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, 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
     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 21, 2021, there were 41,090,876 shares of the registrant’s common stock, $0.001 par value per share, outstanding.
 
 
 

Table of Contents
BRIGHTCOVE INC.
Table of Contents
 
 
  
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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)
 
    
September 30,
2021
   
December 31,

2020
 
              
    
(in thousands, except share
and per share data)
 
Assets
                
Current assets:
                
Cash and cash equivalents
   $ 45,285     $ 37,472  
Accounts receivable, net of allowance of $443 and $648 at September 30, 2021 and December 31, 2020, respectively
     28,138       29,305  
Prepaid expenses
     8,965       5,760  
Other current assets
     11,411       12,978  
    
 
 
   
 
 
 
Total current assets
     93,799       85,515  
Property and equipment, net
     18,777       15,968  
Operating lease
right-of-use
asset
     5,668       8,699  
Intangible assets, net
     8,213       10,465  
Goodwill
     60,902       60,902  
Other assets
     6,491       5,254  
    
 
 
   
 
 
 
Total assets
   $ 193,850     $ 186,803  
    
 
 
   
 
 
 
Liabilities and stockholders’ equity
                
Current liabilities:
                
Accounts payable
   $ 11,007     $ 10,456  
Accrued expenses
     21,082       25,397  
Operating lease liability
     2,176       4,346  
Deferred revenue
     61,739       58,741  
    
 
 
   
 
 
 
Total current liabilities
     96,004       98,940  
Operating lease liability, net of current portion
     3,734       5,498  
Other liabilities
     1,536       2,763  
    
 
 
   
 
 
 
Total liabilities
   $ 101,274       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; 41,175,854 and 40,152,021 shares issued at September 30, 2021 and December 31, 2020, respectively
     41       40  
Additional
paid-in
capital
     295,464       287,059  
Treasury stock, at cost; 135,000 shares
     (871     (871
Accumulated other comprehensive loss
     (600     (188
Accumulated deficit
     (201,458     (206,438
    
 
 
   
 
 
 
Total stockholders’ equity
     92,576       79,602  
    
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 193,850     $ 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
September 30,
    
Nine Months Ended
September 30,
 
    
2021
   
2020
    
2021
   
2020
 
                           
    
(in thousands, except share and per share data)
 
Revenue:
                                 
Subscription and support revenue
   $ 49,226     $ 46,338      $ 148,667     $ 136,613  
Professional services and other revenue
     2,937       2,746        9,785       7,050  
    
 
 
   
 
 
    
 
 
   
 
 
 
Total revenue
     52,163       49,084        158,452       143,663  
Cost of revenue:
                                 
Cost of subscription and support revenue
     16,406       15,735        46,840       50,290  
Cost of professional services and other revenue
     2,247       2,363        8,205       6,349  
    
 
 
   
 
 
    
 
 
   
 
 
 
Total cost of revenue
     18,653       18,098        55,045       56,639  
    
 
 
   
 
 
    
 
 
   
 
 
 
Gross profit
     33,510       30,986        103,407       87,024  
Operating expenses:
                                 
Research and development
     7,902       8,215        24,041       26,199  
Sales and marketing
     18,451       14,813        52,730       42,370  
General and administrative
     7,345       6,694        21,822       19,633  
Merger-related
     45                 300       5,768  
Other (benefit) expense
     —         —          (1,965     —    
    
 
 
   
 
 
    
 
 
   
 
 
 
Total operating expenses
     33,743       29,722        96,928       93,970  
    
 
 
   
 
 
    
 
 
   
 
 
 
(Loss) income from operations
     (233     1,264        6,479       (6,946
Other (expense) income, net
     (319     204        (937     (291
    
 
 
   
 
 
    
 
 
   
 
 
 
(Loss) income before income taxes
     (552     1,468        5,542       (7,237
Provision for income taxes
     468       154        562       597  
    
 
 
   
 
 
    
 
 
   
 
 
 
