2. Revenue from Contracts with Customers

The Company primarily derives revenue from the sale of its online video platform, which enables its customers to publish and distribute video to Internet-connected devices quickly, easily and in a cost-effective and high-quality manner. Revenue is derived from three primary sources: (1) the subscription to its technology and related support; (2) hosting, bandwidth and encoding services; and (3) professional services, which include initiation, set-up and customization services.

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which modifies how all entities recognize revenue, and consolidates revenue recognition guidance into one ASC Topic (ASC Topic 606, Revenue from Contracts with Customers) (“ASC 606”). The Company adopted ASC 606 on January 1, 2018 and applied the modified retrospective method of adoption with a cumulative catch-up adjustment to the opening balance of retained earnings at January 1, 2018. Under this method, the Company applied the revised guidance for the year of adoption and applied ASC Topic 605, Revenue Recognition (“ASC 605”), in the prior years. As a result, the Company applied ASC 606 only to contracts that were not yet completed as of January 1, 2018. The Company recognized a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the entity at the date of adoption. ASC 606 outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

1) Identify the contract with a customer

2) Identify the performance obligations in the contract

3) Determine the transaction price

4) Allocate the transaction price to performance obligations in the contract

5) Recognize revenue when or as the Company satisfies a performance obligation

The Company satisfies performance obligations as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.

Disaggregation of Revenue

The Company classifies its customers by including them in either premium or volume offerings. For premium offerings, the Company organizes its go-to-market approach by focusing its sales and marketing teams on selling primarily to (i) media companies, who generally want to distribute video content to a broad audience and (ii) digital marketers in a wide range of enterprises and organizations, who generally use video for marketing or enterprise communication purposes.

The following table summarizes revenue from contracts with customers by business unit for the three and nine months ended September 30, 2018.


	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Revenue by Business Unit
Media	$	21,926	$	67,300
Digital Marketing / Enterprise		18,110		53,171
Volume		1,085		3,498

Total		41,121		123,969

Subscription and Support

The Company’s subscription arrangements provide customers the right to access its hosted software applications. Customers do not have the right to take possession of the Company’s software during the hosting arrangement. 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 entitlement, and provide the rate at which the customer must pay for actual usage above the annual entitlement allowance. These subscription arrangements are considered stand ready obligations that are providing a series of distinct services that are substantially the same and are transferred with the same pattern to the customer. As such, these subscription arrangements are treated as a single performance obligation and the related fees are recognized as revenue ratably over the term of the underlying arrangement.

Under ASC 605, if usage exceeded the annual allowance level for a particular customer arrangement, the associated revenue was recognized in the period that the additional usage occurred. Under ASC 606, when the transaction price includes a variable amount of consideration, an entity is required to estimate the consideration that is expected to be received for a particular customer arrangement. The Company evaluates variable consideration for usage-based fees at contract inception and re-evaluates quarterly over the course of the contract. Specifically, the Company estimates the revenue pertaining to a customer’s usage that is expected to exceed the annual entitlement allowance and allocates such revenue to the distinct service within the related contract that gives rise to the variable payment. Estimates of variable consideration include analyzing customer usage against the applicable entitlement limit at the end of each reporting period and estimating the amount and timing of additional amounts to be invoiced in connection with projected usage. Estimates of variable consideration relating to customer usage do not include amounts for which it is probable that a significant reversal will occur. Determining the amount of variable consideration to recognize as revenue involves significant judgment on the part of management and it is possible that actual revenue will deviate from estimates over the course of a customer’s committed contract term.

Contracts with customers that are month-to-month arrangements (volume customers) have a maximum monthly level of usage and provide the rate at which the customer must pay for actual usage above the monthly allowable usage. The monthly volume subscription and support and usage fees are recognized as revenue during the related period of performance. Contracts with customers that are invoiced on a pay-as-you-go basis, where there is no monthly or annual commitment for usage, provide the rate at which the customer must pay for actual usage for a particular period. Fees that are invoiced on a pay-as-you-go basis are recognized as revenue during the period of performance.

