LLNW-9.30.2014-10Q
Table of Contents

 
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 September 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 October 31, 2014: 98,685,122 shares.
 

Table of Contents

LIMELIGHT NETWORKS, INC.
FORM 10-Q
Quarterly Period Ended September 30, 2014
TABLE OF CONTENTS
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS (unaudited)
 
 
Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013
 
Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013
 
Unaudited Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013
 
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 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
 
 
 
 

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements
Limelight Networks, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
 
(Unaudited)
 
 
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
67,028

 
$
85,956

Marketable securities
34,228

 
32,506

Accounts receivable, net
22,443

 
21,430

Income taxes receivable
289

 
371

Deferred income taxes
65

 
93

Prepaid expenses and other current assets
9,040

 
8,192

Total current assets
133,093

 
148,548

Property and equipment, net
32,154

 
32,905

Marketable securities, less current portion
40

 
46

Deferred income taxes, less current portion
1,337

 
1,307

Goodwill
76,583

 
77,035

Other intangible assets, net
1,344

 
2,354

Other assets
5,098

 
6,103

Total assets
$
249,649

 
$
268,298

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,314

 
$
5,473

Deferred revenue
3,503

 
3,523

Capital lease obligations
219

 
466

Income taxes payable
634

 
799

Other current liabilities
12,245

 
15,022

Total current liabilities
25,915

 
25,283

Capital lease obligations, less current portion
192

 
358

Deferred income taxes
181

 
321

Deferred revenue, less current portion
627

 
1,500

Other long-term liabilities
2,955

 
3,505

Total liabilities
29,870

 
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 September 30, 2014 and
December 31, 2013; 98,655 and 97,677 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
99

 
98

Additional paid-in capital
463,712

 
458,748

Accumulated other comprehensive loss
(4,596
)
 
(1,663
)
Accumulated deficit
(239,436
)
 
(219,852
)
Total stockholders’ equity
219,779

 
237,331

Total liabilities and stockholders’ equity
$
249,649

 
$
268,298

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

3
Table of Contents

Limelight Networks, Inc.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$
39,020

 
$
42,656

 
$
121,533

 
$
131,232

Cost of revenue:
 
 

 
 
 
 
Cost of services (1)
18,672

 
22,138

 
61,563

 
66,721

Depreciation — network
4,207

 
5,278

 
12,688

 
18,078

Total cost of revenue
22,879

 
27,416

 
74,251

 
84,799

Gross profit
16,141

 
15,240

 
47,282

 
46,433

Operating expenses:
 
 

 
 
 
 
General and administrative
7,295

 
8,244

 
21,966

 
24,022

Sales and marketing
8,731

 
10,363

 
28,356

 
31,545

Research and development
5,514

 
5,423

 
14,951

 
16,814

Depreciation and amortization
825

 
1,433

 
2,868

 
4,325

Total operating expenses
22,365

 
25,463

 
68,141

 
76,706

Operating loss
(6,224
)
 
(10,223
)
 
(20,859
)
 
(30,273
)
Other income (expense):
 
 

 
 
 
 
Interest expense
(7
)
 
(15
)
 
(26
)
 
(64
)
Interest income
66

 
89

 
203

 
238

Other, net
1,192

 
(557
)
 
1,014

 
154

Total other income (expense)
1,251

 
(483
)
 
1,191

 
328

Loss from continuing operations before income taxes
(4,973
)
 
(10,706
)
 
(19,668
)
 
(29,945
)
Income tax provision
98

 
197

 
181

 
328

Loss from continuing operations
(5,071
)
 
(10,903
)
 
(19,849
)
 
(30,273
)
Discontinued operations:
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net of income taxes
(4
)
 
(15
)
 
265

 
(15
)
Net loss
$
(5,075
)
 
$
(10,918
)
 
$
(19,584
)
 
$
(30,288
)
Net loss per share:
 
 

 
 
 
 
Basic and diluted
 
 
 
 
 
 
 
  Continuing operations
$
(0.05
)
 
$
(0.11
)
 
$
(0.20
)
 
$
(0.31
)
  Discontinued operations
$
—

 
$
—

 
$
—

 
$
—

     Total
$
(0.05
)
 
