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 June 30, 2017



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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” , “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer o	Accelerated filer þ
Non-accelerated filer o	Smaller Reporting Company o
(Do not check if a smaller reporting company)	Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, as of July 20, 2017: 109,248,623 shares.

Table of Contents

LIMELIGHT NETWORKS, INC.

FORM 10-Q

Quarterly Period Ended June 30, 2017

TABLE OF CONTENTS



		Page
Note Regarding Forward-Looking Statements		3

PART I. FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016	4
	Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016	5
	Unaudited Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2017 and 2016	6
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016	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	30
Item 1A.	RISK FACTORS	30
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44
Item 3.	DEFAULTS UPON SENIOR SECURITIES	44
Item 4.	MINE SAFETY DISCLOSURES	44
Item 5.	OTHER INFORMATION	44
Item 6.	EXHIBITS	45
	SIGNATURES	46

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 beliefs regarding delivery traffic growth trends and demand for digital content;


•	our expectations regarding revenue, costs and expenses;


•	our plans regarding investing in our content delivery network, as well as other products and technologies;


•	our beliefs regarding the growth of, and competition within, the content delivery industry;


•	our beliefs regarding the growth of our business and how that impacts our liquidity and capital resources requirements;


•	our expectations regarding headcount;


•	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 and strategies regarding acquisitions;


•	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 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)



	June 30, 2017			December 31, 2016
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	22,972		$	21,734
Marketable securities	37,624			44,453
Accounts receivable, net	28,154			27,418
Income taxes receivable	112			125
Prepaid expenses and other current assets	4,121			4,865
Total current assets	92,983			98,595
Property and equipment, net	30,415			30,352
Marketable securities, less current portion	40			40
Deferred income taxes	1,307			1,105
Goodwill	77,032			76,243
Other assets	1,802			1,794
Total assets	$	203,579		$	208,129
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,763		$	8,790
Deferred revenue	1,741			2,138
Income taxes payable	334			188
Provision for litigation	18,000			18,000
Other current liabilities	12,722			12,836
Total current liabilities	43,560			41,952
Deferred income taxes	147			152
Deferred revenue, less current portion	15			22
Provision for litigation, less current portion	18,000			27,000
Other long-term liabilities	1,057			1,435
Total liabilities	62,779			70,561
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; 109,248 and 107,059 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively	109			107
Additional paid-in capital	497,018			490,819
Accumulated other comprehensive loss	(9,045		)	(11,038		)
Accumulated deficit	(347,282		)	(342,320		)
Total stockholders’ equity	140,800			137,568
Total liabilities and stockholders’ equity	$	203,579		$	208,129

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

Table of Contents

Limelight Networks, Inc.

Unaudited Consolidated Statements of Operations

(In thousands, except per share data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenues	$	45,370		$	43,560		$	90,105		$	84,982
Cost of revenue:
Cost of services (1)	19,464			20,271			38,471			40,380
Depreciation — network	4,531			4,489			9,088			9,157
Total cost of revenue	23,995			24,760			47,559			49,537
Gross profit	21,375			18,800			42,546			35,445
Operating expenses:
General and administrative	6,804			7,241			15,319			14,049
Sales and marketing	8,997			8,117			18,265			17,020
Research and development	6,715			6,289			12,934			12,614
Depreciation and amortization	597			626			1,186			1,249
Provision for litigation	—			54,000			—			54,000
Total operating expenses	23,113			76,273			47,704			98,932
Operating loss	(1,738		)	(57,473		)	(5,158		)	(63,487		)
Other income (expense):
Interest expense	(10		)	(279		)	(24		)	(459		)
Interest income	121			8			239			14
Other, net	153			(79		)	241			321
Total other income (expense)	264			(350		)	456			(124		)
Loss before income taxes	(1,474		)	(57,823		)	(4,702		)	(63,611		)
Income tax expense	151			115			260			273
Net loss	(1,625		)	(57,938		)	(4,962		)	(63,884		)

Net loss per share:
Basic and diluted	$	(0.01	)	$	(0.56	)	$	(0.05	)	$	(0.62	)

Weighted average shares used in per share calculation:
Basic and diluted	108,422			103,904			107,893			103,299

____________


(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 unaudited consolidated financial statements.

Table of Contents

LIMELIGHT NETWORKS, INC.

Unaudited Consolidated Statements of Comprehensive Loss

(In thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net loss	$	(1,625	)	$	(57,938	)	$	(4,962	)	$	(63,884	)
Other comprehensive income (loss), net of tax:
Unrealized gain on investments	28			—			58			—
Foreign exchange translation gain (loss)	994			(195		)	1,935			464
Other comprehensive income (loss)	1,022			(195		)	1,993			464
Comprehensive loss	$	(603	)	$	(58,133	)	$	(2,969	)	$	(63,420	)

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

Table of Contents

Limelight Networks, Inc.

