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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, 2018
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 every Interactive Data File required to be submitted 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 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
 
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, 2018: 113,202,864 shares.
 


Table of Contents

LIMELIGHT NETWORKS, INC.
FORM 10-Q
Quarterly Period Ended September 30, 2018
TABLE OF CONTENTS
 
 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS
 
 
Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017
 
Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017
 
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017
 
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017
 
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 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,
2018
 
December 31,
2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
28,678

 
$
20,912

Marketable securities
23,957

 
28,404

Accounts receivable, net
26,147

 
32,381

Income taxes receivable
154

 
98

Prepaid expenses and other current assets
17,859

 
5,397

Total current assets
96,795

 
87,192

Property and equipment, net
27,392

 
28,991

Marketable securities, less current portion
40

 
40

Deferred income taxes
1,590

 
1,506

Goodwill
76,683

 
77,054

Other assets
2,434

 
1,665

Total assets
$
204,934

 
$
196,448

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
8,976

 
$
4,439

Deferred revenue
853

 
1,187

Income taxes payable
111

 
452

Provision for litigation
13,500

 
18,000

Other current liabilities
13,804

 
18,507

Total current liabilities
37,244

 
42,585

Deferred income taxes
174

 
144

Deferred revenue, less current portion
68

 
16

Provision for litigation, less current portion

 
9,000

Other long-term liabilities
385

 
558

Total liabilities
37,871

 
52,303

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; 113,198 and 110,824 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
113

 
111

Additional paid-in capital
509,846

 
502,312

Accumulated other comprehensive loss
(9,477
)
 
(8,328
)
Accumulated deficit
(333,419
)
 
(349,950
)
Total stockholders’ equity
167,063

 
144,145

Total liabilities and stockholders’ equity
$
204,934

 
$
196,448

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,
 
2018
 
2017
 
2018
 
2017
Revenue
$
49,315

 
$
46,069

 
$
151,678

 
$
136,173

Cost of revenue:
 
 

 
 
 
 
Cost of services
21,519

 
19,287

 
63,779

 
57,758

Depreciation — network
3,761

 
4,506

 
12,337

 
13,594

Total cost of revenue
25,280

 
23,793

 
76,116

 
71,352

Gross profit
24,035

 
22,276

 
75,562

 
64,821

Operating expenses:
 
 

 
 
 
 
General and administrative
7,851

 
8,079

 
24,890

 
23,397

Sales and marketing
9,766

 
8,836

 
30,068

 
27,100

Research and development
5,882

 
6,443

 
18,294

 
19,377

Depreciation and amortization
616

 
603

 
1,837

 
1,789

Total operating expenses
24,115

 
23,961

 
75,089

 
71,663

Operating (loss) income
(80
)
 
(1,685
)
 
473

 
(6,842
)
Other income (expense):
 
 

 
 
 
 
Interest expense
(10
)
 
(18
)
 
(76
)
 
(42
)
Interest income
177

 
127

 
440

 
365

Settlement and patent license income

 

 
14,900

 

Other, net
(246
)
 
8

 
(355
)
 
249

Total other (expense) income
(79
)
 
117

 
14,909

 
572

(Loss) income before income taxes
(159
)
 
(1,568
)
 
15,382

 
(6,270
)
Income tax expense
113

 
188

 
347

 
448

Net (loss) income
(272
)
 
(1,756
)
 
15,035

 
(6,718
)
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$

 
$
(0.02
)
 
$
0.13

 
$
(0.06
)
Diluted
$

 
$
(0.02
)
 
$
0.13

 
$
(0.06
)
 
 
 
 
 
 
 
 
Weighted average shares used in per share calculation:
 
 
 
 
 
 
 
Basic
112,760

 
109,342

 
111,626

 
108,376

Diluted
112,760

 
109,342

 
120,025

 
108,376


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 Income (Loss)
(In thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net (loss) income
$
(272
)
 
$
(1,756
)
 
$
15,035

 
$
(6,718
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain on investments
18

 
26

 
38

 
83

Foreign exchange translation (loss) gain
(171
)
 
340

 
(1,187
)
 
2,276

Other comprehensive income (loss)
(153
)
 
366

 
(1,149
)
 
2,359

Comprehensive income (loss)
$
(425
)
 
$
(1,390
)
 
$
13,886

 
$
(4,359
)
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,
 
2018
 
2017
Operating activities
 
 
 
Net income (loss)
$
15,035

 
$
(6,718
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,174

 
15,383

Share-based compensation
10,345

 
9,442

Settlement and patent license income
(14,900
)
 

Foreign currency remeasurement (gain) loss
(97
)
 
658

Deferred income taxes
(86
)
 
(217
)
Gain on sale of property and equipment
(131
)
 
(94
)
Accounts receivable charges
453

 
732

Amortization of premium on marketable securities
82

 
228

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
5,781

 
(2,026
)
Prepaid expenses and other current assets
(2,530
)
 
545

Income taxes receivable
(56
)
 
34

Other assets
(759
)
 
21

Accounts payable and other current liabilities
(2,526
)
 
4,749

Deferred revenue
85

 
(450
)
Income taxes payable
(350
)
 
180

Payments related to litigation, net
(7,540
)
 
(13,500
)
Other long term liabilities
(173
)
 
(584
)
Net cash provided by operating activities
16,807

 
8,383

Investing activities
 
 
 
Purchases of marketable securities
(15,962
)
 
(10,383
)
Sale and maturities of marketable securities
20,365

 
17,744

Purchases of property and equipment
(10,495
)
 
(15,806
)
Proceeds from sale of property and equipment
131

 
83

Net cash used in investing activities
(5,961
)
 
(8,362
)
Financing activities
 
 
 
Payments of employee tax withholdings related to restricted stock vesting
(3,808
)
 
(2,571
)
Cash paid for purchase of common stock
(3,800
)
 

Proceeds from employee stock plans
4,799

 
1,200

Net cash used in financing activities
(2,809
)
 
(1,371
)
Effect of exchange rate changes on cash and cash equivalents
(271
)
 
