Casa Systems Inc - Quarter Report: 2023 September (Form 10-Q)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _________.

Commission File Number: 001-38324

Casa Systems, Inc.

(Exact name of registrant as specified in its charter)


Delaware		75-3108867
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
100 Old River Road Andover, Massachusetts		01810
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (978) 688-6706

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	CASA	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 2, 2023, the registrant had 99,108,998 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2023 and 2022	4
	Condensed Consolidated Statements of Stockholders' (Deficit) Equity for the Three and Nine Months Ended September 30, 2023 and 2022	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 4.	Controls and Procedures	44
PART II.	OTHER INFORMATION	46
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 6.	Exhibits	51
	Signatures	52

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “should,” “expects,” “plans,” “anticipates,” “would,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

•

the sufficiency of our cash resources and needs for additional financing;

•

our ability to fulfill our customers’ orders due to supply chain delays, access to key commodities or technologies or events that impact our manufacturers or their suppliers;

•

we have been notified by The Nasdaq Stock Market LLC, or Nasdaq, of our failure to comply with certain continued listing requirements and, if we are unable to regain compliance with all applicable continued listing requirements and standards of Nasdaq, our common stock could be delisted from Nasdaq, which would have an adverse impact on the trading, liquidity, and market price of our common stock;

•

our ability to anticipate technological shifts;

•

our ability to generate positive returns on our research and development;

•

changes in the rate at which communications service providers or CSPs, deploy and invest in ultra-broadband network capabilities;

•

the lack of predictability of revenue due to lengthy sales cycles and the volatility in capital expenditure budgets of CSPs;

•

our ability to return to operating profitability in the future;

•

our ability to comply with all covenants, agreements and conditions under our credit facility, including, without limitation, our monthly minimum liquidity covenant;

•

our ability to further penetrate our existing customer base and obtain new customers;

•

changes in our pricing policies, whether initiated by us or as a result of competition;

•

the amount and timing of operating costs and capital expenditures related to the operation and expansion of our business;

•

the actual or rumored timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape of our industry, including consolidation among our competitors or customers;

•

our ability to successfully expand our business domestically and internationally, including our ability to maintain the synergies we have realized from our acquisition of NetComm Wireless Limited, or NetComm;

•

insolvency or credit difficulties confronting our customers, which could adversely affect their ability to purchase or pay for our products and services, or our key suppliers, which could disrupt our supply chain;

•

future accounting pronouncements or changes in our accounting policies;

•

stock-based compensation expense;

•

our overall effective tax rate, including impacts caused by the relative proportion of foreign to U.S. income, the amount and timing of certain employee stock-based compensation transactions, changes in the valuation of our deferred tax assets and any new legislation or regulatory developments;

•

increases or decreases in our expenses caused by fluctuations in interest rates and foreign currency exchange rates;

•

impact of inflation and actions taken by central banks to counter inflation;

•

the costs and possible outcomes of any contingent liabilities, as well as legal actions or proceedings against us, including those described under “Part II, Item 1—Legal Proceedings”

•

general economic conditions, both domestically and in foreign markets, including new macro-economic recession concerns, a potential economic downturn, banking industry liquidity concerns, or inflationary conditions;

•

our ability to obtain and maintain intellectual property protection for our products; and

•

our use of proceeds from our initial public offering.

Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CASA SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(Unaudited)


	September 30,			December 31,
	2023			2022
Assets
Current assets:
Cash and cash equivalents	$	47,925		$	126,312
Accounts receivable, net of provision for doubtful accounts of $152 and $636 as of September 30, 2023 and December 31, 2022, respectively(1)		37,360			74,484
Inventory		77,206			81,795
Prepaid expenses and other current assets		4,171			2,836
Prepaid income taxes		3,022			6,352
Total current assets		169,684			291,779
Property and equipment, net		6,427			19,518
Right-of-use assets		3,674			5,199
Goodwill		50,177			50,177
Intangible assets, net		21,316			25,759
Noncurrent assets held for sale		6,146			—
Other assets		5,092			5,862
Total assets	$	262,516		$	398,294
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Accounts payable	$	21,891		$	29,283
Accrued expenses and other current liabilities		30,629			31,825
Warrant liability		11,218			—
Accrued income taxes		1,011			4,298
Deferred revenue(2)		41,859			31,305
Lease liability		1,446			2,040
Current portion of long-term debt, net of unamortized debt issuance costs		6,378			225,161
Total current liabilities		114,432			323,912
Accrued income taxes, net of current portion		6,509			6,640
Deferred tax liabilities		1,488			1,490
Deferred revenue, net of current portion		4,361			5,529
Long-term debt, net of current portion and unamortized debt issuance costs		175,104			—
Warrant liability, net of current portion		4,118			—
Lease liability, net of current portion		2,416			3,416
Other liabilities, net of current portion		7,513			7,906
Total liabilities		315,941			348,893
Commitments and contingencies (Note 18)
Stockholders’ (deficit) equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding as of September 30, 2023 and December 31, 2022		—			—
Common stock, $0.001 par value; 500,000 shares authorized; 102,321 and 98,262 shares issued as of September 30, 2023 and December 31, 2022, respectively; 98,724 and 94,665 shares outstanding as of September 30, 2023 and December 31, 2022, respectively		102			98
Treasury stock, at cost; 3,597 shares as of September 30, 2023 and December 31, 2022		(14,837	)		(14,837	)
Additional paid-in capital		251,140			244,675
Accumulated other comprehensive loss		(3,188	)		(2,305	)
Accumulated deficit		(286,642	)		(178,230	)
Total stockholders’ (deficit) equity		(53,425	)		49,401
Total liabilities and stockholders’ (deficit) equity	$	262,516		$	398,294

(1) Includes accounts receivable due from a related party of $1,289 and $6,044 at September 30, 2023 and December 31, 2022, respectively (see Note 16)

(2) Includes deferred revenue associated with a related party of $27,200 and $18,094 at September 30, 2023 and December 31, 2022, respectively (see Note 16)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CASA SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Revenue:
Product	$	49,736		$	55,435		$	130,972		$	167,121
Service		12,353			11,464			34,417			35,013
Total revenue(1)		62,089			66,899			165,389			202,134
Cost of revenue:
Product		35,131			38,421			94,155			117,531
Service		1,067			1,195			3,372			4,006
Warranty settlement provision		—			12,907			—			12,907
Total cost of revenue		36,198			52,523			97,527			134,444
Gross profit		25,891			14,376			67,862			67,690
Operating expenses:
Research and development		17,121			22,059			57,947			67,545
Selling, general and administrative		27,174			22,442			72,616			66,741
Total operating expenses		44,295			44,501			130,563			134,286
Loss from operations		(18,404	)		(30,125	)		(62,701	)		(66,596	)
Other income (expense):
Interest income		612			810			2,431			1,118
Interest expense		(10,712	)		(4,762	)		(21,896	)		(12,270	)
Loss on extinguishment of debt(2)		—			—			(28,822	)		—
Revaluation of warrant liability		3,795			—			3,795			—
(Loss) gain on foreign currency, net		(160	)		1,546			228			2,089
Other income, net		47			106			657			285
Total other expense, net		(6,418	)		(2,300	)		(43,607	)		(8,778	)
Loss before provision for (benefit from) income taxes		(24,822	)		(32,425	)		(106,308	)		(75,374	)
Provision for (benefit from) income taxes		796			(1,261	)		2,104			5,071
Net loss		(25,618	)		(31,164	)		(108,412	)		(80,445	)
Other comprehensive loss —foreign currency translation adjustment, net of tax		(251	)		(2,737	)		(883	)		(4,683	)
Comprehensive loss	$	(25,869	)	$	(33,901	)	$	(109,295	)	$	(85,128	)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(0.26	)	$	(0.33	)	$	(1.12	)	$	(0.89	)
Weighted-average shares used to compute net loss per share attributable to common stockholders:
Basic and diluted		97,488			94,512			96,705			90,569

(1) Includes revenue of $16,037 and $23,321 during the three and nine months ended September 30, 2023 and $3,041 and $13,591 during the three and nine months ended September 30, 2022, during which a related party relationship existed (see Note 16)

(2) Loss related to Term Loan B refinancing and issuance of warrants during the nine months ended September 30, 2023 (see Note 10)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CASA SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(in thousands)

(Unaudited)


	Common Stock				Treasury Stock					Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount			Capital			Loss			Deficit			Deficit
Balances at June 30, 2023		100,610	$	101		3,597	$	(14,837	)	$	247,609		$	(2,937	)	$	(261,024	)	$	(31,088	)
Exercise of stock options and common stock issued upon vesting of equity awards, net of shares withheld for employee taxes		419		—		—		—			(215	)		—			—			(215	)
Common stock issued for exercise of warrants		1,292		1		—		—			1,173			—			—			1,174
Foreign currency translation adjustment		—		—		—		—			—			(251	)		—			(251	)
Stock-based compensation		—		—		—		—			2,573			—			—			2,573
Net loss		—		—		—		—			—			—			(25,618	)		(25,618	)
Balances at September 30, 2023		102,321	$	102		3,597	$	(14,837	)	$	251,140		$	(3,188	)	$	(286,642	)	$	(53,425	)


	Common Stock				Treasury Stock					Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount			Capital			Loss			Deficit			Equity (Deficit)
Balances at January 1, 2023		98,262	$	98		3,597	$	(14,837	)	$	244,675		$	(2,305	)	$	(178,230	)	$	49,401
Exercise of stock options and common stock issued upon vesting of equity awards, net of shares withheld for employee taxes		2,767		3		—		—			(3,210	)		—			—			(3,207	)
Common stock issued for exercise of warrants		1,292		1		—		—			1,173			—			—			1,174
Foreign currency translation adjustment		—		—		—		—			—			(883	)		—			(883	)
Stock-based compensation		—		—		—		—			8,502			—			—			8,502
Net loss		—		—		—		—			—			—			(108,412	)		(108,412	)
Balances at September 30, 2023		102,321	$	102		3,597	$	(14,837	)	$	251,140		$	(3,188	)	$	(286,642	)	$	(53,425	)

CASA SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY (continued)

(in thousands)

(Unaudited)


	Common Stock				Treasury Stock					Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount			Capital			Loss			Deficit			Equity
Balances at June 30, 2022		98,009	$	98		3,597	$	(14,837	)	$	237,306		$	(1,068	)	$	(148,337	)	$	73,162
Exercise of stock options and common stock issued upon vesting of equity awards, net of shares withheld for employee taxes		203		—		—		—			(398	)		—			—			(398	)
Foreign currency translation adjustment		—		—		—		—			—			(2,737	)		30			(2,707	)
Stock-based compensation		—		—		—		—			3,671			—			—			3,671
Net loss		—		—		—		—			—			—			(31,164	)		(31,164	)
Balances at September 30, 2022		98,212	$	98		3,597	$	(14,837	)	$	240,579		$	(3,805	)	$	(179,471	)	$	42,564


	Common Stock				Treasury Stock					Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount			Capital			Income (Loss)			Deficit			Equity
Balances at January 1, 2022		87,815	$	88		3,393	$	(13,645	)	$	193,654		$	878		$	(99,056	)	$	81,919
Exercise of stock options and common stock issued upon vesting of equity awards, net of shares withheld for employee taxes		1,074		1		—		—			(1,773	)		—			—			(1,772	)
Foreign currency translation adjustment		—		—		—		—			—			(4,683	)		30			(4,653	)
Repurchase of treasury shares		—		—		204		(1,192	)		—			—			—			(1,192	)
Sale of common stock, net of issuance costs		9,323		9		—		—			39,361			—			—			39,370
Stock-based compensation		—		—		—		—			9,337			—			—			9,337
Net loss		—		—		—		—			—			—			(80,445	)		(80,445	)
Balances at September 30, 2022		98,212	$	98		3,597	$	(14,837	)	$	240,579		$	(3,805	)	$	(179,471	)	$	42,564

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CASA SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2023			2022
Operating activities:
Net loss	$	(108,412	)	$	(80,445	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Loss on assets held for sale		4,718			—
Revaluation of warrant liability		(3,795	)		—
Amortization of debt discount recorded to interest expense		5,905			805
Depreciation and amortization		8,496			10,336
Stock-based compensation		8,502			9,178
Deferred income taxes		(2	)		(2,435	)
Change in provision for doubtful accounts		(484	)		178
Change in provision for excess and obsolete inventory		10,792			5,934
Gain on disposal of assets		46			7
Non-cash operating lease expense		1,682			1,751
Loss on extinguishment of debt		28,822			—
Changes in operating assets and liabilities:
Accounts receivable		36,972			35,573
Inventory		(6,267	)		(3,454	)
Prepaid expenses and other assets		(1,967	)		1,833
Prepaid income taxes		3,314			21,013
Accounts payable		(7,417	)		(14,373	)
Accrued expenses and other current liabilities		(3,931	)		7,302
Operating lease liabilities		(1,564	)		(1,583	)
Accrued income taxes		(3,414	)		2,053
Deferred revenue		9,407			17,990
Net cash (used in) provided by operating activities		(18,597	)		11,663
Investing activities:
Purchases of property and equipment		(1,827	)		(2,611	)
Purchases of software licenses		(92	)		(714	)
Net cash used in investing activities		(1,919	)		(3,325	)
Financing activities:
Principal repayments of debt		(42,474	)		(2,250	)
Payment for debt issuance costs		(13,361	)		—
Proceeds from exercise of stock options		2			304
Employee taxes paid related to net share settlement of equity awards		(3,210	)		(2,074	)
Proceeds from sale of common stock, net of issuance costs		—			39,370
Payments of dividends and equitable adjustments		—			(1	)
Repurchases of common stock		—			(1,192	)
Net cash (used in) provided by financing activities		(59,043	)		34,157
Effect of exchange rate changes on cash and cash equivalents		(216	)		(3,697	)
Net (decrease) increase in cash, cash equivalents and restricted cash		(79,775	)		38,798
Cash, cash equivalents and restricted cash at beginning of period		129,425			157,804
Cash, cash equivalents and restricted cash at end of period (1)	$	49,650		$	196,602
Supplemental disclosures of cash flow information:
Cash paid for interest	$	15,084		$	11,419
Cash paid for income taxes	$	5,098		$	7,845
Supplemental disclosures of non-cash operating, investing and financing activities:
Purchases of property and equipment included in accounts payable	$	126		$	313

(1) See Note 2 of the accompanying notes for a reconciliation of the ending balance of cash, cash equivalents and restricted cash shown in these unaudited condensed consolidated statements of cash flows.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CASA SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share amounts)

(Unaudited)

1. Nature of Business and Basis of Presentation

Casa Systems, Inc. (the “Company”) was incorporated under the laws of the State of Delaware on February 28, 2003. The Company is a global communications technology company headquartered in Andover, Massachusetts and has wholly- owned subsidiaries in Australia, Canada, China, France, Germany, Hong Kong, Ireland, the Netherlands, Spain, the United Kingdom, the United States and New Zealand.

