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10-Q
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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
(Mark One)
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2020
OR
 
☐
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:
001-35429
 
 
BRIGHTCOVE INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
  
20-1579162
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
290 Congress Street
Boston, MA 02210
(Address of principal executive offices)
(888)
882-1880
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading Symbol(s)
  
Name of each exchange on which registered
Common Stock, par value $0.001 per share
  
BCOV
  
The NASDAQ Global Market
 
 
Indicate by check mark whether the registrant (1) has 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  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
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
 
☐
  
Accelerated filer
 
☒
       
Non-accelerated
filer
 
☐ 
 
(Do not check if a smaller reporting company)
  
Smaller reporting company
 
☐
       
     
  
Emerging growth company
 
☐
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 13(a) of the Exchange
Act
.  
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange
Act).    
Yes  ☐    No  ☒
As of
October 19
, 2020 there were 39,805,642 shares of the registrant’s common stock, $0.001 par value per share, outstanding.
 
 
 
BRIGHTCOVE INC.
Table of Contents
 
 
  
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2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form
10-Q
contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form
10-Q
that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Such forward-looking statements include any expectation of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements related to adding employees; statements related to potential benefits of acquisitions; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. 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 below, and those discussed in the section titled “Risk Factors” included in Item 1A of Part I of this Quarterly Report on Form
10-Q,
and the risks discussed in our other Securities and Exchange Commission, or SEC, filings. 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. Forward-looking statements in this Quarterly Report on Form
10-Q
may include statements about:
 
  •  
our ability to achieve profitability;
 
  •  
our competitive position and the effect of competition in our industry;
 
  •  
our ability to retain and attract new customers;
 
  •  
our ability to penetrate existing markets and develop new markets for our services;
 
  •  
our ability to retain or hire qualified accounting and other personnel;
 
  •  
our ability to successfully integrate acquired businesses, including the online video platform assets of Ooyala, Inc. and certain of its subsidiaries that we acquired during 2019;
 
  •  
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
 
  •  
our ability to maintain the security and reliability of our systems;
 
  •  
our estimates with regard to our future performance and total potential market opportunity;
 
  •  
our expectations regarding the potential impact of the
COVID-19
pandemic on our business, operations, and the markets in which we and our partners and customers operate;
 
  •  
our estimates regarding our anticipated results of operations, future revenue, bookings growth, capital requirements and our needs for additional financing; and
 
  •  
our goals and strategies, including those related to revenue and bookings growth.
 
3
Table of Contents
PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
Brightcove Inc.
Condensed Consolidated Balance Sheets
(unaudited)
 
    
September 30,
2020
 
 
 
  
December 31,
2019
    
(in thousands, except share
and per share data)
  
Assets
     
Current assets:
     
Cash and cash equivalents
    $ 30,332     $ 22,759  
Accounts receivable, net of allowance of $654 and $904 at September 30, 2020 and December 31, 2019, respectively
      32,218       31,181  
Prepaid expenses
      6,862       5,171  
Other current assets
      10,932       6,713  
  
 
 
    
 
 
  
Total current assets
      80,344       65,824  
Property and equipment, net
      15,715       12,086  
Operating lease
right-of-use
asset
      11,813       16,912  
Intangible assets, net
      11,277       13,875  
Goodwill
      60,902       60,902  
Other assets
      4,505       3,268  
  
 
 
    
 
 
  
Total assets
    $ 184,556     $ 172,867  
  
 
 
    
 
 
  
Liabilities and stockholders’ equity
     
Current liabilities:
     
Accounts payable
    $ 9,405     $ 9,917  
Accrued expenses
      23,293       20,925  
Operating lease liability
      5,592       6,174  
Deferred revenue
      57,334       49,260  
  
 
 
    
 
 
  
Total current liabilities
      95,624       86,276  
Operating lease liability, net of current portion
      7,170       11,701  
Debt
      5,000      
—
  
Other liabilities
      2,672       767  
  
 
 
    
 
 
  
Total liabilities
      110,466       98,744  
Commitments and contingencies
(Note 10)
         
Stockholders’ equity:
     
Undesignated preferred stock, $0.001 par value; 5,000,000 shares authorized;
no shares issued
      —      
—  
  
Common stock, $0.001 par value; 100,000,000 shares authorized; 39,931,247 and 39,042,787 shares issued at September 30, 2020 and December 31, 2019, respectively
      40       39  
Additional
paid-in
capital
      284,121       276,365  
Treasury stock, at cost; 135,000 shares
      (871 )      (871 ) 
Accumulated other comprehensive loss
      (741 )      (785 ) 
Accumulated deficit
      (208,459 )      (200,625 ) 
  
 
 
    
 
 
  
Total stockholders’ equity
      74,090       74,123  
  
 
 
    
 
 
  
Total liabilities and stockholders’ equity
    $ 184,556     $ 172,867  
  
 
 
    
 
 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4
Table of Contents
Brightcove Inc.
Condensed Consolidated Statements of Operations
(unaudited)
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
    
2020
    
2019
    
2020
    
2019
  
    
(in thousands, except share and per share data)
  
Revenue:
         
Subscription and support revenue
    $ 46,338     $ 45,424     $ 136,613     $ 129,192  
Professional services and other revenue
      2,746       2,010     $ 7,050       7,660  
  
 
 
    
 
 
    
 
 
    
 
 
  
Total revenue
      49,084       47,434       143,663       136,852  
Cost of revenue:
         
Cost of subscription and support revenue
      15,735       16,686       50,290       50,237  
Cost of professional services and other revenue
      2,363       1,628       6,349       6,432  
  
 
 
    
 
 
    
 
 
    
 
 
  
Total cost of revenue
      18,098       18,314       56,639       56,669  
  
 
 
    
 
 
    
 
 
    
 
 
  
Gross profit
      30,986       29,120       87,024       80,183  
Operating expenses:
         
Research and development
      8,215       8,127       26,199       23,150  
Sales and marketing
      14,813       14,567       42,370       45,650  
General and administrative
      6,694       6,245       19,633       17,485  
Merger-related
      —       2,539       5,768       8,091  
  
 
 
    
 
 
    
 
 
    
 
 
  
Total operating expenses
      29,722       31,478       93,970       94,376  
  
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss)
from operations
      1,264       (2,358 )      (6,946 )      (14,193 ) 
Other income (expense), net
      204       (441 )      (291 )      (477 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) before income taxes
      1,468       (2,799 )      (7,237 )      (14,670 ) 
Provision for income taxes
      154       171       597       521  
  
 
 
    
 
 
    
 
 
    
 
 
  
Net
 
income
(
loss
)
    $ 1,314     $ (2,970 )    $ (7,834 )    $ (15,191 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Net income (loss) per share—basic and diluted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
    $ 0.03     $ (0.08 )    $ (0.20 )    $ (0.40 ) 
Diluted
 
$
 
0.03
 
 
$
 
(0.08
)
 
 
$
 
(0.20
)
 
 
$
 
(0.40
)
 
Weighted-average shares—basic and diluted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Basic
 
 
39,682,337
 
 
 
38,564,314
 
 
 
