Limelight Networks, Inc.
Annual Report 2012

Plain-text annual report

Section 1: 10-K (FORM 10-K) Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to Commission file number 001-33508 Limelight Networks, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 20-1677033 (I.R.S. Employer Identification No.) 222 South Mill Avenue, 8 Floor th Tempe, AZ 85281 (Address of principal executive offices, including Zip Code) (602) 850-5000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $0.001 par value Name of each exchange on which registered NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No þ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Smaller Reporting Company ¨ Large accelerated filer ¨ Non-accelerated filer ¨ Accelerated filer þ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ (Do not check if a smaller reporting company) The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was approximately $169.1 million based on the last reported sale price of the common stock on the Nasdaq Global Select Market on June 30, 2012. The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, as of February 20, 2013: 97,026,738 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrant’s 2013 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. Table of Contents LIMELIGHT NETWORKS, INC. ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended December 31, 2012 TABLE OF CONTENTS PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships, Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits and Financial Statement Schedules Signatures Schedule II — Valuation and Qualifying Account Exhibits Index and Exhibits Page 1 13 32 32 32 33 34 36 39 67 68 113 113 116 117 117 118 118 118 119 120 121 122 Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This annual report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, among other things, statements as to industry trends, our future expectations, operations, financial condition and prospects, business strategies and other matters that do not relate strictly to historical facts. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management relying on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” set forth in Part I, Item 1A of this annual report on Form 10-K. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Business Item 1. Overview PART I Limelight operates a globally distributed, high-performance computing platform (our global computing platform) and provides a suite of integrated services including content delivery, web and video content management, mobility, web application acceleration, cloud storage, and related consulting services that enable companies and other organizations to create, manage and deliver a global digital presence. The integrated suite of services that we offer collectively comprises our Orchestrate Digital Presence Platform (Orchestrate, or the Orchestrate Platform). We provide the Orchestrate Platform as Software-as-a-Service (SaaS) and Infrastructure-as-a Service (IaaS), which other than content delivery services, are referred to collectively as value-added services (VAS). We offer VAS both collectively as the end-to-end Orchestrate Platform and individually for customers that may not be inclined or able to adopt the entire platform. The Orchestrate Platform and services help our customers optimize and streamline their online digital presence across web, mobile, social and large screen channels. The Orchestrate Platform and services enable our customers to remove the complexity of creating, managing, delivering and optimizing their digital presence, which helps them to deliver a high quality online media experience, improve brand awareness, drive revenue and enhance their customer relationships. The Orchestrate Platform and services provide advanced features, which include website content management, personalization and targeting, video publishing, mobile enablement, content delivery, transcoding and cloud storage, combined with social media integration and reporting analytics. These services are provided through the cloud and leverage our global computing platform, which provides highly available, highly redundant storage, bandwidth and computing resources, as well as connectivity to last-mile broadband network providers. Our professional consulting services team helps organizations assess and optimize their digital presence strategies and activities through content management best practices, performance and delivery of online content, and video creation and publishing. We derive revenue primarily from the sale of the Orchestrate Platform and its components as managed services. We also generate revenue through the sale of professional services and other infrastructure services, such as transit and rack space services. We provide our services to customers that we believe view Internet, mobile, and social initiatives as critical to their success, including traditional and emerging media companies operating in the television, music, radio, newspaper, magazine, movie, videogame, software, and social media industries, as well as to enterprises, technology companies, and government entities conducting business online. 1 Table of Contents Our principal executive offices are located at 222 South Mill Avenue, 8 Floor, Tempe, Arizona 85281, and our main telephone number is (602) 850-5000. Our website address is www.limelightnetworks.com. We began development of our infrastructure in 2001 and began generating meaningful revenue in 2002. We began international operations in 2004. As of December 31, 2012, we had approximately 1,451 active customers and had a presence in approximately 67 countries throughout the world. As used herein, “Limelight,” “we,” “us” and “our” refer to Limelight Networks, Inc. and its subsidiaries, unless the context indicates otherwise. th Recent Developments of the Business On November 26, 2012, we announced the appointment of Robert A. Lento as interim Chief Executive Officer effective immediately. We had previously announced on November 1, 2012 that Jeffrey W. Lunsford would be stepping down as our Chief Executive Officer in January 2013 and that an executive search firm was engaged to recruit his successor. On January 22, 2013, we announced that the Board of Directors (Board) completed its executive search and appointed Mr. Lento as our President and Chief Executive Officer and that Mr. Lunsford had tendered his resignation as a board member and Chairman of the Board. On February 12, 2013, we announced the appointment of George E. Vonderhaar as Chief Sales Officer and, we recently appointed Jonathan Smith as Managing Director and Vice President of Europe, Middle East and Africa. On February 19, 2013, we announced the appointment of Walter D. Amaral to serve as our non-executive Chairman of the Board. Mr. Amaral fills the Chairman role vacated by the resignation of Mr. Lunsford. We also announced the appointments of Charles Kirby Wadsworth as our Chief Marketing Officer on June 25, 2012 and Indu Kodukula as our Chief Operating Officer on October 29, 2012. During 2012, we completed two previously announced stock repurchase plans and commenced a third. On September 12, 2011, our Board authorized and approved a repurchase plan that authorized us to purchase up to $25 million of our shares of common stock, exclusive of any commissions, markups or expenses, from time to time through March 12, 2012. During the period September 12, 2011 through March 12, 2012, we purchased and cancelled approximately 9.7 million shares of common stock for approximately $25.0 million ($25.2 million including commissions) under the initial repurchase plan. On May 3, 2012, we announced a second common stock repurchase plan that authorized us to repurchase up to $15 million of our shares of common stock, exclusive of any commissions, markups or expenses, from time to time through December 15, 2012. During the year ended December 31, 2012, we purchased and cancelled approximately 5.7 million shares of common stock for approximately $15.0 million ($15.1 million including commissions) under the second repurchase plan. On October 29, 2012, our Board authorized and approved a third common stock repurchase plan that authorized us to repurchase up to $10 million of our shares of common stock, exclusive of any commissions, markups or expenses, from time to time through May 9, 2013. Any repurchased shares will be cancelled and return to authorized but unissued status. During the three months ended December 31, 2012, we purchased and cancelled approximately 2.2 million shares under the third repurchase plan for approximately $4.6 million (including commissions). On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in our on-going patent litigation with Akamai Technologies, Inc. (Akamai). The Court of Appeals stated that the trial court correctly determined that we did not directly infringe Akamai’s 6,108,703 patent and upheld the trial court’s decision to vacate the original jury’s damages award. The Court of Appeals also held that we did not infringe Akamai’s 6,553,413 or 7,103,645 patents (the ’413 and ’645 patents, respectively). A slim majority in this three-way divided opinion also announced a revised legal theory of induced infringement, remanded the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to prove that we induced our customers to infringe Akamai’s patent under the Court of Appeals’ new legal standard. On December 28, 2012, we filed a petition for writ of certiorari to the United States Supreme Court to appeal this sharply divided Court of Appeals decision and sought to stay any proceedings at the trial court until the Supreme Court rules on that petition. Akamai then filed a cross petition for consideration of the Court of Appeals standard for direct infringement. Just as we have successfully shown that we do not directly infringe Akamai’s patent, we firmly believe that we ultimately would be successful in showing we do not infringe Akamai’s patent under the Court of Appeals 2 Table of Contents majority’s new induced infringement theory, and we will continue to vigorously defend against the allegation. We do not believe a loss is probable and therefore no provision for this lawsuit is recorded in our financial statements. For additional information, please see “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K. In May 2010, we made a strategic investment in Gaikai Inc., a private cloud-based gaming technology company (Gaikai). In August 2012, Sony Computer Entertainment Inc. (Sony) acquired Gaikai and we recorded a gain on sale of our cost basis investment in Gaikai of $9.4 million, which has been reflected in other income (expense) in the accompanying consolidated statements of operations for the year ended December 31, 2012. The carrying value of the Gaikai cost basis investment as of the sale date was approximately $2.0 million. The aggregate selling price was $11.4 million consisting of $10.2 million of cash received and $1.2 million held in escrow for a period of up to 15 months to cover any potential indemnification claims. As of December 31, 2012, we are not aware of any potential indemnification claims that are expected to reduce the amount received from escrow and have recorded a current receivable of $1.2 million, which is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet for the year ended December 31, 2012. We are registered as a reporting company under the Securities Exchange Act of 1934, as amended (Exchange Act). Accordingly, we file or furnish with the Securities and Exchange Commission, or the Commission, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such reports as required by the Exchange Act and the rules and regulations of the Commission. We refer to these reports as Periodic Reports. The public may read and copy any Periodic Reports or other materials we file with the Commission at the Commission’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling 1-800-SEC-0330. In addition, the Commission maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers, such as Limelight Networks, Inc., that file electronically with the Commission. The address of this website is http://www.sec.gov. Our Internet website address is www.limelightnetworks.com. We make available, free of charge, on or through our Internet website our Periodic Reports and amendments to those Periodic Reports as soon as reasonably practicable after we electronically file them with the Commission. We are not, however, including the information contained on our website, or information that may be accessed through links on our website, as part of, or incorporating it by reference into, this annual report on Form 10-K. Five Trends Driving Internet Traffic Growth We believe there are five important trends driving a substantial need for business enterprises to manage their global online digital presence across web, mobile, social, and large screen channels to a wide variety of online, mobile and connected devices. We believe these trends are: The evolution of digital marketing. As the global online economy has continued to expand and grow, it has become increasingly • difficult for businesses to capture consumer attention. Because of this difficulty, we anticipate that marketing will continue to evolve from broadcast advertising and other marketing messages to engaging with users through conversations associated with content in a variety of places including websites and social networks. We believe this kind of engagement requires that content be dynamic, interactive, and provide rich analytics to assess and gauge the effectiveness of the engagement. To support this trend, we provide a web-based content management system that includes social network publishing and conversation management features. From a single web-based tool, businesses can create, launch, and manage multiple websites, publish new content, and remain actively engaged with users around specific content assets. The continued growth of online video. Consumers are increasingly demanding and consuming, and publishers are increasingly making • available for these consumers, video, music, and other forms of media over the Internet. In particular, we anticipate that consumer demand for online video will 3 Table of Contents • • • continue to grow rapidly. Because of this trend, we expect that businesses will continue to incorporate video into their digital marketing efforts as a way to further differentiate their message from competitors and generate new opportunities for engagement. Video consumption is also spreading to mobile devices. To support this trend, we offer video services that enable companies to manage and publish video both to their own website as well as popular third-party websites like YouTube. These services also automatically convert video to many popular mobile formats such as HLS (for Apple-based devices and others that support Apple’s HLS standard), HDS (for Flash-enabled devices), and Smooth Streaming (for Microsoft-enabled devices) ensuring that the video is provided to end-users in a manner that supports the best possible playback experience at scale for high-performance, high-quality viewing experiences. Mobile First. Mobile is becoming increasingly important as a primary method users interact with online content. Mobile devices enable consumers to remain connected and engaged with a marketer’s story when they are away from their primary computers or TVs. But in order for those consumers to remain engaged, the experience must be consistent across devices. Marketers’ dynamic content and video has to be accessible regardless of device and make use of the same social engagement and interaction with which those users are comfortable on their desktop or laptop computers. To support this trend, we provide a variety of functions that offer mobile enablement and optimization, such as automatic rendering of websites into a mobile template, automatic conversion of video into different formats, live mobile video delivery, and advertisement integration into mobile video. Cloud - The continued migration of IT services into the cloud. Enterprises may seek to decrease infrastructure expenditures by moving to a “cloud-based” model in which application delivery and storage are available on-demand and paid for on an as-needed basis. We anticipate that the core cloud computing market will continue to grow at a rapid pace as the cloud increasingly becomes a mainstream IT strategy embraced by corporate enterprises and government agencies. This core market includes platform-as-a-service (PaaS) and IaaS offerings, as well as the cloud-delivered software used to build and manage a cloud environment. We offer IaaS and SaaS applications built on that infrastructure that augment customers’ existing and new cloud network infrastructure. Social - The rapid growth of use of social media. Consumers are increasingly using social media sites and solutions to communicate and share information. To engage consumers across social media channels, content needs to change constantly and be editable instantaneously by the author and, in some cases, a broader community. Likewise, the audience can interact with and republish social media content. The management of this type of content needs to be scalable, flexible, and fast enough to enable the content to be archived, indexed by search engines, and shared by users in many ways. Our services support this trend letting customers use built-in search engine optimization tools and promotional features to fine-tune marketing programs using blogs and social networking features to engage directly with consumers, and ensuring that dynamic content inherent in social media environments is delivered with a high degree of quality. Requirements for Managing a Digital Presence We believe that the challenges of managing and delivering a global digital presence, particularly related to rich media, dynamic content, and applications over the Internet to a wide variety of mobile and connected devices have created a new set of technical, management, and economic requirements for organizations seeking to succeed in the online economy. Our Orchestrate Platform helps content publishers, enterprises, and government entities achieve the following: • Reduction of IT involvement. Our cloud-based services relieve the burden of purchasing and maintaining hardware or software from our customers. Additionally, because our services all include web-based interfaces built using compliant technologies with many of today’s most popular Web browsers, there is minimal direct IT-support required to enable adoption and usage by the entire company or organization, regardless of location. 4 Table of Contents • Business rules-based content delivery. Consumers increasingly expect the ability to consume any form of media content online. To • • • • • • meet this expectation, traditional media companies are making their enormous libraries of content, such as television shows and movies, available to be viewed online. Users expect a consistent media experience across every title in these large libraries, regardless of a title’s popularity, each time it is viewed. But companies might have regulations with respect to where they can display that content. Our services include powerful features that enable organizations to dictate where content is stored, for how long, and in what regions it can be delivered. Ability to scale capacity to handle rapidly accelerating demand. Online businesses must scale delivery of their web presence smoothly as the quantity of their site visitors or audience increases in order to avoid delays for users. When a large number of users simultaneously access a particular website, the operator must be able to meet that surge in demand without making users wait. Rapidly accelerating demand can be related to a single event, such as a breaking news story or seasonal shopping, or can be spread across an entire library of content, such as when a social media website surges in popularity. Ability to easily publish and deliver online video. As the consumer demand for online video grows, businesses and organizations may be required to adopt video into their marketing messages or risk driving users away. But there are a host of complexities involved in developing and implementing a “video publishing workflow.” Our video related services include simple and easy methods to publish videos while also leveraging the power of the network to deliver video at scale with the highest performance possible. Additionally, video content can be converted automatically to any mobile device with the opportunity to integrate advertisements into on-demand assets. Addressing mobile users. With the increasing popularity of smartphones and tablets, businesses and organizations may be required to ensure that their content, whether dynamic web pages or video, display properly in their mobile format. However, adding this requirement to existing content publishing workflows may greatly complicate internal processes that may result in delays for making content available to end users. Additionally, because many mobile devices have separate requirements, handling this requires specialized resources. Our services include features for delivering both web content and video automatically to mobile phones and solves this workflow challenge by automating the delivery of content as part of the existing publishing process. Reliability. Throughout the path data must traverse to reach a user, and problems with the underlying infrastructure supporting the Internet can occur. For example, servers can crash or network connections can fail. Network, datacenter, or service provider outages can mean frustrated users, lost audiences, and missed revenue opportunities. Our network is a massively redundant network. Spread throughout the globe in over 80 physical locations, the delivery of digital presence assets (like web pages and video files) is always available. Security. Maintaining effective security is a challenge for any enterprise that operates an Internet presence. Threats, such as attacks, viruses, and piracy can impact online web presence in many ways, including compromising personal and sensitive information, loss of customer trust and loyalty, loss of revenue, and negative publicity and brand reputation. Our services employ a number of software and network features to help mitigate the risk of unauthorized access to content and network-related attacks against web properties. Engagement. The rapid growth of social media has radically impacted digital marketing by evolving traditional “broadcasting” of marketing messages to customers to “engaging” with customers through marketing messages. This engagement largely happens through social media networks like Facebook, Twitter, and other services because consumer behavior has shifted to make social networks one of their primary online activities. Our services include powerful social media integration enabling organizations and businesses to integrate customer engagement via social networks directly into their content, as well as a means to analyze the effectiveness of that engagement (i.e., by monitoring the number of shares, conversation threads, etc.). 5 Table of Contents • Personalization. The web continues to expand both horizontally (more businesses coming online) and vertically (more content within each subject or topic). This means that it is increasingly difficult for digital marketers to ensure that their message is reaching consumers and that consumer’s return to that message, whether it is on a website, in a video, or part of a social network. In order to ensure that the message is received and returned, organizations and businesses are personalizing the content experience based on information about the consumer, such as browsing history (on their site), Facebook likes/shares (available via API), etc. Our services include powerful features that enable marketers to personalize the site to offer content and messaging that is more likely to appeal to specific consumers as well as gather browsing and other information to be used in that personalization. Globalization. The development and implementation of regional websites is a strategic priority for enterprises as they look to build global brand awareness and drive revenue. Globalizing an organization’s digital presence includes developing, deploying, localizing, and maintaining regionally specific sites with fresh content while ensuring brand consistency worldwide. • Our Services Our integrated, feature-rich, suite of services and solutions are purpose-built to enable customers to build and manage their digital presence across Internet, mobile, and social channels. Our primary services include the following: • Content delivery services improve the reliability and performance of digital media and enterprise websites by using our global computing platform to deliver rich media files such as video, music, games, and software, or live streaming of corporate or entertainment events (we support all major formats including Adobe Flash, QuickTime, Windows Media, RealNetworks RealPlayer, WebM, and MP3 audio). Video content management services help organizations publish, manage, syndicate, analyze, and monetize video content through a cloud-based service. Services here also include off-the-shelf players for quick deployment, a mobile application to capture video in the field, and monetization features that enable customers to integrate advertising into the video playback experience. Mobile delivery services help publishers deliver properly-formatted, device-optimized video, and web content to almost any media- enabled mobile device as well as to present dynamic pre-, mid-, or post-roll video and audio advertising into media that is delivered to mobile or connected users. These mobility services automatically detect the requesting mobile device and provide a version of the content suitable to that device. Web content management services enable content publishers to create, manage, and publish local and global websites through a cloud-based service, combining web content management, site marketing and personalization tools, and mobile publishing to help any organization be a sophisticated web publisher and marketer. Web acceleration services improve web experiences by providing consistent performance from any geography for dynamic and personalized content, online commerce transactions, and web applications. Cloud storage services provide customers with a scalable, redundant, geographically diverse storage of media and enterprise content offering policies for global geographic placement, content workflow, and business logic controls. Professional services help customers assess their Digital Presence Management strategies and optimize their publishing, e-commerce, mobility, content distribution workflows, and provide best practice support for network architecture design, storage infrastructure, web application development, creative design, live event execution, and the design, deployment, and management of infrastructure. • • • • • • 6 Table of Contents • Reporting and analytics services help customers manage and configure how content is delivered and presented to online users. Together, our complete set of reporting and analytics services help online businesses increase efficiency, reduce expenses, improve end-user experience, and provide insight into performance of content delivery or web property. These services include features such as customer provisioning, custom control over delivery and storage options, custom reports, and Internet health monitor — which provides insight into potential sources of end user experience issues. Our evolution from a pure-play content delivery network (CDN) to a provider of integrated cloud-based software and services for Digital Presence Management is reflected in the increasing percentage of total revenue that our VAS represents. VAS represented approximately 32%, 26%, and 16% of our total revenue in 2012, 2011 and 2010 respectively. Limelight Networks Global Computing Platform Our global computing platform provides highly available, highly redundant storage, bandwidth, and computing resources in support of our services and solutions. This architecture, managed by our proprietary software, seamlessly and automatically responds to network and datacenter outages and disruptions. All of our delivery locations are interconnected via our global network and also connected to multiple Internet backbone and broadband Internet service provider (ISP) networks. Additionally, each location has redundant network equipment connectivity and server capacity, enabling us to continue serving content even if a network connection or server fails. Automatic failover and recovery not only provide uninterrupted customer service but also simplify network maintenance and upgrades. This platform has three main features: • • • Densely configured, high-capacity. Our global computing platform infrastructure consists of dense clusters of specially configured servers organized into large, multi-tiered, logical delivery locations. The extensive storage capacity of these logical locations leads to fewer cache misses to our network of servers than we believe would occur in an early CDN architecture and provides significant scalability and responsiveness to surges in end-user demand. The clustering of many high-performance CPUs provide us with aggregated computational power. Many connections to other networks. Our logical locations are directly connected to hundreds of ISPs and other user access networks, which are computer networks connected to end-users. In addition, for dedicated connectivity between our logical locations, we operate a dedicated fiber optic backbone and metro area networks. Also, our infrastructure has multiple connections to the Internet. In combination, these connections enable us to frequently bypass the often-congested public Internet, improving the delivery speed of content and applications. Intelligent software to manage the network. We have developed proprietary software that manages our global computing platform. This software manages the delivery of content objects, the retrieval of dynamic content, storage and retrieval of objects, activity logging, and information reporting. Segment and Geographic Information We operate in one industry segment, providing content delivery and related services and solutions for global businesses to build and manage their digital presence across Internet, mobile, and social channels. We operate in three geographic areas — North America, Europe, Middle East and Africa (EMEA) and Asia Pacific, including Japan. For the years ended December 31, 2012, 2011, and 2010, approximately 31%, 30%, and 27%, respectively, of our total revenue was derived from our operations outside North America. For the years ended December 31, 2012, 2011, and 2010, we derived approximately 47%, 50%, and 57%, respectively of our international revenue from EMEA and approximately 53%, 50%, and 43%, respectively, of our international revenue from Asia Pacific. We anticipate that our Asia Pacific revenue may continue to grow as a percentage of our total international revenue. During 2012, we had two countries, Japan and the United States that represented more than 10% of our total revenues. No single country outside of the United States accounted for 10% or more of our revenues during 2010 and 2011. For a description of risks attendant to our foreign operations, see the 7 Table of Contents section titled “Risk Factors” set forth in Part 1, Item 1A of this annual report on Form 10-K. For more segment and geographic information, including revenue from customers, a measure of profit or loss, and total assets for each of the last three fiscal years, see our Consolidated Financial Statements included in this annual report on Form 10-K, including Note 22 thereto. Sales, Service and Marketing Our sales and service professionals are located in six offices in the United States with an additional 11 office locations in EMEA and Asia • Pacific. We target media, high tech, software, gaming, enterprise and government agencies and other providers of online media content through: Telesales. Our telesales force is responsible for qualifying demand, and managing direct sales opportunities within the small and mid- market. Field sales. Our field sales force is responsible for managing direct sales opportunities in major accounts and channels. Distribution partners. We maintain relationships with a selection of partners who embed our services or solutions into their offerings. • • • Resellers. Through our reseller relationships, we sell our services to reseller companies who have relationships with target customers in specific regions or markets. Our sales and service organization includes employees in telesales and field sales, professional services, account management, and solutions engineering. As of December 31, 2012, we had approximately 178 employees in our sales and service organization. Our ability to achieve revenue growth in the future will depend in large part on whether we successfully recruit, train, and retain sufficient sales, technical, and global services personnel, and how well we establish and maintain our distribution and reseller relationships. We believe that the complexity of our services will continue to require highly trained global sales and services personnel. To support our sales efforts and promote the Limelight brand, we conduct marketing programs. Our marketing strategies include an active public relations campaign, advertisements, events and trade shows, strategic alliances, and on-going customer communication programs. As of December 31, 2012, we had 12 employees in our global marketing organization. Customers Our customers operate in the media, entertainment, gaming, software, enterprise, and public sectors. As of December 31, 2012, we had approximately 1,451 active customers worldwide, including many widely recognized names in the fields of video, digital music, news media, games, rich media applications, and software delivery. During 2012, some of our most notable customers included Amazon, Bell Canada, QVC, Swiss Re, Electronic Arts, Ciena, NetApp, StarTribune, Middle East Broadcasting Company, NFL, Microsoft, Netflix, Nintendo Wii, Nissan, Sony PlayStation, ABC, BBC, NBC, Punjab Kesari Group, and Fasig Tipton. During 2012 and 2011, we had one customer, Netflix who accounted for more than 10% of our revenue. For each of the years ended December 31, 2012 and 2011, Netflix represented approximately 11% of our total revenue. During 2010, we had no customer that accounted for more than 10% of our revenue. In the past, the customers that comprise our top 10 customers have continually changed, and our large customers may not continue to be as significant going forward as they have been in the past. From time to time we have discontinued service to customers for non-payment. Although we did not receive continuing revenue from these former customers, these changes provided for a stronger mix of customers across our base, decreased our days sales outstanding (DSO), and allowed us to recoup network capacity to help meet future growth needs. We continue to focus on acquiring and retaining high quality customers across all market segments. 8 Table of Contents Competition We operate in the digital content management and delivery market, which is rapidly evolving and highly competitive. We expect this competitive environment to continue. We believe that the principal competitive factors affecting this market fall into three primary categories: management, delivery, and consumer engagement metrics. Management for digital presence is measured by the features available for managing and publishing content that is part of a digital presence. Delivery for digital presence is measured by scale and performance. We measure scale by the number of physical locations in the network and the capabilities for the network to absorb unplanned spikes in requests for content. We measure performance by file delivery time, end-user media consumption rates, quality of the end-user experience, and scalability, both in terms of average capacity and special event capacity. In addition, metrics around the ability to efficiently locate and deliver web content, the ease of implementation, the ability to customize systems for unique content types and mixes, reliability, security, and cost efficiency continue to be key criteria for this market. Consumer engagement relating to digital content is measured by the ease of management and delivery of digital content across multiple channels and to multiple devices, the ability to conduct visitor tracking, lead capture and lead scoring, the enablement of business users to manage and publish digital content to reduce cost and strain on IT departments, increased website conversion rates, and the ability to quickly monetize digital assets. The market for digital content management and delivery is increasingly complex and can require multiple vendors to provide customers with a complete set of tools and services to manage and deliver all of their digital content to all audiences as part of a global digital presence. We believe customers will increasingly look for a single vendor to help them manage their digital presence management needs in order to lower costs in relationship and administration management, reduce risk to their business, increase overall quality and speed of delivery, and improve and measure consumer engagement effectiveness. We believe our integrated suite of services and solutions supported by our global computing platform compete effectively in digital content management and delivery and provide a competitive advantage in that our integrated suite coupled with our global computing platform help obviate the need for customers to seek and manage multiple vendors who provide multiple point solutions. We also believe the combination of cloud-based software (SaaS) and infrastructure/bandwidth associated with the physical network (IaaS) solve multiple challenges for IT departments by removing the need to install, manage, or provision software and hardware to satisfy the requirements for delivering a digital presence. We believe our future success will depend on our ability to continue to enhance the performance, integration, and functionality of our existing suite of services and of our global computing platform, and on our ability to add additional services and functionality to meet the market’s increasing expectations regarding digital content management and delivery and consumer engagement. Research and Development Our research and development organization is responsible for the design, development, testing, and certification of the software, hardware, and network architecture of our global computing platform and support of our content delivery and VAS solutions. As of December 31, 2012, we had 120 employees in our research and development group. Our research and development personnel are primarily located in Mountain View and San Francisco, California, Seattle, Washington, Tel Aviv, Israel, Lviv, Ukraine and at our headquarters in Tempe, Arizona. Our engineering efforts support product development across all of our service areas, as well as innovation related to the global computing platform itself. We test our services to ensure scalability in times of 9 Table of Contents peak demand. We use internally-developed and third-party software to monitor and to improve the performance of our platform in the major Internet consumer markets around the world where we provide services for our customers. Our research and development expenses were approximately $20.2 million in 2012, $17.1 million in 2011, and $10.8 million in 2010, including stock-based compensation expense of approximately $2.7 million in 2012, $3.6 million in 2011, and $3.0 million in 2010. We believe that the investments that we have made in research and development have been effectively utilized. In 2013, we anticipate that our research and development expenditures will increase in absolute dollars and increase as a percentage of our revenue. Intellectual Property Our success depends in part upon our ability to protect our core technology and other intellectual capital. To accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets, copyrights, trademarks, domain registrations, and contractual protections. As of December 31, 2012, we had received 52 patents in the United States, expiring between 2023 and 2032, the Patent and Trademark Office has allowed five more U.S. applications, and we have over 55 U.S. patent applications pending. We have 12 issued patents in Australia and one allowed in China. We do not know whether any of our patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims. Any patents that may be issued to us may be contested, circumvented, found unenforceable or invalidated, and we may not be able to prevent third parties from infringing them. Therefore, we cannot predict the exact effect of having a patent with certainty. As of December 31, 2012, we had received nine trademarks in the United States. Our name, Limelight Networks, has been filed for multiple classes in the United States, Australia, Canada, the European Union, India, Japan, South Korea and Singapore. We have seven pending trademark applications in foreign countries, and 22 non United States trademarks registered. There is a risk that pending trademark applications may not issue, and that those trademarks that have issued may be challenged by others who believe they have superior rights to the marks. We generally control access to and use of our proprietary software and other confidential information through the use of internal and external controls, including physical and electronic security, contractual protections with employees, contractors, customers and partners, and domestic and foreign copyright laws. Despite our efforts to protect our trade secrets and proprietary rights and other intellectual property rights by following sound business practices, licenses, and confidentiality agreements, there is risk that unauthorized parties may still copy or otherwise obtain and use our software and technology. In addition, we have been expanding our international operations, and effective patent, copyright, trademark, and trade secret protection may not be available or may be limited in foreign countries. Further, expansion of our business with additional employees, locations, and legal jurisdictions may create greater risk that our trade secrets and proprietary rights will be harmed. If we fail to effectively protect our intellectual property and other proprietary rights, our business could be harmed. Third parties could claim that our products or technologies infringe their proprietary rights. The Internet content delivery services industry is characterized by the existence of a large number of patents, trademarks, and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We expect that infringement claims may further increase as the number of products, services, and competitors in our market increases. Further, continued success in this market may provide an impetus to those who might use intellectual property litigation as a weapon against us. As described under “Legal Proceedings” in Part 1, Item 3 of this annual report on Form 10-K, during 2012 we were party to a lawsuit alleging aspects of our content delivery network infringed upon third party patent rights. Initially at the trial court in Akamai Technologies, Inc. vs. Limelight Networks, Inc., a jury returned a 10 Table of Contents verdict in February 2008 against us finding we infringed four claims of one patent at issue in that lawsuit, and awarded damages of approximately $45.5 million plus pre-judgment interest estimated to be $2.6 million. An additional provision of approximately $17.5 million for potential additional infringement damages and interest was recorded during the year ended December 31, 2008. We filed a renewed motion for judgment as a matter of law (JMOL), and on May 22, 2009, the court entered JMOL that we did not infringe Akamai’s patent. Akamai appealed that judgment and on December 20, 2010 the Court of Appeals for the Federal Circuit issued its opinion affirming the trial court’s entry of JMOL in our favor. On February 18, 2011, Akamai filed a motion with the Court of Appeals for the Federal Circuit seeking a rehearing and rehearing en banc. On April 21, 2011, the Court of Appeals for the Federal Circuit issued an order denying the petition for rehearing, granting the petition for rehearing en banc, vacating the December 20, 2010 opinion affirming the trial court’s entry of judgment in our favor, and reinstated the appeal. On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in the case. The Court of Appeals stated that the trial court correctly determined we did not directly infringe Akamai’s ’703 patent and upheld the trial court’s decision to vacate the original jury’s damages award. The court also held that we did not infringe Akamai’s ’413 or ’645 patents. A slim majority in this three-way divided opinion also announced a revised legal theory of induced infringement, remanded the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to prove that we induced our customers to infringe Akamai’s patent under the Court of Appeals’ new legal standard. On December 28, 2012, we filed a petition for writ of certiorari to the United States Supreme Court to appeal this sharply divided Court of Appeals decision and will seek to stay any proceedings at the trial court until the Supreme Court rules on that petition. Akamai then filed a cross petition for consideration of the Court of Appeals standard for direct infringement. We believe that the Court of Appeal’s new induced infringement standard runs counter to the Patent Act and Supreme Court precedent, and it should be overturned by the Supreme Court. Additionally, just as we have successfully shown that we do not directly infringe Akamai’s patent, we firmly believe that we ultimately would be successful in showing that we do not infringe Akamai’s patent under the Court of Appeals majority’s new induced infringement theory. We will continue to vigorously defend against the allegation; however, we cannot provide any assurance that the lawsuit ultimately will be resolved in our favor. An adverse ruling could seriously impact our ability to conduct significant portions of our business and to offer certain of our products and services to our customers. A permanent injunction could prevent us from operating our content delivery services or from delivering certain types of traffic, which could impact the viability of those portions of our business. Any adverse ruling, in turn, would harm our revenue, market share, reputation, liquidity and overall financial position. We are not able at this time to estimate the range of potential loss nor, in light of the status of the litigation, do we believe that a loss is probable. Therefore, we have made no provision for this lawsuit in our financial statements. As we gain greater visibility and market exposure as a public company, we are likely to face an increased risk of being the subject of intellectual property infringement claims from other third parties. Employees As of December 31, 2012, we had 511 employees. Of these employees, 416 are based in North America, 68 are based in EMEA and 27 are based in Asia Pacific. None of our employees are represented by a labor union, and we have not experienced any work stoppages to date. We consider the relationships with our employees to be positive. Competition for technical personnel in the industry in which we compete is intense. We believe that our future success depends in part on our continued ability to hire, assimilate, and retain qualified personnel. To date, we believe that we have been successful in recruiting and retaining qualified employees, but there is no assurance that we will continue to be successful in the future. 11 Table of Contents Executive Officers Our executive officers and their ages and positions as of February 21, 2013 are as follows: Name Robert A. Lento Indu Kodukula Douglas S. Lindroth Philip C. Maynard Nathan F. Raciborski Charles Kirby Wadsworth George E. Vonderhaar Age Position 51 President, Chief Executive Officer and Director 39 Chief Operating Officer 46 Senior Vice President, Chief Financial Officer and Treasurer 58 Senior Vice President, Chief Legal Officer and Secretary 46 Co-Founder, Chief Technology Officer and Director 56 Chief Marketing Officer 52 Chief Sales Officer Robert A. Lento has served as our Chief Executive Officer since November 2012 and has served as a member of our board of directors since January 2013. Prior to joining us, Mr. Lento was a senior sales executive at Convergys Corporation, a provider of customer management services, from July 1998 to May 2012, most recently serving as President – Information Management Division from September 2007 to May 2012. Prior to that, from 1997 to 1998, Mr. Lento served as President of LAN Systems for Donnelly Enterprise Solutions, Inc., a provider of information management solutions. From 1989 to 1996, Mr. Lento served in leadership positions at ENTEX Information Services, Inc., a provider of computing infrastructure services. Mr. Lento received a B.S. in Management from the State University of New York. Indu Kodukula has served as our Chief Operating Officer since October 2012. Prior to joining us, Mr. Kodukula served as Executive Vice President, Products and Chief Technology Officer for SunGard Availability Services, Inc., a provider of cloud computing services, from August 2009 to September 2012. Prior to that, from December 2005 to July 2009, Mr. Kodukula served as Vice President of Products, GM for Oracle Corporation’s Service Delivery Platform division, a provider of network communications services. Prior to that, from 2001 to 2005, Mr. Kodukula served as Senior Director of Product Management for BEA Systems, Inc., a provider of enterprise application infrastructure solutions. Mr. Kodukula received a Ph.D. in Computer Science from Cornell University and a B. Tech. in Computer Science from the Indian Institute of Technology. Douglas S. Lindroth has served as our Senior Vice President and Chief Financial Officer since October 2008 and Treasurer since January 2009. Prior to joining us, Mr. Lindroth served as a member of our board of directors since February 2008. Mr. Lindroth has also served as a General Partner of Bayview Investment Company, a real estate investment company, since November 2005. From April 2006 to May 2007, Mr. Lindroth served as Senior Vice-President and Chief Financial Officer of BakBone Software Incorporated, a developer and distributor of data backup, restoration, disaster recovery, replication and storage reporting software. From 1997 through February 2006, Mr. Lindroth served in various capacities for Memec Group Holdings Limited, a privately held company and a specialty semiconductor distributor, including as its Chief Financial Officer beginning in 2003. Mr. Lindroth formerly served on the board of directors of Visual Sciences, Inc. (formerly WebSideStory, Inc.) from May 2006 to January 2008 and BakBone Software Incorporated from May 2007 to January 2011. He is a Certified Public Accountant and received a B.A. in Business Administration from San Diego State University. Philip C. Maynard has served as our Senior Vice President, Chief Legal Officer and Secretary since October 2007. From August 2004 to October 2006, Mr. Maynard served as Senior Vice President, Chief Legal Officer and Secretary of FileNet Corporation, a provider of data and content management software for managing and sharing information across corporate networks and the Internet, and as Associate General Counsel for IBM Corporation from October 2006 to October 2007, following IBM’s acquisition of FileNet. From March 2004 to August 2004, Mr. Maynard served as Executive Vice President and Chief Legal Officer of SRS Labs, Inc., a leading provider of audio enhancement and integrated circuit solutions. From 2003 to 2004, Mr. Maynard was of counsel with the law firm of Stradling Yocca Carlson & Rauth in Newport Beach, California. From 2000 to 2002, Mr. Maynard served as Vice President & Division General Counsel for Invensys Software Systems, a 12 Table of Contents division of Invensys, PLC, a UK-based engineering firm. From 1997 to 2000, Mr. Maynard was General Counsel for Wonderware Corporation, a leading developer of industrial automation software solutions, which was acquired by Invensys. Mr. Maynard received his J.D. (magna cum laude) from Loyola Law School in Los Angeles, California. Nathan F. Raciborski co-founded Limelight Networks in 2001. He has been a Director since July 2006, served as Chief Technology Officer (CTO) through 2012 and currently holds the title of Founder. Mr. Raciborski is the inventor on over thirty patents related to the acceleration of Internet content, the scalability of Internet platforms, and the enhancement of content delivery to mobile devices. Starting in 1993, prior to co- founding Limelight, Mr. Raciborski founded numerous companies including Aerocast (acquired by Motorola), Entera (acquired by Blue Coat Systems, formerly Cacheflow) and Primenet Services for the Internet (merged with GlobalCenter, later acquired by Level3 formerly Frontier/Global Crossing). Charles Kirby Wadsworth has served as our Chief Marketing Officer since June 2012. Prior to joining us, Mr. Wadsworth served as Vice President, Global Marketing for F5 Networks, Inc., a provider of cloud computing services, from July 2006 to May 2012. Prior to that, Mr. Wadsworth served as Senior Vice President, Marketing and Business Development for Acopia Networks, Inc., a provider of file virtualization services, from August 2002 to July 2006. Mr. Wadsworth received an M.B.A. from the Kellogg School of Management at Northwestern University and a B.S. in Information Systems from Northeastern University. George E. Vonderhaar has served as our Chief Sales Officer since February 2013. Prior to joining us, Mr. Vonderhaar served in various capacities for Convergys Corporation, a provider of customer management services, from 1984 through 2012, including as Senior Vice President, General Manager – Cable and Satellite from January 2011 until the division was acquired by NEC Corporation in May 2012, where Mr. Vonderhaar then served as Vice President, General Manager North America Cable from May 2012 to July 2012. Mr. Vonderhaar also was Senior Vice President – Human Resources Management at Convergys Corporation from April 2006 through June 2010, when the Human Resources Outsourcing division was acquired by NorthgateArinso, where Mr. Vonderhaar then served as Vice President, Client Services and General Manager from June 2010 to December 2010. Mr. Vonderhaar also served as General Manager – Mobile Cable Solutions Group at Convergys Corporation from November 2004 to April 2006. Mr. Vonderhaar received a B.S. in Business Administration from Marquette University. Item 1A. Risk Factors You should carefully consider the risks described below. These risks are not the only risks that we may face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occurs, our business, financial condition or results of operations could be materially and adversely affected which could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this annual report on Form 10-K or presented elsewhere by management from time to time. Risks Related to Our Business We currently face competition from established competitors and may face competition from others in the future. We compete in markets that are intensely competitive, rapidly changing and characterized by constantly declining prices and vendors offering a wide range of content delivery solutions. We have experienced and expect to continue to experience increased competition, and particularly aggressive price competition. Many of our current competitors, as well as a number of our potential competitors, have longer operating histories, greater name recognition, broader customer relationships and industry alliances and substantially greater financial, technical and marketing resources than we do. As a consequence of the competitive dynamics in our market we have experienced reductions in our prices, which in turn adversely affect our revenue, gross margin and operating results. 13 Table of Contents Our primary competitors for content delivery services include Akamai, Level 3 Communications, AT&T, Amazon, CDNetworks, Edgecast, and Internap Network Services Corporation, which acquired VitalStream. Also, as a result of the growth of the content delivery market, a number of companies have recently entered or are currently attempting to enter our market, either directly or indirectly, some of which may become significant competitors in the future. Given the relative ease by which customers typically can switch among content delivery service providers, differentiated offerings or pricing by competitors could lead to a rapid loss of customers. Some of our current or potential competitors may bundle their offerings with other services, software or hardware in a manner that may discourage content providers from purchasing the services that we offer. In addition, as we expand internationally, we face different market characteristics and competition with local content delivery service providers, many of which are very well positioned within their local markets. Increased competition could result in price reductions and revenue shortfalls, loss of customers and loss of market share, which could harm our business, financial condition and results of operations. Our primary competitors for our software-as-a-service (SaaS) offerings include Brightcove, Ooyala, Unicorn Media, Sitecore, Adobe, Crown Peak and Interwoven, as well as open source products such as Drupal. However, the competitive landscape is different from content delivery in this area in that changing vendors can be costly and complicated for the customer, which could make it difficult for us to attract new customers and increase our market share. If we are unable to increase our customer base and increase our market share, our business, financial condition and results of operations may suffer. If we are unable to sell our services at acceptable prices relative to our costs, our revenue and gross margins will decrease, and our business and financial results will suffer. Prices for content delivery services have fallen in recent years and are likely to fall further in the future. We have invested significant amounts in purchasing capital equipment to increase the capacity of our global computing network. Our investments in our infrastructure are based upon our assumptions regarding future demand and also prices that we will be able to charge for our services. These assumptions may prove to be wrong. If the price that we are able to charge customers to deliver their content falls to a greater extent than we anticipate, if we over-estimate future demand for our services or if our costs to deliver our services do not fall commensurate with any future price declines, we may not be able to achieve acceptable rates of return on our infrastructure investments and our gross profit and results of operations may suffer dramatically. As we further expand our global computing network and the suite of content delivery services and value-added services (VAS), and as we refresh our network equipment, we are dependent on significant future growth in demand for our services to justify additional capital expenditures. If we fail to generate significant additional demand for our services, our results of operations will suffer, and we may fail to achieve planned or expected financial results. There are numerous factors that could, alone or in combination with other factors, impede our ability to increase revenue, moderate expenses or maintain gross margins, including: • • • • • • continued price declines arising from significant competition with respect to content delivery services and our VAS; increasing settlement fees for certain peering relationships; failure to increase sales of our core content delivery services or to grow our VAS; increases in electricity, bandwidth and rack space costs or other operating expenses, and failure to achieve decreases in these costs and expenses relative to decreases in the prices we can charge for our services and products; inability to maintain our prices relative to our costs; failure of our current and planned services and software to operate as expected; 14 Table of Contents • • • • loss of any significant customers or loss of existing customers at a rate greater than our increase in new customers or our sales to existing customers; failure to increase sales of our services to current customers as a result of their ability to reduce their monthly usage of our services to their minimum monthly contractual commitment; failure of a significant number of customers to pay our fees on a timely basis or at all or failure to continue to purchase our services in accordance with their contractual commitments; and inability to attract high quality customers to purchase and implement our current and planned services. We expect a significant and increasing portion of our revenue to be derived from our VAS offerings. Our VAS tend to have higher gross margins than our content delivery services. We do not have a long history of offering VAS, and we may not be able to achieve the growth rates in such services revenue that we or our investors expect or have experienced in the past. There are numerous companies that compete in providing VAS, and many of these companies have greater financial and sales resources than we do. We may not be successful in competing against current and new providers of VAS. If we are unable to achieve the growth rates in our VAS revenue that we expect, our revenue and operating results could be significantly and negatively affected. If we are unable to develop new services and enhancements to existing services or fail to predict and respond to emerging technological trends and customers’ changing needs, our operating results may suffer. The market for our content delivery services and VAS is characterized by rapidly changing technology, evolving industry standards and new product and service introductions. Our operating results depend on our ability to predict user preferences or industry changes, and modify our solutions and services on a timely basis or develop and introduce new services into existing and emerging markets. The process of developing new technologies is complex and uncertain. We must commit significant resources to developing new services or enhancements to our existing services before knowing whether our investments will result in services the market will accept. Furthermore, we may not execute successfully our technology initiatives because of errors in planning or timing, technical hurdles that we fail to overcome in a timely fashion, misunderstandings about market demand or a lack of appropriate resources. As prices for content delivery services continue to fall, we will increasingly rely on new product offerings and other VAS to maintain or increase our gross margins. Failures in execution, delays in bringing new or improved products or services to market, failure to effectively integrate service offerings or market acceptance of new services we introduce could result in competitors providing those solutions before we do, which could lead to loss of market share, revenue and earnings. Rapidly evolving technologies or new business models could cause demand for our content delivery services and VAS to decline or could cause these services to become obsolete. Customers or third parties may develop technological or business model innovations that address content management and delivery requirements in a manner that is, or is perceived to be, equivalent or superior to our content delivery services and VAS. If competitors introduce new products or services that compete with or surpass the quality or the price or performance of our services, we may be unable to renew our agreements with existing customers or attract new customers at the prices and levels that allow us to generate attractive rates of return on our investment. For example, one or more third parties might develop improvements to current peer-to-peer technology, which is a technology that relies upon the computing power and bandwidth of its participants, such that this technological approach is better able to deliver content in a way that is competitive to our content delivery services, or even makes content delivery services obsolete. We may not anticipate such developments and may be unable to adequately compete with these potential solutions. In addition, our customers’ business models may change in ways that we do not anticipate, and these changes could reduce or eliminate our customers’ needs for content delivery or digital asset management services. If this occurred, we could lose customers or potential customers, and our business and financial results would suffer. As a result of these or similar potential developments, in the future it is possible that competitive dynamics in our market may require us to reduce our prices faster than we anticipate, which could harm our revenue, gross margin and operating results. 