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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
o
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 001-33508
 
 
Limelight Networks, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
20-1677033
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
222 South Mill Avenue, 8th Floor
Tempe, AZ 85281
(Address of principal executive offices, including Zip Code)
(602) 850-5000
(Registrant’s telephone number, including area code)
 
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  þ    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  þ    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer  þ
Non-accelerated filer  o
Smaller Reporting Company  o
               (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o  No  þ
The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, as of July 31, 2014: 98,416,297 shares.
 



LIMELIGHT NETWORKS, INC.
FORM 10-Q
Quarterly Period Ended June 30, 2014
TABLE OF CONTENTS
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS (unaudited)
 
 
Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013
 
Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013
 
Unaudited Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2014 and 2013
 
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013
 
Notes to Unaudited Consolidated Financial Statements
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4.
CONTROLS AND PROCEDURES
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
LEGAL PROCEEDINGS
Item 1A.
RISK FACTORS
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Item 3.
DEFAULTS UPON SENIOR SECURITIES
Item 4.
MINE SAFETY DISCLOSURES
Item 5.
OTHER INFORMATION
Item 6.
EXHIBITS
 
SIGNATURES
 
 
 
 



PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements
Limelight Networks, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
 
(Unaudited)
 
 
 
June 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
73,404

 
$
85,956

Marketable securities
34,052

 
32,506

Accounts receivable, net
24,066

 
21,430

Income taxes receivable
258

 
371

Deferred income taxes
80

 
93

Prepaid expenses and other current assets
7,652

 
8,192

Total current assets
139,512

 
148,548

Property and equipment, net
32,562

 
32,905

Marketable securities, less current portion
40

 
46

Deferred income taxes, less current portion
1,476

 
1,307

Goodwill
77,164

 
77,035

Other intangible assets, net
1,704

 
2,354

Other assets
5,188

 
6,103

Total assets
$
257,646

 
$
268,298

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,282

 
$
5,473

Deferred revenue
3,411

 
3,523

Capital lease obligations
253

 
466

Income taxes payable
766

 
799

Other current liabilities
12,079

 
15,022

Total current liabilities
25,791

 
25,283

Capital lease obligations, less current portion
248

 
358

Deferred income taxes
234

 
321

Deferred revenue, less current portion
805

 
1,500

Other long-term liabilities
3,273

 
3,505

Total liabilities
30,351

 
30,967

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Convertible preferred stock, $0.001 par value; 7,500 shares authorized; no shares issued
  and outstanding

 

Common stock, $0.001 par value; 300,000 shares authorized at June 30, 2014 and
December 31, 2013; 98,656 and 97,677 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
99

 
98

Additional paid-in capital
462,442

 
458,748

Accumulated other comprehensive loss
(888
)
 
(1,663
)
Accumulated deficit
(234,358
)
 
(219,852
)
Total stockholders’ equity
227,295

 
237,331

Total liabilities and stockholders’ equity
$
257,646

 
$
268,298

The accompanying notes are an integral part of the consolidated financial statements.

3


Limelight Networks, Inc.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$
41,343

 
$
42,763

 
$
82,512

 
$
88,576

Cost of revenue:
 
 

 
 
 
 
Cost of services (1)
21,130

 
22,226

 
42,480

 
44,583

Depreciation — network
4,141

 
6,120

 
8,478

 
12,800

Total cost of revenue
25,271

 
28,346

 
50,958

 
57,383

Gross profit
16,072

 
14,417

 
31,554

 
31,193

Operating expenses:
 
 

 
 
 
 
General and administrative
8,452

 
8,009

 
16,434

 
15,778

Sales and marketing
8,951

 
10,699

 
18,676

 
21,183

Research and development
4,665

 
5,650

 
9,033

 
11,391

Depreciation and amortization
977

 
1,442

 
2,043

 
2,892

Total operating expenses
23,045

 
25,800

 
46,186

 
51,244

Operating loss
(6,973
)
 
(11,383
)
 
(14,632
)
 
(20,051
)
Other income (expense):
 
 

 
 
 
 
Interest expense
(7
)
 
(21
)
 
(19
)
 
(48
)
Interest income
67

 
79

 
137

 
149

Other, net
(195
)
 
143

 
(178
)
 
711

Total other (expense) income
(135
)
 
201

 
(60
)
 
812

Loss from continuing operations before income taxes
(7,108
)
 
(11,182
)
 
(14,692
)
 
(19,239
)
Income tax provision
27

 
51

 
83

 
131

Loss from continuing operations
(7,135
)
 
(11,233
)
 
(14,775
)
 
(19,370
)
Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations, net of income taxes
269

 

 
269

 

Net loss
$
(6,866
)
 
$
(11,233
)
 
$
(14,506
)
 
$
(19,370
)
Net loss per share:
 
 

 
 
 
 
Basic and diluted
 
 
 
 
 
 
 
  Continuing operations
$
(0.07
)
 
$
(0.12
)
 
$
(0.15
)
 
$
(0.20
)
  Discontinued operations
$

 
$

 
$

 
$

     Total
$
(0.07
)
 
$
(0.12
)
 
$
(0.15
)
 
$
(0.20
)
 
 
 
 
 
 
 
 
Weighted average shares used in per share calculation:
 
 

 
 
 
 
Basic and diluted
98,419

 
96,257

 
98,183

 
96,538

____________
(1)
Cost of services excludes amortization related to intangibles, including existing technologies, customer relationships, and trade names and trademarks, which are included in depreciation and amortization
The accompanying notes are an integral part of the consolidated financial statements.

4


LIMELIGHT NETWORKS, INC.
Unaudited Consolidated Statements of Comprehensive Loss
(In thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(6,866
)
 
$
(11,233
)
 
$
(14,506
)
 
$
(19,370
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on investments
1

 
(36
)
 
8

 
(91
)
Foreign exchange translation
614

 
(670
)
 
767

 
(2,145
)
Other comprehensive income (loss), net of tax
615

 
(706
)
 
775

 
(2,236
)
Comprehensive loss
$
(6,251
)
 
$
(11,939
)
 
$
(13,731
)
 
$
(21,606
)
The accompanying notes are an integral part of the consolidated financial statements.

