Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements and Risk Factors
See the discussion of forward-looking statements and risk factors in Part I Item 1 and Item 1A of this report.
The following discussion and analysis of our financial condition and results of operations constitutes management’s review of the factors that affected our financial and operating performance for the years ended December 31, 2023 and 2022. This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this report.
Overview
We offer a complete range of 4G and 5G network build and network densification products with an expansive portfolio of software and hardware tools for indoor and outdoor, compact femto, pico, micro and macro base stations, as well as an industry leading 802.11ac and 802.11ax fixed wireless access and backhaul solution portfolio for point-to-point and point-to-multipoint applications. Our solutions help network operators monetize the potential of 4G and 5G technologies and use cases and, in addition, allow enterprises to establish their own private networks especially in 5G, where dedicated spectrum has been allocated. We have developed differentiated RAN software and hardware products to help operators get the maximum capacity and coverage in the following ways:
Very high-performance wireless network technology for both access and backhaul components of the network.
Energy efficient and integrated form factors, enabling cost effective deployment of RAN technology that are able to avoid zoning and site acquisition constraints, which translate into a quicker time-to-market for our customers.
Easy to use, affordable and comprehensive core network elements to support 4G, 5G and fixed wireless services.
Sophisticated provisioning and orchestration software for both backhaul and RAN for 4G and 5G access and the core network that can also integrate a wide range of access.
Fully virtualized cloud native modular software and hardware solutions that adhere to open standards allowing our operator customers to fundamentally shift the dynamics of the value and supply chains of the wireless industry. This decreases vendor lock-in and as a result lowers total cost of ownership typical of traditional incumbent competitors.
The market for our wireless systems includes leading mobile CSPs, large enterprises, military communications integrators and ISPs. Our strategy applies the same network technology across all addressable sectors.
Our main operations are in: Slough, United Kingdom; Mumbai and Bangalore, India; Tokyo, Japan; Airport City, Israel; and our corporate headquarters is in Boca Raton, Florida.
Recent Developments
Chapter 11 Cases
On March 31, 2024, the Debtors filed bankruptcy petitions under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 in the Bankruptcy Court. The Bankruptcy Court confirmed the Company’s Prepackaged Plan on June 28, 2024.
Restructuring Support Agreement
On March 29, 2024, the Company entered into a Restructuring Support Agreement (including all exhibits thereto, collectively, the “RSA”) with (i) certain of its affiliates and subsidiaries (as set forth in the RSA, and together with the Company, the “Company Parties”); (ii) certain Consenting Senior Secured Creditors, (iii) certain Consenting Subordinated Term Loan Lenders and (iv) certain Consenting Subordinated Convertible Noteholder (as each such term is defined in the RSA, and collectively, other than the Company Parties, the “Consenting Stakeholders”).
As set forth in the RSA, the Company and the Consenting Stakeholders have agreed to the principal terms of a restructuring of the Company (the “Restructuring”) through the filing of the Prepackaged Plan in the Bankruptcy Court. Although the Company intends to pursue the Restructuring in accordance with the terms set forth in the RSA, there can be no assurance that the Company will be successful in completing the Restructuring, whether on the same or different terms than those provided in the RSA and the Prepackaged Plan.
The material terms of the Prepackaged Plan are set forth in the restructuring term sheet attached to the RSA (the “Term Sheet”, and the transactions described therein, the “Restructuring Transactions”), which terms include, among other things:
trade claims will be paid in the ordinary course of business during and after the Chapter 11 Cases (as hereinafter defined);
in the bankruptcy cases, the Consenting Senior Secured Creditors committed to provide a senior secured debtor-in-possession financing facility (the “Initial DIP Facility”) which consists of $16.5 million in new money DIP loans and $37.3 million in amounts “rolled up” from certain prepetition bridge facilities, on the terms set forth in the DIP Documents (as that term is defined in the RSA). The new money portion of the Initial DIP Facility became available in two draws, an initial draw of $7.5 million and a second draw of $9.0 million. The Initial DIP Facility as described in the Term Sheet is fully drawn. The Initial DIP Facility was approved by the Bankruptcy Court on a final basis on April 19, 2024.
on the effective date of the Restructuring Transactions (the “Plan Effective Date”), Airspan (as reorganized, “Reorganized Airspan”) will issue a single class of common equity interests (“New Common Equity”) to certain of its creditors as follows: (a) 94.375% pro rata to the Senior Secured Creditors, and (b) 5.625% pro rata to the Subordinated Term Loan Lenders and Subordinated Convertible Noteholders, subject to dilution on account of the management incentive plan (addressed below), the New Money Common Equity (as hereinafter defined), the New Existing Common Equity Warrants (as hereinafter defined), the DIP Facility Amendment No. 1 (as hereinafter defined), and certain other fees, premiums, and/or other terms as set forth in the RSA;
on the Plan Effective Date, the Company will consummate a new-money equity capital raise in an amount up to $95 million in aggregate (the “New Money Common Equity”), up to $90 million of which will be offered for ratable participation by holders of senior secured claims, and the remaining $5 million of which will be offered for ratable participation by holders of subordinated claims, and subject to other terms as set forth in the RSA. Certain of the Consenting Senior Secured Creditors have agreed to backstop the New Money Common Equity in an amount equal to at least (a) the amount sufficient to repay the Initial DIP Facility, plus (b) $22.0 million.
on the Plan Effective Date, Reorganized Airspan will issue new warrants (“New Warrants”), consisting of and exercisable into (i) up to 3% of New Common Equity to holders of our existing common stock (the “Existing Common Stock Interest”), and (ii) 6.25% of New Common Equity to holders of subordinated claims on a pro rata basis, subject to other terms as set forth in the RSA;
on the Plan Effective Date, and in exchange for granting third-party releases and providing certain other consideration, Existing Common Stock Interest will be cancelled and eligible holders of Existing Common Stock Interest, subject to certain limitations set forth in the Plan, will be entitled to: (i) receive their pro rata share of $450,000 cash (the “Equity Cash Pool”), or (ii) elect to receive New Warrants, provided that if more than 150 record holders of Existing Common Stock Interest make such election, no New Warrants shall be issued to holders of Existing Common Stock Interest and all eligible holders of Existing Common Stock Interest will receive their pro rata share of the Equity Cash Pool;
following the Plan Effective Date, Reorganized Airspan may establish a customary management equity incentive plan; and
on the Plan Effective Date, there will be no recovery for holders of other equity interests in the Company;
In accordance with the RSA, the Consenting Stakeholders agreed, among other things, to:
subject to receipt of the Disclosure Statement (as defined in the RSA), vote to accept the Plan;
grant and not opt out of the releases contemplated by the Plan;
refrain from taking any action that would delay or impede consummation of the Plan; and
support and effectuate the documentation within the timeframes contemplated by the RSA.
