EDGIO, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year endedDecember 31, 2021 , included in Part II of our annual report on Form 10-K, as filed with theSEC , onFebruary 17, 2022 . OnJune 15, 2022 , we changed our corporate name fromLimelight Networks, Inc. toEdgio, Inc. We will not distinguish between our prior and current corporate name and will refer to our current corporate name throughout this Quarterly Report on Form 10-Q. Beginning onJune 15, 2022 , our common stock is traded on Nasdaq under the ticker symbol "EGIO".
Prior period information has been modified to conform to current year presentation. All information in this Item 2 is presented in thousands, except per share amounts, client count and where otherwise specifically noted.
Overview
We were founded in 2001 as a provider of content delivery network services to deliver digital content over the internet. We began development of our infrastructure in 2001 and began generating meaningful revenue in 2002. Today, we are an edge-enabled software solutions provider powering secure digital experiences through a seamlessly integrated delivery, applications and streaming platform. Our coordinated complete solution delivers instant, secure website applications that provides powerful tools and we provide a client-first approach to optimize and deliver digital experiences at the edge. We are a trusted partner to some of the world's notable brands and serve their global customers by building sub-second sites, protecting mission critical digital assets and delivering experiences such as livestream sporting events, global movie launches, video games, and file downloads for new phone applications. We offer one of the largest, best-optimized private networks coupled with a global team of industry experts to provide edge services that are fast, secure, and reliable. Our mission is to securely manage and globally deliver digital content, building client satisfaction through exceptional reliability and performance. Our business mission is to design solutions for our clients that help them power extraordinary digital experiences digital experiences for their customers. Because of this, we operate a globally distributed network with services that are available 24 hours a day, seven days a week, and 365 days a year. Our sophisticated and powerful network is fully redundant and includes extensive diversity through data center and telecommunication suppliers within and across regions. In early 2020, theWorld Health Organization ("WHO") declared COVID-19 as a global pandemic. This pandemic has disrupted the normal operations of many businesses, including ours. Despite such disruption, our level of client service has remained uninterrupted. There also has been no material impact to our financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. The future impacts of the COVID-19 pandemic remain uncertain and while it is difficult to predict what the world will look like when this pandemic has run its course, we currently do not expect the COVID-19 pandemic to have a material adverse impact on our balance sheet, financial condition, and results of operations, nor do we expect any impairment of goodwill, long-lived assets or right of use assets. We provide our services in a highly competitive industry in which differentiation is primarily measured by performance and cost and the difference between providers can be as small as a fraction of a percent. We have experienced the commoditization of our once innovative and highly valued content delivery service, which, when combined with the low switching costs in a multi-CDN environment, results in on-going price compression, despite the large, unmet market need for our services. During the first half of 2022, we continued to see a decline in our average selling price, primarily due to the on-going price compression with our multi-CDN clients. InFebruary 2021 ,Bob Lyons joinedEdgio as Chief Executive Officer and Director. Since that date and underMr. Lyon's leadership, we have implemented a go-forward strategy designed to simultaneously address short-term headwinds and to position us to achieve near- and long-term success by building upon and more fully leveraging our ultra-low latency, global network, and operational expertise. We are focused on three key areas: • Improving our core: Our ability to consistently grow revenue requires us to do a better job at managing the cost structure of our network while anticipating and providing our clients with the tools and reliable performance they need and to do it sooner and better than our competitors. Our operating expenses are largely driven by payroll and related employee costs. Our employee headcount increased from 577 onMarch 31, 2022 , to 1,317 onJune 30, 2022 , primarily due to the Edgecast Acquisition. We implemented a broader and more detailed operating model in 2021, built on metrics, process discipline, and improvements to client satisfaction, performance, and cost. We are building an internal culture that embraces speed, transparency, and accountability. Since the close of the Edgecast Acquisition, we have put other cost savings measures into place. We recorded restructuring charges of$4,368 and$5,066 during the three and six months endedJune 30, 2022 , 29 --------------------------------------------------------------------------------
respectively. We are also continuously seeking opportunities to be more efficient and productive in order to achieve cost savings and improve our profitability.