Net (loss) income
   $ (1,020   $ 1,314      $ 4,980     $ (7,834
Net (loss) income per share—basic and diluted
                                 
Basic
   $ (0.02   $ 0.03      $ 0.12     $ (0.20
Diluted
   $ (0.02   $ 0.03      $ 0.12     $ (0.20
Weighted-average shares—basic and diluted
                                 
Basic
     40,934,689       39,682,337        40,570,817       39,319,703  
Diluted
     40,934,689       40,645,982        42,237,438       39,319,703  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
5

Table of Contents
Brightcove Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(unaudited)
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2021
   
2020
    
2021
   
2020
 
                           
    
(in thousands)
 
Net (loss) income
   $ (1,020   $ 1,314      $ 4,980     $ (7,834
Other comprehensive income:
                                 
Foreign currency translation adjustments
     (238     345        (412     44  
    
 
 
   
 
 
    
 
 
   
 
 
 
Comprehensive (loss) income
   $ (1,258   $ 1,659      $ 4,568     $ (7,790
    
 
 
   
 
 
    
 
 
   
 
 
 
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
September 30,
   
Nine Months Ended
September 30,
 
    
2021
   
2020
   
2021
   
2020
 
                          
    
(in thousands, except share data)
 
Shares of common stock issued
                                
Balance, beginning of period
     40,946,572       39,543,991       40,152,021       39,042,787  
Issuance of common stock upon exercise of stock options and pursuant to restricted stock units
     229,282       387,256       1,023,833       888,460  
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, end of period
     41,175,854       39,931,247       41,175,854       39,931,247  
    
 
 
   
 
 
   
 
 
   
 
 
 
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
   $ 41     $ 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                1  
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, end of period
   $ 41     $ 40     $ 41     $ 40  
    
 
 
   
 
 
   
 
 
   
 
 
 
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
   $ 292,775     $ 281,255     $ 287,059     $ 276,365  
Issuance of common stock upon exercise of stock options and pursuant to restricted stock units, net of tax
     194       794       825       792  
Stock-based compensation expense
     2,495       2,072       7,580       6,964  
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, end of period
   $ 295,464     $ 284,121     $ 295,464     $ 284,121  
    
 
 
   
 
 
   
 
 
   
 
 
 
Accumulated deficit
                                
Balance, beginning of period
   $ (200,438   $ (209,773   $ (206,438   $ (200,625
Net income (loss)
     (1,020     1,314       4,980       (7,834
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, end of period
   $ (201,458   $ (208,459   $ (201,458   $ (208,459
    
 
 
   
 
 
   
 
 
   
 
 
 
Accumulated other comprehensive loss
                                
Balance, beginning of period
   $ (362   $ (1,086   $ (188   $ (785
Foreign currency translation adjustment
     (238     345       (412     44  
    
 
 
   
 
 
   
 
 
   
 
 
 
Balance, end of period
   $ (600   $ (741   $ (600   $ (741
    
 
 
   
 
 
   
 
 
   
 
 
 
Total stockholders’ equity
   $ 92,576     $ 74,090     $ 92,576     $ 74,090  
    
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
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Table of Contents
Brightcove Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
    
Nine Months Ended September 30,
 
    
2021
   
2020
 
              
    
(in thousands)
 
Operating activities
                
Net income (loss)
   $ 4,980     $ (7,834
Adjustments to reconcile net loss to net cash provided by operating activities:
                
Depreciation and amortization
     6,284       6,497  
Stock-based compensation
     7,234       6,724  
Provision for reserves on accounts receivable
     246       461  
Changes in assets and liabilities:
                
Accounts receivable
     710       (1,433
Prepaid expenses and other current assets
     (914     (6,414
Other assets
     (1,273     (1,247
Accounts payable
     79       104  
Accrued expenses
     (4,402     3,410  
Operating leases
     (903     (13
Deferred revenue
     2,707       8,667  
    
 
 
   
 
 
 
Net cash provided by operating activities
     14,748       8,922  
Investing activities
                
