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Section 1: 10-Q (10-Q)

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from                          to                         
Commission file number 001-33508
 
 
Limelight Networks, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
20-1677033
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
222 South Mill Avenue, 8th Floor
Tempe, AZ 85281
(Address of principal executive offices, including Zip Code)
(602) 850-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 October 12, 2017: 109,711,131 shares.
 


Table of Contents

LIMELIGHT NETWORKS, INC.
FORM 10-Q
Quarterly Period Ended September 30, 2017
TABLE OF CONTENTS
 
 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS
 
 
Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016
 
Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016
 
Unaudited Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and 2016
 
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016
 
Notes to Unaudited Consolidated Financial Statements
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4.
CONTROLS AND PROCEDURES
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
LEGAL PROCEEDINGS
Item 1A.
RISK FACTORS
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Item 3.
DEFAULTS UPON SENIOR SECURITIES
Item 4.
MINE SAFETY DISCLOSURES
Item 5.
OTHER INFORMATION
Item 6.
EXHIBITS
 
SIGNATURES
 
 
 
 


Table of Contents

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, expenses, gross margin, non-GAAP earnings per share, Adjusted EBITDA and capital expenditures;
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)
 
September 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
20,744

 
$
21,734

Marketable securities
36,948

 
44,453

Accounts receivable, net
28,712

 
27,418

Income taxes receivable
102

 
125

Prepaid expenses and other current assets
4,453

 
4,865

Total current assets
90,959

 
98,595

Property and equipment, net
29,835

 
30,352

Marketable securities, less current portion
40

 
40

Deferred income taxes
1,393

 
1,105

Goodwill
76,925

 
76,243

Other assets
1,794

 
1,794

Total assets
$
200,946

 
$
208,129

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
8,804

 
$
8,790

Deferred revenue
1,694

 
2,138

Income taxes payable
383

 
188

Provision for litigation
18,000

 
18,000

Other current liabilities
15,665

 
12,836

Total current liabilities
44,546

 
41,952

Deferred income taxes
146

 
152

Deferred revenue, less current portion
15

 
22

Provision for litigation, less current portion
13,500

 
27,000

Other long-term liabilities
859

 
1,435

Total liabilities
59,066

 
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; 109,638 and 107,059 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
110

 
107

Additional paid-in capital
499,487

 
490,819

Accumulated other comprehensive loss
(8,679
)
 
(11,038
)
Accumulated deficit
(349,038
)
 
(342,320
)
Total stockholders’ equity
141,880

 
137,568

Total liabilities and stockholders’ equity
$
200,946

 
$
208,129

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

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Limelight Networks, Inc.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
46,069

 
$
39,473

 
$
136,173

 
$
124,456

Cost of revenue:
 
 

 
 
 
 
Cost of services (1)
19,287

 
18,834

 
57,758

 
59,214

Depreciation — network
4,506

 
4,401

 
13,594

 
13,558

Total cost of revenue
23,793

 
23,235

 
71,352

 
72,772

Gross profit
22,276

 
16,238

 
64,821

 
51,684

Operating expenses:
 
 

 
 
 
 
General and administrative
8,079

 
8,033

 
23,397

 
22,082

Sales and marketing
8,836

 
7,711

 
27,100

 
24,730

Research and development
6,443

 
5,626

 
19,377

 
18,241

Depreciation and amortization
603

 
613

 
1,789

 
1,862

Provision for litigation

 

 

 
54,000

Total operating expenses
23,961

 
21,983

 
71,663

 
120,915

Operating loss
(1,685
)
 
(5,745
)
 
(6,842
)
 
(69,231
)
Other income (expense):
 
 

 
 
 
 
Interest expense
(18
)
 
(406
)
 
(42
)
 
(865
)
Interest income
127

 
8

 
365

 
22

Other, net
8

 
151

 
249

 
472

Total other income (expense)
117

 
(247
)
 
572

 
(371
)
Loss before income taxes
(1,568
)
 
(5,992
)
 
(6,270
)
 
(69,602
)
Income tax expense
188

 
130

 
448

 
404

Net loss
(1,756
)
 
(6,122
)
 
(6,718
)
 
(70,006
)
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.02
)
 
$
(0.06
)
 
$
(0.06
)
 
$
(0.67
)
 
 
 
 
 
 
 
 
Weighted average shares used in per share calculation:
 
 
 
 
 
 
 
Basic and diluted
109,342

 
104,860

 
108,376

 
103,819

____________
(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.

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LIMELIGHT NETWORKS, INC.
Unaudited Consolidated Statements of Comprehensive Loss
(In thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(1,756
)
 
$
(6,122
)
 
$
(6,718
)
 
$
(70,006
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gain on investments
26

 

 
83

 

Foreign exchange translation gain
340

 
403

 
2,276

 
867

Other comprehensive income
366

 
403

 
2,359

 
867

Comprehensive loss
$
(1,390
)
 
$
(5,719
)
 
$
(4,359
)
 
$
(69,139
)
The accompanying notes are an integral part of the unaudited consolidated financial statements.

