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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
OR
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☐ | 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.) |
2220 W. 14th Street,
Tempe, AZ 85281
(Address of principal executive offices, including Zip Code)
(602) 850-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act;
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | LLNW | Nasdaq |
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 ☑ No ☐
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 ☑ No ☐
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 | ☐ | Accelerated filer | ☑ |
Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ |
| | Emerging Growth Company | ☐ |
| | | |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, as of April 20, 2022: 138,193,658 shares.
LIMELIGHT NETWORKS, INC.
FORM 10-Q
Quarterly Period Ended March 31, 2022
TABLE OF CONTENTS
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| | Page |
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PART I. FINANCIAL INFORMATION | |
Item 1. | FINANCIAL STATEMENTS | |
| Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021 | |
| Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021 | |
| Unaudited Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2022 and 2021 | |
| Unaudited Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2022 and 2021 | |
| Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 | |
| 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 | |
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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, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 and edge services;
•our expectations regarding revenue, costs, expenses, gross margin, non-generally accepted accounting principles (“Non-GAAP”) earnings per share, Adjusted EBITDA and capital expenditures;
•our plans regarding investing in our content delivery network and Application Operations (“AppOps”), our coordinated complete solution to deliver instant, secure website applications, as well as other products and technologies;
•our beliefs regarding the competition within the digital edge platform industry;
•our beliefs regarding the growth of our business and how that impacts our liquidity and capital resources requirements;
•our expectations regarding headcount and our ability to recruit personnel;
•the impact of certain new accounting standards and guidance as well as the time and cost of continued compliance with existing rules and standards;
•our plans with respect to investments in marketable securities;
•our expectations and strategies regarding acquisitions;
•our expectations regarding litigation and other pending or potential disputes;
•our estimations regarding taxes and belief regarding our tax reserves;
•our beliefs regarding the use of Non-GAAP financial measures;
•our approach to identifying, attracting and keeping new and existing clients, our focus on core market growth segments where we have a right-to-win, as well as our expectations regarding client turnover;
•the sufficiency of our sources of funding;
•the sufficiency of our facilities to meet our needs;
•our beliefs regarding our interest rate risk;
•our beliefs regarding inflation risks;
•our beliefs regarding expense and productivity of and competition for our sales force;
•our beliefs regarding the significance of our large clients; and
•our beliefs regarding the impact of health epidemics and pandemics, including the outbreak of COVID-19, on our current and potential clients, and our balance sheet, financial condition, and results of operations.
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 (the “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, client count, headcount and where specifically noted.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Limelight Networks, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 27,175 | | | $ | 41,918 | |
Marketable securities | 34,751 | | | 37,367 | |
Accounts receivable, net | 55,040 | | | 42,217 | |
Income taxes receivable | 63 | | | 61 | |
Prepaid expenses and other current assets | 16,044 | | | 13,036 | |
Total current assets | 133,073 | | | 134,599 | |
Property and equipment, net | 34,792 | | | 33,622 | |
Operating lease right of use assets | 6,064 | | | 6,338 | |
Marketable securities, less current portion | 40 | | | 40 | |
Deferred income taxes | 1,822 | | | 1,893 | |
Goodwill | 113,463 | | | 114,511 | |
Intangible assets, net | 13,827 | | | 14,613 | |
Other assets | 4,779 | | | 5,485 | |
Total assets | $ | 307,860 | | | $ | 311,101 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 15,599 | | | $ | 11,631 | |