The Company offers physical, virtual and cloud-native 4G and 5G infrastructure and customer premise networking equipment solutions to help communications service providers ("CSPs"), 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 the development of cloud, access devices and cable products, the Company’s 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. As technology has changed, the Company is now viewing offerings across three major product lines, cloud, access devices (which includes the Company's 4G/5G cell radio products) and cable, as opposed to its historical view of cable, wireless and fixed telco. The Company's revenue disclosures have been updated accordingly.

The Company is subject to a number of risks similar to other companies of comparable size and other companies selling and providing services to the CSP industry. These risks include, but are not limited to, the level of capital spending by CSPs, lengthy sales cycles, dependence on the development of new products and services, unfavorable economic and market conditions, competition from larger and more established companies, limited management resources, dependence on a limited number of contract manufacturers and suppliers, the rapidly changing nature of the technology used by CSPs, and reliance on resellers and sales agents. Failure by the Company to anticipate or to respond adequately to technological developments in its industry, changes in customer or supplier requirements, changes in regulatory requirements or industry standards, or any significant delays in the development or introduction of products could have a material adverse effect on the Company’s operating results, financial condition and cash flows.

Prior to December 31, 2022, the Company was an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act provided that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company elected not to “opt out” of such extended transition period, which means that when a standard was issued or revised and it had different application dates for public or private companies, the Company was required to adopt the new or revised standard at or prior to the time private companies were required to adopt the new or revised standard. As of December 31, 2022, the Company no longer qualified as an emerging growth company and is now required to adopt new or revised standards at the same time as other public companies.

The accompanying condensed consolidated balance sheet as of September 30, 2023, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2023 and 2022, the condensed consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022, and the condensed consolidated statements of stockholders’ (deficit) equity for the three and nine months ended September 30, 2023 and 2022 are unaudited. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2023 and 2022 are also unaudited. The accompanying condensed consolidated balance sheet as of December 31, 2022 was derived from the Company’s audited consolidated financial statements for the year ended December 31, 2022, which was included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 15, 2023 (the “Annual Report on Form 10-K”). The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) regarding interim financial reporting. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K. There have been no changes to the Company’s accounting policies from those disclosed in the Annual Report on Form 10-K that would have a material impact on the Company’s condensed consolidated financial statements.

The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and, in the opinion of management, include all adjustments consisting of only normal recurring adjustments, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations and cash flows to be anticipated for the full year ending December 31, 2023 or any future period.

The accompanying condensed consolidated financial statements include the accounts and results of operations of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.

Going Concern

In accordance with the accounting guidance related to the presentation of financial statements, when preparing financial statements for each annual and interim reporting period, management evaluates whether there are conditions or events that, when considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. In making its assessment, management considered the Company’s current financial condition and liquidity sources including current funds available, forecasted future cash flows, conditional and unconditional obligations due over the next twelve months as well as other factors including the provisions of the Company’s senior secured debt facility, and the temporary difficult market and customer demand dynamics for the Company’s Cable and Access Device products now being experienced.

As described further in Note 10, Debt, the Company has debt outstanding that is expected to mature on December 20, 2027, unless earlier repaid or accelerated (the “Superpriority Credit Facility”). The Superpriority Credit Facility contains a liquidity covenant that is tested on a monthly basis, and is further tested on November 15, 2023 and December 10, 2023. The amount of liquidity to be maintained for the monthly minimum liquidity covenant increases monthly starting in Q1 2024. Failure to comply with such covenant would result in a non-monetary event of default under the Superpriority Credit Facility and, as a result, would contractually afford the lenders thereunder the right to declare the Superpriority Term Loans immediately due and payable.

The Company was in compliance with monthly minimum liquidity covenant at September 30, 2023 and October 31, 2023, and as of the date of filing of this Form 10-Q. The Company is also taking actions to try to ensure future compliance including (i) acceleration of collections of receivables, (ii) deferral of expenditures, (iii) cost reductions to align the Company’s cost structure with current revenue levels, (iv) sales of excess inventory and (v) sales of non-core assets, among other actions. The Company believes these actions will produce positive results and improve the Company’s liquidity position. However, due to the inherent uncertainty regarding the Company's ability to meet the liquidity covenant over the next twelve months from the filing of this Quarterly Report on Form 10-Q, management concluded that substantial doubt exists with respect to the Company's ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.

Significant estimates and judgments relied upon by management in preparing these condensed consolidated financial statements include revenue recognition, reserves for excess and obsolete inventory, valuation of inventory and deferred inventory costs, the expensing and capitalization of software-related research and development costs, amortization and depreciation periods, the recoverability of net deferred tax assets, valuations of uncertain tax positions, warranty allowances, the valuation of equity instruments, warrants and embedded derivatives, and stock-based compensation expense.

Although the Company regularly reassesses the assumptions underlying these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances existing at the time such estimates are made.

The COVID-19 pandemic disrupted the Company's global supply chain. Throughout 2022 and 2021, the Company experienced shipping bottlenecks and shortages of supply that resulted in its inability to fulfill certain customer orders within normal lead times. This adversely impacted the Company's revenue and operating results for the years ended December 31, 2022 and 2021. The Company also experienced, in some cases, significant increases in shipping costs. While the impact to the Company has partially subsided during 2023, the Company continues to work with its supply chain, contract manufacturers, logistics partners and customers to minimize the extent of such impacts and will continue to actively monitor supply chain developments. The Company cannot predict if or when such effects will recur or worsen, and in such a case, could prevent the Company from being able to fulfill its customers' orders in a timely manner or at all, which could lead to one or more of its customers canceling their orders. The Company would be neither able to estimate the extent of these impacts nor predict whether its efforts to minimize or contain them will be successful.

In addition, the regions in which the Company operates have experienced a significant increase in inflation, which has adversely impacted the cost to manufacture the Company's products with limited ability to pass such increases on to its customers under previously established fixed price agreements. Inflation has further resulted in increased operating costs and interest rate increases, which will result in increased debt service costs. If interest rates continue to rise, the Company anticipates further adverse effects from inflation and increased interest rates.

At this time, the Company is neither able to estimate the extent of these impacts nor predict whether its efforts to minimize or contain them will be successful. The Company will continue to monitor its business very closely for any effects of COVID-19, inflation and interest rate increases for as long as necessary.

Subsequent Event Considerations

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. The Company has evaluated all subsequent events and determined that there are no additional material recognized or unrecognized subsequent events requiring disclosure in these condensed consolidated financial statements.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include all highly liquid investments maturing within three months from the date of purchase. As of September 30, 2023 and December 31, 2022, the Company’s cash and cash equivalents consisted of savings accounts and investments in money market mutual funds.

Restricted cash as of September 30, 2023 consisted of cash of $1,000 pledged as collateral for a stand-by letter of credit required to support a contractual obligation and cash of $725 pledged as collateral in connection with two letters of credit to support contractual obligations, as further discussed in Note 17, Leases. As of December 31, 2022, restricted cash consisted of a certificate of deposit of $1,013, pledged as collateral for a stand-by letter of credit required to support a contractual obligation, as well as cash of $2,100, pledged as collateral in connection with two letters of credit to support contractual obligations, as further discussed in Note 17, Leases.

The following table is a reconciliation of cash, cash equivalents and restricted cash included in the accompanying condensed consolidated balance sheets that sum to the total cash, cash equivalents and restricted cash included in the accompanying condensed consolidated statements of cash flows:


	September 30, 2023		September 30, 2022
Cash and cash equivalents	$	47,925	$	193,494
Restricted cash included in other assets		1,725		3,108
	$	49,650	$	196,602

Accounts Receivable

Accounts receivable are presented net of a provision for doubtful accounts, which is an estimate of amounts that may not be collectible. Accounts receivable for customer contracts with customary payment terms, which are one year or less, are recorded at invoiced amounts and do not bear interest. The Company may, in limited circumstances, grant payment terms longer than one year. Payments due beyond 12 months from the balance sheet date are recorded as non-current assets. The Company generally does not require collateral, but the Company may, in certain instances based on its credit assessment, require full or partial prepayment prior to shipment.

Accounts receivable as of September 30, 2023 and December 31, 2022 consisted of the following:


	September 30, 2023		December 31, 2022
Current portion of accounts receivable, net:
Accounts receivable, net	$	37,360	$	74,407
Accounts receivable, extended payment terms		—		77
	$	37,360	$	74,484

The Company performs ongoing credit evaluations of its customers and, if necessary, provides a provision for doubtful accounts and expected losses. When assessing and recording its provision for doubtful accounts, the Company evaluates the age of its accounts receivable, current economic trends, creditworthiness of the customer, customer payment history, and other specific customer and transaction information. The Company also provides an overall expected credit loss amount, based on historical loss rates, in accordance with ASC 326, Credit Losses. The Company writes off accounts receivable against the provision when it determines a balance is uncollectible and no longer actively pursues collection of the receivable. Adjustments to the provision for doubtful accounts are recorded as selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss.

As of September 30, 2023 and December 31, 2022, the Company concluded that all amounts due under extended payment terms were collectible and recorded no reserve for credit losses. During the nine months ended September 30, 2023 and 2022, the Company did not provide a reserve for credit losses and did not write off any uncollectible receivables due under extended payment terms.

The Company has entered into customer-sponsored programs administered by unrelated financial institutions that allow for the sales (factor) of certain accounts receivable at discounted rates to the financial institutions, without recourse. Transactions under this agreement were accounted for as a sale of accounts receivable and the related accounts receivable were removed from the Company's condensed consolidated balance sheet at the time of the sales transaction. Under this agreement, the Company sold $10,427 and $31,200 of accounts receivables during the three and nine months ended September 30, 2023, respectively. Selling, general and administrative expenses include factoring costs associated with this program of $170 and $368 during the three and nine months ended September 30, 2023, respectively.

Concentration of Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash and cash equivalents consist of demand deposits, savings accounts and money market mutual funds, and certificates of deposit with financial institutions, which may exceed Federal Deposit Insurance Corporation limits. The Company has not experienced any losses related to its cash and cash equivalents and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

The Company grants credit to customers in the ordinary course of business. Credit evaluations are performed on an ongoing basis to reduce credit risk, and no collateral is required from the Company’s customers. An allowance for uncollectible accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and credit evaluation. Due to these factors, no additional losses beyond the amounts provided for collection losses is believed by management to be probable in the Company’s accounts receivable.

Significant customers are those that represent 10% or more of revenue or accounts receivable and are set forth in the following tables:


	Revenue						Revenue
	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Customer A		26	%	*				14	%	*
Customer B		16	%		17	%		10	%		13	%


	Accounts Receivable, Net
	As of			As of
	September 30, 2023			December 31, 2022
Customer B		10	%	*
Customer C		15	%	*
Customer D	*				12	%
Customer E	*				11	%

* Less than 10% of total

Certain of the components and subassemblies included in the Company’s products are obtained and manufactured from a single source or a limited group of suppliers. Although the Company seeks to reduce dependence on those single or limited source suppliers, the partial or complete loss of certain of these sources could have a material adverse effect on the Company’s operating results, financial condition and cash flows and damage its customer relationships.

Warrant Liability

On June 15, 2023, in connection with the Superpriority Term Loans, as discussed in Note 10, Debt, the Company issued certain penny warrants (the “Warrants”), approximately half of which were immediately vested. The Company’s liability for the Warrants is based on a valuation model utilizing observable inputs from active markets, as further described in Note 7, Fair Value Measurements. The fair value of the warrant liability is classified within Level 3 of the fair value hierarchy as it is based on significant inputs not observable in the market. The Company establishes the fair value for the Warrants using a Monte Carlo simulation model. Due to the variable number of shares for which the Warrants were exercisable, they failed to qualify for equity classification under the indexation guidance in Accounting Standards Codification 815 ("ASC 815"). Therefore, the Warrants are classified as liabilities at fair value on the condensed consolidated balance sheet. Each reporting period, the Warrants are recorded at fair value, with changes in fair value recognized in the Company’s consolidated statement of operations within revaluation of warrant liability.

Embedded Derivatives

In connection with the Superpriority Credit Agreement, as discussed in Note 10, Debt, the Company identified certain embedded features requiring bifurcation as derivatives under ASC 815. These embedded derivatives are required to be bifurcated from the debt host contract at fair value with subsequent changes in fair value recognized in earnings at each balance sheet date (see Note 8, Derivative Financial Instruments).

The Superpriority Term Loans, as defined and discussed in Note 10, Debt, include three embedded features: contingent interest upon an uncured event of default; mandatory prepayment upon certain excess cash flow; and mandatory prepayment upon an uncured event of default. Pursuant to ASC 815, these features have been identified as embedded derivative financial instruments. These embedded derivatives are required to be accounted for as derivatives and bifurcated from the host debt contract, resulting in remeasurement at each balance sheet date, with the change in fair value recognized in the Company’s condensed consolidated statement of operations. The fair value of the embedded derivatives is classified within Level 3 of the fair value hierarchy as it is based on significant inputs not observable in the market.

The fair value of the embedded derivatives is based on a valuation model utilizing a with and without analysis of the embedded features within the debt facility. The Company runs a Monte Carlo simulation model with the embedded derivatives, and then runs a separate Monte Carlo simulation model for the overall debt facility, without the embedded derivative features. The difference between these two Monte Carlo simulation models is used to obtain the value of the embedded features.

Impact of Recently Adopted or Issued Accounting Standards

There have been no recently adopted or issued accounting standards that are applicable to the Company since December 31, 2022.