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Limelight Networks, Inc.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Operating activities
 
 
 
Net loss
$
(6,718
)
 
$
(70,006
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
15,383

 
15,420

Share-based compensation
9,442

 
9,776

Provision for litigation

 
54,000

Foreign currency remeasurement loss
658

 
509

Deferred income taxes
(217
)
 
(25
)
Gain on sale of property and equipment
(94
)
 
(296
)
Accounts receivable charges
732

 
36

Amortization of premium on marketable securities
228

 
19

Realized loss on sale of marketable securities

 
32

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,026
)
 
3,901

Prepaid expenses and other current assets
545

 
4,333

Income taxes receivable
34

 
54

Other assets
21

 
558

Accounts payable and other current liabilities
4,749

 
(670
)
Deferred revenue
(450
)
 
(1,552
)
Income taxes payable
180

 
(76
)
Payments for provision for litigation
(13,500
)
 
(4,500
)
Other long term liabilities
(584
)
 
(550
)
Net cash provided by operating activities
8,383

 
10,963

Investing activities
 
 
 
Purchases of marketable securities
(10,383
)
 

Sale and maturities of marketable securities
17,744

 
28,315

Purchases of property and equipment
(15,806
)
 
(4,666
)
Proceeds from sale of property and equipment
83

 

Net cash (used in) provided by investing activities
(8,362
)
 
23,649

Financing activities
 
 
 
Principal payments on capital lease obligations

 
(4,685
)
Payments of employee tax withholdings related to restricted stock vesting
(2,571
)
 
(1,306
)
Proceeds from employee stock plans
1,200

 
904

Net cash used in financing activities
(1,371
)
 
(5,087
)
Effect of exchange rate changes on cash and cash equivalents
360

 
195

Net increase (decrease) in cash and cash equivalents
(990
)
 
29,720

Cash and cash equivalents, beginning of period
21,734

 
44,680

Cash and cash equivalents, end of period
$
20,744

 
$
74,400

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
11

 
$
682

Cash paid during the period for income taxes, net of refunds
$
400

 
$
457

Property and equipment acquired through capital leases
$

 
$
2,659

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

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Limelight Networks, Inc.
Notes to Unaudited Consolidated Financial Statements
September 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 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 nine months ended September 30, 2017.
During the nine months ended September 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

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by an increase to the valuation allowance. During the nine months ended September 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. 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 and internal control processes including system readiness. In addition, we will update certain disclosures, as applicable, included in our filings pursuant to the Securities Exchange Act of 1934, as amended, to meet the requirements of the new guidance.
We continue to review contracts with our customers and we currently believe that we will be required to record a cumulative effect adjustment to retained earnings upon adoption of the new revenue standard at the beginning of 2018. The cumulative adjustment is primarily related to incremental upfront contract acquisition costs (such as sales commissions) for customer contracts. The new standard requires these costs to be capitalized and amortized over the estimated life of the asset. Currently, these costs are expensed as incurred. For the nine months ended September 30, 2017, we paid approximately $800 in incremental upfront contract acquisition costs. We recognize revenue for most of our customers based on actual monthly usage at an agreed upon rate, where the impact of adoption is not expected to be material. We have entered into some contracts with annual minimum commitments. We are currently evaluating the impact of estimating variable consideration related to these types of contacts and how the new standard could impact revenue recognition. 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. We do not plan to early adopt this ASU.  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

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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.
3. Investments in Marketable Securities
The following is a summary of marketable securities (designated as available-for-sale) at September 30, 2017:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Certificate of deposits
$
40

 
$

 
$

 
$
40

Commercial paper
998

 

 

 
998

Corporate notes and bonds
35,993

 

 
43

 
35,950

Total marketable securities
$
37,031

 
$

 
$
43

 
$
36,988

The amortized cost and estimated fair value of marketable securities at September 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
$
33,481

 
$

 
$
36

 
$
33,445

Due after one year and through five years
3,550

 

 
7

 
3,543

 
$
37,031

 
$

 
$
43

 
$
36,988

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 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:
 
September 30,
 
December 31,
 
2017
 
2016
Accounts receivable
$
29,756

 
$
28,260

Less: credit allowance
(240
)
 
(225
)
Less: allowance for doubtful accounts
(804
)
 
(617
)
Total accounts receivable, net
$
28,712

 
$
27,418


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5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include:
 
