Axogen, Inc. (AXGN) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with our consolidated financial statements and the notes thereto contained in Item 8 of Part II in this Form 10-K, “Forward-Looking Statements” contained in Part 1 of this Form 10-K, “Risk Factors” contained in Item 1A of this Form 10-K, and the other information appearing elsewhere in, or incorporated by reference into, this Form 10-K. Dollar amounts referenced in this Item 7 are in thousands, except per share amounts.
Financial information for prior periods has been reclassified to reflect the retrospective application of voluntary changes in the Company’s accounting policy for shipping and handling costs and changes to certain allocated corporate costs, as discussed under “Note 2 – Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in this Form 10-K.
Unless the context otherwise requires, all references in this report to “Axogen,” the “Company,” “we,” “us” and “our” refer to Axogen, Inc., and its wholly owned subsidiaries Axogen Corporation (“AC”), Axogen Processing Corporation, Axogen Europe GmbH and Axogen Germany GmbH.
Overview
We are the leading company focused specifically on the science, development, and commercialization of technologies for peripheral nerve regeneration and repair. We are passionate about providing the opportunity to restore nerve function and quality of life for patients with peripheral nerve injuries. We provide innovative, clinically proven, and economically effective repair solutions for surgeons and healthcare providers. Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. Every day, people suffer traumatic injuries or undergo surgical procedures that impact the function of their peripheral nerves. Physical damage to a peripheral nerve or the inability to properly reconnect peripheral nerves can result in the loss of muscle or organ function, the loss of sensory feeling, or the initiation of pain.
Product Portfolio
Our platform for peripheral nerve repair features a comprehensive portfolio of products, including:
•Avance® Nerve Graft, a biologically active off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site.
•Axoguard Nerve Connector®, a porcine (pig) submucosa extracellular matrix ("ECM") coaptation aid for tensionless repair of severed peripheral nerves.
•Axoguard Nerve Protector®, a porcine submucosa ECM product used to wrap and protect damaged peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments.
•Axoguard HA+ Nerve Protector™, is comprised of a processed porcine submucosa ECM base layer with a hyaluronate-alginate gel coating designed to provide short- and long-term protection for peripheral nerve injuries. The gel layer facilitates enhanced nerve gliding to aid in minimizing soft tissue attachments, while the base layer is remodeled into a long-term protective tissue layer.
•Axoguard Nerve Cap®, a porcine submucosa ECM product used to protect a peripheral nerve end and separate the nerve from the surrounding environment to reduce the development of symptomatic or painful neuroma.
•Avive+ Soft Tissue Matrix™, a multi-layer amniotic membrane allograft used to protect and separate tissues in the surgical bed during the critical phase of tissue healing.
Our portfolio of products is currently available in the United States ("U.S."), and 19 other countries including Canada, Germany, United Kingdom, Spain and several other European, Asian and Latin American countries.
We derive substantially all of our revenues from sales of our nerve repair products to customers in the U.S.
On June 24, 2024, we announced the launch of Avive+ Soft Tissue Matrix. Avive+ Soft Tissue Matrix is processed and distributed in accordance with U.S. Food and Drug Administration ("FDA") requirements for Human Cellular and Tissue-based Products under the Code of Federal Regulations ("CFR") Title 21 Part 1271 regulations and U.S. Public Health Service Act regulations as a Section 361 human tissue product. Products regulated solely under Section 361 of the Public Health Service Act are a product category under close scrutiny by the FDA for compliance with the regulatory requirements and potentially
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subject to regulatory change in the future. Failure to comply with applicable regulatory requirements could expose us to potential compliance actions by the FDA or state regulators and could risk the commercial availability of the product.
Our strategy remains focused on deepening our presence in high-potential accounts, specifically Level 1 trauma centers and academic-affiliated hospitals with a high number of trained microsurgeons. We will drive growth in these accounts through targeted expansion of nerve repair indications and driving deeper adoption of our nerve repair algorithm across multiple surgical specialties.
Summary of Operational and Business Highlights
•We completed the Biologics License Application ("BLA") submission for Avance Nerve Graft on September 6, 2024. On November 1, 2024, the FDA informed us that they had accepted the BLA for filing and assigned a Prescription Drug User Fee Act goal date of September 5, 2025. The FDA further indicated that it does not currently plan to hold an advisory committee meeting for the application.
•Revenue was $187,338 for the year ended December 31, 2024, an increase of $28,326, or 17.8%, compared to the year ended December 31, 2023.