Deferred revenue | 2,189 | | | 3,266 | |
Operating lease liability obligations | 1,754 | | | 1,861 | |
Income taxes payable | 215 | | | 873 | |
Other current liabilities | 20,403 | | | 19,292 | |
Total current liabilities | 40,160 | | | 36,923 | |
Convertible senior notes, net | 121,991 | | | 121,782 | |
Operating lease liability obligations, less current portion | 9,209 | | | 9,616 | |
Deferred income taxes | 303 | | | 308 | |
Deferred revenue, less current portion | 282 | | | 116 | |
Other long-term liabilities | 721 | | | 777 | |
Total liabilities | 172,666 | | | 169,522 | |
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; 138,178 and 134,337 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 138 | | | 134 | |
Additional paid-in capital | 590,249 | | | 576,807 | |
Accumulated other comprehensive loss | (9,004) | | | (8,345) | |
Accumulated deficit | (446,189) | | | (427,017) | |
Total stockholders’ equity | 135,194 | | | 141,579 | |
Total liabilities and stockholders’ equity | $ | 307,860 | | | $ | 311,101 | |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Limelight Networks, Inc.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Revenue | $ | 57,959 | | | $ | 51,195 | | | | | |
Cost of revenue: | | | | | | | |
Cost of services (1) | 35,070 | | | 33,021 | | | | | |
Depreciation — network | 5,089 | | | 5,679 | | | | | |
Total cost of revenue | 40,159 | | | 38,700 | | | | | |
Gross profit | 17,800 | | | 12,495 | | | | | |
Operating expenses: | | | | | | | |
General and administrative | 15,833 | | | 12,948 | | | | | |
Sales and marketing | 7,627 | | | 9,835 | | | | | |
Research and development | 9,577 | | | 6,113 | | | | | |
Depreciation and amortization | 1,032 | | | 540 | | | | | |
Restructuring charges | 698 | | | 6,873 | | | | | |
Total operating expenses | 34,767 | | | 36,309 | | | | | |
Operating loss | (16,967) | | | (23,814) | | | | | |
Other income (expense): | | | | | | | |
Interest expense | (1,313) | | | (1,286) | | | | | |
Interest income | 27 | | | 45 | | | | | |
Other, net | (713) | | | (214) | | | | | |
Total other expense | (1,999) | | | (1,455) | | | | | |
Loss before income taxes | (18,966) | | | (25,269) | | | | | |
Income tax expense | 206 | | | 260 | | | | | |
Net loss | $ | (19,172) | | | $ | (25,529) | | | | | |
| | | | | | | |
Net loss per share: | | | | | | | |
Basic | $ | (0.14) | | | $ | (0.21) | | | | | |
Diluted | $ | (0.14) | | | $ | (0.21) | | | | | |
| | | | | | | |
Weighted average shares used in per share calculation: | | | | | | | |
Basic | 135,528 | | | 124,290 | | | | | |
Diluted | 135,528 | | | 124,290 | | | | | |
(1) Cost of services excludes amortization related to certain intangibles, including technology, customer relationships, and trade names, which are included in depreciation and amortization
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Limelight Networks, Inc.
Unaudited Consolidated Statements of Comprehensive Loss
(In thousands)
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Net loss | $ | (19,172) | | | $ | (25,529) | | | | | |
Other comprehensive loss, net of tax: | | | | | | | |
Unrealized gain (loss) on investments | (88) | | | 12 | | | | | |
Foreign currency translation loss | (571) | | | (963) | | | | | |
Other comprehensive loss | (659) | | | (951) | | | | | |
Comprehensive loss | $ | (19,831) | | | $ | (26,480) | | | | | |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Limelight Networks, Inc.
Unaudited Consolidated Statements of Stockholders' Equity
(In thousands)
For the Three Months Ended March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | | |
| Shares | | Amount | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total |
Balance December 31, 2021 | 134,337 | | | $ | 134 | | | $ | 576,807 | | | $ | (8,345) | | | $ | (427,017) | | | $ | 141,579 | |
| | | | | | | | | | | |
Net loss | — | | | — | | | — | | | — | | | (19,172) | | | (19,172) | |
Change in unrealized gain on available-for-sale investments, net of taxes | — | | | — | | | — | | | (88) | | | — | | | (88) | |
Foreign currency translation adjustment, net of taxes | — | | | — | | | — | | | (571) | | | — | | | (571) | |
Exercise of common stock options | 3,138 | | | 3 | | | 7,983 | | | — | | | — | | | 7,986 | |
Vesting of restricted stock units | 978 | | | 1 | | | (1) | | | — | | | — | | | — | |
Restricted stock units surrendered in lieu of withholding taxes | (318) | | | — | | | (1,285) | | | — | | | — | | | (1,285) | |
| | | | | | | | | | | |
Share-based compensation | — | | | — | | | 6,745 | | | — | | | — | | | 6,745 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Issuance of common stock for business acquisition | 43 | | | — | | | — | | | — | | | — | | | — | |