September 30,
 
December 31,
 
2017
 
2016
Prepaid bandwidth and backbone
$
1,036

 
$
698

VAT receivable
1,041

 
1,296

Prepaid expenses and insurance
1,993

 
2,321

Vendor deposits and other
383

 
550

Total prepaid expenses and other current assets
$
4,453

 
$
4,865

6. Property and Equipment, net
Property and equipment, net include:
 
September 30,
 
December 31,
 
2017
 
2016
Network equipment
$
106,841

 
$
108,416

Computer equipment and software
9,621

 
10,282

Furniture and fixtures
2,435

 
2,432

Leasehold improvements
5,485

 
5,127

Other equipment
183

 
182

Total property and equipment
124,565

 
126,439

Less: accumulated depreciation
(94,730
)
 
(96,087
)
Total property and equipment, net
$
29,835

 
$
30,352

Depreciation expense related to property and equipment classified in operating expense was $603 and $611 for the three months ended September 30, 2017 and 2016, respectively and was $1,789 and $1,848 for the nine months ended September 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 September 30, 2017. Foreign currency translation adjustments decreased the carrying amount of goodwill by $107 for the three months ended September 30, 2017. For the nine months ended September 30, 2017, foreign currency translation adjustments increased the carrying value of goodwill by $682.
8. Other Current Liabilities
Other current liabilities include:
 
September 30,
 
December 31,
 
2017
 
2016
Accrued compensation and benefits
$
10,074

 
$
5,061

Accrued cost of revenue
2,488

 
2,178

Deferred rent
790

 
730

Accrued legal fees
235

 
262

Other accrued expenses
2,078

 
4,605

Total other current liabilities
$
15,665

 
$
12,836


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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 September 30, 2017 and December 31, 2016, we had no outstanding borrowings, and we had availability under the Credit Agreement of $5,000.
As of September 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) the 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 September 30, 2017 and 2016, interest expense was $0 and $24, respectively, and commitment fees expense and amortization was $18 and $127, respectively. During the nine months ended September 30, 2017 and 2016, interest expense was $0 and $205, respectively, and commitment fees expense and amortization was $42 and $267, 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 September 30, 2017, we were in compliance with all covenants under the Credit Agreement.
In October 2017, we entered into a Third Amendment (Third Amendment) to the Credit Agreement. Under the Third Amendment, we have increased the maximum principal commitment amount from $5,000 to $10,000. The interest rate on any borrowings will decrease from LIBOR plus a margin of 2.75% to LIBOR plus a margin of 2.50% or the Wall Street Journal prime rate. In addition, the unused line fee under the Third Amendment will decrease from 30 basis points to 20 basis points. Under the Third Amendment, we are required to maintain a minimum liquidity of $10,000 at all times, measured quarterly, with a minimum of $5,000 of the $10,000 in cash at SVB. We incurred a commitment fee of $25 related to the Third Amendment.
10. Other Long Term Liabilities
Other long term liabilities include:
 
September 30,
 
December 31,
 
2017
 
2016
Deferred rent
$
615

 
$
1,186

Income taxes payable
244

 
249

Total other long term liabilities
$
859

 
$
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

12

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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 quarterly installments, which began on August 1, 2016. We took a charge in the quarter ended June 30, 2016, for the full, undiscounted amount of $54,000. As of September 30, 2017, there remained $31,500 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 and enforce our intellectual property rights as plaintiffs in this dispute and also 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 also vigorously protect and enforce our intellectual property rights via our counterclaims in this dispute.
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

13

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of tax audits and any related litigation could be materially different than the amounts established for tax contingencies. To the extent these estimates ultimately prove to be inaccurate, the associated reserves would be adjusted, resulting in the recording of a benefit or expense in the period in which a change in estimate or a final determination is made.
12. Net Loss per Share
We calculate basic and diluted loss per weighted average share. We use the weighted-average number of shares of common stock outstanding during the period for the computation of basic loss per share. Diluted loss 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(1,756
)
 
$
(6,122
)
 
$
(6,718
)
 
$
(70,006
)
Basic and diluted weighted average outstanding shares of
  common stock
109,342

 
104,860

 
108,376

 
103,819

Basic and diluted net loss per share:
$
(0.02
)
 
$
(0.06
)
 
$
(0.06
)
 
$
(0.67
)
For the three and nine months ended September 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Employee stock purchase plan
276

 
567

 
276

 
567

Stock options
3,002

 
54

 
1,509

 
91

Restricted stock units
3,145

 
1,015

 
2,808

 
713

 
6,423

 
1,636

 
4,593

 
1,371

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 nine months ended September 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 8,435 as of September 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 months ended September 30, 2017, we did not issue any shares under the ESPP. During the nine months ended September 30, 2017, we issued 432 shares under the ESPP. Total cash proceeds from the

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purchase of the shares under the ESPP was approximately $885. As of September 30, 2017, shares reserved for issuance to employees under this plan totaled 886, and we held employee contributions of $744 (included in other current liabilities) for future purchases under the ESPP.
Preferred Stock
Our board of directors has authorized the issuance of up to 7,500 shares of preferred stock at September 30, 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 September 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 nine months ended September 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
2,276