360

Net increase (decrease) in cash and cash equivalents
7,766

 
(990
)
Cash and cash equivalents, beginning of period
20,912

 
21,734

Cash and cash equivalents, end of period
$
28,678

 
$
20,744

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
76

 
$
11

Cash paid during the period for income taxes, net of refunds
$
843

 
$
400

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, 2018
1. Nature of Business
Limelight Networks Inc., a leading provider of digital content delivery, video, cloud security, and edge computing services, empowers customers to provide exceptional digital experiences. Limelight’s edge services platform includes a unique combination of global private infrastructure, intelligent software, and expert support services that enable current and future workflows.
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 SEC. 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. 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, 2017. All information is presented in thousands, except per share amounts and where specifically noted.
The consolidated financial statements include accounts of Limelight and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. In addition, certain other reclassifications have been made to prior year amounts to conform to the current year presentation.
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results and outcomes may differ from those estimates. The results of operations presented in this quarterly report on Form 10-Q are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, or for any future periods.
Recent Accounting Standards
Adopted Accounting Standards            
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.
On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
We recorded a net decrease to opening accumulated deficit of $1,496 as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to the costs to obtain a customer contract ($1,129), specifically commissions and upfront incentive payments, and from the recognition of revenue from customers with contracts that contain minimum commitments billed ratably over the contract term ($367).
The costs associated with obtaining a customer contract were previously expensed in the period they were incurred. Under Topic 606, these payments have been deferred on our consolidated balance sheets and amortized over the expected life of the customer contract. The impact to sales and marketing expense for the three and nine months ended September 30, 2018 was not material as a result of applying Topic 606. As of September 30, 2018, prepaid commissions were $1,310, with the short

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term portion of $767 included in prepaid expenses and other current assets, and the long term portion of $543 included in other assets.
For customers with contracts that contain minimum commitments billed ratably over the contract term, previously, we either accrued or deferred revenue based on actual usage. Under Topic 606, we are required to evaluate the impact of estimating variable consideration related to these types of contracts. We use the expected value method to estimate the total revenue of the contract, constrained by the probability that there would not be a significant revenue reversal in a future period, and recognize a pro-rata share of the total revenue of the contract each month. We continue to evaluate the expected value of revenue over the term of the contract and adjust revenue recognition as appropriate. The impact to revenues for the three and nine months ended September 30, 2018 was an increase of $450 and $145, respectively, as a result of applying Topic 606.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Our customers generally execute contracts with terms of one year or longer, which are referred to as recurring revenue contracts or long-term contracts. These contracts generally allow the customer access to our network and commit the customer to a minimum monthly level of usage with additional charges applicable for actual usage above the monthly minimum commitment, or are entirely usage based. We define usage as customer data sent or received using our content delivery service, or content that is hosted or cached by us at the request or direction of our customers. For contracts that contain minimum monthly commitments, we recognize revenue equal to the greater of the minimum monthly committed amount or actual usage, if actual usage exceeds the monthly committed amount, using the right to invoice practical expedient allowable under Topic 606.
For contracts that contain minimum commitments over the contractual term, we estimate an amount of variable consideration by using either the expected value method or the most likely amount method. We include estimates of variable consideration in revenue only when we have a high degree of confidence that revenue will not be reversed in a subsequent reporting period. We believe that the expected value method is the most appropriate estimate of the amount of variable consideration. These customers have entered into contracts with contract terms generally from one to four years. As of September 30, 2018, we have approximately $6,600 of remaining unsatisfied performance obligations. We recognized revenue of approximately $1,900 and $3,900 during the three and nine months ended September 30, 2018, respectively, related to these types of contracts with our customers. We expect to recognize approximately 25% of the remaining unsatisfied performance obligations in 2018, approximately 55% in 2019 and the remainder in 2020.
We may charge the customer an installation fee when services are first activated. We do not charge installation fees for contract renewals. Installation fees are not distinct within the context of the overall contractual commitment with the customer to perform our content delivery service and are therefore recognized initially as deferred revenue and recognized as revenue ratably over the estimated life of the customer arrangement.
We also derive revenue from services and events sold as discrete, non-recurring events or based solely on usage. For these services, we recognize revenue when control of promised goods or services is transferred to customers at an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods or services.
At the inception of a customer contract for service, we make an assessment as to that customer’s ability to pay for the services provided. If we subsequently determine that collection from the customer is not probable, we record an allowance for doubtful accounts and bad debt expense or deferred revenue for that customer’s unpaid invoices and cease recognizing revenue for continued services provided until it is probable that revenue will not be reversed in a subsequent reporting period. Our standard payment terms vary by the type and location of our customer.
Arrangements with Multiple Performance Obligations
Certain of our revenue arrangements include multiple promises to our customers. Revenue arrangements with multiple promises are accounted for as separate performance obligations if each promise is distinct. Such arrangements may include a combination of some or all of the following: content delivery services, video content management services, performance services for website and web application acceleration and security, professional services, cloud storage, edge computing services, and sale of equipment. Consideration is allocated to the performance obligations using the relative standalone selling price method. Generally, arrangements with performance obligations are provided over the same contract period, and therefore, revenue is recognized over the same period.


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Deferred Revenue
Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of the unearned portion of monthly billed service fees and prepayments made by customers for services to be rendered in future periods.
Adopted Accounting Standards - continued
In August 2016, the FASB issued ASU No. 2016-15, which amends ASC 230, to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The FASB issued ASU 2016-15 with the intent of reducing diversity in practice with respect to eight types of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We have adopted this guidance effective January 1, 2018. The adoption of this new guidance did not have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award's fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. We have adopted this guidance effective January 1, 2018. The adoption of this new guidance did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements             
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. We are utilizing a comprehensive approach to assess the impact of the guidance on our lease portfolio by reviewing our current accounting policies and practices to identify potential differences that would result from applying the new requirements. We continue to make significant progress on the potential impact on our accounting policies, internal control processes including system readiness and the related disclosures that will be required under the new guidance. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted and should be applied using a modified retrospective approach. We do not plan to early adopt this guidance. We continue to review additional leases to assess the impact under the new guidance, and expect it will result in an increase to total assets and liabilities on our consolidated balance sheet. We expect to utilize the short-term lease recognition and measurement practical expedient, which will lower the overall impact of this guidance on our financial statements. We expect to make an accounting policy election, where leases that are 12 months or less and do not include an option to purchase the underlying asset, will be treated similar to current operating lease accounting. 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 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 June 2018, the FASB issued ASU 2018-07, which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Some of the areas for simplification apply only to nonpublic entities. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this updated guidance are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. We do not plan to early adopt this ASU. We are currently evaluating the

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potential impacts of this updated guidance, and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, which removes, modifies and adds to the disclosure requirements on fair value measurements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. This guidance will become effective for us in fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted upon issuance of this updated guidance. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this updated guidance and delay adoption of the additional disclosures until their effective date. 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 August 2018, the FASB issued ASU 2018-15to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. This guidance will become effective for us in fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. We are currently evaluating the impact that this guidance will have upon our financial position and results of operations, if any.
3. Investments in Marketable Securities
The following is a summary of marketable securities (designated as available-for-sale) at September 30, 2018:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Certificate of deposit
$
40

 
$

 
$

 
$
40

Corporate notes and bonds
23,980

 

 
23

 
23,957

Total marketable securities
$
24,020

 
$

 
$
23

 
$
23,997

The amortized cost and estimated fair value of marketable securities at September 30, 2018, 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
$
23,980

