NEXTNAV INC. (NN) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical information, some of the information contained in the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results and outcomes could differ materially for a variety of reasons. You should review “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” of this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
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Overview
We are the market leader in delivering resilient, next generation, complementary positioning, navigation and timing (“PNT”) solutions designed to overcome the limitations and vulnerabilities of the existing space-based Global Positioning Systems (“GPS”) and Global Navigation Satellite Systems (“GNSS”). Our complementary PNT solutions are built on a deep asset base, which we are evolving to utilize 5G New Radio (“5G NR”) technologies. We expect the evolution of our platform to 5G NR to significantly improve the efficiency and flexibility of our operations, technically enabling the delivery of high-bandwidth data services simultaneously with our industry-leading PNT solutions. Since the inception of NextNav, LLC in 2007, we have secured valuable Federal Communications Commission (“FCC”) licenses for a contiguous 8 MHz band of 900 MHz M-LMS spectrum covering over 90% of the U.S. population, been granted more than 180 patents related to our systems and services, and standardized our TerraPoiNT technology in 3GPP, the global telecommunications standards-setting body.
We deliver differentiated PNT solutions through our network-based Pinnacle and TerraPoiNT solutions. Our Pinnacle service provides accurate altitude to any device with a barometric pressure sensor, including most off-the-shelf Android and iOS smartphones, appropriately specified Internet of Things (“IOT”) devices, as well as vehicles and other equipment. In 2021, we launched our Pinnacle network in partnership with AT&T Services, Inc. (“AT&T”) for FirstNet®, the nationwide, interoperable public safety broadband network. Our Pinnacle network covers over 90% of commercial structures over three stories in the U.S., and in addition to FirstNet®, our network is being used for enhanced 911 (“E911”) by Verizon Communications, Inc. (“Verizon”), and a growing set of devices operating on the remaining national cellular network providers. Pinnacle has also been adopted by a growing number of public safety apps, commercial apps, and is available on multiple app development platforms. Our Pinnacle network is also an important component of our PNT resiliency services, and is being evaluated as a persistent PNT characterization platform. We believe that continuing integration of our Pinnacle service into devices and applications will support revenue growth over the coming year.
Our TerraPoiNT system is a terrestrially-based network designed to overcome the limitations inherent in the space-based nature of GPS. GPS is a faint, unencrypted signal, which is often unavailable indoors, distorted in urban areas, and vulnerable to both jamming and spoofing. TerraPoiNT overcomes these limitations through the transmission of a PNT signal on our licensed 900 MHz LMS spectrum. Unlike GPS, the TerraPoiNT signal can be reliably received indoors and in urban areas, is difficult to jam or spoof, and can support signal authentication (e.g., encryption). Further, the TerraPoiNT signal can embed Pinnacle information to provide a full 3D PNT solution. TerraPoiNT offers positioning, navigation and can be configured to provide NIST-traceable timing services independently of GPS. We believe that these capabilities, whether as a more robust primary solution or as a backup in the event of GPS disruptions, are essential due to the economy’s reliance on GPS for location and precision timing. GPS resiliency is increasingly a U.S. national security priority, and is rising in priority in the European Union, non-European Union countries in Eastern Europe and in other parts of the world due to both the demonstrated vulnerability and lack of local control of space-based signals and systems, highlighted by recent events in Ukraine, the Middle East and elsewhere. Critical infrastructure, including communications networks and power grids, require a reliable GPS signal for accurate timing. A failure of GPS could be catastrophic, and there is no comprehensive, terrestrial backup that is widely deployed today.
