Edgar Filing: Limelight Networks, Inc.

Document

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, 2016



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, 8^th 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 19, 2016: 105,261,189 shares.

Table of Contents

LIMELIGHT NETWORKS, INC.

FORM 10-Q

Quarterly Period Ended September 30, 2016

TABLE OF CONTENTS



		Page
Note Regarding Forward-Looking Statements		3

PART I. FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS (unaudited)
	Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015	4
	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015	5
	Unaudited Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2016 and 2015	6
	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	27
Item 4.	CONTROLS AND PROCEDURES	28

PART II. OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS	29
Item 1A.	RISK FACTORS	29
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43
Item 3.	DEFAULTS UPON SENIOR SECURITIES	43
Item 4.	MINE SAFETY DISCLOSURES	43
Item 5.	OTHER INFORMATION	43
Item 6.	EXHIBITS	44
	SIGNATURES	45

Table of Contents

Special Note Regarding Forward-Looking Statement

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements contained in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. 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 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;


•	the impact of certain new accounting standards and guidance as well as the time and cost of continued compliance with existing rules and standards;


•	our plans with respect to investments in marketable securities;


•	our expectations regarding 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;


•	our beliefs regarding inflation risks;


•	our beliefs regarding expense and productivity of and competition for our sales force; and


•	our beliefs regarding the significance of our large customers.

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.

The forward-looking statements contained herein are based on our current expectations and assumptions and on information available as of the date of the filing of this Quarterly Report on Form 10-Q. 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. All information is presented in thousands, except per share amounts, customer count and where specifically noted.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Limelight Networks, Inc.

Consolidated Balance Sheets

(In thousands, except per share data)



	September 30, 2016			December 31, 2015
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	74,400		$	44,680
Marketable securities	—			28,322
Accounts receivable, net	22,859			26,795
Income taxes receivable	117			170
Deferred income taxes	85			89
Prepaid expenses and other current assets	5,347			9,578
Total current assets	102,808			109,634
Property and equipment, net	29,643			36,143
Marketable securities, less current portion	40			40
Deferred income taxes, less current portion	1,317			1,252
Goodwill	76,437			76,143
Other assets	1,848			2,415
Total assets	$	212,093		$	225,627
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,922		$	9,137
Deferred revenue	1,400			2,890
Capital lease obligations	—			466
Income taxes payable	141			204
Provision for litigation	18,000			—
Other current liabilities	10,828			10,857
Total current liabilities	40,291			23,554
Capital lease obligations, less current portion	—			1,436
Deferred income taxes	148			137
Deferred revenue, less current portion	30			92
Provision for litigation, less current portion	31,500			—
Other long-term liabilities	1,747			2,311
Total liabilities	73,716			27,530
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; 105,218 and 102,299 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively	105			102
Additional paid-in capital	486,574			477,202
Accumulated other comprehensive loss	(9,901		)	(10,812		)
Accumulated deficit	(338,401		)	(268,395		)
Total stockholders’ equity	138,377			198,097
Total liabilities and stockholders’ equity	$	212,093		$	225,627

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

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,
	2016			2015			2016			2015
Revenues	$	39,473		$	42,049		$	124,456		$	128,173
Cost of revenue:
Cost of services (1)	18,834			21,502			59,214			64,430
Depreciation — network	4,401			4,636			13,558			13,164
Total cost of revenue	23,235			26,138			72,772			77,594
Gross profit	16,238			15,911			51,684			50,579
Operating expenses:
General and administrative	8,033			6,586			22,082			19,518
Sales and marketing	7,711			9,489			24,730			29,767
Research and development	5,626			7,429			18,241			21,338
Depreciation and amortization	613			648			1,862			1,924
Provision for litigation	—			—			54,000			—
Total operating expenses	21,983			24,152			120,915			72,547
Operating loss	(5,745		)	(8,241		)	(69,231		)	(21,968		)
Other income (expense):
Interest expense	(406		)	—			(865		)	(4		)
Interest income	8			82			22			231
Other, net	151			473			472			2,155
Total other income (expense)	(247		)	555			(371		)	2,382
Loss before income taxes	(5,992		)	(7,686		)	(69,602		)	(19,586		)
Income tax expense	130			76			404			221
Net loss	(6,122		)	(7,762		)	(70,006		)	(19,807		)

Net loss per share:
Basic and diluted	$	(0.06	)	$	(0.08	)	$	(0.67	)	$	(0.20	)

Weighted average shares used in per share calculation:
Basic and diluted	104,860			100,552			103,819			99,676

____________


(1)	Cost of services excludes amortization related to intangibles, including existing technologies, and customer relationships, which are included in depreciation and amortization.

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

Table of Contents

LIMELIGHT NETWORKS, INC.

Unaudited Consolidated Statements of Comprehensive Loss

(In thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net loss	$	(6,122	)	$	(7,762	)	$	(70,006	)	$	(19,807	)
Other comprehensive income (loss), net of tax:
Unrealized gain on investments	—			15			—			58
Foreign exchange translation (loss) gain	403			(1,132		)	867			(3,184		)
Other comprehensive gain (loss), net of tax	403			(1,117		)	867			(3,126		)
Comprehensive loss	$	(5,719	)	$	(8,879	)	$	(69,139	)	$	(22,933	)

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

Table of Contents

Limelight Networks, Inc.

Unaudited Consolidated Statements of Cash Flows

(In thousands)



	Nine Months Ended September 30,
	2016			2015
Operating activities
Net loss	$	(70,006	)	$	(19,807	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	15,420			15,088
Share-based compensation	9,776			9,473
Provision for litigation	54,000			—
Foreign currency remeasurement loss (gain)	509			(2,083		)
Deferred income taxes	(25		)	(21		)
Gain on sale of property and equipment	(296		)	—
Accounts receivable charges	36			738
Amortization of premium on marketable securities	19			152
Realized loss on sale of marketable securities	32			—
Changes in operating assets and liabilities:
Accounts receivable	3,901			(5,267		)
Prepaid expenses and other current assets	4,333			296
Income taxes receivable	54			35
Other assets	558			1,587
Accounts payable and other current liabilities	(670		)	510
Deferred revenue	(1,552		)	(251		)
Income taxes payable	(76		)	(78		)
Provision for litigation	(4,500		)	—
Other long term liabilities	(550		)	(669		)
Net cash provided by (used in) operating activities	10,963			(297		)
Investing activities
Purchases of marketable securities	—			(16,820		)
Sale and maturities of marketable securities	28,315			16,920
Purchases of property and equipment	(4,666		)	(20,754		)
Net cash provided by (used in) investing activities	23,649			(20,654		)
Financing activities
Principal payments on capital lease obligations	(4,685		)	(358		)
Payments of employee tax withholdings related to restricted stock vesting	(1,306		)	(2,279		)
Cash paid for purchase of common stock	—			(957		)
Proceeds from employee stock plans	904			2,731
Net cash used in financing activities	(5,087		)	(863		)
Effect of exchange rate changes on cash and cash equivalents	195			(501		)
Net increase (decrease) in cash and cash equivalents	29,720			(22,315		)
Cash and cash equivalents, beginning of period	44,680			57,767
Cash and cash equivalents, end of period	$	74,400		$	35,452
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	682		$	4
Cash paid during the period for income taxes, net of refunds	$	457		$	390
Property and equipment acquired through capital leases	$	2,659		$	—

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

Table of Contents

Limelight Networks, Inc.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

1. Nature of Business

Limelight operates a globally distributed, high-performance network and provides a suite of integrated services marketed under the Limelight Orchestrate Platform which include content delivery, video content management, website and web application acceleration, website and content security, and cloud storage services.

