S-1/A 1 d200370ds1a.htm S-1/A #5 S-1/A #5
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As filed with the Securities and Exchange Commission on February 6, 2012

Registration No. 333-176444

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

AMENDMENT NO. 5

TO

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

Brightcove Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware   7372   20-1579162

(State of

Incorporation)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

One Cambridge Center

Cambridge, MA 02142

(888) 882-1880

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Jeremy Allaire

Chief Executive Officer

Brightcove Inc.

One Cambridge Center

Cambridge, MA 02142

(888) 882-1880

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

William J. Schnoor, Esq.

Joseph C. Theis, Esq.

Goodwin Procter LLP

Exchange Place

53 State Street

Boston, MA 02109

(617) 570-1000

 

Andrew Feinberg, Esq., CLO

Christopher Menard, CFO

 

David A. Westenberg, Esq.

Wilmer Cutler Pickering

Hale and Dorr LLP

60 State Street

Boston, MA 02109

(617) 526-6000

 

Christopher Keenan, Esq.

Brightcove Inc.

One Cambridge Center

Cambridge, MA 02142

(888) 882-1880

 

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

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

 

Large Accelerated Filer  ¨      Accelerated Filer  ¨
Non-Accelerated Filer (Do not check if a smaller reporting company)   þ      Smaller Reporting Company  ¨

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Amount to  be
Registered(1)
 

Proposed

Maximum Offering
Price Share

 

Proposed

Maximum Aggregate
Offering Price(2)

  Amount of
Registration Fee(3)

Common Stock, $0.001 par value per share

  5,750,000   $12.00   $69,000,000.00   $2,177.40

 

 

(1)   Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as amended. Includes additional shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2)   Estimated solely for the purpose of calculating the registration fee.
(3)   The Registrant previously paid $5,805.00 in connection with the original filing of this Registration Statement on August 24, 2011.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued February 6, 2012

 

5,000,000 Shares

 

LOGO

COMMON STOCK

 

 

 

Brightcove Inc. is selling 5,000,000 shares of our common stock. This is our initial public offering and no public market currently exists for our shares of common stock. We anticipate that the initial public offering price will be between $10.00 and $12.00 per share.

 

 

 

We have applied to list our common stock on the NASDAQ Global Market under the symbol “BCOV”.

 

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 9.

 

 

 

PRICE $             A SHARE

 

 

 

    

Price to

Public

      

Underwriting

Discounts and

Commissions

      

Proceeds to

Brightcove

 

Per Share

     $                      $                               $                  

Total

     $                          $                                  $                      

 

We have granted the underwriters the right to purchase up to an additional 750,000 shares of common stock to cover over-allotments.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2012.

 

 

 

MORGAN STANLEY   STIFEL NICOLAUS WEISEL

 

 

 

RBC CAPITAL MARKETS   PACIFIC CREST SECURITIES   RAYMOND JAMES

 

 

                    , 2012


Table of Contents

LOGO

 


Table of Contents

 

 

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     9   

Special Note Regarding Forward-Looking Statements

     26   

Use of Proceeds

     27   

Dividend Policy

     27   

Capitalization

     28   

Dilution

     30   

Selected Consolidated Financial Data

     32   

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

     34   

Business

     66   

Management

     81   

Executive Compensation

     87   
 

 

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we file with the Securities and Exchange Commission, or SEC. We and the underwriters have not authorized anyone to provide you with additional information or information different from that contained in this prospectus or any free writing prospectus. We and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or other earlier date stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

 

Until                     , 2012 (the 25th day after the date of this prospectus), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

For investors outside of the United States: Neither we nor any of the underwriters have done anything that would permit this offering outside the United States or permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus. You should also consider, among other things, the matters described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case appearing elsewhere in this prospectus.

 

BRIGHTCOVE INC.

 

Brightcove is a leading global provider of cloud-based solutions for publishing and distributing professional digital media. Brightcove Video Cloud, our flagship product released in 2006, is the world’s leading online video platform. As of December 31, 2011, we had 3,872 customers in over 50 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.

 

Widespread and growing broadband adoption, rapid growth in online video viewership, the proliferation of new Internet-connected devices and the emergence of social media have radically changed the way in which people interact with and consume content online. Organizations now seek to manage growing libraries of content and media, create compelling branded user experiences and deliver those experiences across a wide range of Internet-connected devices such as PCs, smartphones, tablets and televisions. These processes can be complex, expensive and time-consuming.

 

Brightcove Video Cloud, or 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.

 

In May 2011, we announced the initial release of Brightcove App Cloud, or App Cloud. We made our first commercial sale of App Cloud in September 2011 and made App Cloud generally commercially available in November 2011. App Cloud is a software application development and management platform designed to help customers publish and distribute video and other professional digital media through software applications across multiple Internet-connected devices. We refer to these applications as content apps. We believe App Cloud will serve the market for the development and management of content apps much like Video Cloud serves the market for publishing and distributing video content online.

 

We generate revenue by offering our products to customers on a subscription-based, software as a service, or SaaS, model. Our revenue grew from $24.5 million in the fiscal year ended December 31, 2008 to $63.6 million in the fiscal year ended December 31, 2011 and the number of customers using our products grew from 549 as of December 31, 2008 to 3,872 as of December 31, 2011. Our revenue was $43.7 million for the fiscal year ended December 31, 2010, compared to $63.6 million for the fiscal year ended December 31, 2011. To date, substantially all of our revenue has been attributable to our Video Cloud product. Our consolidated net loss was $17.8 million for the fiscal year ended December 31, 2010, compared with $17.3 million for the fiscal year ended December 31, 2011. We expect to continue to invest in the growth of our business and operations and to incur operating losses on an annual basis through at least the end of 2012.

 

 

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Our Mission

 

Our mission is to publish and distribute the world’s professional digital media.

 

Our Market and Industry

 

We believe there is a large and growing market opportunity for our on-demand solutions. This market opportunity reflects several important trends:

 

   

many consumers are now equipped with high-speed broadband connections;

 

   

the cost of creating and producing professional video content has dropped dramatically;

 

   

video content consumption has become a mainstream online activity for consumers;

 

   

smartphones and tablets are rapidly becoming mainstream tools for consuming digital media;

 

   

increasingly, next-generation content experiences are being driven through new Internet-connected consumer electronics;

 

   

the number of content apps is growing rapidly; and

 

   

social media destinations such as Facebook and Twitter are becoming important channels for discovering and distributing digital media.

 

Although these trends are driving a rapid expansion of content creation, they are also creating greater challenges to managing, publishing and distributing a high-quality digital experience. Content owners have attempted to address these challenges with two common solutions: video-sharing sites and in-house solutions. Many content owners are finding these solutions inadequate, however. Although video-sharing sites can serve as distribution channels, these sites generally do not provide the features and functionality that professional organizations require to achieve their objectives. At the same time, in-house solutions are often not a viable alternative because of the significant investment of money, time and people that is required to create and maintain a comprehensive video solution that keeps pace with advances in technology.

 

Publishing and distributing digital content in a high-quality manner is a critical strategy for many organizations worldwide. We believe there is a significant opportunity for a comprehensive SaaS solution designed to address the growing complexity and expense organizations face when seeking to publish professional digital media. Given the industry trends and the limitations of video-sharing sites and in-house solutions, we believe adoption of outsourced online video platforms will increase.

 

Our Solution

 

Video Cloud offers the following key benefits:

 

   

Comprehensive, highly configurable and scalable. Video Cloud includes all of the features and functionality necessary to publish and distribute video online to a broad range of Internet-connected devices in a high-quality manner. Our multi-tenant architecture enables us to scale our solution as our customer and end user base expands.

 

   

Easy to use and low total cost of ownership. We designed Video Cloud to be intuitive and easy-to-use, empowering anyone within an organization to publish and distribute video online. We provide a reliable, cost-effective, on-demand solution to our customers, relieving them of the cost, time and resources associated with in-house solutions.

 

 

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Open platform and extensive ecosystem. Our open and extensible platform enables our customers to customize our solution and integrate it with third-party technology to meet their own specific requirements and business objectives. We also have an extensive ecosystem of technology and solution partners which provide our customers with enhanced flexibility, functionality and ease of use.

 

   

Help customers grow their audience and generate revenue. Our customers use our product to achieve key business objectives such as driving site traffic, increasing viewer engagement on their sites, increasing conversion rates for transactions, increasing brand awareness and expanding their audiences. Our video advertising features such as tools for ad insertions and built-in ad server and network integrations help our customers generate advertising revenue from their audiences.

 

   

Ongoing customer-driven development. Through our account managers, customer support team, product managers and regular outreach from senior leadership, we solicit and capture feedback from our customer base for incorporation into ongoing enhancements to our platform.

 

Our Business Strengths

 

We believe that the following business strengths also differentiate us from our competitors and are key to our success:

 

   

We are the recognized online video platform market leader. In 2011, our customers used Video Cloud to deliver an average of approximately 743 million video streams per month, which we believe is more video streams per month than any other professional solution. In December 2011, our customers used Video Cloud to reach over 177 million unique viewers on over 94,000 websites.

 

   

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, and we have consistently released new features and functionality. In April 2011, we were issued a U.S. patent covering aspects of publishing and distributing digital media online. Our latest innovation is the development and introduction of App Cloud.

 

   

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 and Asia Pacific. We built our solutions to be localized into almost any language and currently offer 24/7 customer support worldwide.

 

   

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 over the life of the committed term. The predictable revenue recognition of our existing contracts provides us with visibility into revenue that has not yet been recognized. We also achieved an overall recurring dollar retention rate of at least 86% in each of the last eight fiscal quarters, including 94%, 93%, 94% and 93% for the three months ended March 31, 2011, June 30, 2011, September 30, 2011 and December 31, 2011, respectively.

 

   

We have customers of all sizes across multiple industries. We offer different editions of Video Cloud tailored to meet the needs of organizations of various sizes, from large global enterprises to small and medium-sized businesses, across industries.

 

   

Our management team has experience building and scaling software companies. Our people have held senior product, business and technology positions at software companies such as Adobe, Allaire, ATG, EMC, Lycos, Macromedia and Phase Forward.

 

 

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Growth Strategy

 

Key elements of our growth strategy are:

 

   

Acquire new customers. We believe that every organization with a website or digital content is a potential customer. We intend to make significant investments across all areas of our business, including sales, marketing, lead-generation and product development to acquire new customers.

 

   

Expand our relationships with existing customers. We believe we can grow our business with existing customers by helping them increase their usage of our products, expanding their deployments with us and selling additional functionality to them.

 

   

Continue to innovate. We plan to continue innovating and bringing to market new solutions and new features on existing solutions. We believe App Cloud is a prime example of this strategy and represents a significant opportunity for growth.

 

   

Increase our global market penetration. We intend to expand our presence in targeted geographies by growing our direct sales force and international sales channels. We believe our existing international markets and new markets each represent significant opportunities for growth.

 

   

Continue to build our brand and drive category awareness. We plan to continue investing in marketing and promotion to enhance our brand and increase awareness of the online video and content app platform categories.

 

   

Pursue strategic acquisitions. We plan to pursue acquisitions that complement our existing business, represent a strong strategic fit and are consistent with our overall growth strategy.

 

Risks Relating to Our Business and Our Industry

 

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. Some of these risks are:

 

   

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 a relatively short operating history, which makes it difficult to evaluate our business and future prospects.