•Gross profit was $141,977 for the year ended December 31, 2024, an increase of $20,108, or 16.5%, compared to the year ended December 31, 2023.
Results of Operations
Comparison of the Years Ended December 31, 2024 and 2023
The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue:
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | ||||||||||
| (dollars in thousands) | |||||||||||||
| Revenues | $ | 187,338 | 100.0 | % | $ | 159,012 | 100.0 | % | |||||
| Cost of goods sold | 45,361 | 24.2 | 37,143 | 23.4 | |||||||||
| Gross profit | 141,977 | 75.8 | 121,869 | 76.6 | |||||||||
| Costs and expenses: | |||||||||||||
| Sales and marketing | 78,461 | 41.9 | 77,580 | 48.8 | |||||||||
| Research and development | 27,767 | 14.8 | 27,339 | 17.2 | |||||||||
| General and administrative | 39,036 | 20.8 | 38,412 | 24.2 | |||||||||
| Total costs and expenses | 145,264 | 77.5 | 143,331 | 90.1 | |||||||||
| Loss from operations | (3,287) | (1.8) | (21,462) | (13.5) | |||||||||
| Other (expense) income: | |||||||||||||
| Investment income | 1,141 | 0.6 | 1,487 | 0.9 | |||||||||
| Interest expense | (8,206) | (4.4) | (2,835) | (1.8) | |||||||||
| Change in fair value of derivatives | 587 | 0.3 | 1,531 | 1.0 | |||||||||
| Other expense | (199) | (0.1) | (437) | (0.3) | |||||||||
| Total other (expense) income, net | (6,677) | (3.7) | (254) | (0.2) | |||||||||
| Net loss | $ | (9,964) | (5.3) | % | $ | (21,716) | (13.7) | % |
Revenues
Revenues for the year ended December 31, 2024 increased $28,326, or 17.8%, to $187,338, as compared to $159,012 for the year ended December 31, 2023. Revenue growth was driven by an increase in unit volume of approximately 9.0%, as well as the net impact of changes in product mix and price of approximately 5.5% and 3.3%, respectively.
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Gross Profit
Gross profit for the year ended December 31, 2024 increased $20,108, or 16.5%, to $141,977, as compared to $121,869 for the year ended December 31, 2023. Gross margin as a percentage of revenue decreased to 75.8% for the year ended December 31, 2024, as compared to 76.6% for the year ended December 31, 2023. The decrease in gross margin was due to the change in our product mix.
Costs and Expenses
Total costs and expenses increased $1,933, or 1.3%, to $145,264 for the year ended December 31, 2024, as compared to $143,331 for the year ended December 31, 2023. The increase in total operating costs was primarily attributable to the following: (i) $9,745 in compensation costs; (ii) $1,288 in professional services fees; and (iii) $308 in net other costs, partially offset by decreases of (i) $3,593 in research and development project costs; (ii) $3,114 in royalty expenses; (iii) $1,621 in marketing program costs; and (iv) $218 in travel costs.
Sales and marketing costs and expenses increased $881, or 1.1%, to $78,461 for the year ended December 31, 2024, as compared to $77,580 for the year ended December 31, 2023. The increase in sales and marketing costs and expenses was due to the following: (i) $6,028 in compensation costs and (ii) $311 in occupancy related costs, partially offset by decreases of (i) $3,114 in royalty expenses; (ii) $1,621 in marketing program costs; (iii) $173 in travel costs; (iv) $153 in professional services fees; and (v) $396 in net other costs.
Research and development costs and expenses increased $428, or 1.6%, to $27,767 for the year ended December 31, 2024, as compared to $27,339 for the year ended December 31, 2023. The increase was primarily due to product development and clinical expenses. Product development costs include spending for a number of specific programs, including the non-clinical expenses related to the BLA for Avance Nerve Graft. Product development costs and expenses represented approximately 53% and 60% of total research and development costs and expenses for the years ended December 31, 2024 and 2023, respectively. Clinical trial costs and expenses represented approximately 47% and 40% of total research and development costs and expenses for the years ended December 31, 2024 and 2023, respectively. The increase in research and development costs and expenses was due to the following: (i) $3,027 in compensation costs and (ii) $1,814 in professional services fees, partially offset by decreases of (i) $3,593 in research and development project costs; (ii) $414 in occupancy related costs; (iii) $173 in travel costs; and (iv) $97 in other costs to support these clinical and non-clinical expenses.