83


2,359

Amounts reclassified from accumulated other comprehensive
  loss





Net current period other comprehensive income
2,276


83


2,359

Balance, September 30, 2017
$
(8,634
)

$
(45
)

$
(8,679
)
15. Share-Based Compensation
The following table summarizes the components of share-based compensation expense included in our consolidated statement of operations:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Share-based compensation expense by type:
 
 
 
 
 
 
 
Stock options
$
917

 
$
812

 
$
2,776

 
$
2,755

Restricted stock units
2,075

 
1,999

 
6,213

 
6,467

ESPP
120

 
176

 
453

 
554

Total share-based compensation expense
$
3,112

 
$
2,987

 
$
9,442

 
$
9,776

Share-based compensation expense:
 
 
 
 
 
 
 
Cost of services
$
352

 
$
209

 
$
1,075

 
$
1,118

General and administrative expense
1,565

 
1,616

 
4,773

 
5,119

Sales and marketing expense
611

 
641

 
1,848

 
2,016

Research and development expense
584

 
521

 
1,746

 
1,523

Total share-based compensation expense
$
3,112

 
$
2,987

 
$
9,442

 
$
9,776

Unrecognized share-based compensation expense totaled approximately $16,288 at September 30, 2017, of which $5,049 related to stock options and $11,239 related to restricted stock units. We currently expect to recognize share-based compensation expense of $2,865 during the remainder of 2017, $8,392 in 2018 and the remainder thereafter based on scheduled vesting of the stock options and restricted stock units outstanding at September 30, 2017.



15

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16. Leases and Purchase Commitments
Operating Leases
We are committed to various non-cancellable operating leases for office space and office equipment which expire through 2022. Certain leases contain provisions for renewal options and rent escalations upon expiration of the initial lease terms. Approximate future minimum lease payments over the remaining lease periods as of September 30, 2017, are as follows:
Remainder of 2017
$
945

2018
3,564

2019
1,618

2020
546

2021
359

Thereafter
55

Total minimum payments
$
7,087

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 September 30, 2017:
Remainder of 2017
$
9,834

2018
23,799

2019
7,145

2020
442

2021

Thereafter

Total minimum payments
$
41,220

17. Concentrations
During the three months ended September 30, 2017, we had two customers, Amazon and Apple, who each represented 10% or more of our total revenue. For the nine months ended September 30, 2017, we had one customer, Amazon, who represented 10% or more of our total revenue. During the three and nine months ended September 30, 2016, we had no individual customer who represented 10% or more of our total revenue.
Revenue from customers located within the United States, our country of domicile, was $28,630 for the three months ended September 30, 2017, compared to $22,996 for the three months ended September 30, 2016. For the nine months ended September 30, 2017, revenue from customers located within the United States was $83,021, compared to $69,033 for the nine months ended September 30, 2016.
During the three months ended September 30, 2017, respectively, we had two countries, based on customer location, the United States, and the United Kingdom that accounted for 10% or more of our total revenues. For the nine months ended September 30, 2017, 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 revenue. During the three and nine months ended September 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 September 30, 2017 and 2016, was $188 and $130, respectively. For the nine months ended September 30, 2017 and 2016, income tax expense was $448 and $404, 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.

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We file income tax returns in jurisdictions with varying statutes of limitations. Tax years 2014 through 2016 remain subject to examination by federal tax authorities. Tax years 2013 through 2016 generally remain subject to examination by state tax authorities. As of September 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.
Revenue by geography is based on the location of the customer from which the revenue is earned. The following table sets forth our revenue by geographic area:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Americas
$
29,485

64.0
%
 
$
24,072

61.0
%
 
$
86,093

63.2
%
 
$
74,183

59.6
%
EMEA
9,280

20.1
%
 
6,912

17.5
%
 
26,543

19.5
%
 
23,300

18.7
%
Asia Pacific
7,304

15.9
%
 
8,489

21.5
%
 
23,537

17.3
%
 
26,973

21.7
%
Total revenue
$
46,069

100.0
%
 
$
39,473

100.0
%
 
$
136,173

100.0
%
 
$
124,456

100.0
%
The following table sets forth long-lived assets by geographic area in which the assets are located:
 
September 30,
 
December 31,
 
2017
 
2016
Americas
$
17,372

 
$
18,665

International
12,463

 
11,687

Total long-lived assets
$
29,835

 
$
30,352

20. Fair Value Measurements
As of September 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 September 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)
$
111

 
$
111

 
$

 
$

Certificate of deposit (1)
40

 

 
40

 

Commercial paper (1)
998

 

 
998

 

Corporate notes and bonds (1)
35,950

 

 
35,950

 

Total assets measured at fair value
$
37,099

 
$
111

 
$
36,988

 
$

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

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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

 
$

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

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Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read 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 79% of our total revenue during the three and nine months ended September 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. Changes in revenue can be driven by a small subset of large customers who have low contractually committed obligations.
In addition to these revenue-related trends, our profitability is impacted by trends in our costs of services and operating expenses. We continuously work with our vendors to 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 535 as of September 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 September 30, 2017, there remained $31,500 due to Akamai under the terms of the settlement and license agreement. Please see our discussion in Note 11 "Contingencies - Legal Matters" of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this quarterly report on Form 10-Q for more information on this and other lawsuits.
Based on current conditions, we expect full-year 2017 revenue to be between $182,000 and $185,000. We expect gross margin improvement for the full year of more than 450 basis points. We also expect full-year non-GAAP earnings per share to be between $0.06 and $0.08. We expect full-year Adjusted EBITDA to be between $26,000 and $29,000. We expect capital expenditures to be approximately $20,000 for the year.