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 are, in the opinion of management, necessary for the fair presentation of the interim periods presented and 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, 2016, 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, 2015. 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, 2016, or for any other future periods.

Recent Accounting Standards

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for all entities by one year. Accordingly, public business entities should apply the guidance in ASU 2014-09 to annual reporting periods (including interim periods within those periods) beginning after December 15, 2017. Early adoption is permitted but not before annual periods beginning after December 15, 2016. We do not plan to early adopt this ASU. The ASU permits the use of the retrospective or the modified approach method. 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 November 2015, the FASB issued ASU 2015-17, which will require entities to present deferred tax assets (DTAs) and deferred tax liabilities (DTLs) as noncurrent in a classified balance sheet. ASU 2015-17 simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current and noncurrent in a classified balance sheet. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods

Table of Contents

within those annual periods. At this time we do not anticipate early adoption of this ASU, and we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, which establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for most leases. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted and should be applied using a modified retrospective approach. We are in the process of evaluating the potential impacts of this new guidance on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-08, which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. We are in the process of evaluating the potential impact that adopting this new accounting standard will have on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, which updated guidance to include changes to simplify the accounting for several aspects of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. We do not plan to early adopt this ASU and are in the process of evaluating the potential impact of this new guidance on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, which amends ASC 230, to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The FASB issued ASU 2016-15 with the intent of reducing diversity in practice with respect to eight types of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the adoption and potential impact of this new guidance on our consolidated financial statements.

3. Investments in Marketable Securities

During the quarter ended March 31, 2016, we sold the majority of our marketable securities.

The following is a summary of marketable securities, designated as available-for-sale, at September 30, 2016:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Certificate of deposits	$	40	$	—	$	—	$	40

The amortized cost and estimated fair value of marketable securities at September 30, 2016, 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	$	—	$	—	$	—	$	—
Due after one year and through five years	40		—		—		40
	$	40	$	—	$	—	$	40

The following is a summary of marketable securities, designated as available-for-sale, at December 31, 2015:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Certificate of deposit	$	12,480	$	1	$	17	$	12,464
Corporate notes and bonds	15,940		2		44		15,898
Total marketable securities	$	28,420	$	3	$	61	$	28,362

Table of Contents

The amortized cost and estimated fair value of marketable securities at December 31, 2015, 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	$	18,075	$	2	$	12	$	18,065
Due after one year and through five years	10,345		1		49		10,297
	$	28,420	$	3	$	61	$	28,362

4. Accounts Receivable, net

Accounts receivable, net include:



	September 30,			December 31,
	2016			2015
Accounts receivable	$	24,138		$	28,599
Less: credit allowance	(270		)	(460		)
Less: allowance for doubtful accounts	(1,009		)	(1,344		)
Total accounts receivable, net	$	22,859		$	26,795

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets include:



	September 30,		December 31,
	2016		2015
Prepaid bandwidth and backbone	$	1,560	$	2,417
VAT receivable	1,251		2,720
Prepaid expenses and insurance	1,958		3,641
Vendor deposits and other	578		800
Total prepaid expenses and other current assets	$	5,347	$	9,578

6. Property and Equipment, net

Property and equipment, net include:



	September 30,			December 31,
	2016			2015
Network equipment	$	112,801		$	129,172
Computer equipment and software	10,535			11,408
Furniture and fixtures	2,474			2,472
Leasehold improvements	5,087			4,976
Other equipment	168			166
Total property and equipment	131,065			148,194
Less: accumulated depreciation	(101,422		)	(112,051		)
Total property and equipment, net	$	29,643		$	36,143

Depreciation expense related to property and equipment classified in operating expense was $611 and $445 for the three months ended September 30, 2016 and 2015, respectively and was $1,848 and $1,322 for the nine months ended September 30, 2016 and 2015, respectively.

Table of Contents

7. Goodwill

We have recorded goodwill as a result of past 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 our financial performance due to the loss of key customers, loss of key personnel, emergence of new technologies or new competitors and/or unfavorable outcomes of intellectual property disputes;


•	decline in overall market or economic conditions leading to a decline in our stock price; and


•	decline in observed control premiums paid in business combinations involving comparable companies.

No interim indicators of impairment were identified as of September 30, 2016. Foreign currency translation adjustments increased the carrying amount of goodwill for the three months ended September 30, 2016 by $195. For the nine months ended September 30, 2016, foreign currency translation adjustments increased the carrying value of goodwill by $294.

8. Other Current Liabilities

Other current liabilities include:



	September 30,		December 31,
	2016		2015
Accrued compensation and benefits	$	3,710	$	4,786
Accrued cost of revenue	2,806		2,698
Deferred rent	731		782
Accrued legal fees	1,243		143
Other accrued expenses	2,338		2,448
Total other current liabilities	$	10,828	$	10,857

9. Line of Credit

In October 2016, we entered into a Loan Modification Agreement (the Modification) to the Loan and Security Agreement (the Credit Agreement) with Silicon Valley Bank (SVB) originally entered into in November 2015. Under the Modification, we have reduced the maximum principal commitment amount from $25,000 to $5,000. Our borrowing capacity is the lesser of the commitment amount or 80% of eligible accounts receivable. The Modification extends the Credit Agreement one year. All outstanding borrowings owed under the Credit Agreement become due and payable no later than the final maturity date of November 2, 2018.

During the three months ended September 30, 2016, we repaid the outstanding balance of $12,790. As of September 30, 2016, we had no outstanding borrowings, and we had availability under the Credit Agreement of approximately $17,300. We had no outstanding borrowings at December 31, 2015, and had availability under the Credit Agreement of approximately $18,000.

As of September 30, 2016, borrowings under the Credit Agreement bear interest at our option of one, two, three or six-month LIBOR plus a margin of 2.75% or an Alternative Base Rate (ABR), which is defined as the higher of (a) Wall Street Journal prime rate or (b) Federal Funds Rate plus 0.50%, plus a margin of 0.50% or 1.50% depending on our minimum liquidity, as defined in the Credit Agreement. If we fall below a minimum liquidity of $17,500, we are required to use the ABR interest rate. We incurred a commitment fee (issuance costs) of 0.45% upon entering into the Modification. In addition, there is an unused line fee of 0.375% under the Credit Agreement and 0.30% under the Modification. Commitment fees are included

Table of Contents

in prepaid expenses and other current assets and as amortized are charged to interest expense. During the three months ended September 30, 2016, interest expense was $24 and commitment fees expense and amortization was $127. During the nine months ended September 30, 2016, interest expense was $205 and commitment fees expense and amortization was $267.

Any borrowings are secured by essentially all of our domestic personal property, with a negative pledge on intellectual property. SVB’s security interest in our foreign subsidiaries is limited to 65% of voting stock of each such foreign subsidiary.

The Modification eliminated the financial covenants under the Credit Agreement. Under the Modification, we are required to maintain a minimum liquidity, defined as cash balance at SVB plus availability on the revolver, of $7,500 at all times, measured quarterly, with a minimum of $5,000 of the $7,500 in cash at SVB. We are also subject to certain customary limitations on our ability to, among other things, incur debt, grant liens, make acquisitions and other investments, make certain restricted payments such as dividends, dispose of assets or undergo a change in control.