5


Limelight Networks, Inc.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
 
Six Months Ended June 30,
 
2014
 
2013
Operating activities
 
 
 
Net loss
$
(14,506
)
 
$
(19,370
)
Income from discontinued operations
269

 

Net loss from continuing operations
(14,775
)
 
(19,370
)
Adjustments to reconcile net loss from continuing operations to net cash (used in) provided by operating activities of continuing operations:
 
 
 
Depreciation and amortization
10,521

 
15,692

Share-based compensation
5,213

 
6,577

Foreign currency remeasurement loss (gain)
140

 
(1,145
)
Deferred income taxes
(202
)
 
(289
)
Accounts receivable charges
512

 
533

Amortization of premium on marketable securities
286

 
280

Loss on sale of property and equipment


22

Non cash tax benefit associated with income from discontinued operations
(59
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(3,148
)
 
1,575

Prepaid expenses and other current assets
572

 
1,963

Income taxes receivable
108

 
148

Other assets
928

 
567

Accounts payable
3,296

 
850

Deferred revenue
(807
)
 
1,083

Other current liabilities
(2,819
)
 
(1,239
)
Income taxes payable
(119
)
 
360

Other long term liabilities
(235
)
 
(282
)
Net cash (used in) provided by operating activities
(588
)
 
7,325

Investing activities
 
 
 
Purchases of marketable securities
(14,683
)
 
(45,970
)
Maturities of marketable securities
12,865

 
27,895

Purchases of property and equipment
(8,909
)
 
(7,122
)
Proceeds from the sale of discontinued operations
414

 
119

Net cash used in investing activities
(10,313
)
 
(25,078
)
Financing activities
 
 
 
Payments on capital lease obligations
(323
)
 
(846
)
Payment of employee tax withholdings related to restricted stock
(1,171
)
 
(2,129
)
Cash paid for purchase of common stock
(1,204
)
 
(5,512
)
Proceeds from exercise of stock options and employee stock plans
734

 
2

Net cash used in financing activities
(1,964
)
 
(8,485
)
Effect of exchange rate changes on cash and cash equivalents
313

 
(566
)
Net decrease in cash and cash equivalents
(12,552
)
 
(26,804
)
Cash and cash equivalents, beginning of period
85,956

 
108,915

Cash and cash equivalents, end of period
$
73,404

 
$
82,111

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
19

 
$
48

Cash paid during the period for income taxes, net of refunds
$
350

 
$
(88
)
Property and equipment expenditures remaining in accounts payable and other current liabilities
$
2,163

 
$
1,460

The accompanying notes are an integral part of the consolidated financial statements.

6


Limelight Networks, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2014
(In thousands, except per share data)
1. Nature of Business
Limelight Networks, Inc. (the Company) operates a globally distributed, high-performance network (its global network) and provides a suite of integrated services including content delivery services, video content management services, performance services for website and web application acceleration, and cloud storage services. These four primary service groups work collectively to enable any organization to deliver digital content to any device, anywhere in the world.
The Company, incorporated in Delaware, has operated in the Phoenix metropolitan area since 2001 and elsewhere throughout the United States since 2003. The Company began international operations in 2004.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. They do not include all of the information and footnotes required by U.S. generally accepted accounting principles (U.S. GAAP) for complete financial statements. Such interim financial information is unaudited but reflects all adjustments that, in the opinion of management, are necessary for the fair presentation of the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. The results of operations presented in this quarterly report on Form 10-Q are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or for any future periods. This quarterly report on Form 10-Q should be read in conjunction with the Company’s audited financial statements and footnotes included in its annual report on Form 10-K for the fiscal year ended December 31, 2013.
The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. In addition, certain other reclassifications have been made to prior year amounts to conform to the current year presentation.
Revision of Previously Issued Financial Statements
As previously disclosed in our 2013 Form 10-K, the consolidated statement of operations was revised to reclassify certain amounts to cost of revenues that were previously reported in general and administrative expenses for the three and six months ended June 30, 2013.
The following table summarizes the reclassifications by line item within the consolidated statement of operations for the three months ended June 30, 2013:

For the Three Months Ended June 30, 2013

As
 

 
As

Reported
 
Reclassifications
 
Revised
Cost of services
$
21,870

 
$
356

 
$
22,226

Total cost of revenue
27,990

 
356

 
28,346

Gross profit
14,773

 
(356
)
 
14,417



 

 

General and administrative
8,365

 
(356
)
 
8,009

Total operating expenses
26,156

 
(356
)
 
25,800

    




7


The following table summarizes the reclassifications by line item within the consolidated statement of operations for the six months ended June 30, 2013:

For the Six Months Ended June 30, 2013

As



As

Reported

Reclassifications

Revised
Cost of services
$
43,923


$
660


$
44,583

Total cost of revenue
56,723


660


57,383

Gross profit
31,853


(660
)

31,193







General and administrative
16,438


(660
)

15,778

Total operating expenses
51,904


(660
)

51,244

Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results and outcomes may differ from those estimates. The results of operations presented in this quarterly report on Form 10-Q are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or for any future periods.
Recent Accounting Standards
Recently Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations - that is, a major effect on the organization's operations and financial results - should be presented as discontinued operations. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. Additionally, this ASU requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. This update is effective for the Company in the first quarter of 2015. The new guidance would only impact the Company upon the disposal of a business.
In May 2014, the FASB issued ASU 2014-09, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance will be effective for the Company in the first quarter of 2017. Early adoption is not permitted. The Company is currently in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements.
3. Investments in Marketable Securities
The following is a summary of marketable securities (designated as available-for-sale) at June 30, 2014:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Certificate of deposit
$
7,440

 
$
1

 
$
11

 
$
7,430

Commercial paper
3,399

 

 
1

 
3,398

Corporate notes and bonds
23,235

 
38

 
9

 
23,264

Total marketable securities
34,074

 
39

 
21

 
34,092

At June 30, 2014, the Company evaluated its marketable securities and determined unrealized losses were due primarily to fluctuations in interest rates. Management does not believe any of the unrealized losses represented an other-than-temporary impairment based on its evaluation of available evidence as of June 30, 2014. The Company’s intent is to hold these investments to such time as these assets are no longer impaired.

8


Expected maturities can differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. The Company views its available-for-sale securities as available for current operations.
The amortized cost and estimated fair value of the marketable debt securities at June 30, 2014, by maturity, are shown below:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities
 
 
 
 
 
 
 
Due in one year or less
$
21,959

 
$
18

 
$
8

 
$
21,969

Due after one year and through five years
12,115

 
21

 
13

 
12,123

 
$
34,074

 
$
39

 
$
21

 
$
34,092

The following is a summary of marketable securities (designated as available-for-sale) at December 31, 2013:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Government agency bonds
$
261

 
$

 
$

 
$
261

Certificate of deposit
4,080

 

 
4

 
4,076

Commercial paper
2,200

 

 

 
2,200

Corporate notes and bonds
26,001

 
15

 
7

 
26,009

 
32,542

 
15

 
11

 
32,546

Publicly traded common stock
12

 

 
6

 
6

Total marketable securities
$
32,554

 
$
15

 
$
17

 
$
32,552

The amortized cost and estimated fair value of the marketable debt securities at December 31, 2013, by maturity, are shown below:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities
 
 
 
 
 
 
 