Unaudited Consolidated Statements of Cash Flows

(In thousands)



	Six Months Ended June 30,
	2017			2016
Operating activities
Net loss	$	(4,962	)	$	(63,884	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	10,274			10,406
Share-based compensation	6,330			6,789
Provision for litigation	—			54,000
Foreign currency remeasurement loss	579			166
Deferred income taxes	(144		)	14
Gain on sale of property and equipment	(92		)	(134		)
Accounts receivable charges (recoveries)	490			(33		)
Amortization of premium on marketable securities	163			19
Realized loss on sale of marketable securities	—			32
Changes in operating assets and liabilities:
Accounts receivable	(1,226		)	1,957
Prepaid expenses and other current assets	867			3,392
Income taxes receivable	21			38
Other assets	8			508
Accounts payable and other current liabilities	2,701			(2,439		)
Deferred revenue	(403		)	(461		)
Income taxes payable	134			(55		)
Payments for provision for litigation	(9,000		)	—
Other long term liabilities	(382		)	(337		)
Net cash provided by operating activities	5,358			9,978
Investing activities
Purchases of marketable securities	(7,519		)	—
Sale and maturities of marketable securities	14,244			28,315
Change in restricted cash	—			(62,790		)
Purchases of property and equipment	(10,478		)	(1,680		)
Proceeds from sale of property and equipment	80			—
Net cash used in investing activities	(3,673		)	(36,155		)
Financing activities
Principal payments on capital lease obligations	—			(478		)
Payments of employee tax withholdings related to restricted stock vesting	(1,916		)	(944		)
Proceeds from line of credit	—			12,790
Proceeds from employee stock plans	1,188			856
Net cash (used in) provided by financing activities	(728		)	12,224
Effect of exchange rate changes on cash and cash equivalents	281			158
Net increase (decrease) in cash and cash equivalents	1,238			(13,795		)
Cash and cash equivalents, beginning of period	21,734			44,680
Cash and cash equivalents, end of period	$	22,972		$	30,885
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	4		$	354
Cash paid during the period for income taxes, net of refunds	$	224		$	281
Property and equipment acquired through capital leases	$	—		$	2,659

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

Table of Contents

Limelight Networks, Inc.

Notes to Unaudited Consolidated Financial Statements

June 30, 2017

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, 2017, 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, 2016. 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.

Recent Accounting Standards

Adopted Accounting Standards

In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2015-17, which requires 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 within those annual periods. We adopted this guidance effective January 1, 2017 on a retrospective basis. The impact of adoption of this ASU was that $88 of current DTAs in our consolidated balance sheet for the year ended December 31, 2016, has been reclassified to noncurrent DTAs.

In March 2016, the FASB issued ASU 2016-09, which amends the existing accounting standards for share-based payments, including the accounting for income taxes and forfeitures, as well as the classifications on the statements of cash flows. We adopted this guidance effective January 1, 2017. Beginning January 1, 2017, stock-based compensation excess tax benefits or tax deficiencies are reflected in the Consolidated Statements of Operations as a component of the provision for taxes, whereas they previously were recognized as additional paid in capital in the stockholders’ deficit in the Consolidated Balance Sheets. We have elected to continue to estimate forfeitures expected to occur to determine stock-based compensation expense. Additionally, beginning with the three months ended March 31, 2017, and on a prospective basis, the Consolidated Statements of Cash Flows now requires excess tax benefits be presented as an operating activity rather than as a financing activity, while the payment of withholding taxes on the settlement of stock-based compensation awards continues to be presented as a financing activity. The implementation of this guidance did not have a material impact on the Consolidated Statements of Cash Flows for the six months ended June 30, 2017.

Table of Contents

During the six months ended June 30, 2017 there was no change to beginning retained earnings for previously unrecognized tax benefits. The increase of $5.2 million to the net operating loss carryforward deferred tax asset was fully offset by an increase to the valuation allowance. During the six months ended June 30, 2017 we did not record excess tax benefits on stock options and restricted stock units as a result of the adoption of ASU 2016-09 because such amounts are fully offset by our valuation allowance.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. 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. While we do not plan to early adopt this ASU, we currently believe that once we do adopt this standard, we will use the modified retrospective approach. We are utilizing a comprehensive approach to assess the impact of the guidance on our contract portfolio by reviewing our current accounting policies and practices to identify potential differences that would result from applying the new requirements to our revenue contracts, including evaluation of performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and accounting treatment of costs to obtain and fulfill contracts. We continue to make significant progress on the potential impact on our accounting policies, internal control processes including system readiness and the related disclosures that will be required under the new guidance. We have reviewed many contracts with our largest revenue generating customers and we currently believe the impact on our consolidated financial statements will not be significant as fees are generally earned on actual usage primarily on a month to month basis. We will continue to review additional customer contracts to assess the impact, including evaluating the treatment of upfront costs to obtain these contracts under the new guidance. We do not know and cannot reasonably estimate quantitative information related to the impact of the new standard on our financial statements at this time.

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 August 2016, the FASB issued ASU No. 2016-15, which amends Accounting Standards Codification 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.

In January 2017, the FASB issued ASU 2017-04, which simplifies the accounting for goodwill impairment. The updated guidance eliminates Step 2 of the impairment test, which requires entities to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value, determined in Step 1. This guidance will become effective for us in fiscal years beginning after December 15, 2019, including interim periods within that reporting period. We will adopt this guidance using a prospective approach. Earlier adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not plan to early adopt this ASU, and we are currently evaluating the impact of this guidance on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award's fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We do not expect this new guidance to have a material impact on our consolidated financial statements.