15 Table of Contents More individuals are using mobile devices to access the Internet, and the solutions developed for these devices may not be widely deployed. The number of people who access the Internet through devices other than PCs, including mobile devices, game consoles and television set- top devices, has increased dramatically in the past few years. The capabilities of these devices are advancing dramatically and the increasing need to provide a high quality video experience will present us and other providers with significant challenges. If we are unable to deliver our service offerings to a substantial number of alternative device users and at a high quality or if we are slow to develop services and technologies that are more compatible with mobile devices, we will fail to capture a significant share of an increasingly important portion of the market. Such a failure could limit our ability to compete effectively in an industry that is rapidly growing and changing. Any unplanned interruption in the functioning of our network or services or attacks on our internal information technology systems could lead to significant costs and disruptions that could reduce our revenue and harm our business, financial results and reputation. 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. Many of our customers depend primarily or exclusively on our services to operate their businesses. Consequently, any disruption of our services could have a material impact on our customers’ businesses. Our network or services could be disrupted by numerous events, including natural disasters, failure or refusal of our third party network providers to provide the necessary capacity or access, failure of our software or global computing platform infrastructure and power losses. In addition, we deploy our servers in third party co-location facilities, and these third-party co-location providers could experience system outages or other disruptions that could constrain our ability to deliver our services. We may also experience disruptions caused by software viruses, unauthorized hacking of our systems, security breaches or other cyber attacks by unauthorized users. Any unauthorized hacking of our systems or other cyber attacks by unauthorized users could lead to the unauthorized release of confidential information that could damage our business. We have not experienced any significant, unplanned disruption of our services to date; however, our network may fail in the future. Despite our significant infrastructure investments, we may have insufficient communications and server capacity to address these or other disruptions, which could result in interruptions in our services. Any widespread interruption of the functioning of our content delivery services and VAS for any reason would reduce our revenue and could harm our business and financial results. If such a widespread interruption occurred, or if we failed to deliver content to users as expected during a high-profile media event, game release or other well-publicized circumstance, our reputation could be damaged severely. Moreover, any disruptions or security breaches could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new ones, either of which could harm our business and results of operations. We are a party to a lawsuit with a significant competitor, and an adverse outcome in that lawsuit is possible, which could have a significant, adverse effect on our financial condition and operations. If an injunction were entered against us, it could force us to cease providing some significant portion of our content delivery services. We are currently a defendant in one significant lawsuit (see discussion in “Legal Proceedings” in Part I, Item 3 of this annual report on Form 10-K). The expenses of defending this lawsuit and other lawsuits to which we are or may become a party, particularly fees paid to our lawyers and expert consultants, have been significant and may continue to adversely affect our operating results during the pendency of such lawsuits. Also, this litigation has been a distraction to our management and technical personnel. On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in Akamai Technologies, Inc. v. Limelight Networks, Inc. The court stated that the trial court correctly determined that we did not directly infringe Akamai’s ’703 patent, and as such it upheld the trial court’s decision to vacate the 16 Table of Contents original jury’s damages award. The court also held that we did not infringe Akamai’s ’413 or ’645 patents. However, a slim majority in this three-way divided opinion also announced a revised legal theory of induced infringement, remanded the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to prove that we induced our customers to infringe Akamai’s patent under the court’s new legal standard. We have filed a petition to appeal this sharply divided Court of Appeals decision to the Supreme Court and will seek to stay any proceedings at the trial court until the Supreme Court rules on that petition. An adverse ruling could seriously impact our ability to conduct our business and to offer our products and services to our customers. A permanent injunction could prevent us from operating our content delivery services or from delivering certain types of traffic, which could impact the viability of those portions of our business. Any adverse ruling, in turn, would harm our revenue, market share, reputation, liquidity and overall financial position. We are from time to time party to other lawsuits in addition to that described above. Lawsuits are expensive to defend and to prosecute, and require a diversion of management time and attention away from other activities to pursue the defense or prosecution of such matters. Adverse ruling in such lawsuits either alone or cumulatively may have an adverse impact on our revenue, expenses, market share, reputation, liquidity and overall financial position. We need to defend our intellectual property and processes against patent or copyright infringement claims, which may cause us to incur substantial costs and threaten our ability to do business. Companies, organizations or individuals, including our competitors, may hold or obtain patents or other proprietary rights that would prevent, limit or interfere with our ability to make, use or sell our services or develop new services, which could make it more difficult for us to operate our business. From time to time, we may receive inquiries from holders of patents inquiring whether we infringe their proprietary rights. Companies holding Internet-related patents or other intellectual property rights are increasingly bringing suits alleging infringement of such rights or otherwise asserting their rights and seeking licenses. In addition, many of our agreements with customers require us to indemnify such customers for third- party intellectual property infringement claims against them. Pursuant to such agreements, we may be required to defend such customers against certain claims which could cause us to incur additional significant costs. Any litigation or claims, whether or not valid, could result in substantial costs and diversion of resources. In addition, if we are determined to have infringed upon a third party’s intellectual property rights, we may be required to do one or more of the following: • • • • cease selling, incorporating or using products or services that incorporate the challenged intellectual property; pay substantial damages; obtain a license from the holder of the infringed intellectual property right, which license may or may not be available on reasonable terms or at all; or redesign products or services. If we are forced to take any of these actions, our business may be seriously harmed. In the event of a successful claim of infringement against us and our failure or inability to obtain a license to the infringed technology, our business and operating results could be harmed. Our business will be adversely affected if we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We have applied for patent protection in the United States and a number of foreign countries. These legal protections afford only limited protection and laws in foreign jurisdictions may not protect our proprietary rights as fully as in the United States. Monitoring infringement of our intellectual property rights is difficult, and we cannot be certain that the steps we have taken will prevent 17 Table of Contents unauthorized use of our intellectual property rights. Developments and changes in patent law, such as changes in interpretations of the joint infringement standard, could restrict how we enforce certain patents we hold. We also cannot be certain that any pending or future patent applications will be granted, that any future patent will not be challenged, invalidated or circumvented, or that rights granted under any patent that may be issued will provide competitive advantages to us. We use certain “open-source” software the use of which could result in our having to distribute our proprietary software, including our source code, to third parties on unfavorable terms which could materially affect our business. Certain of our service offerings use software that is subject to open-source licenses. Open-source code is software that is freely accessible, usable and modifiable. Certain open-source code is governed by license agreements, the terms of which could require users of such open-source code to make any derivative works of such open-source code available to others on unfavorable terms or at no cost. Because we use open-source code, we may be required to take remedial action to protect our proprietary software. Such action could include replacing certain source code used in our software, discontinuing certain of our products or taking other actions that could divert resources away from our development efforts. In addition, the terms relating to disclosure of derivative works in many open-source licenses are unclear. We periodically review our compliance with the open-source licenses we use and do not believe we will be required to make our proprietary software freely available. However, if a court interprets one or more such open-source licenses in a manner that is unfavorable to us, we could be required to make our software available at no cost. If we fail to manage future growth effectively, we may not be able to market and sell our services successfully. Our future operating results depend to a large extent on our ability to successfully manage our operations. For example, we must be effective in training new sales personnel in our varied and increasing offerings to become productive and generate revenue; forecasting revenue; controlling expenses and investments in anticipation of expanded operations; implementing and enhancing our global computing platform and administrative infrastructure, systems and processes; addressing new markets; and expanding our international operations. A failure to manage our growth effectively could materially and adversely affect our ability to market and sell our products and services. If we fail to maintain proper and effective internal controls or fail to implement our controls and procedures with respect to acquired or merged operations, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and investors’ views of us. We must ensure that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis. We are required to spend considerable effort on establishing and maintaining our internal controls, which is costly and time-consuming and needs to be re-evaluated frequently. We have operated as a public company since June 2007, and we will continue to incur significant legal, accounting and other expenses as we comply with the Sarbanes-Oxley Act of 2002, as well as new rules implemented from time to time by the SEC and the Nasdaq Global Select Market. These rules impose various requirements on public companies, including requiring changes in corporate governance practices, increased reporting of compensation arrangements and other requirements. Our management and other personnel will continue to devote a substantial amount of time to these compliance initiatives. Moreover, new rules and regulations will likely increase our legal and financial compliance costs and make some activities more time-consuming and costly. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors (Board), our board committees or as executive officers. 18 Table of Contents Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report our assessment of the effectiveness of our internal control over financial reporting and our audited financial statements as of the end of each fiscal year. Furthermore, our independent registered public accounting firm, Ernst & Young LLP (E&Y), is required to report on whether it believes we maintained, in all material respects, effective internal control over financial reporting as of the end of the year. Our continued compliance with Section 404 will require that we incur substantial expense and expend significant management time on compliance related issues, including our efforts in implementing controls and procedures related to acquired or merged operations. We currently do not have an internal audit group and use an international accounting firm to assist us with our assessment of the effectiveness of our internal controls over financial reporting. In future years, if we fail to timely complete this assessment, or if E&Y cannot timely attest, there may be a loss of public confidence in our internal controls, the market price of our stock could decline, and we could be subject to regulatory sanctions or investigations by the Nasdaq Global Select Market, the SEC or other regulatory authorities, which would require additional financial and management resources. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to timely meet our regulatory reporting obligations. In the previously filed financial statements included in our Form 10-Q for the period ended March 31, 2012 and the period ended June 30, 2012, we improperly classified cash collected from DG Fastchannel, Inc. (currently Digital Generation, Inc.) (DG) related to the sale of EyeWonder, LLC (EyeWonder) and chors GmbH (chors) as cash provided by operating activities of continuing operations in the unaudited Condensed Consolidated Statements of Cash Flows. As a result of the error, we identified a material weakness in our system of internal controls over financial reporting with regard to evaluating the proper cash flow classification of cash collected from DG. We corrected the classification error in our third quarter Form 10- Q and amended our March 31, 2012 Form 10-Q and June 30, 2012 Form 10-Q to reflect the correct classification. Since the date of discovery of this material weakness and through the date of this Form 10-K, we have taken steps which we feel strengthen our internal controls, including implementing a stronger review process around the preparation of our consolidated statement of cash flows and updating our processes and procedures to ensure that accounting personnel have sufficient guidance to remediate the material weakness. As of December 31, 2012, we consider this material weakness to have been fully remediated. The actions we have taken to remediate this material weaknesses are subject to continued management review supported by confirmation and testing, as well as oversight by the Audit Committee of our Board of Directors. We cannot assure you that material weaknesses or significant deficiencies will not occur in the future and that we will be able to remediate such weaknesses or deficiencies in a timely manner, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows. We may lose customers if they elect to develop content delivery services and other competitive VAS solutions internally. Our customers and potential customers may decide to develop their own content delivery, web and video content management and other digital presence management solutions rather than outsource these solutions to services providers like us. This is particularly true as our customers increase their operations and begin expending greater resources on delivering their content using third party solutions. If we fail to offer content delivery, web and video content management and other related services that are competitive to in-sourced solutions, we may lose additional customers or fail to attract customers that may consider pursuing this in-sourced approach, and our business and financial results would suffer. We may lose customers if they are unable to build business models that effectively monetize delivery of their content. Some of our customers will not be successful in selling advertising or otherwise monetizing the content we deliver on their behalf and consequently may not be successful in creating a profitable business model. This will result in some of our customers discontinuing their Internet or web-based business operations and discontinuing 19 Table of Contents use of our services and solutions. Further, weakness and related uncertainty in the global financial markets and economy — which has included, among other things, significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and/or fluctuations in equity and currency values worldwide and concerns that portions of the worldwide economy may be in a prolonged recessionary period — may materially adversely impact our customers’ access to capital or willingness to spend capital on our services or in some cases, ultimately cause the customer to file for protection from creditors under applicable insolvency or bankruptcy laws or simply go out of business. This uncertainty may also impact our customers’ levels of cash liquidity, which could affect their ability or willingness to timely pay for services that they will order or have already ordered from us. From time to time we discontinue service to customers for non-payment of services. We expect further customers may discontinue operations or not be willing or able to pay for services that they have ordered from us. Further loss of customers may adversely affect our financial results. Our business depends on a strong brand reputation, and if we are not able to maintain and enhance our brands, our business will suffer. We believe that maintaining and enhancing the “Limelight Networks” brand is important to expanding our base of customers and maintaining brand loyalty among customers, particularly in North America where brand perception can impact the competitive position in other markets worldwide, and that the importance of brand recognition will increase due to the growing number of competitors providing similar services and solutions. Maintaining and enhancing our brand may require us to make substantial investments in research and development and in the marketing of our solutions and services and these investments may not be successful. If we fail to promote and maintain the “Limelight Networks” brand, or if we incur excessive expenses in this effort, our business and results of operations could be adversely impacted. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Maintaining and enhancing our brand will depend largely on our ability to be a technology leader and to continue to provide high quality solutions and services, which we may not do successfully. We depend on a limited number of customers for a substantial portion of our revenue in any fiscal period, and the loss of, or a significant shortfall in demand from these customers could significantly harm our results of operations. During any given fiscal period, a relatively small number of customers typically account for a significant percentage of our revenue. Sales to our top 10 customers in 2012 accounted for approximately 33% of our total revenue. For each of fiscal 2012 and fiscal 2011, we had one customer, Netflix, which represented approximately 11% of our total revenue. Large customers may not continue to be as significant going forward as they have been in the past. In the past, the customers that comprised our top 10 customers have continually changed, and we also have experienced significant fluctuations in our individual customers’ usage of our services. As a consequence, we may not be able to adjust our expenses in the short term to address the unanticipated loss of a large customer during any particular period. As such, we may experience significant, unanticipated fluctuations in our operating results which may cause us to not meet our expectations or those of stock market analysts, which could cause our stock price to decline. If we are unable to attract new customers or to retain our existing customers, our revenue could be lower than expected and our operating results may suffer. In addition to adding new customers, to increase our revenue, we must sell additional services to existing customers and encourage existing customers to increase their usage levels. If our existing and prospective customers do not perceive our services to be of sufficiently high value and quality, we may not be able to retain our current customers or attract new customers. We sell our services pursuant to service agreements that generally include some form of financial minimum commitment. Our customers have no obligation to renew 20 Table of Contents their contracts for our services after the expiration of their initial commitment, and these service agreements may not be renewed at the same or higher level of service, if at all. Moreover, under some circumstances, some of our customers have the right to cancel their service agreements prior to the expiration of the terms of their agreements. This fact, in addition to the changing competitive landscape in our market, means that we cannot accurately predict future customer renewal rates or usage rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including: • • • • • • their satisfaction or dissatisfaction with our services; the prices of our services; the prices of services offered by our competitors; discontinuation by our customers of their Internet or web-based content distribution business; mergers and acquisitions affecting our customer base; and reductions in our customers’ spending levels. If our customers do not renew their service agreements with us, or if they renew on less favorable terms, our revenue may decline and our business may suffer. Similarly, our customer agreements often provide for minimum commitments that are often significantly below our customers’ historical usage levels. Consequently, even if we have agreements with our customers to use our services, these customers could significantly curtail their usage without incurring any penalties under our agreements. In this event, our revenue would be lower than expected and our operating results could suffer. It also is an important component of our growth strategy to market our services and solutions to industries, such as enterprise and the government. As an organization, we do not have significant experience in selling our services into these markets. We have only recently begun a number of these initiatives, and our ability to successfully sell our services into these markets to a meaningful extent remains unproven. If we are unsuccessful in such efforts, our business, financial condition and results of operations could suffer. Our results of operations may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of securities analysts or investors, which could cause our stock price to decline. Our results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control. If our results of operations fall below the expectations of securities analysts or investors, the price of our common stock could decline substantially. In addition to the effects of other risks discussed in this section, fluctuations in our results of operations may be due to a number of factors, including: • • • • • • • our ability to increase sales to existing customers and attract new customers to our content delivery services and VAS; the addition or loss of large customers, or significant variation in their use of our content delivery services and VAS; costs associated with current or future intellectual property lawsuits and other lawsuits; service outages or third party security breaches to our platform or to one or more of our customers’ platforms; the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our business, operations and infrastructure; the timing and success of new product and service introductions by us or our competitors; the occurrence of significant events in a particular period that result in an increase in the use of our content delivery services and VAS, such as a major media event or a customer’s online release of a new or updated video game; 21 Table of Contents • • • • • • • • changes in our pricing policies or those of our competitors; the timing of recognizing revenue; limitations of the capacity of our global computing platform and related systems; the timing of costs related to the development or acquisition of technologies, services or businesses; the potential write-down or write-off of goodwill associated with business operations that have been disposed of, such as goodwill currently on our balance sheet associated with the initial acquisitions of EyeWonder and chors; general economic, industry and market conditions (such as the fluctuations experienced in the stock and credit markets during the recent deterioration of global economic conditions) and those conditions specific to Internet usage; limitations on usage imposed by our customers in order to limit their online expenses; and war, threat of war or terrorist actions, including cyber terrorism targeted broadly, at us, or our customers, or both, and inadequate cyber security. We believe that our revenue and results of operations may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of one period as an indication of future performance. We have a history of losses and we may not achieve or maintain profitability in the future. Since 2006, we have been profitable only one year, which was as a result of a reversal of a significant reserve for litigation. Our adoption of ASC 718 (formerly FAS 123R) in 2006 substantially increased the amount of share-based compensation expense we record and has had a significant impact on our results of operations. This significant amount of share-based compensation expense reflects an increase in the level of stock options, restricted stock and restricted stock unit (RSU) grants. Also, we have incurred, and continue to incur significant costs associated with litigation. Our share-based compensation expense and any material ongoing litigation costs could adversely affect our ability to achieve and maintain profitability in the future. While our revenue has grown in recent periods, this growth may not be sustainable and we may not achieve sufficient revenue to achieve or maintain profitability. We may incur significant losses in the future for a number of reasons, including slowing demand for our services, increasing competition, as well as other risks described herein, and we may encounter unforeseen expenses, difficulties, complications and delays, and other unknown factors. Accordingly, we may not be able to achieve or maintain profitability and we may continue to incur significant losses in the future, and this could cause the price of our common stock to decline. We generate our revenue primarily from the sale of content delivery services, and the failure of the market for these services to expand as we expect or the reduction in spending on those services by our current or potential customers would seriously harm our business. While we offer our customers a number of services and solutions associated with our global computing platform, we generate the majority of our revenue from charging our customers for the content delivered on their behalf through our global computing platform. We are subject to an elevated risk of reduced demand for these services. Furthermore, if the market for delivery of rich media content in particular does not continue to grow as we expect or grows more slowly, then we may fail to achieve a return on the significant investment we are making to prepare for this growth. Our success, therefore, depends on the continued and increasing reliance on the Internet for delivery of media content and our ability to cost- effectively deliver these services. Factors that may have a general tendency to limit or reduce the number of users relying on the Internet for media content, the amount of content consumed by our customers’ users or the number of providers making this content available online include a general decline in Internet usage, litigation involving our customers and third party restrictions on online content, including copyright restrictions, digital rights management and restrictions in certain 22 Table of Contents geographic regions, system impairments or outages, including those caused by hacking or cyber attacks, as well as a significant increase in the quality or fidelity of offline media content beyond that available online to the point where users prefer the offline experience. The influence of any of these factors may cause our current or potential customers to reduce their spending on content delivery services, which would seriously harm our operating results and financial condition. Many of our significant current and potential customers are pursuing emerging or unproven business models which, if unsuccessful, could lead to a substantial decline in demand for our content delivery services and VAS. Because the proliferation of broadband Internet connections and the subsequent monetization of content libraries for distribution to Internet users are relatively recent phenomena, many of our customers’ business models that center on the delivery of rich media and other content to users remain unproven. For example, social media companies have been among our top recent customers and are pursuing emerging strategies for monetizing the user content and traffic on their websites. Our customers will not continue to purchase our content delivery services and VAS if their investment in providing access to the media stored on or deliverable through our global computing platform does not generate a sufficient return on their investment. A reduction in spending on services by our current or potential customers would seriously harm our operating results and financial condition. We may have difficulty scaling and adapting our existing architecture to accommodate increased traffic and technology advances or changing business requirements, which could lead to the loss of customers and cause us to incur unexpected expenses to make network improvements. Our content delivery services and VAS are highly complex and are designed to be deployed in and across numerous large and complex networks. Our global computing platform infrastructure has to perform well and be reliable for us to be successful. The greater the user traffic and the greater the complexity of our solutions and services, the more resources we will need to invest in additional infrastructure and support. Further, as a result of our on-going litigation in the Akamai Technologies, Inc. v. Limelight Networks, Inc. lawsuit (including the adverse jury verdict in February 2008 in that matter which verdict was overturned by the court’s April 24, 2009 order granting our motion for JMOL), we made significant investment in designing and implementing changes to our network architecture in order to implement our content delivery services in a manner we believe does not infringe the claims of Akamai’s ’703 patent as alleged in the February 2008 trial. We have spent and expect to continue to spend substantial amounts on the purchase and lease of equipment and data centers and the upgrade of our technology and network infrastructure to handle increased traffic over our network, implement changes to our network architecture and integrate existing solutions and to roll out new solutions and services. This expansion is expensive and complex and could result in inefficiencies, operational failures or defects in our network and related software. If we do not implement such changes or expand successfully, or if we experience inefficiencies and operational failures, the quality of our solutions and services and user experience could decline. From time to time, we have needed to correct errors and defects in our software or in other aspects of our network. In the future, there may be additional errors and defects that may harm our ability to deliver our services, including errors and defects originating with third party networks or software on which we rely. These occurrences could damage our reputation and lead us to lose current and potential customers. We must continuously upgrade our infrastructure in order to keep pace with our customers’ evolving demands. Cost increases or the failure to accommodate increased traffic or these evolving business demands without disruption could harm our operating results and financial condition. Our operations are dependent in part upon communications capacity provided by third party telecommunications providers. A material disruption of the communications capacity we have leased could harm our results of operations, reputation and customer relations. We lease private line capacity for our backbone from a third party provider, Global Crossing. Our contracts for private line capacity with Global Crossing generally have terms of three to four years. The communications capacity we have leased may become unavailable for a variety of reasons, such as physical interruption, technical 23 Table of Contents difficulties, contractual disputes, or the financial health of our third party provider. Further one of our direct competitors acquired Global Crossing. Although alternative providers are available, it would be time consuming and expensive to identify and obtain alternative third party connectivity, and accordingly we are dependent on Global Crossing in the near term. Failure of Global Crossing could jeopardize utilization of the service fees pre- paid by us under our agreement with Global Crossing. Additionally, as we grow, we anticipate requiring greater private line capacity than we currently have in place. If we are unable to obtain such capacity on terms commercially acceptable to us or at all, our business and financial results would suffer. We may not be able to deploy on a timely basis enough network capacity to meet the needs of our customer base or effectively manage demand for our services. Our business depends on continued and unimpeded access to third party controlled end-user access networks. Our content delivery services depend on our ability to access certain end-user access networks in order to complete the delivery of rich media and other online content to end-users. Some operators of these networks may take measures, such as the deployment of a variety of filters, that could degrade, disrupt or increase the cost of our or our customers’ access to certain of these end-user access networks by restricting or prohibiting the use of their networks to support or facilitate our services, or by charging increased fees to us, our customers or end-users in connection with our services. This or other types of interference could result in a loss of existing customers, increased costs and impairment of our ability to attract new customers, thereby harming our revenue and growth. In addition, the performance of our infrastructure depends in part on the direct connection of our global computing platform to a large number of end-user access networks, known as peering, which we achieve through mutually beneficial cooperation with these networks. In some instances, network operators charge us for the peering connections. If, in the future, a significant percentage of these network operators elected to no longer peer with our network or peer with our network on less favorable economic terms, then the performance of our infrastructure could be diminished, our costs could increase and our business could suffer. If our ability to deliver media files in popular proprietary content formats was restricted or became cost-prohibitive, demand for our content delivery services could decline, we could lose customers and our financial results could suffer. Our business depends on our ability to deliver media content in all major formats. If our legal right or technical ability to store and deliver content in one or more popular proprietary content formats, such as Adobe Flash or Windows Media, was limited, our ability to serve our customers in these formats would be impaired and the demand for our content delivery services and VAS would decline by customers using these formats. Owners of propriety content formats may be able to block, restrict or impose fees or other costs on our use of such formats, which could lead to additional expenses for us and for our customers, or which could prevent our delivery of this type of content altogether. Such interference could result in a loss of existing customers, increased costs and impairment of our ability to attract new customers, which would harm our revenue, operating results and growth. As part of our business strategy, we may acquire businesses or technologies and may have difficulty integrating these operations. We have completed a number of business acquisitions in recent years and may seek to acquire businesses or technologies that are complementary to our business in the future. Acquisitions are often complex and involve a number of risks to our business, including the difficulty of integrating the operations, services, solutions and personnel of the acquired companies, the potential disruption of our ongoing business, the potential distraction of management, the possibility that our business culture and the business culture of the acquired companies will not be compatible, the difficulty of incorporating or integrating acquired technology and rights with or into our other services and solutions, expenses related to the acquisition and to the integration of the acquired companies, the 24 Table of Contents impairment of relationships with employees and customers as a result of any integration of new personnel, risks related to the businesses of acquired companies that may continue to impact the businesses following the merger and potential unknown liabilities associated with acquired companies. Any inability to integrate services, solutions, operations or personnel in an efficient and timely manner could harm our results of operations. In order to realize the expected benefits and synergies of our acquisition of acquired businesses, we must meet a number of significant challenges, including: • • • • integrating the management teams, strategies, cultures, technologies and operations of the businesses; retaining and assimilating the key personnel of each company; retaining existing customers; and implementing and retaining uniform standards, controls, procedures, policies and information systems. It is possible that the integration process could result in the loss of the technical skills and management expertise of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies due to possible cultural conflicts or differences of opinions on technical decisions and services. A failure to integrate the acquired organizations successfully could adversely affect our ability to maintain relationships with customers, suppliers and employees or to achieve the anticipated benefits of an acquisition. Even if we are able to integrate acquired business operations successfully, these integrations may not result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible from these integrations, and these benefits may not be achieved within a reasonable period of time. If we are not successful in completing acquisitions that we may pursue in the future, we may be required to reevaluate our business strategy, and we may incur substantial expenses and devote significant management time and resources without a productive result. In addition, future acquisitions will require the use of our available cash or dilutive issuances of securities. Future acquisitions or attempted acquisitions could also harm our ability to achieve profitability. We may also experience significant turnover from the acquired operations or from our current operations as we integrate businesses. If we are unable to retain our key employees and hire qualified sales and technical personnel, our ability to compete could be harmed. Our future success depends upon the continued services of our executive officers and other key technology, sales, marketing and support personnel who have critical industry experience and relationships that they rely on in implementing our business plan. There is increasing competition for talented individuals with the specialized knowledge to deliver content delivery services and VAS and this competition affects both our ability to retain key employees and hire new ones. Historically, we have experienced a significant amount of employee turnover, especially with respect to our sales personnel. As a result, a significant number of our sales personnel are relatively new and may need time to become fully productive. The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our services, and negatively impact our ability to sell our services. Our senior management team has limited experience working together as a group, and may not be able to manage our business effectively. Four members of our senior management team, our President and Chief Executive Officer, Robert A. Lento, our Chief Operating Officer, Indu Kodukula, our Chief Marketing Officer, Charles Kirby Wadsworth, and our Chief Sales Officer, George E. Vonderhaar, have been hired by us since June 2012. As a result, our senior management team has limited experience working together as a group. This lack of shared experience could harm our senior management team’s ability to quickly and efficiently respond to problems and effectively manage our business. 25 Table of Contents We face risks associated with international operations that could harm our business. We have operations in numerous foreign countries and may continue to expand our sales and support organizations internationally. As part of our growth strategy, we intend to expand our sales and support organizations internationally, as well as to further expand our international network infrastructure. Expansion could require us to make significant expenditures, including the hiring of local employees, in advance of generating any revenue. As a consequence, we may fail to achieve profitable operations that will compensate our investment in international locations. We are subject to a number of risks associated with international business activities that may increase our costs, lengthen our sales cycle and require significant management attention. These risks include: • • • • • • • • • • • increased expenses associated with sales and marketing, deploying services and maintaining our infrastructure in foreign countries; competition from local content delivery service providers, many of which are very well positioned within their local markets; challenges caused by distance, language and cultural differences; unexpected changes in regulatory requirements preventing or limiting us from operating our global computing platform or resulting in unanticipated costs and delays; interpretations of laws or regulations that would subject us to regulatory supervision or, in the alternative, require us to exit a country, which could have a negative impact on the quality of our services or our results of operations; longer accounts receivable payment cycles and difficulties in collecting accounts receivable; corporate and personal liability for violations of local laws and regulations; currency exchange rate fluctuations and repatriation of funds; potentially adverse tax consequences; credit risk and higher levels of payment fraud; and foreign exchange controls that might prevent us from repatriating cash earned in countries outside the United States. We are subject to the effects of fluctuations in foreign exchange rates, which could affect our operating results. The financial condition and results of operations of our operating foreign subsidiaries are reported in the relevant local currency and are then translated into U.S. dollars at the applicable currency exchange rate for inclusion in our consolidated U.S. dollar financial statements. Also, although a large portion of our customer agreements are denominated in U.S. dollars, we may be exposed to fluctuations in foreign exchange rates with respect to customer agreements with certain of our international customers. Exchange rates between these currencies and U.S. dollars in recent years have fluctuated significantly and may do so in the future. In addition to currency translation risk, we incur currency transaction risk whenever one of our operating subsidiaries enters into a transaction using a different currency than the relevant local currency. Given the volatility of exchange rates, we may be unable to manage our currency transaction risks effectively. Currency fluctuations could have a material adverse effect on our future international sales and, consequently, on our financial condition and results of operations. 26 Table of Contents Internet-related and other laws relating to taxation issues, privacy, data security and consumer protection and liability for content distributed over our network, could harm our business. Laws and regulations that apply to communications and commerce conducted over the Internet are becoming more prevalent, both in the United States and internationally, and may impose additional burdens on companies conducting business online or providing Internet-related services such as ours. Increased regulation could negatively affect our business directly, as well as the businesses of our customers, which could reduce their demand for our services. For example, tax authorities abroad may impose taxes on the Internet-related revenue we generate based on where our internationally deployed servers are located. In addition, domestic and international taxation laws are subject to change. Our services, or the businesses of our customers, may become subject to increased taxation, which could harm our financial results either directly or by forcing our customers to scale back their operations and use of our services in order to maintain their operations. In addition, the laws relating to the liability of private network operators for information carried on, processed by or disseminated through their networks are unsettled, both in the United States and abroad. Network operators have been sued in the past, sometimes successfully, based on the content of material disseminated through their networks. We may become subject to legal claims such as defamation, invasion of privacy and copyright infringement in connection with content stored on or distributed through our network. In addition, our reputation could suffer as a result of our perceived association with the type of content that some of our customers deliver. If we need to take costly measures to reduce our exposure to these risks, or are required to defend ourselves against such claims, our financial results could be negatively affected. Several other federal laws also could expose us to liability and impose significant additional costs on us. For example, the Digital Millennium Copyright Act has provisions that limit, but do not eliminate, our liability for the delivery of customer content that infringe copyrights or other rights, so long as we comply with certain statutory requirements. In addition, the Children’s Online Privacy Protection Act restricts the ability of online services to collect information from minors and the Protection of Children from Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. Also, there are emerging regulation and industry standards regarding the collection and use of personal information and protecting the security of data on networks. Compliance with these laws, regulations and standards is complex and any failure on our part to comply with these regulations may subject us to additional liabilities. Privacy concerns could lead to legislative and other limitations on our ability to use “cookies” and video player “cookies” that are crucial to our ability to provide services to our customers. Our ability to compile data for customers depends on the use of “cookies” and video player “cookies” to identify certain online behavior that allows our customers to measure a website or video’s effectiveness. A cookie is a small file of information stored on a user’s computer that allows us to recognize that user’s browser or video player when the user makes a request for a web page or to play a video. Government authorities inside the United States concerned with the privacy of Internet users have suggested limiting or eliminating the use of cookies. Bills aimed at regulating the collection and use of personal data from Internet users are currently pending in United States Congress and many state legislatures. Attempts at such regulation may be drafted in such a way as to limit or prohibit the use of technology like cookies, thereby creating restrictions that could reduce our ability to use them. In addition, the Federal Trade Commission and the Department of Commerce have conducted hearings regarding user profiling, the collection of non-personally identifiable information and online privacy. Our foreign operations may also be adversely affected by regulatory action outside the United States. For example, the European Union has adopted a directive addressing data privacy that limits the collection, disclosure and use of information regarding European Internet users. In addition, the European Union has enacted an electronic communications directive that imposes certain restrictions on the use of cookies and also places restrictions on the sending of unsolicited communications. Each European Union member country was required 27 Table of Contents to enact legislation to comply with the provisions of the electronic communications directive by October 31, 2003 (though not all have done so). Germany has also enacted additional laws limiting the use of user profiling, and other countries, both in and out of the European Union, may impose similar limitations. Internet users may directly limit or eliminate the placement of cookies on their computers by using third-party software that blocks cookies, or by disabling or restricting the cookie functions of their Internet browser software and in their video player software. Internet browser software upgrades also may result in limitations on the use of cookies. Technologies like the Platform for Privacy Preferences Project may limit collection of cookies. Plaintiffs’ attorneys also have organized class action suits against companies related to the use of cookies and several companies, including companies in the Internet advertising industry, have had claims brought against them before the Federal Trade Commission regarding the collection and use of Internet user information. We may be subject to such suits in the future, which could limit or eliminate our ability to collect such information. If our ability to use cookies were substantially restricted due to the foregoing, or for any other reason, we would have to generate and use other technology or methods that allow the gathering of user data in order to provide services to customers. This change in technology or methods could require significant reengineering time and resources, and may not be complete in time to avoid negative consequences to our business. In addition, alternative technology or methods might not be available on commercially reasonable terms, if at all. If the use of cookies is prohibited and we are not able to efficiently and cost effectively create new technology, our business, financial condition and results of operations would be materially adversely affected. In addition, any compromise of security that results in the release of Internet users’ and/or our customers’ data could seriously limit the adoption of our service offerings as well as harm our reputation and brand, expose us to liability and subject us to reporting obligations under various state laws, which could have an adverse effect on our business. The risk that these types of events could seriously harm our business is likely to increase as the amount of data stored for customers on our servers and the number of countries where we operate has been increasing, and we may need to expend significant resources to protect against security breaches, which could have an adverse effect on our business, financial condition or results of operations. If we are required to seek funding, such funding may not be available on acceptable terms or at all. We may need to obtain funding due to a number of factors beyond our control, including a shortfall in revenue, increased expenses, final adverse judgments in litigation matters, increased investment in capital equipment or the acquisition of significant businesses or technologies. We believe that our cash, cash equivalents and marketable securities classified as current plus cash from operations will be sufficient to fund our operations and proposed capital expenditures for at least the next 12 months. However, we may need or desire funding before such time. If we do need to obtain funding, it may not be available on commercially reasonable terms or at all. If we are unable to obtain sufficient funding, our business would be harmed. Even if we were able to find outside funding sources, we might be required to issue securities in a transaction that could be highly dilutive to our investors or we may be required to issue securities with greater rights than the securities we have outstanding today. We might also be required to take other actions that could lessen the value of our common stock, including borrowing money on terms that are not favorable to us. If we are unable to generate or raise capital that is sufficient to fund our operations, we may be required to curtail operations, reduce our capabilities or cease operations in certain jurisdictions or completely. Our business requires the continued development of effective business support systems to support our customer growth and related services. The growth of our business depends on our ability to continue to develop effective business support systems. This is a complicated undertaking requiring significant resources and expertise. Business support systems are needed for: • • • implementing customer orders for services; delivering these services; and timely and accurate billing for these services. 28 Table of Contents Because our business plan provides for continued growth in the number of customers that we serve and services offered, there is a need to continue to develop our business support systems on a schedule sufficient to meet proposed service rollout dates. The failure to continue to develop effective business support systems could harm our ability to implement our business plans and meet our financial goals and objectives. We have incurred, and will continue to incur significantly increased costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives. As a public company, we have incurred, and will continue to incur, significant accounting and other expenses that we did not incur as a private company. These expenses include increased accounting, legal and other professional fees, insurance premiums, investor relations costs, and costs associated with compensating our independent directors. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq Global Select Market, impose additional requirements on public companies, including requiring changes in corporate governance practices. For example, the listing requirements of the Nasdaq Global Select Market require that we satisfy certain corporate governance requirements relating to independent directors, audit committees, distribution of annual and interim reports, stockholder meetings, stockholder approvals, solicitation of proxies, conflicts of interest, stockholder voting rights and codes of conduct. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and make some activities more time-consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us to obtain director and officer liability insurance. These rules and regulations could also make it more difficult for us to identify and retain qualified persons to serve on our board of directors, our board committees or as executive officers. Divestiture of our businesses or product lines, including those that we have acquired or will acquire, may materially adversely affect our financial condition, results of operations or cash flows, or may result in impairment charges that may adversely affect our results of operations. On September 1, 2011, we sold our EyeWonder and chors rich media advertising unit to DG. Divestitures involve risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention from other business concerns, the disruption of our business, the potential loss of key employees and the retention of uncertain contingent liabilities related to the divested business, any of which could result in a material adverse effect to our financial condition, results of operations or cash flows. Divestitures of previously acquired businesses, such as the divestiture of the EyeWonder and chors rich media advertising services, may result in significant asset impairment charges, including those related to goodwill and other intangible assets, which could have a material adverse effect on our financial condition and results of operations. Future impairment may result from, among other things, deterioration in the performance of the acquired business or product line, adverse market conditions and changes in the competitive landscape, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business or product line, changes in accounting rules and regulations, and a variety of other circumstances. The amount of any impairment is recorded as a charge to the statement of operations. We may never realize the full value of our goodwill and intangible assets, and any determination requiring the write-off of a significant portion of these assets may have an adverse effect on our financial condition and results of operations. We cannot assure you that we will be successful in managing these or any other significant risks that we encounter in divesting a business or product line. Failure to effectively expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our services. Increasing our customer base and achieving broader market acceptance of our services will depend to a significant extent on our ability to expand our sales and marketing operations. We have a concentration of our sales force at our headquarters in Tempe, Arizona but we also have a widely deployed field sales force. We are 29 Table of Contents growing our sales force and realigning our sales resources to improve our sales productivity and efficiency and to bring our sales personnel closer to our current and potential customers. Growing and realigning sales force has been and will continue to be expensive and could cause some near- term productivity impairments. As a result, we may not be successful in growing and improving the productivity and efficiency of our sales force, which could cause our results of operations to suffer. We believe that there is significant competition for both inside and direct sales personnel with the sales skills and technical knowledge that we require. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of inside and direct sales personnel. New hires require significant training and, in most cases, take a significant period of time before they achieve full productivity. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business. Our business will be seriously harmed if our sales force expansion efforts do not generate a corresponding significant increase in revenue. If the accounting estimates we make, and the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may be adversely affected. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments about, among other things, taxes, revenue recognition, share- based compensation costs, contingent obligations and doubtful accounts. These estimates and judgments affect the reported amounts of our assets, liabilities, revenue and expenses, the amounts of charges accrued by us, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances and at the time they are made. If our estimates or the assumptions underlying them are not correct, we may need to accrue additional charges or reduce the value of assets that could adversely affect our results of operations, investors may lose confidence in our ability to manage our business and our stock price could decline. Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations. A change in accounting standards or practices can have a significant effect on our operating results and may affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of existing accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. Risks Related to Ownership of Our Common Stock The trading price of our common stock has been, and is likely to continue to be, volatile. The trading prices of our common stock and the securities of technology companies generally have been highly volatile. Factors affecting the • trading price of our common stock will include: variations in our operating results; announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors; • 30 Table of Contents • • • • • • • commencement or resolution of, our involvement in and uncertainties arising from, litigation, particularly our current litigation with Akamai and the Massachusetts Institute of Technology (MIT); recruitment or departure of key personnel; changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock; developments or disputes concerning our intellectual property or other proprietary rights; the gain or loss of significant customers; market conditions in our industry, the industries of our customers and the economy as a whole; and adoption or modification of regulations, policies, procedures or programs applicable to our business. In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events or speculation of events that affect other companies in our industry even if these events do not directly affect us. If securities or industry analysts do not publish research or reports about our business or if they issue an adverse or misleading opinion or report, our stock, our stock price and trading volume could decline. The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Insiders have substantial control over us and will be able to influence corporate matters. As of December 31, 2012, our directors and executive officers and their affiliates beneficially owned, in the aggregate, approximately 43% of our outstanding common stock, including approximately 31% beneficially owned by investment entities affiliated with Goldman, Sachs & Co. These stockholders are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit other stockholders’ ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. Future equity issuances or a sale of a substantial number of shares of our common stock may cause the price of our common stock to decline. Because we may need to raise additional capital in the future to continue to expand our business and our research and development activities, among other things, we may conduct additional equity offerings. If we or our stockholders sell substantial amounts of our common stock (including shares issued upon the exercise of options and warrants) in the public market, the market price of our common stock could fall. A decline in the market price of our common stock could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. 31 Table of Contents Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock. Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. These provisions: • • • • • • • establish that members of the board of directors may be removed only for cause upon the affirmative vote of stockholders owning a majority of our capital stock; authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; limit who may call special meetings of stockholders; prohibit stockholder action by written consent, thereby requiring stockholder actions to be taken at a meeting of the stockholders; establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings; provide for a board of directors with staggered terms; and provide that the authorized number of directors may be changed only by a resolution of our board of directors. In addition, Section 203 of the Delaware General Corporation Law, which imposes certain restrictions relating to transactions with major stockholders, may discourage, delay or prevent a third party from acquiring us. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our global corporate headquarters is located in approximately 64,000 square feet of leased office space in Tempe, Arizona. We also lease space for a data center and warehouse in Phoenix, Arizona. We lease offices in several other locations in the United States, including in or near Los Angeles, Mountain View, San Diego and San Francisco, California, New York, New York, Grand Rapids, Michigan, Seattle, Washington and Washington DC. We also lease offices in Europe and Asia in or near Munich, Germany, London, England, Paris, France, Tel Aviv, Israel, Lviv, Ukraine, Tokyo, Japan, Bangalore, Delhi and Mumbai, India, Seoul, Korea and Singapore. We believe our facilities are sufficient to meet our needs for the foreseeable future and, if needed, additional space will be available at a reasonable cost. Item 3. Legal Proceedings We are involved in litigation with Akamai and the Massachusetts Institute of Technology (MIT) relating to a claim of patent infringement. The action was filed in June 2006 in the United States District Court for the District of Massachusetts. The trial date was set for February 2008 with respect to four claims in United States Patent No. 6,108,703 (the ’703 patent). Before trial, Akamai waived by stipulation its claims of indirect or induced infringement and proceeded to trial only on the theory of direct infringement. In February 2008, a jury returned a verdict in this lawsuit, finding that we infringed four claims of the ’703 patent at issue and rejecting our invalidity defenses. The jury awarded an aggregate of approximately $45.5 million which includes lost profits, reasonable royalties and price erosion damages for the period April 2005 through December 31, 2007. In addition, the jury awarded pre-judgment interest which we estimated to be $2.6 million at December 31, 2007. We recorded the aggregate $48.1 million as a provision for litigation as of December 31, 2007. During 2008, we recorded an additional provision of approximately $17.5 million for potential additional infringement damages 32 Table of Contents and interest. On July 1, 2008, the court denied our motions for JMOL, Obviousness, and a New Trial. The court also denied Akamai’s Motion for Permanent Injunction as premature and denied its Motions for Summary Judgment regarding our equitable defenses. The court conducted a bench trial in November 2008 regarding our equitable defenses. We also filed a motion for reconsideration of the court’s earlier denial of our motion for JMOL. Our motion for reconsideration of JMOL was based largely upon a clarification in the standard for a finding of joint infringement articulated by the Federal Circuit in the case of Muniauction, Inc. v. Thomson Corp., released after the court denied our initial motion for JMOL. On April 24, 2009, the court issued its order and memorandum setting aside the adverse jury verdict and ruling that we did not infringe Akamai’s ’703 patent and that we were entitled to JMOL. Based upon the court’s April 24, 2009 order, we reversed the $65.6 million provision for litigation previously recorded for this lawsuit as we no longer believed that payment of any amounts represented by the litigation provision was probable. The court entered final judgment in our favor on May 22, 2009, and Akamai filed a notice of appeal of the court’s decision on May 26, 2009. On December 20, 2010, the Court of Appeals for the Federal Circuit issued its opinion affirming the trial court’s entry of judgment in our favor. On February 18, 2011, Akamai filed a motion with the Court of Appeals for the Federal Circuit seeking a rehearing and rehearing en banc. On April 21, 2011, the Court of Appeals for the Federal Circuit issued an order denying the petition for rehearing, granting the petition for rehearing en banc, vacating the December 20, 2010 opinion affirming the trial court’s entry of judgment in our favor, and reinstated the appeal. On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in the case. The Court of Appeals stated that the trial court correctly determined we did not directly infringe Akamai’s ’703 patent and upheld the trial court’s decision to vacate the original jury’s damages award. The Court of Appeals also held that we did not infringe Akamai’s ’413 or ’645 patents. A slim majority in this three-way divided opinion also announced a revised legal theory of induced infringement, remanded the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to prove that we induced our customers to infringe Akamai’s patent under the Court of Appeals’ new legal standard. On December 28, 2012, we filed a petition for writ of certiorari to the United States Supreme Court to appeal this sharply divided Court of Appeals decision and will seek to stay any proceedings at the trial court until the Supreme Court rules on that petition. Akamai then filed a cross petition for consideration of the Court of Appeals standard for direct infringement. We believe that the Court of Appeals new induced infringement standard runs counter to the Patent Act and Supreme Court precedent, and that it should be overturned by the Supreme Court. Additionally, just as we have successfully shown that we do not directly infringe Akamai’s patent, we firmly believe that we ultimately would be successful in showing we do not infringe Akamai’s patent under the Court of Appeals majority’s new induced infringement theory. We will continue to vigorously defend against the allegation; however, we cannot provide any assurance that the lawsuit ultimately will be resolved in our favor. An adverse ruling could seriously impact our ability to conduct significant portions of our business and to offer certain of our products and services to our customers. A permanent injunction could prevent us from operating our content delivery services or from delivering certain types of traffic, which could impact the viability of those portions of our business. Any adverse ruling, in turn, would harm our revenue, market share, reputation, liquidity and overall financial position. We are not able at this time to estimate the range of a potential loss nor in light of the status of the litigation do we believe a loss is probable, and therefore no provision for this lawsuit is recorded in our financial statements. In the ordinary course of our business, we are also involved in a limited number of other legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. With respect to pending legal actions to which we are a party, although the outcomes of these actions are not generally determinable, we believe that the ultimate resolution of these matters will not have a material adverse effect on our financial position, cash flows or results of operations. Litigation relating to the content delivery services industry is not uncommon, and we are, and from time to time have been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future. Item 4. Mine Safety Disclosures. Not applicable. 33 Table of Contents PART II Item 5. Market Information Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock, par value $0.001 per share, trades on The Nasdaq Global Select Market under the symbol “LLNW”. The following table sets forth, for the periods indicated, the high and low sale price per share of our common stock on The Nasdaq Global Select Market: 2011: First Quarter Second Quarter Third Quarter Fourth Quarter 2012: First Quarter Second Quarter Third Quarter Fourth Quarter Holders High Low $8.58 $7.39 $5.16 $3.28 $4.33 $3.35 $3.17 $2.42 $5.72 $4.17 $1.95 $2.03 $2.91 $2.30 $2.22 $1.62 As of February 22, 2013, there were 354 holders of record of our common stock. Dividends We have never paid or declared any cash dividends on shares of our common stock or other securities and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain all future earnings, if any, for use in the operation of our business. Issuer Purchases of Equity Securities The following is a summary of our repurchases of our common stock during the three month period ended December 31, 2012: Period October 1, — October 31, 2012 November 1, — November 30, 2012 December 1, — December 31, 2012 Total Total Number of Shares Purchased — 373,500 2,086,000 2,459,500 Average Price Paid per Share (1) — 1.90 2.17 2.13 $ $ $ Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) — 373,500 2,086,000 2,459,500 Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) — 9,297,890 4,806,122 $ $ Includes commissions, markups and expenses. (1) (2) On October 29, 2012, our board of directors authorized and approved a third common stock repurchase plan that authorizes us to use up to $10 million to repurchase shares of our common stock, exclusive of any commissions, markups or expenses, under which we may purchase shares of our common stock through May 9, 2013. Any repurchased shares will be cancelled and return to authorized but unissued status. 34 Table of Contents During 2012, we completed two previously announced stock repurchase plans and commenced a third. On September 12, 2011, our board of directors authorized and approved a repurchase plan that authorized us to purchase up to $25 million of our shares of common stock, exclusive of any commissions, markups or expenses, from time to time through March 12, 2012. During the period September 12, 2011 through March 12, 2012, we purchased and cancelled approximately 9.7 million shares of common stock for approximately $25.0 million ($25.2 million including commissions) under the initial repurchase plan. On May 3, 2012, we announced a second common stock repurchase plan that authorized us to repurchase up to $15 million of our shares of common stock, exclusive of any commissions, markups or expenses, from time to time through December 15, 2012. During the year ended December 31, 2012, we purchased and cancelled approximately 5.7 million shares of common stock for approximately $15.0 million ($15.1 million including commissions) under the second repurchase plan. On October 29, 2012, the Company’s Board authorized and approved a third common stock repurchase plan that authorized the Company to repurchase up to $10 million of its shares of common stock, exclusive of any commissions, markups or expenses, from time to time through May 9, 2013. Any repurchased shares will be cancelled and return to authorized but unissued status. During the three months ended December 31, 2012, the Company purchased and cancelled approximately 2.2 million shares under the third repurchase plan for approximately $4.6 million including commissions. We did not repurchase any equity securities in 2010 or prior years. STOCK PERFORMANCE GRAPH The graph set forth below compares the cumulative total stockholder return on our common stock between December 31, 2007 and December 31, 2012, with the cumulative total return of (i) the Nasdaq Composite Index and (ii) the S&P Information Technology Sector Index, over the same period. This graph assumes the investment of $100 on December 31, 2007 in our common stock, the Nasdaq Composite Index and the S&P Information Technology Sector Index, and assumes the reinvestment of dividends, if any. The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. This graph assumes an investment on December 31, 2007 of $100 in our common stock (based on the closing sale price of our common stock), and in each of such indices (including the reinvestment of all dividends). Measurement points are to the last trading day for each respective period. The performance shown is not necessarily indicative of future performance. 35 Table of Contents Item 6. Selected Financial Data The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and related notes and with “Management Discussion and Analysis of Financial Condition and Results of Operations” and other financial data included elsewhere in this annual report on Form 10-K. In January 2010 and April 2010, we acquired chors and EyeWonder, respectively. On September 1, 2011, we completed the sale of EyeWonder and chors video and rich media advertising services to DG. Accordingly, the results related to the sale of EyeWonder and chors for the year ended December 31, 2011 and prior periods have been reclassified to discontinued operations and have not been included in our selected financial data and management’s discussion and analysis of financial condition and results of operations. Revenues Cost of revenue: Cost of services (1) Depreciation — network Total cost of revenue Gross profit Operating expenses: General and administrative (1) Sales and marketing (1) Research and development (1) Depreciation and amortization Provision for litigation (2) Total operating expenses Operating (loss) income Other income (expense): Interest expense Interest income Gain on sale of cost basis investment Other, net Total other income (Loss) income from continuing operations before income taxes Income tax expense (benefit) (Loss) income from continuing operations Discontinued operations: (Loss) income from discontinued operations, net of income taxes Net (loss) income Basic net (loss) income per weighted average share: Continuing operations Discontinued operations Total Diluted net (loss) income per weighted average share: Continuing operations Discontinued operations Total Shares used in per weighted average share calculations: Basic Diluted 36 Limelight Networks, Inc. Year Ended December 31, 2010 $154,223 2011 $171,292 2009 $131,663 81,556 28,030 109,586 61,706 32,138 40,081 17,146 4,787 — 94,152 (32,446) (299) 752 — (311) 142 (32,304) (2,238) (30,066) 72,358 22,224 94,582 59,641 29,827 38,614 10,841 2,460 — 81,742 (22,101) (62) 910 — (250) 598 (21,503) 727 (22,230) 61,572 24,051 85,623 46,040 34,128 32,587 7,937 2,351 (65,645) 11,358 34,682 (39) 1,345 — (14) 1,292 35,974 1,084 34,890 2008 $129,530 58,186 25,675 83,861 45,669 52,440 34,916 7,365 1,356 17,515 113,592 (67,923) (55) 5,098 — (171) 4,872 (63,051) 16 (63,067) 2012 $180,236 83,723 27,992 111,715 68,521 36,003 45,044 20,182 5,843 — 107,072 (38,551) (177) 356 9,420 (602) 8,997 (29,554) 481 (30,035) (2,861) $ (32,896) 4,778 $ (25,288) 1,879 $ (20,351) — $ 34,890 — $ (63,067) $ $ $ $ (0.30) (0.02) (0.32) (0.30) (0.02) (0.32) $ $ $ $ (0.28) 0.05 (0.23) (0.28) 0.05 (0.23) $ $ $ $ (0.24) 0.02 (0.22) (0.24) 0.02 (0.22) $ 0.41 — 0.41 $ $ (0.76) — (0.76) $ $ 0.40 — 0.40 $ $ (0.76) — (0.76) $ 101,283 101,283 109,236 109,236 94,300 94,300 84,202 87,972 82,932 82,932 Table of Contents (1) Includes share-based compensation as follows: 2012 2011 Cost of revenue General and administrative Sales and marketing Research and development Total $ 2,117 6,511 3,104 2,743 $14,475 Limelight Networks, Inc. Year Ended December 31, 2010 (In thousands) $ 2,359 5,984 4,840 2,999 $16,182 $ 2,419 6,132 3,776 3,554 $15,881 2009 2008 $ 2,414 7,556 4,970 2,523 $17,463 $ 2,243 8,060 5,400 2,355 $18,058 (2) In February 2008, a jury returned a verdict in a patent infringement lawsuit filed by Akamai and MIT, against us, finding that we infringed four claims of the patent at issue and rejecting our invalidity defenses. The jury awarded Akamai an aggregate of approximately $45.5 million in lost profits, reasonable royalties and price erosion damages, plus pre-judgment interest estimated to be $2.6 million. During 2008, we recorded an additional potential damage liability relating to this infringement of $15.5 million, plus additional interest of $2.0 million. The total provision for litigation at December 31, 2008 was $65.6 million. We also filed a motion for reconsideration of the court’s earlier denial of our motion for JMOL. Our motion for reconsideration of JMOL was based largely upon a clarification in the standard for a finding of joint infringement articulated by the Federal Circuit in the case of Muniauction, Inc. v. Thomson Corp. (the Muniauction Case), released after the court denied our initial motion for JMOL. On April 24, 2009, the court issued its order and memorandum setting aside the adverse jury verdict and ruling that we did not infringe Akamai’s ‘703 patent and that we are entitled to JMOL. Based upon the court’s April 24, 2009 order, we have reversed the $65.6 million provision for litigation previously recorded for this lawsuit as we no longer believe that payment of any amounts represented by the litigation provision is probable. The court entered final judgment in favor of us. Akamai filed a notice of appeal of the court’s decision on May 26, 2009; and the Court of Appeals for the Federal Circuit heard arguments by both parties on June 7, 2010. On December 20, 2010, the Court of Appeals for the Federal Circuit issued its opinion affirming the trial court’s entry of judgment in our favor. On February 18, 2011, Akamai filed a motion with the Court of Appeals for the Federal Circuit seeking a rehearing and rehearing en banc. On April 21, 2011, the Court of Appeals for the Federal Circuit issued an order denying the petition for rehearing, granting the petition for rehearing en banc, vacating the December 20, 2010 opinion affirming the trial court’s entry of judgment in our favor, and reinstated the appeal. On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in the case. The Court of Appeals stated that the trial court correctly determined we did not directly infringe Akamai’s ’703 patent and upheld the trial court’s decision to vacate the original jury’s damages award. The court also held that we did not infringe Akamai’s ’413 or ’645 patents. A slim majority in this three-way divided opinion also announced a revised legal theory of induced infringement, remanded the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to prove that we induced our customers to infringe Akamai’s patent under the Court of Appeals’ new legal standard. On December 28, 2012, we filed a petition for writ of certiorari to the United States Supreme Court to appeal this sharply divided Court of Appeals decision and sought to stay any proceedings at the trial court until the Supreme Court rules on that petition. Akamai then filed a cross petition for consideration of the Court of Appeals standard for direct infringement. We believe that the Court of Appeal’s new induced infringement standard runs counter to the Patent Act and Supreme Court precedent, and it should be overturned by the Supreme Court. Additionally, just as we have successfully shown that we do not directly infringe Akamai’s patent, we firmly believe that we ultimately would be successful in showing that we do not infringe Akamai’s patent under the Court of Appeals majority’s new induced infringement theory. We will continue to vigorously defend against the allegation; however, we cannot provide any assurance that the lawsuit ultimately will be resolved in our favor. An adverse ruling could seriously impact our ability to conduct significant portions of our business and to offer certain of our products and services to our customers. 37 Table of Contents A permanent injunction could prevent us from operating our content delivery services or from delivering certain types of traffic, which could impact the viability of those portions of our business. Any adverse ruling, in turn, would harm our revenue, market share, reputation, liquidity and overall financial position. We are not able at this time to estimate the range of potential loss nor, in light of the status of the litigation, do we believe that a loss is probable. Therefore, we have made no provision for this lawsuit in our financial statements. Consolidated Balance Sheet Data: Cash and cash equivalents and marketable securities, current Non-current marketable securities Working capital Property and equipment, net Total assets Long-term debt, less current portion Total stockholders’ equity 2012 2011 Limelight Networks, Inc. Year Ended December 31, 2010 (In thousands) 2009 2008 $127,955 18 137,066 41,251 304,881 824 267,230 $140,199 51 159,180 56,368 346,345 2,124 309,105 $ 66,870 103 127,280 52,891 298,640 1,641 256,109 $154,379 12 159,530 35,524 235,670 — 202,800 $174,643 13 116,608 40,185 256,792 — 150,131 38 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations This annual report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, among other things, statements as to industry trends, our future expectations, operations, financial condition and prospects, business strategies and other matters that do not relate strictly to historical facts. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” set forth in Part I, Item 1A of this annual report on Form 10-K. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Prior period information has been modified to conform to current year presentation. Overview We were founded in 2001 as a provider of CDN 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 operate a globally distributed, high-performance computing platform (our global computing platform) and provide a suite of integrated services including content delivery, web and video content management, mobility, web application acceleration, cloud storage, and related consulting services that enable companies and other organizations to create, manage, and deliver a global digital presence. The integrated suite of services that we offer collectively comprises our Orchestrate Platform. We provide the Orchestrate Platform as SaaS and IaaS, which other than content delivery services, are referred to collectively as VAS. We offer VAS both collectively as the end-to-end Orchestrate Digital Presence Platform and individually for customers that may not be inclined or able to adopt the entire platform. The Orchestrate Platform and services help our customers optimize and streamline their online digital presence across web, mobile, social and large screen channels. The Orchestrate Platform and services enable our customers to remove the complexity of creating, managing, delivering and optimizing their digital presence, which helps them to deliver a high quality online media experience, improve brand awareness, drive revenue and enhance their customer relationships. The Orchestrate Platform and services provide advanced features which include website content management, personalization and targeting, video publishing, mobile enablement, content delivery, transcoding and cloud storage, combined with social media integration and reporting analytics. These services are provided through the cloud and leverage our global computing platform, which provides highly available, highly redundant storage, bandwidth and computing resources, as well as connectivity to last-mile broadband network providers. Our professional consulting services team helps organizations assess their digital presence requirements and improve their digital presence activities. We derive revenue primarily from the sale of the Orchestrate Platform and its components as managed services. We also generate revenue through the sale of professional services and other infrastructure services, such as transit and rack space services. We provide our services to customers that we believe view Internet, mobile and social initiatives as critical to their success, including traditional and emerging media companies operating in the television, music, radio, newspaper, magazine, movie, videogame, software and social media industries, as well as to enterprises, technology companies, and government entities conducting business online. Our offerings enable organizations to remove the complexity of creating, managing, delivering and optimizing their digital presence by streamlining 39 Table of Contents processes and optimizing business results across all customer interaction channels which helps them to deliver a high quality online media experience, improve brand awareness, drive revenue and enhance their customer relationships. We provide services to customers in three geographic areas — North America, EMEA, and Asia Pacific, including Japan. As of December 31, 2012, we had 1,451 active customers worldwide. In addition to expanding our suite of VAS, we continue to expand the capacity and capabilities, and to enhance the performance and efficiency, of our global computing platform. Although we believe that we may have improved margins in our content delivery services as we expand our customer base and use a greater proportion of our capacity, we expect the majority of our margin increases to result from our VAS increasing as a percentage of our revenue. On November 26, 2012, we announced the appointment of Robert A. Lento as interim Chief Executive Officer effective immediately. We had previously announced on November 1, 2012 that Jeffrey W. Lunsford would be stepping down as our Chief Executive Officer in January 2013 and that an executive search firm was engaged to recruit his successor. On January 22, 2013, we announced that the board of directors completed its executive search and appointed Mr. Lento as our President and Chief Executive Officer and that Mr. Lunsford had tendered his resignation as a board member and Chairman of the Board. On February 12, 2013, we announced George E. Vonderhaar as Chief Sales Officer and recently appointed Jonathan Smith as Managing Director and Vice President of Europe, Middle East and Africa. On February 19, 2013, we announced the appointment of Walter D. Amaral to serve as our non-executive Chairman of the Board. Mr. Amaral fills the Chairman role vacated by the resignation of Mr. Lunsford. We also announced the appointments of Charles Kirby Wadsworth as our Chief Marketing Officer on June 25, 2012 and Indu Kodukula as our Chief Operating Officer on October 29, 2012. During 2012, we completed two previously announced stock repurchase plans and commenced a third. On September 12, 2011, our Board authorized and approved a repurchase plan that authorized us to purchase up to $25 million of our shares of common stock, exclusive of any commissions, markups or expenses, from time to time through March 12, 2012. During the period September 12, 2011 through March 12, 2012, we purchased and cancelled approximately 9.7 million shares of common stock for approximately $25.0 million ($25.2 million including commissions) under the initial repurchase plan. On May 3, 2012, we announced a second common stock repurchase plan that authorized us to repurchase up to $15 million of our shares of common stock, exclusive of any commissions, markups or expenses, from time to time through December 15, 2012. During the year ended December 31, 2012, we purchased and cancelled approximately 5.7 million shares of common stock for approximately $15.0 million ($15.1 million including commissions) under the second repurchase plan. On October 29, 2012, our Board of Directors authorized and approved a third common stock repurchase plan that authorized us to repurchase up to $10 million of our shares of common stock, exclusive of any commissions, markups or expenses, from time to time through May 9, 2013. Any repurchased shares will be cancelled and return to authorized but unissued status. During the three months ended December 31, 2012, we purchased and cancelled approximately 2.2 million shares under the third repurchase plan for approximately $4.6 million including commissions. On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in our on-going patent litigation with Akamai. The Court of Appeals stated that the trial court correctly determined that we did not directly infringe Akamai’s 6,108,703 patent and upheld the trial court’s decision to vacate the original jury’s damages award. The court also held that we did not infringe Akamai’s 6,553,413 or 7,103,645 patents. A slim majority in this three-way divided opinion also announced a revised legal theory of induced infringement, remanded the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to prove that we induced our customers to infringe Akamai’s patent under the Court of Appeals’ new legal standard. On December 28, 2012, we filed a petition for writ of certiorari to the United States Supreme Court to appeal this 40 Table of Contents sharply divided Court of Appeals decision and will seek to stay any proceedings at the trial court until the Supreme Court rules on that petition. Akamai then filed a cross petition for consideration of the Court of Appeals standard for direct infringement. Just as we have successfully shown that we do not directly infringe Akamai’s patent, we firmly believe that we ultimately would be successful in showing we do not infringe Akamai’s patent under the Court of Appeals majority’s new induced infringement theory, and we will continue to vigorously defend against the allegation. We do not believe a loss is probable and therefore no provision for this lawsuit is recorded in our financial statements. For additional information, please see “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K. In May 2010, we made a strategic investment in Gaikai, a private cloud-based gaming technology company. In August 2012, Sony acquired Gaikai and we recorded a gain on sale of our cost basis investment in Gaikai of $9.4 million, which has been reflected in other income (expense) in the accompanying consolidated statements of operations for the year ended December 31, 2012. The carrying value of the Gaikai cost basis investment as of the sale date was approximately $2.0 million. The aggregate selling price was $11.4 million, consisting of $10.2 million of cash received and $1.2 million held in escrow for a period of up to 15 months to cover any potential indemnification claims. As of December 31, 2012, we are not aware of any potential indemnification claims that are expected to reduce the amount received from escrow and have recorded a current receivable of $1.2 million which is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet for the year ended December 31, 2012. 41 Table of Contents The following table sets forth our historical operating results, as a percentage of revenue for the periods indicated. Consolidated Statement of Operations Data: Revenue Cost of revenue: Cost of services Depreciation — network Total cost of revenue Gross profit Operating expenses: General and administrative Sales and marketing Research and development Depreciation and amortization Total operating expenses Operating loss Other income (expense): Interest expense Interest income Gain on sale of cost basis investment Other, net Total other income (expense) Loss from continuing operations before income taxes Income tax provision (benefit) Loss from continuing operations Discontinued operations: (Loss) income from discontinued operations, net of income taxes Net loss Year Ended December 31, 2011 2012 2010 100% 100% 100% 46 16 62 38 20 25 11 3 59 (21) — — 5 — 5 (16) — (16) 48 16 64 36 19 23 10 3 55 (19) — — — — — (19) (1) (18) 47 14 61 39 19 25 7 2 53 (14) — 1 — — — (14) — (14) (2) (18)% 3 (15)% 1 (13)% Traffic on our network and our VAS offerings continued to grow during the year ended December 31, 2012. This traffic growth was primarily the result of growth in the traffic delivered to existing customers and to a lesser extent to new customers. Our content delivery revenue is generated by charging for traffic delivered. While our traffic continued to grow, our CDN revenue decreased approximately $4.8 million during 2012 when compared to 2011. The decrease was primarily due to lower reseller revenue and other non-traffic related revenue. Our VAS revenue represented substantially all of our revenue growth during the year ended December 31, 2012. During 2012, we continued to add new customers, experienced some attrition and elected not to renew some customers as we continue to focus on customer quality. Our average number of products per customer during the three month period ended December 31, 2012 was 1.8. For new customers added during the quarter we averaged 2.2 products. We continue to have success selling new products to our customer base. Our international revenue continued to grow in 2012, and we expect this trend to continue as we focus on our strategy of expanding our network and customer base internationally. For the years ended December 31, 2012, 2011 and 2010, respectively, revenue derived from customers outside North America accounted for approximately 31%, 30% and 27% respectively, of our total revenue. For the years ended December 31, 2012, 2011 and 2010, respectively, we derived approximately 47%, 50% and 57%, respectively of our international 42 Table of Contents revenue from EMEA and approximately 53%, 50% and 43%, respectively of our international revenue from Asia Pacific. We anticipate that our Asia Pacific revenue may continue to grow as a percentage of our total international revenue. During 2012, two countries, Japan and the United States accounted for 10% or more of our total revenues. No single country outside of the United States accounted for 10% or more of our total revenues during the years ended December 31, 2011 and 2010. We expect international revenue to continue to increase in absolute dollars in 2013. Our business is managed as a single segment, and we report our financial results on this basis. During any given fiscal period, a relatively small number of customers typically account for a significant percentage of our revenue. For example, in 2012, sales to our top 10 customers, in terms of revenue, accounted for approximately 33% of our total revenue. During 2011 and 2010, revenue generated from sales to our top 10 customers, in terms of revenue, accounted for approximately 34% respectively, of our total revenue. During 2012 and 2011, we had one customer, Netflix, who accounted for more than 10% of our total revenue. For each of the years ended December 31, 2012 and 2011, Netflix represented approximately 11% of our total revenue. During 2010, we had no customer that accounted for more than 10% of our total revenue. In 2013, we anticipate our top 10 customer concentration levels will be consistent with 2012. In the past, the customers that comprise our top 10 customers have continually changed, and our large customers may not continue to be as significant going forward as they have been in the past. In addition to selling to our direct customers, we maintain relationships with a number of resellers that purchase our services for resale to their customers. Revenue generated from sales to reseller customers was approximately 3%, 4%, and 5%, respectively of our total revenue for the years ended December 31, 2012, 2011, and 2010, respectively. We occasionally generate revenue from certain customers that are entities related to certain of our executive officers and directors. For the year ended December 31, 2012, revenue generated from these related party transactions was approximately 1% of our total revenue. For the year ended December 31, 2011, revenue generated from these related party transactions was less than 1% of our total revenue. For the year ended December 31, 2010, we did not generate any revenue from related parties. In addition to these revenue-related business trends, our cost of revenue increased in absolute dollars and decreased as a percentage of revenue in 2012 when compared to 2011. The increase in absolute dollars was primarily due to increased payroll and related employee costs for our operations personnel, increased professional fees, and increases in other costs associated with the delivery of our services, as well as additional fees and licenses. These increases were offset by decreased bandwidth and co-location costs, which were primarily due to lower transit costs, offset by an increase in paid peering. In addition, 2012 includes a full year of cost of revenue for Clickability, Inc. (Clickability) and AcceloWeb (IL) Ltd. (AcceloWeb) compared to 2011 cost of revenue which includes eight months for Clickability and AcceloWeb which were both acquired in May 2011. We enter into contracts with third party network and data center providers, with terms typically ranging from several months to several years. Our contracts related to transit bandwidth provided by network operators generally commit us to pay a fixed monthly fee or monthly fees plus additional fees for bandwidth usage above a specified level. We entered into an agreement with Global Crossing in January 2009 for use of private lines for additional bandwidth and backbone services with a term of four years from installation. We executed subsequent amendments in September 2009, March 2011 and January 2012 for additional bandwidth and backbone services. The agreement and subsequent amendments required substantial prepayment for such services, and the amendments extended the original term for some services through June 2014. In addition to purchasing services from communications providers, we connect directly to approximately 600 broadband ISPs, generally without either party paying the other. This industry practice, known as settlement free peering, benefits us by allowing us to place content objects directly on user access networks, which helps us provide higher performance delivery for our customers and eliminate paying transit bandwidth fees to network operators. This practice also benefits the ISP and its customers by allowing them to receive improved content delivery through our local servers and 43 Table of Contents eliminate the cost of transit bandwidth associated with delivery receipt of the traffic. We do not consider these relationships to represent the culmination of an earnings process. Accordingly, we do not recognize as revenue the value to the ISPs associated with the use of our servers nor do we recognize as expense the value of the bandwidth received at discounted or no cost. These peering relationships are mutually beneficial and are not contractual commitments. In addition to settlement free peering, we incur costs for non-settlement free peering as well as costs associated with connecting to the ISPs. During 2012, we continued to reduce our network transit bandwidth delivery costs per gigabyte transferred by entering into new supplier contracts with lower pricing and amending existing contracts to take advantage of price reductions from our existing suppliers associated with higher purchase commitments. While we had increased traffic delivered over our network, our total transit bandwidth delivery costs decreased during 2012. We anticipate our overall transit bandwidth delivery costs will continue to increase in absolute dollars as a result of expected higher traffic levels, and we expect this increase to be partially offset by continued reductions in bandwidth costs per unit. We expect that our overall transit bandwidth delivery costs as a percentage of revenue will increase in 2013 compared to 2012. For the year ended December 31, 2012, operating expenses increased in absolute dollars and increased as a percentage of revenue compared to the year ended December 31, 2011. This increase was primarily due to increased sales and marketing expenses, increased general and administrative expenses, increased research and development costs, and increased non-network related depreciation and amortization. The increase in sales and marketing expenses was primarily due to increased payroll and related employee costs, due to increased staffing, increased travel, increased professional fees, and increased facility and facility-related costs, offset by a decrease in share-based compensation. The increase in general and administrative expenses was primarily due to increased professional fees, primarily due to increased consulting and outside professional services, legal fees associated with intellectual property and general corporate legal matters, and recruiting costs. The increase in research and development costs was primarily due to increased payroll and related employee costs due to increased staffing. The increase in non- network related depreciation and amortization was due to increased amortization of intangible assets from our business acquisitions and administrative depreciation and amortization. For the year ended December 31, 2011, operating expenses included approximately eight months of operating expenses from our May 2011 acquisitions of Clickability and AcceloWeb. We make our capital investment decisions based upon careful evaluation of a number of variables, such as the amount of traffic we anticipate on our network, the cost of the physical infrastructure required to deliver that traffic, and the forecasted capacity utilization of our network. Our capital expenditures have varied over time, in particular, as we purchased servers and other network equipment associated with our network build- out. For example, in 2012, 2011, and 2010, we made capital purchases of $18.4 million, $30.4 million, and $33.5 million, respectively, which represented 10%, 18%, and 22%, respectively, of total revenue for each of those years. We expect to have ongoing capital expenditure requirements, as we continue to invest in, refresh and expand our global computing platform. Our future results will be affected by many factors identified in the section captioned “Risk Factors,” in this annual report on Form 10-K, including our ability to: • • • • increase our revenue by adding customers and limiting customer cancellations and terminations, as well as increasing the amount of monthly recurring revenue that we derive from our existing customers; manage the prices we charge for our services, as well as the costs associated with operating our network in light of increased competition; successfully manage our litigation with Akamai to a favorable conclusion; prevent disruptions to our services and network due to accidents or intentional attacks; 44 Table of Contents • • • continue to deliver a significant portion of our traffic through settlement free peering relationships which significantly reduce our cost of delivery; successfully integrate the businesses we have acquired; and successfully manage the disposition of businesses we have divested from. As a result, we cannot assure you that we will achieve our expected financial objectives, including positive net income. Critical Accounting Policies and Estimates The preparation of consolidated financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the consolidated financial statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. The accounting policies described below are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions, and estimates used in the preparation of the consolidated financial statements, and actual results could differ materially from the amounts reported based on these policies. Revenue Recognition We primarily derive revenue from the sale of content delivery and value-added services to our customers. Our customers generally execute contracts with terms of one year or longer, which we refer to as recurring revenue contracts or long-term contracts. These contracts generally commit the customer to a minimum monthly level of usage with additional charges applicable for actual usage above the monthly minimum commitment. We define usage as customer data sent or received using our content delivery service, or content that is hosted or cached by us at the request or direction of our customer. We recognize the monthly minimum as revenue each month provided that an enforceable contract has been signed by both parties, the service has been delivered to the customer, the fee for the service is fixed or determinable, and collection is reasonably assured. Should a customer’s usage of our services exceed the monthly minimum commit, we recognize revenue for such excess in the period of the usage. For annual or other non-monthly period revenue commitments, we recognize revenue monthly based upon the customer’s actual usage each month of the commitment period and only recognize any remaining committed amount for the applicable period in the last month thereof. We typically charge the customer an installation fee when the services are first activated. We do not charge installation fees for contract renewals. Installation fees are recorded as deferred revenue and recognized as revenue ratably over the estimated life of the customer arrangement. We also derive revenue from services and events sold as discrete, non-recurring events or based solely on usage. For these services, we recognize revenue after an enforceable contract has been signed by both parties, the fee is fixed or determinable, the event or usage has occurred, and collection is reasonably assured. We have on occasion entered into multi-element arrangements. Revenue arrangements with multiple deliverables are divided into separate units of accounting if each deliverable has stand-alone value to the customer and there is objective and reliable evidence of the fair value of each deliverable. Arrangements not meeting these criteria are combined into a single unit of accounting. For services sold in multiple-element arrangements, consideration is allocated to each deliverable at the inception of an arrangement based on relative selling prices. Substantially all services are sold on a stand-alone basis, providing vendor specific objective evidence (VSOE) of selling prices. In the absence of VSOE or third-party evidence of selling prices, consideration would be allocated based on management’s best estimate of such prices. 45 Table of Contents We recognized approximately $2.8 million, $4.3 million, and $11.0 million, respectively, in revenue under multi-element arrangements for the years ended December 31, 2012, 2011, and 2010. As of December 31, 2012, we had deferred revenue related to these multi-element arrangements of approximately $0.2 million that will be recognized over the remaining terms of the respective arrangements based on the underlying elements of the arrangements in accordance with our revenue recognition policies. We sell services through a reseller channel. Assuming all other revenue recognition criteria are met, revenue from reseller arrangements is recognized over the term of the contract, based on the reseller’s contracted non-refundable minimum purchase commitments plus amounts sold by the reseller to its customers in excess of the minimum commitments. These excess commitments are recognized as revenue in the period in which the service is provided. Reseller revenue was approximately 3%, 4%, and 5%, respectively, of our total revenue for the years ended December 31, 2012, 2011, and 2010, respectively. At the inception of a customer contract for service, we make an assessment as to that customer’s ability to pay for the services provided. If we subsequently determine that collection from the customer is not reasonably assured, we record an allowance for doubtful accounts and bad debt expense or deferred revenue for all of that customer’s unpaid invoices and cease recognizing revenue for continued services provided until cash is received. Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of the unearned portion of monthly billed service fees, prepayments made by customers for future periods, and deferred installation fees. Accounts Receivable and Related Reserves Trade accounts receivable are recorded at the invoiced amounts and do not bear interest. We record reserves as a reduction of our accounts receivable balance for service credits and for doubtful accounts. Estimates are used in determining both of these reserves. The allowance for doubtful accounts charges are included as a component of general and administrative expenses. Our reserve for service credits relates to service credits that are expected to be issued to customers during the ordinary course of business, as well as for billing disputes. These credits typically relate to customer disputes and billing adjustments and are estimated at the time the revenue is recognized and recorded as a reduction of revenues. Estimates for service credits are based on an analysis of credits issued in previous periods. Our allowance for doubtful accounts is based upon a calculation that uses our aging of accounts receivable and applies a reserve percentage to the specific age of the receivable to estimate the allowance for doubtful accounts. The reserve percentages are determined based on our historical write-off experience. These estimates could change significantly if our customers’ financial condition changes or if the economy in general deteriorates. We perform on-going credit evaluations of our customers. If such an evaluation indicates that payment is no longer reasonably assured for current services provided, any future services provided to that customer will result in the deferral of revenue until payment is made or we determine payment is reasonably assured. Goodwill and Other Intangible Assets We test goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired. As of December 31, 2012 and 2011, we concluded that we had one reporting unit and assigned the entire balance of goodwill to this reporting unit. The fair value of the reporting unit was determined using our market capitalization as of October 31, 2012 and 2011. We performed an impairment test of goodwill as of each of such date and the tests did not indicate an impairment of goodwill. Other intangible assets consist of existing technologies, customer relationships, trade names, and trademarks. Purchased intangible assets, other than goodwill, are amortized over their estimated useful lives based upon the estimated economic value derived from the related intangible assets. Amortization of other intangible assets is included in depreciation and amortization in the accompanying consolidated statements of operations. 46 Table of Contents Impairment and Useful Lives of Long-Lived Assets We review our long-lived assets, such as fixed assets and amortizable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events that would trigger an impairment review include a change in the use of the asset or forecasted negative cash flows related to the asset. When such events occur, we compare the carrying amount of the asset to the undiscounted expected future cash flows related to the asset. If this comparison indicates that impairment is present, the amount of the impairment is calculated as the difference between the carrying amount and the fair value of the asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the asset. The estimates required to apply this accounting policy include forecasted usage of the long-lived assets, the useful lives of these assets, and expected future cash flows. Changes in these estimates could materially impact results from operations. Contingencies We record contingent liabilities resulting from asserted and unasserted claims when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. Deferred Taxes and Tax Reserves Our provision for income taxes is comprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carryforwards using expected tax rates in effect during the years in which the differences are expected to reverse or the carryforwards are expected to be realized. The Company currently has net deferred tax assets consisting of net operating loss (“NOL”) carryforwards, tax credit carryforwards and deductible temporary differences. Management periodically weighs the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. As a result of our recent cumulative losses, we have recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes in the period of such realization. The Company has recorded certain tax reserves to address potential exposures involving its income tax and sales and use tax positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different taxing jurisdictions. The Company’s estimate of the value of its tax reserves contains assumptions based on past experiences and judgments about the interpretation of statutes, rules and regulations by taxing jurisdictions. It is possible that the costs of the ultimate tax liability or benefit from these matters may be materially more or less than the amount that the Company estimated. Uncertainty in income taxes is recognized in the Company’s financial statements under guidance that prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Our unrecognized tax benefit 47 Table of Contents from uncertain tax positions increased from January 1, 2012 to December 31, 2012. We anticipate that our unrecognized tax benefits may increase or decrease within twelve months of the reporting date, as audits or reviews are initiated or settled and as a result of settling potential tax liabilities in certain foreign jurisdictions. It is not currently reasonably possible to estimate the range of change. We recognize interest and penalties related to unrecognized tax benefits in our tax provision. Our effective tax rate is influenced by the recognition of tax positions pursuant to the more likely than not standard that such positions will be sustained upon examination by the taxing authority. In addition, other factors such as changes in tax laws, rulings by taxing authorities and court decisions, and significant changes in our operations through acquisitions or divestitures can have a material impact on the effective tax rate. Differences between our estimated and actual effective income tax rates and related liabilities are recorded in the period they become known. We conduct business in various foreign countries. As a multinational corporation, we are subject to taxation in multiple locations, and the calculation of our foreign tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability no longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for United States or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities. Share-Based Compensation We account for our share-based compensation awards using the fair-value method. The grant date fair value was determined using the Black- Scholes-Merton pricing model. The Black-Scholes-Merton valuation calculation requires us to make key assumptions such as future stock price volatility, expected terms, risk-free rates, and dividend yield. Our expected volatility is derived from our volatility rate as a publicly traded company and historical volatilities of similar public companies within the Internet services and network industry. Each company’s historical volatility is weighted based on certain qualitative factors and combined to produce a single volatility factor used by us. We do not have enough historical experience as a public company to provide a reasonable estimate of the expected term; therefore, expected term is calculated using the “short-cut” method, which takes into consideration the grant’s contractual life and the vesting periods. The risk-free interest factor is based on the United States Treasury yield curve in effect at the time of the grant for zero coupon United States Treasury notes with maturities of approximately equal to each grant’s expected term. We develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. Annual changes in the estimated forfeiture rate may have a significant effect on share-based payments expense, as the effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. We have never paid cash dividends and do not currently intend to pay cash dividends, and therefore, we have assumed a 0% dividend yield. We will continue to use judgment in evaluating the expected term, volatility, and forfeiture rate related to our own share-based awards on a prospective basis, and in incorporating these factors into the model. If our actual experience differs significantly from the assumptions used to compute our share-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little share-based compensation cost. 48 Table of Contents We apply the straight-line attribution method to recognize compensation costs associated with awards that are not subject to graded vesting. For awards that are subject to graded vesting and performance based awards, we recognize compensation costs separately for each vesting tranche. We also estimate when and if performance-based awards will be earned. If an award is not considered probable of being earned, no amount of stock-based compensation is recognized. If the award is deemed probable of being earned, related compensation expense is recorded over the estimated service period. To the extent our estimates of awards considered probable of being earned changes, the amount of stock-based compensation recognized will also change. Results of Continuing Operations Comparison of the Years Ended December 31, 2012 and 2011 Revenue Revenue Year Ended December 31, 2011 2012 $180,236 (in thousands) 171,292 $ Increase (Decrease) Percent Change $ 8,944 5% Revenue increased 5%, or $8.9 million, to $180.2 million for the year ended December 31, 2012 compared to $171.3 million for the year ended December 31, 2011. The increase in revenue for the year ended December 31, 2012 compared to the year ended December 31, 2011 was primarily attributable to an increase in our VAS revenue of approximately $13.8 million. Our VAS revenue, which collectively refers to our mobility, web and video content management, web application acceleration, cloud storage, and consulting revenue, includes revenue from the date of acquisition of Delve Networks, Inc. (Delve), Clickability, and AcceloWeb. The increase in VAS revenue was primarily attributable to increases in our web content management, video publishing, and cloud storage revenue. The increase in VAS revenue was offset by a decrease in our content delivery services revenue. During 2012, we continued to increase the amount of traffic moving through our network, however, we also saw price compression. Our content delivery services revenue decreased approximately $4.8 million. The decrease was primarily due to lower reseller revenue and other non- traffic related revenue. In addition, approximately $1.8 million was due to a reduction in our network pop-build and license revenue from Microsoft. As of December 31, 2012, we had 1,451 customers compared to 1,565 as of December 31, 2011. The decrease in customers count was primarily attributable to the loss of smaller revenue generating customers. For the years ended December 31, 2012 and 2011, approximately 31% and 30%, respectively, of our total revenues were derived from our operations located outside of North America. For the years ended December 31, 2012 and 2011, we derived approximately 47% and 50%, respectively, of our international revenue from EMEA and approximately 53% and 50%, respectively, of our international revenue from Asia Pacific. During 2012, two countries, Japan and the United States, respectively, accounted for 10% or more of our total revenues. During 2011, no single country outside of the United States accounted for 10% or more of our total revenues. We anticipate revenues will increase in 2013. We expect to deliver more traffic on our network and expect continued growth in our VAS. Additionally, we expect our international revenue to continue to increase in absolute dollars and that our Asia Pacific revenue may continue to grow as a percentage of our total international revenue compared to 2012. We anticipate that our customer concentrations levels will be consistent with 2012. 49 Table of Contents Cost of Revenue Cost of revenue Year Ended December 31, 2011 2012 $111,715 (in thousands) 109,586 $ Increase (Decrease) Percent Change $ 2,129 2% 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 ISPs, 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 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. Cost of revenue increased 2%, or $2.1 million, to $111.7 million for the year ended December 31, 2012 compared to $109.6 million for the year ended December 31, 2011. This increase was primarily due to an increase in payroll and related employee costs of approximately $2.5 million primarily associated with increased salaries and bonus accrual, increased professional fees of approximately $0.7 million, consisting of approximately $0.5 million of consulting fees and approximately $0.1 million of recruiting fees, and an increase in other costs of approximately $1.3 million. The increase in other costs was primarily due to $0.5 million of other costs associated with the delivery of our services and increased fees and licenses of approximately $0.5 million. These increases were offset by a decrease of approximately $2.2 million in bandwidth and co-location fees. The decrease in bandwidth and co-location fees was primarily due to reduced transit costs of approximately $3.2 million, reduced rack fees of approximately $0.3 million, and a reduction of approximately $0.7 million in other recurring costs of sales and services, offset by increased peering costs of approximately $2.4 million. For the year ended December 31, 2012 share-based compensation expense decreased $0.3 million compared to the same period of the prior year. Cost of revenue in 2012 and 2011 was composed of the following: Bandwidth and co-location fees Depreciation — network Payroll and related employee costs Share-based compensation expense Professional fees and outside services Travel and travel-related expenses Royalty expenses Other costs Total cost of revenue Year Ended December 31, 2012 2011 (in millions) $ $ 55.2 28.0 18.1 2.1 1.6 0.9 0.9 4.9 111.7 $ $ 57.4 28.0 15.6 2.4 0.9 0.9 0.8 3.6 109.6 We anticipate cost of revenue will increase in 2013. We expect to deliver more traffic on our network, which would result in higher expenses associated with increased bandwidth, peering, rack and co-location costs to support increased traffic; however, such costs are likely to be partially offset by lower bandwidth costs per unit. We anticipate depreciation expense related to our network equipment to decrease compared to 2012 in absolute dollars. Additionally, we expect an increase in payroll and related costs, as we continue to make investments in our network to service our expanding customer base as well as our increase in VAS personnel. We expect that share-based compensation expense will decrease in absolute dollars and remain consistent with 2012 as a percentage of revenue. 50 Table of Contents General and Administrative General and administrative Year Ended December 31, 2012 2011 $36,003 (in thousands) 32,138 $ Increase (Decrease) Percent Change $ 3,865 12% General and administrative expenses consist primarily of the following components: • payroll, share-based compensation and other related costs, including related expenses for executive, finance, legal, business applications, internal network management, human resources and other administrative personnel; fees for professional services and litigation expenses; rent and other facility-related expenditures for leased properties; the provision for doubtful accounts; and non-income related taxes. • • • • General and administrative expenses increased 12%, or $3.9 million, to $36.0 million for the year ended December 31, 2012 compared to $32.1 million for the year ended December 31, 2011. This increase was primarily due to an increase in professional fees of $2.3 million which was due to increased consulting and outside professional services of $1.5 million, legal fees related to intellectual property matters and other matters of $0.4 million, and increased recruiting fees of approximately $0.4 million. In addition, our bad debt expense increased $0.9 million and stock-based compensation increased $0.4 million. The increase in bad debt expense included approximately $0.8 million for a related party entity. Our payroll and payroll-related costs increased approximately of $0.3 million during 2012. These increases were off-set by a decrease in litigation costs of approximately $0.9 million, and a decrease in travel and travel-related costs of approximately $0.2 million. Other costs increased $1.1 million which was primarily due to increased facilities and facilities-related costs of $0.2 million, primarily due to our relocation to our new worldwide headquarters in Tempe, Arizona in April 2011, and increased fees, licenses and non-income taxes of $1.8 million, off-set by the reversal of previously recorded contingent consideration for which we no longer believe that payment is probable of approximately $0.8 million and reduced office supplies of approximately $0.2 million. Other expenses include such items as rent, utilities, telephone, insurance, fees and licenses, and property taxes. Additionally, general and administrative share-based compensation expense increased $0.4 million for the year ended December 31, 2012 compared to the year ended December 31, 2011. General and administrative expenses in 2012 and 2011 were composed of the following: Payroll and related employee costs Professional fees Share-based compensation Bad debt expense Travel and travel related expenses Litigation expenses Other expenses Total general and administrative 51 Year Ended December 31, 2012 2011 (in millions) $ $ 9.4 8.1 6.5 2.0 0.6 0.5 8.9 36.0 $ $ 9.1 5.8 6.1 1.1 0.8 1.4 7.8 32.1 Table of Contents In 2013, we expect our general and administrative expenses to decrease in absolute dollars and as a percentage of revenue. During 2013, we expect to see increased salaries and related employee cost. These increases will be offset by lower consulting, bad debt expense and lower non- income tax related taxes. We expect that share-based compensation expense will decrease in absolute dollars and decrease as a percentage of revenue compared to 2012. Sales and Marketing Sales and marketing Year Ended December 31, 2012 2011 $45,044 (in thousands) 40,081 $ Increase (Decrease) Percent Change $ 4,963 12% Sales and marketing expenses consist primarily of payroll and related costs, share-based compensation and commissions for personnel engaged in marketing, sales and service support functions, professional fees, travel and travel-related expenses, and advertising and promotional expenses. Sales and marketing expenses increased 12%, or $4.9 million, to $45.0 million for the year ended December 31, 2012 compared to $40.1 million for the year ended December 31, 2011. This increase was primarily due to an increase in payroll and related employee costs of $3.0 million, primarily due to increased salaries and benefits of $2.5 million, and to a lesser extent increased variable compensation costs of $0.4 million, an increase in travel and travel-related expenses of $0.7 million, an increase in professional fees of $0.5 million, primarily for consulting, recruiting fees, and casual services, an increase in marketing programs of $0.3 million, and an increase in other costs of $1.1 million. The increase in other costs was primarily due to increased facility and facility-related costs, fees and licenses, office supplies, and costs associated with our website design. Additionally, sales and marketing share-based compensation expense decreased $0.7 million for the year ended December 31, 2012 compared to the same period of the prior year. Sales and marketing expenses in 2012 and 2011 were composed of the following: Year Ended December 31, 2011 2012 Payroll and related employee costs Travel and travel-related expense Share-based compensation expense Marketing programs Professional fees and outside services Other expenses Total sales and marketing $ $ 27.3 3.9 3.1 2.6 2.0 6.1 45.0 24.3 3.2 3.8 2.3 1.5 5.0 40.1 $ (in millions) $ We anticipate our sales and marketing expense will increase in 2013 in absolute dollars and decrease as a percentage of revenue compared to 2012. The increase in absolute dollars is due to expected increases in marketing expenses,variable compensation on higher forecast sales, and an increase in facility and facility-related expenses for our sales and marketing personnel. We expect that share-based compensation expense will decrease in absolute dollars and as a percentage of revenue in 2013 compared to 2012. 