Prior to the Modification, as of September 30, 2016, the Credit Agreement required us to maintain a minimum tangible net worth of $100,000. Tangible net worth is defined as total stockholders’ equity less cash held by our foreign subsidiaries, goodwill and other intangible assets. The tangible net worth requirement would have been adjusted by up to $52,500 upon recording a provision or making a payment related to the Akamai ‘703 Litigation. In addition, the Credit Agreement contained a covenant limiting the maximum unfinanced capital expenditures amount to $25,000 per annum. As of September 30, 2016, we were in compliance with all covenants under the Credit Agreement.

Refer to Note 11 "Contingencies - Legal Matters" for further information.

10. Other Long Term Liabilities

Other long term liabilities include:



	September 30,		December 31,
	2016		2015
Deferred rent	$	1,353	$	1,907
Income taxes payable	394		404
Total other long term liabilities	$	1,747	$	2,311

11. Contingencies

Legal Matters

Akamai ‘703 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 infringing multiple patents assigned to MIT and exclusively licensed by MIT to Akamai. In February 2008, a jury returned a verdict in this lawsuit, finding that we infringed four claims of U.S. Patent No. 6,108,703 (the ’703 patent) and awarded Akamai damages of approximately $45,500, which included lost profits, reasonable royalties and price erosion damages for the period April 2005 through December 31, 2007. We litigated this matter vigorously for years, during which time the jury verdict was overturned in 2009, and then, after more than six years of appeals by both Akamai and us in the Federal Circuit and the Supreme Court of the United States, the jury verdict was ultimately reinstated. A series of motions and hearings followed the reinstatement, and on July 1, 2016, the District Court entered final judgment in the case. On August 1, 2016, we entered into a settlement and license agreement with Akamai with respect to the ‘703 and certain other related patents, which settled all asserted and unasserted claims with respect to the licensed patents. The terms of the agreement require us to pay $54,000 over twelve equal quarterly installments, which began on August 1, 2016. We took a charge in the quarter ended June 30, 2016 for the full, undiscounted amount of $54,000, per our accounting policy. As of September 30, 2016, there remained $49,500 due to Akamai under the terms of the settlement and license agreement.

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.

Akamai and XO Litigation

On November 30, 2015, we filed a lawsuit against Akamai and XO Communications in the District Court for the Eastern District of Virginia alleging the infringement of six of our patents covering a broad range of inventions that we believe

Table of Contents

are critical to the effective and efficient delivery of bytes by a content delivery network (the Akamai and XO Litigation). In April 2016, the District Court denied a request for transfer by Akamai and XO Communications and set the trial date in this case for January 3, 2017. Akamai also filed counterclaims on April 29, 2016, alleging the infringement of five of its patents. We filed an answer to Akamai’s counterclaims, denying each of the allegations of infringement on May 23, 2016. At this time, we believe a loss is neither probable nor reasonably possible, and as such, no provision for this lawsuit has been recorded in the consolidated financial statements. We intend to vigorously protect our intellectual property rights in this matter and vigorously defend against each of the counterclaims.

2016 Akamai Litigation

On February 16, 2016, Akamai filed a complaint against us in the District Court for the District of Massachusetts alleging infringement of three of its patents (the 2016 Akamai Litigation). In April 2016, Akamai amended its complaint by withdrawing one of the asserted patents. We filed our answer to the complaint, denying each of the allegations of infringement, and asserting two counterclaims alleging infringement of two of our patents. At this time, we believe a loss is neither probable nor reasonably possible, and as such, no provision for this lawsuit has been recorded in the consolidated financial statements. We intend to vigorously defend against Akamai’s claims and vigorously protect our intellectual property rights in this matter.

Other Matters

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.

Taxes

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.

12. Net Loss per Share

We calculate basic and diluted loss per weighted average share. 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 include 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.

Table of Contents

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,
	2016			2015			2016			2015
Net loss	$	(6,122	)	$	(7,762	)	$	(70,006	)	$	(19,807	)
Basic and diluted weighted average outstanding shares of common stock	104,860			100,552			103,819			99,676
Basic and diluted net loss per share:	$	(0.06	)	$	(0.08	)	$	(0.67	)	$	(0.20	)

For the three and nine months ended September 30, 2016 and 2015, the following potentially dilutive common stock, including awards granted under our equity incentive compensation plans, were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive.



	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Employee stock purchase plan	567	504	567	504
Stock options	54	1,333	91	1,843
Restricted stock units	1,015	1,760	713	2,718
	1,636	3,597	1,371	5,065

13. Stockholders’ Equity

Common Stock

On February 12, 2014, our board of directors authorized a $15,000 share repurchase program. Under this program, 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 and nine month periods ended September 30, 2016. During the nine months ended September 30, 2015, we purchased and canceled 293 shares for $818, including commissions and expenses. All repurchased shares were canceled and returned to authorized but unissued status.

Amended and Restated Equity Incentive Plan

We established the 2007 Equity Incentive Plan, or the 2007 Plan, which allows for the grant of equity, including stock options and restricted stock unit awards. In June 2016, our stockholders approved the Amended and Restated Equity Incentive Plan, or the Restated 2007 Plan, which amended and restated the 2007 Plan. Approval of the Restated 2007 Plan replaced the terms and conditions of the 2007 Plan with the terms and conditions of the Restated 2007 Plan and extended the term of the plan to April 2026. There was no increase in the aggregate amount of shares available for issuance. The total number of shares authorized for issuance under the Restated 2007 Plan as of September 30, 2016 was approximately 10,027.

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 nine months ended September 30, 2016, we issued 719 shares under the ESPP. Total cash proceeds from the purchase of the shares under the ESPP was approximately $813. As of September 30, 2016, shares reserved for issuance to employees under this plan totaled 1,923, and we held employee contributions of $643 (included in other current liabilities) for future purchases under the ESPP.

Preferred Stock

Our board of directors has authorized the issuance of up to 7,500 shares of preferred stock at September 30, 2016. The preferred stock may be issued in one or more series pursuant to a resolution or resolutions providing for such issuance duly adopted by the board of directors. As of September 30, 2016, the board of directors had not adopted any resolutions for the issuance of preferred stock.

Table of Contents

14. Accumulated Other Comprehensive Loss

Changes in the components of accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2016, was as follows:



				Unrealized
				Gains (Losses) on
	Foreign			Available for
	Currency			Sale Securities			Total
Balance, December 31, 2015	$	(10,768	)	$	(44	)	$	(10,812	)
Other comprehensive income before reclassifications	867			—			867
Amounts reclassified from accumulated other comprehensive loss	—			44			44
Net current period other comprehensive income	867			44			911
Balance, September 30, 2016	$	(9,901	)	$	—		$	(9,901	)

15. Share-Based Compensation

The following table summarizes the components of share-based compensation expense included in our consolidated statement of operations:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Share-based compensation expense by type:
Stock options	$	812	$	952	$	2,755	$	3,165
Restricted stock units	1,999		1,860		6,467		5,830
ESPP	176		312		554		478
Total share-based compensation expense	$	2,987	$	3,124	$	9,776	$	9,473
Share-based compensation expense included in the consolidated statements of operations:
Cost of services	$	209	$	400	$	1,118	$	1,484
General and administrative expense	1,616		1,513		5,119		4,395
Sales and marketing expense	641		643		2,016		1,940
Research and development expense	521		568		1,523		1,654
Total share-based compensation expense	$	2,987	$	3,124	$	9,776	$	9,473

Unrecognized share-based compensation expense totaled approximately $15,152 at September 30, 2016, of which $4,360 related to stock options and $10,792 related to restricted stock units. We currently expect to recognize share-based compensation expense of $2,712 during the remainder of 2016, $7,924 in 2017 and the remainder thereafter based on scheduled vesting of the stock options and restricted stock units outstanding at September 30, 2016.

