functionality. We are discontinuing the lower level pricing options for the Express edition and expect the total number of customers using the Express edition to continue to decrease. Customers who purchase the Express edition generally enter into month-to-month agreements. Express customers are generally billed on a monthly basis and pay via a credit card, or they are billed annually in advance.
The Zencoder Service includes all of the features and functionality necessary to encode digital files and convert them into a wide range of formats in a high-quality manner. The service is offered to customers on a subscription basis, with either committed contracts or pay-as-you-go contracts. The pricing is based on usage, which is comprised of minutes of video processed. The committed contracts include a fixed number of minutes of video processed. Should a customer’s usage of this service exceed the contractual entitlements, the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements. Customers of the Zencoder Service on annual contracts are considered premium customers. Customers on month-to-month contracts, pay-as-you-go contracts, or contracts for a period of less than one year, are considered volume customers.
Professional Services and Other Revenue - Professional services and other revenue consists of services such as implementation, software customizations and project management for customers who subscribe to our premium editions. These arrangements are priced either on a fixed fee basis with a portion due upon contract signing and the remainder due when the related services have been completed, or on a time and materials basis.
Our backlog consists of the total future value of our committed customer contracts, whether billed or unbilled. As of December 31, 2013, we had backlog of approximately $59 million compared to backlog of approximately $53 million as of December 31, 2012. Of the approximately $59 million in backlog as of December 31, 2013, between $52 million and $54 million is expected to be recognized as revenue during the year ended December 31, 2014. Because revenue for any period is a function of revenue recognized from backlog at the beginning of the period as well as from contract renewals and new customer contracts executed during the period, backlog at the beginning of any period is not necessarily indicative of future performance. Our presentation of backlog may differ from that of other companies in our industry.
Cost of Revenue Cost of subscription, support and professional services revenue primarily consists of costs related to supporting and hosting our product offerings and delivering our professional services. These costs include salaries, benefits, incentive compensation and stock-based compensation expense related to the management of our data centers, our customer support team and our professional services staff. In addition to these expenses, we incur third-party service provider costs such as data center and content delivery network expenses,
allocated overhead, depreciation expense and amortization of capitalized internal-use software development costs and acquired intangible assets. We allocate overhead costs such as rent, utilities and supplies to all departments based on relative headcount. As such, general overhead expenses are reflected in cost of revenue in addition to each operating expense category.
The costs associated with providing professional services are significantly higher as a percentage of related revenue than the costs associated with delivering our subscription and support services due to the labor costs of providing professional services. As such, the implementation and professional services costs relating to an arrangement with a new customer are more significant than the costs to renew a customer’s subscription and support arrangement.
Cost of revenue increased in absolute dollars from 2012 to 2013. In future periods we expect our cost of revenue will increase in absolute dollars as our revenue increases. We also expect that cost of revenue as a percentage of revenue will decrease over time as we are able to achieve economies of scale in our business. However, cost of revenue as a percentage of revenue could fluctuate from period to period depending on the growth of our professional services business and any associated costs relating to the delivery of subscription services and the timing of significant expenditures. To the extent that our customer base grows, we intend to continue to invest additional resources in expanding the delivery capability of our products and other services. The timing of these additional expenses could affect our cost of revenue, both in terms of absolute dollars and as a percentage of revenue, in any particular quarterly or annual period.
Operating Expenses We classify our operating expenses as follows:
Research and Development. Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, incentive compensation and stock-based compensation, in addition to the costs associated with contractors and allocated overhead. We have focused our research and development efforts on expanding the functionality and scalability of our products and enhancing their ease of use, as well as creating new product offerings. We expect research and development expenses to increase in absolute dollars as we intend to continue to periodically release new features and functionality, expand our product offerings, continue the localization of our products in various languages, upgrade and extend our service offerings, and develop new technologies. Over the long term, we believe that research and development expenses as a percentage of revenue will decrease, but will vary depending upon the mix of revenue from new and existing products, features and functionality, as well as changes in the technology that our products must support, such as new operating systems or new Internet-connected devices.
Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, incentive compensation, commissions, stock-based compensation and travel costs, amortization of acquired intangible assets, in addition to costs associated with marketing and promotional events, corporate communications, advertising, other brand building and product marketing expenses and allocated overhead. Our sales and marketing expenses have increased in absolute dollars in each of the last three years. We intend to continue to invest in sales and marketing and increase the number of sales representatives to add new customers and expand the sale of our product offerings within our existing customer base, build brand awareness and sponsor additional marketing events. Accordingly, in future periods we expect sales and marketing expense to increase in absolute dollars and continue to be our most significant operating expense. Over the long term, we believe that sales and marketing expense as a percentage of revenue will decrease, but will vary depending upon the mix of revenue from new and existing customers and from small, medium-sized and enterprise customers, as well as changes in the productivity of our sales and marketing programs.
General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for executive, legal, finance, information technology and human resources functions, including salaries, benefits, incentive compensation and stock-based compensation, in addition to the costs associated with professional fees, insurance premiums, other corporate expenses and allocated overhead. In future periods we expect general and administrative expenses to increase in absolute dollars as we continue to incur additional personnel and professional services costs in order to meet the compliance requirements of
operating as a public company, including those costs incurred in connection with Section 404 of the Sarbanes-Oxley Act. Over the long term, we believe that general and administrative expenses as a percentage of revenue will decrease.
Merger-related. Merger-related costs consisted of transaction expenses and related charges incurred as part of the Zencoder and Unicorn Media acquisitions as well as costs associated with the retention of key employees of Zencoder. Approximately $2.7 million is required to be paid to retain certain key employees from the Zencoder acqusition over a two-year period from the date of acquisition of Zencoder as services are performed. Given that the retention amount is related to a future service requirement, the related expense is being recorded as merger-related compensation expense in the consolidated statement of operations over the expected service period.
Other Expense Other expense consists primarily of interest income earned on our cash, cash equivalents and investments, foreign exchange gains and losses, interest expense payable on our debt, loss on disposal of equipment and changes in the fair value of the warrants issued in connection with a line of credit.
Non-Controlling Interest Our results include a non-controlling interest in Brightcove KK. We owned 63% of the entity at December 31, 2012. The non-controlling interest in Brightcove KK is reported as a separate component of stockholders’ equity in our consolidated balance sheet at December 31, 2012. The portion of net income attributable to non-controlling interest is presented as net income attributable to non-controlling interest in consolidated subsidiary in our consolidated statements of operations through January 7, 2013. Two of the minority interest holders in Brightcove KK, J-Stream and Dentsu, also acted as product distributors for Brightcove KK in Japan. We historically recorded revenue from sales to J-Stream and Dentsu as revenue from a related party.
On January 8, 2013, we acquired the remaining 37% interest in Brightcove KK for a purchase price of approximately $1.1 million. As a result of the transaction, we now own 100% of Brightcove KK and will continue to consolidate Brightcove KK for financial reporting purposes, however, commencing on January 8, 2013, we will no longer record a non-controlling interest in the consolidated statements of operations.
Income Taxes As part of the process of preparing our consolidated financial statements, we are required to estimate our taxes in each of the jurisdictions in which we operate. We account for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. In addition, this method requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We have provided a valuation allowance against our existing net deferred tax assets at December 31, 2013, with the exception of the deferred tax assets related to Brightcove KK.
Stock-Based Compensation Expense Our cost of revenue, research and development, sales and marketing, and general and administrative expenses include stock-based compensation expense. Stock-based compensation expense represents the fair value of outstanding stock options and restricted stock awards, which is recognized as expense over the respective stock option and restricted stock award service periods. For the years ended December 31, 2013, 2012, and 2011, we recorded $6.4 million, $5.8 million, and $4.2 million, respectively, of stock-based compensation expense. We expect stock-based compensation expense to increase in absolute dollars in future periods.
Foreign Currency Translation With regard to our international operations, we frequently enter into transactions in currencies other than the U.S. dollar. As a result, our revenue, expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British pound, Australian dollar, and
Japanese yen. For the year ended December 31, 2013, 2012, and 2011, 45%, 41%, and 39%, respectively, of our revenue was generated in locations outside the United States. During the same periods, 31%, 29%, and 28%, respectively, of our revenue was in currencies other than the U.S. dollar, as were some of the associated expenses. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we conduct business, our foreign currency-based revenue and expenses generally increase in value when translated into U.S. dollars. We expect our foreign currency-based revenue to increase in absolute dollars and as a percentage of total revenue.
Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that the following significant accounting policies, which are more fully described in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition We primarily derive revenue from the sale of our online video platform, which enables our customers to publish and distribute video to Internet-connected devices quickly, easily and in a cost-effective and high-quality manner. Revenue is derived from three primary sources: (1) the subscription to our technology and related support; (2) hosting, bandwidth and encoding services; and (3) professional services, which include initiation, set-up and customization services.
We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.
Our subscription arrangements provide customers the right to access our hosted software applications. Customers do not have the right to take possession of our software during the hosting arrangement. Accordingly, we recognize revenue in accordance with Accounting Standards Codification (ASC) 605, Revenue Recognition. Contracts for premium customers generally have a term of one year and are non-cancellable. These contracts generally provide the customer with an annual level of usage, and provide the rate at which the customer must pay for actual usage above the annual allowable usage. For these services, we recognize the annual fee ratably as revenue each month. Should a customer’s usage of our services exceed the annual allowable level, revenue is recognized for such excess in the period of the usage. Contracts for volume customers are generally month-to-month arrangements, have a maximum monthly level of usage and provide the rate at which the customer must pay for actual usage above the monthly allowable usage. The monthly volume subscription and support and usage fees are recognized as revenue during the period in which the related cash is collected.
Revenue recognition commences upon the later of when the application is placed in a production environment, or when all revenue recognition criteria have been met.
Professional services and other revenue sold on a stand-alone basis are recognized as the services are performed, subject to any refund or other obligation.
Deferred revenue includes amounts billed to customers for which revenue has not been recognized, and primarily consists of the unearned portion of annual software subscription and support fees, and deferred professional service fees.
Revenue is presented net of any taxes collected from customers.
Multiple-Element Arrangements We periodically enter into multiple-element service arrangements that include platform subscription fees, support fees, initiation fees, and, in certain cases, other professional services.
Initiation fees and other professional services charged when services are first activated are recorded as deferred revenue, and recognized as revenue ratably over a term beginning upon go-live of the software application and extending through the contract term.
We assess arrangements with multiple deliverables under Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements - a Consensus of the FASB Emerging Issues Task Force. Arrangement consideration is allocated to deliverables based on their relative selling price.
In order to treat deliverables in a multiple-element arrangement as separate units of accounting, the deliverables must have stand-alone value upon delivery. If the deliverables have stand-alone value upon delivery, we account for each deliverable separately. Subscription services have stand-alone value as such services are often sold separately. In determining whether professional services have stand-alone value, we consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date, and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work. To date, we have concluded that all of the professional services included in multiple-element arrangements executed have stand-alone value, with the exception of initiation and activation fees.
When multiple deliverables included in an arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. We determine the relative selling price for a deliverable based on its vendor-specific objective evidence of fair value (VSOE), if available, or its best estimate of selling price (BESP), if VSOE is not available. We have determined that third-party evidence of selling price is not a practical alternative due to differences in our service offerings compared to other parties and the availability of relevant third party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.
We have not established VSOE for our offerings due to the lack of pricing consistency, the introduction of new services and other factors. Accordingly, we use our BESP to determine the relative selling price. We determine BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken into consideration include our discounting practices, the size and volume of our transactions, the geographic area where services are sold, price lists, our go-to-market strategy, historical contractually stated prices and prior relationships and future subscription service sales with certain classes of customers.
The determination of BESP is made through consultation with and approval by our management, taking into consideration the go-to-market strategy. As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in selling prices, including both VSOE and BESP. We plan to analyze the selling prices used in our allocation of arrangement consideration, at a minimum, on an annual basis. Selling prices will be analyzed on a more frequent basis if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices.
Allowance for Doubtful Accounts We offset gross trade accounts receivable with an allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable and is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with specific accounts. Provisions for allowances for doubtful accounts are recorded in general and administrative expense. If, upon signing a customer arrangement, the related account receivable is not considered collectable, we will defer the associated revenue until we collect the cash. To date, we have not incurred any significant write-offs of accounts receivable and
have not been required to revise any of our assumptions or estimates used in determining our allowance for doubtful accounts. As of December 31, 2013, our allowance for doubtful accounts was $461,000.