52 Table of Contents Research and Development Research and development Year Ended December 31, 2011 2012 $ 20,182 (in thousands) 17,146 $ Increase (Decrease) Percent Change $ 3,036 18% Research and development expenses consist primarily of payroll and related costs and share-based compensation expense for research and development personnel, who design, develop, test, and enhance our services, network, and software. Research and development expenses increased 18%, or $3.0 million, to $20.2 million for the year ended December 31, 2012, compared to $17.1 million for the year ended December 31, 2011. This increase was primarily due to an increase of $3.2 million in payroll and related employee costs and increases in professional fees of $0.3 million, and in other costs of $0.4 million. The increase in payroll and related employee costs was primarily due to our hiring of additional network and software engineering personnel. Other expenses include such items as telephone, fees and licenses, office supplies and other employee costs. Additionally, research and development share-based compensation expense decreased $0.8 million for the year ended December 31, 2012 compared to the same period of the prior year. Research and development expenses in 2012 and 2011 were composed of the following: Payroll and related employee costs Share-based compensation expense Professional fees and outside services Travel and travel-related expense Other Total research and development Year Ended December 31, 2012 2011 (in millions) $ $ 15.0 2.8 1.0 0.5 0.9 20.2 $ $ 11.8 3.6 0.7 0.5 0.5 17.1 We anticipate our research and development expenses will increase in 2013 in absolute dollars and increase as a percentage of revenue as we continue to make investments in our core technology, refinements and additions to our other service offerings. We expect increased payroll and related employee costs associated with continued hiring of research and development personnel. We expect that share-based compensation expense will decrease in both absolute dollars and as a percentage of revenue in 2013 compared to 2012. Depreciation and Amortization (Operating Expenses) Depreciation and amortization Year Ended December 31, 2011 2012 $ 5,843 (in thousands) 4,787 $ Increase (Decrease) Percent Change $ 1,056 22% Depreciation expense consists of depreciation on equipment and furnishing used by general administrative, sales and marketing, and research and development personnel. Amortization expense consists of amortization of intangible assets acquired in business combinations. Depreciation and amortization expenses increased 22%, or approximately $1.1 million, to $5.8 million for the year December 31, 2012, compared to $4.8 million for the year ended December 31, 2011. The increase in 53 Table of Contents depreciation and amortization expense was due to an increase of approximately $0.5 million in amortization of intangible assets acquired in business combinations, and to increased general and administrative depreciation and amortization of $0.5 million. For the year ended December 31, 2012, amortization of intangibles was approximately $2.9 million. Based on our other intangible assets as of December 31, 2012, aggregate expense related to amortization of other intangible assets is expected to be $2.8 million for 2013, and $2.1 million, $1.1 million, and $0.3 million for fiscal years 2014, 2015, and 2016, respectively. Interest Expense Interest expense Year Ended December 31, 2011 2012 $ 177 (in thousands) 299 $ Increase (Decrease) Percent Change $ (122) (41)% Interest expense consisted primarily of interest paid on capital leases and accretion of contingent consideration related to our business acquisitions. Interest expense decreased 41%, or $0.1 million, to $0.2 million for the year ended December 31, 2012, compared to $0.3 million for the year ended December 31, 2011. Interest expense for year ended December 31, 2012, was primarily comprised of interest paid on capital leases. Interest expense for the year ended December 31, 2011, was comprised of interest paid on capital leases of approximately $186,000, the accretion of contingent consideration related to our business acquisitions of approximately $97,000 and bank fees of approximately $16,000. As of December 31, 2012, with the exception of our capital leases, we had no outstanding credit facilities. Interest Income Interest income Year Ended December 31, 2011 2012 $ 356 (in thousands) 752 $ Increase (Decrease) Percent Change $ (396) (53)% Interest income includes interest earned on invested cash balances and marketable securities. Interest income decreased 53%, or $0.4 million to $0.4 million for the year ended December 31, 2012, compared to $0.8 million for the year ended December 31, 2011. The decrease in interest income during the year ended December 31, 2012 was primarily due to lower interest rates on our cash and marketable securities balances. Other (Expense) Income Other (expense) income Year Ended December 31, 2011 2012 $ (602) (in thousands) (311) $ Increase (Decrease) Percent Change $ 291 94% Other expense increased $0.3 million to $0.6 million for year ended December 31, 2012, compared to $0.3 million for the year ended December 31, 2011. Other income (expense) consists primarily of foreign currency gains and losses. 54 Table of Contents Income Tax Expense (Benefit) Income tax expense (benefit) Year Ended December 31, 2012 2011 $ 481 (in thousands) (2,238) $ Increase (Decrease) Percent Change $ (2,719) (121)% We had an income tax expense during the year ended December 31, 2012 of $0.5 million or 2% of our pre-tax loss of $29.6 million which was different than our statutory income tax rate due primarily to our providing for a valuation allowance on tax assets in certain jurisdictions, state tax, and foreign tax for the year. For the year ended December 31, 2011, we had an income tax benefit of $2.2 million or 7% of our pre-tax loss of $32.3 million. (Loss) Income from Discontinued Operations (Loss) income from discontinued operations Year Ended December 31, 2011 2012 $ (2,861) (in thousands) 4,778 $ Increase (Decrease) Percent Change $ (7,639) (160)% On September 1, 2011, we completed the sale of EyeWonder and subsidiaries and chors video and rich media advertising services to DG. The sale of EyeWonder and chors met the criteria for discontinued operations during the year ended December 31, 2011. Accordingly, the results of operations related to EyeWonder and chors were classified as discontinued operations in the periods presented. See Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this annual report on Form 10-K for additional information about discontinued operations. Comparison of the Years Ended December 31, 2011 and 2010 Revenue Revenue Year Ended December 31, 2011 2010 $171,292 (in thousands) 154,223 $ Increase (Decrease) Percent Change $ 17,069 11% Revenue increased 11%, or $17.0 million, to $171.3 million for the year ended December 31, 2011 as compared to $154.2 million for the year ended December 31, 2010. The increase in revenue for the year ended December 31, 2011 as compared to the year ended December 31, 2010, was primarily attributable to an increase in our value-added services revenue of approximately $19.6 million. Our value-added services revenue, which collectively refers to our SaaS solutions for mobility, web and video content management, web application acceleration, cloud storage, and consulting, includes revenue from the date of acquisition of Delve, Clickability and AcceloWeb. The increase in value-added services revenue is primarily attributable to increases in our web content management, storage, video publishing, and mobile product offerings. The increase in value- added services revenue was offset by a decrease in our content delivery services revenue of approximately $2.5 million. During 2011, we continued to increase the amount of traffic moving through our network; however, the revenue generated from the increase in traffic grew at a much lower rate and we continue to see a decline in our average unit sales price. Our core content delivery services revenue increased approximately $3.7 million; however, this increase was offset by a decrease of approximately $6.2 million in our network pop-build and license revenue from Microsoft. As of December 31, 2011, we had approximately 1,565 customers as compared to approximately 1,567 as of December 31, 2010. 55 Table of Contents For the years ended December 31, 2011 and 2010, approximately 30% and 27%, respectively, of our total revenues were derived from our operations located outside of North America. For the years ended December 31, 2011 and 2010, we derived approximately 50% and 57%, respectively, of our international revenue from EMEA and approximately 50% and 43%, respectively, of our international revenue from Asia Pacific. No single country outside of the United States accounted for 10% or more of revenues during these periods. Cost of Revenue Cost of revenue Year Ended December 31, 2010 2011 $109,586 (in thousands) 94,582 $ Increase (Decrease) Percent Change $ 15,004 16% Cost of revenue includes fees paid to network providers for bandwidth and backbone, costs incurred for non-settlement free peering and connection to ISPs, and fees paid to data center operators for co-location of our network equipment. Cost of revenue also includes depreciation of network equipment used to deliver our content delivery services, payroll and related costs and equity-related compensation for our network operations, and professional services personnel. Cost of revenue increased 16%, or $15.0 million, to $109.6 million for the year ended December 31, 2011 as compared to $94.6 million for the year ended December 31, 2010. These increases were primarily due to an increase in aggregate bandwidth and co-location fees of $6.1 million. This increase was primarily due to increased peering costs of approximately $7.6 million, increased costs associated with our transit backbone of approximately $0.7 million, and an increase in rack fees of approximately $0.5 million, associated with increased amounts of deployed network assets. These increases were offset by a decrease in our cost of bandwidth transit of approximately $2.3 million, and a decrease in other recurring cost of sales of approximately $0.4 million. In addition, depreciation increased approximately $5.8 million, due to increased amounts of deployed assets, as we continue to build-out our expanding network and to refresh our network equipment, and an increase in payroll and related employee costs of $2.9 million associated with increased staff to build and operate our global computing platform, as well as increased and professional services personnel. Additionally, we had increases in professional fees and outside services of $0.3 million, primarily due to an increase in outside consulting expense, an increase in royalty expense of $0.4 million, and an increase in travel and travel-related expenses of $0.2 million. These increases were offset by a decrease in other costs of $0.7 million. The decrease in other costs is primarily related to $0.8 million of costs in 2010 associated with the sale of equipment to a customer and reduced fees and licenses of approximately $0.4 million in 2011. These decreases were offset by an increase of approximately $0.4 million in other costs associated with the delivery of our services and an increase in office and computer supplies of approximately $0.1 million. Additionally, for both the years ended December 31, 2011 and 2010, cost of revenue includes share-based compensation expense of approximately $2.4 million. 56 Table of Contents Cost of revenue in 2011 and 2010 was composed of the following: Bandwidth and co-location fees Depreciation — network Payroll and related employee costs Share-based compensation expense Travel and travel-related expenses Professional fees and outside services Royalty expenses Other costs Total cost of revenue General and Administrative General and administrative Year Ended December 31, 2011 2010 (in millions) $ $ 57.4 28.0 15.6 2.4 0.9 0.9 0.8 3.6 109.6 $ $ 51.3 22.2 12.7 2.4 0.7 0.6 0.4 4.3 94.6 Year Ended December 31, 2011 2010 (in thousands) Increase (Decrease) Percent Change $ 32,138 $ 29,827 $ 2,311 8% General and administrative expenses consist primarily of the following components: • • • • • payroll, share-based compensation and other related costs, including related expenses for executive, finance, legal, business applications, internal network management, human resources, and other administrative personnel; fees for professional services and litigation expenses; rent and other facility-related expenditures for leased properties; the provision for doubtful accounts; and non-income related taxes. General and administrative expenses increased 8%, or $2.3 million, to $32.1 million for the year ended December 31, 2011 as compared to $29.8 million for the year ended December 31, 2010. These increases were primarily due to an increase in payroll and related employee costs of $0.6 million, which was primarily due to new hires and, to a lesser extent, to the addition of general and administrative personnel of our business acquisitions, an increase in travel and travel-related expenses of $0.2 million, and an increase in other costs of $2.4 million. The increase in other costs was primarily due to increased facilities and facilities-related costs of $1.3 million, primarily due to our relocation to our new worldwide headquarters in Tempe, Arizona in April 2011, increased fees, licenses and non-income taxes of $0.6 million, an increase in telephone and other employee costs of $0.3 million and an increase in general office expenses (office and computer supplies, postage and shipping) of approximately $0.2 million. These increases were offset by a decrease in litigation expenses of $0.7 million and a decrease in bad debt expense of $0.2 million. Other expenses include such items as rent, utilities, telephone, insurance, fees and licenses, and property taxes. Additionally, general and administrative share-based compensation expense increased $0.1 million for the year ended December 31, 2011 compared to the year ended December 31, 2010. 57 Table of Contents General and administrative expenses in 2011 and 2010 were composed of the following: Payroll and related employee costs Share-based compensation Professional fees Litigation expenses Bad debt expense Travel and travel related expenses Other expenses Total general and administrative Sales and Marketing Sales and marketing Year Ended December 31, 2011 2010 (in millions) $ $ 9.1 6.1 5.8 1.4 1.1 0.8 7.8 32.1 $ $ 8.5 6.0 5.9 2.1 1.3 0.6 5.4 29.8 Year Ended December 31, 2011 2010 Increase (Decrease) Percent Change $ 40,081 $ 38,614 $ 1,467 4% (in thousands) Sales and marketing expenses consist primarily of payroll and related costs, share-based compensation and commissions for personnel engaged in marketing, sales and service support functions, professional fees (consultants and recruiting fees), travel and travel-related expenses, as well as advertising and promotional expenses. Sales and marketing expenses increased 4%, or $1.5 million, to $40.1 million for the year ended December 31, 2011, as compared to $38.6 million for the year ended December 31, 2010. The increase in sales and marketing expenses was primarily due to an increase in marketing programs of approximately $0.8 million, an increase in travel and travel-related expenses of $0.2 million and an increase in other costs of $1.9 million. The increase in other costs was primarily due to increased employee events of $0.5 million, increased fees and licenses of $0.4 million, increased facility and facility-related costs of $0.3 million, increased training and seminars of $0.2 million and an increase in telephone costs of $0.2 million. These increases were offset by a decrease in share-based compensation of $1.0 million, a decrease in payroll and payroll-related expenses of $0.3 million, primarily due to increased salaries and related employee costs of $1.6 million, which included approximately $0.5 million of salaries and related employee costs from our business acquisitions, offset by lower variable compensation of $1.3 million and a lower annual bonus accrual of approximately $0.6 million. In addition, professional fees and outside services decreased $0.1 million. As mentioned above, sales and marketing share-based compensation expense decreased $1.0 million for the year ended December 31, 2011 compared to the year ended December 31, 2010. 58 Table of Contents Sales and marketing expenses in 2011 and 2010 were composed of the following: Year Ended December 31, 2010 2011 Payroll and related employee costs Share-based compensation expense Travel and travel-related expense Marketing programs Professional fees and outside services Other expenses Total sales and marketing Research and Development Research and development (in millions) $ $ $ 24.3 3.8 3.2 2.3 1.5 5.0 40.1 24.6 4.8 3.0 1.5 1.6 3.1 38.6 $ Year Ended December 31, 2011 2010 (in thousands) Increase (Decrease) Percent Change $ 17,146 $ 10,841 $ 6,305 58% Research and development expenses consisted primarily of payroll and related costs and share-based compensation expense for research and development personnel, who design, develop, test, and enhance our services, network, and software. Research and development expenses increased 58%, or $6.3 million, to $17.1 million for the year ended December 31, 2011, as compared to $10.8 million for the year ended December 31, 2010. The increase in research and development expenses was primarily due to an increase of $5.0 million in payroll and related employee costs, primarily due to the addition of research and development personnel from our acquisitions, an increase in share-based compensation of $0.6 million, an increase in professional fees and outside services of $0.3 million and an increase in other costs of $0.4 million. The increases in payroll and related employee costs is primarily associated with our hiring of additional network and software engineering personnel and the addition of research and development personnel resulting from our business acquisitions. Other expenses include such items as travel and travel-related expenses, consulting, contract labor, telephone, and office supplies. Research and development expenses in 2011 and 2010 were composed of the following: Payroll and related employee costs Share-based compensation expense Professional fees and outside services Other Total research and development Depreciation and Amortization (Operating Expenses) Year Ended December 31, 2011 2010 (in millions) $ $ 11.8 3.6 0.7 1.0 17.1 $ $ 6.8 3.0 0.4 0.6 10.8 Depreciation and amortization 59 Year Ended December 31, 2011 2010 Increase (Decrease) Percent Change (in thousands) $ 4,787 $ 2,460 $ 2,327 95% Table of Contents Depreciation expense consisted of depreciation on equipment and furnishing used by general administrative, sales and marketing, and research and development personnel. Amortization expense consists of amortization of intangible assets acquired in business combinations. Depreciation and amortization expenses increased 95%, or $2.3 million, to $4.8 million for the year December 31, 2011, as compared to $2.5 million for the year ended December 31, 2010. The increase in depreciation and amortization expense was primarily due to an increase of approximately $2.0 million in amortization of intangible assets acquired in business combinations, and to a lesser extent increased general and administrative depreciation and amortization of $0.3 million when compared to the year ended December 31, 2010. For the year ended December 31, 2011, amortization of intangibles was approximately $2.3 million. Interest Expense Interest expense Year Ended December 31, 2011 2010 Increase (Decrease) Percent Change $ 299 $ 62 $ 237 382% (in thousands) Interest expense consisted of interest paid on capital leases and accretion of contingent consideration related to our business acquisitions. Interest expense increased 382%, or $237,000, to $299,000 for the year ended December 31, 2011, as compared to $62,000 for the year ended December 31, 2010. The increase in interest expense was primarily related to increased interest expense on capital leases (approximately $127,000), the accretion of contingent consideration related to our business acquisitions (approximately $97,000), and other interest (approximately $13,000). Interest expense for the year ended December 31, 2010 included interest paid in association with a filing of non-income tax related payments and interest paid on capital leases. As of December 31, 2011, with the exception of our capital leases, we had no outstanding credit facilities. Interest Income Interest income Year Ended December 31, 2011 $ 752 2010 (in thousands) $ 910 Increase (Decrease) Percent Change $ (158) (17)% Interest income included interest earned on invested cash balances and marketable securities. Interest income decreased 17%, or $158,000 to $752,000 for the year ended December 31, 2011, as compared to $910,000 for the year ended December 31, 2010. Other (Expense) Income Other (expense) income Year Ended December 31, 2011 $ (311) 2010 (in thousands) (250) $ Increase (Decrease) Percent Change $ 61 24% Other expense increased $61,000 to $311,000 for year ended December 31, 2011, as compared to $250,000 for the year ended December 31, 2010. Other income (expense) consists primarily of foreign currency gains and losses. 60 Table of Contents Income Tax (Benefit) Expense Income tax (benefit) expense Year Ended December 31, 2011 2010 Increase (Decrease) Percent Change $ (2,238) $ 727 $ (2,965) (408)% (in thousands) We had an income tax benefit during the year ended December 31, 2011 of $2.2 million or 7% of our pre-tax loss of $32.3 million which was different than our statutory income tax rate due primarily to the tax benefit on losses from continuing operations associated with the sale of EyeWonder and chors. For the year ended December 31, 2010, we had an income tax provision of $0.7 million or (3%) of our pre-tax loss of $21.5 million. Income (Loss) from Discontinued Operations Income (loss) from discontinued operations Year Ended December 31, 2011 $ 4,778 2010 (in thousands) $ 1,879 Increase (Decrease) Percent Change $ 2,899 154% Discontinued operations relates to our EyeWonder and chors rich media advertising services. On September 1, 2011, we completed the sale of EyeWonder and chors to DG. See Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this annual report on Form 10- K for additional information about discontinued operations. Liquidity and Capital Resources To date, we have financed our operations primarily through the following transactions: • • • • • • • • private sales of common and preferred stock and subordinated notes; an initial public offering of our common stock in June 2007; an underwritten public offering of our common stock in March 2011; borrowing on capital leases; borrowing on credit facilities; sale of EyeWonder and chors in September 2011; sale of our cost basis investment in Gaikai in August 2012; and cash generated by operations. As of December 31, 2012, our cash, cash equivalents and marketable securities classified as current totaled $128.0 million. Included in this amount is approximately $5.3 million of cash and cash equivalents held outside the United States. Cash Flow for the Years Ended December 31, 2012, 2011, and 2010 Operating Activities Net cash provided by operating activities of continuing operations increased by $7.6 million, with net cash provided by operating activities equaling $12.5 million for the year ended December 31, 2012, compared to net cash provided by operating activities of approximately $4.9 million for the year ended December 31, 2011. The change in operating cash flows comparing the year ended December 31, 2012 to the year ended December 31, 2011 was primarily due to changes in operating assets and liabilities. Cash provided by operating activities of continuing operations related to changes in operating assets and liabilities was $1.7 million during the year ended December 31, 2012 compared to $11.0 million of cash used during the year ended December 31, 2011. The 61 Table of Contents difference relates primarily to changes in prepaid and other current assets and other assets associated with lower advanced payments for bandwidth and backbone services in 2012, an increase in accounts payable associated with the timing of vendor payments and less cash used related to payments on other current liabilities during 2012 compared to 2011. Net cash provided by operating activities of continuing operations decreased by $10.1 million, with net cash provided by operating activities equaling $4.9 million for the year ended December 31, 2011, compared to net cash provided by operating activities of approximately $15.0 million for the year ended December 31, 2010. The change in operating cash flows comparing the year ended December 31, 2011 to the year ended December 31, 2010 was primarily due to a larger net loss from continuing operations in 2011 compared to 2010, in addition to changes in operating assets and liabilities. Cash used due to changes in operating assets and liabilities was $11.0 million in the year ended December 31, 2011, compared to cash used of $4.2 million in the year ended December 31, 2010. The change related primarily to greater cash usage during the year ended December 31, 2011 related primarily to an increase in prepaid expenses and other current and long-term assets associated with advanced payments for bandwidth and backbone services with a telecommunications provider, a decrease in accounts payable related to the timing of payments, a decrease in other current liabilities primarily related to employee salary related expenditures in 2011, and a decrease in deferred revenue. We expect that cash provided by operating activities may not be sufficient to cover new purchases of property and equipment during 2013, re-purchases of common stock and potential litigation expenses associated with patent litigation. The timing and amount of future working capital changes and our ability to manage our DSO will also affect the future amount of cash used in or provided by operating activities. Investing Activities Net cash used in investing activities of continuing operations was $0.5 million for the year ended December 31, 2012, compared to cash provided by investing activities of $15.5 million for the year ended December 31, 2011. Net cash used in investing activities was principally comprised of cash used for the purchase of short-term marketable securities and capital expenditures primarily for computer equipment associated with the build-out and expansion of our global computing platform, offset by cash generated from maturities of short-term marketable securities, cash collected on the DG receivable, and proceeds from the sale of our investment in Gaikai. In May 2010, we made a strategic investment in Gaikai, a private cloud-based gaming technology company. In August 2012, Sony acquired Gaikai for approximately $380 million and we received approximately $10.2 million in proceeds from the sale of our investment in Gaikai and expect to receive an additional $1.2 million depending upon the amount of indemnification claims made during the 15 month indemnification period. Cash provided by investing activities was $15.5 million for the year ended December 31, 2011, compared to cash used in investing activities of $47.6 million for the year ended December 31, 2010. Cash provided by investing activities was principally comprised of cash received from DG for the sale of EyeWonder and chors, offset by cash used for the acquisition of businesses, the purchase of short-term marketable securities, and capital expenditures primarily for computer equipment associated with the build-out and expansion of our global computing platform, offset by cash generated from the sale of short-term marketable securities. On May 9, 2011, we acquired AcceloWeb, a privately-held provider of advanced technology that helps speed the presentation of web sites and applications located in Tel Aviv, Israel. The purchase price included both cash and company stock for the acquisition. Cash paid, net of cash acquired, was $4.7 million. On May 2, 2011, we acquired Clickability, a privately-held SaaS provider of web content management located in San Francisco, California. The purchase price included both cash and company stock for the acquisition. Cash paid, net of cash acquired, was $2.7 million. 62 Table of Contents On September 1, 2011, we sold EyeWonder and chors to DG for net proceeds of $61.0 million ($66.0 million gross cash proceeds less $5.0 million held in escrow) plus an estimated $10.9 million receivable. As of December 31, 2012, approximately $7.4 million of the receivable had been received from DG. We expect to have ongoing capital expenditure requirements as we continue to invest in and expand our global computing platform. Financing Activities Net cash used in financing activities of continuing operations was approximately $23.1 million for the year ended December 31, 2012, compared to $50.8 million of net cash provided by financing activities of continuing operations for the year ended December 31, 2011. Net cash used in financing activities during the year ended December 31, 2012 related to payments made for the purchase of shares of our common stock under our stock repurchase plans of approximately $20.9 million, payments made on our capital lease obligations of approximately $1.7 million, and payments of employee tax withholdings related to RSUs of approximately $0.7 million, offset by cash received from the exercise of stock options of $0.2 million. Net cash provided by financing activities increased to approximately $50.8 million for the year ended December 31, 2011 compared to $0.2 million for the year ended December 31, 2010. Net cash provided by financing activities in the year ended December 31, 2011 primarily related to proceeds from the public offering of our common stock of approximately $77.0 million and the exercise of stock options of $0.7 million offset by payments made for the re-purchase of our common stock of approximately $24.4 million, payments of employee tax withholdings related to restricted stock of approximately $1.2 million, and payments made on our capital lease obligations of approximately $1.4 million. As of December 31, 2012, we had no outstanding debt other than the aforementioned capital leases. During 2012, we completed two stock repurchase plans and commenced a third. On October 29, 2012, our Board authorized a third common stock repurchase plan that authorized us to repurchase up to $10 million of our shares of common stock, exclusive of any commissions, markups or expenses, from time to time through May 9, 2013. Any repurchased shares will be cancelled and return to authorized but unissued status. During the three months ended December 31, 2012, we purchased and cancelled approximately 2.2 million shares under the third repurchase plan for approximately $4.6 million (including commissions). In May 2012, our Board approved a second common stock repurchase plan that authorized us to repurchase up to $15 million of our shares of common stock, exclusive of any commissions, markups or expenses, from time to time through December 15, 2012. Any repurchased shares will be cancelled and return to authorized but unissued status. During the year ended December 31, 2012, we purchased and cancelled approximately 5.7 million shares of common stock for approximately $15.0 million ($15.1 million including commissions) under the second repurchase plan. Our second stock repurchase plan is now complete. On September 12, 2011, our Board approved an initial repurchase plan that authorized us to repurchase up to $25 million of our shares of common stock, exclusive of any commissions, markups or expenses, from time to time through March 12, 2012. During the year ended December 31, 2012, we repurchased and cancelled approximately 0.3 million shares under the initial repurchase plan. During the period September 12, 2011 through March 12, 2012, we repurchased and cancelled approximately 9.7 million shares of common stock for approximately $25.0 million ($25.2 million including commissions) under the initial repurchase plan. All repurchased shares were cancelled and returned to authorized but unissued status. Our initial repurchase plan is complete. On March 2, 2011, we completed an underwritten public offering of our common stock in which we sold and issued 11,500,000 shares of our common stock, including 1,500,000 shares subject to the underwriters’ 63 Table of Contents over-allotment option, at a price to the public of $7.10 per share. The newly issued shares of common stock began trading on the Nasdaq Global Select Market on March 2, 2011. We raised a total of approximately $81.7 million in gross proceeds from the offering, or approximately $77.0 million in net proceeds after deducting underwriting discounts and commissions of approximately $3.9 million and other offering costs of approximately $0.8 million. 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 changes in our capital and financial structure due to debt repurchases and issuances, stock option exercises, sales of equity investments, and similar events. We believe that our existing cash, cash equivalents, and marketable securities 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. Contractual Obligations, Contingent Liabilities, and Commercial Commitments In the normal course of business, we make certain long-term commitments for operating leases, primarily office facilities, bandwidth, and computer rack space. These leases expire on various dates ranging from 2013 to 2019. We expect that the growth of our business will require us to continue to add to and increase our long-term commitments in 2013 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 December 31, 2012 over the next five years and thereafter (in thousands): Contractual Obligations as of December 31, 2012 Operating Leases Bandwidth leases Rack space leases Real estate leases Total operating leases Capital leases Total commitments Off Balance Sheet Arrangements Payments Due by Period Less than 3- Total 1 year 1-3 years 5 years $22,105 51,840 15,313 89,258 2,251 $91,509 $ 14,680 18,858 3,559 37,097 1,377 $ 38,474 $ 6,580 30,180 5,667 42,427 736 $43,163 $ 845 2,802 3,833 7,480 138 $7,618 More than 5 years $ $ — — 2,254 2,254 — 2,254 As of December 31, 2012, we are not involved in any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. Use of Non-GAAP Financial Measures To evaluate our business, we consider and use Non-GAAP net income (loss) and Adjusted EBITDA as a supplemental measure 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 because it allows us to illustrate the impact of the effects of share-based compensation, litigation expenses, amortization of intangibles, acquisition related expenses, gain on sales of cost basis investment, and discontinued operations. We define EBITDA as GAAP net income (loss) before interest income, interest expense, gain on sales of cost basis 64 Table of Contents investment, other income and expense, provision for income taxes, depreciation and amortization, and discontinued operations. We believe that EBITDA provides a useful metric to investors to compare us with other companies within our industry and across industries. We define Adjusted EBITDA as EBITDA adjusted for operational expenses that we do not consider reflective of our ongoing operations. We use Adjusted EBITDA as a supplemental measure to review and assess operating performance. We also believe use of Adjusted EBITDA facilitates investors’ use of operating performance comparisons from period to period. In addition, it should be noted that our performance-based executive officer bonus structure is tied closely to our performance as measured in part by certain non-GAAP financial measures. In our February 19, 2013 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 United States GAAP, and are not measures of operating income, operating performance or liquidity presented in accordance with United States GAAP. Our Non-GAAP net 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 United States 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; they do not reflect changes in, or cash requirements for, our working capital needs; they do not reflect the cash requirements necessary for litigation costs; they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt that we may incur; they 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 EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures. We compensate for these limitations by relying primarily on our GAAP results and using Non-GAAP net income (loss) 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. 65 Table of Contents Reconciliation of Non-GAAP Financial Measures In accordance with the requirements of Regulation G issued by the SEC, we are presenting the most directly comparable GAAP financial measures and reconciling the non-GAAP financial metrics to the comparable GAAP measures. Reconciliation of GAAP Net Loss to Non-GAAP Net Loss (In thousands) (Unaudited) GAAP net loss Share-based compensation Litigation defense expenses Acquisition related expenses Amortization of intangibles Gain on sale of cost basis investment Loss (income) from discontinued operations Non-GAAP net loss Reconciliation of GAAP Net Loss to EBITDA to Adjusted EBITDA (In thousands) (Unaudited) GAAP net loss Depreciation and amortization Interest expense Gain on sale of cost basis investment Interest and other (income) expense Income tax expense (benefit) (Income) loss from discontinued operations EBITDA Share-based compensation Litigation defense expenses Acquisition related expenses Adjusted EBITDA New Accounting Pronouncements For the Year Ended December 31, 2011 $(25,288) 15,881 1,376 776 2,350 — (4,778) $ (9,683) 2012 $(32,896) 14,475 527 (388) 2,871 (9,420) 2,861 $(21,970) 2010 $(20,351) 16,182 2,149 1,527 319 — (1,879) $ (2,053) For the Year Ended December 31, 2011 $(25,288) 32,817 299 — (441) (2,238) (4,778) 371 $ 15,881 1,376 776 $ 18,404 2012 $(32,896) 33,835 177 (9,420) 246 481 2,861 $ (4,716) 14,475 527 (388) $ 9,898 2010 $(20,351) 24,684 62 — (660) 727 (1,879) $ 2,583 16,182 2,149 1,527 $ 22,441 We do not expect the provisions of recently issued accounting standards to have a significant impact on our future financial statements and disclosures. 66 Table of Contents Item 7A. Interest Rate Risk Quantitative and Qualitative Disclosures about Market 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. Our outstanding capital lease obligations bear fixed interest rates and fluctuations in interest rates. We do not believe that a 10% change in interest rates would have a significant impact on our interest income, operating results, or liquidity. Foreign Currency Risk We operate in North America, EMEA and Asia Pacific, including Japan. 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 revenues associated with certain international customers. To the extent that the U.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 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. We performed a sensitivity analysis of our foreign currency exposure as of December 31, 2012 to assess the potential impact of fluctuations in exchange rates for all foreign denominated revenues and expenses. 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, 2012 would have been higher by approximately $3.0 million. 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. As of December 31, 2010, our international subsidiaries had the U.S. dollar as their functional currencies. During the first quarter of 2011, we analyzed the various economic factors of our international subsidiaries and determined that the operations of our subsidiaries that were previously determined to operate in a U.S. dollar functional currency environment had changed and that their functional currencies should be changed to the local currencies. Effective January 1, 2011, the adjustment from translating these subsidiaries’ financial statements from the local currency to the U.S. dollar was recorded as a separate component of accumulated other comprehensive income (loss). These foreign currency translation adjustments reflect the translation of the balance sheet at period end exchange rates and the income statement at an average exchange rate in effect during each period. Upon the change in functional currency, we recorded a cumulative translation adjustment of approximately $0.5 million, which is included in the consolidated balance sheet. Because of the change in exchange rates between reporting periods and changes in certain account balances, the foreign currency translation adjustment will change from period to period. 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. 67 Table of Contents Item 8. Financial Statements and Supplementary Data LIMELIGHT NETWORKS, INC. Index to Consolidated Financial Statements and Schedule Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2012 and 2011 Consolidated Statements of Operations for the years ended December 31, 2012, 2011, and 2010 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2012, 2011, and 2010 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012, 2011, and 2010 Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010 Notes to Consolidated Financial Statements 68 Page 69 70 71 72 73 75 76 Table of Contents The Board of Directors and Stockholders of Limelight Networks, Inc. Report of Independent Registered Public Accounting Firm We have audited the accompanying consolidated balance sheets of Limelight Networks, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Limelight Networks, Inc. at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Limelight Networks, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2013 expressed an unqualified opinion thereon. Phoenix, Arizona March 1, 2013 /s/ Ernst & Young LLP 69 Limelight Networks, Inc. Consolidated Balance Sheets (In thousands, except per share data) ASSETS Table of Contents Current assets: Cash and cash equivalents Marketable securities Accounts receivable, net Income taxes receivable Deferred income taxes Prepaid expenses and other current assets Total current assets Property and equipment, net Marketable securities, less current portion Deferred income tax, less current portion Goodwill Other intangible assets, net Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Deferred revenue Capital lease obligations Income taxes payable Other current liabilities Total current liabilities Capital lease obligations, less current portion Deferred income tax Deferred revenue, less current portion Other long-term liabilities Total liabilities Commitments and contingencies Stockholders’ equity: Additional paid-in capital Contingent consideration Accumulated other comprehensive loss Accumulated deficit Total stockholders’ equity Total liabilities and stockholders’ equity Convertible preferred stock, $0.001 par value; 7,500 shares authorized; 0 shares issued and outstanding Common stock, $0.001 par value; 300,000 shares authorized at December 31, 2012 and, 2011; 98,038 and 104,349 shares issued and outstanding at December 31, 2012 and 2011, respectively December 31, 2012 December 31, 2011 $ $ $ 108,915 19,040 26,602 471 38 12,308 167,374 41,251 18 2,838 80,278 6,387 6,735 304,881 6,730 6,892 1,301 519 14,866 30,308 824 461 797 5,261 37,651 $ $ $ 120,349 19,850 28,045 31 62 20,646 188,983 56,368 51 1,177 80,105 9,207 10,454 346,345 6,797 7,287 1,750 774 13,195 29,803 2,124 580 539 4,194 37,240 — — 98 452,258 33 (709) (184,450) 267,230 304,881 $ 104 460,845 219 (509) (151,554) 309,105 346,345 $ The accompanying notes are an integral part of the consolidated financial statements. 70 Limelight Networks, Inc. Consolidated Statements of Operations (In thousands, except per share data) Table of Contents Revenues Cost of revenue: Cost of services (1) Depreciation — network Total cost of revenue Gross profit Operating expenses: General and administrative Sales and marketing Research and development Depreciation and amortization Total operating expenses Operating loss Other income (expense): Interest expense Interest income Gain on sale of cost basis investment Other, net Total other income Loss from continuing operations before income taxes Income tax provision (benefit) Loss from continuing operations Discontinued operations: (Loss) income from discontinued operations, net of income taxes Net loss Basic net (loss) income per weighted average share: Continuing operations Discontinued operations Total Diluted net (loss) income per weighted average share: Continuing operations Discontinued operations Total Shares used in per weighted average share calculations: Basic Diluted 2012 $180,236 Years Ended December 31, 2011 $171,292 2010 $154,223 83,723 27,992 111,715 68,521 36,003 45,044 20,182 5,843 107,072 (38,551) (177) 356 9,420 (602) 8,997 (29,554) 481 (30,035) 81,556 28,030 109,586 61,706 32,138 40,081 17,146 4,787 94,152 (32,446) (299) 752 — (311) 142 (32,304) (2,238) (30,066) 72,358 22,224 94,582 59,641 29,827 38,614 10,841 2,460 81,742 (22,101) (62) 910 — (250) 598 (21,503) 727 (22,230) (2,861) $ (32,896) 4,778 $ (25,288) 1,879 $ (20,351) $ $ $ $ (0.30) (0.02) (0.32) (0.30) (0.02) (0.32) $ $ $ $ (0.28) 0.05 (0.23) (0.28) 0.05 (0.23) $ $ $ $ (0.24) 0.02 (0.22) (0.24) 0.02 (0.22) 101,283 101,283 109,236 109,236 94,300 94,300 (1) Cost of services excludes amortization related to certain intangibles, including existing technologies, customer relationships, trade names and trademark, which are included in depreciation and amortization The accompanying notes are an integral part of the consolidated financial statements. 71 Table of Contents LIMELIGHT NETWORKS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) (Unaudited) Net loss Other comprehensive (loss) income, net of tax: Unrealized (loss) gain on investments Cumulative translation adjustment Foreign exchange translation Discontinued operations Other comprehensive (loss) income, net of tax Comprehensive loss Years Ended December 31, 2011 $(25,288) 2012 $(32,896) 2010 $(20,351) (28) — (172) — (200) $(33,096) (52) 494 (1,069) (211) (838) $(26,126) 25 — — 211 236 $(20,115) The accompanying notes are an integral part of the consolidated financial statements. 72 Table of Contents Limelight Networks, Inc. Consolidated Statements of Stockholders’ Equity (In thousands) Common Stock Additional Shares Amount Paid-In Capital Contingent Consideration Accumulated Other Comprehensive Income (Loss) Balance at December 31, 2009 Net loss Change in unrealized gains on available-for-sale investments, net of taxes Discontinued operations Exercise of common stock options Vesting of restricted stock units Restricted stock units surrendered in lieu of 85,011 — 85 308,537 — — — — 829 1,039 — — — — 1,947 (1) 1 1 — — — — — — withholding taxes (286) Contingent consideration for business acquisitions — Issuance of common stock for contingent — (1,582) — — — 3,012 Accumulated Deficit (105,915) (20,351) 93 — 25 211 — — — — — — — — — — Total 202,800 (20,351) 25 211 1,948 — (1,582) 3,012 Issuance of common stock for business consideration acquisitions Share-based compensation Share-based compensation — discontinued operations Balance at December 31, 2010 387 — 1,404 (1,404) — — — 13,088 — 13 52,632 — 16,182 — — — — — — 52,645 16,182 — — 100,068 $ 100 $ 380,338 $ 1,219 — 1,608 $ 1,219 — — 329 $ (126,266) $256,109 73 Table of Contents Net loss Change in unrealized gains (losses) on available- for-sale investments, net of taxes Common Stock Additional Shares Amount — — Paid-In Capital — — — — Cumulative foreign currency translation adjustment, Contingent Consideration Accumulated Other Comprehensive Income (Loss) net of taxes taxes Foreign currency translation adjustment, net of Discontinued operations Exercise of common stock options Vesting of restricted stock units Restricted stock units surrendered in lieu of withholding taxes Common stock received from escrow in settlement of EyeWonder indemnity claims Issuance of common stock for contingent consideration Issuance of common stock for business acquisitions Issuance of common stock related to secondary Purchase of common stock Share-based compensation — continuing offering operations Share-based compensation — discontinued — — — — — 258 985 — — — 1 — — 733 (1) (293) — (1,298) (589) (1) (1,711) 387 — 1,389 (1,389) 1,483 1 11,637 11,500 (9,450) 12 (9) 77,037 (24,364) — — 15,881 — — — — — — — — — — — — — Accumulated Deficit (25,288) Total (25,288) — — — — — — (52) 494 (1,069) (211) 733 — — (1,298) — (1,712) — — — 11,638 — — 77,049 (24,373) — 15,881 — (52) 494 (1,069) (211) — — — — — — — — — operations Balance at December 31, 2011 Net loss Change in unrealized gains (losses) on available- for-sale investments, net of taxes Foreign currency translation adjustment, net of taxes Exercise of common stock options Vesting of restricted stock units Restricted stock units surrendered in lieu of withholding taxes Common stock received from escrow in settlement of EyeWonder indemnity claims Issuance of common stock for contingent consideration Issuance of common stock for business acquisitions Purchase of common stock Share-based compensation — continuing operations Balance at December 31, 2012 — — 104,349 $ 104 $ 460,845 $ — — — 1,204 — 219 $ — — — 1,204 (509) $ (151,554) $309,105 (32,896) (32,896) — — — — — 175 2,451 — — 3 — 190 (3) (788) (1) (1,903) (110) — (398) 61 — 186 350 (8,450) — (8) — (21,134) — — — — — — (186) — — (28) (172) — — — — — — — — (28) — — — (172) 190 — — (1,904) — (398) — — — — — (21,142) — 98,038 $ — 14,475 98 $ 452,258 $ — 33 $ 14,475 — (709) $ (184,450) $267,230 — The accompanying notes are an integral part of the consolidated financial statements. 74 Table of Contents Limelight Networks, Inc. Consolidated Statements of Cash Flows (In thousands) Operating activities Net loss (Loss) income from discontinued operations Net loss from continuing operations Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities of continuing operations: Depreciation and amortization Share-based compensation Deferred income taxes Loss on disposal of property and equipment Accounts receivable charges Accretion of marketable securities Non cash tax benefit associated with sale of discontinued operations Non cash increase in cost basis investment Gain on sale of cost basis investment Changes in operating assets and liabilities: Accounts receivable Prepaid expenses and other current assets Income taxes receivable Other assets Accounts payable Deferred revenue Other current liabilities Income taxes payable Other long term liabilities Net cash provided by operating activities of continuing operations Investing activities Purchase of marketable securities Maturities of marketable securities Purchases of property and equipment Proceeds from the sale of cost basis investment Proceeds from the sale of discontinued operations Acquisition of businesses, net of cash acquired Acquisition of businesses, now included in discontinued operations Net cash (used in) provided by investing activities of continuing operations Financing activities Payments on capital lease obligations Payment of employee tax withholdings related to restricted stock Cash paid for purchase of common stock Proceeds from exercise of stock options Proceeds from secondary public offering, net Net cash (used in) provided by financing activities of continuing operations Effect of exchange rate changes on cash and cash equivalents Discontinued operations Cash used in operating activities of discontinued operations Cash used in investing activities of discontinued operations Net cash used in discontinued operations Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplement disclosure of cash flow information Cash paid during the year for interest Cash paid during the year for income taxes Property and equipment remaining in accounts payable and other current liabilities Purchase of property and equipment under capital leases Property and equipment acquired through leasehold incentives Common stock issued in connection with acquisition of businesses Contingent consideration common stock issued in connection with acquisition of businesses Years Ended December 31, 2012 2011 2010 $ (32,896) (2,861) $ (25,288) 4,778 (30,035) (30,066) 33,835 14,475 (38) 89 2,010 472 — (528) (9,420) (567) 2,910 (440) (1,626) 2,419 (137) 17 (255) (649) 12,532 (27,280) 27,625 (18,390) 10,154 7,441 — — (450) (1,749) (683) (20,851) 190 — (23,093) (274) (149) — (149) (11,434) 120,349 $108,915 32,817 15,881 (214) — 1,181 (63) (2,572) (1,038) — 5 (582) 184 (3,859) (2,491) (1,021) (3,254) (1,357) 1,344 4,895 (22,712) 14,932 (30,363) — 61,000 (7,360) — 15,497 (1,384) (1,196) (24,373) 733 77,049 50,829 351 (5,400) (684) (6,084) 65,488 54,861 $120,349 $(20,351) 1,879 (22,230) 24,683 16,182 (718) 48 1,333 359 — (405) — (2,953) 1,221 418 2,233 288 (7,023) 2,024 (478) 21 15,003 (28,509) 80,924 (33,501) — — (2,622) (63,907) (47,615) (192) (1,582) — 1,948 — 174 210 (1,603) (817) (2,420) (34,648) 89,509 $ 54,861 $ $ $ 178 $ 203 $ 62 1,428 $ 1,851 $ 2,064 948 $ 3,275 $ 5,300 $ — $ 2,271 $ 2,767 $ — $ 2,361 $ — $ — $ 9,413 $ 54,035 $ 186 $ 1,389 $ 1,404 The accompanying notes are an integral part of the consolidated financial statements. 75 Table of Contents 1. Nature of Business Limelight Networks, Inc. Notes to Consolidated Financial Statements December 31, 2012 Limelight Networks, Inc. (the Company), operates a globally distributed, high-performance computing platform (its global computing platform) and provides a suite of integrated services including content delivery, web and video content management, mobility, web application acceleration, cloud storage, and related consulting services that enable companies to create, manage, and deliver a global digital presence. The integrated suite of services that the Company offers collectively comprises its Orchestrate Digital Presence Platform (Orchestrate, or the Orchestrate Platform). The Company provides the Orchestrate Platform as Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS). There are individual point services within Orchestrate, which, other than the content delivery network, are often referred to as the Company’s Value Added Services (VAS). The point services are marketed both collectively as the end-to-end Orchestrate Platform as well as individually for customers that may not be inclined or able to adopt the entire platform. The Orchestrate Platform and services help the Company’s customers optimize their online digital presence across web, mobile, social, and large screen channels. The Orchestrate Platform and services provide advanced features for website content management, personalization and targeting, video publishing, mobile enablement, content delivery, transcoding, and cloud storage, combined with social media integration and reporting analytics. These services are provided through the cloud and leverage the Company’s global computing platform, which provides highly available, highly redundant storage, bandwidth, and computing resources, as well as connectivity to last-mile broadband network providers. The Company’s professional consulting services group helps organizations analyze and identify their digital presence requirements. The Company provides its services to customers that it believes view Internet, mobile, and social initiatives as critical to their success, including traditional and emerging media companies operating in the television, music, radio, newspaper, magazine, movie, videogame, software, and social media industries, as well as to enterprises, technology companies, and government entities conducting business online. The Company’s offerings enable organizations to remove the complexity of creating, managing, delivering, and optimizing their digital presence by streamlining processes and optimizing business results across all customer interaction channels which helps them to deliver a high quality online media experience, improve brand awareness, drive revenue, and enhance their customer relationships. The Company has operated in the Phoenix metropolitan area since 2001 and elsewhere throughout the United States since 2003. The Company began international operations in 2004. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. In addition, certain other reclassifications have been made to prior year amounts to conform to the current year presentation. On September 1, 2011, the Company completed the sale of its EyeWonder LLC and subsidiaries and chors GmbH video and rich media advertising services (EyeWonder and chors) to DG FastChannel, Inc. (now Digital Generation, Inc.) (DG). The sale of EyeWonder and chors met the criteria for discontinued operations during the year ended December 31, 2011. Accordingly, the results of operations related to EyeWonder and chors have been classified as discontinued operations in all periods presented. See further discussion at Note 5. 76 Table of Contents Use of Estimates The preparation of the consolidated financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results and outcomes may differ from those estimates. The results of operations presented in this annual report on Form 10-K are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or for any future periods. Foreign Currency Translation The Company analyzes the functional currency for each of its international subsidiaries periodically to determine if a significant change in facts and circumstances indicate that the primary economic currency has changed. As of December 31, 2010, the Company’s international subsidiaries had the U.S. dollar as their functional currencies. During the first quarter of 2011, the Company analyzed the various economic factors of its international subsidiaries and determined that the operations of its subsidiaries that were previously determined to operate in a U.S. dollar functional currency environment had changed and their functional currencies should be changed to the local currencies. The Company was historically primarily focused on the United States market and deployed network assets in foreign jurisdictions to support its United States customers. The Company is now conducting business and generating revenue from an international customer base. It has significantly expanded its sales, operations and finance resources internationally and various contracts were moved to the foreign subsidiaries to better match foreign currency costs with foreign currency revenues. Effective January 1, 2011, the adjustment from translating these subsidiaries’ financial statements from the local currency to the U.S. dollar was recorded as a separate component of accumulated other comprehensive loss. The foreign currency translation adjustments reflect the translation of the balance sheet at period end exchange rates and the income statement at an average exchange rate in effect during each period. Upon the change in functional currency, the Company recorded a cumulative translation adjustment of approximately $0.5 million, which is included in the consolidated balance sheet. Due to changes in exchange rates between reporting periods and changes in certain account balances, the foreign currency translation adjustment will change from period to period. During each of the years ended December 31, 2012, 2011 and 2010, the Company recorded foreign exchange translation losses of approximately $0.5 million, $0.3 million and $0.2 million respectively. The foreign exchange translation loss is included in other income (expense) in the consolidated statements of operations. Recent Accounting Pronouncements As of January 1, 2012, the Company adopted Accounting Standards Update (ASU) 2011-04 related to guidance associated with fair value measurements and disclosures. This ASU clarified the Financial Accounting Standards Board’s (FASB) intent on current guidance, modified and changed certain guidance and principles, and expanded disclosures concerning Level 3 fair value measurements in the fair value hierarchy (including quantitative information about significant unobservable inputs within Level 3 of the fair value hierarchy). In addition, this ASU required disclosure of the fair value hierarchy for assets and liabilities not measured at fair value in the balance sheet, but whose fair value is required to be disclosed. Adoption of this new guidance did not have a material impact on the Company’s financial statements. As of January 1, 2012, the Company adopted ASU 2011-05 related to guidance on the presentation of comprehensive income. The objective of this ASU was to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This ASU required an entity to present the components of net income and other comprehensive income and total comprehensive income (which includes net income) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminated the option to present the components of other comprehensive income as part of the statement of equity, but did not change the items that must be reported in other comprehensive income. This ASU was effective January 1, 2012, and the Company is presenting total comprehensive income in a separate statement. Additionally, in December 2011, the 77 Table of Contents FASB deferred the effective date for the requirement in this ASU for presenting reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements. As of January 1, 2012, the Company adopted ASU 2011-08 related to the testing of goodwill for impairment. The objective of this ASU was to simplify goodwill impairment testing by adding a qualitative review step to assess whether the required quantitative impairment analysis is necessary. This ASU permitted an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This ASU was effective for the Company beginning January 1, 2012. Adoption of this new guidance did not have a material impact on the Company’s financial statements. The Company did not elect to perform the qualitative screen for the year ended December 31, 2012. Revenue Recognition The Company primarily derives revenue from the sale of content delivery and VAS to its customers. The Company’s customers generally execute contracts with terms of one year or longer, which are referred to as recurring revenue contracts or long-term contracts. These contracts generally commit the customer to a minimum monthly level of usage with additional charges applicable for actual usage above the monthly minimum commitment. The Company defines usage as customer data sent or received using its content delivery service, or content that is hosted or cached by the Company at the request or direction of its customer. The Company recognizes the monthly minimum as revenue each month provided that an enforceable contract has been signed by both parties, the service has been delivered to the customer, the fee for the service is fixed or determinable, and collection is reasonably assured. Should a customer’s usage of the Company’s services exceed the monthly minimum commitment, the Company recognizes revenue for such excess in the period of the usage. For annual or other non-monthly period revenue commitments, the Company recognizes revenue monthly based upon the customer’s actual usage each month of the commitment period and only recognizes any remaining committed amount for the applicable period in the last month thereof. The Company typically charges the customer an installation fee when the services are first activated. The Company does not charge installation fees for contract renewals. Installation fees are recorded as deferred revenue and recognized as revenue ratably over the estimated life of the customer arrangement. The Company also derives revenue from services and events sold as discrete, non-recurring events or based solely on usage. For these services, the Company recognizes revenue after an enforceable contract has been signed by both parties, the fee is fixed or determinable, the event or usage has occurred and collection is reasonably assured. The Company has on occasion entered into multi-element arrangements. Revenue arrangements with multiple deliverables are divided into separate units of accounting if each deliverable has stand-alone value to the customer. Arrangements not meeting these criteria are combined into a single unit of accounting. For services sold in multiple-element arrangements, consideration is allocated to each deliverable at the inception of an arrangement based on relative selling prices. Substantially all services are sold on a stand-alone basis, providing vendor specific objective evidence (VSOE) of selling prices. In the absence of VSOE or third-party evidence of selling prices, consideration would be allocated based on the Company’s best estimate of such prices. The Company recognized approximately $2.8 million, $4.3 million, and $11.0 million, respectively, in revenue under multi-element arrangements for the years ended December 31, 2012, 2011, and 2010. As of December 31, 2012, the Company had deferred revenue related to these multi-element arrangements of approximately $0.2 million that will be recognized over the remaining terms of the respective arrangements based on the underlying elements of the arrangements in accordance with its revenue recognition policies. 