In accordance with the RSA, the Company Parties agreed, among other things, to:
support the Restructuring Transactions, act in good faith, and use commercially reasonable efforts to take all actions, to the extent practicable and subject to the terms of the RSA, and reasonably requested or necessary to implement and consummate the Restructuring Transactions in accordance with the terms, conditions, and applicable deadlines set forth in the RSA, as applicable;
take all commercially reasonable actions to obtain and/or support the Company Parties in obtaining necessary or advisable regulatory or third-party approvals and providing notices in respect of regulatory and licensing requirements, as applicable, in connection with the Restructuring Transactions, including by providing all information reasonably requested by the Company Parties;
negotiate in good faith and use commercially reasonable efforts to execute (where applicable) and implement the definitive documents (as set forth in the RSA) and any other agreements required to effectuate and consummate the Restructuring Transactions as contemplated by the RSA;
support, and not directly or indirectly object to, delay, impede, or take any other action to interfere with, confirmation or consummation of the Plan;
support, and not directly or indirectly object to, delay, impede, or take any other action to interfere with, any motion or other pleading or document filed by a Debtor in the Bankruptcy Court or any other court that is consistent in all respects with the RSA and the Restructuring Transactions; and
take or cause to be taken all corporate actions and provide all authorizations reasonably necessary in furtherance of the Restructuring Transactions as are within the authority of such Consenting Stakeholders.
Pursuant to the RSA, the Company commenced the solicitation of votes on the Prepackaged Plan (the “Solicitation”) on March 30, 2024. In connection with the Solicitation, the Plan and Disclosure Statement were distributed to certain creditors of the Company that are entitled to vote on the Plan.
The RSA may be mutually terminated by the Required Consenting Senior Secured Creditors and each Company Party. The RSA will automatically terminate upon the earlier of the Plan Effective Date or 180 days after the date on which the Company Parties commenced their Chapter 11 Cases (the “Outside Date”); provided, that if the Plan Effective Date shall not have occurred by the Outside Date solely as a result of the failure to receive all necessary or advisable regulatory approvals by the Outside Date, the Outside Date shall automatically extend to the earlier of three business days following the receipt of all necessary or advisable regulatory approvals or 210 days after the date on which the Company Parties commenced their Chapter 11 Cases. Moreover, the Required Consenting Senior Secured Creditors, the Required Consenting Subordinated Creditors and the Company Parties each have termination rights if certain conditions are not met.
DIP Credit Facility
In connection with the Chapter 11 Cases, the Debtors entered into a Senior Secured Superpriority Debtor-in-Possession Term Loan Credit Agreement, dated April 8, 2024 (the “Initial DIP Credit Agreement”), with DBFIP ANI LLC, as administrative and collateral agent (the “DIP Administrative Agent”), and the lenders from time to time party thereto (collectively, the “DIP Lenders”), and a Security Agreement, dated April 8, 2024 (the “DIP Security Agreement”), with DBFIP ANI LLC, as collateral agent. The DIP Lenders are also (i) holders or affiliates, partners or investors of holders under the Company’s senior secured convertible notes sold pursuant to the Senior Secured Convertible Note Purchase and Guarantee Agreement, dated as of July 30, 2021 (as amended, restated, amended and restated, supplemented, modified or replaced, extended or refinanced from time to time), by and among the Company, certain of its subsidiaries as guarantors, the purchasers party thereto and DBFIP ANI LLC, as collateral agent and administrative agent, and (ii) lenders pursuant to the Sixth Amended and Restated Credit Agreement, dated as of March 7, 2024 (as amended, restated, amended and restated, supplemented, modified or replaced, extended or refinanced from time to time) (the “Prepetition Credit Agreement”), by and among Airspan Networks Inc., the Company, certain subsidiaries of the Company, the lenders party thereto and DBFIP ANI LLC, as collateral agent and administrative agent.
Under the Initial DIP Credit Agreement, the DIP Lenders provided term loans to the Borrowers in an original principal amount of $53,848,837, plus certain fees as described below. The DIP Lenders made new financing commitments to the Company under a new money delayed draw term loan facility (the “New Money DIP Facility”) in an aggregate principal amount of up to $16,500,000, all of which has been funded. The Initial DIP Credit Agreement also provides for a credit facility pursuant to which $37,348,837 of outstanding indebtedness under the Fortress Credit Agreement was automatically deemed substituted and exchanged for, and converted, into (such conversion, the “Roll Up”) debtor-in-possession term loans (the “Roll Up Loans”) (such credit facility, together with the New Money DIP Facility, the “Initial DIP Facility”) on a cashless dollar-for-dollar basis, in each case, in accordance with and subject to the terms and conditions in the DIP Credit Agreement. On July 26, 2024, the Debtors, the DIP Lenders, and the DIP Administrative Agent entered into that certain Amendment and Restatement of Senior Secured Superpriority Debtor-In-Possession Term Loan Credit Agreement and Reaffirmation of Loan Documents (the “DIP Facility Amendment No. 1” and together with the Initial DIP Credit Agreement, the “DIP Credit Agreement”) pursuant to which the DIP Lenders increased their financing commitments to the Company under additional new money delayed draw term loans in an amount of up to $5 million (the “First Supplemental DIP Facility” and the term loans made thereunder, the “New DIP Loans”) available in two of $2.5 million each. The Initial DIP Facility together with the First Supplemental DIP Facility, are referred to herein collectively as the “DIP Facility”.
The loans made pursuant to the DIP Credit Agreement are secured by substantially all of the assets of the Debtors under the DIP Security Agreement. Borrowings under the DIP Facility will bear interest at either (i) the Base Rate (as defined in the DIP Credit Agreement) plus 10.00% per annum, or (ii) the Adjusted Term SOFR (as defined in the DIP Credit Agreement) plus 11.00% per annum. Interest on the DIP Facility is payable in-kind.
The Debtors agreed, subject to Bankruptcy Court approval, to pay certain fees, in connection with the Initial DIP Facility, including (i) an administration fee in an amount equal to $50,000 per annum, payable-in-kind, (ii) a 3% Commitment Premium (as defined in the DIP Credit Agreement), payable in-kind, and (iii) a 3% Exit Premium (as defined in the DIP Credit Agreement), earned upon the repayment or maturity of all or a portion of the DIP Facility, and payable on the repaid or maturing amounts. The Commitment Premium and the Exit Premium do not apply to the New DIP Loans.