 

   

If customer demand for our services does not meet expectations, our ability to generate revenue and meet our financial targets could be adversely affected.

 

   

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 must keep up with rapid technological change to remain competitive in a rapidly evolving industry.

 

   

If we are unable to retain our existing customers, our revenue and results of operations will be adversely affected.

 

   

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 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.

 

   

Immediately after this offering our two largest stockholders, Accel Partners and General Catalyst Partners (and entities that are affiliated with them), will beneficially own an aggregate of approximately 42.7% of our outstanding common stock and will likely continue to have effective control over our company.

 

 

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Our Corporate Information

 

We were incorporated in Delaware in August 2004 as Video Marketplace, Inc., and changed our name to Brightcove Inc. in March 2005. Our principal executive office is located at One Cambridge Center, Cambridge, Massachusetts 02142 and our telephone number is (888) 882-1880. Our website address is www.brightcove.com. The information on, or that can be accessed through, our website does not constitute part of this prospectus, and you should not rely on any such information in making the decision whether to purchase our common stock. Unless otherwise stated, all references to “us,” “our,” “Brightcove,” “we,” the “company” and similar designations refer to Brightcove Inc. and its subsidiaries.

 

BRIGHTCOVE, the Brightcove logo and other trademarks or service marks of Brightcove appearing in this prospectus are the property of Brightcove. Trade names, trademarks and service marks of other organizations appearing in this prospectus are the property of their respective holders.

 

 

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THE OFFERING

 

Common stock offered by us

5,000,000 shares

 

Common stock to be outstanding after this offering

26,375,037 shares

 

Overallotment option offered by us

The underwriters have an option to purchase a maximum of 750,000 additional shares of common stock. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

We intend to use approximately $7.0 million of the net proceeds of this offering to repay outstanding indebtedness and to use the remainder for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire complementary technologies or businesses. See “Use of Proceeds.”

 

Proposed NASDAQ Global Market symbol

“BCOV”

 

Risk factors

You should read carefully “Risk Factors” in this prospectus for a discussion of factors that you should consider before deciding to invest in shares of our common stock.

 

The number of shares of common stock to be outstanding after this offering is based on 21,375,037 shares of common stock outstanding as of December 31, 2011 and excludes:

 

   

3,986,706 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2011 with a weighted-average exercise price of $3.76 per share;

 

   

46,713 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2011 with a weighted-average exercise price of $3.21 per share;

 

   

124,703 shares of common stock reserved for future issuance under our Amended and Restated 2004 Stock Option and Incentive Plan, or the 2004 Plan, as of December 31, 2011;

 

   

171,712 shares of common stock issuable upon the exercise of stock options approved by our board of directors for grant effective upon the earlier of (a) the closing of this offering at an exercise price equal to the price to the public listed on the cover page of this prospectus or (b) a date determined by our board of directors that is no later than December 15, 2012 at an exercise price determined by our board of directors on the date of such determination; and

 

   

1,700,000 shares of common stock reserved for future issuance under our 2012 Stock Incentive Plan, or the 2012 Plan.

 

Except as otherwise indicated, the information in this prospectus:

 

   

gives effect to our amended and restated certificate of incorporation, which will be in effect upon completion of this offering;

 

   

gives effect to the conversion of all of our outstanding preferred stock into 16,150,505 shares of common stock upon the closing of this offering;

 

   

assumes that the warrants outstanding as of December 31, 2011 to purchase 60,728 shares of our series B preferred stock automatically become warrants to purchase 46,713 shares of our common stock upon the closing of this offering;

 

   

gives effect to our 1-for-2.6 reverse stock split of our common stock which became effective on February 6, 2012; and

 

   

assumes no exercise by the underwriters of their option to purchase up to an additional 750,000 shares of our common stock in this offering to cover over-allotments.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following tables summarize certain consolidated financial and other data for our business. You should read the following summary consolidated financial data in conjunction with “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

We derived the consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of results to be expected in any future period.

 

     Year Ended December 31,  
         2009             2010             2011      
     (in thousands, except per share
data)
 

Consolidated statements of operations data:

    

Revenue:

      

Subscription and support revenue

   $ 32,240      $ 40,521      $ 60,169   

Professional services and other revenue

     3,947        3,195        3,394   
  

 

 

   

 

 

   

 

 

 

Total revenue

     36,187        43,716        63,563   

Cost of revenue(1):

      

Cost of subscription and support revenue

     6,986        11,060        15,478   

Cost of professional services and other revenue

     3,463        4,065        4,744   
  

 

 

   

 

 

   

 

 

 

Total cost of revenue

     10,449        15,125        20,222   
  

 

 

   

 

 

   

 

 

 

Gross profit

     25,738        28,591        43,341   

Operating expenses(1):

      

Research and development

     8,927        12,257        15,267   

Sales and marketing

     13,218        24,124        31,564   

General and administrative

     6,696        9,617        12,640   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     28,841        45,998        59,471   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (3,103     (17,407     (16,130

Other income (expense):

      

Interest income

     313        185        23   

Interest expense

     —          —          (358

Other income (expense), net

     22        (503     (719
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     335        (318     (1,054
  

 

 

   

 

 

   

 

 

 

Loss before income taxes and non-controlling interest in consolidated subsidiary

     (2,768     (17,725     (17,184

Provision for income taxes

     55        56        90   
  

 

 

   

 

 

   

 

 

 

Consolidated net loss

     (2,823     (17,781     (17,274

Net loss (income) attributable to non-controlling interest in consolidated subsidiary

     478        280        (361
  

 

 

   

 

 

   

 

 

 

Net loss attributable to Brightcove Inc.

     (2,345     (17,501     (17,635

Accretion of dividends on redeemable convertible preferred stock

     (4,918     (5,470     (5,639
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (7,263   $ (22,971   $ (23,274
  

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders—basic and diluted

   $ (1.70   $ (4.98   $ (4.75
  

 

 

   

 

 

   

 

 

 

 

 

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     Year Ended December 31,  
         2009              2010              2011      
     (in thousands, except per share
data)
 

Weighted-average number of common shares used in computing net loss per share attributable to common stockholders—basic and diluted

     4,276         4,612         4,900   

Pro forma net loss per share attributable to common stockholders—basic and diluted(2)

         $ (0.84
        

 

 

 

Pro forma weighted-average number of common shares used in computing net loss per share attributable to common stockholders—basic and diluted(2)

           21,051   
     Year Ended December 31,  
     2009      2010      2011  
     (in thousands)  

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

        

Cost of subscription and support revenue

   $ 21       $ 26       $ 52   

Cost of professional services and other revenue

     36         99         117   

Research and development

     125         369         367   

Sales and marketing

     102         1,459         1,008   

General and administrative

     224         1,362         2,653   

 

    As of December 31,     As of December 31, 2011  
    2010     Actual     Pro Forma(3)     Pro Forma As
Adjusted(3) (4)
 
    (in thousands)  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

  $ 20,341      $ 17,227      $ 17,227      $ 57,577   

Property and equipment, net

    4,706        6,079        6,079        6,079   

Working capital

    17,263        10,204        10,204        51,387   

Total assets

    41,984        47,338        47,338        87,688   

Current and long-term debt

    —          7,000        7,000        —     

Redeemable convertible preferred stock warrants

    285        424        —          —     

Redeemable convertible preferred stock

    114,404        120,351        —          —     

Total stockholders’ (deficit) equity

    (86,937     (105,085     15,690        63,040   

 

(2)  

Pro forma basic and diluted net loss per share have been computed to give effect to the conversion of all redeemable convertible preferred stock into shares of common stock, as if such conversion had occurred as of the date of original issuance. The impact of the accretion of unpaid and undeclared dividends has been excluded from the determination of net loss attributable to common stockholders as the holders of the redeemable convertible preferred stock are not entitled to receive undeclared dividends upon such conversion.

(3)  

The balance sheet data as of December 31, 2011 is presented:

   

on an actual basis;

   

on a pro forma basis to reflect the automatic conversion of all outstanding shares of our preferred stock and warrants to purchase shares of our preferred stock into 16,150,505 shares of common stock and warrants to purchase 46,713 shares of common stock, respectively, upon the completion of this offering; and

   

on a pro forma as adjusted basis to reflect the pro forma adjustments described above and the sale by us of 5,000,000 shares of common stock offered by this prospectus at the initial public offering price of $11.00 per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and after the application of a portion of the net proceeds of this offering to the repayment of certain of our outstanding indebtedness.

(4)  

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the amount of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $4.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of our common stock offered by us would increase (decrease) the amount of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $10.2 million, assuming that the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to invest in our common stock. Any of the risk factors we describe below could materially adversely affect our business, financial condition or results of operations, as could other risks not currently known to us or risks that we consider immaterial. The market price of our common stock could decline if one or more of these risks or uncertainties actually occurs, causing you to lose all or part of your investment. Certain statements below are forward-looking statements. See “Special Note Regarding Forward-Looking Statements” in this prospectus.

 

Risks Relating to Our Business and Our Industry

 

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 $2.8 million for the year ended December 31, 2009, a consolidated net loss of $17.8 million for the year ended December 31, 2010 and a consolidated net loss of $17.3 million for the year ended December 31, 2011. 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 increase at least through 2012. In addition, as a public company we will 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 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.

 

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;

 

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write-downs, impairment charges or unforeseen liabilities in connection with acquisitions;

 

   

our ability to successfully manage any 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.

 

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. In addition, we have very limited experience with customer adoption of our App Cloud product, having made our first commercial sale of App Cloud in September 2011. 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.

 

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.

 

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;

 

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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.

 

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, Germany, Japan, Singapore, South Korea, Spain 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 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.

 

The online video platform 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

 

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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.

 

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, quarterly 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 may 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.

 

We depend on the experience and expertise of our founders, 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 founders and 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 founders, executive officers, key technical personnel and other employees could terminate his or her relationship with us at any time. The loss of any of our founders or any other 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 177 as of December 31, 2009, to 255 as of December 31, 2010 and to 312 as of December 31, 2011, and our revenue grew from $36.2 million in 2009 to $43.7 million in 2010 and was $63.6 million in 2011. Our headcount and operations have grown, both

 

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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.

 

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.

 

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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 providers of online publishing or distribution services. 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 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 other online video platforms and content app development platforms, 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

 

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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 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.

 

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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 three third-party data center facilities located in the United States and from a limited number of cloud computing services facilities located outside the United States. While we control the actual computer and storage systems upon which our platform 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,

 

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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. 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 using premium editions of Video Cloud 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

 

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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.

 

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. Acquisitions involve numerous risks, any of which could harm our business, including:

 

   

difficulties in integrating the technologies, products, operations, existing contracts and personnel of a target company and realizing the anticipated benefits of the combined businesses;

 

   

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;

 

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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.

 

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 Korean won 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.

 

A successful assertion by one or more states that we should collect sales or other taxes on the sale of our services, or that we have failed to do so where required in the past, could result in substantial tax liabilities for past sales and decrease our ability to compete for future sales. Each state has different rules and regulations governing sales and use taxes and these rules and regulations are subject to varying interpretations that may change over time. We review these rules and regulations periodically and, when we believe our services are subject to sales and use taxes in a particular state, voluntarily engage state tax authorities in order to determine how to comply with their rules and regulations. 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.