$
(0.11
)
 
$
(0.20
)
 
$
(0.31
)
 
 
 
 
 
 
 
 
Weighted average shares used in per share calculation:
 
 

 
 
 
 
Basic and diluted
98,458

 
96,949

 
98,274

 
96,675

____________
(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
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LIMELIGHT NETWORKS, INC.
Unaudited Consolidated Statements of Comprehensive Loss
(In thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(5,075
)
 
$
(10,918
)
 
$
(19,584
)
 
$
(30,288
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on investments
(37
)
 
55

 
(30
)
 
(36
)
Foreign exchange translation
(3,671
)
 
1,324

 
(2,903
)
 
(821
)
Other comprehensive income (loss), net of tax
(3,708
)
 
1,379

 
(2,933
)
 
(857
)
Comprehensive loss
$
(8,783
)
 
$
(9,539
)
 
$
(22,517
)
 
$
(31,145
)
The accompanying notes are an integral part of the consolidated financial statements.

5
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Limelight Networks, Inc.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
 
Nine Months Ended September 30,
 
2014
 
2013
Operating activities
 
 
 
Net loss
$
(19,584
)
 
$
(30,288
)
Income (loss) from discontinued operations
265

 
(15
)
Net loss from continuing operations
(19,849
)
 
(30,273
)
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities of
  continuing operations:
 
 
 
Depreciation and amortization
15,556

 
22,403

Share-based compensation
7,800

 
9,800

Foreign currency remeasurement gain
(1,067
)
 
(504
)
Deferred income taxes
(185
)
 
(209
)
Accounts receivable charges
483

 
758

Amortization of premium on marketable securities
374

 
462

Loss on sale of property and equipment
—


25

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

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(1,496
)
 
177

Prepaid expenses and other current assets
(1,045
)
 
1,930

Income taxes receivable
55

 
131

Other assets
991

 
908

Accounts payable
4,762

 
1,102

Deferred revenue
(893
)
 
256

Other current liabilities
(3,663
)
 
(436
)
Income taxes payable
(214
)
 
456

Other long term liabilities
(545
)
 
(448
)
Net cash provided by operating activities
1,005

 
6,538

Investing activities
 
 
 
Purchases of marketable securities
(17,669
)
 
(49,811
)
Maturities of marketable securities
15,550

 
35,321

Purchases of property and equipment
(13,984
)
 
(12,685
)
Proceeds from the sale of discontinued operations
414

 
124

Net cash used in investing activities
(15,689
)
 
(27,051
)
Financing activities
 
 
 
Payments on capital lease obligations
(412
)
 
(1,124
)
Payment of employee tax withholdings related to restricted stock
(1,455
)
 
(2,309
)
Cash paid for purchase of common stock
(2,500
)
 
(5,512
)
Proceeds from exercise of stock options and employee stock plans
967

 
29

Net cash used in financing activities
(3,400
)
 
(8,916
)
Effect of exchange rate changes on cash and cash equivalents
(840
)
 
(256
)
Discontinued operations
 
 
 
Cash used in operating activities of discontinued operations
(4
)
 
(8
)
Net decrease in cash and cash equivalents
(18,928
)
 
(29,693
)
Cash and cash equivalents, beginning of period
85,956

 
108,915

Cash and cash equivalents, end of period
$
67,028

 
$
79,222

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
26

 
$
64

Cash paid during the period for income taxes, net of refunds
$
581

 
$
(35
)
Property and equipment expenditures remaining in accounts payable and other current liabilities
$
2,119

 
$
1,028

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

6
Table of Contents

Limelight Networks, Inc.
Notes to Unaudited Consolidated Financial Statements
September 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.
During the three months ended September 30, 2014, the Company recorded an immaterial error correction of approximately $1,100 relating to previous over billings by a co-location provider.  This correction was recorded as a reduction of costs of revenues.
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 nine months ended September 30, 2013.
The following table summarizes the reclassifications by line item within the unaudited consolidated statement of operations for the three months ended September 30, 2013:

For the Three Months Ended September 30, 2013

As
 

 
As

Reported
 
Reclassifications
 
Revised
Cost of services
$
21,773

 
$
365

 
$
22,138

Total cost of revenue
27,051

 
365

 
27,416

Gross profit
15,605

 
(365
)
 
15,240

General and administrative
8,609

 
(365
)
 
8,244

Total operating expenses
25,828

 
(365
)
 
25,463


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Table of Contents

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

For the Nine Months Ended September 30, 2013

As



As

Reported

Reclassifications

Revised
Cost of services
$
65,696


$
1,025


$
66,721

Total cost of revenue
83,774


1,025


84,799

Gross profit
47,458


(1,025
)

46,433

General and administrative
25,047


(1,025
)

24,022

Total operating expenses
77,731


(1,025
)

76,706

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 other 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.
In August 2014, the FASB issued ASU 2014-15, which provides guidance for disclosure of uncertainties about an entity’s ability to continue as a going concern. ASU 2014-15 defines management's responsibility to assess an entity's ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. This guidance will be effective for the Company in the first annual period ending after December 15, 2016; however, early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
3. Investments in Marketable Securities
The following is a summary of marketable securities (designated as available-for-sale) at September 30, 2014:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Certificate of deposit
$
7,680

 
$
2

 
$
12

 
$
7,670

Commercial paper
3,399

 
—

 
—

 
3,399

Corporate notes and bonds
23,207

 
18

 
26

 
23,199

Total marketable securities
34,286

 
20

 
38

 
34,268


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At September 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 September 30, 2014. The Company’s intent is to hold these investments to such time as these assets are no longer impaired. 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 September 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
$
20,417

 
$
9

 
$
4

 
$
20,422

Due after one year and through five years
13,869

 
11

 
34

 
13,846

 
$
34,286

 
$
20

 
$
38

 
$
34,268

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 nine months ended September 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. (DG) for net proceeds of $61,000 plus an estimated $10,854 receivable from DG pursuant to the purchase agreement.

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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.
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 during the second quarter of 2014.
During the three months ended September 30, 2014, the Company incurred $4 (net of tax) in expense related to discontinued operations which is recorded in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2014.
6. Accounts Receivable, net
Accounts receivable, net include:
 
September 30,
 
December 31,
 
2014
 
2013
Accounts receivable
$
15,982

 
$
17,497

Unbilled accounts receivable
8,386

 
5,943

 
24,368

 
23,440

Less: credit allowance
(380
)
 
(610
)
Less: allowance for doubtful accounts
(1,545
)
 
(1,400
)
Total accounts receivable, net
$
22,443

 
$
21,430

7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include:
 
September 30,
 
December 31,
 
2014
 
2013
Prepaid expenses and insurance
$
3,806

 
$
3,371

Prepaid bandwidth and backbone services
1,943

 
2,045

VAT receivable
1,853

 
1,588

Vendor deposits and other
1,438

 
1,188

Total prepaid expenses and other current assets
$
9,040

 
$
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.

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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 of October 31, 2013 and as of December 31, 2013, the Company determined that goodwill was not impaired. As of September 30, 2014, the Company determined that the estimated fair value of its reporting unit exceeded carrying value by approximately $103,500 or 47%, using 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 September 30, 2014; however, adverse changes to certain key assumptions as described above could result in a future charge to earnings.
Foreign currency translation adjustments decreased the carrying amount of goodwill for the three and nine months ended September 30, 2014 by $581 and $452, respectively.
Other intangible assets that are subject to amortization consisted of the following:
 
September 30, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Existing technologies
$
4,100

 
$
(2,802
)
 
$
1,298

Customer relationships
150

 
(104
)
 
46

Total other intangible assets
$
4,250

 
$
(2,906
)
 
$
1,344

 
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 September 30, 2014 and 2013 was approximately $259 and $711, respectively. For the nine months ended September 30, 2014 and 2013 aggregate expense related to the amortization of other intangible assets was approximately $934 and $2,161, respectively. Based on the Company’s other intangible assets as of September 30, 2014, aggregate expense related to the amortization of other intangible assets is expected to be $211 for the remainder of 2014, and $845, $288, and $0 for fiscal years 2015, 2016, and 2017, respectively.
9. Property and Equipment, net
Property and equipment, net include:
 