Simultaneously, demand for wireless data services continues to grow. The backbone of wireless data services, electromagnetic spectrum, is a finite resource. Our spectrum licenses, covering 919.75-927.75 MHz, are referred to as “low-band spectrum”. There is a finite amount of low-band spectrum available, and it has favorable coverage characteristics compared to higher frequencies, including the ability to provide services indoors and at greater distances. These characteristics result in its ability to be used for coverage and to be deployed more economically, with higher-frequency spectrum often used to provide additional capacity in targeted locations. Our transition to 5G NR as the basis for our PNT services will provide a technical basis for simultaneous broadband data in our band, in addition to our base PNT services, and, subject to appropriate regulatory approvals, may allow us to utilize our spectrum to help meet the continued, growing demand for wireless data capacity.
As of March 2024, TerraPoiNT is deployed and available, with metro-wide service in the San Francisco Bay Area and select services available in 92 total markets nationally. It is also in use by the National Aeronautics and Space Administration (“NASA”) at its Langley Research Center in Hampton, VA for drone operations research and at its Ames facility in Mountain View, CA, leveraging our network in the Bay Area.
On October 31, 2022, we acquired Nestwave, SAS, a French société par actions simplifiée (as subsequently renamed, “NextNav France”), a privately held global leader in low-power geolocation, and completed integrating the NextNav France team into our existing engineering and technology organization during 2023. NextNav France provides advanced geolocation solutions to IOT modem and digital signal processor vendors and end IOT users. We believe that the combination of our technology with NextNav France’s LTE/5G capabilities will allow us to evolve our system to align with 5G NR.
NextNav France’s intellectual property also included a “soft GPS” capability, allowing GPS processing on LTE and 5G NR chipsets, reducing the cost and power requirements for certain types of GPS services for IOT devices. We have licensed this technology to chipset vendors, including a global Tier 1 LTE and 5G NR modem vendor. We expect to start to see the results of these licensing arrangements in 2024.
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Macroeconomic Factors
We are aware that network deployment projects are experiencing delays in schedules and potential cost increases due to a tight labor supply in the field services market. While the impact of this supply constraint is not material to our network projects at this time, we continue to carefully manage labor and materials supply matters. Additionally, there is an increased risk of financial market disruption. Management continues to actively monitor our financial condition, liquidity, operations, suppliers, industry and workforce. We expect these macroeconomic factors and their effects on our operations to continue through the remainder of 2024.
Key Components of Results of Operations
Revenue
We have generated limited revenue since our inception. We derive our revenue from PNT products and services, including “floor-level” altitude location data, and related products and services. Our revenue includes revenue generated through services contracts with wireless carriers, services with applications developers, technology demonstration, assessment and support contracts with government customers, sales of equipment, and licensing of proprietary technology. We recognize revenue when an arrangement exists, services, equipment or access to licensed technology are delivered, the transaction price is determined, the arrangement has commercial substance, and collection of consideration is probable.
Operating Expense
Cost of Goods Sold
Cost of goods sold (“COGS”) consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our operations and manufacturing teams. COGS also includes expenses for site leases, cost of equipment, and professional services related to the maintenance of the equipment at each leased site. We expect our operations costs to increase for the foreseeable future as we continue to invest in our Pinnacle and TerraPoiNT networks in domestic U.S. and international markets.
Research and Development
Research and development expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our research and development functions. Research and development costs also include outside professional services for software and hardware development, cloud hosting costs, and software licensing costs. We expect our research and development costs to increase for the foreseeable future as we continue to invest in research and development for our current and future products.
Selling, General and Administrative
Selling, general and administrative expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our business development, marketing, corporate, executive, finance, legal, human resources, IT and other administrative functions. Selling, general and administrative expenses also include expenses for outside professional services, including legal, auditing and accounting services, recruitment expenses, travel expenses and certain non-income taxes, insurance and other administrative expenses.
We expect our selling, general and administrative expenses to increase for the foreseeable future with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, and additional insurance expenses, investor relations activities, and other administrative and professional services. As a result, we expect our selling, general and administrative expenses will increase in absolute dollars, subject to fluctuations in the volume of stock-based compensation granted, but may fluctuate as a percentage of total revenue over time.