 

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Vendors of services, like us, are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar taxes. 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.

 

Many states are also pursuing legislative expansion of the scope of goods and services that are subject to sales and similar taxes as well as the circumstances in which a vendor of goods and services must collect such taxes. Furthermore, legislative proposals have been introduced in Congress that would provide states with additional authority to impose such taxes. Accordingly, it is possible that either federal or state legislative changes may require us to collect additional sales and similar taxes from our clients in the future.

 

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.

 

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Risks Relating to the Offering

 

An active trading market for our common stock may not develop, and you may not be able to resell your shares at or above the initial offering price.

 

Prior to this offering, there has been no public market for shares of our common stock. Although we anticipate that our common stock will be approved for listing on the NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price of our common stock will be determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price of our common stock after the offering. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell.

 

Our stock price may be volatile and the market price of our common stock after this offering may drop below the price you pay.

 

The market price of our common stock could be subject to significant fluctuations after this offering, and it may decline below the initial public offering price. Market prices for securities of early stage companies have historically been particularly volatile. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. 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 a substantial number of shares of our common stock in the public market could occur at any time after the expiration of the lock-up agreements described in the “Underwriting” section of this prospectus. 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. After this offering, we will have 26,375,037 shares of common stock outstanding based on the number of shares outstanding as of December 31, 2011. This includes

 

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the 5,000,000 shares that we are selling in this offering, which may be resold in the public market immediately. The remaining 21,375,037 shares, or 81.0%, of our outstanding shares after this offering, are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold, subject to any applicable volume limitations under federal securities laws with respect to affiliate sales, in the near future as set forth below.

 

Number of Shares and %
        of Total Outstanding        

  

Date Available for Sale Into Public Market

0 shares, or 0%

   On the date of this prospectus

25,333,877 shares, or 98.5%

   180 days after the date of this prospectus, subject to extension in specified instances, due to lock-up agreements between the holders of these shares and the underwriters. However, Morgan Stanley can waive the provisions of these lock-up agreements and allow these stockholders to sell their shares at any time

 

In addition, as of December 31, 2011, there were 46,713 shares subject to outstanding warrants, 3,986,706 shares subject to outstanding options, 171,712 shares of common stock issuable upon the exercise of stock options approved by our board of directors for grant effective upon the earlier of (a) the closing of this offering at an exercise price equal to the price to the public listed on the cover page of this prospectus or (b) a date determined by our board of directors that is no later than December 15, 2012 at an exercise price determined by our board of directors on the date of such determination, an additional 124,703 shares reserved for future issuance under our employee benefit plans that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended, or the Securities Act. Additionally, in February 2012, our board of directors approved the 2012 Plan under which 1,700,000 shares of common stock are reserved for future issuance. Moreover, after this offering, holders of an aggregate of approximately 17,572,317 shares of our common stock as of December 31, 2011, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our employee benefit plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements and the restrictions imposed on our affiliates under Rule 144.

 

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.

 

After the completion of this offering, we do not expect to declare any dividends in the foreseeable future.

 

After the completion of this offering, 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 funds generated by this offering, together with existing

 

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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.

 

Our management has wide discretion in the use of the offering proceeds and may not apply these proceeds in a manner that will increase our revenue or market value.

 

Our management will have considerable discretion in the application of the proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The proceeds may be used for corporate purposes that do not increase our revenue or our market value.

 

Purchasers in this offering will incur immediate and substantial dilution in the book value of their investment as a result of this offering.

 

If you purchase common stock in this offering, you will incur immediate and substantial dilution of $8.70 per share, representing the difference between the assumed initial public offering price of $11.00 per share and our pro forma net tangible book value per share after giving effect to this offering and the automatic conversion of all outstanding shares of our preferred stock upon the closing of this offering. Moreover, we issued warrants and options in the past to acquire common stock at prices significantly below the assumed initial public offering price. As of December 31, 2011, there were 46,713 shares subject to outstanding warrants with an exercise price of $3.21 per share and 3,986,706 shares subject to outstanding options with a weighted-average exercise price of $3.76 per share. Additionally, there were 171,712 shares of common stock issuable upon the exercise of stock options approved by our board of directors for grant effective upon the earlier of (a) the closing of this offering at an exercise price equal to the price to the public listed on the cover page of this prospectus or (b) a date determined by our board of directors that is no later than December 15, 2012 at an exercise price determined by our board of directors on the date of such determination. To the extent that these outstanding warrants or options are ultimately exercised, you will incur further dilution.

 

Our independent registered public accounting firm has advised us that it has identified a material weakness in our internal control over financial reporting. 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.

 

In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2010, our independent registered public accounting firm reported to our audit committee that it had identified a material weakness in the design and operation of our internal control over financial reporting. Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. Specifically, our independent registered public accounting firm determined that we did not have adequate procedures and controls to ensure that stock-based compensation arrangements were appropriately accounted for under the guidance within Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 718, Compensation—Stock Compensation, and FASB ASC 505, Equity-Based Payments to Non-Employees.

 

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We concurred with the findings of our independent registered public accounting firm. We believe this material weakness has been remediated as of July 1, 2011. We have taken the following steps to remediate the underlying causes of the material weakness, including:

 

   

prior to any stock option grants being recommended to the board for approval, our chief financial officer is responsible for reviewing the list of recommended awards;

 

   

all stock-based awards granted by the board of directors are reviewed by our chief financial officer and corporate controller at the time of grant to ensure that they are appropriately identified as either an award to an employee or non-employee;

 

   

our corporate controller is responsible for reviewing all equity award data uploaded within our third-party equity administration software application package; and

 

   

our corporate controller is responsible for reviewing and approving all calculations and journal entries related to the accounting for non-employee variable stock option grants to ensure they are recorded in accordance with ASC 505.

 

In addition, we will need to evaluate our internal control over financial reporting in connection with Section 404 of the Sarbanes-Oxley Act for fiscal 2013, and our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting starting with our annual report for fiscal 2013. This assessment will need to include 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. We are just beginning the costly and challenging process of compiling the system and processing documentation needed to comply with such requirements. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. 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. As discussed above, we have in the past identified a material weakness in our internal control over financial reporting, and although we believe we have remediated the material weakness, we cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future. 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.

 

Immediately after this offering our two largest stockholders will likely continue to have effective control over our company.

 

As of December 31, 2011, our two largest stockholders, General Catalyst Partners and Accel Partners (and entities that are affiliated with them), beneficially owned, in the aggregate, shares representing approximately 52.8% of our outstanding capital stock. Following the completion of this offering, these stockholders will beneficially own an aggregate of approximately 42.7% of our outstanding common stock. As a result, these stockholders, if they elect to act together, will likely continue to have effective control over our management and affairs and other matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of all or substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change in control would benefit our other stockholders.

 

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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 certificate of incorporation, 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 wiling 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.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

   

our ability to achieve profitability;

 

   

our competitive position and the effect of competition in our industry;

 

   

our ability to retain and attract new customers;

 

   

our ability to penetrate existing markets and develop new markets for our services;

 

   

our ability to retain or hire qualified accounting and other personnel;

 

   

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

   

our ability to maintain the security and reliability of our systems;

 

   

our estimates with regard to our future performance and total potential market opportunity;

 

   

our estimates regarding our anticipated results of operations, future revenue, capital requirements and our needs for additional financing;

 

   

our use of proceeds from this offering; and

 

   

our goals and strategies.

 

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “continue,” and similar expressions, or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement, of which this prospectus is a part, and any related free writing prospectus, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

 

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from the sale of our shares of common stock in this offering will be approximately $40.4 million, based on an assumed initial public offering price of $11.00 per share, which is the mid-point of the estimated price range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters’ over-allotment option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $48.0 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $4.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $10.2 million, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The principal reasons for this offering are to obtain additional capital, to create a public market for our common stock and to facilitate our future access to public equity markets. We currently estimate that of the net proceeds we receive from this offering we will spend approximately $7.0 million to repay the outstanding principal under our credit facility with Silicon Valley Bank. Our credit facility with Silicon Valley Bank consists of an asset based line of credit with a maturity date of March 31, 2013, which accrues interest at the prime rate plus 1.5%, and a term loan line of credit that has a maturity date of 48 months from the date a term advance is made and which accrues interest at the prime rate plus 7%. We have used our credit facility for general working capital purposes and to secure a $2.4 million letter of credit for the lease of our corporate headquarters. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

We anticipate that we will use the remaining net proceeds we receive from this offering, including any net proceeds we receive from the exercise of the underwriters’ over-allotment option, for working capital and other general corporate purposes, funding of our marketing activities and the costs of operating as a public company and further investment in the development of our proprietary technologies. We may use a portion of the net proceeds for the acquisition of businesses, products and technologies that we believe are complementary to our own, although we have no agreements or understandings with respect to any acquisition at this time. We have not allocated any specific portion of the remaining net proceeds to any particular purpose, and our management will have the discretion to allocate the proceeds as it determines. Pending these uses, we intend to invest the net proceeds to us from the offering in a variety of capital preservation investments, including short-term, investment-grade and interest-bearing instruments.

 

DIVIDEND POLICY

 

We have never declared or paid any dividends on our capital stock. We currently intend to retain any future earnings and do not intend to declare or pay cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends will be, subject to applicable law, at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, prospects, contractual restrictions and capital requirements.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the conversion of all outstanding shares of our preferred stock and warrants to purchase shares of our preferred stock into 16,150,505 shares of common stock and warrants to purchase 46,713 shares of common stock, respectively, upon the closing of this offering; and

 

   

on a pro forma as adjusted basis to give further effect to our sale in this offering of 5,000,000 shares of our common stock at an assumed initial public offering price of $11.00 per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and after the application of a portion of the net proceeds of this offering to the repayment of certain of our outstanding indebtedness.

 

The information below is illustrative only and our capitalization following the closing of this offering will be based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock,” and the consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     As of December 31, 2011  
       Actual         Pro Forma       Pro Forma,
as
  Adjusted(1)  
 
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 17,227      $ 17,227      $ 57,577   
  

 

 

   

 

 

   

 

 

 

Current and long-term debt

     7,000        7,000        —     

Redeemable convertible preferred stock warrants

     424        —          —     

Redeemable convertible preferred stock

     120,351        —          —     

Stockholders’ (deficit) equity:

      

Undesignated preferred stock, $0.001 par value:
No shares authorized, issued or outstanding, actual and pro forma; 5,000,000 shares authorized and no shares issued or outstanding, pro forma as adjusted

     —          —          —     

Common stock, $0.001 par value; 68,000,000 shares authorized, actual and pro forma; 5,224,532 shares issued and outstanding, actual and 21,375,037 shares issued and outstanding, pro forma; 100,000,000 shares authorized and 26,375,037 shares issued and outstanding, pro forma as adjusted(2)

     5        21        26   

Additional paid-in capital

     —          106,141        153,486   

Accumulated other comprehensive income

     1,056        1,056        1,056   

Accumulated deficit

     (107,254     (92,636     (92,636
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity attributable to Brightcove Inc.

