NEXTNAV INC. (NN) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical information, some of the information contained in the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results and outcomes could differ materially for a variety of reasons. You should review “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” of this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
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Overview
We are the market leader in delivering resilient, next generation, complementary positioning, navigation and timing (“PNT”) solutions designed to overcome the limitations and vulnerabilities of the existing space-based Global Positioning System (“GPS”) and Global Navigation Satellite Systems (“GNSS”). We are evolving our complementary PNT solutions to use 5G New Radio (“5G NR”) technologies (“NextGen”), in conjunction with our Petition for Rulemaking filed with the FCC, to update and reconfigure the Lower 900 MHz band and our spectrum licenses. We expect the evolution of our platform to NextGen will significantly improve the efficiency, flexibility, and scale of our operations, technically enabling the delivery of high-quality PNT based on a 5G broadband network. Our NextGen solution is being designed to allow one or more partners to integrate our Lower 900 MHz spectrum into their 5G networks. We expect that this will result in wide-scale availability of both complementary PNT services and additional broadband capacity.
Our complementary PNT solutions are built on a deep asset base, including valuable FCC licenses. Our licenses include a contiguous 8 MHz block of 900 MHz M-LMS spectrum covering over 90% of the U.S. population, and on March 7, 2024, we signed an agreement, subject to appropriate regulatory approvals, to acquire an additional 4 MHz of M-LMS licenses covering part of the U.S. population. On April 16, 2024, we petitioned the FCC to commence a rule making to reconfigure and update the rules governing the Lower 900 MHz band plan to allow us to utilize a 15 MHz nationwide configuration for both PNT and 5G broadband (“Petition”). The Petition is subject to an ongoing FCC regulatory review process. We believe that modernizing the Lower 900 MHz band will simultaneously enable a high-quality terrestrial PNT network to complement and back up GPS, address a critical national security vulnerability, and add 5G broadband capacity. We have been granted more than 145 patents related to our systems and services, and standardized certain of our technologies with the 3rd Generation Partnership Project (3GPP), a global telecommunications standards-setting body.
The impact of GPS on the U.S. economy was nearly $1.4 trillion in the aggregate between 1984 and 2017, according to data from a National Institute of Standards and Technology (“NIST”)-sponsored study conducted by RTI International (“RTI”), and the European Commission estimated the annual impact on the economy of the European Union in its 2018 budget process as EUR1.2 trillion. The usage of GPS services is also rapidly expanding, with its presence in devices in the U.S. increasing from 600 million devices to 900 million devices between 2015 and 2019, according to information presented to the National Space-Based PNT Advisory Board by the National Coordination Office for Space-Based PNT. PNT resiliency is a priority of the U.S. Federal Government and is rising in priority in the European Union, non-European Union countries in Eastern Europe and in other parts of the world due to both the demonstrated vulnerability and lack of local control of space-based signals and systems. Critical infrastructure, including communications networks and power grids, require a reliable GPS signal for accurate timing. A failure of GPS could be catastrophic, and there is no comprehensive, terrestrial backup that is widely deployed today. The Department of Homeland Security has also classified the PNT vulnerabilities from GPS as cyber security threats, and the U.S. Department of Transportation (“DoT”) has also outlined a Complementary PNT Action Plan, among other key federal initiatives. Higher performance and availability will continue to expand the reach and value of PNT solutions, while terrestrial resilience is essential to protect the vast economic activity that is reliant on GPS.
Simultaneously, demand for wireless data services continues to grow. The backbone of wireless data services, electromagnetic spectrum, is a finite resource. Our spectrum licenses, which lie in the Lower 900 MHz band, are referred to as “low-band spectrum.” There is a finite amount of low-band spectrum available, and low-band spectrum has favorable coverage characteristics compared to higher frequencies, including the ability to provide services indoors and over greater distances. These characteristics result in its ability to be used for coverage and to be deployed more economically, with higher-frequency spectrum often used to provide additional capacity in targeted locations. The transition to 5G NR for our PNT services will provide a technical capability to support broadband data services, which, subject to appropriate regulatory approvals, may allow the spectrum to be utilized to help meet the continued, growing demand for wireless data capacity.