Software Development Costs Costs incurred to develop software applications used in our on-demand application services consist of (a) certain external direct costs of materials and services incurred in developing or obtaining internal-use computer software and (b) payroll and payroll-related costs for employees who are directly associated with, and who devote time to, the project. These costs generally consist of internal labor during configuration, coding and testing activities. Research and development costs incurred during the preliminary project stage or costs incurred for data conversion activities, training, maintenance and general and administrative or overhead costs are expensed as incurred. Capitalization begins when the preliminary project stage is complete, management with the relevant authority authorizes and commits to the funding of the software project, it is probable the project will be completed, and the software will be used to perform the functions intended and certain functional and quality standards have been met. Qualified costs incurred during the operating stage of our software applications relating to upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality, while costs that cannot be separated between maintenance of, and minor upgrades and enhancements to, internal-use software are expensed as incurred. These capitalized costs are amortized on a straight line basis over the expected useful life of the software, which is three years. We capitalized $1.1 million in 2013, $24,000 in 2012 and $354,000 in 2011, respectively, of internal-use software development costs. Amortization of software development costs was $312,000 in 2013, $542,000 in 2012 and $886,000 in 2011, respectively.
In addition to the software development costs described above, we incur costs to develop computer software to be licensed or otherwise marketed to customers. Costs incurred in the research, design and development of software for sale to others are charged to expense until technological feasibility is established. We capitalize direct computer software development costs upon achievement of technological feasibility subject to net realizable value considerations. Thereafter, software development costs are capitalized until the product is released and amortized to product cost of sales on a straight-line basis over the lesser of three years or the estimated economic lives of the respective products. We have determined that technological feasibility is established at the time a working model of software is completed. Because we believe our current process for developing software will be essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.
Income Taxes We are subject to income taxes in both the United States and international jurisdictions, and we use estimates in determining our provision for income taxes. We account for income taxes under the asset and liability method for accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax basis of assets and liabilities using statutory rates. This process requires us to project our current tax liability and estimate our deferred tax assets and liabilities, including net operating losses and tax credit carryforwards. In assessing the need for a valuation allowance, we considered our recent operating results, future taxable income projections and feasible tax planning strategies. We have provided a valuation allowance against our net deferred tax assets at December 31, 2013 with the exception of the deferred tax assets related to Brightcove KK. Due to the evolving nature and complexity of tax regulations combined with the number of jurisdictions in which we operate, it is possible that our estimates of our tax liability could change in the future, which may result in additional tax liabilities and adversely affect our results of operations, financial condition and cash flows.
As of December 31, 2013 and 2012, we had no material unrecognized tax benefits.
Business Combinations We record tangible and intangible assets acquired and liabilities assumed in business combinations under the purchase method of accounting. Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. We then allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets based on detailed valuations that use information and assumptions provided by management. We allocate any excess purchase price over the fair
value of the net tangible and intangible assets acquired and liabilities assumed to goodwill. If the fair value of the assets acquired exceeds our purchase price, the excess is recognized as a gain.
Significant management judgments and assumptions are required in determining the fair value of acquired assets and liabilities, particularly acquired intangible assets. The valuation of purchased intangible assets is based upon estimates of the future performance and cash flows from the acquired business. Each asset is measured at fair value from the perspective of a market participant.
If different assumptions are used, it could materially impact the purchase price allocation and adversely affect our results of operations, financial condition and cash flows.
Intangible Assets and Goodwill We amortize our intangible assets that have finite lives using either the straight-line method or, if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be consumed utilizing expected undiscounted future cash flows. Amortization is recorded over the estimated useful lives ranging from two to fourteen years.
We review our intangible assets subject to amortization to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If the carrying value of an asset exceeds its undiscounted cash flows, we will write down the carrying value of the intangible asset to its fair value in the period identified. In assessing recoverability, we must make assumptions regarding estimated future cash flows and discount rates. If these estimates or related assumptions change in the future, we may be required to record impairment charges. We generally calculate fair value as the present value of estimated future cash flows to be generated by the asset using a risk adjusted discount rate. If the estimate of an intangible asset’s remaining useful life is changed, we will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.
We review the carrying value of goodwill for impairment whenever events or changes in circumstances indicate that the carrying value of goodwill may exceed its fair value, and otherwise at least annually. Conditions that could trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in certain agreements, significant underperformance relative to historical or projected future operating results, an economic downturn in customers’ industries, increased competition, a significant reduction in our stock price for a sustained period or a reduction of our market capitalization relative to net book value. We evaluate impairment by comparing the estimated fair value of each reporting unit to its carrying value. We estimate fair value primarily utilizing the market approach, which calculates fair value based on the market values of comparable companies or comparable transactions. Actual results may differ materially from these estimates. The estimates we make in determining the fair value of our reporting unit involve the application of judgment, which could affect the timing and size of any future impairment charges. Impairment of our goodwill could significantly affect our operating results and financial position.
We continually evaluate whether events or circumstances have occurred that indicate that the estimated remaining useful life of our long-lived assets may warrant revision or that the carrying value of these assets may be impaired. Any write-downs are treated as permanent reductions in the carrying amount of the assets. We must use judgment in evaluating whether events or circumstances indicate that useful lives should change or that the carrying value of assets has been impaired. Any resulting revision in the useful life or the amount of an impairment also requires judgment. Any of these judgments could affect the timing or size of any future impairment charges. Revision of useful lives or impairment charges could significantly affect our operating results and financial position.
We adopted ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350) Testing Goodwill for Impairment. Under ASU 2011-08, we have the option to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount to determine whether further impairment testing is necessary. Based on the assessment of these qualitative factors, we determined that no impairment indicators were noted, allowing us to forego the quantitative analysis.
Stock-based Compensation Accounting guidance requires employee stock-based payments to be accounted for under the fair value method. Under this method, we are required to record compensation cost based on the estimated fair value for stock-based awards granted over the requisite service periods for the individual awards, which generally equals the vesting periods. We use the straight-line amortization method for recognizing stock-based compensation expense associated with equity awards to employees.
We estimate the fair value of employee stock options on the date of grant using the Black-Scholes option-pricing model, which requires the use of highly subjective estimates and assumptions. For restricted stock awards issued we estimate the fair value of each grant based on the stock price of our common stock on the date of grant. As there was no public market for our common stock prior to February 17, 2012, the effective date of our initial public offering, or IPO, and as the trading history of our common stock was limited through December 31, 2012, we determined the volatility for options granted based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using an average of the historical volatility measures of this peer group of companies. The expected life assumption is based on the “simplified method” for estimating expected term as we do not have sufficient stock option exercise experience to support a reasonable estimate of the expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. We use an expected dividend rate of zero as we currently have no history or expectation of paying dividends on our common stock. In addition, we have estimated expected forfeitures of stock options based on our historical forfeiture rate and used these rates in developing a future forfeiture rate. If our actual forfeiture rate varies from our historical rates and estimates, additional adjustments to compensation expense may be required in future periods.
Given the absence of an active market for our common stock prior to the completion of our IPO on February 17, 2012, the fair value of our common stock underlying our stock-based awards was determined by our board of directors, which intended all stock-based awards granted to be at a price per share not less than the per share fair value of our common stock underlying those awards on the date of grant. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions we use in the valuation model were based on future expectations combined with management’s judgment. In the absence of a public trading market, our board, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each award grant, including the following factors:
• the rights, preferences and privileges of our redeemable convertible preferred stock relative to our common stock;
• the prices of our preferred stock sold to outside investors in arms-length transactions;
• secondary transactions in our common stock;
• our stage of development, operating and financial performance and revenue growth;
• current business conditions and projections;
• the hiring of key personnel;
• the history of our company and the introduction of new products and services;
• the illiquid nature of our common stock;
• contemporaneous or other valuations of our common stock performed by an independent valuation specialist;
• the likelihood of achieving a liquidity event for the shares of common stock underlying these awards, such as an IPO or sale of our company, given prevailing market conditions; and
• the U.S. and global capital market conditions.
Results of Operations The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
Overview of Results of Operations for the Years Ended December 31, 2013 and 2012 Total revenue increased by 25%, or $21.9 million, in 2013 compared to 2012 due to an increase in subscription and support revenue of 22%, or $18.9 million, respectively, and an increase in professional services and other revenue of 82%, or $3.1 million, respectively. The increase in subscription and support revenue resulted primarily from an increase in the number of our premium customers, which was 1,762 as of December 31, 2013 an increase of 8% from 1,625 customers as of December 31, 2012, as well as an increase in revenue from existing customers. In addition, our revenue from volume offerings grew by $2.3 million, or 28%, from the prior year. Our ability to continue to provide the product functionality and performance that our customers require will be a major factor in our ability to continue to increase revenue.
Our gross profit increased by $12.5 million, or 21%, in 2013 compared to 2012, primarily due to an increase in revenue. With the continued growth in our total revenue, our ability to continue to maintain our overall gross profit will depend on our ability to continue controlling our costs of delivery.
Loss from operations was $9.5 million in 2013 compared to $15.4 million in 2012. Loss from operations in 2013 included stock-based compensation expense, amortization of acquired intangible assets and merger-related expenses of $6.4 million, $1.7 million and $2.1 million, respectively. Loss from operations in 2012 included stock-based compensation expense, amortization of acquired intangible assets and merger-related expenses of $5.8 million, $644,000 and $1.9 million, respectively. Over time we expect operating income to improve from increased sales to both new and existing customers and from improved efficiencies throughout our organization as we continue to grow and scale our operations.
As of December 31, 2013, we had $33.0 million of unrestricted cash and cash equivalents, an increase of $11.3 million from $21.7 million at December 31, 2012, due primarily to $8.2 million in maturities of investments offset by $1.1 million used to purchase the non-controlling interest of our Brightcove KK subsidiary and $3.9 million in capital expenditures to support the business.
Revenue
During 2013, revenue increased by $21.9 million, or 25%, compared to 2012, primarily due to an increase in revenue from our premium offerings, which consist of subscription and support revenue, as well as professional services and other revenue. The increase in premium revenue of $19.7 million, or 25%, compared to 2012, is partially the result of an 8% increase in the number of premium customers from 1,625 at December 31, 2012 to 1,762 at December 31, 2013. There were also increases in professional services revenue as well as an increase in revenue from existing customers. In 2013, volume revenue grew by $2.3 million, or 28%, compared to 2012. The increase can be attributed to a full twelve months of Zencoder volume revenue during 2013 as compared to partial revenue in the corresponding period of the prior year.
During 2013, subscription and support revenue increased by $18.9 million, or 22%, compared to 2012. The increase was primarily related to the continued growth of our customer base for our premium offerings, including sales to both new and existing customers. Professional services and other revenue increased by $3.1 million, or 82%. During 2013, there was an increase in the number of professional services engagements that were related to projects and implementations supporting subscription sales. Professional services and other revenue will vary from period to period depending on the number of implementations and other projects that are in process.
For purposes of this section, we designate revenue by geographic regions based upon the locations of our customers. North America is comprised of revenue from the United States, Canada and Mexico. International is comprised of revenue from locations outside of North America. Depending on the timing of new customer contracts, revenue mix from a geographic region can vary from period to period.
During 2013, total revenue for North America increased $9.5 million, or 17%, compared to 2012. The increase in revenue for North America resulted primarily from an increase in subscription and support revenue from our premium offerings. During 2013, total revenue outside of North America increased $12.4 million, or 39%, compared to 2012. The increase in revenue internationally was the result of our increasing focus on marketing our services internationally.
Cost of Revenue
During 2013, cost of subscription and support revenue increased $6.7 million, or 29%, compared to 2012. The increase resulted primarily from an increase in the cost of content delivery network expenses, network hosting services, employee-related expenses and third-party software as a service integrated with our service offering of $3.6 million, $1.4 million, $436,000 and $175,000, respectively. There were also increases in amortization of acquired intangible assets and expenses related to computer maintenance and support of $634,000 and $309,000, respectively.
During 2013, cost of professional services and other revenue increased $2.8 million, or 57%, compared to 2012. The increase resulted primarily from an increase in contractor expenses and employee-related expenses of $2.1 million and $493,000, respectively, in order to support the increase in professional services engagements.
Gross Profit
During 2013, the overall gross profit percentage was 67% compared to 69% during 2012. It is likely that gross profit, as a percentage of revenue, will fluctuate quarter by quarter due to the timing and mix of subscription and support revenue and professional services and other revenue, and the type, timing and duration of service required in delivering certain projects. The professional services and other gross profit percentage increased from 2012 to 2013 as we have continued to build the professional services organization while better leveraging fixed costs with increased customer implementation and customization projects.
Operating Expenses
Research and Development. During 2013, research and development expense increased by $2.3 million, or 12%, compared to 2012 primarily due to increases in employee-related and stock-based compensation expenses of $1.3 million and $504,000, respectively. Rent and travel expenses also increased by $254,000 and $210,000, respectively. In future periods, we expect that our research and development expense will continue to increase in absolute dollars as we continue to add employees, develop new features and functionality for our products, introduce additional software solutions and expand our product and service offerings.
Sales and Marketing. During 2013, sales and marketing expense increased $2.3 million, or 6%, compared to 2012 primarily due to increases in employee-related expenses, stock based compensation and marketing programs of $636,000, $619,000 and $350,000, respectively. There were also increases in rent and amortization of acquired intangible assets of $621,000 and $417,000, respectively. These increases were offset by a decrease in commission expenses of $547,000. We expect that our sales and marketing expense will continue to increase in absolute dollars along with our revenue, as we continue to expand sales coverage and build brand awareness through what we believe are cost-effective channels. We expect that such increases may fluctuate from period to period, however, due to the timing of marketing programs.