September 30,
 
December 31,
 
2014
 
2013
Network equipment
$
190,949

 
$
180,896

Computer equipment
11,381

 
11,073

Furniture and fixtures
2,733

 
2,723

Leasehold improvements
7,353

 
7,162

Other equipment
590

 
570

Total property and equipment
213,006

 
202,424

Less: accumulated depreciation and amortization
(180,852
)
 
(169,519
)
Total property and equipment, net
$
32,154

 
$
32,905

Depreciation and amortization expense related to property and equipment (classified in operating expenses) was $566 and $722 for the three months ended September 30, 2014 and 2013, respectively, and was $1,934 and $2,164 for the nine months ended September 30, 2014 and 2013, respectively.

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10. Other Assets
Other assets include:
 
September 30,
 
December 31,
 
2014
 
2013
Prepaid bandwidth and backbone services
$
3,102

 
$
4,268

Vendor deposits and other
1,996

 
1,835

Total other assets
$
5,098

 
$
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:
 
September 30,
 
December 31,
 
2014
 
2013
Accrued compensation and benefits
$
4,526

 
$
6,682

Accrued cost of revenue
1,680

 
1,833

Accrued legal fees
1,717

 
1,769

Deferred rent
1,277

 
1,074

Indirect taxes payable
746

 
639

Customer deposits
181

 
635

Other accrued expenses
2,118

 
2,390

Total other current liabilities
$
12,245

 
$
15,022

12. Other Long Term Liabilities
Other long term liabilities include:
 
September 30,
 
December 31,
 
2014
 
2013
Deferred rent
$
2,832

 
$
3,384

Income taxes payable
123

 
121

Total other long term liabilities
$
2,955

 
$
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.

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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 Federal Circuit heard arguments on September 11, 2014. 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.

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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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Loss from continuing operations
$
(5,071
)
 
$
(10,903
)
 
$
(19,849
)
 
$
(30,273
)
(Loss) income from discontinued operations
(4
)
 
(15
)
 
265

 
(15
)
Net loss
$
(5,075
)
 
$
(10,918
)
 
$
(19,584
)
 
$
(30,288
)
Basic and diluted weighted average outstanding shares of
  common stock
98,458

 
96,949

 
98,274

 
96,675

Basic and diluted loss per share:
 
 
 
 
 
 
 
  Continuing operations
$
(0.05
)
 
$
(0.11
)
 
$
(0.20
)
 
$
(0.31
)
  Discontinued operations
—

 
—

 
—

 
—

Basic and diluted net loss per share
$
(0.05
)
 
$
(0.11
)
 
$
(0.20
)
 
$
(0.31
)
For the three months ended September 30, 2014 and 2013, outstanding options and restricted stock units of 2,593 and 1,415, respectively, were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive.
For the nine months ended September 30, 2014 and 2013, outstanding options and restricted stock units of 2,323 and 1,689, 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 nine months ended September 30, 2014, the Company purchased and canceled 447 and 947 shares, respectively, for $1,267 and $2,500, respectively, including commissions and expenses. All repurchased shares were canceled and returned to authorized but unissued status.
During the nine months ended September 30, 2013, the Company purchased and canceled approximately 2,300 shares for approximately $5,512, including commissions and expenses under a previously authorized share repurchase program. All repurchased shares were canceled 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 nine months ended September 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

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September 30, 2014, shares reserved for issuance to employees under this plan totaled 4,000 and the Company held employee contributions of $210, (included in other current liabilities) for future purchases under the ESPP. The ESPP is considered compensatory. The Company recorded compensation expense of $41 and $128 during the three and nine months ended September 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 nine months ended September 30, 2014 was as follows:



Unrealized





Gains (Losses) on



Foreign

Available for



Currency

Sale Securities

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

$
25


$
(1,663
)
  Other comprehensive loss before reclassifications
(2,903
)

(30
)

(2,933
)
Amounts reclassified from accumulated other comprehensive
  income (loss)
—


—


—

Net current period other comprehensive loss
(2,903
)

(30
)

(2,933
)
Balance, September 30, 2014
$
(4,591
)