Purchases of property and equipment
     (1,625     (2,163
Capitalized
internal-use
software costs
     (4,657     (5,108
    
 
 
   
 
 
 
Net cash used in investing activities
     (6,282     (7,271
Financing activities
                
Proceeds from exercise of stock options
     2,200       1,207  
Deferred acquisition payments
     (475     —    
Proceeds from debt
     —         10,000  
Debt paydown
     —         (5,000
Other financing activities
     (1,375     (448
    
 
 
   
 
 
 
Net cash provided by financing activities
     350       5,759  
Effect of exchange rate changes on cash and cash equivalents
     (1,003     163  
    
 
 
   
 
 
 
Net increase in cash and cash equivalents
     7,813       7,573  
Cash and cash equivalents at beginning of period
     37,472       22,759  
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 45,285     $ 30,332  
    
 
 
   
 
 
 
Supplemental disclosure of cash flow information
                
Cash paid for operating lease liabilities
   $ 3,505     $ 5,087  
Cash paid for income taxes
 
$
681
 
 
$
993

 
    
 
 
   
 
 
 
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 September 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 Plan.
 
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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
     303  
Write-offs against allowance
     (451 )
Recoveries
     (57 )
Balance as of September 30, 2021
   $ 443  
    
 
 
 
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 September 30, 2021
     28,138        2,311        61,739        50        61,789  
Revenue recognized for the three and nine months ended September 30, 2021 from amounts included in deferred revenue at the beginning of the period was approximately $8.2 million and $54.9 million, respectively. During the three and nine months ended September 30, 2021, 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 $12.0 million as of September 30, 2021 and $13.3 million as of December 31, 2020. Amortization expense recognized for the three and nine months ended September 30, 2021 related to costs to obtain a contract was $3.3 million and $9.6 million, respectively. Amortization expense recognized for 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.
 
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Table of Contents
Transaction Price Allocated to Future Performance Obligations
As of September 30, 2021, the total aggregate transaction price allocated to the unsatisfied performance obligations for subscription and support contracts was approximately $148.6 million, of which approximately $115.0 million is expected to be recognized over the next 12 months. The Company expects to recognize substantially all of the remaining unsatisfied performance obligations by December 2024.
4. Cash and Cash Equivalents
Cash and cash equivalents as of September 30, 2021 consist of the
 
following:
 
    
September 30, 2021
 
Description
  
Contracted

Maturity
    
Cost
    
Fair Market

Value
 
Cash
     Demand      $ 45,244      $ 45,244  
Money market funds
     Demand        41        41  
             
 
 
    
 
 
 
Total cash and cash equivalents
            $ 45,285      $ 45,285  
             
 
 
    
 
 
 
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. (Loss) Earnings 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 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 (loss) earnings per share:
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
(in thousands)
  
2021
    
2020
    
2021
    
2020
 
Net (loss) income
   $ (1,020    $ 1,314      $ 4,980      $ (7,834
    
 
 
    
 
 
    
 
 
    
 
 
 
Weighted average shares used in computing basic earnings per share
     40,934,689        39,682,337        40,570,817        39,319,703  
Effect of weighted average dilutive stock-based awards
            963,645        1,666,621            
    
 
 
    
 
 
    
 
 
    
 
 
 
Weighted average shares used in computing diluted earnings per share
     40,934,689        40,645,982        42,237,438        39,319,703  
Net (loss) income per share—basic and diluted
                                   
Basic
   $ (0.02    $ 0.03      $ 0.12      $ (0.20
Diluted
   $ (0.02    $ 0.03      $ 0.12      $ (0.20
 
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The following outstanding common shares have been excluded from the computation of dilutive (loss) earnings per share as of the periods indicated because such securities are anti-dilutive:
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
(shares in thousands)
  
2021
    
2020
    
2021
    
2020
 
Options outstanding
     1,803        1,570        147        2,234  
Restricted stock units outstanding
     3,185        155        56        3,264  
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
September 30,
   
