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, 2019 , included in Part II of our annual report on Form 10-K, as filed with theSEC , onJanuary 30, 2020 . 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 and customer 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 a leading provider of digital content delivery, online video delivery, cloud security, edge computing, and cloud storage services. Our edge services platform includes a globally distributed, high-performance private network, intelligent software, and support services. Our mission is to securely manage and globally deliver digital content, building customer satisfaction through exceptional reliability and performance. Our delivery services represented approximately 75% of our total revenue during the three and nine months endedSeptember 30, 2020 . We also generate revenue through the sale of professional services and other infrastructure services, such as transit and rack space services. We operate in markets that are highly competitive. We have experienced and expect to continue to experience increased competition in price, features, functionality, integration and other factors leading to customer churn and customers operating their own network. Competition and technology advancements have resulted in declining average selling prices in the industry. We believe continued increases in content delivery traffic growth rates, driven by the continued shift to over the top consumption for online video and increased consumption of rich media content and larger file sizes, increased migration of applications and data to the cloud, and continued growth rates of mobile device usage are all important trends that will continue to outpace declining average selling prices in the industry. In addition to these revenue-related trends, our profitability is impacted by trends in our costs of services and operating expenses. We continuously review our capacity needs and work to optimize our data center footprint. During 2019, we increased our network capacity by more than 100% to over 70 terabits per second through software enhancements and hardware additions. We continuously renegotiate our infrastructure contracts in order to scale our operations based on traffic levels and lower bandwidth costs per unit. Our operating expenses are largely driven by payroll and related employee costs. Our headcount increased from 610 as ofDecember 31, 2019 , to 620 as ofSeptember 30, 2020 . The change in everyday behavior caused by the COVID-19 pandemic has changed people's viewing habits and created new patterns in daily usage worldwide. This has included a greater consumption of content online, such as movies and television shows, news, and video games. As a result, we continued to see strong volumes of customer traffic during the three months endedSeptember 30, 2020 . Nevertheless, there is uncertainty about future traffic patterns as the pandemic evolves, workers return to their places of employment, and seasonal weather impacts end customers viewing habits. Our business is dependent on providing our customers with fast, efficient, and reliable distribution of content delivery and digital asset management services over the Internet every minute of every day. 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 network is fully redundant and includes extensive diversity through data center and telecommunication suppliers within and across regions. In response to the outbreak of COVID-19, we took several precautionary steps early to safeguard our business and our people, including implementing travel bans and restrictions, temporarily closing offices, and canceling participation in various industry events. We have been in constant communication with our business-critical partners and are frequently reassured that, like us, they have activated their pandemic response plans to ensure service continuity. We also have had conversations with various ISPs to understand their pain points and how we can manage our traffic to better alleviate congestion. We have seen a slowing in our collections of outstanding accounts receivable from some of our customers, and we are experiencing logistics challenges in some parts of the world that may cause delays in updating or expanding our network and acquiring new customers. 