The DIP Credit Agreement includes milestones, representations and warranties, covenants applicable to the Debtors, and events of default. If an event of default under the DIP Credit Agreement occurs, the DIP Administrative Agent may, among other things, permanently reduce any remaining commitments and declare the outstanding obligations under the DIP Credit Agreement to be immediately due and payable.
The DIP Credit Agreement has a stated maturity date of October 8, 2024 (the “DIP Stated Maturity Date”). The DIP Credit Agreement will also terminate and all obligations thereunder will become due on the date that is the earliest of the following (i) the DIP Stated Maturity Date, (ii) the consummation of any plan of reorganization under the Chapter 11 Cases, (iii) the consummation of a sale or other disposition of all or substantially all assets of the Debtors, taken as a whole, under section 363 of the Bankruptcy Code and (iv) the date of acceleration following the occurrence of an Event of Default (as defined in the DIP Credit Agreement).
On July 23, 2024, the Bankruptcy Court granted the Company’s motion to approve the DIP Facility Amendment No. 1 to provide up to $5.0 million in additional funding to facilitate continued operations until the Company receives required regulatory approvals and is able to emerge from bankruptcy and close the Restructuring Transactions.
Delisting
In connection with the Chapter 11 Cases, on April 1, 2024, the staff of NYSE Regulation announced its determination to commence proceedings to delist the Common Stock from NYSE American, and trading of the Common Stock was suspended immediately. On April 10, 2024, the staff of NYSE Regulation filed a Form 25-NSE with the SEC to report the delisting of the Common Stock from trading on the NYSE American.
The Company intends to file a Form 15 with the SEC to suspend the Company’s public reporting obligations with the SEC under Section 15(d) of the Exchange Act.
Confirmed Plan
All creditors entitled to vote on the Prepackaged Plan, and who did vote on the Prepackaged Plan, have voted to accept the Prepackaged Plan. The Debtors communicated with various interested parties and resolved all comments on the proposed Prepackaged Plan without changing the key terms outlined above. As part of that process, the Debtors entered into a term sheet with Gogo Inc. which outlines the principal terms and conditions for a new revolving line of credit in the aggregate principal amount of $20.0 million (the “New Revolving Line of Credit”), and the assumption of certain commercial contracts between the Debtors and Gogo Inc. (and its affiliates). The New Revolving Line of Credit is expected to be undrawn as of the Plan Effective Date.
A hearing on confirmation of the proposed Prepackaged Plan took place before the Bankruptcy Court on June 28, 2024, at which the Bankruptcy Court confirmed the Prepackaged Plan .
Gogo Agreements
On or about April 12, 2024, Gogo Business Aviation LLC (“Gogo”) notified the Company of its assertion that the Company was allegedly in default under certain contracts with Gogo (the “Existing Gogo Contracts”), which the Company disputes. Following negotiations, and without any admission or acknowledgment from Legacy Airspan as to the accuracy or validity of any purported default or event of default under the Existing Gogo Contracts, Legacy Airspan and Gogo resolved the dispute by entering into a Waiver and Omnibus Amendment to Airspan/Gogo Agreements dated as of June 27, 2024 (the “Gogo Agreement”) with respect to the Existing Gogo Contracts. Under the Gogo Agreement, Gogo agreed to waive its existing alleged claims under the Existing Gogo Contracts, conditional upon certain specified events not occurring after the Plan Effective Date. Additionally, the parties agreed to modify certain terms of the Existing Gogo Contracts, including certain reporting obligations, observation rights, and performance dates. The amendments and conditional waivers under the Gogo Agreement are not until the Plan Date.
March 2024 Fortress Amendments
On March 7, 2024, the Company, Legacy Airspan and certain of our subsidiaries who are party to the Fortress Credit Agreement entered into a Limited Waiver and Consent, Sixth Amendment and Restatement of Credit Agreement and Reaffirmation of Loan Documents relating to the Fortress Credit Agreement with Fortress the “March 2024 Fortress Credit Amendment”) to, among other things, amend and restate the Fortress Credit Agreement, extend the waiver of certain potential prospective events of default under the March 2024 Fortress Credit Amendment, establish new term delayed draw term loan commitments in the aggregate amount of $18 million, and extend the forbearance by the lenders party to the March 2024 Fortress Credit Amendment from exercising their rights and remedies as a result of certain existing and potential prospective events of default under the March 2024 Fortress Credit Amendment in a limited manner. On March 7, 2024, the Company, Legacy Airspan, and certain of our subsidiaries who are party to the Fortress Senior Secured Convertible Note Purchase and Guarantee Agreement (the “Fortress Convertible Note Agreement”) entered into a Limited Waiver and Consent, Seventh Amendment to Senior Secured Convertible Note Purchase and Guarantee Agreement and Reaffirmation of Note Documents (the “March 2024 Fortress Convertible Note Agreement Amendment”) to, among other things, extend the waiver of certain existing and potential prospective events of under the Fortress Convertible Note Agreement in the limited manner set forth therein, and (ii) extend the forbearance by the purchasers party to the March 2024 Fortress Convertible Note Agreement Amendment from exercising their rights and remedies as a result of certain existing and prospective events of under the Fortress Convertible Note Agreement in the limited manner set forth therein. To effect the March 2024 Fortress Credit Amendment and the March 2024 Fortress Convertible Note Agreement Amendment, the Company incurred capitalized fees of approximately $3.6 million.
On March 25, 2024, the Company, Legacy Airspan and certain of our subsidiaries who are party to the Fortress Credit Agreement entered into an Amendment No. 1 to Limited Waiver and Consent, Sixth Amendment and Restatement of Credit Agreement and Reaffirmation of Loan Documents (the “March 25, 2024 Fortress Credit Amendment) to, among other things, extend the forbearance by the lenders party to the March 25, 2024 Fortress Credit Amendment from exercising their rights and remedies as a result of certain events of default. On March 25, 2024, the Company, Legacy Airspan, and certain of our subsidiaries who are party to the Fortress Convertible Note Agreement entered into Amendment No. 1 to Limited Waiver and Consent, Seventh Amendment to Senior Secured Convertible Note Purchase and Guarantee Agreement and Reaffirmation of Note Documents (the “March 25, 2024 Fortress Convertible Note Agreement Amendment”) to, among other things, extend the forbearance by the purchasers party to the March 25, 2024 Fortress Convertible Note Agreement Amendment from exercising their rights and remedies as a result of certain events of default.
