Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the section titled “Risk Factors.” For discussion comparing the periods ended March 31, 2022 and March 31, 2021, please refer to our Quarterly Report on Form 10-Q filed with the SEC on May 4, 2022.
Overview
With our physical, virtual and cloud-native 5G broadband and customer premise networking equipment solutions, we help our CSP customers transform and expand their public and private high-speed data and multi-service communications networks so they can meet the growing demand for bandwidth and new services. Through our deployment of cloud, access devices and cable products, our core and edge convergence technology enables CSPs and enterprises to cost-effectively and dynamically increase network speed, add bandwidth capacity and new services, reduce network complexity, and reduce operating and capital expenditures regardless of access technology.
We offer end-to-end cloud-native, virtual, physical and distributed infrastructure and customer premise network solutions that enable our customers to provide wireless and fixed-line broadband services to consumers and enterprises. Our solutions are scalable so that CSPs can meet the evolving bandwidth needs of our customers and their subscribers. Our first installation in a service provider’s network frequently involves deploying our broadband products in only a portion of the provider’s network and, for our cable products, with only a fraction of the capacity of our products enabled at the time of initial installation. Over time, our customers have generally expanded the use of our solutions to other areas of their networks to extend network coverage or increase network capacity.
Our solutions are commercially deployed in over 70 countries by more than 475 customers, including regional service providers as well as some of the world’s largest Tier 1 CSPs, serving millions of subscribers.
Global and Macroeconomic Considerations
Rising Inflation and Interest Rates
Supply chain disruption and other economic conditions have led to a recent rise in inflation, which has caused increases in the costs to produce our products, much of which we were not immediately able to pass on to our customers due to fixed price agreements. Increased inflation may result in decreased demand for our products and services, increased operating costs (including our labor costs), reduced liquidity and limitations on our ability to access credit or otherwise raise debt and equity capital. In addition, the U.S. Federal Reserve has raised and may in the future raise interest rates in response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may have the effect of further increasing economic uncertainty and heightening these risks. In an inflationary environment, due to our fixed price agreements, we may be unable to raise the prices of our products and services commensurate with or above the rate at which our costs increase. We also may experience lower than expected sales and potential adverse impacts on our competitive position if there is a decrease in consumer spending or a negative reaction to our pricing for new customers.
In addition, because our outstanding debt bears interest at variable interest rates, the recent increases in interest rates will result in increased future debt service costs. Continued increases in interest rates will further increase the cost of servicing our outstanding indebtedness.
Banking Institution Liquidity
In March 2023, the bank failures of Silicon Valley Bank and Signature Bank created significant market disruption and uncertainty within the U.S. banking sector, particularly with respect to regional banks, and a number of other financial institutions experienced turbulence and a precipitous decline in market value. We are closely monitoring ongoing events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally. While we do not hold a cash balance at Silicon Valley Bank or Signature Bank, we have historically held our cash in a limited number of financial institutions. We
25
do not hold a cash balance at either Silicon Valley Bank or Signature Banks, and we do not believe we have exposure to loss as a result of the failure of either institution.
COVID-19 Pandemic
The COVID-19 pandemic disrupted our global supply chain. Throughout 2022 and 2021, we experienced shipping bottlenecks and shortages of supply that resulted in our inability to fulfill certain customer orders within normal lead times. This adversely impacted our revenue and operating results for the years ended December 31, 2022 and 2021. We have also seen, in some cases, significant increases in shipping costs. While we continue to work with our supply chain, contract manufacturers, logistics partners and customers to minimize the extent of such impacts, we expect the effects of global supply chain issues to continue and cannot predict if or when such effects will subside. This may prevent us from being able to fulfill our customers’ orders in a timely manner or at all, which could lead to one or more of our customers canceling their orders. At this time, we are neither able to estimate the extent of these impacts nor predict whether our efforts to minimize or contain them will be successful.
In addition to the negative impact on our business from global supply chain challenges related to COVID-19, we derived certain benefits from the pandemic that included decreases in certain operating expenses, such as travel and trade show expense, and benefited from certain U.S. government tax relief measures. These benefits began to gradually diminish throughout 2022 and may continue to do so as the various geographies in which we operate continue to recover from the pandemic and government tax relief measures lapse.
