Item 2.02. Results of Operations and Financial Condition.
On March 13, 2023, Edgio, Inc. (the "Company" or "Edgio") issued a press
release, a copy of which is furnished herewith as Exhibit 99.1. Additional
information is included in Item 4.02 below.
In addition, the Company is aware that Silicon Valley Bank ("SVB") was closed on
March 10, 2023 by the California Department of Financial Protection and
Innovation, which appointed the Federal Deposit Insurance Corporation ("FDIC")
as receiver. As of December 31, 2022, the Company had total cash, cash
equivalents and short-term investment balance of approximately $74 million. As
of the date of this Form 8-K, the Company has approximately $20.6 million of
cash held at SVB. According to a March 12, 2023 joint statement by the
Department of the Treasury, the Board of Governors of the Federal Reserve System
and the FDIC, all depositors of SVB will have full access to their deposits
starting Monday, March 13, 2023. The Company will continue to monitor the
situation and any impact on the Company and its operations.
There is no outstanding balance under the Company's Loan and Security Agreement
with SVB, as amended, as of December 31, 2022 nor as of the date of this
Form 8-K.
Item 4.02. Non-Reliance on Previously Issued Financial Statements or a Related
Audit Report or Completed Interim Review
On March 8, 2023, management and the Audit Committee of the Board of Directors
(the "Audit Committee") of Edgio determined that the Company's previously issued
financial statements in its Annual Reports on Form 10-K for the years ended
December 31, 2021 and 2020, as well as the previously filed Quarterly Reports on
Form 10-Q for the quarterly periods ended March 31, 2022 and 2021, June 30, 2022
and 2021 and September 30, 2022 and 2021 (collectively, the "Prior Period
Financial Statements"), should be restated and no longer be relied upon due to
an error in accounting for sales of the Company's Open Edge solution (the
"Impacted Open Edge transactions"). Similarly, any previously furnished or filed
reports, related earnings releases, investor presentations or similar
communications of the Company describing the Company's financial results or
other financial information contained in the Prior Period Financial Statements
should no longer be relied upon. The Company plans to restate the Prior Period
Financial Statements (collectively, the "Restated Prior Period Financial
Statements").
By way of background, in mid-February 2023, as part of Edgio's normal financial
reporting process, prior to completion of the financial audit for the period
ended December 31, 2022, the Company and the Audit Committee reviewed Edgio's
financial results and discussed a technical accounting issue related to the
accounting for sales of Edgio's Open Edge solution. Open Edge is a fully-managed
content delivery network service that embeds Edgio's content delivery platform
directly into the networks of Edgio's customers, primarily internet service
providers ("ISPs"). The Company reevaluated such accounting and determined that
it must correct the previous accounting for the Impacted Open Edge transactions.
The changes that will be recorded due to the Impacted Open Edge transactions did
not result from a change in published accounting guidance during the relevant
time period or override of controls or misconduct, nor has the Audit Committee
been informed of any issues related to an override of controls or misconduct.
The Impacted Open Edge transactions involved Edgio's sale of equipment,
including routing and server communications hardware, to customers, primarily
ISPs, to establish a point of presence ("PoP") in the customer's network. The
equipment included Edgio's proprietary content delivery software, which allows
Edgio to host, use, process, display, and transmit content on the customer's
network. The Impacted Open Edge transactions had a revenue sharing arrangement,
whereby Edgio and the customer shared revenue from the traffic that runs through
the PoP using Edgio's content delivery platform.
Consistent with Edgio's revenue recognition disclosures, revenues from the sale
of the equipment and related equipment costs had historically been recorded at
the point in time when control of the equipment transferred to the customer, and
expenses from the revenue share arrangement were recorded over the term of the
revenue sharing agreement, which is generally five years. Based on the Company's
review to-date of a sample of the Impacted Open Edge transactions related to its
large customers, which remains ongoing, the Company has determined that the
Impacted Open Edge transactions should have been accounted for as financing
leases, in which (1) the up-front payments received from Edgio's customers
associated with the transaction are recognized as a financing liability on the
balance sheet, with the related equipment costs remaining in fixed assets and
depreciated over time, and (2) pursuant to lease accounting, the revenue sharing
payments made by Edgio to its Open Edge customers are allocated between cost of
sales and lease payments, as an offset on the balance sheet against the lease
liability. While the Company's determination
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regarding the revised accounting treatment for the Impacted Open Edge
transactions is based on management's evaluation of a sample of the Impacted
Open Edge transactions, the Company has not yet completed its evaluation of all
such transactions and could reach a different determination as to the remaining
transactions.