Balance March 31, 2022 | 138,178 | | | $ | 138 | | | $ | 590,249 | | | $ | (9,004) | | | $ | (446,189) | | | $ | 135,194 | |
For the Three Months Ended March 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | | | |
| Shares | | Amount | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total | |
Balance December 31, 2020 | 123,653 | | | $ | 124 | | | $ | 556,512 | | | $ | (7,511) | | | $ | (373,933) | | | $ | 175,192 | | |
Cumulative effect of adoption of new accounting pronouncement | — | | | — | | | (21,733) | | | — | | | 1,677 | | | (20,056) | | |
Net loss | — | | | — | | | — | | | — | | | (25,529) | | | (25,529) | | |
Change in unrealized loss on available-for-sale investments, net of taxes | — | | | — | | | — | | | 12 | | | — | | | 12 | | |
Foreign currency translation adjustment, net of taxes | — | | | — | | | — | | | (963) | | | — | | | (963) | | |
Exercise of common stock options | 1,158 | | | 1 | | | 2,847 | | | — | | | — | | | 2,848 | | |
Vesting of restricted stock units | 633 | | | — | | | (1) | | | — | | | — | | | (1) | | |
Restricted stock units surrendered in lieu of withholding taxes | (196) | | | — | | | (671) | | | — | | | — | | | (671) | | |
| | | | | | | | | | | | |
Share-based compensation | — | | | — | | | 8,562 | | | — | | | — | | | 8,562 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance March 31, 2021 | 125,248 | | | $ | 125 | | | $ | 545,516 | | | $ | (8,462) | | | $ | (397,785) | | | $ | 139,394 | | |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Limelight Networks, Inc.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Operating activities | | | |
Net loss | $ | (19,172) | | | $ | (25,529) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 6,121 | | | 6,219 | |
Share-based compensation | 7,012 | | | 8,562 | |
Foreign currency remeasurement (gain) loss | 242 | | | (71) | |
Deferred income taxes | (2) | | | (10) | |
| | | |
Accounts receivable charges | 272 | | | 466 | |
Amortization of premium on marketable securities | 280 | | | 609 | |
Noncash interest expense | 209 | | | 199 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (13,095) | | | 2,059 | |
Prepaid expenses and other current assets | (3,174) | | | 446 | |
Income taxes receivable | (2) | | | (36) | |
Other assets | 834 | | | 399 | |
Accounts payable and other current liabilities | 3,625 | | | 5,209 | |
Deferred revenue | (911) | | | (84) | |
Income taxes payable | (655) | | | 73 | |
Other long term liabilities | (55) | | | (3) | |
Net cash used in operating activities | (18,471) | | | (1,492) | |
Investing activities | | | |
Purchases of marketable securities | (6,839) | | | (10,874) | |
Sale and maturities of marketable securities | 9,087 | | | 5,897 | |
Purchases of property and equipment | (5,350) | | | (6,628) | |
| | | |
Acquisition of business, net of cash acquired | 492 | | | — | |
Net cash used in investing activities | (2,610) | | | (11,605) | |
Financing activities | | | |
| | | |
| | | |
| | | |
Payments of employee tax withholdings related to restricted stock vesting | (1,285) | | | (671) | |
Proceeds from employee stock plans | 7,986 | | | 2,847 | |
Net cash provided by financing activities | 6,701 | | | 2,176 | |
Effect of exchange rate changes on cash and cash equivalents | (363) | | | (254) | |
Net decrease in cash and cash equivalents | (14,743) | | | (11,175) | |
Cash and cash equivalents, beginning of period | 41,918 | | | 46,795 | |
Cash and cash equivalents, end of period | $ | 27,175 | | | $ | 35,620 | |
Supplemental disclosure of cash flow information | | | |
Cash paid during the period for interest | $ | 2,198 | | | $ | 2,252 | |
Cash paid during the period for income taxes, net of refunds | $ | 868 | | | $ | 229 | |
| | | |
Property and equipment remaining in accounts payable and other current liabilities | $ | 2,022 | | | $ | 3,354 | |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Limelight Networks, Inc.
Notes to Unaudited Consolidated Financial Statements
March 31, 2022
1. Nature of Business
Limelight Networks, Inc., a provider of content delivery services, AppOps and Jamstack application architecture, provides powerful tools to optimize and deliver digital experiences. Limelight offers one of the largest, best-optimized private networks coupled with a global team of industry experts to provide edge services that are fast, secure and reliable.
We were incorporated in Delaware in 2003, and have operated in the Phoenix metropolitan area since 2001 and elsewhere throughout the United States since 2003. We began international operations in 2004.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (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, 2021. 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, 2022, or for any future periods.