Due in one year or less
$
17,031

 
$
2

 
$
5

 
$
17,028

Due after one year and through five years
15,511

 
13

 
6

 
15,518

 
$
32,542

 
$
15

 
$
11

 
$
32,546

4. Business Disposition
On December 23, 2013, the Company sold 100% of the outstanding common stock of its Web Content Management (WCM) business for $12,341 in cash, net of preliminary working capital adjustments. After allocating goodwill of $3,799 to WCM, the sale resulted in a gain of $3,836, which was included in Other, net in the consolidated statement of operations for the year ended December 31, 2013. During the three months ended March 31, 2014, the Company recorded a working capital adjustment of $(62) (expense), related to new information subsequent to the closing of the acquisition, which is included in Other, net in the consolidated statement of operations for the six months ended June 30, 2014. This sale was not treated as a discontinued operation because the operations and cash flows of the WCM business cannot be clearly distinguished, operationally or for financial reporting purposes, from the rest of the Company.
5. Discontinued Operations
On September 1, 2011, the Company completed the sale of its EyeWonder and chors rich media advertising services to DG FastChannel, Inc. (currently Digital Generation, Inc. or DG) for net proceeds of $61,000 plus an estimated $10,854 receivable from DG pursuant to the purchase agreement.
The $10,854 receivable from DG was determined by the Company based on estimated future cash payments equal to the excess of certain current assets over certain current liabilities as of August 30, 2011. During 2013, the Company wrote-off the remaining receivable balance of $412 from DG as it believed the balance was no longer collectible.

9


During the three months ended June 30, 2014, the Company received $414 from DG as final settlement for the previously written-off receivable. The Company recorded $269, ($414 cash received, net of tax of $145), as income from discontinued operations in the accompanying consolidated statements of operations for the three and six months ended June 30, 2014.
6. Accounts Receivable, net
Accounts receivable, net include:
 
June 30,
 
December 31,
 
2014
 
2013
Accounts receivable
$
18,915

 
$
17,497

Unbilled accounts receivable
7,154

 
5,943

 
26,069

 
23,440

Less: credit allowance
(400
)
 
(610
)
Less: allowance for doubtful accounts
(1,603
)
 
(1,400
)
Total accounts receivable, net
$
24,066

 
$
21,430

7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include:
 
June 30,
 
December 31,
 
2014
 
2013
Prepaid expenses and insurance
$
2,986

 
$
3,371

Prepaid bandwidth and backbone services
1,943

 
2,045

VAT receivable
1,757

 
1,588

Employee advances and prepaid recoverable commissions
156

 
189

Vendor deposits and other
810

 
999

Total prepaid expenses and other current assets
$
7,652

 
$
8,192

8. Goodwill and Other Intangible Assets
The Company has recorded goodwill and other intangible assets as a result of its business acquisitions. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. In each of the Company’s acquisitions, the objective of the acquisition was to expand the Company’s product offerings and customer base and to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill.
The Company tests goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company concluded that it has one reporting unit and assigned the entire balance of goodwill to that reporting unit. The fair value of the reporting unit is determined using the Company’s market capitalization as of its annual impairment assessment date or each reporting date if circumstances indicate the goodwill might be impaired. Items that could reasonably be expected to negatively affect key assumptions used in estimating fair value include but are not limited to:
sustained decline in the Company’s stock price due to a decline in its financial performance due to the loss of key customers, loss of key personnel, emergence of new technologies or new competitors;
decline in overall market or economic conditions leading to a decline in its stock price; and
decline in observed control premiums paid in business combinations involving comparable companies.
The estimated fair value of the reporting unit is determined using a market capitalization approach. The Company’s market capitalization is adjusted for a control premium based on the estimated average and median control premiums of transactions involving companies comparable to the Company. As of the annual impairment testing date (October 31, 2013) and as of December 31, 2013, the Company determined that goodwill was not impaired. As of June 30, 2014, the Company determined that the estimated fair value of its reporting unit exceeded carrying value by approximately $195,000 or 86%, using

10


the market capitalization of the Company plus an estimated control premium of 40%. Based on this analysis, management believes goodwill is not impaired as of June 30, 2014; however, adverse changes to certain key assumptions as described above could result in a future charge to earnings.
Foreign currency translation adjustments increased the carrying amount of goodwill for the three and six months ended June 30, 2014 by $166 and $129, respectively.
Other intangible assets that are subject to amortization consisted of the following:
 
June 30, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Existing technologies
$
6,231

 
$
(4,579
)
 
$
1,652

Customer relationships
150

 
(98
)
 
52

Total other intangible assets
$
6,381

 
$
(4,677
)
 
$
1,704

 
December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Existing technologies
$
6,164

 
$
(3,875
)
 
$
2,289

Customer relationships
150

 
(85
)
 
65

Total other intangible assets
$
6,314

 
$
(3,960
)
 
$
2,354

Aggregate expense related to amortization of other intangible assets included in operating expenses for the three months ended June 30, 2014 and 2013 was approximately $338 and $718, respectively. For the six months ended June 30, 2014 and 2013 aggregate expense related to the amortization of other intangible assets was approximately $675 and $1,450. Based on the Company’s other intangible assets as of June 30, 2014, aggregate expense related to the amortization of other intangible assets is expected to be $491 for the remainder of 2014, and $905, $308, and $0 for fiscal years 2015, 2016, and 2017, respectively.
9. Property and Equipment, net
Property and equipment, net include:
 
June 30,
 
December 31,
 
2014
 
2013
Network equipment
$
189,988

 
$
180,896

Computer equipment
11,236

 
11,073

Furniture and fixtures
2,751

 
2,723

Leasehold improvements
7,346

 
7,162

Other equipment
571

 
570

Total property and equipment
211,892

 
202,424

Less: accumulated depreciation and amortization
(179,330
)
 
(169,519
)
Total property and equipment, net
$
32,562

 
$
32,905

Depreciation and amortization expense related to property and equipment (classified in operating expenses) was $639 and $724 for the three months ended June 30, 2014 and 2013, respectively, and was $1,368 and $1,442 for the six months ended June 30, 2014 and 2013, respectively.

11


10. Other Assets
Other assets include:
 
June 30,
 
December 31,
 
2014
 
2013
Prepaid bandwidth and backbone services
$
3,491

 
$
4,268

Vendor deposits and other
1,697

 
1,835

Total other assets
$
5,188

 
$
6,103

The Company enters into multi-year arrangements with telecommunications providers for bandwidth and backbone capacity. The agreements sometimes require the Company to make advanced payments for future services to be received.
11. Other Current Liabilities
Other current liabilities include:
 