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The following table summarizes our revenue, costs and expenses in thousands of dollars and as a percentage of total revenue for the three and nine months ended September 30, 2017 and 2016.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
46,069

 
100.0
 %
 
$
39,473

 
100.0
 %
 
$
136,173

 
100.0
 %
 
$
124,456

 
100.0
 %
Cost of revenue
23,793

 
51.6
 %
 
23,235

 
58.9
 %
 
71,352

 
52.4
 %
 
72,772

 
58.5
 %
Gross profit
22,276

 
48.4
 %
 
16,238

 
41.1
 %
 
64,821

 
47.6
 %
 
51,684

 
41.5
 %
Operating expenses
23,961

 
52.0
 %
 
21,983

 
55.7
 %
 
71,663

 
52.6
 %
 
66,915

 
53.8
 %
Provision for litigation

 
 %
 

 
 %
 

 
 %
 
54,000

 
43.4
 %
Operating loss
(1,685
)
 
(3.7
)%
 
(5,745
)
 
(14.6
)%
 
(6,842
)
 
(5.0
)%
 
(69,231
)
 
(55.6
)%
Total other income (expense)
117

 
0.3
 %
 
(247
)
 
(0.6
)%
 
572

 
0.4
 %
 
(371
)
 
(0.3
)%
Loss before income taxes
(1,568
)
 
(3.4
)%
 
(5,992
)
 
(15.2
)%
 
(6,270
)
 
(4.6
)%
 
(69,602
)
 
(55.9
)%
Income tax expense
188

 
0.4
 %
 
130

 
0.3
 %
 
448

 
0.3
 %
 
404

 
0.3
 %
Net loss
$
(1,756
)
 
(3.8
)%
 
$
(6,122
)
 
(15.5
)%
 
$
(6,718
)
 
(4.9
)%
 
$
(70,006
)
 
(56.2
)%
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 October 18, 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;

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although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will be replaced sometime in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
while share-based compensation is a component of operating expense, the impact on our financial statements compared to other companies can vary significantly due to such factors as the assumed life of the options and the assumed volatility of our common stock; and
other companies may calculate Non-GAAP net income (loss), EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.
We compensate for these limitations by relying primarily on our U.S. GAAP results and using Non-GAAP net income (loss), EBITDA, and Adjusted EBITDA only as supplemental support for management’s analysis of business performance. Non-GAAP net income (loss), EBITDA and Adjusted EBITDA are calculated as follows for the periods presented.
Reconciliation of Non-GAAP Financial Measures
In accordance with the requirements of Item 10(e) of Regulation S-K, we are presenting the most directly comparable U.S. GAAP financial measures and reconciling the unaudited Non-GAAP financial metrics to the comparable U.S. GAAP measures.
Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Income (Loss)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
Sept. 30,
 
June 30,
 
Sept. 30,
 
Sept. 30,
 
Sept. 30,
 
2017
 
2017
 
2016
 
2017
 
2016
U.S. GAAP net loss
$
(1,756
)
 
$
(1,625
)
 
$
(6,122
)
 
$
(6,718
)
 
$
(70,006
)
Provision for litigation

 

 

 

 
54,000

Share-based compensation
3,112

 
3,255

 
2,987

 
9,442

 
9,776

Litigation expenses
863

 
1,276

 
2,837

 
4,048

 
5,286

Amortization of intangible assets

 

 
2

 

 
14

Non-GAAP net income (loss)
$
2,219

 
$
2,906

 
$
(296
)
 
$
6,772

 
$
(930
)
Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
Sept. 30,
 
June 30,
 
Sept. 30,
 
Sept. 30,
 
Sept. 30,
 
2017
 
2017
 
2016
 
2017
 
2016
U.S. GAAP net loss
$
(1,756
)
 
$
(1,625
)
 
$
(6,122
)
 
$
(6,718
)
 
$
(70,006
)
Depreciation and amortization
5,109

 
5,128

 
5,014

 
15,383

 
15,420

Interest expense
18

 
10

 
406

 
42

 
865

Interest and other (income) expense
(135
)
 
(274
)
 
(159
)
 
(614
)
 
(494
)
Income tax expense
188

 
151

 
130

 
448

 
404

EBITDA
$
3,424

 
$
3,390

 
$
(731
)
 
$
8,541

 
$
(53,811
)
Provision for litigation

 

 

 

 
54,000

Share-based compensation
3,112

 
3,255

 
2,987

 
9,442

 
9,776

Litigation expenses
863

 
1,276

 
2,837

 
4,048

 
5,286

Adjusted EBITDA
$
7,399

 
$
7,921

 
$
5,093

 
$
22,031

 
$
15,251

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 nine months ended September 30, 2017, there have been no significant changes in our critical accounting policies and estimates.

