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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 September 30, 2020
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)
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Delaware | | 20-1677033 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1465 North Scottsdale Road, Suite 400
Scottsdale, AZ 85257
(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;
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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.
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Large accelerated filer | ☐ | Accelerated filer | ☑ |
Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ |
| | Emerging Growth Company | ☐ |
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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 October 15, 2020: 122,973,706 shares.
LIMELIGHT NETWORKS, INC.
FORM 10-Q
Quarterly Period Ended September 30, 2020
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION | | |
Item 1. | FINANCIAL STATEMENTS | |
| Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019 | |
| Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 | |
| Unaudited Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019 | |
| Unaudited Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2020 and 2019 | |
| Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 | |
| 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 | |
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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 and Section 21E of the Securities Exchange Act of 1934, as amended. 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-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 and our sources of funding;
•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 customers;
•our beliefs regarding the impact of health epidemics and pandemics, including the recent outbreak of COVID-19, on our current and potential customers; and
•our beliefs regarding the impact of health epidemics and pandemics, including the recent outbreak of COVID-19, on our balance sheet, financial condition, and results of operations.
The risks included here are not exhaustive. Other sections of this Quarterly Report on Form 10-Q may include additional factors which could adversely affect our business and financial performance. Also, 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, 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)
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 75,169 | | | $ | 18,335 | |
Marketable securities | 49,623 | | | — | |
Accounts receivable, net | 42,222 | | | 34,476 | |
Income taxes receivable | 81 | | | 82 | |
Prepaid expenses and other current assets | 12,561 | | | 9,920 | |
Total current assets | 179,656 | | | 62,813 | |
Property and equipment, net | 47,493 | | | 46,136 | |
Operating lease right of use assets | 10,844 | | | 12,842 | |
Marketable securities, less current portion | 40 | | | 40 | |
Deferred income taxes | 1,428 | | | 1,319 | |
Goodwill | 77,126 | | | 77,102 | |
Other assets | 7,459 | | | 9,117 | |
Total assets | $ | 324,046 | | | $ | 209,369 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 12,437 | | | $ | 12,020 | |
Deferred revenue | 797 | | | 976 | |
Operating lease liability obligations | 2,654 | | | 2,056 | |
Income taxes payable | 153 | | | 178 | |
Other current liabilities | 17,584 | | | 13,398 | |
Total current liabilities | 33,625 | | | 28,628 | |
Convertible senior notes, net | 99,937 | | | — | |
Operating lease liability obligations, less current portion | 11,745 | | | 13,488 | |
Deferred income taxes | 251 | | | 239 | |
Deferred revenue, less current portion | 230 | | | 161 | |
Other long-term liabilities | 579 | | | 316 | |
Total liabilities | 146,367 | | | 42,832 | |
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; 122,824 and 118,368 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | 123 | | | 118 | |
Additional paid-in capital | 552,559 | | | 530,285 | |
Accumulated other comprehensive loss | (9,379) | | | (9,210) | |
Accumulated deficit | (365,624) | | | (354,656) | |
Total stockholders’ equity | 177,679 | | | 166,537 | |
Total liabilities and stockholders’ equity | $ | 324,046 | | | $ | 209,369 | |
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 September 30, | | | | Nine Months Ended September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Revenue | $ | 59,243 | | | $ | 51,321 | | | $ | 174,801 | | | $ | 140,505 | |
Cost of revenue: | | | | | | | |
Cost of services | 31,905 | | | 25,602 | | | 92,406 | | | 71,311 | |
Depreciation — network | 5,602 | | | 4,961 | | | 16,112 | | | 13,905 | |
Total cost of revenue | 37,507 | | | 30,563 | | | 108,518 | | | 85,216 | |
Gross profit | 21,736 | | | 20,758 | | | 66,283 | | | 55,289 | |
Operating expenses: | | | | | | | |
General and administrative | 7,751 | | | 7,356 | | | 23,820 | | | 23,231 | |