 39,319,703
 
 
 
 37,738,739
 
Diluted
 
 
 40,645,982
 
 
 
38,564,314
 
 
 
 39,319,703
 
 
 
 37,738,739
 
                               
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
5
Table of Contents
Brightcove Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
 
    
Three Months Ended
September 30,
    
Nine Months
 
Ended
September 30,
  
    
2020
    
2019
    
2020
    
2019
  
 
 
(in thousands)
Net
 income
(
loss
)
    $ 1,314     $ (2,970 )    $ (7,834 )    $ (15,191 ) 
Other comprehensive income:
         
Foreign currency translation adjustments
      345       (134 )      44       (74 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Comprehensive income (loss)
    $ 1,659     $ (3,104 )    $ (7,790 )    $ (15,265 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
6
Table of Contents
Brightcove Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
(in thousands, except share data)
 
    
Three Months Ended
September 30,
    
Nine
 Months Ended 
September
30,
  
    
2020
    
2019
    
2020
    
2019
  
    
(in thousands, except share data)
  
Shares of common stock issued
         
Balance, beginning of period
      39,543,991       38,219,843       39,042,787       36,752,469  
Common stock issued upon acquisition
     
—
       230,083      
—
       1,286,846  
Issuance of common stock upon exercise of stock options and pursuant to restricted stock units
      387,256       472,562       888,460       883,173  
  
 
 
    
 
 
    
 
 
    
 
 
  
Balance, end of period
      39,931,247       38,922,488       39,931,247       38,922,488  
  
 
 
    
 
 
    
 
 
    
 
 
  
Shares of treasury stock
         
Balance, beginning of period
      (135,000 )      (135,000 )      (135,000 )      (135,000 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Balance, end of period
      (135,000 )      (135,000 )      (135,000 )      (135,000 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Par value of common stock issued
         
Balance, beginning of period
    $ 39     $ 38     $ 39     $ 37  
Common stock issued upon acquisition
     
—
       1      
—
       1  
Issuance of common stock upon exercise of stock options and pursuant to restricted stock units
      1      
—
      
1
      
1
  
  
 
 
    
 
 
    
 
 
    
 
 
  
Balance, end of period
    $ 40     $ 39     $ 40     $ 39  
  
 
 
    
 
 
    
 
 
    
 
 
  
Value of treasury stock
         
Balance, beginning of period
    $ (871 )    $ (871 )    $ (871 )    $ (871 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Balance, end of period
    $ (871 )    $ (871 )    $ (871 )    $ (871 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Additional
paid-in
capital
         
Balance, beginning of period
    $ 281,255     $ 264,765     $ 276,365     $ 251,122  
Common stock issued upon acquisition
     
—
       3,383      
—
       12,249  
Withholding tax on restricted stock units vesting
      (18 )     
(32
)
     (415 )     
(32
)
 
Issuance of common stock upon exercise of stock options and pursuant to restricted stock units
      812       1,372       1,207       3,215  
Stock-based compensation expense
      2,072       1,805       6,964       4,739  
  
 
 
    
 
 
    
 
 
    
 
 
  
Balance, end of period
    $ 284,121     $ 271,293     $ 284,121     $ 271,293  
  
 
 
    
 
 
    
 
 
    
 
 
  
Accumulated deficit
         
Balance, beginning of period
    $ (209,773 )    $ (190,943 )    $ (200,625 )    $ (178,722 ) 
Net income (loss
)
      1,314       (2,970 )      (7,834 )      (15,191 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Balance, end of period
    $ (208,459 )    $ (193,913 )    $ (208,459 )    $ (193,913 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Accumulated other comprehensive loss
         
Balance, beginning of period
    $ (1,086 )    $ (892 )    $ (785 )    $ (952 ) 
Foreign currency translation adjustment
      345       (134 )      44       (74 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Balance, end of period
    $ (741 )    $ (1,026 )    $ (741 )    $ (1,026 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Total stockholders’ equity
    $ 74,090     $ 75,522     $ 74,090     $ 75,522  
  
 
 
    
 
 
    
 
 
    
 
 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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Brightcove Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
    
Nine Months Ended September 30,
  
    
2020
    
2019
  
    
(in thousands)
  
Operating activities
     
Net loss
    $ (7,834 )    $ (15,191 ) 
Adjustments to reconcile net loss to net cash provided by operating activities:
     
Depreciation and amortization
      6,497       6,150  
Stock-based compensation
      6,724       4,504  
Provision for reserves on accounts receivable
      461       559  
Changes in assets and liabilities:
     
Accounts receivable
      (1,433 )      (5,477 ) 
Prepaid expenses and other current assets
      (6,414 )      642  
Other assets
      (1,247 )      (503 ) 
Accounts payable
      104       2,635  
Accrued expenses
      3,410       4,510  
Operating leases
      (13 )      (261 ) 
Deferred revenue
      8,667       3,061  
  
 
 
    
 
 
  
Net cash provided by operating activities
      8,922       629  
Investing activities
     
Purchases of property and equipment
      (2,163 )      (600 ) 
Cash paid for acquisition, net of cash acquired
      —       (5,402 ) 
Capitalized
internal-use
software costs
      (5,108 )      (4,264 ) 
  
 
 
    
 
 
  
Net cash used in investing activities
      (7,271 )      (10,266 ) 
Financing activities
     
Proceeds from exercise of stock options
      1,207       3,215  
Proceeds from debt
      10,000      
—
  
Debt paydown
      (5,000 )     
—
  
Other financing activities
      (448 )      (208 ) 
  
 
 
    
 
 
  
Net cash provided by financing activities
      5,759       3,007  
Effect of exchange rate changes on cash and cash equivalents
      163       (27 ) 
  
 
 
    
 
 
  
Net increase (decrease) in cash and cash equivalents
      7,573       (6,657 ) 
Cash and cash equivalents at beginning of period
      22,759       29,306  
  
 
 
    
 
 
  
Cash and cash equivalents at end of period
    $ 30,332     $ 22,649  
  
 
 
    
 
 
  
Supplemental disclosure of
non-cash
investing activities
     
Fair value of shares issued for acquisition of a business
    $ —     $ 12,250  
Supplemental disclosure of cash flow information
     
Cash paid for operating lease liabilities
    $ 5,087     $ 5,547  
  
 
 
    
 
 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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Brightcove Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(in thousands, except share and per share data, unless otherwise noted)
1. Business Description and Basis of Presentation
Business Description
Brightcove Inc. (the Company) is a leading global provider of cloud services for video which enable its customers to publish and distribute video to Internet-connected devices quickly, easily and in a cost-effective and high-quality manner.
Basis of Presentation
The accompanying interim condensed consolidated financial statements are unaudited. These condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, other than the changes to accounting for credit losses as described in Note 13, the unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2019 contained in the Company’s Annual Report on Form
10-K
and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2020 and 2019. These interim periods are not necessarily indicative of the results to be expected for any other interim period or the full year.
The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. The Company has evaluated all subsequent events and determined that there are no material recognized or unrecognized subsequent events requiring disclosure, other than those disclosed in this Report on Form
10-Q.
As described in Note 13, the Company implemented a significant accounting policy upon the adoption of Accounting Standards
Update (“ASU”) 2016-13,
 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
 (“ASC 326”). As of September 30, 2020, other than the changes to the accounting for credit losses, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on
Form 10-K for
the year ended December 31, 2019, have not changed.
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.
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 December 31, 2019
    $ 31,181      $ 1,871      $ 49,260      $ 299      $ 49,559  
Balance at
September
 
