Notes to Consolidated Financial Statements
December 31, 2012
1. Nature of Business
Limelight Networks, Inc. (the Company), operates a globally distributed, high-performance computing platform (its
global computing platform) and provides a suite of integrated services including content delivery, web and video content management, mobility, web application acceleration, cloud storage, and related consulting services that enable companies to
create, manage, and deliver a global digital presence.
The integrated suite of services that the Company offers collectively
comprises its Orchestrate Digital Presence Platform (Orchestrate, or the Orchestrate Platform). The Company provides the Orchestrate Platform as Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS). There are individual point services
within Orchestrate, which, other than the content delivery network, are often referred to as the Companys Value Added Services (VAS). The point services are marketed both collectively as the end-to-end Orchestrate Platform as well as
individually for customers that may not be inclined or able to adopt the entire platform.
The Orchestrate Platform and
services help the Companys customers optimize their online digital presence across web, mobile, social, and large screen channels. The Orchestrate Platform and services provide advanced features for website content management, personalization
and targeting, video publishing, mobile enablement, content delivery, transcoding, and cloud storage, combined with social media integration and reporting analytics. These services are provided through the cloud and leverage the Companys
global computing platform, which provides highly available, highly redundant storage, bandwidth, and computing resources, as well as connectivity to last-mile broadband network providers. The Companys professional consulting services group
helps organizations analyze and identify their digital presence requirements.
The Company provides its services to customers
that it believes view Internet, mobile, and social initiatives as critical to their success, including traditional and emerging media companies operating in the television, music, radio, newspaper, magazine, movie, videogame, software, and social
media industries, as well as to enterprises, technology companies, and government entities conducting business online. The Companys offerings enable organizations to remove the complexity of creating, managing, delivering, and optimizing their
digital presence by streamlining processes and optimizing business results across all customer interaction channels which helps them to deliver a high quality online media experience, improve brand awareness, drive revenue, and enhance their
customer relationships.
The Company has operated in the Phoenix metropolitan area since 2001 and elsewhere throughout the
United States since 2003. The Company began international operations in 2004.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles.
The consolidated financial statements include accounts of the Company and its 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.
On September 1, 2011, the Company completed the sale of
its EyeWonder LLC and subsidiaries and chors GmbH video and rich media advertising services (EyeWonder and chors) to DG FastChannel, Inc. (now Digital Generation, Inc.) (DG). The sale of EyeWonder and chors met the criteria for discontinued
operations during the year ended December 31, 2011. Accordingly, the results of operations related to EyeWonder and chors have been classified as discontinued operations in all periods presented. See further discussion at Note 5.
76
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with U.S. generally accepted accounting principles 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 annual report on Form 10-K are not
necessarily indicative of the results that may be expected for the year ending December 31, 2013 or for any future periods.
Foreign Currency Translation
The Company analyzes the functional currency for each of its international subsidiaries periodically to determine if a significant change
in facts and circumstances indicate that the primary economic currency has changed. As of December 31, 2010, the Companys international subsidiaries had the U.S. dollar as their functional currencies. During the first quarter of 2011, the
Company analyzed the various economic factors of its international subsidiaries and determined that the operations of its subsidiaries that were previously determined to operate in a U.S. dollar functional currency environment had changed and their
functional currencies should be changed to the local currencies. The Company was historically primarily focused on the United States market and deployed network assets in foreign jurisdictions to support its United States customers. The Company is
now conducting business and generating revenue from an international customer base. It has significantly expanded its sales, operations and finance resources internationally and various contracts were moved to the foreign subsidiaries to better
match foreign currency costs with foreign currency revenues. Effective January 1, 2011, the adjustment from translating these subsidiaries financial statements from the local currency to the U.S. dollar was recorded as a separate
component of accumulated other comprehensive loss. The foreign currency translation adjustments reflect the translation of the balance sheet at period end exchange rates and the income statement at an average exchange rate in effect during each
period. Upon the change in functional currency, the Company recorded a cumulative translation adjustment of approximately $0.5 million, which is included in the consolidated balance sheet. Due to changes in exchange rates between reporting periods
and changes in certain account balances, the foreign currency translation adjustment will change from period to period. During each of the years ended December 31, 2012, 2011 and 2010, the Company recorded foreign exchange translation losses of
approximately $0.5 million, $0.3 million and $0.2 million respectively. The foreign exchange translation loss is included in other income (expense) in the consolidated statements of operations.
Recent Accounting Pronouncements
As of January 1, 2012, the Company adopted Accounting Standards Update (ASU) 2011-04 related to guidance associated with fair value
measurements and disclosures. This ASU clarified the Financial Accounting Standards Boards (FASB) intent on current guidance, modified and changed certain guidance and principles, and expanded disclosures concerning Level 3 fair value
measurements in the fair value hierarchy (including quantitative information about significant unobservable inputs within Level 3 of the fair value hierarchy). In addition, this ASU required disclosure of the fair value hierarchy for assets and
liabilities not measured at fair value in the balance sheet, but whose fair value is required to be disclosed. Adoption of this new guidance did not have a material impact on the Companys financial statements.
As of January 1, 2012, the Company adopted ASU 2011-05 related to guidance on the presentation of comprehensive income. The
objective of this ASU was to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This ASU required an entity to present the components of net
income and other comprehensive income and total comprehensive income (which includes net income) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminated the option to present
the components of other comprehensive income as part of the statement of equity, but did not change the items that must be reported in other comprehensive income. This ASU was effective January 1, 2012, and the Company is presenting total
comprehensive income in a separate statement. Additionally, in December 2011, the
77
FASB deferred the effective date for the requirement in this ASU for presenting reclassification adjustments for each component of accumulated other comprehensive income in both net income and
other comprehensive income on the face of the financial statements.
As of January 1, 2012, the Company adopted
ASU 2011-08 related to the testing of goodwill for impairment. The objective of this ASU was to simplify goodwill impairment testing by adding a qualitative review step to assess whether the required quantitative impairment analysis is
necessary. This ASU permitted an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it
is necessary to perform the prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This ASU was effective for the Company beginning January 1, 2012. Adoption of this new guidance did not
have a material impact on the Companys financial statements. The Company did not elect to perform the qualitative screen for the year ended December 31, 2012.
Revenue Recognition
The Company primarily derives revenue from the sale of content delivery and VAS to its customers. The Companys customers generally
execute contracts with terms of one year or longer, which are referred to as recurring revenue contracts or long-term contracts. These contracts generally commit the customer to a minimum monthly level of usage with additional charges applicable for
actual usage above the monthly minimum commitment. The Company defines usage as customer data sent or received using its content delivery service, or content that is hosted or cached by the Company at the request or direction of its
customer. The Company recognizes the monthly minimum as revenue each month provided that an enforceable contract has been signed by both parties, the service has been delivered to the customer, the fee for the service is fixed or determinable,
and collection is reasonably assured. Should a customers usage of the Companys services exceed the monthly minimum commitment, the Company recognizes revenue for such excess in the period of the usage. For annual or other non-monthly
period revenue commitments, the Company recognizes revenue monthly based upon the customers actual usage each month of the commitment period and only recognizes any remaining committed amount for the applicable period in the last month
thereof.
The Company typically charges the customer an installation fee when the services are first activated. The Company
does not charge installation fees for contract renewals. Installation fees are recorded as deferred revenue and recognized as revenue ratably over the estimated life of the customer arrangement. The Company also derives revenue from services and
events sold as discrete, non-recurring events or based solely on usage. For these services, the Company recognizes revenue after an enforceable contract has been signed by both parties, the fee is fixed or determinable, the event or usage has
occurred and collection is reasonably assured.
The Company has on occasion entered into multi-element arrangements. Revenue
arrangements with multiple deliverables are divided into separate units of accounting if each deliverable has stand-alone value to the customer. Arrangements not meeting these criteria are combined into a single unit of accounting.
For services sold in multiple-element arrangements, consideration is allocated to each deliverable at the inception of an arrangement
based on relative selling prices. Substantially all services are sold on a stand-alone basis, providing vendor specific objective evidence (VSOE) of selling prices. In the absence of VSOE or third-party evidence of selling prices, consideration
would be allocated based on the Companys best estimate of such prices.
The Company recognized approximately $2.8
million, $4.3 million, and $11.0 million, respectively, in revenue under multi-element arrangements for the years ended December 31, 2012, 2011, and 2010. As of December 31, 2012, the Company had deferred revenue related to these
multi-element arrangements of approximately $0.2 million that will be recognized over the remaining terms of the respective arrangements based on the underlying elements of the arrangements in accordance with its revenue recognition policies.
78
The Company also sells services through a reseller channel. Assuming all other revenue
recognition criteria are met, revenue from reseller arrangements is recognized over the term of the contract, based on the resellers contracted non-refundable minimum purchase commitments plus amounts sold by the reseller to its customers in
excess of the minimum commitments. These excess commitments are recognized as revenue in the period in which the service is provided. Reseller revenue was approximately 3%, 4%, and 5%, respectively, of the Companys total revenue for the years
ended December 31, 2012, 2011, and 2010.
At the inception of a customer contract for service, the Company makes an
assessment as to that customers ability to pay for the services provided. If the Company subsequently determines that collection from the customer is not reasonably assured, the Company records an allowance for doubtful accounts and bad debt
expense or deferred revenue for all of that customers unpaid invoices and ceases recognizing revenue for continued services provided until cash is received.
Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of the unearned portion of monthly billed service fees, prepayments
made by customers for future periods, and deferred installation fees.
Cash and Cash Equivalents
The Company holds its cash and cash equivalents in checking, money market, and highly-liquid investments. The Company considers all highly
liquid investments with maturities of three months or less when purchased to be cash equivalents.
Investments in Marketable Securities
Management determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such
classification as of each balance sheet date. The Company has classified its investments in marketable securities as available-for-sale. Available-for-sale investments are initially recorded at cost with temporary changes in fair value periodically
adjusted through comprehensive income. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in the statements of operations. The Company
periodically reviews its investments for other-than-temporary declines in fair value based on the specific identification method and writes down investments to their fair value when an other-than-temporary decline has occurred.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amounts and do not bear interest. The Company records reserves against its accounts receivable balance for service credits and for doubtful accounts.
Estimates are used in determining both of these reserves. The allowance for doubtful accounts charges are included as a component of general and administrative expenses.
The Companys reserve for service credits relates to service credits that are expected to be issued to customers during the ordinary course of business, as well as for billing disputes. These credits
typically relate to customer disputes and billing adjustments and are estimated at the time the revenue is recognized and recorded as a reduction of revenues. Estimates for service credits are based on an analysis of credits issued in previous
periods.
The allowance for doubtful accounts is based upon a calculation that uses the Companys aging of accounts
receivable and applies a reserve percentage to the specific age of the receivable to estimate the allowance for doubtful accounts. The reserve percentages are determined based on the Companys historical write-off experience. These estimates
could change significantly if the Companys customers financial condition changes or if the economy in general deteriorates. The Company performs on-going credit evaluations of its customers. If such an evaluation indicates that payment
is no longer reasonably assured for current services provided, any future services provided to that customer will result in the deferral of revenue until the Company receives payments or it determines payment is reasonably assured.