     (106,193     14,582        61,932   

Non-controlling interest in consolidated subsidiary

     1,108        1,108        1,108   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (105,085     15,690        63,040   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents and capitalization

   $ 39,917      $ 39,917      $ 120,617   
  

 

 

   

 

 

   

 

 

 

 

(1)  

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase

 

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  (decrease) the amount of cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $4.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) cash and cash equivalents, and additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $10.2 million, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
(2)   The number of shares of our common stock outstanding set forth in the table is based on 21,375,037 shares outstanding as of December 31, 2011 and excludes (i) 3,986,706 shares of common stock issuable upon exercise of outstanding options as of December 31, 2011 at a weighted-average exercise price of $3.76 per share, (ii) 46,713 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2011 with a weighted-average exercise price of $3.21 per share, (iii) 124,703 shares of our common stock reserved for future issuance under the 2004 Plan as of December 31, 2011, (iv) 171,712 shares of common stock issuable upon the exercise of stock options approved by our board of directors for grant effective upon the earlier of (a) the closing of this offering at an exercise price equal to the price to the public listed on the cover page of this prospectus or (b) a date determined by our board of directors that is no later than December 15, 2012 at an exercise price determined by our board of directors on the date of such determination and (v) 1,700,000 shares of common stock reserved for future issuance under the 2012 Plan.

 

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DILUTION

 

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after this offering.

 

Our net tangible book value of our common stock, as of December 31, 2011, was $12.9 million, or $2.47 per share. The net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of outstanding common stock before giving effect to the conversion of all outstanding shares of preferred stock into shares of our common stock upon the completion of this offering. If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share of our common stock after this offering.

 

After giving effect to (i) the automatic conversion of all outstanding preferred stock into common stock immediately prior to completion of this offering and (ii) our sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of December 31, 2011 would have been approximately $60.7 million, or $2.30 per share of common stock. This represents an immediate increase in net tangible book value of $1.68 per share to existing stockholders and an immediate dilution in net tangible book value of $8.70 per share to purchasers of common stock in this offering, as illustrated in the following table:

 

Assumed initial public offering price per share

      $ 11.00   

Pro forma net tangible book value per share as of December 31, 2011

   $ 0.62      

Increase per share attributable to this offering

     1.68      
  

 

 

    

Pro forma as adjusted net tangible book value per share after giving effect to this offering

      $ 2.30   
     

 

 

 

Dilution per share to new investors

      $ 8.70   
     

 

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) the pro forma as adjusted net tangible book value by approximately $0.18 per share and the dilution to new investors by approximately $0.82 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us.

 

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per share of our common stock would be $2.52 per share, the increase in pro forma net tangible book value per share to existing stockholders would be $1.90 per share, and the dilution per share to investors would be $8.48 per share of common stock, in each case assuming an initial public offering price of $11.00 per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus.

 

The following table summarizes, on a pro forma basis, as of December 31, 2011, the difference between the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors at an assumed initial public offering price of $11.00 per share, the mid-point of the price range set forth on the cover of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses.

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     21,375,037         81   $ 95,039,466         63   $ 4.45   

New investors

     5,000,000         19     55,000,000         37   $ 11.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     26,375,037         100   $ 150,039,466         100   $ 5.69   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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The above discussion and tables are based on 5,224,532 shares of common stock issued and outstanding as of December 31, 2011 and also reflects the conversion of all outstanding shares of our preferred stock into an aggregate of 16,150,505 shares of our common stock upon the completion of this offering and excludes:

 

   

3,986,706 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2011 with a weighted-average exercise price of $3.76 per share;

 

   

46,713 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2011 with a weighted-average exercise price of $3.21 per share; 

 

   

124,703 shares of common stock reserved for future issuance under the 2004 Plan as of December 31, 2011;

 

   

171,712 shares of common stock issuable upon the exercise of stock options approved by our board of directors for grant effective upon the earlier of (a) the closing of this offering at an exercise price equal to the price to the public listed on the cover page of this prospectus or (b) a date determined by our board of directors that is no later than December 15, 2012 at an exercise price determined by our board of directors on the date of such determination; and

 

   

1,700,000 shares of common stock reserved for future issuance under the 2012 Plan.

 

To the extent that outstanding options or warrants are exercised and restricted stock grants vest, you will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

 

The consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010 and 2011 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2007 and 2008 and the consolidated balance sheet data as of December 31, 2007, 2008 and 2009 are derived from our audited consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future.

 

    Year Ended December 31,  
    2007     2008     2009     2010     2011  
    (in thousands, except per share data)  

Consolidated statements of operations data:

         

Revenue:

         

Subscription and support revenue

  $ 8,061      $ 22,432      $ 32,240      $ 40,521      $ 60,169   

Professional services and other revenue

    472        2,068        3,947        3,195        3,394   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    8,533        24,500        36,187        43,716        63,563   

Cost of revenue:(1)

         

Cost of subscription and support revenue

    4,635        6,070        6,986        11,060        15,478   

Cost of professional services and other revenue

    721        2,916        3,463        4,065        4,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    5,356        8,986        10,449        15,125        20,222   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    3,177        15,514        25,738        28,591        43,341   

Operating expenses:(1)

         

Research and development

    8,398        7,756        8,927        12,257        15,267   

Sales and marketing

    9,365        11,542        13,218        24,124        31,564   

General and administrative

    6,168        5,970        6,696        9,617        12,640   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    23,931        25,268        28,841        45,998        59,471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (20,754     (9,754     (3,103     (17,407     (16,130

Other income (expense):

         

Interest income

    2,177        918        313        185        23   

Interest expense

    —          —          —          —          (358

Other (expense) income, net

    (26     (1,388     22        (503     (719
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

    2,151        (470     335        (318     (1,054
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Year Ended December 31,  
    2007     2008     2009     2010     2011  
    (in thousands, except per share data)  

Loss before income taxes and non-controlling interest in consolidated subsidiary

    (18,603     (10,224     (2,768     (17,725     (17,184

Provision for income taxes

           11        55        56        90   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net loss

    (18,603     (10,235     (2,823     (17,781     (17,274

Net loss (income) attributable to non-controlling interest in consolidated subsidiary

           305        478        280        (361
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Brightcove Inc.

    (18,603     (9,930     (2,345     (17,501     (17,635

Accretion of dividends on redeemable convertible preferred stock

    (4,774     (4,919     (4,918     (5,470     (5,639
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (23,377   $ (14,849   $ (7,263   $ (22,971   $ (23,274
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders—basic and diluted

  $ (7.91   $ (3.98   $ (1.70   $ (4.98   $ (4.75
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of common shares used in computing net loss per share attributable to common stockholders—basic and diluted

    2,954        3,728        4,276        4,612        4,900   

Pro forma net loss per share attributable to common stockholders—basic and
diluted
(2)

          $ (0.84
         

 

 

 

Pro forma weighted-average number of common shares used in computing net loss per share attributable to common stockholders—basic and diluted(2)

            21,051   

 

    Year Ended December 31,  
    2007     2008     2009     2010     2011  
    (in thousands)  

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

         

Cost of subscription and support revenue

  $ 2      $ 21      $ 21      $ 26      $ 52   

Cost of professional services and other revenue

    1        22        36        99        117   

Research and development

    69        99        125        369        367   

Sales and marketing

    100        82        102        1,459        1,008   

General and administrative

    67        114        224        1,362        2,653   
(2)  

The calculation of pro forma net loss per share attributable to common stockholders does not give effect to the number of shares issued in this offering whose proceeds will be used to repay certain of our outstanding indebtedness as the impact would not be materially different from the amounts presented.

 

 

    As of December 31,  
    2007     2008     2009     2010     2011  
    (in thousands)  

Consolidated Balance Sheet Data:

         

Cash and cash equivalents

  $ 10,928      $ 24,176      $ 22,554      $ 20,341      $ 17,227   

Property and equipment, net

    1,555        2,014        3,355        4,706        6,079   

Working capital

    25,152        24,046        21,054        17,263        10,204   

Total assets

    43,387        40,425        40,255        41,984        47,338   

Current and long-term debt

    —          —          —          —          7,000   

Redeemable convertible preferred stock warrants

    75        85        99        285        424   

Redeemable convertible preferred stock

    85,300        91,013        96,725        114,404        120,351   

Total stockholders’ deficit

    (49,005     (60,524     (66,855     (86,937     (105,085

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements.”

 

Company Overview

 

Brightcove is a leading global provider of cloud-based solutions for publishing and distributing professional digital media. Brightcove Video Cloud, or Video Cloud, our flagship product released in 2006, is the world’s leading online video platform. As of December 31, 2011, we had 3,872 customers in over 50 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 2011, our customers used Video Cloud to deliver an average of approximately 743 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.

 

We were incorporated in Delaware in August 2004 and our headquarters are in Cambridge, Massachusetts. In February 2006 we began generating revenue through our sale of Video Cloud. By the end of 2006, we had 106 employees and 59 customers. In November 2009, we launched the Express edition of our Video Cloud product. In May 2011, we announced the initial release of Brightcove App Cloud, or App Cloud. We made our first commercial sale of App Cloud in September 2011 and made App Cloud generally commercially available in November 2011. App Cloud is a software application development and management platform designed to help customers publish and distribute video and other professional digital media through software applications, which we refer to as content apps, across multiple Internet-connected devices.

 

As of December 31, 2010, we had 255 employees and 2,469 customers, of which 1,564 used our Express edition of Video Cloud and 905 used our premium editions of Video Cloud. As of December 31, 2011, we had 312 employees and 3,872 customers, of which 2,571 used our Express edition of Video Cloud and 1,301 used our premium editions of Video Cloud.

 

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 $24.5 million in the fiscal year ended December 31, 2008 to $63.6 million in the fiscal year ended December 31, 2011 and the number of customers using our solutions grew from 549 as of December 31, 2008 to 3,872 as of December 31, 2011. Our consolidated net loss was $17.8 million for the fiscal year ended December 31, 2010, compared with $17.3 million for the fiscal year ended December 31, 2011.

 

We have signed a new lease for over 80,000 square feet of office space in Boston, Massachusetts. We expect to move into these new headquarters on April 1, 2012. We have sales and marketing offices in New York, New York; London, England; Paris, France; Hanover, Germany; Barcelona, Spain; Tokyo, Japan; Sydney, Australia; Seoul, South Korea; and Singapore, and a research and development office in Seattle, Washington.

 

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For the years ended December 31, 2010 and 2011, our net revenue derived from customers located outside North America was 32% and 34%, 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. For additional information on these and other risks to our business, see the section entitled “Risk Factors.” 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 and new products such as App Cloud. We believe these investments will help us retain our existing Video Cloud customers and lead to the acquisition of new customers for both Video Cloud and App Cloud. As a result of our investment philosophy, we expect to incur operating losses on an annual basis through at least the end of 2012. In addition, we will incur incremental public company expenses related to reporting and compliance. However, we believe these investments will result in increased retention and expansion of our customer base and the resulting revenues. Additionally, we believe this 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 revenues.

 

Key Metrics

 

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

 

   

Number of Customers. We define our number of customers at the end of a particular quarter as the number of customers generating subscription revenue during the period, plus customers who have committed a minimum level of revenue to us for use of our products. We believe the number of customers is a key indicator of our market penetration in the online video platform market, the productivity of our sales organization and the value that our products bring to both large and small organizations. The number of customers subscribing to our Video Cloud product is particularly important to monitor given that we expect revenue from Video Cloud to continue to represent a significant portion of our total revenue, and we are investing significantly to support our sales of this product in a new and rapidly evolving market.

