LLNW-6.30.2015-10Q
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 June 30, 2015
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 24, 2015: 100,443,596 shares.
 


Table of Contents

LIMELIGHT NETWORKS, INC.
FORM 10-Q
Quarterly Period Ended June 30, 2015
TABLE OF CONTENTS
 
 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS (unaudited)
 
 
Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014
 
Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014
 
Unaudited Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2015 and 2014
 
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014
 
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

Note Regarding Forward-Looking Statement
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These statements include, among other things:
our expectations regarding revenue, costs and expenses;
our plans regarding investing in our content delivery network, as well as other products and technologies;
our beliefs regarding the growth of, and competition within, the content delivery industry;
our beliefs regarding the growth of our business and how that impacts our liquidity and capital resources requirements;
our expectations regarding hiring and headcount;
the impact of certain new accounting standards and guidance;
our plans with respect to investments in marketable securities;
our expectations and strategies regarding acquisitions;
our expectations regarding the Akamai litigation and other pending or potential disputes;
our estimations regarding taxes and belief regarding our tax reserves;
our beliefs regarding the use of Non-GAAP financial measures;
our approach to identifying, attracting and keeping new and existing customers, as well as our expectations regarding customer turnover;
the sufficiency of our sources of funding;
our belief regarding our interest rate risk; and
our beliefs regarding the significance of our large customers;
as well as other statements regarding our financial condition and prospects, future operations, and business strategies. Forward-looking statements generally can be identified by the words “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events, as well as trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described under the caption “Risk Factors” in Part II, Item 1A in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the Securities and Exchange Commission (SEC).
In addition, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms "Limelight," "we," "us," and "our" in this document refer to Limelight Networks, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries.



Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements
Limelight Networks, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
 
June 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
40,502

 
$
57,767

Marketable securities
34,415

 
35,317

Accounts receivable, net
31,444

 
22,622

Income taxes receivable
212

 
237

Deferred income taxes
71

 
78

Prepaid expenses and other current assets
9,714

 
9,625

Total current assets
116,358

 
125,646

Property and equipment, net
37,788

 
32,636

Marketable securities, less current portion
40

 
40

Deferred income taxes, less current portion
1,374

 
1,364

Goodwill
76,381

 
76,133

Other intangible assets, net
693

 
1,071

Other assets
4,437

 
4,451

Total assets
$
237,071

 
$
241,341

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
14,339

 
$
7,065

Deferred revenue
4,142

 
3,509

Capital lease obligations

 
223

Income taxes payable
185

 
248

Other current liabilities
11,391

 
14,383

Total current liabilities
30,057

 
25,428

Capital lease obligations, less current portion

 
135

Deferred income taxes
134

 
170

Deferred revenue, less current portion
89

 
405

Other long-term liabilities
2,585

 
3,040

Total liabilities
32,865

 
29,178

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, 2015, and
December 31, 2014; 100,440 and 98,409 shares issued and outstanding at June 30, 2015, and December 31, 2014, respectively
100

 
98

Additional paid-in capital
470,389

 
464,294

Accumulated other comprehensive loss
(9,795
)
 
(7,786
)
Accumulated deficit
(256,488
)
 
(244,443
)
Total stockholders’ equity
204,206

 
212,163

Total liabilities and stockholders’ equity
$
237,071

 
$
241,341

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

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Limelight Networks, Inc.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$
43,795

 
$
41,343

 
$
86,124

 
$
82,512

Cost of revenue:
 
 

 
 
 
 
Cost of services (1)
21,271

 
21,326

 
42,928

 
42,891

Depreciation — network
4,376

 
4,144

 
8,528

 
8,481

Total cost of revenue
25,647

 
25,470

 
51,456

 
51,372

Gross profit
18,148

 
15,873

 
34,668

 
31,140

Operating expenses:
 
 

 
 
 
 
General and administrative
6,081

 
7,643

 
12,932

 
14,671

Sales and marketing
10,002

 
9,370

 
20,278

 
19,624

Research and development
7,646

 
4,859

 
13,909

 
9,437

Depreciation and amortization
635

 
977

 
1,276

 
2,043

Total operating expenses
24,364

 
22,849

 
48,395

 
45,775

Operating loss
(6,216
)
 
(6,976
)
 
(13,727
)
 
(14,635
)
Other income (expense):
 
 

 
 
 
 
Interest expense

 
(7
)
 
(4
)
 
(19
)
Interest income
75

 
67

 
149

 
137

Other, net
(131
)
 
(195
)
 
1,682

 
(178
)
Total other income (expense)
(56
)
 
(135
)
 
1,827

 
(60
)
Loss from continuing operations before income taxes
(6,272
)
 
(7,111
)
 
(11,900
)
 
(14,695
)
Income tax expense
90

 
27

 
145

 
83

Loss from continuing operations
(6,362
)
 
(7,138
)
 
(12,045
)
 
(14,778
)
Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations, net of income taxes

 
269

 

 
269

Net loss
$
(6,362
)
 
$
(6,869
)
 
$
(12,045
)
 
$
(14,509
)
Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
 
 
 
 
 
 
 
   Continuing operations
$
(0.06
)
 
$
(0.07
)
 
$
(0.12
)
 
$
(0.15
)
   Discontinued operations

 

 

 

Total
$
(0.06
)
 
$
(0.07
)
 
$
(0.12
)
 
$
(0.15
)
 
 
 
 
 
 
 
 
Weighted average shares used in per share calculation:
 
 
 
 
 
 
 
Basic and diluted
99,841

 
98,419

 
99,239

 
98,183

____________
(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.

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LIMELIGHT NETWORKS, INC.
Unaudited Consolidated Statements of Comprehensive Loss
(In thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(6,362
)
 
$
(6,869
)
 
$
(12,045
)
 
$
(14,509
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized (loss) gain on investments
(19
)
 
1

 
42

 
8

Foreign exchange translation gain (loss)
1,020

 
614

 
(2,051
)
 
767

Other comprehensive income (loss), net of tax
1,001

 
615

 
(2,009
)
 
775

Comprehensive loss
$
(5,361
)
 
$
(6,254
)
 
$
(14,054
)
 
$
(13,734
)
The accompanying notes are an integral part of the consolidated financial statements.