 
$

 
$
23

 
$
23,957

Due after one year and through five years
40

 

 

 
40

 
$
24,020

 
$

 
$
23

 
$
23,997

The following is a summary of marketable securities (designated as available-for-sale) at December 31, 2017:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Certificate of deposit
$
40

 
$

 
$

 
$
40

Corporate notes and bonds
28,472

 

 
68

 
28,404

Total marketable securities
$
28,512

 
$

 
$
68

 
$
28,444

The amortized cost and estimated fair value of marketable securities at December 31, 2017, by maturity, are shown below:

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Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities
 
 
 
 
 
 
 
Due in one year or less
$
23,924

 
$

 
$
62

 
$
23,862

Due after one year and through five years
4,588

 

 
6

 
4,582

 
$
28,512

 
$

 
$
68

 
$
28,444

4. Accounts Receivable, net
Accounts receivable, net include:
 
September 30,
 
December 31,
 
2018
 
2017
Accounts receivable
$
27,014

 
$
33,519

Less: credit allowance
(190
)
 
(240
)
Less: allowance for doubtful accounts
(677
)
 
(898
)
Total accounts receivable, net
$
26,147

 
$
32,381

5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include:
 
September 30,
 
December 31,
 
2018
 
2017
Settlement and patent license receivable
$
8,940

 
$

Prepaid bandwidth and backbone
1,415

 
1,487

VAT receivable
1,847

 
1,454

Prepaid expenses and insurance
2,056

 
1,870

Vendor deposits and other
3,601

 
586

Total prepaid expenses and other current assets
$
17,859

 
$
5,397

6. Property and Equipment, net
Property and equipment, net include:
 
September 30,
 
December 31,
 
2018
 
2017
Network equipment
$
104,550

 
$
107,916

Computer equipment and software
9,112

 
9,801

Furniture and fixtures
1,316

 
2,432

Leasehold improvements
4,266

 
3,969

Other equipment
156

 
183

Total property and equipment
119,400

 
124,301

Less: accumulated depreciation
(92,008
)
 
(95,310
)
Total property and equipment, net
$
27,392

 
$
28,991

Depreciation expense related to property and equipment classified in operating expense was $616 and $603 for the three months ended September 30, 2018 and 2017, respectively and was $1,837 and $1,789 for the nine months ended September 30, 2018 and 2017, 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

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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, 2018. Foreign currency translation adjustments increased the carrying amount of goodwill by $35 for the three months ended September 30, 2018. For the nine months ended September 30, 2018, foreign currency translation adjustments decreased the carrying value of goodwill by $371.
8. Other Current Liabilities
Other current liabilities include:
 
September 30,
 
December 31,
 
2018
 
2017
Accrued compensation and benefits
$
7,317

 
$
12,181

Accrued cost of revenue
2,583

 
3,170

Deferred rent
213

 
434

Accrued legal fees
28

 
383

Other accrued expenses
3,663

 
2,339

Total other current liabilities
$
13,804

 
$
18,507

9. Line of Credit
In February 2018, we entered into a Fourth Amendment (Fourth Amendment) to the Loan and Security Agreement (the Credit Agreement) with Silicon Valley Bank (SVB) originally entered into in November 2015. Under the Fourth Amendment, we increased the maximum principal commitment amount from $10,000 to $20,000. Our borrowing capacity is the lesser of the commitment amount or 80% of eligible accounts receivable. The Fourth Amendment 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, 2020.
As of September 30, 2018, we had no outstanding borrowings, and we had availability under the Credit Agreement of approximately $18,300. We had no outstanding borrowings at December 31, 2017, and we had availability under the Credit Agreement of approximately $10,000.
As of September 30, 2018, borrowings under the Credit Agreement bear interest at the current prime rate minus 0.25%. In the event of default, obligations shall bear interest at a rate per annum that is 3% above the then applicable rate. We incurred an amendment fee of $50 upon entering into the Fourth Amendment. The amendment fee and other commitment fees are included in interest expense. During the three months ended September 30, 2018 and 2017, there was no interest expense, and fees expense and amortization was $10 and $18, respectively. For the nine months ended September 30, 2018 and 2017, there was no interest expense, and fees expense and related amortization was $76 and $42, 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.
Under the Fourth 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. In addition, we are required to maintain an Adjusted Quick Ratio of at least 1.0 to 1.0. 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, 2018, we were in compliance with all covenants under the Credit Agreement.
10. 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 August 2016, we entered into a settlement and license

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agreement with Akamai with respect to U.S. Patent No. 6,108,703 (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 recorded a charge in the quarter ended June 30, 2016 for the full, undiscounted amount of $54,000. As of September 30, 2018, there remained $13,500 due to Akamai under the terms of the settlement and license agreement.
Other Akamai 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.
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, and we later filed our answer to the complaint, denying each of the allegations of infringement. The two cases were ultimately consolidated into a single action by the court.
On April 9, 2018, we entered into a definitive settlement and patent license agreement where the parties agreed to (i) license certain patents to the other party, (ii) a covenant not to sue for three years for certain patents related to the licensed patents, and (iii) settle all outstanding legal disputes between the parties. The terms of the agreement also require Akamai to pay to Limelight a total of $14,900 over five equal quarterly installments. The second quarterly payment of $2,980 was received in July 2018.
We include litigation expenses in general and administrative expenses as incurred, as reported in the consolidated statement of operations.
Other Matters
We are subject to various other legal proceedings and claims, either asserted or unasserted, arising in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe the outcome of any of these matters will have a material adverse effect on our business, financial position, results of operations, or cash flows. Litigation relating to the content delivery services industry is not uncommon, and we are, and from time to time have been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future.
Taxes
We are subject to indirect taxation in various states and foreign jurisdictions. Laws and regulations that apply to communications and commerce conducted over the Internet are becoming more prevalent, both in the United States and internationally, and may impose additional burdens on us conducting business online or providing Internet-related services. Increased regulation could negatively affect our business directly, as well as the businesses of our customers, which could reduce their demand for our services. For example, tax authorities in various states and abroad may impose taxes on the Internet-related revenue we generate based on regulations currently being applied to similar but not directly comparable industries.
There are many transactions and calculations where the ultimate tax determination is uncertain. In addition, domestic and international taxation laws are subject to change. In the future, we may come under audit, which could result in changes to our tax estimates. We believe we maintain adequate tax reserves, that are not material in amount, to offset potential liabilities that may arise upon audit. Although we believe our tax estimates and associated reserves are reasonable, the final determination of tax audits and any related litigation could be materially different than the amounts established for tax contingencies. To the extent these estimates ultimately prove to be inaccurate, the associated reserves would be adjusted, resulting in the recording of a benefit or expense in the period in which a change in estimate or a final determination is made.