30, 2020
      32,218        2,338        57,334        1,082        58,416  
 
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Revenue recognized during the three and nine months ended September 30, 2020 from amounts included in deferred revenue at the beginning of the period was approximately $7.4 million and $46.3 million, respectively. During the three and nine months ended September 30, 2020, the Company did not recognize a material amount of revenue from performance obligations satisfied or partially satisfied in previous periods.
The assets recognized for costs to obtain a contract were $10.7 million as of September 30, 2020 and $5.9 million as of December 31, 2019. Amortization expense recognized during the three and nine months ended September 30, 2020 related to costs to obtain a contract was $2.0 million and $5.5 million, respectively. Amortization expense recognized during the three and nine months ended September 30, 2019 related to costs to obtain a contract was $1.8 million and $5.5 million, respectively.
Transaction Price Allocated to Future Performance Obligations
As of September 30, 2020, the total aggregate transaction price allocated to the unsatisfied performance obligations for subscription and support contracts was approximately $144.2 million, of which approximately $109.6 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 December 2024.
3. Concentration of Credit Risk
The Company has
no significant off-balance sheet risk,
such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, trade accounts receivable and unbilled trade accounts receivable.
The Company maintains its cash and cash equivalents principally with accredited financial institutions of high credit standing. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits. The Company generally has not experienced any material losses related to receivables from individual customers, or groups of customers. The Company does not require collateral. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company’s accounts receivable. Please see Note 13 for more detail on how the Company assesses credit risk for trade accounts receivable and unbilled trade accounts receivable under ASC 326.
4. Concentration of Other Risks
The Company is dependent on certain content delivery network providers who provide digital media delivery functionality enabling the
Company’s on-demand application
service to function as intended for the Company’s customers and
ultimate end-users. The
disruption of these services could have a material adverse effect on the Company’s business, financial position, and results of operations.
5. Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Management determines the appropriate classification of investments
at the time of purchase, and
re-evaluates
such
determination at each balance sheet date. The Company did not have any short-term or long-term investments at September 30, 2020 or December 31, 2019. The increase in cash and cash equivalents is primarily the result of the Company’s net
 
borrowings
 
of
 
$5.0 million under an existing line of credit, as described in Note 11.
Cash and cash equivalents primarily consist of cash on deposit with banks and amounts held in interest-bearing money market accounts. Cash equivalents are carried at cost, which approximates their fair market value.
Cash and cash equivalents as of September 30, 2020 consist of the following:
 
    
September 30, 2020
  
Description
   
Contracted

Maturity
     
Cost
     
Fair Market

Value
     
Balance Per

Balance Sheet
  
Cash
      Demand      $ 30,291      $ 30,291      $ 30,291  
Money market funds
      Demand        41        41        41  
     
 
 
     
 
 
     
 
 
  
Total cash and cash equivalents
       $ 30,332      $ 30,332      $ 30,332  
     
 
 
     
 
 
     
 
 
  
 
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Cash and cash equivalents as of December 31, 2019 consist of the following:
 
    
December 31, 2019
  
Description
   
Contracted

Maturity
     
Cost
     
Fair Market

Value
     
Balance Per

Balance Sheet
  
Cash
      Demand      $ 22,718      $ 22,718      $ 22,718  
Money market funds
      Demand        41        41        41  
     
 
 
     
 
 
     
 
 
  
Total cash and cash equivalents
       $ 22,759      $ 22,759      $ 22,759  
     
 
 
     
 
 
     
 
 
  
6.
Earnings
 
(
Loss
)
per Share
The Company calculates basic and diluted net earnings (loss) per common share by dividing the net earnings (loss) by the number of common shares outstanding during the period. The calculation of diluted net income (loss) per common share includes the effects of the assumed exercise of any outstanding stock options and the assumed vesting of shares of restricted stock awards, where dilutive. The following outstanding common shares have been excluded from the computation of dilutive net income (loss) per share as of September 30, 2020 and 2019, because such securities are anti-dilutive.
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2020
     
2019
     
2020
     
2019
  
Options
      1,570        2,522        2,234        2,522  
Restricted stock units
      155        3,244        3,264        3,244  
7. Fair Value of Financial Instruments
The Company’s financial instruments carried at fair value were less than $0.1 million as of September 30, 2020 and December 31, 2019.
8. Stock-based Compensation
The weighted-average fair value of options granted during the three months ended September 30, 2020 and 2019 was $4.86 and $5.21 per share, respectively. The weighted-average fair value of options granted during the nine months ended September 30, 2020 and 2019 was $4.01 and $4.54 per share, respectively. The weighted-average assumptions utilized to determine such values are presented in the following table:
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
    
2020
    
2019
    
2020
    
2019
  
Expected life in years
      5.9       6.2       6.1       6.2  
Risk-free interest rate
      0.33 %      1.85 %      0.76 %      2.30 % 
Volatility
      47 %      44 %      46 %      44 % 
Dividend yield
      —      
—
       —      
—
  
 
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As of September 30, 2020, there was $18.9 million of unrecognized stock-based compensation expense related to stock-based awards that is expected to be recognized over a weighted-average period of 1.91 years. The following table summarizes stock-based compensation expense as included in the consolidated statement of operations for the three and nine months ended September 30, 2020 and 2019:
 
    
Three Months Ended
September 30,
     
Nine
 
Months
 
Ended
September 30,
  
    
2020
     
2019
     
2020
     
2019
  
Stock-based compensation:
            
Cost of subscription and support revenue
    $ 139      $ 127      $ 452      $ 341  
Cost of professional services and other revenue
      63        71        233        223  
Research and development
      142        323        839        855  
Sales and marketing
      768        602        2,440        1,411  
General and administrative
      896        598        2,760        1,674  
  
 
 
     
 
 
     
 
 
     
 
 
  
   $ 2,008      $ 1,721      $ 6,724      $ 4,504  
  
 
 
     
 
 
     
 
 
     
 
 
  
The following is a summary of the stock option activity during the nine months ended September 30, 2020.
 