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Limelight Networks, Inc.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Operating activities
 
 
 
Net loss
$
(12,045
)
 
$
(14,509
)
Income from discontinued operations

 
269

Net loss from continuing operations
(12,045
)
 
(14,778
)
Adjustments to reconcile net loss to net cash used in operating activities of continuing operations:
 
 
 
Depreciation and amortization
9,804

 
10,524

Share-based compensation
6,349

 
5,213

Foreign currency remeasurement (gain) loss
(1,595
)
 
140

Deferred income taxes
(115
)
 
(202
)
Accounts receivable charges
470

 
512

Amortization of premium on marketable securities
106

 
286

Non cash tax benefit associated with income from discontinued operations

 
(59
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(9,292
)
 
(3,148
)
Prepaid expenses and other current assets
(202
)
 
572

Income taxes receivable
11

 
108

Other assets
1,009

 
928

Accounts payable
3,374

 
3,296

Deferred revenue
317

 
(807
)
Other current liabilities
(1,708
)
 
(2,819
)
Income taxes payable

 
(119
)
Other long term liabilities
(444
)
 
(235
)
Net cash used in operating activities of continuing operations
(3,961
)
 
(588
)
Investing activities
 
 
 
Purchases of marketable securities
(11,921
)
 
(14,683
)
Maturities of marketable securities
11,760

 
12,865

Purchases of property and equipment
(12,061
)
 
(8,909
)
Proceeds from the sale of discontinued operations

 
414

Net cash used in investing activities of continuing operations
(12,222
)
 
(10,313
)
Financing activities
 
 
 
Payments on capital lease obligations
(358
)
 
(323
)
Payment of employee tax withholdings related to restricted stock vesting
(1,944
)
 
(1,171
)
Cash paid for purchase of common stock
(957
)
 
(1,204
)
Proceeds from exercise of stock options and employee stock plans
2,519

 
734

Net cash used in financing activities of continuing operations
(740
)
 
(1,964
)
Effect of exchange rate changes on cash and cash equivalents
(342
)
 
313

Net decrease in cash and cash equivalents
(17,265
)
 
(12,552
)
Cash and cash equivalents, beginning of period
57,767

 
85,956

Cash and cash equivalents, end of period
$
40,502

 
$
73,404

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
4

 
$
19

Cash paid during the period for income taxes, net of refunds
$
284

 
$
350

Property and equipment expenditures remaining in accounts payable and other current liabilities
$
5,849

 
$
2,163

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

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Limelight Networks, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2015
1. Nature of Business
Limelight operates a globally distributed, high-performance 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 security, 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.
We were incorporated in Delaware in 2003, and have operated in the Phoenix metropolitan area since 2001 and elsewhere throughout the United States since 2003. We 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, 2015, or for any future periods. This quarterly report on Form 10-Q should be read in conjunction with our audited financial statements and footnotes included in our annual report on Form 10-K for the fiscal year ended December 31, 2014. All information is presented in thousands, except per share amounts and where specifically noted.
The consolidated financial statements include accounts of Limelight and our 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.
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, 2015, or for any other future periods.
Recent Accounting Standards
Recently Adopted 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. We adopted this guidance on January 1, 2015. The new guidance would only impact us upon the disposal of a business.
Recently Issued Accounting Pronouncements
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

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for us in the first quarter of 2017, if not deferred as discussed below. Early adoption is not permitted. The standard permits the use of the retrospective or cumulative effect transition method. In July 2015, the FASB decided to defer by one-year the effective date of ASU 2014-09. If this decision is codified without revision, the new standard will become effective for us beginning with the first quarter of 2018. We have not yet selected a transition method, and are currently in the process of evaluating the impact of adoption of this ASU on our consolidated financial statements and disclosures.
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 us in the first annual period ending after December 15, 2016, and interim periods within such year; however, early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, which provides a revised consolidation model for all reporting entities to use in evaluating whether they should consolidate certain legal entities. All legal entities will be subject to reevaluation under this revised consolidation model. The revised consolidation model, among other things, (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, and (iii) modifies the consolidation analysis of reporting entities that are involved with VIEs through fee arrangements and related party relationships. ASU 2015-2 is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after September 1, 2016. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change U.S. GAAP for a customer's accounting for service contracts. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In June 2015, the FASB issued ASU 2015-10, which covers a wide range of Topics in the Codification. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost on most entities. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements and footnote disclosures.
3. Investments in Marketable Securities
The following is a summary of marketable securities, designated as available-for-sale, at June 30, 2015:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Certificate of deposit
$
16,560

 
$
12

 
$
6

 
$
16,566

Commercial paper
1,500

 

 

 
1,500

Corporate notes and bonds
16,410

 
7

 
28

 
16,389

Total marketable securities
$
34,470

 
$
19

 
$
34

 
$
34,455

At June 30, 2015, we evaluated our marketable securities and determined unrealized losses were due to fluctuations in interest rates. We do not believe any of the unrealized losses represented an other-than-temporary impairment based on our evaluation of available evidence as of June 30, 2015. Our intent is to hold these investments to such time as these assets are no longer impaired. We view our available-for-sale securities as available for current operations.
The amortized cost and estimated fair value of the marketable debt securities at June 30, 2015, by maturity, are shown below:

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Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities
 
 
 
 
 
 
 
Due in one year or less
$
23,393

 
$
13

 
$
3

 
$
23,403

Due after one year and through five years
11,077

 
6

 
31

 
11,052

 
$
34,470

 
$
19

 
$
34

 
$
34,455

The following is a summary of marketable securities, designated as available-for-sale, at December 31, 2014:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Certificate of deposit
$
11,040

 
$
2

 
$
32

 
$
11,010

Commercial paper
1,498

 

 
1

 
1,497

Corporate notes and bonds
21,876

 
7

 
33

 
21,850

Convertible debt securities
1,000

 

 

 
1,000

Total marketable securities
$
35,414

 
$
9

 
$
66

 
$
35,357

The amortized cost and estimated fair value of the marketable debt securities at December 31, 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
$
19,798

 
$
5

 
$
9

 
$
19,794

Due after one year and through five years
15,616

 
4

 
57

 
15,563

 
$
35,414

 
$
9

 
$
66

 
$
35,357

4. Accounts Receivable, net
Accounts receivable, net include:
 
June 30,
 
December 31,
 
2015
 
2014
Accounts receivable
$
33,313

 
$
24,456

Less: credit allowance
(500
)
 
(380
)
Less: allowance for doubtful accounts
(1,369
)
 
(1,454
)
Total accounts receivable, net
$
31,444

 
$
22,622

5. Goodwill
We have recorded goodwill as a result of our 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 our acquisitions, the objective of the acquisition was to expand our product offerings and customer base and to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill.
We test goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired. We concluded that we have one reporting unit and assigned the entire balance of goodwill to this reporting unit. The estimated fair value of the reporting unit is determined using our market capitalization as of our 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 our 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 our stock price; and

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decline in observed control premiums paid in business combinations involving comparable companies.
No interim indicators of impairment were identified as of June 30, 2015. Foreign currency translation adjustments increased the carrying amount of goodwill for the three and six months ended June 30, 2015, by $361 and $248, respectively.
6. Property and Equipment, net
Property and equipment, net include:
 