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Depreciation and Amortization
Depreciation and amortization expense results from depreciation and amortization of our property and equipment and intangible assets that is recognized over their estimated useful lives.
Interest Income (Expense)
Interest income consists of interest earned from our cash and cash equivalents balance and on marketable securities. Interest expense relates to interest and amortization of debt discounts on our senior secured notes.
Other Income (Expense)
Other income (expense) consists of miscellaneous non-operating items, such as change in fair value of warrants, equity method income (loss), and foreign currency gains (losses).
Results of Operations
The following table sets forth our statements of operations for the periods indicated:
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||
| (in thousands) | |||||||
| Revenue | $ | 3,862 | $ | 3,926 | |||
| Operating Expense: | |||||||
| Cost of goods sold(1) | 12,743 | 11,806 | |||||
| Research and development(1) | 19,503 | 17,059 | |||||
| Selling, general and administrative(1) | 30,324 | 36,926 | |||||
| Depreciation and amortization | 4,821 | 3,671 | |||||
| Total operating expenses | 67,391 | 69,462 | |||||
| Operating loss | (63,529 | ) | (65,536 | ) | |||
| Interest income (expense) | (3,664 | ) | 901 | ||||
| Other income (expense) | (4,321 | ) | 24,491 | ||||
| Loss before income taxes | (71,514 | ) | (40,144 | ) | |||
| Benefit (Provision) for income taxes | (221 | ) | 28 | ||||
| Net loss | $ | (71,735 | ) | $ | (40,116 | ) |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (1) | Cost of goods sold, research and development, and selling, general and administrative expense for the periods do not include depreciation and amortization, which is presented separately in the Consolidated Statements of Comprehensive Loss, but include stock-based compensation as follows: |
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| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||
| (in thousands) | |||||||
| Cost of goods sold | $ | 2,318 | $ | 2,389 | |||
| Research and development | 6,655 | 6,743 | |||||
| Selling, general and administrative | 12,865 | 17,369 | |||||
| Total stock-based compensation expense | $ | 21,838 | $ | 26,501 |
Comparison of the Fiscal Years Ended December 31, 2023 and 2022
Revenue
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Revenue | $ | 3,862 | $ | 3,926 | $ | (64 | ) | (1.6) | % |
Revenue decreased by less than $0.1 million, or 2%, for the year ended December 31, 2023 from the year ended December 31, 2022. The decrease was driven by decreased integration revenue, partially offset by increased recurring service revenue from technology and service contracts with commercial customers. For the year ended December 31, 2023, two customers accounted for 75% and 10% of total revenue. For the year ended December 31, 2022, two customers accounted for 83% and 10% of total revenue. Accounts receivable as of December 31, 2023 and December 31, 2022 were $2.3 million and $2.2 million, respectively; the deferred revenue balance as of December 31, 2023 and December 31, 2022 was $0.3 million and $0.1 million, respectively.
Operating Expense
Cost of Goods Sold (COGS)
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| COGS | $ | 12,743 | $ | 11,806 | $ | 937 | 7.9 | % |
COGS increased by $0.9 million, or 8%, to $12.7 million for the year ended December 31, 2023 from $11.8 million for the year ended December 31, 2022. The increase was primarily driven by a $0.8 million increase in site rent expense due to deployment of new sites in 2023, a $0.4 million increase in software license expenses, and a $0.3 million increase in payroll-related expenses. The increases were partially offset by a $0.3 million decrease in outside consulting expenses, a $0.2 million decrease in maintenance and operational cost, and a $0.1 million decrease in stock-based compensation.
Research and Development
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Research and development | $ | 19,503 | $ | 17,059 | $ | 2,444 | 14.3 | % |
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Research and development expenses increased by $2.4 million, or 14%, to $19.5 million for the year ended December 31, 2023 from $17.1 million for the year ended December 31, 2022. The increase was primarily driven by a $1.6 million increase in payroll-related expenses driven by headcount, a $0.5 million increase in maintenance and operational cost, a $0.2 million increase in software license expenses, a $0.2 million increase in outside consulting expenses, and a $0.1 million increase in professional fee. The increases were partially offset by a $0.1 million decrease in stock-based compensation.