General and Administrative. During 2013, general and administrative expense increased by $1.7 million, or 10%, compared 2012 primarily due to an increase in outside accounting and legal fees, insurance and investor relations of $1.2 million, $193,000 and $149,000, respectively. There were also increases in bad debt, rent and contractor expenses of $312,000, $149,000 and $112,000, respectively. These increases were offset by a decrease in stock based compensation expense of $721,000. In future periods, we expect general and administrative expenses will increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and operations.
Merger-related. During 2013, we incurred $2.1 million of merger-related expenses, of which $1.7 million was associated with the retention of certain employees of Zencoder and $429,000 was related to transaction expenses incurred in connection with the acquisition of Unicorn Media. During 2012, we incurred merger-related expenses associated with the retention of certain employees of Zencoder of $826,000, in addition to transaction expenses of $1.1 million incurred in connection with the acquisition of Zencoder.
Other Expense, Net
During 2013, interest income, net, decreased by $48,000 compared to 2012. The decrease is primarily due to lower average cash balances as interest income is generated from the investment of our cash balances, less related bank fees.
The interest expense during 2012 is related to borrowings under our term loan which were repaid during the first quarter of 2012. The increase in other expense, net during 2013 was primarily due to an increase in foreign currency exchange losses of $329,000 upon collection of foreign denominated accounts receivable.
Provision for (Benefit from) Income Taxes
The provision for income taxes during 2013 was primarily comprised of income tax expenses related to foreign jurisdictions. During 2012, we recorded a benefit from income taxes of approximately $3.4 million related to the reduction of our valuation against our existing net deferred tax assets to offset certain deferred tax liabilities on amortizable intangibles recognized upon the acquisition of Zencoder. Upon the closing of the acquisition of Zencoder, we assumed $3.4 million of net deferred tax liabilities which created a future source of taxable income for which our net deferred tax assets can be realized and as a result we reduced the valuation allowance by approximately $3.4 million during 2012. We also recorded a $193,000 benefit for the release of the valuation allowance related to the remaining deferred tax assets of Brightcove KK. Based upon the level of historical income of Brightcove KK and future projections, we determined in the fourth quarter of 2012 that it was probable we will realize the benefits of future deductible differences in Japan. These benefits were partially offset by $109,000 of expense relating to income tax in foreign jurisdictions.
Non-Controlling Interest in Consolidated Subsidiary
Non-controlling interest represents the minority stockholders’ proportionate share (37%) of Brightcove KK. On January 8, 2013, we acquired the remaining 37% interest in Brightcove KK and, as a result, we now own 100% of Brightcove KK. We continue to consolidate Brightcove KK for financial reporting purposes, however, commencing on January 8, 2013, we no longer record a non-controlling interest in the consolidated statements of operations. The $20,000 above represents our proportionate share of the net income of Brightcove KK for the period from January 1, 2013 through January 7, 2013.
Overview of Results of Operations for the Years Ended December 31, 2012 and 2011 Total revenue increased by 38%, or $24.4 million, in 2012 compared to 2011 due to an increase in subscription and support revenue of 40%, or $24.1 million, and an increase in professional services revenue of 9%, or $322,000. The increase in subscription and support revenue resulted primarily from an increase in the number of our premium customers, which was 1,625 as of December 31, 2012, an increase of 25% from 1,301customers as of December 31, 2011. In addition, our revenues from volume offerings grew by $2.7 million, or 48%, from the prior year as our volume customer base increased by approximately 84% from the prior year . Our ability to continue to provide the product functionality and performance that our customers require will be a major factor in our ability to continue to increase revenue.
Our gross profit increased by $17.2 million, or 40%, in 2012 compared to 2011, primarily due to an increase in revenue. With the continued growth in our total revenue, our ability to continue to maintain our overall gross profit will depend on our ability to continue controlling our costs of delivery.
Loss from operations was $15.4 million in 2012 compared to $16.1 million in 2011. Loss from operations in 2012 and 2011 included $5.8 million and $4.2 million, respectively, of stock-based compensation expense.
Our results of operations in 2012 compared to 2011 were impacted by foreign exchange rate fluctuations, resulting in a decrease in revenue of approximately $967,000, or 2%, of revenue, and a decrease in expense of approximately $373,000.
As of December 31, 2012, we had $21.7 million of unrestricted cash and cash equivalents, an increase of $4.5 million from $17.2 million at December 31, 2011, due to the net proceeds of $58.8 million received from the issuance of common stock in connection with our IPO. This increase was offset by the $27.2 million of net cash paid as part of the Zencoder acquisition, investments of $14.1 million and $1.2 million of cash used in operating activities. In addition, as of December 31, 2011, we had $7.0 million of outstanding debt which was repaid during 2012.
Revenue
During 2012, revenue increased by $24.4 million compared to 2011, primarily due to an increase in revenue from our premium offerings, which consist of subscription and support revenue, as well as professional service and other revenue. The increase in premium revenue of $21.8 million, or 37%, is the result of a 25% increase in the number of premium customers from 1,301 at December 31, 2011 to 1,625 at December 31, 2012, as well as increased revenue from our existing customers. Revenue from our volume offerings grew by $2.7 million, or 48%. The increase in volume revenue was driven by an increase of 84% in customers from 2,571 at December 31, 2011 to 4,742 at December 31, 2012, which includes customers acquired as part of the Zencoder acquisition.
During 2012, subscription and support revenue increased by $24.1 million, or 40%, compared to 2011. The increase was primarily related to the continued growth of our customer base for our premium offerings. In addition, professional services and other revenue increased by $322,000, or 9%. Professional services and other revenue will vary from period to period depending on the timing and completion of related implementation and other projects.
For purposes of this section, we designate revenue by geographic regions based upon the locations of our customers. North America is comprised of revenue from the United States, Canada and Mexico. International is comprised of revenue from locations outside of North America. Depending on the timing of new customer contracts, revenue mix from a geographic region can vary from period to period.
During 2012, total revenue for North America increased $13.9 million, or 33%, compared to 2011. The increase in revenue for North America resulted primarily from an increase in subscription and support revenue from our premium offerings. During 2012, total revenue outside of North America increased $10.5 million, or 49%, compared to 2011. The increase in revenue internationally was the result of our increasing focus on marketing our services internationally.
Cost of Revenue
During 2012, cost of subscription and support revenue increased $7.1 million, or 46%, compared to 2011. The increase resulted primarily from an increase in the cost of content delivery network expenses, network hosting services, employee-related expenses and depreciation expense of $2.0 million, $1.6 million, $1.0 million and $606,000, respectively. There were also increases in expenses related to third-party software as a service integrated with our service offering, amortization of intangible assets acquired in the acquisition of Zencoder, sales tax expense and telecommunications of $419,000, $379,000, $332,000 and $321,000, respectively. These increases were partially offset by a decrease in amortization of capitalized software development costs of $344,000, as some of our previously capitalized software development costs were fully amortized.
During 2012, cost of professional services and other revenue remained relatively unchanged when compared to 2011.
Gross profit
During 2012, the overall gross profit percentage was 69% compared to 68% during 2011. The increase in overall gross profit percentage was related to improvement in the professional services and other gross profit percentage as we were able to better leverage our fixed costs to deliver professional services and increase related revenue. Subscription and support gross profit percentage decreased slightly when compared to the corresponding period of the prior year. It is likely that gross profit, as a percentage of revenue, will fluctuate quarter by quarter due to the timing and mix of subscription and support revenue and professional services and other revenue, and the type, timing and duration of service required in delivering certain projects.
Operating Expenses
Research and Development. During 2012, research and development expense increased by $3.5 million, or 23%, compared to 2011 primarily due to increases in employee-related, rent and stock-based compensation expenses of $2.1 million and $550,000 and $320,000, respectively. A portion of the increase in employee-related expenses can be attributed to higher capitalized software development costs during the year ended December 31, 2011 as compared to the year ended December 31, 2012.
Sales and Marketing. During 2012, sales and marketing expense increased $7.2 million, or 23%, compared to 2011 primarily due to increases in employee-related expenses, marketing programs, commission expenses and travel expenses of $2.6 million, $847,000, $812,000 and $625,000, respectively. There were also increases in expenses related to rent, stock-based compensation, amortization of intangible assets acquired in the acquisition of Zencoder and computer-related maintenance and support of $777,000, $598,000, $250,000 and $245,000, respectively.
General and Administrative. During 2012, general and administrative expense increased by $4.1 million, or 32%, compared to 2011 primarily due to increases in employee-related expenses and stock-based compensation of $1.4 million and $656,000, respectively. There were also increases in expenses related to insurance, depreciation and rent of $378,000, $372,000 and $233,000, respectively.
Merger-related. During 2012, we incurred $1.9 million of merger-related expenses associated with our acquisition of Zencoder. Merger-related expenses include $1.1 million of costs incurred in connection with closing the acquisition of Zencoder in addition to $826,000 of costs associated with the retention of certain employees of Zencoder. We did not incur any merger-related expenses during 2011.
Other Income (Expense), Net
During 2012, interest income increased by $83,000 compared to 2011. Interest income is generated from the investment of our cash balances, less related bank fees.
Interest expense, which is related to borrowings under our term loan, decreased as we repaid the term loan during the first quarter of 2012.
The decrease in other expense, net was primarily due to the expense of $139,000 recorded during 2011 related to the revaluation of a warrant compared to a corresponding gain of $28,000 recorded during 2012. There was also a decrease in expense attributable to the realized loss of $146,000, recognized during 2011, when we sold our remaining auction rate security, or ARS.
Provision for Income Taxes
nm - not meaningful
During 2012, we recorded a benefit from income taxes of approximately $3.4 million related to the reduction of our valuation allowance against our existing net deferred tax assets to offset certain deferred tax liabilities on amortizable intangibles recognized upon the acquisition of Zencoder. Upon the closing of the acquisition of Zencoder, we assumed $3.4 million of net deferred tax liabilities which created a future source of taxable income for which our net deferred tax assets can be realized and as a result we reduced the valuation allowance by approximately $3.4 million during the year ended December 31, 2012. We also recorded a $193,000 benefit for the release of the valuation allowance related to the remaining deferred tax assets of Brightcove KK. Based upon the level of historical income of Brightcove KK and future projections, we determined in the fourth quarter of 2012 that it was probable we will realize the benefits of future deductible differences in Japan. These benefits were partially offset by $109,000 of expense relating to income tax in foreign jurisdictions and state tax in lieu of income taxes.
Non-Controlling Interest in Consolidated Subsidiary
Non-controlling interest represents the minority stockholders’ proportionate share (37%) of our majority - owned subsidiary, Brightcove KK. During 2012 and 2011, Brightcove KK generated net income as a result of continued market penetration in Japan.
Liquidity and Capital Resources In connection with our initial public offering in February 2012, we received aggregate proceeds of approximately $58.8 million, including the proceeds from the underwriters’ exercise of their overallotment option, net of underwriters’ discounts and commissions, but before deducting offering expenses of approximately $4.3 million. Prior to our initial public offering, we funded our operations primarily through private placements of preferred and common stock, as well as through borrowings of $7.0 million under our bank credit facilities. In February 2012, we repaid the $7.0 million balance under our bank credit facilities. All of the preferred stock was converted into shares of our common stock in connection with our initial public offering.
Cash, cash equivalents and investments. Our cash, cash equivalents and investments at December 31, 2013 were held for working capital purposes and were invested primarily in money market funds, certificates of deposit and corporate debentures. We do not enter into investments for trading or speculative purposes. At December 31, 2013 and December 31, 2012, restricted cash was $322,000 and $303,000, respectively, and was held in certificates of deposit as collateral for letters of credit related to the contractual provisions of our corporate credit cards and the contractual provisions with a customer. Additionally, a portion of the restricted cash balance at December 31, 2012 was associated with the lease agreement for our office in Seattle, Washington. Upon renegotiation of the Seattle lease agreement during 2013, the restricted cash obligation expired and the collateral was released. At December 31, 2013 and December 31, 2012, we had $7.9 million and $5.6 million, respectively, of cash and cash equivalents held by subsidiaries in international locations, including subsidiaries located in Japan and the United Kingdom. It is our current intention to permanently reinvest unremitted earnings in such subsidiaries or to repatriate the earnings only when tax effective. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated working capital and capital expenditure needs over at least the next 12 months.