79
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation or amortization. Depreciation and amortization are computed using
the straight-line method over the assets estimated useful lives of the applicable asset.
|
|
|
|
|
Network equipment
|
|
|
3 years
|
|
Computer equipment
|
|
|
3 years
|
|
Capitalized software
|
|
|
3 years
|
|
Furniture and fixtures
|
|
|
3-5 years
|
|
Other equipment
|
|
|
3-7 years
|
|
Leasehold improvements are amortized over the shorter of the assets estimated useful life or the respective lease
term. Repairs and maintenance are charged to expense as incurred.
Goodwill and Other Intangible Assets
Goodwill represents costs in excess of fair values assigned to the underlying net assets of the acquired company. Goodwill is not
amortized but instead is tested for impairment annually or more frequently if events or changes in circumstances indicate Goodwill might be impaired.
The Companys other intangible assets represent existing technologies, trade names and trademarks, and customer relationship intangibles. Other intangible assets are amortized over their respective
estimated lives, ranging from less than one year to six years. In the event that facts and circumstances indicate intangibles or other long-lived assets may be impaired, the Company evaluates the recoverability and estimated useful lives of such
assets. Amortization of other intangible assets is included in depreciation and amortization in the accompanying consolidated statements of operations.
Contingencies
The Company records contingent liabilities resulting from asserted and unasserted claims when it is probable that a loss has been incurred
and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple
factors, in some cases including judgments about the potential actions of third party claimants and courts. Therefore, actual losses in any future period are inherently uncertain.
Long-Lived Assets
The Company reviews its long-lived assets for impairment annually. Whenever events or circumstances indicate that the carrying amount of
an asset may not be fully recoverable, the Company recognizes an impairment loss if the sum of the expected long-term undiscounted cash flows that the long-lived asset is expected to generate is less than the carrying amount of the long-lived asset
being evaluated. The Company treats any write-downs as permanent reductions in the carrying amounts of the assets. The Company believes the carrying amounts of its long-lived assets at December 31, 2012 and 2011 are fully realizable and has not
recorded any impairment losses.
Deferred Rent and Lease Accounting
The Company leases bandwidth, co-location and office space in various locations. At the inception of each lease, the Company evaluates the
lease terms to determine whether the lease will be accounted for as an operating or a capital lease. The term of the lease used for this evaluation includes renewal option periods only in instances where the exercise of the renewal option can be
reasonably assured and failure to exercise the option would result in an economic penalty. The Company records tenant improvement allowances granted under the lease agreements as leasehold improvements within property and equipment and within
deferred rent.
80
For leases that contain rent escalation provisions, the Company records the total rent
payable during the lease term on a straight-line basis over the term of the lease (including any rent free period beginning upon possession of the premises), and records any difference between the actual rent paid and the straight-line
rent expense recorded as increases or decreases in deferred rent.
Cost of Revenue
Cost of revenues consists primarily of fees paid to network providers for bandwidth and backbone, costs incurred for non-settlement free peering and connection to Internet service provider (ISP) networks
and fees paid to data center operators for housing network equipment in third party network data centers, also known as co-location costs. Cost of revenues also includes depreciation of network equipment used to deliver the Companys content
delivery services, payroll and related costs and share-based compensation for its network operations, and professional services personnel.
The Company enters into contracts for bandwidth with third party network providers with terms typically ranging from several months to five years. These contracts generally commit the Company to pay
minimum monthly fees plus additional fees for bandwidth usage above contracted minimums. A portion of the global computing platform traffic delivery is completed through direct connection to ISP networks, called peering, generally at no charge. This
entirely avoids the bandwidth cost associated with the delivery. The Company does not consider these relationships to represent the culmination of an earnings process. Accordingly, the Company does not recognize as revenue the value to the ISPs
associated with the use of the Companys servers, nor does the Company recognize as expense the value of the rack space and bandwidth received at no cost.
Research and Development and Software Development Costs
Research and development costs consist primarily of payroll and related personnel costs for the design, development, deployment, testing,
operation, and enhancement of the Companys services, and network. Costs incurred in the development of the Companys services are expensed as incurred.
Advertising Costs
Costs associated with advertising are expensed as incurred. Advertising expenses, which are comprised of Internet, trade show, and publications advertising, were approximately $2.5 million,
$2.3 million, and $1.4 million, respectively, for the years ended December 31, 2012, 2011, and 2010.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such
determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. In the event
the Company was to determine that it would be able to realize its deferred income tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the provision for
income taxes.
81
The Company recognizes uncertain income tax positions in its financial statements when it is
more-likely-than-not the position will be sustained upon examination.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents approximate fair value due to the nature and short maturity of those instruments. The
respective fair values of marketable securities are determined based on quoted market prices, which approximate fair values. The carrying amounts of accounts receivable, accounts payable, and accrued liabilities reported in the consolidated balance
sheets approximate their respective fair values due to the immediate or short-term maturity of these financial instruments.
Recently Issued Accounting Pronouncements
There are no recently issued accounting pronouncements that would have a material impact on the Company.
3. Investments in Marketable Securities
The following is a summary of marketable securities (designated as available-for-sale) at December 31, 2012 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Government agency bonds
|
|
$
|
6,266
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
6,270
|
|
Certificate of deposit
|
|
|
2,741
|
|
|
|
|
|
|
|
|
|
|
|
2,741
|
|
Commercial paper
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
Corporate notes and bonds
|
|
|
9,527
|
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
9,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,034
|
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
19,040
|
|
Publicly traded common stock
|
|
|
12
|
|
|
|
6
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
19,046
|
|
|
$
|
13
|
|
|
$
|
(1
|
)
|
|
$
|
19,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012, the Company evaluated its marketable securities and determined unrealized losses were due to
fluctuations in interest rates.
Expected maturities can differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment penalties, and the Company views its available-for-sale securities as available for current operations.
The amortized cost and estimated fair value of the marketable securities (designated as available-for-sale) at December 31, 2012, by maturity, are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
18,260
|
|
|
$
|
6
|
|
|
$
|
(1
|
)
|
|
$
|
18,265
|
|
Due after one year and through five years
|
|
|
774
|
|
|
|
1
|
|
|
|
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,034
|
|
|
$
|
7
|
|
|
$
|
(1
|
)
|
|
$
|
19,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
The following is a summary of marketable securities (designated as available-for-sale) at
December 31, 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Government agency bonds
|
|
$
|
9,614
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
9,614
|
|
Certificate of deposit
|
|
|
2,730
|
|
|
|
|
|
|
|
|
|
|
|
2,730
|
|
Commercial paper
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
1,749
|
|
Corporate notes and bonds
|
|
|
5,757
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
5,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,850
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
19,850
|
|
Publicly traded common stock
|
|
|
12
|
|
|
|
39
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
19,862
|
|
|
$
|
41
|
|
|
$
|
(2
|
)
|
|
$
|
19,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of the marketable securities (designated as available-for-sale) at
December 31, 2011, by maturity, are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
19,850
|
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
|
$
|
19,850
|
|
Due after one year and through five years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,850
|
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
|
$
|
19,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Business Acquisitions
AcceloWeb, (IL) Ltd. Acquisition
On May 9, 2011, the Company acquired all of the issued and outstanding shares of AcceloWeb, (IL) Ltd. (AcceloWeb), a Tel Aviv, Israel-based privately-held provider of advanced technology that helps
speed the presentation of websites and applications. The services provided by AcceloWeb aligned with the Companys current whole site acceleration strategy, provided a time to market advantage over development of a new product and furthered the
Companys value-added services growth strategy. The aggregate purchase price of approximately $12.0 million consisted of approximately $5.0 million of cash paid at the closing (cash paid net of cash acquired was $4.7 million) and 1,100,629
shares of the Companys common stock with an estimated fair value of approximately $7.0 million on the acquisition date. The number of shares of common stock issued at the closing was determined on the basis of the average closing market price
of the Companys common stock on the five days preceding the acquisition date. In addition, the purchase price included contingent consideration with an aggregate potential value of $8.0 million ($4.0 million payable in cash and $4.0 million
payable in the Companys common stock), which may be earned upon the achievement of certain performance milestones which will be measured quarterly during the eight full consecutive quarters ending June 30, 2013 (the Earn-Out). As of
December 31, 2011, the estimated value of the Earn-Out contingent consideration was $0.8 million. During the year ended December 31, 2012, 2012, the Company determined that the achievement of the Earn-Out performance milestones was not
probable and reversed the previously recorded earn-out liability of $0.8 million. The reversal has been reflected as a reduction to general and administrative expense in the accompanying consolidated statement of operations for the year ended
December 31, 2012.
Under the terms of the merger agreement, a portion of the purchase price consisting of 188,677 shares
of the Companys common stock was set aside in an escrow account and was held for a period of up to 18 months following the closing date to satisfy any unresolved indemnification claims. There were no indemnification claims made on the escrow
account, and in 2012 these shares were released from escrow.
83
The Companys consolidated financial statements include the results of operations of
AcceloWeb from the date of acquisition. The historical results of operations of AcceloWeb were not significant to the Companys consolidated results of operations for the periods presented. The total purchase consideration was allocated to the
assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition, as determined by management and, with respect to identifiable intangible assets, by management with the assistance of an appraisal provided by a
third party valuation firm. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded as goodwill. The objective of the acquisition was to expand the Companys product offerings and
customer base and is expected to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill. The goodwill associated with the AcceloWeb acquisition will not be amortized and will be tested for
impairment at least annually (see Note 8).
The following table presents the allocation of the purchase price for AcceloWeb
for the period ended December 31, 2011:
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
(In thousands)
|
|
Consideration:
|
|
|
|
|
Cash
|
|
$
|
5,000
|
|
Common stock
|
|
|
6,989
|
|
Contingent consideration cash
|
|
|
382
|
|
Contingent consideration common stock
|
|
|
382
|
|
|
|
|
|
|
Total consideration
|
|
$
|
12,753
|
|
|
|
|
|
|
Acquisition-related costs (included in general and administrative expenses)
|
|
$
|
304
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed:
|
|
|
|
|
Financial assets
|
|
$
|
2,171
|
|
Property and equipment
|
|
|
5
|
|
Developed technology intangible asset
|
|
|
4,450
|
|
Financial liabilities
|
|
|
(2,457
|
)
|
|
|
|
|
|
Total identifiable net assets
|
|
|
4,169
|
|
Goodwill
|
|
|
8,584
|
|
|
|
|
|
|
|
|
$
|
12,753
|
|
|
|
|
|
|
Developed technology with a value of approximately $4.5 million is being amortized over its expected useful life of
five years.
The goodwill resulting from the AcceloWeb acquisition is not deductible for income tax purposes.
In determining the purchase price allocation, the Company considered, among other factors, how a market participant would likely use the
acquired assets and the historical and estimated future demand for AcceloWeb services. The estimated fair value of intangible assets was based upon the income approach. The income approach relies on an estimation of the present value of the future
monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its
present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risks inherent in the asset. The expected future cash flow that is projected should include all of the economic benefits attributable
to the asset, including the tax savings associated with the amortization of the intangible asset value over the tax life of the asset. The income approach may take the form of a relief from royalty methodology, a cost savings
methodology, a with and without methodology, or excess earnings methodology, depending on the specific asset under consideration.
