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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 June 30, 2021
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 July 22, 2021 there were 40,812,422 shares of the registrant’s common stock, $0.001 par value per share, outstanding.
 
 
 
Table of Contents
BRIGHTCOVE INC.
Table of Contents
 
 
  
Page
 
PART I. FINANCIAL INFORMATION
  
  
 
4
 
  
 
5
 
  
 
6
 
  
 
7
 
  
 
8
 
  
 
9
 
  
 
15
 
  
 
28
 
  
 
30
 
  
 
30
 
  
 
30
 
  
 
30
 
  
 
31
 
  
 
32
 
  
 
33
 
 
2
Table of Contents
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;
 
 
•
 
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
 
 
•
 
our ability to maintain the security and reliability of our systems;
 
 
•
 
our estimates with regard to our future performance and total potential market opportunity;
 
 
•
 
our estimates regarding our anticipated results of operations, future revenue, 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)
 
 
  
June 30,
2021
 
 
December 31,
2020
 
 
  
(in thousands, except share
and per share data)
 
Assets
  
 
Current assets:
  
 
Cash and cash equivalents
    $ 40,387     $ 37,472  
Accounts receivable, net of allowance of $738 and $648 at June 30, 2021 and December 31, 2020, respectively
      31,445       29,305  
Prepaid expenses
      9,563       5,760  
Other current assets
      11,483       12,978  
    
 
 
    
 
 
  
Total current assets
      92,878       85,515  
Property and equipment, net
      17,460       15,968  
Operating lease
right-of-use
asset
      6,749       8,699  
Intangible assets, net
      8,956       10,465  
Goodwill
      60,902       60,902  
Other assets
      6,236       5,254  
Total assets
    $ 193,181     $ 186,803  
    
 
 
    
 
 
  
Liabilities and stockholders’ equity
                 
Current liabilities:
                 
Accounts payable
    $ 11,001     $ 10,456  
Accrued expenses
      20,779       25,397  
Operating lease liability
      2,734       4,346  
Deferred revenue
      62,433       58,741  
    
 
 
    
 
 
  
Total current liabilities
      96,947       98,940  
Operating lease liability, net of current portion
      4,200       5,498  
Other liabilities
      889       2,763  
    
 
 
    
 
 
  
Total liabilities
    $ 102,036       107,201  
Commitments and contingencies
(Note 8)
                 
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; 40,946,572 and 40,152,021 shares issued at June 30, 2021 and December 31, 2020, respectively
      41       40  
Additional
paid-in
capital
      292,775       287,059  
Treasury stock, at cost; 135,000 shares
      (871 )      (871 ) 
Accumulated other comprehensive loss
      (362 )      (188 ) 
Accumulated deficit
      (200,438 )      (206,438 ) 
    
 
 
    
 
 
  
Total stockholders’ equity
      91,145       79,602  
    
 
 
    
 
 
  
Total liabilities and stockholders’ equity
    $ 193,181     $ 186,803  
    
 
 
    
 
 
  
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 June 30,
 
 
Six Months Ended June 30,
 
 
  
2021
 
 
2020
 
 
2021
 
 
2020
 
 
  
(in thousands, except share and per share data)
 
Revenue:
  
 
 
 
Subscription and support revenue
    $ 48,602     $ 45,617     $ 99,441     $ 90,275  
Professional services and other revenue
      2,870       2,309       6,848       4,304  
    
 
 
    
 
 
    
 
 
    
 
 
  
Total revenue
      51,472       47,926       106,289       94,579  
Cost of revenue:
                                 
Cost of subscription and support revenue
      14,756       17,807       30,434       34,555  
Cost of professional services and other revenue
      2,468       2,092       5,958       3,986  
    
 
 
    
 
 
    
 
 
    
 
 
  
Total cost of revenue
      17,224       19,899       36,392       38,541  
    
 
 
    
 
 
    
 
 
    
 
 
  
Gross profit
      34,248       28,027       69,897       56,038  
Operating expenses:
                                 
Research and development
      7,855       9,131       16,139       17,984  
Sales and marketing
      18,130       13,383       34,279       27,557  
General and administrative
      7,418       6,407       14,477       12,939  
Merger-related
      255       259       255       5,768  
Other (benefit) expense
      —         —         (1,965 )      —    
    
 
 
    
 
 
    
 
 
    
 
 
  
Total operating expenses
      33,658       29,180       63,185       64,248  
    
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) from operations
      590       (1,153 )      6,712       (8,210 ) 
Other expense, net
      117       (27 )      (618 )      (495 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) before income taxes
      707       (1,180 )      6,094       (8,705 ) 
Provision for income taxes
      (163 )      115       94       443  
    
 
 
    
 
 
    
 
 
    
 
 
  