Accounts receivable, net. Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. The fluctuations vary depending on the timing of our billing activity, cash collections, and changes to our allowance for doubtful accounts. In many instances we receive cash payment from a customer prior to the time we are able to recognize revenue on a transaction. We record these payments as deferred revenue, which has a positive effect on our accounts receivable balances. We use days’ sales outstanding, or DSO, calculated on a quarterly basis, as a measurement of the quality and status of our receivables. We define DSO as (a) accounts receivable, net of allowance for doubtful accounts, divided by total revenue for the most recent quarter, multiplied by (b) the number of days in that quarter. DSO was 67 days at December 31, 2013, 72 days at December 31, 2012, and 73 days at December 31, 2011.
Operating activities. Cash used by operating activities consists primarily of net loss adjusted for certain non-cash items including depreciation and amortization, stock-based compensation expense, the provision for bad debts and the effect of changes in working capital and other activities. Cash provided by operating activities during 2013 was $7.3 million and consisted of $10.2 million of net loss offset in part by non-cash expenses of $6.4 million for stock-based compensation expense, $5.9 million for depreciation and amortization expense and a $449,000 provision for reserves on accounts receivable. Uses of cash included an increase in accounts
receivable, other assets and prepaid expenses and other current assets of $3.2 million, $819,000 and $644,000, respectively. These outflows were offset in part by an increase in deferred revenue, accrued expenses and accounts payable of $4.8 million, $2.5 million and $2.1 million, respectively. Increases in deferred revenue and accounts receivable primarily related to an increase in sales of our subscription and support services to both new and existing customers. In addition, during 2013, we experienced an increase in the number of sales of subscription and support services with the annual fee payable at the outset of the arrangement instead of in monthly installments.
Investing activities. Cash provided by investing activities during 2013 was $4.3 million, consisting primarily of $8.2 million for the maturities of investments, offset partially by $3.4 million for purchases of property and equipment and $500,000 for the capitalization of internal-use software costs.
Financing activities Cash provided by financing activities during 2013 was $746,000, consisting of proceeds received from the exercise of common stock options of $1.8 million, offset partially by $1.1 million for the purchase of the remaining 37% interest in Brightcove KK.
Credit facility borrowings. On March 30, 2011, we entered into a loan and security agreement with Silicon Valley Bank, or SVB, providing for an asset-based line of credit. Under this loan and security agreement, we could borrow up to the lesser of (i) $8.0 million or (ii) 80% of our eligible accounts receivable. The amounts owed under the loan and security agreement are secured by substantially all of our assets, excluding our intellectual property. Outstanding amounts under the credit agreement accrue interest at a rate equal to the prime rate plus 1.5%. Amounts owed under the loan and security agreement were due on March 31, 2013, and interest and related finance charges are payable monthly. On April 29, 2013, we amended our loan and security agreement with SVB to increase the aggregate amount of borrowings that may be outstanding under our asset-based line of credit from $8.0 million to $10.0 million and to extend the maturity date to March 30, 2015. We had no outstanding borrowings under this line of credit at December 31, 2013.
On June 24, 2011, we amended our loan and security agreement with SVB to provide us with the ability to borrow up to an additional $7.0 million in the form of a term loan. Outstanding amounts under the term loan accrue interest at a rate equal to the prime rate plus 7%. We are required to pay only interest on the term loan for the first 12 months and then principal and interest thereafter over the next 36 months. There is a final payment due under the term loan of 2% of the original principal amount of such term loan. In 2011, we borrowed $7.0 million under this credit facility. In February 2012, we repaid the $7.0 million balance and made a final payment of $140,000, representing 2% of the outstanding balance, pursuant to the terms of the agreement. As such, we had no outstanding borrowings under this agreement at December 31, 2013.
Net operating loss carryforwards. As of December 31, 2013, we had federal and state net operating losses of approximately $97.0 million and $43.4 million, respectively, which are available to offset future taxable income, if any, through 2033. We had research and development tax credits of $3.6 million and $2.5 million, respectively, which expire in various amounts through 2033. Our net operating loss and tax credit amounts are subject to annual limitations under Section 382 change of ownership rules of the U.S. Internal Revenue Code of 1986, as amended. We completed an assessment to determine whether there may have been a Section 382 ownership change and determined that it is more likely than not that our net operating and tax credit amounts as disclosed are not subject to any material Section 382 limitations.
In assessing our ability to utilize our net deferred tax assets, we considered whether it is more likely than not that some portion or all of our net deferred tax assets will not be realized. Based upon the level of our historical U.S. losses and future projections over the period in which the net deferred tax assets are deductible, at this time, we believe it is more likely than not that we will not realize the benefits of these deductible differences. Accordingly, we have provided a valuation allowance against our net deferred tax assets as of December 31, 2013 and December 31, 2012.
We have historically provided a valuation allowance against our net deferred tax assets in Japan. Based upon the level of historical income in Japan and future projections, we determined in the fourth quarter of 2012 that it was probable that we will realize the benefits of our future deductible differences. As such, we released the valuation allowance related to the remaining deferred tax assets in Japan and recorded a $193,000 income tax benefit in our consolidated statement of operations for the year ended December 31, 2012. For the year ended December 31, 2013 a portion of our profits in Japan were offset by losses in Japan. Accordingly, our deferred tax asset in Japan decreased during the year ended December 31, 2013.
Contractual Obligations and Commitments. Our principal commitments consist primarily of obligations under our leases for our office space and contractual commitments for hosting and other support services. Other than these lease obligations and contractual commitments, we do not have commercial commitments under lines of credit, standby repurchase obligations or other such debt arrangements. The following table summarizes these contractual obligations at December 31, 2013:
Anticipated Cash Flows We expect to incur significant operating costs, particularly related to services delivery costs, sales and marketing and research and development, for the foreseeable future in order to execute our business plan. We anticipate that such operating costs, as well as planned capital expenditures will constitute a material use of our cash resources. As a result, our net cash flows will depend heavily on the level of future sales, changes in deferred revenue and our ability to manage infrastructure costs.
We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditures for at least the next 12 months. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new products and enhancements, and our expansion of sales and marketing and product development activities. To the extent that our cash and cash equivalents, short and long-term investments and cash flow from operating activities are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to acquire businesses, technologies and products that will complement our existing operations. In the event funding is required, we may not be able to obtain bank credit arrangements or equity or debt financing on terms acceptable to us or at all.
Off-Balance Sheet Arrangements We do not have any special purpose entities or off-balance sheet arrangements.
Recent Accounting Pronouncements In February 2013, the Financial Accounting Standards Board (FASB) issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income (AOCI) by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. The ASU is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a significant impact on our results of operations or financial position.
In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters, which permits an entity to release cumulative translation adjustments into net income when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, or, if a controlling financial interest is no longer held. The revised standard is effective beginning after December 15, 2013. We adopted this guidance effective January 1, 2014. We do not expect the adoption of ASU 2013-05 to significantly impact our consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740). ASU 2013-11 requires that unrecognized tax benefits be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. We have adopted this guidance effective January 1, 2014. We do not expect the adoption of ASU 2013-11 to significantly impact our consolidated financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk Quantitative and Qualitative Disclosure About Market Risk We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks include primarily foreign exchange risks, interest rate and inflation.
Financial instruments Financial instruments meeting fair value disclosure requirements consist of cash equivalents, accounts receivable and accounts payable. The fair value of these financial instruments approximates their carrying amount.
Foreign currency exchange risk Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British pound, Australian dollar and Japanese yen. Except for revenue transactions in Japan, we enter into transactions directly with substantially all of our foreign customers.
Percentage of revenues and expenses in foreign currency is as follows:
(1) Percentage of revenues and expenses denominated in foreign currency for the years ended December 31, 2013 and 2012:
As of December 31, 2013 and 2012, we had $8.0 million and $6.6 million, respectively, of receivables denominated in currencies other than the U.S. dollar. We also maintain cash accounts denominated in currencies other than the local currency, which exposes us to foreign exchange rate movements.
In addition, although our foreign subsidiaries have intercompany accounts that are eliminated upon consolidation, these accounts expose us to foreign currency exchange rate fluctuations. Exchange rate fluctuations on short-term intercompany accounts are recorded in our consolidated statements of operations under “other income (expense), net”, while exchange rate fluctuations on long-term intercompany accounts are recorded in our consolidated balance sheets under “accumulated other comprehensive income” in stockholders’ equity, as they are considered part of our net investment and hence do not give rise to gains or losses.
Currently, our largest foreign currency exposures are the euro and British pound, primarily because our European operations have a higher proportion of our local currency denominated expenses. Relative to foreign currency exposures existing at December 31, 2013, a 10% unfavorable movement in foreign currency exchange rates would expose us to significant losses in earnings or cash flows or significantly diminish the fair value of our foreign currency financial instruments. For the year ended December 31, 2013, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have decreased revenues by $3.4 million, decreased expenses by $1.8 million and decreased operating income by $1.6 million. The estimates used assume that all currencies move in the same direction at the same time and the ratio of non-U.S. dollar denominated revenue and expenses to U.S. dollar denominated revenue and expenses does not change from current levels. Since a portion of our revenue is deferred revenue that is recorded at different foreign currency exchange rates, the impact to revenue of a change in foreign currency exchange rates is recognized over time, and the impact to expenses is more immediate, as expenses are recognized at the current foreign currency exchange rate in effect at the time the expense is incurred. All of the potential changes noted above are based on sensitivity analyses performed on our financial results as of December 31, 2013 and 2012.
Interest rate risk We had unrestricted cash and cash equivalents and investments totaling $36.1 million at December 31, 2013. Cash and cash equivalents were invested primarily in money market funds and are held for working capital purposes, while the investments were primarily held in certificates of deposit, commercial paper and corporate debentures, and we intend to hold such investments until their maturity date. We do not use derivative financial instruments in our investment portfolio. Due to the short nature of our short-term investments and low current market yields of our long-term investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.
Inflation risk We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Item 8.
Item 8. Financial Statements and Supplementary Data Brightcove, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
of Brightcove Inc.
We have audited the accompanying consolidated balance sheets of Brightcove Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Brightcove Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Brightcove Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 10, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 10, 2014
Brightcove Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
See accompanying notes.
Brightcove Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
See accompanying notes.
Brightcove Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
See accompanying notes.
Brightcove Inc.
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share data)
Brightcove Inc.
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) - (continued)
(in thousands, except share data)
Brightcove Inc.
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) - (continued)
(in thousands, except share data)
Brightcove Inc.
Consolidated Statements of Cash Flows
(in thousands)
Brightcove Inc.
Consolidated Statements of Cash Flows - (Continued)
(in thousands)
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 1. Business Description Brightcove Inc. (the Company) is a leading global provider of cloud services for video which enable its customers to publish and distribute video to Internet-connected devices quickly, easily and in a cost-effective and high-quality manner.
The Company is headquartered in Boston, Massachusetts and was incorporated in the state of Delaware on August 24, 2004. At December 31, 2013, the Company had nine wholly-owned subsidiaries: Brightcove UK Ltd, Brightcove Singapore Pte. Ltd., Brightcove Korea, Brightcove Australia Pty Ltd, Brightcove Holdings, Inc., Bright Bay Co. Ltd., Brightcove Kabushiki Kaisha (Brightcove KK), Zencoder Inc. (Zencoder) and Brightcove FZ-LLC.
Prior to January 8, 2013, the Company owned a 63% interest in Brightcove KK, which the Company held since the formation of Brightcove KK in 2008. On January 8, 2013, the Company acquired the remaining 37% interest in Brightcove KK and, as a result, Brightcove KK is now 100% owned by the Company. See Note 2 and Note 8 for further discussion on this transaction.
2. Summary of Significant Accounting Policies The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the consolidated financial statements.
The Company believes that a significant accounting policy is one that is both important to the portrayal of the Company’s financial condition and results, and requires management’s most difficult, subjective, or complex judgments, often as the result of the need to make estimates about the effect of matters that are inherently uncertain.
Use of Estimates and Uncertainties The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts expensed during the reporting period. Actual results could differ from those estimates.
Significant estimates relied upon in preparing these consolidated financial statements include revenue recognition and revenue reserves, allowances for doubtful accounts, contingent liabilities, expensing and capitalization of research and development costs for internal-use software, intangible asset valuations, amortization periods, expected future cash flows used to evaluate the recoverability of long-lived assets, the determination of the fair value of stock awards issued, stock-based compensation expense, and the recoverability of the Company’s net deferred tax assets and related valuation allowance.
Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made.
The Company is subject to a number of risks and uncertainties common to companies in similar industries and stages of development including, but not limited to, rapid technological changes, competition from substitute products and services from larger companies, customer concentration, management of international activities, protection of proprietary rights, patent litigation, and dependence on key individuals.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 2. Summary of Significant Accounting Policies - (continued) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and non-controlling interest. All significant intercompany balances and transactions have been eliminated in consolidation.
Non-controlling interest in 2012 represents the minority stockholders’ proportionate share (37%) of the Company’s majority-owned subsidiary, Brightcove KK, a Japanese joint venture, which was formed on July 18, 2008. The non-controlling interest in Brightcove KK is reported as a separate component of stockholders’ equity in the accompanying consolidated financial statements. The portion of net income attributable to non-controlling interest prior to the remaining acquisition in 2013 is presented as net income attributable to non-controlling interest in consolidated subsidiary in the consolidated statements of operations, and the portion of other comprehensive loss of this subsidiary is presented in the consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit) and statements of comprehensive loss. See Note 8 for further discussion.
