Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2017

 

OR

 

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

 

For the transition period from          to        

 

Commission File Number 001-35982

 

TREMOR VIDEO, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. x

 

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

 

As of May 5, 2017, there were 50,121,884

 

shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

Table of Contents

 

TREMOR VIDEO, INC.

FORM 10-Q

 

TABLE OF CONTENTS

 

			PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016		3
	Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited)		4
	Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2017 and 2016 (unaudited)		5
	Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2017 (unaudited)		6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)		7
	Notes to Consolidated Financial Statements (unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		28
Item 4.	Controls and Procedures		29
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		29
Item 1A.	Risk Factors		29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults Upon Senior Securities		30
Item 4.	Mine Safety Disclosures		30
Item 5.	Other Information		30
Item 6.	Exhibits		31
SIGNATURES
CERTIFICATIONS

 

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Part I — FINANCIAL INFORMATION

 

Item 1. — Financial Statements

 

Tremor Video, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

		March 31,			December 31,
		2017			2016
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	28,032		$	43,160
Accounts receivable, net of allowance for doubtful accounts of $299 and $3 as of March 31, 2017 and December 31, 2016, respectively		67,665			79,027
Prepaid expenses and other current assets		3,114			2,405
Total current assets		98,811			124,592
Long-term assets:
Restricted cash		—			770
Property and equipment, net of accumulated depreciation of $12,547 and $11,282 as of March 31, 2017 and December 31, 2016, respectively		9,209			9,656
Intangible assets, net of accumulated amortization of $30,121 and $29,012 as of March 31, 2017 and December 31, 2016, respectively		5,933			6,922
Goodwill		10,871			10,758
Other assets		1,596			1,527
Total long-term assets		27,609			29,633
Total assets		$	126,420		$	154,225
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses		$	44,653		$	64,691
Deferred rent, short-term		880			704
Contingent consideration on acquisition, short-term		3,517			2,483
Deferred revenue		27			5
Capital leases, short-term		352			362
Other current liabilities		100			179
Total current liabilities		49,529			68,424
Long-term liabilities:
Deferred rent		5,778			6,072
Deferred tax liabilities		446			447
Capital leases		668			760
Total liabilities		56,421			75,703
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.0001 par value: 250,000,000 shares authorized as of March 31, 2017 and December 31, respectively; 50,078,359 and 50,431,324 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively		5			5
Treasury stock, at cost 3,845,496 and 2,861,632 shares, respectively		(8,443		)	(6,037		)
Additional paid-in capital		284,237			283,486
Accumulated other comprehensive (loss) income		(245		)	(331		)
Accumulated deficit		(205,555		)	(198,601		)
Total stockholders’ equity		69,999			78,522
Total liabilities and stockholders’ equity		$	126,420		$	154,225

 

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

 

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Tremor Video, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

 

		Three Months Ended
		March 31,
		2017			2016
Revenue		$	41,400		$	34,565
Cost of revenue		22,023			18,347
Gross profit		19,377			16,218
Operating expenses:
Technology and development		5,661			5,843
Sales and marketing		13,053			12,664
General and administrative		5,083			4,922
Depreciation and amortization		2,349			2,239
Mark-to-market		55			1,044
Total operating expenses		26,201			26,712
Loss from operations		(6,824		)	(10,494		)
Interest and other (expense) income, net:
Interest expense		(52		)	(2		)
Other Income/(expense), net		25			(252		)
Total interest and other (expense) income, net		(27		)	(254		)
Loss before provision for income taxes		(6,851		)	(10,748		)
Provision for income taxes		9			326
Net loss		$	(6,860	)	$	(11,074	)
Net loss per share:
Basic and diluted		$	(0.14	)	$	(0.21	)
Weighted-average number of shares of common stock outstanding:
Basic and diluted		49,998,547			52,372,857

 

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

 

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Tremor Video, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

		Three Months Ended
		March 31,
		2017			2016
Net loss		$	(6,860	)	$	(11,074	)
Other comprehensive loss:
Foreign currency translation adjustments		86			(22		)
Comprehensive loss		$	(6,774	)	$	(11,096	)

 

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

 

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Tremor Video, Inc.