 

During 2010, the number of customers increased 185%, and during 2011, the number of customers increased 57%. Most of the increase was a result of 2010 being the first full year in which we offered the Express edition of Video Cloud, which was introduced in November of 2009. During these periods, we experienced an increase in revenue from Video Cloud, which made up substantially all revenue through December 31, 2011. As of December 31, 2011, we had 3,872 customers, of which 2,571 used our Express edition of Video Cloud and 1,301 used our premium editions of Video Cloud. For more information about our customers, see “Business—Our Customers.”

 

   

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. We also expect growth in streams will be driven, in part, by improvements in products and features that drive traffic to our customers’ websites and growth in the number of customers.

 

In the year ended December 31, 2011, the average number of monthly streams was approximately 743 million, which represents 56% growth over the year ended December 31, 2010, reflecting increased viewership of our customers’ video content.

 

   

Recurring Dollar Retention Rate. We believe that our ability to retain our customers is an indicator of the stability of our revenue base and the long-term value of our customer relationships. We assess our

 

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performance in this area 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.

 

In the year ended December 31, 2010, the recurring dollar retention rate was 88% compared with 93% for the year ended December 31, 2011. This recurring dollar retention rate provides visibility into our ongoing revenue. We did not calculate recurring dollar retention rate prior to December 31, 2009 in part because there were no renewals of our Express customers prior to that date.

 

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

 

     Years Ended December 31,  
     2009      2010     2011  

Key Metrics

       

Customers (at period end):

       

Express

     143         1,564        2,571   

Premium

     723         905        1,301   
  

 

 

    

 

 

   

 

 

 

Total customers (at period end)

     866         2,469        3,872   
  

 

 

    

 

 

   

 

 

 

Average monthly year to date streams (in thousands)

     313,262         475,450        742,965   

Recurring dollar retention rate

             88     93

 

Components of Consolidated Statements of Operations

 

Revenue

 

Subscription and Support Revenue—We generate subscription and support revenue from the sale of our on-demand online video platform called Video Cloud. Video Cloud allows customers to publish and distribute video and other professional digital media across Internet-connected devices. 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 bandwidth. 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.

 

Our second product line is our Express edition, which 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. 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.

 

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 typically priced on a fixed fee basis with a portion due upon contract signing and the remainder due when the related services have been completed.

 

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Our backlog consists of the total future value of our committed customer contracts, whether billed or unbilled. As of December 31, 2011, we had backlog of approximately $43 million compared to backlog of approximately $28 million as of December 31, 2010. Of the approximately $43 million in backlog as of December 31, 2011, approximately $37 to $39 million is expected to be recognized as revenue during the fiscal year ended December 31, 2012. 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 networking expenses, allocated overhead, depreciation expense and amortization of capitalized internal-use software development costs. 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 both fiscal 2009 to fiscal 2010 and fiscal 2010 to fiscal 2011. 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

 

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compensation and travel costs, 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. The increase in sales and marketing expenses as a percentage of revenue is primarily due to our substantial investments in obtaining and retaining customers. 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. We currently anticipate that we will be required to comply with Section 404 of the Sarbanes-Oxley Act for the year ending December 31, 2013. Over the long term, we believe that general and administrative expenses as a percentage of revenue will decrease.

 

Other Income (Expense)

 

Other income (expense) consists primarily of interest income earned on our cash and cash equivalents, foreign exchange gains and losses, interest expense payable on our debt, changes in the fair value of the warrants issued in connection with a line of credit and income (loss) recorded upon the sale of long-term investments.

 

Non-Controlling Interest

 

Our results include a non-controlling interest in our majority-owned subsidiary, Brightcove Kabushiki Kaisha, or Brightcove KK. Brightcove KK is a Japanese joint venture which was formed on July 18, 2008. We own 63% of the entity. The non-controlling interest in Brightcove KK is reported as a separate component of stockholders’ equity (deficit) in our consolidated balance sheet. The portion of net income (loss) attributable to non-controlling interests is presented as net income (loss) attributable to non-controlling interests in consolidated subsidiary in our consolidated statements of operations, and the portion of the other comprehensive loss of this subsidiary is presented in the consolidated statements of stockholders’ equity (deficit) and comprehensive loss.

 

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 full valuation allowance against our net deferred tax assets at December 31, 2010 and 2011.

 

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

 

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value of outstanding stock options and restricted stock awards, which are recognized over the respective stock option and restricted stock award service periods. During 2009, 2010 and 2011, we recorded $508,000, $3.3 million and $4.2 million, respectively, of stock-based compensation expense. The increase in stock-based compensation expense is primarily related to an increase in the fair market value of our common stock. 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 revenues, 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. In 2009, 2010 and 2011, approximately 28%, 32% and 34%, respectively, of our revenue was generated in locations outside the United States. During the same periods, 26%, 30% and 28%, respectively, of our revenue was in currencies other than the U.S. dollar, as are some of the associated expenses. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we conduct business, our foreign currency-based revenues and expenses generally increase in value when translated into U.S. dollars. We expect our foreign currency-based revenue to increase in absolute dollars and as a percentage of total revenue.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues 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 prospectus, 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 on-demand application service to our internet video platform, which provides customers the right to access our hosted software applications for uploading, managing, distributing, and monetizing our video assets. Revenue is derived from three primary sources: (1) the subscription of our technology and related support; (2) hosting and bandwidth 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 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, 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 our Express customers are

 

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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 Express 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 upon final delivery. 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 maintenance and support fees, and deferred initiation and professional service fees. Revenue is presented net of any taxes collected from customers.

 

We periodically enter into multi-element service arrangements that include platform subscription fees, support fees, initiation fees, and, in certain cases, other professional services. Prior to January 1, 2011, when we entered into such arrangements, each element was accounted for separately over our respective service period, provided that each element had value to the customer on a stand-alone basis, and there was objective and reliable evidence of fair value for the separate elements. If these criteria could not be objectively met or determined, the total value of the arrangement was generally recognized ratably as a single unit of accounting over the entire service period to the extent that all services had begun to be provided at the outset of the period. For multi-element service arrangements entered into through December 31, 2010, we were unable to separately account for the different elements because we did not have objective and reliable evidence of fair value for certain of our deliverables. Therefore, all revenue under these arrangements has been recognized ratably over the contract term.

 

Initiation fees and other professional services charged when services are first activated were 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.

 

In October 2009, the Financial Accounting Standards Board (FASB) issued 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 the new guidance, objective and reliable evidence of fair value of the undelivered elements is no longer required in order to account for deliverables in a multiple-deliverable 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.

 

Effective January 1, 2011, we adopted this new accounting guidance on a prospective basis. We applied the new accounting guidance to those multiple-element arrangements entered into, or materially modified, on or after January 1, 2011, which is the beginning of our fiscal year. The adoption of this new accounting guidance did not have a material impact on our financial condition, results of operations or cash flows.

 

Under the new accounting guidance, in order to treat deliverables in a multiple-deliverable 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-deliverable arrangements executed have stand-alone value, with the exception of initiation and activation fees.

 

Under the new accounting guidance, 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 vendor-

 

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specific objective evidence of fair value, or VSOE, if available, or best estimate of selling price, or BESP, if VSOE is not available. We have determined that third-party evidence of selling price, or TPE, 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 lack of pricing consistency, the introduction of new services and other factors. Accordingly, we use 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 transactions, the geographic area where services are sold, price lists, our go to market strategy, historic 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.

 

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 $694,000 in 2009, $829,000 in 2010 and $354,000 in 2011. Amortization of software development costs was $601,000 in 2009, $845,000 in 2010 and $886,000 in 2011.

 

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

 

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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 full valuation allowance against our net deferred tax assets at both December 31, 2010 and 2011.

 

We account 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. We did not have any recorded liabilities for uncertain tax positions as of December 31, 2010 or December 31, 2011.

 

Goodwill

 

We review the carrying value of goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may exceed its fair value. 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.

 

For the year ended December 31, 2011, we elected to adopt 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.

 

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Accounting for Stock-based Compensation Arrangements

 

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.

 

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. Historically, as a private company, we lacked company-specific historical and implied volatility information. Therefore, we estimate our expected volatility from the historical volatility of selected publicly-traded peer companies and expect to continue to do so until we have adequate historical data regarding the volatility of our traded stock price. 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 capital 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. The weighted-average assumptions for volatility, expected life, risk-free interest rate and expected dividend yield for the years ended December 31, 2010 and 2011 are presented in the following table:

 

     Year Ended
December 31, 2010
    Year Ended
December 31,  2011
 

Risk-free interest rate

     2.87     2.62

Expected volatility

     61     57

Expected life (in years)

     6.2        6.2   

Expected dividend yield

              

 

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 are 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;

 

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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 initial public offering or sale of our company, given prevailing market conditions; and

 

   

the U.S. and global capital market conditions.

 

The following table summarizes stock options granted to employees from April 1, 2010 through December 31, 2011. There were no grants of restricted stock during this time:

 

Option Grant Dates

   Number of
Shares
Underlying
Options Granted
     Per Share
Exercise Price
of Options (1)
     Per Share
Fair Value
of
Underlying
Common
Stock
     Per Share
Estimated
Fair Value
of Options (2)
     Aggregate
Estimated
Fair Value
of Options (2)

(in-thousands)
 

May 14, 2010

     394,174       $ 9.31       $ 9.31       $ 5.52       $ 2,176   

July 27, 2010

     246,657         9.31         9.31         5.40         1,333   

March 8, 2011

     521,648         8.19         8.19         4.18-4.63         2,406   

May 12, 2011

     208,833         8.19         10.45         6.45         1,347   

June 23, 2011

     98,132         10.45         10.45         5.82         571   

July 27, 2011

     85,346         10.45         10.45         5.74         490   

 

(1)   The per share exercise price of options was determined by our board.
(2)   As described above, the estimated fair value of options was estimated on the date of grant using the Black-Scholes option-pricing model. For the March 8, 2011 grants, we have disclosed a range of per share fair values due to differences in the estimated term of stock options granted on that date.

 

During December 2011, our board approved options to purchase 171,712 shares of common stock to be granted effective upon the earlier of (a) the closing of this offering at an exercise price equal to the price to the public listed on the cover page of this prospectus or (b) a date determined by our board of directors that is no later than December 15, 2012 at an exercise price determined by our board of directors on the date of such determination. Since the grant date of these options has not been determined, these options have been excluded from the table above.

 

As discussed above, in order to determine the fair value of our common stock underlying stock option and restricted stock grants, our board considered numerous objective and subjective factors, including arm’s length transactions in our common shares whenever those transactions were considered contemporaneous with the valuation date of our common stock. If contemporaneous transactions were not available, in addition to considering the objective and subjective factors listed above, our board considered valuations provided by management from an independent third-party valuation specialist. These valuations estimated the fair value of a minority interest in our common stock, determined based on our business enterprise value, or BEV. Our BEV was estimated using a combination of generally accepted approaches: the income approach using the discounted cash flow method, or DCF method, the market approach using the guideline public company method, and the market approach using the guideline transaction method. The DCF method estimates the enterprise value based on the estimated present value of future net cash flows the business is expected to generate over a forecasted period and an estimate of the present value of cash flows beyond that period, which is referred to as the terminal value. The estimated present value is calculated using a discount rate known as the weighted average cost of capital, which accounts for the time value of money and the appropriate degree of risks inherent in the business. The market approach considers multiples of financial metrics based on guideline transactions and trading multiples of guideline public companies. These multiples are then applied to our financial metrics to derive a range of indicated values. Once calculated, the DCF method and guideline company methods are then weighted. Our indicated BEV was allocated to the shares of preferred stock, common stock, warrants and stock options,

 

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using the option pricing method, or OPM, or the probability weighted expected return method, or PWERM. Estimates of the volatility of our common stock were based on available information on the volatility of common stock of comparable, publicly traded companies. We applied a discount for lack of marketability to our common stock based on a put option model.