78 Table of Contents The Company also sells services through a reseller channel. Assuming all other revenue recognition criteria are met, revenue from reseller arrangements is recognized over the term of the contract, based on the reseller’s contracted non-refundable minimum purchase commitments plus amounts sold by the reseller to its customers in excess of the minimum commitments. These excess commitments are recognized as revenue in the period in which the service is provided. Reseller revenue was approximately 3%, 4%, and 5%, respectively, of the Company’s total revenue for the years ended December 31, 2012, 2011, and 2010. At the inception of a customer contract for service, the Company makes an assessment as to that customer’s ability to pay for the services provided. If the Company subsequently determines that collection from the customer is not reasonably assured, the Company records an allowance for doubtful accounts and bad debt expense or deferred revenue for all of that customer’s unpaid invoices and ceases recognizing revenue for continued services provided until cash is received. Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of the unearned portion of monthly billed service fees, prepayments made by customers for future periods, and deferred installation fees. Cash and Cash Equivalents The Company holds its cash and cash equivalents in checking, money market, and highly-liquid investments. The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Investments in Marketable Securities Management determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such classification as of each balance sheet date. The Company has classified its investments in marketable securities as available-for-sale. Available-for-sale investments are initially recorded at cost with temporary changes in fair value periodically adjusted through comprehensive income. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in the statements of operations. The Company periodically reviews its investments for other-than-temporary declines in fair value based on the specific identification method and writes down investments to their fair value when an other-than-temporary decline has occurred. Accounts Receivable Trade accounts receivable are recorded at the invoiced amounts and do not bear interest. The Company records reserves against its accounts receivable balance for service credits and for doubtful accounts. Estimates are used in determining both of these reserves. The allowance for doubtful accounts charges are included as a component of general and administrative expenses. The Company’s reserve for service credits relates to service credits that are expected to be issued to customers during the ordinary course of business, as well as for billing disputes. These credits typically relate to customer disputes and billing adjustments and are estimated at the time the revenue is recognized and recorded as a reduction of revenues. Estimates for service credits are based on an analysis of credits issued in previous periods. The allowance for doubtful accounts is based upon a calculation that uses the Company’s aging of accounts receivable and applies a reserve percentage to the specific age of the receivable to estimate the allowance for doubtful accounts. The reserve percentages are determined based on the Company’s historical write-off experience. These estimates could change significantly if the Company’s customers’ financial condition changes or if the economy in general deteriorates. The Company performs on-going credit evaluations of its customers. If such an evaluation indicates that payment is no longer reasonably assured for current services provided, any future services provided to that customer will result in the deferral of revenue until the Company receives payments or it determines payment is reasonably assured. 79 Table of Contents Property and Equipment Property and equipment are carried at cost less accumulated depreciation or amortization. Depreciation and amortization are computed using the straight-line method over the assets’ estimated useful lives of the applicable asset. Network equipment Computer equipment Capitalized software Furniture and fixtures Other equipment 3 years 3 years 3 years 3-5 years 3-7 years Leasehold improvements are amortized over the shorter of the asset’s estimated useful life or the respective lease term. Repairs and maintenance are charged to expense as incurred. Goodwill and Other Intangible Assets Goodwill represents costs in excess of fair values assigned to the underlying net assets of the acquired company. Goodwill is not amortized but instead is tested for impairment annually or more frequently if events or changes in circumstances indicate Goodwill might be impaired. The Company’s other intangible assets represent existing technologies, trade names and trademarks, and customer relationship intangibles. Other intangible assets are amortized over their respective estimated lives, ranging from less than one year to six years. In the event that facts and circumstances indicate intangibles or other long-lived assets may be impaired, the Company evaluates the recoverability and estimated useful lives of such assets. Amortization of other intangible assets is included in depreciation and amortization in the accompanying consolidated statements of operations. Contingencies The Company records contingent liabilities resulting from asserted and unasserted claims when it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. Long-Lived Assets The Company reviews its long-lived assets for impairment annually. Whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable, the Company recognizes an impairment loss if the sum of the expected long-term undiscounted cash flows that the long-lived asset is expected to generate is less than the carrying amount of the long-lived asset being evaluated. The Company treats any write-downs as permanent reductions in the carrying amounts of the assets. The Company believes the carrying amounts of its long-lived assets at December 31, 2012 and 2011 are fully realizable and has not recorded any impairment losses. Deferred Rent and Lease Accounting The Company leases bandwidth, co-location and office space in various locations. At the inception of each lease, the Company evaluates the lease terms to determine whether the lease will be accounted for as an operating or a capital lease. The term of the lease used for this evaluation includes renewal option periods only in instances where the exercise of the renewal option can be reasonably assured and failure to exercise the option would result in an economic penalty. The Company records tenant improvement allowances granted under the lease agreements as leasehold improvements within property and equipment and within deferred rent. 80 Table of Contents For leases that contain rent escalation provisions, the Company records the total rent payable during the lease term on a straight-line basis over the term of the lease (including any “rent free” period beginning upon possession of the premises), and records any difference between the actual rent paid and the straight-line rent expense recorded as increases or decreases in deferred rent. Cost of Revenue Cost of revenues consists primarily of fees paid to network providers for bandwidth and backbone, costs incurred for non-settlement free peering and connection to Internet service provider (ISP) networks and fees paid to data center operators for housing network equipment in third party network data centers, also known as co-location costs. Cost of revenues also includes depreciation of network equipment used to deliver the Company’s content delivery services, payroll and related costs and share-based compensation for its network operations, and professional services personnel. The Company enters into contracts for bandwidth with third party network providers with terms typically ranging from several months to five years. These contracts generally commit the Company to pay minimum monthly fees plus additional fees for bandwidth usage above contracted minimums. A portion of the global computing platform traffic delivery is completed through direct connection to ISP networks, called peering, generally at no charge. This entirely avoids the bandwidth cost associated with the delivery. The Company does not consider these relationships to represent the culmination of an earnings process. Accordingly, the Company does not recognize as revenue the value to the ISPs associated with the use of the Company’s servers, nor does the Company recognize as expense the value of the rack space and bandwidth received at no cost. Research and Development and Software Development Costs Research and development costs consist primarily of payroll and related personnel costs for the design, development, deployment, testing, operation, and enhancement of the Company’s services, and network. Costs incurred in the development of the Company’s services are expensed as incurred. Advertising Costs Costs associated with advertising are expensed as incurred. Advertising expenses, which are comprised of Internet, trade show, and publications advertising, were approximately $2.5 million, $2.3 million, and $1.4 million, respectively, for the years ended December 31, 2012, 2011, and 2010. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. In the event the Company was to determine that it would be able to realize its deferred income tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. 81 Table of Contents The Company recognizes uncertain income tax positions in its financial statements when it is more-likely-than-not the position will be sustained upon examination. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents approximate fair value due to the nature and short maturity of those instruments. The respective fair values of marketable securities are determined based on quoted market prices, which approximate fair values. The carrying amounts of accounts receivable, accounts payable, and accrued liabilities reported in the consolidated balance sheets approximate their respective fair values due to the immediate or short-term maturity of these financial instruments. Recently Issued Accounting Pronouncements There are no recently issued accounting pronouncements that would have a material impact on the Company. 3. Investments in Marketable Securities The following is a summary of marketable securities (designated as available-for-sale) at December 31, 2012 (in thousands): Government agency bonds Certificate of deposit Commercial paper Corporate notes and bonds Publicly traded common stock Total marketable securities Amortized Cost $ 6,266 2,741 500 9,527 19,034 12 $ 19,046 Gross Unrealized Gains $ 4 — — 3 7 6 13 $ Gross Unrealized Losses $ — — — (1) (1) — (1) $ Estimated Fair Value 6,270 $ 2,741 500 9,529 19,040 18 $ 19,058 At December 31, 2012, the Company evaluated its marketable securities and determined unrealized losses were due to fluctuations in interest rates. Expected maturities can differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties, and the Company views its available-for-sale securities as available for current operations. The amortized cost and estimated fair value of the marketable securities (designated as available-for-sale) at December 31, 2012, by maturity, are shown below (in thousands): Available-for-sale securities Due in one year or less Due after one year and through five years Amortized Cost $ 18,260 774 $ 19,034 Gross Unrealized Gains $ $ 6 1 7 Gross Unrealized Losses $ (1) — (1) $ Estimated Fair Value $ 18,265 775 $ 19,040 82 Table of Contents The following is a summary of marketable securities (designated as available-for-sale) at December 31, 2011 (in thousands): Government agency bonds Certificate of deposit Commercial paper Corporate notes and bonds Publicly traded common stock Total marketable securities Amortized Cost $ 9,614 2,730 1,749 5,757 19,850 12 $ 19,862 Gross Unrealized Gains 1 $ — — 1 2 39 41 $ Gross Unrealized Losses (1) $ — — (1) (2) — (2) $ Estimated Fair Value 9,614 $ 2,730 1,749 5,757 19,850 51 $ 19,901 The amortized cost and estimated fair value of the marketable securities (designated as available-for-sale) at December 31, 2011, by maturity, are shown below (in thousands): Available-for-sale securities Due in one year or less Due after one year and through five years 4. Business Acquisitions AcceloWeb, (IL) Ltd. Acquisition Amortized Cost $ 19,850 — $ 19,850 Gross Unrealized Gains $ 2 — 2 $ Gross Unrealized Losses $ (2) — (2) $ Estimated Fair Value $ 19,850 — $ 19,850 On May 9, 2011, the Company acquired all of the issued and outstanding shares of AcceloWeb, (IL) Ltd. (AcceloWeb), a Tel Aviv, Israel- based privately-held provider of advanced technology that helps speed the presentation of websites and applications. The services provided by AcceloWeb aligned with the Company’s current whole site acceleration strategy, provided a time to market advantage over development of a new product and furthered the Company’s value-added services growth strategy. The aggregate purchase price of approximately $12.0 million consisted of approximately $5.0 million of cash paid at the closing (cash paid net of cash acquired was $4.7 million) and 1,100,629 shares of the Company’s common stock with an estimated fair value of approximately $7.0 million on the acquisition date. The number of shares of common stock issued at the closing was determined on the basis of the average closing market price of the Company’s common stock on the five days preceding the acquisition date. In addition, the purchase price included contingent consideration with an aggregate potential value of $8.0 million ($4.0 million payable in cash and $4.0 million payable in the Company’s common stock), which may be earned upon the achievement of certain performance milestones which will be measured quarterly during the eight full consecutive quarters ending June 30, 2013 (the Earn-Out). As of December 31, 2011, the estimated value of the Earn-Out contingent consideration was $0.8 million. During the year ended December 31, 2012, 2012, the Company determined that the achievement of the Earn-Out performance milestones was not probable and reversed the previously recorded earn-out liability of $0.8 million. The reversal has been reflected as a reduction to general and administrative expense in the accompanying consolidated statement of operations for the year ended December 31, 2012. Under the terms of the merger agreement, a portion of the purchase price consisting of 188,677 shares of the Company’s common stock was set aside in an escrow account and was held for a period of up to 18 months following the closing date to satisfy any unresolved indemnification claims. There were no indemnification claims made on the escrow account, and in 2012 these shares were released from escrow. 83 Table of Contents The Company’s consolidated financial statements include the results of operations of AcceloWeb from the date of acquisition. The historical results of operations of AcceloWeb were not significant to the Company’s consolidated results of operations for the periods presented. The total purchase consideration was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition, as determined by management and, with respect to identifiable intangible assets, by management with the assistance of an appraisal provided by a third party valuation firm. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded as goodwill. The objective of the acquisition was to expand the Company’s product offerings and customer base and is expected to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill. The goodwill associated with the AcceloWeb acquisition will not be amortized and will be tested for impairment at least annually (see Note 8). The following table presents the allocation of the purchase price for AcceloWeb for the period ended December 31, 2011: Consideration: Cash Common stock Contingent consideration — cash Contingent consideration — common stock Total consideration Acquisition-related costs (included in general and administrative expenses) Recognized amounts of identifiable assets acquired and liabilities assumed: Financial assets Property and equipment Developed technology intangible asset Financial liabilities Total identifiable net assets Goodwill December 31, 2011 (In thousands) $ $ $ $ $ 5,000 6,989 382 382 12,753 304 2,171 5 4,450 (2,457) 4,169 8,584 12,753 Developed technology with a value of approximately $4.5 million is being amortized over its expected useful life of five years. The goodwill resulting from the AcceloWeb acquisition is not deductible for income tax purposes. In determining the purchase price allocation, the Company considered, among other factors, how a market participant would likely use the acquired assets and the historical and estimated future demand for AcceloWeb services. The estimated fair value of intangible assets was based upon the income approach. The income approach relies on an estimation of the present value of the future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risks inherent in the asset. The expected future cash flow that is projected should include all of the economic benefits attributable to the asset, including the tax savings associated with the amortization of the intangible asset value over the tax life of the asset. The income approach may take the form of a “relief from royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration. 84 Table of Contents The relief-from-royalty method was used to value the technology acquired from AcceloWeb. The relief-from-royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be required to pay royalties or license fees on revenues earned through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the intangible asset. The royalty rate is then applied to estimate the royalty savings. The key assumptions used in valuing the technology acquired are as follows: royalty rate of 20%, discount rate of 42%, tax rate of 39%, and an economic life of approximately five years. The Company retained an independent third-party appraiser to assist management in its valuation which was finalized as of September 30, 2011. Clickability Acquisition On May 2, 2011, the Company acquired all of the issued and outstanding shares of Clickability, Inc. (Clickability), a privately-held SaaS provider of web content management located in San Francisco, California. The services provided by Clickability aligned with the Company’s current value-added services and furthered the Company’s value-added services growth strategy. The aggregate purchase price of approximately $9.6 million consisted of approximately $4.9 million of cash paid at the closing (cash paid net of cash acquired was $2.7 million), $0.1 million held by the Company to cover future claims and 732,000 shares of the Company’s common stock with an estimated fair value of approximately $4.6 million on the date of acquisition. The Company issued 382,000 shares of common stock with an estimated fair value of approximately $2.4 million at the closing. The number of shares of the Company’s common stock issued as consideration for Clickability was determined on the basis of the average closing market price of the Company’s common stock on the 30 days preceding the acquisition date. Under the terms of the merger agreement, a portion of the purchase price consisting of approximately 350,000 shares of the Company’s common stock with an estimated fair market value on the acquisition date of approximately $2.2 million and $0.1 million of cash was unissued and available to cover future claims. There were no claims made on the escrow account and, 350,000 shares of common stock were issued and $0.1 million cash were released from escrow in 2012. The Company’s consolidated financial statements include the results of operations of Clickability from the date of acquisition. The historical results of operations of Clickability were not significant to the Company’s consolidated results of operations for the periods presented. The total purchase consideration was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition, as determined by management and, with respect to identifiable intangible assets, by management with the assistance of an appraisal provided by a third party valuation firm. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded as goodwill. The objective of the acquisition was to expand the Company’s product offerings and customer base and is expected to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill. The goodwill associated with the Clickability acquisition will not be amortized and will be tested for impairment at least annually (see Note 8). 85 Table of Contents The following table presents the allocation of the purchase price for Clickability for the period ended December 31, 2011: Consideration: Cash Common stock Total consideration Acquisition-related costs (included in general and administrative expenses) Recognized amounts of identifiable assets acquired and liabilities assumed: Financial assets Property and equipment Identifiable intangible assets Financial liabilities Total identifiable net assets Goodwill (In thousands) $ $ $ $ $ 5,000 4,649 9,649 111 3,774 429 5,500 (4,133) 5,570 4,079 9,649 The following were the identified intangible assets acquired and the respective estimated periods over which such assets will be amortized: Technology Customer relationships Trade names and trademarks Total Amount (In thousands) 2,120 $ 3,250 130 5,500 $ Weighted Average useful life (In years) 3.0 4.0 0.7 The total weighted average amortization period for the identifiable intangible assets acquired from Clickability is 3.5 years. The goodwill resulting from the Clickability acquisition is not deductible for income tax purposes. In determining the purchase price allocation, the Company considered, among other factors, how a market participant would likely use the acquired assets and the historical and estimated future demand for Clickability services. The estimated fair value of intangible assets was based upon the income approach. The income approach relies on an estimation of the present value of the future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risks inherent in the asset. The expected future cash flow that is projected should include all of the economic benefits attributable to the asset, including the tax savings associated with the amortization of the intangible asset value over the tax life of the asset. The income approach may take the form of a “relief from royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration. 86 Table of Contents The relief-from-royalty method was used to value the trade names and trademarks and technology acquired from Clickability. The relief-from- royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be required to pay royalties or license fees on revenues earned through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the intangible asset. The royalty rate is then applied to estimate the royalty savings. The key assumptions used in valuing the existing trade names and trademarks acquired are as follows: royalty rate of 2.5%, discount rate of 21.5%, tax rate of 39% and an economic life of approximately 0.7 years. The key assumptions used in valuing the technology acquired are as follows: royalty rate of 10%, discount rate of 21.5%, tax rate of 39%, and an economic life of approximately three years. The customer relationships were valued using a form of the income approach known as the multi-period excess earnings method. Inherent in the multi-period excess earnings method is the recognition that, in most cases, all of the assets of the business, both tangible and intangible, contribute to the generation of the cash flow of the business and the net cash flows attributable to the subject asset must recognize the support of the other assets which contribute to the realization of the cash flows. The contributory asset charges are based on the fair value of the contributory assets and either pre-tax or after-tax cash flows are assessed charges representing “returns on” the contributory assets. A contributory asset charge for the use of the technology was assessed on pre-tax cash flows, while contributory asset charges for the use of the working capital, fixed assets, and assembled work force have been deducted from the after-tax cash flow in each year to determine the net future cash flow attributable to the relationships. This future cash flow was then discounted using an estimated required rate of return for the asset to determine the present value of the future cash flows attributable to the asset. The key assumptions used in valuing the customer relationships acquired are as follows: discount rate of 21.5%, tax rate of 39%, and estimated average economic life of four years. The Company retained an independent third-party appraiser to assist management in its valuation which was finalized as of September 30, 2011. 5. Discontinued Operations On September 1, 2011, the Company completed the sale of its EyeWonder and chors rich media advertising services to DG for net proceeds of $61.0 million ($66.0 million gross cash proceeds less $5.0 million held in escrow) plus an estimated $10.9 million receivable from DG pursuant to the purchase agreement dated as of August 30, 2011 by and among the Company, DG and Limelight Networks Germany GmbH. The $5.0 million held in escrow was intended to cover DG’s ordinary operating expenses associated with the integration of EyeWonder and chors. The Company estimates that it will not receive any portion of the funds held in escrow and has excluded such amount from its calculation of the gain on sale of discontinued operations. The $10.9 million receivable from DG was determined by the Company based on estimated future cash payments equal to the excess of certain current assets over certain current liabilities of EyeWonder and chors as of August 30, 2011, as defined in the purchase agreement (the Net Working Capital). The Company estimated the Net Working Capital based on its determination of the current assets and current liabilities in accordance with the relevant provisions of the purchase agreement. 87 Table of Contents As of August 31, 2011, the estimated Net Working Capital related to EyeWonder and chors was comprised of the following (in thousands): Current assets Cash and cash equivalents Accounts receivable Income tax receivables Other current assets Total current assets Current liabilities Accounts payable and other current liabilities Net Working Capital $ 2,677 9,643 500 528 13,348 (2,494) $10,854 Under the terms of the purchase agreement, the $0.7 million excess of the cash and cash equivalents and other current assets over the current liabilities was immediately payable to the Company with the remaining Net Working Capital payable as the accounts receivable of $9.6 million and income tax receivable of $0.5 million are collected. As of December 31, 2011 the receivable from DG was $10.9 million and no payments had been received from DG related to the Net Working Capital. The following is a summary of activity related to the receivable from DG for the year ended December 31, 2012 (in thousands): Balance, December 31, 2011 Payments received from DG Allowance for doubtful accounts receivable and other receivables adjustments Net Working Capital adjustments Balance, December 31, 2012 $10,854 (7,440) (2,060) (818) 536 $ As of December 31, 2012, the Company has received payments totaling $7.4 million from DG. At December 31, 2012, approximately $0.5 million has been reflected on the balance sheet as due to the Company. This amount is comprised of net cash due from DG of $1.2 million plus income tax receivables of $0.1 million offset by Net Working Capital adjustments of $0.8 million. The Company determined that certain adjustments to decrease the Net Working Capital amount due from DG were required. As of December 31, 2012, the Company estimated adjustments totaling $0.8 million which were recorded as a reduction to the receivable from DG. After 120 days from the closing of the sale of EyeWonder and chors (the Receivables Collection Period), the Company and DG have the option to have the uncollected accounts receivable assigned to the Company (currently $1.6 million at December 31, 2012). Following the expiration of the Receivables Collections Period, DG and the Company may mutually agree to extend the Receivables Collections Period in 60 day increments. DG and the Company had agreed to extend the Receivables Collection Period and the accounts receivable were not assigned to the Company, however, DG allowed the Company to take the lead and work directly with its former international customers regarding collections. Based on the collection efforts performed to date and the age of the underlying receivables, the Company assessed the collectability of the remaining accounts receivable balance and recorded its estimate of the amount expected to be collected at December 31, 2012. As a result, the Company has provided an allowance for doubtful accounts receivable on the remaining uncollected balance of $1.6 million as of December 31, 2012. The Company expects to continue to pursue collections and will record recoveries as an adjustment to income (loss) from discontinued operations. 88 Table of Contents During the year ended December 31, 2012, the Company recorded a charge to discontinued operations of $2.9 million in the consolidated statement of operations comprised of $2.1 million of allowance for doubtful accounts receivable and a reduction of $0.8 million related to Net Working Capital adjustments. During the year ended December 31, 2011, the Company recorded a gain on sale of discontinued operations of $14.8 million net of income taxes. The gain on sale also reflects the realization of foreign currency translation adjustment gains of approximately $0.4 million and $0.1 million in unrealized losses on investments previously included in accumulated other comprehensive income (loss). The table below provides details of the computation of the gain on sale of EyeWonder and chors for the year ended December 31, 2011 (in thousands): Gross cash proceeds Less: Estimated net proceeds Plus: Less: Add: Escrow holdback Estimated income taxes payable Estimated selling expenses Net receivable from DG per terms of the purchase agreement Book value of assets sold Income tax provision related to sale of discontinued operations Book value of liabilities released Other comprehensive income gains recognized Gain on sale of discontinued operations, net of income taxes 89 $ 66,000 (5,000) (555) (805) 10,854 70,494 (57,563) (2,572) 4,095 302 $ 14,756 Table of Contents The sale of EyeWonder and chors met the criteria to be reported as discontinued operations. Accordingly, the operating results of EyeWonder and chors were reclassified to discontinued operations in the accompanying consolidated statements of operations. The Company included only revenues and costs directly attributable to the discontinued operations in determining income (loss) from discontinued operations, and not those attributable to the ongoing entity. Accordingly, no general corporate overhead costs were allocated to discontinued operations. Operating results of discontinued operations for the years ended December 31, 2012, 2011, and 2010, respectively, were as follows (in thousands, except per share data): Revenues Cost of revenues General and administrative expenses Sales and marketing expenses Research and development expenses Depreciation and amortization Interest expense Interest income Other (expense) income (Loss) gain on sale of discontinued operations, net of income taxes (Loss) income before income taxes Income tax (expense) benefit (Loss) income from discontinued operations (Loss) income from discontinued operations per weighted average share: Basic Diluted Shares used in per weighted average share calculation for discontinued operations: Basic and diluted 2012 $ — — 163 — — — — — — (3,024) (2,861) — $ (2,861) Years Ended December 31, 2011 $ 22,302 (8,843) (6,055) (8,183) (4,853) (3,761) (16) 21 (525) 14,756 4,843 (65) 4,778 $ 2010 (a) $29,104 (8,137) (5,933) (8,138) (4,914) (3,899) (15) 4 28 — (1,900) 3,779 $ 1,879 $ $ (0.02) (0.02) $ $ 0.05 0.05 $ $ 0.02 0.02 101,283 109,236 94,300 (a) Represent operating results from date of acquisition of chors (January 27, 2010) and EyeWonder (April 30, 2010) through December 31, 2010. 6. Accounts Receivable Accounts receivable include (in thousands): Accounts receivable Unbilled accounts receivable Less: credit allowance Less: allowance for doubtful accounts Total accounts receivable, net 90 December 31, 2012 $23,675 6,997 30,672 (640) (3,430) $26,602 2011 $24,260 8,176 32,436 (810) (3,581) $28,045 Table of Contents 7. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets include (in thousands): Prepaid bandwidth and backbone services Non-income taxes receivable (VAT) Gaikai sale escrow receivable Receivable from DG (see note 5) Employee advances and prepaid recoverable commissions Vendor deposits and other Total prepaid expenses and other current assets December 31, 2012 $ 3,614 1,739 1,237 536 551 4,631 $12,308 2011 $ 2,544 2,067 — 11,151 332 4,552 $20,646 In May 2010, the Company made a strategic investment in Gaikai Inc., a private cloud-based gaming technology company (Gaikai). In August 2012, Sony Computer Entertainment Inc. (Sony) acquired Gaikai and the Company recorded a gain on sale of its cost basis investment in Gaikai of $9.4 million, which is reflected in other income (expense) in the accompanying consolidated statement of operations for the year ended December 31, 2012. The carrying value of the Gaikai cost basis investment as of the sale date was approximately $2.0 million. The aggregate selling price was $11.4 million consisting of $10.2 million of cash received and $1.2 million held in escrow for a period of up to 15 months to cover any potential indemnification claims. As of December 31, 2012, the Company was not aware of any potential indemnification claims that are expected to reduce the amount received from escrow and recorded a current receivable of approximately $1.2 million, which is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet for the year ended December 31, 2012. Additionally, as a result of the acquisition by Sony, the Company’s contract for services with Gaikai was terminated and the Company received approximately $1.3 million in terminations fees which was recorded as revenue in 2012. 8. Goodwill and Other Intangible Assets The Company has recorded goodwill and other intangible assets as a result of its business acquisitions. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. In each of the Company’s acquisitions, the objective of the acquisition was to expand the Company’s product offerings and customer base and to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill. The Company concluded that it has one reporting unit and assigned the entire balance of goodwill to this reporting unit at December 31, 2012. The Company is required to perform an impairment assessment at least annually, and more frequently under certain circumstances. The Company performed its annual goodwill impairment test in the fourth quarter of 2012 (as of October 31, 2012). No impairment of goodwill was indicated during the Company’s annual tests in 2012, 2011, or 2010. If the Company determines through the impairment process that goodwill has been impaired, the Company will record the impairment charge in the statement of operations. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. 91 Table of Contents The changes in the carrying amount of goodwill for continuing operations for the years ended December 31, 2012 and 2011 were as follows (in thousands): Balance, December 31, 2010 Goodwill related to AcceloWeb acquisition Goodwill related to Clickability acquisition Foreign currency translation adjustment Balance, December 31, 2011 Foreign currency translation adjustment Balance, December 31, 2012 Other intangible assets that are subject to amortization consisted of the following (in thousands): Existing technologies Customer relationships Trade names and trademark Total other intangible assets Existing technologies Customer relationships Trade names and trademark Total other intangible assets $68,390 8,584 4,079 (948) $80,105 173 $80,278 Gross Carrying Amount $ 8,436 3,412 160 $12,008 Gross Carrying Amount $ 8,347 3,412 160 $11,919 December 31, 2012 Accumulated Amortization (4,035) $ (1,427) (159) (5,621) $ December 31, 2011 Accumulated Amortization (1,976) $ (589) (147) (2,712) $ Net Carrying Amount $ 4,401 1,985 1 $ 6,387 Net Carrying Amount $ 6,371 2,823 13 $ 9,207 Aggregate expense related to amortization of other intangible assets included in continuing operations for the years ended December 31, 2012, 2011, and 2010, respectively, was approximately $2.9 million, $2.3 million, and $0.3 million, respectively. Based on the Company’s other intangible assets as of December 31, 2012, aggregate expense related to amortization of other intangible assets is expected to be $2.8 million in 2013, and $2.1 million, $1.1 million, and $0.3 million for fiscal years 2014, 2015, and 2016, respectively. 92 Table of Contents 9. Property and Equipment Property and equipment include (in thousands): Network equipment Computer equipment Furniture and fixtures Leasehold improvements Other equipment Less: accumulated depreciation Total property and equipment, net December 31, 2012 $ 168,637 10,398 2,595 6,684 534 188,848 (147,597) $ 41,251 2011 $ 176,307 9,129 2,480 6,775 453 195,144 (138,776) $ 56,368 During the year ended December 31, 2012, the Company removed property, plant, and equipment and the associated accumulated depreciation of approximately $21.9 million to reflect the retirement of property, plant, and equipment that was fully depreciated and no longer in service. Cost of revenue depreciation expense related to property and equipment was approximately $28.0 million, $28.0 million, and $22.2 million, respectively, for the years ended December 31, 2012, 2011, and 2010, respectively. Operating expense depreciation and amortization expense related to property and equipment was approximately $3.0 million, $2.5 million, and $2.1 million, respectively, for the years ended December 31, 2012, 2011, and 2010, respectively. 10. Other Assets Other assets include (in thousands): Prepaid bandwidth and backbone services Vendor deposits and other Deferred expenses Cost basis investment Total other assets December 31, 2012 $5,799 729 207 — $6,735 2011 $ 7,373 1,384 253 1,444 $10,454 The Company enters into multi-year arrangements with a telecommunications providers for bandwidth and backbone capacity. The agreements sometimes require the Company to make advanced payments for future services to be received. 93 Table of Contents 11. Other Current Liabilities Other current liabilities include (in thousands): Accrued compensation and benefits Accrued cost of revenue Accrued legal fees Indirect taxes payable Customer deposits Other accrued expenses Total other current liabilities 12. Other Long Term Liabilities Other long term liabilities include (in thousands): Deferred rent Income taxes payable Contingent consideration liability Total other long term liabilities 13. Contingencies Akamai Litigation December 31, 2012 $ 6,703 2,307 1,591 1,029 361 2,875 $14,866 2011 $ 4,421 3,027 1,507 633 847 2,760 $13,195 December 31, 2012 $3,543 1,718 — $5,261 2011 $3,352 — 842 $4,194 In June 2006, Akamai Technologies, Inc., or Akamai, and the Massachusetts Institute of Technology, or MIT, filed a lawsuit against the Company in the United States District Court for the District of Massachusetts alleging that the Company was infringing two patents assigned to MIT and exclusively licensed by MIT to Akamai, United States Patent No. 6,553,413 (the ’413 patent) and United States Patent No. 6,108,703 (the ’703 patent). In September 2006, Akamai and MIT expanded their claims to assert infringement of a third, recently issued patent United States Patent No. 7,103,645 (the ’645 patent). Before trial, Akamai waived by stipulation its claims of indirect or induced infringement and proceeded to trial only on the theory of direct infringement. In February 2008, a jury returned a verdict in this lawsuit, finding that the Company infringed four claims of the ’703 patent at issue and rejecting the Company’s invalidity defenses. The jury awarded an aggregate of approximately $45.5 million which includes lost profits, reasonable royalties and price erosion damages for the period April 2005 through December 31, 2007. In addition, the jury awarded prejudgment interest which the Company estimated to be $2.6 million at December 31, 2007. The Company recorded an aggregate $48.1 million as a provision for litigation as of December 31, 2007. During 2008, the Company recorded a potential additional provision of approximately $17.5 million for potential additional infringement damages and interest. The total provision for litigation at December 31, 2008 was $65.6 million. On July 1, 2008, the court denied the Company’s Motions for Judgment as a Matter of Law (JMOL), Obviousness, and a New Trial. The court also denied Akamai’s Motion for Permanent Injunction as premature and its Motions for Summary Judgment regarding the Company’s equitable defenses. The court conducted a bench trial in November 2008 regarding the Company’s equitable defenses. The Company also filed a motion for reconsideration of the court’s earlier denial of the Company’s motion for JMOL. The Company’s motion for JMOL was based largely upon a clarification in the standard for a finding of joint infringement articulated by the 94 Table of Contents Federal Circuit in the case of Muniauction, Inc. v. Thomson Corp., released after the court denied the Company’s initial motion for JMOL. On April 24, 2009, the court issued its order and memorandum setting aside the adverse jury verdict and ruling that the Company did not infringe Akamai’s ’703 patent and that the Company was entitled to JMOL. Based upon the court’s April 24, 2009 order, the Company reversed the $65.6 million provision for litigation previously recorded for this lawsuit as the Company no longer believed that payment of any amounts represented by the litigation provision was probable. The court entered final judgment in favor of the Company on May 22, 2009, and Akamai filed its notice of appeal of the court’s decision on May 26, 2009. On December 20, 2010, the Court of Appeals for the Federal Circuit issued its opinion affirming the trial court’s entry of judgment in the Company’s favor. On February 18, 2011, Akamai filed a motion with the Court of Appeals for the Federal Circuit seeking a rehearing and rehearing en banc. On April 21, 2011, the Court of Appeals for the Federal Circuit issued an order denying the petition for rehearing, granting the petition for rehearing en banc, vacating the December 20, 2010 opinion affirming the trial court’s entry of judgment in the Company’s favor, and reinstated the appeal. On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in the case. The Court of Appeals stated that the trial court correctly determined that the Company did not directly infringe Akamai’s ’703 patent and upheld the trial court’s decision to vacate the original jury’s damages award. The Court of Appeals also held that the Company did not infringe Akamai’s ’413 or ’645 patents. A slim majority in this three-way divided opinion also announced a revised legal theory of induced infringement, remanded the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to prove that the Company induced its customers to infringe Akamai’s patent under the Court of Appeals’ new legal standard. On December 28, 2012, the Company filed a petition for writ of certiorari to the United States Supreme Court to appeal this sharply divided Court of Appeals decision and sought to stay any proceedings at the trial court until the Supreme Court rules on that petition. Akamai then filed a cross petition for consideration of the Court of Appeals standard for direct infringement. The Company believes that the Court of Appeal’s new induced infringement standard runs counter to the Patent Act and Supreme Court precedent, and it should be overturned by the Supreme Court. Additionally, just as the Company has successfully shown that it does not directly infringe Akamai’s patent, the Company firmly believes that it ultimately would be successful in showing that it does not infringe Akamai’s patent under the Court of Appeals majority’s new induced infringement theory, and it will continue to vigorously defend against the allegation. The Company is not able at this time to estimate the range of a potential loss nor in light of the status of the litigation does it believe a loss is probable, and therefore no provision for this lawsuit is recorded in the consolidated financial statements. Legal and other expenses associated with this case have been significant. The Company includes these litigation expenses in general and administrative expenses as incurred, as reported in its consolidated statement of operations. Other Litigation The Company is subject to various other legal proceedings and claims, either asserted or unasserted, arising in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe the outcome of any of these matters will have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows. Litigation relating to the content delivery services industry is not uncommon, and the Company is, and from time to time has been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future. Other Matters The Company is subject to indirect taxation in various states and foreign jurisdictions. Laws and regulations that apply to communications and commerce conducted over the Internet are becoming more prevalent, both in the United States and internationally, and may impose additional burdens on the Company conducting business online or providing Internet-related services. Increased regulation could negatively affect the Company’s 95 Table of Contents business directly, as well as the businesses of its customers, which could reduce their demand for the Company’s services. For example, tax authorities in various states and abroad may impose taxes on the Internet-related revenue the Company generates based on regulations currently being applied to similar but not directly comparable industries. There are many transactions and calculations where the ultimate tax determination is uncertain. In addition, domestic and international taxation laws are subject to change. In the future, the Company may come under audit, which could result in changes to its tax estimates. The Company believes it maintains adequate tax reserves to offset potential liabilities that may arise upon audit. Although the Company believes its tax estimates and associated reserves are reasonable, the final determination of tax audits and any related litigation could be materially different than the amounts established for tax contingencies. To the extent these estimates ultimately prove to be inaccurate, the associated reserves would be adjusted, resulting in the recording of a benefit or expense in the period in which a change in estimate or a final determination is made. 14. Net (Loss) Income per Share The Company calculates basic and diluted earnings per weighted average share based on net income (loss). The Company uses the weighted- average number of shares of common stock outstanding during the period for the computation of basic earnings per share. Diluted earnings per share include the dilutive effect of convertible stock options and restricted stock units in the weighted-average number of shares of common stock outstanding. Net income (loss) from continuing operations is utilized in determining whether potential shares of common stock are dilutive or antidilutive for purposes of computing diluted net income (loss) per share. The following table sets forth the components used in the computation of basic and diluted net (loss) income per share for the periods indicated (in thousands, except per share data): Net loss from continuing operations Net (loss) income from discontinued operations Net loss available to common stockholders Basic weighted average shares of common stock Basic weighted average shares of common stock Dilutive effect of stock options and restricted stock units Diluted weighted average shares of common stock Basic income (loss) per share: Continuing operations Discontinued operations Basic net loss per share Diluted income (loss) per share: Continuing operations Discontinued operations Diluted net loss per share 2012 $ (30,035) (2,861) $ (32,896) 101,283 101,283 — 101,283 $ $ $ $ (0.30) (0.02) (0.32) (0.30) (0.02) (0.32) 2011 $ (30,066) 4,778 $ (25,288) 109,236 109,236 — 109,236 $ $ $ $ (0.28) 0.05 (0.23) (0.28) 0.05 (0.23) 2010 $(22,230) 1,879 $(20,351) 94,300 94,300 — 94,300 $ $ $ $ (0.24) 0.02 (0.22) (0.24) 0.02 (0.22) For the years ended December 31, 2012, 2011 and 2010, outstanding options and restricted stock units of approximately 2.3 million, 4.4 million and 5.0 million, respectively, were excluded from the computation of diluted net loss per share because including them would have been anti- dilutive. 96 Table of Contents 15. Stockholders’ Equity Common Stock During 2012, the Company completed two stock repurchase plans and commenced a third. On September 12, 2011, the Company’s Board of Directors (Board) authorized and approved a repurchase plan that authorized the Company to repurchase up to $25 million of its shares of common stock, exclusive of any commissions, markups or expenses, from time to time through March 12, 2012. During the year ended December 31, 2012, the Company repurchased and cancelled approximately 0.3 million shares under the initial repurchase plan. During the period September 12, 2011 through March 12, 2012, the Company repurchased and cancelled approximately 9.7 million shares of common stock for approximately $25.0 million ($25.2 million including commissions) under the initial repurchase plan. All repurchased shares were cancelled and returned to authorized but unissued status. As of December 31, 2012, the Company’s initial repurchase plan was complete. On May 3, 2012, the Company announced a second common stock repurchase plan that authorized the Company to repurchase up to $15 million of its shares of common stock, exclusive of any commissions, markups or expenses, from time to time through December 15, 2012. During the year ended December 31, 2012, the Company repurchased and cancelled approximately 5.7 million shares of common stock for approximately $15.0 million ($15.1 million including commissions) under the second repurchase plan. All repurchased shares were cancelled and returned to authorized but unissued status. As of December 31, 2012, the Company’s second repurchase plan was complete. On October 29, 2012, the Company’s Board authorized and approved a third common stock repurchase plan that authorized the Company to repurchase up to $10 million of its shares of common stock, exclusive of any commissions, markups or expenses, from time to time through May 9, 2013. Any repurchased shares will be cancelled and return to authorized but unissued status. During the three months ended December 31, 2012, the Company purchased and cancelled approximately 2.2 million shares under the third repurchase plan for approximately $4.6 million including commissions. During the year ended December 31, 2012, the Company issued 350,000 shares of its common stock in connection with the expiration of the holdback period related to the acquisition of Clickability. For additional information regarding the acquisition of Clickability, see Note 4. The Company has reserved approximately 6,171,000 unissued shares of Common Stock for future options and restricted stock units under the incentive compensation plan. Preferred Stock The board of directors has authorized the issuance of up to 7,500,000 shares of preferred stock at December 31, 2012. The preferred stock may be issued in one or more series pursuant to a resolution or resolutions providing for such issuance duly adopted by the board of directors. As of December 31, 2012, the Board had not adopted any resolutions for the issuance of preferred stock. 97 Table of Contents 16. Share-Based Compensation Incentive Compensation Plans The Company maintains Incentive Compensation Plans (the Plans) to attract, motivate, retain, and reward high quality executives and other employees, officers, directors, and consultants by enabling such persons to acquire or increase a propriety interest in the Company. The Plans are intended to be qualified plans under the Internal Revenue Code. The Plans allow the Company to award stock option grants and restricted stock units (RSUs) to employees, directors and consultants of the Company. During 2012, the Company has granted awards to employees, directors and consultants. The exercise price of incentive stock options granted under the Plan may not be granted at less than 100% of the fair market value of the Company’s common stock on the date of the grant. Data pertaining to stock option activity under the Plans are as follows: Balance at December 31, 2009 Granted Exercised Cancelled Balance at December 31, 2010 Granted Exercised Cancelled Balance at December 31, 2011 Granted Exercised Cancelled Balance at December 31, 2012 98 Number of Shares (In thousands) 7,860 5,751 (829) (774) 12,008 4,675 (262) (3,073) 13,348 2,972 (175) (1,834) 14,310 Weighted Average Exercise Price $ 5.22 4.17 2.35 4.95 4.94 5.68 2.30 5.04 5.23 2.40 1.08 6.10 4.58 Table of Contents The following table summarizes the information about stock options outstanding and exercisable at December 31, 2012: Options Outstanding Options Exercisable Exercise Price $ 0.00 — $ 1.50 $ 1.51 — $ 3.00 $ 3.01 — $ 4.50 $ 4.51 — $ 6.00 $ 6.01 — $ 7.50 $ 7.51 — $ 9.00 $ 9.01 — $10.50 $10.51 — $12.00 $12.01 — $13.50 $13.51 — $15.00 Weighted Average Remaining Contractual Life (Years) 2.95 9.32 7.21 7.39 5.04 7.70 4.86 4.22 — 4.41 Weighted Average Exercise Price $ 0.35 2.09 3.80 5.19 6.46 8.03 9.93 11.13 — 15.00 Number of Options Outstanding (In thousands) 725 2,759 4,742 2,708 1,907 891 10 164 — 404 14,310 Number of Options Exercisable (In thousands) 725 408 3,099 1,728 1,725 477 10 142 — 404 8,718 Weighted Average Exercise Price $ 0.35 2.37 3.78 5.09 6.46 8.00 9.93 11.15 — 15.00 The weighted-average grant-date fair value of options granted during the year ended December 31, 2012, 2011, and 2010 on a per-share basis was approximately $1.60, $3.70, and $2.55, respectively. The total intrinsic value of the options exercised during the years ended December 31, 2012, 2011, and 2010 was approximately $0.3 million, $0.8 million, and $2.8 million, respectively. The aggregate intrinsic value of options outstanding at December 31, 2012 is approximately $2.0 million. The weighted average remaining contractual term of options currently exercisable at December 31, 2012 was 6 years. The Company measures all employee share-based payment awards using a fair-value method. The grant date fair value is determined using the Black-Scholes-Merton pricing model. The Black-Scholes-Merton valuation calculation requires the Company to make key assumptions such as future stock price volatility, expected terms, risk-free rates, and dividend yield. The Company’s expected volatility is derived from its own volatility rate as a publicly traded company and historical volatilities of similar public companies within the Internet services and network industry. Each company’s historical volatility is weighted based on certain qualitative factors and combined to produce a single volatility factor used by the Company. The Company does not have enough historical experience as a public company to provide a reasonable estimate of the expected term; therefore, expected term is calculated using the “short-cut” method, which takes into consideration the grant’s contractual life and the vesting periods. The risk-free interest factor is based on the United States Treasury yield curve in effect at the time of the grant for zero coupon United States Treasury notes with maturities of approximately equal to each grant’s expected term. The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. Any impact from a forfeiture rate adjustment will be recognized in full in the period of the adjustment. 99 Table of Contents The fair value of each new option awarded is estimated on the grant date using the Black-Scholes-Merton model using the assumptions noted in the following table: Expected volatility Expected term, years Risk-free interest Expected dividends Years Ended December 31, 2011 72.25% 6.08 2.14% 0.00% 2012 78.10% 5.88 0.91% 0.00% 2010 67.08% 6.08 2.57% 0.00% Unrecognized share-based compensation related to stock options totaled $11.8 million at December 31, 2012. The Company expects to amortize unvested stock compensation related to stock options over a weighted average period of approximately 2 years at December 31, 2012. During the year ended December 31, 2012, 2011, and 2010, the Company recorded share-based compensation related to stock options of approximately $7.4 million, $9.6 million, and $9.8 million, respectively. The following table summarizes the different types of RSUs outstanding (in thousands): RSUs with service-based vesting conditions Performance-based RSUs Unvested RSUs Year Ended December 31, 2012 4,232 349 4,581 Year Ended December 31, 2011 3,392 459 3,851 Year Ended December 31, 2010 1,473 1,154 2,627 Each RSU represents the right to receive one share of the Company’s common stock upon vesting. The fair value of these RSUs was calculated based upon the Company’s closing stock price on the date of grant, and the share-based compensation expense is being recognized over the service period of the award. Data pertaining to RSUs activity under the Plan is as follows: Balance at December 31, 2009 Granted Vested Cancelled Balance at December 31, 2010 Granted Vested Cancelled Balance at December 31, 2011 Granted Vested Cancelled Balance at December 31, 2012 100 Number of Units (In thousands) 2,184 1,939 (1,039) (457) 2,627 2,829 (986) (619) 3,851 4,085 (2,450) (905) 4,581 Weighted Average Fair Value $ 5.22 4.18 5.57 1.12 4.31 3.32 4.09 4.04 3.66 2.37 2.68 3.17 2.74 Table of Contents The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2012, 2011, and 2010 was approximately $2.37, $3.32, and $4.18, respectively. The total intrinsic value of the units vested during the year ended December 31, 2012, 2011, and 2010 was approximately $5.4 million, $2.9 million, and $5.4 million, respectively. The aggregate intrinsic value of RSUs outstanding at December 31, 2012 is $10.2 million. Share-based payment compensation related to all restricted stock awards and RSUs for the years ended December 31, 2012, 2011, and 2010 was approximately $7.1 million, $6.3 million, and $6.4 million, respectively. At December 31, 2012 there was approximately $8.4 million of total unrecognized compensation costs related to RSUs. That cost is expected to be recognized over a weighted-average period of approximately 2.30 years as of December 31, 2012. The Company’s stock option plan contains an “early exercise” provision. Upon early exercise of the option, the exercising holder receives restricted common stock. The restricted stock shares vest over the same period as the original stock option award. If the restricted stock does not vest because the required service period is unmet, the Company has the option to reacquire the restricted common stock for the lesser of the amount paid to acquire it or the fair value of the common stock at the call date. As of December 31, 2012, 2011, and 2010, respectively, there were no unvested shares of restricted common stock related to the early exercise of stock options subject to repurchase by the Company. The Company applies the straight-line attribution method to recognize compensation costs associated with awards that are not subject to graded vesting. For awards that are subject to graded vesting and performance based awards, the Company recognizes compensation costs separately for each vesting tranche. The Company also estimates when and if performance-based awards will be earned. If an award is not considered probable of being earned, no amount of stock-based compensation is recognized. If the award is deemed probable of being earned, related compensation expense is recorded over the estimated service period. To the extent the Company’s estimates of awards considered probable of being earned changes, the amount of stock-based compensation recognized will also change. The Company recorded share-based compensation expense related to stock options, restricted stock and RSUs during the years ended December 31, 2012, 2011, and 2010 of approximately $14.5 million, $15.9 million, and $16.2 million, respectively. Unrecognized share-based compensation expense totaled approximately $20.1 million at December 31, 2012, which is expected to be recognized over a weighted average period of approximately 2.14 years. 101 Table of Contents The following table summarizes the components of share-based compensation expense included in the Company’s consolidated statement of operations for the years ended December 31, 2012, 2011, and 2010 in accordance with current accounting standards (in thousands): Share-based compensation expense by type of award: Stock options Restricted stock units Total share-based compensation expense Effect of share-based compensation expense on income by financial statement line: Cost of services General and administrative expense Sales and marketing expense Research and development expense Total cost related to share-based compensation expense 17. Related Party Transactions Years Ended December 31, 2012 2011 2010 $ 7,426 7,049 $14,475 $ 9,568 6,313 $15,881 $ 9,818 6,364 $16,182 $ 2,117 6,511 3,104 2,743 $14,475 $ 2,419 6,132 3,776 3,554 $15,881 $ 2,359 5,984 4,840 2,999 $16,182 In July 2006, an aggregate of 39,869,960 shares of Series B Preferred Stock was issued at a purchase price of $3.26 per share to certain accredited investors in a private placement transaction. As a result of this transaction, entities affiliated with Goldman, Sachs & Co., one of the lead underwriters of the Company’s initial public offering, became holders of more than 10% of the Company’s common stock. On June 14, 2007, upon the closing of the Company’s IPO, all outstanding shares of the Company’s Series B Convertible Preferred Stock automatically converted into shares of common stock on a 1-for-1 share basis. As of December 31, 2012, 2011, and 2010, Goldman, Sachs & Co. owned approximately 31%, 29%, and 30%, respectively, of the Company’s outstanding common stock. The Company leased office space to an entity in which current members of its board of directors have an ownership interest. During the years ended December 31, 2012 and 2011, the Company invoiced and collected approximately $15,640 and $70,500, respectively, in office space rental from this entity. For the year ended December 31, 2010 there was no relationship between the Company and this entity for office space rental. The Company sells services to entities owned, in whole or in part, by certain of the Company’s executive officers and directors. Revenue derived from related parties was approximately 1% for the years ended December 31, 2012 and 2011, respectively. For the year ended December 31, 2010, the Company did not generate any revenue from related parties. Total outstanding accounts receivable from all related parties as of December 31, 2012 and 2011 was approximately $1.3 million and $0.4 million, respectively. As of December 31, 2012, the Company has an allowance for doubtful accounts receivable of approximately $0.8 million for an outstanding related party accounts receivable. The Company leased office space from a company owned by one of the Company’s executives. Rent expense for the lease, including reimbursement for telecommunication lines, was approximately $0 for the years ended December 31, 2012 and 2011, and was $4,000 for the year ended December 31, 2010. 102 Table of Contents 18. Leases and Commitments Operating Leases The Company is committed to various non-cancelable operating leases for office space and office equipment which expire through 2019. Certain leases contain provisions for renewal options and rent escalations upon expiration of the initial lease terms. Approximate future minimum lease payments over the remaining lease periods as of December 31, 2012 are as follows (in thousands): 2013 2014 2015 2016 2017 and thereafter Total minimum payments Purchase Commitments $ 3,559 2,953 2,714 2,054 4,033 $15,313 The Company has long-term commitments for bandwidth usage and co-location with various networks and ISPs. The following summarizes minimum commitments as of December 31, 2012 (in thousands): 2013 2014 2015 2016 2017 and thereafter Total minimum payments $33,538 21,114 15,646 3,578 69 $73,945 Rent and operating expense relating to these operating lease agreements and bandwidth and co-location agreements was approximately $58.8 million, $60.1 million, and $52.4 million, respectively, for the years ended December 31, 2012, 2011, and 2010. Capital Leases The Company leases equipment under capital lease agreements which extend through 2016. As of December 31, 2012 and 2011, the outstanding balance for capital leases was approximately $2.1 and $3.9 million, respectively. The Company recorded assets under capital lease obligations of approximately $5.1 and $5.3 million, respectively, as of December 31, 2012 and 2011. Related accumulated amortization totaled approximately $2.9 million and $1.4 million, respectively as of December 31, 2012 and 2011. The assets acquired under capital leases and related accumulated amortization is included in property and equipment, net in the consolidated balance sheets. The related amortization is included in depreciation and amortization expense in the Consolidated Statements of Operations. The average interest rate on the Company’s outstanding capital leases at December 31, 2012 was approximately seven percent. Interest expense related to capital leases was approximately $0.2 million, $0.2 million, and $0.1 million, respectively, for the years ended December 31, 2012, 2011, and 2010. 