Nine Months Ended
September 30,
 
    
2021
   
2020
   
2021
   
2020
 
Weighted-average fair value of options granted during the period
   $ 6.29     $ 4.86     $ 7.51     $ 4.01  
Risk-free interest rate
     1.14     0.33     1.16     0.76
Expected volatility
     48     47     48     46
Expected life (in years)
     6.2       5.9       6.2       6.1  
Expected dividend yield
                                    
As of September 30, 2021, there was $23.6 million of unrecognized stock-based compensation expense related to stock-based awards that is expected to be recognized over a weighted-average period of 2.28 years. The following table summarizes stock-based compensation expense as included in the consolidated statement of operations for the three months ended September 30, 2021 and 2020:
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2021
    
2020
    
2021
    
2020
 
Stock-based compensation:
                                   
Cost of subscription and support revenue
   $ 157      $ 139      $ 501      $ 452  
Cost of professional services and other revenue
     113        63        299        233  
Research and development
     408        142        1,261        839  
Sales and marketing
     583        768        2,082        2,440  
General and administrative
     1,072        896        3,091        2,760  
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 2,333      $ 2,008      $ 7,234      $ 6,724  
    
 
 
    
 
 
    
 
 
    
 
 
 
The following is a summary of the stock option activity during the nine months ended September 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
     92,905        16.05                    
Exercised
     (254,502      8.65               $ 2,724  
Canceled
     (145,930      10.17                    
    
 
 
                            
Outstanding at September 30, 2021
     1,802,959      $ 9.56        5.94      $ 4,177  
    
 
 
                            
Exercisable at September 30, 2021
     1,313,116      $ 8.96        5.23      $ 3,522  
    
 
 
                            
(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, 2021 of $11.54 per share, or the date of exercise, as appropriate, and the exercise price of the underlying options.
 
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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 nine months ended September 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
     1,039,266       14.44        64,011       12.65        1,103,277       14.33  
Vested and issued
     (546,818     9.11        (181,910     8.74        (728,728     9.01  
Canceled
     (411,567     11.38        (365,909     9.50        (777,476     10.49  
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Unvested at September 30, 2021
     2,081,297     $ 12.56        1,103,993     $ 10.97        3,185,290     $ 12.00  
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
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 September 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 September 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.
 
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Table of Contents
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 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 September 30, 2021 and there were no borrowings outstanding as of September 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
September 30,
    
Nine Months Ended
September 30,
 
    
2021
    
2020
    
2021
    
2020
 
Revenue:
                                   
North America
   $ 29,420      $ 27,515      $ 89,204      $ 78,553  
Europe
     9,689        8,435        28,159        25,323  
Japan
     6,185        5,688        19,263        17,344  
Asia Pacific
     6,746        7,211        21,421        21,795  
Other
     123        235        405        648  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenue
   $ 52,163      $ 49,084      $ 158,452      $ 143,663  
    
 
 
    
 
 
    
 
 
    
 
 
 
North America is comprised of revenue from the United States, Canada and Mexico. Revenue from customers located in the United States was $27.6 million and $25.6 million for the three months ended September 30, 2021 and 2020, respectively. Revenue from customers located in the United States was $83.6 million and $72.5 million for the nine months ended September 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 nine months ended September 30, 2021 and 2020.
As of September 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 September 30, 2021 and 2020 we had 693 and 616 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 $143.7 million in the nine months ended September 30, 2020 to $158.5 million in the nine months ended September 30, 2021, due to an increase in the average annual subscription revenue per premium customer.
Included in the consolidated net income for the nine months ended September 30, 2021 was stock-based compensation expense and amortization of acquired intangible assets of $7.2 million, and $2.3 million, 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.
 
