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YUME > SEC Filings for YUME > Form 10-Q on 15-May-2014All Recent SEC Filings

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Form 10-Q for YUME INC


15-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our consolidated financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and in our audited consolidated financial statements and related notes thereto and the Management's Discussion and Analysis and Results of Operations for the year ended December 31, 2013 appearing in our Annual Report on Form 10-K filed with the SEC on May 27, 2014.

Forward Looking Information

This Quarterly Report on Form 10-Q including "Management's Discussion and Analysis of Financial Condition and Results of Operations," 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 (the "Exchange Act"). The statements that are not purely historical fact are forward-looking statements and are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "plan," "project," "seek," "should," "target," "will," "would" and similar expressions or variations intended to identify forward-looking statements. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such 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" included under Part II, Item 1A of this Quarterly Report on Form 10Q. Furthermore, such forward-looking statements speak only as of the date of this report. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Unless expressly indicated or the context requires otherwise, the terms "YuMe," "Company," "Registrant," "we," "us" and "our" in this document refer to YuMe, Inc., and, where appropriate, its wholly-owned subsidiaries.

Overview

We are a leading independent provider of digital video advertising solutions that are purpose-built for large brand advertisers, advertising agencies, and digital media properties. Through a sophisticated platform of proprietary embedded software, data science and machine learning algorithms, we deliver TV-scale video advertising campaigns to relevant, brand-receptive digital audiences. We aggregate these audiences across a wide range of Internet-connected devices by providing global digital media properties with software that monetizes their professionally produced content and applications with our advertising campaigns. Our industry leadership is reflected in our wide audience reach, large customer base, and scale in data derived from our large embedded software base.

For our network of advertising customers, we overcome the complexities of delivering digital video advertising campaigns in a highly fragmented environment where audiences use an increasing variety of Internet-connected devices to access thousands of online and mobile websites and applications. Our solutions deliver video advertising campaigns seamlessly across personal computers, smartphones, tablets, set-top boxes, game consoles, Internet-connected TVs and other devices. In addition, our platform optimizes campaign results to metrics that are relevant to brand advertisers, such as brand awareness, message recall, brand favorability and purchase intent.

For our global digital media property owners, we offer software that delivers digital video advertisements to their audiences. We access data from this software and we apply our data science capabilities to target those audiences that will be relevant to particular advertisers. In combination, these capabilities allow us to deliver ads to audiences that we expect to be receptive to specific brand messages, while driving better monetization for digital media property owners.

We generate revenue primarily by delivering digital video advertisements on Internet-connected devices. Our ads run when users choose to view video content on their devices. Advertising customers submit ad insertion orders to us and we fulfill those orders by delivering their digital video advertisements to audiences available through digital media properties, a process that we refer to as an advertising campaign. We are typically paid on a cost per thousand basis ("CPM"), of which we generally pay digital media properties a negotiated percentage. Our customers primarily consist of large global brands and their advertising agencies. In the three months ended March 31, 2014, our customers included 58 of the top 100 U.S. advertisers as ranked by Advertising Age magazine in 2012 ("the AdAge 100"), such as American Express, AT&T, GlaxoSmithKline, Home Depot and McDonald's.


The core of our business relies on our sophisticated platform that encompasses customized embedded software, advertising management, and data science capabilities. Our YuMe SDKs are embedded by our digital media property owners and collect dozens of data elements that we use for our advanced audience modeling algorithms that continuously improve our ability to optimize campaigns around key brand metrics. Our Placement Quality Index ("PQI") inventory scoring system leverages YuMe SDK and other data sources through algorithms to assess the quality of ad placements and optimize placements to maximize brand advertising results. In addition, our Audience Amplifier machine-learning tool uses those brand results in its correlative data models to find audiences that we expect to be receptive to specific brand messages.

Over our nine-year operating history we have amassed a vast amount of data derived from our large software installed base of YuMe SDKs that are embedded in online and mobile websites and entertainment applications residing on millions of personal computers, smartphones, tablets, Internet-connected TVs and other devices. This allows us to deliver television-like ads, enhanced and customized for each specific device type, and collect valuable advertisement viewership data. We collect billions of data points each year from ad impressions we deliver. As we grow our audience and advertiser footprint, we are able to collect even more data, which in turn enables us to improve the efficacy of our targeting models, further improving the utility of our solutions and driving additional adoption.