84
The relief-from-royalty method was used to value the technology acquired from AcceloWeb. The
relief-from-royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be required to pay royalties or license fees on revenues earned through the use of the asset. The royalty rate used is based
on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the intangible asset. The royalty rate is then applied to estimate the royalty
savings. The key assumptions used in valuing the technology acquired are as follows: royalty rate of 20%, discount rate of 42%, tax rate of 39%, and an economic life of approximately five years.
The Company retained an independent third-party appraiser to assist management in its valuation which was finalized as of
September 30, 2011.
Clickability Acquisition
On May 2, 2011, the Company acquired all of the issued and outstanding shares of Clickability, Inc. (Clickability), a privately-held SaaS provider of web content management located in San Francisco,
California. The services provided by Clickability aligned with the Companys current value-added services and furthered the Companys value-added services growth strategy. The aggregate purchase price of approximately $9.6 million
consisted of approximately $4.9 million of cash paid at the closing (cash paid net of cash acquired was $2.7 million), $0.1 million held by the Company to cover future claims and 732,000 shares of the Companys common stock with an estimated
fair value of approximately $4.6 million on the date of acquisition. The Company issued 382,000 shares of common stock with an estimated fair value of approximately $2.4 million at the closing. The number of shares of the Companys common stock
issued as consideration for Clickability was determined on the basis of the average closing market price of the Companys common stock on the 30 days preceding the acquisition date.
Under the terms of the merger agreement, a portion of the purchase price consisting of approximately 350,000 shares of the Companys
common stock with an estimated fair market value on the acquisition date of approximately $2.2 million and $0.1 million of cash was unissued and available to cover future claims. There were no claims made on the escrow account and, 350,000 shares of
common stock were issued and $0.1 million cash were released from escrow in 2012.
The Companys consolidated financial
statements include the results of operations of Clickability from the date of acquisition. The historical results of operations of Clickability were not significant to the Companys consolidated results of operations for the periods presented.
The total purchase consideration was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition, as determined by management and, with respect to identifiable intangible assets, by
management with the assistance of an appraisal provided by a third party valuation firm. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded as goodwill. The objective of the
acquisition was to expand the Companys product offerings and customer base and is expected to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill. The goodwill associated with the
Clickability acquisition will not be amortized and will be tested for impairment at least annually (see Note 8).
85
The following table presents the allocation of the purchase price for Clickability for the
period ended December 31, 2011:
|
|
|
|
|
|
|
(In thousands)
|
|
Consideration:
|
|
|
|
|
Cash
|
|
$
|
5,000
|
|
Common stock
|
|
|
4,649
|
|
|
|
|
|
|
Total consideration
|
|
$
|
9,649
|
|
|
|
|
|
|
Acquisition-related costs (included in general and administrative expenses)
|
|
$
|
111
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed:
|
|
|
|
|
Financial assets
|
|
$
|
3,774
|
|
Property and equipment
|
|
|
429
|
|
Identifiable intangible assets
|
|
|
5,500
|
|
Financial liabilities
|
|
|
(4,133
|
)
|
|
|
|
|
|
Total identifiable net assets
|
|
|
5,570
|
|
Goodwill
|
|
|
4,079
|
|
|
|
|
|
|
|
|
$
|
9,649
|
|
|
|
|
|
|
The following were the identified intangible assets acquired and the respective estimated periods over which such
assets will be amortized:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Weighted
Average
useful life
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
Technology
|
|
$
|
2,120
|
|
|
|
3.0
|
|
Customer relationships
|
|
|
3,250
|
|
|
|
4.0
|
|
Trade names and trademarks
|
|
|
130
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total weighted average amortization period for the identifiable intangible assets acquired from Clickability is 3.5
years.
The goodwill resulting from the Clickability acquisition is not deductible for income tax purposes.
In determining the purchase price allocation, the Company considered, among other factors, how a market participant would likely use the
acquired assets and the historical and estimated future demand for Clickability services. The estimated fair value of intangible assets was based upon the income approach. The income approach relies on an estimation of the present value of the
future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted
to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risks inherent in the asset. The expected future cash flow that is projected should include all of the economic benefits
attributable to the asset, including the tax savings associated with the amortization of the intangible asset value over the tax life of the asset. The income approach may take the form of a relief from royalty methodology, a cost
savings methodology, a with and without methodology, or excess earnings methodology, depending on the specific asset under consideration.
86
The relief-from-royalty method was used to value the trade names and trademarks and
technology acquired from Clickability. The relief-from-royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be required to pay royalties or license fees on revenues earned through the use of
the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the intangible asset. The royalty rate is
then applied to estimate the royalty savings. The key assumptions used in valuing the existing trade names and trademarks acquired are as follows: royalty rate of 2.5%, discount rate of 21.5%, tax rate of 39% and an economic life of approximately
0.7 years. The key assumptions used in valuing the technology acquired are as follows: royalty rate of 10%, discount rate of 21.5%, tax rate of 39%, and an economic life of approximately three years.
The customer relationships were valued using a form of the income approach known as the multi-period excess earnings method. Inherent in
the multi-period excess earnings method is the recognition that, in most cases, all of the assets of the business, both tangible and intangible, contribute to the generation of the cash flow of the business and the net cash flows attributable to the
subject asset must recognize the support of the other assets which contribute to the realization of the cash flows. The contributory asset charges are based on the fair value of the contributory assets and either pre-tax or after-tax cash flows are
assessed charges representing returns on the contributory assets. A contributory asset charge for the use of the technology was assessed on pre-tax cash flows, while contributory asset charges for the use of the working capital, fixed
assets, and assembled work force have been deducted from the after-tax cash flow in each year to determine the net future cash flow attributable to the relationships. This future cash flow was then discounted using an estimated required rate of
return for the asset to determine the present value of the future cash flows attributable to the asset. The key assumptions used in valuing the customer relationships acquired are as follows: discount rate of 21.5%, tax rate of 39%, and estimated
average economic life of four years.
The Company retained an independent third-party appraiser to assist management in its
valuation which was finalized as of September 30, 2011.
5. Discontinued Operations
On September 1, 2011, the Company completed the sale of its EyeWonder and chors rich media advertising services to
DG for net proceeds of $61.0 million ($66.0 million gross cash proceeds less $5.0 million held in escrow) plus an estimated $10.9 million receivable from DG pursuant to the purchase agreement dated as of August 30, 2011 by and among the
Company, DG and Limelight Networks Germany GmbH. The $5.0 million held in escrow was intended to cover DGs ordinary operating expenses associated with the integration of EyeWonder and chors. The Company estimates that it will not receive any
portion of the funds held in escrow and has excluded such amount from its calculation of the gain on sale of discontinued operations.
The $10.9 million receivable from DG was determined by the Company based on estimated future cash payments equal to the excess of certain current assets over certain current liabilities of EyeWonder and
chors as of August 30, 2011, as defined in the purchase agreement (the Net Working Capital). The Company estimated the Net Working Capital based on its determination of the current assets and current liabilities in accordance with the relevant
provisions of the purchase agreement.
87
As of August 31, 2011, the estimated Net Working Capital related to EyeWonder and chors
was comprised of the following (in thousands):
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,677
|
|
Accounts receivable
|
|
|
9,643
|
|
Income tax receivables
|
|
|
500
|
|
Other current assets
|
|
|
528
|
|
|
|
|
|
|
Total current assets
|
|
|
13,348
|
|
Current liabilities
|
|
|
|
|
Accounts payable and other current liabilities
|
|
|
(2,494
|
)
|
|
|
|
|
|
Net Working Capital
|
|
$
|
10,854
|
|
|
|
|
|
|
Under the terms of the purchase agreement, the $0.7 million excess of the cash and cash equivalents and other current
assets over the current liabilities was immediately payable to the Company with the remaining Net Working Capital payable as the accounts receivable of $9.6 million and income tax receivable of $0.5 million are collected.
As of December 31, 2011 the receivable from DG was $10.9 million and no payments had been received from DG related to the Net
Working Capital. The following is a summary of activity related to the receivable from DG for the year ended December 31, 2012 (in thousands):
|
|
|
|
|
Balance, December 31, 2011
|
|
$
|
10,854
|
|
Payments received from DG
|
|
|
(7,440
|
)
|
Allowance for doubtful accounts receivable and other receivables adjustments
|
|
|
(2,060
|
)
|
Net Working Capital adjustments
|
|
|
(818
|
)
|
|
|
|
|
|
Balance, December 31, 2012
|
|
$
|
536
|
|
|
|
|
|
|
As of December 31, 2012, the Company has received payments totaling $7.4 million from DG. At December 31,
2012, approximately $0.5 million has been reflected on the balance sheet as due to the Company. This amount is comprised of net cash due from DG of $1.2 million plus income tax receivables of $0.1 million offset by Net Working Capital adjustments of
$0.8 million.
The Company determined that certain adjustments to decrease the Net Working Capital amount due from
DG were required. As of December 31, 2012, the Company estimated adjustments totaling $0.8 million which were recorded as a reduction to the receivable from DG.
After 120 days from the closing of the sale of EyeWonder and chors (the Receivables Collection Period), the Company and DG have the option to have the uncollected accounts receivable assigned to the
Company (currently $1.6 million at December 31, 2012). Following the expiration of the Receivables Collections Period, DG and the Company may mutually agree to extend the Receivables Collections Period in 60 day increments. DG and the Company
had agreed to extend the Receivables Collection Period and the accounts receivable were not assigned to the Company, however, DG allowed the Company to take the lead and work directly with its former international customers regarding collections.
Based on the collection efforts performed to date and the age of the underlying receivables, the Company assessed the collectability of the remaining accounts receivable balance and recorded its estimate of the amount expected to be collected at
December 31, 2012. As a result, the Company has provided an allowance for doubtful accounts receivable on the remaining uncollected balance of $1.6 million as of December 31, 2012. The Company expects to continue to pursue collections and
will record recoveries as an adjustment to income (loss) from discontinued operations.
88
During the year ended December 31, 2012, the Company recorded a charge to discontinued
operations of $2.9 million in the consolidated statement of operations comprised of $2.1 million of allowance for doubtful accounts receivable and a reduction of $0.8 million related to Net Working Capital adjustments.
During the year ended December 31, 2011, the Company recorded a gain on sale of discontinued operations of $14.8 million net of
income taxes. The gain on sale also reflects the realization of foreign currency translation adjustment gains of approximately $0.4 million and $0.1 million in unrealized losses on investments previously included in accumulated other comprehensive
income (loss).
The table below provides details of the computation of the gain on sale of EyeWonder and chors for the year
ended December 31, 2011 (in thousands):
|
|
|
|
|
Gross cash proceeds
|
|
$
|
66,000
|
|
Less:
|
|
|
|
|
Escrow holdback
|
|
|
(5,000
|
)
|
Estimated income taxes payable
|
|
|
(555
|
)
|
Estimated selling expenses
|
|
|
(805
|
)
|
Plus:
|
|
|
|
|
Net receivable from DG per terms of the purchase agreement
|
|
|
10,854
|
|
|
|
|
|
|
Estimated net proceeds
|
|
|
70,494
|
|
Less:
|
|
|
|
|
Book value of assets sold
|
|
|
(57,563
|
)
|
Income tax provision related to sale of discontinued operations
|
|
|
(2,572
|
)
|
Add:
|
|
|
|
|
Book value of liabilities released
|
|
|
4,095
|
|
Other comprehensive income gains recognized
|
|
|
302
|
|
|
|
|
|
|
Gain on sale of discontinued operations, net of income taxes
|
|
$
|
14,756
|
|
|
|
|
|
|
89
The sale of EyeWonder and chors met the criteria to be reported as discontinued operations.