On January 8, 2013, the Company acquired the remaining 37% interest in Brightcove KK. The purchase price of the remaining interest of Brightcove KK was approximately $1.1 million and was funded by cash on hand. The Company owned a 63% interest in the Brightcove KK joint venture since its formation in 2008. Brightcove KK is now 100% owned by the Company. The purchase was accounted for as an equity transaction and, as such, the Company has continued to consolidate Brightcove KK for financial reporting purposes; however, commencing on January 8, 2013, the Company no longer records non-controlling interest in its consolidated financial statements.
Subsequent Events Considerations The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. The Company has evaluated all subsequent events and determined that, other than as reported herein and described below, there are no material recognized or unrecognized subsequent events.
On January 31, 2014, the Company acquired substantially all of the assets of Unicorn Media, Inc. and certain of its subsidiaries, or Unicorn, a provider of cloud video ad insertion technology, in exchange for 2,850,547 unregistered shares of the Company’s common stock and approximately $9.5 million of cash. Based on a $10.74 price per share of the Company’s common stock at the date of closing, the transaction is valued at approximately $40.1 million. Pursuant to the purchase agreement, 1,285,715 shares were placed into an escrow account. The acquisition was accounted for as a purchase transaction, and as such the results of operations of Unicorn will be consolidated with the Company beginning on January 31, 2014, the closing date of the acquisition. In connection with the acquisition of Unicorn, the Company incurred $429 of merger and integration-related costs during 2013, which the Company recorded as an expense in its consolidated statements of operations for the year ended December 31, 2013. At this time, the Company has not completed its evaluation of the purchase accounting related to this transaction.
Reclassification The Company previously reported in its consolidated balance sheet Deferred revenue and Deferred revenue, net of current portion of $18,961 and $255, respectively, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. In its Annual Report on Form 10-K for the year ended December 31, 2013, the Company reclassified $142 for the year ended December 31, 2012 from Deferred revenue, net of current portion to Deferred revenue. This reclassification had no impact on the previously reported results of operations or cash flows.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 2. Summary of Significant Accounting Policies - (continued) Foreign Currency Translation The reporting currency of the Company is the U.S. dollar. The functional currency of the Company’s foreign subsidiaries is the local currency of each subsidiary. All assets and liabilities in the balance sheets of entities whose functional currency is a currency other than the U.S. dollar are translated into U.S. dollar equivalents at exchange rates as follows: (1) asset and liability accounts at period-end rates, (2) income statement accounts at weighted-average exchange rates for the period, and (3) stockholders’ equity accounts at historical exchange rates. The resulting translation adjustments are excluded from income (loss) and reflected as a separate component of stockholders’ equity. Foreign currency transaction gains and losses are included in net loss for the period. The Company may periodically have certain intercompany foreign currency transactions that are deemed to be of a long-term investment nature; exchange adjustments related to those transactions are made directly to a separate component of stockholders’ equity.
Cash, Cash Equivalents and Investments The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Investments not classified as cash equivalents with maturities less than one year from the balance sheet date, are classified as short-term investments, while investments with maturities in excess of one year from the balance sheet date are classified as long-term investments. Management determines the appropriate classification of investments at the time of purchase, and re-evaluates such determination at each balance sheet date.
Cash and cash equivalents primarily consist of cash on deposit with banks and amounts held in interest-bearing money market accounts. Cash equivalents are carried at cost, which approximates their fair market value. Investments primarily consist of certificates of deposit, commercial paper and corporate debentures. At December 31, 2013 and 2012, the Company classified its investments as held-to-maturity as it is the Company’s intention to hold such investments until they mature. As such, investments were recorded at amortized cost at December 31, 2013 and 2012.
Cash, cash equivalents and investments as of December 31, 2013 consist of the following:
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 2. Summary of Significant Accounting Policies - (continued) Cash and cash equivalents as of December 31, 2012 consist of the following:
Restricted Cash At December 31, 2013 and 2012, restricted cash was $322,000 and $303,000, respectively, and was held in certificates of deposit as collateral for letters of credit related to the contractual provisions of the Company’s corporate credit cards and the contractual provisions with a customer. Additionally, a portion of the restricted cash balance at December 31, 2012 was associated with the lease agreement for the Company’s office in Seattle, Washington. Upon renegotiation of the Seattle lease agreement during 2013, the restricted cash obligation expired and the collateral was released.
Disclosure of Fair Value of Financial Instruments The carrying amounts of the Company’s financial instruments, which include cash, cash equivalents, accounts receivable, accounts payable and accrued expenses, approximated their fair values at December 31, 2013 and 2012, due to the short-term nature of these instruments. See Note 5 for discussion on the determination of the fair value of the Company’s long-term investments.
The Company has evaluated the estimated fair value of financial instruments using available market information and management’s estimates. The use of different market assumptions and/or estimation methodologies could have a significant impact on the estimated fair value amounts. See Note 5 for further discussion.
Revenue Recognition The Company primarily derives revenue from the sale of its online video platform, which enables its customers to publish and distribute video to Internet-connected devices quickly, easily and in a cost-effective and high-quality manner. Revenue is derived from three primary sources: (1) the subscription to its technology and related support; (2) hosting, bandwidth and encoding services; and (3) professional services, which include initiation, set-up and customization services.
The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 2. Summary of Significant Accounting Policies - (continued) The Company’s subscription arrangements provide customers the right to access its hosted software applications. Customers do not have the right to take possession of the Company’s software during the hosting arrangement. Accordingly, the Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 605, Revenue Recognition. Contracts for premium customers generally have a term of one year and are non-cancellable. These contracts generally provide the customer with a maximum annual level of usage, and provide the rate at which the customer must pay for actual usage above the annual allowable usage. For these services, the Company recognizes the annual fee ratably as revenue each month. Should a customer’s usage of the Company’s services exceed the annual allowable level, revenue is recognized for such excess in the period of the usage. Contracts for volume customers are generally month-to-month arrangements, have a maximum monthly level of usage and provide the rate at which the customer must pay for actual usage above the monthly allowable usage. The monthly volume subscription and support and usage fees are recognized as revenue during the period in which the related cash is collected.
Revenue recognition commences upon the later of when the application is placed in a production environment, or when all revenue recognition criteria have been met.
Professional services and other revenue sold on a stand-alone basis are recognized as the services are performed, subject to any refund or other obligation.
Deferred revenue includes amounts billed to customers for which revenue has not been recognized, and primarily consists of the unearned portion of annual software subscription and support fees, and deferred initiation and professional service fees.
Revenue is presented net of any taxes collected from customers.
Multiple-Element Arrangements The Company periodically enters into multiple-element service arrangements that include platform subscription fees, support fees, initiation fees, and, in certain cases, other professional services.
Initiation fees and other professional services charged when services are first activated are recorded as deferred revenue, and recognized as revenue ratably over a term beginning upon go-live of the software application and extending through the contract term.
The Company assesses arrangements with multiple deliverables under Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements - a Consensus of the FASB Emerging Issues Task Force, which amended the previous multiple-element arrangements accounting guidance. Pursuant to ASU 2009-13, objective and reliable evidence of fair value of the undelivered elements is no longer required in order to account for deliverables in a multiple-element arrangement separately. Instead, arrangement consideration is allocated to deliverables based on their relative selling price. The new guidance also eliminates the use of the residual method.
In order to treat deliverables in a multiple-element arrangement as separate units of accounting, the deliverables must have stand-alone value upon delivery. If the deliverables have stand-alone value upon delivery, the Company accounts for each deliverable separately. Subscription services have stand-alone value as such services are often sold separately. In determining whether professional services have stand-alone value, the Company considers the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date, and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work. To date, the Company has concluded that all of the professional services included in multiple-element arrangements executed have stand-alone value, with the exception of initiation and activation fees.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 2. Summary of Significant Accounting Policies - (continued) When multiple deliverables included in an arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. The Company determines the relative selling price for a deliverable based on its vendor-specific objective evidence of fair value (VSOE), if available, or its best estimate of selling price (BESP), if VSOE is not available. The Company has determined that third-party evidence of selling price (TPE) is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.
The Company has not established VSOE for its offerings due to the lack of pricing consistency, the introduction of new services and other factors. Accordingly, the Company uses its BESP to determine the relative selling price. The Company determines BESP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, the size and volume of the Company’s transactions, the geographic area where services are sold, price lists, its go-to-market strategy, historical contractually stated prices and prior relationships and future subscription service sales with certain classes of customers.
The determination of BESP is made through consultation with and approval by the Company’s management, taking into consideration the go-to-market strategy. As the Company’s go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in selling prices, including both VSOE and BESP. The Company plans to analyze the selling prices used in its allocation of arrangement consideration, at a minimum, on an annual basis. Selling prices will be analyzed on a more frequent basis if a significant change in the Company’s business necessitates a more timely analysis or if the Company experiences significant variances in its selling prices.
Cost of Revenue Cost of revenue primarily consists of costs related to supporting and hosting the Company’s product offerings and delivering professional services. These costs include salaries, benefits, incentive compensation and stock-based compensation expense related to the management of the Company’s data centers, customer support team and the Company’s professional services staff, in addition to third-party service provider costs such as data center and networking expenses, allocated overhead, amortization of capitalized internal-use software development costs and intangible assets and depreciation expense.
Allowance for Doubtful Accounts The Company offsets gross trade accounts receivable with an allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable and is based upon historical loss patterns, the number of days that billings are past due, and an evaluation of the potential risk of loss associated with specific accounts. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Provisions for allowances for doubtful accounts are recorded in general and administrative expense.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 2. Summary of Significant Accounting Policies - (continued) Below is a summary of the changes in the Company’s allowance for doubtful accounts for the years ended December 31, 2013, 2012 and 2011:
Off-Balance Sheet Risk and Concentration of Credit Risk The Company has no significant off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments and trade accounts receivable. The Company maintains its cash and cash equivalents and investments principally with accredited financial institutions of high credit standing. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits. The Company routinely assesses the creditworthiness of its customers. The Company generally has not experienced any material losses related to receivables from individual customers, or groups of customers. The Company does not require collateral. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company’s accounts receivable.
For the years ended December 31, 2013, 2012 and 2011, no individual customer accounted for more than 10% of total revenue.
As of December 31, 2013 and 2012, no individual customer accounted for more than 10% of net accounts receivable.
Concentration of Other Risks The Company is dependent on certain content delivery network providers who provide digital media delivery functionality enabling the Company’s on-demand application service to function as intended for the Company’s customers and ultimate end-users. The disruption of these services could have a material adverse effect on the Company’s business, financial position, and results of operations.
Software Development Costs Costs incurred to develop software applications used in the Company’s on-demand application services consist of (a) certain external direct costs of materials and services incurred in developing or obtaining internal-use computer software, and (b) payroll and payroll-related costs for employees who are directly associated with, and who devote time to, the project. These costs generally consist of internal labor during configuration, coding, and testing activities. Research and development costs incurred during the preliminary project stage or costs incurred for data conversion activities, training, maintenance and general and administrative or overhead costs are expensed as incurred. Capitalization begins when the preliminary project stage is complete, management, with the relevant authority, authorizes and commits to the funding of the software project, it is probable the project will be completed, the software will be used to perform the functions intended and certain functional and quality standards have been met. Qualified costs incurred during the operating stage of the Company’s software applications relating to upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality, while costs that cannot be separated between maintenance of, and minor upgrades and enhancements to, internal-use software are expensed as incurred. These capitalized costs are amortized on a straight-line basis over the expected useful
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 2. Summary of Significant Accounting Policies - (continued) life of the software, which is estimated to be three years. Capitalized internal-use software development costs are classified as “Software” within “Property and Equipment, net” in the accompanying consolidated balance sheets.
During the years ended December 31, 2013, 2012 and 2011, the Company capitalized $1,065, $24 and $354, respectively, of internal-use software development costs. The Company recorded amortization expense associated with its capitalized internal-use software development costs of $312, $542 and $886 for the years ended December 31, 2013, 2012 and 2011, respectively.
In addition to the software development costs described above, the Company incurs costs to develop computer software to be licensed or otherwise marketed to customers. Costs incurred in the research, design and development of software for sale to others are charged to expense until technological feasibility is established. The Company capitalizes eligible computer software development costs upon achievement of technological feasibility subject to net realizable value considerations. Thereafter, software development costs are capitalized until the product is released and amortized to product cost of sales on a straight-line basis over the lesser of three years or the estimated economic lives of the respective products. The Company has determined that technological feasibility is established at the time a working model of software is completed. Because the Company believes its current process for developing software will be essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.