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. There has been 23 -------------------------------------------------------------------------------- Table of Contents no material impact to our financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. The following table summarizes our revenue, costs, and expenses for the three and nine months endedSeptember 30, 2020 and 2019 (in thousands of dollars and as a percentage of total revenue). Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue$ 59,243 100.0 %$ 51,321 100.0 %$ 174,801 100.0 %$ 140,505 100.0 % Cost of revenue 37,507 63.3 % 30,563 59.6 % 108,518 62.1 % 85,216 60.6 % Gross profit 21,736 36.7 % 20,758 40.4 % 66,283 37.9 % 55,289 39.4 % Operating expenses 24,016 40.5 % 23,401 45.6 % 74,762 42.8 % 73,530 52.3 % Operating loss (2,280) (3.8) % (2,643) (5.1) % (8,479) (4.9) % (18,241) (13.0) % Total other income (expense) (1,639) (2.8) % 58 0.1 % (2,112) (1.2) % 283 0.2 % Loss before income taxes (3,919) (6.6) % (2,585) (5.0) % (10,591) (6.1) % (17,958) (12.8) % Income tax expense 66 0.1 % 166 0.3 % 377 0.2 % 544 0.4 % Net loss$ (3,985) (6.7) %$ (2,751) (5.4) %$ (10,968) (6.3) %$ (18,502) (13.2) % 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 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 beU.S. GAAP net income (loss), adjusted to exclude share-based compensation and non-cash interest expense. 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 asU.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. 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 ourOctober 22, 2020 , 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 underU.S. GAAP, and are not measures of operating income, operating performance or liquidity presented in accordance withU.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 withU.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; 24 -------------------------------------------------------------------------------- Table of Contents •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 comparableU.S. GAAP financial measures and reconciling the unaudited Non-GAAP financial metrics to the comparableU.S. GAAP measures. Reconciliation ofU.S. GAAP Net Loss to Non-GAAP Net Income (Loss) (Unaudited) Three Months Ended Nine Months Ended Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30, 2020 2020 2019 2020 2019 U.S. GAAP net loss$ (3,985) $ (1,727) $ (2,751) $ (10,968) $ (18,502) Share-based compensation 1,923 5,251 3,358 12,238 10,463 Non-cash interest expense 868 - - 868 - Non-GAAP net (loss) income$ (1,194) $ 3,524 $ 607 $ 2,138 $ (8,039) Reconciliation ofU.S. GAAP Net Loss to EBITDA to Adjusted EBITDA (Unaudited) Three Months Ended Nine Months Ended Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30, 2020 2020 2019 2020 2019 U.S. GAAP net loss$ (3,985) $ (1,727) $ (2,751) $ (10,968) $ (18,502) Depreciation and amortization 5,986 5,683 5,133 17,161 14,450 Interest expense 1,674 71 10 1,756 30 Interest and other (income) expense (35) 306 (68) 356 (313) Income tax expense 66 136 166 377 544 EBITDA$ 3,706 $ 4,469 $ 2,490 $ 8,682 $ (3,791) Share-based compensation 1,923 5,251 3,358 12,238 10,463 Adjusted EBITDA$ 5,629 $ 9,720 $ 5,848 $ 20,920 $ 6,672
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, 2019 . During the nine months endedSeptember 30, 2020 , there have been no other significant changes in our critical accounting policies and estimates. 25 -------------------------------------------------------------------------------- Table of Contents Results of Operations Revenue We derive revenue primarily from the sale of our digital content delivery, video delivery, 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 customers build out edge solutions. The following table reflects our revenue for the three and nine months endedSeptember 30, 2020 , compared to the three and nine months endedSeptember 30, 2019 : Three Months EndedSeptember 30 ,
Nine Months Ended
$ % $ %
2020 2019 Change Change 2020 2019 Change Change
Revenue $ 59,243 $ 51,321 $ 7,922 15 % $ 174,801 $ 140,505 $ 34,296 24 %
Our revenue increased during the three and nine months ended September 30,
2020 , versus the comparable 2019 periods due to a significant increase in
volumes driven by increased demand for our content delivery services. During the
three and nine months ended September 30, 2020 , we experienced a decrease in
average selling price versus the comparable 2019 periods as a result of
continuous pricing compression, which is common within our industry.