    
Number of

Shares
     
Weighted-Average

Exercise Price
     
Weighted-Average

Remaining

Contractual

Term (In Years)
     
Aggregate

Intrinsic

Value (1)
  
Outstanding at December 31, 2019
      2,479,423      $ 8.96                    
Granted
      129,584        9.04                    
Exercised
      (164,188 )       7.36               $ 439  
Canceled
      (210,326 )       9.07                    
  
 
 
           
Outstanding at September 30, 2020
      2,234,493      $ 9.08        6.73      $ 3,064  
  
 
 
           
Exercisable at September 30, 2020
      1,332,255      $ 8.81        5.75      $ 2,227  
  
 
 
           
 
(1)
The aggregate intrinsic value was calculated based on the positive difference between the fair value of the Company’s common stock on September 30, 2020 of $10.24 per share, or the date of exercise, as appropriate, and the exercise price of the underlying options.
The following table summarizes the restricted stock unit activity during the nine months ended September 30, 2020:
 
    
Shares
     
Weighted

Average Grant

Date Fair Value
  
Unvested at December 31, 2019
      3,626,364      $ 9.03  
Granted
      902,303        8.53  
Vested and issued
      (718,763 )       9.21  
Canceled
      (546,196 )       8.52  
  
 
 
     
 
 
  
Unvested at September 30, 2020
      3,263,708      $ 8.84  
  
 
 
     
 
 
  
The aggregate fair value of vested and issued RSUs for the nine months ended September 30, 2020 was $7.1 million.
9. Income Taxes
For the three months ended September 30, 2020 and 2019, the Company recorded income tax expense of $154 and $171, respectively. For the nine months ended September 30, 2020 and 2019, the Company recorded income tax expense of $597 and $521, respectively. The income tax expense relates principally to the Company’s foreign operations.
 
The Company is required to
compute
income tax expense in each jurisdiction in which it operates. This process requires the Company to project its current tax liability and estimate its deferred tax assets and liabilities, including net operating loss (“NOL”) and tax credit carry-forwards. In assessing the ability to realize the net deferred tax assets, management considers whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
 
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The Company has provided a
valuation
allowance against its remaining U.S. net deferred tax assets as of September 30, 2020 and December 31, 2019, based upon the level of historical U.S. losses and future projections over the period in which the net deferred tax assets are deductible, at this time, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences.
10. Commitments and Contingencies
Legal Matters
The Company, from time to time, is party to litigation arising in the ordinary course of business. Management does not believe that the outcome of these claims will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company based on the status of proceedings at this time.
Guarantees and Indemnification Obligations
The Company typically enters into indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies and agrees to reimburse the indemnified party for losses and costs incurred by the indemnified party, generally the Company’s customers, in connection with patent, copyright, trade secret, or other intellectual property or personal right infringement claims by third parties with respect to the Company’s technology. The term of these indemnification agreements is generally perpetual after execution of the agreement. Based on when customers first subscribe for the Company’s service, the maximum potential amount of future payments the Company could be required to make under certain of these indemnification agreements is unlimited, however, more recently the Company has typically limited the maximum potential value of such potential future payments in relation to the value of the contract. Based on historical experience and information known as of September 30, 2020, the Company has not incurred any costs for the above guarantees and indemnities. The Company has received requests for indemnification from customers in connection with patent infringement suits brought against the customer by a third party. To date, the Company has not agreed that the requested indemnification is required by the Company’s contract with any such customer.
In certain circumstances, the Company warrants that its products and services will perform in all material respects in accordance with its standard published specification documentation in effect at the time of delivery of the licensed products and services to the customer for the warranty period of the product or service. To date, the Company has not incurred significant expense under its warranties and, as a result, the Company believes the estimated fair value of these agreements is immaterial.
11. Debt
On December 14, 2018, the Company entered into an amended and restated loan and security agreement with a lender (the “Loan Agreement”) providing for up to a $30.0 million asset based line of credit (the “Line of Credit”). Under the Line of Credit, the Company can borrow up to $30.0 million. Borrowings under the Line of Credit are secured by substantially all of the Company’s assets, excluding its intellectual property. Outstanding amounts under the Line of Credit accrue interest at a rate as follows: (i) for prime rate advances, the greater of (A) the prime rate and (B) 4%, and (ii) for LIBOR advances, the greater of (A) the LIBOR rate plus 225 basis points and (B) 4%. Under the Loan Agreement, the Company must comply with certain financial covenants, including maintaining a minimum asset coverage ratio. If the outstanding principal during any month is at least $15.0 million, the Company must also maintain a minimum net income threshold based on non-GAAP operating measures. Failure to comply with these covenants, or the occurrence of an event of default, could permit the lenders under the Line of Credit to declare all amounts borrowed under the Line of Credit, together with accrued interest and fees, to be immediately due and payable. The Company was in compliance with all covenants under the Line of Credit as of September 30, 2020.
In March 2020, the Company borrowed $10.0 million on the Line of Credit in anticipation of any operating cash needs in light
of COVID-19. In
June 2020 the Company repaid $5.0 million on the Line of Credit. The effective interest rate for the amounts borrowed on the Line of Credit was 4% for the
nine
 months ended September 30, 2020. The Line of Credit matures in December 2021. The fair value of these borrowings, net of amounts paid, which are classified as Level 2, approximates their carrying value at September 30, 2020 as the instrument carries a variable rate of interest which
 
approximates
 
current market rates.
 
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12. Segment Information
Geographic Data
Total revenue from unaffiliated customers by geographic area, based on the location of the customer, was as follows:
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2020
     
2019
     
2020
     
2019
  
Revenue:
            
North America
    $ 27,515      $ 24,904      $ 78,553      $ 72,425  
Europe
      8,435        8,178        25,323        22,814  
Japan
      5,688        5,391        17,344        16,725  
Asia Pacific
      7,211        8,646        21,795        24,009  
Other
      235        315        648        879  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total revenue
    $ 49,084      $ 47,434      $ 143,663      $ 136,852  
  
 
 
     
 
 
     
 
 
     
 
 
  
North America is comprised of revenue from the United States, Canada and Mexico. Revenue from customers located in the United States was $25,549 and $23,162 during the three months ended September 30, 2020 and 2019, respectively. Revenue from customers located in the United States was $72,511 and $67,534 during the nine months ended September 30, 2020 and 2019, respectively. Other than the United States and Japan, no other country contributed more than 10% of the Company’s total revenue during the three and nine months ended September 30, 2020 and 2019.
As of
September
 30, 2020 and December 31, 2019, property and equipment at locations outside the U.S. was not material.
13. Recently Issued and Adopted Accounting Standards
In June 2016, the FASB
issued ASU No. 2016-13, which requires
measurement and recognition of expected credit losses for financial assets held. Effective January 1, 2019, the Company adopted ASC 326 using the transition method
introduced by ASU 2016-13. The
adoption of ASC 326 did not result in an adjustment to the estimated allowance as of December 31, 2019.
Under ASC 326, the Company changed its policy for assessing credit losses to include consideration of a broader range of information to estimate credit losses over the life of its financial assets. As of
September
 30, 2020, the financial assets of the Company within the scope of the assessment comprised trade accounts receivable (“AR”) and unbilled trade accounts receivable. Unbilled trade accounts receivable (“UAR”) is reflected in Other Current Assets on the Company’s Condensed Consolidated Balance Sheets and was $2.3 
million and $2.0
million as of September 30, 2020 and December 31, 2019
, respectively
.
The Company uses the aging method to estimate its expected credit losses on AR and UAR. In order to estimate expected credit losses, the Company assessed recent historical experience, current economic conditions and any reasonable and supportable forecasts to identify risk characteristics that are shared within the financial asset. These risk characteristics are then used to bifurcate the aging method into risk pools. Historical credit loss for each risk pool is then applied to the current period aging as presented in the identified risk pools to determine the needed reserve allowance. In the absence of current economic conditions and/or forecasts that may affect future credit losses, the Company has determined that recent historical experience provides the best basis for estimating credit losses. As of September 30, 2020, the Company estimates the life of its AR
as 50-60 days.
This estimate is based on the Company’s historical experience for days sales outstanding (“DSO”).
The information obtained from assessing historical experience, current economic conditions and reasonable and supportable forecasts were used to identify risk characteristics that can affect future credit loss experience. The historical analysis yielded one material risk factor, the geographical location of the customer. Specifically, historical experience showed that AR that was due from customers in the Asia Pacific region had experienced more credit losses than the other geographic areas listed in Note 12. Europe and Japan had significantly less credit loss experience when compared to Asia Pacific while North America’s credit loss experience was commensurate with the proportion of total AR that North America’s AR comprised. There were no other significant risk characteristics identified in the review of historical experience.
The Company’s assessment of current economic conditions and reasonable and supportable forecasts included an assessment of customer industries affected
by COVID-19. Based
on available information, the Company identified the following customer industries
 