June 30,
 
December 31,
 
2015
 
2014
Network equipment
$
138,907

 
$
127,962

Computer equipment and software
10,540

 
9,079

Furniture and fixtures
2,379

 
2,498

Leasehold improvements
5,196

 
5,262

Other equipment
181

 
186

Total property and equipment
157,203

 
144,987

Less: accumulated depreciation and amortization
(119,415
)
 
(112,351
)
Total property and equipment, net
$
37,788

 
$
32,636

Depreciation and amortization expense related to property and equipment classified in operating expense was $434 and $639 for the three months ended June 30, 2015 and 2014, respectively and was $877 and $1,368 for the six months ended June 30, 2015 and 2014, respectively.
7. Other Current Liabilities
Other current liabilities include:
 
June 30,
 
December 31,
 
2015
 
2014
Accrued compensation and benefits
$
4,562

 
$
5,266

Accrued cost of revenue
2,310

 
2,031

Deferred rent
1,086

 
1,277

Accrued legal fees
64

 
1,292

Other accrued expenses
3,369

 
4,517

Total other current liabilities
$
11,391

 
$
14,383

8. Other Long Term Liabilities
Other long term liabilities include:
 
June 30,
 
December 31,
 
2015
 
2014
Deferred rent
$
2,096

 
$
2,511

Income taxes payable
489

 
529

Total other long term liabilities
$
2,585

 
$
3,040

9. Contingencies
Legal Matters
Akamai Litigation
In June 2006, Akamai Technologies, Inc. (Akamai) and the Massachusetts Institute of Technology (MIT) filed a lawsuit against us in the United States District Court for the District of Massachusetts alleging that we were 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

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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 we infringed four claims of the ’703 patent at issue and rejecting our 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 we estimated to be $2,600 at December 31, 2007. We recorded an aggregate $48,100 as a provision for litigation as of December 31, 2007. During 2008, we 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.
On July 1, 2008, the District Court denied our Motions for Judgment as a Matter of Law (JMOL), Obviousness, and a New Trial. The District Court also denied Akamai’s Motion for Permanent Injunction as premature and its Motions for Summary Judgment regarding our equitable defenses. The District Court conducted a bench trial in November 2008 regarding our equitable defenses. We also filed a motion for reconsideration of the District Court’s earlier denial of our motion for JMOL. Our motion for JMOL was based largely upon a clarification in the standard for a finding of joint infringement articulated by the United States Court of Appeals for the Federal Circuit in the case of Muniauction, Inc. v. Thomson Corp., released after the District Court denied our initial motion for JMOL. On April 24, 2009, the District Court issued its order and memorandum setting aside the adverse jury verdict and ruling that we did not infringe Akamai’s ’703 patent and that we were entitled to JMOL. Based upon the District Court’s April 24, 2009 order, we reversed the $65,600 provision for litigation previously recorded for this lawsuit as we no longer believed that payment of any amounts represented by the litigation provision was probable. The District Court entered final judgment in our favor on May 22, 2009, and Akamai filed its notice of appeal of the District Court’s decision on May 26, 2009. On December 20, 2010, the United States Court of Appeals for the Federal Circuit issued its opinion affirming the District Court’s entry of judgment in our favor. On February 18, 2011, Akamai filed a motion with the Federal Circuit seeking a rehearing and rehearing en banc. On April 21, 2011, 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 District Court’s entry of judgment in our favor, and reinstated the appeal.
On August 31, 2012, the Federal Circuit issued its opinion in the case. The Federal Circuit stated that the District Court correctly determined that we did not directly infringe Akamai’s ’703 patent and upheld the District Court’s decision to vacate the original jury’s damages award. The Federal Circuit also held that we 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 District Court, and gave Akamai an opportunity for a new trial to attempt to prove that we induced our customers to infringe Akamai’s patent under the Federal Circuit's new legal standard. On December 28, 2012, we filed a petition for writ of certiorari to the United States Supreme Court to appeal this sharply divided Federal Circuit decision. Akamai then filed a cross petition for consideration of the Court of Appeals' standard for direct infringement followed by an opposition to our 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, and on May 13, 2015, the Federal Circuit issued its opinion in the case, holding that we did not infringe Akamai's '703 patent. On June 12, 2015, Akamai filed a motion with the Federal Circuit seeking a rehearing en banc. We do 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, we believe that there is a reasonable possibility that we have incurred a loss related to the Akamai litigation. While we believe that there is a reasonable possibility that a loss has been incurred, we are not able to estimate a range of the loss due to the complexity and procedural status of the case. We will continue to vigorously defend against the allegation.
Legal and other expenses associated with this case have been significant. We include these litigation expenses in general and administrative expenses as incurred, as reported in the consolidated statement of operations.
Other Litigation
We are 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 our business, financial position, results of operations, or cash flows. Litigation relating to the content delivery services industry is not uncommon, and we are, and from time to time have been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future.

12

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Other Matters
We are 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 us conducting business online or providing Internet-related services. Increased regulation could negatively affect our business directly, as well as the businesses of our customers, which could reduce their demand for our services. For example, tax authorities in various states and abroad may impose taxes on the Internet-related revenue we generate based on regulations currently being applied to similar but not directly comparable industries.
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, we may come under audit, which could result in changes to our tax estimates. We believe we maintain adequate tax reserves to offset potential liabilities that may arise upon audit. Although we believe our 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.
10. Net Loss per Share
We calculate basic and diluted earnings per weighted average share based on net loss. We use 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 includes the dilutive effect of all potentially dilutive common stock, including awards granted under our equity incentive compensation plans 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,
 
2015
 
2014
 
2015
 
2014
Loss from continuing operations
$
(6,362
)
 
$
(7,138
)
 
$
(12,045
)
 
$
(14,778
)
Income from discontinued operations
$

 
$
269

 
$

 
$
269

Net loss
$
(6,362
)
 
$
(6,869
)
 
$
(12,045
)
 
$
(14,509
)
Basic and diluted weighted average outstanding shares of common stock
99,841

 
98,419

 
99,239

 
98,183

Basic and diluted net loss per share:
 
 
 
 
 
 
 
  Continuing operations
$
(0.06
)
 
$
(0.07
)
 
$
(0.12
)
 
$
(0.15
)
  Discontinued operations

 

 

 

Total
$
(0.06
)
 
$
(0.07
)
 
$
(0.12
)
 
$
(0.15
)
For the three months ended June 30, 2015 and 2014, potentially dilutive common stock, including awards granted under our equity incentive compensation plans of 5,998 (stock options 2,787, restricted stock units 3,145, employee stock purchase plan 66) and 2,080 (stock options 673, restricted stock units 1,381, employee stock purchase plan 26), 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, 2015 and 2014, potentially dilutive common stock, including awards granted under our equity incentive compensation plans of 5,151 (stock options 2,088, restricted stock units 2,997, employee stock purchase plan 66) and 1,931 (stock options 626, restricted stock units 1,279, employee stock purchase plan 26), respectively, were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive.