At this time, we are neither able to estimate the extent of these impacts nor predict whether our efforts to minimize or contain them will be successful. We intend to continue to monitor our business very closely for any effects of COVID-19, inflation and interest rates for as long as necessary.
Due to the above circumstances, our results of operations for the three months ended March 31, 2023 and 2022 are not necessarily indicative of the results to be expected in future years.
Results of Operations
The following tables set forth our consolidated results of operations in dollar amounts and as percentages of total revenue for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Revenue: |
|
|
|
|
|
|
Product |
|
$ |
35,249 |
|
|
$ |
52,545 |
|
Service |
|
|
10,048 |
|
|
|
11,854 |
|
Total revenue |
|
|
45,297 |
|
|
|
64,399 |
|
Cost of revenue(1): |
|
|
|
|
|
|
Product |
|
|
26,015 |
|
|
|
36,228 |
|
Service |
|
|
1,127 |
|
|
|
1,492 |
|
Total cost of revenue |
|
|
27,142 |
|
|
|
37,720 |
|
Gross profit |
|
|
18,155 |
|
|
|
26,679 |
|
Operating expenses: |
|
|
|
|
|
|
Research and development(1) |
|
|
20,840 |
|
|
|
22,673 |
|
Selling, general and administrative(1) |
|
|
24,457 |
|
|
|
22,329 |
|
Total operating expenses |
|
|
45,297 |
|
|
|
45,002 |
|
Loss from operations |
|
|
(27,142 |
) |
|
|
(18,323 |
) |
Other expense, net |
|
|
(4,368 |
) |
|
|
(3,909 |
) |
Loss before provision for income taxes |
|
|
(31,510 |
) |
|
|
(22,232 |
) |
Provision for income taxes |
|
|
148 |
|
|
|
10,352 |
|
Net loss |
|
$ |
(31,658 |
) |
|
$ |
(32,584 |
) |
(1) Includes stock-based compensation expense related to stock options; SARs; RSUs; and PSUs, granted to employees, directors and non-employee consultants as follows:
26
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Cost of revenue |
|
$ |
26 |
|
|
$ |
35 |
|
Research and development expense |
|
|
700 |
|
|
|
595 |
|
Selling, general and administrative expense |
|
|
3,396 |
|
|
|
1,998 |
|
Total stock-based compensation expense |
|
$ |
4,122 |
|
|
$ |
2,628 |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(as a percentage of total revenue) |
|
Revenue: |
|
|
|
|
|
|
Product |
|
|
77.8 |
% |
|
|
81.6 |
% |
Service |
|
|
22.2 |
|
|
|
18.4 |
|
Total revenue |
|
|
100.0 |
|
|
|
100.0 |
|
Cost of revenue: |
|
|
|
|
|
|
Product |
|
|
57.4 |
|
|
|
56.3 |
|
Service |
|
|
2.5 |
|
|
|
2.3 |
|
Total cost of revenue |
|
|
59.9 |
|
|
|
58.6 |
|
Gross profit |
|
|
40.1 |
|
|
|
41.4 |
|
Operating expenses: |
|
|
|
|
|
|
Research and development |
|
|
46.0 |
|
|
|
35.2 |
|
Selling, general and administrative |
|
|
54.0 |
|
|
|
34.7 |
|
Total operating expenses |
|
|
100.0 |
|
|
|
69.9 |
|
Loss from operations |
|
|
(59.9 |
) |
|
|
(28.5 |
) |
Other expense, net |
|
|
(9.6 |
) |
|
|
(6.1 |
) |
Loss before provision for income taxes |
|
|
(69.6 |
) |
|
|
(34.5 |
) |
Provision for income taxes |
|
|
0.3 |
|
|
|
16.1 |
|
Net loss |
|
|
(69.9 |
)% |
|
|
(50.6 |
)% |
Percentages in the table above are based on actual values. As a result, some totals may not sum due to rounding.
Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
|
Amount |
|
|
% of Total |
|
|
Amount |
|
|
% of Total |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
35,249 |
|
|
|
77.8 |
% |
|
$ |
52,545 |
|
|
|
81.6 |
% |
|
$ |
(17,296 |
) |
|
|
(32.9 |
)% |
Service |
|
|
10,048 |
|
|
|
22.2 |
% |
|
|
11,854 |
|
|
|
18.4 |
% |
|
|
(1,806 |
) |
|
|
(15.2 |
)% |
Total revenue |
|
$ |
45,297 |
|
|
|
100.0 |
% |
|
$ |
64,399 |
|
|
|
100.0 |
% |
|
$ |
(19,102 |
) |
|
|
(29.7 |
)% |
Revenue by geographic region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
21,010 |
|
|
|
46.4 |
% |
|
$ |
29,294 |
|
|
|
45.5 |
% |
|
$ |
(8,284 |
) |
|
|
(28.3 |
)% |
Europe, Middle East and Africa |
|
|
5,908 |
|
|
|
13.0 |
% |
|
|
6,280 |
|
|
|
9.8 |
% |
|
|
(372 |
) |
|
|
(5.9 |
)% |
Asia-Pacific |
|
|
16,566 |
|
|
|
36.6 |
% |
|
|
24,698 |
|
|
|
38.4 |
% |
|
|
(8,132 |
) |
|
|
(32.9 |
)% |
Latin America |
|
|
1,813 |
|
|
|
4.0 |
% |
|
|
4,127 |
|
|
|
6.3 |
% |
|
|
(2,314 |
) |
|
|
(56.1 |
)% |
Total revenue |
|
$ |
45,297 |
|
|
|
100.0 |
% |
|
$ |
64,399 |
|
|
|
100.0 |
% |
|
$ |
(19,102 |
) |
|
|
(29.7 |
)% |
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
% |
|
Product revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Access devices |
|
$ |
24,908 |
|
|
$ |
31,747 |
|
|
$ |
(6,839 |
) |
|
|
(21.5 |
)% |
Cable |
|
|
6,918 |
|
|
|
19,774 |
|
|
|
(12,856 |
) |
|
|
(65.0 |
)% |
Cloud |
|
|
3,423 |
|
|
|
1,024 |
|
|
|
2,399 |
|
|
|
234.3 |
% |
Total product revenue |
|
|
35,249 |
|
|
|
52,545 |
|
|
|
(17,296 |
) |
|
|
(32.9 |
)% |
Service revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Access devices |
|
|
846 |
|
|
|
1,762 |
|
|
|
(916 |
) |
|
|
(52.0 |
)% |
Cable |
|
|
8,416 |
|
|
|
8,855 |
|
|
|
(439 |
) |
|
|
(5.0 |
)% |
Cloud |
|
|
786 |
|
|
|
1,237 |
|
|
|
(451 |
) |
|
|
(36.5 |
)% |
Total service revenue |
|
|
10,048 |
|
|
|
11,854 |
|
|
|
(1,806 |
) |
|
|
(15.2 |
)% |
Total revenue |
|
$ |
45,297 |
|
|
$ |
64,399 |
|
|
$ |
(19,102 |
) |
|
|
(29.7 |
)% |
Product revenue during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was adversely affected by reduced demand and timing of orders from various Tier 1 customers, particularly in our access devices and cable markets. Cloud revenue increased significantly, primarily due to expanding deployments of our software license solutions.
Service revenue in the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 resulted from lower support services revenue due to declines in the correlated product revenues.