Accordingly, the operating results of EyeWonder and chors were reclassified to discontinued operations in the accompanying consolidated statements of operations. The Company included only revenues and costs directly attributable to the
discontinued operations in determining income (loss) from discontinued operations, and not those attributable to the ongoing entity. Accordingly, no general corporate overhead costs were allocated to discontinued operations. Operating results of
discontinued operations for the years ended December 31, 2012, 2011, and 2010, respectively, were as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010 (a)
|
|
Revenues
|
|
$
|
|
|
|
$
|
22,302
|
|
|
$
|
29,104
|
|
Cost of revenues
|
|
|
|
|
|
|
(8,843
|
)
|
|
|
(8,137
|
)
|
General and administrative expenses
|
|
|
163
|
|
|
|
(6,055
|
)
|
|
|
(5,933
|
)
|
Sales and marketing expenses
|
|
|
|
|
|
|
(8,183
|
)
|
|
|
(8,138
|
)
|
Research and development expenses
|
|
|
|
|
|
|
(4,853
|
)
|
|
|
(4,914
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
(3,761
|
)
|
|
|
(3,899
|
)
|
Interest expense
|
|
|
|
|
|
|
(16
|
)
|
|
|
(15
|
)
|
Interest income
|
|
|
|
|
|
|
21
|
|
|
|
4
|
|
Other (expense) income
|
|
|
|
|
|
|
(525
|
)
|
|
|
28
|
|
(Loss) gain on sale of discontinued operations, net of income taxes
|
|
|
(3,024
|
)
|
|
|
14,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(2,861
|
)
|
|
|
4,843
|
|
|
|
(1,900
|
)
|
Income tax (expense) benefit
|
|
|
|
|
|
|
(65
|
)
|
|
|
3,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
$
|
(2,861
|
)
|
|
$
|
4,778
|
|
|
$
|
1,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations per weighted average share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per weighted average share calculation for discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
101,283
|
|
|
|
109,236
|
|
|
|
94,300
|
|
(a)
|
Represent operating results from date of acquisition of chors (January 27, 2010) and EyeWonder (April 30, 2010) through December 31, 2010.
|
6. Accounts Receivable
Accounts receivable include (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Accounts receivable
|
|
$
|
23,675
|
|
|
$
|
24,260
|
|
Unbilled accounts receivable
|
|
|
6,997
|
|
|
|
8,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,672
|
|
|
|
32,436
|
|
Less: credit allowance
|
|
|
(640
|
)
|
|
|
(810
|
)
|
Less: allowance for doubtful accounts
|
|
|
(3,430
|
)
|
|
|
(3,581
|
)
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
26,602
|
|
|
$
|
28,045
|
|
|
|
|
|
|
|
|
|
|
90
7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Prepaid bandwidth and backbone services
|
|
$
|
3,614
|
|
|
$
|
2,544
|
|
Non-income taxes receivable (VAT)
|
|
|
1,739
|
|
|
|
2,067
|
|
Gaikai sale escrow receivable
|
|
|
1,237
|
|
|
|
|
|
Receivable from DG (see note 5)
|
|
|
536
|
|
|
|
11,151
|
|
Employee advances and prepaid recoverable commissions
|
|
|
551
|
|
|
|
332
|
|
Vendor deposits and other
|
|
|
4,631
|
|
|
|
4,552
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
12,308
|
|
|
$
|
20,646
|
|
|
|
|
|
|
|
|
|
|
In May 2010, the Company made a strategic investment in Gaikai Inc., a private cloud-based gaming technology company
(Gaikai). In August 2012, Sony Computer Entertainment Inc. (Sony) acquired Gaikai and the Company recorded a gain on sale of its cost basis investment in Gaikai of $9.4 million, which is reflected in other income (expense) in the accompanying
consolidated statement of operations for the year ended December 31, 2012. The carrying value of the Gaikai cost basis investment as of the sale date was approximately $2.0 million. The aggregate selling price was $11.4 million consisting of
$10.2 million of cash received and $1.2 million held in escrow for a period of up to 15 months to cover any potential indemnification claims. As of December 31, 2012, the Company was not aware of any potential indemnification claims that are
expected to reduce the amount received from escrow and recorded a current receivable of approximately $1.2 million, which is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet for the year ended
December 31, 2012.
Additionally, as a result of the acquisition by Sony, the Companys contract for services with
Gaikai was terminated and the Company received approximately $1.3 million in terminations fees which was recorded as revenue in 2012.
8. Goodwill and Other Intangible Assets
The Company has recorded goodwill and other intangible assets as a result of its business acquisitions. Goodwill is
recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. In each of the Companys acquisitions, the objective of the acquisition was to expand the
Companys product offerings and customer base and to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill. The Company concluded that it has one reporting unit and assigned the entire
balance of goodwill to this reporting unit at December 31, 2012.
The Company is required to perform an impairment
assessment at least annually, and more frequently under certain circumstances. The Company performed its annual goodwill impairment test in the fourth quarter of 2012 (as of October 31, 2012). No impairment of goodwill was indicated during
the Companys annual tests in 2012, 2011, or 2010. If the Company determines through the impairment process that goodwill has been impaired, the Company will record the impairment charge in the statement of operations. There can be no assurance
that future goodwill impairment tests will not result in a charge to earnings.
91
The changes in the carrying amount of goodwill for continuing operations for the years ended
December 31, 2012 and 2011 were as follows (in thousands):
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
68,390
|
|
Goodwill related to AcceloWeb acquisition
|
|
|
8,584
|
|
Goodwill related to Clickability acquisition
|
|
|
4,079
|
|
Foreign currency translation adjustment
|
|
|
(948
|
)
|
|
|
|
|
|
Balance, December 31, 2011
|
|
$
|
80,105
|
|
Foreign currency translation adjustment
|
|
|
173
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
$
|
80,278
|
|
|
|
|
|
|
Other intangible assets that are subject to amortization consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Existing technologies
|
|
$
|
8,436
|
|
|
$
|
(4,035
|
)
|
|
$
|
4,401
|
|
Customer relationships
|
|
|
3,412
|
|
|
|
(1,427
|
)
|
|
|
1,985
|
|
Trade names and trademark
|
|
|
160
|
|
|
|
(159
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
12,008
|
|
|
$
|
(5,621
|
)
|
|
$
|
6,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Existing technologies
|
|
$
|
8,347
|
|
|
$
|
(1,976
|
)
|
|
$
|
6,371
|
|
Customer relationships
|
|
|
3,412
|
|
|
|
(589
|
)
|
|
|
2,823
|
|
Trade names and trademark
|
|
|
160
|
|
|
|
(147
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
11,919
|
|
|
$
|
(2,712
|
)
|
|
$
|
9,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate expense related to amortization of other intangible assets included in continuing operations for the years
ended December 31, 2012, 2011, and 2010, respectively, was approximately $2.9 million, $2.3 million, and $0.3 million, respectively. Based on the Companys other intangible assets as of December 31, 2012, aggregate expense related to
amortization of other intangible assets is expected to be $2.8 million in 2013, and $2.1 million, $1.1 million, and $0.3 million for fiscal years 2014, 2015, and 2016, respectively.
92
9. Property and Equipment
Property and equipment include (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Network equipment
|
|
$
|
168,637
|
|
|
$
|
176,307
|
|
Computer equipment
|
|
|
10,398
|
|
|
|
9,129
|
|
Furniture and fixtures
|
|
|
2,595
|
|
|
|
2,480
|
|
Leasehold improvements
|
|
|
6,684
|
|
|
|
6,775
|
|
Other equipment
|
|
|
534
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188,848
|
|
|
|
195,144
|
|
Less: accumulated depreciation
|
|
|
(147,597
|
)
|
|
|
(138,776
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
41,251
|
|
|
$
|
56,368
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2012, the Company removed property, plant, and equipment and the associated
accumulated depreciation of approximately $21.9 million to reflect the retirement of property, plant, and equipment that was fully depreciated and no longer in service.
Cost of revenue depreciation expense related to property and equipment was approximately $28.0 million, $28.0 million, and $22.2 million, respectively, for the years ended December 31,
2012, 2011, and 2010, respectively.
Operating expense depreciation and amortization expense related to property and equipment
was approximately $3.0 million, $2.5 million, and $2.1 million, respectively, for the years ended December 31, 2012, 2011, and 2010, respectively.
10. Other Assets
Other assets include (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Prepaid bandwidth and backbone services
|
|
$
|
5,799
|
|
|
$
|
7,373
|
|
Vendor deposits and other
|
|
|
729
|
|
|
|
1,384
|
|
Deferred expenses
|
|
|
207
|
|
|
|
253
|
|
Cost basis investment
|
|
|
|
|
|
|
1,444
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
6,735
|
|
|
$
|
10,454
|
|
|
|
|
|
|
|
|
|
|
The Company enters into multi-year arrangements with a telecommunications providers for bandwidth and backbone
capacity. The agreements sometimes require the Company to make advanced payments for future services to be received.
93
11. Other Current Liabilities
Other current liabilities include (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Accrued compensation and benefits
|
|
$
|
6,703
|
|
|
$
|
4,421
|
|
Accrued cost of revenue
|
|
|
2,307
|
|
|
|
3,027
|
|
Accrued legal fees
|
|
|
1,591
|
|
|
|
1,507
|
|
Indirect taxes payable
|
|
|
1,029
|
|
|
|
633
|
|
Customer deposits
|
|
|
361
|
|
|
|
847
|
|
Other accrued expenses
|
|
|
2,875
|
|
|
|
2,760
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
14,866
|
|
|
$
|
13,195
|
|
|
|
|
|
|
|
|
|
|
12. Other Long Term Liabilities
Other long term liabilities include (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred rent
|
|
$
|
3,543
|
|
|
$
|
3,352
|
|
Income taxes payable
|
|
|
1,718
|
|
|
|
|
|
Contingent consideration liability
|
|
|
|
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
Total other long term liabilities
|
|
$
|
5,261
|
|
|
$
|
4,194
|
|
|
|
|
|
|
|
|
|
|
13. Contingencies
Akamai Litigation
In June 2006, Akamai Technologies, Inc., or Akamai, and the Massachusetts Institute of Technology, or MIT, filed a lawsuit against the Company in the United States District Court for the District of
Massachusetts alleging that the Company was infringing two patents assigned to MIT and exclusively licensed by MIT to Akamai, United States Patent No. 6,553,413 (the 413 patent) and United States Patent No. 6,108,703 (the
703 patent). In September 2006, Akamai and MIT expanded their claims to assert infringement of a third, recently issued patent United States Patent No. 7,103,645 (the 645 patent). Before trial, Akamai waived by stipulation its
claims of indirect or induced infringement and proceeded to trial only on the theory of direct infringement. In February 2008, a jury returned a verdict in this lawsuit, finding that the Company infringed four claims of the 703 patent at issue
and rejecting the Companys invalidity defenses. The jury awarded an aggregate of approximately $45.5 million which includes lost profits, reasonable royalties and price erosion damages for the period April 2005 through December 31, 2007.