Net income (loss)
    $ 870     $ (1,295 )    $ 6,000     $ (9,148 ) 
Net income (loss) per share—basic and diluted
                                 
Basic
    $ 0.02     $ (0.03 )    $ 0.15     $ (0.23 ) 
Diluted
    $ 0.02     $ (0.03 )    $ 0.14     $ (0.23 ) 
Weighted-average shares—basic and diluted
                                 
Basic
      40,615,149       39,291,649       40,385,866       39,136,394  
Diluted
      42,208,933       39,291,649       42,390,641       39,136,394  
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 June 30,
 
 
Six Months
 
Ended

June 30,
 
 
  
2021
 
  
2020
 
 
2021
 
 
2020
 
 
  
(in thousands)
 
Net income (loss)
    $ 870      $ (1,295 )    $ 6,000     $ (9,148 ) 
Other comprehensive income:
                                  
Foreign currency translation adjustments
      35        158       (174 )      (301 ) 
    
 
 
     
 
 
    
 
 
    
 
 
  
Comprehensive income (loss)
    $ 905      $ (1,137 )    $ 5,826     $ (9,449 ) 
    
 
 
     
 
 
    
 
 
    
 
 
  
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)
 
 
  
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
  
2021
 
 
2020
 
 
2021
 
 
2020
 
 
  
(in thousands, except share data)
 
Shares of common stock issued
  
 
 
 
Balance, beginning of period
      40,412,577       39,105,853       40,152,021       39,042,787  
Issuance of common stock upon exercise of stock options and pursuant to restricted stock units
      533,995       438,138       794,551       501,204  
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance, end of period
      40,946,572       39,543,991       40,946,572       39,543,991  
    
 
 
    
 
 
    
 
 
    
 
 
  
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
    $ 40     $ 39     $ 41     $ 39  
Issuance of common stock upon exercise of stock options
      —         —         —         —    
Issuance of common stock upon exercise of stock options and pursuant to restricted stock units
      1       —         —         —    
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance, end of period
    $ 41     $ 39     $ 41     $ 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
    $ 290,403     $ 279,114     $ 287,059     $ 276,365  
Issuance of common stock upon exercise of stock options and pursuant to restricted stock units, net of tax
      (378 )      (38 )      631       (2 ) 
Stock-based compensation expense
      2,750       2,179       5,085       4,892  
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance, end of period
    $ 292,775     $ 281,255     $ 292,775     $ 281,255  
    
 
 
    
 
 
    
 
 
    
 
 
  
Accumulated deficit
                                 
Balance, beginning of period
    $ (201,308 )    $ (208,478 )    $ (206,438 )    $ (200,625 ) 
Net income (loss)
      870       (1,295 )      6,000       (9,148 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance, end of period
    $ (200,438 )    $ (209,773 )    $ (200,438 )    $ (209,773 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Accumulated other comprehensive loss
                                 
Balance, beginning of period
    $ (397 )    $ (1,244 )    $ (188 )    $ (785 ) 
Foreign currency translation adjustment
      35       158       (174 )      (301 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance, end of period
    $ (362 )    $ (1,086 )    $ (362 )    $ (1,086 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total stockholders’ equity
    $ 91,145     $ 69,564     $ 91,145     $ 69,564  
    
 
 
    
 
 
    
 
 
    
 
 
  
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)
 
 
  
Six Months Ended
June 30,
 
 
  
2021
 
 
2020
 
 
  
(in thousands)
 
Operating activities
  
 
Net income (loss)
    $ 6,000     $ (9,148 ) 
Adjustments to reconcile net loss to net cash provided by operating activities:
                 
Depreciation and amortization
      4,278       4,357  
Stock-based compensation
      4,901       4,716  
Provision for reserves on accounts receivable
      276       401  
Changes in assets and liabilities:
                 
Accounts receivable
      (2,634 )      4,055  
Prepaid expenses and other current assets
      (1,337 )      (5,357 ) 
Other assets
      (1,000 )      (300 ) 
Accounts payable
      105       2,038  
Accrued expenses
      (6,053 )      (577 ) 
Operating leases
      (960 )      3  
Deferred revenue
      3,801       5,112  
    
 
 
    
 
 
  
Net cash provided by operating activities
      7,377       5,300  
Investing activities
                 
Purchases of property and equipment
      (808 )      (1,197 ) 
Capitalized
internal-use
software costs
      (2,977 )      (3,839 ) 
    
 
 
    
 
 
  
Net cash used in investing activities
      (3,785 )      (5,036 ) 
Financing activities
                 
Proceeds from exercise of stock options
      1,980       394  
Deferred acquisition payments
      (475 )      —    
Proceeds from debt
      —         10,000  
Debt paydown
      —         (5,000 ) 
Other financing activities
      (1,348 )      (429 ) 
    