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as being significantly affected
by COVID-19, in
no particular order: restaurants, hospitality, tourism, sports, travel and consumer goods. The Company assessed the relevant and supportable information available and estimated and recorded approximately $0.2 million increase in the provision for credit losses due
to COVID-19. The
Company will continue to assess
the COVID-19 risk
to its AR for the duration of the pandemic.
The following details the changes in the Company’s reserve allowance for estimated credit losses for AR for the period:
 
    
Allowance for Credit Losses
  
     (in thousands)  
Balance as of December 31, 2019
    $ 904  
Current provision for credit losses
      332  
Write-offs against allowance
      (582 ) 
Recoveries
      —  
Balance as of September 30, 2020
    $ 654  
  
 
 
  
Estimated credit losses for UAR were not material.
Estimating credit losses based on risk characteristics requires significant judgment by the Company. Significant judgments include, but are not limited to: assessing current economic conditions and the extent to which they would be relevant to the existing characteristics of the Company’s financial assets, the estimated life of financial assets, and the level of reliance on historical experience in light of economic conditions. The Company will have to continually review and update, when necessary, its historical risk characteristics that are meaningful to estimating credit losses, any new risk characteristics that arise in the natural course of business, and the estimated life of its financial assets.
14. Restructuring
During the first half of 2020, the Company committed to an action to restructure certain parts of the Company with the intent of aligning skills with the Company’s strategy and facilitating cost efficiencies and savings. As a result, certain headcount reductions were necessary. The Company incurred approximately $
443
 
and $1.7 million, respectively, in restructuring charges during the three and nine months ended
September 30,
2020. The
restructuring charges reflect
 $1.3 million of
post-employment benefits and are reflected in the
Condensed Consolidated Statements of Operations
as follows: $1.1 million – Research and Development; $138 - General and Administrative; $51 – Cost of subscription and support: and $23 – Sales and Marketing.
 
In addition to post-employment benefits the Company incurred $388 of other costs related to the restructuring in the three months ending September 
30
, 2020 and this is reflected in General and Administrative expense.
As of
September
 30, 2020
,
the Company had accrued $388 related to this action, which is expected to be paid in the next three months.
 
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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 and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form
10-Q
and our Annual Report on Form
10-K
for the year ended December 31, 2019.
Company Overview
We are a leading global provider of cloud-based services for video. We were incorporated in Delaware in August 2004 and our headquarters are in Boston, Massachusetts. Our suite of products and services reduce the cost and complexity associated with publishing, distributing, measuring and monetizing video across devices.
Brightcove Video Cloud, or Video Cloud, our flagship product, is the world’s leading online video platform. Video Cloud enables our customers to publish and distribute video to Internet-connected devices quickly, easily and in a cost-effective and high-quality manner. Brightcove OTT Flow is a service for media companies and content owners to rapidly deploy high-quality, direct-to-consumer, live and on-demand video services across platforms. Brightcove Video Marketing Suite, or Video Marketing Suite, is a comprehensive suite of video technologies designed to address the needs of marketers to drive awareness, engagement and conversion. Brightcove Enterprise Video Suite, or Enterprise Video Suite, is an enterprise-class platform for internal communications, employee training, live streaming, marketing and ecommerce videos.
We also have a number of modular solutions for customers, including Brightcove Zencoder, or Zencoder, which is a cloud-based video encoding service. Brightcove SSAI, or SSAI, is an innovative, cloud-based ad insertion and video stitching service that addresses the limitations of traditional online video ad insertion technology. Brightcove Player, or Player, is a cloud-based service for creating and managing video player experiences.
In September 2019, we released Brightcove Beacon, which is a purpose-built app that enables companies to deliver and launch premium OTT video experiences quickly and cost effectively across mobile, web, smart TVs and connected TVs, all with the flexibility of multiple monetization models. In January 2020, we released Brightcove Campaign, which is a purpose-built app that enables marketers to easily create video-driven marketing campaigns that yield insightful data with the ability to compare video performance to a variety of industry benchmarks.
Our philosophy for the next few years will continue to be to invest in our product strategy and development, sales, and
go-to-market
activities to support our long-term revenue growth. We believe these investments will help us address some of the challenges facing our business such as demand for our products by existing and potential customers, rapid technological change in our industry, increased competition and resulting price sensitivity. These investments include support for the expansion of our infrastructure within our hosting facilities, the hiring of additional technical and sales personnel, the innovation of new features for existing products and the development of new products. We believe this strategy will help us retain our existing customers, increase our average annual subscription revenue per premium customer and lead to the acquisition of new customers. Additionally, we believe customer growth will enable us to achieve economies of scale which will reduce our cost of goods sold, research and development and general and administrative expenses as a percentage of total revenue.
As of September 30, 2020, we had 616 employees and 3,381 customers, of which 2,267 used our premium offerings and 1,114 used our volume offerings. As of September 30, 2019, we had 596 employees and 3,720 customers, of which 2,362 used our premium offerings and 1,358 used our volume offerings.
We generate revenue by offering our products to customers on a subscription-based, software as a service, or SaaS, model. Our revenue grew from $136.9 million in the nine months ended September 30, 2019 to $143.7 million in the nine months ended September 30, 2020, primarily related to incremental revenue from the Ooyala acquisition that was completed on April 1, 2019 and, to a lesser extent, an increase in sales of our premium offerings to both new and existing customers. Our consolidated net loss was $7.8 million and $15.2 million for the nine months ended September 30, 2020 and 2019, respectively. Included in the consolidated net loss for the nine months ended September 30, 2020 was merger-related expense, stock-based compensation expense, and amortization of acquired intangible assets of $5.8 million, $6.7 million, and $2.6 million, respectively. Included in consolidated net loss for the nine months ended September 30, 2019 was merger-related expense, stock-based compensation expense and amortization of acquired intangible assets of $8.1 million, $4.5 million and $2.2 million, respectively.
 