Table of Contents

3. Investments in Marketable Securities

The following is a summary of marketable securities (designated as available-for-sale) at June 30, 2017:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Certificate of deposits	$	40	$	—	$	—	$	40
Commercial paper	1,995		—		1		1,994
Corporate notes and bonds	35,698		—		68		35,630
Total marketable securities	$	37,733	$	—	$	69	$	37,664

The amortized cost and estimated fair value of marketable debt securities at June 30, 2017, 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	$	28,162	$	—	$	40	$	28,122
Due after one year and through five years	9,571		—		29		9,542
	$	37,733	$	—	$	69	$	37,664

The following is a summary of marketable securities (designated as available-for-sale) at December 31, 2016:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Certificate of deposit	$	40	$	—	$	—	$	40
Commercial paper	8,228		—		6		8,222
Corporate notes and bonds	36,353		—		122		36,231
Total marketable securities	$	44,621	$	—	$	128	$	44,493

The amortized cost and estimated fair value of marketable debt securities at December 31, 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	$	27,920	$	—	$	52	$	27,868
Due after one year and through five years	16,701		—		76		16,625
	$	44,621	$	—	$	128	$	44,493

4. Accounts Receivable, net

Accounts receivable, net include:



	June 30,			December 31,
	2017			2016
Accounts receivable	$	29,100		$	28,260
Less: credit allowance	(240		)	(225		)
Less: allowance for doubtful accounts	(706		)	(617		)
Total accounts receivable, net	$	28,154		$	27,418

Table of Contents

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets include:



	June 30,		December 31,
	2017		2016
Prepaid bandwidth and backbone	$	408	$	698
VAT receivable	1,522		1,296
Prepaid expenses and insurance	1,896		2,321
Vendor deposits and other	295		550
Total prepaid expenses and other current assets	$	4,121	$	4,865

6. Property and Equipment, net

Property and equipment, net include:



	June 30,			December 31,
	2017			2016
Network equipment	$	109,980		$	108,416
Computer equipment and software	9,940			10,282
Furniture and fixtures	2,435			2,432
Leasehold improvements	5,339			5,127
Other equipment	183			182
Total property and equipment	127,877			126,439
Less: accumulated depreciation	(97,462		)	(96,087		)
Total property and equipment, net	$	30,415		$	30,352

Depreciation expense related to property and equipment classified in operating expense was $597 and $620 for the three months ended June 30, 2017 and 2016, respectively and was $1,186 and $1,237 for the six months ended June 30, 2017 and 2016, respectively.

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.

No interim indicators of impairment were identified as of June 30, 2017. Foreign currency translation adjustments increased the carrying amount of goodwill by $330 for the three months ended June 30, 2017. For the six months ended June 30, 2017, foreign currency translation adjustments increased the carrying value of goodwill by $789.

8. Other Current Liabilities

Other current liabilities include:



	June 30,		December 31,
	2017		2016
Accrued compensation and benefits	$	6,738	$	5,061
Accrued cost of revenue	2,349		2,178
Deferred rent	782		730
Accrued legal fees	532		262
Other accrued expenses	2,321		4,605
Total other current liabilities	$	12,722	$	12,836

Table of Contents

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.

As of June 30, 2017 and December 31, 2016, we had no outstanding borrowings, and we had availability under the Credit Agreement of $5,000.

As of June 30, 2017, 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 in prepaid expenses and other current assets and as amortized are charged to interest expense. During the three months ended June 30, 2017 and 2016, interest expense was $0 and $109, respectively, and commitment fees expense and amortization was $10 and $114, respectively. During the six months ended June 30, 2017 and 2016, interest expense was $0 and $181, respectively, and commitment fees expense and amortization was $20 and $140, respectively.

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. As of June 30, 2017, we were in compliance with all covenants under the Credit Agreement.

10. Other Long Term Liabilities

Other long term liabilities include:



	June 30,		December 31,
	2017		2016
Deferred rent	$	814	$	1,186
Income taxes payable	243		249
Total other long term liabilities	$	1,057	$	1,435

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 in July 2016, the District Court entered final judgment in the case. In August 2016, we entered into a settlement and license agreement with Akamai with respect to the ‘703 patent 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 qua

Table of Contents

rterly 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. As of June 30, 2017, there remained $36,000 due to Akamai under the terms of the settlement and license agreement.

Akamai and XO Litigation

In November 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 are critical to the effective and efficient delivery of bytes by a content delivery network (the Akamai and XO Litigation). Akamai also filed counterclaims in April 2016, alleging the infringement of five of its patents. We filed an answer to Akamai’s counterclaims, denying each of the allegations of infringement in May 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

In February 2016, Akamai filed a complaint against us in the District Court for the District of Massachusetts alleging infringement of three of its patents. In April 2016, Akamai amended its complaint by withdrawing one of the asserted patents. In April 2016, 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. In December 2016, Akamai filed a second complaint against us in the District Court for the District of Massachusetts alleging infringement of three additional patents. In February 2017, we filed our answer to the complaint, denying each of the allegations of infringement. The two cases were then consolidated into a single action by the court. At this time, we believe a loss is neither probable nor reasonably possible in either pending matter in the District of Massachusetts, and as such, no provision for these lawsuits have been recorded in the consolidated financial statements. We intend to vigorously defend against Akamai’s claims and vigorously protect our intellectual property rights in these matters.