Consolidated Statement of Changes in Stockholders’ Equity

(in thousands, except share and per share data)

(unaudited)

 

													Accumulated
										Additional			Other						Total
		Common Stock					Treasury			Paid-In			Comprehensive			Accumulated			Stockholders’
		Share		Capital			Stock			Capital			Income (Loss)			Deficit			Equity
Balance as of December 31, 2016		50,431,324		$	5		$	(6,037	)	$	283,486		$	(331	)	$	(198,601	)	$	78,522
Exercise of stock options awards		33,978								38									38
Stock-based compensation expense										1,016									1,016
Cumulative-effect adjustment for stock compensation forfeitures										94						(94		)	—
Common stock issued for settlement of restricted stock units net of 290,657 shares withheld to satisfy income tax withholding obligations		420,023								(654		)				999			(654		)
Common stock issuance in connection with employee stock purchase plan		176,898								257									257
Treasury stock — repurchase of stock		(983,864	)				(2,406		)										(2,406		)
Net loss																(6,860		)	(6,860		)
Foreign currency translation adjustment													86						86
Balance as of March 31, 2017		50,078,359		$	5		$	(8,443	)	$	284,237		$	(245	)	$	(205,555	)	$	69,999

 

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Tremor Video, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

		Three Months Ended
		March 31,
		2017			2016
Cash flows from operating activities:
Net loss		$	(6,860	)	$	(11,074	)
Adjustments required to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		2,349			2,239
Loss from sublease		—			341
Bad debt (recovery)/expense		296			(35		)
Mark-to-market expense		55			1,049
Compensation expense related to the acquisition contingent consideration		825			1,206
Stock-based compensation expense		1,016			964
Deferred tax benefit		(27		)	—
Net changes in operating assets and liabilities:
Decrease in accounts receivable		11,262			17,966
Increase in prepaid expenses, other current assets and other long-term assets		(779		)	(137		)
Decrease in accounts payable and accrued expenses		(20,499		)	(14,932		)
Decrease in other current liabilities		(79		)	—
(Decrease)/increase in deferred rent and security deposits payable		(118		)	245
Decrease/(increase) in restricted cash		770			(320		)
Increase in deferred revenue		22			79
Net cash used in operating activities		(11,767		)	(2,409		)
Cash flows from investing activities:
Purchase of property and equipment		(754		)	(854		)
Net cash used in investing activities		(754		)	(854		)
Cash flows from financing activities:
Proceeds from the exercise of stock options awards		38			—
Proceeds from common stock issuance		256			—
Principal portion of capital lease payments		(102		)	—
Treasury stock — repurchase of stock		(2,406		)	—
Tax withholdings related to net share settlements of restricted stock unit awards (RSUs)		(654		)	(215		)
Net cash used in financing activities		(2,868		)	(215		)
Net decrease in cash and cash equivalents		(15,389		)	(3,478		)
Effect of exchange rate changes in cash and cash equivalents		261			35
Cash and cash equivalents at beginning of period		43,160			59,887
Cash and cash equivalents at end of period		$	28,032		$	56,444
Supplemental disclosure of cash flow activities:
Cash paid for income taxes		$	13		$	187
Cash paid for interest expense		$	52		$	2
Supplemental disclosure of non-cash investing and financing activities:
Purchase of property and equipment in accounts payable and accrued expenses		$	68		$	1,380
Common stock issued for settlement of RSUs		$	946		$	318

 

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

 

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Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

1. Organization and Description of Business

 

Tremor Video, Inc. (the “Company”) is an advertising technology company that provides software for video advertising effectiveness.  The Company’s buyer and seller platforms enable seamless transactions in a premium video marketplace by offering control and transparency to its clients.  The Company’s technology optimizes performance of video ad campaigns across all screens, including computers, smartphones, tablets and connected TVs, to make advertising more relevant to consumers and deliver maximum results for buyers and sellers.

 

On August 3, 2015 (the “Acquisition Date”), the Company acquired all of the outstanding shares of The Video Network Pty Ltd., an Australian proprietary limited company (“TVN”).  Refer to note 6 for further discussion.

 

The Company is headquartered in the State of New York.

 

2.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements and footnotes have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commissions (the “SEC”) regarding unaudited interim financial information.  In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated balance sheets, statements of operations, comprehensive loss and cash flows for the interim periods presented.  Operating results for the interim periods presented are not necessarily indicative of the results of operations to be expected for the full year or the results for any future periods due to seasonal and other factors.  Certain information and footnote disclosures normally included in the consolidated financial statements in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC.  Accordingly, these unaudited interim consolidated financial statements and footnotes should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Company’s Form 10-K for the year ended December 31, 2016 filed with the SEC on March 10, 2017.

 

Principles of Consolidation

 

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

 

Concentrations of Credit Risk

 

Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

 

All of the Company’s cash and cash equivalents are held at financial institutions that management believes to be of high credit quality.  The Company’s cash and cash equivalents may exceed federally insured limits at times.  The Company has not experienced any losses on cash and cash equivalents to date.

 

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

 

During the quarters ended March 31, 2017 and 2016, there were no advertisers that accounted for more than 10% of revenue.  At March 31, 2017 there was one advertiser that accounted for 10.9% of outstanding accounts receivables.  At March 31, 2016, there were no advertisers that accounted for more than 10% of outstanding accounts receivables.