 
 
    
 
 
  
Net cash provided by financing activities
      157       4,965  
Effect of exchange rate changes on cash and cash equivalents
      (834 )      (235 ) 
    
 
 
    
 
 
  
Net increase in cash and cash equivalents
      2,915       4,994  
Cash and cash equivalents at beginning of period
      37,472       22,759  
    
 
 
    
 
 
  
Cash and cash equivalents at end of period
    $ 40,387     $ 27,753  
    
 
 
    
 
 
  
Supplemental disclosure of cash flow information
                 
Cash paid for operating lease liabilities
    $ 3,165     $ 3,561  
    
 
 
    
 
 
  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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Table of Contents
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.
The Company is headquartered in Boston, Massachusetts and was incorporated in the state of Delaware on August 24, 2004.
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, 2020.
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, 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, 2020 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 financial position for the three months ended June 30, 2021 and 2020. These interim periods are not necessarily indicative of the results to be expected for any other interim period or the full year.
2. Quarterly Update to Significant Accounting Policies
Stock-Based Compensation
On March 25, 2021, the Board adopted, the Brightcove Inc. 2021 Stock Incentive Plan (the “2021 Plan”) which was approved by the shareholders on May 11, 2021. The maximum number of shares of stock reserved and available for issuance under the 2021 Plan
is 6,200,000
shares. Any awards under the Plan and under the Company’s existing 2012 Stock Incentive Plan (the “2012 Plan”) and the Company’s Amended and Restated 2004 Stock Option and Incentive Plan that are forfeited, canceled or otherwise terminated (other than by exercise) will be added back to the shares of stock available for issuance under the 2021 Plan and may be issued as awards thereunder.
The 2021 Plan is designed to enable the flexibility to grant equity awards to our officers, employees,
non-employee
directors and consultants and to ensure that we can continue to grant equity awards to eligible recipients at levels determined to be appropriate by the Board and/or the Compensation Committee. The 2021 Plan replaces the 2012 Plan and therefore there will
be no
future grants issued under the 2012
P
lan.
 
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Allowance for Doubtful Accounts
The following details the changes in the Company’s reserve allowance for estimated credit losses for accounts receivable for the period:
 
 
  
Allowance for Credit Losses
 
 
  
(in thousands)
 
Balance as of December 31, 2020
    $ 648  
Current provision for credit losses
      233  
Write-offs against allowance
      (135 ) 
Recoveries
      (8 )
Balance as of
June
 3
0
, 2021
    $ 738  
    
 
 
  
Estimated credit losses for unbilled trade accounts receivable were not material.
Other (Benefit) Expense.
Other (benefit) expense, reflects other operating costs (or benefits) that do not directly relate to research and development, sales and marketing, general and administrative, and merger related.
On March 27, 2020, in response to the
COVID-19
pandemic, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act which was amended by the Consolidated Appropriations Act in December of 2020 (the “CARES Act”). The CARES Act provides numerous tax provisions and other stimulus measures, including the creation of certain refundable employee retention credits. In the first quarter of 2021, the Company recognized a benefit of $1,965 from the CARES Act related to employee retention credits. The Company recognizes such government relief when it is reasonably assured that it qualifies for the relief, the underlying expense has been incurred and it is probable that the Company will receive it. Credits associated with government relief are recognized in profit or loss on a systematic basis over the periods in which the Company recognizes as expense the related costs for which the relief is intended to compensate.
Recently Issued and Adopted Accounting Pronouncements
ASU
2019-12—Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU
2019-12,
“Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU
2019-12
amends ASC 740 to simplify the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations and interim calculations, and adding guidance to reduce complexity in the accounting standard under the FASB’s simplification initiative. Upon adoption, the amendments in ASU
2019-12
are applied on a prospective basis to all periods presented. The Company adopted the new guidance under ASU
2019-12
in the first quarter of 2021 with no material impact.
3. 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, 2020
    $ 29,305      $ 2,078      $ 58,741      $ 811      $ 59,552  
Balance at June 30, 2021
      31,445        2,077        62,433        434        62,867  
Revenue recognized for the three and six months ended June 30, 2021 from amounts included in deferred revenue at the beginning of the period was approximately
$15.5 
million and $46.7 million, respectively. During the three and six months ended June 30, 2021, the Company did not recognize a material amount of revenue from performance obligations satisfied or partially satisfied in previous periods.
 
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Table of Contents
The assets recognized for costs to obtain a contract were $12.6 million as of June 30, 2021 and $13.3
 
million as of December 31, 2020. Amortization expense recognized for the three and six months ended June 30, 2021 related to costs to obtain a contract was $3.2 million and $6.3 million, respectively.
 