16. Leases and Purchase Commitments

Operating Leases

We are committed to various non-cancellable operating leases for office space and office equipment which 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 September 30, 2016, are as follows:

Table of Contents



Remainder of 2016	$	913
2017	3,301
2018	2,915
2019	1,350
2020	505
Thereafter	413
Total minimum payments	$	9,397

Purchase Commitments

We have long-term commitments for bandwidth usage and co-location with various networks and Internet service providers (ISPs). The following summarizes minimum commitments as of September 30, 2016:



Remainder of 2016	$	9,012
2017	22,854
2018	11,518
2019	3,135
2020	53
Thereafter	9
Total minimum payments	$	46,581

Capital Leases

We leased equipment under capital lease agreements which extended through 2020. The outstanding balance for capital leases was approximately $1,902 as of December 31, 2015. In August 2016, we paid $4,236, which represented the total outstanding balance for our capital lease obligations. As a result, as of September 30, 2016, we had no outstanding capital lease obligations. 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 - network (cost of revenue) and depreciation and amortization expense (operating expenses), depending on the nature of the asset, in the consolidated statements of operations. Interest expense related to capital leases was approximately $255 and $0, respectively, for the three months ended September 30, 2016 and 2015. Interest expense related to capital leases was approximately $339 and $4, respectively, for the nine months ended September 30, 2016 and 2015.

17. Concentrations

During the three and nine months ended September 30, 2016 and 2015, we had no customer who represented 10% or more of our total revenue.

Revenue from customers located within the United States, our country of domicile, was $22,996 for the three months ended September 30, 2016, compared to $22,997 for the three months ended September 30, 2015. For the nine months ended September 30, 2016, revenue from customers located within the United States was $69,033, compared to $74,269 for the nine months ended September 30, 2015.

During the three and nine months ended September 30, 2016 and 2015, we had two countries, based on customer location, the United States and Japan that accounted for 10% or more of our total revenues.

18. 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, income tax expense for the three months ended September 30, 2016 and 2015, was $130 and $76, respectively. For the nine months ended September 30, 2016 and 2015, income tax expense was $404 and $221, 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 month periods.

Table of Contents

We file income tax returns in jurisdictions with varying statutes of limitations. Tax years 2013 through 2015 remain subject to examination by federal tax authorities. Tax years 2012 through 2015 generally remain subject to examination by state tax authorities. As of September 30, 2016, we are not under any federal or state examination for income taxes.

19. Segment Reporting and Geographic Areas

Our chief operating decision maker (whom is our Chief Executive Officer) reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating our financial performance. We operate in one industry segment — content delivery and related services and 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 our revenue by geographic area:



	Three Months Ended September 30,								Nine Months Ended September 30,
	2016				2015				2016				2015
Americas	$	24,072	61.0	%	$	24,541	58.4	%	$	74,183	59.6	%	$	78,768	61.5	%
EMEA	6,912		17.5	%	7,914		18.8	%	23,300		18.7	%	23,490		18.3	%
Asia Pacific	8,489		21.5	%	9,594		22.8	%	26,973		21.7	%	25,915		20.2	%
Total revenue	$	39,473	100.0	%	$	42,049	100.0	%	$	124,456	100.0	%	$	128,173	100.0	%

The following table sets forth long-lived assets by geographic area in which the assets are located:



	September 30,		December 31,
	2016		2015
Americas	$	17,688	$	19,692
International	11,955		16,466
Total long-lived assets	$	29,643	$	36,158

20. Fair Value Measurements

As of September 30, 2016, and December 31, 2015, 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 September 30, 2016:



			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)	$	65,763	$	65,763	$	—	$	—
Certificate of deposit (1)	40		—		40		—
Total assets measured at fair value	$	65,803	$	65,763	$	40	$	—

____________


(1)	Classified in marketable securities


(2)	Classified in cash and cash equivalents

Table of Contents

The following is a summary of fair value measurements at December 31, 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)	$	725	$	725	$	—	$	—
Corporate notes and bonds (1)	15,898		—		15,898		—
Certificate of deposit (1)	12,464		—		12,464		—
Total assets measured at fair value	$	29,087	$	725	$	28,362	$	—

____________


(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.

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, 2015, included in Part II of our annual report on Form 10-K filed with the SEC, on February 11, 2016.

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. The suite of services that we offer collectively comprise 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 74% of our total revenue during the three and nine months ended September 30, 2016. We also generate revenue through the sale of professional services and other infrastructure services, such as transit and rack space services.

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. Competition and technology advancements have resulted in declining average selling prices in the industry. We believe continued increases in content delivery traffic growth rates in the long term is an important trend that will continue to outpace declining average selling prices in the industry.

For the three and nine months ended September 30, 2016 and 2015, we had no customer who accounted for 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.

In addition to these revenue-related trends, our profitability is impacted by trends in our costs of services and operating expenses. We continuously work with our vendors to consolidate our datacenter footprint. We continuously renegotiate our infrastructure contracts 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. Our headcount decreased from 509 at December 31, 2015, to 502 as of September 30, 2016.

On August 1, 2016, we entered into a settlement and license agreement with Akamai with respect to the ‘703 and certain other related patents. The agreement settles all asserted and unasserted claims with respect to the licensed patents. The terms of the agreement require us to pay $54,000 over twelve equal quarterly installments beginning on August 1, 2016. The settlement and license agreement required Akamai to release us from a prior letter of credit promptly following its receipt of the initial license payment. In accordance with ASC 855, Subsequent Events, this was a recognized subsequent event. Accordingly, we recorded a charge in the quarter ended June 30, 2016 for the full, undiscounted amount of $54,000, per our accounting policy. As of September 30, 2016, there remained $49,500 due to Akamai under the terms of the settlement and license agreement.

Please see our discussion in Note 11 "Contingencies - Legal Matters" of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this quarterly report on Form 10-Q for more information on this and other lawsuits.

In October 2016, we entered into a Loan Modification Agreement (the Modification) to the Loan and Security Agreement (the Credit Agreement) with Silicon Valley Bank (SVB) originally entered into in November 2015. Please see our discussion in Note 9 "Line of Credit" of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this quarterly report on Form 10-Q for more information on our line of credit.

Based on current conditions, we expect fourth quarter 2016 revenue to be between $43,000 and $45,000. We expect gross margin improvement for the fourth quarter and full year of over 250 basis points. We also expect non-GAAP net income to be positive. We expect capital expenditures to be less than $15,000 for the full year. For 2017, we currently expect mid-

Table of Contents

single digit percent revenue growth, triple digit basis point gross margin improvement and capital expenditures to be approximately $20 million.

The following table summarizes our revenue, costs and expenses in thousands of dollars and as a percentage of total revenue.