103 Table of Contents Future minimum capital lease payments at December 31, 2012 were as follows (in thousands): 2013 2014 2015 2016 2017 and thereafter Total Amounts representing interest Present value of minimum lease payments 19. Concentrations $1,377 498 238 133 5 2,251 (126) $2,125 For each of the years ended December 31, 2012 and 2011, Netflix, Inc. represented approximately 11% of the Company’s total revenue. During the year ended December 31, 2010, the Company did not have any customers for which revenue exceeded 10% of total revenue. Revenue from sources outside North America totaled approximately $56.4 million, $52.0 million, and $42.0 million, respectively, for the years ended December 31, 2012, 2011, and 2010. During the year ended December 31, 2012, the Company had two countries, Japan and the United States, that accounted for 10% or more of the Company’s total revenues. No single country outside of the United States accounted for 10% or more of the Company’s total revenues during the years ended December 31, 2011 and 2010, respectively. 20. Income Taxes (Loss) income before income taxes consists of the following (in thousands): (Loss) income before income taxes: United States Foreign The components of the provision (benefit) for income taxes are as follows (in thousands): Current: Federal State Foreign Total current Deferred: Federal State Foreign Total deferred Total (benefit) provision 104 Years Ended December 31, 2011 2010 2012 $(29,991) 437 $(29,554) $(30,438) (1,866) $(32,304) $(24,602) 3,099 $(21,503) Years Ended December 31, 2012 2011 2010 $ — (20) 558 538 16 — (73) (57) $ 481 $ — 198 550 748 (2,571) — (415) (2,986) $(2,238) $ — 130 1,600 1,730 80 — (1,083) (1,003) 727 $ Table of Contents A reconciliation of the U.S. federal statutory rate to the Company’s effective income tax rate is shown in the table below (in thousands, except percent): U.S. federal statutory tax rate Impact related to sale of discontinued operations Valuation allowance Foreign income taxes State income taxes Non-deductible expenses Uncertain tax positions Share-based compensation Other Provision for (benefit from) income taxes 2012 Years Ended December 31, 2011 2010 Amount $(10,344) — 10,329 351 (20) 168 (18) — 15 481 $ Percent 35% — (35) (1) — (1) — — — (2)% Amount $(11,306) 7,893 52 797 198 136 (9) — 1 $ (2,238) Percent 35% (24) — (3) (1) — — — — 7% Amount $(7,526) — 8,311 (260) 131 110 (366) 190 137 727 $ Percent 35% — (38) 1 (1) — 2 (1) (1) (3)% Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purpose. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands): Deferred tax assets: Share-based compensation Net operating loss and tax credit carry-forwards Deferred revenue Accounts receivable reserves Fixed assets Other Total deferred tax assets Deferred tax liabilities: Intangible assets Prepaid expenses Other Total deferred tax liabilities Valuation allowance Net deferred tax assets (liabilities) December 31, 2012 2011 $ 12,506 27,484 3,984 1,281 4,904 921 51,080 (2,103) (187) (160) (2,450) (46,215) $ 2,415 $ 12,540 17,951 4,058 1,388 3,822 522 40,281 (3,053) (173) (181) (3,407) (36,215) 659 $ The Company made certain corrections to the December 31, 2011 deferred tax asset balances compared to the amounts presented in the prior year financial statements. These corrections related to fixed assets in the amount of $3.0 million and net operating loss and tax credit carryforwards in the amount of $0.4 million with an offsetting increase to the valuation allowance of $3.4 million as of December 31, 2011. The corrections did not impact the net deferred tax asset of $0.7 million as of December 31, 2011. In addition to the deferred tax assets listed in the table above, the Company has unrecorded tax benefits of $10.0 million and $9.9 million at December 31, 2012 and December 31, 2011 respectively, primarily attributable to the difference between the amount of the financial statement expense and the allowable tax deduction associated with employee stock options and restricted stock units, which, if subsequently realized will be 105 Table of Contents recorded to contributed capital. As a result of net operating loss carryforwards, the Company was not able to recognize the excess tax benefits of stock option deductions because the deductions did not reduce income tax payable. Although not recognized for financial reporting purposes, this unrecorded tax benefit is available to reduce future income and is incorporated into the disclosed amounts of the Company’s federal and state NOL carryforwards, discussed below. The federal and state net operating loss carryforwards relate to prior years’ NOLs, which may be used to reduce tax liabilities in future years. At December 31, 2012, the Company had $68.3 million federal and $52.4 million state net operating loss carryforwards, including the NOLs discussed in the preceding paragraph. The Company’s federal net operating losses will begin to expire in 2019 and the state net operating loss carryforwards will begin to expire in 2012. Pursuant to Sections 382 and 383 of the Internal Revenue Code, the utilization of NOLs and other tax attributes may be subject to substantial limitations if certain ownership changes occur during a three-year testing period (as defined by the Internal Revenue Code). At December 31, 2012 the Company had state tax credit carryforwards of $0.6 million, which will expire at various dates beginning in 2013. At December 31, 2012 the Company had federal tax credit carryforwards of $0.3 million, which will expire at various dates beginning in 2026. The Company reduces the carrying amounts of deferred tax assets by a valuation allowance, if based on the evidence available, it is more- likely-than-not that such assets will not be realized. In making the assessment under the more-likely-than-not standard, appropriate consideration must be given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods by jurisdiction, unitary versus stand alone state tax filings, the Company’s experience with loss carryforwards not expiring unutilized, and all tax planning alternatives that may be available. A valuation allowance has been recorded against the Company’s deferred tax assets, with the exception of deferred tax assets at certain foreign subsidiaries and deferred tax assets relating to the Company’s uncertain tax positions, as management cannot conclude that it is more likely than not that these assets will be realized. No valuation allowance is being provided on $1.6 million of deferred tax assets associated with certain net operating losses because it is believed that they will be used to offset the Company’s liabilities relating to its uncertain tax positions. The Company has certain taxable temporary differences related to intangible assets that cannot be offset by existing deductible temporary differences resulting in a deferred tax liability of approximately $0.4 million and $0.6 million as of December 31, 2012 and 2011, respectively. A summary of the activities associated with the Company’s reserve for unrecognized tax benefits, interest and penalties follow (in thousands): Balance at January 1, 2011 Settlements Reduction for tax positions of prior years Balance at December 31, 2011 Additions for tax positions related to current year Settlements Reduction for tax positions of prior years Balance at December 31, 2012 106 Unrecognized Tax Benefits 53 $ — (14) 39 1,718 — — 1,757 $ Table of Contents The Company recognizes interest and penalties related to unrecognized tax benefits in its tax provision. As of December 31, 2012, the Company had an interest and penalties accrual related to unrecognized tax benefits of $80,000, which decreased during 2012 by $18,000. The Company anticipates its unrecognized tax benefits may increase or decrease within twelve months of the reporting date, as audits or reviews are initiated or settled and as a result of settled potential tax liabilities in certain foreign jurisdictions. It is not currently reasonably possible to estimate the range of change. The Company files income tax returns in jurisdictions with varying statues of limitations. Tax years 2009 through 2011 generally remain subject to examination by federal and most state tax authorities. As of December 31, 2012, the Company is not under any federal or state examinations. Income taxes have not been provided on a portion of the undistributed earnings of the Company’s foreign subsidiaries over which the Company had sufficient influence to control the distribution of such earnings and had determined that substantially all of such earnings were reinvested indefinitely. The undistributed earnings of the Company’s foreign subsidiaries were approximately $1.2 million at December 31, 2012. These earnings could become subject to either or both federal income tax and foreign withholding tax if they are remitted as dividends, if foreign earnings are loaned to any of the Company’s domestic subsidiaries, or if the Company sells its investment in such subsidiaries. 21. 401(k) Plan Effective January 1, 2004, the Company adopted the Limelight Networks 401(k) Plan covering effectively all employees of the Company. The plan is a 401(k) profit sharing plan in which participating employees are fully vested in any contributions they make. Effective January 1, 2007, the Company amended the plan to include a Company match. The Company will match employee deferrals as follows: a dollar-for-dollar match on eligible employee’s deferral that does not exceed 3% of compensation for the year and a 50% match on the next 2% of the employee deferrals. Company employees may elect to reduce their current compensation up to the statutory limit. The Company made matching contributions of approximately $1.1 million, $0.9 million, and $0.7 million, respectively, during the years ended December 31, 2012, 2011, and 2010. 22. Segment Reporting The Company operates in one industry segment — content delivery and related services. The Company operates in three geographic areas — North America, Europe, Middle East and Africa (EMEA) and Asia Pacific, including Japan. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single operating segment. 107 Table of Contents Revenue by geography is based on the location of the customer from which the revenue is earned. The following table sets forth revenue and long-lived assets by geographic area (in thousands): Revenue Domestic revenue International revenue EMEA International revenue Asia Pacific Total revenue Long-lived Assets Domestic long-lived assets International long-lived assets Total long-lived assets 23. Fair Value Measurements Years Ended December 31, 2011 2012 2010 $ 123,866 $ 119,298 $ 112,243 23,984 17,996 $ 180,236 $ 171,292 $ 154,223 25,968 26,026 26,476 29,894 Years Ended December 31, 2011 2012 2010 $ 35,318 $ 49,831 $ 39,692 15,260 $ 47,638 $ 65,575 $ 54,952 15,744 12,320 The Company evaluates certain of its financial instruments within the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1 Level 2 Level 3 — defined as observable inputs such as quoted prices in active markets; — defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. As of December 31, 2012 and 2011, the Company held certain assets and liabilities that were required to be measured at fair value on a recurring basis. These include money market funds, commercial paper, corporate notes and bonds, U.S. government agency bonds, and publicly traded stocks, which are classified as either cash and cash equivalents or marketable securities. The Company also had acquisition related contingent consideration which is classified as a current liability on the Company’s consolidated balance sheets. The Company’s financial assets are valued using market prices on both active markets (level 1) and less active markets (level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments or identical instruments in less active markets. Level 3 inputs are valued using models that take into account the terms of the arrangement as well as multiple inputs where applicable, such as estimated units sold and other customer utilization metrics. 108 Table of Contents The following is a summary of fair value measurements at December 31, 2012 (in thousands): Fair Value Measurements at Reporting Date Using Quoted Prices In Active Markets for Identical Assets (Level 1) $ $ — 14,697 — — — 18 14,715 Total $ 6,270 14,697 9,529 500 2,741 18 $33,755 Significant Other Observable Inputs (Level 2) $ $ 6,270 — 9,529 500 2,741 — 19,040 Significant Unobservable Inputs (Level 3) $ $ — — — — — — — Description Assets: Government agency bonds (1) Money market funds (2) Corporate notes and bonds (1) Commercial paper (1) Certificate of deposit (1) Publicly traded common stock (1) Total assets measured at fair value (1) Classified in marketable securities (2) Classified in cash and cash equivalents For the year ended December 31, 2012, realized gains and losses for marketable securities are reported in interest income, unrealized gains and losses for marketable securities are included in other comprehensive income and expense. For the year ended December 31, 2012, the Company had net unrealized losses of approximately $28,000. The fair value measurement for contingent consideration is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value. The progressions of the Company’s Level 3 instruments for the year ended December 31, 2012 are shown in the table below (in thousands): Balance at December 31, 2011 Adjustment to fair value of AcceloWeb contingent consideration Payment of contingent consideration Balance at December 31, 2012 109 Acquisition Related Contingent Consideration 994 $ (842) (152) — $ Table of Contents The following is a summary of money market funds, marketable securities, other investment-related assets and current liabilities at December 31, 2011 (in thousands): Fair Value Measurements at Reporting Date Using Quoted Prices In Active Markets for Identical Assets (Level 1) $ $ $ $ — 24,855 — — — 51 24,906 — — Total $ 9,614 24,855 5,757 2,749 2,730 51 $45,756 $ $ 994 994 Significant Other Observable Inputs (Level 2) $ $ $ $ 9,614 — 5,757 2,749 2,730 — 20,850 — — Significant Unobservable Inputs (Level 3) $ $ $ $ — — — — — — — 994 994 Description Assets: Government agency bonds (1) Money market funds (2) Corporate notes and bonds (1) Commercial paper (1) (2) Certificate of deposit (1) Publicly traded common stock (1) Total assets measured at fair value Liabilities: Acquisition related contingent consideration Total liabilities measured at fair value (1) Classified in marketable securities (2) Classified in cash and cash equivalents For the year ended December 31, 2011, realized gains and losses for marketable securities are reported in interest income, unrealized gains and losses for marketable securities are included in other comprehensive income and expense. For the year ended December 31, 2011, the Company had net unrealized gains of approximately $0.1 million. On May 9, 2011, the Company acquired AcceloWeb. The total consideration associated with the AcceloWeb acquisition included contingent consideration with an aggregate potential value of $8.0 million ($4.0 million payable in cash and $4.0 million payable in the Company’s common stock) with terms described in Note 4. Additionally, the total consideration associated with the Delve acquisition in July 2010 included contingent consideration of up to $0.5 million upon the achievement of certain financial milestones. The progressions of the Company’s Level 3 instruments for the year ended December 31, 2011 are shown in the table below (in thousands): Balance at December 31, 2010 Additions Accretion Payment of contingent consideration Balance at December 31, 2011 Acquisition Related Contingent Consideration 414 $ 764 97 (281) 994 $ The carrying amount of cash equivalents approximates fair value because their maturity is less than three months. The carrying amount of short-term and long-term marketable securities approximates fair value as the 110 Table of Contents securities are marked to market as of each balance sheet date with any unrealized gains and losses reported in stockholders’ equity. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts. The Company did not estimate the fair value of its cost basis investment at December 31, 2011 because the Company did not identify any events or circumstances that would have a significant adverse effect on the fair value of the investment. Determining fair value was not practicable because the entity in which the Company made the investment is not a publically traded company and information necessary to determine fair value was not available. 24. Quarterly Financial Results (unaudited) The following table sets forth certain unaudited quarterly results of operations of the Company for the years ended December 31, 2012 and 2011. In the opinion of management, this information has been prepared on the same basis as the audited consolidated financial statements and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below for a fair statement of the quarterly information when read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K (in thousands, except per share data): Revenues Gross profit Net loss from continuing operations Net loss from discontinued operations Net loss Basic and diluted net loss per share from continuing operations Basic and diluted net loss per share from discontinued operations Basic and diluted net loss per share Basic and diluted weighted average common shares outstanding Revenues Gross profit Net loss from continuing operations Net (loss) income from discontinued operations Net (loss) income Basic and diluted net loss per share from continuing operations Basic and diluted net (loss) income per share from discontinued operations Basic and diluted net (loss) income per share Basic and diluted weighted average common shares outstanding 111 March 31, 2012 $ 44,316 $ 16,986 $ (9,697) $ (309) $ (10,006) (0.09) $ (0.01) $ $ (0.10) 104,226 March 31, 2011 $ 41,403 $ 15,138 $ (6,500) $ (3,318) $ (9,818) (0.06) $ $ (0.03) (0.09) $ 103,917 For the Three Months Ended Sept. 30, June 30, 2012 2012 $ 45,001 $ 44,447 $ 16,718 $ 16,884 (610) $ $ (9,437) (218) $ $ (391) (828) $ $ (9,828) (0.01) $ (0.10) $ 0.00 $ 0.00 $ $ $ (0.01) (0.10) 99,359 102,783 For the Three Months Ended Sept. 30, June 30, 2011 2011 $ 42,352 $ 41,558 $ 15,074 $ 13,181 $ (6,402) $ (11,169) $ 11,420 $ (2,766) 5,018 $ $ (13,935) (0.06) $ (0.10) $ $ $ 0.10 (0.02) 0.04 $ (0.12) $ 113,662 113,113 Dec. 31, 2012 $ 46,471 $ 17,933 $ (10,291) $ (1,943) $ (12,234) (0.10) $ (0.02) $ $ (0.12) 98,765 Dec. 31, 2011 $ 45,979 $ 18,313 $ (5,995) $ (558) $ (6,553) (0.06) $ $ (0.00) (0.06) $ 106,253 Table of Contents In May 2010, the Company made a strategic investment in Gaikai, a private cloud-based gaming technology company that allows users to play major PC and console games through a web browser. In June 2012, Sony entered into a definitive agreement to acquire Gaikai for approximately $380 million. In August 2012, Sony completed its acquisition of Gaikai and the Company recorded a gain on sale of its cost basis investment in Gaikai of $9.4 million, which is included in the Company’s quarterly results for the three month period ended September 30, 2012. On January 27, 2010 and April 30, 2010, the Company acquired chors and EyeWonder. On September 1, 2011, the Company completed the sale of its EyeWonder and chors video and rich media advertising services to DG. Accordingly, the results related to the sale of EyeWonder and chors for the year ended December 31, 2011 and prior periods have been reclassified to discontinued operations. For the three month periods ended March 31, 2011 and the three month period ended June 30, 2011, the quarterly information previously reported on Form 10-Q was revised to reflect the operations of EyeWonder and chors as discontinued operations. The table below reflects the revisions made to revenues and gross profit for the applicable periods (in thousands): Revenue: March 31, 2011 June 30, 2011 Gross Profit: March 31, 2011 June 30, 2011 As Reported Discontinued Operations Continuing Operations $49,817 $50,539 $20,405 $18,678 $ $ $ $ (8,414) (8,981) $ 41,403 $ 41,558 (5,267) (5,497) $ 15,138 $ 13,181 112 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Controls and Procedures Item 9A. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2012, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit 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 our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting During the third quarter of 2012, we identified a material weakness in our internal controls over financial reporting. The material weakness related to the classification of cash collected from DG related to the sale of EyeWonder and chors in the unaudited Condensed Consolidated Statements of Cash Flows. The cash collected from DG was classified as cash generated from operations in the Condensed Consolidated Statements of Cash Flows, which was incorrect. The cash collected from DG should have been classified in investing activities in the Condensed Consolidated Statements of Cash Flows. The correction of the improperly classified cash was corrected in the third quarter of 2012, and we amended our March 31, 2012 Form 10-Q and our June 30, 2012 Form 10-Q to reflect the correct classification. The correction of the classification error had no impact on our results of operations for either period. Since the date of discovery of this material weakness and through the date of this Form 10-K, we have taken steps that we feel have strengthened our internal controls, including implementing a stronger review process around the preparation of our consolidated statement of cash flows and updating our processes and procedures to ensure that accounting personnel have sufficient guidance to remediate the material weakness. The actions we have taken to remediate this material weakness are subject to continued management review supported by confirmation and testing, as well as oversight by the Audit Committee of our Board of Directors. As of December 31, 2012, this material weakness has been remediated. There were no other changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2012. Management reviewed the results of its assessment with our Audit Committee. 113 Table of Contents The effectiveness of our internal control over financial reporting as of December 31, 2012 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report which is included in this annual report on Form 10-K. Limitations on Effectiveness of Controls and Procedures 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. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. 114 Table of Contents Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of Limelight Networks, Inc. We have audited Limelight Networks, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Limelight Networks, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Limelight Networks, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Limelight Networks, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012 and our report dated March 1, 2013 expressed an unqualified opinion thereon. Phoenix, Arizona March 1, 2013 /s/ Ernst & Young LLP 115 Table of Contents Item 9B. Other Information None. 116 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item relating to our directors and nominees is included under the captions “Proposal One: Election of Directors,” “— Information About the Directors and Nominees,” and “Board of Directors Meetings and Committees — Nominating and Governance Committee” in our Proxy Statement related to the 2013 Annual Meeting of Shareholders and is incorporated herein by reference. The information required by this item regarding our Audit Committee is included under the caption “Board of Directors Meetings and Committees” in our Proxy Statement related to the 2013 Annual Meeting of Shareholders and is incorporated herein by reference. Pursuant to General Instruction G(3) of Form 10-K, the information required by this item relating to our executive officers is included under the caption “Executive Officers of the Registrant” in Part I of this report. The information required by this item regarding compliance with Section 16(a) of the Securities Act of 1934 is included under the caption “Executive Compensation and Other Matters — Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement related to the 2013 Annual Meeting of Shareholders and is incorporated herein by reference. We have adopted a code of ethics and business conduct that applies to our Chief Executive Officer, Chief Financial Officer and all other principal executive and senior financial officers and all employees, officers and directors. This code of ethics and business conduct is posted on our website. The Internet address for our website is www.limelight.com, and the code of ethics may be found from our main webpage by clicking first on “Company” and then on “Investor Overview”, next on “Corporate Governance”, and finally on “Code of Ethics” under Governance Documents. We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our website, on the webpage found by clicking through to “Code of Business Conduct” as specified above. Item 11. Executive Compensation The information appearing under the headings “Executive Compensation and Other Matters,” “— Director Compensation,” “Board of Directors Meetings and Committees — Compensation Committee Interlocks and Insider Participation,” and “— Compensation Committee Report” in our Proxy Statement related to the 2013 Annual Meeting of Shareholders is incorporated herein by reference. 117 Table of Contents Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item relating to security ownership of certain beneficial owners and management is included under the heading “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement related to the 2013 Annual Meeting of Shareholders, and is incorporated herein by reference. Equity Compensation Plan Information The following table provides information regarding our current equity compensation plans as of December 31, 2012 (shares in thousands): Plan category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) 14,310 — 14,310 $ $ 4.58 — 4.58 6,171 — 6,171 Item 13. Certain Relationships, Related Transactions, and Director Independence The information required by this item relating to review, approval or ratification of transactions with related persons is included under the heading “Certain Relationships and Related Transactions,” and the information required by this item relating to director independence is included under the headings “Proposal One: Election of Directors” and “Board of Directors Meetings and Committees — Board Independence,” in each case in our Proxy Statement related to the 2013 Annual Meeting of Shareholders, and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this item is included under the headings “Audit Committee Report—Principal Accountant Fees and Services” and “— Audit Committee Pre-Approval Policy,” in each case in our Proxy Statement related to the 2013 Annual Meeting of Shareholders, and is incorporated herein by reference. 118 Table of Contents Item 15. Exhibits and Financial Statement Schedules. (a) Documents included in this annual report on Form 10-K. PART IV (1) (2) Financial Statements. See Item 8 — Financial Statements and Supplementary Data included in this annual report on Form 10-K. Financial Schedules. The schedule listed below is filed as part of this annual report on Form 10-K: Schedule II — Valuation and Qualifying Accounts Page 121 All other schedules are omitted as the information required is inapplicable or the information is presented in the consolidated financial statements and the related notes. (b) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits and are incorporated herein. 119 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIMELIGHT NETWORKS, INC. Date: March 1, 2013 By: /S/ DOUGLAS S. LINDROTH Douglas S. Lindroth Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert A. Lento and Douglas S. Lindroth and each of them, each with the power of substitution, their attorney-in-fact, to sign any amendments to this Annual Report on Form 10-K (including post-effective amendments), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title /S/ ROBERT A. LENTO Robert A. Lento President, Chief Executive Officer and Director (Principal Executive Officer) /S/ DOUGLAS S. LINDROTH Douglas S. Lindroth /S/ WALTER D. AMARAL Walter D. Amaral /S/ THOMAS FALK Thomas Falk /S/ JEFFREY T. FISHER Jeffrey T. Fisher /S/ JOSEPH H. GLEBERMAN Joseph H. Gleberman /S/ FREDRIC W. HARMAN Fredric W. Harman /S/ PETER J. PERRONE Peter J. Perrone /S/ DAVID C. PETERSCHMIDT David C. Peterschmidt /S/ NATHAN F. RACIBORSKI Nathan F. Raciborski Date March 1, 2013 March 1, 2013 Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) Non-Executive Chairman of the Board and Director March 1, 2013 Director Director Director Director Director Director March 1, 2013 March 1, 2013 March 1, 2013 March 1, 2013 March 1, 2013 March 1, 2013 Co-Founder, Chief Technology Officer and Director March 1, 2013 120 Table of Contents LIMELIGHT NETWORKS, INC. SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS (In thousands) Description Year ended December 31, 2010: Allowances deducted from asset accounts: Reserves for accounts receivable Deferred tax asset valuation allowance Year ended December 31, 2011: Allowances deducted from asset accounts: Reserves for accounts receivable Deferred tax asset valuation allowance Year ended December 31, 2012: Allowances deducted from asset accounts: Reserves for accounts receivable Deferred tax asset valuation allowance Additions Balance at Beginning of Period Charged to Costs and Expenses Charged Against Revenue Deductions Write-Offs Net of Recoveries Balance at End of Period $ 9,226 $ 34,368 1,194 752 (110) — 6,732 $ $ 35,120 1,357 1,095 (270) — $ 4,391 $ 36,215 2,062 10,000 (170) — 121 3,578 — 3,428 — 2,213 — $ $ $ $ $ $ 6,732 35,120 4,391 36,215 4,070 46,215 Table of Contents INDEX TO EXHIBITS Exhibit Number 2.1(1) 2.2(2) 3.1(3) 3.2(4) 4.1(5) 4.2(5) 10.1(5) 10.2(5) 10.3(5) 10.4(5) 10.4.01†(6) 10.4.02(7) 10.5†(8) 10.5.01†(9) 10.5.02†(10) 10.5.03†(11) 10.6(12) 10.7(13) 10.7.01(14) 10.8†(15) 10.8.01†(16) Exhibit Title Agreement and Plan of Merger by and among Registrant, Elvis Merger Sub One Corporation, Elvis Merger Sub Two LLC, EyeWonder, Inc., John J. Vincent, as Stockholder Representative and Deutsche Bank National Trust, as Escrow Agent, dated December 21, 2009. Purchase Agreement dated as of August 30, 2011 by and among DG FastChannel, Inc., Limelight Networks, Inc. and Limelight Networks Germany GmbH. Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect. Amended and Restated Bylaws of the Registrant, as currently in effect. Specimen Common Stock Certificate of the Registrant. Amended and Restated Investors’ Rights Agreement dated July 12, 2006. Form of Indemnification Agreement for directors and officers. Amended and Restated 2003 Incentive Compensation Plan and form of agreement thereunder. 2007 Equity Incentive Plan and form of agreement thereunder. Employment Agreement between the Registrant and Jeffrey W. Lunsford dated October 20, 2006. Equity Award Amendment and Grant of Restricted Stock Units under the Registrant’s 2007 Equity Incentive Plan dated November 25, 2008. Amendment to Employment Agreement between the Registrant and Jeffrey W. Lunsford dated December 30, 2008. Bandwidth/Capacity Agreement between the Registrant and Global Crossing Bandwidth, Inc., dated August 29, 2001, and amendments thereto. Amendments to Bandwidth/Capacity Agreement between the Registrant and Global Crossing Bandwidth, Inc., dated August 29, 2001. Amendment #23 to Bandwidth/Capacity Agreement between the Registrant and Global Crossing Bandwidth, Inc., dated August 29, 2001, as amended. Amendment #24 to Bandwidth/Capacity Agreement between the Registrant and Global Crossing Bandwidth, Inc., dated August 29, 2001, as amended. Form of At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement for officers and employees. Employment Agreement between the Registrant and David M. Hatfield dated March 27, 2007. Amendment to Employment Agreement between the Registrant and David M. Hatfield dated December 30, 2008. Edge Computing Network Service and License Agreement dated March 1, 2007 between the Registrant and Microsoft Corporation, and Addendum to the Edge Computing Network Service and License Agreement dated March 19, 2007. Amendment to Edge Computing Network Service and License Agreement between the Registrant and Microsoft Corporation dated October 1, 2008. 10.9(17) Employment Agreement between the Registrant and Philip C. Maynard effective October 22, 2007. 122 Table of Contents Exhibit Number 10.9.01(18) 10.10(19) 10.10.01(20) 10.11(21) 10.11.01(22) 10.11.02 10.12(23) 10.13(24) 10.14(25) 10.15(26) 10.16(27) 10.17(28) 10.18(29) 10.19 10.20 10.21 10.22 21.1(30) 23.1 24.1 31.1 31.2 32.1* Exhibit Title Amendment to Employment Agreement between the Registrant and Philip C. Maynard dated December 30, 2008. Employment Agreement between the Registrant and Nathan F. Raciborski dated September 22, 2008. Amendment to Employment Agreement between the Registrant and Nathan F. Raciborski dated December 30, 2008. Employment Agreement between the Registrant and Douglas S. Lindroth dated October 14, 2008. Amendment to Employment Agreement between the Registrant and Douglas S. Lindroth dated December 30, 2008. Amendment No. 2 to Employment Agreement between the Registrant and Douglas S. Lindroth dated December 3, 2012. Master Executive Bonus and Management Bonus Plan. Form of 2007 Equity Incentive Plan Restricted Stock Unit Agreement. Form of 2007 Equity Incentive Plan Restricted Stock Unit Agreement for Non-U.S. Employees. European Expansion Consulting Agreement among the Registrant, eValue AG and Thomas Falk dated April 13, 2010. Non-Competition Agreement between the Registrant and Thomas Falk dated April 13, 2010. Standard Office Lease between the Registrant and GateWay Tempe LLC dated as of July 20, 2010. Employment Agreement between the Registrant and Charles Kirby Wadsworth dated June 22, 2012. Employment Agreement between the Registrant and Indu Kodukula dated October 8, 2012. Interim CEO Employment Agreement between the Registrant and Robert A. Lento dated November 8, 2012. Employment Agreement between the Registrant and Robert A. Lento dated January 22, 2013. Employment Agreement between the Registrant and George Vonderhaar dated January 22, 2013. List of subsidiaries of the Registrant. Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. Power of Attorney (See signature page). Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 123 Table of Contents Exhibit Number 32.2* 101.INS** 101.SCH** 101.CAL** 101.DEF** 101.LAB** 101.PRE** Exhibit Title Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. XBRL INSTANCE DOCUMENT. XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT. XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT. XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT. XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT. XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) Incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on December 21, 2009. Incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on September 6, 2011. Incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on June 14, 2011. Incorporated by reference to Exhibit 3.4 of the Registrant’s Form S-1 Registration Statement (Registration No. 333-141516), declared effective by the Securities and Exchange Commission on June 7, 2007. Incorporated by reference to the same number exhibit of the Registrant’s Form S-1 Registration Statement (Registration No. 333-141516), declared effective by the Securities and Exchange Commission on June 7, 2007. Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on November 26, 2008. Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on December 31, 2008. Incorporated by reference to Exhibit 10.10 of the Registrant’s Form S-1 Registration Statement (Registration No. 333-141516), declared effective by the Securities and Exchange Commission on June 7, 2007. Incorporated by reference to Exhibit 10.10.01 of the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2008. Incorporated by reference to Exhibit 10.10.02 of the Registrant’s Annual Report on Form 10-K filed on March 13, 2009. Incorporated by reference to Exhibit 10.10.03 of the Registrant’s Quarterly Report on Form 10-Q filed on November 6, 2009. Incorporated by reference to Exhibit 10.12 of the Registrant’s Form S-1 Registration Statement (Registration No. 333-141516), declared effective by the Securities and Exchange Commission on June 7, 2007. Incorporated by reference to Exhibit 10.13 of the Registrant’s Form S-1 Registration Statement (Registration No. 333-141516), declared effective by the Securities and Exchange Commission on June 7, 2007. Incorporated by reference to Exhibit 99.6 of the Registrant’s Current Report on Form 8-K filed on December 31, 2008. Incorporated by reference to Exhibit 10.15 of the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2007. 124 Table of Contents (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27) (28) (29) (30) * ** Incorporated by reference to Exhibit 10.15.01 of the Registrant’s Quarterly Report on Form 10-Q filed on November 13, 2008. Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K filed on November 13, 2007. Incorporated by reference to Exhibit 99.7 of the Registrant’s Current Report on Form 8-K filed on December 31, 2008. Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on September 23, 2008. Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K filed on December 31, 2008. Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on October 15, 2008. Incorporated by reference to Exhibit 99.4 of the Registrant’s Current Report on Form 8-K filed on December 31, 2008. Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on May 19, 2009. Incorporated by reference to Exhibit (a)(1)(I) of the Registrant’s Schedule TO filed on May 15, 2008. Incorporated by reference to Exhibit (a)(1)(J) of the Registrant’s Schedule TO filed on May 15, 2008. Incorporated by reference to Exhibit 99.3 of the Registrant’s Current Report on Form 8-K filed on May 6, 2010. Incorporated by reference to Exhibit 99.4 of the Registrant’s Current Report on Form 8-K filed on May 6, 2010. Incorporated by reference to Exhibit 10.32 of the Registrant’s Quarterly Report on Form 10-Q filed on November 5, 2010. Incorporated by reference to Exhibit 10.29 of the Registrant’s Quarterly Report on Form 10-Q filed on November 5, 2012. Incorporated by reference to Exhibit 21.1 of the Registrant’s Annual Report on Form 10-K filed on March 2, 2012. This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. In accordance with Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. † Confidential treatment has been requested or granted for portions of this exhibit by the Securities and Exchange Commission. (Back To Top) 125 Section 2: EX-10.11.02 (EX-10.11.02) Exhibit 10.11.02 LIMELIGHT NETWORKS, INC. SECOND AMENDMENT TO EMPLOYMENT AGREEMENT This Second Amendment to the Employment Agreement (the “Amendment”) is made as of December 3, 2012, by and between Limelight Networks, Inc. (the “Company”), and Douglas Lindroth (the “Executive”). RECITALS A. The Company and Executive entered into that certain Employment Agreement dated as of October 14, 2008 which was amended as of December 30, 2008 (collectively, the “Agreement”); and B. The Company and Executive desire to amend the Agreement to clarify and memorialize certain existing aspects of Executive’s employment with the Company. NOW, THEREFORE, the Company and Executive agree that in consideration of the foregoing and the promises and covenants contained herein, the parties agree as follows: AGREEMENT 1. Executive Office Location. Section 1(d) is added to the Agreement and reads as follows: 1.(d). Executive Office Location. Executive’s principal office is the Company’s Solana Beach, California office but Executive will spend such time in the Company’s Tempe, Arizona, and San Francisco, California offices, and will travel on Company business to such other locations and for such periods, as may be necessary or appropriate to carry out his responsibilities. Executive will also maintain an operational office in his residence in Southern California, which may become Executive’s principal office if the Solana Beach office were to close. Expenses. Section 5 of the Agreement is modified to read in its entirety as follows: 2. 5. Expenses. The Company will reimburse Executive for reasonable travel, entertainment and other expenses, and for professional association fees and continuing education expenses, incurred by Executive in the furtherance of the performance of Executive’s duties hereunder. Executive is expected to travel frequently to the Company’s Tempe, Arizona and San Francisco, California offices, and business travel expense includes, without limitation, airfare and other transportation expenses and reasonable reimbursement for, or use of, an apartment and related utilities in the Phoenix/Tempe, Arizona area comparable to that currently provided. All reimbursements to Executive by the Company pursuant to this Section 5 shall be in accordance with the Company’s expense reimbursement policy as in effect from time to time. 3. Termination without Cause or Good Reason. Section 7(a) of the Agreement is modified to read in its entirety as follows: (a) Termination Without Cause or Good Reason other than in Connection with a Change of Control. If Executive’s employment is terminated by the Company without Cause or if Executive resigns for Good Reason, and such termination is not in Connection with a Change of Control, then, subject to Section 8, Executive will receive: (i) continued payment of Executive’s Base Salary (subject to applicable tax withholdings) for twelve (12) months, such amounts to be paid in accordance with the Company’s normal payroll policies; (ii) the actual earned cash incentive, if any, payable to Executive for the current year, pro-rated to the date of termination, with such pro-rated amount to be calculated by multiplying the current year’s Target Annual Incentive by a fraction with a numerator equal to the number of days inclusive between the start of the current calendar year and the date of termination and a denominator equal to 365, such amounts to be paid at the same time as similar bonus payments are made to the Company’s other Executive officers, and (iii) reimbursement for premiums paid for continued health benefits for Executive (and any eligible dependents) under the Company’s health plans until the earlier of (A) twelve (12) months, payable when such premiums are due (provided Executive validly elects to continue coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”)), or (B) the date upon which Executive and Executive’s eligible dependents become covered under similar plans; provided, however, that if Executive resigns for Good Reason under subsection (iii)(A) of the definition of Good Reason in Section 10(d), then the continued payment of Base Salary identified above in clause (i) shall be for a period of six (6) months. For purposes of clarity, the Committee shall determine, in good faith, the extent to which any cash incentive has been earned by Executive. 4. Modification of Good Reason Definition. The definition of Good Reason is included at Section 10(d) of the Agreement, and subsection (iii) thereof is modified to read in its entirety as follows: 10.(d)(iii)(A) a material change in geographic location at which Executive must perform services to the Company for more than an average of three (3) full working days per week (that is, the requirement that Executive perform services for more than an average of three full working days per week at a facility or location that is more than thirty-five (35) miles from his current residence in Southern California) or (B) a material change in geographic location of Executive’s principal office (that is, the relocation of Executive to a facility or location that is more than thirty-five (35) miles from either the Company’s Solana Beach office or Executive’s current residence in Southern California); or Full Force and Effect. To the extent not expressly amended hereby, the Agreement remains in full force and effect. 5. IN WITNESS WHEREOF, the undersigned parties have caused this Amendment to be executed as of the date first set forth above. DOUGLAS LINDROTH /s/ Douglas Lindroth Signature Douglas Lindroth Print Name (Back To Top) LIMELIGHT NETWORKS, INC. /s/ Robert Lento Signature Robert Lento Print Name Chief Executive Officer Print Title Section 3: EX-10.19 (EX-10.19) LIMELIGHT NETWORKS, INC. INDU KODUKULA EMPLOYMENT AGREEMENT Exhibit 10.19 This Employment Agreement (the “Agreement”) is entered into as of October 8, 2012 (the “Signing Date”), by and between Limelight Networks, Inc. (the “Company”) and Indu Kodukula (“Executive”). 1. Duties and Scope of Employment. (a) Positions and Duties. No later than November 5, 2012, Executive will commence service as the Company’s Chief Operating Officer (“COO”). Executive will report to the Company’s Chief Executive Officer (the “CEO”). The date on which Executive actually commences such service as the Company’s COO shall be the “Effective Date.” As of the Effective Date, Executive will render such business and professional services in the performance of his duties, consistent with Executive’s position within the Company, as will reasonably be assigned to him by the CEO. Without limiting the foregoing, Executive will be responsible for managing all aspects of product management, research and development, CDN, network and storage operations, Software as a Service (SaaS) operations and customer service and support. Immediate goals will include, inter alia, design and implementation of plans, programs and initiatives that will demonstrably and measurably improve network cost and performance efficiency, assure timely and efficient design and development of competitive products and services and enhancement of existing products and services, and demonstrably and measurably improve customer support and service. The period Executive is employed by the Company under this Agreement is referred to herein as the “Employment Term.” In the event that Executive fails to begin full-time employment with the Company by November 5, 2012, this Agreement and any equity awards to be granted pursuant to the terms hereof shall be null and void upon the date of such failure. Executive will be based in San Francisco, California but will spend such time in the Company’s Tempe, Arizona, Mountain View, California and San Diego, California offices, and will travel on Company business to such other locations and for such periods, as may be necessary or appropriate to carry out his responsibilities or as may be directed by the Company’s CEO. (b) Obligations. During the Employment Term, Executive, except as provided in this Agreement, will devote Executive’s full business efforts and time to the Company and will use good faith efforts to discharge Executive’s obligations under this Agreement to the best of Executive’s ability and in accordance with each of the Company’s written corporate guidance and ethics guidelines, conflict of interests policies, code of conduct and other policies and procedures as the Company may adopt from time to time. For the duration of the Employment Term, Executive agrees not to actively engage in any other employment, occupation, or consulting activity for any direct or indirect remuneration without the prior approval of the CEO (which approval will not be unreasonably withheld); provided, however, that Executive may, without the approval of the CEO, serve in any capacity with any civic, educational, professional, industry or charitable organization, provided such services do not interfere with Executive’s performance of his obligations to Company, are disclosed in writing to the Company and are otherwise consistent with the Company’s policies. -1- Subject to prior approval of the CEO and in appropriate cases (as determined by the Company) approval of the Audit Committee of the Company’s board (which approval will not be unreasonably withheld) Executive may also serve on the board(s) of for-profit business associations provided such participation does not interfere with Executive’s performance of his obligations to the Company, are disclosed in writing to the Company, are consistent with the terms of Executive’s employment with the Company (including without limitation the restrictive covenants in the Confidential Information Agreement, as defined in Section 12 below) and are consistent with the Company’s policies (including without limitation the Company’s Code of Business Conduct). Based upon Executive’s written disclosure regarding Edison Corp. and his role with respect thereto, Executive’s existing participation on the board of Edison Corp. is approved; provided such approval could change in the future if Executive’s future participation conflicts with any of the provisos in the previous sentence. (i) Executive hereby represents, warrants and covenants to the Company that as of the Effective Time, Executive will not be a party to any contract, understanding, agreement or policy, written or otherwise, that will be breached by Executive’s entering into, or performing services under, this Agreement. Executive further represents that he has disclosed to the Company in writing all threatened, pending, or actual claims that are unresolved and still outstanding as of the Signing Date, in each case, against Executive of which he is aware, if any, as a result of his employment with any previous employer or his membership on any boards of directors. (c) Other Entities. Executive agrees to serve if appointed, without additional compensation, as an officer and director for each of the Company’s subsidiaries, partnerships, joint ventures, limited liability companies and other affiliates, including entities in which the Company has a significant investment as determined by the Company. As used in this Agreement, the term “affiliates” will mean any entity controlled by, controlling, or under common control of the Company. 2. At-Will Employment. Executive and the Company agree that Executive’s employment with the Company constitutes “at-will” employment. Executive and the Company acknowledge that this employment relationship may be terminated at any time, upon written notice to the other party, with or without good cause or for any or no cause, at the option either of the Company or Executive. However, as described in this Agreement, Executive may be entitled to severance benefits depending upon the circumstances of Executive’s termination of employment. 3. Compensation. (a) Base Salary. Commencing with the Effective Date, the Company will pay Executive an annual salary of $350,000 as compensation for his services (such annual salary, as is then effective, to be referred to herein as “Base Salary”). Executive’s Base Salary will be subject to annual review. The Base Salary will be paid periodically in accordance with the Company’s normal payroll practices and will be subject to the usual, required withholdings. (b) Annual Incentive. Executive will be eligible to receive annual cash incentives payable for the achievement of performance goals established by the Board of Directors of the Company (the “Board”) or by the Compensation Committee of the Board (the “Committee”). -2- During calendar year 2012 and 2013, Executive’s target annual incentive (“Target Annual Incentive”) will be $250,000. The Target Annual Incentive for 2012 shall be prorated for the portion of calendar year 2012 during which Executive is an employee of the Company. The actual earned annual cash incentive, if any, payable to Executive for any performance period will depend upon the extent to which the applicable performance goal(s) specified by the Committee are achieved. Any annual cash incentives earned pursuant to this Section 3(b) will be paid to Executive as soon as reasonably practicable following the date on which such annual cash incentives are earned, but in no event will be paid later than March 15 of the year following the year in which such annual cash incentives are earned. (c) Equity Awards. (i) Subject to Committee approval, on the grant date set by the Committee, the Company will issue to Executive 475,000 Restricted Stock Units (“RSUs”) pursuant the Company’s 2007 Equity Incentive Plan (the “Plan). The RSUs will be granted under and subject to the terms, definitions and provisions of the Plan. One- quarter (1/4 ) of the RSUs will vest on the one year anniversary of the Effective Date, and an additional one-sixteenth (1/16 ) will vest on March 1, 2014 the first day of each June, September, December and March thereafter, provided Executive continues to be a Service Provider through each such vesting date. th th Such awards together with the equity awards issued pursuant to this Agreement may be referred to in this Agreement as Equity Awards. (ii) Executive may from time to time be issued stock options, RSUs or other equity awards under the Plan or a successor plan. (iii) In the event that the Company consummates a Change of Control transaction, 50% of Executive’s then outstanding unvested Equity Awards will vest immediately. In the event Executive’s employment is terminated in connection with a Change of Control, the balance of Executive’s then outstanding Equity Awards may vest as provided in Section 7(b) below. 4. Employee Benefits. (a) Generally. Executive will be eligible to participate in accordance with the terms of all Company employee benefit plans, policies and arrangements that are applicable to other officers of the Company, as such plans, policies and arrangements may exist from time to time. (b) Vacation. Executive will be entitled to receive paid annual vacation in accordance with Company policy for other vice president level officers, but with vacation accrual of not less than two (2) weeks per year. 5. Expenses. The Company will reimburse Executive for reasonable travel, entertainment and other business expenses, including professional association fees, incurred by Executive in the furtherance of the performance of Executive’s duties hereunder. Executive is expected to travel frequently to the Company’s Tempe, Arizona office, and business travel expense may include reasonable reimbursement for, or use of, an apartment in the Phoenix/Tempe, Arizona area. All reimbursements to Executive by the Company pursuant to this Section 5 shall be in accordance with the Company’s expense reimbursement policy as in effect from time to time. -3- 6. Termination of Employment. In the event Executive’s employment with the Company terminates for any reason, Executive will be entitled to any (a) unpaid Base Salary accrued up to the effective date of termination; (b) unpaid, but earned and accrued annual incentive for any completed fiscal year as of his termination of employment; (c) pay for accrued but unused vacation; (d) benefits or compensation as provided under the terms of any employee benefit and compensation agreements or plans applicable to Executive; (e) unreimbursed business expenses required to be reimbursed to Executive; and (f) rights to indemnification Executive may have under the Company’s Certificate of Incorporation, Bylaws and this Agreement as applicable. In the event Executive’s employment with the Company terminates for any reason (other than Cause), Executive will be entitled to exercise any outstanding vested stock options until the first to occur of: (i) the date that is three months following the later of such termination of employment or the date upon which Executive ceases to be a Service Provider (as defined in the Plan), (ii) the applicable scheduled expiration date of such award (in the absence of any termination of employment) as set forth in the award agreement, or (iii) the ten (10) year anniversary of the award’s original date of grant. For purposes of clarity, the term “expiration date” shall be the scheduled expiration of the option agreement and not the period that Executive shall be entitled to exercise such option. In addition, if the termination is by the Company without Cause, Executive will be entitled to the amounts and benefits specified in Section 7. 7. Severance. (a) Termination Without Cause other than in Connection with a Change of Control. If Executive’s employment is terminated by the Company without Cause and such termination is not in Connection with a Change of Control, then, subject to Section 8, Executive will receive: (i) continued payment of Executive’s Base Salary (subject to applicable tax withholdings) for six (6) months, such amounts to be paid in accordance with the Company’s normal payroll policies; (ii) the actual earned cash incentive, if any, payable to Executive for the current year, pro-rated to the date of termination, with such pro-rated amount to be calculated by multiplying the current year’s Target Annual Incentive by a fraction with a numerator equal to the number of days inclusive between the start of the current calendar year and the date of termination and a denominator equal to 365, such amounts to be paid at the same time as similar bonus payments are made to the Company’s other executive officers, and (iii) reimbursement for premiums paid for continued health benefits for Executive (and any eligible dependents) under the Company’s health plans until the earlier of (A) six (6) months, payable when such premiums are due (provided Executive validly elects to continue coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”)), or (B) the date upon which Executive and Executive’s eligible dependents become covered under similar plans. For purposes of clarity, the Compensation Committee of the Board of Directors shall determine, in good faith, the extent to which any cash incentive has been earned by Executive. (b) Termination Without Cause or Resignation for Good Reason in Connection with a Change of Control. If Executive’s employment is terminated by the Company without Cause or Executive terminates voluntarily for Good Reason and the termination is in Connection with a Change of Control, then, subject to Section 8, Executive will receive: (i) continued payment of Executive’s Base Salary for the year in which the termination occurs (subject to applicable tax withholdings), for six (6) months, such amounts to be paid in accordance -4- with the Company’s normal payroll policies; (ii) the payment in an amount equal to 100% of Executive’s Target Annual Incentive for the year in which the termination occurs (subject to applicable tax withholdings), such amounts to be paid in accordance with the Company’s normal payroll policies over the course of six (6) months; (iii) 100% of Executive’s then outstanding unvested Equity Awards will vest, and (iv) reimbursement for premiums paid for continued health benefits for Executive (and any eligible dependents) under the Company’s health plans until the earlier of (A) six (6) months, payable when such premiums are due (provided Executive validly elects to continue coverage under COBRA), or (B) the date upon which Executive and Executive’s eligible dependents become covered under similar plans. (c) Voluntary Termination or Termination for Cause. If Executive’s employment is terminated voluntarily or is terminated for Cause by the Company, then, except as provided in Section 6, (i) all further vesting of Executive’s outstanding Equity Awards will terminate immediately and stock options shall be exercisable as provided in Section 6; (ii) all payments of compensation by the Company to Executive hereunder will terminate immediately, and (iii) Executive will be eligible for severance benefits only in accordance with the Company’s then established plans. In the event that Executive’s employment is terminated due to death or Disability, twenty-five percent (25%) of Executive’s then unvested Equity Awards shall vest. (d) Resignation for Material Corporate Change. If within twelve (12) months following the Effective Date Executive voluntarily resigns because of a Material Corporate Change then, subject to the terms of this Agreement including without limitation the conditions in Section 8, Executive will be entitled to the severance benefits described in Section 7(a) above. This Section 7(d) expires twelve (12) months following the Effective Date. For purposes of this Section 7(d) Material Corporate Change means an unanticipated (as of the Effective Date), material change in the Company’s executive management team coupled with a significant, material reduction of responsibilities as of the Effective Date. A sale, separation or spin-off of a portion of the Company’s business operations provided the Company remains a going concern and provided Executive’s duties, position and responsibilities with respect to the remaining business operations are not materially reduced will also not be considered a Material Corporate Change. Executive will not resign for a Material Corporate Change without first providing the Company with written notice within thirty (30) days of the event that Executive believes constitutes a Material Corporate Change specifically identifying the acts or omissions constituting the grounds for resignation under this Section 7(d) and a reasonable cure period of not less than thirty (30) days. 8. Conditions to Receipt of Severance: No Duty to Mitigate. (a) Separation Agreement and Release of Claims. The receipt of any severance or other benefits pursuant to Section 7 will be subject to Executive signing and not revoking a separation agreement and release of claims in a form acceptable to the Company and provided that such release of claims becomes effective and irrevocable no later than sixty (60) days following the termination date (such deadline, the “Release Deadline”). The Company shall deliver such form to Executive within five (5) business days after the date of termination. No severance or other benefits pursuant to Section 7 will be paid or provided until the separation agreement and -5- release of claims becomes effective and irrevocable. If the separation agreement and release of claims does not become effective by the Release Deadline, Executive will forfeit any rights to severance or benefits under this Agreement. Any severance payments or benefits under this Agreement that would be considered Deferred Compensation Severance Benefits (as defined in Section 24), will be paid on, or, in the case of installments, will not commence until, the sixtieth (60 ) day following Executive’s “separation from service”, or, if later, such time as required by Section 24. Any installment payments that would have been made to Executive during the sixty (60) day period immediately following Executive’s “separation from service” but for the preceding sentence will be paid to Executive on the sixtieth (60 ) day following Executive’s “separation from service” and the remaining payments will be made as provided in this Agreement. If Executive should die before all of the severance amounts have been paid, such unpaid amounts will be paid in a lump-sum payment promptly following such event to Executive’s designated beneficiary, if living, or otherwise to the personal representative of Executive’s estate. th th (b) Non-solicitation and Non-competition. The receipt of any severance or other benefits pursuant to Section 7 is subject to Executive agreeing that during the Employment Term and for twelve (12) months thereafter, Executive will comply with all of the restrictive covenants contained in the Confidential Information Agreement (as defined in Section 12 below), including without limitation, the non-compete, non- solicitation of employees and non-solicitation of customers covenants contained in Section 5 of the Confidential Information Agreement. (c) Nondisparagement. During the Employment Term and for twelve (12) months thereafter, Executive and the Company in its official communications will not knowingly and materially disparage, criticize, or otherwise make any derogatory statements regarding the other. The Company will instruct its officers and directors to not knowingly and materially disparage, criticize, or otherwise make any derogatory statements regarding Executive. Notwithstanding the foregoing, nothing contained in this agreement will be deemed to restrict Executive, the Company or any of the Company’s current or former officers and/or directors from providing factual information to any governmental or regulatory agency (or in any way limit the content of any such information) to the extent they are requested or required to provide such information pursuant to applicable order, subpoena, law or regulation. (d) Other Requirements. Executive’s receipt of continued severance payments pursuant to Section 7 will be subject to Executive continuing to comply with the terms of the Confidential Information Agreement and the provisions of this Section 8. (e) No Duty to Mitigate. Executive will not be required to mitigate the amount of any payment contemplated by this Agreement, nor will any earnings that Executive may receive from any other source reduce any such payment. 