June 30,
 
December 31,
 
2014
 
2013
Accrued compensation and benefits
$
4,026

 
$
6,682

Accrued cost of revenue
1,995

 
1,833

Accrued legal fees
1,707

 
1,769

Deferred rent
1,263

 
1,074

Indirect taxes payable
783

 
639

Customer deposits
111

 
635

Other accrued expenses
2,194

 
2,390

Total other current liabilities
$
12,079

 
$
15,022

12. Other Long Term Liabilities
Other long term liabilities include:
 
June 30,
 
December 31,
 
2014
 
2013
Deferred rent
$
3,152

 
$
3,384

Income taxes payable
121

 
121

Total other long term liabilities
$
3,273

 
$
3,505

13. Contingencies
Akamai Litigation
In June 2006, Akamai Technologies, Inc., or Akamai, and the Massachusetts Institute of Technology, or MIT, filed a lawsuit against the Company in the United States District Court for the District of Massachusetts alleging that the Company was infringing two patents assigned to MIT and exclusively licensed by MIT to Akamai, United States Patent No. 6,553,413 (the ’413 patent) and United States Patent No. 6,108,703 (the ’703 patent). In September 2006, Akamai and MIT expanded their claims to assert infringement of a third patent United States Patent No. 7,103,645 (the ’645 patent). Before trial, Akamai waived by stipulation its claims of indirect or induced infringement and proceeded to trial only on the theory of direct infringement. In February 2008, a jury returned a verdict in this lawsuit, finding that the Company infringed four claims of the ’703 patent at issue and rejecting the Company’s invalidity defenses. The jury awarded an aggregate of approximately $45,500 which includes lost profits, reasonable royalties and price erosion damages for the period April 2005 through December 31, 2007. In addition, the jury awarded prejudgment interest which the Company estimated to be $2,600 at December 31, 2007. The Company recorded an aggregate $48,100 as a provision for litigation as of December 31, 2007. During 2008, the Company recorded a potential additional provision of approximately $17,500 for potential additional infringement damages and interest. The total provision for litigation at December 31, 2008 was $65,600.

12


On July 1, 2008, the court denied the Company’s Motions for Judgment as a Matter of Law (JMOL), Obviousness, and a New Trial. The court also denied Akamai’s Motion for Permanent Injunction as premature and its Motions for Summary Judgment regarding the Company’s equitable defenses. The court conducted a bench trial in November 2008 regarding the Company’s equitable defenses. The Company also filed a motion for reconsideration of the court’s earlier denial of the Company’s motion for JMOL. The Company’s motion for JMOL was based largely upon a clarification in the standard for a finding of joint infringement articulated by the Federal Circuit in the case of Muniauction, Inc. v. Thomson Corp., released after the court denied the Company’s initial motion for JMOL. On April 24, 2009, the court issued its order and memorandum setting aside the adverse jury verdict and ruling that the Company did not infringe Akamai’s ’703 patent and that the Company was entitled to JMOL. Based upon the court’s April 24, 2009 order, the Company reversed the $65,600 provision for litigation previously recorded for this lawsuit as the Company no longer believed that payment of any amounts represented by the litigation provision was probable. The court entered final judgment in favor of the Company on May 22, 2009, and Akamai filed its notice of appeal of the court’s decision on May 26, 2009. On December 20, 2010, the Court of Appeals for the Federal Circuit issued its opinion affirming the trial court’s entry of judgment in the Company’s favor. On February 18, 2011, Akamai filed a motion with the Court of Appeals for the Federal Circuit seeking a rehearing and rehearing en banc. On April 21, 2011, the Court of Appeals for the Federal Circuit issued an order denying the petition for rehearing, granting the petition for rehearing en banc, vacating the December 20, 2010 opinion affirming the trial court’s entry of judgment in the Company’s favor, and reinstated the appeal.
On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in the case. The Court of Appeals stated that the trial court correctly determined that the Company did not directly infringe Akamai’s ’703 patent and upheld the trial court’s decision to vacate the original jury’s damages award. The Court of Appeals also held that the Company did not infringe Akamai’s ’413 or ’645 patents. A slim majority in this three-way divided opinion also announced a revised legal theory of induced infringement, remanded the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to prove that the Company induced its customers to infringe Akamai’s patent under the Court of Appeals’ new legal standard. On December 28, 2012, the Company filed a petition for writ of certiorari to the United States Supreme Court to appeal this sharply divided Court of Appeals decision. Akamai then filed a cross petition for consideration of the Court of Appeals standard for direct infringement followed by an opposition to the Company’s petition. On January 10, 2014, the Supreme Court granted our petition for writ of certiorari and did not act on Akamai's cross petition. On April 30, 2014, the Supreme Court heard oral argument in our case. On June 2, 2014, the Supreme Court issued its decision and reversed the Federal Circuit's decision, remanding the case back to that court. On July 24, 2014, the Federal Circuit issued an order vacating its prior judgment, reinstating the appeals, dissolving its en banc status, and referring the case back to the original Court of Appeals panel for further proceedings. The Company does not believe an ultimate loss is probable; therefore, no provision for this lawsuit is recorded in the consolidated financial statements.
In light of the status of the litigation, the Company believes that there is a reasonable possibility that it has incurred a loss related to the Akamai litigation. While the Company believes that there is a reasonable possibility that a loss has been incurred, the Company is not able to estimate a range of the loss due to the complexity and procedural status of the case. The Company will continue to vigorously defend against the allegation.
Legal and other expenses associated with this case have been significant. The Company includes these litigation expenses in general and administrative expenses as incurred, as reported in the consolidated statement of operations.
Other Litigation
The Company is subject to various other legal proceedings and claims, either asserted or unasserted, arising in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe the outcome of any of these matters will have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows. Litigation relating to the content delivery services industry is not uncommon, and the Company is, and from time to time has been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future.
Other Matters
The Company is subject to indirect taxation in various states and foreign jurisdictions. Laws and regulations that apply to communications and commerce conducted over the Internet are becoming more prevalent, both in the United States and internationally, and may impose additional burdens on the Company conducting business online or providing Internet-related services. Increased regulation could negatively affect the Company’s business directly, as well as the businesses of its customers, which could reduce their demand for the Company’s services. For example, tax authorities in various states and abroad may impose taxes on the Internet-related revenue the Company generates based on regulations currently being applied to similar but not directly comparable industries.

13


There are many transactions and calculations where the ultimate tax determination is uncertain. In addition, domestic and international taxation laws are subject to change. In the future, the Company may come under audit, which could result in changes to its tax estimates. The Company believes it maintains adequate tax reserves to offset potential liabilities that may arise upon audit. Although the Company believes its tax estimates and associated reserves are reasonable, the final determination of tax audits and any related litigation could be materially different than the amounts established for tax contingencies. To the extent these estimates ultimately prove to be inaccurate, the associated reserves would be adjusted, resulting in the recording of a benefit or expense in the period in which a change in estimate or a final determination is made.
14. Net Loss per Share
The Company calculates basic and diluted earnings per weighted average share based on net income (loss). The Company uses the weighted-average number of shares of common stock outstanding during the period for the computation of basic earnings per share. Diluted earnings per share include the dilutive effect of convertible stock options and restricted stock units in the weighted-average number of shares of common stock outstanding.
The following table sets forth the components used in the computation of basic and diluted net loss per share for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Loss from continuing operations
$
(7,135
)
 
$
(11,233
)
 
$
(14,775
)
 
$
(19,370
)
Income from discontinued operations
269

 

 
269

 