Selling, General and Administrative
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Selling, general and administrative | $ | 30,324 | $ | 36,926 | $ | (6,602 | ) | (17.9) | % |
Selling, general and administrative expenses decreased by $6.6 million, or 18%, to $30.3 million during the year ended December 31, 2023 from $36.9 million in the year ended December 31, 2022. The decrease was primarily driven by a $4.5 million decrease in stock-based compensation, a $1.0 million decrease in professional services, a $1.0 million decrease in directors’ and officers’ insurance, a $0.8 million decrease in outside consulting expenses, and a $0.4 million decrease in marketing and recruiting cost. The decreases were partially offset by a $0.9 million increase in payroll-related expenses driven by headcount and a $0.2 million increase in other operational expenses.
Depreciation and Amortization
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Depreciation and amortization | $ | 4,821 | $ | 3,671 | $ | 1,150 | 31.3 | % |
Depreciation and amortization expenses increased by $1.2 million, or 31%, to $4.8 million during the year ended December 31, 2023 from $3.7 million during the year ended December 31, 2022. The increase in depreciation and amortization expense is primarily attributable to placing the Pinnacle and TerraPoiNT network assets in service since the third quarter of 2022 and amortization related to acquired intangibles in the fourth quarter of 2022.
Interest Income (Expense)
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Interest income (expense) | $ | (3,664 | ) | $ | 901 | $ | (4,565 | ) | (506.7) | % |
Interest expense was $7.4 million whereas interest income was $3.7 million resulting in net interest expense of $3.7 million for the year ended December 31, 2023 compared with interest income of $0.9 million for the year ended December 31, 2022. The increase in interest expense was due to interest and amortization of debt discounts on our senior secured notes issued during 2023.
Other Income (Expense)
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Other income (expense) | $ | (4,321 | ) | $ | 24,491 | $ | (28,812 | ) | (117.6) | % |
Other expense was $4.3 million for the year ended December 31, 2023 compared with other income of $24.5 million for the year ended December 31, 2022.The change in other expense was primarily driven by change in the fair value of warrants.
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Liquidity and Capital Resources
We have incurred net losses since our inception and to date have generated only limited revenue. We have primarily relied upon debt and equity financings to fund our cash requirements. During each of the twelve months ended December 31, 2023 and 2022, we incurred net losses of $71.7 million and $40.1 million, respectively. During each of the twelve months ended December 31, 2023, our net cash used in operating activities and cash provided by investing activities was $35.4 million was $1.1 million, respectively. During the twelve months ended December 31, 2022, our net cash used in operating activities and investing activities was $37.1 million and $15.7 million, respectively. As of December 31, 2023, we had cash and cash equivalents and marketable securities of $85.8 million and an accumulated deficit of $760.2 million. We expect to incur additional losses and higher operating expenses for the foreseeable future. Our primary uses of cash are to fund our operations as we continue to grow our business. We will require a significant amount of cash for expenditures as we invest in ongoing research and development and our PNT networks.
Managing liquidity and our cash position is a priority of ours. We continually work to optimize our expenses in light of the growth of our business, and adapt to changes in the economic environment. We believe that our cash and cash equivalents and marketable securities as of December 31, 2023 will be sufficient to meet our working capital and capital expenditure needs, including all contractual commitments, beyond the next 12 months. We believe we will meet longer term expected future cash requirements and obligations through a combination of our existing cash and cash equivalents balances and marketable securities, cash flows from operations, and issuance of equity securities or debt offerings. However, this determination is based upon internal financial projections and is subject to changes in market and business conditions.