 

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Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

 

2.  Summary of Significant Accounting Policies (Continued)

 

Recently Issued Accounting Pronouncements

 

FASB Accounting Standards Update No. 2016-15 — Classification of Certain Cash Receipts and Cash Payments

 

In August 2016, the FASB issued Accounting Standards Update (“ASU”), which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The new guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. This update is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that the update will have on its consolidated financial statements and related disclosures.

 

FASB Accounting Standards Update No. 2016-09 — Compensation — Stock Compensation (Topic 718)

 

In March 2016, the FASB issued Accounting Standards Update (“ASU”), which identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2016 including interim periods within that reporting period, with early adoption permitted.  The Company has adopted the provisions of ASU 2016-09 in the first quarter of 2017. The guidance requires the recognition in the income statement of the income tax effects of vested or settled awards. Further, the guidance requires that the recognition of anticipated tax windfalls/shortfalls be excluded in the calculation of assumed proceeds when applying the treasury stock method. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes and not classify the award as a liability that requires valuation on a mark-to-market basis. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. As a result of the adoption, the impact to the financial statements resulted in an increase in the accumulated deficit and a corresponding increase in additional paid-in capital of $94 during the quarter ended March 31, 2017.

 

FASB Accounting Standards Update No. 2016-02 — Leases (Topic 842)

 

In February 2016, the FASB issued an Accounting Standards Update (“ASU”), which clarifies and improves existing authoritative guidance related to leasing transactions.  This update will require the recognition of lease assets and lease liabilities on the balance sheet and disclosing information about material leasing arrangements.  This update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact that the update will have on its consolidated financial statements and related disclosures.

 

FASB Accounting Standards Update No. 2015-17 — Income Taxes (“Topic 740”): Balance Sheet Classification of Deferred Taxes

 

In November 2015, the FASB issued an Accounting Standards Update (“ASU”), which requires deferred tax assets and liabilities be classified and presented as non-current on the balance sheet. This update is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company adopted this update in the fourth quarter of 2015 on a prospective basis.  All prior year balances were not retrospectively adjusted.  The adoption of this update did not have a material impact on the Company’s consolidated financial statements and related disclosures.

 

FASB Accounting Standards Update No. 2015-16 — Business Combinations (“Topic 805”): Simplifying the Accounting for Measurement-Period Adjustments

 

In September 2015, the FASB issued an ASU, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Pursuant to this update, acquirers must recognize measurement-period adjustments in the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. This guidance is effective for fiscal years beginning after December 15, 2016, with early adoption permitted.  The Company has determined that there is no impact on its consolidated financial statements and related disclosures.

 

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Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

 

2.  Summary of Significant Accounting Policies (Continued)

 

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

 

In May 2014, the FASB issued an ASU that provides a comprehensive model for recognizing revenue with customers.  This update clarifies and replaces all existing revenue recognition guidance within U.S. GAAP and may be adopted retrospectively for all periods presented or adopted using a modified retrospective approach.  In July 2015, FASB deferred the effective date by one year to December 15, 2017 (beginning with the Company’s first quarter in 2018) and permitting early adoption of the standard, but not before the original effective date of December 15, 2016.  The Company will adopt the new standard in the first quarter of 2018 and expects to apply the modified retrospective approach.

 

We are in the initial stages of our evaluation of the impact of the new standard on our accounting policies, processes, and system requirements. We have assigned internal resources in addition to the engagement of a third party service provider to assist in the evaluation. Implementation efforts, to date, have included training on the new standard and preparing initial gap assessments on the Company’s significant revenue streams through its buyer and seller platforms.

 

While we continue to assess the potential impacts of the new standard, including the areas described above, we do not know or cannot reasonably estimate quantitative information related to the impact of the new standard on our financial statements at this time.  However, as the implementation efforts progress through 2017, the Company will continue to provide updated disclosures within its periodic filings on Form 10-Q.

 

3.  Fair Value Measurements

 

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

 

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

 

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

 

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

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

		March 31, 2017										December 31, 2016
		(unaudited)
		Level 1			Level 2		Level 3		Total			Level 1			Level 2		Level 3			Total
Assets:
Money market funds (1)		$	13,627						$	13,627		$	33,710							$	33,710
Total assets		$	13,627						$	13,627		33,710								33,710
Liabilities:
Contingent consideration on acquisition liability (2)		$					3,517		$	3,517		$					2,483			$	2,483
Total liabilities		$					3,517		$	3,517		$					$	2,483		$	2,483

 

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Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

 

3.  Fair Value Measurements (continued)

 

(1)   Money market funds are included within cash and cash equivalents in the Company’s consolidated balance sheets.  As short-term, highly liquid investments readily convertible to known amounts of cash, the Company’s money market funds have carrying values that approximates its fair value.  Amounts above do not include $14,405 and $9,450 of operating cash balances as of March 31, 2017 and December 31, 2016, respectively.