Other

Other than the disclosures above, there have been no changes to the significant accounting policies disclosed in Note 2, Summary of Significant Accounting Policies, to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

3. Goodwill and Intangible Assets

Goodwill

There have been no changes to the $50,177 carrying amount of goodwill during the three and nine months ended September 30, 2023 and 2022.

Intangible Assets

Intangible assets, net consisted of intangible assets resulting from the acquisition of NetComm and purchased software to be used in the Company’s products. Intangible assets, net consisted of the following at September 30, 2023 and December 31, 2022, respectively:


	Cost		Accumulated Amortization			Net Balance
Developed Technology	$	25,000	$	(15,181	)	$	9,819
Customer Relationships		18,000		(7,650	)		10,350
Trade Name		1,000		(1,000	)		—
Purchased Software		2,638		(1,491	)		1,147
Totals as of September 30, 2023	$	46,638	$	(25,322	)	$	21,316


	Cost		Accumulated Amortization			Net Balance
Developed Technology	$	25,000	$	(12,502	)	$	12,498
Customer Relationships		18,000		(6,300	)		11,700
Trade Name		1,000		(1,000	)		—
Purchased Software		2,545		(984	)		1,561
Totals as of December 31, 2022	$	46,545	$	(20,786	)	$	25,759

As of September 30, 2023, amortization expense on existing intangible assets for the next five years and beyond is as follows:


Year Ending December 31,
Remainder of 2023	$	1,486
2024		5,929
2025		5,786
2026		3,615
2027		1,800
Thereafter		2,700
	$	21,316

A summary of amortization expense recorded during the three and nine months ended September 30, 2023 and 2022 is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Product cost of revenue	$	893	$	893	$	2,679	$	2,679
Research and development		174		149		507		393
Selling, general and administrative		450		450		1,350		1,520
Totals	$	1,517	$	1,492	$	4,536	$	4,592

4. Inventory

Inventory as of September 30, 2023 and December 31, 2022 consisted of the following:


	September 30, 2023		December 31, 2022
Raw materials	$	31,745	$	47,581
Finished goods:
Manufactured finished goods		45,245		32,863
Deferred inventory costs		216		1,351
	$	77,206	$	81,795

The decrease in inventory is due to $10,792 of additional reserves recognized during the nine months ended September 30, 2023 primarily due to certain of the Company's products and components that management has designated to be discontinued or that have limited future demand and as a result were adjusted to their estimated net realizable values, as well as certain component inventory received during 2023 which the Company believes now has limited utility due to recent technological changes in the market as well as supplier delay and delivery issues, and the Company has fully reserved for this component inventory at September 30, 2023. This was partially offset by additional purchases of inventory during the year.

5. Property and Equipment

Property and equipment as of September 30, 2023 and December 31, 2022 consisted of the following:


	September 30, 2023			December 31, 2022
Computers and purchased software	$	23,912		$	25,572
Leasehold improvements		3,790			4,226
Furniture and fixtures		2,284			2,471
Machinery and equipment		24,161			34,502
Land		—			3,091
Building		—			4,765
Building improvements		—			7,374
Trial systems at customers’ sites		1,636			2,582
		55,783			84,583
Less: Accumulated depreciation and amortization		(49,356	)		(65,065	)
	$	6,427		$	19,518

Depreciation and amortization expense on property and equipment totaled $1,240 and $1,704 for the three months ended September 30, 2023 and 2022, respectively, and $3,960 and $5,744, for the nine months ended September 30, 2023 and 2022, respectively.

Sale and Leaseback of Andover, MA Headquarters

On July 27, 2023, the Company’s Board of Directors approved a plan to sell and leaseback the Company's headquarters in Andover, MA. On August 16, 2023, the Company entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with DND Homes, LLC (the “Buyer”), for the sale of the Company's headquarters, inclusive of land, building and related improvements, at 100 Old River Road, Andover, Massachusetts (the "Property") for a purchase price of $6,400. The Purchase Agreement was subject to the satisfactory completion of due diligence by the Buyer, during which time the Buyer retained the right to cancel the Purchase Agreement. Upon execution of the Purchase Agreement, the Buyer paid a down payment of $300 into escrow, which was held in accordance with the Purchase Agreement until the closing, which was completed on October 24, 2023.

In accordance with the terms of the Purchase Agreement, upon the closing of the sale of the Property, the Company entered into a Commercial Lease (the “Lease”) with the Buyer, pursuant to which the Property will be leased back to the Company. The Lease has an initial term of 18 months commencing from the closing. The annual fixed rent will be $610. The Lease is a triple net lease, pursuant to which all costs, expenses, and obligations relating to the Property, including, repair and maintenance charges, utility charges, real estate taxes or other taxes that may be imposed that relate to the Property, shall be

paid by the Company. In addition, the Lease contains other customary terms and provisions generally contained within leases of this type.

The net cash proceeds the Company received following closing is $6,110 after taxes, expenses, and fees. The Company is required to use the net cash proceeds to pay down the principal balance of the Superiority Term Loans, as further described in Note 10, Debt.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of September 30, 2023 and December 31, 2022 consisted of the following:


	September 30, 2023		December 31, 2022
Current liabilities
Accrued compensation and related taxes	$	13,634	$	11,666
Accrued warranty		1,245		1,678
Inventory-related accruals		1,264		5,819
Warranty settlement provision (see Note 18)		3,589		3,761
Other accrued expenses		10,897		8,901
Accrued expenses and other current liabilities	$	30,629	$	31,825
Non-current liabilities
Warranty settlement provision, net of current portion (see Note 18)	$	5,711	$	6,119
Other accrued expenses, net of current portion		1,802		1,787
Other liabilities, net of current portion	$	7,513	$	7,906

On March 14, 2023, Jerry Guo, the Company’s co-founder, President and Chief Executive Officer, announced his retirement from his executive roles effective March 17, 2023. A separation agreement was entered into by Mr. Guo and the Company’s board of directors on March 13, 2023. Pursuant to this agreement, Mr. Guo was entitled to certain termination benefits, including accelerated vesting of stock awards, for which additional stock-based compensation of $1,737 was recognized in the nine months ended September 30, 2023, as discussed in Note 12, Stock-based Compensation, all of which was accrued for during the three months ended March 31, 2023. The agreement also included separation pay, equal to the sum of (i) Mr. Guo's annual base salary at the rate in effect as of March 17, 2023 and (ii) Mr. Guo's target bonus for the calendar year 2023. During the nine months ended September 30, 2023, the Company recorded severance expenses of $2,199 related to Mr. Guo's separation agreement, of which $1,015 is still included in accrued compensation and related taxes in the table above as of September 30, 2023. Total expense recognized as a result of the separation agreement during the nine months ended September 30, 2023 was $3,936, inclusive of severance expense and stock based compensation expense as described above.

Reduction in Force

In April 2023, the Company approved a plan for a reduction in force. The Company reduced its workforce by 134 employees, representing approximately 13% of the Company's total workforce.

Severance payments and other employee-related cost in connection with the reduction in force during the nine months ended September 30, 2023 were classified in the condensed consolidated statements of operations and comprehensive loss as follows:


	Nine Months Ended September 30,
	2023
Research and development expenses	$	1,826
Selling, general and administrative expenses		188
Cost of revenue		137
Total	$	2,151

As of September 30, 2023, substantially all of these severance payments have been paid.

Accrued Warranty

Substantially all of the Company’s products are covered by warranties for software and hardware for periods ranging from 90 days to two years. In addition, in conjunction with customers’ renewals of maintenance and support contracts, the Company offers an extended warranty for periods typically of one to three years for agreed-upon fees. In the event of a failure of a hardware product or software covered by these warranties, the Company must generally repair or replace the software or hardware or, if those remedies are insufficient, and at the discretion of the Company, provide a refund. The Company’s warranty reserve, which is included in accrued expenses and other current liabilities in the condensed consolidated balance sheets, reflects estimated material, labor and other costs related to potential or actual software and hardware warranty claims for which the Company expects to incur an obligation. The Company’s estimates of anticipated rates of warranty claims and the costs associated therewith are primarily based on historical information and future forecasts. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary. If the historical data used to calculate the adequacy of the warranty reserve are not indicative of future requirements, additional or reduced warranty reserves may be required.

The following table presents a summary of changes in the amount reserved for warranty costs for the nine months ended September 30, 2023 and 2022:


	Nine Months Ended September 30,
	2023			2022
Warranty reserve at beginning of period	$	1,678		$	2,392
Provisions		635			2,371
Charges		(1,068	)		(1,396	)
Warranty reserve at end of period	$	1,245		$	3,367

7. Fair Value Measurements

Recurring Fair Value Measurement

The following tables present information about the fair value of the Company’s financial assets and liabilities as of September 30, 2023 and December 31, 2022 and indicate the level of the fair value hierarchy utilized to determine such fair values:


	Fair Value Measurements as of September 30, 2023 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Money market mutual funds	$	28,624	$	—	$	—	$	28,624
	$	28,624	$	—	$	—	$	28,624

Liabilities:
Warrant liability	$	—	$	—	$	15,336	$	15,336
Embedded derivatives		—		—		1,170		1,170
	$	—	$	—	$	16,506	$	16,506


	Fair Value Measurements as of December 31, 2022 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Certificates of deposit—restricted cash	$	—	$	1,013	$	—	$	1,013
Money market mutual funds		90,984		—		—		90,984
	$	90,984	$	1,013	$	—	$	91,997

During the nine months ended September 30, 2023 and 2022, there were no transfers between Level 1, Level 2 and Level 3.

Warrant Liability

On June 15, 2023, in connection with the closing of the Superpriority Term Loans, as discussed in Note 10, Debt, the Company issued Warrants, defined in Note 2, Summary of Significant Accounting Policies. The warrants are exercisable for a variable percentage of the Common Stock of the Company depending on how long the debt remains outstanding. Warrants representing the right to purchase an aggregate of 9,691 shares of the Company's common stock (the “10% Warrants”) were immediately vested as of the June 15, 2023 closing date. Warrants representing the right to purchase 4,846 shares of the Company's common stock (the “5% Warrants”) will vest on January 1, 2024, if the debt remains outstanding. Warrants representing the right to purchase 4,836 shares of the Company's common stock (the “4.99% Warrants”) will vest on January 1, 2025, if the debt remains outstanding. Due to the variable number of shares for which the warrants were exercisable, they failed to qualify for equity classification under the indexation guidance in ASC 815. Therefore, the Warrants are classified as liabilities and recorded at fair value on the condensed consolidated balance sheet. A summary of the warrants is as follows:


	Number of Shares
Outstanding as of June 14, 2023		—
Granted		19,373
Exercised		(1,306	)
Outstanding at September 30, 2023		18,067
Warrants exercisable at September 30, 2023		8,385

Each reporting period, the Warrants are recorded at fair value, with changes in fair value recognized in the Company’s consolidated statement of operations. Changes in the fair value of the warrant liability from June 15, 2023 to September 30, 2023 were as follows:


	Warrant liability fair value
Balance as of June 15, 2023	$	20,305
Exercise of warrants		(1,174	)
Change in fair value of warrant liability		(3,795	)
Balance at September 30, 2023	$	15,336

The Company’s liability for the Warrants is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company establishes the fair value for the Warrants using a Monte Carlo simulation model. The key inputs into the valuation models were as follows:


	Three Months Ended	Nine Months Ended
	September 30, 2023	September 30, 2023
Risk-free interest rate	4.7%	3.9%–4.7%
Correlated random variable	0.2	0.2–0.3
Expected volatility - revenue	40.0%	40.0%–45.0%
Expected volatility - equity	93.0%	90.0%–93.0%
Vesting dates	1/1/2024 1/1/2025	6/15/2023 1/1/2024 1/1/2025
Simulated stock price	$0.85	$0.85–$1.01
Stock price at September 30, 2023	$0.85	$0.85

Embedded Derivatives

Further, in connection with the Superpriority Credit Agreement, the Company identified certain embedded features requiring bifurcation as derivatives under ASC 815. These embedded derivatives are required to be bifurcated from the debt host contract at fair value with subsequent changes in fair value recognized in earnings at each balance sheet date (see Note 8). The fair value of the embedded derivatives is based on a Monte Carlo valuation model utilizing a with and without analysis of the embedded features within the debt facility. The Company ran a Monte Carlo simulation model with the embedded derivatives, and then ran a separate Monte Carlo simulation model for the overall debt facility, without the embedded derivative features. The difference between these two Monte Carlo simulation models was used to obtain the value of the embedded features. The key inputs into the valuation models for both the with and without were as follows:


	Three Months Ended	Nine Months Ended
	September 30, 2023	September 30, 2023
Risk-free interest rate	4.7%	3.9%–4.7%
Correlated random variable	0.2	0.2–0.3
Expected volatility - revenue	40.0%	40.0%–45.0%

The Company’s liability for the embedded derivatives is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. Changes in the fair value of the embedded derivatives were as follows:


	Embedded derivatives fair value
Balance at June 15, 2023	$	1,240
Change in fair value of embedded derivatives		(70	)
Balance at September 30, 2023	$	1,170

Nonrecurring Fair Value Measurements

Assets held for sale

Property and equipment, net is identified as held for sale when it meets the held for sale criteria of Accounting Standards Codification Topic 360, Property, Plant, and Equipment ("ASC 360"). Depreciation is not recorded for assets that are classified as held for sale. When an asset meets the held for sale criteria, the lower of its carrying value or fair value less costs to sell the asset is reclassified from property and equipment, net and into noncurrent assets held for sale on the condensed consolidated balance sheets, where it remains until it is either sold or it no longer meets the held for sale criteria.

As a result of the sale of the Company's headquarters, as described in Note 5, Property and Equipment, the Company measured the related asset groups at their fair values and recorded an impairment charge of $4,718 during the three and nine months ended September 30, 2023 in selling, general and administrative expense in the condensed consolidated statements of operations and comprehensive loss. The Company also recorded the fair value of $6,146 as noncurrent assets held for sale on the condensed consolidated balance sheet as of September 30, 2023, which represents a Level 1 measurement in the fair value hierarchy.

Superiority Term Loans

The Company initially recognized the Superpriority Term Loans at fair value in the application of extinguishment accounting (see Note 10, Debt). The Company established the fair value for the debt facility, which is a nonrecurring fair value calculation, using a discounted-cash flow analysis, for which the initial fair value measurement on June 15, 2023 was $186,990. Under the discounted-cash flow analysis, the Company discounts each principal and interest payment by an applicable discount rate determined by referencing the Company’s current public credit rating and seniority of the debt instrument in hand. The stream of principal and interest payments (discounted to present value) are used to calculate the fair value of the debt.