Cost of Revenue and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
26,015 |
|
|
$ |
36,228 |
|
|
$ |
(10,213 |
) |
|
|
(28.2 |
)% |
Service |
|
|
1,127 |
|
|
|
1,492 |
|
|
|
(365 |
) |
|
|
(24.5 |
)% |
Total cost of revenue |
|
$ |
27,142 |
|
|
$ |
37,720 |
|
|
$ |
(10,578 |
) |
|
|
(28.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
|
Amount |
|
|
Gross Margin |
|
|
Amount |
|
|
Gross Margin |
|
|
Amount |
|
|
Gross Margin (bps) |
|
|
|
(dollars in thousands) |
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
9,234 |
|
|
|
26.2 |
% |
|
$ |
16,317 |
|
|
|
31.1 |
% |
|
$ |
(7,083 |
) |
|
|
(490 |
) |
Service |
|
|
8,921 |
|
|
|
88.8 |
% |
|
|
10,362 |
|
|
|
87.4 |
% |
|
|
(1,441 |
) |
|
|
140 |
|
Total gross profit |
|
$ |
18,155 |
|
|
|
40.1 |
% |
|
$ |
26,679 |
|
|
|
41.4 |
% |
|
$ |
(8,524 |
) |
|
|
(130 |
) |
Cost of product and service revenue decreased in direct relation to the decrease in related revenue in the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Gross margin declined in the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 due to a decrease in product gross margin resulting primarily from shifts in product revenue mix, partially offset by an increase in service gross margin.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Research and development |
|
$ |
20,840 |
|
|
$ |
22,673 |
|
|
$ |
(1,833 |
) |
|
|
(8.1 |
)% |
Percentage of revenue |
|
|
46.0 |
% |
|
|
35.2 |
% |
|
|
|
|
|
|
28
The decrease in research and development expense in the three months ended March 31, 2023 was primarily due to decreased personnel costs of $1.8 million, driven by decreased salaries, payroll taxes and benefits of $1.1 million due to a shift in headcount from the US to China and decreased bonus expense of $0.8 million. In addition, there was a decrease in depreciation of $0.5 million during the three months ended March 31, 2023, partially offset by an increase in purchases of research and development materials of $0.4 million compared to the three months ended March 31, 2022.
Selling, General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Selling, general and administrative |
|
$ |
24,457 |
|
|
$ |
22,329 |
|
|
$ |
2,128 |
|
|
|
9.5 |
% |
Percentage of revenue |
|
|
54.0 |
% |
|
|
34.7 |
% |
|
|
|
|
|
|
The increase in selling, general and administrative expense in the three months ended March 31, 2023 was primarily due to expenses incurred in connection with the retirement of the Company's co-founder and CEO, who, under the terms of a separation agreement, received certain termination benefits which resulted in total additional expense of $3.9 million during the three months ended March 31, 2023, consisting of cash and stock-based compensation expenses of $2.2 million and $1.7 million, respectively. Excluding such amounts, personnel costs decreased by $2.5 million, driven decreased salaries, payroll taxes and benefits of $1.3 million and decreased commissions of $1.2 million, decreased stock-based compensation of $0.3 million, partially offset by increased travel expenses of $0.3 million. In addition, bad debt decreased by $0.7 million and depreciation expense decreased by $0.3 million. These decreases were partially offset by increased legal and professional fees of $1.6 million and trade show expenses of $0.2 million during the three months ended March 31, 2023.
Other Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Other expense, net |
|
$ |
(4,368 |
) |
|
$ |
(3,909 |
) |
|
$ |
(459 |
) |
|
|
11.7 |
% |
Percentage of revenue |
|
|
(9.6 |
)% |
|
|
(6.1 |
)% |
|
|
|
|
|
|
The change in other expense, net was primarily due to a $1.5 million increase in interest expense in the three months ended March 31, 2023 due to the increased interest rates applied to our outstanding debt. Interest income also increased $0.9 million due to increased interest rates during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. In addition, there was a gain on extinguishment of debt of $0.1 million.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Provision for income taxes |
|
$ |
148 |
|
|
$ |
10,352 |
|
|
$ |
(10,204 |
) |
|
|
(98.6 |
)% |
The change in the provision for income taxes was primarily due to the period over period changes in our valuation allowance and the impact of changes in our forecasted profitability and the jurisdictional mix of earnings.