 

Significant factors considered by our board in determining the fair value of our common stock at each grant date in the table above are as follows:

 

May and July 2010 Grants

 

In March 2010, we issued a total of 2,315,842 shares of our series D redeemable convertible preferred stock for $5.1817 per share to a group of existing investors for aggregate proceeds of approximately $12.0 million. Additionally, at the time of the series D financing, certain members of our management team sold shares of common stock to certain investors participating in the series D financing for $9.30 per share.

 

On May 14, 2010 and July 27, 2010, our board determined that the fair value of our common stock was $9.31 per share. In addition to considering the series D financing and the secondary transaction for our common stock described above, our board also considered the contemporaneous valuation of a minority interest in our common stock as of March 31, 2010 provided by management from an independent third-party valuation specialist. We concluded that it was appropriate to rely on the March 31, 2010 valuation analysis, which was completed on April 26, 2010, but dated as of March 31, 2010, for purposes of the May 14, 2010 and July 27, 2010 grants because there were no significant changes to the business, including our forecasted financial results, and no significant changes to market conditions, between March 31, 2010 and the date of the grants.

 

Our valuation of the common stock as of March 31, 2010, which was based on the contemporaneous transactions described above, also considered the DCF method under the income approach and the guideline public company transaction methods under the market approach.

 

Under the DCF method, future values were discounted to present value using a discount rate of 19%. In determining the appropriate discount rate, we determined our weighted average cost of capital based on comparable companies. The terminal value was determined using a Gordon growth model, which capitalizes expected cash flows.

 

Under the guideline public company method, we considered multiples of financial metrics based on both acquisitions and trading multiples of a peer group of companies. The companies used for comparison under the guideline public company method were selected based on a number of factors, including but not limited to, the similarity of their industry, growth rate, stage of development, and financial risk. These multiples were then applied to our financial metrics to derive an indication of our enterprise value. A discount of 10% for lack of marketability was applied after considering a number of factors, including the prospects and timeframe for an initial public offering of our common stock.

 

We used the OPM to allocate the total BEV in the valuation analysis as of March 31, 2010, with the income approach and the market approach both being weighted at 50%, and arrived at a per share fair value of common stock of $8.50. Management and our board relied on the March 2010 contemporaneous transaction in the common stock as we believed this to be the best indicator of the fair value of our common stock as of the date of the May and July 2010 grants.

 

March 2011 Grants

 

On March 8, 2011, our board determined that the fair value of our common stock was $8.19 per share. In addition to considering the objective and subjective factors listed above, our board considered the contemporaneous valuation of a minority interest in our common stock as of December 31, 2010 provided by

 

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management from an independent third-party valuation specialist. We concluded that it was appropriate to rely on the December 31, 2010 valuation analysis, which was completed on January 11, 2011, but dated as of December 31, 2010, for purposes of the March 8, 2011 grants because there were no significant changes to the business, including our forecasted financial results, and no significant changes to market conditions, between December 31, 2010 and the date of the grants.

 

Our valuation of our common stock as of December 31, 2010 was based on contemporaneous transactions completed in November 2010. On November 24, 2010, our Chief Executive Officer sold common shares to certain of our existing investors at a price of $9.30 per share. This price was based on the March 2010 transaction described above. Additionally, at this time, one of our nonemployee investors sold shares of common stock, as well as series B, series C and series D redeemable convertible preferred stock to other existing investors. Our common stock was priced at $8.19 per share. The price for series B, series C and series D redeemable convertible preferred stock was $6.2977, $8.05 and $5.1817, respectively. As the amount received by our Chief Executive Officer exceeded the estimated fair value of our common stock at the time of the transaction, we recorded compensation expense for the difference between the transaction price and the estimated fair value of our common stock and the date of the transaction.

 

Management and our board believe that the secondary transaction made by nonemployee investors, discussed above, as well as the results of the contemporaneous valuation as of December 31, 2010 are the best indicators of the fair value of our common stock as of the date of the May and July 2010 grants, and accordingly, granted stock options to purchase 521,648 shares of common stock with an exercise price of $8.19 per share on March 8, 2011.

 

May 2011 Grant

 

On May 12, 2011, we granted options to purchase 208,833 shares of common stock with an exercise price of $8.19 per share, which was determined to be the fair market value of our common stock at that time, based in part on the contemporaneous third-party valuation as of December 31, 2010, which is discussed above.

 

In connection with the preparation of our financial statements for the six months ended June 30, 2011, and in light of the contemporaneous valuation of our common stock as of May 31, 2011, we reassessed the fair market value of our common stock granted on May 12, 2011, and we determined $10.45 per share to be the fair market value of our common stock for purposes of valuing all stock options granted on that date.

 

The May 31, 2011 contemporaneous valuation, provided to management by an independent third-party valuation specialist, was based on the market approach, specifically the guideline public company method and the guideline transactions method. The allocation of value was based on the PWERM, which evaluates the probability of a future sale or an IPO. This method calculated enterprise values ranging from $280 million to $565 million and a discount rate of 19%, resulting in a stock price of $10.45 after taking into account a 10% discount for the lack of marketability. Under these scenarios, we (1) estimated the future value of total stockholders’ equity using a multiple of forecasted revenues as of the estimated IPO or sale date, (2) allocated that equity value to the preferred and common stock on a pro-rata basis considering the preferred stock conversion at an IPO and sale event, and (3) then discounted the resulting per share common stock value back to the valuation date. The key inputs under this model are the estimated IPO and sale value range, the probability weighting that we assign to each point within the range and the discount rate. We estimated our value range considering a variety of factors, the most significant of which were revenue multiples derived from market data and our forecasted trailing 12-month revenues as of the estimated event date. We assigned a higher probability to the middle of the range and lower probabilities to the low and high end of the range. We determined the discount rate using venture capital rates of return appropriate for our stage of development as of the valuation date.

 

The key assumptions in the sale and IPO scenarios included an estimated value range of $280 million to $565 million, assigning various probabilities of 35%, 25%, 15%, 10%, 10%, and 5% to $280 million,

 

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$295 million, $385 million, $405 million, $540 million and $565 million, respectively, and a discount rate of 19%. Additionally, we applied a discount for lack of marketability of 10%, resulting in an estimated common stock value of $10.45 per share.

 

No single event caused the fair value of our common stock on May 31, 2011 to increase from the fair value of our common stock on March 8, 2011; rather, it was a combination of factors. As noted above, we relied on the December 31, 2010 valuation analysis for purposes of the March 8, 2011 grants because there were no significant changes to the business, including our forecasted financial results, and no significant changes to market conditions, between December 31, 2010 and the date of the grants. The December 31, 2010 value was based on a transaction completed in November 2010. It was the board’s estimate that the November 2010 transaction provided a sufficiently contemporaneous indication of value for stock options granted in December 2010 and March 2011.

 

For stock options granted in May 2011, it was the board’s estimate that the November 2010 transaction no longer provided a contemporaneous indication of value. In its estimate of value as of May 31, 2011, the board concluded that the value of the common stock had increased from March 8, 2011. The increase is due to the following factors:

 

   

improvements in market conditions, including a 13% increase in the median multiple of revenue for our guideline public companies from December 31, 2010 to May 31, 2011;

 

   

the substance of our continued discussions with underwriters for our potential initial public offering, which we believed indicated an increased probability of our completing an initial public offering;

 

   

the favorable financial performance of our business through May 31, 2011 compared to our original forecast for that period, which resulted in an increase in our forecast for the remainder of 2011; and

 

   

in May 2011, we made our first public announcement of our intention to market our second product, App Cloud.

 

We believe each of these events contributed to the overall increase in our enterprise value. As a result, the estimated fair value of our common stock increased from $8.19 per share on March 8, 2011 to $10.45 per share in the May 31, 2011 valuation.

 

June and July 2011 Grants

 

On June 23, 2011 and July 27, 2011, our board granted options to purchase 98,132 and 85,346 shares, respectively, of common stock with an exercise price of $10.45 per share, which was determined to be the fair market value of our common stock at each date of grant, based in part on the contemporaneous third-party valuation as of May 31, 2011, which is discussed above. We concluded that it was appropriate to rely on the May 31, 2011 valuation analysis for purposes of the June 23, 2011 and July 27, 2011 grants because there were no significant changes to the business, including our forecasted financial results, and no significant changes to market conditions, between May 31, 2011 and the date of the grants.

 

On January 31, 2012, we and the underwriters for this offering determined a preliminary range for the initial public offering price of $10.00 to $12.00 per share, the mid-point of which represents a valuation increase of approximately 5% over the fair value of our common stock as determined by our board of directors in connection with the options we granted in July 2011. In determining the fair value of common stock relating to options granted during July 2011, our board relied on our most recent valuation report dated May 31, 2011. Our offering price range was determined in consultation with the underwriters and reflects other factors including market conditions for initial public offerings and valuations based on multiples of projected revenue.

 

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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.

 

    Year Ended December 31,  
    2009     2010     2011  
    (in thousands)  

Consolidated statements of operations data:

     

Revenue:

     

Subscription and support revenue

  $ 32,240      $ 40,521      $ 60,169   

Professional services and other revenue

    3,947        3,195        3,394   
 

 

 

   

 

 

   

 

 

 

Total revenue

    36,187        43,716        63,563   

Cost of revenue:

     

Cost of subscription and support revenue

    6,986        11,060        15,478   

Cost of professional services and other revenue

    3,463        4,065        4,744   
 

 

 

   

 

 

   

 

 

 

Total cost of revenue

    10,449        15,125        20,222   
 

 

 

   

 

 

   

 

 

 

Gross profit

    25,738        28,591        43,341   

Operating expenses:

     

Research and development

    8,927        12,257        15,267   

Sales and marketing

    13,218        24,124        31,564   

General and administrative

    6,696        9,617        12,640   
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    28,841        45,998        59,471   
 

 

 

   

 

 

   

 

 

 

Loss from operations

    (3,103     (17,407     (16,130

Other income (expense):

     

Interest income

    313        185        23   

Interest expense

    —          —          (358

Other (expense) income, net

    22        (503     (719
 

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

    335        (318     (1,054
 

 

 

   

 

 

   

 

 

 

Loss before income taxes and non-controlling interest in consolidated subsidiary

    (2,768     (17,725     (17,184

Provision for income taxes

    55        56        90   
 

 

 

   

 

 

   

 

 

 

Consolidated net loss

    (2,823     (17,781     (17,274

Net loss (income) attributable to non-controlling interest in consolidated subsidiary

    478        280        (361
 

 

 

   

 

 

   

 

 

 

Net loss attributable to Brightcove Inc.