February 2024 Fortress Amendments
On February 28, 2024, the Company, Legacy Airspan and certain of our subsidiaries who are party to the Fortress Credit Agreement entered into a Limited Waiver and Consent, Fifth Amendment and Restatement of Credit Agreement and Reaffirmation of Loan Documents relating to the Fortress Credit Agreement with Fortress the “February 2024 Fortress Credit Amendment”) to, among other things, amend and restate the Fortress Credit Agreement, extend the waiver of certain potential prospective events of default under the February 2024 Fortress Credit Amendment, establish new term delayed draw term loan commitments in the aggregate amount of $750,000, and establish the forbearance by the lenders party to the February 2024 Fortress Credit Amendment from exercising their rights and remedies as a result of certain potential prospective events of default under the February 2024 Fortress Credit Amendment in a limited manner. On February 28, 2024, the Company, Legacy Airspan, and certain of our subsidiaries who are party to the Fortress Convertible Note Agreement entered into a Limited Waiver and Consent, Sixth Amendment to Senior Secured Convertible Note Purchase and Guarantee Agreement and Reaffirmation of Note Documents (the “February 2024 Fortress Convertible Note Agreement Amendment”) to, among other things, extend the waiver of certain potential prospective events of default under the Fortress Convertible Note Agreement in the limited manner set forth therein, and (ii) establish the forbearance by the purchasers party to the February 2024 Fortress Convertible Note Agreement Amendment from exercising their rights and remedies as a result of certain prospective events of under the Fortress Convertible Note Agreement in the limited manner set forth therein. To effect the February 2024 Fortress Credit Amendment and the February 2024 Fortress Convertible Note Agreement Amendment, the Company incurred capitalized fees of approximately $300,000.
December 2023 Fortress Amendments
On December 22, 2023, the Company, Legacy Airspan and certain of our subsidiaries who are party to the Fortress Credit Agreement entered into a Limited Waiver and Consent, Fourth Amendment and Restatement of Credit Agreement and Reaffirmation of Loan Documents relating to the Fortress Credit Agreement with Fortress (the “December 2023 Fortress Credit Amendment”) to, among other things, amend and restate the Fortress Credit Agreement, effect a limited waiver of certain existing and potential prospective events of default under the Fortress Credit Agreement, establish new delayed draw term loan commitments in the amount of $10.0 million, defer the due date of certain cash payments of principal and interest under the Fortress Credit Agreement, and establish certain new covenants. On December 22, 2023, the Company, Legacy Airspan and certain of our subsidiaries who are party to the Fortress Convertible Agreement entered into a Limited Waiver and Consent, Fifth Amendment to Senior Secured Convertible Note Purchase and Guarantee Agreement and Reaffirmation of Note Documents relating to the Fortress Convertible Note Agreement with Fortress (the “December 2023 Fortress Convertible Note Agreement Amendment”) to, among other things, effect a limited waiver of certain existing and potential prospective events of default under the Fortress Convertible Note Agreement, the due date of certain cash payments of interest under the Fortress Convertible Notes, and establish certain new covenants. To effect the December 2023 Fortress Credit Amendment and the December 2023 Fortress Convertible Note Agreement Amendment, the Company incurred fees of approximately $4 million, capitalized on a pro rata basis in connection with each advance.
November 2023 Fortress Amendments
On November 14, 2023, the Company, Legacy Airspan and certain of our subsidiaries who are party to the Fortress Credit Agreement entered into a Limited Waiver and Consent, Third Amendment and Restatement of Credit Agreement and Reaffirmation of Loan Documents relating to the Fortress Credit Agreement with Fortress (the “November 2023 Fortress Credit Amendment”) to, among other things, amend and restate the Fortress Credit Agreement, effect a limited waiver of certain events of default under the Fortress Credit Agreement, establish new delayed draw term loan commitments in the aggregate amount of $5.0 million, and establish certain new covenants. On November 14, 2023, the Company, Legacy Airspan and certain of our subsidiaries who are party to the Fortress Convertible Note Agreement entered into a Limited Waiver and Consent, Fourth Amendment to Senior Secured Convertible Note Purchase and Guarantee Agreement and Reaffirmation of Note Documents relating to the Fortress Convertible Note Agreement with Fortress (the “November 2023 Fortress Convertible Note Agreement Amendment”) to, among other things, effect a limited waiver of certain events of default under the Fortress Convertible Note Agreement, and establish certain new covenants. To effect the November 2023 Fortress Credit Amendment and the November 2023 Fortress Convertible Note Agreement Amendment, the Company incurred fees of approximately $4 million, capitalized on a pro rata basis in connection with each advance.
August 2023 Fortress Amendments
On August 11, 2023, the Company, Legacy Airspan and certain of our subsidiaries who are party to the Fortress Credit Agreement entered into a Consent and Partial Release and Amendment No. 1 to Loan Documents relating to the Fortress Credit Agreement with Fortress (the “August 2023 Fortress Credit Amendment”) to, among other things, implement certain modifications to the Fortress Credit Agreement relating to the Purchase Agreement and the Transaction. On August 11, 2023, the Company, Legacy Airspan and certain of our subsidiaries who are party to the Fortress Convertible Note Purchase and Guarantee Agreement entered into a Consent and Partial Release and Fourth Amendment to Note Documents relating to the Fortress Convertible Note Agreement with Fortress (the “August 2023 Fortress Convertible Note Agreement Amendment”) to, among other things, implement certain modifications to the Fortress Convertible Note Agreement relating to the Purchase Agreement and the Transaction.
May 2023 Fortress Amendments
On May 18, 2023, the Company, Legacy Airspan and certain of our subsidiaries who are party to the Fortress Credit Agreement entered into a Limited Waiver and Consent, Second Amendment and Restatement of Credit Agreement and Reaffirmation of Loan Documents relating to the Fortress Credit Agreement with Fortress (the “May 2023 Fortress Credit Amendment”) to, among other things, amend and restate the Fortress Credit Agreement, effect a limited waiver of certain events of default under the Fortress Credit Agreement, terminate the existing delayed draw term loan commitments under the Fortress Credit Agreement and establish new delayed draw term loan commitments in the aggregate amount of $25.0 million, modify the interest rates applicable to certain loans under the Fortress Credit Agreement, obtain certain consents related to the Transaction, and provide for the issuance of 5,912,040 warrants to purchase shares of the Company’s common stock. On May 18, 2023, the Company, Legacy Airspan and certain of our subsidiaries who are party to the Fortress Convertible Note Agreement entered into a Limited Waiver and Consent, Third Amendment to Senior Secured Convertible Note Purchase and Guarantee Agreement and Reaffirmation of Note Documents relating to the Fortress Convertible Note Agreement with Fortress (the “May 2023 Fortress Convertible Note Agreement Amendment”) to, among other things, effect a limited waiver of certain events of under the Fortress Convertible Note Agreement, exchange the existing Convertible Notes for amended and Convertible Notes, increase or modify the interest rates applicable to the Convertible Notes, and obtain certain consents related to the Transaction. To effect the May 2023 Fortress Credit Amendment and the May 2023 Fortress Convertible Note Agreement Amendment, the Company incurred fees of approximately (a) $2,157,751.26 (b)five percent of the new draw term loans under the Fortress Credit Agreement, payable at the time of each such advance, and (c) $2.5 million, which was capitalized to increase the aggregate principal amount of the Convertible Notes to $52.5 million.