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For the nine months ended September 30, 2020 and 2019, our revenue derived from customers located outside North America was 45% and 48%, respectively. We expect the percentage of total net revenue derived from outside North America to increase in future periods as we continue to expand our international operations.
Key Metrics
We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
 
•  
Number of Customers
. We define our number of customers at the end of a particular quarter as the number of customers generating subscription revenue at the end of the quarter. We believe the number of customers is a key indicator of our market penetration, the productivity of our sales organization and the value that our products bring to our customers. We classify our customers by including them in either premium or volume offerings. Our premium offerings include our premium Video Cloud customers (Enterprise and Pro editions), our Zencoder customers (other than Zencoder
customers on month-to-month contracts and pay-as-you-go contracts), our
SSAI customers, our Player customers, our OTT Flow customers, our Video Marketing Suite customers, our Enterprise Video Suite customers, our Brightcove Beacon customers and our Brightcove Campaign customers. Our volume offerings include our Video Cloud Express customers and our Zencoder
customers on month-to-month contracts and pay-as-you-go contracts.
As of September 30, 2020, we had 3,381 customers, of which 2,267 used our premium offerings and 1,114 used our volume offerings. As of September 30, 2019, we had 3,720 customers, of which 2,362 used our premium offerings and 1,358 used our volume offerings.
Our go-to-market focus
and growth strategy is to expand our premium customer base, as we believe our premium customers represent a greater opportunity for our solutions. Premium customers decreased compared to the prior period due to some customers deciding to switch to
in-house
solutions or other third-party solutions and some customers acquired in the Ooyala acquisition deciding not to switch to our solution. Volume customers decreased in recent periods primarily due to our discontinuation of the promotional Video Cloud Express offering. As a result, we have experienced attrition of this base level offering without a corresponding addition of customers. We expect customers using our volume offerings to continue to decrease in 2020 and beyond as we continue to focus on the market for our premium solutions.
 
•  
Recurring Dollar Retention Rate
. We assess our ability to retain customers using a metric we refer to as our recurring dollar retention rate. We calculate the recurring dollar retention rate by dividing the retained recurring value of subscription revenue for a period by the previous recurring value of subscription revenue for the same period. We define retained recurring value of subscription revenue as the committed subscription fees for all contracts that renew in a given period, including any increase or decrease in contract value. We define previous recurring value of subscription revenue as the recurring value from committed subscription fees for all contracts that expire in that same period. We typically calculate our recurring dollar retention rate on a monthly basis. Recurring dollar retention rate provides visibility into our ongoing revenue. During the nine months ended September 30, 2020 and 2019, the recurring dollar retention rate was 88% and 89%, respectively.
 
•  
Average Annual Subscription Revenue Per Premium Customer
. We define average annual subscription revenue per premium customer as the total subscription revenue from premium customers for an annual period, excluding professional services revenue, divided by the average number of premium customers for that period. We believe that this metric is important in understanding subscription revenue for our premium offerings in addition to the relative size of premium customer arrangements. As our Starter edition has a price point of $199 or $499 per month, we disclose the average annual subscription revenue per premium customer separately for Starter edition customers and all other premium customers.
 
•  
Backlog
. We define backlog as the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied, excluding professional service engagements. We believe that this metric is important in understanding future business performance. As of September 30, 2020, the total backlog for subscription and support contracts was approximately $144.2 million, of which approximately $109.6 million is expected to be recognized over the next 12 months. As of September 30, 2019, the total backlog for subscription and support contracts was approximately $125.7 million, of which approximately $100.6 million was expected to be recognized over the next 12 months.
 
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The following table includes our key metrics for the periods presented:
 
    
Nine Months Ended
September 30,
  
    
2020
    
2019
  
Customers (at period end)
     
Premium
      2,267       2,362  
Volume
      1,114       1,358  
  
 
 
    
 
 
  
Total customers (at period end)
      3,381       3,720  
  
 
 
    
 
 
  
Recurring dollar retention rate
      88 %      89 % 
Average annual subscription revenue per premium customer, excluding Starter edition customers (in thousands)
    $ 87.3     $ 82.0  
Average annual subscription revenue per premium customer for Starter edition customers only (in thousands)
    $ 4.5     $ 4.6  
Total backlog, excluding professional services engagements (in millions)
    $ 144.2     $ 125.7  
Total backlog to be recognized over next 12 months, excluding professional services engagements (in millions)
    $ 109.6     $ 100.6  
COVID-19
Update
While the implications of
the COVID-19 pandemic
remain uncertain, we plan to continue to make investments to support business growth. We believe that the growth of our business is dependent on many factors, including our ability to expand our customer base, increase adoption of our product offerings within existing customers, develop new products and applications to extend the functionality of our products and provide a high level of customer service. We expect to invest in sales and marketing to support customer growth. We also expect to invest in research and development as we continue to introduce new products and applications to extend the functionality of our products. We intend to maintain a high level of customer service and support which we consider critical for our continued success. We also expect to continue to incur general and administrative expenses to support our business and to maintain the infrastructure required to be a public company. We expect to use our cash flow from operations and, if necessary, our credit facility to fund operations.
See the section titled “Risk Factors” included under Part II, Item 1A below for further discussion of the possible impact of
the COVID-19 pandemic
on our business.
Components of Consolidated Statements of Operations
Revenue
Subscription and Support Revenue
 — We generate subscription and support revenue from the sale of our products.
Video Cloud is offered in two product lines. The first product line is comprised of our premium product editions. All premium editions include functionality to publish and distribute video to Internet-connected devices, with higher levels of premium editions providing additional features and functionality. Customer arrangements are typically one year contracts, which include a subscription to Video Cloud, basic support and a pre-determined amount of video streams, bandwidth, transcoding and storage. We also offer gold support or platinum support to our premium customers for an additional fee, which includes extended phone support. The pricing for our premium editions is based on the value of our software, as well as the number of users, accounts and usage, which is comprised of video streams, bandwidth, transcoding and storage. Should a customer’s usage exceed the contractual entitlements, the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements. The second product line is comprised of our volume product edition. Our volume editions target small and medium-sized businesses, or SMBs. The volume editions provide customers with the same basic functionality that is offered in our premium product editions but have been designed for customers who have lower usage requirements and do not typically require advanced features and functionality. We discontinued the lower level pricing options for the Express edition of our volume offering and expect the total number of customers using the Express edition to continue to decrease. Customers who purchase the volume editions generally enter into month-to-month agreements. Volume customers are generally billed on a monthly basis and pay via a credit card.
 