Amortization expense recognized for the three and six months ended June 30, 2020 related to costs to obtain a contract was $1.8 million and $3.4 million, respectively.
Transaction Price Allocated to Future Performance Obligations
As of June 30, 2021, the total aggregate transaction price allocated to the unsatisfied performance obligations for subscription and support contracts was approximately $152.8 million, of which approximately $119.8 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.
4. Cash and Cash Equivalents
Cash and cash equivalents as of June 30, 2021 consist of the following:
 
    
June 30, 2021
  
Description
   
Contracted

Maturity
     
Cost
     
Fair Market

Value
  
Cash
      Demand      $ 40,346      $ 40,346  
Money market funds
      Demand        41        41  
             
 
 
     
 
 
  
Total cash and cash equivalents
             $ 40,387      $ 40,387  
             
 
 
     
 
 
  
Cash and cash equivalents as of December 31, 2020 consist of the following:
 
    
December 31, 2020
  
Description
   
Contracted

Maturity
     
Cost
     
Fair 
Market

Value
  
Cash
      Demand      $ 37,431      $ 37,431  
Money market funds
      Demand        41        41  
             
 
 
     
 
 
  
Total cash and cash equivalents
             $ 37,472      $ 37,472  
             
 
 
     
 
 
  
5. Earnings (Loss) per Share
The Company calculates basic and diluted earnings (loss) per common share by dividing the earnings (loss) amount by the number of common shares outstanding during the period. The calculation of diluted earnings (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 table set forth the computations of basic and diluted earnings per share:
 
    
Three Months Ended June 30,
     
Six Months Ended June 30,
  
(in thousands)
   
2021
     
2020
     
2021
     
2020
  
Net income (loss)
    $ 870      $ (1,295 )     $ 6,000      $ (9,148 ) 
    
 
 
     
 
 
     
 
 
     
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares used in computing basic earnings per share
      40,615,149        39,291,649        40,385,866        39,136,394  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of weighted average dilutive stock-based awards
      1,593,784        —          2,004,775        —    
    
 
 
     
 
 
     
 
 
     
 
 
  
Weighted average shares used in computing diluted earnings per share
      42,208,933        39,291,649        42,390,641        39,136,394  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share—basic and diluted
                                    
Basic
    $ 0.02      $ (0.03 )     $ 0.15      $ (0.23 ) 
Diluted
    $ 0.02      $ (0.03 )     $ 0.14      $ (0.23 ) 
 
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The following outstanding common shares have been excluded from the computation of dilutive earnings (loss) per share as of the periods indicated because such securities are anti-dilutive:
 
 
  
Three Months Ended June 30,
 
  
Six Months Ended June 30,
 
(shares in thousands)
  
2021
 
  
2020
 
  
2021
 
  
2020
 
Options outstanding
      145        2,372        122        2,372  
Restricted stock units outstanding
      68        3,580        68        3,580  
6. Stock-based Compensation
The weighted-average assumptions utilized to determine the weighted-average fair value of options are presented in the following table:
 
    
Three Months Ended June 30,
    
Six Months Ended June 30,
  
    
2021
    
2020
    
2021
    
2020
  
Weighted-average fair value of options granted during the period
    $ 6.75     $ 3.76     $ 7.72     $ 3.48  
Risk-free interest rate
      1.22 %      0.62 %      1.16 %      1.03 % 
Expected volatility
      48 %      48 %      48 %      46 % 
Expected life (in years)
      6.2       6.3       6.2       6.2  
Expected dividend yield
      —         —         —         —    
As of June 30, 2021, there was $26.6 million of unrecognized stock-based compensation expense related to stock-based awards that is expected to be recognized over a weighted-average period of 2.36 years. The following table summarizes stock-based compensation expense as included in the consolidated statement of operations for the three months ended June 30, 2021 and 2020:
 
    
Three Months Ended June 30,
     
Six Months Ended June 30,
  
    
2021
     
2020
     
2021
     
2020
  
Stock-based compensation:
                                    
Cost of subscription and support revenue
    $ 187      $ 123      $ 344      $ 313  
Cost of professional services and other revenue
      118        90        186        170  
Research and development
      531        257        853        697  
Sales and marketing
      762        761        1,499        1,672  
General and administrative
      1,011        867        2,019        1,864  
    
 
 
     
 
 
     
 
 
     
 
 
  
     $ 2,609      $ 2,098      $ 4,901      $ 4,716  
    
 
 
     
 
 
     
 
 
     
 
 
  
The following is a summary of the stock option activity during the six months ended June 30, 2021.
 