Sales and marketing | 10,456 | | | 10,713 | | | 33,279 | | | 32,679 | |
Research and development | 5,425 | | | 5,160 | | | 16,614 | | | 17,075 | |
Depreciation and amortization | 384 | | | 172 | | | 1,049 | | | 545 | |
Total operating expenses | 24,016 | | | 23,401 | | | 74,762 | | | 73,530 | |
Operating loss | (2,280) | | | (2,643) | | | (8,479) | | | (18,241) | |
Other income (expense): | | | | | | | |
Interest expense | (1,674) | | | (10) | | | (1,756) | | | (30) | |
Interest income | 10 | | | 81 | | | 40 | | | 402 | |
Other, net | 25 | | | (13) | | | (396) | | | (89) | |
Total other (expense) income | (1,639) | | | 58 | | | (2,112) | | | 283 | |
Loss before income taxes | (3,919) | | | (2,585) | | | (10,591) | | | (17,958) | |
Income tax expense | 66 | | | 166 | | | 377 | | | 544 | |
Net loss | $ | (3,985) | | | $ | (2,751) | | | $ | (10,968) | | | $ | (18,502) | |
| | | | | | | |
Net loss per share: | | | | | | | |
Basic | $ | (0.03) | | | $ | (0.02) | | | $ | (0.09) | | | $ | (0.16) | |
Diluted | $ | (0.03) | | | $ | (0.02) | | | $ | (0.09) | | | $ | (0.16) | |
| | | | | | | |
Weighted average shares used in per share calculation: | | | | | | | |
Basic | 122,363 | | | 116,270 | | | 120,519 | | | 115,318 | |
Diluted | 122,363 | | | 116,270 | | | 120,519 | | | 115,318 | |
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 September 30, | | | | Nine Months Ended September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Net loss | $ | (3,985) | | | $ | (2,751) | | | $ | (10,968) | | | $ | (18,502) | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Unrealized (loss) gain on investments | (80) | | | 2 | | | (80) | | | 39 | |
Foreign currency translation gain (loss) | 732 | | | (357) | | | (89) | | | 157 | |
Other comprehensive income (loss) | 652 | | | (355) | | | (169) | | | 196 | |
Comprehensive loss | $ | (3,333) | | | $ | (3,106) | | | $ | (11,137) | | | $ | (18,306) | |
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 September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | | | | |
| Shares | | Amount | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total |
Balance June 30, 2020 | 121,692 | | | $ | 122 | | | $ | 541,363 | | | $ | (10,031) | | | $ | (361,639) | | | $ | 169,815 | |
Net loss | — | | | — | | | — | | | — | | | (3,985) | | | (3,985) | |
Change in unrealized loss on available-for-sale investments, net of taxes | — | | | — | | | — | | | (80) | | | | | (80) | |
Foreign currency translation adjustment, net of taxes | — | | | — | | | — | | | 732 | | | — | | | 732 | |
Exercise of common stock options | 812 | | | 1 | | | 2,598 | | | — | | | — | | | 2,599 | |
Vesting of restricted stock units | 488 | | | — | | | — | | | — | | | — | | | — | |
Restricted stock units surrendered in lieu of withholding taxes | (168) | | | — | | | (1,041) | | | — | | | — | | | (1,041) | |
| | | | | | | | | | | |
Share-based compensation | — | | | — | | | 4,305 | | | — | | | — | | | 4,305 | |
Equity component of convertible senior notes, net | — | | | — | | | 21,747 | | | — | | | — | | | 21,747 | |
Purchase of capped calls related to issuance of convertible senior notes | — | | | — | | | (16,413) | | | — | | | — | | | (16,413) | |
Balance September 30, 2020 | 122,824 | | | $ | 123 | | | $ | 552,559 | | | $ | (9,379) | | | $ | (365,624) | | | $ | 177,679 | |
For the Three Months Ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | | | | |
| Shares | | Amount | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total |
Balance June 30, 2019 | 115,760 | | | $ | 116 | | | $ | 520,375 | | | $ | (9,482) | | | $ | (354,363) | | | $ | 156,646 | |
Net loss | — | | | — | | | — | | | — | | | (2,751) | | | (2,751) | |
Change in unrealized loss on available-for-sale investments, net of taxes | — | | | — | | | — | | | 2 | | | — | | | 2 | |
Foreign currency translation adjustment, net of taxes | — | | | — | | | — | | | (357) | | | — | | | (357) | |
Exercise of common stock options | 5 | | | — | | | 13 | | | — | | | — | | | 13 | |
Vesting of restricted stock units | 1,129 | | | 1 | | | (1) | | | — | | | — | | | — | |
Restricted stock units surrendered in lieu of withholding taxes | (381) | | | — | | | (1,015) | | | — | | | — | | | (1,015) | |
Share-based compensation | — | | | — | | | 5,386 | | | — | | | — | | | 5,386 | |
Balance September 30, 2019 | 116,513 | | | $ | 117 | | | $ | 524,758 | | | $ | (9,837) | | | $ | (357,114) | | | $ | 157,924 | |
For the Nine Months Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | | | | |
| Shares | | Amount | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total |
Balance December 31, 2019 | 118,368 | | | $ | 118 | | | $ | 530,285 | | | $ | (9,210) | | | $ | (354,656) | | | $ | 166,537 | |
Net loss | — | | | — | | | — | | | — | | | (10,968) | | | (10,968) | |
Change in unrealized loss on available-for-sale investments, net of taxes | — | | | — | | | — | | | (80) | | | — | | | (80) | |