Property and Equipment Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset. Upon retirement or sale, the cost of assets disposed of, and the related accumulated depreciation, are removed from the accounts, and any resulting gain or loss is included in the determination of net income or loss in the period of retirement.
Property and equipment consists of the following:
Depreciation and amortization expense, which includes amortization expense associated with capitalized internal-use software development costs, for the years ended December 31, 2013, 2012 and 2011 was $4,148, $4,022 and $2,992, respectively.
Expenditures for maintenance and repairs are charged to expense as incurred, whereas major improvements are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable. In these instances, the Company recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the asset.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 2. Summary of Significant Accounting Policies - (continued) Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During this review, the Company re-evaluates the significant assumptions used in determining the original cost and estimated lives of long-lived assets. Although the assumptions may vary from asset to asset, they generally include operating results, changes in the use of the asset, cash flows, and other indicators of value. Management then determines whether the remaining useful life continues to be appropriate, or whether there has been an impairment of long-lived assets based primarily upon whether expected future undiscounted cash flows are sufficient to support the assets’ recovery. If impairment exists, the Company adjusts the carrying value of the asset to fair value, generally determined by a discounted cash flow analysis.
For the years ended December 31, 2013, 2012 and 2011, the Company has not identified any impairment of its long-lived assets.
Intangible Assets and Goodwill Intangible assets that have finite lives are amortized over their useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During this review, the Company re-evaluates the significant assumptions used in determining the original cost and estimated lives of long-lived assets. Although the assumptions may vary from asset to asset, they generally include operating results, changes in the use of the asset, cash flows and other indicators of value. Management then determines whether the remaining useful life continues to be appropriate or whether there has been an impairment of long-lived assets based primarily upon whether expected future undiscounted cash flows are sufficient to support the assets’ recovery. If impairment exists, the Company would adjust the carrying value of the asset to fair value, generally determined by a discounted cash flow analysis.
Goodwill is not amortized, but is evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
In assessing the recoverability of goodwill, the Company must make assumptions regarding the estimated future cash flows, and other factors, to determine the fair value of these assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges against these assets in the reporting period in which the impairment is determined. The Company has determined, based on its organizational structure, that it had one reporting unit as of December 31, 2013 and 2012.
For goodwill, the impairment evaluation includes a comparison of the carrying value of the reporting unit to the fair value of the reporting unit. If the reporting unit’s estimated fair value exceeds the reporting unit’s carrying value, no impairment of goodwill exists. If the fair value of the reporting unit does not exceed its carrying value, then further analysis would be required to determine the amount of the impairment, if any.
In 2011, the Company adopted ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350) Testing Goodwill for Impairment. Under ASU 2011-08, the Company has the option to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount to determine whether further impairment testing is necessary. Based on the results of the qualitative review of goodwill performed as of December 31, 2013 and 2012, the Company did not identify any indicators of impairment. As such, the two-phase process described above was not necessary.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 2. Summary of Significant Accounting Policies - (continued) Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions, other events, and circumstances from non-owner sources. Accumulated other comprehensive income (loss) is presented separately on the consolidated balance sheets and consists entirely of cumulative foreign translation adjustments as of December 31, 2013 and 2012.
Net Loss per Share The Company calculates basic and diluted net loss per common share by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. The Company has excluded (a) all unvested restricted shares that are subject to repurchase and (b) the Company’s other potentially dilutive shares, which include redeemable convertible preferred stock in 2012 and 2011, warrants to purchase redeemable convertible preferred stock in 2012 and 2011, warrants to purchase common stock and outstanding common stock options, from the weighted-average number of common shares outstanding as their inclusion in the computation for all periods would be anti-dilutive due to net losses. The Company’s redeemable convertible preferred stock were deemed to be participating securities as defined by ASC 260-10, Earnings Per Share, but were excluded from the earnings per share calculation as they do not have an obligation to share in the Company’s net losses.
A reconciliation of the number of shares used in the calculation of basic and diluted net loss per share is as follows:
The following potentially dilutive common shares have been excluded from the computation of weighted-average shares outstanding as of December 31, 2013, 2012 and 2011, as their effect would have been antidilutive:
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 2. Summary of Significant Accounting Policies - (continued) Income Taxes The Company accounts for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. In addition, this method requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company accounts for uncertain tax positions recognized in the consolidated financial statements by prescribing a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interest and penalties, if applicable, related to uncertain tax positions would be recognized as a component of income tax expense. The Company has no recorded liabilities for uncertain tax positions as of December 31, 2013 or 2012.
Stock-Based Compensation At December 31, 2013, the Company had three stock-based compensation plans: the Amended and Restated 2004 Stock Option and Incentive Plan, the 2012 Stock Incentive Plan and the Brightcove Inc. 2012 RSU Inducement Plan. Additionally, during March 2009, Brightcove KK adopted the Brightcove KK Stock Option Plan. As discussed in Note 1, on January 8, 2013 the Company acquired the remaining 37% of Brightcove KK. The Brightcove KK Stock Option Plan was terminated in conjunction with the acquisition. These plans are more fully described in Note 7.
For stock options issued under the Company’s stock-based compensation plans, the fair value of each option grant is estimated on the date of grant, and an estimated forfeiture rate is used when calculating stock-based compensation expense for the period. For restricted stock awards issued under the Company’s stock-based compensation plans, the fair value of each grant is calculated based on the Company’s stock price on the date of grant. For service-based options, the Company recognizes compensation expense on a straight-line basis over the requisite service period of the award.
Given the absence of an active market for the Company’s common stock prior to the completion of the Company’s initial public offering (IPO) on February 17, 2012, the Board of Directors (the Board), the members of which the Company believes have extensive business, finance, and venture capital experience, were required to estimate the fair value of the Company’s common stock at the time of each option grant. The Board considered numerous objective and subjective factors in determining the value of the Company’s common stock at each option grant date, including the following factors: (1) prices for the Company’s preferred stock, which the Company had sold to outside investors in arm’s-length transactions, and the rights, preferences, and privileges of the Company’s preferred stock and common stock; (2) valuations performed by an independent valuation specialist; (3) the Company’s stage of development and revenue growth; (4) the fact that the option grants involved illiquid securities in a private company; and (5) the likelihood of achieving a liquidity event for the shares of common stock underlying the options, such as an initial public offering or sale of the Company, given prevailing market conditions. The Company believes this to have been a reasonable methodology based upon the Company’s internal peer company analyses, and based on several arm’s-length transactions involving the Company’s preferred stock, supportive of the results produced by this valuation methodology. Prior to the Company’s common stock being actively traded, the determination of fair value involved assumptions, judgments and estimates. If different assumptions were made, stock-based compensation expense, net loss and consolidated net loss per share could have been significantly different.
The fair value of each option grant issued under the Company’s stock-based compensation plans was estimated using the Black-Scholes option-pricing model that used the assumptions noted in the following table. As there was no public market for its common stock prior to February 17, 2012, the effective date of
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 2. Summary of Significant Accounting Policies - (continued) the Company’s IPO, and as the trading history of the Company’s common stock was limited through December 31, 2013, the Company determined the volatility for options granted based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using an average of the historical volatility measures of this peer group of companies. The expected life of options has been determined utilizing the “simplified method”. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. The Company has not paid, and does not anticipate paying, cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero. In addition, based on an analysis of the historical actual forfeitures, the Company applied an estimated forfeiture rate of approximately 15%, 14% and 13% for the years ended December 31, 2013, 2012 and 2011, respectively, in determining the expense recorded in the accompanying consolidated statements of operations.
The weighted-average fair value of options granted during the years ended December 31, 2013, 2012 and 2011, was $5.34, $7.74 and $5.28 per share, respectively. The weighted-average assumptions utilized to determine such values are presented in the following table:
As of December 31, 2013, there was $12,133 of total unrecognized stock-based compensation expense related to unvested employee stock options, restricted stock awards and restricted stock units issued under the Company’s stock-based compensation plans that is expected to be recognized over a weighted-average period of 2.81 years. The total unrecognized stock-based compensation expense will be adjusted for future changes in estimated forfeitures.
The Company accounts for transactions in which services are received from non-employees in exchange for equity instruments based on the fair value of such services received, or of the equity instruments issued, whichever is more reliably measured. The Company determines the total stock-based compensation expense related to non-employee awards using the Black-Scholes option-pricing model. Additionally, in accordance with ASC 505, Equity-Based Payments to Non-Employees, the Company accounts for awards to non-employees prospectively, such that the fair value of the awards is remeasured at each reporting date until the earlier of (a) the performance commitment date or (b) the date the services required under the arrangement have been completed.
For the years ended December 31, 2013, 2012 and 2011, the Company recorded stock-based compensation expense for stock options granted to non-employees in the accompanying consolidated statements of operations of $6, $35 and $234, respectively.
For the years ended December 31, 2013, 2012 and 2011, total stock-based compensation expense, including expense related to stock-based awards granted under the Brightcove KK Plan, was $6,401 $5,843 and $4,197, respectively.
See Note 7 for a summary of the stock option activity under the Company’s stock-based compensation plans for the year ended December 31, 2013.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 2. Summary of Significant Accounting Policies - (continued) Advertising Costs Advertising costs are charged to operations as incurred. The Company incurred advertising costs of $3,215, $3,881 and $3,630 for the years ended December 31, 2013, 2012 and 2011, respectively.
Recent Accounting Pronouncements In February 2013, the Financial Accounting Standards Board (FASB) issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income (AOCI) by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. The ASU is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a significant impact on the Company’s results of operations or financial position.
In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters, which permits an entity to release cumulative translation adjustments into net income when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, or, if a controlling financial interest is no longer held. The revised standard is effective for the Company for fiscal years beginning after December 15, 2013. The Company adopted this guidance effective January 1, 2014. The Company does not expect the adoption of ASU 2013-05 to significantly impact its consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740). ASU 2013-11 requires that unrecognized tax benefits be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company has adopted this guidance effective January 1, 2014. The Company does not expect the adoption of ASU 2013-11 to significantly impact its consolidated financial statements.
3. Business Combination On August 14, 2012, the Company acquired all of the outstanding capital stock of Zencoder, a privately-held company based in San Francisco, California. The purchase price of Zencoder was approximately $27,379 and was funded by cash on hand. The Company acquired Zencoder to enhance and extend the Company’s existing offerings with Zencoder’s media encoding services. The Company believes that the unification of Zencoder’s audio and video encoding service with the Company’s existing offerings will enable new and improved scalable services that will help customers reduce the cost and complexity of video encoding and delivery.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 3. Business Combination - (continued) The acquisition was accounted for using the purchase method of accounting in accordance with ASC 805, Business Combinations. Accordingly, the results of operations of Zencoder have been included in the accompanying consolidated financial statements since the date of acquisition. The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based upon the respective estimates of fair value as of the date of the merger and using assumptions that the Company’s management believes are reasonable given the information currently available. Transaction costs and retention costs associated with the transaction were expensed as incurred.
The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates.
During the years ended December 31, 2013 and 2012, the Company recorded merger-related expenses of $2,069 and $1,852, respectively. Included in merger-related expenses are costs incurred in connection with closing the acquisition in addition to costs associated with the retention of key employees. In addition to the $27,379 purchase price, per the merger agreement, approximately $2,667 is to be paid to retain certain key employees over a two year period as services are performed. Through December 31, 2013, the Company has paid $1,667 in connection with the retention. Given that the retention amount is related to a future service requirement, the related expense is being recorded as compensation expense in the Merger-related line item in the consolidated statements of operations over the expected service period, and was $1,640 and $826, respectively, during the years ended December 31, 2013 and 2012.
The Company recorded revenue and net loss for Zencoder of approximately $960 and $858, respectively, in the consolidated statements of operations from the acquisition date through December 31, 2012.
All of the assets acquired and the liabilities assumed in the transaction have been recognized at their acquisition date fair values, which was finalized at December 31, 2012. The total purchase price for Zencoder was allocated as follows:
The following are the identifiable intangible assets acquired and their respective useful lives:
In performing the purchase price allocation, the Company considered, among other factors, its intention for future use of the acquired assets, analyses of historical financial performance, and estimates of future cash flows from Zencoder’s products and services. The allocation resulted in acquired intangible assets of $11,031.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 3. Business Combination - (continued) The acquired intangible assets consisted of developed technology, customer relationships, non-compete agreements and trade names and were valued using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to price the transaction, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted average cost of capital. Additionally, the Company assumed certain liabilities in the acquisition, including deferred revenue to which a fair value of $46 was ascribed using a cost-plus profit approach.
The deferred tax liabilities primarily relate to the tax impact of future amortization or impairments associated with the identified intangible assets acquired, which are not deductible for tax purposes. The deferred tax assets relate to the net operating losses and other tax benefits acquired from Zencoder as part of the transaction. The Company assumed $3.4 million of the net deferred tax liabilities which created a future source of taxable income for which the Company’s net deferred tax assets can be realized and as a result the Company reduced the valuation allowance by approximately $3.4 million during 2012.
