Notes to Consolidated Financial Statements
December 31, 2013
1. Nature of Business
Limelight Networks, Inc. (the Company) operates a globally distributed, high-performance network (its global network) and provides a suite of integrated services including content delivery services, video content management services, performance services for website and web application acceleration, and cloud storage services. These four services work collectively to enable any organization to deliver a digital experience to any device, anywhere in the world.
The Company, incorporated in Delaware, 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 (U.S. GAAP). 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. All information is presented in thousands, except per share amounts and where specifically noted.
Revision of Previously Issued Financial Statements
For the year ended December 31, 2013, the statement of operations was revised to reclassify certain amounts to cost of revenues, research and development and sales and marketing expenses that were previously reported in general and administrative expenses. The following table summarizes the reclassification by line item within the statement of operations for the prior years ended December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2012
|
|
As
|
|
As
|
|
Reported
|
Reclassifications
|
Revised
|
Cost of services
|
$
|
83,723
|
|
$
|
1,503
|
|
$
|
85,226
|
|
Total cost of revenue
|
111,715
|
|
1,503
|
|
113,218
|
|
Gross profit
|
68,521
|
|
(1,503
|
)
|
67,018
|
|
|
|
|
|
General and administrative
|
36,003
|
|
(1,503
|
)
|
34,500
|
|
Total operating expenses
|
107,072
|
|
(1,503
|
)
|
105,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2011
|
|
As
|
|
As
|
|
Reported
|
Reclassifications
|
Revised
|
Cost of services
|
$
|
81,556
|
|
$
|
1,420
|
|
$
|
82,976
|
|
Total cost of revenue
|
109,586
|
|
1,420
|
|
111,006
|
|
Gross profit
|
61,706
|
|
(1,420
|
)
|
60,286
|
|
|
|
|
|
General and administrative
|
32,138
|
|
(1,466
|
)
|
30,672
|
|
Sales and marketing
|
40,081
|
|
29
|
|
40,110
|
|
Research and development
|
17,146
|
|
17
|
|
17,163
|
|
Total operating expenses
|
94,152
|
|
(1,420
|
)
|
92,732
|
|
The Company also revised the statement of cash flow presentation for certain remeasurement gains and losses from the “Effect of exchange rate changes on cash and cash equivalents” line item to the “Foreign currency remeasurement (gain)
loss” line item included in “Net cash provided by operating activities of continuing operations.” The amount of this revision for the year ended December 31, 2012 was approximately
$103
.
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 in Note 5.
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results and outcomes may differ from those estimates. The results of operations presented in this annual report on Form 10-K are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 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 Company’s 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
$494
, which is included in the consolidated statement of comprehensive loss for the year ended December 31, 2011. 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 the years ended December 31, 2013, 2012 and 2011, the Company recorded additional foreign currency translation losses of
$941
,
$172
and
$1,069
, respectively, in its statements of comprehensive loss. During the year ended December 31, 2013, the Company recorded a foreign exchange remeasurement gain of approximately $
92
. During each of the years ended December 31,
2012
and
2011
, the Company recorded foreign exchange remeasurement losses of approximately
$513
and
$266
respectively. The foreign exchange remeasurement gains and losses are included in other income (expense) in the consolidated statements of operations.
Recent Accounting Standards
Recently Adopted Accounting Standards
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02, which requires additional disclosures regarding the reporting of reclassifications out of accumulated other comprehensive income (loss). ASU 2013-02 requires an entity to present, either on the face of the statement where net income (loss) is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income (loss) by the respective line items of net income (loss), but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income (loss) in its entirety in the same reporting period. This guidance is effective for reporting periods beginning after December 15, 2012. The Company adopted this guidance effective January 1, 2013, and has included the additional disclosures in Note 16.
In March 2013, the FASB issued ASU 2013-05, which permits an entity to release cumulative translation adjustments into net income when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, or, if a controlling financial interest is no longer held. The revised standard is effective for the Company for fiscal years beginning after December 15, 2013. The company adopted this guidance effective
January 1, 2014. The Company does not expect adoption of this ASU to significantly impact its consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740). ASU 2013-11 requires that unrecognized tax benefits be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The company has adopted this guidance, see further discussion in Note 21.
Revenue Recognition
The Company derives revenue primarily from the sale of services that comprise components of its Orchestrate Platform. The Company’s 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 customer’s usage of the Company’s 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 customer’s 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 Company’s best estimate of such prices.
The Company recognized approximately
$1,914
,
$2,837
, and
$4,309
, respectively, in revenue under multi-element arrangements for the years ended
December 31, 2013
,
2012
, and
2011
. As of
December 31, 2013
, the Company had no deferred revenue related to multi-element arrangements.
At the inception of a customer contract for service, the Company makes an assessment as to that customer’s 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 customer’s 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 recorded 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 allowance for doubtful accounts is based upon a calculation that uses the Company’s 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 Company’s historical write-off experience. These estimates could change significantly if the Company’s customers’ financial condition changes or if the economy in general deteriorates.
The Company’s reserve for service credits relates to credits that are expected to be issued to customers during the ordinary course of business. 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.
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 asset’s 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 Company’s 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. Contingent liabilities are disclosed 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, or 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,
2013
and
2012
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.
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 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 Company’s 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.
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 Company’s services, and network. Costs incurred in the development of the Company’s 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
$2,754
,
$2,474
, and
$2,290
for the years ended December 31,
2013
,
2012
, and
2011
, respectively.
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.
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.
3. Investments in Marketable Securities
The following is a summary of marketable securities (designated as available-for-sale) at
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
Government agency bonds
|
$
|
261
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
261
|
|
Certificate of deposit
|
4,080
|
|
|
—
|
|
|
4
|
|
|
4,076
|
|
Commercial paper
|
2,200
|
|
|
—
|
|
|
—
|
|
|
2,200
|
|
Corporate notes and bonds
|
26,001
|
|
|
15
|
|
|
7
|
|
|
26,009
|
|
|
32,542
|
|
|
15
|
|
|
11
|
|
|
32,546
|
|
Publicly traded common stock
|
12
|
|
|
—
|
|
|
6
|
|
|
6
|
|
Total marketable securities
|
$
|
32,554
|
|
|
$
|
15
|
|
|
$
|
17
|
|
|
$
|
32,552
|
|
At December 31, 2013, the Company evaluated its marketable securities and determined unrealized losses were due to fluctuations in interest rates. Management does not believe any of the unrealized losses represented an other-than-temporary impairment based on its evaluation of available evidence as of December 31, 2013. The Company’s intent is to hold these investments to such time as these assets are no longer impaired.