• Expanding our core: We have redesigned our commercial and product approaches to strengthen and broaden our key client relationships, to support a land and expand strategy. We believe that this, coupled with new edge-based tools and solutions we anticipate bringing to market, will assist in our ability to re-accelerate growth. Key elements of our plan to Expand the Core include tightening the alignment between our Sales and Marketing organizations, moving to a "client success" model that pairs client relationship managers with client performance managers to ensure proactive client success and exploring ways to dynamically optimize how we price our services that gives us more flexibility - and a renewed ability to sell more broadly into our existing client base. • Extending our core: Longer term, we believe we can drive meaningful improvements to profitability and growth by diversifying our capabilities, clients, and revenue mix. We need to enable digital builders to easily load content faster, personalize it more and protect it outside of a controlled environment. We believe we have an opportunity of extending the use of our network to new clients with new solutions that utilize non-peak traffic solutions. InSeptember 2021 , we acquired Moov, aCalifornia corporation doing business as Layer0, a sub-scale SaaS based application acceleration and developer platform. We believe this platform coupled with our global CDN network will be a catalyst in our pursuit of positioning us as an Edge Solutions platform. InMarch 2022 , we announced that we had entered into a definitive agreement to acquire Yahoo's Edgecast, a leading provider of edge security, content delivery and video services, in an all-stock transaction. Edgecast is a business unit of Yahoo, which is owned by funds managed by affiliates ofApollo and Verizon Communications.Edgio will deliver significantly increased scale and scope with diversified revenue across products, clients, geographies, and channels. The combination will create a globally scaled, edge enabled software solutions provider with pro forma 2021 revenue of more than$500 million across cloud security and web applications, content delivery and edge video platform in an expanded total addressable market of$40 billion . We are committed to helping our clients deliver better digital experiences to their customers, create better returns for our shareholders, and provide our employees an environment in which they can grow, develop, and win. The following table summarizes our revenue, costs, and expenses for the three and six months endedJune 30, 2022 and 2021 (in thousands of dollars and as a percentage of total revenue). For the three and six months endedJune 30, 2022 , results of operations include Edgecast results for the periodJune 15, 2022 toJune 30, 2022 . Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenue$ 74,312 100.0 %$ 48,348 100.0 %$ 132,270 100.0 %$ 99,543 100.0 % Cost of revenue 51,991 70.0 % 38,905 80.5 % 92,149 69.7 % 77,629 78.0 % Gross profit 22,321 30.0 % 9,443 19.5 % 40,121 30.3 % 21,914 22.0 % Operating expenses 51,542 69.4 % 19,035 39.4 % 85,611 64.7 % 48,447 48.7 % Restructuring charges 4,368 5.9 % 2,155 4.5 % 5,066 3.8 % 9,028 9.1 % Operating loss (33,589) (45.2) % (11,747) (24.3) % (50,556) (38.2) % (35,561) (35.7) % Total other income (expense) (2,428) (3.3) % (1,703) (3.5) % (4,427) (3.3) % (3,159) (3.2) % Loss before income taxes (36,017) (48.5) % (13,450) (27.8) % (54,983) (41.6) % (38,720) (38.9) % Income tax (benefit) expense (19,589) (26.4) % 248 0.5 % (19,383) (14.7) % 507 0.5 % Net loss$ (16,428) (22.1) %$ (13,698) (28.3) %$ (35,600) (26.9) %$ (39,227) (39.4) %
Use of Non-GAAP Financial Measures
To evaluate our business, we consider and use non-generally accepted accounting
principles ("Non-GAAP") net income (loss), EBITDA and Adjusted EBITDA as
supplemental measures of operating performance. These measures include the same
adjustments that our management takes into account when it reviews and assesses
operating performance on a period-to-period basis. We consider Non-GAAP net
income (loss) to be an important indicator of overall business performance. We
define Non-GAAP net income (loss) to be U.S. GAAP net income (loss), adjusted to
exclude share-based compensation, non-cash interest expense, restructuring and
transition related charges, acquisition and legal related expenses, and
amortization of intangible assets. We believe that EBITDA provides a useful
metric to investors to compare us with other companies within our industry and
across industries. We define EBITDA as U.S. GAAP net income (loss), adjusted to
exclude depreciation and amortization, interest expense, interest and other
(income) expense, and income tax expense. We define Adjusted EBITDA as EBITDA
adjusted to exclude share-based compensation, restructuring and transition
related charges, and acquisition and legal
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related expenses. We use Adjusted EBITDA as a supplemental measure to review and
assess operating performance. Our management uses these Non-GAAP financial
measures because, collectively, they provide valuable information on the
performance of our on-going operations, excluding non-cash charges, taxes and
non-core activities (including interest payments related to financing
activities). These measures also enable our management to compare the results of
our on-going operations from period to period, and allow management to review
the performance of our on-going operations against our peer companies and
against other companies in our industry and adjacent industries. We believe
these measures also provide similar insights to investors, and enable investors
to review our results of operations "through the eyes of management."
Furthermore, our management uses these Non-GAAP financial measures to assist
them in making decisions regarding our strategic priorities and areas for future
investment and focus.
In our August 8, 2022 , earnings press release, as furnished on Form 8-K, we
included Non-GAAP net income (loss), EBITDA and Adjusted EBITDA. The terms
Non-GAAP net income (loss), EBITDA and Adjusted EBITDA are not defined under
U.S. GAAP, and are not measures of operating income, operating performance or
liquidity presented in accordance with U.S. GAAP. Our Non-GAAP net income
(loss), EBITDA and Adjusted EBITDA have limitations as analytical tools, and
when assessing our operating performance, Non-GAAP net income (loss), EBITDA and
Adjusted EBITDA should not be considered in isolation, or as a substitute for
net income (loss) or other consolidated income statement data prepared in
accordance with U.S. GAAP. Some of these limitations include, but are not
limited to:
•EBITDA and Adjusted EBITDA do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
•These measures do not reflect changes in, or cash requirements for, our working capital needs;
•Non- GAAP net income (loss) and Adjusted EBITDA do not reflect the cash requirements necessary for litigation costs, including provision for litigation and litigation expenses;
•These measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt that we may incur;
•These measures do not reflect income taxes or the cash requirements for any tax payments;
•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will be replaced sometime in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; •While share-based compensation is a component of operating expense, the impact on our financial statements compared to other companies can vary significantly due to such factors as the assumed life of the options and the assumed volatility of our common stock; and
•other companies may calculate Non-GAAP net income (loss), EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.