 

(2)   On the Acquisition Date, the Company acquired all of the outstanding shares of TVN.  In connection with the acquisition, the former stockholders of TVN (“TVN Sellers”) are eligible to receive future cash payments over a term of two years contingent on the operating performance of TVN in reaching certain financial milestones in each of the periods from July 1, 2015 to June 30, 2016 (the “Year 1 Earn-Out Period”) and the period from July 1, 2016 to June 30, 2017 (the “Year 2 Earn-Out Period”), a portion of which is also contingent on continued employment of certain TVN Sellers (the “TVN Employee Sellers”) by the Company. In estimating the fair value of the contingent consideration, the Company used a Monte-Carlo valuation model based on future expectations on reaching financial milestones, other management assumptions (including operating results, business plans, anticipated future cash flows, and marketplace data), and the weighted-probabilities of possible payments. These assumptions were based on significant inputs not observed in the market and, therefore, represent a Level 3 measurement. Subsequent to the date of acquisition, the Company re-measured the estimated fair value of the contingent consideration at each reporting date with any changes in fair value recorded in the Company’s statements of operations. Any changes in the unobservable inputs could significantly impact the estimated fair value of the contingent consideration.

 

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

 

The following table represents the changes in the Company’s Level 3 instruments measured at fair value on a recurring basis for the three months ended March 31, 2017:

 

		2017
Beginning balance at January 1, 2017		$	2,483
Compensation expense (1)		825
Mark-to-market expense (2)		55
Foreign currency translation adjustment		154
Ending balance at March 31, 2017		$	3,517

 

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(1)          Represents the estimated fair value of contingent consideration attributable to the TVN Employee Sellers that has been recorded during the three months ended March 31, 2017.  Refer to the table above regarding assumptions used for Level 3 instruments, and note 6 for further discussion of contingent consideration payments owed in connection with the Company’s acquisition of TVN. The Company recorded the compensation-related expenses in connection with the continued employment of the TVN Employee Sellers within sales and marketing expenses in its consolidated statements of operations.

(2)          Reflects expense incurred based on the Company’s re-measurement, at March 31, 2017, of the estimated fair value of the contingent consideration relating to the TVN Sellers that are not required to remain employed with the Company as a condition to earning such contingent consideration. Amounts recorded as mark-to-market expense relating to Level 3 instruments are recorded in operating expense.  Refer to the table above regarding assumptions used for Level 3 instruments, and note 6 for further discussion of contingent consideration payments owed in connection with the Company’s acquisition of TVN.

 

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Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

4.  Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of:

 

		March 31,			December 31,
		2017			2016
		(unaudited)
Prepaid expenses and other current assets		$	2,932		$	2,240
Prepaid rent		36			19
Leasehold improvement incentives		55			55
Deferred rental income		91			91
Total prepaid expenses and other current assets		$	3,114		$	2,405

 

5.  Property and Equipment, Net

 

Property and equipment, net consisted of:

 

		March 31,			December 31,
		2017			2016
		(unaudited)
Leasehold improvements		$	8,561		$	8,524
Computer hardware		9,502			8,909
Furniture and fixtures		1,783			1,708
Computer software		1,679			1,571
Office equipment		231			226
Total property and equipment		21,756			20,938
Less: accumulated depreciation		(12,547		)	(11,282		)
Total property and equipment, net of accumulated depreciation		$	9,209		$	9,656

 

The depreciation expense related to property and equipment was $1,269 and $1,078 for the three months ended March 31, 2017 and 2016, respectively.

 

For the three months ended March 31, 2016, the Company recorded a net loss of $341 on the subleasing of office space included within other (expense) income, net in the Company’s consolidated statements of operations.

 

6.  Acquisition

 

On the Acquisition Date, the Company acquired all of the outstanding shares of TVN.  As consideration for the acquisition of the equity of TVN, the Company made an initial payment to the TVN Sellers of $3,040 Australian dollars ($2,217 U.S. dollars based on the currency exchange rate on the Acquisition Date), subject to certain adjustments as set forth in the acquisition agreement, and is required to make payments of $380 Australian dollars ($277 U.S. dollars based on the currency exchange rate on the Acquisition Date) on each of the first and second anniversary of the closing, respectively. Subsequent to the Acquisition Date, the Company paid an additional $661 Australian dollars ($482 U.S. dollars based on the currency exchange rate on the payment date) to the TVN Sellers for certain working capital adjustments.