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Zencoder is offered to customers on a subscription basis, with either committed contracts or
pay-as-you-go
contracts. The pricing is based on usage, which is comprised of minutes of video processed. The committed contracts include a fixed number of minutes of video processed. Should a customer’s usage exceed the contractual entitlements, the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements. Zencoder customers are considered premium customers other than Zencoder customers on
month-to-month
contracts or
pay-as-you-go
contracts, which are considered volume customers.
SSAI is offered to customers on a subscription basis, with varying levels of functionality, usage entitlements and support based on the size and complexity of a customer’s needs.
Player is offered to customers on a subscription basis. Customer
arrangements are typically one-year contracts, which include
a subscription to Player, basic
support and a pre-determined amount of video
streams. We also offer gold support or platinum support to our Player customers for an additional fee, which includes extended phone support. The pricing for Player is based on the number of users, accounts and usage, which is comprised of video streams. Should a customer’s usage exceed the contractual entitlements, the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements.
OTT Flow, Brightcove Beacon and Brightcove Campaign are each offered to customers on a subscription basis, with varying levels of functionality, usage entitlements and support based on the size and complexity of a customer’s needs. Customer arrangements
are typically one-year contracts.
Video Marketing Suite and Enterprise Video Suite are offered to customers on a subscription basis in Starter, Pro and Enterprise editions. The Pro and Enterprise customer arrangements
are typically one-year contracts, which
typically include a subscription to Video Cloud, Gallery, Brightcove Social (for Video Marketing Suite customers) or Brightcove Live (for Enterprise Video Suite customers), basic support
and a pre-determined amount of
video streams or plays (for Video Marketing Suite customers), viewers (for Enterprise Video Suite customers), bandwidth and storage or videos. We also generally offer gold support or platinum support to these customers for an additional fee, which includes extended phone support. The pricing for our Pro and Enterprise editions is based on the number of users, accounts and usage, which is comprised of video streams or plays, viewers, bandwidth and storage or videos. Should a customer’s usage exceed the contractual entitlements, the contract will provide the rate at which the customer must pay for actual usage above the contractual entitlements, or will require the customer to upgrade its package upon renewal. The Starter edition provides customers with the same basic functionality that is offered in our Pro and Enterprise editions but has been designed for customers who have lower usage requirements and do not typically seek advanced features and functionality. Customers who purchase the Starter edition may
enter into one-year agreements or month-to-month agreements. Starter
customers with month-to-month agreements are
generally billed on a monthly basis and pay via a credit card.
All Brightcove Beacon, Brightcove Campaign, SSAI, Player, OTT Flow, Video Marketing Suite and Enterprise Video Suite customers are considered premium customers.
Professional Services and Other Revenue
— Professional services and other revenue consists of services such as implementation, software customizations and project management for customers who subscribe to our premium editions. These arrangements are priced either on a fixed fee basis with a portion due upon contract signing and the remainder due when the related services have been completed, or on a time and materials basis.
Cost of Revenue
Cost of subscription, support and professional services revenue primarily consists of costs related to supporting and hosting our product offerings and delivering our professional services. These costs include salaries, benefits, incentive compensation and stock-based compensation expense related to the management of our data centers, our customer support team and our professional services staff. In addition to these expenses, we incur third-party service provider costs such as data center and content delivery network, or CDN, expenses, allocated overhead, depreciation expense and amortization
of capitalized internal-use software development
costs and acquired intangible assets. We allocate overhead costs such as rent, utilities and supplies to all departments based on relative headcount. As such, general overhead expenses are reflected in cost of revenue in addition to each operating expense category. The costs associated with providing professional services are significantly higher as a percentage of related revenue than the costs associated with delivering our subscription and support services due to the labor costs of providing professional services.
In future periods we expect our cost of revenue will increase in absolute dollars as our revenue increases. Cost of revenue as a percentage of revenue could fluctuate from period to period depending on the number of our professional services engagements and
 
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any associated costs relating to the delivery of subscription services and the timing of significant expenditures. To the extent that our customer base grows, we intend to continue to invest additional resources in expanding the delivery capability of our products and other services. The timing of these additional expenses could affect our cost of revenue, both in terms of absolute dollars and as a percentage of revenue, in any particular quarterly or annual period.
Operating Expenses
We classify our operating expenses as follows:
Research and Development
. Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, incentive compensation and stock-based compensation, in addition to the costs associated with contractors and allocated overhead. We have focused our research and development efforts on expanding the functionality and scalability of our products and enhancing their ease of use, as well as creating new product offerings. We expect research and development expenses to increase in absolute dollars as we intend to continue to periodically release new features and functionality, expand our product offerings, continue the localization of our products in various languages, upgrade and extend our service offerings, and develop new technologies. Over the long term, we believe that research and development expenses as a percentage of revenue will decrease, but will vary depending upon the mix of revenue from new and existing products, features and functionality, as well as changes in the technology that our products must support, such as new operating systems or new Internet-connected devices.
Sales and Marketing
. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, incentive compensation, commissions, stock-based compensation and travel costs, amortization of acquired intangible assets, in addition to costs associated with marketing and promotional events, corporate communications, advertising, other brand building and product marketing expenses and allocated overhead. Our sales and marketing expenses have increased in absolute dollars in each of the last three years. We intend to continue to invest in sales and marketing and expand the sale of our product offerings within our existing customer base, build brand awareness and sponsor additional marketing events. Accordingly, we expect sales and marketing expense to continue to be our most significant operating expense in future periods. Over the long term, we believe that sales and marketing expense as a percentage of revenue will decrease, but will vary depending upon the mix of revenue from new and existing customers and
from small, medium-sized and enterprise
customers, as well as changes in the productivity of our sales and marketing programs.
General and Administrative
. General and administrative expenses consist primarily of personnel and related expenses for executive, legal, finance, information technology and human resources functions, including salaries, benefits, incentive compensation and stock-based compensation. General and administrative expenses also include the costs associated with professional fees, insurance premiums, other corporate expenses and allocated overhead. Over the long term, we believe that general and administrative expenses as a percentage of revenue will decrease.
Merger-related
. Merger-related costs consist of expenses related to mergers and acquisitions, integration costs and general corporate development activities and fluctuates based on the activity in the period.
Other Income (Expense), net
Other income (expense) consists primarily of interest expense from our credit facility, interest income earned on our cash, cash equivalents, and foreign exchange gains and losses.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our taxes in each of the jurisdictions in which we operate. We account for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. In addition, this method requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We have provided a valuation allowance against our existing U.S. net deferred tax assets at December 31, 2019.
 
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Stock-Based Compensation Expense
Our cost of revenue, research and development, sales and marketing, and general and administrative expenses include stock-based compensation expense. Stock-based compensation expense represents the grant date fair value of outstanding stock options and restricted stock awards, which is recognized as expense over the respective stock option and restricted stock award service periods. For the three months ended September 30, 2020 and 2019, we recorded $2.0 million and $1.7 million, respectively, of stock-based compensation expense. For the nine months ended September 30, 2020 and 2019, we recorded $6.7 million and $4.5 million, respectively, of stock-based compensation expense. We expect stock-based compensation expense to increase in absolute dollars in future periods.
Foreign Currency Translation
With regard to our international operations, we frequently enter into transactions in currencies other than the U.S. dollar. As a result, our revenue, expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British pound, Australian dollar, and Japanese yen. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we conduct business, our foreign currency-based revenue and expenses generally increase in value when translated into U.S. dollars. We expect the percentage of total net revenue derived from outside North America to increase in future periods as we continue to expand our international operations.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
We consider the assumptions and estimates associated with revenue recognition, income taxes, business combinations, intangible assets and goodwill to be our critical accounting policies and estimates.
For a detailed explanation of the judgments made in these areas, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on
Form 10-K for
the year ended December 31, 2019, which we filed with the Securities and Exchange Commission on February 27, 2020.
Results of Operations
As described above in
“COVID-19
Update”, the ultimate extent of the impact of any epidemic, pandemic, outbreak or other public health crisis on our results of operations will depend on future developments, which are highly uncertain, including new information that may emerge concerning the severity of the
current COVID-19 pandemic
or other public health crisis and actions taken to contain or prevent the further spread, among others. Accordingly, we cannot fully predict the extent to which our business and results of operations will be affected; however we expect
the COVID-19 pandemic
to continue to impact our operations in several ways. Our discussion of these risks is detailed in the section titled “Risk Factors” included under Part II, Item 1A below.
 