Legal and other expenses associated with litigation have been significant. We include these litigation expenses in general and administrative expenses as incurred, as reported in the consolidated statement of operations.

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 that are not material in amount, 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.

Table of Contents

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.

The following table sets forth the components used in the computation of basic and diluted net loss per share for the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net loss	$	(1,625	)	$	(57,938	)	$	(4,962	)	$	(63,884	)
Basic and diluted weighted average outstanding shares of common stock	108,422			103,904			107,893			103,299
Basic and diluted net loss per share:	$	(0.01	)	$	(0.56	)	$	(0.05	)	$	(0.62	)

For the three and six months ended June 30, 2017 and 2016, 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 June 30,		Six Months Ended June 30,
	2017	2016	2017	2016
Employee stock purchase plan	107	205	107	205
Stock options	1,496	84	844	109
Restricted stock units	2,688	482	2,382	502
	4,291	771	3,333	816

13. Stockholders’ Equity

Common Stock

On March 14, 2017, our board of directors authorized a $25,000 share repurchase program. Any shares repurchased under this program will be canceled and returned to authorized but unissued status. This new share repurchase program replaces the $9,500 remaining from the previously announced $15,000 share repurchase program. During the three and six months ended June 30, 2017 and 2016, respectively, we did not repurchase any shares under the repurchase programs.

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 was approximately 8,259 as of June 30, 2017.

Employee Stock Purchase Plan

In June 2013, our stockholders approved our 2013 Employee Stock Purchase Plan (ESPP). The ESPP allows participants to purchase our common stock at a 15% discount of the lower of the beginning or end of the offering period using the closing price on that day. During the three and six months ended June 30, 2017, we issued 432 shares under the ESPP. Total cash proceeds from the purchase of the shares under the ESPP was approximately $885. As of June 30, 2017, shares reserved for issuance to employees under this plan totaled 886, and we held employee contributions of $262 (included in other current liabilities) for future purchases under the ESPP.

Preferred Stock

Table of Contents

Our board of directors has authorized the issuance of up to 7,500 shares of preferred stock at June 30, 2017. 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 June 30, 2017, the board of directors had not adopted any resolutions for the issuance of preferred stock.

14. Accumulated Other Comprehensive Loss

Changes in the components of accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2017, was as follows:



				Unrealized
				Gains (Losses) on
	Foreign			Available for
	Currency			Sale Securities			Total
Balance, December 31, 2016	$	(10,910	)	$	(128	)	$	(11,038	)
Other comprehensive income before reclassifications	1,935			58			1,993
Amounts reclassified from accumulated other comprehensive loss	—			—			—
Net current period other comprehensive income	1,935			58			1,993
Balance, June 30, 2017	$	(8,975	)	$	(70	)	$	(9,045	)

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 June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Share-based compensation expense by type:
Stock options	$	909	$	960	$	1,859	$	1,943
Restricted stock units	2,110		2,108		4,138		4,468
ESPP	236		225		333		378
Total share-based compensation expense	$	3,255	$	3,293	$	6,330	$	6,789
Share-based compensation expense:
Cost of services	$	364	$	436	$	723	$	909
General and administrative expense	1,674		1,677		3,208		3,503
Sales and marketing expense	617		638		1,237		1,375
Research and development expense	600		542		1,162		1,002
Total share-based compensation expense	$	3,255	$	3,293	$	6,330	$	6,789

Unrecognized share-based compensation expense totaled approximately $19,391 at June 30, 2017, of which $6,037 related to stock options and $13,354 related to restricted stock units. We currently expect to recognize share-based compensation expense of $5,940 during the remainder of 2017, $8,476 in 2018 and the remainder thereafter based on scheduled vesting of the stock options and restricted stock units outstanding at June 30, 2017.

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 June 30, 2017, are as follows:

Table of Contents



Remainder of 2017	$	1,839
2018	3,437
2019	1,614
2020	545
2021	359
Thereafter	54
Total minimum payments	$	7,848

Purchase Commitments

We have long-term commitments for bandwidth usage and co-location with various networks and Internet service providers. The following summarizes minimum commitments as of June 30, 2017:



Remainder of 2017	$	16,852
2018	20,588
2019	5,137
2020	50
2021	—
Thereafter	—
Total minimum payments	$	42,627

17. Concentrations

During the three and six months ended June 30, 2017, we had one customer, Amazon, who represented 10% or more of our total revenue. During the three and six months ended June 30, 2016, we had one customer, Microsoft, who represented 10% or more of our total revenue.

Revenue from customers located within the United States, our country of domicile, was $27,018 for the three months ended June 30, 2017, compared to $23,627 for the three months ended June 30, 2016. For the six months ended June 30, 2017, revenue from customers located within the United States was $54,391, compared to $46,037 for the six months ended June 30, 2016.

During the three and six months ended June 30, 2017, respectively, we had three countries, based on customer location, the United States, Japan, and the United Kingdom that accounted for 10% or more of our total revenues. During the three and six months ended June 30, 2016, respectively, 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 June 30, 2017 and 2016, was $151 and $115, respectively. For the six months ended June 30, 2017 and 2016, income tax expense was $260 and $273, 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.

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 June 30, 2017, 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 our 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.