We compensate for these limitations by relying primarily on ourU.S. GAAP results and using Non-GAAP net income (loss), EBITDA, and Adjusted EBITDA only as supplemental support for management's analysis of business performance. Non-GAAP net income (loss), EBITDA and Adjusted EBITDA are calculated as follows for the periods presented.
Reconciliation of Non-GAAP Financial Measures
In accordance with the requirements of Item 10(e) of Regulation S-K, we are
presenting the most directly comparable
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Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Income (Loss)
(Unaudited)
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
2022 2022 2021 2022 2021
U.S. GAAP net loss $ (16,428) $ (19,172) $ (13,698) $ (35,600) $ (39,227)
Share-based compensation 7,291 7,012 3,341 14,303 5,985
Non-cash interest expense 211 209 201 420 400
Restructuring and transition
related charges 4,368 698 2,155 5,066 13,855
Acquisition and legal related
expenses 14,167 5,107 - 19,274 -
Amortization of intangible assets 1,172 786 - 1,958 -
Non-GAAP net income (loss) $ 10,781 $ (5,360) $ (8,001) $ 5,421 $ (18,987)
Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA
(Unaudited)
Three Months Ended Six Months Ended
June 30, March June 30, June 30, June 30,
2022 2022 2021 2022 2021
U.S. GAAP net loss $ (16,428) $ (19,172) $ (13,698) $ (35,600) $ (39,227)
Depreciation and amortization 7,411 6,121 6,478 13,532 12,697
Interest expense 1,315 1,313 1,305 2,628 2,591
Interest and other (income) expense 1,113 686 398 1,799 568
Income tax (benefit) expense (19,589) 206 248 (19,383) 507
EBITDA $ (26,178) $ (10,846) $ (5,269) $ (37,024) $ (22,864)
Share-based compensation 7,291 7,012 3,341 14,303 5,985
Restructuring and transition
related charges 4,368 698 2,155 5,066 13,855
Acquisition and legal related
expenses 14,167 5,107 - 19,274 -
Adjusted EBITDA $ (352) $ 1,971 $ 227 $ 1,619 $ (3,024) Critical Accounting Policies and Estimates
Please see Note 2 of Part I, Item 1 of this Quarterly Report on Form 10-Q for a summary of changes in significant accounting policies. In addition, our critical accounting policies and estimates are disclosed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . During the six months endedJune 30, 2022 , there have been no other significant changes in our critical accounting policies and estimates.
Results of Operations
Revenue
We derive revenue primarily from the sale of our digital content delivery, video delivery, website development and acceleration, cloud security, edge compute, and origin storage services. We also generate revenue through the sale of professional services and other infrastructure services, such as transit, rack space services, and hardware to help our clients build out edge solutions.
The following table reflects our revenue for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
$ % $ %
2022 2021 Change Change 2022 2021 Change Change
Revenue $ 74,312 $ 48,348 $ 25,964 54 % $ 132,270 $ 99,543 $ 32,727 33 %
32-------------------------------------------------------------------------------- Our revenue increased during the three and six months endedJune 30, 2022 , versus the comparable 2021 period, primarily due to an increase in our delivery services, edge services, video services revenue and the inclusion of 16 days of revenue from the close of the Edgecast Acquisition that occurred onJune 15, 2022 . The increase in delivery services revenue was primarily due to increased traffic volumes as a result of new content released for consumption. We continue to see price compression, which is expected in the industry. We believe that we have improved our performance with many of our largest clients, and we are positioned to take advantage of volume growth as additional new content is released. Our active clients worldwide increased to 1,000 as ofJune 30, 2022 , compared to 533 as ofJune 30, 2021 . The increase was primarily driven by our acquisition of Edgecast inJune 2022 andMoov Corporation inSeptember 2021 . During the three months endedJune 30, 2022 and 2021, sales to our top 20 clients accounted for approximately 74% and 78%, respectively, of our total revenue. For the six months endedJune 30, 2022 and 2021, sales to our top 20 clients accounted for approximately 75% and 77%, respectively, of our total revenue. The clients that comprised our top 20 clients change from time to time, and our large clients may not continue to be as significant going forward as they have been in the past. During the three and six months endedJune 30, 2022 , and 2021, respectively, we had two clients, Amazon and Sony,who each represented 10% or more of our total revenue. Revenue by geography is based on the location of the client from which the revenue is earned. The following table sets forth revenue by geographic area (in thousands and as a percentage of total revenue): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Americas$ 51,840 70 %$ 29,677 61 %$ 85,646 65 %$ 58,367 59 % EMEA 5,437 7 % 5,306 11 % 11,970 9 % 14,559 14 % Asia Pacific 17,035 23 % 13,365 28 % 34,654 26 % 26,617 27 % Total revenue$ 74,312 100 %$ 48,348 100 %$ 132,270 100 %$ 99,543 100 % Cost of Revenue Cost of revenue consists primarily of fees paid to network providers for bandwidth and backbone, costs incurred for non-settlement free peering and connection to internet service providers, and fees paid to data center operators for housing of our network equipment in third party network data centers, also known as co-location costs. Cost of revenue also includes leased warehouse space and utilities, depreciation of network equipment used to deliver our content delivery services, payroll and related costs, and share-based compensation for our network operations and professional services personnel. Other costs include hardware costs, professional fees and outside services, travel and travel-related expenses, and royalty expenses.