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, 2013
, by maturity, are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Due in one year or less
|
$
|
17,031
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
17,028
|
|
Due after one year and through five years
|
15,511
|
|
|
13
|
|
|
6
|
|
|
15,518
|
|
|
$
|
32,542
|
|
|
$
|
15
|
|
|
$
|
11
|
|
|
$
|
32,546
|
|
The following is a summary of marketable securities (designated as available-for-sale) at
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
4. Business Disposition
On December 23, 2013, the Company sold
100%
of the outstanding common stock of our Web Content Management (WCM) business for
$12,341
in cash, net of preliminary working capital adjustments. After allocating goodwill of
$3,799
to WCM, the sale resulted in a gain of approximately
$3,836
, which is included in Other, net in the consolidated statement of operations for the year ended December 31, 2013. This sale was not treated as a discontinued operation because the operations and cash flows of the WCM business cannot be clearly distinguished, operationally or for financial reporting purposes, from the rest of the Company.
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
$61,000
(
$66,000
gross cash proceeds less
$5,000
held in escrow) plus an estimated
$10,854
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
$10,854
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.
The following is a summary of activity related to the receivable from DG for the years ended December 31,
2013
and 2012:
|
|
|
|
|
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
|
|
Payments received from DG
|
(124
|
)
|
Allowance for doubtful accounts receivable and other receivable adjustments
|
(412
|
)
|
Balance, December 31, 2013
|
$
|
—
|
|
During the year ended December 31, 2013, the Company recorded a charge to discontinued operations of
$412
in the consolidated statement of operations to write-off the remaining accounts receivable balance from DG as it was determined the balance was no longer collectible.
During the year ended December 31, 2012, the Company recorded a charge to discontinued operations of
$2,861
in the consolidated statement of operations comprised of
$2,060
of allowance for doubtful accounts receivable and a reduction of
$818
related to Net Working Capital adjustments.
During the year ended December 31, 2011, the Company recorded a gain on sale of discontinued operations of
$14,756
net of income taxes. The gain on sale also reflects the realization of foreign currency translation adjustment gains of approximately
$400
and
$100
in unrealized losses on investments previously included in accumulated other comprehensive income (loss).
The sale of EyeWonder and chors met the criteria to be reported as discontinued operations. Accordingly, the operating results of EyeWonder and chors have been 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,
2013
,
2012
, and 2011, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
Revenues
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,302
|
|
Cost of revenues
|
—
|
|
|
—
|
|
|
(8,843
|
)
|
General and administrative expenses
|
(15
|
)
|
|
163
|
|
|
(6,055
|
)
|
Sales and marketing expenses
|
—
|
|
|
—
|
|
|
(8,183
|
)
|
Research and development expenses
|
—
|
|
|
—
|
|
|
(4,853
|
)
|
Depreciation and amortization
|
—
|
|
|
—
|
|
|
(3,761
|
)
|
Interest expense
|
—
|
|
|
—
|
|
|
(16
|
)
|
Interest income
|
—
|
|
|
—
|
|
|
21
|
|
Other (expense) income
|
—
|
|
|
—
|
|
|
(525
|
)
|
(Loss) gain on sale of discontinued operations, net of income taxes
|
(411
|
)
|
|
(3,024
|
)
|
|
14,756
|
|
(Loss) income before income taxes
|
(426
|
)
|
|
(2,861
|
)
|
|
4,843
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
(65
|
)
|
(Loss) income from discontinued operations
|
$
|
(426
|
)
|
|
$
|
(2,861
|
)
|
|
$
|
4,778
|
|
(Loss) income from discontinued operations per weighted average share:
|
|
|
|
|
|
Basic
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
Diluted
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
Shares used in per weighted average share calculation for discontinued operations:
|
|
|
|
|
|
Basic and diluted
|
96,851
|
|
|
101,283
|
|
|
109,236
|
|
6. Accounts Receivable
Accounts receivable include:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Accounts receivable
|
$
|
17,497
|
|
|
$
|
23,675
|
|
Unbilled accounts receivable
|
5,943
|
|
|
6,997
|
|
|
23,440
|
|
|
30,672
|
|
Less: credit allowance
|
(610
|
)
|
|
(640
|
)
|
Less: allowance for doubtful accounts
|
(1,400
|
)
|
|
(3,430
|
)
|
Total accounts receivable, net
|
$
|
21,430
|
|
|
$
|
26,602
|
|
7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Prepaid bandwidth and backbone services
|
$
|
2,045
|
|
|
$
|
3,614
|
|
Non-income taxes receivable (VAT)
|
1,588
|
|
|
1,739
|
|
Gaikai sale escrow receivable
|
—
|
|
|
1,237
|
|
Receivable from DG (see note 5)
|
—
|
|
|
536
|
|
Employee advances and prepaid recoverable commissions
|
189
|
|
|
551
|
|
Vendor deposits and other
|
4,370
|
|
|
4,631
|
|
Total prepaid expenses and other current assets
|
$
|
8,192
|
|
|
$
|
12,308
|
|
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
$9,420
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
$2,000
. The aggregate selling price was
$11,400
consisting of
$10,154
of cash received and
$1,237
held in escrow for a period of up to
15 months
to cover any potential indemnification claims. In November 2013, the Company received
$1,246
, which included the escrow receivable of
$1,237
, plus interest of
$9
.