	Three Months Ended September 30,										Nine Months Ended September 30,
	2016					2015					2016					2015
Revenues	$	39,473		100.0	%	$	42,049		100.0	%	$	124,456		100.0	%	$	128,173		100.0	%
Cost of revenue	23,235			58.9	%	26,138			62.2	%	72,772			58.5	%	77,594			60.5	%
Gross profit	16,238			41.1	%	15,911			37.8	%	51,684			41.5	%	50,579			39.5	%
Operating expenses	21,983			55.7	%	24,152			57.4	%	66,915			53.8	%	72,547			56.6	%
Provision for litigation	—			—	%	—			—	%	54,000			43.4	%	—			—	%
Operating loss	(5,745		)	(14.6	)%	(8,241		)	(19.6	)%	(69,231		)	(55.6	)%	(21,968		)	(17.1	)%
Total other income (expense)	(247		)	(0.6	)%	555			1.3	%	(371		)	(0.3	)%	2,382			1.9	%
Loss before income taxes	(5,992		)	(15.2	)%	(7,686		)	(18.3	)%	(69,602		)	(55.9	)%	(19,586		)	(15.3	)%
Income tax expense	130			0.3	%	76			0.2	%	404			0.3	%	221			0.2	%
Net loss	(6,122		)	(15.5	)%	(7,762		)	(18.5	)%	(70,006		)	(56.2	)%	(19,807		)	(15.5	)%

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 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 loss, adjusted to exclude provision for litigation, share-based compensation, litigation expenses, and amortization of intangible assets. We believe that EBITDA provides a useful metric to investors to compare us with other companies within our industry and across industries. We define EBITDA as U.S. GAAP net loss, adjusted to exclude interest and other (income) expense, interest expense, income tax expense, and depreciation and amortization. We define Adjusted EBITDA as EBITDA adjusted to exclude provision for litigation, share-based compensation and litigation expenses. We use Adjusted EBITDA as a supplemental measure to review and assess operating performance. Our management uses these Non-GAAP financial measures because, collectively, they provide valuable information on the performance of our on-going operations, excluding non-cash charges, taxes and non-core activities (including interest payments related to financing activities). These measures also enable our management to compare the results of our on-going operations from period to period, and allow management to review the performance of our on-going operations against our peer companies and against other companies in our industry and adjacent industries. We believe these measures also provide similar insights to investors, and enable investors to review our results of operations “through the eyes of management.”

Furthermore, our management uses these Non-GAAP financial measures to assist them in making decisions regarding our strategic priorities and areas for future investment and focus.

In our October 26, 2016, earnings press release, as furnished on Form 8-K, we included Non-GAAP net income (loss), EBITDA and Adjusted EBITDA. The terms Non-GAAP net income (loss), EBITDA 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 income (loss), EBITDA and Adjusted EBITDA have limitations as analytical tools, and when assessing our operating performance, Non-GAAP net income (loss), EBITDA 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 and Adjusted EBITDA do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;


•	these measures do not reflect changes in, or cash requirements for, our working capital needs;


•	Non- GAAP net income (loss) and Adjusted EBITDA do not reflect the cash requirements necessary for litigation costs, including provision for litigation and litigation expenses;


•	these measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt that we may incur;

Table of Contents


•	these measures 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 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 Non-GAAP net income (loss), EBITDA 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, and Adjusted EBITDA only as supplemental support for management’s analysis of business performance. Non-GAAP net income (loss), EBITDA and Adjusted EBITDA are calculated as follows for the periods presented.

Reconciliation of Non-GAAP Financial Measures

In accordance with the requirements of Item 10(e) of Regulation S-K, 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 Income (Loss)

(Unaudited)



	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
	2016			2016			2015			2016			2015
U.S. GAAP net loss	$	(6,122	)	$	(57,938	)	$	(7,762	)	$	(70,006	)	$	(19,807	)
Provision for litigation	—			54,000			—			54,000			—
Share-based compensation	2,987			3,293			3,124			9,776			9,473
Litigation expenses	2,837			1,271			140			5,286			(1,015		)
Amortization of intangible assets	2			6			203			14			602
Non-GAAP net income (loss)	$	(296	)	$	632		$	(4,295	)	$	(930	)	$	(10,747	)

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,
	2016			2016			2015			2016			2015
U.S. GAAP net loss	$	(6,122	)	$	(57,938	)	$	(7,762	)	$	(70,006	)	$	(19,807	)
Depreciation and amortization	5,014			5,115			5,284			15,420			15,088
Interest expense	406			279			—			865			4
Interest and other (income) expense	(159		)	71			(555		)	(494		)	(2,386		)
Income tax expense	130			115			76			404			221
EBITDA	$	(731	)	$	(52,358	)	$	(2,957	)	$	(53,811	)	$	(6,880	)
Provision for litigation	—			54,000			—			54,000			—
Share-based compensation	2,987			3,293			3,124			9,776			9,473
Litigation expenses	2,837			1,271			140			5,286			(1,015		)
Adjusted EBITDA	$	5,093		$	6,206		$	307		$	15,251		$	1,578

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, 2015. During the nine months ended September 30, 2016, there have been no significant changes in our critical accounting policies and estimates.

Results of 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, 2016, compared to the three and nine months ended September 30, 2015:



	Three Months Ended September 30,									Nine Months Ended September 30,
					$			%						$			%
	2016		2015		Change			Change		2016		2015		Change			Change
Revenue	$	39,473	$	42,049	$	(2,576	)	(6.1	)%	$	124,456	$	128,173	$	(3,717	)	(2.9	)%

Our revenue decreased during the three and nine months ended September 30, 2016, versus the comparable 2015 periods primarily due to a decrease in our content delivery revenue, which was driven by a decrease in our average selling price, partially offset by increases in volumes primarily with certain of our larger customers.

Our active customers worldwide decreased to 875 as of September 30, 2016, compared to 981 as of September 30, 2015. We are continuing our selective approach to accepting profitable business by following a clear process for identifying customers that value quality, performance, availability, and service.

During the three months ended September 30, 2016 and 2015, sales to our top 20 customers accounted for approximately 62% and 58%, respectively, of our total revenue. For the nine months ended September 30, 2016 and 2015, sales to our top 20 customers accounted for approximately 61% and 56%, respectively, of our total revenue. The customers that comprised our top 20 customers change from time to time, and our large customers may not continue to be as significant going forward as they have been in the past.

During the three and nine months ended September 30, 2016 and 2015, we had no customer who represented 10% or more 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 September 30,								Nine Months Ended September 30,
	2016				2015				2016				2015
Americas	$	24,072	61.0	%	$	24,541	58.4	%	$	74,183	59.6	%	$	78,768	61.5	%
EMEA	6,912		17.5	%	7,914		18.8	%	23,300		18.7	%	23,490		18.3	%
Asia Pacific	8,489		21.5	%	9,594		22.8	%	26,973		21.7	%	25,915		20.2	%
Total revenue	$	39,473	100.0	%	$	42,049	100.0	%	$	124,456	100.0	%	$	128,173	100.0	%

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):

Table of Contents



	Three Months Ended September 30,								Nine Months Ended September 30,
	2016				2015				2016				2015
Bandwidth and co-location fees	$	13,811	35.0	%	$	15,207	36.2	%	$	42,506	34.2	%	$	44,023	34.3	%
Depreciation - network	4,401		11.1	%	4,636		11.0	%	13,558		10.9	%	13,164		10.3	%
Payroll and related employee costs	3,442		8.7	%	4,377		10.4	%	11,241		9.0	%	13,975		10.9	%
Share-based compensation	209		0.5	%	400		1.0	%	1,118		0.9	%	1,484		1.2	%
Other costs	1,372		3.5	%	1,518		3.6	%	4,349		3.5	%	4,948		3.9	%
Total cost of revenue	$	23,235	58.9	%	$	26,138	62.2	%	$	72,772	58.5	%	$	77,594	60.5	%

Our cost of revenue decreased in aggregate dollars and as a percentage of revenue for the three and nine months ended September 30, 2016, versus the comparable 2015 period primarily as a result of the following:


•	decreased payroll and related employee costs due to lower operations headcount, reduction in variable compensation and lower average salary per employee. Our year to date decrease includes the reduction of payroll and related employee costs resulting from the reorganization of job responsibilities on April 1, 2015 (as further discussed below);


•	decreased bandwidth and co-location fees. Co-location fees decreased as a result of our continued consolidation efforts. Bandwidth costs decreased slightly on slightly lower volume; and


•	decreased other costs primarily due to lower professional fees, travel and facilities.