Cost of revenue was composed of the following (in thousands and as a percentage of total revenue):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Bandwidth and co-location fees $ 28,216 38.0 % $ 24,180 50.0 % $ 52,666 39.8 % $ 47,923 48.1 %
Depreciation - network 5,903 7.9 % 5,929 12.3 % 10,992 8.3 % 11,608 11.7 %
Payroll and related employee
costs 3,291 4.4 % 3,771 7.8 % 5,565 4.2 % 8,469 8.5 %
Share-based compensation 326 0.4 % 458 0.9 % 734 0.6 % 704 0.7 %
Other costs 14,255 19.2 % 4,567 9.4 % 22,192 16.8 % 8,925 9.0 %
Total cost of revenue $ 51,991 70.0 % $ 38,905 80.5 % $ 92,149 69.7 % $ 77,629 78.0 %
Our cost of revenue increased in aggregate dollars and decreased as a percentage
of total revenue for the three and six months ended June 30, 2022 , versus the
comparable 2021 period. The changes in cost of revenue were primarily a result
of the following:
•Bandwidth and co-location fees increased in aggregate dollars due to higher
transit fees, rack space fees, increased variable bandwidth costs as a result of
an increase in traffic, as well as continued expansion in existing and new
geographies and capacity acquired with the Edgecast Acquisition.
•Depreciation expense decreased due to less deployments of capital equipment.
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•Payroll and related employee costs were lower as a result of decreased network
operations and lower variable compensation. We have also increased the use of
third party consultants to augment direct staffing expense.
•Other costs increased for both the three and six months ended June 30, 2022 ,
primarily due to costs associated with increased costs for hardware sold to
customers, operations from our acquisition of Moov Corporation in September
2021 , international re-seller costs, and professional fees including third party
consultants.
General and Administrative
General and administrative expense was composed of the following (in thousands and as a percentage of total revenue):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Payroll and related employee
costs $ 5,275 7.1 % $ 2,447 5.1 % $ 10,146 7.7 % $ 6,373 6.4 %
Professional fees and outside
services 3,276 4.4 % 1,338 2.8 % 5,278 4.0 % 2,565 2.6 %
Share-based compensation 2,166 2.9 % 1,874 3.9 % 4,269 3.2 % 7,902 7.9 %
Acquisition and legal related
expenses 14,167 19.1 % - - % 19,274 14.6 % - - %
Other costs 2,043 2.7 % 1,856 3.8 % 3,793 2.9 % 3,572 3.6 %
Total general and administrative $ 26,927 36.2 % $ 7,515 15.5 % $ 42,760 32.3 % $ 20,412 20.5 %
Our general and administrative expense increased in both aggregate dollars and
as a percentage of total revenue for the three and six months ended June 30,
2022 , versus the comparable 2021 period.
The increase in aggregate dollars for the three months ended June 30, 2022 ,
versus the comparable 2021 period was primarily driven by increased acquisition
and legal related expenses, payroll and related employee costs, and professional
fees. The increase in acquisition and legal related expenses is the result of
expenses that have been incurred regarding the Edgecast Acquisition. The
increase in payroll and related employee costs is due to increased headcount and
the increase in professional fees is due to increased costs for consulting,
recruiting and casual labor.
The increase in aggregate dollars for the six months ended June 30, 2022 , versus
the comparable 2021 periods was primarily driven by increased acquisition and
legal related expenses, payroll and related employee costs and professional
fees, partially offset by a decrease in share based compensation. The increase
in acquisition and legal related expenses is the result of expenses that have
been incurred regarding the Edgecast Acquisition. The increase in payroll and
related employee costs is due to increased headcount and the increase in
professional fees is due to increased costs for consulting, recruiting and
casual labor. The decrease in share-based compensation was the result of a
transition agreement entered into between us and our former Chief Executive
Officer who retired in January 2021 , and for a sign-on bonus converted from cash
to restricted stock units for our new Chief Executive Officer.
We expect our general and administrative expenses for 2022 to increase in both
aggregate dollars and as a percentage of total revenue primarily due to expenses
supporting the Edgecast Acquisition.