General and administrative costs and expenses increased $624, or 1.6%, to $39,036 for the year ended December 31, 2024, as compared to $38,412 for the year ended December 31, 2023. The increase was primarily due to (i) $921 in bad debt expense and (ii) $254 in occupancy related costs; partially offset by decreases of (i) $373 in professional services fees and (ii) $187 in compensation costs.
Other Expense
Total other expense increased $6,423, or 2528.7%, to $6,677 for the year ended December 31, 2024, as compared to $254 for the year ended December 31, 2023. The increase was primarily due to the increase in interest expense of $5,372 which was a result of no longer capitalizing interest due to the completion of the Axogen Processing Center facility (the "APC Facility") in 2023. In connection with our credit facility with Oberland Capital ("Credit Facility"), we recognized total interest charges of $8,101 and $8,083 for the years ended December 31, 2024 and 2023, respectively, and of the total interest charges, we capitalized to the construction of the APC Facility interest charges of $— and $5,285 for the years ended December 31, 2024 and 2023, respectively. The decrease in investment income was primarily related to the Federal Reserve decreasing interest rates 100 basis points throughout 2024.
Income Taxes
We had no federal income tax expense or benefit for the years ended December 31, 2024 and 2023 due to the incurrence of net operating losses in both years, the benefits of which have a full valuation allowance. From time to time, we receive notices of examination of prior tax filings from federal and state authorities. The Internal Revenue Service is currently examining the Company's 2021 federal income tax return. We do not believe that there are any additional tax expenses or benefits currently available.
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Comparison of the Years Ended December 31, 2023 and 2022
The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue:
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | ||||||||||
| (dollars in thousands) | |||||||||||||
| Revenues | $ | 159,012 | 100.0 | % | $ | 138,584 | 100.0 | % | |||||
| Cost of goods sold | 37,143 | 23.4 | 29,775 | 21.5 | |||||||||
| Gross profit | 121,869 | 76.6 | 108,809 | 78.5 | |||||||||
| Costs and expenses: | |||||||||||||
| Sales and marketing | 77,580 | 48.8 | 71,983 | 51.9 | |||||||||
| Research and development | 27,339 | 17.2 | 25,627 | 18.5 | |||||||||
| General and administrative | 38,412 | 24.2 | 40,906 | 29.5 | |||||||||
| Total costs and expenses | 143,331 | 90.1 | 138,516 | 100.0 | |||||||||
| Loss from operations | (21,462) | (13.5) | (29,707) | (21.4) | |||||||||
| Other (expense) income: | |||||||||||||
| Investment income | 1,487 | 0.9 | 569 | 0.4 | |||||||||
| Interest expense | (2,835) | (1.8) | (624) | (0.5) | |||||||||
| Change in fair value of derivatives | 1,531 | 1.0 | 1,044 | 0.8 | |||||||||
| Other expense | (437) | (0.3) | (230) | (0.2) | |||||||||
| Total other (expense) income, net | (254) | (0.2) | 759 | 0.5 | |||||||||
| Net loss | $ | (21,716) | (13.7) | % | $ | (28,948) | (20.9) | % |
Revenues
Revenues for the year ended December 31, 2023 increased $20,428, or 14.7%, to $159,012, as compared to $138,584 for the year ended December 31, 2022. Revenue growth was driven by an increase in unit volume of approximately 8.6%, as well as the net impact of changes in price and product mix of approximately 3.7% and 2.5%, respectively. The unit volume increase was attributed to growth in our core and active accounts. As of December 31, 2023, we had 1,006 active accounts, an increase of 3.9% from 968 at December 31, 2022 and 376 core accounts, an increase of 13.3% from 332 at December 31, 2022.
Gross Profit
Gross profit for the year ended December 31, 2023 increased $13,060, or 12.0%, to $121,869, as compared to $108,809 for the year ended December 31, 2022. Gross margin as a percentage of revenue decreased to 76.6% for the year ended December 31, 2023, as compared to 78.5% for the year ended December 31, 2022.
Costs and Expenses
Total costs and expenses increased $4,815, or 3.5%, to $143,331 for the year ended December 31, 2023, as compared to $138,516 for the year ended December 31, 2022. The increase in total operating costs and expenses was due to the following: (i) $5,469 in compensation costs; (ii) $1,243 in marketing program costs; (iii) $1,156 in professional services fees; (iv) $852 in travel costs; and (v) $326 in occupancy related costs; partially offset by decreases of (i) $1,190 in research and development projects and (ii) $3,041 of other general business costs, including insurance expenses of $1,033, bad debt recovery of $883, merchant fees of $727, and other items administrative in nature of $398.