In addition, the jury awarded prejudgment interest which the Company estimated to be $2.6 million at December 31, 2007. The Company recorded an aggregate $48.1 million as a provision for litigation as of December 31, 2007. During 2008, the
Company recorded a potential additional provision of approximately $17.5 million for potential additional infringement damages and interest. The total provision for litigation at December 31, 2008 was $65.6 million.
On July 1, 2008, the court denied the Companys Motions for Judgment as a Matter of Law (JMOL), Obviousness, and a New Trial.
The court also denied Akamais Motion for Permanent Injunction as premature and its Motions for Summary Judgment regarding the Companys equitable defenses. The court conducted a bench trial in November 2008 regarding the Companys
equitable defenses. The Company also filed a motion for reconsideration of the courts earlier denial of the Companys motion for JMOL. The Companys motion for JMOL was based largely upon a clarification in the standard for a finding
of joint infringement articulated by the
94
Federal Circuit in the case of
Muniauction, Inc. v. Thomson Corp.
, released after the court denied the Companys initial motion for JMOL. On April 24, 2009, the court issued its
order and memorandum setting aside the adverse jury verdict and ruling that the Company did not infringe Akamais 703 patent and that the Company was entitled to JMOL. Based upon the courts April 24, 2009 order, the
Company reversed the $65.6 million provision for litigation previously recorded for this lawsuit as the Company no longer believed that payment of any amounts represented by the litigation provision was probable. The court entered final judgment in
favor of the Company on May 22, 2009, and Akamai filed its notice of appeal of the courts decision on May 26, 2009. On December 20, 2010, the Court of Appeals for the Federal Circuit issued its opinion affirming the trial
courts entry of judgment in the Companys favor. On February 18, 2011, Akamai filed a motion with the Court of Appeals for the Federal Circuit seeking a rehearing and rehearing
en banc
. On April 21, 2011, the Court of
Appeals for the Federal Circuit issued an order denying the petition for rehearing, granting the petition for rehearing
en banc
, vacating the December 20, 2010 opinion affirming the trial courts entry of judgment in the
Companys favor, and reinstated the appeal.
On August 31, 2012, the Court of Appeals for the Federal Circuit issued
its opinion in the case. The Court of Appeals stated that the trial court correctly determined that the Company did not directly infringe Akamais 703 patent and upheld the trial courts decision to vacate the original jurys
damages award. The Court of Appeals also held that the Company did not infringe Akamais 413 or 645 patents. A slim majority in this three-way divided opinion also announced a revised legal theory of induced infringement, remanded
the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to prove that the Company induced its customers to infringe Akamais patent under the Court of Appeals new legal standard. On December 28, 2012,
the Company filed a petition for writ of certiorari to the United States Supreme Court to appeal this sharply divided Court of Appeals decision and sought to stay any proceedings at the trial court until the Supreme Court rules on that petition.
Akamai then filed a cross petition for consideration of the Court of Appeals standard for direct infringement. The Company believes that the Court of Appeals new induced infringement standard runs counter to the Patent Act and Supreme Court
precedent, and it should be overturned by the Supreme Court. Additionally, just as the Company has successfully shown that it does not directly infringe Akamais patent, the Company firmly believes that it ultimately would be successful in
showing that it does not infringe Akamais patent under the Court of Appeals majoritys new induced infringement theory, and it will continue to vigorously defend against the allegation. The Company is not able at this time to estimate the
range of a potential loss nor in light of the status of the litigation does it believe a loss is probable, and therefore no provision for this lawsuit is recorded in the consolidated financial statements.
Legal and other expenses associated with this case have been significant. The Company includes these litigation expenses in general and
administrative expenses as incurred, as reported in its consolidated statement of operations.
Other Litigation
The Company is 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 the Companys business, financial position, results of
operations, or cash flows. Litigation relating to the content delivery services industry is not uncommon, and the Company is, and from time to time has been, subject to such litigation. No assurances can be given with respect to the extent or
outcome of any such litigation in the future.
Other Matters
The Company is 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 the Company conducting business online or providing Internet-related services. Increased
regulation could negatively affect the Companys
95
business directly, as well as the businesses of its customers, which could reduce their demand for the Companys services. For example, tax authorities in various states and abroad may
impose taxes on the Internet-related revenue the Company generates 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, the Company may
come under audit, which could result in changes to its tax estimates. The Company believes it maintains adequate tax reserves to offset potential liabilities that may arise upon audit. Although the Company believes its 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.
14. Net (Loss) Income per Share
The Company calculates basic and diluted earnings per weighted average share based on net income (loss). The
Company uses the weighted-average number of shares of common stock outstanding during the period for the computation of basic earnings per share. Diluted earnings per share include the dilutive effect of convertible stock options and restricted
stock units in the weighted-average number of shares of common stock outstanding. Net income (loss) from continuing operations is utilized in determining whether potential shares of common stock are dilutive or antidilutive for purposes of computing
diluted net income (loss) per share.
The following table sets forth the components used in the computation of basic and
diluted net (loss) income per share for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Net loss from continuing operations
|
|
$
|
(30,035
|
)
|
|
$
|
(30,066
|
)
|
|
$
|
(22,230
|
)
|
Net (loss) income from discontinued operations
|
|
|
(2,861
|
)
|
|
|
4,778
|
|
|
|
1,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(32,896
|
)
|
|
$
|
(25,288
|
)
|
|
$
|
(20,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares of common stock
|
|
|
101,283
|
|
|
|
109,236
|
|
|
|
94,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares of common stock
|
|
|
101,283
|
|
|
|
109,236
|
|
|
|
94,300
|
|
Dilutive effect of stock options and restricted stock units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares of common stock
|
|
|
101,283
|
|
|
|
109,236
|
|
|
|
94,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.30
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.24
|
)
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.05
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.32
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.30
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.24
|
)
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.05
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share
|
|
$
|
(0.32
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2012, 2011 and 2010, outstanding options and restricted stock units of
approximately 2.3 million, 4.4 million and 5.0 million, respectively, were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive.
96
15. Stockholders Equity
Common Stock
During 2012, the Company completed two stock repurchase plans and commenced a third. On September 12, 2011, the Companys Board of Directors (Board) authorized and approved a repurchase plan
that authorized the Company to repurchase up to $25 million of its shares of common stock, exclusive of any commissions, markups or expenses, from time to time through March 12, 2012. During the year ended December 31, 2012, the Company
repurchased and cancelled approximately 0.3 million shares under the initial repurchase plan. During the period September 12, 2011 through March 12, 2012, the Company repurchased and cancelled approximately 9.7 million shares of
common stock for approximately $25.0 million ($25.2 million including commissions) under the initial repurchase plan. All repurchased shares were cancelled and returned to authorized but unissued status. As of December 31, 2012, the
Companys initial repurchase plan was complete.
On May 3, 2012, the Company announced a second common stock
repurchase plan that authorized the Company to repurchase up to $15 million of its shares of common stock, exclusive of any commissions, markups or expenses, from time to time through December 15, 2012. During the year ended December 31,
2012, the Company repurchased and cancelled approximately 5.7 million shares of common stock for approximately $15.0 million ($15.1 million including commissions) under the second repurchase plan. All repurchased shares were cancelled and
returned to authorized but unissued status. As of December 31, 2012, the Companys second repurchase plan was complete.
On October 29, 2012, the Companys Board authorized and approved a third common stock repurchase plan that authorized the Company to repurchase up to $10 million of its shares of common stock,
exclusive of any commissions, markups or expenses, from time to time through May 9, 2013. Any repurchased shares will be cancelled and return to authorized but unissued status. During the three months ended December 31, 2012, the Company
purchased and cancelled approximately 2.2 million shares under the third repurchase plan for approximately $4.6 million including commissions.
During the year ended December 31, 2012, the Company issued 350,000 shares of its common stock in connection with the expiration of the holdback period related to the acquisition of Clickability. For
additional information regarding the acquisition of Clickability, see Note 4.
The Company has reserved approximately
6,171,000 unissued shares of Common Stock for future options and restricted stock units under the incentive compensation plan.
Preferred Stock
The board of directors has authorized the issuance of up to 7,500,000 shares of preferred stock at December 31, 2012. The preferred
stock may be issued in one or more series pursuant to a resolution or resolutions providing for such issuance duly adopted by the board of directors. As of December 31, 2012, the Board had not adopted any resolutions for the issuance of
preferred stock.
97
16. Share-Based Compensation
Incentive Compensation Plans
The Company maintains Incentive Compensation Plans (the Plans) to attract, motivate, retain, and reward high quality executives and other employees, officers, directors, and consultants by enabling such
persons to acquire or increase a propriety interest in the Company. The Plans are intended to be qualified plans under the Internal Revenue Code.
The Plans allow the Company to award stock option grants and restricted stock units (RSUs) to employees, directors and consultants of the Company. During 2012, the Company has granted awards to employees,
directors and consultants. The exercise price of incentive stock options granted under the Plan may not be granted at less than 100% of the fair market value of the Companys common stock on the date of the grant.
Data pertaining to stock option activity under the Plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
(In thousands)
|
|
|
|
|
Balance at December 31, 2009
|
|
|
7,860
|
|
|
$
|
5.22
|
|
Granted
|
|
|
5,751
|
|
|
|
4.17
|
|
Exercised
|
|
|
(829
|
)
|
|
|
2.35
|
|
Cancelled
|
|
|
(774
|
)
|
|
|
4.95
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
12,008
|
|
|
|
4.94
|
|
Granted
|
|
|
4,675
|
|
|
|
5.68
|
|
Exercised
|
|
|
(262
|
)
|
|
|
2.30
|
|
Cancelled
|
|
|
(3,073
|
)
|
|
|
5.04
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
13,348
|
|
|
|
5.23
|
|
Granted
|
|
|
2,972
|
|
|
|
2.40
|
|
Exercised
|
|
|
(175
|
)
|
|
|
1.08
|
|
Cancelled
|
|
|
(1,834
|
)
|
|
|
6.10
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
14,310
|
|
|
|
4.58
|
|
|
|
|
|
|
|
|
|
|
98
The following table summarizes the information about stock options outstanding and
exercisable at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise Price
|
|
Number of
Options
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Options
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
$ 0.00 $ 1.50
|
|
|
725
|
|
|
|
2.95
|
|
|
$
|
0.35
|
|
|
|
725
|
|
|
$
|
0.35
|
|
$ 1.51 $ 3.00
|
|
|
2,759
|
|
|
|
9.32
|
|
|
|
2.09
|
|
|
|
408
|
|
|
|
2.37
|
|
$ 3.01 $ 4.50
|
|
|
4,742
|
|
|
|
7.21
|
|
|
|
3.80
|
|
|
|
3,099
|
|
|
|
3.78
|
|
$ 4.51 $ 6.00
|
|
|
2,708
|
|
|
|
7.39
|
|
|
|
5.19
|
|
|
|
1,728
|
|
|
|
5.09
|
|
$ 6.01 $ 7.50
|
|
|
1,907
|
|
|
|
5.04
|
|
|
|
6.46
|
|
|
|
1,725
|
|
|
|
6.46
|
|
$ 7.51 $ 9.00
|
|
|
891
|
|
|
|
7.70
|
|
|
|
8.03
|
|
|
|
477
|
|
|
|
8.00
|
|
$ 9.01 $10.50
|
|
|
10
|
|
|
|
4.86
|
|
|
|
9.93
|
|
|
|
10
|
|
|
|
9.93
|
|
$10.51 $12.00
|
|
|
164
|
|
|
|
4.22
|
|
|
|
11.13
|
|
|
|
142
|
|
|
|
11.15
|
|
$12.01 $13.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$13.51 $15.00
|
|
|
404
|
|
|
|
4.41
|
|
|
|
15.00
|
|
|
|
404
|
|
|
|
15.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,310
|
|
|
|
|
|
|
|
|
|
|
|
8,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the year ended December 31, 2012, 2011, and
2010 on a per-share basis was approximately $1.60, $3.70, and $2.55, respectively. The total intrinsic value of the options exercised during the years ended December 31, 2012, 2011, and 2010 was approximately $0.3 million,
$0.8 million, and $2.8 million, respectively. The aggregate intrinsic value of options outstanding at December 31, 2012 is approximately $2.0 million. The weighted average remaining contractual term of options currently exercisable at
December 31, 2012 was 6 years.