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Results of Operations
Revenue
We derive revenue primarily from the sale of components of the Orchestrate Platform. We also generate revenue through the sale of professional services and other infrastructure services, such as transit and rack space services.
The following table reflects our revenue for the three and nine months ended September 30, 2017, compared to the three and nine months ended September 30, 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
 
$
 
%
 




$

%
 
2017
 
2016
 
Change
 
Change
 
2017

2016

Change

Change
Revenue
$
46,069

 
$
39,473

 
$
6,596

 
16.7
%
 
$
136,173

 
$
124,456

 
$
11,717

 
9.4
%
Our revenue increased during the three and nine months ended September 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. During the three months ended September 30, 2017, we experienced a small increase in average selling price versus the comparable 2016 period, due to customer and product mix.
Our active customers worldwide decreased to 753 as of September 30, 2017, compared to 875 as of September 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 September 30, 2017 and 2016, sales to our top 20 customers accounted for approximately 66% and 62%, respectively, of our total revenue. For the nine months ended September 30, 2017 and 2016, sales to our top 20 customers accounted for approximately 65% 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 months ended September 30, 2017 we had two customers, Amazon and Apple, who each accounted for 10% or more of our total revenue. During the nine months ended September 30, 2017 we had one customer, Amazon, who accounted for 10% or more of our total revenue. For the three and nine months ended September 30, 2016, we had no customer who represented 10% or more of our total revenue.
    Revenue by geography is based on the location of the customer from which the revenue is earned. The following table sets forth revenue by geographic area (in thousands and as a percentage of total revenue):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Americas
$
29,485

64.0
%
 
$
24,072

61.0
%
 
$
86,093

63.2
%
 
$
74,183

59.6
%
EMEA
9,280

20.1
%
 
6,912

17.5
%
 
26,543

19.5
%
 
23,300

18.7
%
Asia Pacific
7,304

15.9
%
 
8,489

21.5
%
 
23,537

17.3
%
 
26,973

21.7
%
Total revenue
$
46,069

100.0
%
 
$
39,473

100.0
%
 
$
136,173

100.0
%
 
$
124,456

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.

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Cost of revenue was composed of the following (in thousands and as a percentage of total revenue):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Bandwidth and co-location fees
$
13,166

 
28.6
%
 
$
13,811

 
35.0
%
 
$
39,606

 
29.1
%
 
$
42,506

 
34.2
%
Depreciation - network
4,506

 
9.8
%
 
4,401

 
11.1
%
 
13,594

 
10.0
%
 
13,558

 
10.9
%
Payroll and related employee costs
4,183

 
9.1
%
 
3,442

 
8.7
%
 
12,536

 
9.2
%
 
11,241

 
9.0
%
Share-based compensation
352

 
0.8
%
 
209

 
0.5
%
 
1,075

 
0.8
%
 
1,118

 
0.9
%
Other costs
1,586

 
3.4
%
 
1,372

 
3.5
%
 
4,541

 
3.3
%
 
4,349

 
3.5
%
Total cost of revenue
$
23,793

 
51.6
%
 
$
23,235

 
58.9
%
 
$
71,352

 
52.4
%
 
$
72,772

 
58.5
%
Our cost of revenue increased in aggregate dollars and decreased as a percentage of total revenue for the three months ended September 30, 2017, versus the comparable 2016 period. For the nine months ended September 30, 2017, our cost of revenue decreased in aggregate dollars and decreased as a percentage of total revenue versus the comparable 2016 period. The changes in cost of revenue were primarily a result of the following:
Bandwidth and co-location fees decreased during the quarter as a result of reduced peering and transit costs off-set by a small increase in co-location costs. For the nine months ended September 30, 2017, bandwidth and co-location fees decreased primarily due to decreased peering and co-location costs reflecting our continued co-location consolidation efforts and contract negotiations with our vendors. As a percentage of total revenue, our peering costs, 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.
We anticipate an improvement in gross margin of more than 450 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Payroll and related employee costs
$
3,312