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11. Net Income (Loss) per Share
We calculate basic and diluted income (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 income (loss) per share. Diluted income (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 income (loss) per share for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net (loss) income
$
(272
)
 
$
(1,756
)
 
$
15,035

 
$
(6,718
)
Basic weighted average outstanding shares of common stock
112,760

 
109,342

 
111,626

 
108,376

Basic weighted average outstanding shares of common stock
112,760

 
109,342

 
111,626

 
108,376

Dilutive effect of stock options, restricted stock units, and other equity incentive plans

 

 
8,399

 

Diluted weighted average outstanding shares of common stock
112,760

 
109,342

 
120,025

 
108,376

Basic net income (loss) per share
$

 
$
(0.02
)
 
$
0.13

 
$
(0.06
)
Diluted net income (loss) per share:
$

 
$
(0.02
)
 
$
0.13

 
$
(0.06
)
For the three and nine months ended September 30, 2018 and 2017, respectively, 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,
 
2018
 
2017
 
2018
 
2017
Employee stock purchase plan
214

 
276

 

 
276

Stock options
5,660

 
3,002

 
2,941

 
1,509

Restricted stock units
2,101

 
3,145

 
21

 
2,808

 
7,975

 
6,423

 
2,962

 
4,593

12. 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 share repurchase program replaced the $9,500 remaining from the previously announced $15,000 share repurchase program. During the three months ended September 30, 2018, we did not repurchase any shares under the repurchase program. During the nine months ended September 30, 2018, we purchased and canceled 1,000 shares for $3,800, including commissions and fees. During the three and nine months ended September 30, 2017, we did not repurchase any shares under the repurchase programs. As of September 30, 2018, there remained $21,200 under this share repurchase program.
Amended and Restated Equity Incentive Plan
We established the 2007 Equity Incentive Plan, or the 2007 Plan, which allows for the grant of equity, including stock options and restricted stock unit awards. In June 2016, our stockholders approved the Amended and Restated Equity Incentive Plan, or the Restated 2007 Plan, which amended and restated the 2007 Plan.  Approval of the Restated 2007 Plan replaced the terms and conditions of the 2007 Plan with the terms and conditions of the Restated 2007 Plan, and extended the term of the plan to April 2026. There was no increase in the aggregate amount of shares available for issuance. The total number of shares authorized for issuance under the Restated 2007 Plan as of September 30, 2018 was approximately 10,706.

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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, 2018, we did not issue any shares under the ESPP. During the nine months ended September 30, 2018, we issued 250 shares under the ESPP. Total cash proceeds from the purchase of the shares under the ESPP was approximately $1,110. As of September 30, 2018, shares reserved for issuance to employees under this plan totaled 380, and we held employee contributions of $911 (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, 2018. 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, 2018, the board of directors had not adopted any resolutions for the issuance of preferred stock.
13. Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2018, was as follows:



Unrealized





Gains (Losses) on



Foreign

Available for



Currency

Sale Securities

Total
Balance, December 31, 2017
$
(8,259
)

$
(69
)

$
(8,328
)
  Other comprehensive (loss) income before reclassifications
(1,187
)

38


(1,149
)
Amounts reclassified from accumulated other comprehensive
  loss





Net current period other comprehensive (loss) income
(1,187
)

38


(1,149
)
Balance, September 30, 2018
$
(9,446
)

$
(31
)

$
(9,477
)
14. 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,
 
2018
 
2017
 
2018
 
2017
Share-based compensation expense by type:
 
 
 
 
 
 
 
Stock options
$
1,044

 
$
917

 
$
3,151

 
$
2,776

Restricted stock units
2,177

 
2,075

 
6,524

 
6,213

ESPP
200

 
120

 
670

 
453

Total share-based compensation expense
$
3,421

 
$
3,112

 
$
10,345

 
$
9,442

Share-based compensation expense:
 
 
 
 
 
 
 
Cost of services
$
352

 
$
352

 
$
1,059

 
$
1,075

General and administrative expense
1,887

 
1,565

 
5,666

 
4,773

Sales and marketing expense
638

 
611

 
1,874

 
1,848

Research and development expense
544

 
584

 
1,746

 
1,746

Total share-based compensation expense
$
3,421

 
$
3,112

 
$
10,345

 
$
9,442

Unrecognized share-based compensation expense totaled approximately $17,172 at September 30, 2018, of which $5,443 related to stock options and $11,729 related to restricted stock units. We currently expect to recognize share-based

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compensation expense of $3,059 during the remainder of 2018, $9,121 in 2019 and the remainder thereafter based on scheduled vesting of the stock options and restricted stock units outstanding at September 30, 2018.
15. Related Party Transactions
In July 2006, an aggregate of 39,869,960 shares of Series B Preferred Stock was issued at a purchase price of $3.26
per share to certain accredited investors in a private placement transaction. As a result of this transaction, entities affiliated with
Goldman, Sachs & Co., one of the lead underwriters of our initial public offering (IPO), became holders of more than 10% of
our common stock. On June 14, 2007, upon the closing of our IPO, all outstanding shares of our Series B Preferred Stock automatically converted into shares of common stock on a 1-for-1 share basis. Between November 2017 and March 2018, investment partnerships affiliated with Goldman Sachs & Co. LLC and Goldman Sachs Group, Inc. sold 30,272,493 shares that they had acquired upon the conversation of their Series B Preferred Stock at the time of the Company’s IPO in June 2007. As of September 30, 2018, Goldman, Sachs & Co. owned less than 1% of our outstanding common stock. We had no other material related party transactions during the three and nine months ended September 30, 2018 and 2017.
16. Leases and Purchase Commitments
Operating Leases
We are committed to various non-cancellable operating leases for office space and office equipment which expire through 2022. Certain leases contain provisions for renewal options and rent escalations upon expiration of the initial lease terms. Approximate future minimum lease payments over the remaining lease periods as of September 30, 2018, are as follows:
Remainder of 2018
$
740

2019
1,705

2020
781

2021
466

2022
55

Thereafter

Total minimum payments
$
3,747

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 for future periods as of September 30, 2018:
Remainder of 2018
$
10,358

2019
18,597

2020
3,312

2021
795

2022
244

Thereafter

Total minimum payments
$
33,306

17. Concentrations
During the three months ended September 30, 2018, we had one customer, Amazon, who represented 10% or more of our total revenue. 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. During the nine months ended September 30, 2018 and 2017, respectively, we had one customer, Amazon, who represented 10% or more of our total revenue.
Revenue from customers located within the United States, our country of domicile, was $27,823 for the three months ended September 30, 2018, compared to $28,630 for the three months ended September 30, 2017. For the nine months ended September 30, 2018, revenue from customers located within the United States was $88,443, compared to $83,021 for the nine months ended September 30, 2017.
During the three months ended September 30, 2018, based on customer location, we had three countries, the United

