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