Table of Contents

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 June 30,								Six Months Ended June 30,
	2017				2016				2017				2016
Americas	$	28,413	62.6	%	$	26,102	59.9	%	$	56,608	62.8	%	$	50,110	59.0	%
EMEA	8,807		19.4	%	7,476		17.2	%	17,264		19.2	%	16,388		19.2	%
Asia Pacific	8,150		18.0	%	9,982		22.9	%	16,233		18.0	%	18,484		21.8	%
Total revenue	$	45,370	100.0	%	$	43,560	100.0	%	$	90,105	100.0	%	$	84,982	100.0	%

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



	June 30,		December 31,
	2017		2016
Americas	$	17,688	$	18,665
International	12,727		11,687
Total long-lived assets	$	30,415	$	30,352

20. Fair Value Measurements

As of June 30, 2017, and December 31, 2016, we held certain assets and liabilities that were required to be measured at fair value on a recurring basis.

The following is a summary of fair value measurements at June 30, 2017:



			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)	$	2,460	$	2,460	$	—	$	—
Certificate of deposit (1)	40		—		40		—
Commercial paper (1)	1,994		—		1,994		—
Corporate notes and bonds (1)	35,630		—		35,630		—
Total assets measured at fair value	$	40,124	$	2,460	$	37,664	$	—

____________


(1)	Classified in marketable securities


(2)	Classified in cash and cash equivalents

The following is a summary of fair value measurements at December 31, 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)	$	301	$	301	$	—	$	—
Certificate of deposit (1)	40		—		40		—
Commercial paper (1)	8,222		—		8,222		—
Corporate notes and bonds (1)	36,231		—		36,231		—
Total assets measured at fair value	$	44,794	$	301	$	44,493	$	—

____________

Table of Contents


(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, 2016, included in Part II of our annual report on Form 10-K filed with the SEC, on February 17, 2017.

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). Our mission is to securely manage and globally deliver digital content, building customer satisfaction through exceptional reliability and performance.

We derive revenue primarily from the sale of components of the Orchestrate Platform. Our delivery services represented approximately 77% of our total revenue during the three and six months ended June 30, 2017. 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, driven by increased consumption of content and larger file sizes, is an important trend that will continue to outpace declining average selling prices in the industry. June 2017 represented the highest volume of traffic delivered in the Company's history. Changes in revenue can be driven by a small subset of large customers who have low contractually committed obligations. For the three and six months ended June 30, 2017, we had one customer, Amazon, who accounted for 10% or more of our total revenue.

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 optimize our data center 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 increased from 510 at December 31, 2016, to 533 as of June 30, 2017.

In August 2016, we entered into a settlement and license agreement with Akamai Technologies, Inc. (Akamai) with respect to the U.S. Patent No. 6,108,703 (the ‘703 patent) 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. As of June 30, 2017, there remained $36,000 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.

Based on current conditions, we expect full-year 2017 revenue to be between $180,000 and $182,000. We expect gross margin improvement for the full year of approximately 300 basis points. We also expect full-year non-GAAP earnings per share to be between $0.05 and $0.07. We expect full-year Adjusted EBITDA to be between $24,000 and $28,000. We expect capital expenditures to be approximately $20,000 for the year.

Table of Contents

The following table summarizes our revenue, costs and expenses in thousands of dollars and as a percentage of total revenue for the three and six months ended June 30, 2017 and 2016.



	Three Months Ended June 30,										Six Months Ended June 30,
	2017					2016					2017					2016
Revenues	$	45,370		100.0	%	$	43,560		100.0	%	$	90,105		100.0	%	$	84,982		100.0	%
Cost of revenue	23,995			52.9	%	24,760			56.8	%	47,559			52.8	%	49,537			58.3	%
Gross profit	21,375			47.1	%	18,800			43.2	%	42,546			47.2	%	35,445			41.7	%
Operating expenses	23,113			50.9	%	22,273			51.1	%	47,704			52.9	%	44,932			52.9	%
Provision for litigation	—			—	%	54,000			124.0	%	—			—	%	54,000			63.5	%
Operating loss	(1,738		)	(3.8	)%	(57,473		)	(131.9	)%	(5,158		)	(5.7	)%	(63,487		)	(74.7	)%
Total other income (expense)	264			0.6	%	(350		)	(0.8	)%	456			0.5	%	(124		)	(0.1	)%
Loss before income taxes	(1,474		)	(3.2	)%	(57,823		)	(132.7	)%	(4,702		)	(5.2	)%	(63,611		)	(74.9	)%
Income tax expense	151			0.3	%	115			0.3	%	260			0.3	%	273			0.3	%
Net loss	$	(1,625	)	(3.6	)%	$	(57,938	)	(133.0	)%	(4,962		)	(5.5	)%	(63,884		)	(75.2	)%

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 depreciation and amortization, interest expense, interest and other (income) expense, and income tax expense. 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 July 26, 2017, 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;


•	these measures do not reflect income taxes or the cash requirements for any tax payments;

Table of Contents


•	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									Six Months Ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2017			2017			2016			2017			2016
U.S. GAAP net loss	$	(1,625	)	$	(3,337	)	$	(57,938	)	$	(4,962	)	$	(63,884	)
Provision for litigation	—			—			54,000			—			54,000
Share-based compensation	3,255			3,075			3,293			6,330			6,789
Litigation expenses	1,276			1,909			1,271			3,185			2,449
Amortization of intangible assets	—			—			6			—			12
Non-GAAP net income (loss)	$	2,906		$	1,647		$	632		$	4,553		$	(634	)

Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA

(Unaudited)



	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2017			2017			2016			2017			2016
U.S. GAAP net loss	$	(1,625	)	$	(3,337	)	$	(57,938	)	$	(4,962	)	$	(63,884	)
Depreciation and amortization	5,128			5,146			5,115			10,274			10,406
Interest expense	10			14			279			24			459
Interest and other (income) expense	(274		)	(204		)	71			(480		)	(335		)
Income tax expense	151			108			115			260			273
EBITDA	$	3,390		$	1,727		$	(52,358	)	$	5,116		$	(53,081	)
Provision for litigation	—			—			54,000			—			54,000
Share-based compensation	3,255			3,075			3,293			6,330			6,789
Litigation expenses	1,276			1,909			1,271			3,185			2,449
Adjusted EBITDA	$	7,921		$	6,711		$	6,206		$	14,631		$	10,157

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, 2016. During the six months ended June 30, 2017, there have been no significant changes in our critical accounting policies and estimates.

Table of Contents

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 six months ended June 30, 2017, compared to the three and six months ended June 30, 2016:



	Three Months Ended June 30,								Six Months Ended June 30,
					$		%						$		%
	2017		2016		Change		Change		2017		2016		Change		Change
Revenue	$	45,370	$	43,560	$	1,810	4.2	%	$	90,105	$	84,982	$	5,123	6.0	%

Our revenue increased during the three and six months ended June 30, 2017, versus the comparable 2016 periods primarily due to an increase in our content delivery revenue, which was driven by increases in volumes with certain of our larger customers. These increases were partially offset by a decrease in our average selling price.

Our active customers worldwide decreased to 779 as of June 30, 2017, compared to 904 as of June 30, 2016. 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 June 30, 2017 and 2016, sales to our top 20 customers accounted for approximately 65% and 62%, respectively, of our total revenue. For the six months ended June 30, 2017 and 2016, sales to our top 20 customers accounted for approximately 64% and 61%, 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 six months ended June 30, 2017 we had one customer, Amazon, who accounted for 10% or more of our total revenue. For the three and six months ended June 30, 2016, we had one customer, Microsoft, 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 June 30,								Six Months Ended June 30,
	2017				2016				2017				2016
Americas	$	28,413	62.6	%	$	26,102	59.9	%	$	56,608	62.8	%	$	50,110	59.0	%
EMEA	8,807		19.4	%	7,476		17.2	%	17,264		19.2	%	16,388		19.2	%
Asia Pacific	8,150		18.0	%	9,982		22.9	%	16,233		18.0	%	18,484		21.8	%
Total revenue	$	45,370	100.0	%	$	43,560	100.0	%	$	90,105	100.0	%	$	84,982	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, 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.

Table of Contents

Cost of revenue was composed of the following (in thousands and as a percentage of total revenue):



	Three Months Ended June 30,								Six Months Ended June 30,
	2017				2016				2017				2016
Bandwidth and co-location fees	$	13,174	29.0	%	$	14,316	32.9	%	$	26,440	29.3	%	$	28,695	33.8	%
Depreciation - network	4,531		10.0	%	4,489		10.3	%	9,088		10.1	%	9,157		10.8	%
Payroll and related employee costs	4,320		9.5	%	3,835		8.8	%	8,353		9.3	%	7,799		9.2	%
Share-based compensation	364		0.8	%	436		1.0	%	723		0.8	%	909		1.1	%
Other costs	1,606		3.5	%	1,684		3.9	%	2,955		3.3	%	2,977		3.5	%
Total cost of revenue	$	23,995	52.9	%	$	24,760	56.8	%	$	47,559	52.8	%	$	49,537	58.3	%

Our cost of revenue decreased in aggregate dollars and as a percentage of revenue for the three and six months ended June 30, 2017, versus the comparable 2016 periods primarily as a result of the following:


•	Bandwidth and co-location fees decreased as a result of reduced peering costs and our continued co-location consolidation efforts. As a percentage of revenue, our co-location fees and other costs of revenue decreased due to improved server and operational efficiencies resulting in additional revenue without corresponding proportional costs.


•	Payroll and related employee costs increased due to higher variable compensation and increased headcount.

We anticipate an improvement in gross margin of approximately 300 basis points for the full year 2017 compared to 2016 as a result of our co-location consolidation efforts, reduced peering costs and product mix.

General and Administrative

General and administrative expense was composed of the following (in thousands and as a percentage of total revenue):



	Three Months Ended June 30,									Six Months Ended June 30,
	2017					2016				2017				2016
Payroll and related employee costs	$	3,311		7.3	%	$	2,253	5.2	%	$	6,115	6.8	%	$	4,218	5.0	%
Professional fees and outside services	836			1.8	%	813		1.9	%	1,674		1.9	%	1,639		1.9	%
Share-based compensation	1,674			3.7	%	1,677		3.8	%	3,208		3.6	%	3,503		4.1	%
Litigation expenses	1,276			2.8	%	1,271		2.9	%	3,185		3.5	%	2,449		2.9	%
Other costs	(293		)	(0.6	)%	1,227		2.8	%	1,137		1.3	%	2,240		2.6	%
Total general and administrative	$	6,804		15.0	%	$	7,241	16.6	%	$	15,319	17.0	%	$	14,049	16.5	%

Our general and administrative expense decreased in aggregate dollars and decreased as a percentage of total revenue for the three months ended June 30, 2017, versus the comparable 2016 period. The decrease was primarily driven by lower other costs, which was the result of a state sales tax refund. This decrease in other costs was partially offset by increased payroll and related employee costs primarily due to higher headcount, average salaries, and variable compensation.