As we evolve our technology platform to NextGen and pursue regulatory changes to the Lower 900 MHz band and our spectrum licenses, we continue to deliver high-quality PNT services through our Pinnacle and TerraPoiNT solutions. Our Pinnacle solution, launched in partnership with AT&T Services, Inc. (“AT&T”) as part of its FirstNet® initiative, can provide accurate altitude service to any device with a barometric pressure sensor and covers over 90% of commercial structures over three stories in the U.S. Our Pinnacle system is primarily used for public safety applications, including enhanced 911 (“E911”) for Verizon Communications, Inc. (“Verizon”), and a growing number of devices operating on the remaining national cellular network providers.
Our TerraPoiNT system is a terrestrially based dedicated, complementary PNT network designed to overcome the limitations inherent in the space-based nature of GPS. GPS is a faint, unencrypted signal, which is often unavailable indoors, distorted in urban areas, and vulnerable to both jamming and spoofing. TerraPoiNT overcomes these limitations through a network of wide-area location transmitters that broadcast a PNT signal on our licensed Lower 900 MHz M-LMS spectrum. Unlike GPS, the TerraPoiNT signal can be reliably received indoors and in urban areas, is difficult to jam or spoof compared to GPS, and can support signal authentication (e.g., encryption). Further, the TerraPoiNT signal can embed Pinnacle information to provide a full three-dimensional PNT solution. TerraPoiNT received the highest scores in testing by the DoT reported in 2021 regarding potential PNT backup solutions, in each category tested, and was the only solution evaluated capable of providing the full set of services provided by GPS. Continuing our engagement with the DoT, in 2024 we were awarded a contract to establish performance characteristics for TerraPoiNT to allow DoT to incorporate our solutions into a clearinghouse of solutions defined in the DoT Complementary PNT Action Plan, for potential use by Federal government customers.
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Key Components of Results of Operations
Revenue
We have generated limited revenue since our inception. We derive our revenue from PNT products and services. Our revenue includes revenue generated through services contracts with wireless carriers, services with applications developers, technology demonstration, assessment and support contracts with government customers, sales of equipment, and licensing of proprietary technology. We recognize revenue when an arrangement exists, services, equipment or access to licensed technology are delivered, the transaction price is determined, the arrangement has commercial substance, and collection of consideration is probable.
Operating Expense
Cost of Goods Sold
Cost of goods sold (“COGS”) consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our operations and manufacturing teams. COGS also includes expenses for site leases, cost of equipment, software license costs, including cloud hosting costs, and professional services related to the maintenance of the equipment at each leased site. Our COGS may increase for the foreseeable future as we continue to invest in our PNT technologies in domestic U.S. and international markets.
Research and Development
Research and development expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our research and development functions. Research and development costs also include outside professional services for software and hardware development, and software license costs, including cloud hosting costs. We expect our research and development costs to increase for the foreseeable future as we continue to invest in research and development for our current and future products including our NextGen platform.
Selling, General and Administrative
Selling, general and administrative expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility costs for our business development, marketing, corporate, executive, finance, legal, human resources, IT and other administrative functions. Selling, general and administrative expenses also include expenses for outside professional services, including legal, auditing and accounting services, recruitment expenses, travel expenses and certain non-income taxes, insurance and other administrative expenses.
We expect our selling, general and administrative expenses to increase for the foreseeable future with the growth of our business, in pursuit of regulatory and technology initiatives, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, and additional insurance expenses, investor relations activities, and other administrative and professional services.
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Depreciation and Amortization
Depreciation and amortization expense results from depreciation and amortization of our property and equipment and intangible assets that is recognized over their estimated useful lives.
Interest Income (Expense)
Interest income consists of interest earned from our cash and cash equivalents balance and on marketable securities. Interest expense relates to interest and amortization of debt discounts on our senior secured notes.