Net loss available to common stockholders
$
(6,866
)
 
$
(11,233
)
 
$
(14,506
)
 
$
(19,370
)
Basic and diluted weighted average outstanding shares of common stock
98,419

 
96,257

 
98,183

 
96,538

Basic and diluted loss per share:
 
 
 
 
 
 
 
  Continuing operations
$
(0.07
)
 
$
(0.12
)
 
$
(0.15
)
 
$
(0.20
)
  Discontinued operations

 

 

 

Basic and diluted net loss per share
$
(0.07
)
 
$
(0.12
)
 
$
(0.15
)
 
$
(0.20
)
For the three months ended June 30, 2014 and 2013, outstanding options and restricted stock units of 2,080 and 1,251, respectively, were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive.
For the six months ended June 30, 2014 and 2013, outstanding options and restricted stock units of 1,931 and 1,317, respectively, were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive.
15. Stockholders’ Equity
Common Stock
On February 12, 2014, the Company's board of directors authorized a $15,000 share repurchase program. Under the current authorization, the Company may repurchase shares periodically in the open market or through privately negotiated transactions, in accordance with applicable securities rules regarding issuer repurchases. During the three and six months ended June 30, 2014, the Company purchased and cancelled approximately 500 shares for approximately $1,233 including commissions and expenses. All repurchased shares were cancelled and returned to authorized but unissued status.
During the three months ended March 31, 2013, the Company purchased and cancelled approximately 2,300 shares for approximately $5,512, including commissions and expenses under a previously authorized share repurchase program. All repurchased shares were cancelled and returned to authorized but unissued status.
In June 2013, the Company’s stockholders approved the Company’s 2013 Employee Stock Purchase Plan (ESPP). The ESPP allows participants to purchase the Company’s common stock at a 15% discount of the lower of the beginning or end of the offering period using the closing price on that day. During the three and six months ended June 30, 2014, the Company issued 141 shares under the ESPP. Total cash proceeds from the purchase of shares under the ESPP were approximately $235. As of June 30, 2014, shares reserved for issuance to employees under this plan totaled 4,000 and the Company held employee contributions of $52, (included in other current liabilities) for future purchases under the ESPP. The ESPP is considered

14


compensatory. The Company recorded compensation expense of $30 and $86 during the three and six months ended June 30, 2014, respectively, related to the ESPP.
16. Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss, net of tax, for the three and six months ended June 30, 2014 was as follows:



Unrealized





Gains (Losses) on



Foreign

Available for



Currency

Sale Securities

Total
Balance, March 31, 2014
$
(1,535
)

$
32


$
(1,503
)
  Other comprehensive income before reclassifications
614


1


615

Amounts reclassified from accumulated other comprehensive income (loss)





Net current period other comprehensive income
614


1


615

Balance, June 30, 2014
$
(921
)

$
33


$
(888
)



Unrealized





Gains (Losses) on



Foreign

Available for



Currency

Sale Securities

Total
Balance, December 31, 2013
$
(1,688
)

$
25


$
(1,663
)
  Other comprehensive income before reclassifications
767


8


775

Amounts reclassified from accumulated other comprehensive income (loss)





Net current period other comprehensive income
767


8


775

Balance, June 30, 2014
(921
)

33


(888
)
17. Share-Based Compensation
The following table summarizes the components of share-based compensation expense included in the Company’s consolidated statement of operations for the three and six months ended June 30, 2014 and 2013:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Share-based compensation expense by type of award:
 
 
 
 
 
 
 
Stock options
$
1,195

 
$
1,714

 
$
2,425

 
$
3,601

Restricted stock units
1,409

 
1,513

 
2,702

 
2,976

2013 ESPP
30

 

 
86

 

Total share-based compensation expense
$
2,634

 
$
3,227

 
$
5,213

 
$
6,577

Effect of share-based compensation expense on income by financial statement line:
 
 
 
 
 
 
 
Cost of services
$
395

 
$
513

 
$
819

 
$
1,018

General and administrative expense
1,518

 
1,605

 
2,986

 
3,226

Sales and marketing expense
420

 
595

 
811

 
1,258

Research and development expense
301

 
514

 
597

 
1,075

Total share-based compensation expense
$
2,634

 
$
3,227

 
$
5,213

 
$
6,577

Unrecognized share-based compensation expense totaled approximately $21,635 at June 30, 2014, of which $8,582 related to stock options and $13,053 related to restricted stock awards. The Company currently expects to recognize share-

15


based compensation expense of $5,235 during the remainder of 2014, $8,206 in 2015 and the remainder thereafter based on scheduled vesting of the stock options and restricted stock units outstanding at June 30, 2014.
18. Related Party Transactions
The Company sells services to entities owned, in whole or in part, by certain of the Company’s directors. Revenue derived from related parties was less than 1% of total revenue for the three and six months ended June 30, 2014 and 2013, respectively. Total outstanding accounts receivable from all related parties as of June 30, 2014 and December 31, 2013 was approximately $6 and $7, respectively.
19. Leases and Commitments
Operating Leases
The Company is committed to various non-cancellable operating leases for office space and office equipment which expire through 2023. Certain leases contain provisions for renewal options and rent escalations upon expiration of the initial lease terms. Approximate future minimum lease payments over the remaining lease periods as of June 30, 2014 are as follows:
2014
$
2,096

2015
3,422

2016
2,772

2017
2,365

2018 and thereafter
4,162

Total minimum payments
$
14,817

Purchase Commitments
The Company has long-term commitments for bandwidth usage and co-location with various networks and Internet service providers, or ISPs.
The following summarizes minimum commitments as of June 30, 2014:
2014
$
20,866

2015
23,384

2016
5,028

2017
920

2018 and thereafter
380

Total minimum payments
$
50,578

Capital Leases
The Company leases equipment under capital lease agreements which extend through 2017. The outstanding balance for capital leases was $501 and $824 as of June 30, 2014 and December 31, 2013, respectively. The Company recorded assets under capital lease obligations of $2,327 and $2,312 as of June 30, 2014 and December 31, 2013, respectively. Related accumulated amortization totaled $2,198 and $1,878 as of June 30, 2014 and December 31, 2013, respectively. The assets acquired under capital leases and related accumulated amortization is included in property and equipment, net in the consolidated balance sheets. The related amortization is included in depreciation and amortization expense in the consolidated statements of operations. Interest expense related to capital leases was $9 and $21 for the three months ended June 30, 2014 and 2013, respectively. Interest expense related to capital leases was $19 and $48 for the six months ended June 30, 2014 and 2013, respectively.