For the six months ended June 30, 2017, our general and administrative expenses increased in aggregate dollars and increased as a percentage of revenue versus the comparable 2016 period. The increase was primarily due to increased payroll and related employee costs due to higher headcount, average salaries, and variable compensation. In addition, litigation expenses increased due to work related to our intellectual property lawsuits. Other costs decreased as a result of the state sales tax refund.

Excluding litigation expenses, we expect our general and administrative expenses for 2017 to increase due to variable compensation as compared to 2016.

Sales and Marketing

Sales and marketing expense was composed of the following (in thousands and as a percentage of total revenue):

Table of Contents



	Three Months Ended June 30,								Six Months Ended June 30,
	2017				2016				2017				2016
Payroll and related employee costs	$	6,380	14.1	%	$	5,553	12.7	%	$	12,610	14.0	%	$	11,750	13.8	%
Share-based compensation	617		1.4	%	638		1.5	%	1,237		1.4	%	1,375		1.6	%
Marketing programs	476		1.0	%	401		0.9	%	1,021		1.1	%	723		0.9	%
Other costs	1,524		3.4	%	1,525		3.5	%	3,397		3.8	%	3,172		3.7	%
Total sales and marketing	$	8,997	19.8	%	$	8,117	18.6	%	$	18,265	20.3	%	$	17,020	20.0	%

Our sales and marketing expense increased in aggregate dollars and increased as a percentage of total revenue for the three and six months ended June 30, 2017, respectively, versus the comparable 2016 periods. The increase in sales and marketing expense was primarily as a result of the following:


•	increased payroll and related employee costs due to increased headcount and higher variable compensation and


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

We expect our sales and marketing expenses for 2017 to increase compared to 2016 as we expand our sales force and marketing efforts.

Research and Development

Research and development expense was composed of the following (in thousands and as a percentage of total revenue):



	Three Months Ended June 30,								Six Months Ended June 30,
	2017				2016				2017				2016
Payroll and related employee costs	$	4,936	10.9	%	$	4,684	10.8	%	$	9,607	10.7	%	$	9,683	11.4	%
Share-based compensation	600		1.3	%	542		1.2	%	1,162		1.3	%	1,002		1.2	%
Other costs	1,179		2.6	%	1,063		2.4	%	2,165		2.4	%	1,929		2.3	%
Total research and development	$	6,715	14.8	%	$	6,289	14.4	%	$	12,934	14.4	%	$	12,614	14.8	%

Our research and development expense increased in aggregate dollars and as a percentage of total revenue for the three months ended June 30, 2017, versus the comparable 2016 period. For the six months ended June 30, 2017, our research and development expenses increased in aggregate dollars and decreased as a percentage of revenue versus the comparable 2016 period. The increase in aggregate dollars was primarily due to increased payroll and related employee costs due to higher variable compensation, partially offset by lower average salaries. Additionally, other costs increased primarily due to an increase in outside labor costs.

We expect our research and development expenses for 2017 to increase to due higher variable compensation as compared with 2016.

Depreciation and Amortization (Operating Expenses)

Depreciation and amortization expense was $597, or 1.3% of revenue, for the three months ended June 30, 2017, versus $626, or 1.4% of revenue, for the comparable 2016 period. For the six months ended June 30, 2017, depreciation and amortization expense was $1,186, or 1.3% of revenue versus $1,249, or 1.5% of revenue, for the comparable 2016 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 $10 for the three months ended June 30, 2017, versus $279 for the comparable 2016 period. For the six months ended June 30, 2017, interest expense was $24 versus $459 for the comparable 2016 period. The decrease was primarily due to a reduction in interest on our line of credit borrowings, capital leases, fees and the amortization of fees associated with our Credit Agreement.

Table of Contents

Interest Income

Interest income was $121 for the three months ended June 30, 2017, versus $8 for the comparable 2016 period. For the six months ended June 30, 2017, interest income was $239 versus $14 for the comparable 2016 period. Interest income includes interest earned on invested cash balances and marketable securities.

Other Income (Expense)

Other income was $153 for the three months ended June 30, 2017, versus other expense of $79 for the comparable 2016 period. For the six months ended June 30, 2017, other income was $241 versus other income of $321 for the comparable 2016 period. For the three months ended June 30, 2017 and 2016, respectively, and the six months ended June 30, 2017, other income consisted primarily of foreign currency transaction gains and losses and the gain on sale of fixed assets. For the six months ended June 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.

Income Tax Expense

Based on an estimated annual effective tax rate and discrete items, the estimated income tax expense for the three and six months ended June 30, 2017, was $151 and $260, respectively, versus $115 and $273 for the comparable 2016 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 June 30, 2017, our cash, cash equivalents and marketable securities classified as current totaled $60,596. Included in this amount is approximately $4,426 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.