Professional Services and Other Revenue

Professional services and other revenue consist of services such as implementation, software customizations and project management for customers who subscribe to our premium editions. These arrangements are priced either on a fixed fee basis with a portion due upon contract signing and the remainder due when the related services have been completed, or on a time and materials basis. Professional services and other revenue sold on a stand-alone basis are recognized as the services are performed, subject to any refund or other obligation.

Contracts with Multiple Performance Obligations

The Company periodically enters into multiple-element service arrangements that include platform subscription fees, support fees, and, in certain cases, other professional services. These contracts include multiple promises that the Company evaluates to determine if the promises are separate performance obligations. Performance obligations are identified based on services to be transferred to a customer that are both capable of being distinct and are distinct within the context of the contract. Once the Company determines the performance obligations, the Company determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method. The transaction price post allocation is recognized as revenue as the related performance obligation is satisfied.

Costs to Obtain a Contract

Commissions are paid to internal sales representatives as compensation for obtaining contracts. Under the new guidance, the Company capitalizes commissions that are incremental, as a result of costs incurred to obtain a customer contract, if those costs are not within the scope of another topic within the accounting literature and meet the specified criteria. Assets recognized for costs to obtain a contract are amortized over the period of performance for the underlying customer contracts. The commission expense on contracts with new customers was previously recorded over the respective contract term. Under the new guidance, the commission expense on contracts with new customers will be recorded over the average life of a customer given the commission amount associated with sales to new customers is not commensurate with the commission amount associated with the contract renewal for those same customers. The commission amount associated with the renewal of a contract in addition to any commission amount related to incremental sales was previously recorded as expense in the quarter the commission was earned; however, under ASC 606 these commission amounts are recorded as expense over the term of the renewed contract. These assets are periodically assessed for impairment.

Financial Statement Impact of Adoption ASC 606

The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made on the condensed consolidated balance sheet as of January 1, 2018.


	As Reported			Adjustments				Adjusted
	December 31, 2017			Subscription and Support Revenue		Costs to Obtain a Contract		January 1, 2018
Assets
Current assets:
Cash and cash equivalents	$	26,132						$	26,132
Accounts receivable, net		25,236			926				26,162
Prepaid expenses		3,991							3,991
Other current assets		3,045			1,861		3,384		8,290

Total current assets		58,404			2,787		3,384		64,575
Property and equipment, net		9,143							9,143
Intangible assets, net		8,236							8,236
Goodwill		50,776							50,776
Deferred tax asset		87							87
Other assets		969					978		1,947

Total assets	$	127,615		$	2,787	$	4,362	$	134,764

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	6,142						$	6,142
Accrued expenses		13,621							13,621
Capital lease liability		228							228
Equipment financing		26							26
Deferred revenue		39,370			1,429				40,799

Total current liabilities		59,387			1,429		—		60,816
Deferred revenue, net of current portion		244			115				359
Other liabilities		1,228							1,228

Total liabilities		60,859			1,544		—		62,403
Commitments and contingencies
Stockholders’ equity:
Undesignated preferred stock		—							—
Common stock		35							35
Additional paid-in capital		238,700							238,700
Treasury stock		(871	)						(871	)
Accumulated other comprehensive loss		(809	)						(809	)
Accumulated deficit		(170,299	)		1,243		4,362		(164,694	)

Total stockholders’ equity		66,756			1,243		4,362		72,361

Total liabilities and stockholders’ equity	$	127,615		$	2,787	$	4,362	$	134,764

Subscription and Support

Under ASC 606, the Company estimates the variable consideration to be received and recognizes those amounts, subject to constraint, as the Company satisfies its performance obligation. In conjunction with the January 1, 2018 adoption of ASC 606, the Company reduced accumulated deficit by $1,243 reflecting the recognition of revenue primarily relating to variable consideration, for contracts that still require performance by the entity at the date of adoption.