16


Future minimum capital lease payments at June 30, 2014 were as follows:
2014
$
156

2015
238

2016
134

2017
4

2018 and thereafter

Total
532

Amounts representing interest
(31
)
Present value of minimum lease payments
$
501

20. Concentrations
For the three months ended June 30, 2014 and 2013, Netflix, Inc. (Netflix) represented approximately 13% of the Company’s total revenue. For the six months ended June 30, 2014 and 2013, Netflix represented approximately 12% and 13%, respectively, of the Company's total revenue.
Revenue from sources outside America totaled approximately $15,363 and $13,941 for the three months ended June 30, 2014 and 2013, respectively. Revenue from sources outside of America totaled approximately $29,308 and $27,699 for the six months ended June 30, 2014 and 2013, respectively.
During the three and six months ended June 30, 2014, the Company had two countries, the United States and Japan, that accounted for 10% or more of the Company's total revenues. During the three and six months ended June 30, 2013, the Company had no single country outside of the United States that accounted for 10% or more of the Company's total revenues.
21. Income Taxes
Income taxes for the interim periods presented have been included in the accompanying consolidated financial statements on the basis of an estimated annual effective tax rate. Based on an estimated annual effective tax rate and discrete items, the income tax expense for the three and six months ended June 30, 2014 was $27 and $83, respectively. Income tax expense on the loss from continuing operations before taxes was different than the statutory income tax rate primarily due to the Company providing for a valuation allowance on deferred tax assets in certain jurisdictions, and the recording of state and foreign tax expense for the three and six month periods.
The Company files income tax returns in jurisdictions with varying statues of limitations. Tax years 2010 through 2013 generally remain subject to examination by federal and most state tax authorities. As of June 30, 2014, the Company is not under any federal or state examination.
On September 13, 2013, the Internal Revenue Service released final tangible property regulations under Sections 162(a) and 263(a) of the Internal Revenue Code of 1986 (Code), regarding the deduction and capitalization of expenditures related to tangible property. The final regulations replace temporary regulations that were issued in December 2011. Also released were proposed regulations under Section 168 of the Code regarding dispositions of tangible property. Early adoption was available; however, the Company did not elect to early adopt the regulations. The Company adopted the regulations on January 1, 2014, and does not believe there will be a material impact on its consolidated financial statements.
22. Segment Reporting
The Company operates in one industry segment — content delivery and related services. The Company operates in three geographic areas — Americas, Europe, Middle East and Africa (EMEA) and Asia Pacific.
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single operating segment.

17


Revenue by geography is based on the location of the customer from which the revenue is earned. The following table sets forth revenue by geographic area:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Americas
$
25,980

 
$
28,822

 
$
53,204

 
$
60,877

EMEA
8,861

 
8,286

 
17,363

 
16,608

Asia Pacific
6,502

 
5,655

 
11,945

 
11,091

Total revenue
$
41,343

 
$
42,763

 
$
82,512

 
$
88,576

The following table sets forth long-lived assets by geographic area:
 
June 30,
 
December 31,
 
2014
 
2013
Americas
$
23,026

 
$
26,502

International
11,240

 
8,757

Total long-lived assets
$
34,266

 
$
35,259

23. Fair Value Measurements
The Company evaluates certain of its financial instruments within the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1
defined as observable inputs such as quoted prices in active markets;
Level 2
defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3
defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of June 30, 2014 and December 31, 2013, the Company held certain assets and liabilities that were required to be measured at fair value on a recurring basis. These include money market funds, commercial paper, corporate notes and bonds, U.S. government agency bonds, and publicly traded stocks, which are classified as either cash and cash equivalents or marketable securities.
The Company’s financial assets are valued using market prices on both active markets (level 1) and less active markets (level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments or identical instruments in less active markets. Level 3 inputs are valued using models that take into account the terms of the arrangement as well as multiple inputs where applicable, such as estimated units sold and other customer utilization metrics.
The following is a summary of fair value measurements at June 30, 2014:
 
 
 
Fair Value Measurements at Reporting Date Using
Description
Total
 
Quoted Prices In Active Markets for Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Money market funds (2)
$
8,347

 
$
8,347

 
$

 
$

Corporate notes and bonds (1)
23,264

 

 
23,264

 

Commercial paper (1)
3,398

 
 
 
3,398

 
 
Certificate of deposit (1)
7,430

 

 
7,430

 

Total assets measured at fair value
$
42,439

 
$
8,347

 
$
34,092

 
$

  
____________
(1)
Classified in marketable securities
(2)
Classified in cash and cash equivalents

18


The following is a summary of fair value measurements at December 31, 2013:
 
 
 
Fair Value Measurements at Reporting Date Using
Description
Total
 
Quoted Prices In Active Markets for Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Government agency bonds (1)
$
261

 
$

 
$
261

 
$

Money market funds (2)
9,740

 
9,740

 

 

Corporate notes and bonds (1)
26,009

 

 
26,009

 

Commercial paper (1)
2,200

 

 
2,200

 

Certificate of deposit (1)
4,076

 

 
4,076

 

Publicly traded common stock (1)
6

 
6

 

 

Total assets measured at fair value
$
42,292

 
$
9,746

 
$
32,546

 
$

____________
(1)
Classified in marketable securities
(2)
Classified in cash and cash equivalents
The carrying amount of cash equivalents approximates fair value because their maturity is less than three months. The carrying amount of short-term and long-term marketable securities approximates fair value as the securities are marked to market as of each balance sheet date with any unrealized gains and losses reported in stockholders’ equity. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts.


19


Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this quarterly report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2013 included in our annual report on Form 10-K filed with the Securities and Exchange Commission (SEC), on February 20, 2014. This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, among other things, statements as to industry trends, our future expectations, operations, financial condition and prospects, business strategies and other matters that do not relate strictly to historical facts. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. 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 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” set forth in Part II, Item 1A of this quarterly report on Form 10-Q and in our SEC filings, including the Risk Factors set forth in our annual report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Prior period information has been modified to conform to current year presentation. All information is presented in thousands, except per share amounts, customer count and where specifically noted.
Overview
We were founded in 2001 as a provider of content delivery network services to deliver digital content over the Internet. We began development of our infrastructure in 2001 and began generating meaningful revenue in 2002. Today, we operate a globally distributed, high-performance, computing platform (our global network) and provide a suite of integrated services including content delivery services, video content management services, performance services for website and web application acceleration, and cloud storage services. These four primary service groups work collectively to enable organizations to deliver digital content to any device, anywhere in the world.
The suite of services that we offer collectively comprises our Limelight Orchestrate Platform (the Orchestrate Platform). Recently, we launched a revised website that brought further focus to what we offer to the market by aligning products to three core solutions-Video Delivery, Web Delivery, and Software Delivery-that better reflect the core functionality and strength of the Orchestrate Platform.
We sold our Web Content Management (WCM) business on December 23, 2013 for $12,341 in cash, net of preliminary working capital adjustments. The sale resulted in a gain of $3,836, which was included in Other, net in the consolidated statement of operations for the year ended December 31, 2013. During the three months ended March 31, 2014, we recorded a working capital adjustment of $62 (expense), which is included in Other, net in the consolidated statement of operations for the six months ended June 30, 2014. Consistent with our focus on digital content delivery services, the integration of our services and the disposal of our web content management service line, we will no longer distinguish between value added services and non-value added services.
On February 12, 2014, our board of directors authorized a $15,000 share repurchase program. During the three and six months ended June 30, 2014, we purchased and cancelled approximately 500 shares for approximately $1,233 including commissions and expenses. As of July 31, 2014, we have purchased and cancelled approximately 947 shares for approximately $2,500 including commissions and expenses. All repurchased shares were cancelled and returned to authorized but unissued status.
We currently expect full year revenue for 2014 to be between $155,000 and $159,000. We expect our third quarter revenue and gross margin will be down versus the second quarter, due to the departure of Netflix and our cost of revenue infrastructure being largely fixed.
The following table summarizes our revenue, costs and expenses for the three and six months ended June 30, 2014 and 2013 (in thousands of dollars and as a percentage of total revenue). The information presented below has been revised to reclassify certain amounts to cost of revenues that were previously reported in general and administrative expenses. This reclassification is discussed in Note 2, Revision of Previously Issued Financial Statements, in Part I, Item 1 of this quarterly report on Form 10-Q.