The excess of the purchase price over the estimated amounts of net assets as of the effective date of the acquisition was allocated to goodwill. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the Zencoder acquisition. These benefits include the expectation that the combined company’s complementary products will significantly broaden the Company’s offerings in media encoding and delivery. The combined company will benefit from a broader global presence, and with the Company’s direct sales force and larger channel coverage, the combined company anticipates significant cross-selling opportunities. None of the goodwill is expected to be currently deductible for tax purposes.
4. Intangible Assets and Goodwill Finite-lived intangible assets consist of the following as of December 31, 2013:
Finite-lived intangible assets consist of the following as of December 31, 2012:
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 4. Intangible Assets and Goodwill - (continued) Amortization expense related to intangible assets for the years ended December 31, 2013 and 2012 was $1,719 and $644, respectively. There was no related amortization expense for the year ended December 31, 2011.
The estimated remaining amortization expense for each of the five succeeding years and thereafter is as follows:
In connection with the acquisition of Zencoder, the consideration transferred to acquire the business exceeded the fair value of the assets acquired and the liabilities assumed. As a result, the Company recorded the difference of $19,646 as goodwill during the year ended December 31, 2012, none of which is expected to be deductible for tax purposes. There was no change to goodwill during the year ended December 31, 2013.
5. Fair Value Measurements Fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company uses valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
• Level 1: Observable inputs, such as quoted prices for identical assets or liabilities in active markets;
• Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly, such as quoted prices for similar assets or liabilities, or market-corroborated inputs; and
• Level 3: Unobservable inputs for which there is little or no market data which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities.
The valuation techniques that may be used to measure fair value are as follows:
A. Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
B. Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models, and excess earnings method.
C. Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 5. Fair Value Measurements - (continued) The following tables set forth the Company’s financial instruments carried at fair value using the lowest level of input as of December 31, 2013 and 2012:
Realized gains and losses from sales of the Company’s investments are included in “Other expense, net”.
The Company measures eligible assets and liabilities at fair value, with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to remeasure any of its existing financial assets or liabilities, and did not elect the fair value option for any financial assets and liabilities transacted in the years ended December 31, 2013 or 2012.
6. Commitments and Contingencies Operating Lease Commitments The Company leases its facilities under non-cancelable operating leases. These operating leases expire at various dates through March 2022. Future minimum rental commitments under operating leases at December 31, 2013 are as follows:
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 6. Commitments and Contingencies - (continued) Certain amounts included in the table above relating to co-location leases for the Company’s servers include usage based charges in addition to base rent.
The Company’s primary office lease has the option to renew the lease for two successive periods of five years each. In connection with the office lease, the Company entered into a letter of credit in the amount of $2,404.
Certain of the Company’s operating leases include escalating payment amounts and lease incentives. The Company is recognizing the related rent expense on a straight-line basis over the term of the lease. The lease incentives are considered an inseparable part of the lease agreement, and are recognized as a reduction of rent expense on a straight-line basis over the term of the lease. As of December 31, 2013 and 2012, the Company had deferred rent and rent incentives of $1,304 and $759, respectively, of which $1,261 and $735, respectively, is classified as a long-term liability in the accompanying consolidated balance sheets. Rent expense for the years ended December 31, 2013, 2012 and 2011 was $5,328, $4,197 and $2,396, respectively. Income from sublease rental activity amounted to $0, $88 and $158 for the years ended December 31, 2013, 2012 and 2011.
In addition to the operating lease commitments discussed above, as of December 31, 2013, the Company had non-cancelable commitments of $5,262 payable in 2014 and $19 payable in 2015, primarily for content delivery network and storage services.
Legal Matters The Company, from time to time, is party to litigation arising in the ordinary course of its business. Management does not believe that the outcome of these claims will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company based on the status of proceedings at this time.
On August 27, 2012, a complaint was filed by Blue Spike, LLC naming the Company in a patent infringement case (Blue Spike, LLC v. Audible Magic Corporation, et al., United States District Court for the Eastern District of Texas). The complaint alleges that the Company has infringed U.S. Patent No. 7,346,472 with a listed issue date of March 18, 2008, entitled “Method and Device for Monitoring and Analyzing Signals,” U.S. Patent No. 7,660,700 with a listed issue date of February 9, 2010, entitled “Method and Device for Monitoring and Analyzing Signals,” U.S. Patent No. 7,949,494 with a listed issue date of May 24, 2011, entitled “Method and Device for Monitoring and Analyzing Signals” and U.S. Patent No. 8,214,175 with a listed issue date of July 3, 2012, entitled “Method and Device for Monitoring and Analyzing Signals.” The complaint seeks an injunction enjoining infringement, damages and pre- and post-judgment costs and interest. The Company answered and filed counterclaims against Blue Spike on December 3, 2012. The Company amended its answer and counterclaims on July 15, 2013. This complaint is subject to indemnification by one of the Company’s vendors. The Company cannot yet determine whether it is probable that a loss will be incurred in connection with this complaint, nor can the Company reasonably estimate the potential loss, if any.
On September 10, 2013, a complaint was filed by Cinsay Inc. naming the Company in a patent infringement case (Cinsay Inc. v. Brightcove Inc. and Joyus Inc., United States District Court for the Northern District of Texas). The complaint alleges that the Company has infringed U.S. Patent No. 8,312,486 with a listed issue date of November 13, 2012, entitled “Interactive Product Placement and Method Therefor” and U.S. Patent No. 8,533,753 with a listed issue date of September 10, 2013, entitled “Interactive Product Placement and Method Therefor.” On October 1, 2013, Cinsay filed an amended complaint against the Company in which it reasserted the allegations of infringement of U.S. Patent No. 8,312,486 and U.S. Patent No. 8,533,753 and added allegations that the Company infringed U.S. Patent No. 8,549,555 with a listed issue date of October 1, 2013, entitled “Interactive Product Placement and Method Therefor.” The amended
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 6. Commitments and Contingencies - (continued) complaint seeks an injunction enjoining infringement, damages and pre- and post-judgment costs and interest. The Company answered the amended complaint on November 12, 2013. The Company cannot yet determine whether it is probable that a loss will be incurred in connection with this complaint, nor can the Company reasonably estimate the potential loss or range of a possible loss, if any.
Guarantees and Indemnification Obligations The Company typically enters into indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies and agrees to reimburse the indemnified party for losses and costs incurred by the indemnified party, generally the Company’s customers, in connection with patent, copyright, trade secret, or other intellectual property or personal right infringement claim by third parties with respect to the Company’s technology. The term of these indemnification agreements is generally perpetual after execution of the agreement. Based on when customers first subscribe for the Company’s service, the maximum potential amount of future payments the Company could be required to make under certain of these indemnification agreements is unlimited, however, more recently the Company has typically limited the maximum potential value of such potential future payments in relation to the value of the contract. Based on historical experience and information known as of December 31, 2013, the Company has not incurred any costs for the above guarantees and indemnities. The Company has received requests for indemnification from customers in connection with patent infringement suits brought against the customer by a third party. To date, the Company has not agreed that the requested indemnification is required by the Company’s contract with any such customer.
In certain circumstances, the Company warrants that its products and services will perform in all material respects in accordance with its standard published specification documentation in effect at the time of delivery of the licensed products and services to the customer for the warranty period of the product or service. To date, the Company has not incurred significant expense under its warranties and, as a result, the Company believes the estimated fair value of these agreements is immaterial.
7. Stockholders’ Equity On February 23, 2012, the Company closed its IPO in which the Company sold and issued 5,750,000 shares of common stock, including 750,000 shares of common stock sold pursuant to the exercise of the underwriters’ option to purchase additional shares, which were sold to the public at a price of $11.00 per share. The Company received aggregate proceeds of approximately $58.8 million from the IPO, including the exercise of the underwriters’ overallotment option, net of underwriters’ discounts and commissions, but before deducting offering expenses of approximately $4.3 million. Upon the closing of the IPO, all shares of the Company’s outstanding redeemable convertible preferred stock automatically converted into 16,150,505 shares of common stock and all outstanding warrants to purchase redeemable convertible preferred stock automatically converted into warrants to purchase 46,713 shares of common stock at $3.21 per share.
Common Stock Common stockholders are entitled to one vote per share. Holders of common stock are entitled to receive dividends, when and if declared by the Board.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 7. Stockholders’ Equity - (continued) Equity Incentive Plans At December 31, 2013, the Company had three stock-based compensation plans, the Amended and Restated 2004 Stock Option and Incentive Plan (the 2004 Plan), the 2012 Stock Incentive Plan (the 2012 Plan) and the Brightcove Inc. 2012 RSU Inducement Plan (the RSU Plan). Additionally, during March 2009, Brightcove KK adopted the Brightcove KK Stock Option Plan (the Brightcove KK Plan). As discussed in Note 1, on January 8, 2013 the Company acquired the remaining 37% of Brightcove KK. The Brightcove KK Plan was terminated in conjunction with the acquisition. As discussed in Note 2, on January 31, 2014 the Company acquired Unicorn. In connection with the Unicorn acquisition, the Company adopted the Brightcove Inc. 2014 Stock Inducement Plan and made awards of options to 61 new employees. The awards of options cover an aggregate of 578,350 shares of the Company’s common stock in the form of options to purchase shares of the Company’s common stock as an inducement to the employees entering into employment with the Company.
The 2004 Plan provided for the issuance of incentive and non-qualified stock options, restricted stock, and other equity awards to the Company’s employees, officers, directors, consultants and advisors, up to an aggregate of 7,397,843 shares of the Company’s common stock. The Company also established a UK Sub-Plan of the 2004 Plan under which the Company was permitted to make grants of options to employees subject to tax in the United Kingdom. In conjunction with the effectiveness of the 2012 Plan, the Board voted that no further stock options or other equity-based awards may be granted under the 2004 Plan.
In 2012, the Board and stockholders adopted the 2012 Plan, which became effective on February 16, 2012. The 2012 Plan provides for the issuance of incentive and non-qualified stock options, restricted stock and other stock-based awards to the Company’s officers, employees, non-employee directors and certain other key persons of the Company as are selected by the Board or the compensation committee thereof. In connection with the approval of the 2012 Plan, the Company reserved 1,700,000 shares of common stock for issuance under the 2012 Plan, and 124,703 shares were transferred from the 2004 Plan. The number of shares reserved and available for issuance under the 2012 Plan automatically increases each January 1, beginning in 2013, by 4% of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s compensation committee subject to an overall overhang limit of 30%. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. At December 31, 2013, 1,046,018 shares were available for issuance under all stock-based compensation plans.
The Brightcove KK Plan provided for the issuance of stock options to employees, officers, directors, and advisors of Brightcove KK and to employees of the Company. Stock options granted under the Brightcove KK Plan were not exchangeable for either options or shares of the Company.
In 2012, the Company adopted the RSU Plan and made awards of restricted stock units pursuant to the RSU Plan to fifteen new employees in connection with the acquisition of Zencoder. The awards of restricted stock units cover an aggregate of 77,100 shares of the Company’s common stock and were made as a material inducement to the employees entering into employment with the Company in connection with the acquisition of Zencoder. The restricted stock units will be settled in shares of the Company’s common stock upon vesting.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 7. Stockholders’ Equity - (continued) The following is a summary of the status of the Company’s stock options as of December 31, 2013 and the stock option activity for all stock options plans (excluding the Brightcove KK Plan) during the year ended December 31, 2013:
(1) This represents the number of vested options as of December 31, 2013 plus the number of unvested options expected to vest as of December 31, 2013, based on the unvested options outstanding at December 31, 2013 and adjusted for the estimated forfeiture rate.
(2) The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on December 31, 2013 of $14.14 per share, or the date of exercise, as appropriate, and the exercise price of the underlying options.
The aggregate intrinsic value for options exercised during the years ended December 31, 2012 and 2011 was $8,594 and $3,108, respectively.
The Company has entered into restricted stock unit (RSU) agreements with certain of its employees. Under the terms of the agreement, the Company grants RSUs to its employees pursuant to the 2012 Plan and the RSU Plan. Vesting occurs periodically at specified time intervals, ranging from three months to four years, and in specified percentages. Upon vesting, the holder will receive one share of the Company’s common stock for each unit vested.
The following table summarizes the restricted stock unit award activity during the year ended December 31, 2013:
During the year ended December 31, 2010, the Company granted 156,292 shares of restricted common stock to an employee under the 2004 Plan. Under the terms of the agreement, the Company had a repurchase provision whereby the Company had the right to repurchase any unvested shares when/if the employee
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 7. Stockholders’ Equity - (continued) terminates, at a price equal to the original exercise price. Accordingly, the Company recorded the payment received for the purchase of the restricted shares as a liability at the time of purchase and subsequently, reclassified such amounts to additional paid-in capital upon vesting of the award. During the year ended December 31, 2013, the Company reclassified $8 of this amount to additional-paid-in-capital upon final vesting of a portion of this award. The Company did not grant any shares of restricted common stock during the years ended December 31, 2013 or 2012.