 
7.2
%
 
$
1,513

 
3.8
%
 
$
9,427

 
6.9
%
 
$
5,731

 
4.6
%
Professional fees and outside services
788

 
1.7
%
 
907

 
2.3
%
 
2,463

 
1.8
%
 
2,546

 
2.0
%
Share-based compensation
1,565

 
3.4
%
 
1,616

 
4.1
%
 
4,773

 
3.5
%
 
5,119

 
4.1
%
Litigation expenses
863

 
1.9
%
 
2,837

 
7.2
%
 
4,048

 
3.0
%
 
5,286

 
4.2
%
Other costs
1,551

 
3.4
%
 
1,160

 
2.9
%
 
2,686

 
2.0
%
 
3,400

 
2.7
%
Total general and administrative
$
8,079

 
17.5
%
 
$
8,033

 
20.4
%
 
$
23,397

 
17.2
%
 
$
22,082

 
17.7
%
Our general and administrative expense increased slightly in aggregate dollars and decreased as a percentage of total revenue for the three months ended September 30, 2017, versus the comparable 2016 period. The slight increase was primarily driven by increased payroll and related employee costs, which was due to higher headcount, average salaries, and variable compensation, as well as an increase in other costs which was primarily due to increased fees and licenses and an increase in bad debt expense. These increases were off-set by a decrease in litigation expenses.
For the nine months ended September 30, 2017, our general and administrative expenses increased in aggregate dollars and decreased as a percentage of total revenue versus the comparable 2016 period. The increase in aggregate dollars was primarily due to increased payroll and related employee costs due to higher headcount, average salaries, and variable compensation. These increases were off-set by a decrease in litigation expenses related to our intellectual property lawsuits. Other costs decreased as a result of a state sales tax refund received in the second quarter of 2017.
Excluding litigation expenses, we expect our general and administrative expenses for 2017 to increase due to variable compensation as compared to 2016.

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Sales and Marketing
Sales and marketing expense was composed of the following (in thousands and as a percentage of total revenue):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Payroll and related employee costs
$
6,239

 
13.5
%
 
$
5,205

 
13.2
%
 
$
18,848

 
13.8
%
 
$
16,955

 
13.6
%
Share-based compensation
611

 
1.3
%
 
641

 
1.6
%
 
1,848

 
1.4
%
 
2,016

 
1.6
%
Marketing programs
498

 
1.1
%
 
330

 
0.8
%
 
1,519

 
1.1
%
 
1,053

 
0.8
%
Other costs
1,488

 
3.2
%
 
1,535

 
3.9
%
 
4,885

 
3.6
%
 
4,706

 
3.8
%
Total sales and marketing
$
8,836

 
19.2
%
 
$
7,711

 
19.5
%
 
$
27,100

 
19.9
%
 
$
24,730

 
19.9
%
Our sales and marketing expense increased in aggregate dollars and slightly decreased as a percentage of total revenue for the three months ended September 30, 2017, versus the comparable 2016 period. For the nine months ended September 30, 2017, our sales and marketing expense increased in aggregate dollars and remained consistent with the comparable 2016 period as a percentage of total revenue. 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Payroll and related employee costs
$
4,701

 
10.2
%
 
$
4,081

 
10.3
%
 
$
14,309

 
10.5
%
 
$
13,764

 
11.1
%
Share-based compensation
584

 
1.3
%
 
521

 
1.3
%
 
1,746

 
1.3
%
 
1,523

 
1.2
%
Other costs
1,158

 
2.5
%
 
1,024

 
2.6
%
 
3,322

 
2.4
%
 
2,954

 
2.4
%
Total research and development
$
6,443

 
14.0
%
 
$
5,626

 
14.3
%
 
$
19,377

 
14.2
%
 
$
18,241

 
14.7
%
Our research and development expense increased in aggregate dollars and decreased as a percentage of total revenue for the three and nine months ended September 30, 2017, respectively, versus the comparable 2016 periods. 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 $603, or 1.3% of revenue, for the three months ended September 30, 2017, versus $613, or 1.6% of revenue, for the comparable 2016 period. For the nine months ended September 30, 2017, depreciation and amortization expense was $1,789, or 1.3% of revenue versus $1,862, 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 $18 for the three months ended September 30, 2017, versus $406 for the comparable 2016 period. For the nine months ended September 30, 2017, interest expense was $42 versus $865 for the comparable 2016 period.