In 2023, we issued $70.0 million in aggregate principal amount of senior secured notes with a fixed interest rate of 10% to the lenders thereto. Such notes will mature on December 1, 2026 with interest payable semi-annually in arrears on June 1 and December 1 of each year. We may elect, at our sole discretion, to pay up to 50% of the accrued and unpaid interest on the senior secured notes due with our common stock. Refer to Note 8 to our consolidated financial statements for the twelve months ended December 31, 2023 included elsewhere in this Annual Report on Form 10-K for more information.
Cash Flows
The following table summarizes our cash flows for the period indicated:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| (in thousands) | ||||||||
| Net cash (used in) operating activities | $ | (35,440 | ) | $ | (37,095 | ) | ||
| Net cash provided (used in) investing activities | 1,074 | (15,736 | ) | |||||
| Net cash provided by financing activities | 68,984 | 43 |
Cash Flows from Operating Activities
Our cash flows used in operating activities are significantly affected by the growth of our business primarily related to research and development, sales and marketing, and selling, general and administrative activities. Our operating cash flows are also affected by our working capital needs to support growth in personnel-related expenditures and fluctuations in accounts payable and other current assets and liabilities.
Net cash used in operating activities during 2023 was $35.4 million, resulting primarily from a net loss of $71.7 million adjusted for non-cash charges of $21.8 million for stock-based compensation, $4.8 million for depreciation and amortization, $4.1 million for change in the fair value of warrant liability, $3.2 million in amortization of debt issuance costs, $0.5 million realized and unrealized gain on marketable securities, $0.2 million for equity method investment loss, and $0.1 million in asset retirement obligations accretion expense. Additionally, there was a net increase in operating liabilities of $2.7 million.
Net cash used in operating activities during 2022 was $37.1 million, resulting from a net loss of $40.1 million and non-cash charge of $24.7 million for the change in fair value of warrant liability, adjusted for non-cash charges of $26.5 million in stock-based compensation charges, $0.23 million for equity method investment loss, non-cash charges of $3.7 million in depreciation, and a decrease of $2.7 million in accounts payable, prepaid and other current assets.
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Cash Flows from Investing Activities
Net cash provided by investing activities during 2023 was $1.1 million, representing sale and of maturity of marketable securities, net of purchase of marketable securities, and cash used for addition in property and equipment primarily related to the deployment of the TerraPoiNT network and internal use software.
Net cash used in investing activities during 2022 was $15.7 million, representing additions to short term investment, acquisition of NextNav France, equity method investments, and property and equipment primarily related to the deployment of the Pinnacle and TerraPoiNT network and internal use software.
Cash Flows from Financing Activities
Net cash provided by financing activities during 2023 was $69.0 million, primarily reflecting cash proceeds from issuance of senior secured notes, net of debt issuance cost.
Net cash provided by financing activities during 2022 was $43 thousand, primarily reflecting cash proceeds from exercise of common stock options.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles. In doing such preparation, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in them have had or are reasonably likely to have a material effect on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.
See Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.
Revenue Recognition
We derive our revenue from PNT technology, products and services including revenue generated through technology demonstration and assessment contracts with customers, support services provided to customers, sales of equipment, and licensing of proprietary technology.
We recognize revenue when an arrangement exists, services, equipment or access to licensed technology are delivered, the transaction price is determined, the arrangement has commercial substance, payment terms are determined and collection of consideration is probable.
We sell software licenses and services through arrangements that may bundle software, equipment, and other services. When we determine that we have separate distinct performance obligations, we allocate the bundled contract price among the various performance obligations based on each deliverable’s stand-alone selling price. If the stand-alone selling price is not directly observable, we estimate the amount to be allocated for each performance obligation based on observable market transactions. When we determine the performance obligations are not distinct, we recognize revenue on a combined basis as the obligation is satisfied. To the extent our contracts include variable consideration, the transaction price includes both fixed and variable consideration. The variable consideration contained within our contracts with customers may include discounts, credits and other similar items. When a contract includes variable consideration, we evaluate the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, we include the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
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We recognize equipment sales and the related costs when control of the equipment passes to the customer, typically upon shipment. Customers do not have rights of return without our prior consent. Revenue pursuant to licensing agreements for our technology represents performance obligations that are satisfied over time. We recognize support services ratably over the periods in which the services are provided; the related costs are expensed as incurred.