The key inputs in valuing the debt and embedded derivatives include management projections (i.e., revenue, gross margin, operating expenses, R&D expenses, depreciation and amortization, and employee stock compensation), the Company’s cash balance, penalty amounts under an event of default (only applicable to the embedded derivatives), the forward SOFR curve, revenue volatility, revenue discount rate (derived using asset beta, metric volatility, asset volatility, risk-free rate, equity risk premium, small stock risk premium, company specific risk premium), and risk discount rate. The fair value of the Superiority Term Loans is classified within Level 3 of the fair value hierarchy.

The principal amount of our outstanding Superpriority debt was $187,242 at September 30, 2023 and the estimated fair value of our outstanding debt was $181,680 at September 30, 2023, excluding unamortized debt discount.

Other than the valuation techniques used for the warrant liability, embedded derivatives and Superiority Term Loans, there were no changes to the valuation techniques used to measure asset and liability fair values during the nine months ended September 30, 2023 from those included in the Company’s consolidated financial statements for the year ended December 31, 2022.

8. Derivative Financial Instruments

Fair value accounting requires bifurcation of embedded derivative instruments in debt or equity instruments and measurement of their fair value for accounting purposes.

The Superpriority Term Loans, as defined and discussed in Note 10, Debt, include three embedded features; contingent interest upon an uncured event of default; mandatory prepayment upon certain excess cash flow; and mandatory prepayment upon an uncured event of default. Pursuant to ASC 815, these features have been identified as embedded derivative financial instruments. These embedded derivatives are required to be accounted for as derivatives and bifurcated from the debt host contract, resulting in remeasurement at each balance sheet date, with the change in fair value recognized in the Company’s condensed consolidated statement of operations. The total derivative liability related to these features as of September 30, 2023 was $1,170 and was included with accrued expenses and other current liabilities and other liabilities, net of current portion on the condensed consolidated balance sheet, as appropriate.

9. Income Taxes

The Company’s effective income tax rate was (3.2%) and (3.9%) for the three months ended September 30, 2023 and 2022, respectively. The provision for (benefit from) income taxes was $796 and $(1,261) for the three months ended September 30, 2023 and 2022, respectively. The change in the provision for income taxes was primarily due to the period over period changes in the Company's valuation allowance against its deferred tax assets, the impact of changes in the Company's forecasted profitability and the jurisdictional mix of earnings.

The Company’s effective income tax rate was (2.0%) and 6.7% for the nine months ended September 30, 2023 and 2022, respectively. The provision for income taxes was $2,104 and $5,071 for the nine months ended September 30, 2023 and 2022, respectively. The change in the provision for income taxes was primarily due to the period over period changes in the Company's valuation allowance against its deferred tax assets, the impact of changes in the Company's forecasted profitability and the jurisdictional mix of earnings.

The provision for income taxes for the three and nine months ended September 30, 2023 and 2022, respectively, differed from the federal statutory rate primarily due to the geographical mix of earnings and related foreign tax rate differential, permanent differences, research and development credits, foreign tax credits, and the valuation allowance maintained against the Company's deferred tax assets and withholding taxes.

10. Debt

Current debt obligations reflected in the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022 consisted of the following:


	September 30,			December 31,
	2023			2022
Current liabilities:
Original Term Loans	$	5,019		$	226,009
Superpriority Term Loans		1,865			—
Current portion of long-term debt		6,884			226,009
Unamortized debt issuance discounts, current portion		(506	)		(848	)
Current portion of long-term debt, net of unamortized debt issuance discounts	$	6,378		$	225,161
Non-current liabilities:
Superpriority Term Loans	$	185,377		$	—
Unamortized debt issuance discounts, net of current portion		(10,273	)		—
Long-term debt, net of current portion and unamortized debt issuance discounts	$	175,104		$	—

As of September 30, 2023, aggregate minimum future principal payments of the Company's debt are summarized as follows:


Year Ending December 31,
Remainder of 2023	$	5,487
2024		1,861
2025		1,842
2026		1,824
2027		181,247
	$	192,261

On December 20, 2016, the Company entered into a credit agreement (the "Original Credit Agreement") with JPMorgan Chase Bank, N.A., as administrative agent, various lenders, JPMorgan Chase Bank, N.A. and Barclays Bank PLC providing for (i) a term loan facility of $300,000 (the “Original Term Loans”), due to mature on December 20, 2023, and (ii) a revolving credit facility (the "Original Revolving Loan") of up to $25,000 in revolving credit loans and letters of credit, which matured on December 20, 2021.

On June 15, 2023 (the “Effective Date”), the Borrower and certain of the Lenders entered into various agreements to effectively exchange $218,848 of the Original Term Loans, representing approximately 97.8% of the then outstanding principal balance, for loans of an equal principal amount having a first priority security interest in all or substantially all of the Company's and its domestic subsidiaries' assets, subject to permitted liens (the “Superpriority Credit Agreement” or “Superpriority Term Loans”), whereby the maturity date would be extended to December 20, 2027 in exchange for the Company paying down $40,000 of its exchanged Original Term Loans (as part of an early principal repayment), providing certain Warrants to the Lenders and paying certain in-kind fees, among other changes (the “Exchange”), and with $5,036 of the Original Term Loans principal remaining outstanding and still due to mature on December 20, 2023.

The Exchange was deemed to be an exchange of debt with substantially different terms under ASC Subtopic 470-50, “Modifications and Extinguishments,” and the Company recorded a loss on extinguishment of debt of approximately $28,956 in the condensed consolidated statement of operations for the nine months ended September 30, 2023. In applying extinguishment accounting, the Company recorded the Superpriority Term Loans at fair value. Therefore, the current carrying value of the loans approximates fair value as of September 30, 2023.

The Superpriority Term Loans bear interest at the Adjusted Term SOFR Rate (as defined in the Superpriority Credit Agreement) (subject to a 2.00% per annum floor) or Base Rate (as defined in the Superpriority Credit Agreement), as applicable, plus (x) in the case of SOFR Rate Loans (as defined in the Superpriority Credit Agreement), 6.50% per annum or (y) in the case of Base Rate Loans (as defined in the Superpriority Credit Agreement), 5.50% per annum, provided that, the foregoing interest rate margin in respect of both SOFR Rate Loans and Base Rate Loans shall be increased (i) by 0.50% per annum on July 1, 2024 and (ii) by 1.00% per annum on and after January 1, 2025 (for a total increase of 1.50% per annum), if, in each case, the outstanding amount of Superpriority Term Loans on such date is in excess of $125,000 (with continuing effect from such date regardless of the outstanding amount of Superpriority Term Loans at any time after such date of determination); and any time after June 30, 2025, with respect to Superpriority Term Loans (x) in the case of SOFR Rate Loans, 13.00% per

annum or (y) in the case of Base Rate Loans, 12.00% per annum. As of September 30, 2023, the interest rate on the Superpriority Term Loans was 12.22% per annum, and the effective interest rate on the Superpriority Term Loans was approximately 22%.

The Superpriority Term Loans are prepayable at par between the closing of the Superpriority Credit Agreement through December 31, 2023; thereafter, the Superpriority Term Loans are prepayable at any time and from time to time, subject to an exit fee increasing over time ranging from 3.0% to 20.0% through maturity. In the event the Superpriority Term Loans are accelerated prior to their maturity following any event of default, the maximum exit fee will be payable in connection therewith.

The Superpriority Term Loans are expected to mature on December 20, 2027 (subject to a springing maturity of December 20, 2025 if, unless otherwise waived by holders collectively owning or controlling at least 75% of the Superpriority Term Loans on the date of determination, (x)(1) the Total Net First Lien Leverage Ratio (as defined in the Superpriority Credit Agreement) is greater than 1.00:1.00, or (2) the Total Net Leverage Ratio (as defined in the Superpriority Credit Agreement) is greater than 1.50:1.00, in each case, as of September 30, 2025, or (y) a Default (as defined in the Superpriority Credit Agreement) or Event of Default (as defined in the Superpriority Credit Agreement) has occurred and is continuing under the Superpriority Credit Agreement as of December 20, 2025), unless earlier repaid or accelerated. The Superpriority Term Loans will amortize in equal quarterly installments, resulting in an aggregate annual amount equal to 1.0% of the principal amount of the Superpriority Term Loans outstanding on the date of the Term Loan Exchange (after giving effect to the Closing Date Prepayment).

The Superpriority Term Loans are subject to mandatory prepayments, including 75% of Excess Cash Flow, as defined by the Superpriority Credit Agreement, and the proceeds from certain non-ordinary course asset dispositions, the issuance of certain equity interests by Casa and the incurrence of certain indebtedness by Casa and its subsidiaries. Such prepayments shall be subject to the exit fee described above (to the extent otherwise then applicable). The Superpriority Credit Agreement also allows for the Company to retain up to $25,000 of proceeds from issuances of equity or subordinated debt, once the principal balance of the Superpriority Term Loans has been paid down by $20,000.

The Superpriority Credit Agreement contains customary representations and warranties, conditions, affirmative and negative covenants, a minimum liquidity-based financial covenant, measured monthly and with special measurements in November and December of 2023 prior to the maturity date of the Original Term Loans having a principal balance of $5,019 on December 20, 2023, events of default, and indemnification obligations. As of September 30, 2023, the Company was in compliance with the terms of the Superpriority Credit Agreement.

As a result of the Exchange, $5,019 principal remains outstanding under the Original Term Loans. The Company, certain lenders party to the Original Credit Agreement and JPMorgan Chase Bank, N.A., as agent, entered into Amendment No. 1 thereto (“Amendment No. 1”) which, among other things, permitted the transaction contemplated by the Exchange and eliminated all mandatory prepayments (other than at maturity) and representations and warranties and most affirmative and negative covenants and events of default previously applicable to the Original Term Loans. The interest rates applicable to the Original Term Loans remain unchanged. Borrowings under the Original Term Loans bear interest at a floating rate, which could be either a synthetic Eurodollar rate plus an applicable margin or, at the Company’s option, a base rate (defined as the highest of (x) the JPMorgan Chase Bank, 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 Original Term Loans 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 rate payable under the Original Term Loans is subject to an increase of 2.00% per annum during the continuance of any payment default.

For Eurodollar rate loans, the Company may select interest periods of one, three or six months or, with the consent of all relevant affected lenders, twelve months. Interest is 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. The Company has the right to convert Eurodollar rate loans into base rate loans and the right to convert base rate loans into Eurodollar rate loans at its option, subject, in the case of Eurodollar rate loans, to breakage costs if the conversion was effected prior to the end of the applicable interest period. As of September 30, 2023 and December 31, 2022, the interest rate on the Original Term Loans was 9.65% and 8.38% per annum, respectively, which was based on a three-month and one-month Eurodollar rate of 5.65% and 4.38% per annum, respectively, plus the applicable margin of 4.00% per annum for Eurodollar rate loans.

Upon entering into the Original Term Loans, the Company incurred debt issuance costs of $7,811, which were initially recorded as a reduction of the debt liability and were amortized to interest expense using the effective interest method from the issuance date of the Original Term Loans until the Effective Date. Upon entering into the Superpriority Term Loan, the

remaining $509 of debt issuance costs from the Original Term Loans was included in the loss on extinguishment of debt in the condensed consolidated statement of operations. The Company also incurred additional debt issuance costs of $14,388 in relation to the Exchange, which were recorded as a reduction of the debt liability and will be amortized to interest expense using the effective interest method from the issuance date of the Superpriority Term Loan until the maturity date.

The Company made principal payments of $41,237 and $2,250 during the nine months ended September 30, 2023 and 2022, respectively, in addition to the repurchase as discussed below. Interest expense, including the amortization of debt issuance costs, totaled $10,732 and $4,696 for the three months ended September 30, 2023 and 2022, respectively, and totaled $21,791 and $12,270 for the nine months ended September 30, 2023 and 2022, respectively.

On October 27, 2022, the Company's board of directors authorized the use of up to $50,000 of cash to fund the partial repurchase of debt outstanding under the Original Term Loans. Subsequent to this authorization and prior to the Superiority Term Loan refinancing on June 15, 2023, the Company repurchased a portion of its outstanding Original Term Loans from certain of its debt holders. During the nine months ended September 30, 2023, but prior to the June 15, 2023 refinancing, the Company made a payment of $1,237 to retire $1,375 of its outstanding debt. The Company recognized a gain on extinguishment of debt, net of fees, of $133, and also recognized $4 of interest expense for the pro-rata portion of unamortized debt issuance costs attributed to the debt repurchased. Total payments made under this authorization from October 27, 2022 through September 30, 2023 amounted to $47,116, which were paid using funds included in cash and cash equivalents in the condensed consolidated balance sheets. Based on the applicable fair value of debt repurchased, the amount of outstanding principal of the Original Term Loans that was retired under this authorization was $50,591.

Voluntary prepayments of principal amounts outstanding under the Original Term Loans 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, the Company is required to compensate the lenders thereunder for any funding losses and expenses incurred as a result of the prepayment.

The Original Term Loans, which are now subordinated to the Superpriority Term Loans, is secured by, among other things, a second priority security interest, subject to permitted liens, in substantially all of the Company’s assets and a pledge of certain of the stock of certain of its subsidiaries, in each case subject to specified exceptions. The Company was in compliance with all the terms of the Original Credit Agreement September 30, 2023 and December 31, 2022.

11. Stockholders’ Equity

Stock Repurchase Program

On February 21, 2019, the Company announced a stock repurchase program authorizing it to repurchase up to $75,000 of the Company’s common stock. The Company repurchased 204 shares, at a cost of $1,192, including commissions, during the nine months ended September 30, 2022. There were no repurchases made during the three and nine months ended September 30, 2023 and during the three months ended September 30, 2022. As of September 30, 2023, $60,234 remained authorized for repurchases of the Company’s common stock under the stock repurchase program. As part of the debt refinancing closed in June of 2023, the Company is now prohibited from using cash to repurchase common stock.