The Company measures all employee share-based payment awards using a fair-value method.
The grant date fair value is determined using the Black-Scholes-Merton pricing model. The Black-Scholes-Merton valuation calculation requires the Company to make key assumptions such as future stock price volatility, expected terms, risk-free rates,
and dividend yield. The Companys expected volatility is derived from its own volatility rate as a publicly traded company and historical volatilities of similar public companies within the Internet services and network industry. Each
companys historical volatility is weighted based on certain qualitative factors and combined to produce a single volatility factor used by the Company. The Company does not have enough historical experience as a public company to provide a
reasonable estimate of the expected term; therefore, expected term is calculated using the short-cut method, which takes into consideration the grants contractual life and the vesting periods. The risk-free interest factor is based
on the United States Treasury yield curve in effect at the time of the grant for zero coupon United States Treasury notes with maturities of approximately equal to each grants expected term. The Company estimates its forfeiture rate based on
an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. Any impact from a forfeiture rate adjustment
will be recognized in full in the period of the adjustment.
99
The fair value of each new option awarded is estimated on the grant date using the
Black-Scholes-Merton model using the assumptions noted in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Expected volatility
|
|
|
78.10
|
%
|
|
|
72.25
|
%
|
|
|
67.08
|
%
|
Expected term, years
|
|
|
5.88
|
|
|
|
6.08
|
|
|
|
6.08
|
|
Risk-free interest
|
|
|
0.91
|
%
|
|
|
2.14
|
%
|
|
|
2.57
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Unrecognized share-based compensation related to stock options totaled $11.8 million at December 31, 2012.
The Company expects to amortize unvested stock compensation related to stock options over a weighted average period of approximately 2 years at December 31, 2012.
During the year ended December 31, 2012, 2011, and 2010, the Company recorded share-based compensation related to stock options of approximately $7.4 million, $9.6 million, and $9.8 million,
respectively.
The following table summarizes the different types of RSUs outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2012
|
|
|
Year Ended
December 31,
2011
|
|
|
Year Ended
December 31,
2010
|
|
RSUs with service-based vesting conditions
|
|
|
4,232
|
|
|
|
3,392
|
|
|
|
1,473
|
|
Performance-based RSUs
|
|
|
349
|
|
|
|
459
|
|
|
|
1,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested RSUs
|
|
|
4,581
|
|
|
|
3,851
|
|
|
|
2,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Each RSU represents the right to receive one share of the Companys common stock upon vesting. The fair value of
these RSUs was calculated based upon the Companys closing stock price on the date of grant, and the share-based compensation expense is being recognized over the service period of the award.
Data pertaining to RSUs activity under the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
|
Weighted
Average
Fair Value
|
|
|
|
(In thousands)
|
|
|
|
|
Balance at December 31, 2009
|
|
|
2,184
|
|
|
$
|
5.22
|
|
Granted
|
|
|
1,939
|
|
|
|
4.18
|
|
Vested
|
|
|
(1,039
|
)
|
|
|
5.57
|
|
Cancelled
|
|
|
(457
|
)
|
|
|
1.12
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
2,627
|
|
|
|
4.31
|
|
Granted
|
|
|
2,829
|
|
|
|
3.32
|
|
Vested
|
|
|
(986
|
)
|
|
|
4.09
|
|
Cancelled
|
|
|
(619
|
)
|
|
|
4.04
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
3,851
|
|
|
|
3.66
|
|
Granted
|
|
|
4,085
|
|
|
|
2.37
|
|
Vested
|
|
|
(2,450
|
)
|
|
|
2.68
|
|
Cancelled
|
|
|
(905
|
)
|
|
|
3.17
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
4,581
|
|
|
|
2.74
|
|
|
|
|
|
|
|
|
|
|
100
The weighted-average grant-date fair value of RSUs granted during the years ended
December 31, 2012, 2011, and 2010 was approximately $2.37, $3.32, and $4.18, respectively. The total intrinsic value of the units vested during the year ended December 31, 2012, 2011, and 2010 was approximately $5.4 million, $2.9 million,
and $5.4 million, respectively. The aggregate intrinsic value of RSUs outstanding at December 31, 2012 is $10.2 million.
Share-based payment compensation related to all restricted stock awards and RSUs for the years ended December 31, 2012, 2011, and 2010 was approximately $7.1 million, $6.3 million, and
$6.4 million, respectively. At December 31, 2012 there was approximately $8.4 million of total unrecognized compensation costs related to RSUs. That cost is expected to be recognized over a weighted-average period of approximately
2.30 years as of December 31, 2012.
The Companys stock option plan contains an early exercise
provision. Upon early exercise of the option, the exercising holder receives restricted common stock. The restricted stock shares vest over the same period as the original stock option award. If the restricted stock does not vest because the
required service period is unmet, the Company has the option to reacquire the restricted common stock for the lesser of the amount paid to acquire it or the fair value of the common stock at the call date. As of December 31, 2012, 2011, and
2010, respectively, there were no unvested shares of restricted common stock related to the early exercise of stock options subject to repurchase by the Company.
The Company applies the straight-line attribution method to recognize compensation costs associated with awards that are not subject to graded vesting. For awards that are subject to graded vesting and
performance based awards, the Company recognizes compensation costs separately for each vesting tranche. The Company also estimates when and if performance-based awards will be earned. If an award is not considered probable of being earned, no
amount of stock-based compensation is recognized. If the award is deemed probable of being earned, related compensation expense is recorded over the estimated service period. To the extent the Companys estimates of awards considered probable
of being earned changes, the amount of stock-based compensation recognized will also change.
The Company recorded share-based
compensation expense related to stock options, restricted stock and RSUs during the years ended December 31, 2012, 2011, and 2010 of approximately $14.5 million, $15.9 million, and $16.2 million, respectively. Unrecognized
share-based compensation expense totaled approximately $20.1 million at December 31, 2012, which is expected to be recognized over a weighted average period of approximately 2.14 years.
101
The following table summarizes the components of share-based compensation expense included
in the Companys consolidated statement of operations for the years ended December 31, 2012, 2011, and 2010 in accordance with current accounting standards (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Share-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
7,426
|
|
|
$
|
9,568
|
|
|
$
|
9,818
|
|
Restricted stock units
|
|
|
7,049
|
|
|
|
6,313
|
|
|
|
6,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
14,475
|
|
|
$
|
15,881
|
|
|
$
|
16,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of share-based compensation expense on income by financial statement line:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
$
|
2,117
|
|
|
$
|
2,419
|
|
|
$
|
2,359
|
|
General and administrative expense
|
|
|
6,511
|
|
|
|
6,132
|
|
|
|
5,984
|
|
Sales and marketing expense
|
|
|
3,104
|
|
|
|
3,776
|
|
|
|
4,840
|
|
Research and development expense
|
|
|
2,743
|
|
|
|
3,554
|
|
|
|
2,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost related to share-based compensation expense
|
|
$
|
14,475
|
|
|
$
|
15,881
|
|
|
$
|
16,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. Related Party Transactions
In July 2006, an aggregate of 39,869,960 shares of Series B Preferred Stock was issued at a purchase price of
$3.26 per share to certain accredited investors in a private placement transaction. As a result of this transaction, entities affiliated with Goldman, Sachs & Co., one of the lead underwriters of the Companys initial public offering,
became holders of more than 10% of the Companys common stock. On June 14, 2007, upon the closing of the Companys IPO, all outstanding shares of the Companys Series B Convertible Preferred Stock automatically converted
into shares of common stock on a 1-for-1 share basis. As of December 31, 2012, 2011, and 2010, Goldman, Sachs & Co. owned approximately 31%, 29%, and 30%, respectively, of the Companys outstanding common stock.
The Company leased office space to an entity in which current members of its board of directors have an ownership interest. During the
years ended December 31, 2012 and 2011, the Company invoiced and collected approximately $15,640 and $70,500, respectively, in office space rental from this entity. For the year ended December 31, 2010 there was no relationship between the
Company and this entity for office space rental.
The Company sells services to entities owned, in whole or in part, by
certain of the Companys executive officers and directors. Revenue derived from related parties was approximately 1% for the years ended December 31, 2012 and 2011, respectively. For the year ended December 31, 2010, the Company did
not generate any revenue from related parties. Total outstanding accounts receivable from all related parties as of December 31, 2012 and 2011 was approximately $1.3 million and $0.4 million, respectively. As of December 31, 2012, the
Company has an allowance for doubtful accounts receivable of approximately $0.8 million for an outstanding related party accounts receivable.
The Company leased office space from a company owned by one of the Companys executives. Rent expense for the lease, including reimbursement for telecommunication lines, was approximately $0 for the
years ended December 31, 2012 and 2011, and was $4,000 for the year ended December 31, 2010.
102
18. Leases and Commitments
Operating Leases
The Company is committed to various non-cancelable operating leases for office space and office equipment which expire through 2019. Certain leases contain provisions for renewal options and rent
escalations upon expiration of the initial lease terms. Approximate future minimum lease payments over the remaining lease periods as of December 31, 2012 are as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
3,559
|
|
2014
|
|
|
2,953
|
|
2015
|
|
|
2,714
|
|
2016
|
|
|
2,054
|
|
2017 and thereafter
|
|
|
4,033
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
15,313
|
|
|
|
|
|
|
Purchase Commitments
The Company has long-term commitments for bandwidth usage and co-location with various networks and ISPs. The following summarizes minimum commitments as of December 31, 2012 (in thousands):
|
|
|
|
|
2013
|
|
$
|
33,538
|
|
2014
|
|
|
21,114
|
|
2015
|
|
|
15,646
|
|
2016
|
|
|
3,578
|
|
2017 and thereafter
|
|
|
69
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
73,945
|
|
|
|
|
|
|
Rent and operating expense relating to these operating lease agreements and bandwidth and co-location agreements was
approximately $58.8 million, $60.1 million, and $52.4 million, respectively, for the years ended December 31, 2012, 2011, and 2010.