13

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11. Stockholders’ Equity
Common Stock
On February 12, 2014, our board of directors authorized a $15,000 share repurchase program. Under this authorization, we may repurchase shares periodically in the open market or through privately negotiated transactions, in accordance with applicable securities rules regarding issuer repurchases. We did not purchase any shares during the three months ended June 30, 2015. During the six months ended June 30, 2015, we purchased and canceled 293 shares for $818, including commissions and expenses. During the three and six months ended June 30, 2014, we purchased and canceled approximately 500 shares for approximately $1,233 including commissions and expenses. All repurchased shares were canceled and returned to authorized but unissued status.
Employee Stock Purchase Plan
In June 2013, our stockholders approved our 2013 Employee Stock Purchase Plan (ESPP). The ESPP allows participants to purchase our 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, 2015, we issued 202 shares under the ESPP. Total cash proceeds from the purchase of shares under the ESPP was approximately $451. As of June 30, 2015, shares reserved for issuance to employees under this plan totaled 3,394, and we held employee contributions of $241 (included in other current liabilities) for future purchases under the ESPP. The ESPP is considered compensatory. During the three months ended June 30, 2015 and 2014, we recorded compensation expense of $92 and $30, respectively. During the six months ended June 30, 2015 and 2014, we recorded compensation expense of $166 and $86, respectively.
12. Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2015, was as follows:



Unrealized





Gains (Losses) on



Foreign

Available for



Currency

Sale Securities

Total
Balance, December 31, 2014
$
(7,743
)

$
(43
)

$
(7,786
)
  Other comprehensive (loss) income before reclassifications
(2,051
)

42


(2,009
)
Amounts reclassified from accumulated other comprehensive
  income (loss)





Net current period other comprehensive (loss) income
(2,051
)

42


(2,009
)
Balance, June 30, 2015
$
(9,794
)

$
(1
)

$
(9,795
)

14

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13. Share-Based Compensation
The following table summarizes the components of share-based compensation expense included in our consolidated statement of operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Share-based compensation expense by type:
 
 
 
 
 
 
 
Stock options
$
1,031

 
$
1,195

 
$
2,213

 
$
2,425

Restricted stock units
2,157

 
1,409

 
3,970

 
2,702

ESPP
92

 
30

 
166

 
86

Total share-based compensation expense
$
3,280

 
$
2,634

 
$
6,349

 
$
5,213

Share-based compensation expense included in the consolidated statements of operations:
 
 
 
 
 
 
 
Cost of services
$
571

 
$
498

 
$
1,084

 
$
1,002

General and administrative expense
1,476

 
1,165

 
2,882

 
2,365

Sales and marketing expense
608

 
601

 
1,297

 
1,126

Research and development expense
625

 
370

 
1,086

 
720

Total share-based compensation expense
$
3,280

 
$
2,634

 
$
6,349

 
$
5,213

Unrecognized share-based compensation expense totaled approximately $23,949 at June 30, 2015, of which $7,479 related to stock options and $16,470 related to restricted stock awards. We currently expect to recognize share-based compensation expense of $5,849 during the remainder of 2015, $10,131 in 2016 and the remainder thereafter based on scheduled vesting of the stock options and restricted stock units outstanding at June 30, 2015.
14. Leases and Commitments
Operating Leases
We are committed to various non-cancellable operating leases for office space and office equipment that expire through 2022. 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, 2015, are as follows:
Remainder of 2015
$
2,137

2016
3,734

2017
3,070

2018
2,849

2019
1,151

Thereafter
604

Total minimum payments
$
13,545

Purchase Commitments
We have 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, 2015:
Remainder of 2015
$
20,464

2016
16,719

2017
3,810

2018
1,393

2019
409

Thereafter
19

Total minimum payments
$
42,814


15

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Capital Leases
We leased equipment under capital lease agreements which extended through 2017. The outstanding balance for capital leases was $358 as of December 31, 2014. In March 2015, we paid $323, which represented the outstanding balance for our capital lease obligations. As of June 30, 2015, we had no outstanding capital lease obligations. Interest expense for all periods presented was immaterial.
15. Concentrations
During the three and six months ended June 30, 2015, we had no customer who represented 10% or more of our total revenue. For the three and six months ended June 30, 2014, we had one customer, Netflix, Inc. who represented approximately 13% and 12%, respectively, of our total revenue.
Revenue from customers located within the United States, our country of domicile, was $25,661 for the three months ended June 30, 2015, compared to $24,124 for the three months ended June 30, 2014. For the six months ended June 30, 2015, revenue from customers located within the United States was $51,272, compared to $49,284 for the six months ended June 30, 2014.
During the three and six months ended June 30, 2015 and 2014, we had two countries, based on customer location, the United States and Japan, that accounted for 10% or more of our total revenues.
16. 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 months ended June 30, 2015 and 2014, was $90 and $27, respectively. For the six months ended June 30, 2015 and 2014, income tax expense was $145 and $83, respectively. Income tax expense was different than the statutory income tax rate primarily due to us 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.
We file income tax returns in jurisdictions with varying statues of limitations. Tax years 2010 through 2014 generally remain subject to examination by federal and most state tax authorities. As of June 30, 2015, we are not under any federal or state examination for income taxes.
17. Segment Reporting and Geographic Areas
We operate in one industry segment — content delivery and related services. We operate 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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Americas
$
26,968

61.6
%
 
$
25,980

62.8
%
 
$
54,228

63.0
%
 
$
53,204

64.5
%
EMEA
7,527

17.2
%
 
8,861

21.4
%
 
15,575

18.0
%
 
17,363

21.0
%
Asia Pacific
9,300

21.2
%
 
6,502

15.7
%
 
16,321

19.0
%
 
11,945

14.5
%
Total revenue
$
43,795

100.0
%
 
$
41,343

100.0
%
 
$
86,124

100.0
%
 
$
82,512

100.0
%
The following table sets forth long-lived assets by geographic area in which the assets are located:
 
June 30,
 
December 31,
 
2015
 
2014
Americas
$
23,183

 
$
22,505

International
15,298

 
11,202

Total long-lived assets
$
38,481

 
$
33,707


16

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18. Fair Value Measurements
As of June 30, 2015, and December 31, 2014, we held certain assets and liabilities that were required to be measured at fair value on a recurring basis.
The following is a summary of fair value measurements at June 30, 2015:
 
 
 
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)
16,389

 

 
16,389

 

Commercial paper (1)
1,500

 
 
 
1,500

 
 
Certificate of deposit (1)
16,566

 