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States, the United Kingdom, and Japan, that accounted for 10% or more of our total revenue. For the three months ended September 30, 2017, based on customer location, we had two countries, the United States, and the United Kingdom, that accounted for 10% or more of our total revenue. During the nine months ended September 30, 2018, we had two countries, the United States and the United Kingdom, that accounted for 10% or more of our total revenue based on customer location. For the nine months ended September 30, 2017, we had three countries, the United States, Japan, and the United Kingdom, that accounted for 10% or more of our total revenue based on customer location.
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, 2018 and 2017, was $113 and $188, respectively. For the nine months ended September 30, 2018 and 2017, income tax expense was $347 and $448, respectively. Income tax expense was different than the statutory income tax rate primarily due to us providing for a valuation allowance on deferred tax assets in certain jurisdictions, and the recording of state and foreign tax expense for the three and nine month periods.
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, 2018, we are not under any federal or state examination for income taxes.
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) significantly revised the U.S. corporate income tax law, by among other things, reducing the corporate income tax rate to 21% for tax years beginning in 2018, implementing a modified territorial system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries and creating new taxes on certain foreign sourced earnings.
Also on December 22, 2017, The SEC staff issued Staff Accounting Bulletin (SAB) 118 to provide guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Act in the period of enactment. SAB 118 provides for a measurement period of up to one year from the date of enactment. During the measurement period, companies need to reflect adjustments to any provisional amounts if it obtains, prepares or analyzes additional information about facts and circumstances that existed as of the enactment date that, if known, would have affected the income tax effects initially reported as provisional amounts.
At September 30, 2018 we have not yet completed our analysis of the Tax Act; however, in certain circumstances, as described below, we have made a reasonable estimate of the effects of the Tax Act.
Provisional Amounts
Our deferred tax balances for the year ending December 31, 2017 reflected an estimated $41 tax benefit related to the re-measurement of a deferred tax liability on a long-lived asset. The remaining impact from the re-measurement of our net U.S. deferred tax asset at the lower 21% rate was offset by the valuation allowance.
Our deferred tax balances for the year ending December 31, 2017 reflected the estimated impact from the one-time transition tax that we previously deferred from U.S. income taxes. The transition tax that we calculated resulted in an immaterial amount of additional federal taxable income. The additional taxable income from the transition tax was offset by net operating losses (NOLs) and did not result in cash taxes payable.
There were no changes to the provisional amounts recorded as of December 31, 2017. We will consider the revaluation of our deferred balances and the one-time transition tax amount as provisional amounts until we finalize our analysis.
The tax provision incorporates assumptions made based upon the Company’s current interpretation of the Tax Act, and may change as we receive additional clarification and implementation guidance and as the interpretation of the Tax Act evolves over time. The Tax Act contains several base broadening provisions that became effective on January 1, 2018 that we do not expect to have a material impact on future earnings due to our NOL and valuation allowance position. Also effective for 2018 is a new Global Intangible Low-Taxed Income inclusion (GILTI). There was no impact to income tax expense related to the GILTI as a result of our NOL and valuation allowance position. We do not expect the GILTI to have a material impact on future earnings due to our NOL and valuation allowance position.

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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,
 
2018
 
2017
 
2018
 
2017
Americas
$
28,700

58
%
 
$
29,485

64
%
 
$
92,317

61
%
 
$
86,093

63
%
EMEA
9,656

20
%
 
9,280

20
%
 
31,156

20
%
 
26,543

20
%
Asia Pacific
10,959

22
%
 
7,304

16
%
 
28,205

19
%
 
23,537

17
%
Total revenue
$
49,315

100
%
 
$
46,069

100
%
 
$
151,678

100
%
 
$
136,173

100
%
The following table sets forth the individual countries and their respective revenue for those countries whose revenue exceeded 10% of our total revenue:
 
Three Months Ended September 30,
Nine Months Ended September 30,
Country / Region
2018
 
2017
2018
 
2017
United States / Americas
27,823

 
28,630

88,443

 
83,021

United Kingdom / EMEA
6,590

 
5,629

21,896

 
15,207

Japan / Asia Pacific
5,610

 
4,379

14,841

 
14,196

The following table sets forth long-lived assets by geographic area in which the assets are located:
 
September 30,
 
December 31,
 
2018
 
2017
Americas
$
19,639

 
$
17,119

International
7,753

 
11,872

Total long-lived assets
$
27,392

 
$
28,991

20. Fair Value Measurements
As of September 30, 2018, and December 31, 2017, 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, 2018:
 
 
 
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)
$
1,763

 
$
1,763

 
$

 
$

Certificate of deposit (1)
40

 

 
40

 

Corporate notes and bonds (1)
23,957

 

 
23,957

 

Total assets measured at fair value
$
25,760

 
$
1,763

 
$
23,997

 
$

  
____________
(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, 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)
$
6,789

 
$
6,789

 
$

 
$

Certificate of deposit (1)
40

 

 
40

 

Corporate notes and bonds (1)
28,404

 

 
28,404

 

Total assets measured at fair value
$
35,233

 
$
6,789

 
$
28,444

 
$

____________
(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, 2017, included in Part II of our annual report on Form 10-K, as amended filed with the SEC, on February 8, 2018.
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 are a leading provider of digital content delivery, video, cloud security, and edge computing services, empowering customers to provide exceptional digital experiences. Our edge services platform includes a unique combination of global private infrastructure, intelligent software, and expert support services that enable current and future workflows. Our mission is to securely manage and globally deliver digital content, building customer satisfaction through exceptional reliability and performance.
Our delivery services represented approximately 81% of our total revenue during the three and nine months ended September 30, 2018. 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 networks. 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 migration of applications and data to the cloud, continued growth rates of mobile device usage and increased consumption of rich media content and larger file sizes, are all important trends that will continue to outpace declining average selling prices in the industry.
During the three months ended September 30, 2018, we had one customer, Amazon, who represented 10% or more of our total revenue. 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. During the nine months ended September 30, 2018 and 2017, respectively, we had one customer, Amazon, who represented 10% or more of our total revenue.
In addition to these revenue-related trends, our profitability is impacted by trends in our costs of services and operating expenses. We continuously work with our vendors to optimize our data center footprint. We continuously renegotiate our infrastructure contracts in order to scale our operations based on traffic levels and lower bandwidth costs per unit. Our operating expenses are largely driven by payroll and related employee costs. Our headcount increased from 533 at December 31, 2017, to 551 as of September 30, 2018.
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, 2018, there remained $13,500 due to Akamai under the terms of the settlement and license agreement.
On April 9, 2018, we entered into a definitive settlement and patent license agreement with Akamai in a separate matter where the parties agreed to (i) license certain patents to the other party, (ii) a covenant not to sue for three years for certain patents related to the licensed patents, and (iii) settle all outstanding legal disputes between the parties. The terms of the agreement also require Akamai to pay to Limelight a total of $14,900, over five equal quarterly installments. The second quarterly payment of $2,980 was received in July 2018. As of September 30, 2018, there remained $8,940 due from Akamai.
Please see our discussion in Note 10 "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 2018 revenue to be between $200,000 and $203,000. We expect more than a 150 basis point improvement in gross margin for the full year. We expect full-year GAAP earnings per share to be