The revised accounting treatment for a sample of the Impacted Open Edge
transactions reviewed to-date does not impact the Company's overall cash flow,
nor does it impact the economic terms or substance of the Company's
transactions. The Company currently anticipates that the primary effects to the
Restated Prior Period Financial Statements from this restatement will be a
reduction to revenue of up to approximately $23.0 million for the nine-month
period ended September 30, 2022, up to approximately $16.7 million for the
twelve-month period ended December 31, 2021, and up to approximately
$6.6 million for the twelve-month period ended December 31, 2020, with a
corresponding costs of sales reduction and impact to depreciation expenses and
income taxes, as well as other adjustments. This represents a reduction in
revenue of 5.8% on a consolidated pro-forma basis for the nine-month period
ended September 30, 2022, and a reduction in previously reported revenue of 7.7%
in 2021 and 2.9% in 2020. There can be no assurance that the actual effects of
the error corrections will be only as described above.
The Company plans to include the Restated Prior Period Financial Statements in
connection with the filing of its Annual Report on Form 10-K for the year ended
December 31, 2022 ("Form 10-K") as soon as practicable. The Company anticipates
a delay in the timely filing of its Form 10-K and will file a notification of
late filing on Form 12b-25 with the U.S. Securities and Exchange Commission
("SEC") to obtain an automatic 15-day extension of the filing deadline for the
Form 10-K. The accounting related to the Impacted Open Edge transactions is
complex and technical and involves significant judgments in applying U.S. GAAP.
Due to the complexities associated with accounting for the Impacted Open Edge
transactions, the Company does not expect that it will complete the preparation
and filing of its Form 10-K within the extension period. The Company is
committed to filing its Form 10-K as expeditiously as possible. In addition, the
Company expects to receive a notice from The Nasdaq Stock Market that it is not
in compliance with the timely filing requirement for continued listing under
Nasdaq Listing Rule 5250(c)(1). Such notification letter is not expected to have
an immediate effect on the listing or trading of Edgio common stock on the
Nasdaq Global Select Market.
Due to the accounting associated with the financing leases, however, the Company
may not be in compliance with all of its financial covenants under its Loan and
Security Agreement with SVB, as amended, after giving effect to the restatement,
which, in addition to the Company's late filing of its Form 10-K, may trigger an
event of default under the agreement. However, there was no outstanding balance
under this credit facility as of December 31, 2022 nor as of the date of this
Form 8-K. The Company's late filing of its Form 10-K may also trigger a default
under the Indenture between the Company and U.S. Bank National Association dated
July 27, 2020 regarding the 3.50% Convertible Senior Notes due 2025 if a waiver
is not obtained.
The Company also expects to disclose in its Form 10-K a material weakness in the
Company's design and operation of effective internal controls over the
accounting for the Impacted Open Edge transactions, in connection with the
aforementioned restatement. The Company will provide further specifics on the
material weakness and its plan for remediation in its Form 10-K. Additional
deficiencies or material weaknesses in the Company's design and operation of
effective internal controls may be identified during the completion of the
audit.
In addition to the above, the Company expects to correct certain other errors
within the Prior Period Financial Statements.
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The Audit Committee has discussed the matters disclosed in this Item 4.02 of
Form 8-K with the Company's independent registered public accounting firm,
Ernst & Young LLP.
Item 7.01 Regulation FD Disclosure.
The information contained in Item 2.02 of this Current Report on Form 8-K is
incorporated herein by reference.