$
(5
)

$
(4,596
)
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 nine months ended September 30, 2014 and 2013:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Share-based compensation expense by type:
 
 
 
 
 
 
 
Stock options
$
1,120

 
$
1,614

 
$
3,545

 
$
5,214

Restricted stock units
1,426

 
1,609

 
4,127

 
4,586

ESPP
41

 
—

 
128

 
—

Total share-based compensation expense
$
2,587

 
$
3,223

 
$
7,800

 
$
9,800

Share-based compensation expense included in our consolidated statements of operations:
 
 
 
 
 
 
 
Cost of services
$
464

 
$
499

 
$
1,466

 
$
1,518

General and administrative expense
1,174

 
1,591

 
3,539

 
4,817

Sales and marketing expense
567

 
638

 
1,693

 
1,896

Research and development expense
382

 
495

 
1,102

 
1,569

Total share-based compensation expense
$
2,587

 
$
3,223

 
$
7,800

 
$
9,800

Unrecognized share-based compensation expense totaled approximately $19,380 at September 30, 2014, of which $7,470 related to stock options and $11,910 related to restricted stock awards. The Company currently expects to recognize share-based compensation expense of $2,568 during the remainder of 2014, $8,161 in 2015 and the remainder thereafter based on scheduled vesting of the stock options and restricted stock units outstanding at September 30, 2014.
18. 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 September 30, 2014 are as

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follows:
Remainder of 2014
$
1,045

2015
3,394

2016
2,746

2017
2,343

2018 and thereafter
4,096

Total minimum payments
$
13,624

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 September 30, 2014:
Remainder of 2014
$
11,470

2015
26,155

2016
5,648

2017
974

2018 and thereafter
449

Total minimum payments
$
44,696

Capital Leases
The Company leases equipment under capital lease agreements which extend through 2017. The outstanding balance for capital leases was $411 and $824 as of September 30, 2014 and December 31, 2013, respectively. The Company recorded assets under capital lease obligations of $2,267 and $2,312 as of September 30, 2014 and December 31, 2013, respectively. Related accumulated amortization totaled $2,224 and $1,878 as of September 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 $7 and $15 for the three months ended September 30, 2014 and 2013, respectively. Interest expense related to capital leases was $26 and $64 for the nine months ended September 30, 2014 and 2013, respectively.
Future minimum capital lease payments at September 30, 2014 were as follows:
Remainder of 2014
$
59

2015
238

2016
134

2017
4

2018 and thereafter
—

Total
435

Amounts representing interest
(24
)
Present value of minimum lease payments
$
411

19. Concentrations
For the three months ended September 30, 2014 and 2013, and the nine months ended September 30, 2014, the Company had no customer who represented 10% or more of its total revenue. For the nine months ended September 30, 2013, Netflix, Inc. represented approximately 12% of the Company's total revenue.
Revenue from sources outside America totaled approximately $15,467 and $14,069 for the three months ended September 30, 2014 and 2013, respectively. Revenue from sources outside of America totaled approximately $44,776 and $41,769 for the nine months ended September 30, 2014 and 2013, respectively.
During the three and nine months ended September 30, 2014, and the three months ended September 30, 2013, the Company had two countries, the United States and Japan, that accounted for 10% or more of the Company's total revenues.

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During the nine months ended September 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.
20. 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 nine months ended September 30, 2014 was $98 and $181, 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 nine 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 September 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 has been or will be a material impact on its consolidated financial statements.
21. 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.
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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Americas
$
23,553

60.4
%
 
$
28,587

67.0
%
 
$
76,757

63.2
%
 
$
89,463

68.2
%
EMEA
8,368

21.4
%
 
7,960

18.7
%
 
25,732

21.2
%
 
24,569

18.7
%
Asia Pacific
7,099

18.2
%
 
6,109

14.3
%
 
19,044

15.7
%
 
17,200

13.1
%
Total revenue
$
39,020

100.0
%
 
$
42,656

100.0
%
 
$
121,533

100.0
%
 
$
131,232

100.0
%
The following table sets forth long-lived assets by geographic area:
 