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between $0.12 and $0.14, and we expect full-year non-GAAP earnings per share to be between $0.14 and $0.17, and full-year Adjusted EBITDA to be between $35,000 and $37,000. We expect capital expenditures to be below $18,000 for the full year.
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, 2018 and 2017.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
$
49,315

 
100.0
 %
 
$
46,069

 
100.0
 %
 
$
151,678

 
100.0
%
 
$
136,173

 
100.0
 %
Cost of revenue
25,280

 
51.3
 %
 
23,793

 
51.6
 %
 
76,116

 
50.2
%
 
71,352

 
52.4
 %
Gross profit
24,035

 
48.7
 %
 
22,276

 
48.4
 %
 
75,562

 
49.8
%
 
64,821

 
47.6
 %
Operating expenses
24,115

 
48.9
 %
 
23,961

 
52.0
 %
 
75,089

 
49.5
%
 
71,663

 
52.6
 %
Operating income (loss)
(80
)
 
(0.2
)%
 
(1,685
)
 
(3.7
)%
 
473

 
0.3
%
 
(6,842
)
 
(5.0
)%
Settlement and patent license income

 
 %
 

 
 %
 
14,900

 
9.8
%
 

 
 %
Total other income (expense)
(79
)
 
(0.2
)%
 
117

 
0.3
 %
 
9

 
%
 
572

 
0.4
 %
Income (loss) before income taxes
(159
)
 
(0.3
)%
 
(1,568
)
 
(3.4
)%
 
15,382

 
10.1
%
 
(6,270
)
 
(4.6
)%
Income tax expense
113

 
0.2
 %
 
188

 
0.4
 %
 
347

 
0.2
%
 
448

 
0.3
 %
Net income (loss)
$
(272
)
 
(0.6
)%
 
$
(1,756
)
 
(3.8
)%
 
$
15,035

 
9.9
%
 
$
(6,718
)
 
(4.9
)%
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 income (loss), adjusted to exclude the settlement and patent license income, share-based compensation, and litigation expenses. 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 income (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 the settlement and patent license income, 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, 2018, 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 income (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;

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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;
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 Income (Loss) to Non-GAAP Net Income
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
September 30,
 
2018
 
2018
 
2017
 
2018
 
2017
U.S. GAAP net (loss) income
$
(272
)
 
$
15,159

 
$
(1,756
)
 
$
15,035

 
$
(6,718
)
Settlement and patent license income

 
(14,900
)
 

 
(14,900
)
 

Share-based compensation
3,421

 
3,557

 
3,112

 
10,345

 
9,442

Litigation expenses
19

 
215

 
863

 
2,904

 
4,048

Non-GAAP net income
$
3,168

 
$
4,031

 
$
2,219

 
$
13,384

 
$
6,772

Reconciliation of U.S. GAAP Net Income (Loss) to EBITDA to Adjusted EBITDA
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
September 30,
 
2018
 
2018
 
2017
 
2018
 
2017
U.S. GAAP net (loss) income
$
(272
)
 
$
15,159

 
$
(1,756
)
 
$
15,035

 
$
(6,718
)
Depreciation and amortization
4,377

 
4,829

 
5,109

 
14,174

 
15,383

Interest expense
10

 
7

 
18

 
76

 
42

Interest and other (income) expense
69

 
87

 
(135
)
 
(85
)
 
(614
)
Income tax expense
113

 
249

 
188

 
347

 
448

EBITDA
$
4,297

 
$
20,331

 
$
3,424

 
$
29,547

 
$
8,541

Settlement and patent license income

 
(14,900
)
 

 
(14,900
)
 

Share-based compensation
3,421

 
3,557

 
3,112

 
10,345

 
9,442

Litigation expenses
19

 
215

 
863

 
2,904

 
4,048

Adjusted EBITDA
$
7,737

 
$
9,203

 
$
7,399

 
$
27,896

 
$
22,031


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Critical Accounting Policies and Estimates
Please see Note 2 of Part I, Item 1 of this Quarterly Report on Form 10-Q for a summary of changes in significant accounting policies. In addition, our critical accounting policies and estimates are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. During the nine months ended September 30, 2018, there have been no other significant changes in our critical accounting policies and estimates.
Results of Operations
Revenue
We derive revenue primarily from the sale of our digital content delivery, video, cloud security, and edge computing services. 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, 2018, compared to the three and nine months ended September 30, 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
 
$
 
%
 




$

%
 
2018
 
2017
 
Change
 
Change
 
2018

2017

Change

Change
Revenue
$
49,315

 
$
46,069

 
$
3,246

 
7
%
 
$
151,678

 
$
136,173

 
$
15,505

 
11
%
Our revenue increased during the three and nine months ended September 30, 2018, versus the comparable 2017 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, 2018, we experienced a small decrease in average selling price versus the comparable 2017 period, due to customer and product mix. For the nine months ended September 30, 2018, we experienced a small increase in average selling price versus the comparable 2017 period, again due to customer and product mix.
Our active customers worldwide decreased to 667 as of September 30, 2018, compared to 753 as of September 30, 2017. 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, 2018 and 2017, sales to our top 20 customers accounted for approximately 72% and 66%, respectively, of our total revenue. For the nine months ended September 30, 2018 and 2017, sales to our top 20 customers accounted for approximately 72% and 65%, 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, 2018, we had one customer, Amazon, who represented 10% or more of our total revenue. 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. During the nine months ended September 30, 2018 and 2017, respectively, we had one customer, Amazon, 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,
 
2018
 
2017
 
2018
 
2017
Americas
$
28,700

58
%
 
$
29,485

64
%
 
$
92,317

61
%
 
$
86,093

63
%
EMEA
9,656

20
%
 
9,280

20
%
 
31,156

20
%
 
26,543

20
%
Asia Pacific
10,959

22
%
 
7,304

16
%
 
28,205

19
%
 
23,537

17
%
Total revenue
$
49,315

100
%
 
$
46,069

100
%
 
$
151,678

100
%
 
$
136,173

100
%
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

24

Table of Contents

leased warehouse space and utilities, depreciation of network equipment used to deliver our content delivery services, payroll and related costs, and share-based compensation for our network operations and professional services personnel. Other costs include professional fees and outside services, travel and travel-related expenses, and royalty expenses.
Cost of revenue was composed of the following (in thousands and as a percentage of total revenue):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Bandwidth and co-location fees
$
14,095