Securities Purchase Agreement with Verizon Ventures LLC

On April 18, 2022, the Company entered into a Securities Purchase Agreement (the “SPA”) with Verizon Ventures LLC providing for the private placement of an aggregate of 9,323 shares (the “Shares”) of the Company's common stock, par value $0.001 per share at a price of $4.24 per share, for an aggregate purchase price of approximately $39,530. Issuance costs related to this transaction totaled $160 and were net against the amount recorded to additional paid in capital on the condensed consolidated balance sheet. The Company filed a resale registration statement for the Shares with the SEC on May 17, 2022.

12. Stock-based Compensation

2017 Stock Incentive Plan

The Company’s 2017 Stock Incentive Plan (the “2017 Plan”) provides for the Company to sell or issue common stock or restricted common stock, or to grant qualified incentive stock options, nonqualified stock options, stock appreciation rights ("SARs"), performance-based restricted stock units (“PSUs”), restricted stock units ("RSUs") or other stock-based awards to the Company’s employees, officers, directors, advisors and outside consultants. The total number of shares authorized for issuance under the 2017 Plan was 16,589 shares as of September 30, 2023, of which 2,019 shares remained available for future grant.

Inducement Award

During the three months ended September 30, 2023, the Company awarded two inducement grants (the "Inducements"), consisting of restricted stock units to persons who were not previously an employee or director of the Company as an inducement to such person’s entry into employment with the Company and in accordance with the requirements of the Nasdaq Stock Market Rule 5635(c)(4). The Inducements granted outside of the 2017 Plan totaled 3,750 during the three months ended September 30, 2023.

Stock Options

A summary of stock option activity for the nine months ended September 30, 2023 is as follows:


	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value

Outstanding at January 1, 2023		6,537		$	7.55		4.42	$	134
Granted		46			1.03
Exercised		(1	)		2.23
Forfeited		(647	)		6.59
Outstanding at September 30, 2023		5,935		$	7.61		3.80	$	—
Options exercisable at September 30, 2023		5,069		$	8.25		2.99	$	—
Vested or expected to vest at September 30, 2023		5,899		$	7.63		3.77	$	—

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model using the following assumptions:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
Risk-free interest rate	4.4%	3.7%	3.5%–4.4%	1.7%–3.7%
Expected term (in years)	6.1	6.1	6.1	5.6–6.1
Expected volatility	45.8%	41.5%	44.3%–45.8%	38.5%–41.5%
Expected dividend yield	0.0%	0.0%	0.0%	0.0%

The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2023 and 2022 was $0.44 and $1.62 per share, respectively. Cash proceeds received upon the exercise of options were $2 and $304 during the nine months ended September 30, 2023 and 2022, respectively. The intrinsic value of stock options exercised during the nine months ended September 30, 2023 and 2022 was $1 and $342, respectively. The aggregate intrinsic value is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock.

Restricted Stock Units

A summary of RSU activity for the nine months ended September 30, 2023 is as follows:


	Number of Shares			Weighted- Average Grant Date Fair Value		Aggregate Fair Value
Unvested balance at January 1, 2023		5,505		$	4.49
Granted		10,273			1.01
Vested		(3,161	)		4.00	$	6,772
Forfeited		(256	)		5.02
Unvested balance at September 30, 2023		12,361		$	1.67

The Company withheld 1,633 and 456 shares of common stock in settlement of employee tax withholding obligations due upon the vesting of RSUs and PSUs during the nine months ended September 30, 2023 and 2022, respectively.

Performance-Based Stock Units

During the nine months ended September 30, 2022, the Company granted PSUs to certain employees that vest over a three-year period based on the achievement of performance goals and continued performance of services. All PSUs granted prior to the nine months ended September 30, 2022, and a portion of PSUs granted during the nine months ended September 30, 2022, consist solely of market-based vesting conditions, determined by the Company’s level of achievement of pre-established parameters relating to the performance of the Company’s stock price as set by the board of directors. Vesting for these market-based PSUs may occur at any time during the three-year period. The remaining portion of PSUs granted during the three months ended September 30, 2022 consisted of performance-based vesting conditions determined by the Company's achievement of performance targets with respect to a certain customer agreement. Vesting of these performance-based PSUs occurred during the nine months ended September 30, 2023 pursuant to Jerry Guo's retirement as discussed below. No PSUs were granted during the nine months ended September 30, 2023.

A summary of PSU activity for the nine months ended September 30, 2023 is as follows:


	Number of Shares			Weighted- Average Grant Date Fair Value		Aggregate Fair Value
Unvested balance at January 1, 2023		1,262		$	4.15
Granted		—			—
Vested		(1,238	)		3.48	$	2,102
Forfeited		—			—
Unvested balance at September 30, 2023		24		$	7.89

Compensation expense is based on the estimated value of the awards on the grant date, and is recognized over the period from the grant date through the expected vest dates of each vesting condition, both of which were estimated based on a Monte Carlo simulation model applying the following key assumptions:


		Nine months ended
		September 30, 2022
Risk-free interest rate		2.8%
Volatility		79.1%
Dividend yield		0.0%
Cost of equity		13.2%

Stock Appreciation Rights

Over time, the Company has granted SARs that allow the holder the right, upon exercise, to receive in cash the amount of the difference between the fair value of the Company’s common stock at the date of exercise and the price of the underlying common stock at the date of grant of each SAR. The SARs vested over a four-year period from the date of grant and expire ten years from the date of grant.

There was no SAR liability as of September 30, 2023 or December 31, 2022, as the exercise price of all outstanding SARs exceeded the fair value of the Company's common stock as of each applicable date. There were no grants, exercises or forfeitures during the nine-month period ending September 30, 2023.

Stock-Based Compensation Expense

Stock-based compensation expense related to stock options, RSUs, SARs and PSUs for the three and nine months ended September 30, 2023 and 2022 was classified in the condensed consolidated statements of operations and comprehensive loss as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Cost of revenue	$	25	$	31	$	61	$	92
Research and development expenses		690		824		1,942		2,113
Selling, general and administrative expenses		1,858		2,816		6,499		6,973
Total stock-based compensation	$	2,573	$	3,671	$	8,502	$	9,178

The Company recognized stock-based compensation expense for the three and nine months ended September 30, 2023 and 2022 in the condensed consolidated balance sheet as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Change in fair value of SAR liability	$	—	$	—	$	—	$	(159	)
Recognized as additional paid-in capital		2,573		3,671		8,502		9,337
Total stock-based compensation	$	2,573	$	3,671	$	8,502	$	9,178

As of September 30, 2023, there was $18,661 of unrecognized compensation cost related to outstanding stock options, RSUs, SARs and PSUs, which is expected to be recognized over a weighted-average period of 2.83 years.

Retirement of Jerry Guo

13. Net Loss per Share

The following potential common shares were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Options to purchase common stock		5,935		6,657		5,935		6,657
Unvested restricted stock units		12,361		5,568		12,361		5,568
Unvested performance-based stock units		24		1,262		24		1,262

14. Revenue from Contracts with Customers

Disaggregation of revenue

The Company disaggregates its revenue by product and service in the condensed consolidated statements of operations and comprehensive loss. Performance obligations related to product revenue are recognized at a point in time, while performance obligations related to service revenue are recognized over time. The Company also disaggregates its revenue based on geographic locations of its customers, as determined by the customer’s shipping address, summarized as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
North America:
United States	$	29,201	$	16,988	$	61,772	$	53,220
Canada		11,985		14,556		27,542		39,655
Total North America		41,186		31,544		89,314		92,875
Europe, Middle East and Africa:		6,564		10,936		17,992		22,102
Asia-Pacific:
Australia		7,417		14,448		33,258		51,740
Other		4,670		5,467		14,316		21,058
Total Asia-Pacific		12,087		19,915		47,574		72,798
Latin America		2,252		4,504		10,509		14,359
Total revenue(1)	$	62,089	$	66,899	$	165,389	$	202,134

(1) Other than the United States, Canada and Australia, no individual countries represented 10% or more of the Company’s total revenue for any of the periods presented.

The Company also disaggregates its revenue based on product lines as determined by the technical characteristics of the product. As telecommunication technologies, and the market for them evolves, the categorization of its products is subject to shifts that management monitors and reevaluates as necessary. Accordingly, beginning with the three months ended March 31, 2023, the Company updated its product line reporting. Revenue amounts for the three and nine months ended September 30, 2022 have been reclassified to conform with 2023 reporting.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Product revenue:
Access devices	$	31,750	$	33,612	$	83,642	$	100,365
Cable		8,226		20,573		33,871		56,448
Cloud		9,760		1,250		13,459		10,308
Total product revenue		49,736		55,435		130,972		167,121
Service revenue:
Access devices		1,363		1,006		3,442		4,637
Cable		9,226		9,670		26,408		27,622
Cloud		1,764		788		4,567		2,754
Total service revenue		12,353		11,464		34,417		35,013
Total revenue	$	62,089	$	66,899	$	165,389	$	202,134

Contract Balances

Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue when the Company satisfies its performance obligations, consistent with the Company's revenue recognition policy. During the three and nine months ended September 30, 2023, the Company recognized revenue of $3,902 and $14,507, respectively, that was included in deferred revenue in the condensed consolidated balance sheet as of December 31, 2022. During the three and nine months ended September 30, 2022, the Company recognized revenue of $1,726 and $13,706, respectively, that was included in deferred revenue in the condensed consolidated balance sheet as of December 31, 2021.

The Company receives payments from customers based upon contractual billing terms. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include amounts related to the Company’s contractual

right to consideration for both completed and partially completed performance obligations that may not have been invoiced. As of September 30, 2023 and December 31, 2022, the Company included contract assets of $1,621 and $2,674, respectively, in accounts receivable, net in the condensed consolidated balance sheets.

Transaction Price Allocated to the Remaining Performance Obligations

As of September 30, 2023, the aggregate remaining amount of revenue expected to be recognized related to unsatisfied or partially unsatisfied performance obligations was $46,220, which consisted of deferred revenue. The Company expects approximately 91% of this amount to be recognized in the next twelve months with the remaining amount to be recognized over the next two to five years.

15. Segment Information

The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the Company’s chief operating decision maker, or decision-making group, in deciding how to allocate resources and assess performance. The Company has determined that its chief operating decision maker is its Chief Executive Officer. The Company’s chief operating decision maker reviews the Company’s financial information on a consolidated basis for purposes of allocating resources and assessing financial performance. Since the Company operates as one operating segment, all required financial segment information can be found in these condensed consolidated financial statements.

The Company’s property and equipment, net by location was as follows:


	September 30, 2023		December 31, 2022
China	$	2,673	$	3,017
United States		2,572		14,679
Australia		682		1,054
Other		500		768
Total property and equipment, net	$	6,427	$	19,518

16. Related Parties

Employment of Rongke Xie

Rongke Xie, who serves as General Manager of Guangzhou Casa Communication Technology LTD (“Casa China”), a subsidiary of the Company, is the sister of Lucy Xie, who served as the Company’s Senior Vice President of Operations until her retirement on December 31, 2022, and as a member of the Company’s board of directors until May 18, 2023. Rongke Xie is also the sister-in-law of Jerry Guo, who served as the Company's President and Chief Executive Officer until his retirement on March 17, 2023, and remains serving as a member of the Company's board of directors. Casa China paid Rongke Xie $180 and $181 in total compensation during the nine months ended September 30, 2023 and 2022, respectively, for her services as an employee.

To date, the Company has granted to Rongke Xie 165 RSUs, which vest over four-year periods. The grant-date fair value of the awards totaled $617, which is recorded as stock-based compensation expense over the vesting period of the awards. During the three months ended September 30, 2023 and 2022, the Company recognized selling, general and administrative expenses of $25 and $26 related to these awards. During the nine months ended September 30, 2023 and 2022, the Company recognized selling, general and administrative expenses of $79 and $87 related to these awards.

Transactions Involving Verizon Communications Inc. and its Affiliates

As a result of the Company's SPA with Verizon Ventures LLC on April 18, 2022 (see Note 11, Stockholders Equity), Verizon Communications Inc. and its subsidiaries (“Verizon and Affiliates”) collectively became a principal stockholder of the Company through its ownership of common stock. Verizon and Affiliates are customers of the Company.

During the three and nine months ended September 30, 2023, the Company recognized revenue of $16,037 and $23,321, respectively, from transactions with Verizon and Affiliates, and amounts received in cash resulting from revenue transactions with Verizon and Affiliates during the nine months ended September 30, 2023 totaled $36,924. During the three and nine

months ended September 30, 2022, the Company recognized revenue of $3,041 and $13,591 from transactions with Verizon and Affiliates during which a related party relationship existed, and amounts received in cash resulting from revenue transactions with Verizon and Affiliates during the six months ended September 30, 2022 totaled $27,203. As of September 30, 2023 and December 31, 2022, amounts due from Verizon and Affiliates totaled $1,289 and $6,044, respectively, and were included in accounts receivable, net in the condensed consolidated balance sheet. As of September 30, 2023 and December 31, 2022, revenue from transactions that did not meet the criteria for recognition totaling $27,200 and $18,094, respectively, with Verizon and Affiliates were included in deferred revenue in the condensed consolidated balance sheet.

17. Leases

The Company leases manufacturing, warehouse and office space in the United States, Ireland, China, Hong Kong, Spain and Australia under non-cancelable operating leases with expiration dates through 2028, as well as various equipment leases. The leases have remaining lease terms of 1 year to 5 years, some of which contain options to extend the leases for up to 3 additional years and some of which include options to terminate the leases within 1 year. The lease agreements contain lease and non-lease components, which are generally accounted for together.

After the adoption of ASC 842, the Company determines if an arrangement is a lease at inception. Operating leases are included in the operating lease right-of-use, (“ROU”), assets and the short-term and long-term lease liabilities on the consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Pursuant to the terms of the lease agreement for the Company’s Australia office, the Company obtained six standby letters of credit in the amount of approximately $725 and $2,100 as security on the lease obligation, as of September 30, 2023 and December 31, 2022, respectively. The letters of credit are classified as restricted cash in the accompanying condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022.