    (2,345     (17,501     (17,635
 

 

 

   

 

 

   

 

 

 

Accretion of dividends on redeemable convertible preferred stock

    (4,918     (5,470     (5,639
 

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (7,263   $ (22,971   $ (23,274
 

 

 

   

 

 

   

 

 

 

 

Overview of Results of Operations for the Years Ended December 31, 2010 and 2011

 

Total revenue increased by 45%, or $19.9 million, in 2011 compared to 2010 due to both an increase in subscription and support revenue of 48%, or $19.6 million, and an increase in professional services revenue of 6%, or $199,000. The increase in subscription and support revenue resulted primarily from an increase in the number of our premium customers, which was 1,301 as of December 31, 2011, an increase of 44% from 905 customers as of December 31, 2010. In addition, our revenues from Express offerings grew by $3.5 million, or 175%, from the prior year as our Express customer base increased by approximately 64% 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 $14.8 million, or 52%, in 2011 compared to 2010, 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 $16.1 million in 2011 compared to $17.4 million in 2010. Loss from operations in 2011 and 2010 included $4.2 million and $3.3 million, respectively, of stock-based compensation expense. We expect operating income to increase 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.

 

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Our results of operations in 2011 compared to 2010 were impacted by foreign exchange rate fluctuations, resulting in an increase in revenue of approximately $960,000, or 2%, of revenue, and an increase in expense of approximately $877,000, or 1%, of expenses.

 

As of December 31, 2011, we had $17.2 million of unrestricted cash and cash equivalents, a decrease of $3.1 million from $20.3 million at December 31, 2010. In addition, as of December 31, 2011, we had $7.0 million of outstanding debt.

 

Revenue

 

      Year Ended December 31,               
      2010     2011     Change  

Revenue by Product Line

   Amount      Percentage
of Revenue
    Amount      Percentage
of  Revenue
    Amount          %      
     (in thousands)  

Premium

   $ 41,710         95   $ 58,042         91   $ 16,332         39

Express

     2,006         5        5,521         9        3,515         175   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total

   $ 43,716         100   $ 63,563         100   $ 19,847         45
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

During 2011, revenue increased by $19.9 million, or 45%, compared to 2010, 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 $16.3 million, or 39%, is the result of a 44% increase in the number of premium customers from 905 at December 31, 2010 to 1,301 at December 31, 2011, as well as increased revenue from our existing customers. Express revenue grew by $3.5 million, or 175%, which was also driven by an increase of 64% in customers from 1,564 at December 31, 2010 to 2,571 at December 31, 2011.

 

          Year Ended December 31,                   
      2010     2011         Change      

Revenue by Type

   Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
    Amount          %      
     (in thousands)  

Subscription and support

   $ 40,521         93   $ 60,169         95   $ 19,648         48

Professional services and other

     3,195         7        3,394         5        199         6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total

   $ 43,716         100   $ 63,563         100   $ 19,847         45
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

During 2011, subscription and support revenue increased by $19.6 million, or 48%, compared to 2010. 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 $199,000, or 6%. Professional services and other revenue will vary from period to period depending on the timing and completion of related implementation and other projects.

 

      Year Ended December 31,               
      2010     2011     Change  

Revenue by Geography

   Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
      Amount          %    
     (in thousands)  

North America

   $ 29,582         68   $ 41,953         66   $ 12,371         42
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Europe

     11,077         25        14,489         23        3,412         31   

Japan

     2,546         6        4,764         8        2,218         87   

Asia Pacific

     482         1        2,219         3        1,737         360   

Other

     29                138                109         376   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

International subtotal

     14,134         32        21,610         34        7,476         53   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total

   $ 43,716         100   $ 63,563         100   $ 19,847         45
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

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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 2011, total revenue for North America increased $12.4 million, or 42%, compared to 2010. The increase in revenue for North America resulted primarily from an increase in subscription and support revenue from our premium offerings. During 2011, total revenue outside of North America increased $7.5 million, or 53%, compared to 2010. The increase in revenue internationally was the result of our increasing focus on marketing our services internationally.

 

Cost of Revenue

 

      Year Ended December 31,               
      2010     2011     Change  

Cost of Revenue

   Amount      Percentage
of Related
Revenue
    Amount      Percentage
of Related
Revenue
    Amount          %      
     (in thousands)  

Subscription and support

     $11,060         27   $ 15,478         26   $ 4,418         40

Professional services and other

     4,065         127        4,744         140        679         17   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total

   $ 15,125         35   $ 20,222         32   $ 5,097         34
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

During 2011, cost of subscription and support revenue increased $4.4 million, or 40%, compared to 2010. The increase resulted primarily from an increase in the cost of content delivery network expenses, network hosting services, depreciation expense and employee-related expenses of $3.3 million, $762,000, $693,000 and $340,000, respectively. There were also increases in expenses related to computer maintenance and support and contractors of $139,000 and $123,000, respectively. These increases were offset in part by a $1.2 million sales tax expense, recorded during 2010, without a corresponding amount recorded during 2011 as we determined we were subject to sales tax in certain states.

 

During 2011, cost of professional services and other revenue increased $679,000, or 17%, from the corresponding period of the prior year. The increase can be attributed primarily to increased employee-related expenses of $763,000, as we hired an additional five employees.

 

Gross profit

 

      Year Ended December 31,              
      2010     2011     Change  

Gross profit

   Amount     Percentage
of Related
Revenue
    Amount     Percentage
of Related
Revenue
    Amount         %      
     (in thousands)  

Subscription and support

   $ 29,461        73   $ 44,691        74   $ 15,230        52

Professional services and other

     (870     (27     (1,350     (40     (480     (55
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   $ 28,591        65   $ 43,341        68   $ 14,750        52
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

During 2011, the overall gross profit percentage was 68% compared to 65% during 2010. The subscription and support gross profit percentage increased primarily related to a decrease in sales tax expense. The professional services and other gross profit percentage decreased primarily due to increases in employee-related expenses of $763,000. We continue to generate a negative gross profit for professional services and other due to the development of our professional services management team and infrastructure. We expect to gain economies

 

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of scale over time. 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

 

      Year Ended December 31,               
      2010     2011     Change  

Operating Expenses

   Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
    Amount          %      
     (in thousands)  

Research and development

   $ 12,257         28   $ 15,267         24   $ 3,010         25

Sales and marketing

     24,124         55        31,564         50        7,440         31   

General and administrative

     9,617         22        12,640         20        3,023         31   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total

   $ 45,998         105   $ 59,471         94   $ 13,473         29
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

Research and Development. During 2011, research and development expense increased by $3.0 million, or 25%, compared to 2010 primarily due to increases in employee-related expenses and recruiting of $2.4 million and $329,000, respectively, as we hired an additional 15 employees. There was also an increase in computer-related maintenance and support expenses of $254,000. These increases were partially offset by a decrease in contractor expenses of $109,000. In future periods, we expect that our research and development expense will continue to increase in absolute dollars as we continue to add employees, develop new features and functionality for our products, introduce additional software solutions and expand our product and service offerings.

 

Sales and Marketing. During 2011, sales and marketing expense increased $7.4 million, or 31%, compared to 2010 primarily due to increases in employee-related expenses, marketing programs, commission expenses and travel expenses of $4.0 million, $2.1 million, $1.2 million and $419,000, respectively. These increases were partially offset by decreases in stock-based compensation and contractor expenses of $451,000 and $240,000, respectively. We expect that our sales and marketing expense will continue to increase in absolute dollars along with our revenues, 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 2011, general and administrative expense increased by $3.0 million, or 31%, compared to 2010 primarily due to an increase in employee-related expenses and stock-based compensation expenses of $1.6 million and $1.3 million, respectively, as well as an increase in computer-related maintenance and support of $219,000. These increases were partially offset by a decrease in travel expenses of $261,000. 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.

 

Other Income (Expense), Net

 

      Year Ended December 31,              
      2010     2011     Change  

Other Income (Expense)

   Amount     Percentage
of  Revenue
    Amount     Percentage
of  Revenue
    Amount         %      
     (in thousands)  

Interest income, net

   $ 185             $ 23             $ (162     (88 )% 

Interest expense

                   (358     (1     (358     (100

Other expense, net

     (503     (1     (719     (1     (216     (43
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   $ (318     (1 )%    $ (1,054     (2 )%    $ (736     (231 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

During 2011, interest income, net decreased by $162,000, or 88%, from the corresponding period of the prior year. Interest income is generated from the investment of our cash balances, less related bank fees. The decrease in interest income is due to decreased interest rates associated with our auction rate security, or ARS, holdings.

 

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The increase in interest expense related to borrowings under our line of credit and term loan. The increase in other expense, net was primarily due to a realized loss of $146,000, recognized during 2011, when we sold our remaining ARS holdings. There was also an increase in foreign currency transaction losses of $83,000. These increases were partially offset by a decrease of $48,000 related to the change in the valuation of the warrants to purchase 60,728 shares of series B preferred stock during 2011, compared to the change in 2010.

 

Provision for Income Taxes

 

      Year Ended December 31,                
      2010      2011      Change  

Provision for income taxes

   Amount      Percentage
of  Revenue
     Amount      Percentage
of  Revenue
     Amount      %  
     (in thousands)  

Provision for income taxes

   $ 56               $ 90               $ 34         61
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

The increase in the provision for income taxes during 2011 compared to 2010, resulted primarily from an increase in income tax expenses related to foreign jurisdictions.

 

Non-Controlling Interest in Consolidated Subsidiary

 

      Year Ended December 31,              
      2010     2011     Change  

Non-controlling interest in consolidated subsidiary

   Amount      Percentage
of  Revenue
    Amount     Percentage
of  Revenue
    Amount     %  
     (in thousands)  

Net loss (income) attributable to non-controlling interest in consolidated subsidiary

   $ 280         1   $ (361     (1 )%    $ (641     (229 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

Non-controlling interests represent the minority stockholders’ proportionate share (37%) of our majority- owned subsidiary, Brightcove KK. During 2011, Brightcove KK generated net income as a result of increased market penetration in Japan.

 

Overview of Results of Operations for the Years Ended December 31, 2009 and 2010

 

Total revenue increased by 21%, or $7.5 million, in 2010 compared to 2009 due to an increase in subscription and support revenue of 26%, or $8.3 million, which was partially offset by a 19% decrease in professional services and other revenue of $752,000. The increase in subscription and support revenue resulted primarily from an increase in the number of our premium customers, which was 905 at December 31, 2010, an increase of about 25% from that of the prior year. We also had our first full year of Express revenue in 2010 and ended the year with 1,564 Express customers, generating a total of $2.0 million in revenue.

 

Our gross profit increased by 11%, or $2.9 million, in 2010 compared to 2009, primarily due to a more significant increase in revenue compared to the increase in the cost of revenue. The increase in gross profit is primarily due to the increase in subscription and support revenue, which has a higher gross profit than professional services revenue.

 

Loss from operations was $17.4 million in 2010 compared to $3.1 million in 2009. This increase was primarily the result of an increase in research and development, sales and marketing and general administrative expenses to support the growth of our operations. Loss from operations in 2010 and 2009 included $3.3 million and $508,000, respectively, of stock-based compensation expense.

 

Our results of operations in 2010 compared to 2009 were impacted by foreign exchange rate fluctuations, resulting in a decrease in revenue of approximately $153,000, and a decrease in expenses of approximately $21,000.