Costs to Obtain a Contract

Under the new guidance, the commission expense on contracts with new customers will be recorded over the average life of a customer given the commission amount associated with sales to new customers is not commensurate with the commission amount associated with the contract renewal for those same customers. The commission amount associated with the renewal of a contract in addition to any related incremental sale is recorded as expense over the term of the renewed contract. The net impact of these changes resulted in a $4,362 reduction to accumulated deficit for contracts that still require performance by the Company at the date of adoption.

Income Taxes

The adoption of ASC 606 primarily resulted in an acceleration of revenue and the reduction of expense as of December 31, 2017, which in turn generated additional deferred tax liabilities that ultimately reduced the Company’s net deferred tax asset position. As the Company fully reserves its net deferred tax assets in the jurisdictions impacted by the adoption of ASC 606, this impact was offset by a corresponding reduction to the valuation allowance.

Impact of New Revenue Guidance on Financial Statement Line Items

The following tables compare the reported condensed consolidated balance sheet, statement of operations and cash flows, as of and for the three and nine months ended September 30, 2018, to the pro-forma amounts had the previous guidance been in effect.


	As of September 30, 2018
Balance Sheet	As reported			Pro forma as if the previous accounting guidance was in effect
Assets
Current assets:
Cash and cash equivalents	$	26,855			26,855
Accounts receivable, net		24,040			23,312
Prepaid expenses		4,483			4,483
Other current assets		7,388			2,497

Total current assets		62,766			57,147
Property and equipment, net		10,153			10,153
Intangible assets, net		6,340			6,340
Goodwill		50,776			50,776
Deferred tax asset		87			87
Other assets		2,288			928

Total assets	$	132,410		$	125,431

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	5,041		$	5,041
Accrued expenses		15,065			15,065
Capital lease liability		154			154
Deferred revenue		39,516			38,412

Total current liabilities		59,776			58,672
Deferred revenue, net of current portion		278			280
Other liabilities		1,117			1,117

Total liabilities		61,171			60,069
Commitments and contingencies
Stockholders’ equity:
Undesignated preferred stock		—			—
Common stock		37			37
Additional paid-in capital		249,176			249,176
Treasury stock		(871	)		(871	)
Accumulated other comprehensive loss		(998	)		(998	)
Accumulated deficit		(176,105	)		(181,982	)

Total stockholders’ equity		71,239			65,362

Total liabilities and stockholders’ equity	$	132,410		$	125,431

Total reported assets were $6,979 greater than the pro-forma balance sheet, which assumes the previous guidance remained in effect as of September 30, 2018. This was largely due to impacts of variable consideration and costs to obtain a contract.

Total reported liabilities were $1,102 greater than the pro-forma balance sheet, which assumes the previous guidance remained in effect as of September 30, 2018. This was largely due to the impact of variable consideration.

The following summarizes the significant changes on the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2018 as a result of the adoption of ASC 606 on January 1, 2018 compared to if the Company had continued to recognize revenues under ASC 605.


	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
Statement of Operations	As reported			Pro forma as if the previous accounting guidance was in effect			As reported			Pro forma as if the previous accounting guidance was in effect
Revenue:
Subscription and support revenue	$	37,442		$	37,478		$	113,176		$	113,200
Professional services and other revenue		3,679			3,679			10,793			10,793

Total revenue		41,121			41,157			123,969			123,993
Cost of revenue:
Cost of subscription and support revenue		13,142			13,142			39,723			39,723
Cost of professional services and other revenue		3,176			3,176			10,424			10,424

Total cost of revenue		16,318			16,318			50,147			50,147

Gross profit		24,803			24,839			73,822			73,846
Operating expenses:
Research and development		8,314			8,314			23,832			23,832
Sales and marketing		14,009			13,898			42,508			42,804
General and administrative		5,621			5,621			18,056			18,056

Total operating expenses		27,944			27,833			84,396			84,692

Loss from operations		(3,141	)		(2,994	)		(10,574	)		(10,846	)
Other income (expense), net		(217	)		(217	)		(427	)		(427	)

Loss before income taxes		(3,358	)		(3,211	)		(11,001	)		(11,273	)
Provision for income taxes		144			144			410			410

Net loss	$	(3,502	)	$	(3,355	)	$	(11,411	)	$	(11,683	)