 
28.6
%
 
$
13,166

 
28.6
%
 
$
42,749

 
28.2
%
 
$
39,606

 
29.1
%
Depreciation - network
3,761

 
7.6
%
 
4,506

 
9.8
%
 
12,337

 
8.1
%
 
13,594

 
10.0
%
Payroll and related employee costs
3,991

 
8.1
%
 
4,183

 
9.1
%
 
11,979

 
7.9
%
 
12,536

 
9.2
%
Share-based compensation
352

 
0.7
%
 
352

 
0.8
%
 
1,059

 
0.7
%
 
1,075

 
0.8
%
Other costs
3,081

 
6.2
%
 
1,586

 
3.4
%
 
7,992

 
5.3
%
 
4,541

 
3.3
%
Total cost of revenue
$
25,280

 
51.3
%
 
$
23,793

 
51.6
%
 
$
76,116

 
50.2
%
 
$
71,352

 
52.4
%
Our cost of revenue increased in aggregate dollars and decreased as a percentage of total revenue for the three and nine months ended September 30, 2018, versus the comparable 2017 periods. The changes in cost of revenue were primarily a result of the following:
Bandwidth expenses, in aggregate dollars, increased due to higher transit costs resulting from increased traffic volumes on our network and expansion into new geographies. As a percentage of total revenue, our bandwidth expenses remained consistent versus the comparable 2017 periods due to renegotiated lower rates with our vendors. Our co-location costs remained consistent in aggregate dollars, but decreased as a percentage of total revenue versus the comparable 2017 periods, due to improved server and operational efficiencies, resulting in additional revenue without corresponding proportional costs.
Payroll and related employee costs decreased due to lower variable compensation.
Other costs increased primarily due to an increase in international re-seller costs.
We anticipate an improvement in gross margin of more than 150 basis points for the full year 2018 compared to 2017.
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,
 
2018
 
2017
 
2018
 
2017
Payroll and related employee costs
$
2,797

 
5.7
%
 
$
3,312

 
7.2
%
 
$
8,736

 
5.8
%
 
$
9,427

 
6.9
%
Professional fees and outside services
1,602

 
3.2
%
 
788

 
1.7
%
 
3,181

 
2.1
%
 
2,463

 
1.8
%
Share-based compensation
1,887

 
3.8
%
 
1,565

 
3.4
%
 
5,666

 
3.7
%
 
4,773

 
3.5
%
Litigation expenses
19

 
%
 
863

 
1.9
%
 
2,904

 
1.9
%
 
4,048

 
3.0
%
Other costs
1,546

 
3.1
%
 
1,551

 
3.4
%
 
4,403

 
2.9
%
 
2,686

 
2.0
%
Total general and administrative
$
7,851

 
15.9
%
 
$
8,079

 
17.5
%
 
$
24,890

 
16.4
%
 
$
23,397

 
17.2
%
Our general and administrative expense decreased in aggregate dollars for the three months ended September 30, 2018, versus the comparable 2017 period. For the nine months ended September 30, 2018, our general and administrative expenses increased in aggregate dollars versus the comparable 2017 period. As a percentage of sales, for the three and nine months ended September 30, 2018, our general and administrative expense decreased versus the comparable 2017 periods.
The decrease in aggregate dollars for the three months ended September 30, 2018, versus the comparable 2017 period was primarily driven by reduced litigation expenses due to the settlement of our intellectual property lawsuits and lower payroll and related employee costs due to reduced variable compensation. These decreases were partially off-set by increased professional fees and higher share-based compensation.
The increase in aggregate dollars for the nine months ended September 30, 2018, versus the comparable 2017 period was primarily driven by our receipt of a state sales tax refund in 2017. In addition, we incurred an increase in professional fees

25

Table of Contents

and increased share-based compensation. These increases were off-set by decreased litigation expenses, due to the settlement of our intellectual property lawsuits and decreased payroll and related employee costs, primarily due to lower variable compensation.
Excluding litigation expenses, we expect our general and administrative expenses for 2018 to remain consistent with 2017.
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,
 
2018
 
2017
 
2018
 
2017
Payroll and related employee costs
$
6,979

 
14.2
%
 
$
6,239

 
13.5
%
 
$
21,437

 
14.1
%
 
$
18,848

 
13.8
%
Share-based compensation
638

 
1.3
%
 
611

 
1.3
%
 
1,874

 
1.2
%
 
1,848

 
1.4
%
Marketing programs
519

 
1.1
%
 
498

 
1.1
%
 
1,662

 
1.1
%
 
1,519

 
1.1
%
Other costs
1,630

 
3.3
%
 
1,488

 
3.2
%
 
5,095

 
3.4
%
 
4,885

 
3.6
%
Total sales and marketing
$
9,766

 
19.8
%
 
$
8,836

 
19.2
%
 
$
30,068

 
19.8
%
 
$
27,100

 
19.9
%
Our sales and marketing expense increased in aggregate dollars for the three and nine months ended September 30, 2018, versus the comparable 2017 periods. For the three months ended September 30, 2018, our sales and marketing expense increased as a percentage of total revenue with the comparable 2017 period. For the nine months ended September 30, 2018, our sales and marketing expense remained consistent as a percentage of total revenue versus the comparable 2017 period.
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.
Increased marketing spending related to public relations and trade shows.
Increased other costs primarily due to increased travel and entertainment, increased facilities costs and higher fees and licenses.
We expect our sales and marketing expenses for 2018 to increase compared to 2017 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,
 
2018
 
2017
 
2018
 
2017
Payroll and related employee costs
$
4,127

 
8.4
%
 
$
4,701

 
10.2
%
 
$
13,159

 
8.7
%
 
$
14,309

 
10.5
%
Share-based compensation
544

 
1.1
%
 
584

 
1.3
%
 
1,746

 
1.2
%
 
1,746

 
1.3
%
Other costs
1,211

 
2.5
%
 
1,158

 
2.5
%
 
3,389

 
2.2
%
 
3,322

 
2.4
%
Total research and development
$
5,882

 
11.9
%
 
$
6,443

 
14.0
%
 
$
18,294

 
12.1
%
 
$
19,377

 
14.2
%
Our research and development expense decreased in aggregate dollars and decreased as a percentage of total revenue for the three and nine months ended September 30, 2018, versus the comparable 2017 periods. The decrease in aggregate dollars was primarily due to a decrease in payroll and related employee costs due to lower variable compensation and lower average salary expense. Other costs increased due to increased casual labor and other employee costs.
We expect our research and development expenses for 2018 to be lower than 2017 due to the aforementioned reasons.
Depreciation and Amortization (Operating Expenses)
Depreciation and amortization expense was $616, or 1.2% of revenue, for the three months ended September 30, 2018, versus $603, or 1.3% of revenue, for the comparable 2017 period. For the nine months ended September 30, 2018, depreciation and amortization expense was $1,837, or 1.2% of revenue versus $1,789, or 1.3% of revenue, for the comparable 2017 period.