Foreign currency translation adjustment, net of taxes | — | | | — | | | — | | | (89) | | | — | | | (89) | |
Exercise of common stock options | 2,672 | | | 3 | | | 7,607 | | | — | | | — | | | 7,610 | |
Vesting of restricted stock units | 2,233 | | | 2 | | | 5 | | | — | | | — | | | 7 | |
Restricted stock units surrendered in lieu of withholding taxes | (749) | | | — | | | (3,986) | | | — | | | — | | | (3,986) | |
Issuance of common stock under employee stock purchase plan | 300 | | | — | | | 1,074 | | | — | | | — | | | 1,074 | |
Share-based compensation | — | | | — | | | 12,240 | | | — | | | — | | | 12,240 | |
Equity component of convertible senior notes, net | — | | | — | | | 21,747 | | | — | | | — | | | 21,747 | |
Purchase of capped calls related to issuance of convertible senior notes | — | | | — | | | (16,413) | | | — | | | — | | | (16,413) | |
Balance September 30, 2020 | 122,824 | | | $ | 123 | | | $ | 552,559 | | | $ | (9,379) | | | $ | (365,624) | | | $ | 177,679 | |
For the Nine Months Ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | | | | |
| Shares | | Amount | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total |
Balance December 31, 2018 | 114,246 | | | 114 | | | 513,682 | | | (10,033) | | | (338,612) | | | 165,151 | |
Net loss | — | | | — | | | — | | | — | | | (18,502) | | | (18,502) | |
Change in unrealized loss on available-for-sale investments, net of taxes | — | | | — | | | — | | | 39 | | | — | | | 39 | |
Foreign currency translation adjustment, net of taxes | — | | | — | | | — | | | 157 | | | — | | | 157 | |
Exercise of common stock options | 10 | | | — | | | 21 | | | — | | | — | | | 21 | |
Vesting of restricted stock units | 2,695 | | | 3 | | | (3) | | | — | | | — | | | — | |
Restricted stock units surrendered in lieu of withholding taxes | (887) | | | — | | | (2,528) | | | — | | | — | | | (2,528) | |
Issuance of common stock under employee stock purchase plan | 449 | | | — | | | 1,095 | | | — | | | — | | | 1,095 | |
Share-based compensation | — | | | — | | | 12,491 | | | — | | | — | | | 12,491 | |
Balance September 30, 2019 | 116,513 | | | 117 | | | 524,758 | | | (9,837) | | | (357,114) | | | 157,924 | |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Limelight Networks, Inc.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2020 | | 2019 |
Operating activities | | | |
Net loss | $ | (10,968) | | | $ | (18,502) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 17,161 | | | 14,450 | |
Share-based compensation | 12,238 | | | 10,463 | |
Foreign currency remeasurement gain | (113) | | | (104) | |
Deferred income taxes | (80) | | | (30) | |
Gain on sale of property and equipment | (1) | | | (56) | |
Accounts receivable charges | 476 | | | 1,274 | |
Amortization of premium on marketable securities | 87 | | | 29 | |
Noncash interest expense | 868 | | | — | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (8,221) | | | (11,051) | |
Prepaid expenses and other current assets | (2,679) | | | (777) | |
Income taxes receivable | 3 | | | 43 | |
Other assets | 2,504 | | | (2,641) | |
Accounts payable and other current liabilities | 8,159 | | | 3,675 | |
Deferred revenue | (109) | | | (557) | |
Income taxes payable | (15) | | | 204 | |
Payments related to litigation, net | — | | | (3,040) | |
Other long term liabilities | 265 | | | (137) | |
Net cash provided by (used in) operating activities | 19,575 | | | (6,757) | |
Investing activities | | | |
Purchases of marketable securities | (52,690) | | | (10,279) | |
Sale and maturities of marketable securities | 2,900 | | | 32,153 | |
Purchases of property and equipment | (22,128) | | | (24,224) | |
Proceeds from sale of property and equipment | 1 | | | 51 | |
Net cash used in investing activities | (71,917) | | | (2,299) | |
Financing activities | | | |
Proceeds from issuance of debt, net | 121,600 | | | — | |
Purchase of capped calls | (16,413) | | | — | |
Payment of debt issuance costs | (784) | | | — | |
Payments of employee tax withholdings related to restricted stock vesting | (3,987) | | | (2,528) | |
Proceeds from employee stock plans | 8,691 | | | 1,116 | |
Net cash provided by (used in) financing activities | 109,107 | | | (1,412) | |
Effect of exchange rate changes on cash and cash equivalents | 69 | | | (83) | |
Net increase (decrease) in cash and cash equivalents | 56,834 | | | (10,551) | |
Cash and cash equivalents, beginning of period | 18,335 | | | 25,383 | |
Cash and cash equivalents, end of period | $ | 75,169 | | | $ | 14,832 | |
Supplemental disclosure of cash flow information | | | |
Cash paid during the period for interest | $ | 97 | | | $ | 30 | |
Cash paid during the period for income taxes, net of refunds | $ | 452 | | | $ | 340 | |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Limelight Networks, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2020