20


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$
41,343

 
100.0
 %
 
$
42,763

 
100.0
 %
 
$
82,512

 
100.0
 %
 
$
88,576

 
100.0
 %
Cost of revenue
25,271

 
61.1
 %
 
28,346

 
66.3
 %
 
50,958

 
61.8
 %
 
57,383

 
64.8
 %
Gross profit
16,072

 
38.9
 %
 
14,417

 
33.7
 %
 
31,554

 
38.2
 %
 
31,193

 
35.2
 %
Total operating expenses
23,045

 
55.7
 %
 
25,800

 
60.3
 %
 
46,186

 
56.0
 %
 
51,244

 
57.9
 %
Operating loss
(6,973
)
 
(16.9
)%
 
(11,383
)
 
(26.6
)%
 
(14,632
)
 
(17.7
)%
 
(20,051
)
 
(22.6
)%
Total other (expense) income
(135
)
 
(0.3
)%
 
201

 
0.5
 %
 
(60
)
 
(0.1
)%
 
812

 
0.9
 %
Loss from continuing operations before income taxes
(7,108
)
 
(17.2
)%
 
(11,182
)
 
(26.1
)%
 
(14,692
)
 
(17.8
)%
 
(19,239
)
 
(21.7
)%
Income tax provision
27

 
0.1
 %
 
51

 
0.1
 %
 
83

 
0.1
 %
 
131

 
0.1
 %
Loss from continuing operations
(7,135
)
 
(17.3
)%
 
(11,233
)
 
(26.3
)%
 
(14,775
)
 
(17.9
)%
 
(19,370
)
 
(21.9
)%
Discontinued operations:


 


 


 


 


 

 


 
 
Income from discontinued operations, net of income taxes
269

 
0.7
 %
 

 
 %
 
269

 
0.3
 %
 

 
 %
Net loss
$
(6,866
)
 
(16.6
)%
 
$
(11,233
)
 
(26.3
)%
 
$
(14,506
)
 
(17.6
)%
 
$
(19,370
)
 
(21.9
)%
Use of Non-GAAP Financial Measures
To evaluate our business, we consider and use non-generally accepted accounting principles (Non-GAAP) net income (loss) and Adjusted EBITDA as a supplemental measure of operating performance. These measures include the same adjustments that management takes into account when it reviews and assesses operating performance on a period-to-period basis. We consider Non-GAAP net income (loss) to be an important indicator of overall business performance because it allows us to evaluate results without the effects of share-based compensation, litigation expenses, amortization of intangibles, acquisition related expenses, discontinued operations and the gain (loss) on sale of our WCM business. We define EBITDA from continuing operations as U.S. GAAP net income (loss) before interest income, interest expense, other income and expense, provision for income taxes, depreciation and amortization, discontinued operations and gain (loss) on sale of WCM. We believe that EBITDA from continuing operations provides a useful metric to investors to compare us with other companies within our industry and across industries. We define Adjusted EBITDA as EBITDA from continuing operations adjusted for share-based compensation, litigation expenses, and acquisition related expenses. We use Adjusted EBITDA as a supplemental measure to review and assess operating performance. We also believe use of Adjusted EBITDA facilitates investors’ use of operating performance comparisons from period to period, as well as across companies.
In our August 4, 2014 earnings press release, as furnished on Form 8-K, we included Non-GAAP net loss, EBITDA from continuing operations and Adjusted EBITDA. The terms Non-GAAP net loss, EBITDA from continuing operations and Adjusted EBITDA are not defined under U.S. GAAP, and are not measures of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Our Non-GAAP net loss, EBITDA from continuing operations and Adjusted EBITDA have limitations as analytical tools, and when assessing our operating performance, Non-GAAP net loss, EBITDA from continuing operations and Adjusted EBITDA should not be considered in isolation, or as a substitute for net loss or other consolidated income statement data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to:
EBITDA from continuing operations and Adjusted EBITDA do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
they do not reflect changes in, or cash requirements for, our working capital needs;
they do not reflect the cash requirements necessary for litigation costs;
they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt that we may incur;
they do not reflect income taxes or the cash requirements for any tax payments;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will be replaced sometime in the future, and EBITDA from continuing operations and Adjusted EBITDA do not reflect any cash requirements for such replacements;

21


while share-based compensation is a component of operating expense, the impact on our financial statements compared to other companies can vary significantly due to such factors as the assumed life of the options and the assumed volatility of our common stock; and
other companies may calculate EBITDA from continuing operations and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.
We compensate for these limitations by relying primarily on our U.S. GAAP results and using Non-GAAP net income (loss), EBITDA from continuing operations, and Adjusted EBITDA only as supplemental support for management’s analysis of business performance. Non-GAAP net income (loss), EBITDA from continuing operations and Adjusted EBITDA are calculated as follows for the periods presented.
Reconciliation of Non-GAAP Financial Measures
In accordance with the requirements of Regulation G issued by the SEC, we are presenting the most directly comparable U.S. GAAP financial measures and reconciling the unaudited Non-GAAP financial metrics to the comparable U.S. GAAP measures.
Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Loss
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,

June 30,
 
2014
 
2014
 
2013
 
2014

2013
U.S. GAAP net loss
$
(6,866
)
 
$
(7,640
)
 
$
(11,233
)
 
$
(14,506
)
 
$
(19,370
)
Share-based compensation
2,634

 
2,579

 
3,227

 
5,213

 
6,577

Litigation defense expenses
536

 
273

 
109

 
809

 
151

Amortization of intangible assets
338

 
337

 
718

 
675

 
1,450

Loss on sale of the WCM business

 
62

 

 
62

 

Acquisition related expenses

 

 
(9
)
 

 
(33
)
Income from discontinued operations
(269
)
 

 

 
(269
)
 

Non-GAAP net loss
$
(3,627
)
 
$
(4,389
)
 