Sale of Mimosa Networks
On March 8, 2023, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Mimosa, Legacy Airspan, and Radisys Corporation (“Radisys”), pursuant to which we sold all of the issued and outstanding shares of common stock of Mimosa to Radisys for an aggregate purchase price of approximately $60 million in cash (subject to customary adjustments) on the terms and subject to the conditions set forth in the Purchase Agreement (the “Transaction”). The Transaction closed on August 11, 2023.
Restructuring Activities
In the second quarter of 2023, as part of a strategic review of our operations, the Company implemented a cost reduction and restructuring program (the “2023 Restructuring Program”). The 2023 Restructuring Program was primarily comprised of entering into severance and termination agreements with employees. Formal announcements to the relevant employees were made in May, June and July 2023 and activities continued throughout the third and fourth quarter of 2023. The payments related to severance costs were completed by March 31, 2024, and the payments related to the building costs should be completed by December 31, 2024.
The Company also recorded an inventory impairment charge of $12.0 million in the year ended December 31, 2023, which is included in cost of revenues in the consolidated statement of operations. A charge of $10.1 million relates to certain product initiatives that were eliminated or reduced as a result of the headcount reductions in the 2023 Restructuring Program and $1.9 million relates to an accrual for inventory on order for these eliminated or reduced product initiatives.
Global Economic Conditions
We have experienced supply chain disruptions and inflationary impacts across our businesses, driven by the impact of regional conflicts, economic sanctions, and general macroeconomic factors. These factors have increased our operating costs. While we are taking actions to respond to the supply chain disruptions, inflationary environment, and global demand dynamics, we may not be able to enact these measures in a timely manner, or the measures may not be sufficient to offset the increase in costs, which could have a material adverse impact on our results of operations.
Cybersecurity Incidents
In January 2022, we experienced a denial-of-service attack on our e-mail service. We were able to restore e-mail service after working to do so as quickly as possible.
In connection with this incident, we have incurred certain incremental one-time costs of $0.1 million related to consultants, experts and data recovery efforts, net of insurance recoveries, and expect to incur additional costs related to cybersecurity protections in the future. We are in the process of implementing a variety of measures to further enhance our cybersecurity protections and minimize the impact of any future attack. However, cyber threats are constantly evolving, and there can be no guarantee that a future cyber event will not occur.
Going Concern Update
The accompanying financial statements have been prepared and are presented assuming the Company’s ability to continue as a going concern. We will need to secure additional funding to meet our operations on a timely basis, to satisfy our debt covenants and, ultimately, to attain profitable operations. The Company filed Chapter 11 on March 31, 2024. The Bankruptcy Court confirmed the Company’s Prepackaged Plan on June 28, 2024.
In addition, as discussed in Notes 14 and 15 to the consolidated financial statements, the Company’s senior term loan and Convertible Notes require certain financial covenants to be met. We were not in compliance with the minimum liquidity covenant under the Fortress Credit Agreement and the Fortress Convertible Note Agreement at all times from November 29, 2022, which was an event of default under those agreements for which a waiver was obtained. We also did not make cash payments of principal and interest under the Fortress Credit Agreement and the Fortress Convertible Note on September 30, October 31, November 30, and December 31 within any grace period applicable thereto, for which we obtained a deferral of such payments. We also obtained a prospective waiver of compliance with the minimum liquidity covenant, the minimum last twelve-month EBITDA covenant and the minimum last twelve-month revenue covenant under the Fortress Credit Agreement and the Fortress Convertible Note Agreement as of the December 31, 2023 quarterly measurement date.
In order to address the need to satisfy the Company’s continuing obligations and realize its long-term strategy, management has taken several steps and is considering additional actions to improve its operating and financial results, including the following:
focusing the Company’s efforts to increase sales in additional geographic markets;
continuing to develop 5G product offerings that will expand the market for the Company’s products;
continuing to improve days sales outstanding to provide additional liquidity; and
continuing to implement cost reduction initiatives to reduce non-strategic costs in operations and expand the Company’s labor force in lower cost geographies, with headcount reductions in higher cost geographies.
There can be no assurance that the above actions will be successful. Without additional financing or capital, the Company’s current cash balance would be insufficient to satisfy repayment demands from its lenders if the lenders elect to declare the senior term loan and the senior secured convertible notes due prior to the maturity date. There is no assurance that the new or renegotiated financing will be available, or that if available, will have satisfactory terms. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements are issued. If the Company emerges from bankruptcy under the currently proposed Restructuring Support Agreement (“RSA”), this is expected to provide adequate equity financing and eliminate all existing senior and subordinated debt. In addition, the Company expects to have access to a $20.0 million revolving line of credit. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenue, cost of revenue, research and development, sales and marketing, general and administrative, interest expense, income taxes and net income. To further help us assess our performance with these key indicators, we use Adjusted Earnings before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”) as a non-GAAP financial measure. We believe Adjusted EBITDA provides useful information to investors and expanded insight to measure our revenue and cost performance as a supplement to our GAAP consolidated financial statements. See the “Adjusted EBITDA” sections below for a reconciliation to net income (loss), the most directly comparable GAAP measure.
Revenues
We derive the majority of our revenues from sales of our networking products, with the remaining revenue generated from software licenses and service fees relating to non-recurring engineering, product maintenance contracts and professional services for our products. We sell our products and services to end customers, distributors and resellers. Products and services may be sold separately or in bundled packages.
Our top three customers accounted for 68% and 61% of revenue for the years ended December 31, 2023 and 2022, respectively.
Our sales outside the U.S. and North America accounted for 78% and 57% of our total revenue in the years ended December 31, 2023 and 2022, respectively. The following table identifies the percentage of our revenue by customer geographic region in the periods identified.