1. Nature of Business
Limelight Networks Inc., a provider of digital content delivery, online video delivery, cloud security, edge computing and cloud storage services, empowers customers to provide exceptional digital experiences. Limelight’s edge services platform includes a globally distributed, high performance private network, 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, 2019. 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, 2020, or for any future periods.
Recent Accounting Standards
Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, which requires measurement and recognition of expected credit losses for financial assets held. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures and there was no cumulative-effect adjustment required.
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. We adopted this guidance effective January 1, 2020, using a prospective approach. The adoption of this guidance did not 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. 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 adopted this guidance effective January
1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, to 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. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.
Recently Issued Accounting Standards
In December 2019, the FASB issued ASU 2019-12 to simplifying the accounting for income taxes. ASU 2019-12 is intended to simplify various aspects related to accounting for income taxes, eliminates certain exceptions to the general principles in the Accounting Standards Codification (ASC) Topic 740 related to intra-period tax allocation, simplifies when companies recognize deferred taxes in an interim period, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for public business entities for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. ASU 2019-12 requires a retrospective, modified retrospective or prospective transition approach for individual aspects of the ASU. This guidance is applicable to us for our fiscal year beginning January 1, 2021. We are currently evaluating the potential impact of this guidance on our consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for convertible instruments. ASU 2020-06 eliminates certain models that require separate accounting for embedded conversion features, in certain cases. Additionally, among other changes, the guidance eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. ASU 2020-06 also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. ASU 2020-06 is effective for our fiscal year beginning after December 15, 2021, including interim periods within this fiscal year. Early adoption is permitted, but no earlier than our fiscal year beginning after December 15, 2020, including interim periods within those fiscal years. This guidance can be applied using either a modified or full retrospective approach. We expect to early adopt this guidance, however at this time we are currently evaluating the impact this guidance will have on our consolidated financial statements.
Significant Accounting Policies
There have been no changes in the significant accounting policies from those that were disclosed in our Annual Report, except for convertible senior notes as described below:
Convertible Senior Notes
In July 2020, we issued $125,000 aggregate principal amount of 3.50% convertible senior notes. We separate our convertible senior notes (the Notes) into liability and equity components. The carrying amount of the liability component is calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option is determined by deducting the fair value of the liability component from the principal amount of the Notes. The excess of the principal amount of the Notes over the carrying amount of the liability component (debt discount) is amortized to interest expense at an effective interest rate over the contractual term of the Notes. The equity component is recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. We allocate the issuance costs to the liability and equity components of the Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the contractual terms of the Notes. Issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.
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.
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, 2020, we have approximately $3,641 of remaining unsatisfied performance obligations. We recognized revenue of approximately $1,911 and $2,200, respectively, during the three months ended September 30, 2020 and 2019, related to these types of contracts with our customers. During the nine months ended September 30, 2020 and 2019, we recognized approximately $6,008 and $7,400, respectively. We expect to recognize approximately 37% of the remaining unsatisfied performance obligations in 2020, approximately 57% in 2021, and approximately 6% in 2022.