September 30,
 
December 31,
 
2014
 
2013
Americas
$
22,055

 
$
26,502

International
11,443

 
8,757

Total long-lived assets
$
33,498

 
$
35,259

22. Fair Value Measurements
As of September 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

17
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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 September 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)
$
174

 
$
174

 
$
—

 
$
—

Corporate notes and bonds (1)
23,199

 
—

 
23,199

 
—

Commercial paper (1)
3,399

 
 
 
3,399

 
 
Certificate of deposit (1)
7,670

 
—

 
7,670

 
—

Total assets measured at fair value
$
34,442

 
$
174

 
$
34,268

 
$
—

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


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Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with 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)
On February 12, 2014, our board of directors authorized a $15,000 share repurchase program. During the three and nine months ended September 30, 2014, we purchased and canceled 447 and 947 shares, respectively, for $1,267 and $2,500, respectively, including commissions and expenses. All repurchased shares were canceled and returned to authorized but unissued status. As of September 30, 2014, we have $12,509 remaining under this share repurchase authorization.
The following table summarizes our revenue, costs and expenses for the three and nine months ended September 30, 2014 and 2013 (in thousands of dollars and as a percentage of total revenue). The information presented below has been revised to reflect the adjustments discussed in Note 2, Revision of Previously Issued Financial Statements, in Part I, Item 1 of this quarterly report on Form 10-Q.

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Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$
39,020

 
100.0
 %
 
$
42,656

 
100.0
 %
 
$
121,533

 
100.0
 %
 
$
131,232

 
100.0
 %
Cost of revenue
22,879

 
58.6
 %
 
27,416

 
64.3
 %
 
74,251

 
61.1
 %
 
84,799

 
64.6
 %
Gross profit
16,141

 
41.4
 %
 
15,240

 
35.7
 %
 
47,282

 
38.9
 %
 
46,433

 
35.4
 %
Total operating expenses
22,365

 
57.3
 %
 
25,463

 
59.7
 %
 
68,141

 
56.1
 %
 
76,706

 
58.5
 %
Operating loss
(6,224
)
 
(16.0
)%
 
(10,223
)
 
(24.0
)%
 
(20,859
)
 
(17.2
)%
 
(30,273
)
 
(23.1
)%
Total other income (expense)
1,251

 
3.2
 %
 
(483
)
 
(1.1
)%
 
1,191

 
1.0
 %
 
328

 
0.2
 %
Loss from continuing operations before income taxes
(4,973
)
 
(12.7
)%
 
(10,706
)
 
(25.1
)%
 
(19,668
)
 
(16.2
)%
 
(29,945
)
 
(22.8
)%
Income tax provision
98

 
0.3
 %
 
197

 
0.5
 %
 
181

 
0.1
 %
 
328

 
0.2
 %
Loss from continuing operations
(5,071
)
 
(13.0
)%
 
(10,903
)
 
(25.6
)%
 
(19,849
)
 
(16.3
)%
 
(30,273
)
 
(23.1
)%
Discontinued operations:


 


 


 


 


 

 


 
 
(Loss) income from discontinued operations, net of income taxes
(4
)
 
—
 %
 
(15
)
 
—
 %
 
265

 
0.2
 %
 
(15
)
 
—
 %
Net loss
$
(5,075
)
 
(13.0
)%
 
$
(10,918
)
 
(25.6
)%
 
$
(19,584
)
 
(16.1
)%
 
$
(30,288
)
 
(23.1
)%
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 November 10, 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;

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•
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
 
Nine Months Ended
 
Sept. 30,
 
June 30,
 
Sept. 30,
 
Sept. 30,

Sept. 30,
 
2014
 
2014
 
2013
 
2014

2013
U.S. GAAP net loss
$
(5,075
)
 
$
(6,869
)
 
$
(10,918
)
 
$
(19,584
)
 
$
(30,288
)
Share-based compensation
2,587

 
2,634

 
3,223

 
7,800

 
9,800

Litigation defense expenses
10

 
536

 
149

 
819

 
299

Amortization of intangible assets
259

 
338

 
711

 
934

 
2,161

Loss on sale of the WCM business
—

 
—

 
—

 
62

 
—

Acquisition related expenses
—

 
—

 
146

 
—

 
113

Loss (income) from discontinued operations
4

 
(269
)
 