 
16,566

 

Total assets measured at fair value
$
34,629

 
$
174

 
$
34,455

 
$

  
____________
(1)
Classified in marketable securities
(2)
Classified in cash and cash equivalents
The following is a summary of fair value measurements at December 31, 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)
$
57

 
$
57

 
$

 
$

Corporate notes and bonds (1)
21,850

 

 
21,850

 

Commercial paper (1)
1,497

 

 
1,497

 

Certificate of deposit (1)
11,010

 

 
11,010

 

Convertible debt security (1)
1,000

 

 

 
1,000

Total assets measured at fair value
$
35,414

 
$
57

 
$
34,357

 
$
1,000

____________
(1)
Classified in marketable securities
(2)
Classified in cash and cash equivalents
During the three months ended June 30, 2015, a $1,000 convertible debt security, classified as Level 3 in the fair value hierarchy as of December 31, 2014, was converted into preferred shares of the issuing entity. As a result of the conversion, we recognized $275 in gain, related to a beneficial conversion feature, which is included in other income (expense) in our statement of operations. After conversion, at June 30, 2015, the investment is carried at cost ($1,275) and is evaluated for impairment quarterly or when events or changes in circumstances indicate the carrying value of the investment may exceed its fair value. The Company did not estimate the fair value of the investment because the Company did not identify any events or circumstances that would have a significant adverse effect on the fair value of the investment. Determining fair value is not practicable because the preferred shares are not publicly traded and information necessary to determine fair value is not available. The cost basis investment has been reclassified to, and is included in, other assets in our consolidated balance sheet, and is no longer subject to fair value measurement disclosures and was accordingly transferred out of Level 3 as of June 30, 2015.
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

17

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of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts.

18

Table of Contents

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 together with our consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as 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, 2014, included in Part II of our annual report on Form 10-K filed with the SEC, on February 17, 2015.
Prior period information has been modified to conform to current year presentation. All information in this Item 2 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 security, 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).
We derive revenue primarily from the sale of components of the Orchestrate Platform. Our delivery services represented approximately 77% of our total revenue during the three and six months ended June 30, 2015. We also generate revenue through the sale of professional services and other infrastructure services, such as transit and rack space services. We believe continued increases in content delivery traffic growth rates is an important trend that will continue to outpace declining average selling prices in the industry.
We operate in markets that are highly competitive. We have experienced and expect to continue to experience increased competition in price, features, functionality, integration and other factors leading to customer churn and customers operating their own network. Although during the three and six months ended June 30, 2015, we had no customer who represented 10% or more of our total revenue, changes in revenue are driven by a small subset of large customers who have low contractually committed obligations. For the three and six months ended June 30, 2014, we had one customer, Netflix, Inc. (Netflix)who represented approximately 13% and 12%, respectively, of our total revenue. Our contract with Netflix expired in July 2014.
In addition to these revenue-related trends, our profitability is impacted by trends in our costs of services and operating expenses. We continue to work with our vendors to renegotiate our fixed rate infrastructure contracts to variable rate in order to scale our operations based on traffic levels and lower bandwidth costs per unit. Our operating expenses are largely driven by payroll and related employee costs. We increased headcount from 520 at December 31, 2014, to 563 as of June 30, 2015, primarily in our research and development and sales organizations. We expect headcount will continue to increase as we expand our business and continue our investments in research and development and increase our sales force.
During the second quarter of 2015 we reorganized the job responsibilities of certain employees, and as a result, such employee expenses have moved from cost of services to research and development on a prospective basis. This reorganization resulted in an increase of approximately $750 in gross margin compared to previous periods, which represented an approximately 1.7% improvement in gross margin.


19

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The following table summarizes our revenue, costs and expenses in thousands of dollars and as a percentage of total revenue.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$
43,795

 
100.0
 %
 
$
41,343

 
100.0
 %
 
$
86,124

 
100.0
 %
 
$
82,512

 
100.0
 %
Cost of revenue
25,647

 
58.6
 %
 
25,470

 
61.6
 %
 
51,456

 
59.7
 %
 
51,372

 
62.3
 %
Gross profit
18,148

 
41.4
 %
 
15,873

 
38.4
 %
 
34,668

 
40.3
 %
 
31,140

 
37.7
 %
Total operating expenses
24,364

 
55.6
 %
 
22,849

 
55.3
 %
 
48,395

 
56.2
 %
 
45,775

 
55.5
 %
Operating loss
(6,216
)
 
(14.2
)%
 
(6,976
)
 
(16.9
)%
 
(13,727
)
 
(15.9
)%
 
(14,635
)
 
(17.7
)%
Total other income (expense)
(56
)
 
(0.1
)%
 
(135
)
 
(0.3
)%
 
1,827

 
2.1
 %
 
(60
)
 
(0.1
)%
Loss from continuing operations before income taxes
(6,272
)
 
(14.3
)%
 
(7,111
)
 
(17.2
)%
 
(11,900
)
 
(13.8
)%
 
(14,695
)
 
(17.8
)%
Income tax expense
90

 
0.2
 %
 
27

 
0.1
 %
 
145

 
0.2
 %
 
83

 
0.1
 %
Loss from continuing operations
(6,362
)
 
(14.5
)%
 
(7,138
)
 
(17.3
)%
 
(12,045
)
 
(14.0
)%
 
(14,778
)
 
(17.9
)%
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations, net of income taxes

 
 %
 
269

 
0.7
 %
 

 
 %
 
269

 
0.3
 %
Net loss
$
(6,362
)
 
(14.5
)%
 
$
(6,869
)
 
(16.6
)%
 
$
(12,045
)
 
(14.0
)%
 
$
(14,509
)
 
(17.6
)%
Use of Non-GAAP Financial Measures
To evaluate our business, we consider and use non-generally accepted accounting principles (Non-GAAP) net income (loss), EBITDA from continuing operations and Adjusted EBITDA as supplemental measures 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. We define Non-GAAP net income (loss) to be U.S. GAAP net income (loss) without the effects of share-based compensation, litigation defense expenses, amortization of intangible assets, discontinued operations and the gain (loss) on sale of our web content management (WCM) business. We define EBITDA from continuing operations as U.S. GAAP net income (loss) before interest and other (income) expense, interest expense, income tax expense, 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 and litigation defense 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 3, 2015, 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;

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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;
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,
 
2015
 
2015
 
2014
 
2015

2014
U.S. GAAP net loss
$
(6,362
)
 
$
(5,683
)
 
$
(6,869
)
 
$
(12,045
)
 
$
(14,509
)
Share-based compensation
3,280

 
3,069

 
2,634

 
6,349

 
5,213

Litigation defense expenses
(1,174
)
 
19

 
536

 
(1,155
)
 