Our active customers worldwide decreased to 534 as of
During the three months endedSeptember 30, 2020 and 2019, sales to our top 20 customers accounted for approximately 79% and 74%, respectively, of our total revenue. For the nine months endedSeptember 30, 2020 and 2019, sales to our top 20 customers accounted for approximately 77% and 71%, respectively, of our total revenue. The customers that comprised our top 20 customers change from time to time, and our large customers may not continue to be as significant going forward as they have been in the past. During the three months endedSeptember 30, 2020 , we had one customer, Amazon, who represented 10% or more of our total revenue. During the nine months endedSeptember 30, 2020 , we had two customers, Amazon and Sony, who each represented 10% or more of our total revenue. During the three and nine months endedSeptember 30, 2019 , we had one customer, Amazon, who represented 10% or more of our total revenue. Revenue by geography is based on the location of the customer 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Americas$ 38,594 65 %$ 32,860 64 %$ 109,652 63 %$ 86,865 62 % EMEA 8,590 15 % 7,574 15 % 27,411 16 % 22,122 16 % Asia Pacific 12,059 20 % 10,887 21 % 37,738 21 % 31,518 22 % Total revenue$ 59,243 100 %$ 51,321 100 %$ 174,801 100 %$ 140,505 100 % 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 professional fees and outside services, travel and travel-related expenses, and royalty expenses. 26
--------------------------------------------------------------------------------
Table of Contents
Cost of revenue was composed of the following (in thousands and as a percentage of total revenue):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Bandwidth and co-location fees $ 22,824 38.5 % $ 17,377 33.9 % $ 64,314 36.8 % $ 48,052 34.2 %
Depreciation - network 5,602 9.5 % 4,961 9.7 % 16,112 9.2 % 13,905 9.9 %
Payroll and related employee
costs 4,827 8.1 % 3,889 7.6 % 14,329 8.2 % 12,233 8.7 %
Share-based compensation 130 0.2 % 331 0.6 % 1,685 1.0 % 1,119 0.8 %
Other costs 4,124 7.0 % 4,005 7.8 % 12,078 6.9 % 9,907 7.1 %
Total cost of revenue $ 37,507 63.3 % $ 30,563 59.6 % $ 108,518 62.1 % $ 85,216 60.6 %
Our cost of revenue increased in both aggregate dollars and as a percentage of
total revenue for the three and nine months ended September 30, 2020 , versus the
comparable 2019 periods. The changes in cost of revenue were primarily a result
of the following:
•Bandwidth expenses increased in aggregate dollars due to higher transit fees
and increased peering costs, resulting from increased traffic on our network and
our continued expansion in existing, as well as new geographies.
•Our co-location costs increased in aggregate dollars primarily due to our
expansion in existing, as well as new geographies.
•Depreciation expense increased due to increased capital expenditures over the
last two years.
•Payroll and related employee costs increased as a result of additional network
operations and professional services personnel and increased variable
compensation.
•Other costs increased primarily due to an increase in international re-seller
costs, which was partially off-set by decreased travel and entertainment and
contract royalties.
General and Administrative
General and administrative expense was composed of the following (in thousands and as a percentage of total revenue):
Three Months Ended September 30 ,
Nine Months Ended
2020 2019 2020 2019
Payroll and related employee
costs $ 3,617 6.1 % $ 2,176 4.2 % $ 10,005 5.7 % $ 7,918 5.6 %
Professional fees and outside
services 1,103 1.9 % 1,145 2.2 % 2,971 1.7 % 3,487 2.5 %
Share-based compensation 1,272 2.1 % 2,006 3.9 % 5,770 3.3 % 6,240 4.4 %
Other costs 1,759 3.0 % 2,029 4.0 % 5,074 2.9 % 5,586 4.0 %
Total general and administrative $ 7,751 13.1 % $ 7,356 14.3 % $ 23,820 13.6 % $ 23,231 16.5 %
Our general and administrative expense increased in aggregate dollars and decreased as a percentage of total revenue for the three and nine months endedSeptember 30, 2020 , versus the comparable 2019 period. The increase in aggregate dollars for the three and nine months endedSeptember 30, 2020 , versus the comparable 2019 period was primarily driven by increased payroll and related employee costs due to increased general and administrative personnel and increased variable compensation. These increases were partially off-set by decreased share-based compensation resulting from reduced variable compensation that was to be paid in restricted stock units, decreased professional fees and services (consulting) and decreased other costs, which was primarily lower bad debt expense and lower travel and entertainment expenses partially off-set by increased fees and licenses.
We expect our general and administrative expenses for 2020 to increase slightly in both aggregate dollars and as a percentage of total revenue due to expected changes in variable compensation.
27
--------------------------------------------------------------------------------
Table of Contents
Sales and Marketing
Sales and marketing expense was composed of the following (in thousands and as a percentage of total revenue):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Payroll and related employee
costs $ 8,391 14.2 % $ 7,859 15.3 % $ 24,409 14.0 % $ 23,710 16.9 %
Share-based compensation 206 0.3 % 584 1.1 % 2,756 1.6 % 1,666 1.2 %
Marketing programs 634 1.1 % 522 1.0 % 1,705 1.0 % 1,648 1.2 %
Other costs 1,225 2.1 % 1,748 3.4 % 4,409 2.5 % 5,655 4.0 %
Total sales and marketing $ 10,456 17.6 % $ 10,713 20.9 % $ 33,279 19.0 % $ 32,679 23.3 %
Our sales and marketing expense decreased in both aggregate dollars and as a
percentage of total revenue for the three months ended September 30, 2020 ,
versus the comparable 2019 period. For the nine months ended September 30, 2020 ,
our sales and marketing expense increased in aggregate dollars but decreased as
a percentage of revenue versus the comparable 2019 period.