The components of lease expense were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Operating lease cost	$	531	$	556	$	1,637	$	1,753
Short-term lease cost		2		2		4		2
Variable lease cost		63		69		191		217
Total lease cost	$	596	$	627	$	1,832	$	1,972

Supplemental cash flow information related to leases was as follows:


	Nine Months Ended		Nine Months Ended
	September 30, 2023		September 30, 2022
Cash paid for operating leases included in cash flows from operating activities	$	1,564	$	1,583
Right-of-use assets obtained in exchange for new operating leases		55		507

Supplemental balance sheet information related to leases was as follows:


	September 30, 2023	December 31, 2022
Weighted average remaining lease term for operating leases	3.24 years	3.58 years
Weighted average discount rate for operating leases	4.2%	4.0%

Maturities of operating lease liabilities were as follows:


Year Ending December 31,
2023	$	530
2024		1,296
2025		931
2026		826
2027		559
Thereafter		2
Total future minimum lease payments		4,144
Less: amounts representing interest		(282	)
Total lease liabilities		3,862
Less: current operating lease liability		(1,446	)
Long term operating lease liability	$	2,416

18. Commitments and Contingencies

Indemnification

The Company has, in the ordinary course of business, agreed to defend and indemnify certain customers and partners against third-party claims asserting (i) infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and (ii) certain other harms caused by the acts or omissions of the Company.

As permitted under Delaware law, the Company indemnifies its officers, directors and employees for certain events or occurrences that happen by reason of their relationship with or position held at the Company.

As of September 30, 2023 and December 31, 2022 the Company accrued $579 and $1,487, respectively, as a minimum estimated liability related to ongoing indemnification claims. As of September 30, 2023 and December 31, 2022, no additional material claims were outstanding where a contingent loss was considered to be probable or reasonably estimable. The Company does not expect additional significant claims related to these indemnification obligations and, consequently, concluded that the fair value of any additional obligations is negligible.

Litigation

From time to time, the Company is a party to various litigation matters and subject to claims that arise in the ordinary course of business including, for example, patent infringement lawsuits by non-practicing entities. In addition, third parties may from time to time assert claims against the Company in the form of letters and other communications. The Company is not presently subject to any pending or threatened litigation that it believes, if determined adversely to the Company, individually, or taken together, would reasonably be expected to have a material adverse effect on its business or financial results.

Other

As described in Note 6, Accrued Expenses and Other Current Liabilities, the Company provides industry-standard product warranties to its customers and is thus inherently subject to loss contingencies that include warranty claims which may arise in the ordinary course of business.

On July 21, 2022, the Company received written notification from a significant customer of one of its international subsidiaries, of alleged costs incurred and expected to be incurred by that customer with respect to an ongoing warranty matter relating to field replacements of failed units for one particular product, which failure was attributable to an unauthorized part substitution in 2019 by a supplier to the subsidiary.

On December 23, 2022, the Company executed a settlement deed with the customer, whereby the Company agreed to, among other things, a settlement amount of 20,000 Australian dollars, to be paid in four equal annual installments, the first of which was paid upon execution of the settlement deed in the amount of 5,000 Australian dollars, or $3,398. As of September 30, 2023, the remaining accrued expense balance, representing the estimated net present value of the remaining payments, plus the estimated cost of other non-monetary obligations under the settlement deed was $9,300, as shown in Note 6, Accrued Expenses

and Other Current Liabilities.

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 September 30, 2022 and September 30, 2021, please refer to our Quarterly Report on Form 10-Q filed with the SEC on November 9, 2022.

Overview

With our physical, virtual and cloud-native 4G and 5G broadband and customer premise networking equipment solutions, we help our communication service providers, or 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 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

The recent rise in inflation 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. Continued 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 and we do not believe we have exposure to loss as a result of the failure of either institution, we have historically held our cash in a limited number of financial institutions.

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 have seen the effects subside in part during 2023, we continue to work with our supply chain, contract manufacturers, logistics partners and customers to minimize the extent of such impacts and will continue to actively monitor supply chain developments. We cannot predict if or when such effects will recur or worsen, which in such a case, could 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. We are not able to estimate the extent of these impacts nor predict whether our efforts to minimize or contain them would be successful.

Due to the above circumstances, our results of operations for the three and nine months ended September 30, 2023 and 2022 are not necessarily indicative of the results to be expected in future years.

Recent Developments

On September 26, 2023, we received notice from the Listing Qualifications Staff of Nasdaq indicating that, based upon the closing bid price of the Common Stock for the prior 30 consecutive business days, we were not in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq, as set forth in Nasdaq Listing Rule 5550(a)(2), or the Bid Price Rule. The Notification Letter has no immediate effect on the listing or trading of our common stock on The Nasdaq Global Select Market and, at this time, our common stock will continue to trade on The Nasdaq Global Select Market under the symbol “CASA."

We have 180 days from September 26, 2023, or through March 25, 2024, to regain compliance with the Bid Price Rule. To regain compliance, the bid price of our common stock must have a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days. We intend to monitor the closing bid price of our common stock and may, if appropriate, consider implementing available options, including, but not limited to, implementing a reverse stock split of our outstanding securities to regain compliance with the minimum bid price requirement under the Nasdaq Listing Rules.

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 September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(in thousands)						(in thousands)
Revenue:
Product	$	49,736		$	55,435		$	130,972		$	167,121
Service		12,353			11,464			34,417			35,013
Total revenue		62,089			66,899			165,389			202,134
Cost of revenue(1):
Product		35,131			38,421			94,155			117,531
Service		1,067			1,195			3,372			4,006
Warranty settlement provision		—			12,907			—			12,907
Total cost of revenue		36,198			52,523			97,527			134,444
Gross profit		25,891			14,376			67,862			67,690
Operating expenses:
Research and development(1)		17,121			22,059			57,947			67,545
Selling, general and administrative(1)		27,174			22,442			72,616			66,741
Total operating expenses		44,295			44,501			130,563			134,286
Loss from operations		(18,404	)		(30,125	)		(62,701	)		(66,596	)
Other expense, net		(6,418	)		(2,300	)		(43,607	)		(8,778	)
Loss before provision for (benefit from) income taxes		(24,822	)		(32,425	)		(106,308	)		(75,374	)
Provision for (benefit from) income taxes		796			(1,261	)		2,104			5,071
Net loss	$	(25,618	)	$	(31,164	)	$	(108,412	)	$	(80,445	)

(1) Includes stock-based compensation expense related to stock options; SARs; RSUs; and PSUs, granted to employees, directors and non-employee consultants as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)				(in thousands)
Cost of revenue	$	25	$	31	$	61	$	92
Research and development expense		690		824		1,942		2,113
Selling, general and administrative expense		1,858		2,816		6,499		6,973
Total stock-based compensation expense	$	2,573	$	3,671	$	8,502	$	9,178


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(as a percentage of total revenue)						(as a percentage of total revenue)
Revenue:
Product		80.1	%		82.9	%		79.2	%		82.7	%
Service		19.9			17.1			20.8			17.3
Total revenue		100.0			100.0			100.0			100.0
Cost of revenue:
Product		56.6			57.4			56.9			58.1
Service		1.7			1.8			2.0			2.0
Warranty settlement provision		—			19.3			—			6.4
Total cost of revenue		58.3			78.5			59.0			66.5
Gross profit		41.7			21.5			41.0			33.5
Operating expenses:
Research and development		27.6			33.0			35.0			33.4
Selling, general and administrative		43.8			33.5			43.9			33.0
Total operating expenses		71.3			66.5			78.9			66.4
Loss from operations		(29.6	)		(45.0	)		(37.9	)		(32.9	)
Other expense, net		(10.3	)		(3.4	)		(26.4	)		(4.3	)
Loss before provision for (benefit from) income taxes		(40.0	)		(48.5	)		(64.3	)		(37.3	)
Provision for (benefit from) income taxes		1.3			(1.9	)		1.3			2.5
Net loss		(41.3	)%		(46.6	)%		(65.5	)%		(39.8	)%

Percentages in the table above are based on actual values. As a result, some totals may not sum due to rounding.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022


	Three Months Ended September 30,
	2023					2022					Change
	Amount		% of Total			Amount		% of Total			Amount			%
	(dollars in thousands)
Revenue:
Product	$	49,736		80.1	%	$	55,435		82.9	%	$	(5,699	)		(10.3	)%
Service		12,353		19.9	%		11,464		17.1	%		889			7.8	%
Total revenue	$	62,089		100.0	%	$	66,899		100.0	%	$	(4,810	)		(7.2	)%
Revenue by geographic region:
North America	$	41,186		66.3	%	$	31,544		47.2	%	$	9,642			30.6	%
Europe, Middle East and Africa		6,564		10.6	%		10,936		16.3	%		(4,372	)		(40.0	)%
Asia-Pacific		12,087		19.5	%		19,915		29.8	%		(7,828	)		(39.3	)%
Latin America		2,252		3.6	%		4,504		6.7	%		(2,252	)		(50.0	)%
Total revenue	$	62,089		100.0	%	$	66,899		100.0	%	$	(4,810	)		(7.2	)%


	Three Months Ended September 30,				Change
	2023		2022		Amount			%
	(dollars in thousands)
Product revenue:
Access devices	$	31,750	$	33,612	$	(1,862	)		(5.5	)%
Cable		8,226		20,573		(12,347	)		(60.0	)%
Cloud		9,760		1,250		8,510			680.8	%
Total product revenue		49,736		55,435		(5,699	)		(10.3	)%
Service revenue:
Access devices		1,363		1,006		357			35.5	%
Cable		9,226		9,670		(444	)		(4.6	)%
Cloud		1,764		788		976			123.9	%
Total service revenue		12,353		11,464		889			7.8	%
Total revenue	$	62,089	$	66,899	$	(4,810	)		(7.2	)%

Product revenue decreased during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 due to reduced demand and timing of orders from various Tier 1 customers, particularly in our cable and access device markets. Cloud revenue increased due to timing of acceptance from a Tier 1 customer necessary for revenue recognition of software licenses.

Service revenue increased during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 due to increased professional services with a Tier 1 customer, partially offset by lower cable support service revenue that is highly correlated to lower cable product revenues in the same period.

Cost of Revenue and Gross Profit


	Three Months Ended September 30,				Change
	2023		2022		Amount			%
	(dollars in thousands)
Cost of revenue:
Product	$	35,131	$	38,421	$	(3,290	)		(8.6	)%
Service		1,067		1,195		(128	)		(10.7	)%
Warranty settlement provision		—		12,907		(12,907	)		(100.0	)%
Total cost of revenue	$	36,198	$	52,523	$	(16,325	)		(31.1	)%


	Three Months Ended September 30,
	2023					2022						Change
	Amount		Gross Margin			Amount			Gross Margin			Amount			Gross Margin (bps)
	(dollars in thousands)
Gross profit:
Product	$	14,605		29.4	%	$	17,014			30.7	%	$	(2,409	)		(130	)
Service		11,286		91.4	%		10,269			89.6	%		1,017			180
Warranty settlement provision		—		—			(12,907	)		(19.3	)%		12,907			1,930
Total gross profit	$	25,891		41.7	%	$	14,376			21.5	%	$	11,515			2,020

Cost of product revenue decreased in the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 due to a decrease in cable and access devices revenue in the same period. Cost of service revenue in the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, decreased due to reductions in labor costs.

Cost of revenue also included a non-recurring warranty settlement provision of $12.9 million, which represents a 19.3% gross margin impact, for the three months ended September 30, 2022, which was not incurred in the same period for 2023.

Please refer to Note 18, Commitments and Contingencies, of the accompanying condensed consolidated financial statements for more discussion regarding this provision.

Product gross margin decreased during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 due to unfavorable shifts in product revenue mix in cable and access devices, partially offset by an increase in license revenue with a Tier 1 customer in 2023. Service gross margin increased during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, due to increased cloud professional service revenue with a Tier 1 customer in 2023, combined with reductions in direct labor costs.

Research and Development


	Three Months Ended September 30,						Change
	2023			2022			Amount			%
	(dollars in thousands)
Research and development	$	17,121		$	22,059		$	(4,938	)		(22.4	)%
Percentage of revenue		27.6	%		33.0	%

The decrease in research and development expense during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily due to decreased personnel costs of $3.6 million, primarily driven by decreased salaries, payroll taxes, benefits and stock-based compensation of $3.4 million and decreased bonus of $0.2 million. In addition, there was a decrease in purchases of research and development materials of $1.1 million and a decrease in depreciation of $0.3 million.

Selling, General and Administrative


	Three Months Ended September 30,						Change
	2023			2022			Amount		%
	(dollars in thousands)
Selling, general and administrative	$	27,174		$	22,442		$	4,732		21.1	%
Percentage of revenue		43.8	%		33.5	%

The increase in selling, general and administrative expense during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily due to a loss on assets held for sale of $4.7 million. In addition, there was an increase in professional services of $0.8 million, offset by decreased trade show expenses of $0.6 million and decreased personnel costs of $0.1 million, primarily driven by decreased stock-based compensation of $1.0 million, decreased salaries, payroll taxes and benefits of $0.7 million, partially offset by increased bonus expense of $1.1 million, and increased commissions of $0.5 million.

Other Expense, Net


	Three Months Ended September 30,						Change
	2023			2022			Amount			%
	(dollars in thousands)
Other expense, net	$	(6,418	)	$	(2,300	)	$	(4,118	)		179.0	%
Percentage of revenue		(10.3	)%		(3.4	)%

Other expense increased primarily due to an increase in interest expense of $6.0 million in the three months ended September 30, 2023 due to increased interest rates applied to our outstanding debt as well as increased amortization of the debt discount related to our refinanced debt and foreign exchange losses of $1.7 million. These increases in other expense were partially offset by a gain on the change in the warrant liability fair value of $3.8 million.