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For the nine months ended September 30, 2021 and 2020, our revenue derived from customers located outside North America was 44% and 45%, 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:
 
    
Nine Months Ended September 30,
 
    
2021
   
2020
 
Customers (at period end)
    
Premium
     2,265       2,267  
Volume
     940       1,114  
  
 
 
   
 
 
 
Total customers (at period end)
     3,205       3,381  
  
 
 
   
 
 
 
Net revenue retention rate
     97.1     93.8
Recurring dollar retention rate
     88     88
Average annual subscription revenue per premium customer,
excluding Starter edition customers (in thousands)
   $ 93.9     $ 87.3  
Average annual subscription revenue per premium customer
for Starter edition customers only (in thousands)
   $ 4.6     $ 4.5  
Total backlog, excluding professional services engagements (in millions)
   $ 148.6     $ 144.2  
Total backlog to be recognized over next 12 months, excluding
professional services engagements (in millions)
   $ 115.0     $ 109.6  
 
 
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 nine months of 2020 to the first nine 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 September 30, 2021 and 2020, we recorded $2.3 million and $2.0 million, respectively, of stock-based compensation expense. We expect stock-based compensation expense to increase in absolute dollars in future periods.
 
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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, 2020, which we filed with the Securities and Exchange Commission on February 24, 2021.
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.
 
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Three Months Ended September 30,
    
Nine Months Ended September 30,
 
    
2021
    
2020
    
2021
    
2020
 
                             
    
(in thousands, except share and per share data)
 
Revenue:
           
Subscription and support revenue
   $ 49,226      $ 46,338      $ 148,667      $ 136,613  
Professional services and other revenue
     2,937        2,746        9,785        7,050  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total revenue
     52,163        49,084        158,452        143,663  
Cost of revenue:
           
Cost of subscription and support revenue
     16,406        15,735        46,840        50,290  
Cost of professional services and other revenue
     2,247        2,363        8,205        6,349  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total cost of revenue
     18,653        18,098        55,045        56,639  
  
 
 
    
 
 
    
 
 
    
 
 
 
Gross profit
     33,510        30,986        103,407        87,024  
Operating expenses:
           
Research and development
     7,902        8,215        24,041        26,199  
Sales and marketing
     18,451        14,813        52,730        42,370  
General and administrative
     7,345        6,694        21,822        19,633  
Merger-related
     45        —          300        5,768  
Other (benefit) expense
     —          —          (1,965      —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Total operating expenses
     33,743        29,722        96,928        93,970  
  
 
 
    
 
 
    
 
 
    
 
 
 
(Loss) income from operations
     (233      1,264        6,479        (6,946
Other (expense) income, net
     (319      204        (937      (291
  
 
 
    
 
 
    
 
 
    
 
 
 
(Loss) income before income taxes
     (552      1,468        5,542        (7,237
Provision for income taxes
     468        154        562        597  
  
 
 
    
 
 
    
 
 
    
 
 
 
Net (loss) income
   $ (1,020    $ 1,314      $ 4,980      $ (7,834
Net (loss) income per share—basic and diluted
           
Basic
   $ (0.02    $ 0.03      $ 0.12      $ (0.20
Diluted
   $ (0.02    $ 0.03      $ 0.12      $ (0.20
Weighted-average shares—basic and diluted
           
Basic
     40,934,689        39,682,337        40,570,817        39,319,703  
Diluted
     40,934,689        40,645,982        42,237,438        39,319,703  
Overview of Results of Operations for the Three Months Ended September 30, 2021 and 2020
Total revenue increased by 6%, or $3.1 million, in the three months ended September 30, 2021 compared to the three months ended September 30, 2020 due to an increase in subscription and support revenue of 6%, or $2.9 million, primarily due to an increase in average revenue per premium customer of 6.9%. Professional services and other revenue also increased by 7% or $191. 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 $3.3 million, or 7%, in the three months ended September 30, 2021 compared to the three months ended September 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 $2.5 million, or 8%, in the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily due to an increase in revenue and our transition of acquired Ooyala customers to our technology during 2020, which resulted in reduced costs. Our ability to continue to maintain our overall gross profit will depend primarily on our ability to continue controlling our costs of delivery.
Loss from operations was $0.2 million in the three months ended September 30, 2021 compared to a loss from operations of $1.3 million in the three months ended September 30, 2020. This is primarily due to an increase in revenue of $3.1 million and the improvement of gross profit on subscription and support revenue in the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
 