Recent Accounting Standards
Adopted Accounting Standards
None
Recently Issued Accounting Standards
None
Significant Accounting Policies
There have been no changes in the significant accounting policies from those that were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
For contracts that contain minimum commitments over the contractual term, not subject to the variable consideration exception, we estimate an amount of variable consideration by using the expected value 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 clients have entered into contracts with contract terms generally from one to four years. As of March 31, 2022, we have approximately $1,881 of remaining unsatisfied performance obligations. We recognized revenue of
approximately $1,406 and $1,901, respectively, during the three months ended March 31, 2022 and 2021, related to these types of contracts with our clients. We expect to recognize approximately 85% of the remaining unsatisfied performance obligations in 2022, approximately 13% in 2023, and approximately 2% in 2024. In addition, we have deferred revenue of approximately $712 as of March 31, 2022 which represents our aggregate remaining performance obligations for services that have been invoiced, but not yet provided to the client and will be recognized as revenue in the period in which the performance obligations are satisfied. We expect to recognize approximately 93% of the remaining unsatisfied performance obligations in 2022, and approximately 7% in 2023.
3. Business Acquisitions
Pending Acquisition
In March 2022, we announced that we had entered into a definitive agreement to acquire Yahoo's Edgecast, Inc., a leading provider of edge security, content delivery and video services, in an all-stock transaction. Under the terms of the agreement, Yahoo will initially receive approximately 72.2 million shares of our common stock, subject to customary closing adjustments, valuing Edgecast at approximately $300 million based on the 30-day trailing volume weighted average price of $4.12. The purchase price also includes a $30 million investment in the combined company by Apollo and their co-investors, through their ownership of Yahoo. Yahoo can also receive up to an additional 12.7 million shares of our common stock, representing up to an additional $100 million in deal consideration, over the period ending on the third anniversary of the closing of the transaction, subject to the achievement of certain share-price targets. Upon closing of the transaction, our current stockholders will own approximately 68.1% of the combined company, or approximately 64.5% under the assumption that we achieve all share price targets under the conditional consideration agreement, while Yahoo will own approximately 31.9% or 35.5%, respectively. The transaction, which has been unanimously approved by the Board of Directors of both companies, is currently expected to close in the second half of 2022, subject to receipt of regulatory approvals and the satisfaction of other customary closing conditions.
Moov Acquisition
In September 2021, we closed the acquisition of 100% of the equity interests of Moov, a California corporation doing business as Layer0, a sub-scale SaaS based application acceleration and developer support platform, for total purchase consideration of $52,487. The total purchase consideration included $34,054 in cash, and 6,878 shares of our common stock valued at $18,433 at the acquisition date.
The following table presents the allocation of the purchase price for Moov:
| | | | | |
Consideration: | |
Cash | $ | 34,054 | |
Common stock | 18,433 | |
Total consideration | $ | 52,487 | |
The fair value of our common stock consideration of 6,878 shares, is based on the closing price of our common stock of $2.68 per share on the acquisition closing date.
The following table summarizes the allocation of the purchase consideration to the acquisition date fair value of the assets, including intangible assets, liabilities assumed and related goodwill acquired:
| | | | | |
Cash | $ | 3,130 | |
Accounts receivable | 2,514 | |
| |
Prepaid expenses and other current assets (a) | 1,133 | |
| |
| |
| |
Goodwill (a) | 35,588 | |
Intangible assets: | |
| |
Trade name | 91 | |
Client relationships | 7,090 | |
Developed technology | 8,480 | |
| |
Total assets acquired | 58,026 | |
Accounts payable and accrued liabilities | 2,432 | |
Deferred revenue | 3,107 | |
| |
| |
| |
| |
| |
| |
| |
Total liabilities | 5,539 | |
Total purchase consideration | $ | 52,487 | |
(a) During the first quarter of 2022, we identified measurement period adjustments related to preliminary fair value estimates. The total adjustment was an increase to prepaid expenses and other current assets of $860 and a decrease to goodwill of $860.
Certain amounts noted above are preliminary and subject to change during the respective measurement period (up to one year from the acquisition date) as we obtain additional information for the preliminary fair value estimates of the assets acquired and liabilities assumed. The remaining items to be finalized relate to the calculation of non-income based taxes and residual goodwill.