Sales and marketing costs and expenses increased $5,597, or 7.8%, to $77,580 for the year ended December 31, 2023, as compared to $71,983 for the year ended December 31, 2022. The increase in sales and marketing costs and expenses was due to the following: (i) $2,497 in compensation costs; (ii) $1,243 in marketing program costs; (iii) $831 in travel costs; (iv) $625 in professional services fees; (v) other items administrative in nature of $251 and (vi) $150 in occupancy related costs.
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Research and development costs and expenses increased $1,712, or 6.7%, to $27,339 for the year ended December 31, 2023, as compared to $25,627 for the year ended December 31, 2022. The increase in research and development costs and expenses was primarily due to product development and clinical expenses. Product development costs include spending for a number of specific programs, including the non-clinical expenses related to the BLA for Avance Nerve Graft. Product development costs and expenses represented approximately 60% and 52% of total research and development costs and expenses for the years ended December 31, 2023 and 2022, respectively. Clinical trial costs and expenses represented approximately 40% and 48% of total research and development costs and expenses for the years ended December 31, 2023 and 2022, respectively. The increase in research and development costs and expenses was due to the following: (i) $2,171 in compensation costs; (ii) $331 in professional services fees; (iii) $287 in occupancy related costs; and (iv) $98 in travel costs to support these clinical and non-clinical expenses, partially offset by a decrease of $1,190 in research and development projects.
General and administrative costs and expenses decreased $2,494, or 6.1%, to $38,412 for the year ended December 31, 2023, as compared to $40,906 for the year ended December 31, 2022. The decrease in general and administrative costs and expenses was primarily due to the following: (i) $1,033 in insurance expenses, (ii) $883 in bad debt recovery, (iii) $727 in merchant fees, (iv) $330 in other services, (v) $205 in licenses and fees; (vi) other items administrative in nature of $128; (vi) $112 in occupancy related costs; and (vii) $78 in travel costs, partially offset by increases of (i) $801 in compensation costs and (ii) $201 in professional services fees.
Other (Expense) Income
Total other expense increased $1,013, or 133.5%, to expense of $254 for the year ended December 31, 2023, as compared to income of $759 for the year ended December 31, 2022. The increase was primarily due to the increase in interest expense of $2,211 and other expenses of $208, partially offset by the increase in investment income of $918 and the fair value of the derivative liability of $488. In connection with the Credit Facility, we recognized total interest charges of $8,083 and $6,721 for the years ended December 31, 2023 and 2022, respectively, and of this interest we capitalized to the construction of the APC Facility, interest charges of $5,285 and $6,155 for the years ended December 31, 2023 and 2022, respectively. The increase in investment income was primarily related to the Federal Reserve raising interest rates 100 basis points throughout 2023.
Income Taxes
We had no federal income tax expense or benefit for the years ended December 31, 2023 and 2022 due to the incurrence of net operating losses in both years, the benefits of which have been fully reserved. We do not believe that there are any additional tax expenses or benefits currently available.
Liquidity and Capital Resources
As of December 31, 2024, our principal sources of liquidity were our cash and cash equivalents and investments totaling $33,482. Our cash equivalent is comprised of a money market mutual fund and our investments are comprised of U.S. Treasuries. Our cash and cash equivalents and investments increased $2,458 to $33,482 from $31,024 at December 31, 2023, due to a reduction in capital expenditures and general operating activities. On December 31, 2024 and 2023, our current assets exceeded our current assets liabilities by $68,607 and $57,574, respectively. Based on current estimates, we believe that our existing cash and cash equivalents and investments, as well as cash provided by sales of our products will allow us to fund our operations through at least the next twelve months from the date of issuance of the accompanying financial statements.
Cash Flow Information
The following table presents a summary of our cash flows from operating, investing and financing activities:
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | |||||
| Net cash provided by (used in): | |||||||
| Operating activities | $ | 4,535 | $ | (5,716) | |||
| Investing activities | (10,297) | 19,253 | |||||
| Financing activities | 2,290 | 1,954 | |||||
| Net (decrease) increase in cash and cash equivalents | $ | (3,472) | $ | 15,491 |
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Net Cash Provided By (Used In) Operating Activities
Net cash provided by operating activities was $4,535 compared to net cash used in operating activities of $5,716 for the years ended December 31, 2024 and 2023, respectively. The favorable change in net cash provided by operating activities of $10,251 was due to the decrease in net loss of $11,751 and the favorable change in noncash accounts of $6,093, partially offset by an unfavorable change in working capital of $7,594.