Sales and Marketing
Sales and marketing expense was composed of the following (in thousands and as a percentage of total revenue):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Payroll and related employee
costs $ 6,827 9.2 % $ 4,211 8.7 % $ 11,706 8.9 % $ 11,710 11.8 %
Share-based compensation 1,376 1.9 % 395 0.8 % 2,557 1.9 % 958 1.0 %
Marketing programs 1,040 1.4 % 276 0.6 % 1,511 1.1 % 709 0.7 %
Other costs 1,703 2.3 % 902 1.9 % 2,799 2.1 % 2,254 2.3 %
Total sales and marketing $ 10,946 14.7 % $ 5,784 12.0 % $ 18,573 14.0 % $ 15,631 15.7 %
Our sales and marketing expense increased in both aggregate dollars and as a
percentage of total revenue for the three months ended June 30, 2022 , versus the
comparable 2021 period. The increase in aggregate dollars for the three months
ended June 30, 2022 , versus the comparable 2021 periods was primarily driven by
an increase in payroll and related employee costs,
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share-based compensation, other costs, and marketing programs. The increase in
payroll and related employee costs is due to increased headcount associated with
the acquisitions of Moov and Edgecast. Share-based compensation increased
primarily as a result of our acquisition of Moov in September 2021 . The increase
in other costs was mainly due to fees and licenses and professional fees (casual
labor), partially off-set by lower facility costs. Marketing program expenses
increased due to increased trade show, and promotional and advertising costs.
Our sales and marketing expense increased in aggregate dollars and decreased as
a percentage of total revenue for the six months ended June 30, 2022 , versus the
comparable 2021 period. The increase in aggregate dollars for the six months
ended June 30, 2022 , versus the comparable 2021 periods was primarily driven by
an increase in share-based compensation, marketing programs, and other costs.
Share-based compensation increased primarily as a result of our acquisition of
Moov in September 2021 . Marketing program expenses increased due to increased
trade show, and promotional and advertising costs. The increase in other costs
was mainly due to fees and licenses and professional fees (casual labor),
partially off-set by lower facilities costs.
We expect our sales and marketing expenses for 2022 to increase in both aggregate dollars and as a percentage of total revenue.
Research and Development
Research and development expense was composed of the following (in thousands and as a percentage of total revenue):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Payroll and related employee
costs $ 6,022 8.1 % $ 3,034 6.3 % $ 10,111 7.6 % $ 7,208 7.2 %
Share-based compensation 3,423 4.6 % 614 1.3 % 6,743 5.1 % 985 1.0 %
Other costs 2,716 3.7 % 1,539 3.2 % 4,884 3.7 % 3,122 3.1 %
Total research and development $ 12,161 16.4 % $ 5,187 10.7 % $ 21,738 16.4 % $ 11,315 11.4 %
Our research and development expense increased in both aggregate dollars and
as a percentage of total revenue for the three and six months ended June 30,
2022 , versus the comparable 2021 period.
The increase in aggregate dollars during the three months ended June 30, 2022 ,
versus the comparable 2021 periods was primarily driven by an increase in
payroll and related employee costs, share-based compensation, and other costs.
The increase in payroll and related employee costs is due to increased headcount
associated with the acquisitions of Moov and Edgecast. Share-based compensation
increased primarily as a result of our acquisition of Moov in September 2021 .
The increase in other costs, was primarily due to increased professional fees
(casual labor, consulting) and increased fees and licenses, partially off-set by
lower facilities and other employee costs.
The increase in aggregate dollars during the six months ended June 30, 2022 ,
versus the comparable 2021 periods was primarily driven by an increase in
share-based compensation, payroll and related employee costs, and other costs.
Share-based compensation increased primarily as a result of our acquisition of
Moov Corporation in September 2021 . The increase in payroll and related employee
costs is due to increased headcount associated with the Moov Corporation and
Edgecast acquisitions. The increase in other costs, was primarily due to
increased professional fees (casual labor, consulting) and increased fees and
licenses, partially off-set by lower facilities and other employee costs.
We expect our research and development expenses for 2022 to increase in both aggregate dollars and as a percentage of total revenue.
Depreciation and Amortization (Operating Expenses)
Depreciation expense consists of depreciation on equipment and furnishings used by general administrative, sales and marketing, and research and development personnel. Amortization expense consists of amortization of acquired intangible assets. Depreciation and amortization expense was$1,508 , or 2.0% of revenue, for the three months endedJune 30, 2022 , versus$549 , or 1.1% of revenue, for the comparable 2021 period. Depreciation and amortization expense was$2,540 , or 1.9% of revenue, for the six months endedJune 30, 2022 , versus$1,089 , or 1.0% of revenue, for the comparable 2021 period.