Additionally, as a result of the acquisition by Sony, the Company’s contract for services with Gaikai was terminated and the Company received approximately
$1,300
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 Company’s acquisitions, the objective of the acquisition was to expand the Company’s 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 tests goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company concluded that it has one reporting unit and assigned the entire balance of goodwill to this reporting unit during 2013. The fair value of the reporting unit is determined using the Company’s market capitalization as of its annual impairment assessment date or each reporting date if circumstances indicate the goodwill might be impaired. Items that could reasonably be expected to negatively affect key assumptions used in estimating fair value include but are not limited to:
|
|
•
|
sustained decline in the Company’s stock price due to a decline in its financial performance due to the loss of key customers, loss of key personnel, emergence of new technologies or new competitors;
|
|
|
•
|
decline in overall market or economic conditions leading to a decline in its stock price; and
|
|
|
•
|
decline in observed control premiums paid in business combinations involving comparable companies.
|
The estimated fair value of the reporting unit is determined using a market approach. The Company’s market capitalization is adjusted for a control premium based on the estimated average and median control premiums of transactions involving companies comparable to the Company. As of the annual impairment testing date of October 31, 2013 and at December 31, 2013, the Company determined that goodwill was not impaired. The Company determined that the estimated fair value of its reporting unit exceeded carrying value by approximately
$24,800
or
11%
, and
$33,100
or
14%
, using the market capitalization of the Company plus an estimated control premium of
40%
on October 31, 2013 and December 31, 2013, respectively. Adverse changes to certain key assumptions as described above could result in a future charge to earnings.
The changes in the carrying amount of goodwill for continuing operations for the years ended
December 31, 2013
and 2012 were as follows:
|
|
|
|
|
Balance, December 31, 2011
|
$
|
80,105
|
|
Foreign currency translation adjustment
|
173
|
|
Balance, December 31, 2012
|
$
|
80,278
|
|
Foreign currency translation adjustment
|
556
|
|
Disposition of the WCM business
|
$
|
(3,799
|
)
|
Balance, December 31, 2013
|
$
|
77,035
|
|
Other intangible assets that are subject to amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Existing technologies
|
$
|
6,164
|
|
|
$
|
(3,875
|
)
|
|
$
|
2,289
|
|
Customer relationships
|
150
|
|
|
(85
|
)
|
|
65
|
|
Total other intangible assets
|
$
|
6,314
|
|
|
$
|
(3,960
|
)
|
|
$
|
2,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Aggregate expense related to amortization of other intangible assets included in continuing operations for the years ended December 31, 2013, 2012, and 2011 was approximately $
2,843
,
$2,871
, and
$2,350
, respectively. Based on the Company’s other intangible assets as of December 31, 2013, aggregate expense related to the amortization of other intangible assets is expected to be
$1,159
in
2014
, and
$892
,
$303
, and
$0
for fiscal years
2015
,
2016
, and
2017
, respectively.
The weighted average amortization period for Existing technologies is
4.7
years. The weighted average amortization period for Customer relationships is
6.0
years.
9. Property and Equipment
Property and equipment include:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Network equipment
|
$
|
180,896
|
|
|
$
|
168,637
|
|
Computer equipment
|
11,073
|
|
|
10,398
|
|
Furniture and fixtures
|
2,723
|
|
|
2,595
|
|
Leasehold improvements
|
7,162
|
|
|
6,684
|
|
Other equipment
|
570
|
|
|
534
|
|
|
202,424
|
|
|
188,848
|
|
Less: accumulated depreciation
|
(169,519
|
)
|
|
(147,597
|
)
|
Total property and equipment, net
|
$
|
32,905
|
|
|
$
|
41,251
|
|
Cost of revenue depreciation expense related to property and equipment was approximately
$22,942
,
$27,992
, and
$28,030
, respectively, for the years ended December 31,
2013
,
2012
, and
2011
, respectively.
Operating expense depreciation and amortization expense related to property and equipment was approximately
$2,961
,
$2,972
, and
$2,437
, respectively, for the years ended December 31,
2013
,
2012
, and
2011
, respectively.
10. Other Assets
Other assets include:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Prepaid bandwidth and backbone services
|
$
|
4,268
|
|
|
$
|
5,799
|
|
Vendor deposits and other
|
1,835
|
|
|
729
|
|
Deferred expenses
|
—
|
|
|
207
|
|
Total other assets
|
$
|
6,103
|
|
|
$
|
6,735
|
|
The Company enters into multi-year arrangements with telecommunications providers for bandwidth and backbone capacity. The agreements sometimes require the Company to make advanced payments for future services to be received.
11. Other Current Liabilities
Other current liabilities include:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Accrued compensation and benefits
|
$
|
6,682
|
|
|
$
|
6,703
|
|
Accrued cost of revenue
|
1,833
|
|
|
2,307
|
|
Accrued legal fees
|
1,769
|
|
|
1,591
|
|
Indirect taxes payable
|
639
|
|
|
1,029
|
|
Customer deposits
|
635
|
|
|
361
|
|
Other accrued expenses
|
3,464
|
|
|
2,875
|
|
Total other current liabilities
|
$
|
15,022
|
|
|
$
|
14,866
|
|
12. Other Long Term Liabilities
Other long term liabilities include:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Deferred rent
|
$
|
3,384
|
|
|
$
|
3,543
|
|
Income taxes payable
|
121
|
|
|
1,718
|
|
Total other long term liabilities
|
$
|
3,505
|
|
|
$
|
5,261
|
|
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 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 Company’s invalidity defenses. The jury awarded an aggregate of approximately
$45,500
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
$2,600
at December 31, 2007. The Company recorded an aggregate
$48,100
as a provision for litigation as of December 31, 2007. During 2008, the Company recorded a potential additional provision of approximately
$17,500
for potential additional infringement damages and interest. The total provision for litigation at December 31, 2008 was
$65,600
.
On July 1, 2008, the court denied the Company’s Motions for Judgment as a Matter of Law (JMOL), Obviousness, and a New Trial. The court also denied Akamai’s Motion for Permanent Injunction as premature and its Motions for Summary Judgment regarding the Company’s equitable defenses. The court conducted a bench trial in November 2008 regarding the Company’s equitable defenses. The Company also filed a motion for reconsideration of the court’s earlier denial of the Company’s motion for JMOL. The Company’s motion for JMOL was based largely upon a clarification in the standard for a finding of joint infringement articulated by the Federal Circuit in the case of
Muniauction, Inc. v. Thomson Corp.