    
Number of

Shares
     
Weighted-Average

Exercise Price
     
Weighted-Average

Remaining

Contractual

Term (In Years)
     
Aggregate

Intrinsic

Value (1)
  
Outstanding at December 31, 2020
      2,110,486      $ 9.19                    
Granted
      79,230        16.51                    
Exercised
      (226,525 )       8.74               $ 2,616  
Canceled
      (64,506 )       9.95                    
    
 
 
                             
Outstanding at June 30, 2021
      1,898,685      $ 9.54        6.54      $ 9,385  
    
 
 
                             
Exercisable at June 30, 2021
      1,275,816      $ 8.93        5.81      $ 6,968  
    
 
 
                             
 
(1)
The aggregate intrinsic value was calculated based on the positive difference between the fair value of the Company’s common stock on June 30, 2021 of $14.34 per share, or the date of exercise, as appropriate, and the exercise price of the underlying options.
 
12
Table of Contents
The following table summarizes the restricted stock unit activity for our service-based awards
(“S-RSU”)
and our performance-based awards
(“P-RSU”)
during the six months ended June 30, 2021:
 
    
S-RSU

Shares
    
Weighted

Average Grant

Date Fair Value
     
P-RSU

Shares
    
Weighted

Average Grant

Date Fair Value
     
Total RSU
Shares
    
Weighted

Average Grant

Date Fair Value
  
Unvested at December 31, 2020
      2,000,416     $ 10.40        1,587,801     $ 10.30        3,588,217     $ 10.35  
Granted
      847,994       14.78        —         —          847,994       14.78  
Vested and issued
      (345,513 )      8.65        (181,910 )      8.74        (527,423 )      8.68  
Canceled
      (198,131 )      10.33        (196,840 )      8.76        (394,971 )      9.52  
    
 
 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
  
Unvested at June 30, 2021
      2,304,766     $ 12.26        1,209,051     $ 10.79        3,513,817     $ 11.75  
    
 
 
    
 
 
     
 
 
    
 
 
     
 
 
    
 
 
  
7. Income Taxes
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.
The Company has provided a valuation allowance against its remaining U.S. net deferred tax assets as of June 30, 2021 and December 31, 2020, 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.
8. 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 June 30, 2021, 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.
9. Debt
On December 28, 2020, 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”). 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
 
 
13
Table of Contents
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 Line of Credit agreement will expire on December 28, 2023. The Company
was
in compliance with all covenants under the Line of Credit as of June 30, 2021 and there were no borrowings outstanding as of June 30, 2021.
10. 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 June 30,
     
Six Months Ended June 30,
  
    
2021
     
2020
     
2021
     
2020
  
Revenue:
                                    
North America
    $ 29,398      $ 26,039      $ 59,784      $ 51,038  
Europe
      9,547        8,427        18,470        16,888  
Japan
      5,370        5,554        13,078        11,656  
Asia Pacific
      7,016        7,714        14,675        14,584  
Other
      141        192        282        413  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total revenue
    $ 51,472      $ 47,926      $ 106,289      $ 94,579  
    
 
 
     
 
 
     
 
 
     
 
 
  
North America is comprised of revenue from the United States, Canada and Mexico. Revenue from customers located in the United States was $27.5 million and $24.0 million for the three months ended June 30, 2021 and 2020, respectively. Revenue from customers located in the United States was $55.9 million and $47.0 million for the six months ended June 30, 2021 and 2020, 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 six months ended June 30, 2021 and 2020.
As of June 30, 2021 and December 31, 2020, property and equipment at locations outside the U.S. was not material.
 