9. Excise Tax. In the event that the benefits provided for in this Agreement constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) and will be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then Executive’s severance benefits payable under the terms of this Agreement will be either (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such -6- severance benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits. Any reduction in payments and/or benefits required by this Section 9 will occur in the following order: (1) reduction of cash payments; (2) reduction of vesting acceleration of equity awards; and (3) reduction of other benefits paid or provided to Executive. In the event that acceleration of vesting of equity awards is to be reduced, such acceleration of vesting will be cancelled in the reverse order of the date of grant for Executive’s equity awards. If two or more equity awards are granted on the same date, each award will be reduced on a pro-rata basis. 10. Definitions. (a) Cause. For purposes of this Agreement, “Cause” will mean: (i) Acts or omissions constituting gross negligence, recklessness or willful misconduct on the part of Executive with respect to Executive’s obligations under this Agreement or otherwise relating to the business of the Company, or failure or refusal to carry out lawful directions from the CEO with respect to Executive’s obligations under this Agreement or otherwise relating to the business of the Company; with the intention or reasonable expectation that such action may result in the substantial personal enrichment of Executive; (ii) Any act of personal dishonesty taken by Executive in connection with his responsibilities as an employee of the Company material detrimental effect on the Company’s reputation or business; (iii) Executive’s conviction of, or plea of nolo contendere to, a felony that the Board reasonably believes has had or will have a reputation or business; (iv) A breach of any fiduciary duty owed to the Company by Executive that has a material detrimental effect on the Company’s entering any cease and desist order with respect to such action (regardless of whether or not Executive admits or denies liability); (v) Executive being found liable in any Securities and Exchange Commission or other civil or criminal securities law action or (vi) Executive (A) obstructing or impeding; (B) endeavoring to obstruct, impede or improperly influence, or (C) failing to materially cooperate with, any investigation authorized by the Board or any governmental or self-regulatory entity (an “Investigation”). However, Executive’s failure to waive attorney-client privilege relating to communications with Executive’s own attorney in connection with an Investigation will not constitute “Cause”; (vii) Executive’s disqualification or bar by any governmental or self-regulatory authority from serving in the capacity contemplated by this Agreement or Executive’s loss of any governmental or self-regulatory license that is reasonably necessary for Executive to perform his responsibilities to the Company under this Agreement, if (A) the disqualification, bar or loss continues for more than thirty (30) days, and (B) during that period the Company uses its -7- good faith efforts to cause the disqualification or bar to be lifted or the license replaced. While any disqualification, bar or loss continues during Executive’s employment, Executive will serve in the capacity contemplated by this Agreement to whatever extent legally permissible and, if Executive’s employment is not permissible, Executive will be placed on leave (which will be paid to the extent legally permissible); or (b) Change of Control. For purposes of this Agreement, “Change of Control” will mean the occurrence of any of the following events: (i) The consummation by the Company of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (ii) The approval by the stockholders of the Company, or if stockholder approval is not required, approval by the Board, of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; or (iii) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than Goldman Sachs and its related funds and entities, becoming the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities. (c) Continuance Period. For purposes of this Agreement, “Continuance Period” will mean the period of time beginning on the date of the termination of Executive’s employment and ending on the date on which Executive is no longer receiving Base Salary payments under Section 7. (d) Disability. For purposes of this Agreement, “Disability” will mean Executive’s absence from his responsibilities with the Company on a full-time basis for 120 calendar days in any consecutive twelve (12) month period as a result of Executive’s mental or physical illness or injury. (e) In Connection with a Change of Control. For purposes of this Agreement, a termination of Executive’s employment with the Company is “in Connection with a Change of Control” if Executive’s employment is terminated within three (3) months prior to the execution of an agreement that results in a Change of Control or twelve (12) months following a Change of Control. (f) Good Reason. For purposes of this Agreement, “Good Reason” means Executive’s voluntary resignation of employment within twelve (12) months following a Change of Control because of the existence of any of the following reasons and which reason(s) continue following the expiration of any cure period (as discussed below), without Executive’s written consent: responsibilities in effect immediately prior to the Change of Control. A change of title alone is not Good Reason; (i) A significant, material reduction of Executive’s duties, position, or responsibilities, relative to Executive’s duties, position, or -8- (ii) A material reduction in Executive’s cash compensation (either Base Salary, or Base Salary and Annual Incentive Target combined) as in effect immediately prior to such reduction. Notwithstanding the foregoing, a one-time reduction that also is applied to other similarly situated executive officers of the Company and which one-time reduction reduces the cash compensation by a percentage reduction of 10% or less in the aggregate will not be deemed material and will not constitute “Good Reason”; (iii) A material change in the geographic location from which Executive must perform services (that is, a requirement that Executive re-locate his permanent residence to a location other than the greater San Francisco Bay area, CA), it being recognized that Executive may routinely be required to travel in performance of his business duties; or Agreement (including, without limitation, the failure of the Company to obtain the assumption of this Agreement by a successor). (iv) A material breach by the Company (or its successor) of any material contractual obligation owed Executive pursuant to this Executive will not resign for Good Reason following a Change of Control without first providing the Company with written notice within thirty (30) days of the event that Executive believes constitutes “Good Reason” specifically identifying the acts or omissions constituting the grounds for Good Reason and a reasonable cure period of not less than thirty (30) days. 11. Indemnification. Subject to applicable law, Executive will be provided indemnification to the maximum extent permitted by the Company’s Certificate of Incorporation or Bylaws, including, if applicable, any directors and officers insurance policies, with such indemnification to be on terms determined by the Board or any of its committees, but on terms no less favorable than provided to any other Company executive officer or director and subject to the terms of any separate written indemnification agreement. 12. Confidential Information. Executive will execute the form of At-Will Employment, Confidential Information, Inventions Assignment and Arbitration Agreement, appended hereto as Exhibit A (the “Confidential Information Agreement”). In the event of any inconsistency between the terms of this Agreement and the terms of the Confidential Information Agreement, this Agreement will prevail. 13. Assignment. This Agreement will be binding upon and inure to the benefit of (a) the heirs, executors and legal representatives of Executive upon Executive’s death, and (b) any successor of the Company. Any such successor of the Company will be deemed substituted for the Company under the terms of this Agreement for all purposes. For this purpose, “successor” means any person, firm, corporation, or other business entity which at any time, whether by purchase, merger, or otherwise, directly or indirectly acquires all or substantially all of the assets or business of the Company. None of the rights of Executive to receive any form of compensation payable -9- pursuant to this Agreement may be assigned or transferred except by will or the laws of descent and distribution. Any other attempted assignment, transfer, conveyance, or other disposition of Executive’s right to compensation or other benefits will be null and void. This Section 13 will in no way prevent Executive from transferring any vested property he owns. 14. Notices. All notices, requests, demands and other communications called for hereunder will be in writing and will be deemed given (a) on the date of delivery if delivered personally; (b) one (1) day after being sent overnight by a well-established commercial overnight service, or (c) four (4) days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the parties or their successors at the following addresses, or at such other addresses as the parties may later designate in writing: If to the Company: 222 South Mill Ave. , Suite 800 Tempe, Arizona 85281 Attn: Senior Director of Human Resources With Copy to: 222 South Mill Ave., Suite 800 Tempe, Arizona 85281 Attn: Chief Legal Officer If to Executive: at the last residential address known by the Company. 15. Severability. If any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable, or void, this Agreement will continue in full force and effect without said provision. 16. Arbitration. The parties agree that any and all disputes arising out of the terms of this Agreement, Executive’s employment by the Company, Executive’s service as an officer or director of the Company, or Executive’s compensation and benefits, their interpretation and any of the matters herein released, will be subject to binding arbitration in accordance with the terms of section 12 of the Confidential Information Agreement. The Parties further agree that the prevailing party in any arbitration will be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award. The parties hereby agree to waive their right to have any dispute between them resolved in a court of law by a judge or jury. This paragraph will not prevent either party from seeking injunctive relief (or any other provisional remedy) from any court having jurisdiction over the Parties and the subject matter of their dispute relating to Executive’s obligations under this Agreement and the Confidential Information Agreement. -10- 17. Integration. This Agreement, together with the Confidential Information Agreement and the forms of equity award agreements that describe Executive’s outstanding Equity Awards, represents the entire agreement and understanding between the parties as to the subject matter herein and supersedes all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in a writing and signed by duly authorized representatives of the parties hereto. In entering into this Agreement, no party has relied on or made any representation, warranty, inducement, promise, or understanding that is not in this Agreement. To the extent that any provisions of this Agreement conflict with those of any other agreement to be signed upon Executive’s hire, the terms in this Agreement will prevail. 18. Waiver of Breach. The waiver of a breach of any term or provision of this Agreement, which must be in writing, will not operate as or be construed to be a waiver of any other previous or subsequent breach of this Agreement. 19. Survival. The Confidential Information Agreement and the Company’s and Executive’s responsibilities under Sections 6, 7, 8, and 11 will survive the termination of this Agreement. 20. Headings. All captions and Section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement. 21. Tax Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes. 22. Governing Law. This Agreement will be governed by the laws of the state of Arizona without regard to its conflict of laws provisions. 23. Acknowledgment. Executive acknowledges that he has had the opportunity to discuss this matter with and obtain advice from his private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of this Agreement, and is knowingly and voluntarily entering into this Agreement. 24. Code Section 409A. (a) Notwithstanding anything to the contrary in this Agreement, no severance payable to Executive, if any, pursuant to this Agreement, when considered together with any other severance payments or separation benefits that are considered deferred compensation under Section 409A of the Code and the final regulations and any guidance promulgated thereunder (“Section 409A”) (together, the “Deferred Compensation Separation Benefits”) will be payable until Executive has a “separation from service” within the meaning of Section 409A. (b) Notwithstanding anything to the contrary in this Agreement, if Executive is a “specified employee” within the meaning of Section 409A at the time of Executive’s termination (other than due to death), then the Deferred Compensation Separation Benefits that are payable within the first six (6) months following Executive’s separation from service, will become payable on the first payroll date that occurs on or after the date six (6) months and one (1) day following the -11- date of Executive’s separation from service. All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if Executive dies following Executive’s separation from service but prior to the six (6) month anniversary of the separation, then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death and all other Deferred Compensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. (c) Any amount paid under this Agreement that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1 (b)(4) of the Treasury Regulations will not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above. (d) Any amount paid under this Agreement that qualifies as a payment made as a result of an involuntary separation from service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that do not exceed the Section 409A Limit will not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above. For purposes of this Agreement, “Section 409A Limit” will mean the lesser of two (2) times: (i) Executive’s annualized compensation based upon the annual rate of pay paid to Executive during the Company’s taxable year preceding the Company’s taxable year of Executive’s termination of employment as determined under Treasury Regulation 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto; or (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Code for the year in which Executive’s employment is terminated. (e) The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. The Company and Executive agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Executive under Section 409A.” 25. Counterparts. This Agreement may be executed in counterparts, and each counterpart will have the same force and effect as an original and will constitute an effective, binding agreement on the part of each of the undersigned. -12- IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by a duly authorized officer, as of the day and year written below. COMPANY: LIMELIGHT NETWORKS, INC. /s/ Jeff Lunsford Jeff Lunsford, Chief Executive Officer EXECUTIVE: /s/ Indu Kodukula Indu Kodukula Date: October 9, 2012 Date: October 9, 2012 [SIGNATURE PAGE TO KODUKULA EMPLOYMENT AGREEMENT] -13- Exhibit A FORM OF CONFIDENTIAL INFORMATION AGREEMENT -14- (Back To Top) Section 4: EX-10.20 (EX-10.20) Exhibit 10.20 LIMELIGHT NETWORKS, INC. ROBERT LENTO INTERIM CEO EMPLOYMENT AGREEMENT This Employment Agreement (the “Agreement”) is entered into as of November 8, 2012 (the “Signing Date”), by and between Limelight Networks, Inc. (the “Company”) and Robert Lento (“Executive”). 1. Duties and Scope of Employment. (a) Positions and Duties. Effective November 8, 2012 (the “Effective Date”), Executive will commence service as Special Advisor to the Board, and on November 26, 2012, Executive will commence service as the Company’s Interim Chief Executive Officer and Principal Executive Officer (“I-CEO”). Executive will report to the Company’s Board of Directors (the “Board”). As of the Effective Date, Executive will render such business and professional services in the performance of his duties, consistent with Executive’s position within the Company, as will reasonably be assigned to him by the Board. Unless extended by an instrument in writing signed by Executive and the Company, the term of this Agreement is for six (6) months following the Effective Date (the “Employment Term”). Executive will be based in San Francisco, California but will spend such time in the Company’s Tempe, Arizona, Mountain View, California and San Diego, California offices, and will travel on Company business to such other locations and for such periods, as may be necessary or appropriate to carry out his responsibilities or as may be directed by the Board. (b) Obligations. During the Employment Term, Executive, except as provided in this Agreement, will devote Executive’s full business efforts and time to the Company and will use good faith efforts to discharge Executive’s obligations under this Agreement to the best of Executive’s ability and in accordance with each of the Company’s written corporate guidance and ethics guidelines, conflict of interests policies, code of conduct and other policies and procedures as the Company may adopt from time to time. For the duration of the Employment Term, Executive agrees not to actively engage in any other employment, occupation, or consulting activity for any direct or indirect remuneration without the prior approval of the Board (which approval will not be unreasonably withheld); provided, however, that Executive may, without the approval of the Board, serve in any capacity with any civic, educational, professional, industry or charitable organization, provided such services do not interfere with Executive’s performance of his obligations to Company, are disclosed in writing to the Company and are otherwise consistent with the Company’s policies. Subject to prior approval of the Board or the Board’s Audit Committee (which approval will not be unreasonably withheld) Executive may also serve on the board(s) of for-profit business associations provided such participation does not interfere with Executive’s performance of his obligations to the Company, are disclosed in writing to the Company, are consistent with the terms of Executive’s employment with the Company (including without limitation the restrictive covenants in the Confidential Information Agreement, as defined in Section 12 below) and are consistent with the Company’s policies (including without limitation the Company’s Code of Business Conduct). Notwithstanding the foregoing, the Company acknowledges that Executive currently serves on the board of directors for two entities: the Cincinnati Chamber of Commerce and Corrona, Inc. Executive’s service on those boards does not violate this Section 1(b). -1- (c) No Conflicts. Executive hereby represents, warrants and covenants to the Company that as of the Effective Date, Executive will not be a party to any contract, understanding, agreement or policy, written or otherwise, that will be breached by Executive’s entering into, or performing services under, this Agreement. Executive further represents that he has disclosed to the Company in writing all threatened, pending, or actual claims against Executive, if any, of which he is aware, that are unresolved and still outstanding as of the Signing Date, and which, in each case, relate to his employment with any previous employer or his membership on any board of directors. (d) Other Entities. Executive agrees to serve if appointed, without additional compensation, as an officer and director for each of the Company’s subsidiaries, partnerships, joint ventures, limited liability companies and other affiliates, including entities in which the Company has a significant investment as determined by the Company. As used in this Agreement, the term “affiliates” will mean any entity controlled by, controlling, or under common control of the Company. 2. At-Will Employment. Executive and the Company agree that Executive’s employment with the Company constitutes “at-will” employment. Executive and the Company acknowledge that this employment relationship may be terminated at any time, upon written notice to the other party, with or without good cause or for any or no cause, at the option either of the Company or Executive. However, as described in this Agreement, Executive may be entitled to continuation of Base Salary and benefits for a limited period of time depending upon the circumstances of Executive’s termination of employment. 3. Compensation. (a) Base Salary. Commencing with the Effective Date, the Company will pay Executive a monthly salary of $60,000 as compensation for his services (such monthly salary, as is then effective, to be referred to herein as “Base Salary”). Executive’s Base Salary will be subject to review for period(s) beyond the Employment Term, if any. The Base Salary will be paid periodically in accordance with the Company’s normal payroll practices and will be subject to the usual, required withholdings. (b) Cash Bonus Incentive. Executive will not be eligible to receive cash bonus incentives for service during the Employment Term. (c) Equity Awards. (i) On the grant date set by the Board’s Compensation Committee (the “Committee”), the Company will issue to Executive seventy-five thousand (75,000) Restricted Stock Units (“RSUs”) and two hundred fifty thousand non-qualified stock options (“Stock Options”) pursuant the Company’s 2007 Equity Incentive Plan (the “Plan). The RSUs and the Stock Options will be granted under and subject to the terms, definitions and provisions of the Plan and the -2- Company’s form of equity award agreement. The exercise price of the Stock Options will be the fair market value of the Company’s common shares (as defined in the Plan) on the grant date (which will be the date the grant is approved by the Committee or such later day as may be set by the Committee). The RSUs and the Stock Options may be referred to collectively as the Equity Awards. Subject to the provisions of Section 3(c)(ii) below, the Equity Awards will vest on the six (6) month anniversary of the Effective Date, provided Executive continues to be a Service Provider through that vesting date. The Company will use commercially reasonable efforts to set the grant date within five business days following the Effective Date. (ii) If the Company consummates a Change of Control transaction and Executive’s employment is terminated in connection with the Change of Control (or at any time during the Employment Term following a Change of Control), then 100% of Executive’s then outstanding unvested Equity Awards will vest immediately. If the Company selects a permanent CEO to replace the Executive and Executive’s employment is terminated in connection with that selection then 100% of Executive’s then outstanding unvested Equity Awards will vest immediately. For purposes of this Section, Executive’s termination is deemed “in connection with selection of a permanent CEO” if Executive’s employment is terminated without Cause, voluntarily resigns with Good Reason or dies and the permanent CEO begins service within thirty (30) calendars days of Executive’s termination, resignation or death. If the Company terminates Executive’s employment without Cause or if Executive voluntarily resigns for Good Reason or if Executive dies prior to the expiration of the Employment Term other than in connection with selection of a permanent CEO, then a portion of Executive’s then outstanding unvested Equity Awards will vest immediately that portion being the greater of (i) fifty percent (50%) of the unvested Equity Awards, or (ii) the then outstanding unvested Equity Awards multiplied by a fraction the numerator of which is the actual number of calendar days of service completed (which shall include Saturdays, Sundays and holidays) between the Effective Date and the date of termination of Executive’s employment and the denominator of which is 180. For purposes of this section a full month of service is calculated from the Effective Date to the same date in subsequent months. If the Company terminates Executive’s employment for Cause or if Executive voluntarily resigns without Good Reason prior to expiration of the Employment Term, then no portion of Executive’s then outstanding Equity Awards will vest and vesting will terminate immediately. Executive will be entitled to exercise any vested Stock Options until the first to occur of: (i) the date that is two years following the later of the (A) date upon which such Stock Options vested or (B) the date upon which Executive ceases to be a Service Provider (as defined in the Plan), (ii) the applicable scheduled expiration date of such award (in the absence of any termination of employment) as set forth in the award agreement, or (iii) the ten (10) year anniversary of the award’s original date of grant. For purposes of clarity, the term “expiration date” shall be the scheduled expiration of the option agreement and not the period that Executive shall be entitled to exercise such option. Vesting of Equity Awards under this Section 3(c)(ii) is subject to compliance with the conditions in Section 8. (d) Attorneys’ Fees. Executive shall be entitled to receive reimbursement from the Company for the actual, reasonable attorneys’ fees and costs incurred by him in connection with the review and negotiation of this Agreement not to exceed five thousand ($5,000) dollars. In the event of any dispute related to or based upon this Agreement or the Confidential Information Agreement, and if Executive is the prevailing party then he shall be entitled to recover from the Company his reasonable attorneys’ fees and costs. -3- 4. Employee Benefits. (a) Generally. Executive will be eligible to participate in accordance with the terms of all Company employee benefit plans, policies, arrangements and perquisites that are applicable to other senior officers of the Company and no less beneficial to Executive than those applicable to previous chief executive officers of the Company (excluding use of his personal airplane), as such plans, policies, arrangements and perquisites may exist from time to time. (b) Vacation. Executive will be entitled to receive paid vacation in accordance with Company policy for other executive level officers, but with vacation accrual of not less than four (4) weeks per year, with not less than two (2) weeks during the initial six month Employment Term. 5. Expenses. The Company will reimburse Executive for reasonable travel (including business or first class airfare), entertainment and other business expenses, including professional association fees, incurred by Executive in the furtherance of the performance of Executive’s duties hereunder. Executive is expected to travel frequently to the Company’s Tempe, Arizona and San Francisco, California offices, and business travel expense shall include reasonable reimbursement for, or use of, an apartment in either the Phoenix/Tempe, Arizona or San Francisco Bay area and reasonable moving expenses, if Executive is requested and agrees to relocate his residence, subject to limitations set by the Chairman of the Committee. All reimbursements to Executive by the Company pursuant to this Section 5 shall be in accordance with the Company’s expense reimbursement policy as in effect from time to time. 6. Termination of Employment. In the event Executive’s employment with the Company terminates for any reason, Executive will be entitled to any (a) unpaid Base Salary accrued up to the effective date of termination; (b) pay for accrued but unused vacation; (c) benefits or compensation as provided under the terms of any employee benefit plans applicable to Executive; (d) unreimbursed business expenses required to be reimbursed to Executive; and (e) rights to indemnification Executive may have under the Company’s Certificate of Incorporation, Bylaws, and the Indemnification Agreement as applicable. In addition, if the termination is by the Company without Cause or by the Executive for Good Reason, then, subject to compliance with the conditions in Section 8, Executive will be entitled to the amounts and benefits specified in Section 7 and the vesting of Equity Awards as described in Section 3(c)(ii). 7. Severance. (a) Termination Without Cause or for Good Reason During the Employment Term. If Executive’s employment is terminated by the Company without Cause or by the Executive for Good Reason prior to expiration of the Employment Term then, subject to Section 8, Executive will receive: (i) continued payment of Executive’s Base Salary (subject to applicable tax withholdings) for the remainder of the Employment Term, such amounts to be paid in accordance -4- with the Company’s normal payroll policies; and (iii) reimbursement for premiums paid for continued health benefits for Executive (and any eligible dependents) under the Company’s health plans until the earlier of (A) expiration of the Employment Term, payable when such premiums are due (provided Executive validly elects to continue coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”)), or (B) the date upon which Executive and Executive’s eligible dependents become covered under similar plans. (b) Voluntary Termination without Good Reason or Termination for Cause. If Executive’s employment is terminated voluntarily without Good Reason or is terminated for Cause by the Company, then, except as provided in Section 6, (i) all further vesting of Executive’s outstanding Equity Awards will terminate immediately; (ii) all payments of compensation by the Company to Executive hereunder will terminate immediately. 8. Conditions to Receipt of Severance: No Duty to Mitigate. (a) Separation Agreement and Release of Claims. The receipt of any Base Salary continuation or other benefits pursuant to Section 7 and vesting of Equity Awards pursuant to Section 3(c)(ii) will be subject to Executive signing and not revoking a separation agreement and release of claims in a form acceptable to the Company and provided that such release of claims becomes effective and irrevocable no later than sixty (60) days following the termination date (such deadline, the “Release Deadline”). The Company shall deliver such form to Executive within five (5) business days after the date of termination. No severance or other benefits pursuant to Section 7 will be paid or provided until the separation agreement and release of claims becomes effective and irrevocable. If the separation agreement and release of claims does not become effective by the Release Deadline, Executive will forfeit any rights to severance or benefits under this Agreement. (b) Non-solicitation and Non-competition. The receipt of any severance or other benefits pursuant to Section 7 is subject to Executive agreeing that during the Employment Term and for twelve (12) ) months thereafter, Executive will comply with all of the restrictive covenants contained in the Confidential Information Agreement (as defined in Section 12 below), including without limitation, the non-compete, non- solicitation of employees and non-solicitation of customers covenants contained in Section 5 of the Confidential Information Agreement. (c) Nondisparagement. During the Employment Term and for twelve (12) months thereafter, Executive and the Company in its official communications will not knowingly and materially disparage, criticize, or otherwise make any derogatory statements regarding the other. The Company will instruct its officers and directors to not knowingly and materially disparage, criticize, or otherwise make any derogatory statements regarding Executive. Notwithstanding the foregoing, nothing contained in this agreement will be deemed to restrict Executive, the Company or any of the Company’s current or former officers and/or directors from providing factual information to any governmental or regulatory agency (or in any way limit the content of any such information) to the extent they are requested or required to provide such information pursuant to applicable order, subpoena, law or regulation. -5- (d) Other Requirements. Executive’s receipt of payments pursuant to Section 7 will be subject to Executive continuing to comply with the terms of the Confidential Information Agreement and the provisions of this Section 8. (e) No Duty to Mitigate. Executive will not be required to mitigate the amount of any payment contemplated by this Agreement, nor will any earnings that Executive may receive from any other source reduce any such payment. 9. Excise Tax. In the event that the benefits provided for in this Agreement constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) and will be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then Executive’s severance benefits payable under the terms of this Agreement will be either (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits. Any reduction in payments and/or benefits required by this Section 9 will occur in the following order: (1) reduction of cash payments; (2) reduction of vesting acceleration of equity awards; and (3) reduction of other benefits paid or provided to Executive. In the event that acceleration of vesting of equity awards is to be reduced, such acceleration of vesting will be cancelled in the reverse order of the date of grant for Executive’s equity awards. If two or more equity awards are granted on the same date, each award will be reduced on a pro-rata basis. 10. Definitions. (a) Cause. For purposes of this Agreement, “Cause” will mean any of the following events, as determined in good faith by the Board: (i) Acts or omissions constituting gross negligence, recklessness or willful misconduct on the part of Executive with respect to Executive’s obligations under this Agreement or otherwise relating to the business of the Company, or failure or refusal, after written notice thereof from the Chairman of the Board and an opportunity to cure of at least 10 business days, to carry out lawful directions from the Board with respect to Executive’s obligations under this Agreement or otherwise relating to the business of the Company; with the intention or reasonable expectation that such action may result in the substantial personal enrichment of Executive; (ii) Any act of personal dishonesty taken by Executive in connection with his responsibilities as an employee of the Company material detrimental effect on the Company’s reputation or business; (iii) Executive’s conviction of, or plea of nolo contendere to, a felony that the Board reasonably believes has had or will have a reputation or business; (iv) A breach of any fiduciary duty owed to the Company by Executive that has a material detrimental effect on the Company’s -6- entering any cease and desist order with respect to such action (regardless of whether or not Executive admits or denies liability); (v) Executive being found liable in any Securities and Exchange Commission or other civil or criminal securities law action or (vi) Executive (A) obstructing or impeding; (B) endeavoring to obstruct, impede or improperly influence, or (C) failing to materially cooperate with, any investigation authorized by the Board or any governmental or self-regulatory entity (an “Investigation”). However, Executive’s failure to waive attorney-client privilege relating to communications with Executive’s own attorney in connection with an Investigation will not constitute “Cause”; (vii) Executive’s disqualification or bar by any governmental or self-regulatory authority from serving in the capacity contemplated by this Agreement or Executive’s loss of any governmental or self-regulatory license that is reasonably necessary for Executive to perform his responsibilities to the Company under this Agreement, if (A) the disqualification, bar or loss continues for more than thirty (30) days, and (B) during that period the Company uses its good faith efforts to cause the disqualification or bar to be lifted or the license replaced. While any disqualification, bar or loss continues during Executive’s employment, Executive will serve in the capacity contemplated by this Agreement to whatever extent legally permissible and, if Executive’s employment is not permissible, Executive will be placed on leave (which will be paid to the extent legally permissible). (b) Change of Control. For purposes of this Agreement, “Change of Control” will mean the occurrence of any of the following events: (i) The consummation by the Company of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (ii) The approval by the stockholders of the Company, or if stockholder approval is not required, approval by the Board, of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; or (iii) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than Goldman Sachs and its related funds and entities, becoming the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities. (c) Disability. For purposes of this Agreement, “Disability” will mean Executive’s absence from his responsibilities with the Company on a full-time basis for 120 calendar days in any consecutive twelve (12) month period as a result of Executive’s mental or physical illness or injury. -7- (d) In Connection with a Change of Control. For purposes of this Agreement, a termination of Executive’s employment with the Company is “in Connection with a Change of Control” if Executive’s employment is terminated within three (3) months prior to the execution of an agreement that results in a Change of Control or three (3) months following a Change of Control. (e) Good Reason. For purposes of this Agreement, “Good Reason” means the following: (i) A reduction in the Executive’s Base Salary; (ii) The material reduction without his consent of the Executive’s title, authority, duties, or responsibilities from those in effect immediately prior to the reduction, or a material adverse change in the Executive’s reporting responsibilities, provided however a sale, separation or spin-off of a portion of the Company’s business operations provided the Company remains a going concern and provided Executive’s duties, position and responsibilities with respect to the remaining business operations are not materially reduced will also not be considered a basis for Good Reason resignation; place of performance as specified in Section 1(a)) that is not cured following notice and a reasonable cure period as provided below; or (iii) Any material breach by the Company of any other material provision of this Agreement (including but not limited to the obligations to the Executive under this Agreement. (iv) A failure by the Company to require any successor entity to the Company specifically to assume all of the Company’s Executive will not resign for Good Reason without first providing the Company with written notice within ten (10) days of the event that Executive believes constitutes “Good Reason” specifically identifying the acts or omissions constituting the grounds for Good Reason and a reasonable cure period of not less than thirty (30) days which may be waived in the Company’s discretion. 11. Indemnification. Executive will be provided indemnification to the maximum extent permitted by the Company’s Certificate of Incorporation, Bylaws and an Indemnification Agreement between Executive and Company of even date herewith (the “Indemnification Agreement”). Executive will be provided directors and officers insurance coverage, on terms no less favorable than provided to any other Company executive officer or director. 12. Confidential Information. Executive will execute the form of At-Will Employment, Confidential Information, Inventions Assignment and Arbitration Agreement, appended hereto as Exhibit A (the “Confidential Information Agreement”). In the event of any inconsistency between the terms of this Agreement and the terms of the Confidential Information Agreement, this Agreement will prevail. -8- 13. Assignment. This Agreement will be binding upon and inure to the benefit of (a) the heirs, executors and legal representatives of Executive upon Executive’s death, and (b) any successor of the Company. Any such successor of the Company will be deemed substituted for the Company under the terms of this Agreement for all purposes. For this purpose, “successor” means any person, firm, corporation, or other business entity which at any time, whether by purchase, merger, or otherwise, directly or indirectly acquires all or substantially all of the assets or business of the Company. None of the rights of Executive to receive any form of compensation payable pursuant to this Agreement may be assigned or transferred except by will or the laws of descent and distribution. Any other attempted assignment, transfer, conveyance, or other disposition of Executive’s right to compensation or other benefits will be null and void. 14. Notices. All notices, requests, demands and other communications called for hereunder will be in writing and will be deemed given (a) on the date of delivery if delivered personally; or (b) one (1) day after being sent overnight by a well-established commercial overnight service and addressed to the parties or their successors at the following addresses, or at such other addresses as the parties may later designate in writing: If to the Company: 222 South Mill Ave. , Suite 800 Tempe, Arizona 85281 Attn: Senior Director of Human Resources With Copy to: 222 South Mill Ave., Suite 800 Tempe, Arizona 85281 Attn: Chief Legal Officer If to Executive: at the last residential address known by the Company. With a copy to Michael D. DiSanto Dinsmore & Shohl LLP 255 E. Fifth Street Suite 1900 Cincinnati OH 45202 -9- 15. Severability. If any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable, or void, this Agreement will continue in full force and effect without said provision. 16. Arbitration. The parties agree that any and all disputes arising out of the terms of this Agreement, Executive’s employment by the Company, Executive’s service as an officer or director of the Company, or Executive’s compensation and benefits, their interpretation and any of the matters herein released, will be subject to binding arbitration in accordance with the terms of section 12 of the Confidential Information Agreement. The Parties further agree that the prevailing party in any arbitration will be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award. The parties hereby agree to waive their right to have any dispute between them resolved in a court of law by a judge or jury. This paragraph will not prevent either party from seeking injunctive relief (or any other provisional remedy) from any court having jurisdiction over the Parties and the subject matter of their dispute relating to Executive’s obligations under this Agreement and the Confidential Information Agreement. 17. Integration. This Agreement, together with the Confidential Information Agreement and the forms of equity award agreements that describe Executive’s outstanding Equity Awards, represents the entire agreement and understanding between the parties as to the subject matter herein and supersedes all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in a writing and signed by duly authorized representatives of the parties hereto. In entering into this Agreement, no party has relied on or made any representation, warranty, inducement, promise, or understanding that is not in this Agreement. To the extent that any provisions of this Agreement conflict with those of any other agreement to be signed upon Executive’s hire, the terms in this Agreement will prevail. 18. Waiver of Breach. The waiver of a breach of any term or provision of this Agreement, which must be in writing, will not operate as or be construed to be a waiver of any other previous or subsequent breach of this Agreement. 19. Survival. The Confidential Information Agreement and the Company’s and Executive’s responsibilities under Sections 6, 7, 8, 11 and 12 will survive the termination of this Agreement. 20. Headings. All captions and Section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement. 21. Tax Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes. 22. Governing Law. This Agreement will be governed by the laws of the state of Arizona without regard to its conflict of laws provisions. 23. Acknowledgment. Executive acknowledges that he has had the opportunity to discuss this matter with and obtain advice from his private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of this Agreement, and is knowingly and voluntarily entering into this Agreement. -10- 24. Code Section 409A. (a) Notwithstanding anything to the contrary in this Agreement, no severance payable to Executive, if any, pursuant to this Agreement, when considered together with any other severance payments or separation benefits that are considered deferred compensation under Section 409A of the Code and the final regulations and any guidance promulgated thereunder (“Section 409A”) (together, the “Deferred Compensation Separation Benefits”) will be payable until Executive has a “separation from service” within the meaning of Section 409A. (b) Notwithstanding anything to the contrary in this Agreement, if Executive is a “specified employee” within the meaning of Section 409A at the time of Executive’s termination (other than due to death), then the Deferred Compensation Separation Benefits that are payable within the first six (6) months following Executive’s separation from service, will become payable on the first payroll date that occurs on or after the date six (6) months and one (1) day following the date of Executive’s separation from service. All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if Executive dies following Executive’s separation from service but prior to the six (6) month anniversary of the separation, then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death and all other Deferred Compensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. (c) Any amount paid under this Agreement that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1 (b)(4) of the Treasury Regulations will not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above. (d) Any amount paid under this Agreement that qualifies as a payment made as a result of an involuntary separation from service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that do not exceed the Section 409A Limit will not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above. For purposes of this Agreement, “Section 409A Limit” will mean the lesser of two (2) times: (i) Executive’s annualized compensation based upon the annual rate of pay paid to Executive during the Company’s taxable year preceding the Company’s taxable year of Executive’s termination of employment as determined under Treasury Regulation 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto; or (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Code for the year in which Executive’s employment is terminated. (e) The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. The Company and Executive agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Executive under Section 409A.” -11- 25. Counterparts. This Agreement may be executed in counterparts, and each counterpart will have the same force and effect as an original and will constitute an effective, binding agreement on the part of each of the undersigned. -12- IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by a duly authorized officer, as of the day and year written below. COMPANY: LIMELIGHT NETWORKS, INC. /s/ Doug Lindroth Doug Lindroth, CFO EXECUTIVE: /s/ Robert Lento Robert Lento Date: November 13, 2012 Date: November 13, 2012 [SIGNATURE PAGE TO LENTO EMPLOYMENT AGREEMENT] -13- Exhibit A FORM OF CONFIDENTIAL INFORMATION AGREEMENT -14- (Back To Top) Section 5: EX-10.21 (EX-10.21) LIMELIGHT NETWORKS, INC. ROBERT LENTO EMPLOYMENT AGREEMENT Exhibit 10.21 This Employment Agreement (the “Agreement”) is entered into as of January 22, 2013 (the “Signing Date”), by and between Limelight Networks, Inc. (the “Company”) and Robert A. Lento (“Executive”). 1. Duties and Scope of Employment. (a) Positions and Duties. Executive is currently serving as the Company’s Interim CEO. Effective as of January 22, 2013 (the “Effective Date”), Executive will commence service as the Company’s Chief Executive Officer (“CEO”). Executive will report to the Company’s Board of Directors (the “Board”). As of the Effective Date, Executive will render such business and professional services in the performance of his duties, consistent with Executive’s position within the Company, as will reasonably be assigned to him by the Board. The period Executive is employed by the Company under this Agreement is referred to herein as the “Employment Term.” Executive will be based in San Francisco, California but will spend such time in the Company’s Tempe, Arizona, Mountain View, California and San Diego, California offices, and will travel on Company business to such other locations and for such periods, as may be necessary or appropriate to carry out his responsibilities or as may be directed by the Company’s Board. Executive will relocate his principal residence from Cincinnati, Ohio, to the San Francisco Bay area not later than June 30, 2013. If Executive does not relocate to the San Francisco Bay area by June 30, 2013, then the Company may terminate his employment and this Agreement without payment of severance or other obligations or liabilities other than those provided in Section 6 below. (b) Obligations. During the Employment Term, Executive, except as provided in this Agreement, will devote Executive’s full business efforts and time to the Company and will use good faith efforts to discharge Executive’s obligations under this Agreement to the best of Executive’s ability and in accordance with each of the Company’s written corporate guidance and ethics guidelines, conflict of interests policies, code of conduct and other policies and procedures as the Company may adopt from time to time. For the duration of the Employment Term, Executive agrees not to actively engage in any other employment, occupation, or consulting activity for any direct or indirect remuneration without the prior approval of the Chairman of the Board (which approval will not be unreasonably withheld); provided, however, that Executive may, without the approval of the Chairman of the Board, serve in any capacity with any civic, educational, professional, industry or charitable organization, provided such services do not interfere with Executive’s performance of his obligations to Company, are disclosed in writing to the Company and are otherwise consistent with the Company’s policies. Subject to prior approval of the Chairman of the Board and, in appropriate cases (as determined by the Board) the prior approval of the Audit Committee of the Board (which approval will not be unreasonably withheld), Executive may also serve on the board(s) of for-profit business associations provided such participation does not interfere with Executive’s performance of his obligations to the Company, are disclosed in writing to the -1- Company, are consistent with the terms of Executive’s employment with the Company (including without limitation the restrictive covenants in the Confidential Information Agreement, as defined in Section 12 below) and are consistent with the Company’s policies (including without limitation the Company’s Code of Business Conduct). Notwithstanding the foregoing, the Company acknowledges that Executive currently serves on the board of director for Corrona, Inc. Executive’s service on those boards does not violate this Section 1(b) and shall continue to be permitted for the length of the Employment Term. (c) No Conflicts. Executive hereby represents, warrants and covenants to the Company that as of the Effective Time, Executive will not be a party to any contract, understanding, agreement or policy, written or otherwise, that will be breached by Executive’s entering into, or performing services under, this Agreement. Executive further represents that he has disclosed to the Company in writing all threatened, pending, or actual claims that are unresolved and still outstanding as of the Signing Date, in each case, against Executive of which he is aware, if any, as a result of his employment with any previous employer or his membership on any boards of directors. (d) Other Entities. Executive agrees to serve if appointed, without additional compensation, as an officer and director for each of the Company’s subsidiaries, partnerships, joint ventures, limited liability companies and other affiliates, including entities in which the Company has a significant investment as determined by the Company. As used in this Agreement, the term “affiliates” will mean any entity controlled by, controlling, or under common control of the Company. (e) Board Membership. At or prior to the first regular meeting of the Board, Executive will be appointed as a member of the Company’s Board. Subject to Board approval he will be appointed as a Class II director and his initial term will expire at the Company’s annual meeting of the shareholders in 2015. 2. At-Will Employment. Executive and the Company agree that Executive’s employment with the Company constitutes “at-will” employment. Executive and the Company acknowledge that this employment relationship may be terminated at any time, upon written notice to the other party, with or without good cause or for any or no cause, at the option either of the Company or Executive. However, as described in this Agreement, Executive may be entitled to severance benefits depending upon the circumstances of Executive’s termination of employment. 3. Compensation. (a) Base Salary. Commencing with the Effective Date, the Company will pay Executive an annual salary of four hundred seventy five thousand ($475,000) as compensation for his services (such annual salary, as is then effective, to be referred to herein as “Base Salary”). Executive’s Base Salary will be subject to annual review. The Base Salary will be paid periodically in accordance with the Company’s normal payroll practices and will be subject to the usual, required withholdings. -2- (b) Annual Incentive. Executive will be eligible to receive annual cash incentives payable for the achievement of performance goals established by the Board or by the Compensation Committee of the Board (the “Committee”). During calendar year 2013, Executive’s target annual incentive (“Target Annual Incentive”) will be three hundred thousand ($300,000). The Target Annual Incentive for 2013 shall be prorated for the portion of calendar year 2013 during which Executive is an employee of the Company (Executive’s service as Interim CEO during 2013 will be tacked to his service as CEO under this Agreement). The actual earned annual cash incentive, if any, payable to Executive for any performance period will depend upon the extent to which the applicable performance goal(s) specified by the Committee are achieved. Any annual cash incentives earned pursuant to this Section 3(b) will be paid to Executive as soon as reasonably practicable following the date on which such annual cash incentives are earned, but in no event will be paid later than March 15 of the year following the year in which such annual cash incentives are earned. th (c) Equity Awards. (i) On the grant date set by the Committee, the Company will issue to Executive seven hundred fifty thousand (750,000) Restricted Stock Units (“RSUs”) and two million (2,000,000) non-qualified stock options (“Stock Options”) pursuant the Company’s 2007 Equity Incentive Plan (the “Plan). The RSUs and Stock Options will be granted under and subject to the terms, definitions and provisions of the Plan and the Company’s form of equity award agreement. The exercise price of the Stock Options will be the fair market value of the Company’s common shares (as defined in the Plan) on the grant date (which will be the date the grant is approved by the Committee or such later day as may be set by the Committee in accordance with the Company’s Equity Award Policy). One-quarter (1/4 ) of the RSUs will vest on the first anniversary of the Effective Date, and one-sixteenth (1/16 ) will vest on March 1, 2014 and an additional one-sixteenth (1/16 ) will vest on the first day of each June, September, December and March thereafter until all of the RSUs have vested (four years), provided Executive continues to be a Service Provider (as defined in the Plan) through each such vesting date. One-quarter (1/4 ) of the Stock Options will also vest on the first anniversary of the Effective Date, and one-forty-eighth (1/48 ) of the Stock Options will vest on the 20 day of February, 2014 and on the 20 day of each month thereafter until all of the Stock Options have vested (four years), provided Executive continues to be a service Provider through each such vesting date. Executive will not be eligible for additional Equity Awards before January, 2016. th th th th th th th Such awards together with the equity awards issued pursuant to this Agreement may be referred to in this Agreement as “Equity Awards.” (ii) Executive may from time to time be issued stock options, RSUs or other equity awards under the Plan or a successor plan. (iii) In the event that the Company consummates a Change of Control transaction, 50% of Executive’s then outstanding unvested Equity Awards will vest immediately with such vesting being applied in reverse order such that the Equity Awards with the latest vesting date first become non-forfeitable under this provision provided that there remain at least six (6) months of vesting term remain after application of the reverse order vesting. In the event Executive’s employment is terminated in connection with a Change of Control, the balance of Executive’s then outstanding Equity Awards may vest as provided in Section 7(b) below. -3- (d) Relocation Expense Reimbursement. The Company will reimburse Executive for customary and reasonable relocation expenses actually incurred (subject to the reasonable approval of the Compensation Committee of the Board), including the cost of moving his family’s personal possessions and real estate brokerage fees paid by Executive in connection with the sale of his current residence if he chooses to sell that property within the first two years of the Employment Term. (e) Attorneys’ Fees. Executive shall be entitled to receive reimbursement from the Company for the actual, reasonable attorneys’ fees and costs incurred by him in connection with the review and negotiation of this Agreement not to exceed five thousand ($5,000) dollars. 4. Employee Benefits. (a) Generally. Executive will be eligible to participate in accordance with the terms of all Company employee benefit plans, policies, arrangements and perquisites that are applicable to other senior officers of the Company and no less beneficial to Executive than those applicable to previous chief executive officers of the Company (excluding use of his personal airplane), as such plans, policies, arrangements and perquisites may exist from time to time. (b) Vacation. Executive will be entitled to receive paid annual vacation in accordance with Company policy for other vice president level officers, but with vacation accrual of not less than five (5) weeks per year. 5. Expenses. The Company will reimburse Executive for reasonable travel, (including business or first class airfare), entertainment and other business expenses, including professional association fees, incurred by Executive in the furtherance of the performance of Executive’s duties hereunder. Executive is expected to travel to the Company’s Tempe, Arizona and other offices, as is reasonably practical in the Executive’s discretion. All reimbursements to Executive by the Company pursuant to this Section 5 shall be in accordance with the Company’s expense reimbursement policy as in effect from time to time. 6. Termination of Employment. In the event Executive’s employment with the Company terminates for any reason, Executive will be entitled to any (a) unpaid Base Salary accrued up to the effective date of termination; (b) unpaid, but earned and accrued annual incentive for any completed fiscal year as of his termination of employment; (c) pay for accrued but unused vacation; (d) benefits or compensation as provided under the terms of any employee benefit and compensation agreements or plans applicable to Executive; (e) unreimbursed business expenses required to be reimbursed to Executive; and (f) rights to indemnification Executive may have under the Company’s Certificate of Incorporation, Bylaws and this Agreement as applicable. In the event Executive’s employment with the Company terminates for any reason (other than Cause), Executive will be entitled to exercise any outstanding vested stock options until the first to occur of: (i) the date that is two (2) years following the later of such termination of employment or the date upon which -4- Executive ceases to be a Service Provider, (ii) the applicable scheduled expiration date of such award (in the absence of any termination of employment) as set forth in the award agreement, or (iii) the ten (10) year anniversary of the award’s original date of grant. For purposes of clarity, the term “expiration date” shall be the scheduled expiration of the option agreement and not the period that Executive shall be entitled to exercise such option. In addition, if the termination is by the Company without Cause or resignation by Executive for Good Reason, Executive will be entitled to the amounts and benefits specified in Section 7. 