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The following tables set forth our results of operations for the periods presented. The data has been derived from the unaudited condensed consolidated financial statements contained in this Quarterly Report on
Form 10-Q which,
in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for the interim periods presented.
The period-to-period comparison
of financial results is not necessarily indicative of future results. This information should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on
Form 10-K for
the year ended December 31, 2019.
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2020
     
2019
     
2020
     
2019
  
    
(in thousands, except share and per share data)
  
Revenue:
            
Subscription and support revenue
    $ 46,338      $ 45,424      $ 136,613      $ 129,192  
Professional services and other revenue
      2,746        2,010        7,050        7,660  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total revenue
      49,084        47,434        143,663        136,852  
Cost of revenue:
            
Cost of subscription and support revenue
      15,735        16,686        50,290        50,237  
Cost of professional services and other revenue
      2,363        1,628        6,349        6,432  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total cost of revenue
      18,098        18,314        56,639        56,669  
  
 
 
     
 
 
     
 
 
     
 
 
  
Gross profit
      30,986        29,120        87,024        80,183  
Operating expenses:
            
Research and development
      8,215        8,127        26,199        23,150  
Sales and marketing
      14,813        14,567        42,370        45,650  
General and administrative
      6,694        6,245        19,633        17,485  
Merger-related
      —          2,539        5,768        8,091  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total operating expenses
      29,722        31,478        93,970        94,376  
  
 
 
     
 
 
     
 
 
     
 
 
  
Loss from operations
      1,264        (2,358 )       (6,946 )       (14,193 ) 
Other income (expense), net
      204        (441 )       (291 )       (477 ) 
  
 
 
     
 
 
     
 
 
     
 
 
  
Loss before income taxes
      1,468        (2,799 )       (7,237 )       (14,670 ) 
Provision for income taxes
      154        171        597        521  
  
 
 
     
 
 
     
 
 
     
 
 
  
Net income (loss)
    $ 1,314      $ (2,970 )     $ (7,834 )     $ (15,191 ) 
  
 
 
     
 
 
     
 
 
     
 
 
  
Net income (loss) per share—basic and diluted
            
Basic
    $ 0.03      $ (0.08 )     $ (0.20 )     $ (0.40 ) 
Diluted
    $ 0.03      $ (0.08 )     $ (0.20 )     $ (0.40 ) 
Weighted-average shares—basic and diluted
            
Basic
      39,682,337        38,564,314        39,319,703        37,738,739  
Diluted
      40,645,982        38,564,314        39,319,703        37,738,739  
Overview of Results of Operations for the Three Months Ended September 30, 2020 and 2019
Total revenue increased by 3%, or $1.7 million, in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 due to an increase in subscription and support revenue of 2%, or $914,000, primarily due to an increase in revenue from our premium offerings. The increase was also due to an increase in professional services and other revenue of 37%, or $736,000. Professional services and other revenue will vary from period to period depending on the number of implementations and other projects that are in process. Our revenue from premium offerings increased by $1.7 million, or 4%, in the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Our ability to continue to provide the product functionality and performance that our customers require will be a major factor in our ability to continue to increase revenue.
Our gross profit increased by $1.9 million, or 6%, in the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to an increase in revenue and a decrease in costs of revenue. Our ability to continue to maintain our overall gross profit will depend primarily on our ability to continue controlling our costs of delivery.
Income from operations was $1.3 million in the three months ended September 30, 2020 compared to a loss of $2.4 million in the three months ended September 30, 2019. This is primarily due to a decrease in costs of revenue and merger related expenses in the three months ended September 30, 2020 compared to the three months ended September 30, 2019.
As of September 30, 2020, we had $30.3 million of unrestricted cash and cash equivalents, an increase of $7.6 million from $22.8 million at December 31, 2019, due primarily to $8.9 million of cash provided by operating activities and $5.0 million in net proceeds from debt. These increases were offset by $5.1 million in
capitalized internal-use software
costs, and $2.2 million in capital expenditures.
 
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Revenue
 
    
Three Months Ended September 30,
              
    
2020
    
2019
    
Change
  
Revenue by Product Line
   
Amount
     
Percentage of

Revenue
    
Amount
     
Percentage of

Revenue
    
Amount
    
%
  
     (in thousands, except percentages)  
Premium
    $ 48,175        98 %    $ 46,462        98 %    $ 1,713       4 % 
Volume
      909        2       972        2       (63 )      (6 ) 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Total
    $ 49,084        100 %    $ 47,434        100 %    $ 1,650       3 % 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
During the three months ended September 30, 2020, revenue increased by $1.7 million, or 3%, compared to the three months ended September 30, 2019, primarily due to an increase in revenue from our premium offerings, which consists of subscription and support revenue as well as professional services and other revenue. The increase in premium revenue of $1.7 million, or 4%, is primarily the result of a 5% increase in average annual subscription revenue per premium customer during the three months ended September 30, 2020 compared to the three months ended September 30, 2019. In the three months ended September 30, 2020, volume revenue decreased by $63,000, or 6%, compared to the three months ended September 30, 2019.
 
    
Three Months Ended September 30,
               
    
2020
    
2019
    
Change
  
Revenue by Type
   
Amount
     
Percentage of

Revenue
    
Amount
     
Percentage of

Revenue
    
Amount
     
%
  
     (in thousands, except percentages)  
Subscription and support
    $ 46,338        94 %    $ 45,424        96 %    $ 914        2 % 
Professional services and other
      2,746        6       2,010        4       736        37  
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
Total
    $ 49,084        100 %    $ 47,434        100 %    $ 1,650        3 % 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
During the three months ended September 30, 2020, subscription and support revenue increased by $914,000, or 2%, compared to the three months ended September 30, 2019. The increase was primarily related to a 5% increase in average annual subscription revenue per premium customer during the three months ended September 30, 2020 compared to the three months ended September 30, 2019. In addition, professional services and other revenue increased by $736,000, or 37%, compared to the corresponding quarter in the prior year. Professional services and other revenue will vary from period to period depending on the number of implementations and other projects that are in process.
 
    
Three Months Ended September 30,
              
    
2020
    
2019
    
Change
  
Revenue by Geography
   
Amount
     
Percentage of

Revenue
    
Amount
     
Percentage of

Revenue
    
Amount
    
%
  
     (in thousands, except percentages)  
North America
    $ 27,515        56 %    $ 24,904        53 %    $ 2,611       10 %