The information in Item 7.01 and Exhibit 99.1 of this Current Report on Form 8-K
attached hereto shall not be deemed "filed" for purposes of Section 18 of the
Securities Act of 1934, as amended (the "Exchange Act"), or otherwise subject to
the liabilities of that Section, or incorporated by reference in any filing
under the Securities Act of 1933, as amended, or the Exchange Act, except as
shall be expressly set forth by specific reference in such filing.
Forward-Looking Statement Disclaimer
The Company includes in this Current Report on Form 8-K "forward-looking
statements" within the meaning of the federal securities laws. A reader can
identify forward-looking statements because they are not limited to historical
fact or they use words such as "expects," "estimates," "intends," and similar
expressions that concern the Company's strategy, plans, intentions or beliefs
about future occurrences or results, including without limitation, statements
regarding the nature and extent of the accounting changes and errors, and the
expected impact of the accounting changes and the restatement on the Company's
prior and future financial statements, financial position, expected preliminary
revenues, and other results of operations, and the Company's ability to recover
its cash on deposit at SVB. These forward-looking statements are made as of the
date hereof and are based on current expectations, estimates, forecasts and
projections as well as the beliefs and assumptions of management.
Forward-looking statements are subject to risks, uncertainties and other factors
that may change at any time and may cause actual results to differ materially
from those that the Company expected. Many of these statements are derived from
the Company's operating budgets and forecasts, which are based on many detailed
assumptions that the Company believes are reasonable, or are based on various
assumptions about certain plans, activities or events which the Company expects
will or may occur in the future. The Company's actual results could differ
materially from those stated or implied in forward-looking statements due to a
number of factors, including, but not limited to: the risk that the Company's
cash on deposit on SVB may not be recoverable above the FDIC insured limit and
the risk that the Company may experience liquidity or cash flow issues; the risk
that additional information may arise prior to the filing of the restated
financial statements; additional adjustments the Company may determine to
include as it finalizes the restated financial statements and the financial
statements for the fiscal year ended December 31, 2022; the risk that the
Company could reach a different determination regarding the revised accounting
treatment for the Impacted Open Edge transactions upon completion of its
evaluation of such transactions; the risk that the sample of Impacted Open Edge
transactions management evaluated may not accurately represent all such
transactions; the risk that Open Edge will no longer be a strategic initiative
for the Company; the risk that additional deficiencies or material weaknesses in
the Company's design and operation of effective internal controls are
identified; the timing and ultimate conclusions of the auditors regarding the
audit of the Company's financial statements; the risk that the completion and
filing of the Company's Annual Report on Form 10-K will take longer than
expected and will not be completed by the extension period provided by Rule
12b-25 of the Securities Exchange Act of 1934, as amended; the possibility that
The Nasdaq Stock Market may delist the Company's securities; the possibility
that the Company will not be able to become current in its filings with the SEC;
investigations or actions by governmental authorities or regulators and the
consequences thereof, including the imposition of civil or criminal penalties;
the risk of an event of default under the Indenture between the Company and U.S.
Bank National Association dated July 27, 2020 regarding the 3.50% Convertible
Senior Notes due 2025, including as a result of the Company's failure to timely
file its annual financial statements; the risk of an event of default under the
Company's Loan and Security Agreement with SVB, as amended, including as a
result of the Company's failure to timely file its annual financial statements;
and the risk that the Company may become subject to stockholder lawsuits or
claims. It is very difficult to predict the effect of known factors, and the
Company cannot anticipate all factors that could affect actual results that may
be important to an investor. All forward-looking information should be evaluated
in the context of these risks, uncertainties and other factors, including those
factors disclosed in this Current Report and those factors disclosed under "Risk
Factors" in the Company's Annual Report on Form 10-K filed with the SEC on
February 17, 2022 and the Company's subsequent reports filed with the SEC.
All forward-looking statements in this Form 8-K are based on information
available to the Company as of the date hereof. The Company undertakes no
obligation to revise or publicly release the results of any revision to these
forward-looking statements, except as required by law. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements.
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Item 9.01 Financial Statements and Exhibits
(d) Exhibits
Exhibit No. Description
99.1 Press Release, dated March 13, 2023.
104.1 Cover Page Interactive Data File (embedded within the Inline XBRL
document).
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