4. Investments in Marketable Securities
The following is a summary of marketable securities (designated as available-for-sale) at March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Certificate of deposit | $ | 40 | | | $ | — | | | $ | — | | | $ | 40 | |
Corporate notes and bonds | 17,861 | | | — | | | 89 | | | 17,772 | |
Municipal securities | 17,024 | | | — | | | 45 | | | 16,979 | |
Total marketable securities | $ | 34,925 | | | $ | — | | | $ | 134 | | | $ | 34,791 | |
The amortized cost and estimated fair value of marketable securities at March 31, 2022, 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 | $ | 34,885 | | | $ | — | | | $ | 134 | | | $ | 34,751 | |
Due after one year and through five years | 40 | | | — | | | — | | | 40 | |
Total marketable securities | $ | 34,925 | | | $ | — | | | $ | 134 | | | $ | 34,791 | |
The following is a summary of marketable securities (designated as available-for-sale) at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Certificate of deposit | $ | 40 | | | $ | — | | | $ | — | | | $ | 40 | |
Corporate notes and bonds | 18,297 | | | — | | | 38 | | | 18,259 | |
Municipal securities | 19,117 | | | — | | | 9 | | | 19,108 | |
Total marketable securities | $ | 37,454 | | | $ | — | | | $ | 47 | | | $ | 37,407 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The amortized cost and estimated fair value of marketable securities at December 31, 2021, 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 | $ | 37,209 | | | $ | — | | | $ | 47 | | | $ | 37,162 | |
Due after one year and through five years | 245 | | | — | | | — | | | 245 | |
Total marketable securities | $ | 37,454 | | | $ | — | | | $ | 47 | | | $ | 37,407 | |
5. Accounts Receivable, net
Accounts receivable, net include:
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2022 | | 2021 |
Accounts receivable | $ | 56,755 | | | $ | 43,887 | |
Less: credit allowance | (160) | | | (170) | |
Less: allowance for doubtful accounts | (1,555) | | | (1,500) | |
Total accounts receivable, net | $ | 55,040 | | | $ | 42,217 | |
The following is a roll-forward of the allowances for doubtful accounts related to trade accounts receivable for the three months ended March 31, 2022 and the twelve months ended December 31, 2021:
| | | | | | | | | | | |
| Three Months Ended | | Twelve Months Ended |
| March 31, 2022 | | December 31, 2021 |
Beginning of period | $ | 1,500 | | | $ | 1,012 | |
Provision for credit losses | 272 | | | 1,082 | |
Write-offs | (217) | | | (594) | |
End of period | $ | 1,555 | | | $ | 1,500 | |
6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include:
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2022 | | 2021 |
Prepaid bandwidth and backbone | $ | 3,214 | | | $ | 1,754 | |
VAT receivable | 4,992 | | | 4,781 | |
Prepaid expenses and insurance | 2,952 | | | 1,975 | |
Vendor deposits and other | 4,886 | | | 4,526 | |
Total prepaid expenses and other current assets | $ | 16,044 | | | $ | 13,036 | |
7. Property and Equipment, net
Property and equipment, net include:
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2022 | | 2021 |
Network equipment | $ | 123,691 | | | $ | 123,915 | |
Computer equipment and software | 7,228 | | | 7,107 | |
Furniture and fixtures | 1,397 | | | 1,406 | |
Leasehold improvements | 6,433 | | | 6,454 | |
Other equipment | 17 | | | 18 | |
Total property and equipment | 138,766 | | | 138,900 | |
Less: accumulated depreciation | (103,974) | | | (105,278) | |
Total property and equipment, net | $ | 34,792 | | | $ | 33,622 | |
Cost of revenue depreciation expense related to property and equipment was approximately $5,089 and $5,679, for the three months ended March 31, 2022 and 2021, respectively.
Operating expense depreciation and amortization expense related to property and equipment was approximately $246 and $540, for the three months ended March 31, 2022 and 2021, respectively.
8. Goodwill and Other Intangible Assets
We have recorded goodwill as a result of past business acquisitions. We review goodwill for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may exceed their fair value. We concluded that we have one reporting unit and assigned the entire balance of goodwill to this reporting unit as of March 31, 2022.
The changes in the carrying amount of goodwill for the three months ended March 31, 2022, were as follows:
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Balance, December 31, 2021 | $ | 114,511 | |
Foreign currency translation adjustment | (188) | |
Measurement period adjustments - Moov acquisition | (860) | |
Balance, March 31, 2022 | $ | 113,463 | |
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Intangible assets consist of the following as of March 31, 2022:
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| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Trade name | $ | 91 | | | $ | (18) | | | $ | 73 | |
Client relationships | 7,090 | | | (827) | | | 6,263 | |
Technology | 8,480 | | | (989) | | | 7,491 | |
Total other intangible assets | $ | 15,661 | | | $ | (1,834) | | | $ | 13,827 | |
Aggregate expense related to amortization of other intangible assets for the three months ended March 31, 2022 was approximately $786. There was no amortization expense in the three months ended March 31, 2021. There were no impairment charges incurred in the periods presented.