 

In addition, the TVN Sellers are eligible to receive future cash payments over a term of two years contingent on the operating performance of TVN in reaching certain financial milestones for the Year 1 Earn-Out Period and Year 2 Earn-Out Period, a portion of which is also contingent on continued employment of certain TVN Employee Sellers.  Subsequent to the Acquisition Date, the Company and TVN Sellers agreed to modify certain financial milestones and reduced the eligible contingent payments from $12,200 Australian dollars ($8,896 U.S. dollars based on the currency exchange rate on the Acquisition Date) to $10,470 Australian dollars ($7,651 U.S. dollars based on the currency exchange rate on the modification date).

 

 

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Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

6.  Acquisition (Continued)

 

As of the Acquisition Date, the Company estimated the fair value of the contingent consideration to be $3,870 Australian dollars ($2,822 U.S. dollars based on the currency exchange rate on the Acquisition Date), of which the Company recorded $1,122 Australian dollars ($818 U.S. dollars based on the currency exchange rate on the Acquisition Date) as purchase consideration for TVN related to TVN Sellers that are not subject to continued employment.  This amount has been included within total liabilities in the Company’s consolidated balance sheet. Subsequent to the date of acquisition, the Company re-measured the estimated fair value of the contingent consideration at each reporting date.  Refer to note 3 for further discussion on assumptions used to estimate the fair value of the contingent consideration.

 

On August 16, 2016, the Company made a payment to the TVN Sellers of $4,990 Australian Dollars ($3,837 U.S. Dollars based on the currency exchange rate on the date of payment), based on the performance of TVN during the Year 1 Earn-Out Period.

 

As of March 31, 2017, the estimated fair value of the contingent cash consideration for the Year 2 Earn-Out Period is $5,600 Australian dollars ($4,282 U.S. dollars based on the currency exchange rate at March 31, 2017).

 

For the TVN Employee Sellers, the payment of the contingent cash consideration is dependent upon continued employment through the date of payment. As a result, the estimated fair value of the contingent cash consideration relating to such TVN Employee Sellers was excluded from the purchase consideration and such amounts will be recorded as compensation expense over the Year 1 Earn-Out Period and Year 2 Earn-Out Period.  The estimated fair value of the contingent cash consideration related to such TVN Employee Sellers as of March 31, 2017 for the Year 2 Earn-Out Period is $4,000 Australian dollars ($3,058 U.S. dollars based on the currency exchange rate at the March 31, 2017).   For the three months ended March 31, 2017, the Company recorded $825 in compensation-related expenses in connection with the continued employment of the TVN Employee Sellers within sales and marketing expenses in its consolidated statements of operations.

 

For the TVN Sellers that are not TVN Employee Sellers, the estimated fair value of the contingent cash consideration as of March 31 2017 for the Year 2 Earn-Out Period is $1,600 Australian dollars ($1,223 U.S. dollars based on the currency exchange rate at March 31, 2017).  For the three months ended March 31 2017, the Company recorded $55 in mark-to-market expense in the Company’s consolidated statements of operations.

 

The total consideration transferred in the acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed at the Acquisition Date, and are subject to adjustment during a measurement period of up to one year from the Acquisition Date. The measurement period provides the Company with the ability to adjust the fair values of acquired assets and liabilities assumed for new information that is obtained about events and circumstances that existed as of the Acquisition Date.  Goodwill recognized in the TVN acquisition is not deductible for tax purposes.

 

The results of operations of TVN have been included in the Company’s consolidated statements of operations since the Acquisition Date.

 

7.  Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of:

 

		March 31,			December 31,
		2017			2016
		(unaudited)
Trade accounts payable		$	32,970		$	49,074
Accrued compensation, benefits and payroll taxes		4,485			7,023
Accrued cost of sales		6,138			7,559
Other payables and accrued expenses		1,060			1,035
Total accounts payable and accrued expenses		$	44,653		$	64,691

 

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Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

8.  Changes in Accumulated Other Comprehensive (Loss) Income

 

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

 

		Foreign
		Currency
		Translation
		Adjustment			Total
Beginning balance at January 1, 2017		$	(331	)	$	(331	)
Other comprehensive income (1)		86			86
Ending balance at March 31, 2017		$	(245	)	$	(245	)

 

		Foreign
		Currency
		Translation
		Adjustment			Total
Beginning balance at January 1, 2016		$	(55	)	(55	)
Other comprehensive loss (1)		(22		)	(22	)
Ending balance at March 31, 2016		$	(77	)	(77	)

 

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(1)          For the three months ended March 31, 2017 and 2016, there were no reclassifications to or from accumulated other comprehensive (loss) income.