The increase in depreciation and amortization expense for the three and six
months ended
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comparable 2021 period was primarily due to the amortization of intangible
assets acquired in our business combination in
Restructuring Charges
The restructuring charge for the three and six month period endedJune 30, 2022 , was the result of management's commitment to restructure certain parts of the company to focus on cost efficiencies, improved growth and profitability, and align our workforce and facility requirements with our continued investment in the business. As a result, we are incurring certain charges for facilities, right of use assets, outside service contracts, and professional fees. Please refer to Note 11 "Restructuring Charge" of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We expect to incur approximately$2,000 of additional restructure charges primarily for consulting fees to restructure our datacenter architecture over the next 18 months. Interest Expense Interest expense was$1,315 for the three months endedJune 30, 2022 , versus$1,305 for the comparable 2021 period. For the six months endedJune 30, 2022 , interest expense was$2,628 versus$2,591 for the comparable 2021 period. Interest expense includes expense associated with the issuance of our senior convertible notes inJuly 2020 and fees associated with the Loan and Security Agreement (as amended, the Credit Agreement) withSilicon Valley Bank ("SVB") originally entered into inNovember 2015 .
Interest Income
Interest income was$33 for the three months endedJune 30, 2022 , versus$42 for the comparable 2021 period. For the six months endedJune 30, 2022 , interest income was$60 versus$87 for the comparable 2021 period. Interest income includes interest earned on invested cash balances and marketable securities.
Other Income (Expense)
Other expense was$1,146 for the three months endedJune 30, 2022 , versus other expense of$440 for the comparable 2021 period. For the six months endedJune 30, 2022 , other expense was$1,859 versus other expense of$655 for the comparable 2021 period. For the three and six months endedJune 30, 2022 , other expense consisted primarily of foreign currency transaction gains and losses. For the three and six months endedJune 30, 2021 , other expense consisted primarily of foreign currency transaction gains and losses, legal settlement, and the gain/loss on sale of fixed assets.
Income Tax Expense (Benefit)
Based on an estimated annual effective tax rate and discrete items, the estimated income tax (benefit) expense for the three months endedJune 30, 2022 was$(19,589) , versus$248 for the comparable 2021 period. For the six months endedJune 30, 2022 , income tax (benefit) expense was$(19,383) , versus$507 for the comparable 2021 period. Income tax (benefit) expense on our income (loss) before income taxes was different than the statutory income tax rate primarily due to the release of a partial valuation allowance due to the Edgecast Acquisition and Edgecast's net deferred tax liabilities, and recording of state and foreign tax expense for the quarter. The effective income tax rate is based primarily upon forecasted income or loss for the year, the composition of the income or loss in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions for tax audits.
Liquidity and Capital Resources
As ofJune 30, 2022 , our cash, cash equivalents, and marketable securities classified as current totaled$77,333 . Included in this amount is approximately$10,816 of cash and cash equivalents held outsidethe United States . Changes in cash, cash equivalents and marketable securities are dependent upon changes in, among other things, working capital items such as deferred revenues, accounts payable, accounts receivable, accrued provision for litigation, and various accrued expenses, as well as purchases of property and equipment and changes in our capital and financial structure due to debt repurchases and issuances, stock option exercises, sales of equity investments, and similar events. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A titled "Risk Factors". However, we believe that our existing cash, cash equivalents, and marketable securities, and available borrowing capacity will be sufficient to meet our anticipated cash needs for at least the next 12 months. If the assumptions underlying our business plan regarding future revenue and expenses change or if unexpected opportunities or needs arise, we may seek to raise additional cash by selling equity or debt securities. 36 --------------------------------------------------------------------------------
The major components of changes in cash flows for the six months ended
Operating Activities
Net cash used in operating activities was$19,322 for the six months endedJune 30, 2022 , versus net cash provided by operating activities of$2,445 for the comparable 2021 period, an increase in net cash used of$21,767 . Changes in operating assets and liabilities of$5,868 during the six months endedJune 30, 2022 , versus$13,728 in the comparable 2021 period, were primarily due to: •accounts receivable increased$17,956 during the six months endedJune 30, 2022 , as a result of timing of collections as compared to a$5,962 decrease in the comparable 2021 period; •prepaid expenses and other current assets increased$4,625 during the six months endedJune 30, 2022 , primarily due to increases in vendor deposits and other, prepaid expenses, and VAT receivables, compared to a decrease of$439 in the comparable 2021 period; •accounts payable and other current liabilities increased$26,671 during the six months endedJune 30, 2022 , versus an increase of$6,732 for the comparable 2021 period primarily due to accrued cost of sales, accounts payable accruals, and increased compensation and benefit costs. Cash provided by operating activities may not be sufficient to cover new purchases of property and equipment during the remainder of 2022 and beyond. The timing and amount of future working capital changes and our ability to manage our days sales outstanding will also affect the future amount of cash used in or provided by operating activities.
Investing Activities
Net cash provided by investing activities was$27,243 for the six months endedJune 30, 2022 , versus net cash used in investing activities of$9,203 for the comparable 2021 period. For the six months endedJune 30, 2022 , net cash provided by investing activities was related to cash acquired in the Edgecast Acquisition and cash received from the sale and maturities of marketable securities, partially offset by capital expenditures, primarily for servers and network equipment associated with the build-out and expansion of our global computing platform, and from purchases of marketable securities. For the six months endedJune 30, 2021 , net cash used in investing activities was related to the purchase of marketable securities, and capital expenditures primarily for servers and network equipment, partially offset by cash received from the sale and maturities of marketable securities. We expect to have ongoing capital expenditure requirements as we continue to invest in and expand our network. During the six months endedJune 30, 2022 , we made capital expenditures of$18,325 , which represented approximately 14% of our total revenue. We currently expect capital expenditures in 2022 to be slightly less than 10% of revenue, as we continue to increase the capacity of our global network and re-fresh our systems.