Other Income (Expense)
Other income (expense) consists of miscellaneous non-operating items, such as change in fair value of warrants and Asset Purchase Agreement liability, equity method income (loss), and foreign currency gains (losses).
Results of Operations
The following table sets forth our statements of operations for the periods indicated:
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||
| (in thousands) | |||||||
| Revenue | $ | 5,669 | $ | 3,862 | |||
| Operating Expense: | |||||||
| Cost of goods sold(1) | 10,777 | 12,743 | |||||
| Research and development(1) | 16,242 | 19,503 | |||||
| Selling, general and administrative(1) | 33,510 | 30,324 | |||||
| Depreciation and amortization | 5,238 | 4,821 | |||||
| Total operating expenses | 65,767 | 67,391 | |||||
| Operating loss | (60,098 | ) | (63,529 | ) | |||
| Interest expense, net | (9,401 | ) | (3,664 | ) | |||
| Other expense | (32,207 | ) | (4,321 | ) | |||
| Loss before income taxes | (101,706 | ) | (71,514 | ) | |||
| Provision for income taxes | 173 | 221 | |||||
| Net loss | $ | (101,879 | ) | $ | (71,735 | ) |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (1) | Cost of goods sold, research and development, and selling, general and administrative expense for the periods do not include depreciation and amortization, which is presented separately in the Consolidated Statements of Comprehensive Loss, but include stock-based compensation as follows: |
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| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||
| (in thousands) | |||||||
| Cost of goods sold | $ | 729 | $ | 2,318 | |||
| Research and development | 4,106 | 6,655 | |||||
| Selling, general and administrative | 9,021 | 12,865 | |||||
| Total stock-based compensation expense | $ | 13,856 | $ | 21,838 |
Comparison of the Fiscal Years Ended December 31, 2024 and 2023
Revenue
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Revenue | $ | 5,669 | $ | 3,862 | $ | 1,807 | 46.8 | % |
Revenue increased by $1.8 million, or 47%, to $5.7 million for the year ended December 31, 2024 from $3.9 million for the year ended December 31, 2023. The increase was driven by an increase in service revenue from technology and services contracts with government and commercial customers. For the year ended December 31, 2024, three customers accounted for 57%, 18% and 11% of total revenue. For the year ended December 31, 2023, two customers accounted for 75% and 10% of total revenue. Accounts receivable as of December 31, 2024 and December 31, 2023 were $3.3 million and $2.3 million, respectively; the deferred revenue balance as of December 31, 2024 and December 31, 2023 was $0.3 million.
Operating Expense
Cost of Goods Sold (COGS)
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| COGS | $ | 10,777 | $ | 12,743 | $ | (1,966 | ) | (15.4) | % |
COGS decreased by $2.0 million, or 15%, to $10.8 million for the year ended December 31, 2024 from $12.7 million for the year ended December 31, 2023. The decrease was primarily driven by a $1.6 million decrease in stock-based compensation, a $0.4 million decrease in software license expenses, a $0.3 million decrease in outside consulting expenses, and a $0.3 million decrease in maintenance and operational cost. The decreases were partially offset by a $0.3 million increase in payroll-related expenses, a $0.2 million increase in site rent expense due to deployment of new sites in second and third quarter of 2023, and a $0.1 million increase in non-recurring engineering services.
Research and Development
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Research and development | $ | 16,242 | $ | 19,503 | $ | (3,261 | ) | (16.7) | % |
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Research and development expenses decreased by $3.3 million, or 17%, to $16.2 million for the year ended December 31, 2024 from $19.5 million for the year ended December 31, 2023. The decrease was primarily driven by a $2.5 million decrease in stock based compensation, a $0.7 million decrease in software license expenses, a $0.4 million decrease in outside consulting expenses, a $0.2 million decrease in maintenance and operational cost, and a $0.1 million decrease in professional fee. The decreases were partially offset by a $0.6 million increase in payroll-related expenses.