, released after the court denied the Company’s 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 Akamai’s ’703 patent and that the Company was entitled to JMOL. Based upon the court’s April 24, 2009 order, the Company reversed the
$65,600
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 court’s decision on May 26, 2009. On December 20, 2010, the Court of Appeals for the Federal Circuit issued its opinion affirming the trial court’s entry of judgment in the Company’s 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 court’s entry of judgment in the Company’s 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 Akamai’s ’703 patent and upheld the trial court’s decision to vacate the original jury’s damages award. The Court of Appeals also held that the Company did not infringe Akamai’s ’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 Akamai’s 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 followed by an opposition to the Company’s petition. On January 10, 2014, the Supreme Court granted our petition for writ of certiorari and will hear argument in our case on April 30, 2014. The Company believes that the Court of Appeal’s 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 Akamai’s patent, the Company firmly believes that it will ultimately be successful in showing that it does not infringe Akamai’s patent under the Court of Appeals majority’s new induced infringement theory, and does not believe a loss is probable; therefore,
no
provision for this lawsuit is recorded in the consolidated financial statements.
In light of the status of the litigation, the Company believes that there is a reasonable possibility that it has incurred a loss related to the Akamai litigation. While the Company believes that there is a reasonable possibility that a loss has been incurred, the Company is not able to estimate a range of the loss due to the complexity and procedural status of the case. The Company will continue to vigorously defend against the allegation.
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 the 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 Company’s 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 Company’s business directly, as well as the businesses of its customers, which could reduce their demand for the Company’s 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 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 anti-dilutive 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 per share for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Net loss from continuing operations
|
$
|
(34,976
|
)
|
|
$
|
(30,035
|
)
|
|
$
|
(30,066
|
)
|
Net (loss) income from discontinued operations
|
(426
|
)
|
|
(2,861
|
)
|
|
4,778
|
|
Net loss available to common stockholders
|
$
|
(35,402
|
)
|
|
$
|
(32,896
|
)
|
|
$
|
(25,288
|
)
|
Basic weighted average outstanding shares of common stock
|
96,851
|
|
|
101,283
|
|
|
109,236
|
|
Basic weighted average outstanding shares of common stock
|
96,851
|
|
|
101,283
|
|
|
109,236
|
|
Dilutive effect of stock options and restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted average outstanding shares of common stock
|
96,851
|
|
|
101,283
|
|
|
109,236
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
Continuing operations
|
$
|
(0.36
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.28
|
)
|
Discontinued operations
|
(0.01
|
)
|
|
(0.02
|
)
|
|
0.05
|
|
Basic and diluted net loss per share
|
$
|
(0.37
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
For the years ended December 31,
2013
,
2012
and
2011
, outstanding options and restricted stock units of approximately
1,986
,
2,273
and
4,427
, respectively, were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive.
15. Stockholders’ Equity
Common Stock
The Company has had a share repurchase program since September 2011. The Company has repurchased shares of common stock from time to time through May 9, 2013. Through December 31, 2013, the Company has used a total of
$50,736
, including commissions and expenses, to repurchase
19,990,423
shares at an average cost per share of
$2.55
. All repurchased shares were cancelled and returned to authorized but unissued status.
In June 2013, the Company’s stockholders approved the Company’s 2013 Employee Stock Purchase Plan (ESPP). The ESPP allows participants to purchase the Company’s common stock at a
15%
discount of the lower of the beginning or end of the offering period using the closing price on that day. During the year ended December 31, 2013, the Company issued
135,271
shares under the ESPP. Total cash proceeds from the purchase of shares under the ESPP were approximately
$225
. As of December 31, 2013, shares reserved for issuance to employees under this plan totaled
4,000,000
and the Company held employee contributions of approximately
$26
for future purchases under the ESPP. The ESPP is considered compensatory. The Company recorded compensation expense of
$57
during the year ended December 31, 2013 related to the ESPP.
During the year ended December 31, 2013, the Company issued
10,915
shares of its common stock in connection with the achievement of contingent consideration goals related to a previous acquisition.
The Company has reserved approximately
5,162,930
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, 2013. 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, 2013, the Board had not adopted any resolutions for the issuance of preferred stock.
16. Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss, net of tax, for the years ended December 31, 2013 and 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Gains (Losses) on
|
|
|
|
Foreign
|
|
Available for
|
|
|
|
Currency
|
|
Sale Securities
|
|
Total
|
Balance, December 31, 2012
|
$
|
(747
|
)
|
|
$
|
38
|
|
|
$
|
(709
|
)
|
Other comprehensive loss before reclassifications
|
(941
|
)
|
|
(13
|
)
|
|
(954
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
Net current period other comprehensive loss
|
(941
|
)
|
|
(13
|
)
|
|
(954
|
)
|
Balance, December 31, 2013
|
$
|
(1,688
|
)
|
|
$
|
25
|
|
|
$
|
(1,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Gains (Losses) on
|
|
|
|
Foreign
|
|
Available for
|
|
|
|
Currency
|
|
Sale Securities
|
|
Total
|
Balance, December 31, 2011
|
$
|
(575
|
)
|
|
$
|
66
|
|
|
$
|
(509
|
)
|
Other comprehensive loss before reclassifications
|
(172
|
)
|
|
(28
|
)
|
|
(200
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
Net current period other comprehensive loss
|
(172
|
)
|
|
(28
|
)
|
|
(200
|
)
|
Balance, December 31, 2012
|
$
|
(747
|
)
|
|
$
|
38
|
|
|
$
|
(709
|
)
|
17. 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 proprietary 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 2013, the Company granted awards to employees and directors. 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 Company’s 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, 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
|
(176
|
)
|
|
1.08
|
|
Cancelled
|
(1,834
|
)
|
|
6.10
|
|
Balance at December 31, 2012
|
14,310
|
|
|
4.58
|
|
Granted
|
4,902
|
|
|
2.19
|
|
Exercised
|
(143
|
)
|
|
0.26
|
|
Cancelled
|
(3,087
|
)
|
|
3.87
|
|
Balance at December 31, 2013
|
15,982
|
|
|
4.00
|
|
The following table summarizes the information about stock options outstanding and exercisable at December 31,
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
569
|
|
|
2.2
|
|
$
|
0.36
|
|
|
569
|
|
|
$
|
0.36
|
|
$ 1.51 — $ 3.00
|
|
6,661
|
|
|
8.4
|
|
2.17
|
|
|
1,606
|
|
|
2.11
|
|
$ 3.01 — $ 4.50
|
|
3,640
|
|
|
5.4
|
|
3.77
|
|
|
3,269
|
|
|
3.76
|
|
$ 4.51 — $ 6.00
|
|
2,070
|
|
|
5.9
|
|
5.18
|
|
|
1,700
|
|
|
5.13
|
|
$ 6.01 — $ 7.50
|
|
1,759
|
|
|
3.4
|
|
6.46
|
|
|
1,685
|
|
|
6.46
|
|
$ 7.51 — $ 15.00
|
|
1,283
|
|
|
3.9
|
|
10.56
|
|
|
1,155
|
|
|
10.83
|
|
|
|
15,982
|
|
|
|
|
|
|
9,984
|
|
|
|
The weighted-average grant-date fair value of options granted during the years ended December 31,
2013
,
2012
, and
2011
on a per-share basis was approximately
$1.48
,
$1.60
, and
$3.70
, respectively. The total intrinsic value of the options exercised during the years ended December 31,
2013
,
2012
, and
2011
was approximately
$265
,
$309
, and
$801
, respectively. The aggregate intrinsic value of options outstanding at December 31,
2013
is approximately
$1,113
. The weighted average remaining contractual term of options currently exercisable at December 31,
2013
was
4.8
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 Company’s 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 company’s historical volatility is weighted based on certain qualitative factors and combined to produce a single volatility factor used by the Company. For most of 2013, the Company did not have enough historical experience as a public company to provide a reasonable estimate of the expected term; therefore, expected term was calculated using the “short-cut” method, which takes into consideration the grant’s contractual life and the vesting periods. As of December 31, 2013, the Company's expected term is based on its historical experience. 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 grant’s 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.
The fair value of each new option awarded is estimated on the grant date using the assumptions noted in the following table:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
Expected volatility
|
77.96
|
%
|
|
78.10
|
%
|
|
72.25
|
%
|
Expected term, years
|
6.05
|
|
|
5.88
|
|
|
6.08
|
|
Risk-free interest
|
1.31
|
%
|
|
0.91
|
%
|
|
2.14
|
%
|
Expected dividends
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Unrecognized share-based compensation related to stock options totaled
$8,186
at December 31,
2013
. The Company expects to amortize unvested stock compensation related to stock options over a weighted average period of approximately
2.5
years at December 31, 2013.
During the years ended December 31,
2013
,
2012
, and
2011
, the Company recorded share-based compensation related to stock options of approximately
$6,617
,
$7,426
, and
$9,568
, respectively.
The following table summarizes the different types of RSUs outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
RSUs with service-based vesting conditions
|
5,286
|
|
|
4,232
|
|
|
3,392
|
|
Performance-based RSUs
|
—
|
|
|
349
|
|
|
459
|
|
Unvested RSUs
|
5,286
|
|
|
4,581
|
|
|
3,851
|
|
Each RSU represents the right to receive one share of the Company’s common stock upon vesting. The fair value of these RSUs was calculated based upon the Company’s closing stock price on the date of grant.
Data pertaining to RSUs activity under the Plans is as follows:
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted
Average
Fair Value
|
|
(In thousands)
|
|
|
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
|
|
Granted
|
4,970
|
|
|
2.15
|
|
Vested
|
(2,032
|
)
|
|
2.53
|
|
Cancelled
|
(2,233
|
)
|
|
2.78
|
|
Balance at December 31, 2013
|
5,286
|
|
|
2.24
|
|
The weighted-average grant-date fair value of RSUs granted during the years ended December 31,
2013
,
2012
, and
2011
was approximately
$2.15
,
$2.37
, and
$3.32
, respectively. The total intrinsic value of the units vested during the years ended December 31,
2013
,
2012
, and
2011
was approximately
$5,117
,
$5,400
, and
$2,900
, respectively. The aggregate intrinsic value of RSUs outstanding at December 31,
2013
is
$10,467
.
Share-based payment compensation related to all restricted stock awards and RSUs for the years ended December 31,
2013
,
2012
, and
2011
was approximately
$5,671
,
$7,049
, and
$6,313
, respectively. At December 31,
2013
there was approximately
$8,788
of total unrecognized compensation costs related to RSUs. That cost is expected to be recognized over a weighted-average period of approximately
2.55
years as of December 31,
2013
.
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 Company’s 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,
2013
,
2012
, and
2011
of approximately
$12,345
,
$14,475
, and
$15,881
, respectively. Unrecognized share-based compensation expense totaled approximately
$16,974
at December 31,
2013
, which is expected to be recognized over a weighted average period of approximately
2.53
years.
The following table summarizes the components of share-based compensation expense included in the Company’s consolidated statement of operations for the years ended December 31,
2013
,
2012
, and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
Share-based compensation expense by type of award:
|
|
|
|
|
|
Stock options
|
$
|
6,617
|
|
|
$
|
7,426
|
|
|
$
|
9,568
|
|
Restricted stock units
|
5,671
|
|
|
7,049
|
|
|
6,313
|
|
Shares issued under the 2013 ESPP
|
57
|
|
|
—
|
|
|
—
|
|
Total share-based compensation expense
|
$
|
12,345
|
|
|
$
|
14,475
|
|
|
$
|
15,881
|
|
Effect of share-based compensation expense on income by financial statement line:
|
|
|
|
|
|
Cost of services
|
$
|
1,873
|
|
|
$
|
2,117
|
|
|
$
|
2,419
|
|
General and administrative expense
|
5,971
|
|
|
6,511
|
|
|
6,132
|
|
Sales and marketing expense
|
2,245
|
|
|
3,104
|
|
|
3,776
|
|
Research and development expense
|
2,256
|
|
|
2,743
|
|
|
3,554
|
|
Total cost related to share-based compensation expense
|
$
|
12,345
|
|
|
$
|
14,475
|
|
|
$
|
15,881
|
|
18. 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 Company’s initial public offering (IPO), became holders of more than
10%
of the Company’s common stock. On June 14, 2007, upon the closing of the Company’s IPO, all outstanding shares of the Company’s Series B Preferred Stock automatically converted into shares of common stock
on a 1-for-1 share basis
. As of December 31,
2013
,
2012
, and
2011
, Goldman, Sachs & Co. owned approximately
31%
,
31%
, and
29%
, respectively, of the Company’s 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
$16
and $
71
, respectively, in office space rental from this entity.