7. Severance. (a) Termination Without Cause or Resignation for Good Reason other than in Connection with a Change of Control. If Executive’s employment is terminated by the Company without Cause or Executive terminates voluntarily for Good Reason and such termination is not in Connection with a Change of Control, then, subject to Section 8, Executive will receive: (i) continued payment of Executive’s Base Salary (subject to applicable tax withholdings) for twelve (12) months, such amounts to be paid in accordance with the Company’s normal payroll policies; (ii) the actual earned cash incentive, if any, payable to Executive for the current year, pro-rated to the date of termination, with such pro-rated amount to be calculated by multiplying the actually earned portion of the current year’s Target Annual Incentive by a fraction with a numerator equal to the number of days inclusive between the start of the current calendar year and the date of termination and a denominator equal to 365, such amounts to be paid at the same time as similar bonus payments are made to the Company’s other executive officers, and (iii) reimbursement for premiums paid for continued health benefits for Executive (and any eligible dependents) under the Company’s health plans until the earlier of (A) twelve (12) months, payable when such premiums are due (provided Executive validly elects to continue coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”)), or (B) the date upon which Executive and Executive’s eligible dependents become covered under similar plans. For purposes of clarity, the Compensation Committee of the Board shall determine, in good faith, the extent to which any cash incentive has been earned by Executive. (b) Termination Without Cause or Resignation for Good Reason in Connection with a Change of Control. If Executive’s employment is terminated by the Company without Cause or Executive terminates voluntarily for Good Reason and the termination is in Connection with a Change of Control, then, subject to Section 8, Executive will receive: (i) continued payment of Executive’s Base Salary for the year in which the termination occurs (subject to applicable tax withholdings), for twelve (12) months, such amounts to be paid in accordance with the Company’s normal payroll policies; (ii) the payment in an amount equal to 100% of Executive’s Target Annual Incentive for the year in which the termination occurs (subject to applicable tax withholdings), such amounts to be paid in accordance with the Company’s normal payroll policies over the course of twelve (12) months; (iii) 100% of Executive’s then outstanding unvested Equity Awards will vest, and (iv) reimbursement for premiums paid for continued health benefits for Executive (and any eligible dependents) under the Company’s health plans until the earlier of (A) twelve (12) months, payable when such premiums are due (provided Executive validly elects to continue coverage under COBRA), or (B) the date upon which Executive and Executive’s eligible dependents become covered under similar plans. -5- (c) Voluntary Termination or Termination for Cause. If Executive’s employment is terminated voluntarily not for Good Reason or is terminated for Cause by the Company, then, except as provided in Section 6, (i) all further vesting of Executive’s outstanding Equity Awards will terminate immediately and stock options shall be exercisable as provided in Section 6; (ii) all payments of compensation by the Company to Executive hereunder will terminate immediately, and (iii) Executive will be eligible for severance benefits only in accordance with the Company’s then established plans. (d) Termination as a Result of Death or Disability. In the event that Executive’s employment is terminated due to death or Disability, twenty-five percent (25%) of Executive’s then unvested Equity Awards shall vest. 8. Conditions to Receipt of Severance: No Duty to Mitigate. (a) Separation Agreement and Release of Claims. The receipt of any severance or other benefits pursuant to Section 7 will be subject to Executive signing and not revoking a separation agreement and release of claims in a form acceptable to the Company and provided that such release of claims becomes effective and irrevocable no later than sixty (60) days following the termination date (such deadline, the “Release Deadline”). The Company shall deliver such form to Executive within five (5) business days after the date of termination. No severance or other benefits pursuant to Section 7 will be paid or provided until the separation agreement and release of claims becomes effective and irrevocable. If the separation agreement and release of claims does not become effective by the Release Deadline, Executive will forfeit any rights to severance or benefits under this Agreement. Any severance payments or benefits under this Agreement that would be considered Deferred Compensation Severance Benefits (as defined in Section 24), will be paid on, or, in the case of installments, will not commence until, the sixtieth (60 ) day following Executive’s “separation from service”, or, if later, such time as required by Section 24. Any installment payments that would have been made to Executive during the sixty (60) day period immediately following Executive’s “separation from service” but for the preceding sentence will be paid to Executive on the sixtieth (60 ) day following Executive’s “separation from service” and the remaining payments will be made as provided in this Agreement. If Executive should die before all of the severance amounts have been paid, such unpaid amounts will be paid in a lump-sum payment promptly following such event to Executive’s designated beneficiary, if living, or otherwise to the personal representative of Executive’s estate. th th (b) Non-solicitation and Non-competition. The receipt of any severance or other benefits pursuant to Section 7 is subject to Executive agreeing that during the Employment Term and for twelve (12) months thereafter, Executive will comply with all of the restrictive covenants contained in the Confidential Information Agreement (as defined in Section 12 below), including without limitation, the non-compete, non- solicitation of employees and non-solicitation of customers covenants contained in Section 5 of the Confidential Information Agreement. -6- (c) Nondisparagement. During the Employment Term and for twelve (12) months thereafter, Executive and the Company in its official communications will not knowingly and materially disparage, criticize, or otherwise make any derogatory statements regarding the other. The Company will instruct its officers and directors to not knowingly and materially disparage, criticize, or otherwise make any derogatory statements regarding Executive. Notwithstanding the foregoing, nothing contained in this agreement will be deemed to restrict Executive, the Company or any of the Company’s current or former officers and/or directors from providing factual information to any governmental or regulatory agency (or in any way limit the content of any such information) to the extent they are requested or required to provide such information pursuant to applicable order, subpoena, law or regulation. (d) Other Requirements. Executive’s receipt of continued severance payments pursuant to Section 7 will be subject to Executive continuing to comply with the terms of the Confidential Information Agreement and the provisions of this Section 8. (e) No Duty to Mitigate. Executive will not be required to mitigate the amount of any payment contemplated by this Agreement, nor will any earnings that Executive may receive from any other source reduce any such payment. 9. Excise Tax. In the event that the benefits provided for in this Agreement constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) and will be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then Executive’s severance benefits payable under the terms of this Agreement will be either (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits. Any reduction in payments and/or benefits required by this Section 9 will occur in the following order: (1) reduction of cash payments; (2) reduction of vesting acceleration of equity awards; and (3) reduction of other benefits paid or provided to Executive. In the event that acceleration of vesting of equity awards is to be reduced, such acceleration of vesting will be cancelled in the reverse order of the date of grant for Executive’s equity awards. If two or more equity awards are granted on the same date, each award will be reduced on a pro-rata basis. The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the change of control resulting in the parachute payment shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the change of control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder. The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and Executive within fifteen (15) calendar days after the date on which Executive’s right to a payment is triggered (if requested at that time by the Company or Executive) or such other time as requested by the Company or Executive. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon the Company and Executive. -7- 10. Definitions. (a) Cause. For purposes of this Agreement, “Cause” will mean: (i) Acts or omissions constituting gross negligence, recklessness or willful misconduct on the part of Executive with respect to Executive’s obligations under this Agreement or otherwise relating to the business of the Company, or failure or refusal, after written notice thereof from the Chairman of the Board and an opportunity to cure of at least 10 business days, to carry out lawful directions from the Board with respect to Executive’s obligations under this Agreement or otherwise relating to the business of the Company; with the intention or reasonable expectation that such action may result in the substantial personal enrichment of Executive; (ii) Any act of personal dishonesty taken by Executive in connection with his responsibilities as an employee of the Company material detrimental effect on the Company’s reputation or business; (iii) Executive’s conviction of, or plea of nolo contendere to, a felony that the Board reasonably believes has had or will have a reputation or business; (iv) A breach of any fiduciary duty owed to the Company by Executive that has a material detrimental effect on the Company’s entering any cease and desist order with respect to such action (regardless of whether or not Executive admits or denies liability); (v) Executive being found liable in any Securities and Exchange Commission or other civil or criminal securities law action or (vi) Executive (A) obstructing or impeding; (B) endeavoring to obstruct, impede or improperly influence, or (C) failing to materially cooperate with, any investigation authorized by the Board or any governmental or self-regulatory entity (an “Investigation”). However, Executive’s failure to waive attorney-client privilege relating to communications with Executive’s own attorney in connection with an Investigation will not constitute “Cause”; or (vii) Executive’s disqualification or bar by any governmental or self-regulatory authority from serving in the capacity contemplated by this Agreement or Executive’s loss of any governmental or self-regulatory license that is reasonably necessary for Executive to perform his responsibilities to the Company under this Agreement, if (A) the disqualification, bar or loss continues for more than thirty (30) days, and (B) during that period the Company uses its good faith efforts to cause the disqualification or bar to be lifted or the license replaced. While any disqualification, bar or loss continues during Executive’s employment, Executive will serve in the capacity contemplated by this Agreement to whatever extent legally permissible and, if Executive’s employment is not permissible, Executive will be placed on leave (which will be paid to the extent legally permissible). -8- (b) Change of Control. For purposes of this Agreement, “Change of Control” will mean the occurrence of any of the following events: (i) The consummation by the Company of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (ii) The approval by the stockholders of the Company, or if stockholder approval is not required, approval by the Board, of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; or (iii) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than Goldman Sachs and its related funds and entities, becoming the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities. (c) Continuance Period. For purposes of this Agreement, “Continuance Period” will mean the period of time beginning on the date of the termination of Executive’s employment and ending on the date on which Executive is no longer receiving Base Salary payments under Section 7. (d) Disability. For purposes of this Agreement, “Disability” will mean Executive’s absence from his responsibilities with the Company on a full-time basis for 120 calendar days in any consecutive twelve (12) month period as a result of Executive’s mental or physical illness or injury. (e) In Connection with a Change of Control. For purposes of this Agreement, a termination of Executive’s employment with the Company is “in Connection with a Change of Control” if Executive’s employment is terminated within three (3) months prior to the execution of an agreement that results in a Change of Control or twelve (12) months following a Change of Control. (f) Good Reason. For purposes of this Agreement, “Good Reason” means Executive’s voluntary resignation of employment because of the existence of any of the following reasons and which reason(s) continue following the expiration of any cure period (as discussed below), without Executive’s written consent: in effect immediately prior to the reduction, or a material adverse change in the Executive’s reporting responsibilities, provided however a sale, (i) A substantial, material reduction without his consent of the Executive’s title, authority, duties, or responsibilities from those -9- separation or spin-off of a portion of the Company’s business operations provided the Company remains a going concern and provided Executive’s duties, position and responsibilities with respect to the remaining business operations are not materially reduced will also not be considered a basis for Good Reason resignation; (ii) A material reduction in Executive’s cash compensation (either Base Salary, or Base Salary and Annual Incentive Target combined) as in effect immediately prior to such reduction. Notwithstanding the foregoing, a one-time reduction that also is applied to other similarly situated executive officers of the Company and which one-time reduction reduces the cash compensation by a percentage reduction of 10% or less in the aggregate will not be deemed material and will not constitute “Good Reason”; obligations to the Executive under this Agreement; or (iii) A failure by the Company to require any successor entity to the Company specifically to assume all of the Company’s (iv) A material breach by the Company (or its successor) of any material contractual obligation owed Executive pursuant to this Agreement (including, without limitation, the failure of the Company to obtain the assumption of this Agreement by a successor) that is not cured following notice and a reasonable cure period as provided below. Executive will not resign for Good Reason without first providing the Company with written notice within thirty (30) days of the event that Executive believes constitutes “Good Reason” specifically identifying the acts or omissions constituting the grounds for Good Reason and a reasonable cure period of not less than thirty (30) days. 11. Indemnification. Subject to applicable law, Executive will be provided indemnification to the maximum extent permitted by the Company’s Certificate of Incorporation, Bylaws and an Indemnification Agreement between Executive and Company of even date herewith (the “Indemnification Agreement”). Executive will be provided directors and officers insurance coverage, on terms no less favorable than provided to any other Company executive officer or director. 12. Confidential Information. Executive will execute or if previously executed hereby re-affirms the form of At-Will Employment, Confidential Information, Inventions Assignment and Arbitration Agreement, appended hereto as Exhibit A (the “Confidential Information Agreement”). In the event of any inconsistency between the terms of this Agreement and the terms of the Confidential Information Agreement, this Agreement will prevail. 13. Assignment. This Agreement will be binding upon and inure to the benefit of (a) the heirs, executors and legal representatives of Executive upon Executive’s death, and (b) any successor of the Company. Any such successor of the Company will be deemed substituted for the Company under the terms of this Agreement for all purposes. For this purpose, “successor” means any person, firm, corporation, or other business entity which at any time, whether by purchase, merger, or otherwise, directly or indirectly acquires all or substantially all of the assets or business of -10- the Company. None of the rights of Executive to receive any form of compensation payable pursuant to this Agreement may be assigned or transferred except by will or the laws of descent and distribution. Any other attempted assignment, transfer, conveyance, or other disposition of Executive’s right to compensation or other benefits will be null and void. This Section 13 will in no way prevent Executive from transferring any vested property he owns. 14. Notices. All notices, requests, demands and other communications called for hereunder will be in writing and will be deemed given (a) on the date of delivery if delivered personally; (b) one (1) day after being sent overnight by a well-established commercial overnight service, or (c) four (4) days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the parties or their successors at the following addresses, or at such other addresses as the parties may later designate in writing: If to the Company: 222 South Mill Ave., Suite 800 Tempe, Arizona 85281 Attn: Senior Director of Human Resources With Copy to: 222 South Mill Ave., Suite 800 Tempe, Arizona 85281 Attn: Chief Legal Officer If to Executive: at the last residential address known by the Company. With a copy to Michael D. DiSanto Dinsmore & Shohl LLP 255 E. Fifth Street Suite 1900 Cincinnati OH 45202 15. Severability. If any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable, or void, this Agreement will continue in full force and effect without said provision. 16. Arbitration. The parties agree that any and all disputes arising out of the terms of this Agreement, Executive’s employment by the Company, Executive’s service as an officer or director of the Company, or Executive’s compensation and benefits, their interpretation and any of the matters herein released, will be subject to binding arbitration in accordance with the terms of section -11- 12 of the Confidential Information Agreement. The Parties further agree that the prevailing party in any arbitration will be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award. The parties hereby agree to waive their right to have any dispute between them resolved in a court of law by a judge or jury. This paragraph will not prevent either party from seeking injunctive relief (or any other provisional remedy) from any court having jurisdiction over the Parties and the subject matter of their dispute relating to Executive’s obligations under this Agreement and the Confidential Information Agreement. 17. Integration and Effect on November 8, 2012 Interim CEO Agreement. The Company and Executive previously entered into an Interim CEO Agreement dated November 8, 2012 (the “Interim Agreement”). Subject to the survival of certain rights and duties as described in this Section the interim Agreement is terminated as of the Effective Date of this Agreement. Certain provisions of the Interim Agreement survive termination as provided in Section 19 of the Interim Agreement. The Equity Awards specified in Section 3(c) of the Interim Agreement will remain outstanding and continue to vest in accordance with their terms and provided Executive remains a Service Provider through each such vesting date. This Agreement, together with the Confidential Information Agreement, the Indemnification Agreement between the Company and Executive and the forms of equity award agreements that describe Executive’s outstanding Equity Awards, represents the entire agreement and understanding between the parties as to the subject matter herein and supersede all prior or contemporaneous agreements, including the Interim Agreement, whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in a writing and signed by duly authorized representatives of the parties hereto. In entering into this Agreement, no party has relied on or made any representation, warranty, inducement, promise, or understanding that is not in this Agreement. To the extent that any provisions of this Agreement conflict with those of any other agreement to be signed upon Executive’s hire, the terms in this Agreement will prevail. 18. Waiver of Breach. The waiver of a breach of any term or provision of this Agreement, which must be in writing, will not operate as or be construed to be a waiver of any other previous or subsequent breach of this Agreement. 19. Survival. The Confidential Information Agreement and the Company’s and Executive’s responsibilities under Sections 6, 7, 8, 11 and 12 will survive the termination of this Agreement. 20. Headings. All captions and Section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement. 21. Tax Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes. 22. Governing Law. This Agreement will be governed by the laws of the state of Arizona without regard to its conflict of laws provisions. -12- 23. Acknowledgment. Executive acknowledges that he has had the opportunity to discuss this matter with and obtain advice from his private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of this Agreement, and is knowingly and voluntarily entering into this Agreement. 24. Code Section 409A. (a) Notwithstanding anything to the contrary in this Agreement, no severance payable to Executive, if any, pursuant to this Agreement, when considered together with any other severance payments or separation benefits that are considered deferred compensation under Section 409A of the Code and the final regulations and any guidance promulgated thereunder (“Section 409A”) (together, the “Deferred Compensation Separation Benefits”) will be payable until Executive has a “separation from service” within the meaning of Section 409A. (b) Notwithstanding anything to the contrary in this Agreement, if Executive is a “specified employee” within the meaning of Section 409A at the time of Executive’s termination (other than due to death), then the Deferred Compensation Separation Benefits that are payable within the first six (6) months following Executive’s separation from service, will become payable on the first payroll date that occurs on or after the date six (6) months and one (1) day following the date of Executive’s separation from service. All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if Executive dies following Executive’s separation from service but prior to the six (6) month anniversary of the separation, then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death and all other Deferred Compensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. (c) Any amount paid under this Agreement that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1 (b)(4) of the Treasury Regulations will not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above. (d) Any amount paid under this Agreement that qualifies as a payment made as a result of an involuntary separation from service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that do not exceed the Section 409A Limit will not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above. For purposes of this Agreement, “Section 409A Limit” will mean the lesser of two (2) times: (i) Executive’s annualized compensation based upon the annual rate of pay paid to Executive during the Company’s taxable year preceding the Company’s taxable year of Executive’s termination of employment as determined under Treasury Regulation 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto; or (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Code for the year in which Executive’s employment is terminated. (e) The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. The Company and Executive agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Executive under Section 409A. -13- 25. Counterparts. This Agreement may be executed in counterparts, and each counterpart will have the same force and effect as an original and will constitute an effective, binding agreement on the part of each of the undersigned. -14- IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by a duly authorized officer, as of the day and year written below. COMPANY: LIMELIGHT NETWORKS, INC. /s/ Doug Lindroth Doug Lindroth, CFO EXECUTIVE: /s/ Robert A. Lento Robert A. Lento Date: January 22, 2013 Date: January 22, 2013 [SIGNATURE PAGE TO LENTO EMPLOYMENT AGREEMENT] -15- Exhibit A FORM OF CONFIDENTIAL INFORMATION AGREEMENT -16- (Back To Top) Section 6: EX-10.22 (EX-10.22) LIMELIGHT NETWORKS, INC. GEORGE VONDERHAAR EMPLOYMENT AGREEMENT Exhibit 10.22 This Employment Agreement (the “Agreement”) is entered into as of January 22, 2013 (the “Signing Date”), by and between Limelight Networks, Inc. (the “Company”) and George Vonderhaar (“Executive”). 1. Duties and Scope of Employment. (a) Positions and Duties. No later than February 28. 2013, Executive will commence service as the Company’s Chief Sales Officer (“CSO”). Executive will report to the Company’s Chief Executive Officer (the “CEO”). The date on which Executive actually commences such service as the Company’s CSO shall be the “Effective Date.” As of the Effective Date, Executive will render such business and professional services in the performance of his duties, consistent with Executive’s position within the Company, as will reasonably be assigned to him by the CEO. Without limiting the foregoing, Executive will be responsible for managing all aspects of the global sales operations. Immediate goals include aligning the sales organization and personnel and designing and implementing sales plans, programs and initiatives that will demonstrably and measurably improve sales growth and efficiency and reduce customer churn and dissatisfaction. The period Executive is employed by the Company under this Agreement is referred to herein as the “Employment Term.” In the event that Executive fails to begin full-time employment with the Company by February 28, 2013, this Agreement and any equity awards to be granted pursuant to the terms hereof shall be null and void upon the date of such failure. Executive will maintain a home office in Cincinnati, Ohio, but will spend such time in the Company’s San Francisco, California, Tempe, Arizona, Mountain View, California and San Diego, California offices, and will travel on Company business to such other locations and for such periods, as may be necessary or appropriate to carry out his responsibilities or as may be directed by the Company’s CEO. It is anticipated that Executive will be present in the Company’s offices or at customer visits a significant portion of each business week. (b) Obligations. During the Employment Term, Executive, except as provided in this Agreement, will devote Executive’s full business efforts and time to the Company and will use good faith efforts to discharge Executive’s obligations under this Agreement to the best of Executive’s ability and in accordance with each of the Company’s written corporate guidance and ethics guidelines, conflict of interests policies, code of conduct and other policies and procedures as the Company may adopt from time to time. For the duration of the Employment Term, Executive agrees not to actively engage in any other employment, occupation, or consulting activity for any direct or indirect remuneration without the prior approval of the CEO (which approval will not be unreasonably withheld); provided, however, that Executive may, without the approval of the CEO, serve in any capacity with any civic, educational, professional, industry or charitable organization, provided such services do not interfere with Executive’s performance of his obligations to Company, are disclosed in writing to the Company and are otherwise consistent with the Company’s policies. Subject to prior approval of the CEO and in appropriate cases (as determined by the Company) -1- approval of the Audit Committee of the Company’s board (which approval will not be unreasonably withheld) Executive may also serve on the board(s) of for-profit business associations provided such participation does not interfere with Executive’s performance of his obligations to the Company, are disclosed in writing to the Company, are consistent with the terms of Executive’s employment with the Company (including without limitation the restrictive covenants in the Confidential Information Agreement, as defined in Section 12 below) and are consistent with the Company’s policies (including without limitation the Company’s Code of Business Conduct). (i) Executive hereby represents, warrants and covenants to the Company that as of the Effective Time, Executive will not be a party to any contract, understanding, agreement or policy, written or otherwise, that will be breached by Executive’s entering into, or performing services under, this Agreement. Executive further represents that he has disclosed to the Company in writing all threatened, pending, or actual claims that are unresolved and still outstanding as of the Signing Date, in each case, against Executive of which he is aware, if any, as a result of his employment with any previous employer or his membership on any boards of directors. (c) Other Entities. Executive agrees to serve if appointed, without additional compensation, as an officer and director for each of the Company’s subsidiaries, partnerships, joint ventures, limited liability companies and other affiliates, including entities in which the Company has a significant investment as determined by the Company. As used in this Agreement, the term “affiliates” will mean any entity controlled by, controlling, or under common control of the Company. 2. At-Will Employment. Executive and the Company agree that Executive’s employment with the Company constitutes “at-will” employment. Executive and the Company acknowledge that this employment relationship may be terminated at any time, upon written notice to the other party, with or without good cause or for any or no cause, at the option either of the Company or Executive. However, as described in this Agreement, Executive may be entitled to severance benefits depending upon the circumstances of Executive’s termination of employment. 3. Compensation. (a) Base Salary. Commencing with the Effective Date, the Company will pay Executive an annual salary of $275,000 as compensation for his services (such annual salary, as is then effective, to be referred to herein as “Base Salary”). Executive’s Base Salary will be subject to annual review. The Base Salary will be paid periodically in accordance with the Company’s normal payroll practices and will be subject to the usual, required withholdings. (b) Annual Incentive. Executive will be eligible to receive annual cash incentives payable for the achievement of performance goals established by the Board of Directors of the Company (the “Board”) or by the Compensation Committee of the Board (the “Committee”). During calendar year 2013, Executive’s target annual incentive (“Target Annual Incentive”) will be $200,000. The Target Annual Incentive for 2013 shall be prorated for the portion of calendar year 2013 during which Executive is an employee of the Company. The actual earned annual cash incentive, if any, payable to Executive for any performance period will depend upon the extent to which the applicable performance goal(s) specified by the Committee are achieved. Any annual cash -2- incentives earned pursuant to this Section 3(b) will be paid to Executive as soon as reasonably practicable following the date on which such annual cash incentives are earned, but in no event will be paid later than March 15 of the year following the year in which such annual cash incentives are earned. (c) Equity Awards. (i) Subject to Committee approval, on the grant date set by the Committee, the Company will issue to Executive 200,000 Restricted Stock Units (“RSUs”) pursuant the Company’s 2007 Equity Incentive Plan (the “Plan). The RSUs will be granted under and subject to the terms, definitions and provisions of the Plan. One-sixteenth (1/16 ) will vest on June 1, 2013 and an additional one-sixteenth (1/16 ) will vest on the first day of each September, December, March and June thereafter, provided Executive continues to be a Service Provider through each such vesting date. th th (ii) Subject to Committee approval, on the grant date set by the Committee, the Company will issue to Executive an option to purchase 250,000 shares of the Company’s common stock (the “Options”) pursuant to the Plan. The Options will be granted under and subject to the terms, definitions and provisions of the Plan. Twenty-five percent (25%) of the Options will vest on December 3, 2013, and the remaining seventy-five percent (75%) will vest in thirty-six (36) equal monthly installments beginning January 3, 2014 and on the third day of each month thereafter for thirty-five (35) consecutive months, provided Executive continues to be a Service Provider through each such vesting date. Such awards together with the equity awards issued pursuant to this Agreement may be referred to in this Agreement as Equity Awards. (iii) Executive may from time to time be issued stock options, RSUs or other equity awards under the Plan or a successor plan. (iv) In the event that the Company consummates a Change of Control transaction, 50% of Executive’s then outstanding unvested Equity Awards will vest immediately. In the event Executive’s employment is terminated in connection with a Change of Control, the balance of Executive’s then outstanding Equity Awards may vest as provided in Section 7(b) below. 4. Employee Benefits. (a) Generally. Executive will be eligible to participate in accordance with the terms of all Company employee benefit plans, policies and arrangements that are applicable to other officers of the Company, as such plans, policies and arrangements may exist from time to time. (b) Vacation. Executive will be entitled to receive paid annual vacation in accordance with Company policy for other vice president level officers, but with vacation accrual of not less than five (5) weeks per year. 5. Expenses. The Company will reimburse Executive for reasonable travel, entertainment and other business expenses, including professional association fees, incurred by Executive in the furtherance of the performance of Executive’s duties hereunder. Executive is expected to travel frequently to the Company’s San Francisco, California, and Tempe, Arizona -3- offices. All reimbursements to Executive by the Company pursuant to this Section 5 shall be in accordance with the Company’s expense reimbursement policy as in effect from time to time. The Company will reimburse Executive up to $2,500 for legal fees incurred by Executive for reviewing this Agreement and advising Executive prior to signing this Agreement. 6. Termination of Employment. In the event Executive’s employment with the Company terminates for any reason, Executive will be entitled to any (a) unpaid Base Salary accrued up to the effective date of termination; (b) unpaid, but earned and accrued annual incentive for any completed fiscal year as of his termination of employment; (c) pay for accrued but unused vacation; (d) benefits or compensation as provided under the terms of any employee benefit and compensation agreements or plans applicable to Executive; (e) unreimbursed business expenses required to be reimbursed to Executive; and (f) rights to indemnification Executive may have under the Company’s Certificate of Incorporation, Bylaws and this Agreement as applicable. In the event Executive’s employment with the Company terminates for any reason (other than Cause), Executive will be entitled to exercise any outstanding vested stock options until the first to occur of: (i) the date that is six (6) months following the later of such termination of employment or the date upon which Executive ceases to be a Service Provider (as defined in the Plan), (ii) the applicable scheduled expiration date of such award (in the absence of any termination of employment) as set forth in the award agreement, or (iii) the ten (10) year anniversary of the award’s original date of grant. For purposes of clarity, the term “expiration date” shall be the scheduled expiration of the option agreement and not the period that Executive shall be entitled to exercise such option. In addition, if the termination is by the Company without Cause, Executive will be entitled to the amounts and benefits specified in Section 7. 7. Severance. (a) Termination Without Cause or Resignation for Good Reason other than in Connection with a Change of Control. If Executive’s employment is terminated by the Company without Cause or Executive terminates voluntarily for Good Reason and such termination is not in Connection with a Change of Control, then, subject to Section 8 and except as provided in Section 7(e) below, Executive will receive: (i) continued payment of Executive’s Base Salary (subject to applicable tax withholdings) for twelve (12) months, such amounts to be paid in accordance with the Company’s normal payroll policies; (ii) the payment in an amount equal to 100% of Executive’s Target Annual Incentive for the year in which the termination occurs (subject to applicable tax withholdings), such amounts to be paid in accordance with the Company’s normal payroll policies over the course of twelve (12) months, and (iii) reimbursement for premiums paid for continued health benefits for Executive (and any eligible dependents) under the Company’s health plans until the earlier of (A) twelve (12) months, payable when such premiums are due (provided Executive validly elects to continue coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”)), or (B) the date upon which Executive and Executive’s eligible dependents become covered under similar plans. (b) Termination Without Cause or Resignation for Good Reason in Connection with a Change of Control. If Executive’s employment is terminated by the Company without Cause or Executive terminates voluntarily for Good Reason and the termination is in Connection with a Change of Control, then, subject to Section 8, Executive will receive: (i) continued payment of -4- Executive’s Base Salary for the year in which the termination occurs (subject to applicable tax withholdings), for twelve (12) months, such amounts to be paid in accordance with the Company’s normal payroll policies; (ii) the payment in an amount equal to 100% of Executive’s Target Annual Incentive for the year in which the termination occurs (subject to applicable tax withholdings), such amounts to be paid in accordance with the Company’s normal payroll policies over the course of twelve (12) months; (iii) the actual earned cash incentive, if any, payable to Executive for the current year, pro-rated to the date of termination; (iv)100% of Executive’s then outstanding unvested Equity Awards will vest, and (v) reimbursement for premiums paid for continued health benefits for Executive (and any eligible dependents) under the Company’s health plans until the earlier of (A) twelve (12) months, payable when such premiums are due (provided Executive validly elects to continue coverage under COBRA), or (B) the date upon which Executive and Executive’s eligible dependents become covered under similar plans. The amount of the cash incentive actually earned and payable under subsection (iii) will be determined by multiplying the Target Annual Incentive by (A) the percentage of the then current (as of the first day of the month immediately preceding the date of termination) attainment of cash incentive metrics as a percentage of the then current target cash incentive metrics set in the applicable cash incentive plan for the current year (measured in the same manner as used to calculate bonus accrual for financial accounting purposes), the product of which is then (B) multiplied by a fraction with a numerator equal to the number of days inclusive between the start of the current calendar year and the date of termination and a denominator equal to 365. For purposes of clarity, the Compensation Committee of the Board of Directors shall determine, in good faith, the extent to which any cash incentive under subsection (iii) has been earned by Executive and its decision will be conclusive. (c) Voluntary Termination without Good Reason or Termination for Cause. If Executive’s employment is terminated voluntarily without Good Reason or is terminated for Cause by the Company, then, except as provided in Section 6, (i) all further vesting of Executive’s outstanding Equity Awards will terminate immediately and stock options shall be exercisable as provided in Section 6; (ii) all payments of compensation by the Company to Executive hereunder will terminate immediately, and (iii) Executive will be eligible for severance benefits only in accordance with the Company’s then established plans. In the event that Executive’s employment is terminated due to death or Disability, twenty-five percent (25%) of Executive’s then unvested Equity Awards shall vest. (d) Resignation for Material Corporate Change. If within six (6) months following the Effective Date Executive voluntarily resigns because of a Material Corporate Change then, subject to the terms of this Agreement including without limitation the conditions in Section 8, Executive will be entitled as a severance benefit to continued payment of Executive’s Base Salary (subject to applicable tax withholdings) for twelve (12) months, such amounts to be paid in accordance with the Company’s normal payroll policies. This Section 7(d) expires on the earlier of (i) six (6) months following the Effective Date, or (ii) the date on which the board approves the person currently serving as Interim CEO as the permanent CEO. For purposes of this Section 7(d) Material Corporate Change means the selection of a person as permanent CEO other than the person currently serving as interim CEO coupled with a significant, material reduction of Executive’s duties, position, or responsibilities relative to Executive’s duties, position, or responsibilities as of the Effective Date. A sale, separation or spin-off of a portion of the Company’s business operations provided the Company remains a going concern and provided Executive’s duties, position and responsibilities with respect -5- to the remaining business operations are not materially reduced will also not be considered a Material Corporate Change. Executive will not resign for a Material Corporate Change without first providing the Company with written notice within thirty (30) days of the event that Executive believes constitutes a Material Corporate Change specifically identifying the acts or omissions constituting the grounds for resignation under this Section 7 (d) and a reasonable cure period of not less than thirty (30) days. (e) Resignation for Required Relocation. If the Company requires Executive to re-locate his permanent residence to a location other than Cincinnati, Ohio, and such requirement is not in connection with a Change of Control, and Executive resign for Good Reason (under Section 10(f)(iii) of this Agreement) then, subject to the terms of this Agreement including without limitation the conditions in Section 8, Executive, in lieu of the severance benefits listed in Section 7(a) above, will be entitled as a severance benefit to the following: (i) continued payment of Executive’s Base Salary (subject to applicable tax withholdings) for twelve (12) months, such amounts to be paid in accordance with the Company’s normal payroll policies; (ii) reimbursement for premiums paid for continued health benefits for Executive (and any eligible dependents) under the Company’s health plans until the earlier of (A) twelve (12) months, payable when such premiums are due (provided Executive validly elects to continue coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”)), or (B) the date upon which Executive and Executive’s eligible dependents become covered under similar plans. Executive will not resign for a required relocation under this Section 7(e) without first providing the Company with written notice of his resignation under this Section 7(e) within thirty (30) days of the event that Executive believes constitutes a required relocation under this Section 7(e) and a reasonable cure period of not less than thirty (30) days. 8. Conditions to Receipt of Severance: No Duty to Mitigate. (a) Separation Agreement and Release of Claims. The receipt of any severance or other benefits pursuant to Section 7 will be subject to Executive signing and not revoking a separation agreement and release of claims in a form acceptable to the Company and provided that such release of claims becomes effective and irrevocable no later than sixty (60) days following the termination date (such deadline, the “Release Deadline”). The Company shall deliver such form to Executive within five (5) business days after the date of termination. No severance or other benefits pursuant to Section 7 will be paid or provided until the separation agreement and release of claims becomes effective and irrevocable. If the separation agreement and release of claims does not become effective by the Release Deadline, Executive will forfeit any rights to severance or benefits under this Agreement. Any severance payments or benefits under this Agreement that would be considered Deferred Compensation Severance Benefits (as defined in Section 24), will be paid on, or, in the case of installments, will not commence until, the sixtieth (60 ) day following Executive’s “separation from service”, or, if later, such time as required by Section 24. Any installment payments that would have been made to Executive during the sixty (60) day period immediately following Executive’s “separation from service” but for the preceding sentence will be paid to Executive on the sixtieth (60 ) day following Executive’s “separation from service” and the remaining payments will be made as provided in this Agreement. If Executive should die before all of the severance amounts have been paid, such unpaid amounts will be paid in a lump-sum payment promptly following such event to Executive’s designated beneficiary, if living, or otherwise to the personal representative of Executive’s estate. th th -6- (b) Non-solicitation and Non-competition. The receipt of any severance or other benefits pursuant to Section 7 is subject to Executive agreeing that during the Employment Term and for twelve (12) months thereafter, Executive will comply with all of the restrictive covenants contained in the Confidential Information Agreement (as defined in Section 12 below), including without limitation, the non-compete, non- solicitation of employees and non-solicitation of customers covenants contained in Section 5 of the Confidential Information Agreement. (c) Nondisparagement. During the Employment Term and for twelve (12) months thereafter, Executive and the Company in its official communications will not knowingly and materially disparage, criticize, or otherwise make any derogatory statements regarding the other. The Company will instruct its officers and directors to not knowingly and materially disparage, criticize, or otherwise make any derogatory statements regarding Executive. Notwithstanding the foregoing, nothing contained in this agreement will be deemed to restrict Executive, the Company or any of the Company’s current or former officers and/or directors from providing factual information to any governmental or regulatory agency (or in any way limit the content of any such information) to the extent they are requested or required to provide such information pursuant to applicable order, subpoena, law or regulation. (d) Other Requirements. Executive’s receipt of continued severance payments pursuant to Section 7 will be subject to Executive continuing to comply with the terms of the Confidential Information Agreement and the provisions of this Section 8. (e) No Duty to Mitigate. Executive will not be required to mitigate the amount of any payment contemplated by this Agreement, nor will any earnings that Executive may receive from any other source reduce any such payment. 9. Excise Tax. In the event that the benefits provided for in this Agreement constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) and will be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then Executive’s severance benefits payable under the terms of this Agreement will be either (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits. Any reduction in payments and/or benefits required by this Section 9 will occur in the following order: (1) reduction of cash payments; (2) reduction of vesting acceleration of equity awards; and (3) reduction of other benefits paid or provided to Executive. In the event that acceleration of vesting of equity awards is to be reduced, such acceleration of vesting will be cancelled in the reverse order of the date of grant for Executive’s equity awards. If two or more equity awards are granted on the same date, each award will be reduced on a pro-rata basis. -7- 10. Definitions. (a) Cause. For purposes of this Agreement, “Cause” will mean: (i) Acts or omissions constituting gross negligence, recklessness or willful misconduct on the part of Executive with respect to Executive’s obligations under this Agreement or otherwise relating to the business of the Company, repeated instances of neglect of Executive’s duties after notice of such neglect, or failure or refusal to carry out lawful directions from the CEO with respect to Executive’s obligations under this Agreement or otherwise relating to the business of the Company; with the intention or reasonable expectation that such action may result in the substantial personal enrichment of Executive; (ii) Any act of personal dishonesty taken by Executive in connection with his responsibilities as an employee of the Company material detrimental effect on the Company’s reputation or business; (iii) Executive’s conviction of, or plea of nolo contendere to, a felony that the Board reasonably believes has had or will have a reputation or business; (iv) A breach of any fiduciary duty owed to the Company by Executive that has a material detrimental effect on the Company’s entering any cease and desist order with respect to such action (regardless of whether or not Executive admits or denies liability); (v) Executive being found liable in any Securities and Exchange Commission or other civil or criminal securities law action or (vi) Executive (A) obstructing or impeding; (B) endeavoring to obstruct, impede or improperly influence, or (C) failing to materially cooperate with, any investigation authorized by the Board or any governmental or self-regulatory entity (an “Investigation”). However, Executive’s failure to waive attorney-client privilege relating to communications with Executive’s own attorney in connection with an Investigation will not constitute “Cause”; (vii) Executive’s disqualification or bar by any governmental or self-regulatory authority from serving in the capacity contemplated by this Agreement or Executive’s loss of any governmental or self-regulatory license that is reasonably necessary for Executive to perform his responsibilities to the Company under this Agreement, if (A) the disqualification, bar or loss continues for more than thirty (30) days, and (B) during that period the Company uses its good faith efforts to cause the disqualification or bar to be lifted or the license replaced. While any disqualification, bar or loss continues during Executive’s employment, Executive will serve in the capacity contemplated by this Agreement to whatever extent legally permissible and, if Executive’s employment is not permissible, Executive will be placed on leave (which will be paid to the extent legally permissible); or (b) Change of Control. For purposes of this Agreement, “Change of Control” will mean the occurrence of any of the following events: (i) The consummation by the Company of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; -8- (ii) The approval by the stockholders of the Company, or if stockholder approval is not required, approval by the Board, of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; or (iii) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than Goldman Sachs and its related funds and entities, becoming the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities. (c) Continuance Period. For purposes of this Agreement, “Continuance Period” will mean the period of time beginning on the date of the termination of Executive’s employment and ending on the date on which Executive is no longer receiving Base Salary payments under Section 7. (d) Disability. For purposes of this Agreement, “Disability” will mean Executive’s absence from his responsibilities with the Company on a full-time basis for 120 calendar days in any consecutive twelve (12) month period as a result of Executive’s mental or physical illness or injury. (e) In Connection with a Change of Control. For purposes of this Agreement, a termination of Executive’s employment with the Company is “in Connection with a Change of Control” if Executive’s employment is terminated within three (3) months prior to the execution of an agreement that results in a Change of Control or twelve (12) months following a Change of Control. (f) Good Reason. For purposes of this Agreement, “Good Reason” means Executive’s voluntary resignation of employment because of the existence of any of the following reasons and which reason(s) continue following the expiration of any cure period (as discussed below), without Executive’s written consent: (i) A significant, material reduction of Executive’s duties, position, or responsibilities, relative to Executive’s duties, position, or responsibilities in effect immediately prior to the reduction of such duties, position or responsibilities that Executive asserts constitutes the basis for resignation for Good Reason. A change of title alone is not Good Reason; combined) as in effect immediately prior to such (ii) A material reduction in Executive’s cash compensation (either Base Salary, or Base Salary and Annual Incentive Target -9- reduction. Notwithstanding the foregoing, a one-time reduction that also is applied to other similarly situated executive officers of the Company and which one-time reduction reduces the cash compensation by a percentage reduction of 10% or less in the aggregate will not be deemed material and will not constitute “Good Reason”; (iii) A material change in the geographic location from which Executive must perform services (that is, a requirement that Executive re-locate his permanent residence to a location other than Cincinnati, Ohio), it being recognized that Executive will be required to travel extensively and be present in the Company’s San Francisco, CA and Tempe, AZ offices consistently in performance of his business duties; or Agreement (including, without limitation, the failure of the Company to obtain the assumption of this Agreement by a successor). (iv) A material breach by the Company (or its successor) of any material contractual obligation owed Executive pursuant to this Executive will not resign for Good Reason without first providing the Company with written notice within thirty (30) days of the event that Executive believes constitutes “Good Reason” specifically identifying the acts or omissions constituting the grounds for Good Reason and a reasonable cure period of not less than thirty (30) days. 11. Indemnification. Subject to applicable law, Executive will be provided indemnification to the maximum extent permitted by the Company’s Certificate of Incorporation or Bylaws, including, if applicable, any directors and officers insurance policies, with such indemnification to be on terms determined by the Board or any of its committees, but on terms no less favorable than provided to any other Company executive officer or director and subject to the terms of any separate written indemnification agreement. 12. Confidential Information. Executive will execute the form of At-Will Employment, Confidential Information, Inventions Assignment and Arbitration Agreement, appended hereto as Exhibit A (the “Confidential Information Agreement”). In the event of any inconsistency between the terms of this Agreement and the terms of the Confidential Information Agreement, this Agreement will prevail. 13. Assignment. This Agreement will be binding upon and inure to the benefit of (a) the heirs, executors and legal representatives of Executive upon Executive’s death, and (b) any successor of the Company. Any such successor of the Company will be deemed substituted for the Company under the terms of this Agreement for all purposes. For this purpose, “successor” means any person, firm, corporation, or other business entity which at any time, whether by purchase, merger, or otherwise, directly or indirectly acquires all or substantially all of the assets or business of the Company. None of the rights of Executive to receive any form of compensation payable pursuant to this Agreement may be assigned or transferred except by will or the laws of descent and distribution. Any other attempted assignment, transfer, conveyance, or other disposition of Executive’s right to compensation or other benefits will be null and void. This Section 13 will not prevent Executive from transferring any vested property he owns. -10- 14. Notices. All notices, requests, demands and other communications called for hereunder will be in writing and will be deemed given (a) on the date of delivery if delivered personally; (b) one (1) day after being sent overnight by a well-established commercial overnight service, or (c) four (4) days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the parties or their successors at the following addresses, or at such other addresses as the parties may later designate in writing: If to the Company: 222 South Mill Ave., Suite 800 Tempe, Arizona 85281 Attn: Senior Director of Human Resources With Copy to: 222 South Mill Ave., Suite 800 Tempe, Arizona 85281 Attn: Chief Legal Officer If to Executive: at the last residential address known by the Company. 15. Severability. If any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable, or void, this Agreement will continue in full force and effect without said provision. 16. Arbitration. The parties agree that any and all disputes arising out of the terms of this Agreement, Executive’s employment by the Company, Executive’s service as an officer or director of the Company, or Executive’s compensation and benefits, their interpretation and any of the matters herein released, will be subject to binding arbitration in accordance with the terms of section 12 of the Confidential Information Agreement. The Parties further agree that the prevailing party in any arbitration will be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award. The parties hereby agree to waive their right to have any dispute between them resolved in a court of law by a judge or jury. This paragraph will not prevent either party from seeking injunctive relief (or any other provisional remedy) from any court having jurisdiction over the Parties and the subject matter of their dispute relating to Executive’s obligations under this Agreement and the Confidential Information Agreement. 17. Integration. This Agreement, together with the Confidential Information Agreement and the forms of equity award agreements that describe Executive’s outstanding Equity Awards, represents the entire agreement and understanding between the parties as to the subject matter herein and supersedes all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in a writing and signed by duly authorized representatives of the parties hereto. In entering into this Agreement, no party has relied on or made any representation, warranty, inducement, promise, or -11- understanding that is not in this Agreement. To the extent that any provisions of this Agreement conflict with those of any other agreement to be signed upon Executive’s hire, the terms in this Agreement will prevail. 18. Waiver of Breach. The waiver of a breach of any term or provision of this Agreement, which must be in writing, will not operate as or be construed to be a waiver of any other previous or subsequent breach of this Agreement. 19. Survival. The Confidential Information Agreement and the Company’s and Executive’s responsibilities under Sections 6, 7, 8, and 11 will survive the termination of this Agreement. 20. Headings. All captions and Section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement. 21. Tax Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes. 22. Governing Law. This Agreement will be governed by the laws of the state of Arizona without regard to its conflict of laws provisions. 23. Acknowledgment. Executive acknowledges that he has had the opportunity to discuss this matter with and obtain advice from his private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of this Agreement, and is knowingly and voluntarily entering into this Agreement. 24. Code Section 409A. (a) Notwithstanding anything to the contrary in this Agreement, no severance payable to Executive, if any, pursuant to this Agreement, when considered together with any other severance payments or separation benefits that are considered deferred compensation under Section 409A of the Code and the final regulations and any guidance promulgated thereunder (“Section 409A”) (together, the “Deferred Compensation Separation Benefits”) will be payable until Executive has a “separation from service” within the meaning of Section 409A. (b) Notwithstanding anything to the contrary in this Agreement, if Executive is a “specified employee” within the meaning of Section 409A at the time of Executive’s termination (other than due to death), then the Deferred Compensation Separation Benefits that are payable within the first six (6) months following Executive’s separation from service, will become payable on the first payroll date that occurs on or after the date six (6) months and one (1) day following the date of Executive’s separation from service. All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if Executive dies following Executive’s separation from service but prior to the six (6) month anniversary of the separation, then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death and all other Deferred Compensation Separation Benefits will be payable in accordance with the payment schedule -12- applicable to each payment or benefit. Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. (c) Any amount paid under this Agreement that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1 (b)(4) of the Treasury Regulations will not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above. (d) Any amount paid under this Agreement that qualifies as a payment made as a result of an involuntary separation from service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that do not exceed the Section 409A Limit will not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above. For purposes of this Agreement, “Section 409A Limit” will mean the lesser of two (2) times: (i) Executive’s annualized compensation based upon the annual rate of pay paid to Executive during the Company’s taxable year preceding the Company’s taxable year of Executive’s termination of employment as determined under Treasury Regulation 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto; or (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Code for the year in which Executive’s employment is terminated. (e) The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. The Company and Executive agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Executive under Section 409A.” 25. Counterparts. This Agreement may be executed in counterparts, and each counterpart will have the same force and effect as an original and will constitute an effective, binding agreement on the part of each of the undersigned. -13- IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by a duly authorized officer, as of the day and year written below. COMPANY: LIMELIGHT NETWORKS, INC. /s/ Robert A. Lento Robert A. Lento, Chief Executive Officer EXECUTIVE: /s/ George Vonderhaar George Vonderhaar Date: January 22, 2013 Date: January 22, 2013 [SIGNATURE PAGE TO VONDERHAAR EMPLOYMENT AGREEMENT] -14- Exhibit A FORM OF CONFIDENTIAL INFORMATION AGREEMENT -15- (Back To Top) Section 7: EX-23.1 (EX-23.1) Consent of Independent Registered Public Accounting Firm Exhibit 23.1 We consent to the incorporation by reference in the Registration Statements on Form S-3 (File No. 333-170609) pertaining to the registration of certain securities and Forms S-8 (File Nos. 333-181280, 333-147830, 333-259132, 333-165436 and 333-176760) pertaining to the Amended and Restated 2003 Incentive Compensation Plan and 2007 Equity Incentive Plan of Limelight Networks, Inc. of our reports dated March 1, 2013, with respect to the consolidated financial statements and schedule of Limelight Networks, Inc., and the effectiveness of internal control over financial reporting of Limelight Networks, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2012. /s/ Ernst & Young LLP Phoenix, Arizona March 1, 2013 (Back To Top) Section 8: EX-31.1 (EX-31.1) EXHIBIT 31.1 I, Robert A. Lento, certify that: 1. I have reviewed this annual report on Form 10-K of Limelight Networks, Inc.; CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER 2. 3. 4. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 1, 2013 By: /s/ ROBERT A. LENTO (Back To Top) Section 9: EX-31.2 (EX-31.2) Name: Title: Robert A. Lento President, Chief Executive Officer and Director (Principal Executive Officer) EXHIBIT 31.2 I, Douglas S. Lindroth, certify that: 1. I have reviewed this annual report on Form 10-K of Limelight Networks, Inc.; CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER 2. 3. 4. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 1, 2013 (Back To Top) Section 10: EX-32.1 (EX-32.1) By: Name: Title: /s/ DOUGLAS S. LINDROTH Douglas S. Lindroth Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) EXHIBIT 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Pursuant to 18 U.S.C. Section 1350, As Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I, Robert A. Lento, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the annual report of Limelight Networks, Inc. on Form 10-K for the period ended December 31, 2012, fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such annual report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Limelight Networks, Inc. Date: March 1, 2013 By: /s/ ROBERT A. LENTO  Name: Title: Robert A. Lento President, Chief Executive Officer and Director (Principal Executive Officer) A signed original of this written statement required by Section 906 has been provided to Limelight Networks, Inc. and will be retained by, Limelight Networks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This certification “accompanies” the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing. (Back To Top) Section 11: EX-32.2 (EX-32.2) EXHIBIT 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Pursuant to 18 U.S.C. Section 1350, As Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I, Douglas S. Lindroth, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the annual report of Limelight Networks, Inc. on Form 10-K for the period ended December 31, 2012, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such annual report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Limelight Networks, Inc. Date: March 1, 2013 By: Name: Title: /s/ DOUGLAS S. LINDROTH Douglas S. Lindroth Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) A signed original of this written statement required by Section 906 has been provided to Limelight Networks, Inc. and will be retained by, Limelight Networks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This certification “accompanies” the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing. (Back To Top) 

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