 

9.  Commitments and Contingencies

 

Legal Contingencies

 

The Company is from time to time involved with various claims and litigation arising during the normal course of business. Reserves are established in connection with such matters when a loss is probable and the amount of such loss can be reasonably estimated. As of March 31, 2017 and December 31, 2016, no reserves were recorded.  The determination of probability and the estimation of the actual amount of any such loss are inherently unpredictable, and it is therefore possible that the eventual outcome of such claims and litigation could exceed the estimated reserves, if any.  Based upon the Company’s experience, current information and applicable law, it generally does not believe it is reasonably probable that any proceedings or possible related claims will have a material effect on its financial statements. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

 

In November 2013, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York (the “District Court”) against the Company, its directors and certain of its executive officers, alleging certain misrepresentations by the Company in connection with its initial public offering concerning its business and prospects.  On March 5, 2015, the District Court granted the Company’s motion to dismiss the lawsuit and entered judgment in the Company’s favor and on February 8, 2016, the United States Court of Appeals for the Second Circuit confirmed the judgment of the District Court.

 

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Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

10.  Stock-Based Compensation

 

The Company included stock-based compensation expense related to its stock-based awards in various operating expense categories for the three months ended March 31, 2017 and 2016 as follows:

 

		Three Months Ended
		March 31,
		2017			2016
		(unaudited)
Technology and development		$	211		$	218
Sales and marketing		368			386
General and administrative		437			360
Total stock-based compensation expense		$	1,016		$	964

 

Stock Option Awards Outstanding

 

The following table presents summary information of the Company’s stock option awards outstanding and exercisable under all plans as of March 31, 2017:

 

		Number of		Weighted
		Stock Option		Average
		Awards		Exercise Price
		Outstanding		Per Share
Stock option awards outstanding as of December 31, 2016 (1)		6,425,832		$	3.65
Stock option awards granted		—		—
Stock option awards forfeited		(85,558	)	4.29
Stock option awards exercised		(33,978	)	1.11
Stock option awards outstanding as of March 31, 2017		6,306,296		3.65
Stock option awards vested and exercisable as of March 31, 2017 (2)		5,178,135		3.95

 

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(1)                Includes employment inducement stock option awards granted to the Company’s Chief Financial Officer (“CFO”), Chief Technology Officer (“CTO”), and Chief Marketing Officer (“CMO”) covering 570,000, 350,000 and 125,000 shares of common stock, respectively (collectively, “Inducement Awards”).  The Inducement Awards were issued outside of the Company’s stockholder approved equity compensation plans, but are generally subject to the same terms and conditions as applied to awards granted under the Company’s 2013 Plan. Stock option awards are generally granted at the fair market value of the Company’s common stock on the date of grant, generally vest over periods up to four years, have a one year cliff with monthly vesting thereafter, and have terms not to exceed 10 years.

(2)                Includes the vested portion of each Inducement Award.

 

Other selected information is as follows:

 

		Three Months Ended
		March 31,
		2017			2016
		(unaudited)
Aggregate intrinsic value of stock option awards exercised		$	46		$	—
Weighted-average grant-date fair value per share of stock option awards granted		—			0.60
Cash proceeds received from stock option awards exercised		38			—

 

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Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

10.  Stock-Based Compensation (continued)

 

The fair value for stock option awards granted under all plans was estimated at the date of grant using a Black-Scholes option pricing model.  Calculating the fair value of the stock option awards requires subjective assumptions, including, but not limited to, the expected term of the stock option awards and stock price volatility. The Company estimates the expected life of stock option awards granted based on the simplified method, which the Company believes is representative of the actual characteristics of the awards. The Company estimates the volatility of its common stock on the date of grant based on the historic volatility of comparable companies in its industry.  Risk-free interest rates are based on yields from United States Treasury zero-coupon issues with a term consistent with the expected term of the awards in effect at the time of grant. Estimated forfeitures are based on actual historical pre-vesting forfeitures. The Company has never declared or paid any cash dividends and has no current plan to do so. Consequently, it used an expected dividend yield of zero.

 

There was $904 of total unrecognized compensation cost related to non-vested stock option awards granted under the Company’s equity incentive plans as of March 31, 2017.  This cost is expected to be recognized over a weighted-average period of 2.39 years.

 

Non-vested Restricted Stock Units (RSU) Awards Outstanding

 

The following table presents a summary of the Company’s non-vested restricted stock unit award activity under all plans and related information for the three months ended March 31, 2017:

 

		Number of		Weighted
		Shares of		Average
		Restricted		Grant Date
		Stock Unit		Fair Value
		Awards		Per Share
Non-vested restricted stock unit awards outstanding as of December 31, 2016		3,750,292		$	2.07
Restricted stock unit awards granted		1,973,297		2.15
Restricted stock unit awards forfeited		(224,899	)	2.14
Restricted stock unit awards vested		(710,680	)	2.17
Non-vested restricted stock unit awards outstanding as of March 31, 2017		4,788,010		2.08

 

There was $9,000 of total unrecognized compensation cost related to non-vested restricted stock unit awards granted under the Company’s equity incentive plans as of March 31, 2017.  This cost is expected to be recognized over a weighted-average period of 3.26 years.