Year Ended
December 31,
Geographic Area
United States
Other North America
North America
India
Japan
Other Asia
Asia
Europe
Africa and the Middle East
Latin America and the Caribbean
Total revenue
Note that the year ended December 31, 2023 sales by geographic region included Mimosa sales through August 11, 2023 which affects the comparability to the sales by geographic region for the year ended December 31, 2022.
Cost of Revenues
Cost of revenues consists of component and material costs, direct labor costs, warranty costs, royalties, overhead related to manufacture of our products and customer support costs. Our gross margin is affected by changes in our product mix both because our gross margin on software and services is higher than the gross margin on base station related equipment, and because our different product lines generate different margins. In addition, our gross margin is affected by changes in the average selling price of our systems and volume discounts granted to significant customers. We expect the average selling prices of our existing products to continue to decline and we intend to continue to implement product cost reductions and develop and introduce new products or product enhancements in an effort to maintain or increase our gross margins. Further, we may derive an increasing proportion of our revenue from the sale of our integrated systems through distribution channels. Revenue derived from these sales channels typically carries a lower gross margin than direct sales.
Operating Expenses
Research and Development
Research and development expenses consist primarily of salaries and related costs for personnel and expenses for design, development, testing facilities and equipment depreciation. These expenses also include costs associated with product development efforts, including consulting fees and prototyping costs from initial product concept to manufacture and production as well as sub-contracted development work. We expect to continue to make substantial investments in research and development.
Sales and Marketing
Sales and marketing expenses consist of salaries and related costs for personnel, sales commissions, consulting and agent’s fees and expenses for advertising, travel, technical assistance, trade shows, and promotional and demonstration materials. We expect to continue to incur substantial expenditures related to sales and marketing activities.
General and Administrative
General and administrative expenses consist primarily of salaries and related expenses for our personnel, audit, professional and consulting fees and facilities costs.
Restructuring costs
Restructuring costs consist primarily of employee termination benefits.
Non-Operating Expenses
Interest Expense, Net
Interest expense consists primarily of interest associated with the Convertible Notes, two subordinated loan facilities and our senior secured credit facility, which consisted of a term loan and revolving credit facility. Interest on the term loan was determined based on the highest of the LIBOR Rate (or, subsequent to the transition to SOFR, the SOFR Rate), commercial lending rate of the collateral agent and federal funds rate, plus an applicable margin. Interest on the revolving credit facility is based on the LIBOR Rate (or, subsequent to the transition to SOFR the SOFR Rate) plus an applicable margin. On May 18, August 11, November 14, and December 22, 2023, we amended the terms of our credit facility with Fortress and the agreement governing the Convertible Notes. On May 18, 2023, we amended and restated the Convertible Notes. (See Notes 12 and 13 of the notes to the audited consolidated financial statements included in this Annual Report on Form 10-K for further discussion on these agreements.)
Loss on Extinguishment of Debt
The senior term loan and convertible debt were amended with the May 2023 Fortress Credit Agreement Amendment and the May 2023 Fortress Convertible Note Agreement Amendment. Due to the increased interest rates and maturity amounts, the modification of terms was accounted for as debt extinguishment and all fees from the prior agreement were expensed as loss on extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2023.
Change in fair value of warrant liability and derivatives, net
Change in fair value of warrant liability and derivatives, net represents the revaluations each quarter of the warrant liabilities and derivatives.
Gain on sale of subsidiary
Gain on the sale of the Mimosa business represents the proceeds less the costs and net assets and liabilities to calculate the gain on the sale.
Income Tax Benefit
Our provision for income tax benefit includes the expected benefit of all deferred tax assets, including our net operating loss carryforwards and expected tax credits under the UK’s Research and Development Expenditure Credit (“RDEC”) regime. Our net operating loss carryforwards will begin to expire in 2024 and continue to expire through 2037. Our tax benefit has been impacted by non-deductible expenses, including equity compensation and research and development amortization.
Net Loss
Net loss is determined by subtracting operating and non-operating expenses from revenues.
Non-GAAP Financial Measures
Adjusted EBITDA is defined as net income before depreciation and amortization, interest expense and income taxes, and also adjusted to add back share-based compensation costs, changes in the fair value of the warrant liability and embedded derivatives, loss on extinguishment of debt and gain on sale of subsidiary, as these costs are not considered a part of our core business operations and are not an indicator of ongoing, future company performance. We use Adjusted EBITDA to evaluate our performance, both internally and as compared to our peers, because these measures exclude certain items that may not be indicative of our core operating results, as well as items that can vary widely among companies within our industry. For example, share-based compensation costs can be subject to volatility from changes in the market price per share of our Common Stock or variations in the value and number of shares granted.
Adjusted EBITDA is one of the primary metrics used by management to evaluate the financial performance of our business because it excludes, among other things, the effects of certain transactions that are outside the control of management, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the jurisdictions in which we operate and capital investments.
We present this non-GAAP financial measure because we believe it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Further, we believe it is helpful in highlighting trends in our operating results by focusing on our core operating results and is useful to evaluate our performance in conjunction with our GAAP financial measures. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to operating income, net income or earnings per share, as a measure of operating performance, cash flows or as a measure of liquidity. Non-GAAP financial measures are not necessarily calculated the same way by different companies and should not be considered a substitute for or superior to GAAP measures.
In particular, Adjusted EBITDA is subject to certain limitations, including the following:
Adjusted EBITDA does not reflect interest expense, or the amounts necessary to service interest or principal payments under the Fortress Credit Agreement;
Adjusted EBITDA does not reflect income tax provision (benefit), and because the payment of taxes is part of our operations, tax provision is a necessary element of our costs and ability to operate;
Although depreciation and amortization are eliminated in the calculation of Adjusted EBITDA, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any costs of such replacements;
Adjusted EBITDA does not reflect the noncash component of share-based compensation;
Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be reflective, on a recurring basis, of our ongoing operations; and
Other companies in our industry may calculate Adjusted EBITDA or similarly titled measures differently than we do, limiting its usefulness as a comparative measure.
We adjust for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information.
Segments
Our business is organized around one reportable segment, the development and supply of broadband wireless products and technologies. This is based on the objectives of the business and how our chief operating decision maker, the Chief Executive Officer, monitors operating performance and allocates resources.