As of March 31, 2022, the weighted-average remaining useful lives of our acquired intangible assets were 2.3 years for trade name, 4.3 years for client relationships, and 4.3 years for technology, and 4.3 years in total, for all acquired intangible assets.
As of March 31, 2022, future amortization expense related to our other intangible assets is expected to be recognized as follows:
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Remainder of 2022 | | $ | 2,358 | |
2023 | | 3,145 | |
2024 | | 3,134 | |
2025 | | 3,114 | |
2026 | | 2,076 | |
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Total | | $ | 13,827 | |
9. Other Current Liabilities
Other current liabilities include:
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| March 31, | | December 31, |
| 2022 | | 2021 |
Accrued compensation and benefits | $ | 5,134 | | | $ | 5,131 | |
Accrued cost of revenue | 5,557 | | | 5,714 | |
Accrued interest payable | 729 | | | 1,823 | |
Restructuring charges | 287 | | | 415 | |
Accrued legal fees | 2,968 | | | 233 | |
Other accrued expenses | 5,728 | | | 5,976 | |
Total other current liabilities | $ | 20,403 | | | $ | 19,292 | |
10. Debt
Convertible Senior Notes - Due 2025
On July 27, 2020, we issued $125,000 aggregate principal amount of 3.50% Convertible Senior Notes due 2025 (the “Notes”), including the initial purchasers’ exercise in full of their option to purchase an additional $15,000 principal amount of the Notes, in a private placement to qualified institutional buyers in an offering exempt from registration under the Securities Act of 1933, as amended. The net proceeds from the issuance of the Notes was $120,741 after deducting transaction costs.
The Notes are governed by an indenture (the “Indenture”) between us, as the issuer, and U.S. Bank, National Association, as trustee. The Notes are senior, unsecured obligations of ours and will be equal in right of payment with our senior, unsecured indebtedness; senior in right of payment to our indebtedness that is expressly subordinated to the notes; effectively subordinated to our senior, secured indebtedness, including future borrowings, if any, under our $20,000 credit facility with Silicon Valley Bank (“SVB”), to the extent of the value of the collateral securing that indebtedness; and structurally subordinated to all indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries. The Indenture includes customary covenants and sets forth certain events of default after which the Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving us after which the Notes become automatically due and payable.
The Notes mature on August 1, 2025, unless earlier converted, redeemed or repurchased in accordance with their term prior to the maturity date. Interest is payable semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2021. The holders of the Notes may convert all or any portion of their Notes at their option only in the following circumstances:
(1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2020 (and only during such calendar quarter), if the last reported sale price per share of our common stock exceeds 130% of the conversion price of $8.53 for each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
(2) during the five consecutive business days immediately after any ten consecutive trading day period (such ten consecutive trading day period, the measurement period) in which the trading price per $1 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day;
(3) upon the occurrence of certain corporate events or distributions of our common stock;
(4) if we call such Notes for redemption; and
(5) at any time from, and including, May 1, 2025, until the close of business on the second scheduled trading day immediately before the maturity date.
On or after May 1, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in minimum principal amount denominations of $1 or any integral multiple of $1 in excess thereof, at the option of the holder regardless of the foregoing circumstances. Upon conversion, we may satisfy our conversion obligation by paying or delivering, as applicable, cash, shares of common stock or a combination of cash and shares of common stock, at our election, in the manner and subject to the terms and conditions provided in the Indenture. The Notes have an initial conversion rate of 117.2367 shares of our common stock per $1 principal amount of Notes, which is equal to an initial conversion price of approximately $8.53 per share of our common stock. The initial conversion price of the Notes represents a premium of approximately 27.5% over the last reported sale price of our common stock on The Nasdaq Global Select Market of $6.69 per share on July 22, 2020. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture. In addition, following certain corporate events that occur prior to the maturity date or if we deliver a notice of redemption, we will increase the conversion rate in certain circumstances for a holder who elects to convert its Notes in connection with such a corporate event or convert its Notes called (or deemed called) for redemption in connection with such notice of redemption, provided that the conversion rate will not exceed 149.4768 share of our common stock per $1 principal amount of Notes, subject to adjustment.