 

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As of December 31, 2010, we had $20.3 million of unrestricted cash and cash equivalents, a decrease of $2.2 million from $22.6 million at December 31, 2009. In addition, as of December 31, 2010 and 2009, we had $2.9 million and $3.0 million, respectively, of long-term investments.

 

Revenue

 

     Year Ended December 31,               
     2009     2010     Change  

Revenue by Product Line

   Amount      Percentage
of Revenue
    Amount      Percentage
of Revenue
    Amount      %  
     (in thousands)  

Premium

   $ 36,164         100   $ 41,710         95   $ 5,546         15

Express

     23                2,006         5        1,983         nm   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total

   $ 36,187         100   $ 43,716         100   $ 7,529         21
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

nm—not meaningful

 

During 2010, revenue increased by $7.5 million, or 21%, compared to 2009, primarily due to an increase in revenue from our premium offerings. The increase in premium revenue was $5.5 million, or 15%, and is the result of a 25% increase in the number of premium customers from 723 at December 31, 2009 to 905 at December 31, 2010, as well as increased revenue from our existing customers. Our Express revenues grew by $2.0 million, resulting primarily from an increase in Express customers from 143 at December 31, 2009 to 1,564 at December 31, 2010. Fiscal 2010 was our first full year of Express revenue.

 

     Year Ended December 31,              
     2009     2010     Change  

Revenue by Type

   Amount      Percentage
of Revenue
    Amount      Percentage
of Revenue
    Amount     %  
     (in thousands)  

Subscription and support

   $ 32,240         89   $ 40,521         93   $ 8,281        26

Professional services and other

     3,947         11        3,195         7        (752     (19
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total

   $ 36,187         100   $ 43,716         100   $ 7,529        21
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

During 2010, subscription and support revenue increased by $8.3 million, or 26%, compared to 2009. The increase was primarily related to the continued growth of our customer base for our premium offerings. This increase was partially offset by a $752,000 decrease in professional services and other revenue. Professional services and other revenue will vary depending on the timing and completion of related implementation and other projects.

 

     Year Ended December 31,               
     2009     2010     Change  

Revenue by Geography

   Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
    Amount      %  
     (in thousands)  

North America

   $ 26,193         72   $ 29,582         68   $ 3,389         13
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Europe

     8,680         24        11,077         25        2,397         28   

Japan

     931         3        2,546         6        1,615         173   

Asia Pacific

     359         1        482         1        123         34   

Other

     24                29                5         21   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

International subtotal

     9,994         28        14,134         32        4,140         41   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total

   $ 36,187         100   $ 43,716         100   $ 7,529         21
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

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For purposes of this discussion, we designate revenue by geographic regions based upon the locations of our customers. Depending on the timing of new customer contracts, revenue mix from geographic region can vary from period to period.

 

During 2010, total revenue for North America increased $3.4 million, or 13%, compared to 2009. The increase in revenue for North America resulted primarily from an increase in subscription and support revenue from our premium offerings. Total revenue outside of North America increased $4.1 million, or 41%, compared to 2009. The increase in revenue internationally was the result of expanded geographic focus to establish a wider distribution of our service.

 

Cost of Revenue

 

     Year Ended December 31,               
     2009     2010     Change  

Cost of Revenue

   Amount      Percentage
of Related
Revenue
    Amount      Percentage
of Related
Revenue
    Amount      %  
     (in thousands)  

Subscription and support

   $ 6,986         22   $ 11,060         27   $ 4,074         58

Professional services and other

     3,463         88        4,065         127        602         17   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total

   $ 10,449         29   $ 15,125         35   $ 4,676         45
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

During 2010, cost of subscription and support revenue increased by $4.1 million, or 58%, compared to 2009 primarily due to an increase in sales tax, content delivery network expenses, and employee related expenses of $1.2 million, $875,000, and $557,000, respectively. There were also increases in expenses relating to outside service providers, including network hosting fees and other services, of $701,000. In addition, there was an increase in both amortization of capitalized software costs and depreciation expense of $244,000 and $227,000, respectively.

 

During 2010, cost of professional services and other revenue increased by $602,000, or 17%, compared to 2009 primarily due to increases in employee related expenses of $449,000 and increases in computer-related maintenance and support expenses of $94,000. These increases were partially offset by decreases in expenses for contractors of $121,000.

 

Gross Profit

 

     Year Ended December 31,              
     2009     2010     Change  

Gross profit

   Amount      Percentage
of Related
Revenue
    Amount     Percentage
of Related
Revenue
    Amount     %  
     (in thousands)  

Subscription and support

   $ 25,254         78   $ 29,461        73   $ 4,207        17

Professional services and other

     484         12        (870     (27     (1,354     (280
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

Total

   $ 25,738         71   $ 28,591        65   $ 2,853        11
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

During 2010, the overall gross profit percentage was 65% compared to 71% during 2009. The subscription and support gross profit percentage decreased from 78% to 73% due to an increase in sales tax, content delivery network expenses and network hosting services, which offset the growth in subscription and support revenues. The professional services gross profit percentage decreased from 12% to (27%) primarily due to increases in employee-related expenses as a percentage of related revenues. During 2010 and 2009, gross margin was impacted by the timing of professional services revenue recognized in multiple element arrangements that included both subscription and professional services fees. In such arrangements, the professional services fees were recognized ratably along with the subscription fees, while the costs to provide professional services fees for these arrangements were expensed as incurred.

 

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Table of Contents

Operating Expenses

 

     Year Ended December 31,               
     2009     2010     Change  

Operating Expenses

   Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
    Amount      %  
     (in thousands)  

Research and development

   $ 8,927         25   $ 12,257         28   $ 3,330         37

Sales and marketing

     13,218         37        24,124         55        10,906         83   

General and administrative

     6,696         18        9,617         22        2,921         44   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total

   $ 28,841         80   $ 45,998         105   $ 17,157         59
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

Research and Development. During 2010, research and development expense increased by $3.3 million, or 37%, compared to 2009 primarily due to increases in employee-related and recruiting expenses of $2.2 million and $171,000, respectively, as we hired an additional 16 employees. Additionally, we had increases in contractor and stock-based compensation expenses of $283,000 and $244,000, respectively.

 

Sales and Marketing. During 2010, sales and marketing expense increased by $10.9 million, or 83%, compared to 2009 primarily due to increases in employee-related expenses, marketing programs and commission expense of $3.8 million, $2.5 million and $977,000, respectively. The employee-related and commission expense increases were primarily driven by an increase in headcount as we hired an additional 40 employees to support our growth. Additionally, stock-based compensation expenses, travel and recruiting expenses increased by $1.4 million, $965,000, and $279,000, respectively.

 

General and Administrative. During 2010, general and administrative expense increased by $2.9 million, or 44%, compared to 2009 primarily due to increases in stock-based compensation expense of $1.1 million and employee-related expenses of $872,000, as we hired an additional 13 employees. There were also increases in travel expenses and recruiting and computer-related maintenance and support for of $240,000, $226,000, and $195,000, respectively.

 

Other Income (Expense), Net

 

     Year Ended December 31,              
     2009     2010     Change  

Other Income (Expense)

   Amount      Percentage
of  Revenue
    Amount     Percentage
of  Revenue
    Amount     %  
     (in thousands)  

Interest income, net

   $ 313         1   $ 185             $ (128     (41 )% 

Other income (expense), net

     22                (503     (1 )%      (525     nm   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

Total

   $ 335         1   $ (318     (1 )%    $ (653     (195 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

nm—not meaningful

 

During 2010, interest income, net decreased by $128,000, or 41%, compared to 2009. Interest income is generated from investment of our cash balances, less related bank fees. The decrease in interest income, net principally reflected a decline in interest rates associated with our auction rate security holdings. The decrease in other, net in 2010 was primarily due to an increase in foreign currency loss of $351,000 from 2009 to 2010 and an increase of $172,000 related to the revaluation of our warrants.

 

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Table of Contents

Provision for Income Taxes

 

     Year Ended December 31,                
     2009      2010      Change  

Provision for income taxes

   Amount      Percentage
of  Revenue
     Amount      Percentage
of  Revenue
     Amount      %  
     (in thousands)  

Provision for income taxes

   $ 55               $ 56               $ 1         2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Provision for income taxes remained relatively unchanged from 2009 to 2010, and primarily consists of taxes from our foreign jurisdictions.

 

Non-Controlling Interest in Consolidated Subsidiary

 

     Year Ended December 31,              
     2009     2010     Change  

Non-controlling interest in consolidated subsidiary

   Amount      Percentage
of  Revenue
    Amount      Percentage
of  Revenue
    Amount     %  
     (in thousands)  

Net loss attributable to non-controlling interest in consolidated subsidiary

   $ 478         1   $ 280         1   $ (198     (41 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

Non-controlling interests represent the minority stockholders’ proportionate share (37%) of our majority-owned subsidiary, Brightcove KK. The net loss attributable to the non-controlling interest decreased in 2010 by $198,000 due to a reduced net loss of the subsidiary.

 

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Table of Contents

Quarterly Results of Operations Data

 

The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters ended December 31, 2011. We have prepared the quarterly data on a basis consistent with the audited consolidated financial statements included in this prospectus. In the opinion of management, the financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 

    For the Three Months Ended  
    March 31,
2010
    June 30,
2010
    September 30,
2010
    December 31,
2010
    March 31,
2011
    June 30,
2011
    September 30,
2011
    December 31,
2011
 
    (in thousands, except per share data)  

Consolidated Statements of Operations Data:

               

Revenue:

               

Subscription and support revenue

  $ 9,235      $ 9,563      $ 10,322      $ 11,401      $ 12,492      $ 14,478      $ 15,906      $ 17,293   

Professional services and other revenue

    791        716        730        958        582        802        767        1,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    10,026        10,279        11,052        12,359        13,074        15,280        16,673        18,536   

Cost of revenue(1):

               

Cost of subscription and support
revenue

    2,861        2,326        2,703        3,170        3,279        3,760        4,038        4,401   

Cost of professional services and other revenue

    887        978        1,086        1,114        1,097        1,176        1,237        1,234   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    3,748        3,304        3,789        4,284        4,376        4,936        5,275        5,635   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    6,278        6,975        7,263        8,075        8,698        10,344        11,398        12,901   

Operating expenses(1):

               

Research and development

    2,588        2,914        3,393        3,362        3,443        3,755        3,981        4,088   

Sales and marketing

    5,151        6,233        6,372        6,368        6,966        8,406        7,453        8,739   

General and administrative

    2,060        2,372        2,277        2,908        2,725        3,253        3,261        3,401   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    9,799        11,519        12,042        12,638        13,134        15,414        14,695        16,228   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (3,521     (4,544     (4,779     (4,563     (4,436     (5,070     (3,297     (3,327

Other income (expense):

               

Interest income

    64        75        36        10        12        6        2        3   

Interest expense

    —          —          —          —          —          (8     (174     (176

Other (expense) income, net

    (476     (118     175        (84     110        (259     (411     (159
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

    (412     (43     211        (74     122        (261     (583     (332
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes and non-controlling interest in subsidiary

    (3,933     (4,587     (4,568     (4,637     (4,314     (5,331     (3,880     (3,659

Provision for income taxes

    19        19        17        1        32        51        11        (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net loss

    (3,952     (4,606     (4,585     (4,638     (4,346     (5,382     (3,891     (3,655

Net loss (income) attributable to non-controlling interest in consolidated subsidiary

    104