Liquidity and Capital Resources
Our principal sources of liquidity have been and continue to be our cash and cash equivalents and cash flows from operations. The following tables set forth our cash and cash equivalents and working capital as of March 31, 2023 and December 31, 2022 and our cash flows for the three months ended March 31, 2023 and 2022:
29
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
|
(in thousands) |
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
112,495 |
|
|
$ |
126,312 |
|
Working capital |
|
|
(60,935 |
) |
|
|
(32,133 |
) |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Consolidated Cash Flow Data: |
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
$ |
(8,350 |
) |
|
$ |
18,097 |
|
Net cash used in investing activities |
|
|
(679 |
) |
|
|
(966 |
) |
Net cash used in financing activities |
|
|
(4,924 |
) |
|
|
(3,354 |
) |
As of March 31, 2023, we had cash, cash equivalents and restricted cash of $112.5 million and net accounts receivable of $47.5 million.
We had outstanding borrowings under our $300 million term loan facility, or the Term Loan (which is more fully described below under the heading "Term Loan and Revolving Credit Facilities") of $223.9 million at December 31, 2022, which matures on December 20, 2023. Because the Term Loan matures within one year and the Company does not currently have committed financing or available liquidity to meet such debt obligations if they were to become due in accordance with their current terms, there is substantial doubt about our ability to continue as a going concern. We continue to work with potential lenders to refinance the existing debt. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth; the mix of revenues and impact on related gross margins; the timing and extent of spending on research and development efforts and other business initiatives; purchases of capital equipment to support our growth; the expansion of our sales and marketing activities; the expansion of our business through acquisitions or our investments in complementary products, technologies or businesses; the use of working capital to purchase additional inventory; the timing of new product introductions; market acceptance of our products and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.
Cash Flows
Operating Activities
Our primary source of cash from operating activities has been cash collections from our customers. We expect cash flows from operating activities to be affected by changes in sales volumes and timing of collections, and by purchases and shipments of inventory. Our primary uses of cash from operating activities have been for purchases of inventory, personnel costs and investment in our selling, general and administrative departments and research and development. Future cash outflows from operating activities may increase as a result of further investment in research and development and selling, general and administrative requirements, as well as increases in personnel costs as we continue to grow our business by enhancing our existing products and introducing new products.
During the three months ended March 31, 2023, cash used in operating activities was $8.4 million, primarily resulting from our net loss of $31.7 million, partially offset by net cash provided by changes in our operating assets and liabilities of $16.6 million and net non-cash adjustments of $6.7 million. Net cash provided by changes in our operating assets and liabilities during the three months ended March 31, 2023 was primarily due to a $27.7 million decrease in accounts receivable due to collections during the period; a $3.4 million decrease in prepaid income taxes; a $4.7 million increase in deferred revenue due to the timing of revenue recognition; and a $2.3 million increase in accrued expenses due to the timing of certain accrual payments. These sources of cash were partially offset by a $13.9 million decrease in accounts payable due to timing of vendor payments; a $2.6 million decrease in accrued income taxes; a $3.3 million increase in prepaid expenses and a $1.2 million increase in inventory.
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Investing Activities
Our investing activities have consisted primarily of expenditures for lab and computer equipment and software to support the development of new products. In addition, our investing activities included expansion of and improvements to our facilities. To the extent our business expands, we expect that we will continue to invest in these areas.
Net cash used in investing activities during the three months ended March 31, 2023 was $0.7 million, consisting of purchases of property and equipment.
Financing Activities
Net cash used in financing activities during the three months ended March 31, 2023 was $4.9 million, which was mainly due to debt principal repayments of $2.0 million and employee taxes paid related to the net share settlement of equity awards of $2.9 million, primarily due to RSUs that vested during the three months ended March 31, 2023.
Cash Flows from Future Operations
Subject to successful completion of a refinancing of our Term Loan, we believe our existing cash and cash equivalents and anticipated cash flows from future operations will be sufficient to meet our working capital and capital expenditure needs and debt service obligations for at least the next 12 months. As described in Note 9 within our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, our outstanding Term Loan is scheduled to mature in December 2023, and we have commenced the refinancing process. Due to the risk that we may be unable to successfully complete a refinancing of a sufficient portion of the outstanding balance prior to maturity or otherwise satisfy our repayment obligations, there is substantial doubt about our ability to continue as a going concern beyond the maturity date of the loan.
Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, purchases of capital equipment to support our growth, the expansion of sales and marketing activities, expansion of our business through acquisitions or our investments in complementary products, technologies or businesses, the use of working capital to purchase additional inventory, the timing of new product introductions, market acceptance of our products and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.
Term Loan and Revolving Credit Facilities
On December 20, 2016, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, various lenders and JPMorgan Chase Bank, N.A. and Barclays Bank PLC, as joint lead arrangers and joint bookrunners, providing for:
•the Term Loan of $300.0 million; and
•a revolving credit facility of up to $25.0 million in revolving credit loans and letters of credit.
As of March 31, 2023 and December 31, 2022, we had borrowings of $223.9 million and $226.0 million, respectively, outstanding under the Term Loan. On December 20, 2021, the revolving credit facility matured.
The Term Loan matures on December 20, 2023 and is subject to amortization in equal quarterly installments, which commenced on March 31, 2017, of principal in an annual aggregate amount equal to 1.0% of the original principal amount of the term loans of $300.0 million, with the remaining outstanding balance payable at the date of maturity.
On May 8, 2023, we entered into a Transaction Support Agreement (“TSA”) with an ad hoc committee of lenders (“Consenting Lenders”) representing approximately 60% of the $223.9 million in aggregate principal currently outstanding, to extend the maturity date of the debt to December 2027. The Consenting Lenders have agreed, subject to certain terms and conditions set forth in the TSA, to exchange approximately $133.9 million of their existing 2023 TLB Debt for a newly issued super-priority term loan B (the "2027 TLB Debt"). The TSA also provides that other holders of the existing 2023 TLB Debt that did not initially sign the TSA may execute a joinder to the TSA under certain conditions. Any such other holder that executes a joinder will be required, subject to the same terms and conditions, to exchange its 2023 TLB Debt for such 2027 TLB Debt. We will pay down the 2027 TLB Debt principal held by the Consenting Lenders by $40.0 million using available cash on hand. Upon closing of the transactions contemplated by the TSA, which are subject to customary closing conditions
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and achieving certain participation thresholds as set forth therein, and conditioned on the satisfaction or waiver of certain conditions precedent, including finalizing all definitive documents, management believes that we will have sufficient cash and cash equivalents to meet our working capital and capital expenditure needs and debt service obligations for at least the following 12 months. However, there can be no assurance that the transactions contemplated by the TSA will be completed as contemplated, or at all. If we are unable to complete this transaction or any other alternative transactions, on favorable terms or at all, due to market conditions or otherwise, our financial condition could be materially adversely affected. Thus, there is substantial doubt about our ability to continue as a going concern. See also the Going Concern subsection of Note 1, Nature of Business and Basis of Presentation.
Borrowings under the Term Loan bear interest at a floating rate, which can be either a Eurodollar rate plus an applicable margin or, at our option, a base rate (defined as the highest of (x) the JPMorgan Chase, N.A. prime rate, (y) the federal funds effective rate, plus one-half percent (0.50%) per annum and (z) a one-month Eurodollar rate plus 1.00% per annum) plus an applicable margin. The applicable margin for borrowings under the Term Loan is 4.00% per annum for Eurodollar rate loans (subject to a 1.00% per annum interest rate floor) and 3.00% per annum for base rate loans. The interest rates payable under the Term Loan are subject to an increase of 2.00% per annum during the continuance of any payment default.
For Eurodollar rate loans, we may select interest periods of one, three or six months or, with the consent of all relevant affected lenders, twelve months. Interest will be payable at the end of the selected interest period, but no less frequently than every three months within the selected interest period. Interest on any base rate loan is not set for any specified period and is payable quarterly. We have the right to convert Eurodollar rate loans into base rate loans and the right to convert base rate loans into Eurodollar rate loans at our option, subject, in the case of Eurodollar rate loans, to breakage costs if the conversion is effected prior to the end of the applicable interest period. As of March 31, 2023, the interest rate on the Term Loan was 8.84% per annum, which was based on a one-month Eurodollar rate of 4.84% per annum plus the applicable margin of 4.00% per annum for Eurodollar rate loans. As of December 31, 2022, the interest rate on the Term Loan was 8.38% per annum, which was based on a one-month Eurodollar rate of 4.38% per annum plus the applicable margin of 4.00% per annum for Eurodollar rate loans.