809

Amortization of intangible assets
201

 
197

 
338

 
399

 
675

Loss on sale of WCM business

 

 

 

 
62

Income from discontinued operations, net of income taxes

 

 
(269
)
 

 
(269
)
Non-GAAP net loss
$
(4,055
)
 
$
(2,398
)
 
$
(3,630
)
 
$
(6,452
)
 
$
(8,019
)

Reconciliation of U.S. GAAP Net Loss to EBITDA from Continuing Operations to Adjusted EBITDA
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
June 30,
 
2015
 
2015
 
2014
 
2015
 
2014
U.S. GAAP net loss
$
(6,362
)
 
$
(5,683
)
 
$
(6,869
)
 
$
(12,045
)
 
$
(14,509
)
Depreciation and amortization
5,011

 
4,793

 
5,121

 
9,804

 
10,524

Interest expense

 
4

 
7

 
4

 
19

Loss on sale of the WCM business

 

 

 

 
62

Interest and other (income) expense
56

 
(1,886
)
 
128

 
(1,831
)
 
(21
)
Income tax expense
90

 
55

 
27

 
145

 
83

Income from discontinued operations, net of income taxes

 

 
(269
)
 

 
(269
)
EBITDA from continuing operations
$
(1,205
)
 
$
(2,717
)
 
$
(1,855
)
 
$
(3,923
)
 
$
(4,111
)
Share-based compensation
3,280

 
3,069

 
2,634

 
6,349

 
5,213

Litigation defense expenses
(1,174
)
 
19

 
536

 
(1,155
)
 
809

Adjusted EBITDA
$
901

 
$
371

 
$
1,315

 
$
1,271

 
$
1,911


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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, 2014. During the six months ended June 30, 2015, 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, 2015, compared to June 30, 2014:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
 
$
 
%
 




$

%
 
2015
 
2014
 
Change
 
Change
 
2015

2014

Change

Change
Revenue
$
43,795

 
$
41,343

 
$
2,452

 
5.9
%
 
$
86,124

 
$
82,512

 
$
3,612

 
4.4
%
Our revenue increased during the three and six months ended June 30, 2015, versus the comparable 2014 periods primarily due to an increase in our content delivery revenue which was driven by volume increases with our large customers partially offset by a decrease in average selling price.
The three and six months ended June 30, 2014 included $5,365 and $10,226 of revenue from Netflix whose contract expired in July 2014. Our active customers worldwide decreased to 1,035 as of June 30, 2015, compared to 1,186 as of June 30, 2014. 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, 2015 and 2014, sales to our top 20 customers accounted for approximately 59% and 52%, respectively, of our total revenue. For the six months ended June 30, 2015 and 2014, sales to our top 20 customers accounted for approximately 57% and 51%, respectively of our total revenue. The customers that comprised our top 20 customers have continually changed, and our large customers may not continue to be as significant going forward as they have been in the past.
During the three and six months ended June 30, 2015, we had no customer who represented 10% or more of our total revenue. For the three and six months ended June 30, 2014, we had one customer, Netflix, who represented approximately 13% and 12%, respectively, of our total revenue.
    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 (in thousands and as a percentage of total revenue):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Americas
$
26,968

61.6
%
 
$
25,980

62.8
%
 
$
54,228

63.0
%
 
$
53,204

64.5
%
EMEA
7,527

17.2
%
 
8,861

21.4
%
 
15,575

18.0
%
 
17,363

21.0
%
Asia Pacific
9,300

21.2
%
 
6,502

15.7
%
 
16,321

19.0
%
 
11,945

14.5
%
Total revenue
$
43,795

100.0
%
 
$
41,343

100.0
%
 
$
86,124

100.0
%
 
$
82,512

100.0
%
We invoice our customers primarily in U.S. dollars. However, we have certain customers invoiced in local currencies. The strengthening of the U.S. dollar compared to these local currencies resulted in a decrease in U.S. dollar revenues of approximately $1,000 when comparing the average exchange rates for the three months ended June 30, 2015, versus the comparable 2014 period.
We expect revenues for the year ended December 31, 2015, to total between $170,000 and $174,000.



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Table of Contents

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 Internet Service Providers or 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.
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,
 
2015
 
2014
 
2015
 
2014
Bandwidth and co-location fees
$
14,546

 
33.2
%
 
$
14,625

 
35.4
%
 
$
28,815

 
33.5
%
 
$
29,421

 
35.7
%
Depreciation - network
4,376

 
10.0
%
 
4,144

 
10.0
%
 
8,528

 
9.9
%
 
8,481

 
10.3
%
Payroll and related employee costs
4,525

 
10.3
%
 
4,466

 
10.8
%
 
9,598

 
11.1
%
 
8,834

 
10.7
%
Share-based compensation
571

 
1.3
%
 
498

 
1.2
%
 
1,084

 
1.3
%
 
1,002

 
1.2
%
Other costs
1,629

 
3.7
%
 
1,737

 
4.2
%
 
3,431

 
4.0
%
 
3,634

 
4.4
%
Total cost of revenue
$
25,647

 
58.6
%
 
$
25,470

 
61.6
%
 
$
51,456

 
59.7
%
 
$
51,372

 
62.3
%
Our cost of revenue slightly increased in aggregate dollars and decreased as a percentage of total revenue for the three and six months ended June 30, 2015, versus the comparable 2014 periods primarily as a result of the following:
increased depreciation as a result of the new servers and network equipment placed into service; and
increased payroll and related employee costs as a result of increased operations personnel.
These increases were partially offset by decreases in bandwidth and co-location fees and other costs as a result of the following:
decreased bandwidth and co-location fees as a result of our focus on improving our gross margins. We have begun our datacenter consolidation effort through which we intend to increase the utilization of our power and related expenses.  In addition, we have renegotiated certain bandwidth contracts from fixed rates to variable aligning costs with traffic growth; and
decreased other costs, which was primarily professional fees, other recurring cost of sales, office and computer equipment and other employee costs.
Effective April 1, 2015, we reorganized the job responsibilities of certain employees, and as a result, such employee expenses have moved from cost of services to research and development, on a prospective basis. This reorganization resulted in approximately $750 of payroll and related employee costs being allocated to research and development, with such costs being allocated to cost of services in prior periods.
We anticipate an improvement in gross margin compared to 2014 and we anticipate that our depreciation expense related to our network equipment will increase compared to 2014 as we expect to increase our capital expenditures over 2014 levels.
General and Administrative
General and administrative expense was composed of the following (in thousands and as a percentage of total revenue)

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Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Payroll and related employee costs
$
2,752