These decreases were partially offset by increased depreciation (year to date) as a result of new servers and network equipment placed in service.

Effective April 1, 2015, we reorganized the job responsibilities of certain employees, and as a result, such employee expenses were moved from cost of services to research and development, on a prospective basis. This reorganization resulted in approximately $650 per quarter of payroll and related employee costs starting in the second quarter of 2015 to be allocated to research and development, which were previously allocated to cost of services.

We anticipate an improvement in gross margin for the full year 2016 compared to 2015 as a result of our co-location consolidation efforts and controlling payroll and related employee costs.

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,
	2016				2015				2016				2015
Payroll and related employee costs	$	1,513	3.8	%	$	2,544	6.1	%	$	5,731	4.6	%	$	8,255	6.4	%
Professional fees and outside services	907		2.3	%	896		2.1	%	2,546		2.0	%	3,376		2.6	%
Share-based compensation	1,616		4.1	%	1,513		3.6	%	5,119		4.1	%	4,395		3.4	%
Other costs	3,997		10.1	%	1,633		3.9	%	8,686		7.0	%	3,492		2.7	%
Total general and administrative	$	8,033	20.4	%	$	6,586	15.7	%	$	22,082	17.7	%	$	19,518	15.2	%

Our general and administrative expense increased in aggregate dollars and increased as a percentage of total revenue for the three and nine months ended September 30, 2016, versus the comparable 2015 periods. The increase was primarily due to increased other costs, which was driven by increased litigation expenses related to our intellectual property lawsuits and an increase in share-based compensation. Other costs in the nine months ended September 30, 2015 include a vendor negotiated reduction to litigation expense of $1,200.

These increases were partially offset by decreased payroll and related employee costs, which was driven by lower general and administrative headcount and lower average salary per employee and decreased (year to date) professional fees.

We expect our general and administrative expenses for 2016 to increase from 2015 in aggregate dollars as a result of litigation expenses.

Table of Contents

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,
	2016				2015				2016				2015
Payroll and related employee costs	$	5,205	13.2	%	$	6,340	15.1	%	$	16,955	13.6	%	$	19,765	15.4	%
Share-based compensation	641		1.6	%	643		1.5	%	2,016		1.6	%	1,940		1.5	%
Marketing programs	330		0.8	%	392		0.9	%	1,053		0.8	%	1,366		1.1	%
Other costs	1,535		3.9	%	2,114		5.0	%	4,706		3.8	%	6,696		5.2	%
Total sales and marketing	$	7,711	19.5	%	$	9,489	22.6	%	$	24,730	19.9	%	$	29,767	23.2	%

Our sales and marketing expense decreased in both aggregate dollars and as a percentage of total revenue for the three and nine months ended September 30, 2016, versus the comparable 2015 periods. The decrease in sales and marketing expense was primarily as a result of the following:


•	decreased payroll and related employee costs due to decreased sales and marketing personnel and a reduction in variable compensation;


•	decreased other costs which was primarily lower travel and entertainment expenses, reduced other employee costs and lower professional fees (consulting, recruiting, and outside services); and


•	decreased marketing and public relations spending related to advertising and trade shows.

These decreases were partially offset by increased (year to date) share-based compensation costs.

We expect our sales and marketing expenses for the second half of 2016 to remain consistent with the first half of 2016.

Research and Development

Research and development 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,
	2016				2015				2016				2015
Payroll and related employee costs	$	4,081	10.3	%	$	5,761	13.7	%	$	13,764	11.1	%	$	16,221	12.7	%
Share-based compensation	521		1.3	%	568		1.4	%	1,523		1.2	%	1,654		1.3	%
Other costs	1,024		2.6	%	1,100		2.6	%	2,954		2.4	%	3,463		2.7	%
Total research and development	$	5,626	14.3	%	$	7,429	17.7	%	$	18,241	14.7	%	$	21,338	16.6	%

Our research and development expense decreased in aggregate dollars and as a percentage of total revenue for the three and nine months ended September 30, 2016, versus the comparable 2015 periods. The decrease was primarily due to decreased payroll and related employee costs due to decreased headcount and decreased other costs, which was driven by reduced travel and entertainment expenses and reduced professional fees, which were primarily consulting costs.

Effective April 1, 2015, we reorganized the job responsibilities of certain employees, and as a result, such employee expenses were moved from cost of services to research and development, on a prospective basis. This reorganization resulted in approximately $650 of payroll and related employee costs starting in the second quarter of 2015 being allocated to research and development, which were previously allocated to cost of services.

We expect our research and development expenses for the second half of 2016 to remain consistent with the first half of 2016.

Depreciation and Amortization (Operating Expenses)

Depreciation and amortization expense was $613, or 1.6% of revenue, for the three months ended September 30, 2016, versus $648, or 1.5% of revenue, for the comparable 2015 period. For the nine months ended September 30, 2016, depreciation and amortization expense was $1,862, or 1.5% of revenue versus $1,924, or 1.5% of revenue, for the comparable

Table of Contents

2015 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 $406 for the three months ended September 30, 2016, versus $-0- for the comparable 2015 period. For the nine months ended September 30, 2016 interest expense was $865 versus $4 for the comparable 2015 period. These increases were primarily due to interest on our line of credit borrowings, capital leases, fees and the amortization of fees associated with our Credit Agreement.

Interest Income

Interest income was $8 for the three months ended September 30, 2016, versus $82 for the comparable 2015 period. For the nine months ended September 30, 2016 interest income was $22 versus $231 for the comparable 2015 period. Interest income includes interest earned on invested cash balances and marketable securities.

Other Income (Expense)

Other income was $151 for the three months ended September 30, 2016, versus other income of $473 for the comparable 2015 period. For the three months ended September 30, 2016, other income consisted primarily of foreign currency transaction gains and losses and the gain on sale of fixed assets. For the three months ended September 30, 2015, other income consisted primarily of foreign currency transaction gains and losses.

For the nine months ended September 30, 2016, other income was $472 versus other income of $2,155 for the comparable 2015 period. For the nine months ended September 30, 2016, other income consisted primarily of foreign currency transaction gains and losses, the gain on sale of fixed assets, and the receipt of a state tax refund related to a previously divested business. For the nine months ended September 30, 2015, other income consisted primarily of foreign currency transaction gains and losses and the $275 gain on the conversion of our convertible debt into preferred shares.