Voluntary prepayments of principal amounts outstanding under the Term Loan are permitted at any time; however, if a prepayment of principal is made with respect to a Eurodollar loan on a date other than the last day of the applicable interest period, we are required to compensate the lenders for any funding losses and expenses incurred as a result of the prepayment.
In addition, we are required to make mandatory prepayments under the Term Loan with respect to (i) 100% of the net cash proceeds from certain asset dispositions (including casualty and condemnation events) by us or certain of our subsidiaries, subject to certain exceptions and reinvestment provisions, (ii) 100% of the net cash proceeds from the issuance or incurrence of any additional debt by us or certain of our subsidiaries, subject to certain exceptions, and (iii) 50% of our excess cash flow, as defined in the credit agreement, subject to reduction upon our achievement of specified performance targets.
The Term Loan is secured by, among other things, a first priority security interest, subject to permitted liens, in substantially all of our assets and all of the assets of certain of our subsidiaries and a pledge of certain of the stock of certain of our subsidiaries, in each case subject to specified exceptions. The Term Loan contains customary affirmative and negative covenants, including certain restrictions that are currently in effect based upon our total net leverage ratio, such as our ability to pay dividends and repurchase outstanding shares. As of March 31, 2023 and December 31, 2022, we were in compliance with all applicable covenants of the Term Loan.
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Restructuring
In April 2023, we approved a plan to reduce our current workforce by approximately 135 employees, representing approximately 13% of our total workforce. We expect to incur total estimated one-time cash charges of approximately $2.1 million in connection with the reduction in force, primarily consisting of severance payments and other employee-related costs. We expect that the majority of these charges will be incurred in the second quarter of 2023 and that the reduction in workforce will be substantially complete by June 30, 2023.
Together with certain other actions undertaken by management, the expected net reduction in operating expenses for the remainder of 2023 is approximately $5.5 million.
Tax Cuts and Jobs Act
Of our total cash and cash equivalents of $112.5 million as of March 31, 2023, $44.3 million was held by our foreign subsidiaries. The TCJA established a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries. As of March 31, 2023, applicable U.S. corporate income taxes have been provided on substantially all of our accumulated earnings of foreign subsidiaries.
The TCJA included a provision requiring companies to capitalize all of their research and development costs incurred in tax years beginning after 2021. As a result, research and development costs can no longer be expensed as incurred for tax purposes, and must be capitalized and amortized, 5 years for domestic research and 15 years for international. While it is possible that Congress may retroactively defer, modify or repeal this provision, any such actions would be accounted for in the period of enactment. Absent such Congressional action, this change in tax law will result in significant cash tax payments and have a material adverse effect on our liquidity.
Stock Repurchase Program
On February 21, 2019, we announced a stock repurchase program under which we were authorized to repurchase up to $75.0 million of our common stock. During the three months ended March 31, 2023, we did not repurchase any shares. During the three months ended March 31, 2022, we repurchased approximately 0.2 million shares for a total cost of approximately $1.2 million. As of March 31, 2023, approximately $60.2 million remained authorized for repurchases of our common stock under the stock repurchase program. However, based on our net leverage ratio at March 31, 2023, as described in Note 9 of the above notes to our condensed consolidated financial statements, our ability to repurchase shares is currently restricted. The stock repurchase program has no expiration date and does not require us to purchase a minimum number of shares, and we may suspend, modify or discontinue the stock repurchase program at any time without prior notice.
Contractual Obligations, Commitments and Contingencies
Our material contractual obligations include our term loan, operating leases and purchase agreements with our contract manufacturers and suppliers. There have been no material changes to our contractual obligations, commitments and contingencies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Critical Accounting Policies and Significant Judgments and Estimates
We prepare our condensed consolidated financial statements in accordance with GAAP. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management.