 
6.3
%
 
$
2,700

 
6.5
%
 
$
5,712

 
6.6
%
 
$
5,161

 
6.3
%
Professional fees and outside services
1,475

 
3.4
%
 
1,442

 
3.5
%
 
2,480

 
2.9
%
 
2,751

 
3.3
%
Share-based compensation
1,476

 
3.4
%
 
1,165

 
2.8
%
 
2,882

 
3.3
%
 
2,365

 
2.9
%
Other costs
378

 
0.9
%
 
2,336

 
5.7
%
 
1,858

 
2.2
%
 
4,394

 
5.3
%
Total general and administrative
$
6,081

 
13.9
%
 
$
7,643

 
18.5
%
 
$
12,932

 
15.0
%
 
$
14,671

 
17.8
%
Our general and administrative expense decreased in aggregate dollars and as a percentage of total revenue for the three and six months ended June 30, 2015, versus the comparable 2014 periods primarily as a result of the following:
decreased other costs as a result of our negotiations with a vendor during the three months ended June 30, 2015, which reduced our legal fees by $1,200, reduced bad debt expense, lower fees and licenses, insurance and facilities; and
decreased year-to-date professional fees, primarily due to lower consulting fees.
These decreases were partially offset by increased payroll and related employee costs due to higher average salaries for general and administrative personnel and increased share-based compensation.
We expect our general and administrative expenses to remain consistent with 2014 in aggregate dollars.
Sales and Marketing
Sales and marketing 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,
 
2015
 
2014
 
2015
 
2014
Payroll and related employee costs
$
6,670

 
15.2
%
 
$
5,909

 
14.3
%
 
$
13,425

 
15.6
%
 
$
12,689

 
15.4
%
Share-based compensation
608

 
1.4
%
 
601

 
1.5
%
 
1,297

 
1.5
%
 
1,126

 
1.4
%
Marketing programs
501

 
1.1
%
 
409

 
1.0
%
 
974

 
1.1
%
 
784

 
1.0
%
Other costs
2,223

 
5.1
%
 
2,451

 
5.9
%
 
4,582

 
5.3
%
 
5,025

 
6.1
%
Total sales and marketing
$
10,002

 
22.8
%
 
$
9,370

 
22.7
%
 
$
20,278

 
23.5
%
 
$
19,624

 
23.8
%
Our sales and marketing expense increased in aggregate dollars for the three and six months ended June 30, 2015, versus the comparable 2014 periods. Our sales and marketing expense as a percentage of total revenue remained consistent with the comparable 2014 period for the three months ended June 30, 2015 and slightly decreased for the six month period ended June 30, 2015, primarily as a result of the following:
increased payroll and related employee costs due to increased sales and marketing personnel and higher variable compensation; and
increased marketing and public relations spending related to trade shows.
These increases were partially offset by decreased other costs, which was primarily lower consulting expense, fees and licenses.
We expect our sales and marketing expenses to increase in both aggregate dollars and as a percentage of revenue compared to 2014 as we expand our sales workforce.
Research and Development
Research and development expense was composed of the following (in thousands and as a percentage of total revenue):

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Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Payroll and related employee costs
$
5,640

 
12.9
%
 
$
3,669

 
8.9
%
 
$
10,460

 
12.1
%
 
$
7,362

 
8.9
%
Share-based compensation
625

 
1.4
%
 
370

 
0.9
%
 
1,086

 
1.3
%
 
720

 
0.9
%
Other costs
1,381

 
3.2
%
 
820

 
2.0
%
 
2,363

 
2.7
%
 
1,355

 
1.6
%
Total research and development
$
7,646

 
17.5
%
 
$
4,859

 
11.8
%
 
$
13,909

 
16.1
%
 
$
9,437

 
11.4
%
Our research and development expense increased in aggregate dollars and as a percentage of total revenue for the three and six months ended June 30, 2015, versus the comparable 2014 periods, primarily as a result of the following:
increased payroll and related employee costs due to increased headcount as we expand our research and development activities;
the aforementioned reorganization of certain employees from cost of services to research and development; and
increased other costs primarily due to increased professional fees for consulting and travel expenses.
We expect our research and development expenses to increase in both aggregate dollars and as a percentage of revenue compared to 2014 as we continue to increase headcount and our investments in research and development.
Depreciation and Amortization (Operating Expenses)
Depreciation and amortization expense was $635, or 1.4% of revenue, for the three months ended June 30, 2015, versus $977, or 2.4% of revenue, for the comparable 2014 period. For the six months ended June 30, 2015, depreciation and amortization was $1,276, or 1.5% of revenue versus $2,043, or 2.5% of revenue for the comparable 2014 period. Depreciation expense consists of depreciation on equipment and furnishings used by general administrative, sales and marketing, and research and development personnel. Amortization expense consists of amortization of intangible assets acquired in business combinations.
Interest Expense
Interest expense was $-0- and $4 for the three and six months ended June 30, 2015, versus $7 and $19 for the comparable 2014 periods. Interest expense is primarily comprised of interest paid on capital leases that were paid in full in March 2015. As of June 30, 2015, we had no outstanding credit facilities.
Interest Income
Interest income was $75 and $149 for the three and six months ended June 30, 2015, versus $67 and $137 for the comparable 2014 periods. Interest income includes interest earned on invested cash balances and marketable securities.
Other Income (Expense)
Other expense was $131 and $195, respectively, for the three months ended June 30, 2015 and 2014. Other expense consists primarily of net foreign currency transaction losses, partially offset by the gain on the conversion of our convertible debt security into preferred shares.
For the six months ended June 30, 2015, other income was $1,682, compared to other expense of $178 for the comparable 2014 period. For the six months ended June 30, 2015, other income consists primarily of net foreign currency transaction gains and the $275 gain on the conversion of our convertible debt security into preferred shares. For six months ended June 30, 2014, other expense consists primarily of net foreign currency transaction losses, and the working capital adjustment associated with the sale of our WCM business, partially offset by the gain on sale of assets.
Income Tax Expense
Based on an estimated annual effective tax rate and discrete items, the estimated income tax expense from continuing operations for the three and six months ended June 30, 2015, was $90 and $145, respectively, versus $27 and $83 for the comparable 2014 periods. Income tax expense on the loss from continuing operations before income taxes was different than the statutory income tax rate primarily due to our providing for a valuation allowance on deferred tax assets in certain jurisdictions, and recording of state and foreign tax expense for the quarter and year to date periods. The effective income tax rate is based primarily upon forecasted income or loss for the year, the composition of the income or loss in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions for tax audits.