Selling, General and Administrative
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Selling, general and administrative | $ | 33,510 | $ | 30,324 | $ | 3,186 | 10.5 | % |
Selling, general and administrative expenses increased by $3.2 million, or 11%, to $33.5 million during the year ended December 31, 2024 from $30.3 million in the year ended December 31, 2023. The increase was primarily driven by a $3.0 million increase in professional services, a $3.0 million increase in payroll-related expenses driven by headcount costs, executive and employment separation costs, a $1.0 million increase in outside consulting expenses, a $0.5 million increase in other operational expenses, and a $0.3 million increase in marketing and recruiting cost. The increases were partially offset by a $3.8 million decrease in stock-based compensation and a $0.8 million decrease in directors’ and officers’ insurance.
Depreciation and Amortization
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Depreciation and amortization | $ | 5,238 | $ | 4,821 | $ | 417 | 8.6 | % |
Depreciation and amortization expenses increased by $0.4 million, or 9%, to $5.2 million during the year ended December 31, 2024 from $4.8 million during the year ended December 31, 2023. The increase in depreciation and amortization expense is primarily attributable to placing the network assets in service since the third quarter of 2023.
Interest Expense, Net
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Interest expense, net | $ | (9,401 | ) | $ | (3,664 | ) | $ | (5,737 | ) | 156.6 | % |
Interest expense, net of interest income, for the year ended December 31, 2024 was $9.4 million. Interest expense, net of interest income, for the year ended December 31, 2023 was $3.7 million. The increase in interest expense was due to interest and amortization of debt discounts on our senior secured notes issued during the second and third quarters of 2023.
Other Expense
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Other expense | $ | (32,207 | ) | $ | (4,321 | ) | $ | (27,886 | ) | 645.4 | % |
Other expense was $32.2 million for the year ended December 31, 2024 compared with other expense of $4.3 million for the year ended December 31, 2023.The increase was primarily driven by a $29.1 million increase in expense related to change in the fair value of warrants, partially offset by $1.0 million of income related to the settlement of the Asset Purchase Agreement liability.
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Liquidity and Capital Resources
We have incurred net losses since our inception and to date have generated only limited revenue. We have primarily relied upon debt and equity financings to fund our cash requirements. During each of the twelve months ended December 31, 2024 and 2023, we incurred net losses of $101.9 million and $71.7 million, respectively. During each of the twelve months ended December 31, 2024, our net cash used in operating activities and cash provided by investing activities was $38.0 million was $39.5 million, respectively. During the twelve months ended December 31, 2023, our net cash used in operating activities and investing activities was $35.4 million and $1.1 million, respectively. As of December 31, 2024, we had cash and cash equivalents and marketable securities of $80.1 million and an accumulated deficit of $862.1 million. We expect to incur additional losses and higher operating expenses for the foreseeable future. Our primary uses of cash are to fund our operations as we continue to grow our business. We will require a significant amount of cash for expenditures as we invest in ongoing research and development and our PNT networks.
Managing liquidity and our cash position is a priority of ours. We continually work to optimize our expenses in light of the growth of our business, and adapt to changes in the economic environment. We believe that our cash and cash equivalents and marketable securities as of December 31, 2024 will be sufficient to meet our working capital and capital expenditure needs, including all contractual commitments, beyond the next 12 months from the filing of this Annual report on Form 10-K. We believe we will meet longer term expected future cash requirements and obligations through a combination of our existing cash and cash equivalents balances and marketable securities, cash flows from operations, and issuance of equity securities or debt offerings. However, this determination is based upon internal financial projections and is subject to changes in market and business conditions.
In 2023, we issued $70.0 million in aggregate principal amount of senior secured notes with a fixed interest rate of 10% to the lenders thereto. Such notes will mature on December 1, 2026 with interest payable semi-annually in arrears on June 1 and December 1 of each year. We may elect, at our sole discretion, to pay up to 50% of the accrued and unpaid interest on the senior secured notes due with our common stock. Refer to Note 8 to our consolidated financial statements for the twelve months ended December 31, 2024 included elsewhere in this Annual Report on Form 10-K for more information.