The decrease in aggregate dollars for the three months ended September 30, 2020 ,
versus the comparable 2019 period was primarily driven by decreased other costs
(travel and entertainment, professional fees, facilities, supplies), and
decreased share-based compensation. These decreases were partially offset by
increased payroll and related employee costs and increased marketing expense.
The increase in aggregate dollars for the nine months ended September 30, 2020
was primarily related to increased share-based compensation primarily due to
variable compensation that was paid in restricted stock units and increased
payroll and related employee costs. These increases were partially offset by
lower other costs (travel and entertainment, professional fees and facilities).
We expect our sales and marketing expenses for 2020 to remain consistent throughout the year. Research and Development
Research and development expense was composed of the following (in thousands and as a percentage of total revenue):
Three Months Ended September 30 ,
Nine Months Ended
2020 2019 2020 2019
Payroll and related employee
costs $ 3,973 6.7 % $ 3,500 6.8 % $ 11,117 6.4 % $ 12,075 8.6 %
Share-based compensation 315 0.5 % 437 0.9 % 2,027 1.2 % 1,438 1.0 %
Other costs 1,137 1.9 % 1,223 2.4 % 3,470 2.0 % 3,562 2.5 %
Total research and development $ 5,425 9.2 % $ 5,160 10.1 % $ 16,614 9.5 % $ 17,075 12.2 %
Our research and development expense increased in aggregate dollars and
decreased as a percentage of total revenue for the three months ended
September 30, 2020 , versus the comparable 2019 period. For the nine months ended
September 30, 2020 , our research and development expense decreased in both
aggregate dollars and as a percentage of total revenue versus the comparable
2019 period.
The increase in aggregate dollars during the three months ended September 30,
2020 was primarily due to an increase in payroll and related employee costs
related to increased variable compensation. This increase was partially offset
by decreased share-based compensation and decreased other costs (travel and
entertainment and other employee costs).
The decrease in aggregate dollars for the nine months ended September 30, 2020 ,
versus the comparable 2019 period was primarily driven by decreased payroll and
related employee costs (lower salaries) and decreased other costs (decreased
travel and entertainment, facilities, other employee costs, and fees and
licenses, off-set by increased professional fees). These decreases were
partially offset by increased share-based compensation.
We expect our research and development expenses for 2020 to remain consistent throughout the year.
28
--------------------------------------------------------------------------------
Table of Contents
Depreciation and Amortization (Operating Expenses)
Depreciation and amortization expense was $384 , or 0.6% of revenue, for the
three months ended September 30, 2020 , versus $172 , or 0.3% of revenue, for the
comparable 2019 period. For the nine months ended September 30, 2020 ,
depreciation and amortization expense was $1,049 , or 0.6% of revenue versus
$545 , or 0.4% of revenue, for the comparable 2019 period. 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.
Interest Expense
Interest expense was $1,674 for the three months ended September 30, 2020 ,
versus $10 for the comparable 2019 period. For the nine months ended
September 30, 2020 , interest expense was $1,756 versus $30 for the comparable
2019 period. Interest expense includes expense associated with the issuance of
our senior convertible notes in July 2020 and fees associated with the Loan and
Security Agreement (as amended, the Credit Agreement) with Silicon Valley Bank
(SVB) originally entered into in November 2015 .
Interest Income
Interest income was $10 for the three months ended September 30, 2020 , versus
$81 for the comparable 2019 period. For the nine months ended September 30,
2020 , interest income was $40 versus $402 for the comparable 2019 period.
Interest income includes interest earned on invested cash balances and
marketable securities.
Other Income (Expense)
Other income was $25 for the three months ended September 30, 2020 , versus
other expense of $13 for the comparable 2019 period. For the nine months ended
September 30, 2020 , other expense was $396 versus $89 for the comparable 2019
period. For the three and nine months ended September 30, 2020 and 2019, other
income/expense consisted primarily of foreign currency transaction gains and
losses and the gain/loss on sale of fixed assets.