We may not redeem the Notes prior to August 4, 2023. We may redeem for cash all, or any portion in an authorized denomination, of the Notes, at our option, on or after August 4, 2023, and on or prior to the 41st scheduled trading day immediately preceding the maturity date, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days, whether or not consecutive, including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes, which means that we are not required to redeem or retire the Notes periodically.
If we undergo a fundamental change (as defined in the Indenture), holders may require us to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
As of March 31, 2022, the conditions allowing holders of the Notes to convert had not been met and therefore the Notes are not yet convertible. The Notes are classified as long-term debt on our condensed consolidated balance sheet as of March 31, 2022, and December 31, 2021.
At the time of issuance in July 2020, we separately accounted for the liability and equity components of the Notes. We determined the initial carrying amount of the $102,500 liability component before consideration of debt discount and transaction fees by calculating the present value of the cash flows using an effective interest rate of 8.6%. The interest rate was determined based on non-convertible debt offerings of similar sizes and terms by companies with similar credit ratings (Level 2 inputs). The carrying amount of the equity component, representing the conversion option, was $22,500 and was calculated by deducting the initial carrying value of the liability component from the principal amount of the Notes as a whole. This difference represents a debt discount that is amortized to interest expense over the 5-year contractual term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. On January 1, 2021, we early adopted ASU 2020-06 on a modified retrospective basis. As a result of the adoption of ASU 2020-06, our total remaining interest expense over the contractual terms of our convertible debt will be approximately $20,823 less than under the previous accounting standards. The adoption resulted in a $21,733 decrease in additional paid in capital from the derecognition of the bifurcated equity component, $20,255 increase in debt from the derecognition of the discount associated with the bifurcated equity component and $1,677 decrease to the opening balance of accumulated deficit, representing the cumulative interest expense recognized related to the amortization of the bifurcated conversion option.
We initially allocated transaction costs related to the issuance of the Notes to the liability and equity components using the same proportions as the initial carrying value of the Notes. Transaction costs initially attributable to the liability component were $3,400 and are being amortized to interest expense using the effective interest method over the term of the Notes. Transaction costs attributable to the equity component were $859. Following the adoption of ASU 2020-06, the transaction costs attributable to the original equity component are now being amortized to interest expense over the remaining term of the Notes.
The net carrying amount of the liability and equity components of the Notes was as follows:
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| March 31, | | December 31, |
| 2022 | | 2021 |
Liability component: | | | |
Principal | $ | 125,000 | | | $ | 125,000 | |
Unamortized transaction costs | (3,009) | | | (3,218) | |
Net carrying amount | $ | 121,991 | | | $ | 121,782 | |
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Interest expense recognized related to the Notes was as follows:
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| Three Months Ended | | |
| March 31, 2022 | | March 31, 2021 | | | | |
Contractual interest expense | $ | 1,094 | | | $ | 1,071 | | | | | |
Amortization of transaction costs | 209 | | | 199 | | | | | |
Total | $ | 1,303 | | | $ | 1,270 | | | | | |
As of March 31, 2022, and December 31, 2021, the estimated fair value of the Notes was $130,674 and $119,363, respectively. We estimated the fair value based on the quoted market prices in an inactive market on the last trading day of the reporting period, which are considered Level 2 inputs.
Capped Call Transactions
In connection with the offering of the Notes, we entered into privately negotiated capped call transactions with certain counterparties (collectively, the Capped Calls). The Capped Calls have an initial strike price of approximately $8.53 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have an initial cap price of $13.38 per share, subject to certain adjustments. The Capped Calls are generally intended to reduce or offset the potential economic dilution of approximately 14.7 million shares to our common stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. As the Capped Calls are considered indexed to our own stock and are equity classified, they are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $16,400 incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.
Line of Credit
In November 2015 we entered into the original Loan and Security Agreement (the Credit Agreement) with SVB. Since the inception, there have been eight amendments, with the most recent amendment being in September 2021. The maximum principal commitment amount remains at $20,000. Our borrowing capacity is the lesser of the commitment amount or 80% of eligible accounts receivable. All outstanding borrowings owed under the Credit Agreement become due and payable no later than the final maturity date of November 2, 2022. As long as our Adjusted Quick Ratio remains above 1.5 to 1, we no longer are required to submit quarterly borrowing base reports.