Provision for (Benefit from) Income Taxes


	Three Months Ended September 30,					Change
	2023		2022			Amount		%
	(dollars in thousands)
Provision for (benefit from) income taxes	$	796	$	(1,261	)	$	2,057		(163.1	)%

The change in the provision for (benefit from) income taxes for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to the period over period changes in our valuation allowance against deferred tax assets and the impact of changes in our forecasted profitability and the jurisdictional mix of earnings.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022


	Nine Months Ended September 30,
	2023					2022					Change
	Amount		% of Total			Amount		% of Total			Amount			%
	(dollars in thousands)
Revenue:
Product	$	130,972		79.2	%	$	167,121		82.7	%	$	(36,149	)		(21.6	)%
Service		34,417		20.8	%		35,013		17.3	%		(596	)		(1.7	)%
Total revenue	$	165,389		100.0	%	$	202,134		100.0	%	$	(36,745	)		(18.2	)%
Revenue by geographic region:
North America	$	89,314		53.9	%	$	92,875		46.0	%	$	(3,561	)		(3.8	)%
Europe, Middle East and Africa		17,992		10.9	%		22,102		10.9	%		(4,110	)		(18.6	)%
Asia-Pacific		47,574		28.8	%		72,798		36.0	%		(25,224	)		(34.6	)%
Latin America		10,509		6.4	%		14,359		7.1	%		(3,850	)		(26.8	)%
Total revenue	$	165,389		100.0	%	$	202,134		100.0	%	$	(36,745	)		(18.2	)%


	Nine Months Ended September 30,				Change
	2023		2022		Amount			%
	(dollars in thousands)
Product revenue:
Access devices	$	83,642	$	100,365	$	(16,723	)		(16.7	)%
Cable		33,871		56,448		(22,577	)		(40.0	)%
Cloud		13,459		10,308		3,151			30.6	%
Total product revenue		130,972		167,121		(36,149	)		(21.6	)%
Service revenue:
Access devices		3,442		4,637		(1,195	)		(25.8	)%
Cable		26,408		27,622		(1,214	)		(4.4	)%
Cloud		4,567		2,754		1,813			65.8	%
Total service revenue		34,417		35,013		(596	)		(1.7	)%
Total revenue	$	165,389	$	202,134	$	(36,745	)		(18.2	)%

Product revenues decreased during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 due to reduced demand and timing of orders from various Tier 1 customers in the cable and access device markets, partially offset by increased cloud revenue from a Tier 1 customer.

Service revenues decreased slightly during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 due to reduced professional services revenue in the access devices market and lower support services in the cable market, partially offset by an increase in professional services revenue from a Tier 1 customer in the cloud market.

Cost of Revenue and Gross Profit


	Nine Months Ended September 30,				Change
	2023		2022		Amount			%
	(dollars in thousands)
Cost of revenue:
Product	$	94,155	$	117,531	$	(23,376	)		(19.9	)%
Service		3,372		4,006		(634	)		(15.8	)%
Warranty settlement provision		—		12,907		(12,907	)		(100.0	)%
Total cost of revenue	$	97,527	$	134,444	$	(36,917	)		(27.5	)%


	Nine Months Ended September 30,
	2023					2022						Change
	Amount		Gross Margin			Amount			Gross Margin			Amount			Gross Margin (bps)
	(dollars in thousands)
Gross profit:
Product	$	36,817		28.1	%	$	49,590			29.7	%	$	(12,773	)		(160	)
Service		31,045		90.2	%		31,007			88.6	%		38			160
Warranty settlement provision		—		—			(12,907	)		(6.4	)%		12,907			640
Total gross profit	$	67,862		41.0	%	$	67,690			33.5	%	$	172			750

Cost of product revenue decreased in the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 due to a decrease in cable and access devices revenue in the same period. Cost of service revenue in the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, decreased due to reductions in labor costs.

Cost of revenue also included a non-recurring warranty settlement provision of $12.9 million, which represents a 6.4% gross margin impact, for the nine months ended September 30, 2022, which was not incurred in the same period for 2023. Please refer to Note 18, Commitments and Contingencies, of the accompanying condensed consolidated financial statements for more discussion regarding this provision.

Product gross margin decreased during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to unfavorable shifts in product revenue mix in cable and access devices, partially offset by an increase in license revenue with a Tier 1 customer in 2023. Service gross margin increased during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, due to increased cloud professional service revenue with a Tier 1 customer in 2023, combined with reductions in direct labor costs.

Research and Development


	Nine Months Ended September 30,						Change
	2023			2022			Amount			%
	(dollars in thousands)
Research and development	$	57,947		$	67,545		$	(9,598	)		(14.2	)%
Percentage of revenue		35.0	%		33.4	%

The decrease in research and development expense during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily due to decreased personnel costs of $6.8 million, driven by decreased salaries, payroll taxes and benefits of $6.6 million due to an overall decrease in headcount due to the reduction in force and decreased bonus expense of $1.9 million, partially offset by an increase in severance costs related to the April 2023 reduction in force of $1.8 million. In addition, there was a decrease in purchases of research and development materials of $1.8 million and a decrease in depreciation of $1.0 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Selling, General and Administrative


	Nine Months Ended September 30,						Change
	2023			2022			Amount		%
	(dollars in thousands)
Selling, general and administrative	$	72,616		$	66,741		$	5,875		8.8	%
Percentage of revenue		43.9	%		33.0	%

The increase in selling, general and administrative expense during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to expenses incurred in connection with the retirement of Jerry Guo, our 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 nine months ended September 30, 2023., consisting of cash and stock-based compensation expenses of $2.2 million and $1.7 million, respectively. In addition, there was a loss on assets held for sale for $4.7 million, an increase in professional services costs of $3.1 million, and $0.4 million in factoring expense. These increases were offset by decreased bad debt expense of $0.7 million, decreased depreciation and amortization of $0.7 million, and decreased trade-show expense of $0.4 million. Excluding the retirement expenses above, personnel costs decreased by $4.3 million in the period, caused by decreased salaries and benefits of $3.1 million as a result of lower headcount, decreased commissions of $1.6 million, decreased stock-based compensation of $2.2 million, partially offset by increased bonus expense of $2.4 million and increased severance costs of $0.2 million.

Other Expense, Net


	Nine Months Ended September 30,						Change
	2023			2022			Amount			%
	(dollars in thousands)
Other expense, net	$	(43,607	)	$	(8,778	)	$	(34,829	)		396.8	%
Percentage of revenue		(26.4	)%		(4.3	)%

Other expense increased during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 primarily due to a $28.8 million loss on debt extinguishment related to our debt refinancing on June 15, 2023. The increase was also due to an increase in interest expense of $9.6 million as a result of increased interest rates applied to our outstanding debt as well as increased amortization of the debt discount related to our refinanced debt and foreign exchange losses of $1.9 million. These increases were partially offset by an increase in interest income of $1.3 million due to increased interest rates, a gain on the change in the warrant liability fair value of $3.8 million and research and development tax credits received of $0.4 million during the nine months ended September 30, 2023.

Provision for Income Taxes


	Nine Months Ended September 30,				Change
	2023		2022		Amount			%
	(dollars in thousands)
Provision for income taxes	$	2,104	$	5,071	$	(2,967	)		(58.5	)%

The change in the provision for income taxes for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to the period over period changes in the our valuation allowance against deferred tax assets 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 September 30, 2023 and December 31, 2022 and our cash flows for the nine months ended September 30, 2023 and 2022:


	September 30, 2023		December 31, 2022
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	47,925	$	126,312
Working capital		55,252		(32,133	)


	Nine Months Ended September 30,
	2023			2022
	(in thousands)
Consolidated Cash Flow Data:
Net cash (used in) provided by operating activities	$	(18,597	)	$	11,663
Net cash used in investing activities		(1,919	)		(3,325	)
Net cash (used in) provided by financing activities		(59,043	)		34,157

As of September 30, 2023, we had cash, cash equivalents and restricted cash of $49.7 million and net accounts receivable of $37.4 million.

On August 8, 2023, we entered into an equity distribution agreement, which established an at-the-market equity program (the “2023 ATM Program”). Under the 2023 ATM Program, we may offer and sell shares of our common stock having an aggregate sales price of up to $10.0 million, in amounts and at times determined by management. During the three months ended September 30, 2023, we issued no shares under the 2023 ATM Program, leaving shares of common stock having an aggregate offering price of up to $10.0 million available for issuance under the 2023 ATM Program. We currently do not have plans to use our ATM program to issue any shares.

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 to the extent we grow our business by enhancing our existing products and introducing new products.

During the nine months ended September 30, 2023, cash used in operating activities was $18.6 million, primarily resulting from our net loss of $108.4 million, partially offset by net cash provided by changes in our operating assets and liabilities of $25.1 million and net non-cash adjustments of $64.6 million, including $28.8 million for loss on extinguishment of debt and $10.8 million of excess and obsolete inventory reserves. Net cash provided by changes in our operating assets and liabilities during the nine months ended September 30, 2023 was primarily due to a $37.0 million decrease in accounts receivable due to collections during the period; a $9.4 million increase in deferred revenue due to the timing of revenue recognition; and a $3.3 million decrease in prepaid income taxes. These sources of cash were partially offset by a $7.4 million decrease in accounts payable due to timing of vendor payments; a $6.3 million increase in inventory; a $3.9 million decrease in accrued expenses due to the timing of certain accrual payments; a $3.4 million decrease in accrued income taxes; a $2.0 million increase in prepaid expenses; and a $1.6 million decrease in operating lease liability.

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 nine months ended September 30, 2023 was $1.9 million, consisting of purchases of property and equipment and software licenses.

Financing Activities

Net cash used in financing activities during the nine months ended September 30, 2023 was $59.0 million, which was mainly due to debt principal repayments of $42.5 million, payments for deferred financing fees related to our loan refinancing of $13.4 million and employee taxes paid related to the net share settlement of equity awards of $3.2 million, primarily due to RSUs that vested during the nine months ended September 30, 2023.

Credit Facilities

On December 20, 2016, we entered into a credit agreement, or the Original 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 loans, or the Original Term Loans, under our December 20, 2026 credit facility of $300.0 million; and

•

a revolving credit facility of up to $25.0 million in revolving credit loans and letters of credit.

On June 15, 2023, the Borrower and the Lenders entered into various agreements to effectively exchange $218.8 million of the Original Term Loans for loans of an equal principal amount in the form of the Superpriority Term Loans, under the Superpriority Credit Agreement, dated June 15, 2023, with JPMorgan Chase Bank, N.A., as administrative agent, Delaware Trust Company, as collateral agent, and the lenders party thereto, whereby the maturity date would be extended to December 20, 2027 in exchange for us paying down $40,000 of our exchanged Original Term Loans (as part of an early principal repayment), providing certain penny warrants, or the Warrants, to the lenders and paying certain in-kind fees, amongst other changes, which we collectively refer to as the Exchange.

As of September 30, 2023 and December 31, 2022, we had borrowings of $192.3 million and $226.0 million, respectively, outstanding under the Original Term Loans and Superpriority Term Loans. On December 20, 2021, the revolving credit facility matured.

The Exchange was deemed to be an exchange of debt with substantially different terms under ASC Subtopic 470-50, “Modifications and Extinguishments,” and we recorded a loss on extinguishment of debt of approximately $29.0 million in the condensed consolidated statement of operations for the nine months ended September 30, 2023. In applying extinguishment accounting, we recorded the Superpriority Term Loans at fair value. Therefore, the then-current carrying value of the loans approximates fair value as of June 15, 2023.

The Superpriority Term Loans are expected to mature on December 20, 2027 (subject to a springing maturity on December 20, 2025 if, unless otherwise waived by holders collectively owning or controlling at least 75% of the Superpriority Term Loans on the date of determination, (x)(1) the Total Net First Lien Leverage Ratio (as defined in the Superpriority Credit Agreement) is greater than 1.00:1.00, or (2) the Total Net Leverage Ratio (as defined in the Superpriority Credit Agreement) is greater than 1.50:1.00, in each case, as of September 30, 2025 or (y) a Default (as defined in the Superpriority Credit Agreement) or Event of Default (as defined in the Superpriority Credit Agreement) has occurred and is continuing under the Superpriority Credit Agreement as of December 20, 2025), unless earlier repaid or accelerated. The Superpriority Term Loans

will amortize in equal quarterly installments in the aggregate annual amount equal to 1.0% of the principal amount of the Superpriority Term Loans outstanding on the date of the Term Loan Exchange (after giving effect to the closing date prepayment).

The Superpriority Term Loans are subject to mandatory prepayments, including 75% of excess cash flow, certain non-ordinary course asset dispositions, the issuance of certain equity interests by us and the incurrence of certain indebtedness by us and our subsidiaries. Such prepayments shall be subject to the exit fee described above (to the extent otherwise then applicable). The Superpriority Credit Agreement contains customary representations and warranties, conditions, affirmative and negative covenants, a liquidity-based financial covenant, measured monthly and with special measurements in November and December of 2023 prior to the maturity date of the Original Term Loans having a principal balance of $5,019 on December 20, 2023, events of default and indemnification obligations. As of September 30, 2023, we were in compliance with the terms of the Superpriority Credit Agreement.

As a result of the Exchange, $5.0 million principal remains under the Original Term Loans. We, certain lenders party to the Original Credit Agreement and JPMorgan Chase Bank, N.A., as agent, entered into Amendment No. 1 which, among other things, permitted the transaction contemplated by the Exchange and eliminated all mandatory prepayments (other than at maturity) and representations and warranties and most affirmative and negative covenants and events of default previously applicable to the Original Term Loans. The interest rates applicable to the Original Term Loans remain unchanged. Borrowings under the Original Term Loans bear interest at a floating rate, which can be either a synthetic Eurodollar rate plus an applicable margin or, at our option, a base rate (defined as the highest of (x) the JPMorgan Chase Bank, 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 Original Term Loans 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 Original Term Loans 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 September 30, 2023, the interest rate on the Original Term Loans was 9.65% per annum, which was based on a three-month Eurodollar rate of 5.65% per annum plus the applicable margin of 4.0% per annum for Eurodollar rate loans. As of December 31, 2022, the interest rate on the Original Term Loans 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 Original Term Loans 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.

The Original Term Loans are secured by, among other things, a second priority security interest, subject to permitted liens, in substantially all of our assets and a pledge of certain of the stock of certain of our subsidiaries, in each case subject to specified exceptions. As of September 30, 2023 and December 31, 2022, we were in compliance with the terms of the Original Term Loans.

Restructuring

In April 2023, we reduced our current workforce by 134 employees, representing approximately 13% of our total workforce.


	Nine Months Ended September 30,
	2023
Research and development expenses	$	1,826
Selling, general and administrative expenses		188
Cost of revenue		137
Total	$	2,151

The reduction in workforce is complete as of September 30, 2023. Together with certain other actions undertaken by management, the expected net reduction in operating expenses for the remainder of 2023 is approximately $5.1 million.

Tax Cuts and Jobs Act

Of our total cash and cash equivalents of $47.9 million as of September 30, 2023, $24.5 million was held by our foreign subsidiaries. As of September 30, 2023, the Company has foreign subsidiary unremitted earnings of $38,727, the majority of which can be distributed in a tax-free manner. The Company has recorded a deferred tax liability related to withholding taxes of $1,514 associated with its undistributed foreign subsidiary earnings.