Net loss per share - basic and diluted	$	(0.10	)	$	(0.09	)	$	(0.32	)	$	(0.33	)

Weighted-average number of common shares used in computing net loss per share		36,212,246			36,212,246			35,564,311			35,564,311

The primary difference in subscription and support revenue relates to the impacts of applying the variable consideration guidance under ASC 606. Under the previous guidance, subscription and support revenue would have been approximately $36 and $24 higher, respectively, for the three and nine months ended September 30, 2018 as revenue for usage based fees, for contracts with annual entitlement allowances, was recognized in the month of such usage. Under ASC 606, usage based fees, for contracts with annual entitlement allowances, are recognized as revenue over the term of the underlying arrangement.

Sales and marketing expense, under the previous guidance, would have decreased by approximately $111 for the three months ended September 30, 2018. Sales and marketing expense would have increased by $296 for the nine months ended September 30, 2018, due to a portion of the commission payments being recorded immediately to expense at the time a liability was recorded. In addition, certain commission amounts that were amortized to expense over the underlying term of the arrangement are now amortized over the average customer life under ASC 606.

The net impact of accounting for revenue under the new guidance increased net loss per share by $0.01 per basic and diluted share for the three months ended September 30, 2018, and decreased net loss per share by $0.01 per basic and diluted share for the nine months ended September 30, 2018.


	Nine Months Ended September 30, 2018
Statement of Cash Flows	As reported			Pro forma as if the previous accounting guidance was in effect
Operating activities
Net loss	$	(11,411	)	$	(11,683	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		5,164			5,164
Stock-based compensation		5,022			5,022
Provision for reserves on accounts receivable		99			99
Changes in assets and liabilities:
Accounts receivable		1,998			1,799
Prepaid expenses and other current assets		(118	)		(472	)
Other assets		(355	)		28
Accounts payable		(1,262	)		(1,262	)
Accrued expenses		1,964			1,964
Deferred revenue		(1,335	)		(893	)

Net cash provided by operating activities	$	(234	)	$	(234	)

The adoption of ASC 606 had no impact on the Company’s cash flows from operations. The aforementioned impacts resulted in offsetting shifts in cash flows between net loss and various working capital balances.

The following summarizes the opening and closing balances of receivables, contract assets and contract liabilities from contracts with customers.


	Accounts Receivable, net		Contract Assets (current)		Deferred Revenue (current)		Deferred Revenue (non-current)		Total Deferred Revenue
Balance at January 1, 2018	$	26,162	$	3,124	$	40,799	$	359	$	41,158
Balance at September 30, 2018		24,040		2,032		39,516		278		39,794

Revenue recognized during the nine months ended September 30, 2018 from amounts included in deferred revenue at the beginning of the period was approximately $38.1 million. During the nine months ended September 30, 2018, the Company did not recognize revenue from performance obligations satisfied or partially satisfied in previous periods.

The assets recognized for costs to obtain a contract were $5.5 million and $5.4 million as of September 30, 2018 and January 1, 2018, respectively. Amortization expense recognized during the three and nine months ended September 30, 2018 related to costs to obtain a contract was $1.9 million and $5.7 million, respectively.

Transaction Price Allocated to Future Performance Obligations

ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as September 30, 2018. ASC 606 provides certain practical expedients that limit the requirement to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations.

Subscription and Support Revenue

As of September 30, 2018, the total aggregate transaction price allocated to the unsatisfied performance obligations for subscription and support contracts was approximately $108.0 million, of which approximately $86.0 million is expected to be recognized over the next 12 months. The Company expects to recognize substantially all of the remaining unsatisfied performance obligations by the end of 2020. The Company applied the practical expedient to not disclose the amount of transaction price allocated to unsatisfied performance obligations for variable consideration that the Company is able to allocate to one or more of the performance obligations in its contracts.

Professional Services

The Company applied the practical expedient to not disclose the amount of transaction price allocated to unsatisfied performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or less. The Company does not have material future obligations associated with professional services that extend beyond one year.