A discussion of net cash used in operating activities during the year ended December 31, 2022 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission ("SEC") on March 5, 2024.
Net Cash (Used In) Provided By Investing Activities
Net cash used in investing activities was $10,297 compared to net cash provided by investing activities of $19,253 for the years ended December 31, 2024 and 2023, respectively. The unfavorable change in net cash used in investing activities of $29,550 was due to the decrease in proceeds from the sale of investments, net of investment purchases, totaling $39,944, partially offset by a net decrease in capital expenditures of $10,771, primarily related to the renovation of the APC Facility completed in 2023.
A discussion of net cash used in investing activities during the year ended December 31, 2022 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 5, 2024.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $2,290 as compared to $1,954 for the years ended December 31, 2024 and 2023, respectively, an increase of $335, or 17%. The increase in net cash provided by financing activities was primarily due to an increase of $336 in proceeds from the exercise of stock options and Employee Stock Purchase Plan (“ESPP”) purchases year-over-year.
A discussion of net cash provided by financing activities during the year ended December 31, 2022 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 5, 2024.
Sources of Capital
Our expected future capital requirements may depend on many factors including expanding our customer base and sales force and timing and extent of spending in obtaining regulatory approval and introduction of new products. Additional sources of liquidity available to us include issuance of additional equity securities through public or private equity offerings, debt financings or from other sources. The sale of additional equity may result in dilution to our shareholders. There is no assurance that we will be able to secure funding on terms acceptable to us, or at all. The increasing need for capital could also make it more difficult to obtain funding through either equity or debt. Should additional capital not become available to us as needed, we may be required to take certain actions, such as slowing sales and marketing expansion, delaying regulatory approvals, or reducing headcount.
Credit Facilities
As of December 31, 2024, we had $50,000 outstanding in indebtedness under a credit facility; $35,000 maturing on June 30, 2027 and $15,000 maturing on June 30, 2028. Quarterly interest only and revenue participation payments are due through each of the maturity dates. Interest is calculated as 7.5% plus the greater of the forward-looking term rate based on the secured overnight financing rate as set by the Federal Reserve Bank of New York plus 0.10% ("Adjusted SOFR") or 2.0% (12.19% as of December 31, 2024). Revenue participation payments are calculated as a percentage of our net revenues, up to $70,000 in any given year, adding approximately 1.5% per year of additional interest payments on the outstanding indebtedness. Upon each maturity date or upon such date earlier repayment occurs, we will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to the lender equal to 11.5%, less the total of all quarterly interest and revenue participation payments previously paid. See Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees and Note 15 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements Part II, Item 8 of this Form 10-K.
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Contractual Obligations and Commitments
| Contractual Obligations | 2025 | 2026-2027 | 2028-2029 | Thereafter | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Credit Facility Principal(1) | $ | — | $ | 35,000 | $ | 15,000 | $ | — | $ | 50,000 | |||||||||
| Credit Facility Interest(1)(2) | 6,095 | 10,057 | 914 | — | 17,066 | ||||||||||||||
| Credit Facility Revenue Participation(1) | 756 | 1,512 | 231 | — | 2,499 | ||||||||||||||
| Operating and financing lease obligations(3) | 4,148 | 7,404 | 6,306 | 15,385 | 33,243 | ||||||||||||||
| Transition and separation obligations to former CEO(4) | 1,164 | 18 | — | — | 1,182 | ||||||||||||||
| Insurance financing agreement(5) | 1,304 | — | — | — | 1,304 | ||||||||||||||
| Separation obligation to former employee(6) | 843 | 17 | — | — | 860 | ||||||||||||||
| $ | 14,310 | $ | 54,008 | $ | 22,451 | $ | 15,385 | $ | 106,154 |
(1) See Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees and Note 15 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.
(2) Calculated at 12.19%; the interest rate as of December 31, 2024.
(3) See Note 8 - Leases in Part II, Item 8 of this Form 10-K.
(4) Includes former CEO's 2024 bonus to be paid in March of 2025, senior advisory fees through May 2025, eighteen months of Consolidated Omnibus Budget Reconciliation Act ("COBRA") payments and related employer paid taxes. See Note 15 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.
(5) See Note 15 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.
(6) Includes severance, accrued paid time off, twenty-four months of COBRA payments and related employer paid taxes payable to a former employee. See Note 15 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.
See Note 8 - Leases, Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees, and Note 15 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K, for further information.