Financing Activities
Net cash provided by financing activities was$6,962 for the six months endedJune 30, 2022 , versus net cash provided by financing activities of$4,332 for the comparable 2021 period. Net cash provided by financing activities in the six months endedJune 30, 2022 , primarily relates to cash received from the exercise of stock options of$8,771 , offset by the payments of employee tax withholdings related to the net settlement of vested restricted stock units of$1,809 . Net cash provided by financing activities in the six months endedJune 30, 2021 , primarily relates to cash received from the exercise of stock options of$5,460 , offset by the payments of employee tax withholdings related to the net settlement of vested restricted stock units of$1,098 .
Convertible Senior Notes and Capped Call Transactions
InJuly 2020 , we issued$125,000 aggregate principal amount of 3.50% Convertible Senior Notes due 2025 (the "Notes"), with an initial conversion rate of 117.2367 shares of our common stock (equal to an initial conversion rate of$8.53 per share), subject to adjustment in some events. The Notes will be senior, unsecured obligations of ours and will be equal in right of payment with our senior, unsecured indebtedness; senior in right of payment to our indebtedness that is expressly subordinated to the Notes; effectively subordinated to our senior, secured indebtedness, including future borrowings, if any, under our$20,000 credit facility with SVB, to the extent of the value of the collateral securing that indebtedness; and structurally subordinated to all indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries. The Notes are governed by an indenture (the "Indenture") between us, as the issuer, andU.S. Bank, National Association , as trustee. The Indenture does not contain any financial covenants. 37 -------------------------------------------------------------------------------- The Notes mature onAugust 1, 2025 , unless earlier converted, redeemed or repurchased in accordance with their term prior to the maturity date. Interest is payable semiannually in arrears onFebruary 1 andAugust 1 of each year, beginning onFebruary 1, 2021 . We may not redeem the Notes prior toAugust 4, 2023 . On or afterAugust 4, 2023 , and on or before the 40th scheduled trading day immediately before the maturity date, we may redeem for cash all or any portion of the Notes if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. The redemption price will equal 100% of the principal amount of the Notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
As of
In connection with the offering of the Notes, we also entered into privately negotiated capped call transactions (collectively, the "Capped Calls"). The Capped Calls have an initial strike price of approximately$8.53 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have an initial cap price of$13.38 per share, subject to certain adjustments. The capped call transactions cover, subject to anti-dilution adjustments, approximately 14.7 million shares of our common stock and are expected to offset the potential economic dilution to our common stock up to the initial cap price.
Line of Credit
InNovember 2015 we entered into the Credit Agreement with SVB. Since the inception, there have been eight amendments, with the most recent amendment being inSeptember 2021 . The maximum principal commitment amount remains at$20,000 . Our borrowing capacity is the lesser of the commitment amount or 80% of eligible accounts receivable. All outstanding borrowings owed under the Credit Agreement become due and payable no later than the final maturity date ofNovember 2, 2022 . As long as our Adjusted Quick Ratio remains above 1.5 to 1, we no longer are required to submit quarterly borrowing base reports. As ofJune 30, 2022 , borrowings under the Credit Agreement bear interest at the current prime rate minus 0.25%. In the event of default, obligations shall bear interest at a rate per annum which is 3% above the then applicable rate. As ofJune 30, 2022 , andDecember 31, 2021 , we had no outstanding borrowings, and we had availability under the Credit Agreement of$20,000 and$20,000 , respectively.
Financial Covenants and Borrowing Limitations
The Credit Agreement requires, and any future credit facilities will likely require, us to comply with specified financial requirements that may limit the amount we can borrow. A breach of any of these covenants could result in a default. Our ability to satisfy those covenants depends principally upon our ability to meet or exceed certain financial performance results. Any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions. We are required to maintain an Adjusted Quick Ratio of at least 1.0 to 1.0. We are also subject to certain customary limitations on our ability to, among other things, incur debt, grant liens, make acquisitions and other investments, make certain restricted payments such as dividends, dispose of assets or undergo a change in control. As ofJune 30, 2022 , we were in compliance with our covenant under the Credit Agreement.
For a more detailed discussion regarding our Credit Agreement, please refer to Note 10 "Debt - Line of Credit" of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We may be prevented from taking advantage of business opportunities that arise
because of the limitations imposed on us by restrictive covenants within the
Credit Agreement. These restrictions may also limit our ability to plan for or
react to market conditions, meet capital needs or otherwise restrict our
activities or business plans and adversely affect our ability to finance our
operations, enter into acquisitions, execute our business strategy, effectively
compete with companies that are not similarly restricted or engage in other
business activities that would be in our interest. In the future, we may also
incur debt obligations that might subject us to additional and different
restrictive covenants that could affect our financial and operational
flexibility. We cannot assure you that we will be granted waivers or amendments
to the indenture governing the Credit Agreement, or such other debt obligations
if for any reason we are unable to comply with our obligations thereunder or
that we will be able to refinance our debt on acceptable terms, or at all,
should we seek to do so. Any such limitations on borrowing
38
--------------------------------------------------------------------------------under the Credit Agreement, including payments related to litigation, could have a material adverse impact on our liquidity and our ability to continue as a going concern could be impaired.