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, and deferred revenue on the Consolidated Balance Sheets. We bill amounts under our agreed-upon contractual terms at periodic intervals for services, upon shipment for equipment, or upon achievement of contractual milestones or as work progresses. Billing may occur subsequent to revenue recognition, resulting in accounts receivable. We may also receive payments from customers before revenue is recognized, resulting in deferred revenue.
Indefinite-lived Intangible Assets
We hold wireless Multilateration LMS licenses. Certain general regulatory requirements apply to all licensed wireless spectrum, including, for example, certain build-out or “substantial service” requirements, which generally must be satisfied as a condition to the retention of the license. We are actively engaged in either meeting such requirements currently or seeking an extension of such requirements from the FCC for each of our LMS licenses. Although licenses are issued for only a fixed time, ten years, such licenses are subject to renewal by the FCC, based on the achievement of certain milestones and a finding that such renewal would serve the public interest. Renewal of our licenses has occurred previously and at nominal cost. As a result, we treat our wireless LMS spectrum licenses as an indefinite-lived intangible asset. We reevaluate the useful life determination for wireless licenses each year to determine whether events and circumstances continue to support an indefinite useful life. Costs incurred to maintain the FCC licenses are recorded in operating expenses.
We assess indefinite-lived intangible assets for potential impairment annually as of October 1, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating indefinite-lived intangible assets for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If we conclude that it is not more likely than not that the fair value of the asset is less than its carrying value, then no further testing is required. However, if we conclude that it is more likely than not that the fair value of the asset is less than its carrying value, then we perform a two-step impairment test to identify potential impairment and measures the amount of impairment we will recognize, if any.
Goodwill
Goodwill is tested for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company operates as one reporting unit. When testing goodwill for impairment, the Company may first perform an optional qualitative assessment. If the Company determines it is not more likely than not the reporting unit’s fair value is less than its carrying value, then no further analysis is necessary. If the Company determines that it is more likely than not that the fair value of its reporting unit is less than its carrying amount, then the quantitative impairment test will be performed. Under the quantitative impairment test, if the carrying amount of the Company’s reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to that excess but limited to the total amount of goodwill.
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Long-term debt
In conjunction with the issuance of senior secured notes in May and July of 2023, we issued warrants to certain of the purchasers thereto. We allocated the proceeds from the debt issuance to long term debt and equity classified warrants based on relative fair value as determined by the Discounted Cash Flow approach and Monte Carlo simulation model, respectively. The portion of proceeds allocated to equity-classified warrants and direct debt issuance costs are classified as debt discounts. The carrying value of long term debt in the Company’s consolidated balance sheet consists of principal amount of debt, net of debt discounts. Debt discounts are amortized to interest expense based on the related debt agreements primarily using the effective interest method.
Recently Issued and Adopted Accounting Standards
For information regarding new accounting pronouncements, and the impact of these pronouncements on our consolidated financial statements, if any, refer to Note 2 to our consolidated financial statements for the year ended December 31, 2023 included elsewhere in this Annual Report on Form 10-K.
Emerging Growth Company Status
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. Spartacus previously elected to avail itself of the extended transition period, and following the consummation of the Business Combination, we became an emerging growth company (for the period described in the immediately succeeding paragraph) and will continue to take advantage of the benefits of the extended transition period emerging growth company status permits. During the extended transition period, it may be difficult or impossible to compare our financial results with the financial results of another public company that complies with public company effective dates for accounting standard updates because of the potential differences in accounting standards used.
We will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2025, (b) the last date of our fiscal year in which we have total annual gross revenue of at least $1.235 billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.
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