In July 2013, our board of directors and stockholders approved an amendment to our then current amended and restated certificate of incorporation. The amendment provided for a 1-for-6 reverse stock split of the outstanding common stock, effective July 24, 2013. Accordingly, (i) every six shares of common stock have been combined into one share of common stock, (ii) the number of shares of common stock into which each outstanding option or warrant to purchase common stock is exercisable, as the case may be, have been proportionately decreased on a 1-for-6 basis, (iii) the exercise price for each such outstanding option or warrant to purchase common stock has been proportionately increased on a 6-for-1 basis, and (iv) the conversion ratio for each share of preferred stock outstanding was proportionately reduced on a 1-for-6 basis. All of the share numbers, share prices, and exercise prices have been adjusted within our consolidated financial statements, on a retroactive basis, to reflect this 1-for-6 reverse stock split. We paid cash in lieu of any fractional shares to which a holder of common stock would otherwise be entitled as a result of the reverse stock split.

On August 12, 2013, we closed the IPO of our common stock. In the IPO, we sold 5,125,000 shares of our common stock at a public offering price of $9.00 per share. Net proceeds were approximately $40.0 million, after deducting underwriting discounts and commissions of $3.2 million and offering expenses of $2.9 million. Upon the closing of the IPO, all outstanding shares of our convertible preferred stock automatically converted into 21,840,537 shares of common stock and all outstanding warrants to purchase convertible preferred stock converted into warrants to purchase 53,983 shares of our common stock.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, website and internal-use software development costs, business combinations, income taxes and stock-based compensation have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

For further information on all of our critical accounting policies and estimates, refer to our 2013 Annual Report on Form 10-K filed with Securities and Exchange Commission on March 27, 2013.

Recent Pronouncements

In July 2013, the FASB issued amended standards that provided explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryforward exists. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance became effective on January 1, 2014 and should be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. The Company adopted this guidance prospectively in fiscal 2014 and the adoption did not impact the condensed consolidated financial statements.


Results of Operations

The following tables set forth our results of operations for the periods presented as a percentage of revenue for those periods (certain items may not foot due to rounding). The period-to-period comparison of financial results is not necessarily indicative of future results. These tables include all adjustments, consisting only of normal recurring adjustments that we consider for the fair statement of our consolidated financial position and operating results for the quarters presented. Seasonality has caused, and is likely to continue to cause fluctuations in our quarterly results.

                                                            Three Months Ended
                                                                March 31,
                                                    2014                         2013
Condensed Consolidated Statements of
Operations Data:                                          (dollars in thousands)
Revenue                                    $  37,292         100.0 %    $  26,612         100.0 %
Cost of revenue                               20,184          54.1         14,553          54.7
Gross margin                                  17,108          45.9         12,059          45.3
Operating expenses
Sales and marketing                           15,466          41.5         10,217          38.4
Research and development                         936           2.5          1,000           3.8
General and administrative                     5,622          15.1          3,938          14.8
Total operating expenses                      22,024          59.1         15,155          56.9
Loss from operations                          (4,916 )       (13.2 )       (3,096 )       (11.6 )
Loss before income taxes                      (4,937 )       (13.2 )       (3,307 )       (12.4 )
Net loss                                   $  (5,069 )       (13.6 )%   $  (3,338 )       (12.5 )%

Revenue

We principally derive revenue from advertising solutions priced on a CPM basis and measured by the number of advertising impressions delivered on digital media properties. A substantial majority of our contracts with customers take the form of ad insertion orders placed by advertising agencies on behalf of their brand advertiser clients, which are typically one to three months in duration. Occasionally, we enter into longer term contracts with customers.

We count direct advertising customers in accordance with the following principles: we count (i) each advertiser, not the advertising agencies through which its ad insertion orders may be placed, as the customer; and (ii) entities that are part of the same corporate structure are counted as a single customer. We also recognize immaterial amounts of other revenue (i) that are paid by digital media property owners, including platform fees, professional service fees and ad serving fees and (ii) from intermediaries that have relationships with advertising agencies and advertisers. In calculating revenue per direct advertising customer, we exclude this other revenue.

Our revenue tends to fluctuate based on seasonal factors that affect the advertising industry. For example, many advertisers devote the largest portion of their budgets to the fourth quarter of the calendar year, to coincide with increased holiday and year-end purchasing activities. Historically, the fourth quarter of the year reflects the highest advertising activity and the first quarter reflects the lowest level of such activity.