15

 
(265
)
 
15

Non-GAAP net loss
$
(2,215
)
 
$
(3,630
)
 
$
(6,674
)
 
$
(10,234
)
 
$
(17,900
)
Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
Sept. 30,
 
June 30,
 
Sept. 30,
 
Sept. 30,
 
Sept. 30,
 
2014
 
2014
 
2013
 
2014
 
2013
U.S. GAAP net loss
$
(5,075
)
 
$
(6,869
)
 
$
(10,918
)
 
$
(19,584
)
 
$
(30,288
)
Depreciation and amortization
5,032

 
5,121

 
6,711

 
15,556

 
22,403

Interest expense
7

 
7

 
15

 
26

 
64

Loss on sale of the WCM business
—

 
—

 
—

 
62

 
—

Interest and other (income) expense
(1,258
)
 
128

 
468

 
(1,279
)
 
(392
)
Income tax provision
98

 
27

 
197

 
181

 
328

Loss (income) from discontinued operations
4

 
(269
)
 
15

 
(265
)
 
15

EBITDA from continuing operations
$
(1,192
)
 
$
(1,855
)
 
$
(3,512
)
 
$
(5,303
)
 
$
(7,870
)
Share-based compensation
2,587

 
2,634

 
3,223

 
7,800

 
9,800

Litigation defense expenses
10

 
536

 
149

 
819

 
299

Acquisition related expenses
—

 
—

 
146

 
—

 
113

Adjusted EBITDA
$
1,405

 
$
1,315

 
$
6

 
$
3,316

 
$
2,342

Non-GAAP metrics for the three and nine months ended September 30, 2014, include the impact of recording an immaterial error correction of approximately $1,100 relating to previous over billings by a co-location provider.  This correction was recorded as a reduction of costs of revenues.

21
Table of Contents

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 nine months ended September 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 nine months ended September 30, 2014 compared to September 30, 2013:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
Percent
 




 

Percent
 
2014
 
2013
 
Decrease
 
Change
 
2014

2013

Decrease

Change
Revenue
$
39,020

 
$
42,656

 
$
(3,636
)
 
(8.5
)%
 
$
121,533

 
$
131,232

 
$
(9,699
)
 
(7.4
)%
Our revenue decreased during the three and nine months ended September 30, 2014 versus the comparable 2013 period primarily due to the sale of the Web Content Management (WCM) business in December 2013 and the expiration of our content delivery contract with Netflix, Inc. (Netflix) in July 2014. Our active customers worldwide decreased to 1,134 as of September 30, 2014 compared to 1,341 as of September 30, 2013. Approximately 25% of the decrease in customers is attributable to the sale of the WCM business. 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 September 30, 2014 and 2013, sales to our top 10 customers accounted for approximately 37% and 36%, respectively, of our total revenue. For the nine months ended September 30, 2014 and 2013, sales to our top 10 customers accounted for approximately 38% and 35%, respectively, of our total revenue.
During the three months ended September 30, 2014 and 2013, and the nine months ended September 30, 2014, we had no customer who accounted for 10% or more of our total revenue. For the nine months ended September 30, 2013, Netflix represented approximately 12% 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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Americas
$
23,553

60.4
%
 
$
28,587

67.0
%
 
$
76,757

63.2
%
 
$
89,463

68.2
%
EMEA
8,368

21.4
%
 
7,960

18.7
%
 
25,732

21.2
%
 
24,569

18.7
%
Asia Pacific
7,099

18.2
%
 
6,109

14.3
%
 
19,044

15.7
%
 
17,200

13.1
%
Total revenue
$
39,020

100.0
%
 
$
42,656

100.0
%
 
$
121,533

100.0
%
 
$
131,232

100.0
%
We anticipate revenues will decrease in the remaining portion of 2014 compared to 2013 as a result of our sale of our WCM business in December 2013 and the expiration of the content delivery contract with Netflix in July 2014. We expect revenues for the year ended December 31, 2014 to total between $159,000 and $161,000.
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.