The following table summarizes the restricted stock award activity during the year ended December 31, 2013:
Warrants In September 2006, the Company issued fully vested warrants to purchase an aggregate of 46,713 shares of Series B Preferred Stock, at a purchase price of $3.21 per share, to two lenders in connection with a line of credit agreement. The warrants are exercisable at any time up until the expiration date of August 31, 2016. The fair value of the warrants was recorded as a discount on the related debt, and was amortized to interest expense over the life of the debt. The debt was fully repaid in March 2007. The warrant liability was reported at fair value until completion of the Company’s IPO in February 2012, whereupon the warrants automatically converted into warrants to purchase shares of the Company’s common stock. At the time of conversion of the warrants in connection with the Company’s IPO, the fair value of the warrants was $395, which was reclassified as a component of additional paid-in capital.
During 2012, 18,685 shares exercisable under the warrants were exercised pursuant to a net exercise provision, which resulted in the issuance of 15,781 common shares. There have been no additional exercises through December 31, 2013. For the years ended December 31, 2013, 2012 and 2011, the Company recorded other expense of $0, $28 and $139, respectively, in the accompanying consolidated statements of operations, related to the increase in the fair value of the warrants, which was determined utilizing the Black-Scholes option-pricing model, during each respective year.
Common Stock Reserved for Future Issuance At December 31, 2013, the Company has reserved the following shares of common stock for future issuance:
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 8. Non-controlling Interest On May 30, 2008, the Company formed Brightcove KK, a wholly owned subsidiary of Brightcove Inc. On July 18, 2008, the Company entered into a joint venture agreement with J-Stream Inc. (J-Stream), Dentsu, Inc. (Dentsu), Cyber Communications, Inc. and Transcosmos Investments & Business Development, Inc. (collectively, the minority stockholders). The minority stockholders invested cash of approximately $4.8 million in Brightcove KK such that their cumulative ownership interest in the entity was 37%, while the Company retained a 63% ownership interest in the entity. The Company determined that it had a controlling interest and was the primary beneficiary of the entity. As such, the Company consolidated Brightcove KK for financial reporting purposes, and a non-controlling interest was recorded for the third parties’ interest in the net assets and operations of Brightcove KK to the extent of the non-controlling partners’ individual investments.
On January 8, 2013, the Company acquired the remaining 37% interest in Brightcove KK and, as a result, Brightcove KK is now 100% owned by the Company. The purchase price of the remaining equity interest was approximately $1.1 million and was funded by cash on hand. The Company continues to consolidate Brightcove KK for financial reporting purposes, however, commencing on January 8, 2013, the Company no longer records a non-controlling interest in the consolidated financial statements. The purchase was accounted for as an equity transaction in accordance with ASC 810, Consolidation. Accordingly, the non-controlling interest in the consolidated subsidiary on the accompanying consolidated balance sheet was reduced to zero on the transaction date to reflect the Company’s increased ownership percentage, with the excess of the non-controlling interest balance on the date of the acquisition over the $1.1 million purchase price recorded as additional-paid-in-capital.
Non-controlling interest represents the minority shareholders’ proportionate share of the Company’s majority owned subsidiary, Brightcove KK. The following table sets forth the changes in non-controlling interest for the years ended December 31, 2013 and 2012:
9. Related Party Transactions Two of the former non-controlling interest holders in Brightcove KK, J-Stream and Dentsu, acted as product distributors for the Company in Japan. As disclosed in Note 1 to the consolidated financial statements, on January 8, 2013, the Company acquired the remaining 37% interest in Brightcove KK and, as a result, Brightcove KK is now 100% owned by the Company. As such, J-Stream and Dentsu are no longer considered related parties effective January 8, 2013.
As of December 31, 2013 and December 31, 2012, accounts receivable from related parties was:
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 9. Related Party Transactions - (continued) For the years ended December 31, 2013, 2012 and 2011, the Company recorded revenue from related parties of:
The Company believes that all related party transactions have been negotiated at arm’s length.
(1) Represents related party revenue for the period from January 1, 2013 through January 7, 2013, which is the period prior to the Company’s acquisition of the remaining 37% interest in Brightcove KK on January 8, 2013.
10. Income Taxes Income (loss) before the provision for income taxes consists of the following:
The provision for (benefit from) income taxes in the accompanying consolidated financial statements consists of the following:
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 10. Income Taxes - (continued) A reconciliation of the U.S. federal statutory rate to the Company’s effective tax rate is as follows:
The approximate income tax effect of each type of temporary difference and carryforward as of December 31, 2013 and 2012 is as follows:
The Company is required to compute income tax expense in each jurisdiction in which it operates. This process requires the Company to project its current tax liability and estimate its deferred tax assets and liabilities, including net operating loss (NOL) and tax credit carryforwards. In assessing the ability to realize the net deferred tax assets, management considers whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
Upon the closing of the Zencoder acquisition, the Company assumed $3.4 million of net deferred tax liabilities which created a future source of taxable income for which the Company’s net deferred tax assets can be realized and as a result the Company reduced the valuation allowance by approximately $3.4 million during the year ended December 31, 2012. The Company has provided a valuation allowance against its remaining U.S. net deferred tax assets as of December 31, 2013 and 2012, as based upon the level of historical U.S. losses and future projections over the period in which the net deferred tax assets are deductible, at this time, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences. The increase in the valuation allowance from 2012 to 2013 principally relates to the current year taxable loss.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 10. Income Taxes - (continued) The Company has historically provided a valuation allowance against its net deferred tax assets in Japan. Based upon the level of historical income in Japan and future projections, the Company determined in the fourth quarter of 2012 that it was probable it will realize the benefits of its future deductible differences. As such, the Company released the valuation allowance related to the remaining deferred tax assets in Japan and recorded a $193 income tax benefit in the consolidated statement of operations for the year ended December 31, 2012. In 2013 a portion of the Company’s profits in Japan were offset by losses in Japan. Accordingly, the Company’s deferred tax asset in Japan decreased in 2013.
As of December 31, 2013, the Company had federal and state net operating losses of approximately $97.0 million and $43.4 million, respectively, which are available to offset future taxable income, if any, through 2033. The Company also had federal and state research and development tax credits of $3.6 million and $2.5 million, respectively, which expire in various amounts through 2033. The net operating loss and tax credit amounts are subject to annual limitations under Section 382 change of ownership rules under the U.S. Internal Revenue Code of 1986, as amended. Through April 30, 2013, the Company completed an assessment to determine whether there may have been a Section 382 ownership change and determined that it is more-likely-than-not that the Company’s net operating and tax credit amounts as disclosed are not subject to any material Section 382 limitations.
On January 1, 2009, the Company adopted the provision for uncertain tax positions under ASC 740, Income Taxes. The adoption did not have an impact on the Company’s retained earnings balance. At December 31, 2013 and 2012, the Company had no recorded liabilities for uncertain tax positions.
Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expense in the accompanying consolidated statements of operations. At December 31, 2013 and 2012, the Company had no accrued interest or penalties related to uncertain tax positions.
The Company files income tax returns in the U.S. federal tax jurisdiction, various state and various foreign jurisdictions. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available.
The Company’s current intention is to reinvest the total amount of its unremitted earnings in the local international tax jurisdiction or to repatriate the earnings only when tax effective. As such, the Company has not provided for U.S. taxes on the unremitted earnings of its international subsidiaries. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company may be subject to U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of the unrecognized deferred U.S. income tax liability is not practical due to the complexity associated with this hypothetical calculation.
11. Debt The Company has an amended loan and security agreement (Line of Credit) with a lender providing for an asset based line of credit. Under the Line of Credit, the Company can borrow up to the lesser of (i) $10.0 million or (ii) 80% of the Company’s eligible accounts receivable. Borrowing availability under the Line of Credit changes based upon the amount of eligible receivables, concentration of eligible receivables and other factors. The Company has the ability to obtain letters of credit, which reduce the borrowing availability of the Line of Credit. Borrowings under the Line of Credit are secured by substantially all of the Company’s assets. Outstanding amounts under the Line of Credit accrue interest at a rate equal to the prime rate plus 1.5%. Advances under the Line of Credit are due on March 30, 2015, and interest and related finance charges are payable monthly. At December 31, 2013 and 2012, the Company had no amounts outstanding under the Line of Credit.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 11. Debt - (continued) On June 24, 2011, the Company entered into the First Loan Modification Agreement (Modification Agreement) to the Line of Credit. Pursuant to the terms of the Modification Agreement, during the year ended December 31, 2011, the Company drew $7.0 million in term loan advances. In February 2012, the Company repaid the $7.0 million balance under the Modification Agreement and made a final payment of $140,000, representing 2% of the outstanding balance, pursuant to the terms of the Modification Agreement. As such, the Company had no outstanding borrowings under the Modification Agreement at December 31, 2013.
12. Accrued Expenses Accrued expenses consist of the following:
13. Segment Information Disclosure requirements about segments of an enterprise and related information establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in interim financial reports issued to stockholders. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief decision maker is its chief executive officer. The Company and the chief decision maker view the Company’s operations and manage its business as one operating segment.
Geographic Data Total revenue to unaffiliated customers by geographic area, based on the location of the customer, was as follows:
North America is comprised of revenue from the United States, Canada and Mexico. During the years ended December 31, 2013, 2012 and 2011, revenue from customers located in the United States was $60,195, $51,695 and $38,820, respectively. During the years ended December 31, 2013, 2012 and 2011, no other country contributed more than 10% of the Company’s total revenue.
Brightcove Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
(in thousands, except share and per share data, unless otherwise noted) 13. Segment Information - (continued) As of December 31, 2013 and 2012, property and equipment at locations outside the United States was not material.
14. 401(k) Savings Plan The Company maintains a defined contribution savings plan covering all eligible U.S. employees under Section 401(k) of the Internal Revenue Code. Company contributions to the plan may be made at the discretion of the Board. To date, the Company has not made any contributions to the plan.
15. Quarterly Financial Data (unaudited)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
Item 9A.
Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its Internal Control-Integrated Framework (1992). Based on this assessment and those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2013.
The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
of Brightcove Inc.
We have audited Brightcove Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Brightcove Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Brightcove Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2013 of Brightcove Inc. and our report dated March 10, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 10, 2014
Item 9B.
Item 9B. Other Information None.
PART III Item 10.
Item 10. Directors, Executive Officers, and Corporate Governance Incorporated by reference from the information in our Proxy Statement for our 2014 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
Item 11.
Item 11. Executive Compensation Incorporated by reference from the information in our Proxy Statement for our 2014 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Incorporated by reference from the information in our Proxy Statement for our 2014 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence Incorporated by reference from the information in our Proxy Statement for our 2014 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
Item 14.
Item 14. Principal Accountant Fees and Services Incorporated by reference from the information in our Proxy Statement for our 2014 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
PART IV Item 15.
Item 15. Exhibits, Financial Statements and Schedules (a)(1) Financial Statements.
The response to this portion of Item 15 is set forth under Item 8 above.
(a)(2) Financial Statement Schedules.
All schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto set forth under Item 8 above.
(a)(3) Exhibits.
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K. The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this Annual Report on Form 10-K.
Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BRIGHTCOVE INC.
By: /s/ David Mendels
David Mendels
Chief Executive Officer
POWER OF ATTORNEY Each person whose individual signature appears below hereby constitutes and appoints Christopher Menard and Andrew Feinberg, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
(1) Filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 26, 2012.
(2) Filed as Exhibit 3.2 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
(3) Filed as Exhibit 3.3 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
(4) Filed as Exhibit 4.1 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
(5) Filed as Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 24, 2011.
(6) Filed as Exhibit 4.3 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 24, 2011.
(7) Filed as Exhibit 4.4 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 24, 2011.
(8) Filed as Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 14, 2012.
(9) Filed as Exhibit 4.5 to the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 14, 2012.
(10) Filed as Exhibit 10.1 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
(11) Filed as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 24, 2011.
(12) Filed as Exhibit 10.3 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
(13) Filed as Exhibit 10.4 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
(14) Filed as Exhibit 10.5 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
(15) Filed as Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 24, 2011.
(16) Filed as Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 24, 2011.
(17) Filed as Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 24, 2011.
(18) Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 30, 2013.
(19) Filed as Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 24, 2011.
(20) Filed as Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 24, 2011.
(21) Filed as Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 24, 2011.
(22) Filed as Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 24, 2011.
(23) Filed as Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 24, 2011.
(24) Filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2013.
(25) Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 25, 2013.
(26) Filed as Exhibit 10.14 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
(27) Filed as Exhibit 10.15 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
(28) Filed as Exhibit 10.16 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
(29) Filed as Exhibit 10.17 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
(30) Filed as Exhibit 10.18 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
(31) Filed as Exhibit 10.19 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 6, 2012.
* Incorporated herein by reference.
** Filed herewith.
• The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference.
+ In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
 Indicates a management contract or any compensatory plan, contract or arrangement.