Three Months Ended March 31, Change 2014 2013 $ %

(dollars in thousands)

Revenue $ 37,292 $ 26,612 $ 10,680 40.1 %

For the three months ended March 31, 2014, revenue increased $10.7 million, or 40.1%, compared to the three months ended March 31, 2013. The increase was due to an increase of $10.6 million in advertising sales. The increase in advertising sales was primarily driven by an increase in the number of advertising customers, including those located in international markets in which we operate and have recently entered. We had 351 advertising customers at March 31, 2014, an increase of 37.1%, compared to 256 at March 31, 2013. The average revenue per advertising customer for the three months ended March 31, 2014 was $104,000, an increase of 2.5%, compared to $101,000 for the three months ended March 31, 2013. Our top 20 advertising customers for the three months ended March 31, 2014 accounted for $16.9 million, or 45.4%, of our revenue, compared to $15.0 million, or 56.3%, of our revenue for the three months ended March 31, 2013.

Cost of Revenue and Gross Profit

Our cost of revenue primarily consists of amounts incurred with digital media property owners, typically under revenue-sharing arrangements. We refer to these costs as traffic acquisition costs. Generally, we incur traffic acquisition costs in the period the advertising impressions are delivered. In certain circumstances, we incur costs based on minimum guaranteed impressions. Cost of revenue also includes ad delivery costs, such as labor and related costs, depreciation and amortization related to acquired technologies, internally developed software and data center assets, and Internet access costs. These expenses are classified as cost of revenue in the corresponding period in which the revenue is recognized. We expect that cost of revenues, including our traffic acquisition costs, may increase as a percentage of revenue in the near term.


                           Three Months Ended March 31,               Change
                             2014                 2013             $          %
                                          (dollars in thousands)
Cost of revenue         $       20,184       $       14,553     $ 5,631       38.7 %
Percentage of revenue             54.1 %               54.7 %
Gross profit            $       17,108       $       12,059     $ 5,049       41.9 %
Percentage of revenue             45.9 %               45.3 %

For the three months ended March 31, 2014, cost of revenue increased $5.6 million, or 38.7%, compared to the three months ended March 31, 2013. The increase was primarily attributable to an increase of $5.3 million in traffic acquisition, third-party service and delivery, and ad delivery costs as a result of the increase in revenue, and a $0.4 million increase in other costs of revenues. For the three months ended March 31, 2014, cost of revenue, as a percentage of revenue, decreased by 0.6%, to 54.1%, compared to the three months ended March 31, 2013, primarily as a result of the benefit of certain economies of scale.

Sales and Marketing

We sell to our customers primarily through our direct sales force personnel who have established relationships with major ad agencies and direct relationships with advertisers. Our sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, travel and entertainment expenses, and incentive compensation for our sales and marketing employees. Sales and marketing expenses also include promotional, advertising and public relations costs, as well as depreciation, facilities and other supporting overhead costs. We expect sales and marketing expenses to increase as we hire additional employees to expand our sales force and to support our marketing initiatives, and to decline as a percentage of revenue over time.

Three Months Ended March 31, Change 2014 2013 $ %

(dollars in thousands)

Sales and marketing $ 15,466 $ 10,217 $ 5,249 51.4 % Percentage of revenue 41.5 % 38.4 %

For the three months ended March 31, 2014, sales and marketing expenses increased $5.2 million, or 51.4%, compared to the three months ended March 31, 2013. The increase was primarily attributable to an increase of $4.8 million in employee compensation, benefits and other employee-related expenses, including stock-based compensation, and an increase of $0.3 million in other departmental expenses, as a result of an increase in employee count as we expanded our sales organization, both domestically and internationally. For the three months ended March 31, 2014, sales and marketing expenses, as a percentage of revenue, increased by 3.1%, to 41.5%, compared to the three months ended March 31, 2013, primarily as a result of the increase in employee count.

Research and Development

We engage in research and development efforts to create new, and enhance our existing, data-science capabilities and proprietary technologies. Our research and development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product development and information technology personnel. Research and development expenses also include outside services and consulting, depreciation, facilities and other overhead costs. We capitalize a portion of our research and development costs attributable to internally developed software.

                               Three Months Ended March 31,              Change
                              2014                   2013                       %
                                            (dollars in thousands)
Research and development   $       936         $          1,000     $ (64 )     (6.4 )%
Percentage of revenue              2.5 %                    3.8 %

For the three months ended March 31, 2014, research and development expenses decreased $0.1 million, or 6.4%, compared to the three months ended March 31, 2013. The decrease was primarily attributable to a decrease in employee compensation, benefits and other employee-related expenses. For the three months ended March 31, 2014, research and development expenses, as a percentage of revenue, decreased by 1.3%, to 2.5%, compared to the three months ended March 31, 2013, primarily as a result of the increase in revenue.