The Tax Cuts and Jobs Act of 2017, or 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 nine months ended September 30, 2023, we did not repurchase any shares. During the nine months ended September 30, 2022, we repurchased approximately 0.2 million shares for a total cost of approximately $1.2 million. As of September 30, 2023, approximately $60.2 million remained authorized for repurchases of our common stock under the stock repurchase program. As part of the debt refinancing closed in June of 2023, we are now prohibited from using cash to repurchase common stock.

Contractual Obligations, Commitments and Contingencies

Our material contractual obligations include our term loan, operating leases and purchase agreements with our contract manufacturers and suppliers. Other than the refinancing of our term loan, as discussed above, 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.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our 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 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 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 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.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are a party to various litigation matters and subject to claims that arise in the ordinary course of business, including, for example, patent infringement lawsuits by non-practicing entities. In addition, third parties may from time to time assert claims against us in the form of letters and other communications.

Item 1A. Risk Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Part I, Item 1A Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, or the 2022 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. As a supplement to the risk factors identified in the 2022 10-K, below we have updated several others for recent changes in our business. Other than as provided below, there have been no material changes from the risk factors previously disclosed in the 2022 10-K.

If we are unable to hire, retain, train and motivate qualified personnel and senior management, our business, financial condition, results of operations and prospects could be adversely affected.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel, particularly software engineering and sales personnel. Competition for highly skilled personnel is often intense, particularly in the greater Boston region where we are headquartered, and we may not be able to attract and retain the highly skilled employees that we need to support our business. Many of the companies with which we compete for experienced personnel have greater resources than we have to provide more attractive compensation packages and other amenities. Research and development personnel are aggressively recruited by startup and growth companies, which are especially active in many of the technical areas and geographic regions in which we conduct product development. In addition, in making employment decisions, particularly in the high-technology industry, job candidates often consider the value of the stock-based compensation they are to receive in connection with their employment. Declines in the market price of our stock could adversely affect our ability to attract, motivate or retain key employees. If we are unable to attract or retain qualified personnel, or if there are delays in hiring required personnel, our business, financial condition, results of operations and prospects could be materially adversely affected.

Also, to the extent we hire personnel from competitors, or from certain customers or other third parties whose employees we have agreed not to solicit, we may be subject to allegations that such personnel have been improperly solicited, that such personnel have divulged proprietary or other confidential information, or that former employers own certain inventions or other work product. Such claims could result in litigation.

Our future performance also depends on the continued services and continuing contributions of our senior management to execute our business plan and to identify and pursue new opportunities and product innovations. Our employment arrangements with our employees do not require that they continue to work for us for any specified period, and therefore, they could terminate their employment with us at any time. Further, the loss of members of our senior management team, sales and marketing team or engineering team, or any difficulty attracting or retaining other highly qualified personnel in the future, could significantly delay or prevent the achievement of our development and strategic objectives, which could materially adversely affect our business, financial condition, results of operations and prospects.

On March 14, 2023, Jerry Guo announced his retirement from his positions as president and chief executive officer, and our board of directors appointed Edward Durkin, our chief financial officer, as interim chief executive officer. On July 12, 2023, the Company announced the appointment of Michael Glickman as our new president and chief executive officer, effective August 1, 2023. Leadership transitions can be inherently difficult to manage, and an inadequate transition to a new chief executive officer may cause disruption, adversely affecting our financial performance and ability to meet operational goals and strategic plans. Management turnover also inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution. If we are unable to attract and retain qualified management personnel, our business could suffer.

We do not maintain “key person” life insurance on our officers, directors or key employees.

We may not meet the continued listing requirements of Nasdaq, which could result in a delisting of our common stock.

As previously reported, on September 26, 2023, we received a letter from Nasdaq indicating that, based upon the closing bid price of our common stock for the 30 consecutive business day period between August 8, 2023, through September 25, 2023, we did not meet the minimum bid price of $1.00 per share required for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(a)(2), or the Minimum Bid Price Requirement. The letter also indicated that we will be provided with a compliance period of 180 calendar days until March 25, 2024, or the Compliance Period, in which to regain compliance pursuant to the Minimum Bid Price Requirement. In order to regain compliance with the Minimum Bid Price Requirement, our common stock must maintain a minimum closing bid price of $1.00 for at least ten consecutive business days during the Compliance Period. In the event we do not regain compliance by the end of the Compliance Period, we may be eligible for additional time to regain compliance. To qualify, we will be required to meet the continued listing requirement for the market value of our publicly held shares and all other initial listing standards for Nasdaq, with the exception of the Minimum Bid Price Requirement, and will need to provide written notice of our intention to cure the deficiency during the second compliance period. If we meet these requirements, we may be granted an additional 180 calendar days to regain compliance. However, if it appears to Nasdaq that we will be unable to cure the deficiency, or if we are not otherwise eligible for the additional cure period, Nasdaq will provide notice that our common stock will be subject to delisting.

The issuance and sale of common stock upon exercise of warrants may cause substantial dilution to existing shareholders and may also depress the market price of our common stock. Warrants to purchase shares of our common stock have cashless exercise rights.

On June 15, 2023, we issued warrants (or rights to obtain warrants) to certain of our lenders representing up to 19.99% of the total number of shares of our common stock outstanding as of that date, or 19,373 shares of common stock in the aggregate. As of September 30, 2023, certain of our lenders hold warrants (or the rights to obtain warrants) that are currently vested and unexercised for an aggregate of 8,385 shares of our common, with an exercise price of $0.01 per share. Warrants representing an additional 4,846 shares of our common stock will vest and become exercisable on January 1, 2024, and warrants representing an additional 4,836 shares of our common stock will vest and become exercisable on January 1, 2025, provided certain of our debt remains outstanding as of each such date. If the holders of the warrants choose to exercise the warrants, it may cause significant dilution to the then holders of our common stock. If exercises of the warrants and sales of such shares issuable upon exercise thereof take place, the price of our common stock may decline.

We have outstanding debt that could limit our ability to make expenditures and investments in the conduct of our business and adversely impact our ability to obtain future financing.

As of September 30, 2023, we had $192.3 million of outstanding borrowings under our credit facilities, $5.0 million of which matures on December 20, 2023 and the remainder of which matures on December 20, 2027 (subject, under certain circumstances, to an earlier springing maturity of December 20, 2025). We may be unable to generate cash sufficient to pay when due the principal of, interest on, or other amounts due in respect of our indebtedness. We may be required to dedicate significant cash flows from operations to make such payments, which could limit our ability to make other expenditures and investments in the conduct of our business. Our indebtedness may also reduce our flexibility in planning for or reacting to changes in our business and market conditions. Our indebtedness also exposes us to interest rate risk, since our debt obligations generally bear interest at variable rates. In addition, we may incur additional indebtedness in the future to meet future financing needs. If we add new debt, the risks described above could increase.

In addition, primarily as a result of the completion of the refinancing of our outstanding debt on June 15, 2023, our cash available for operations has decreased from $126.3 million to $47.9 million at December 31, 2022 and September 30, 2023, respectively. While management presently expects such available cash on hand to be sufficient to fund our operations and meet our debt service requirements, the reduced level of available cash could impede our ability to manage our cash flows and sustain operations in the event of any significant unforeseeable negative trends or events, such as significant delays in customer payments or other unexpected negative cash flow developments.

Our Superpriority Credit Facility contains restrictive covenants that may limit our operating flexibility.

Our Superpriority Credit Facility contains certain restrictive covenants that either limit our ability to do (or require a mandatory prepayment in the event we do) any of the following: incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, change business locations, make certain investments, make any payments on our equity interests or any subordinated debt, transfer or dispose of assets, amend certain material agreements, and enter into various specified transactions. We, therefore, may not be able to engage in any of the foregoing transactions unless we obtain the consent of our lenders or prepay the outstanding amount under our Superpriority Credit Facility.

Furthermore, our future working capital, borrowings or equity financing could be unavailable to repay or refinance the amounts outstanding under the Superpriority Credit Facility. In the event of a liquidation, our secured lenders would be repaid all outstanding principal and interest prior to distribution of assets to unsecured creditors, and the holders of our common stock would receive a portion of any liquidation proceeds only if all of our creditors, including our lenders, were first repaid in full.

Our Superpriority Credit Facility contains liquidity covenants that may impede our ability to grow and with which we may fail to comply, which could materially adversely affect our business, financial condition, results of operations and prospects.

Our Superpriority Credit Facility contains a liquidity covenant that is tested on a monthly basis and is further tested on November 15, 2023 and December 10, 2023. The amount of liquidity to be maintained increases monthly. The liquidity covenant may impede our ability to grow our business or respond to competitive pressures. Moreover, failure to comply with such covenant would result in an event of default under the Superpriority Credit Facility and, as a result, would afford the lenders thereunder the right to declare the Superpriority Term Loans immediately due and payable.

If an event of default occurs and we are unable to obtain necessary waivers or amendments, we may lack sufficient assets to repay the accelerated Superpriority Term Loans in full. If we are not successful in raising additional capital or refinancing our existing debt or securing new financing on terms acceptable to us, we may be required to enter a restructuring or liquidation, reduce the scope of our operations, sell assets where possible, and/or suspend or curtail planned programs, among other possible courses of action, all of which could materially adversely affect our business, financial condition, results of operations and prospects.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Use of Proceeds

On December 14, 2017, the SEC declared our registration statement on Form S-1 (File No. 333-221658) for our initial public offering, or IPO, effective. The net offering proceeds to us from the IPO, after deducting underwriting discounts of $6.3 million and offering expenses payable by us totaling $4.1 million, were approximately $79.3 million. No offering discounts, commissions or expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning 10.0% or more of any class of our equity securities or to any other affiliates. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on December 15, 2017 pursuant to Rule 424(b)(4). As of September 30, 2023, we had used approximately $13.4 million of the net offering proceeds for general corporate purposes, including working capital, operating expenses, satisfying accounts payable, and capital expenditures, and we have invested the balance of the proceeds into an investment portfolio with the primary objective of preserving principal and providing liquidity without significantly increasing risk.

Stock Repurchase Program

The following table sets forth information with respect to repurchases of shares of our common stock during the three-month period ended September 30, 2023:

Casa Systems, Inc. Purchase of Equity Securities

Period

Total Number of
Shares Purchased

Average
Price Paid per
Share (1)

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs (2)

Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs

(In thousands)

July 1 - July 31, 2023

—

August 1 - August 31, 2023

—

September 1 - September 30, 2023

—

(1)

On February 21, 2019, we announced that our board of directors authorized the repurchase of up to $75.0 million of our common stock under a stock repurchase program. From inception through September 30, 2023, we repurchased approximately 3.6 million shares under the program. The stock repurchase program has no expiration date and does not require us to purchase a minimum number of shares. We may suspend, modify or discontinue the stock repurchase program at any time without prior notice. As part of the debt refinancing closed in June of 2023, we are now prohibited from using cash to repurchase common stock.

Warrant Issuances

On June 15, 2023, in connection with the Superpriority Credit Agreement and the Exchange, we entered into a Warrant Agreement with American Stock Transfer & Trust Company, LLC, as warrant agent. Subject to the terms and conditions set forth therein, the Lenders (or their affiliates or designees) received (or have the right to receive) warrants, or the Warrants, exercisable for an aggregate of 19,373 shares of our common stock when vested, with an exercise price of $0.01 per share of common stock. The Warrants were issued to the Lenders on a pro rata basis in accordance with the amount of the Superpriority Term Loans held by such Lender. The shares underlying the Warrants vest in three tranches: the first tranche, which represents the right to purchase an aggregate of up to 9,691 shares of our common stock, was immediately exercisable upon issuance of the Warrants; the second tranche, representing the right to purchase up to 4,846 shares of our common stock, vests on January 1, 2024, provided that the Superpriority Term Loans remain outstanding as of such date; and the third tranche, representing the right to purchase up to 4,836 shares of our common stock, vests on January 1, 2025, provided the Superpriority Term Loans remain outstanding as of such date. In the aggregate, the Warrants are exercisable for up to 19,373 shares of our common stock, which represents up to 19.99% of the shares of our common stock that were issued and outstanding as of the date the Warrants were issued. The Warrants will expire on June 15, 2033. We will receive proceeds from any cash exercise of the Warrants, however, the Warrants provide for exercise on a “cashless basis” that, if elected by the selling stockholders, will reduce the number of shares of common stock issued upon exercise of the warrants in lieu of cash payment. As of September 30, 2023, 1,306 shares have been exercised.

The foregoing summary of the Warrant Agreement is qualified in its entirety by reference to the full text of the Warrant Agreement, which is referenced to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 001-38324) filed on June 21, 2023 and is incorporated herein by reference.

Item 6. Exhibits.

Exhibit Index


Exhibit Number		Description

3.1		Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-38324) filed on December 19, 2017)

3.2		By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-38324) filed on December 19, 2017)

10.1		Offer Letter to Michael Glickman (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-38324) filed on July 13, 2023)

10.2		Restricted Stock Unit Agreement by and between the Company and Michael Glickman (incorporated by reference to Exhibit 99.1 to the Registrants Registration Statement on Form S-8 (File No. 333-273542) filed on July 31, 2023)

10.3		Equity Distribution Agreement (incorporated by reference to Exhibit 1.2 to the Registrant’s Registration Statement on Form S-3 (File No. 333-273815) filed on August 8, 2023)

10.4		Offer Letter to Philip E. Paro, Jr. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-38324) filed on August 10, 2023)

10.5		Restricted Stock Unit Agreement by and between the Company and Philip E. Paro, Jr. (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-274299) filed on September 1, 2023)

31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

* Furnished herewith.

† Certain identified information has been omitted from this exhibit because it is both not material and is the type that the registrant treats as private or confidential, in compliance with Regulation S-K Item 601(b)(10).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	CASA SYSTEMS, INC.
Date: November 8, 2023		/s/ Michael Glickman
		Michael Glickman
		President, Chief Executive Officer and Director (Principal Executive Officer)

Date: November 8, 2023	By:	/s/ Edward Durkin
		Edward Durkin
		Chief Financial Officer (Principal Financial Officer)