Share Repurchases
OnMarch 14, 2017 , our board of directors authorized a$25,000 share repurchase program. Any shares repurchased under this program will be canceled and returned to authorized but unissued status. During the six months endedJune 30, 2022 and 2021, we did not repurchase any shares under the repurchase program. As ofJune 30, 2022 , there remained$21,200 under this share repurchase program.
Contractual Obligations, Contingent Liabilities, and Commercial Commitments
In the normal course of business, we make certain long-term commitments for
right-of-use ("ROU") assets, (primarily office facilities) and purchase
commitments for bandwidth and computer rack space. These commitments expire on
various dates ranging from 2022 to 2030. We expect that the growth of our
business will require us to continue to add to and increase our ROU assets and
long-term commitments in 2022 and beyond. As a result of our growth strategies,
we believe that our liquidity and capital resources requirements will grow.
The following table presents our contractual obligations and commercial
commitments, as of
Payments Due by Period
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Purchase Commitments
Bandwidth commitments $ 87,027 $ 37,409 $ 31,368 $ 17,950 $ 300
Rack space commitments 27,107 18,233 8,874 - -
Total purchase commitments 114,134 55,642 40,242 17,950 300
Right-of-use assets and other operating
leases 18,808 5,709 5,544 2,937 4,618
Total commitments $ 132,942 $ 61,351 $ 45,786 $ 20,887 $ 4,918 Off Balance Sheet Arrangements
As of
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our debt and investment portfolio. In our investment portfolio, we do not use derivative financial instruments. Our investments are primarily with our commercial and investment banks and, by policy, we limit the amount of risk by investing primarily in money market funds, United States Treasury obligations, high quality corporate and municipal obligations, and certificates of deposit. Interest expense on our line of credit is at the current prime rate minus 0.25%. In the event of default, obligations shall bear interest at a rate per annum which is 3% above the then applicable rate. An increase in interest rates of 100 basis points would add$10 of interest expense per year, to our financial position or results of operations, for each$1,000 drawn on the line of credit. As ofJune 30, 2022 , there were no outstanding borrowings against the line of credit. Foreign Currency Risk We operate in theAmericas , EMEA, andAsia-Pacific . As a result of our international business activities, our financial results could be affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets, and there is no assurance that exchange rate fluctuations will not harm our business in the future. We have foreign currency exchange rate exposure on our results of operations as it relates to revenues and expenses denominated in foreign currencies. A portion of our cost of revenues and operating expenses are denominated in foreign currencies as are our revenues associated with certain international clients. To the extent that theU.S. dollar weakens, similar foreign currency denominated transactions in the future will result in higher revenues and higher cost of revenues and operating expenses, with expenses having the greater impact on our financial results. Similarly, our revenues and expenses will decrease if theU.S. dollar strengthens against these foreign currencies. Although we will continue to monitor our exposure to currency fluctuations, and, 39 -------------------------------------------------------------------------------- where appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, we are not currently engaged in any financial hedging transactions. Assuming a 10% weakening of theU.S. dollar relative to our foreign currency denominated revenues and expenses, our net loss for the year endedDecember 31, 2021 , would have been higher by approximately$4,128 , and our net loss for the six months endedJune 30, 2022 , would have been higher by approximately$1,763 . There are inherent limitations in the sensitivity analysis presented, primarily due to the assumption that foreign exchange rate movements across multiple jurisdictions are similar and would be linear and instantaneous. As a result, the analysis is unable to reflect the potential effects of more complex markets or other changes that could arise, which may positively or negatively affect our results of operations.
Inflation Risk
Inflation rates throughout the world have increased from prior years. If we cannot increase our revenue through traffic growth or pricing changes to offset cost increases our financial condition and results of operations could be negatively impacted.
Credit Risk
During any given fiscal period, a relatively small number of clients typically account for a significant percentage of our revenue. For the three months endedJune 30, 2022 and 2021, sales to our top 20 clients accounted for approximately 74% and 78%, respectively, of our total revenue. During the three months endedJune 30, 2022 and 2021, respectively, we had two clients, Amazon and Sony,who each represented more than 10% of our total revenue. For the six months endedJune 30, 2022 and 2021, sales to our top 20 clients accounted for approximately 75% and 77%, respectively, of our total revenue. During the six months endedJune 30, 2022 and 2021, respectively, we had two clients, Amazon and Sony,who each represented more than 10% of our total revenue. In 2022, we anticipate that our top 20 client concentration levels will remain consistent with 2021. In the past, the clients that comprised our top 20 clients have continually changed, and our large clients may not continue to be as significant going forward as they have been in the past.
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