The Company sells services to entities owned, in whole or in part, by certain of the Company’s executive officers and directors. Revenue derived from related parties was approximately
1%
for the years ended December 31,
2013
,
2012
, and 2011 respectively. Total outstanding accounts receivable from all related parties as of December 31,
2013
,
2012
and 2011 was approximately
$7
,
$1,300
and $
400
, respectively.
During 2013, the Company entered into an agreement for services with an entity in which a current member of its board of directors is an officer. During 2013, the Company incurred approximately $
154
in expense for services rendered.
19. Leases and Commitments
Operating Leases
The Company is committed to various non-cancellable operating leases for office space and office equipment which expire through 2022. Certain leases contain provisions for renewal options and rent escalations upon expiration of the initial lease terms. Approximate future minimum lease payments over the remaining lease periods as of December 31,
2013
are as follows:
|
|
|
|
|
2014
|
$
|
3,887
|
|
2015
|
3,242
|
|
2016
|
2,621
|
|
2017
|
2,213
|
|
2018 and thereafter
|
3,387
|
|
Total minimum payments
|
$
|
15,350
|
|
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,
2013
:
|
|
|
|
|
2014
|
$
|
32,728
|
|
2015
|
18,674
|
|
2016
|
4,831
|
|
2017
|
873
|
|
2018 and thereafter
|
382
|
|
Total minimum payments
|
$
|
57,488
|
|
Rent and operating expense relating to these operating lease agreements and bandwidth and co-location agreements was approximately
$61,693
,
$58,818
, and
$60,140
, respectively, for the years ended December 31,
2013
,
2012
, and
2011
.
Capital Leases
The Company leases equipment under capital lease agreements which extend through 2016. As of December 31,
2013
and
2012
, the outstanding balance for capital leases was approximately
$824
and
$2,125
, respectively. The Company recorded assets under capital lease obligations of approximately
$2,312
and
$5,100
, respectively, as of December 31,
2013
and
2012
. Related accumulated amortization totaled approximately
$1,878
and
$2,900
, respectively as of December 31,
2013
and
2012
. 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 Company’s outstanding capital leases at December 31,
2013
was approximately
six
percent. Interest expense related to capital leases was approximately
$76
,
$170
, and
$186
, respectively, for the years ended December 31,
2013
,
2012
, and
2011
.
Future minimum capital lease payments at December 31, 2013 were as follows (in thousands):
|
|
|
|
|
2014
|
$
|
498
|
|
2015
|
238
|
|
2016
|
133
|
|
2017
|
5
|
|
2018 and thereafter
|
—
|
|
Total
|
874
|
|
Amounts representing interest
|
(50
|
)
|
Present value of minimum lease payments
|
$
|
824
|
|
20. Concentrations
For each of the years ended December 31,
2013
,
2012
, and 2011, Netflix, Inc. represented approximately
11%
of the Company’s total revenue.
Revenue from sources outside America totaled approximately
$55,020
,
$54,636
, and
$51,427
, respectively, for the years ended December 31,
2013
,
2012
, and
2011
.
During the years ended December 31,
2013
and 2011, the Company had no single country outside of the United States that accounted for 10% or more of the Company's total revenues. During the year ended December 31, 2012, the Company had two countries, Japan and the United States, which accounted for
10%
or more of the Company’s total revenues.
21. Income Taxes
The Company's loss from continuing operations before income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
(Loss) income before income taxes:
|
|
|
|
|
|
United States
|
$
|
(34,789
|
)
|
|
$
|
(29,991
|
)
|
|
$
|
(30,438
|
)
|
Foreign
|
200
|
|
|
437
|
|
|
(1,866
|
)
|
|
$
|
(34,589
|
)
|
|
$
|
(29,554
|
)
|
|
$
|
(32,304
|
)
|
The components of the provision (benefit) for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
Current:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
80
|
|
|
(20
|
)
|
|
198
|
|
Foreign
|
442
|
|
|
558
|
|
|
550
|
|
Total current
|
522
|
|
|
538
|
|
|
748
|
|
Deferred:
|
|
|
|
|
|
Federal
|
16
|
|
|
16
|
|
|
(2,571
|
)
|
State
|
—
|
|
|
—
|
|
|
—
|
|
Foreign
|
(151
|
)
|
|
(73
|
)
|
|
(415
|
)
|
Total deferred
|
(135
|
)
|
|
(57
|
)
|
|
(2,986
|
)
|
Total (benefit) provision
|
$
|
387
|
|
|
$
|
481
|
|
|
$
|
(2,238
|
)
|
A reconciliation of the U.S. federal statutory rate to the Company’s effective income tax rate is shown in the table below (in thousands, except percent):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
U.S. federal statutory tax rate
|
$
|
(12,106
|
)
|
|
35
|
%
|
|
$
|
(10,344
|
)
|
|
35
|
%
|
|
$
|
(11,306
|
)
|
|
35
|
%
|
Impact related to sale of discontinued operations
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
7,893
|
|
|
(24
|
)%
|
Valuation allowance
|
12,958
|
|
|
(37
|
)%
|
|
10,329
|
|
|
(35
|
)%
|
|
52
|
|
|
—
|
%
|
Foreign income taxes
|
221
|
|
|
(1
|
)%
|
|
351
|
|
|
(1
|
)%
|
|
797
|
|
|
(3
|
)%
|
State income taxes
|
80
|
|
|
—
|
%
|
|
(20
|
)
|
|
—
|
%
|
|
198
|
|
|
(1
|
)%
|
Non-deductible expenses
|
(783
|
)
|
|
2
|
%
|
|
168
|
|
|
(1
|
)%
|
|
136
|
|
|
—
|
%
|
Uncertain tax positions
|
14
|
|
|
—
|
%
|
|
(18
|
)
|
|
—
|
%
|
|
(9
|
)
|
|
—
|
%
|
Share-based compensation
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Other
|
3
|
|
|
—
|
%
|
|
15
|
|
|
—
|
%
|
|
1
|
|
|
—
|
%
|
Provision for (benefit from) income taxes
|
$
|
387
|
|
|
(1
|
)%
|
|
$
|
481
|
|
|
(2
|
)%
|
|
$
|
(2,238
|
)
|
|
7
|
%
|
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
Company’s deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Deferred tax assets:
|
|
|
|
Share-based compensation
|
$
|
12,797
|
|
|
$
|
12,506
|
|
Net operating loss and tax credit carry-forwards
|
26,991
|
|
|