Results of Operations
Year Ended
December 31,
(in thousands)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of intangibles
Restructuring costs
Total operating expenses
Loss from operations
Interest expense, net
Change in fair value of warrant liability and derivatives, net
Loss on extinguishment of debt
Gain on sale of subsidiary
Other income (expense), net
Loss before income taxes
Income tax benefit
Net loss
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
Revenue
Revenue for the above periods is presented below:
Year Ended December 31,
($ in thousands)
Revenue
Revenue
Revenue:
Products and software licenses
Maintenance, warranty and services
Total revenue
Revenue from products and software licenses of $64.1 million for the year ended December 31, 2023 decreased by $84.8 million, or 57.0%, from $148.9 million for the year ended December 31, 2022. This decrease was primarily due to lower demand of products to two customers in Asia Pacific of $21.2 million, lower demand to three customers in North America of $44.4 million (due to the sale of our subsidiary in August 2023), lower demand to one customer in Europe of $2.4 million, lower demand to two customers in Latin America of $3.3 million, lower demand to one customer in Middle East & Africa of $2.5 million, and lower demand to all other customers of $11.0 million.
Revenue from maintenance, warranty and services of $13.5 million for the year ended December 31, 2023 decreased by $4.8 million, or 26.5%, from $18.3 million for the year ended December 31, 2022. This decrease was primarily due to decreases in service, NRE, and maintenance revenue of $1.5 million, $2.3 million, and $1.0 million respectively.
Cost of Revenue
Cost of revenue for the above periods are presented below:
Year Ended December 31,
($ in thousands)
Revenue
Revenue
Cost of revenue:
Products and software licenses
Maintenance, warranty and services
Total cost of revenue
Cost of revenue from products and software licenses of $53.4 million for the year ended December 31, 2023 decreased by $41.9 million, or 44.0%, from $95.3 million for the year ended December 31, 2022. This decrease was primarily due to a decrease in products and software licenses revenue for the year ended December 31, 2023 due to the sale of our subsidiary in August 2023, offset by an inventory provision of $12.0 million for the year ended December 31, 2023.
Cost of revenue from maintenance, warranty and services of $4.7 million for the year ended December 31, 2023 decreased by $0.8 million, or 14.1%, from $5.5 million for the year ended December 31, 2022, which is attributable to a decrease in maintenance and warranty.
Operating Expenses
Operating expenses for the above periods are presented below:
Year Ended December 31,
($ in thousands)
Revenue
Revenue
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of intangibles
Restructuring costs
Total operating expenses
Research and development — Research and development expenses were $45.0 million for the year ended December 31, 2023, a decrease of $16.4 million, or 36%, from $61.4 million for the year ended December 31, 2022. The decrease was primarily due to a decrease in headcount-related expenses of $13.2 million, share-based compensation of $2.2 million, and materials & supplies expenses of $1.5 million. These decreases were offset by an increase in other expenses of $0.5 million.
Sales and marketing — Sales and marketing expenses were $18.3 million for the year ended December 31, 2023, a decrease of $12.3 million, or 67% from $30.6 million for the year ended December 31, 2022, primarily due to a decrease in headcount-related expenses of $8.7 million and share-based compensation of $1.8 million and other combined expenses of $1.6 million.
General and administrative — General and administrative expenses of $21.7 million for the year ended December 31, 2023 decreased by $18.4 million, or 85%, from $40.1 million for the year ended December 31, 2022. The decrease was primarily due to decreases in share-based compensation of $10.0 million, other outside service expenses of $3.6 million, headcount-related expenses of $2.6 million, facilities expenses of $1.4 million, and other expenses of $0.8 million.
Amortization of intangibles — Amortization of intangibles of $0.2 million for the year ended December 31, 2023 decreased by $0.9 million, or 450%, from $1.1 million for the year ended December 31, 2022, due to the sale of Mimosa and the resulting elimination of the related intangible assets.
Restructuring costs — Restructuring costs of $5.3 million for the year ended December 31, 2023 increased by $4.0 million, or 308%, from $1.3 million for the year ended December 31, 2022, due to the 2023 Restructuring Program.
Non-Operating Expenses
Interest expense, net — Interest expense, net was $39.0 million for the year ended December 31, 2023, an increase of $18.6 million from $20.4 million for the year ended December 31, 2022. The increase was primarily due to a higher average debt outstanding in 2023 compared to 2022, as well as higher variable interest rates and $10.7 million of debt waiver and amendment fees under the Fortress Credit Agreement and Convertible Notes.
Change in fair value of warrant liability and derivatives — Change in fair value of warrant liability and derivatives was a gain of $2.1 million for the year ended December 31, 2023, a change of $5.0 million from a gain of $7.1 million for the year ended December 31, 2022. The fluctuation included changes in fair values of derivative liability and warrants of $2.1 million and $7.1 million for the years ended December 31, 2023 and 2022, respectively. The decrease is primarily a result of the Company’s decreased stock price during the year ended December 31, 2023.
Loss on extinguishment of debt — Loss on extinguishment of debt was $8.3 million for the year ended December 31, 2023, compared with no loss for the year ended December 31, 2022. There was a $5.1 million loss on the extinguishment of the senior term loan and $3.2 million loss on the extinguishment of the convertible debt.
Other income (expense), net — Other expense, net was income of $28.5 million for the year ended December 31, 2023, a change of $32.8 million from an expense of $4.3 million for the year ended December 31, 2022. The difference was primarily due to a gain on the sale of Mimosa of $28.4 million, foreign currency losses of $4.0 million, and other expenses of $0.4 million.
Income tax benefit — Income tax benefit was $0.5 million for the year ended December 31, 2023, a minimal change from an income tax benefit of $0.2 million for the year ended December 31, 2022.
Net Loss
We had net loss of $78.9 million for the year ended December 31, 2023, a change of $6.5 million compared to net loss of $85.4 million for the year ended December 31, 2022, due to the same factors described above.
Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA for the year ended December 31, 2023 was a loss of $55.3 million, representing a change of $10.1 million, or 22.2%, from a loss $45.2 million for the year ended December 31, 2022. The decrease in Adjusted EBITDA was primarily due to the increase in net loss discussed above and certain higher adjusting items detailed in the table below.
The following table presents the reconciliation of net loss, the most directly comparable GAAP measure, to Adjusted EBITDA:
Year Ended
December 31,
($ in thousands)
Net loss
Adjusted for:
Interest expense, net
Income tax benefit
Depreciation and amortization
EBITDA
Share-based compensation expense
Change in fair value of warrant liability and derivatives
Restructuring costs
Gain on sale of subsidiary
Loss on extinguishment of debt
Adjusted EBITDA
Liquidity and Capital Resources
To date, our principal sources of liquidity have been our cash and cash equivalents and cash generated from operations, proceeds from the issuance of long-term debt, preferred and common stock, and the sale of certain receivables. Our capital requirements depend on a number of factors, including sales, the extent of our spending on research and development, expansion of sales and marketing activities and market adoption of our products and services. The Company filed the Chapter 11 Cases on March 31, 2024. The Bankruptcy Court confirmed the Company’s Prepackaged Plan on June 28, 2024.