Income Tax Expense
Based on an estimated annual effective tax rate and discrete items, the
estimated income tax expense for the three and nine months ended September 30,
2020 , was $66 and $377 , respectively, versus $166 and $544 , respectively, for
the comparable 2019 periods. Income tax expense on our income (loss) before
income taxes was different than the statutory income tax rate primarily due to
our providing for a valuation allowance on deferred tax assets in certain
jurisdictions, 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.
On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (CARES
Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among
other things, permits NOL carryovers and carrybacks to offset 100% of taxable
income for taxable years beginning before 2021. In addition, the CARES Act
allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the
five preceding taxable years to generate a refund of previously paid income
taxes. We are currently evaluating the impact of the CARES Act, but at present
do not expect that the NOL carryback provision of the CARES Act would result in
a cash benefit to us.
Liquidity and Capital Resources
As of September 30, 2020 , our cash, cash equivalents, and marketable securities
classified as current totaled $124,792 . Included in this amount is approximately
$11,447 of cash and cash equivalents held outside the 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.
29--------------------------------------------------------------------------------
Table of Contents
The major components of changes in cash flows for the nine months ended
Net cash provided by operating activities was$19,575 for the nine months endedSeptember 30, 2020 , versus net cash used in operating activities of$6,757 for the comparable 2019 period, an increase of$26,332 . Changes in operating assets and liabilities of$(93) during the nine months endedSeptember 30, 2020 , versus$(14,281) in the comparable 2019 period, were primarily due to: •accounts receivable increased$8,221 during the nine months endedSeptember 30, 2020 , as a result of timing of collections as compared to a$11,051 increase in the comparable 2019 period; •prepaid expenses and other current assets increased$2,679 during the nine months endedSeptember 30, 2020 , due to an increase in, prepaid expenses and insurance, and VAT receivable, offset by the amortization of prepaid bandwidth and backbone expenses, compared to an increase of$777 in the comparable 2019 period; •accounts payable and other current liabilities increased$8,159 during the nine months endedSeptember 30, 2020 , versus an increase of$3,675 for the comparable 2019 period due to timing of variable compensation and vendor payments; and •net payments for provision for litigation decreased$3,040 as a result of our final payments from a settled litigation matter during the three months endedJune 30, 2019 . Cash provided by operating activities may not be sufficient to cover new purchases of property and equipment during the remainder of 2020 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 used in investing activities was$71,917 for the nine months endedSeptember 30, 2020 , versus net cash used in investing activities of$2,299 for the comparable 2019 period. For the nine months endedSeptember 30, 2020 , net cash used in investing activities was related to the purchase of marketable securities, and capital expenditures primarily for servers and network equipment associated with the build-out and expansion of our global computing platform. For the nine months endedSeptember 30, 2019 , net cash used in investing activities primarily related to cash received from the sale and maturities of marketable securities, offset by cash used for capital expenditures, primarily for servers and network equipment and the purchase of marketable securities. We expect to have ongoing capital expenditure requirements as we continue to invest in and expand our content delivery network. During the nine months endedSeptember 30, 2020 , we made capital expenditures of$22,128 , which represented approximately 13% of our total revenue. We currently expect capital expenditures in 2020 to be approximately$25 to$30 million , 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$109,107 for the nine months endedSeptember 30, 2020 , versus net cash used in financing activities of$1,412 for the comparable 2019 period. Net cash provided by financing activities in the nine months endedSeptember 30, 2020 , primarily relates to cash received from the issuance of our Notes of$121,600 , and the exercise of stock options and our employee stock purchase plan of$8,691 , offset by$16,413 premium paid related to our capped call transactions,$784 payment of debt issuance costs, and the payments of employee tax withholdings related to the net settlement of vested restricted stock units of$3,987 . Net cash used in financing activities in the nine months endedSeptember 30, 2019 , primarily relates to the payments of employee tax withholdings related to the net settlement of vested restricted stock units of$2,528 , offset by cash received from the exercise of stock options and our employee stock purchase plan of$1,116 . 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, 30 -------------------------------------------------------------------------------- Table of Contents 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. 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. During the three months endedSeptember 30, 2020 , the conditions allowing holders of the Notes to convert were not met and therefore the Notes are not yet convertible. 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 InJuly 2020 , we entered into a Sixth Amendment (Sixth Amendment) to the Credit Agreement with SVB. Under the Sixth Amendment, the maximum principal commitment amount remained at$20,000 . In addition, the Sixth Amendment modified language within the Credit Agreement which permitted us to issue our Notes. 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 ofSeptember 30, 2020 , 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 ofSeptember 30, 2020 , andDecember 31, 2019 , we had no outstanding borrowings, and we had availability under the Credit Agreement of$20,000 .