As of March 31, 2022, and December 31, 2021, we had no outstanding borrowings, and we had availability under the Credit Agreement of $20,000 and $20,000, respectively.
As of March 31, 2022, 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.
Amendment fees and other commitment fees are included in interest expense. During the three months ended March 31, 2022 and 2021, there was no interest expense and fees expense and amortization was $10 and $16, 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 the voting stock of each such foreign subsidiary.
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 March 31, 2022, we were in compliance with our covenant under the Credit Agreement.
11. Restructuring Charge
During the third quarter of 2021, management committed to restructure certain parts of the company to align our workforce and facility requirements with our continued investment in the business as we focus on cost efficiencies, improved growth and profitability. As a result, certain facilities, right of use assets, outside service contracts and professional fees were incurred. During the three months ended March 31, 2022, we incurred $698 of costs related to this restructuring plan. We expect approximately $1,800 of additional costs related primarily to consulting fees to restructure our datacenter architecture over the next 12 months.
The following table summarizes the activity of our restructuring accrual (recorded in other current liabilities on our condensed consolidated balance sheet) during the three months ended March 31, 2022 (in thousands):
2022 Restructuring Charges
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| Employee Severance and Related Benefits | | Share-Based Compensation | | Facilities Related Charges | | Professional Fees and Other | | Total |
Balance as of December 31, 2021 | $ | 235 | | | $ | — | | | $ | 180 | | | $ | — | | | $ | 415 | |
Costs incurred (recorded in restructuring charge) | (95) | | | — | | | 791 | | | 2 | | | 698 | |
Cash disbursements | (140) | | | — | | | (687) | | | (2) | | | (829) | |
Non-cash charges | — | | | — | | | 3 | | | — | | | 3 | |
Balance as of March 31, 2022 | $ | — | | | $ | — | | | $ | 287 | | | $ | — | | | $ | 287 | |
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The following table summarizes the activity of our restructuring accrual (recorded in other current liabilities on our condensed consolidated balance sheet) during the twelve months ended December 31, 2021 (in thousands):
2021 Restructuring Charges
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| Employee Severance and Related Benefits | | Share-Based Compensation | | Facilities Related Charges | | Professional Fees and Other | | Total |
Balance as of January 1, 2021 | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Costs incurred (recorded in restructuring charge) | 3,513 | | | 1,354 | | | — | | | 2,006 | | | 6,873 | |
Cash disbursements | (1,143) | | | — | | | — | | | (237) | | | (1,380) | |
Non-cash charges | — | | | (1,354) | | | — | | | — | | | (1,354) | |
Balance as of March 31, 2021 | $ | 2,370 | | | $ | — | | | $ | — | | | $ | 1,769 | | | $ | 4,139 | |
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12. Contingencies
Legal 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 and accordingly, no material legal contingencies were accrued as of March 31, 2022 and December 31, 2021. 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 clients, 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.
13. Net Loss per Share
We calculate basic and diluted loss per weighted average share. We use the weighted-average number of shares of common stock outstanding during the period for the computation of basic loss per share. Diluted loss per share include the dilutive effect of all potentially dilutive common stock, including awards granted under our equity incentive compensation plans in the weighted-average number of shares of common stock outstanding.
The following table sets forth the components used in the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share data):
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| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Net loss | $ | (19,172) | | | $ | (25,529) | | | | | |
Basic weighted average outstanding shares of common stock | 135,528 | | | 124,290 | | | | | |
Basic weighted average outstanding shares of common stock | 135,528 | | | 124,290 | | | | | |
Dilutive effect of stock options, restricted stock units, and other equity incentive plans | — | | | — | | | | | |
Diluted weighted average outstanding shares of common stock | 135,528 | | | 124,290 | | | | | |
Basic net loss per share | $ | (0.14) | | | $ | (0.21) | | | | | |
Diluted net loss per share: | $ | (0.14) | | | $ | (0.21) | | | | | |
For the three and nine months ended March 31, 2022 and 2021, 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.
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| Three Months Ended March 31, | | | |
| 2022 | | 2021 | | | | | |
Employee stock purchase plan | 230 | | | 256 | | | | | | |
Stock options and warrants | 3,177 | | | 3,400 | | | | | | |
Restricted stock units | 5,834 | | | 1,207 | | | | | | |
Convertible senior notes | 14,654 | | | 14,654 | | | | | | |
| 23,895 | | | |