 

Employee Stock Purchase Plan

 

In April 2014, the Company’s board of directors adopted the 2014 Employee Stock Purchase Plan (“2014 ESPP”), which was approved by the Company’s stockholders at the 2014 annual meeting of stockholders.  The 2014 ESPP allows eligible participants to purchase shares of the Company’s common stock generally at six-month intervals, or offering periods, at a price equal to 85% of the lower of (i) the fair market value at the beginning of the offering period or (ii) the fair market value at the end of the offering period, or the purchase date. The Company’s current offering period commenced in February 2017 and will end in August 2017.

 

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

 

During the three months ended March 31, 2017, employees purchased 176,898 shares of common stock pursuant to the ESPP at an exercise price of $1.44 per share.  No more than 2,000,000 shares of common stock are reserved for future issuance under the 2014 ESPP of which 1,103,671 shares remain available at March 31, 2017.

 

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Tremor Video, Inc.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

 

10.  Stock-Based Compensation (continued)

 

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

 

There was $92 of total unrecognized compensation cost related to awards under the 2014 ESPP as of March 31, 2017. This cost is expected to be recognized over a weighted-average period of less than one year.

 

11.  Net Loss Per Share of Common Stock

 

		Three Months Ended
		March 31,
		2017			2016
		(unaudited)
Numerator:
Net loss		$	(6,860	)	$	(11,074	)
Denominator:
Weighted-average number of shares of common stock outstanding for basic and diluted net loss per share		49,998,547			52,372,857
Basic and diluted net loss per share		$	(0.14	)	$	(0.21	)

 

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

 

		Three Months Ended
		March 31,
		2017		2016
		(unaudited)
Warrants to purchase common stock		31,130		39,824
Stock option awards		6,306,296		7,029,538
Restricted stock unit awards		4,788,010		3,722,537
Total anti-dilutive securities		11,125,436		10,791,899

 

12.  Stock Repurchases

 

On March 29, 2016 the Company announced that the Company’s Board of Directors approved a share repurchase program, under which the Company is authorized to purchase up to $15,000 of common stock over an eighteen month period commencing March 25, 2016. The repurchases may be made, from time to time, in the open market or by privately negotiated transactions, and are expected to be funded from cash on hand. The share repurchase program may be suspended, modified or discontinued at any time. During the three months ended March 31, 2017, the Company made open-market purchases totaling 983,864 shares of common stock, respectively for an aggregate purchase price of $2,406.

 

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

 

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with (1) the unaudited interim consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2016 included in the Annual Report on Form 10-K filed with the SEC on March 10, 2017.  This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.  These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations.  Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings, including our Annual Report on Form 10-K filed with the SEC on March 10, 2017.  You should not rely upon forward-looking statements as predictions of future events.  Furthermore, such forward-looking statements speak only as of the date of this report.  Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.  We will disclose material non-public information through one or more of the following channels: our investor relations website (http://investor.tremorvideo.com), the social media channels identified on our investor relations website, press releases, SEC filings, public conference calls and webcasts.

 

Overview

 

Tremor Video, Inc., we or us, provides software for video advertising effectiveness.  Our buyer and seller platforms enable seamless transactions in a premium video marketplace by offering control and transparency to our clients.

 

Our buyer platform enables advertisers, agencies and other buyers of advertising, which we collectively refer to as buyers, to discover, buy, optimize and measure the effectiveness of their video ad campaigns across all screens, including computers, smartphones, tablets and TVs.  Our proprietary technology analyzes video content, detects viewer and system attributes, and leverages our large repository of stored and integrated third-party data to optimize the delivery of ad campaigns to achieve a broad spectrum of marketing goals — from audience reach to more sophisticated goals such as engagement, brand lift and viewability.  Through our All-Screen optimization solution, buyers are able to choose a single campaign goal and our technology will optimize delivery of  the campaign across a broad inventory pool to find the right viewer wherever they may be watching video, eliminating the need to allocate campaign budgets to a specific screen or device.

 

We empower video ad buying however a buyer wants to transact.  Our buyer platform is directly integrated with video inventory sources, enabling the dynamic purchase of ad impressions through robust auctions, as well as through private marketplaces that connect buyers directly to sellers.  Buyers can purchase advertising on a guaranteed basis, where we execute the campaign according to an agreed set of objectives for a fixed price, or on a non-guaranteed basis, utilizing our proprietary real-time bidding technology.  We offer varying levels of client service, from fully managed to self-service, depending on a buyer’s needs.