In August 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. As of June 30, 2017, there remained $36,000 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.

The major components of changes in cash flows for the six months ended June 30, 2017 and 2016, are discussed in the following paragraphs.

Operating Activities

Net cash provided by operating activities was $5,358 for the six months ended June 30, 2017, versus net cash provided by operating activities of $9,978 for the comparable 2016 period, a decrease of $4,620. Changes in operating assets and liabilities of ($7,280) during the six months ended June 30, 2017, versus $2,603 in the comparable 2016 period were primarily due to:


•	accounts receivable increased $1,226 during the six months ended June 30, 2017 as a result of timing of collections as compared to a $1,957 decrease in the comparable 2016 period;


•	prepaid expenses and other current assets decreased $867 during the six months ended June 30, 2017, due to the amortization of prepaid bandwidth expenses and other prepaid expenses, as well as the receipt of VAT refunds compared to a $3,392 decrease in the comparable 2016 period;

Table of Contents


•	accounts payable and other current liabilities increased $2,701 during the six months ended June 30, 2017, versus an decrease of $2,439 for the comparable 2016 period due to timing of vendor payments and increased variable compensation accruals; and


•	provision for litigation decreased by $9,000 as a result of our settlement agreement payments made to Akamai.

Cash provided by operating activities may not be sufficient to cover new purchases of property and equipment during the remainder of 2017 and 2018, 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 used in investing activities was $3,673 for the six months ended June 30, 2017, versus net cash used in investing activities of $36,155 for the comparable 2016 period. Net cash used in investing activities was primarily related to the purchase of marketable securities, and capital expenditures primarily for servers and network equipment associated with the build-out and expansion of our global computing platform, partially offset by cash received from the sale and maturities of marketable securities. During the six months ended June 30, 2016, we liquidated our investments in marketable securities in order to provide collateral for the 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 six months ended June 30, 2017, we made capital expenditures of $10,478, which represented approximately 12% of our total revenue. We currently expect an increase in capital expenditures in 2017 compared to 2016, as we continue to increase the capacity of our global network and re-fresh our systems. We currently expect capital expenditures in 2017 to be approximately $20,000.

Financing Activities

Net cash used in financing activities was $728 for the six months ended June 30, 2017, versus net cash provided by financing activities of $12,224 for the comparable 2016 period. Net cash used in financing activities in the six months ended June 30, 2017, primarily relates to payments of employee tax withholdings related to the net settlement of vested restricted stock units of $1,916, offset by cash received from the exercise of stock options and our employee stock purchase plan of $1,188.

Net cash provided by financing activities in the six months ended June 30, 2016, primarily relates to proceeds from borrowings against our line of credit of $12,790, and cash received from the exercise of stock options and our employee stock purchase plan of $856, offset by payments of employee tax withholdings related to the net settlement of vested restricted stock units of $944 and principal payments made on our capital lease obligations of $478.

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 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.

As of June 30, 2017, and December 31, 2016, we had no outstanding borrowings, and we had availability under the Credit Agreement of approximately $5,000.

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.

Table of Contents

For a more detailed discussion regarding our Credit Agreement and Modification, 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.

Share Repurchases

On March 14, 2017, our board of directors authorized a $25,000 share repurchase program. Any shares repurchased under this program will be canceled and returned to authorized but unissued status. This new share repurchase program replaces the $9,500 remaining from the previously announced $15,000 share repurchase program. During the three and six month periods ended June 30, 2017 and 2016, respectively, we did not repurchase any shares under the repurchase programs.

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 2017 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 2017 and beyond. As a result of our growth strategies, we believe that our liquidity and capital resources requirements will grow.

The following table presents our contractual obligations and commercial commitments, as of June 30, 2017, 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	$	24,870	$	16,780	$	8,090	$	—	$	—
Rack space leases	17,757		11,990		5,767		—		—
Real estate leases	7,848		3,608		3,615		625		—
Total operating leases	50,475		32,378		17,472		625		—
Settlement agreement	36,000		18,000		18,000		—		—
Total commitments	$	86,475	$	50,378	$	35,472	$	625	$	—

Off Balance Sheet Arrangements

As of June 30, 2017, 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

Table of Contents

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. 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 Credit 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 June 30, 2017, 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 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, 2016, and the six months ended June 30, 2017, would have been higher by approximately $1,963 and $881, 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 months ended June 30, 2017 and 2016, sales to our top 20 customers accounted for approximately 65% and 62%, respectively, of our total revenue. During the three months ended June 30, 2017, we had one customer, Amazon, who accounted for more than 10% of our total revenue. For the three months ended June 30, 2016, we had one customer, Microsoft, who represented 10% or more of our total revenue.

For the six months ended June 30, 2017 and 2016, sales to our top 20 customers accounted for approximately 64% and 61%, respectively, of our total revenue. During the six months ended June 30, 2017, we had one customer, Amazon, who accounted for more than 10% of our total revenue. During the six months ended June 30, 2016, we had one customer, Microsoft, who represented 10% or more of our total revenue. In 2017, we anticipate that our top 20 customer concentration levels will remain consistent with 2016. 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

Table of Contents

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 June 30, 2017. 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 June 30, 2017, 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, Fastly, CDNetworks, StackPath, 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 internat