$
(7,188
)
 
$
(8,016
)
 
$
(11,225
)
Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
June 30,
 
2014
 
2014
 
2013
 
2014
 
2013
U.S. GAAP net loss
$
(6,866
)
 
$
(7,640
)
 
$
(11,233
)
 
$
(14,506
)
 
$
(19,370
)
Depreciation and amortization
5,118

 
5,403

 
7,562

 
10,521

 
15,692

Interest expense
7

 
12

 
21

 
19

 
48

Loss on sale of the WCM business

 
62

 

 
62

 

Interest and other expense (income)
128

 
(149
)
 
(222
)
 
(21
)
 
(860
)
Income tax provision
27

 
56

 
51

 
83

 
131

Income from discontinued operations
(269
)
 

 

 
(269
)
 

EBITDA from continuing operations
$
(1,855
)
 
$
(2,256
)
 
$
(3,821
)
 
$
(4,111
)
 
$
(4,359
)
Share-based compensation
2,634

 
2,579

 
3,227

 
5,213

 
6,577

Litigation defense expenses
536

 
273

 
109

 
809

 
151

Acquisition related expenses

 

 
(9
)
 

 
(33
)
Adjusted EBITDA (loss)
$
1,315

 
$
596

 
$
(494
)
 
$
1,911

 
$
2,336


22


Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. During the six months ended June 30, 2014, there have been no significant changes in our critical accounting policies and estimates.
Results of Continuing Operations
Revenue
We derive revenue primarily from the sale of components of the Orchestrate Platform. We also generate revenue through the sale of professional services and other infrastructure services, such as transit and rack space services.
The following table reflects our revenue for the three and six months ended June 30, 2014 compared to June 30, 2013:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
 
 
 
Percent
 




 

Percent
 
2014
 
2013
 
Decrease
 
Change
 
2014

2013

Decrease

Change
Revenue
$
41,343

 
$
42,763

 
$
(1,420
)
 
(3.3
)%
 
$
82,512

 
$
88,576

 
$
(6,064
)
 
(6.8
)%
Our revenue decreased during the three and six months ended June 30, 2014 versus the comparable 2013 period primarily due to the sale of the WCM business in December 2013 and a decrease in our professional services revenue, off-set by an increase in our content delivery revenue. While customer churn has improved, our active customers worldwide decreased to 1,186 as of June 30, 2014 compared to 1,358 as of June 30, 2013. Approximately 30% of the decrease in customers is attributable to the sale of the WCM business and we are continuing our selective approach to accepting profitable business by establishing a clear process for identifying customers that value quality, performance, availability, and service.
During the three months ended June 30, 2014 and 2013, sales to our top 10 customers accounted for approximately 41% and 36%, respectively, of our total revenue. For the six months ended June 30, 2014 and 2013, sales to our top 10 customers accounted for approximately 40% and 36%, respectively, of our total revenue.
During the three months ended June 30, 2014 and 2013, Netflix represented approximately 13% of our total revenue. For the six months ended June 30, 2014 and 2013, Netflix represented approximately 12% and 13%, respectively, of our total revenue. The customers that comprised our top 10 customers have continually changed, and our large customers may not continue to be as significant going forward as they have been in the past.
Revenue by geography is based on the location of the customer from which the revenue is earned. The following table sets forth revenue by geographic area:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Americas
$
25,980

 
$
28,822

 
$
53,204

 
$
60,877

EMEA
8,861

 
8,286

 
17,363

 
16,608

Asia Pacific
6,502

 
5,655

 
11,945

 
11,091

Total revenue
$
41,343

 
$
42,763

 
$
82,512

 
$
88,576

We anticipate revenues will decrease in 2014 compared to 2013 as a result of our sale of our WCM business in December 2013 and the plan for Netflix to leave our network in the third quarter of 2014. We expect revenues for 2014 to total between $155,000 and $159,000.
Cost of Revenue
Cost of revenue consists primarily of fees paid to network providers for bandwidth and backbone, costs incurred for non-settlement free peering and connection to ISPs, and fees paid to data center operators for housing of our network equipment in third party network data centers, also known as co-location costs. Cost of revenue also includes leased warehouse space and utilities, depreciation of network equipment used to deliver our content delivery services, payroll and related costs, and share-based compensation for our network operations and professional services personnel. Other costs include professional fees and outside services, travel and travel-related expenses and royalty expenses.

23


Cost of revenue was composed of the following (in thousands and as a percentage of total revenue):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Bandwidth and co-location fees
$
14,625

 
35.4
%
 
$
15,053

 
35.2
%
 
$
29,421

 
35.7
%
 
$
30,161

 
34.1
%
Depreciation - network
4,141

 
10.0
%
 
6,120

 
14.3
%
 
8,478

 
10.3
%
 
12,800

 
14.5
%
Payroll and related employee costs
4,374

 
10.6
%
 
4,668

 
10.9
%
 
8,610

 
10.4
%
 
9,290

 
10.5
%
Share-based compensation
395

 
1.0
%
 
513

 
1.2
%
 
819

 
1.0
%
 
1,018

 
1.1
%
Other costs
1,736

 
4.2
%
 
1,992

 
4.7
%
 
3,630

 
4.4
%
 
4,114

 
4.6
%
Total cost of revenue
$
25,271

 
61.1
%
 
$
28,346

 
66.3
%
 
$
50,958

 
61.8
%
 
$
57,383

 
64.8
%
Our cost of revenue decreased in aggregate dollars and as a percentage of total revenue for the three and six months ended June 30, 2014 versus the comparable 2013 period primarily as a result of a decrease in network depreciation as a result of a decrease in capital expenditures since 2012.
Bandwidth and co-location fees decreased in aggregate dollars as a result of decreased traffic delivered; however it increased as a percentage of total revenue as some of these contracts are at fixed rates. Payroll and related employee costs decreased as a result of lower headcount due to the sale of the WCM business in December 2013, and lower average salaries. Other costs decreased primarily due to lower royalty expense and reduced professional fees.
We anticipate depreciation expense related to our network equipment will continue to decrease compared to 2013 in both absolute dollars and as a percentage of revenue as our capital expenditures have decreased in recent years.
General and Administrative
General and administrative expense was composed of the following (in thousands and as a percentage of total revenue)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Payroll and related employee costs
$
3,109

 
7.5
%
 
$
2,535

 
5.9
%
 
$
6,220

 
7.5
%
 
$
5,322

 
6.0
%
Professional fees and outside services
1,442

 
3.5
%
 
1,956

 
4.6
%
 
2,751

 
3.3
%
 
3,736

 
4.2
%
Share-based compensation
1,518

 
3.7
%
 
1,605

 
3.8
%
 
2,986

 
3.6
%
 
3,226

 
3.6
%
Bad debt expense
351

 
0.8
%
 
205

 
0.5
%
 
512

 
0.6
%
 
531

 
0.6
%
Other costs
2,032

 
4.9
%
 
1,708