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Table of Contents
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except share and per share data, unless otherwise noted)
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, 2020.
Company Overview
We are a leading global provider of cloud-based services for video. We were incorporated in Delaware in August 2004. With our Emmy
®
-winning technology and award-winning services, we help our customers realize the potential of video to address business-critical challenges. Customers rely on our suite of products, services, and expertise to reduce the cost and complexity associated with publishing, distributing, measuring and monetizing video across devices.
We sell five core video products that help our customers use video to further their businesses in meaningful ways: (1) Video Cloud, our flagship product and the world’s leading online video platform, enables our customers to quickly and easily distribute high-quality video to Internet-connected devices; (2) Brightcove Live, our industry-leading solution for live streaming, delivers high-quality viewer experiences at scale; (3) Brightcove Beacon, a purpose-built application that enables companies to launch premium OTT video experiences quickly and cost effectively, across devices and with the flexibility of multiple monetization models; (4) Brightcove Player, an exceptionally fast, cloud-based technology for creating and managing video experiences; and (5) Zencoder, a powerful, cloud-based video encoding technology.
Customers can complement their use of our core products with modular technologies that provide enhanced capabilities such as (1) innovative ad insertion and video stitching through Brightcove SSAI; (2) efficient publication of videos to Facebook, Twitter, and YouTube through Brightcove Social; (3) an app for creating marketing campaigns with insightful data and industry benchmarks through Brightcove Campaign; (4) simple streaming of video communications to an app through Brightcove Engage; and (5) create branded video experience by accessing templates with
built-in
best practices through Brightcove Gallery.
We have also brought to market several video solutions, which are comprised of a suite of video technologies that address specific customer
use-cases
and needs: (1) Virtual Events Experience helps brands to transform events into customized virtual experiences; (2) Brightcove Video Marketing Suite, enables marketers to use video to drive brand awareness, engagement and conversion; and (3) Brightcove Enterprise Video Suite, provides an enterprise-class platform for internal communications, employee training, live streaming, marketing and ecommerce videos.
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 June 30, 2021 and 2020 we had 670 and 607 employees, respectively.
We generate revenue by offering our products to customers on a subscription-based, software as a service, or SaaS, model. Our revenue grew from $94.6 million in the six months ended June 30, 2020 to $106.3 million in the six months ended June 30, 2021, due to an increase in the average annual subscription revenue per premium customer.
Included in the consolidated net income for the six months ended June 30, 2021 was stock-based compensation expense and amortization of acquired intangible assets of $4.9 million, and $1.5 million, respectively. Included in the consolidated net loss for the six months ended June 30, 2020 was merger-related expense, stock-based compensation expense, and amortization of acquired intangible assets of $5.8 million, $4.7 million, and $1.8 million, respectively.
 
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For the six months ended June 30, 2021 and 2020, our revenue derived from customers located outside North America was 43 and 46, 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.
The following table includes our key metrics for the periods presented:
 
    
Six Months Ended
June 30,
  
    
2021
    
2020
  
Customers (at period end)
     
Premium
      2,280       2,279  
Volume
      983       1,144  
  
 
 
    
 
 
  
Total customers (at period end)
      3,263       3,423  
  
 
 
    
 
 
  
Net revenue retention rate
      98 %      92 % 
Recurring dollar retention rate
      86 %      84 % 
Average annual subscription revenue per premium customer, excluding Starter edition customers (in thousands)
    $ 92.2     $ 86.4  
Average annual subscription revenue per premium customer for Starter edition customers only (in thousands)
    $ 4.5     $ 4.5  
Total backlog, excluding professional services engagements (in millions)
    $ 152.8     $ 136.9  
Total backlog to be recognized over next 12 months, excluding professional services engagements (in millions)
    $ 119.8     $ 108.8  
 
•  
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 (OTT Flow is our partner-based OTT platform, which preceded Brightcove Beacon), our Virtual Event Experience customers, our Video Marketing Suite customers, our Enterprise Video Suite customers, our Brightcove Beacon customers, Brightcove Engage 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.
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 2021 and beyond as we continue to focus on the market for our premium solutions.
 
•  
Net Revenue Retention Rate
. We assess our ability to retain and expand customers using a metric we refer to as our net revenue retention rate. We calculate the net revenue retention rate by dividing: a) the current annualized recurring revenue for premium customers that existed twelve months prior by b) the annualized recurring revenue for all premium customers that existed twelve months prior. We define annualized recurring revenue for premium customers as the aggregate annualized contract value from our premium customer base, measured as of the end of a given period. We typically calculate our net revenue retention rate on a quarterly basis. For annual periods, we report net revenue retention rate as the average of the net revenue retention rate for all fiscal quarters included in the period. By dividing the retained recurring revenue by the base recurring revenue, we measure our success in retaining and growing installed revenue from the specific cohort of customers we served at the beginning of the period. The recurring dollar retention rate focuses on contracts up for renewal in a given quarter and only captures expansion/upsells at time of renewal, and is more susceptible to swings than the net revenue retention rate. Accordingly, we plan to continue to report the net revenue retention rate and discontinue reporting recurring dollar retention rate after December 31, 2021.
 
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•  
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.
 
•  
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.
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.
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, platinum and platinum plus support to our premium customers for an additional fee. 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.
Virtual Events Experience, Brightcove Live and Brightcove Player are offered to customers on a subscription basis. Customer arrangements are
typically one-year contracts,
which include a subscription to Virtual Events Experience, Brightcove Live or the Brightcove Player, basic support and
a pre-determined amount
of video streams, bandwidth, transcoding, and storage and only video streams for Brightcove Player. We also offer gold, platinum, and platinum plus support to our Virtual Events Experience, Brightcove Live and Brightcove Player customers for an additional fee. The pricing for these products is based on the value of our software, as well as, the number of users, accounts and usage. 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.
 