27,484
|
|
Deferred revenue
|
2,808
|
|
|
3,984
|
|
Accounts receivable reserves
|
537
|
|
|
1,281
|
|
Fixed assets
|
5,751
|
|
|
4,904
|
|
Other
|
1,209
|
|
|
921
|
|
Total deferred tax assets
|
50,093
|
|
|
51,080
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
(738
|
)
|
|
(2,103
|
)
|
Prepaid expenses
|
(164
|
)
|
|
(187
|
)
|
Other
|
(65
|
)
|
|
(160
|
)
|
Total deferred tax liabilities
|
(967
|
)
|
|
(2,450
|
)
|
Valuation allowance
|
(48,047
|
)
|
|
(46,215
|
)
|
Net deferred tax assets (liabilities)
|
$
|
1,079
|
|
|
$
|
2,415
|
|
In addition to the deferred tax assets listed in the table above, the Company has unrecorded tax benefits of
$10,350
and
$10,000
at December 31,
2013
and December 31,
2012
, 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 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 Company’s 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,
2013
, the Company had
$79,300
federal and
$59,200
state net operating loss carryforwards, including the NOLs discussed in the preceding paragraph. The Company’s federal net operating losses will begin to expire in
2019
and the state net operating loss carryforwards will begin to expire in
2014
. 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,
2013
the Company had state tax credit carryforwards of
$340
, which will expire at various dates beginning in
2014
. At December 31,
2013
the Company had federal tax credit carryforwards of
$300
, 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 Company’s experience with loss carryforwards not expiring unutilized, and all tax planning alternatives that may be available.
A valuation allowance has been recorded against the Company’s deferred tax assets, with the exception of deferred tax assets at certain foreign subsidiaries as management cannot conclude that it is more-likely-than-not that these assets will be realized. As of December 31, 2012, no valuation allowance was provided on $
1,600
of deferred tax assets associated with certain net operating losses because it was believed that they will be used to offset the Company’s liabilities relating to its uncertain tax positions. In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740). ASU 2013-11 requires that unrecognized tax benefits be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with
deferred tax assets. The company has analyzed the guidance under ASU 2013-11 and determined that due to the Company’s NOL position, the unrecognized tax benefits of
$1,600
associated with certain net operating losses should be presented in the December 31, 2013 financial statements as a reduction to the deferred tax assets for the net operating loss carryforward.
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
$250
and
$400
as of December 31,
2013
and
2012
, respectively.
A summary of the activities associated with the Company’s reserve for unrecognized tax benefits, interest and penalties follow (in thousands):
|
|
|
|
|
|
Unrecognized
Tax Benefits
|
Balance at January 1, 2012
|
$
|
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
|
|
Additions for tax positions related to current year
|
—
|
|
Settlements
|
—
|
|
Reduction for tax positions of prior years
|
—
|
|
Balance at December 31, 2013
|
$
|
1,757
|
|
The Company recognizes interest and penalties related to unrecognized tax benefits in its tax provision. As of December 31,
2013
, the Company had an interest and penalties accrual related to unrecognized tax benefits of
$94
, which decreased during
2013
by
$14
. 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 2012
generally remain subject to examination by federal and most state tax authorities. As of December 31,
2013
, 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 Company’s 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 Company’s foreign subsidiaries were approximately
$1,600
at December 31,
2013
. 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 Company’s domestic subsidiaries, or if the Company sells its investment in such subsidiaries.
22. 401(k) Plan
The Company manages 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.
The Company will match employee deferrals as follows: a dollar-for-dollar match on eligible employee’s 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
$1,196
,
$1,101
, and
$918
during the years ended December 31,
2013
,
2012
, and
2011
, respectively.
23. Segment Reporting
The Company operates in
one
industry segment — content delivery and related services. The Company operates in
three
geographic areas — Americas, Europe, Middle East and Africa (EMEA) and Asia Pacific.
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 Company’s chief operating decision maker is its Chief Executive Officer. The Company’s 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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
Revenue
|
|
|
|
|
|
Americas
|
$
|
118,413
|
|
|
$
|
125,600
|
|
|
$
|
119,865
|
|
EMEA
|
31,401
|
|
|
30,898
|
|
|
31,697
|
|
Asia Pacific
|
23,619
|
|
|
23,738
|
|
|
19,730
|
|
Total revenue
|
$
|
173,433
|
|
|
$
|
180,236
|
|
|
$
|
171,292
|
|
For the year ended December 31, 2013, the Company made reclassifications to certain customers within our geographic regions. This was primarily the result of customers relocating from one geographic region to another geographic region. For all periods presented, customers are reported in their new geographic region. The impact of the customer reclassifications from previously reported amounts were as follows. For the year ended December 31, 2012, Americas increased
$1,734
, EMEA increased
$4,422
, and Asia Pacific decreased
$6,156
. For the year ended December 31, 2011, Americas increased
$567
, EMEA increased
$5,729
, and Asia Pacific decreased
$6,296
.