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Revenue
 
    
Three Months Ended September 30,
             
    
2021
   
2020
   
Change
 
Revenue by Product Line
  
Amount
    
Percentage of

Revenue
   
Amount
    
Percentage of

Revenue
   
Amount
   
%
 
                                        
     (in thousands, except percentages)  
Premium
   $ 51,466        99   $ 48,175        98   $ 3,291       7
Volume
     697        1       909        2       (212     (23
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
Total
   $ 52,163        100   $ 49,084        100   $ 3,079       6
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
During the three months ended September 30, 2021, revenue increased by $3.1 million, or 6%, compared to the three months ended September 30, 2020, primarily due to an increase in revenue from our premium offerings. The increase in premium revenue of $3.3 million, or 7%, is primarily the result of increased premium subscription offerings to our customers as the average annual subscription revenue per premium customer increased 6.9% compared to the prior period. In the three months ended September 30, 2021, volume revenue decreased by $212, or 23%, compared to the three months ended September 30, 2020, as we continue to focus on the market for our premium solutions.
 
    
Three Months Ended September 30,
              
    
2021
   
2020
   
Change
 
Revenue by Type
  
Amount
    
Percentage of

Revenue
   
Amount
    
Percentage of

Revenue
   
Amount
    
%
 
                                         
     (in thousands, except percentages)  
Subscription and support
   $ 49,226        94   $ 46,338        96   $ 2,888        6
Professional services and other
     2,937        6       2,746        4       191        7  
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total
   $ 52,163        100   $ 49,084        100   $ 3,079        6
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
During the three months ended September 30, 2021, subscription and support revenue increased by $2.9 million, or 6%, compared to the three months ended September 30, 2020. The increase was primarily related to an increase in the average annual subscription revenue per premium customer of 6.9% during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. In addition, professional services and other revenue increased by $191, or 7%, 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,
             
    
2021
   
2020
   
Change
 
Revenue by Geography
  
Amount
    
Percentage of

Revenue
   
Amount
    
Percentage of

Revenue
   
Amount
   
%
 
                                        
     (in thousands, except percentages)  
North America
   $ 29,420        56   $ 27,515        56   $ 1,905       7
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
Europe
     9,689        19       8,435        17       1,254       15  
Japan
     6,185        12       5,688        12       497       9  
Asia Pacific
     6,746        13       7,211        15       (465     (6
Other
     123        —         235        —         (112     (48
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
International subtotal
     22,743        44       21,569        44       1,174       5  
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
Total
   $ 52,163        100   $ 49,084        100   $ 3,079       6
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
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 September 30, 2021, total revenue for North America increased $1.9 million, or 7%, compared to the three months ended September 30, 2020. In the three months ended September 30, 2021, total revenue outside of North America increased $1.2 million, or 5%, compared to the three months ended September 30, 2020. The increase in revenue from international regions is primarily related to increases in revenue in Europe.
 
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Cost of Revenue
 
    
Three Months Ended September 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
   $ 16,406        33   $ 15,735        34   $ 671       4
Professional services and other
     2,247        77       2,363        86       (116     (5
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
Total
   $ 18,653        36   $ 18,098        37   $ 555       3
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
In the three months ended September 30, 2021, cost of subscription and support revenue increased by $671, or 4%, compared to the three months ended September 30, 2020. The increase resulted primarily from the 6% increase in subscription and support revenue in the three months ended September 30, 2021 compared to the three months ended September 30, 2020. In the three months ended September 30, 2021, cost of professional services and other revenue decreased by $116, or 5%, compared to the three months ended September 30, 2020. This decrease corresponds to a decrease in contractor expenses of $216 in the three months ended September 30, 2021, compared to the three months ended September 30, 2020.
Gross Profit
 