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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.
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, OTT Flow, Brightcove Campaign, Brightcove Live, SSAI, Player, Virtual Events Experience, 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.
Cost of revenue increased in absolute dollars from the first six months of 2020 to the first six months of 2021. 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 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
 
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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.
Other (Benefit) Expense
. Reflects other operating benefits, costs that do not directly relate to the operating activities listed above.
Other Income (Expense), net
Other income (expense) consists primarily of 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, 2020. We maintain net deferred tax liabilities for temporary differences related to our Japanese subsidiary.
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 June 30, 2021 and 2020, we recorded $2.6 million and $2.1 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
 
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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, 2020, which we filed with the Securities and Exchange Commission on February 24, 2021.
 
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Results of Operations
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, 2020.
 
    
Three Months Ended June 30,
    
Six Months Ended June 30,
  
    
2021
    
2020
    
2021
    
2020
  
    
(in thousands, except share and per share data)
  
Revenue:
         
Subscription and support revenue
    $ 48,602     $ 45,617     $ 99,441     $ 90,275  
Professional services and other revenue
      2,870       2,309       6,848       4,304  
  
 
 
    
 
 
    
 
 
    
 
 
  
Total revenue
      51,472       47,926       106,289       94,579  
Cost of revenue:
         
Cost of subscription and support revenue
      14,756       17,807       30,434       34,555  
Cost of professional services and other revenue
      2,468       2,092       5,958       3,986  
  
 
 
    
 
 
    
 
 
    
 
 
  
Total cost of revenue
      17,224       19,899       36,392       38,541  
  
 
 
    
 
 
    
 
 
    
 
 
  
Gross profit
      34,248       28,027       69,897       56,038  
Operating expenses:
         
Research and development
      7,855       9,131       16,139       17,984  
Sales and marketing
      18,130       13,383       34,279       27,557  
General and administrative
      7,418       6,407       14,477       12,939  
Merger-related
      255       259       255       5,768  
Other (benefit) expense
      —         —         (1,965 )      —    
  
 
 
    
 
 
    
 
 
    
 
 
  
Total operating expenses
      33,658       29,180       63,185       64,248  
  
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) from operations
      590       (1,153 )      6,712       (8,210 ) 
Other expense, net
      117       (27 )      (618 )      (495 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Income (loss) before income taxes
      707       (1,180 )      6,094       (8,705 ) 
Provision for income taxes
      (163 )      115       94       443  
  
 
 
    
 
 
    
 
 
    
 
 
  
Net income (loss)
    $ 870     $ (1,295 )    $ 6,000     $ (9,148 ) 
Net income (loss) per share—basic and diluted
         
Basic
    $ 0.02     $ (0.03 )    $ 0.15     $ (0.23 ) 
Diluted
    $ 0.02     $ (0.03 )    $ 0.14     $ (0.23 ) 
Weighted-average shares—basic and diluted
         
Basic
      40,615,149       39,291,649       40,385,866       39,136,394  
Diluted
      42,208,933       39,291,649       42,390,641       39,136,394  
Overview of Results of Operations for the Three Months Ended June 30, 2021 and 2020
Total revenue increased by 8%, or $3.5 million, in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 due to an increase in subscription and support revenue of 7%, or $3.0 million, primarily due to an increase in average revenue per premium customer of 5.7%. Professional services and other revenue also increased by 24% or $561.0. Professional services and other revenue will vary from period to period depending on the number of implementations and other projects that are in process. In addition, our revenue from premium offerings grew by $3.8 million, or 8%, in the three months ended June 30, 2021 compared to the three months ended June 30, 2020. 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 $6.2 million, or 22%, in the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to an increase in revenue and our transition of acquired Ooyala customers to our technology during 2020. Our ability to continue to maintain our overall gross profit will depend primarily on our ability to continue controlling our costs of delivery.
 
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Income from operations was $0.6 million in the three months ended June 30, 2021 compared to a loss from operations of $1.2 million in the three months ended June 30, 2020. This is primarily due to an increase in revenue of $3.5 million and the improvement of gross profit on subscription and support revenue in the three months ended June 30, 2021 compared to the three months ended June 30, 2020.
Revenue
 
    
Three Months Ended June 30,
              
    
2021
    
2020
    
Change
  
Revenue by Product Line
   
Amount
     
Percentage of

Revenue
    
Amount
     
Percentage of

Revenue
    
Amount
    
%
  
     (in thousands, except percentages)  
Premium
    $ 50,694        98 %    $ 46,941        98 %    $ 3,753       8 % 
Volume
      778        2       985        2       (207 )      (21 ) 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Total
    $ 51,472        100 %    $ 47,926        100 %    $ 3,546       8 % 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
During the three months ended June 30, 2021, revenue increased by $3.5 million, or 8%, compared to the three months ended June 30, 2020, primarily due to an increase in revenue from our premium offerings. The increase in premium revenue of $3.8 million, or 8%, is primarily the result of increased premium subscription offerings to our customers as the average annual subscription revenue per premium customer increased 5.7% compared to the prior period. In the three months ended June 30, 2021, volume revenue decreased by $207, or 21%, compared to the three months ended June 30, 2020, as we continue to focus on the market for our premium solutions.
 