Income Tax Expense

Based on an estimated annual effective tax rate and discrete items, the estimated income tax expense for the three and nine months ended September 30, 2016, was $130 and $404, respectively, versus $76 and $221 for the comparable 2015 periods. Income tax expense on our loss 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.

Liquidity and Capital Resources

As of September 30, 2016, our cash, cash equivalents and marketable securities classified as current totaled $74,400. Included in this amount is approximately $4,804 of cash and cash equivalents held outside the United States. 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.

On August 1, 2016, we entered into a settlement and license agreement with Akamai with respect to the ‘703 and certain other related patents. The agreement settles all asserted and unasserted claims with respect to the licensed patents. The terms of the agreement require us to pay $54,000 over twelve equal quarterly installments beginning on August 1, 2016. We recorded a charge in the quarter ended June 30, 2016 for the full, undiscounted amount of $54,000, per our accounting policy. As of September 30, 2016, there remained $49,500 due to Akamai under the terms of the settlement and license agreement.

We believe that our existing cash, cash equivalents and marketable securities, and available borrowing capacity 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.

Table of Contents

The major components of changes in cash flows for the nine months ended September 30, 2016 and 2015, are discussed in the following paragraphs.

Operating Activities

Net cash provided by operating activities was $10,963 for the nine months ended September 30, 2016, versus net cash used in operating activities of $297 for the comparable 2015 period, an increase of $11,260. Changes in operating assets and liabilities of $1,498 during the nine months ended September 30, 2016, versus ($3,837) in the comparable 2015 period were primarily due to:


•	accounts receivable decreased $3,901 during the nine months ended September 30, 2016, due to a decrease in days sales outstanding as a result of timing of collections as compared to a $5,267 increase in the comparable 2015 period;


•	prepaid expenses and other current assets decreased $4,333 during the nine months ended September 30, 2016, due to the receipt of VAT refunds and the amortization of prepaid bandwidth expenses compared to a $296 decrease in the comparable 2015 period;


•	other assets decreased $558 during the nine months ended September 30, 2016, due to a decrease in vendor deposits and other long term assets versus a decrease of $1,587 for the comparable 2015 period;


•	accounts payable and other current liabilities decreased $670 during the nine months ended September 30, 2016, versus an increase of $510 for the comparable 2015 period due to timing of vendor payments and the payment of 2015 accrued compensation; and


•	provision for litigation decreased due to our initial payment of $4,500 related to our settlement agreement with Akamai.

Cash provided by operating activities may not be sufficient to cover new purchases of property and equipment during the remainder of 2016 and 2017, and potential litigation expenses associated with patent litigation, including any potential payment required on the ultimate outcomes of the associated litigation. The timing and amount of future working capital changes and our ability to manage our days sales outstanding will also affect the future amount of cash used in or provided by operating activities.

Investing Activities

Net cash provided by investing activities was $23,649 for the nine months ended September 30, 2016, versus net cash used in investing activities of $20,654 for the comparable 2015 period. During the nine months ended September 30, 2016, we liquidated our investments in marketable securities in order to provide collateral for the stand-by letter of credit for the previously estimated upper end of our range of potential loss in our intellectual property dispute with Akamai. Upon entering into the settlement agreement with Akamai in August 2016, we were no longer required to provide the stand-by letter of credit removing the restriction on the use of these funds. Refer to Note 11 "Contingencies - Legal Matters" of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this quarterly report on Form 10-Q, for further information.

We expect to have ongoing capital expenditure requirements as we continue to invest in and expand our content delivery network. During the nine months ended September 30, 2016, we made capital expenditures of $4,666, which represented approximately 4% of our total revenue. We currently expect a decrease in capital expenditures in 2016 compared to 2015, as we believe technological enhancements in our software will provide increased capacity in our global network and systems.

Financing Activities

Net cash used in financing activities was $5,087 for the nine months ended September 30, 2016, versus net cash used in financing activities of $863 for the comparable 2015 period. Net cash used in financing activities in the nine months ended September 30, 2016, primarily relates to principal payments made on our capital lease obligations of $4,685 and payments of employee tax withholdings related to the net settlement of vested restricted stock units of $1,306, offset by cash received from the exercise of stock options and our employee stock purchase plan of $904.

Net cash used in financing activities in the nine months ended September 30, 2015, related to payments of employee tax withholdings related to the net settlement of vested restricted stock units of $2,279, cash paid for the repurchase of our common stock of $957, and principal 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 $2,731.

Table of Contents

Line of Credit

In October 2016, we entered into the Modification to the Credit Agreement with SVB originally entered into in November 2015. Under the Modification, we have reduced the maximum principal commitment amount from $25,000 to $5,000. The Modification extends the Credit Agreement one year. All outstanding borrowings owed under the Credit Agreement become due and payable no later than the final maturity date of November 2, 2018.

Financial Covenants and Borrowing Limitations

The Credit Agreement requires, and any future credit facilities will likely require, us to comply with specified financial requirements that may limit the amount we can borrow. A breach of any of these covenants could result in a default. Our ability to satisfy those covenants depends principally upon our ability to meet or exceed certain financial performance results. Any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions.

For a more detailed discussion regarding our Credit Agreement, please refer to Note 9 "Line of Credit" of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by restrictive covenants within the Credit Agreement. These restrictions may also limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or business plans and adversely affect our ability to finance our operations, enter into acquisitions, execute our business strategy, effectively compete with companies that are not similarly restricted or engage in other business activities that would be in our interest. In the future, we may also incur debt obligations that might subject us to additional and different restrictive covenants that could affect our financial and operational flexibility. We cannot assure you that we will be granted waivers or amendments to the indenture governing the Credit Agreement, or such other debt obligations if for any reason we are unable to comply with our obligations thereunder or that we will be able to refinance our debt on acceptable terms, or at all, should we seek to do so. Any such limitations on borrowing under the Credit Agreement, including payments related to litigation, could have a material adverse impact on our liquidity and our ability to continue as a going concern could be impaired.

Capital leases

Share repurchases

On February 12, 2014, our board of directors authorized a $15,000 share repurchase program. During the three months ended March 31, 2015, we purchased and canceled approximately 293 shares. All repurchased shares were canceled and returned to authorized but unissued status. During the nine months ended September 30, 2016, we did not purchase any shares. As of September 30, 2016, we have $9,525 remaining under this share repurchase authorization.

Table of Contents

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 2016 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 2016 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 September 30, 2016, 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	$	22,251	$	14,812	$	7,369	$	70	$	—
Rack space leases	24,272		12,604		11,550		118		—
Real estate leases	9,397		3,458		4,855		975		109
Total operating leases	55,920		30,874		23,774		1,163		109
Settlement agreement	49,500		18,000		31,500		—		—
Other purchase obligations	58		58		—		—		—
Total commitments	$	105,478	$	48,932	$	55,274	$	1,163	$	109

Off Balance Sheet Arrangements

As of September 30, 2016, 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. Our outstanding capital lease obligations bear variable interest rates and are impacted by fluctuations in interest rates. We do not believe that an interest rate increase related to our capital leases would be material to our results of operations. Interest expense on our line of credit will fluctuate as the interest rate for the line of credit floats based, at our option of one, two, three or six-month LIBOR plus a margin of 2.75% or an Alternative Base Rate (ABR), which is defined as the higher of (a) Wall Street Journal prime rate or (b) Federal Funds Rate plus 0.50%, plus a margin of 0.50% or 1.50% depending on our minimum liquidity, as defined in the Agreement. If we fall below a minimum liquidity of $17,500, we are required to use the ABR interest rate. An increase in interest rates of 100 basis points would add $10 of interest expense per year, to our financial position or results of operations, for each $1,000 drawn on the line of credit. As of September 30, 2016, there were no outstanding borrowings against the line of credit.