3. Investments in Marketable Securities
The following is a summary of marketable securities (designated as available-for-sale) at September 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Certificate of deposit | $ | 40 | | | $ | — | | | $ | — | | | $ | 40 | |
Corporate notes and bonds | 46,705 | | | — | | | 78 | | | 46,627 | |
Municipal securities | 2,997 | | | 1 | | | 2 | | | 2,996 | |
Total marketable securities | $ | 49,742 | | | $ | 1 | | | $ | 80 | | | $ | 49,663 | |
The amortized cost and estimated fair value of marketable securities at September 30, 2020, 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 | $ | 42,175 | | | $ | 1 | | | $ | 69 | | | $ | 42,107 | |
Due after one year and through five years | 7,567 | | | — | | | 11 | | | 7,556 | |
Total marketable securities | $ | 49,742 | | | $ | 1 | | | $ | 80 | | | $ | 49,663 | |
The following is a summary of marketable securities (designated as available-for-sale) at December 31, 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Certificate of deposit | $ | 40 | | | $ | — | | | $ | — | | | $ | 40 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The amortized cost and estimated fair value of marketable securities at December 31, 2019, by maturity are shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Available-for-sale securities: | | | | | | | |
| | | | | | | |
Due after one year and through five years | 40 | | | — | | | — | | | 40 | |
| | | | | | | |
4. Accounts Receivable, net
Accounts receivable, net include:
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2020 | | 2019 |
Accounts receivable | $ | 43,306 | | | $ | 35,619 | |
Less: credit allowance | (200) | | | (170) | |
Less: allowance for doubtful accounts | (884) | | | (973) | |
Total accounts receivable, net | $ | 42,222 | | | $ | 34,476 | |
All trade receivables are reported on the Consolidated Balance Sheets at their amortized cost adjusted for any write-offs and net of allowances for credit losses. We maintain an allowance for credit losses, which represents an estimate of expected losses of our receivables considering current market conditions and estimates for supportable forecasts when appropriate. The estimate is a result of our ongoing assessments and evaluations of collectability, historical loss experience, and future expectations in estimating credit losses for our trade receivables. For trade receivables, we apply a reserve percentage to the specific age of the receivable to estimate the allowance for doubtful accounts. The reserve percentages are determined based on our historical write-off experience. Determination of the proper amount of allowance requires management to exercise judgment about the timing, frequency and severity of potential credit losses that could materially affect the provision for credit losses and, as a result, net earnings. The allowance takes into consideration numerous quantitative and qualitative factors that include receivable type, historical loss experience, delinquency trends, collection experience, current economic conditions, estimates for supportable forecasts, when appropriate, and credit risk characteristics.
We evaluate the credit risk of the customer when extending credit based on a combination of various financial and qualitative factors that may affect our customers’ ability to pay. These factors may include the customer’s financial condition, past payment experience, and credit bureau information.
The following is a roll-forward of the allowances for doubtful accounts related to trade accounts receivable for the nine months ended September 30, 2020:
| | | | | |
| Nine Months Ended |
| September 30, 2020 |
Beginning of period | 973 | |
Provision for credit losses | 476 | |
Write-offs | (565) | |
End of period | 884 | |
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include:
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2020 | | 2019 |
Prepaid bandwidth and backbone | 1,324 | | | 1,717 | |
VAT receivable | 3,877 | | | 3,068 | |
Prepaid expenses and insurance | 2,731 | | | 1,685 | |
Vendor deposits and other | 4,629 | | | 3,450 | |
Total prepaid expenses and other current assets | $ | 12,561 | | | $ | 9,920 | |
6. Property and Equipment, net
Property and equipment, net include:
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2020 | | 2019 |
Network equipment | $ | 134,082 | | | $ | 126,975 | |
Computer equipment and software | 7,293 | | | 7,603 | |
Furniture and fixtures | 1,785 | | | 1,906 | |
Leasehold improvements | 7,455 | | | 7,888 | |
Other equipment | 21 | | | 54 | |
Total property and equipment | 150,636 | | | 144,426 | |
Less: accumulated depreciation | (103,143) | | | (98,290) | |
Total property and equipment, net | $ | 47,493 | | | $ | 46,136 | |
Cost of revenue depreciation expense related to property and equipment was approximately $5,602 and $4,961, respectively, for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, respectively, cost of revenue depreciation expense related to property and equipment was approximately $16,112 and $13,905, respectively.
Operating expense depreciation and amortization expense related to property and equipment was approximately $384 and $172, respectively, for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, respectively, operating expense depreciation and amortization expense related to property and equipment was approximately $1,049 and $545, respectively.
7.