    
Three Months Ended June 30,
               
    
2021
    
2020
    
Change
  
Revenue by Type
   
Amount
     
Percentage of

Revenue
    
Amount
     
Percentage of

Revenue
    
Amount
     
%
  
     (in thousands, except percentages)  
Subscription and support
    $ 48,602        94 %    $ 45,617        96 %    $ 2,985        7 % 
Professional services and other
      2,870        6       2,309        4       561        24  
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
Total
    $ 51,472        100 %    $ 47,926        100 %    $ 3,546        8 % 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
During the three months ended June 30, 2021, subscription and support revenue increased by $3.0 million, or 7%, compared to the three months ended June 30, 2020. The increase was primarily related to an increase in the average annual subscription revenue per premium customer of 5.7% during the three months ended June 30, 2021 compared to the three months ended June 30, 2020. In addition, professional services and other revenue increased by $561, or 24%, 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 June 30,
              
    
2021
    
2020
    
Change
  
Revenue by Geography
   
Amount
     
Percentage of

Revenue
    
Amount
     
Percentage of

Revenue
    
Amount
    
%
  
     (in thousands, except percentages)  
North America
    $ 29,398        57 %    $ 26,039        54 %    $ 3,359       13 % 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Europe
      9,547        19       8,427        18       1,120       13  
Japan
      5,370        10       5,554        12       (184 )      (3 ) 
Asia Pacific
      7,016        14       7,714        16       (698 )      (9 ) 
Other
      141        —         192        —         (51 )      (27 ) 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
International subtotal
      22,074        43       21,887        46       187       1  
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Total
    $ 51,472        100 %    $ 47,926        100 %    $ 3,546       8 % 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
For purposes of this section, we designate revenue by geographic regions based upon the locations of our customers. North America is comprised of revenue from the United States, Canada and Mexico. International is comprised of revenue from locations outside of North America. Depending on the timing of new customer contracts, revenue mix from a geographic region can vary from period to period.
During the three months ended June 30, 2021, total revenue for North America increased $3.4 million, or 13%, compared to the three months ended June 30, 2020. In the three months ended June 30, 2021, total revenue outside of North America increased $187, or 1%, compared to the three months ended June 30, 2020. The increase in revenue from international regions is primarily related to increases in revenue in Japan.
 
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Cost of Revenue
 
    
Three Months Ended June 30,
              
    
2021
    
2020
    
Change
  
Cost of Revenue
   
Amount
     
Percentage of

Related

Revenue
    
Amount
     
Percentage of

Related

Revenue
    
Amount
    
%
  
     (in thousands, except percentages)  
Subscription and support
    $ 14,756        30 %    $ 17,807        39 %    $ (3,051 )      (17 )% 
Professional services and other
      2,468        86       2,092        91       376       18  
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Total
    $ 17,224        33 %    $ 19,899        42 %    $ (2,675 )      (13 )% 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
In the three months ended June 30, 2021, cost of subscription and support revenue decreased by $3.1 million, or 17%, compared to the three months ended June 30, 2020. The decrease resulted primarily from incremental costs from the acquisition of Ooyala in the three months ended June 30, 2020 which did not recur in the three months ended June 30, 2021. In the three months ended June 30, 2021, cost of professional services and other revenue increased by $376, or 18%, compared to the three months ended June 30, 2020. This increase corresponds to an increase in contractor expenses of $270 to support the increase in professional services revenue.
Gross Profit
 
    
Three Months Ended June 30,
               
    
2021
    
2020
    
Change
  
Gross Profit
   
Amount
     
Percentage of

Related

Revenue
    
Amount
     
Percentage of

Related

Revenue
    
Amount
     
%
  
     (in thousands, except percentages)  
Subscription and support
    $ 33,846        70 %    $ 27,810        61 %    $ 6,036        22 % 
Professional services and other
      402        14       217        9       185        85 % 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
Total
    $ 34,248        67 %    $ 28,027        58 %    $ 6,221        22 % 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
The overall gross profit percentage was 67% for the three months ended June 30, 2021 compared to 58% for the three months ended June 30, 2020. Subscription and support gross profit increased $6.0 million, or 22%, compared to the three months ended June 30, 2020. The increase in gross profit dollars for subscription and support revenue was due to incremental costs from the acquisition of Ooyala in the three months ended June 30, 2020 which did not recur in the three months ended June 30, 2021.
Operating Expenses
 
    
Three Months Ended June 30,