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Table of Contents

Income from Discontinued Operations
Discontinued operations relate to our EyeWonder and chors rich media advertising services. On September 1, 2011, we completed the sale of EyeWonder and chors to DG. During the three months ended June 30, 2014, we received approximately $414 from DG for previously written-off receivables. We recorded $269, 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.
Liquidity and Capital Resources
As of June 30, 2015, our cash, cash equivalents and marketable securities classified as current totaled $74,917. Included in this amount is approximately $6,251 of cash and cash equivalents held outside the United States that would be subject to withholding taxes upon repatriation.
The major components of changes in cash flows for the six months ended June 30, 2015 and 2014, are discussed in the following paragraphs.
Operating Activities
Net cash used in operating activities of continuing operations was $3,961 for the six months ended June 30, 2015, versus $588 for the comparable 2014 period, an increase of $3,373. Changes in operating assets and liabilities of ($6,935) during the six months ended June 30, 2015, versus ($2,224) in the comparable 2014 period were primarily due to:
accounts receivable increased $9,292 during the six months ended June 30, 2015, due to the timing of billings net of collections and an increase in our days sales outstanding (DSO) due to longer payment terms with certain large customers as compared to a $3,148 increase in the comparable 2014 period;
other assets decreased $1,009 during the six months ended June 30, 2015, due to amortization of prepaid bandwidth expenses versus a decrease of $928 for the comparable 2014 period;
accounts payable increased $3,374 during the six months ended June 30, 2015 versus an increase of $3,296 for the comparable 2014 period due to timing of vendor payments;
other current liabilities decreased $1,708 during the six months ended June 30, 2015, primarily due to the payment of 2014 accrued compensation and the reversal of accrued legal fees versus a decrease of $2,819 for the comparable 2014 period.
Cash provided by operating activities of continuing operations may not be sufficient to cover new purchases of property and equipment during 2015 and potential litigation expenses associated with patent litigation. The timing and amount of future working capital changes and our ability to manage our DSO will also affect the future amount of cash used in or provided by operating activities.
Investing Activities
Net cash used in investing activities of continuing operations was $12,222 for the six months ended June 30, 2015, versus $10,313 for the comparable 2014 period. Net cash used in investing activities of continuing operations during the six months ended June 30, 2015 and 2014, primarily relates to purchases of marketable securities, and capital expenditures consisting primarily of servers and network equipment associated with the build-out and expansion of our global computing platform, partially offset by cash received from maturities of marketable securities.
We expect to have ongoing capital expenditure requirements as we continue to invest in and expand our content delivery network. During the six months ended June 30, 2015, we made capital expenditures of $12,061 which represented approximately 14% of our total revenue. We expect an increase in capital expenditures in 2015 compared to 2014, to support growth opportunities and to further upgrade our global network and systems.
Financing Activities
Net cash used in financing activities of continuing operations was $740 for the six months ended June 30, 2015, versus $1,964 for the comparable 2014 period. Net cash used in financing activities of continuing operations in the six months ended June 30, 2015, related to payments of employee tax withholdings related to the net settlement of vested restricted stock units of $1,944, cash paid for the repurchase of our common stock of $957, and payments made on our capital lease obligations of $358, offset by cash received from the exercise of stock options and our employee stock plan of $2,519.

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Table of Contents

Net cash used in financing activities in the six months ended June 30, 2014 related to cash paid for the repurchase of our common stock of $1,204, payments of employee tax withholdings related to restricted stock units of $1,171, and payments made on our capital lease obligations of $323, offset by cash received from the exercise of stock options and our employee stock purchase plan of $734.
On March 12, 2015, we paid in full the outstanding balance on our capital leases. As of June 30, 2015, we had no outstanding credit facilities.
On February 12, 2014, our board of directors authorized a $15,000 share repurchase program. During the six months ended June 30, 2015, we have purchased and canceled approximately 293 shares. All repurchased shares were canceled and returned to authorized but unissued status. As of June 30, 2015, we have $9,525 remaining under this share repurchase authorization.
Changes in cash, cash equivalents and marketable securities are dependent upon changes in, among other things, working capital items such as deferred revenues, accounts payable, accounts receivable, accrued provision for litigation and various accrued expenses, as well as purchases of property and equipment and changes in our capital and financial structure due to debt repurchases and issuances, stock option exercises, sales of equity investments and similar events.
We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for at least the next 12 months. If the assumptions underlying our business plan regarding future revenue and expenses change, or if unexpected opportunities or needs arise, we may seek to raise additional cash by selling equity or debt securities.
Contractual Obligations, Contingent Liabilities, and Commercial Commitments
In the normal course of business, we make certain long-term commitments for operating leases, primarily office facilities, bandwidth, and computer rack space. These leases expire on various dates ranging from 2015 to 2022. We expect that the growth of our business will require us to continue to add to and increase our long-term commitments in 2015 and beyond. As a result of our growth strategies, we believe that our liquidity and capital resources requirements will grow.
The following table presents our contractual obligations and commercial commitments, as of June 30, 2015, over the next five years and thereafter:


Payments Due by Period




Less than





More than
 

Total

1 year

1-3 years

3-5 years

5 years
Operating Leases










  Bandwidth leases

$
22,191


$
16,928


$
4,970


$
293


$

  Rack space leases

20,137


15,185


4,514


438



  Real estate leases

13,545


4,077


6,338


2,755


375

Total operating leases

55,873


36,190


15,822


3,486


375

Other purchase obligations

486


486







Total commitments

$
56,359


$
36,676


$
15,822


$
3,486


$
375

Off Balance Sheet Arrangements
As of June 30, 2015, we are not involved in any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Item 3.    Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our debt and investment portfolio. In our investment portfolio, we do not use derivative financial instruments. Our investments are primarily with our commercial and investment banks and, by policy, we limit the amount of risk by investing primarily in money market funds, United States Treasury obligations, high quality corporate and municipal obligations, and certificates of deposit. We do not believe that a 10% change in interest rates would have a significant impact on our interest income, operating results, or liquidity.


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Foreign Currency Risk
We operate in the Americas, EMEA and Asia-Pacific. As a result of our international business activities, our financial results could be affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets, and there is no assurance that exchange rate fluctuations will not harm our business in the future. We have foreign currency exchange rate exposure on our results of operations as it relates to revenues and expenses denominated in foreign currencies. A portion of our cost of revenues and operating expenses are denominated in foreign currencies as are revenues associated with certain international customers. Approximately 16% of our revenue for the three and six months ended June 30, 2015, was denominated in foreign currencies. To the extent that the U.S. dollar weakens, similar foreign currency denominated transactions in the future will result in higher revenues and higher cost of revenues and operating expenses, with expenses having the greater impact on our financial results. Similarly, our revenues and expenses will decrease if the U.S. dollar strengthens against these foreign currencies. Although we will continue to monitor our exposure to currency fluctuations, and, where appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, we are not currently engaged in any financial hedging transactions. Assuming a 10% weakening of the U.S. dollar relative to our foreign currency denominated revenues and expenses, our net loss for the year ended December 31, 2014, and the six months ended June 30, 2015, would have been higher by approximately $3,019