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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.
Interest Income
Interest income was $127 for the three months ended September 30, 2017, versus $8 for the comparable 2016 period. For the nine months ended September 30, 2017, interest income was $365 versus $22 for the comparable 2016 period. Interest income includes interest earned on invested cash balances and marketable securities.
Other Income (Expense)
Other income was $8 for the three months ended September 30, 2017, versus other income of $151 for the comparable 2016 period. For the nine months ended September 30, 2017, other income was $249 versus other income of $472 for the comparable 2016 period. For the three months ended September 30, 2017 and 2016, respectively, and the nine months ended September 30, 2017, other income consisted primarily of foreign currency transaction gains and losses and the gain on sale of fixed assets. For the nine months ended September 30, 2016, other income consisted primarily of foreign currency transaction gains and losses, the gain on sale of fixed assets, and the receipt of a state tax refund related to a previously divested business.
Income Tax Expense
Based on an estimated annual effective tax rate and discrete items, the estimated income tax expense for the three and nine months ended September 30, 2017, was $188 and $448, respectively, versus $130 and $404 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 September 30, 2017, our cash, cash equivalents and marketable securities classified as current totaled $57,692. Included in this amount is approximately $4,783 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 September 30, 2017, there remained $31,500 due to Akamai under the terms of the settlement and license agreement.
We believe that our existing cash, cash equivalents and marketable securities, and available borrowing capacity will be sufficient to meet our anticipated cash needs for at least the next 12 months. If the assumptions underlying our business plan regarding future revenue and expenses change or if unexpected opportunities or needs arise, we may seek to raise additional cash by selling equity or debt securities.
The major components of changes in cash flows for the nine months ended September 30, 2017 and 2016, are discussed in the following paragraphs.
Operating Activities
Net cash provided by operating activities was $8,383 for the nine months ended September 30, 2017, versus net cash provided by operating activities of $10,963 for the comparable 2016 period, a decrease of $2,580. Changes in operating assets and liabilities of ($11,031) during the nine months ended September 30, 2017, versus $1,498 in the comparable 2016 period were primarily due to:
accounts receivable increased $2,026 during the nine months ended September 30, 2017 as a result of timing of collections as compared to a $3,901 decrease in the comparable 2016 period;

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prepaid expenses and other current assets decreased $545 during the nine months ended September 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 $4,333 decrease in the comparable 2016 period;
accounts payable and other current liabilities increased $4,749 during the nine months ended September 30, 2017, versus a decrease of $670 for the comparable 2016 period due to timing of vendor payments and increased variable compensation accruals; and
provision for litigation decreased by $13,500 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 $8,362 for the nine months ended September 30, 2017, versus net cash provided by investing activities of $23,649 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 nine months ended September 30, 2016, we liquidated our investments in marketable securities.
We expect to have ongoing capital expenditure requirements as we continue to invest in and expand our content delivery network. During the nine months ended September 30, 2017, we made capital expenditures of $15,806, which represented approximately 12% of our total revenue. Our capital expenditures will increase 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 $1,371 for the nine months ended September 30, 2017, versus net cash used in financing activities of $5,087 for the comparable 2016 period. Net cash used in financing activities in the nine months ended September 30, 2017, primarily relates to payments of employee tax withholdings related to the net settlement of vested restricted stock units of $2,571, offset by cash received from the exercise of stock options and our employee stock purchase plan of $1,200.
Net cash used in financing activities in the nine months ended September 30, 2016, primarily relates to principal payments made on our capital lease obligations of $4,685 and payments of employee tax withholdings related to the net settlement of vested restricted stock units of $1,306, offset by cash received from the exercise of stock options and our employee stock purchase plan of $904.
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.
In October 2017, we entered into a Third Amendment to the Loan and Security Agreement (Third Amendment) to the Credit Agreement. Under the Third Amendment, we have increased the maximum principal commitment amount from $5,000 to $10,000. The interest rate on any borrowings will decrease from LIBOR plus a margin of 2.75% to LIBOR plus a margin of 2.50% or the Wall Street Journal prime rate. In addition, the unused line fee under the Third Amendment will decrease from 30 basis points to 20 basis points. We incurred a fee of $25 related to the Third Amendment.
As of September 30, 2017, and December 31, 2016, we had no outstanding borrowings, and we had availability under the Credit Agreement of approximately $5,000.

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Table of Contents

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.
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.
Under the Third Amendment, we are required to maintain a minimum liquidity of $10,000 at all times, measured quarterly, with a minimum of $5,000 of the $10,000 in cash at SVB.
For a more detailed discussion regarding our Credit Agreement, Modification and Third Amendment, 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 nine month periods ended September 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 September 30, 2017, over the next five years and thereafter:

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Payments Due by Period
 
 

 
Less than
 

 

 
More than
 
 
Total
 
1 year
 
1-3 years
 
3-5 years
 
5 years
Operating Leases
 

 

 

 

 

  Bandwidth leases
 
$
24,918

 
$
16,843

 
$
8,075

 
$

 
$

  Rack space leases
 
16,302

 
12,145

 
4,157

 

 

  Real estate leases
 
7,087

 
3,648

 
2,919

 
520

 

Total operating leases
 
48,307

 
32,636

 
15,151

 
520

 

Settlement agreement
 
31,500

 
18,000

 
13,500

 

 

Total commitments
 
$
79,807

 
$
50,636

 
$
28,651

 
$
520

 
$

Off Balance Sheet Arrangements
As of September 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
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 September 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 nine months ended September 30, 2017, would have been higher by approximately $1,963 and $1,398, 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.

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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 September 30, 2017 and 2016, sales to our top 20 customers accounted for appro