    
Three Months Ended September 30,
              
    
2021
   
2020
   
Change
 
Gross Profit
  
Amount
    
Percentage of

Related

Revenue
   
Amount
    
Percentage of

Related

Revenue
   
Amount
    
%
 
                                         
     (in thousands, except percentages)  
Subscription and support
   $ 32,820        67   $ 30,603        66   $ 2,217        7
Professional services and other
     690        23       383        14       307        80
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Total
   $ 33,510        64   $ 30,986        63   $ 2,524        8
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
The overall gross profit percentage was 64% for the three months ended September 30, 2021 compared to 63% for the three months ended September 30, 2020. Subscription and support gross profit increased $2.2 million, or 7%, compared to the three months ended September 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 September 30, 2020 which did not recur in the three months ended September 30, 2021.
Operating Expenses
 
    
Three Months Ended September 30,
             
    
2021
   
2020
   
Change
 
Operating Expenses
  
Amount
    
Percentage of

Revenue
   
Amount
    
Percentage of

Revenue
   
Amount
   
%
 
                                        
     (in thousands, except percentages)  
Research and development
   $ 7,902        15   $ 8,215        17   $ (313     (4 )% 
Sales and marketing
     18,451        35       14,813        30       3,638       25  
General and administrative
     7,345        14       6,694        14       651       10  
Merger-related
     45        —         —          —         45       N/A  
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
Total
   $ 33,743        65   $ 29,722        61   $ 4,021       14
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
 
Research and Development
.
 In the three months ended September 30, 2021, research and development expense decreased by $313 or 4%, compared to the three months ended September 30, 2020 primarily due to a decrease in rent and contractor expenses of $315 and $292 respectively. These decreases were offset by an increase in stock-based compensation of $267, as well as various other expenses that, in the aggregate, increased by approximately $27. We expect our research and development expense as a percentage of revenue to remain relatively unchanged.
 
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Table of Contents
Sales and Marketing
.
In the three months ended September 30, 2021, sales and marketing expense increased by $3.6 million, or 25%, compared to the three months ended September 30, 2020, primarily due to an increase in marketing campaigns, employee-related, and commission expenses of $1.8 million, $1.6 million, and $1.2 million, respectively. These increases were offset by a decrease in rent and contractor expenses of $435 and $627, respectively. The remaining decrease was due to various other expenses that, in aggregate, decreased by approximately $46. We expect that our sales and marketing expense will increase in absolute dollars for the remainder of 2021 as compared to the prior period as we will continue to invest in these activities to support revenue growth.
General and Administrative
.
In the three months ended September 30, 2021, general and administrative expense increased by $651, or 10%, compared to the three months ended September 30, 2020, primarily due to increases in outside professional services, employee- related, and stock-based compensation expenses of $244, $193, and $176, respectively. The remaining increase was due to various other expenses that, in aggregate, increased by approximately $38. In future periods, we expect general and administrative expense to remain relatively unchanged.
Merger-Related
.
 In the three months ended September 30, 2021, merger-related expenses remained relatively unchanged, compared to the three months ended September 30, 2020.
Overview of Results of Operations for the Nine Months Ended September 30, 2021 and 2020
Total revenue increased by 10%, or $14.8 million, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 due to an increase in subscription and support revenue of 9%, or $12.1 million, primarily due to an increase in revenue from our premium offerings. Professional services and other revenue also increased by 39%, or $2.7 million, compared to the corresponding period 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. Our revenue from premium offerings grew by $15.3 million, or 11%, in the nine months ended September 30, 2021 compared to the nine months ended September 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 $16.4 million, or 19%, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, due to an increase in revenue and an improvement in subscription and support gross profit. The increase in revenue is due to an increase in our average revenue per premium customer. The improvement in subscription and support gross profit was primarily due to transition of acquired Ooyala customers to our technology during 2020, which reduced costs. Our ability to continue to maintain our overall gross profit will depend primarily on