Cash Flows
The following table summarizes our cash flows for the period indicated:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Net cash used in operating activities | $ | (38,008 | ) | $ | (35,440 | ) | ||
| Net cash provided (used in) investing activities | (39,467 | ) | 1,074 | |||||
| Net cash provided by financing activities | 35,103 | 68,984 |
Cash Flows from Operating Activities
Our cash flows used in operating activities are significantly affected by the growth of our business primarily related to research and development, sales and marketing, and selling, general and administrative activities. Our operating cash flows are also affected by our working capital needs to support growth in personnel-related expenditures and fluctuations in accounts payable and other current assets and liabilities.
Net cash used in operating activities during 2024 was $38.0 million, resulting primarily from a net loss of $101.9 million adjusted for non-cash charges of $13.9 million for stock-based compensation, $33.2 million for change in the fair value of warrant liability, $6.2 million in amortization of debt issuance costs, $5.2 million for depreciation and amortization, $0.2 million for equity method investment loss, and $0.1 million in asset retirement obligations accretion expense. These changes were partially offset by a net increase in operating liabilities of $7.0 million, non-cash income of $1.0 million for change in fair value of Asset Purchase Agreement liability, and $0.9 million realized and unrealized gain on marketable securities.
Net cash used in operating activities during 2023 was $35.4 million, resulting primarily from a net loss of $71.7 million adjusted for non-cash charges of $21.8 million for stock-based compensation, $4.8 million for depreciation and amortization, $4.1 million for change in the fair value of warrant liability, $3.2 million in amortization of debt issuance costs, $0.5 million realized and unrealized gain on marketable securities, $0.2 million for equity method investment loss, and $0.1 million in asset retirement obligations accretion expense. Additionally, there was a net increase in operating liabilities of $2.7 million.
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Cash Flows from Investing Activities
Net cash provided by investing activities during 2024 was $39.5 million, representing net purchase of marketable securities of $35.9 million, and cash used for Asset Purchase Agreement of $2.7 million and cash used for property and equipment, including internal use software of $0.8 million.
Net cash provided by investing activities during 2023 was $1.1 million, representing sale and of maturity of marketable securities, net of purchase of marketable securities, and cash used for addition in property and equipment primarily related to the deployment of the TerraPoiNT network and internal use software.
Cash Flows from Financing Activities
Net cash provided by financing activities during 2024 was $35.1 million, primarily reflecting cash proceeds from exercise of warrants and stock options.
Net cash provided by financing activities during 2023 was $69.0 million, primarily reflecting cash proceeds from issuance of senior secured notes, net of debt issuance cost.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles. In doing such preparation, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in them have had or are reasonably likely to have a material effect on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.
See Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.
Revenue Recognition
We derive our revenue from PNT technology, products and services including revenue generated through technology demonstration and assessment contracts with customers, support services provided to customers, sales of equipment, and licensing of proprietary technology.
We recognize revenue when an arrangement exists, services, equipment or access to licensed technology are delivered, the transaction price is determined, the arrangement has commercial substance, payment terms are determined and collection of consideration is probable.
We sell software licenses and services through arrangements that may bundle software, equipment, and other services. When we determine that we have separate distinct performance obligations, we allocate the bundled contract price among the various performance obligations based on each deliverable’s stand-alone selling price. If the stand-alone selling price is not directly observable, we estimate the amount to be allocated for each performance obligation based on observable market transactions. When we determine the performance obligations are not distinct, we recognize revenue on a combined basis as the obligation is satisfied. To the extent our contracts include variable consideration, the transaction price includes both fixed and variable consideration. The variable consideration contained within our contracts with customers may include discounts, credits and other similar items. When a contract includes variable consideration, we evaluate the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, we include the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
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We recognize equipment sales and the related costs when control of the equipment passes to the customer, typically upon shipment. Customers do not have rights of return without our prior consent. Revenue pursuant to licensing agreements for our technology represents performance obligations that are satisfied over time. We recognize support services ratably over the periods in which the services are provided; the related costs are expensed as incurred.