Capital Leases
The Company leases equipment under capital lease
agreements which extend through 2016. As of December 31, 2012 and 2011, the outstanding balance for capital leases was approximately $2.1 and $3.9 million, respectively. The Company recorded assets under capital lease obligations of
approximately $5.1 and $5.3 million, respectively, as of December 31, 2012 and 2011. Related accumulated amortization totaled approximately $2.9 million and $1.4 million, respectively as of December 31, 2012 and 2011. The assets
acquired under capital leases and related accumulated amortization is included in property and equipment, net in the consolidated balance sheets. The related amortization is included in depreciation and amortization expense in the Consolidated
Statements of Operations. The average interest rate on the Companys outstanding capital leases at December 31, 2012 was approximately seven percent. Interest expense related to capital leases was approximately $0.2 million, $0.2 million,
and $0.1 million, respectively, for the years ended December 31, 2012, 2011, and 2010.
103
Future minimum capital lease payments at December 31, 2012 were as follows (in
thousands):
|
|
|
|
|
2013
|
|
$
|
1,377
|
|
2014
|
|
|
498
|
|
2015
|
|
|
238
|
|
2016
|
|
|
133
|
|
2017 and thereafter
|
|
|
5
|
|
|
|
|
|
|
Total
|
|
|
2,251
|
|
Amounts representing interest
|
|
|
(126
|
)
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
2,125
|
|
|
|
|
|
|
19. Concentrations
For each of the years ended December 31, 2012 and 2011, Netflix, Inc. represented approximately 11% of the
Companys total revenue. During the year ended December 31, 2010, the Company did not have any customers for which revenue exceeded 10% of total revenue.
Revenue from sources outside North America totaled approximately $56.4 million, $52.0 million, and $42.0 million, respectively, for the years ended December 31, 2012, 2011, and 2010.
During the year ended December 31, 2012, the Company had two countries, Japan and the United States, that accounted for 10% or more of the Companys total revenues. No single country outside of the United States accounted for 10% or more
of the Companys total revenues during the years ended December 31, 2011 and 2010, respectively.
20. Income Taxes
(Loss) income before income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
(Loss) income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(29,991
|
)
|
|
$
|
(30,438
|
)
|
|
$
|
(24,602
|
)
|
Foreign
|
|
|
437
|
|
|
|
(1,866
|
)
|
|
|
3,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(29,554
|
)
|
|
$
|
(32,304
|
)
|
|
$
|
(21,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the provision (benefit) for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
(20
|
)
|
|
|
198
|
|
|
|
130
|
|
Foreign
|
|
|
558
|
|
|
|
550
|
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
538
|
|
|
|
748
|
|
|
|
1,730
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
16
|
|
|
|
(2,571
|
)
|
|
|
80
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(73
|
)
|
|
|
(415
|
)
|
|
|
(1,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(57
|
)
|
|
|
(2,986
|
)
|
|
|
(1,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (benefit) provision
|
|
$
|
481
|
|
|
$
|
(2,238
|
)
|
|
$
|
727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
A reconciliation of the U.S. federal statutory rate to the Companys effective income
tax rate is shown in the table below (in thousands, except percent):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
U.S. federal statutory tax rate
|
|
$
|
(10,344
|
)
|
|
|
35
|
%
|
|
$
|
(11,306
|
)
|
|
|
35
|
%
|
|
$
|
(7,526
|
)
|
|
|
35
|
%
|
Impact related to sale of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
7,893
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
10,329
|
|
|
|
(35
|
)
|
|
|
52
|
|
|
|
|
|
|
|
8,311
|
|
|
|
(38
|
)
|
Foreign income taxes
|
|
|
351
|
|
|
|
(1
|
)
|
|
|
797
|
|
|
|
(3
|
)
|
|
|
(260
|
)
|
|
|
1
|
|
State income taxes
|
|
|
(20
|
)
|
|
|
|
|
|
|
198
|
|
|
|
(1
|
)
|
|
|
131
|
|
|
|
(1
|
)
|
Non-deductible expenses
|
|
|
168
|
|
|
|
(1
|
)
|
|
|
136
|
|
|
|
|
|
|
|
110
|
|
|
|
|
|
Uncertain tax positions
|
|
|
(18
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
(366
|
)
|
|
|
2
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
|
|
(1
|
)
|
Other
|
|
|
15
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
137
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
481
|
|
|
|
(2
|
)%
|
|
$
|
(2,238
|
)
|
|
|
7
|
%
|
|
$
|
727
|
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purpose. Significant components of the Companys deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
$
|
12,506
|
|
|
$
|
12,540
|
|
Net operating loss and tax credit carry-forwards
|
|
|
27,484
|
|
|
|
17,951
|
|
Deferred revenue
|
|
|
3,984
|
|
|
|
4,058
|
|
Accounts receivable reserves
|
|
|
1,281
|
|
|
|
1,388
|
|
Fixed assets
|
|
|
4,904
|
|
|
|
3,822
|
|
Other
|
|
|
921
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
51,080
|
|
|
|
40,281
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(2,103
|
)
|
|
|
(3,053
|
)
|
Prepaid expenses
|
|
|
(187
|
)
|
|
|
(173
|
)
|
Other
|
|
|
(160
|
)
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(2,450
|
)
|
|
|
(3,407
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(46,215
|
)
|
|
|
(36,215
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
2,415
|
|
|
$
|
659
|
|
|
|
|
|
|
|
|
|
|
The Company made certain corrections to the December 31, 2011 deferred tax asset balances compared to the amounts
presented in the prior year financial statements. These corrections related to fixed assets in the amount of $3.0 million and net operating loss and tax credit carryforwards in the amount of $0.4 million with an offsetting increase to the valuation
allowance of $3.4 million as of December 31, 2011. The corrections did not impact the net deferred tax asset of $0.7 million as of December 31, 2011.
In addition to the deferred tax assets listed in the table above, the Company has unrecorded tax benefits of $10.0 million and $9.9 million at December 31, 2012 and December 31, 2011
respectively, primarily attributable to the difference between the amount of the financial statement expense and the allowable tax deduction associated with employee stock options and restricted stock units, which, if subsequently realized will be
105
recorded to contributed capital. As a result of net operating loss carryforwards, the Company was not able to recognize the excess tax benefits of stock option deductions because the deductions
did not reduce income tax payable. Although not recognized for financial reporting purposes, this unrecorded tax benefit is available to reduce future income and is incorporated into the disclosed amounts of the Companys federal and state NOL
carryforwards, discussed below.
The federal and state net operating loss carryforwards relate to prior years NOLs,
which may be used to reduce tax liabilities in future years. At December 31, 2012, the Company had $68.3 million federal and $52.4 million state net operating loss carryforwards, including the NOLs discussed in the preceding paragraph. The
Companys federal net operating losses will begin to expire in 2019 and the state net operating loss carryforwards will begin to expire in 2012. Pursuant to Sections 382 and 383 of the Internal Revenue Code, the utilization of NOLs and other
tax attributes may be subject to substantial limitations if certain ownership changes occur during a three-year testing period (as defined by the Internal Revenue Code). At December 31, 2012 the Company had state tax credit carryforwards
of $0.6 million, which will expire at various dates beginning in 2013. At December 31, 2012 the Company had federal tax credit carryforwards of $0.3 million, which will expire at various dates beginning in 2026.
The Company reduces the carrying amounts of deferred tax assets by a valuation allowance, if based on the evidence available, it is
more-likely-than-not that such assets will not be realized. In making the assessment under the more-likely-than-not standard, appropriate consideration must be given to all positive and negative evidence related to the realization of the deferred
tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods by jurisdiction, unitary versus stand
alone state tax filings, the Companys experience with loss carryforwards not expiring unutilized, and all tax planning alternatives that may be available.
A valuation allowance has been recorded against the Companys deferred tax assets, with the exception of deferred tax assets at certain foreign subsidiaries and deferred tax assets relating to the
Companys uncertain tax positions, as management cannot conclude that it is more likely than not that these assets will be realized. No valuation allowance is being provided on $1.6 million of deferred tax assets associated with certain net
operating losses because it is believed that they will be used to offset the Companys liabilities relating to its uncertain tax positions.
The Company has certain taxable temporary differences related to intangible assets that cannot be offset by existing deductible temporary differences resulting in a deferred tax liability of approximately
$0.4 million and $0.6 million as of December 31, 2012 and 2011, respectively.
A summary of the activities associated
with the Companys reserve for unrecognized tax benefits, interest and penalties follow (in thousands):
|
|
|
|
|
|
|
Unrecognized
Tax Benefits
|
|
Balance at January 1, 2011
|
|
$
|
53
|
|
Settlements
|
|
|
|
|
Reduction for tax positions of prior years
|
|
|
(14
|
)
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
39
|
|
Additions for tax positions related to current year
|
|
|
1,718
|
|
Settlements
|
|
|
|
|
Reduction for tax positions of prior years
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
1,757
|
|
|
|
|
|
|
106
The Company recognizes interest and penalties related to unrecognized tax benefits in its
tax provision. As of December 31, 2012, the Company had an interest and penalties accrual related to unrecognized tax benefits of $80,000, which decreased during 2012 by $18,000. The Company anticipates its unrecognized tax benefits may
increase or decrease within twelve months of the reporting date, as audits or reviews are initiated or settled and as a result of settled potential tax liabilities in certain foreign jurisdictions. It is not currently reasonably possible to estimate
the range of change.
The Company files income tax returns in jurisdictions with varying statues of limitations. Tax years
2009 through 2011 generally remain subject to examination by federal and most state tax authorities. As of December 31, 2012, the Company is not under any federal or state examinations.
Income taxes have not been provided on a portion of the undistributed earnings of the Companys foreign subsidiaries over which the
Company had sufficient influence to control the distribution of such earnings and had determined that substantially all of such earnings were reinvested indefinitely. The undistributed earnings of the Companys foreign subsidiaries were
approximately $1.2 million at December 31, 2012. These earnings could become subject to either or both federal income tax and foreign withholding tax if they are remitted as dividends, if foreign earnings are loaned to any of the
Companys domestic subsidiaries, or if the Company sells its investment in such subsidiaries.
21. 401(k) Plan
Effective January 1, 2004, the Company adopted the Limelight Networks 401(k) Plan covering effectively all
employees of the Company. The plan is a 401(k) profit sharing plan in which participating employees are fully vested in any contributions they make.
Effective January 1, 2007, the Company amended the plan to include a Company match. The Company will match employee deferrals as follows: a dollar-for-dollar match on eligible employees
deferral that does not exceed 3% of compensation for the year and a 50% match on the next 2% of the employee deferrals. Company employees may elect to reduce their current compensation up to the statutory limit. The Company made matching
contributions of approximately $1.1 million, $0.9 million, and $0.7 million, respectively, during the years ended December 31, 2012, 2011, and 2010.