22
Table of Contents

Cost of revenue was composed of the following (in thousands and as a percentage of total revenue):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Bandwidth and co-location fees
$
12,027

 
30.8
%
 
$
14,631

 
34.3
%
 
$
41,449

 
34.1
%
 
$
44,791

 
34.1
%
Depreciation - network
4,207

 
10.8
%
 
5,278

 
12.4
%
 
12,688

 
10.4
%
 
18,078

 
13.8
%
Payroll and related employee costs
4,396

 
11.3
%
 
4,703

 
11.0
%
 
13,230

 
10.9
%
 
13,993

 
10.7
%
Share-based compensation
464

 
1.2
%
 
499

 
1.2
%
 
1,466

 
1.2
%
 
1,518

 
1.2
%
Other costs
1,785

 
4.6
%
 
2,305

 
5.4
%
 
5,418

 
4.5
%
 
6,419

 
4.9
%
Total cost of revenue
$
22,879

 
58.6
%
 
$
27,416

 
64.3
%
 
$
74,251

 
61.1
%
 
$
84,799

 
64.6
%
Our cost of revenue decreased in aggregate dollars and as a percentage of total revenue for the three and nine months ended September 30, 2014 versus the comparable 2013 periods primarily as a result of the following:
•
decreased bandwidth and co-location fees as a result of our focus on renegotiating our fixed rate infrastructure contracts to variable rate based on traffic levels. Additionally, during the third quarter of 2014, we recorded a nonrecurring $1,100 credit related to an over billing from one of our co-location providers; 
•decreased network depreciation as a result of a decrease in capital expenditures since 2012; and
•decreased payroll and related employee costs as a result of lower average salaries.
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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Payroll and related employee costs
$
2,553

 
6.5
%
 
$
2,190

 
5.1
%
 
$
7,714

 
6.3
%
 
$
7,512

 
5.7
%
Professional fees and outside services
2,177

 
5.6
%
 
2,137

 
5.0
%
 
4,928

 
4.1
%
 
5,873

 
4.5
%
Share-based compensation
1,174

 
3.0
%
 
1,591

 
3.7
%
 
3,539

 
2.9
%
 
4,817

 
3.7
%
Other costs
1,391

 
3.6
%
 
2,326

 
5.5
%
 
5,785

 
4.8
%
 
5,820

 
4.4
%
Total general and administrative
$
7,295

 
18.7
%
 
$
8,244

 
19.3
%
 
$
21,966

 
18.1
%
 
$
24,022

 
18.3
%
Our general and administrative expense decreased in aggregate dollars and as a percentage of total revenue for the three and nine months ended September 30, 2014 versus the comparable 2013 periods.
The decrease during the three months ended September 30, 2014 versus the comparable 2013 period was primarily the result of the following:
•
decreased share-based compensation expense; and
•
lower other costs which was primarily reduced bad debt expense, rent and litigation expenses.
These decreases were partially offset by increased payroll and related employee costs due to higher average salaries and an increase in general and administrative personnel.
The decrease during the nine months ended September 30, 2014 versus the comparable 2013 period was primarily the result of the following:
•
decreased share-based compensation; and
•
decreased professional fees and outside services primarily due to lower patent defense costs and reduced recruiting fees.

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Table of Contents

These decreases were partially offset by increased payroll and related employee costs due to an increase in general and administrative personnel.
Sales and Marketing
Sales and marketing expense was composed of the following (in thousands and as a percentage of total revenue):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Payroll and related employee costs
$
5,566

 
14.3
%
 
$
6,182

 
14.5
%
 
$
18,256

 
15.0
%
 
$
18,813

 
14.3
%
Share-based compensation
567

 
1.5
%
 
637

 
1.5
%
 
1,693

 
1.4
%
 
1,896

 
1.4
%
Marketing programs
321

 
0.8
%
 
486

 
1.1
%
 
1,105

 
0.9
%
 
2,010

 
1.5
%
Other costs
2,277

 
5.8
%
 
3,058

 
7.2
%
 
7,302

 
6.0
%
 
8,826

 
6.7
%
Total sales and marketing
$
8,731

 
22.4
%
 
$
10,363

 
24.3
%
 
$
28,356

 
23.3
%