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

Table of Contents

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 our revenues associated with certain international customers. 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, 2015, and the nine months ended September 30, 2016, would have been higher by approximately $2,979 and $1,650, respectively. There are inherent limitations in the sensitivity analysis presented, primarily due to the assumption that foreign exchange rate movements across multiple jurisdictions are similar and would be linear and instantaneous. As a result, the analysis is unable to reflect the potential effects of more complex markets or other changes that could arise, which may positively or negatively affect our results of operations.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition, or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Credit Risk

During any given fiscal period, a relatively small number of customers typically account for a significant percentage of our revenue. During the three and nine months ended September 30, 2016 and 2015, sales to our top 20 customers accounted for approximately 62% and 61%, respectively, and 58% and 56%, respectively, of our total revenue. During the three and nine months ended September 30, 2016 and 2015, we had no customer who represented 10% or more of our total revenue. In 2016, we anticipate that our top 20 customer concentration levels will remain consistent with the concentration levels from 2015. In the past, 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.

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in SEC Rules 13a-15(e) and 15d-15(e). We maintain disclosure controls and procedures, as such term is defined in SEC Rules 13a-15(e) and 15d-15(e), that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of September 30, 2016. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting, as defined in SEC Rules 13a-15(f) and 15d-15(f), during the fiscal quarter ended September 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our material pending legal proceedings, please refer to Note 11 "Contingencies - Legal Matters" of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item II, and our consolidated financial statements and related notes, before making a decision to invest in our common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment. All information is presented in thousands, except per share amounts, customer count, head count and where specifically noted.

Risks Related to Our Business

We currently face competition from established competitors and may face competition from others in the future.

We compete in markets that are intensely competitive, rapidly changing and characterized by frequently declining prices. In these markets, vendors offer a wide range of alternate solutions. We have experienced and expect to continue to experience increased competition on price, features, functionality, integration and other factors. Several of our current competitors, as well as a number of our potential competitors, have longer operating histories, greater name recognition, broader customer relationships and industry alliances, and substantially greater financial, technical and marketing resources than we do. As a consequence of the competitive dynamics in our markets, we have experienced reductions in our prices, and an increased requirement for product advancement and innovation in order to remain competitive, which in turn have adversely affected and may continue to adversely affect our revenue, gross margin and operating results.

Our primary competitors for the content delivery service offering of our Orchestrate Platform include Akamai, Level 3, Amazon, CDNetworks, and Verizon Digital Media Services. In addition, a number of companies have recently entered or are currently attempting to enter our market, either directly or indirectly, as a result of the growth in the content delivery market. These new entrants include companies that have built internal content delivery networks to solely deliver their own traffic, rather than relying solely, largely or in part on content delivery specialists, such as us. Some of these new entrants may become significant competitors in the future. Given the relative ease by which customers typically can switch among content delivery service providers, differentiated offerings or pricing by competitors could lead to a rapid loss of customers. Some of our current or potential competitors may bundle their offerings with other services, software or hardware in a manner that may discourage content providers from purchasing the services that we offer. In addition, we face different market characteristics and competition with local content delivery service providers as we expand internationally. Many of these international competitors are very well positioned within their local markets. Increased competition could result in price reductions and revenue shortfalls, loss of customers and loss of market share, which could harm our business, financial condition and results of operations.

We face different competitors for the other service offerings of our Orchestrate Platform. However, the competitive landscape is different from content delivery in this area in that the process of changing vendors can be more costly and complicated for the customer, which could make it difficult for us to attract new customers and increase our market share.

Several of our competitors have greater financial and sales resources than we do. Many have been offering similar services in the markets in which we compete longer than we have. We may not be able to successfully compete against these or new competitors. If we are unable to increase our customer base and increase our market share, our business, financial condition and results of operations may suffer.

Any unplanned interruption or degradation in the functioning or availability of our network or services, or attacks on or disruptions to our internal information technology systems, could lead to increased costs, a significant decline in our revenue and harm to our reputation.

Table of Contents

Our business is dependent on providing our customers with fast, efficient, and reliable distribution of content delivery and digital asset management services over the Internet every minute of every day. Many of our customers depend primarily or exclusively on our services to operate their businesses. Consequently, any disruption, or substantial and extensive degradation, of our services could have a material impact on our customers’ businesses. Our network or services could be disrupted by numerous events, including natural disasters, failure or refusal of our third-party network providers to provide the necessary capacity or access, failure of our software or global network infrastructure and power losses. In addition, we deploy our servers in third-party co-location facilities, and these third-party co-location providers could experience system outages or other disruptions that could constrain our ability to deliver our services. We may also experience disruptions caused by software viruses, unauthorized hacking of our systems, security breaches or other cyberattacks by unauthorized users. Any hacking of our systems or other cyberattacks could lead to the unauthorized release of confidential information that could damage our customers’ business and reputation, as well as our own. The economic costs to us to eliminate or alleviate cyber or other security problems, viruses, worms, malicious software programs, and other security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service, and loss of existing or potential customers. In addition, our release of a security-related solution may increase our visibility as a security-focused company and make us a more attractive target for attacks on our infrastructure intended to steal information about our technology, financial data, or customer information or take other actions that would be damaging to our customers and us.

We could experience a significant, unplanned disruption, or substantial and extensive degradation of our services, or our network may fail in the future. Despite our significant infrastructure investments, we may have insufficient communications and server capacity to address these or other disruptions, which could result in interruptions in our services. Any widespread interruption or substantial and extensive degradation in the functioning of our Orchestrate Platform services for any reason would reduce our revenue and could harm our business and results of operations. If such a widespread interruption occurred, or if we failed to deliver content to users as expected during a high-profile media event, game release or other well-publicized circumstance, our reputation could be damaged severely. Moreover, any disruptions, significant degradation, cybersecurity threats, security breaches, or attacks on our internal information technology systems could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new ones, either of which could harm our business and results of operations.

We have a history of losses and we may not achieve or maintain profitability in the future.

Since 2006, we have been profitable only one year, which was as a result of a reversal of a significant reserve for litigation. We incur significant share-based compensation expense, which has substantial impact on our results of operations. We have also incurred, and may continue to incur, significant costs associated with litigation. Our share-based compensation expense and any material ongoing litigation costs could adversely affect our ability to achieve and maintain profitability in the future.

We also may not achieve sufficient revenue to achieve or maintain profitability and thus may continue to incur significant losses in the future for a number of reasons, including, among others:


•	slowing demand for our services,


•	increasing competition and competitive pricing pressures,


•	any inability to provide our services in a cost-effective manner,


•	the incurrence of unforeseen expenses, difficulties, complications and delays, and


•	other risks described in this quarterly report on Form 10-Q.

If we fail to achieve and maintain profitability, the price of our common stock could decline, and our business, financial condition and results of operations could suffer.

If we are unable to sell our services at acceptable prices relative to our costs, our revenue and gross margins will decrease and our business and financial results will suffer.

Prices for content delivery services have fallen in rec