Recent Accounting Pronouncements
Refer to the “Summary of Significant Accounting Policies” footnote within our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for our analysis of recent accounting pronouncements that are applicable to our business.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Interim Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q, has concluded that, based on such evaluation and as a result of the material weaknesses discussed below, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and is accumulated and communicated to our management including our Interim Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Notwithstanding the identified material weaknesses, our management believes the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with U.S. GAAP.
Material Weaknesses and Remediation of Material Weaknesses
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2023, management and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting. A material weakness is a weakness or deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. Management and our independent registered public accounting firm identified material weaknesses that are pervasive in our internal control processes and involve the control environment, risk assessment, control activity, information and communication, and monitoring components of the Committee of Sponsoring Organizations of the Treadway Commission framework. Specifically, the material weaknesses relate to: an insufficiently staffed finance organization with the requisite knowledge or skills in and ability to focus on internal control over financial reporting matters; not fully designing, implementing and monitoring policies or financial reporting controls that identify and sufficiently mitigate risks of material misstatement to the financial statements; and insufficient design, implementation and monitoring of general information technology controls to support the effective operation of financial controls. Because of the material weaknesses described above, our management believes that our internal control over financial reporting was not effective.
Remediation of the Material Weaknesses in Internal Control Over Financial Reporting
Immediately following the identification of the material weaknesses described above, and with the oversight of the audit committee of our board of directors, we commenced a process to remediate the underlying causes of these material weaknesses, enhance the control environment and strengthen our internal control over financial reporting. We are committed and are taking steps necessary to remediate the control deficiencies that caused the above material weaknesses by implementing changes to
34
our internal control over financial reporting. We have begun the process to remediate the material weakness and will continue our efforts through fiscal 2023. Our plans for remediation include the following:
•We have added and will continue the process of adding a sufficient number of qualified personnel within our accounting function to establish the appropriate level of resources to ensure successful remediation, and thereafter, ongoing maintenance of adequate internal controls over financial reporting. We have recently hired a new Director of Revenue and, an additional IT resource, we have engaged accounting advisory consultants to provide additional oversight and expertise to enhance our period end close, technical accounting, and financial reporting capabilities, and we will continue to utilize such additional resources as necessary;
•As these resources are added, we will continuously evaluate the assignment of responsibilities, internal and external, associated with the performance of control activities and will continue to consider hiring additional accounting, finance and IT personnel as necessary;
•We have delivered, and will continue delivering, training on a regular basis related to internal control over financial reporting to our team members including, but not limited to, finance and accounting personnel, to educate control owners and enhance policies to ensure that all design elements of control activities are addressed in the performance of control activities;
•We will continue the process of implementing and/or enhancing control activities, including automating certain manual processes, which is expected to help increase the efficiency of processing transactions and produce accurate and timely information;
•We have engaged third-party consultants to continue to re-assess our control environment and assist with re-designing existing controls and the development of new controls where needed, including Information Technology General Controls. This effort will also include updating and improving existing control documentation as well as developing and performing ongoing and separate evaluations of our internal control environment to ascertain whether the components of internal control are present and functioning at an appropriate level; and
•In addition, under the direction of the audit committee of the board of directors, management will continue to review and make necessary changes to the overall design of our internal control environment, as well as to refine and monitor policies and procedures to improve the overall effectiveness of internal control over financial reporting of our company.
When fully implemented and operational, we believe the measures described above will remediate the material weaknesses we have identified and strengthen our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, our management may determine to take additional measures.
The measures we are implementing are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. Management and the audit committee of the board of directors remain committed to the implementation of remediation efforts to address the material weaknesses. We will continue to implement measures to remedy our internal control deficiencies, though there can be no assurance that our efforts will be successful or avoid potential future material weaknesses. In addition, until remediation steps have been completed and are operated for a sufficient period of time, and subsequent evaluation of their effectiveness is completed, the material weakness previously disclosed, and as described above, will continue to exist.
Changes in Internal Control over Financial Reporting
Except as otherwise noted above under “Remediation of Material Weaknesses in Internal Control Over Financial Reporting” including the on-going remediation efforts described, there were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
35