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Table of Contents

Depreciation expense consists of depreciation on equipment and furnishings used by general administrative, sales and marketing, and research and development personnel. Amortization expense consists of amortization of intangible assets acquired in business combinations.
Interest Expense
Interest expense was $10 for the three months ended September 30, 2018, versus $18 for the comparable 2017 period. For the nine months ended September 30, 2018, interest expense was $76 versus $42 for the comparable 2017 period. The increase in the nine months ended September 30, 2018 was due to fees associated with the Fourth Amendment (Fourth Amendment) to the Loan and Security Agreement (the Credit Agreement) with Silicon Valley Bank (SVB) originally entered into in November 2015.
Interest Income
Interest income was $177 for the three months ended September 30, 2018, versus $127 for the comparable 2017 period. For the nine months ended September 30, 2018, interest income was $440 versus $365 for the comparable 2017 period. Interest income includes interest earned on invested cash balances and marketable securities.
Settlement and Patent License Income
On April 9, 2018, we entered into a definitive Settlement and Patent License Agreement (the Agreement) where the parties agreed to (i) license certain patents to the other party, (ii) a covenant not to sue for three years for certain patents related to the licensed patents, and (iii) settle all outstanding legal disputes between the parties. The terms of the Agreement also require Akamai to pay to Limelight a total of $14,900 over five equal quarterly installments. The second quarterly payment of $2,980 was received in July 2018. As of September 30, 2018, there remained $8,940 due from Akamai.
Other Income (Expense)
Other expense was $246 for the three months ended September 30, 2018, versus other income of $8 for the comparable 2017 period. For the nine months ended September 30, 2018, other expense was $355 versus other income of $249 for the comparable 2017 period. For the three and nine months ended September 30, 2018 and 2017, respectively, other income consisted primarily of foreign currency transaction gains and losses and the gain on sale of fixed assets.
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, 2018, was $113 and $347, respectively, versus $188 and $448 for the comparable 2017 period. Income tax expense on our income (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, 2018, our cash, cash equivalents and marketable securities classified as current totaled $52,635. Included in this amount is approximately $5,851 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, accrued settlement and patent license agreement, 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, 2018, there remained $13,500 due to Akamai under the terms of the settlement and license agreement.
On April 9, 2018, we entered into a definitive settlement patent license agreement with Akamai in a separate matter where the parties agreed to (i) license certain patents to the other party, (ii) a covenant not to sue for three years for certain patents related to the licensed patents, and (iii) settle all outstanding legal disputes between the parties. The terms of the

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Agreement also require Akamai to pay to us a total of $14,900, over five equal quarterly installments. The second quarterly payment of $2,980 was received in July 2018. As of September 30, 2018, there remained $8,940 due from Akamai.
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, 2018 and 2017, are discussed in the following paragraphs.
Operating Activities
Net cash provided by operating activities was $16,807 for the nine months ended September 30, 2018, versus net cash provided by operating activities of $8,383 for the comparable 2017 period, an increase of $8,424. Changes in operating assets and liabilities of $(8,068) during the nine months ended September 30, 2018, versus $(11,031) in the comparable 2017 period were primarily due to:
accounts receivable decreased $5,781 during the nine months ended September 30, 2018 as a result of timing of collections as compared to a $2,026 increase in the comparable 2017 period;
prepaid expenses and other current assets increased $2,530 during the nine months ended September 30, 2018, due to an increase in customer acquisition costs off-set by the amortization of prepaid bandwidth expenses and other prepaid expenses, compared to a $545 decrease in the comparable 2017 period;
accounts payable and other current liabilities decreased $2,526 during the nine months ended September 30, 2018, versus an increase of $4,749 for the comparable 2017 period due to timing of vendor payments and the payment of 2017 variable compensation accruals; and
net payments for provision for litigation decreased $5,960 as a result of the first two payments received from Akamai under the settlement and patent license agreement.
Cash provided by operating activities may not be sufficient to cover new purchases of property and equipment during the remainder of 2018 and 2019. 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 $5,961 for the nine months ended September 30, 2018, versus net cash used in investing activities of $8,362 for the comparable 2017 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.
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, 2018, we made capital expenditures of $10,495 which represented approximately 7% of our total revenue. Our capital expenditures may increase in 2018 compared to 2017, as we continue to increase the capacity of our global network and re-fresh our systems.
Financing Activities
Net cash used in financing activities was $2,809 for the nine months ended September 30, 2018, versus net cash used in financing activities of $1,371 for the comparable 2017 period. Net cash used in financing activities in the nine months ended September 30, 2018, primarily relates to the payments of employee tax withholdings related to the net settlement of vested restricted stock units of $3,808, the repurchase of our common stock of $3,800, offset by cash received from the exercise of stock options and our employee stock purchase plan of $4,799.
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.

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Line of Credit                 
In February 2018, we entered into the Fourth Amendment to the Credit Agreement with SVB originally entered into in November 2015. Under the Fourth Amendment, we increased the maximum principal commitment amount from $10,000 to $20,000. Our borrowing capacity is the lesser of the commitment amount or 80% of eligible accounts receivable. The Fourth Amendment extended 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, 2020.
As of September 30, 2018, borrowings under the Credit Agreement bear interest at the current prime rate minus 0.25%. In the event of default, obligations shall bear interest at a rate per annum which is 3% above the then applicable rate.  As of September 30, 2018, and December 31, 2017, respectively, we had no outstanding borrowings, and we had availability under the Credit Agreement of approximately $18,300 and $10,000, respectively.
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.
Under the Fourth 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. In addition, we are required to maintain an Adjusted Quick Ratio of at least 1.0 to 1.0. 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, 2018, we were in compliance with all covenants under the Credit Agreement.
For a more detailed discussion regarding our Credit Agreement and Fourth 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 share repurchase program replaced the $9,500 remaining from the previously announced $15,000 share repurchase program. During the nine months ended September 30, 2018, we purchased and canceled 1,000 shares for $3,800, including commissions and fees. During the nine months ended September 30, 2017, we did not repurchase any shares under the repurchase programs. As of September 30, 2018, there remained $21,200 under this share repurchase program.
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 2018 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 2018 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, 2018, 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