General and Administrative

Our general and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, legal, human resources and other administrative employees. General and administrative expenses also include outside consulting, legal and accounting services, and facilities and other supporting overhead costs. We expect our general and administrative expenses to increase as we expand our financial, accounting, human resources, information systems and legal personnel and resources to support our public reporting requirements, and to decrease as a percentage of revenue over time.

Three Months Ended March 31, Change 2014 2013 $ %

(dollars in thousands)

General and administrative $ 5,622 $ 3,938 $ 1,684 42.8 % Percentage of revenue 15.1 % 14.8 %

For the three months ended March 31, 2014, general and administrative expenses increased $1.7 million, or 42.8%, compared to the three months ended March 31, 2013. The increase was primarily attributable to an increase of $1.3 million in employee compensation, benefits and other employee-related expenses, including stock-based compensation, and a $0.4 million increase in departmental expenses, as a result of an increase in general and administrative employees hired in association with operating as a public company and to support the growth in our business. For the three months ended March 31, 2014, general and administrative expenses, as a percentage of revenue, increased by 0.3%, to 15.1%, compared to the three months ended March 31, 2013, primarily as a result of the increase in employee count.

Interest and Other Income (Expense), Net

Interest and other income (expense), net consists primarily of the interest expense on our capital lease obligations and notes payable, interest income earned on our cash and cash equivalents and marketable securities, foreign exchange gains and losses, and prior to our IPO in August 2013, the revaluation of our outstanding convertible preferred stock warrants.

                                                          Three Months Ended March 31,
                                                           2014                   2013            Change $
                                                                          (in thousands)
Interest income                                       $          158         $            -     $         158
Interest expense                                                  (3 )                  (19 )              16
Accretion and amortization on marketable securities             (126 )                    -              (126 )
Transaction gain (loss) on foreign exchange                      (52 )                 (171 )             119
Change in fair value of warrants liability                         -                    (28 )              28
Other non-operating income (loss), net                             2                      7                (5 )
Interest and other income (expense), net              $          (21 )       $         (211 )   $         190

Prior to our IPO, the fair value of our preferred stock warrant liability was re-measured at the end of each reporting period and any changes in fair value were recognized in other non-operating income (loss), net. Upon the closing of our IPO in August 2013, the preferred stock warrants were automatically converted into warrants to purchase common stock in accordance with their terms, which resulted in a reclassification of the preferred stock warrant liability to additional paid-in capital. Upon reclassification of the preferred stock warrants, no further changes in fair value will be recognized.

For the three months ended March 31, 2014, other income and (expenses), net increased by $0.2 million, compared to the three months ended March 31, 2013. The increase was primarily due to interest income on our marketable securities and an increase in unrealized gains on the remeasurement of our foreign entities into U.S. dollars.

Provision for Income Taxes

Provision for income taxes consists of federal and state income taxes in the U.S. and income taxes in certain foreign jurisdictions, deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and the realization of net operating loss carryforwards.

Three Months Ended March 31, 2014 2013 Change $

(in thousands)

Income tax expense $ 132 $ 31 $ 101

For the three months ended March 31, 2014 and 2013, income tax expense was primarily related to the federal alternative minimum tax, state taxes and taxes due in foreign jurisdictions.


Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income
(loss), adjusted to exclude expenses for: interest, income taxes, depreciation and amortization, and stock-based compensation. We believe that adjusted EBITDA provides useful information to investors in understanding and evaluating our operating results in the same manner as management and the board of directors. This non-GAAP information is not necessarily comparable to non-GAAP information of other companies. Non-GAAP information should not be viewed as a substitute for, or superior to, net income (loss) prepared in accordance with GAAP as a measure of our profitability or liquidity. Users of this financial information should consider the types of events and transactions for which adjustments have been made. The following is a reconciliation of adjusted EBITDA to net income
(loss) for the periods indicated below:

                                          Three Months Ended
                                               March 31,
                                           2014          2013
Net loss                                $   (5,069 )   $ (3,338 )
Adjustments:
Interest expense                                 3           19
Income tax expense                             132           31
Depreciation and amortization expense        1,099        1,026
Stock-based compensation expense             1,161          645
Total Adjustments                            2,395        1,721
Adjusted EBITDA                         $   (2,674 )   $ (1,617 )

We have included adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by us and the board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our . . .

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