Critical Accounting Estimates
In preparing our financial statements in accordance with generally accepted accounting principles, there are certain accounting policies, which may require substantial judgment or estimation in their application. We believe these accounting policies and the others set forth in Note 2 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K are critical to understanding our results of operations and financial condition. Actual results could differ from our estimates and assumptions, and any such differences could be material to our results of operations and financial condition.
Inventories
Description
Inventories consist of purchased materials, direct labor and manufacturing overhead, and are stated at the lower of cost or net realizable value, as determined by the first-in, first-out method.
Judgments and Uncertainties
We maintain reserves for excess and obsolete inventory resulting from the potential inability to sell certain products in excess of current carrying cost. We make estimates regarding the future recoverability of the costs of these products and record provisions based on historical experience, expiration dates and expected future trends.
Sensitivity of Estimate to Change
As of December 31, 2024, we have reserved $1,630 for potential losses relating to inventory. If our actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write downs may be required, which could unfavorably affect future operating results.
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Derivative Instruments
Description
We review debt instruments to determine whether there are embedded derivative instruments, which are required to be bifurcated and accounted for separately as a derivative financial instrument. Embedded derivatives that are not clearly and closely related to the debt host are bifurcated and recognized at fair value on the Consolidated Balance Sheets with changes in fair value recognized as either a gain or loss on the Consolidated Statements of Operations for each reporting period.
Judgements and Uncertainties
The fair value of embedded derivatives is measured based on equity markets and interest rates, as well as an estimate of our nonperformance risk adjustment. This estimate includes an option adjusted spread and an estimate of our discount rate.
Sensitivity of Estimate to Change
As of December 31, 2024, we recorded a derivative liability of $2,400. However, if the discount rate were to change by 1%, it would have a less than $50 effect on our derivative liability fair value.
Stock-Based Compensation
Description
Stock-based compensation is in the form of stock options, restricted stock units ("RSU") and performance stock units ("PSU") granted to employees and directors. Stock-based compensation expense is based on the fair value of the stock options, RSUs and PSUs.
Judgments and Uncertainties
We estimate the grant date fair value of each stock option award on the date of grant using a multiple-point Black-Scholes option-pricing model. In addition, we estimate the grant date fair value of stock options granted to employees at a premium price based on market conditions, such as the trading price of our common stock, using a Monte Carlo simulation option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods.
The fair value of the PSU grants tied to revenue goals (the "Revenue PSUs") is determined based on the fair value of our common stock on the date of grant and our estimate of achieving the applicable revenue goals. Compensation expense for the Revenue PSUs is recorded as the milestones are achieved. The number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on the actual performance metrics as set forth in the applicable Revenue PSU award agreement. The amount actually awarded will be based upon achievement of the performance measures. Expectations related to the achievement of the revenue goals associated with the Revenue PSU grants is assessed at each reporting period and is used to determine whether any of the Revenue PSU grants are expected to vest. If the performance-based milestones related to the Revenue PSU grants are not met or not expected to be met, any compensation expense recognized associated with such grants is reversed.
The estimated grant date fair value of the Total Shareholder Return PSUs ("TSR PSUs") is calculated by using a Monte Carlo simulation. The number of TSR PSUs that will be earned is based upon the achievement of stock price targets ("Price Targets") over the measurement period. Compensation expense is recognized regardless if the Price Targets are satisfied. Compensation expense will be reversed if an employee's employment is terminated prior to satisfying the requisite service period.
We recognize compensation expense related to the ESPP based on the estimated fair value of the options on the date of grant. We estimate the grant date fair value using a Black-Scholes option pricing model for each purchase period. The grant date fair value is expensed on a straight-line basis over the offering period.
The determination of fair value using option-pricing models, as indicated above, is affected by our stock price, as well as assumptions regarding several subjective variables. These variables include, but are not limited to, our expected stock price volatility over the expected term of the awards. We determine the expected term of each award giving consideration to the contractual terms, vesting schedules, and post-vesting forfeitures. We use the risk-free interest rate on the implied yield available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected term of the award. The fair value of the Revenue PSUs also includes our estimates of achieving the applicable revenue goals. The value of the
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portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Operations. If factors change and different assumptions are used, stock-based compensation expense could be materially different in the future.
Sensitivity of Estimate of Change
As of December 31, 2024, if we determine that the unvested PSUs outstanding were in a pay-out range of 150%, our stock-based compensation expense would increase by $616.
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements, Part II Item 8 of this Form 10-K for further information.