 

Buyers are able to access our buyer platform on a programmatic basis through the Tremor Video DSP, an intuitive and customizable user interface where they can actively manage the execution of their campaigns.  The Tremor Video DSP creates significant work flow efficiencies for buyers, providing them with tools to manage settings across account, advertiser, campaign or placement level, and the ability to discover, activate and measure all of their private market place deals through one central console. Our advanced analytics suite enables buyers to gain a deep understanding of the drivers of campaign performance and obtain reporting on key brand performance metrics such as viewability, as well as TV-like metrics that measure reach and frequency of viewing by a particular audience.

 

Our higher-function buying products offer clients innovative ways to reach their target audiences and ensure that they are only paying for what performs.   With our proprietary outcome-based pricing models, a buyer only pays when they have achieved their desired objective, fully aligning our results with the success of a campaign.    For instance, with our CPE pricing, an advertiser only pays when a viewer actively engages with an ad, such as by interacting with the ad through clicks or screen touches.  Our advanced targeting solutions allow buyers to leverage unique data sets to find their desired audience across screens and increase the impact of their brand advertising.

 

Our seller platform, the Tremor Video SSP, helps suppliers of video advertising inventory, or sellers, improve yield and maximize the value of their video inventory by enabling their programmatic sales efforts.  Sellers on the Tremor Video SSP can make inventory available to buyers through an open exchange, where buyers bid on inventory in a robust auction environment, or through private marketplaces so that only selected buyers have the opportunity to purchase video ad inventory.  Through the Tremor Video SSP, we provide sellers with tools to manage their supply hierarchies and demand tiers, and offer real-time reporting that allows sellers to effectively monitor bidding activity on their inventory.  Buyers connect to sellers on the Tremor Video SSP through third-party demand

 

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side platforms, or third party DSPs, that are integrated directly with our seller platform.  In addition, the Tremor Video SSP is one of many inventory sources that is connected to our buyer platform.

 

Advertising spend transacted on our platforms has grown significantly.  Total spend (refer to “Key Metrics-Total spend”) increased from $51.2 million in the first quarter of 2016 to $60.9 million in the first quarter of 2017.  Over the same period, our revenue increased from $34.6 million in the first quarter of 2016 to $41.4 million in the first quarter of 2017, while our gross margin remained relatively flat at 46.8% and 46.9% at March 31, 2017 and 2016, respectively. Our net loss decreased from a loss of $11.1 million in the first quarter of 2016 to a loss of $6.9 million in the first quarter of 2017, and our Adjusted EBITDA (refer to “Key Metrics-Adjusted EBITDA”) increased from a loss of $4.2 million in the first quarter of 2016 to a loss of $2.4 million in the first quarter of 2017.

 

Key Metrics

 

We monitor the key metrics set forth in the table below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies. Revenue, gross margin and net loss are discussed under the headings “Components of our Results of Operations.”  Total spend and Adjusted EBITDA are discussed immediately following the table below.

 

		Three Months Ended
		March 31,
		2017			2016
		(dollars in thousands)
Revenue		$	41,400		$	34,565
Gross margin		46.8		%	46.9		%
Net loss		$	(6,860	)	$	(11,074	)
Total spend		$	60,892		$	51,230
Adjusted EBITDA		$	(2,400	)	$	(4,222	)

 

Total spend

 

We define total spend as the aggregate gross spend transacted through our platforms.

 

Total spend does not represent revenue earned by us and is a non-GAAP financial measure.  We believe total spend is a meaningful measurement of our operating performance because our ability to generate increases in total spend is strongly correlated to our ability to generate increases in revenue.  Total spend is a key measure used by management to assess our market share and scale, and is used to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital.  However, use of total spend has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. One of the limitations of total spend is that other companies, including companies in our industry, may calculate total spend or similarly titled measures differently, which reduces its usefulness as a measure of comparison to other companies in our industry.

 

The following table presents a reconciliation of revenue to total spend, the most directly comparable U.S. GAAP measure, for each of the periods indicated:

 

		Three Months Ended
		March 31,
		2017			2016
		(dollars in thousands)
Revenue		$	41,400		$	34,565
Add: Tremor Video SSP inventory costs (1)		19,492			16,665
Total spend		$	60,892		$	51,230

 

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(1)          We record revenue from our buyer platform on a gross basis, including costs of inventory.  Accordingly, for revenue generated from our buyer platform, total spend is equivalent to revenue.  We record revenue from the Tremor Video SSP net of inventory costs. Total spend through the Tremor Video SSP is equal to the revenue generated from the Tremor Video SSP plus associated costs of inventory.

 

Within total spend, we closely monitor the percentage contributions among the following operational metrics: programmatic; non-programmatic higher-function; and non-programmatic media.  Programmatic includes all spend transacted through the Tremor Video SSP, Tremor Video DSP, and agency trading desks.  We define non-programmatic higher-function as non-programmatic spend

 

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