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, and deferred revenue on the Consolidated Balance Sheets. We bill amounts under our agreed-upon contractual terms at periodic intervals for services, upon shipment for equipment, or upon achievement of contractual milestones or as work progresses. Billing may occur subsequent to revenue recognition, resulting in accounts receivable. We may also receive payments from customers before revenue is recognized, resulting in deferred revenue.
Indefinite-lived Intangible Assets
We hold wireless Multilateration LMS licenses. Certain general regulatory requirements apply to all licensed wireless spectrum, including, for example, certain build-out or “substantial service” requirements, which generally must be satisfied as a condition to the retention of the license. We are actively engaged in either meeting such requirements currently or seeking an extension of such requirements from the FCC for each of our LMS licenses. Although licenses are issued for only a fixed time, ten years, such licenses are subject to renewal by the FCC, based on the achievement of certain milestones and a finding that such renewal would serve the public interest. Renewal of our licenses has occurred previously and at nominal cost. As a result, we treat our wireless LMS spectrum licenses as an indefinite-lived intangible asset. We reevaluate the useful life determination for wireless licenses each year to determine whether events and circumstances continue to support an indefinite useful life. Costs incurred to maintain the FCC licenses are recorded in operating expenses.
We assess indefinite-lived intangible assets for potential impairment annually as of October 1, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating indefinite-lived intangible assets for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If we conclude that it is not more likely than not that the fair value of the asset is less than its carrying value, then no further testing is required. However, if we conclude that it is more likely than not that the fair value of the asset is less than its carrying value, then we perform a two-step impairment test to identify potential impairment and measures the amount of impairment we will recognize, if any.
Goodwill
Goodwill is tested for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company operates as one reporting unit. When testing goodwill for impairment, the Company may first perform an optional qualitative assessment. If the Company determines it is not more likely than not the reporting unit’s fair value is less than its carrying value, then no further analysis is necessary. If the Company determines that it is more likely than not that the fair value of its reporting unit is less than its carrying amount, then the quantitative impairment test will be performed. Under the quantitative impairment test, if the carrying amount of the Company’s reporting unit exceeds its fair value, the Company will recognize an impairment loss in an amount equal to that excess but limited to the total amount of goodwill.
Long-term debt
In conjunction with the issuance of senior secured notes in May and July of 2023, we issued warrants to certain of the purchasers thereto. We allocated the proceeds from the debt issuance to long term debt and equity classified warrants based on relative fair value as determined by the Discounted Cash Flow approach and Monte Carlo simulation model, respectively. The portion of proceeds allocated to equity-classified warrants and direct debt issuance costs are classified as debt discounts. The carrying value of long term debt in the Company’s consolidated balance sheet consists of principal amount of debt, net of debt discounts. Debt discounts are amortized to interest expense based on the related debt agreements primarily using the effective interest method.
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Recently Issued and Adopted Accounting Standards
For information regarding new accounting pronouncements, and the impact of these pronouncements on our consolidated financial statements, if any, refer to Note 2 to our consolidated financial statements for the year ended December 31, 2024 included elsewhere in this Annual Report on Form 10-K.
Emerging Growth Company Status
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. Spartacus previously elected to avail itself of the extended transition period, and following the consummation of the Business Combination, we became an emerging growth company (for the period described in the immediately succeeding paragraph) and will continue to take advantage of the benefits of the extended transition period emerging growth company status permits. During the extended transition period, it may be difficult or impossible to compare our financial results with the financial results of another public company that complies with public company effective dates for accounting standard updates because of the potential differences in accounting standards used.
We will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2025, (b) the last date of our fiscal year in which we have total annual gross revenue of at least $1.235 billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.