The following table sets forth long-lived assets by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
Long-lived Assets
|
|
|
|
|
|
Americas
|
$
|
26,502
|
|
|
$
|
36,513
|
|
|
$
|
51,478
|
|
International
|
8,757
|
|
|
11,125
|
|
|
14,097
|
|
Total long-lived assets
|
$
|
35,259
|
|
|
$
|
47,638
|
|
|
$
|
65,575
|
|
Approximately
$1,195
and
$1,647
, respectively, of long-lived assets at December 31, 2012 and 2011, has been reclassified to Americas from International.
24. 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,
2013
and
2012
, 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’s 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.
The following is a summary of fair value measurements at December 31,
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
$
|
261
|
|
|
$
|
—
|
|
|
$
|
261
|
|
|
$
|
—
|
|
Money market funds (2)
|
9,740
|
|
|
9,740
|
|
|
—
|
|
|
—
|
|
Corporate notes and bonds (1)
|
26,009
|
|
|
—
|
|
|
26,009
|
|
|
—
|
|
Commercial paper (1)
|
2,200
|
|
|
—
|
|
|
2,200
|
|
|
—
|
|
Certificate of deposit (1)
|
4,076
|
|
|
—
|
|
|
4,076
|
|
|
—
|
|
Publicly traded common stock (1)
|
6
|
|
|
6
|
|
|
—
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
42,292
|
|
|
$
|
9,746
|
|
|
$
|
32,546
|
|
|
$
|
—
|
|
____________
|
|
(1)
|
Classified in marketable securities
|
|
|
(2)
|
Classified in cash and cash equivalents
|
For the year ended December 31,
2013
, unrealized gains and losses for marketable securities are included in other comprehensive income and expense. For the year ended December 31,
2013
, the Company had net unrealized losses of approximately
$13
.
The following is a summary of fair value measurements at December 31,
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
, 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
.
The carrying amount of cash equivalents approximates fair value because their maturity is less than
three
months. The carrying amount of short-term and long-term marketable securities approximates fair value as the securities are marked to market as of each balance sheet date with any unrealized gains and losses reported in stockholders’ equity. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts.
25. Quarterly Financial Results (unaudited)
The following table sets forth certain unaudited quarterly results of operations of the Company for the years ended December 31,
2013
and
2012
. The information for the March 31, June 30 and September 30, 2013 quarters and each of the quarters in the year ended December 31, 2012 have been revised to reclassify certain amounts to cost of revenues, research and development and sales and marketing expenses. These costs were previously reported in general and administrative expenses.
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,
2013
|
|
June 30,
2013
|
|
Sept. 30,
2013
|
|
Dec. 31,
2013 (a)
|
Revenues
|
$
|
45,813
|
|
|
$
|
42,763
|
|
|
$
|
42,656
|
|
|
$
|
42,200
|
|
Gross profit (c)
|
$
|
16,777
|
|
|
$
|
14,417
|
|
|
$
|
15,240
|
|
|
$
|
15,275
|
|
Net loss from continuing operations
|
$
|
(8,136
|
)
|
|
$
|
(11,233
|
)
|
|
$
|
(10,903
|
)
|
|
$
|
(4,704
|
)
|
Net loss from discontinued operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
$
|
(411
|
)
|
Net loss
|
$
|
(8,136
|
)
|
|
$
|
(11,233
|
)
|
|
$
|
(10,918
|
)
|
|
$
|
(5,115
|
)
|
Basic and diluted net loss per share from continuing
operations
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.05
|
)
|
Basic and diluted net loss per share from discontinued
operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Basic and diluted net loss per share
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.05
|
)
|
Basic and diluted weighted average common shares
outstanding
|
96,818
|
|
|
96,257
|
|
|
96,949
|
|
|
97,380
|
|
(a) See discussion of sale of Clickability in Note 4.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
2012
|
|
June 30,
2012
|
|
Sept. 30,
2012 (b)
|
|
Dec. 31,
2012
|
Revenues
|
$
|
44,316
|
|
|
$
|
44,447
|
|
|
$
|
45,001
|
|
|
$
|
46,471
|
|
Gross profit (c)
|
$
|
16,596
|
|
|
$
|
16,517
|
|
|
$
|
16,309
|
|
|
$
|
17,596
|
|
Net loss from continuing operations
|
$
|
(9,697
|
)
|
|
$
|
(9,437
|
)
|
|
$
|
(610
|
)
|
|
$
|
(10,291
|
)
|
Net (loss) income from discontinued operations
|
$
|
(309
|
)
|
|
$
|
(391
|
)
|
|
$
|
(218
|
)
|
|
$
|
(1,943
|
)
|
Net (loss) income
|
$
|
(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) income per share from discontinued operations
|
$
|
(0.01
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.02
|
)
|
Basic and diluted net (loss) income 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
|
|
(b) See discussion of sale of cost basis investment in Gaikai in Note 7.
(c) The table below reflects reclassifications made to gross profit for the applicable periods (See Note 2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
As
|
|
|
|
As
|
Three Months Ended
|
|
Reported
|
|
Reclassifications
|
|
Revised
|
March 31, 2013
|
|
$
|
17,081
|
|
|
$
|
(304
|
)
|
|
$
|
16,777
|
|
June 30, 2013
|
|
$
|
14,773
|
|
|
$
|
(356
|
)
|
|
$
|
14,417
|
|
September 30, 2013
|
|
$
|
15,605
|
|
|
$
|
(365
|
)
|
|
$
|
15,240
|
|
December 31, 2013
|
|
$
|
15,275
|
|
|
$
|
—
|
|
|
$
|
15,275
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
$
|
16,986
|
|
|
$
|
(390
|
)
|
|
$
|
16,596
|
|
June 30, 2012
|
|
$
|
16,884
|
|
|
$
|
(367
|
)
|
|
$
|
16,517
|
|
September 30, 2012
|
|
$
|
16,718
|
|
|
$
|
(409
|
)
|
|
$
|
16,309
|
|
December 31, 2012
|
|
$
|
17,933
|
|
|
$
|
(337
|
)
|
|
$
|
17,596
|
|