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 ofSeptember 30, 2020 , we were in compliance with our covenant under the Credit Agreement.
For a more detailed discussion regarding our Credit Agreement and Sixth Amendment, please refer to Note 8 "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
31
--------------------------------------------------------------------------------
Table of Contents
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 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
On March 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 nine months ended
September 30, 2020 and 2019, we did not repurchase any shares under the
repurchase program. As of September 30, 2020 , 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 2020 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 2020 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 September 30, 2020 , over the next five years and thereafter:
Payments Due by Period
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Purchase Commitments
Bandwidth commitments $ 36,576 $ 24,238 $ 12,165 $ 173 $ -
Rack space commitments 16,479 9,960 6,014 505 -
Total purchase commitments 53,055 34,198 18,179 678 -
Right-of-use assets and other operating
leases 17,693 3,374 4,247 2,878 7,194
Total commitments $ 70,748 $ 37,572 $ 22,426 $ 3,556 $ 7,194
Off Balance Sheet Arrangements
As of September 30, 2020 , we are not involved in any off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
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 under the Credit Agreement, as amended,
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 of September 30, 2020 , there
were no outstanding borrowings against the line of credit.
Foreign Currency Risk
We operate in the Americas , EMEA, and Asia-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 customers. To the extent that the
U.S. dollar weakens, similar foreign currency
32
--------------------------------------------------------------------------------
Table of Contents
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
the U.S. dollar strengthens against these foreign currencies. Although we will
continue to monitor our exposure to currency fluctuations, and, 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 the U.S. dollar relative to
our foreign currency denominated revenues and expenses, our net loss for the
year ended December 31, 2019 , would have been higher by approximately $3,049 ,
and our net loss for the nine months ended September 30, 2020 , would have been
higher by approximately $2,959 . 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
We do not believe that inflation has had a material effect on our business,
financial condition, or results of operations. If our costs were to become
subject to significant inflationary pressures, we may not be able to fully
offset such higher costs through price increases. Our inability or failure to do
so could harm our business, financial condition and results of operations.
Credit Risk
During any given fiscal period, a relatively small number of customers typically
account for a significant percentage of our revenue. During the three months
ended September 30, 2020 and 2019, sales to our top 20 customers accounted for
approximately 79% and 74%, respectively, of our total revenue. During the three
months ended September 30, 2020 , we had one customer, Amazon, who represented
more than 10% of our total revenue. During the three months ended September 30,
2019 , we had one customer, Amazon, who represented more than 10% of our total
revenue.
For the nine months ended September 30, 2020 and 2019, sales to our top 20
customers accounted for approximately 77% and 71%, respectively, of our total
revenue. During the nine months ended September 30, 2020 , we had two customers,
Amazon and Sony, who each represented more than 10% of our total revenue. During
the nine months ended September 30, 2019 , we had one customer, Amazon, who
represented more than 10% of our total revenue.
In 2020, we anticipate that our top 20 customer concentration levels will
remain consistent with 2019. In the past, the customers that comprised our top
20 customers have continually changed, and our large customers may not continue
to be as significant going forward as they have been in the past.
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We are responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in SEC Rules 13a-15(e) and
15d-15(e). We maintain disclosure controls and procedures, as such term is
defined in SEC Rules 13a-15(e) and 15d-15(e), that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and that such information is accumulated and
communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of
September 30, 2020 . Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting, as
defined in SEC Rules 13a-15(f) and 15d-15(f), during the fiscal quarter ended
September 30, 2020 , that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
33--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