We had $37.1 million of current assets and $194.3 million of current liabilities at December 31, 2023. During the year ended December 31, 2023, we used $39.7 million in cash flows from operating activities, an increase of $7.5 million from December 31, 2022. We are investing heavily in 5G research and development and expect to use cash from operations during the remainder of 2024 to fund research and development activities. Cash on hand and the available borrowing capacity under the Fortress Credit Agreement may not allow us to meet our forecasted cash requirements.
Days sales outstanding (“DSO”) is a measurement of the time it takes to collect receivables. DSO is calculated by dividing accounts receivable, net as of the end of the quarter by the average daily revenue for the quarter. Average daily revenue for the quarter is calculated by dividing the quarterly revenue by ninety days. All customer accounts are actively managed, and no losses in excess of amounts reserved are currently expected. DSO can fluctuate due to the timing and nature of contracts, as well as the payment terms of individual customers. DSO was 52 days and 101 days as of December 31, 2023 and 2022, respectively. The decrease in DSO as of December 31, 2023 is attributable to a lower accounts receivable balance due to the sale of Mimosa (see Note 3). Notwithstanding the DSO of 52 and 101 days as of December 31, 2023 and 2022, respectively, our accounts receivable were $10.4 million and $46.6 million due to high sales volumes in the fourth quarters of each respective year.
As of December 31, 2023, we had commitments with our main subcontract manufacturers under various purchase orders and forecast arrangements of $13.2 million, the majority of which have expected delivery dates during the first six months of 2024.
As of the date of this Annual Report on Form 10-K, we believe our existing cash resources are not sufficient to fund the cash needs of our business for at least the next 12 months. The Company filed the Chapter 11 Cases on March 31, 2024. The Bankruptcy Court confirmed the Company’s Prepackaged Plan on June 28, 2024.
Cash Flows
The following table summarizes the changes to our cash flows for the periods presented:
For the
Years Ended
December 31,
(in thousands)
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
Operating Activities
Net cash used in operating activities was $39.7 million for the year ended December 31, 2023, a decrease of $7.5 million from net cash used in operating activities of $47.2 million for the year ended December 31, 2022. The decrease is a result of $18.8 million less used from working capital, $12.7 million less from results of our operations and offset by a $24.0 million decrease in non-cash adjustments.
Investing Activities
Net cash provided by investing activities was $53.7 million for the year ended December 31, 2023, an increase of $56.8 million from a use of cash of $3.1 million for the year ended December 31, 2022, primarily due to the net proceeds from the sale of the Mimosa business of $55.0 million.
Financing Activities
Net cash used in financing activities was $13.8 million for the year ended December 31, 2023. This included $24.9 million of repayments under the senior term loan, $16.8 million of repayments under the convertible debt, $1.9 million of debt issuance costs, $0.2 million of payment for taxes withheld on stock awards, partially offset by $30.0 million of borrowings under the senior term loan.
Net cash used in financing activities was $5.6 million for the year ended December 31, 2022. This included $5.3 million of repayments under the senior term loan and $0.3 million of payment for taxes withheld on stock awards.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate the effectiveness of our estimates and judgments, including those related to revenue recognition and share-based compensation.
We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and may change as future events occur.
We believe the following critical accounting policies are dependent on significant estimates used in the preparation of our consolidated financial statements.
Revenue recognition
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Certain of our contracts have multiple distinct performance obligations, as the promise to transfer individual goods or services is separately identifiable from other promises in the contracts and the customer can benefit from these individual goods or services either on their own or together with other resources that are readily available to the customer. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based on its relative stand-alone selling price. The stand-alone selling prices are determined based on the prices at which we separately sell these products. For items that are not sold separately, we estimate the stand-alone selling prices using either an expected cost-plus margin or the adjusted market assessment approach depending on the nature of the specific performance obligation.
Revenue from non-recurring engineering is recognized at a point in time or over-time depending on if the customer controls the asset being created or enhanced. For new product design or software development services, the customer does not control the asset being created, the customer is not simultaneously receiving or consuming the benefits from the work performed and the work performed has alternative use to the Company. Therefore, revenue related to these projects is recognized at a point in time which is when the specified developed technology has been delivered and accepted by the customer.
Revenue from professional service contracts primarily relates to training and other consulting arrangements performed by the Company for its customers. Revenues from professional services contracts provided on a time and materials basis are recognized when the Company has the right to invoice under the practical expedient as amounts correspond directly with the value of the services rendered to date.
Share-based compensation
We apply ASC 718, Share-based Payments. ASC 718 requires awards classified as equity awards to be accounted for using the estimated grant date fair value. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statements of operations over the requisite service periods. Share-based compensation expense recognized in the consolidated statements of operations includes compensation expense for share-based awards granted based on the estimated grant date fair value. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense has been reduced to account for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We determine the fair value of stock options using the Black-Scholes option pricing model, which is impacted by the following assumptions:
Fair Value of Common Stock - To determine the grant date fair value of our Common Stock, we use the closing market price of our Common Stock at the grant date.
Expected Term - Expected term is estimated based on our prior five years of historical data regarding expired, forfeited or if applicable, exercise behavior.
Expected Volatility - Since we have limited historical basis for determining our own volatility, the expected volatility assumption was based on the average historical volatility of a representative peer group, which includes consideration of the peer company’s industry, market capitalization, state of life cycle and capital structure.
Expected Dividend Yield - The dividend yield assumption is based on our history and our expectation of no dividend payouts.
Risk-Free Interest Rate - The risk-free interest rate assumption is based upon observed interest rates appropriate for an equivalent remaining term equal to the expected life of the award.
Recent Accounting Pronouncements
Refer to Note 2 of our audited consolidated financial statements included in this Annual Report on Form 10-K for further information on accounting pronouncements.
JOBS Act
The JOBS Act contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We qualify as an “emerging growth company” and under the JOBS Act are allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies. We are electing to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, the financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Additionally, we have chosen to rely on certain reduced reporting requirements applicable to emerging growth companies, including, among other things, we are not required to (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of New Beginnings’ initial public offering or until we are no longer an “emerging growth company,” whichever is earlier.
We will remain an “emerging growth company” under the JOBS Act until the earliest of: (i) the last day of the fiscal year (a) following the fifth anniversary of the closing of New Beginnings’ initial public offering, (b) in which we have total annual gross revenue of at least $1.235 billion, or (c) when we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of our common equity held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter; or (ii) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