22. Segment Reporting
The Company operates in one industry segment content delivery and related services. The Company operates in
three geographic areas North America, Europe, Middle East and Africa (EMEA) and Asia Pacific, including Japan.
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Companys chief operating decision maker is its Chief Executive Officer. The Companys Chief
Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held
accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single operating segment.
107
Revenue by geography is based on the location of the customer from which the revenue is
earned. The following table sets forth revenue and long-lived assets by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic revenue
|
|
$
|
123,866
|
|
|
$
|
119,298
|
|
|
$
|
112,243
|
|
International revenue EMEA
|
|
|
26,476
|
|
|
|
25,968
|
|
|
|
23,984
|
|
International revenue Asia Pacific
|
|
|
29,894
|
|
|
|
26,026
|
|
|
|
17,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
180,236
|
|
|
$
|
171,292
|
|
|
$
|
154,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Long-lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic long-lived assets
|
|
$
|
35,318
|
|
|
$
|
49,831
|
|
|
$
|
39,692
|
|
International long-lived assets
|
|
|
12,320
|
|
|
|
15,744
|
|
|
|
15,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
47,638
|
|
|
$
|
65,575
|
|
|
$
|
54,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23. Fair Value Measurements
The Company evaluates certain of its financial instruments within the three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value. These tiers include:
|
|
|
|
|
|
|
Level 1
|
|
|
|
|
|
defined as observable inputs such as quoted prices in active markets;
|
Level 2
|
|
|
|
|
|
defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
|
Level 3
|
|
|
|
|
|
defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
As of December 31, 2012 and 2011, the Company held certain assets and liabilities that were required
to be measured at fair value on a recurring basis. These include money market funds, commercial paper, corporate notes and bonds, U.S. government agency bonds, and publicly traded stocks, which are classified as either cash and cash equivalents or
marketable securities. The Company also had acquisition related contingent consideration which is classified as a current liability on the Companys consolidated balance sheets.
The Companys financial assets are valued using market prices on both active markets (level 1) and less active markets
(level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for
comparable instruments or identical instruments in less active markets. Level 3 inputs are valued using models that take into account the terms of the arrangement as well as multiple inputs where applicable, such as estimated units sold and other
customer utilization metrics.
108
The following is a summary of fair value measurements at December 31, 2012 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
|
Total
|
|
|
Quoted
Prices
In Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency bonds (1)
|
|
$
|
6,270
|
|
|
$
|
|
|
|
$
|
6,270
|
|
|
$
|
|
|
Money market funds (2)
|
|
|
14,697
|
|
|
|
14,697
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds (1)
|
|
|
9,529
|
|
|
|
|
|
|
|
9,529
|
|
|
|
|
|
Commercial paper (1)
|
|
|
500
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
Certificate of deposit (1)
|
|
|
2,741
|
|
|
|
|
|
|
|
2,741
|
|
|
|
|
|
Publicly traded common stock (1)
|
|
|
18
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
33,755
|
|
|
$
|
14,715
|
|
|
$
|
19,040
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Classified in marketable securities
|
(2)
|
Classified in cash and cash equivalents
|
For the year ended December 31, 2012, realized gains and losses for marketable securities are reported in interest
income, unrealized gains and losses for marketable securities are included in other comprehensive income and expense. For the year ended December 31, 2012, the Company had net unrealized losses of approximately $28,000.
The fair value measurement for contingent consideration is based on significant inputs not observed in the market and thus represents a
Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Companys own assumptions in measuring fair value.
The progressions of the Companys Level 3 instruments for the year ended December 31, 2012 are shown in the table below (in
thousands):
|
|
|
|
|
|
|
Acquisition
Related
Contingent
Consideration
|
|
Balance at December 31, 2011
|
|
$
|
994
|
|
Adjustment to fair value of AcceloWeb contingent consideration
|
|
|
(842
|
)
|
Payment of contingent consideration
|
|
|
(152
|
)
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
|
|
|
|
|
|
|
109
The following is a summary of money market funds, marketable securities, other
investment-related assets and current liabilities at December 31, 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
|
Total
|
|
|
Quoted
Prices
In Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency bonds (1)
|
|
$
|
9,614
|
|
|
$
|
|
|
|
$
|
9,614
|
|
|
$
|
|
|
Money market funds (2)
|
|
|
24,855
|
|
|
|
24,855
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds (1)
|
|
|
5,757
|
|
|
|
|
|
|
|
5,757
|
|
|
|
|
|
Commercial paper (1) (2)
|
|
|
2,749
|
|
|
|
|
|
|
|
2,749
|
|
|
|
|
|
Certificate of deposit (1)
|
|
|
2,730
|
|
|
|
|
|
|
|
2,730
|
|
|
|
|
|
Publicly traded common stock (1)
|
|
|
51
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
45,756
|
|
|
$
|
24,906
|
|
|
$
|
20,850
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition related contingent consideration
|
|
$
|
994
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
994
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Classified in marketable securities
|
(2)
|
Classified in cash and cash equivalents
|
For the year ended December 31, 2011, realized gains and losses for marketable securities are reported in interest
income, unrealized gains and losses for marketable securities are included in other comprehensive income and expense. For the year ended December 31, 2011, the Company had net unrealized gains of approximately $0.1 million.
On May 9, 2011, the Company acquired AcceloWeb. The total consideration associated with the AcceloWeb acquisition included
contingent consideration with an aggregate potential value of $8.0 million ($4.0 million payable in cash and $4.0 million payable in the Companys common stock) with terms described in Note 4. Additionally, the total consideration
associated with the Delve acquisition in July 2010 included contingent consideration of up to $0.5 million upon the achievement of certain financial milestones.
The progressions of the Companys Level 3 instruments for the year ended December 31, 2011 are shown in the table below (in thousands):
|
|
|
|
|
|
|
Acquisition
Related
Contingent
Consideration
|
|
Balance at December 31, 2010
|
|
$
|
414
|
|
Additions
|
|
|
764
|
|
Accretion
|
|
|
97
|
|
Payment of contingent consideration
|
|
|
(281
|
)
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
994
|
|
|
|
|
|
|
The carrying amount of cash equivalents approximates fair value because their maturity is less than three
months. The carrying amount of short-term and long-term marketable securities approximates fair value as the
110
securities are marked to market as of each balance sheet date with any unrealized gains and losses reported in stockholders equity. The carrying amount of accounts receivable, accounts
payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts.
The Company did not
estimate the fair value of its cost basis investment at December 31, 2011 because the Company did not identify any events or circumstances that would have a significant adverse effect on the fair value of the investment. Determining fair value
was not practicable because the entity in which the Company made the investment is not a publically traded company and information necessary to determine fair value was not available.
24. Quarterly Financial Results (unaudited)
The following table sets forth certain unaudited quarterly results of operations of the Company for the years ended
December 31, 2012 and 2011. In the opinion of management, this information has been prepared on the same basis as the audited consolidated financial statements and all necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts below for a fair statement of the quarterly information when read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
2012
|
|
|
June 30,
2012
|
|
|
Sept. 30,
2012
|
|
|
Dec. 31,
2012
|
|
Revenues
|
|
$
|
44,316
|
|
|
$
|
44,447
|
|
|
$
|
45,001
|
|
|
$
|
46,471
|
|
Gross profit
|
|
$
|
16,986
|
|
|
$
|
16,884
|
|
|
$
|
16,718
|
|
|
$
|
17,933
|
|
Net loss from continuing operations
|
|
$
|
(9,697
|
)
|
|
$
|
(9,437
|
)
|
|
$
|
(610
|
)
|
|
$
|
(10,291
|
)
|
Net loss from discontinued operations
|
|
$
|
(309
|
)
|
|
$
|
(391
|
)
|
|
$
|
(218
|
)
|
|
$
|
(1,943
|
)
|
Net loss
|
|
$
|
(10,006
|
)
|
|
$
|
(9,828
|
)
|
|
$
|
(828
|
)
|
|
$
|
(12,234
|
)
|
Basic and diluted net loss per share from continuing operations
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.10
|
)
|
Basic and diluted net loss per share from discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.12
|
)
|
Basic and diluted weighted average common shares outstanding
|
|
|
104,226
|
|
|
|
102,783
|
|
|
|
99,359
|
|
|
|
98,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
2011
|
|
|
June 30,
2011
|
|
|
Sept. 30,
2011
|
|
|
Dec. 31,
2011
|
|
Revenues
|
|
$
|
41,403
|
|
|
$
|
41,558
|
|
|
$
|
42,352
|
|
|
$
|
45,979
|
|
Gross profit
|
|
$
|
15,138
|
|
|
$
|
13,181
|
|
|
$
|
15,074
|
|
|
$
|
18,313
|
|
Net loss from continuing operations
|
|
$
|
(6,500
|
)
|
|
$
|
(11,169
|
)
|
|
$
|
(6,402
|
)
|
|
$
|
(5,995
|
)
|
Net (loss) income from discontinued operations
|
|
$
|
(3,318
|
)
|
|
$
|
(2,766
|
)
|
|
$
|
11,420
|
|
|
$
|
(558
|
)
|
Net (loss) income
|
|
$
|
(9,818
|
)
|
|
$
|
(13,935
|
)
|
|
$
|
5,018
|
|
|
$
|
(6,553
|
)
|
Basic and diluted net loss per share from continuing operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
Basic and diluted net (loss) income per share from discontinued operations
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.00
|
)
|
Basic and diluted net (loss) income per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.06
|
)
|
Basic and diluted weighted average common shares outstanding
|
|
|
103,917
|
|
|
|
113,113
|
|
|
|
113,662
|
|
|
|
106,253
|
|
111
In May 2010, the Company made a strategic investment in Gaikai, a private cloud-based gaming
technology company that allows users to play major PC and console games through a web browser. In June 2012, Sony entered into a definitive agreement to acquire Gaikai for approximately $380 million. In August 2012, Sony completed its acquisition of
Gaikai and the Company recorded a gain on sale of its cost basis investment in Gaikai of $9.4 million, which is included in the Companys quarterly results for the three month period ended September 30, 2012.
On January 27, 2010 and April 30, 2010, the Company acquired chors and EyeWonder. On September 1, 2011, the Company
completed the sale of its EyeWonder and chors video and rich media advertising services to DG. Accordingly, the results related to the sale of EyeWonder and chors for the year ended December 31, 2011 and prior periods have been reclassified to
discontinued operations. For the three month periods ended March 31, 2011 and the three month period ended June 30, 2011, the quarterly information previously reported on Form 10-Q was revised to reflect the operations of EyeWonder
and chors as discontinued operations.
The table below reflects the revisions made to revenues and gross profit for the
applicable periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Reported
|
|
|
Discontinued
Operations
|
|
|
Continuing
Operations
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
$
|
49,817
|
|
|
$
|
(8,414
|
)
|
|
$
|
41,403
|
|
June 30, 2011
|
|
$
|
50,539
|
|
|
$
|
(8,981
|
)
|
|
$
|
41,558
|
|
|
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
$
|
20,405
|
|
|
$
|
(5,267
|
)
|
|
$
|
15,138
|
|
June 30, 2011
|
|
$
|
18,678
|
|
|
$
|
(5,497
|
)
|
|
$
|
13,181
|
|
112