Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this Annual Report.
Overview
Historically, we organized our operations into two reportable business segments: Identity and Premises. Our Identity segment included products and solutions that enabled secure access to information serving the logical access and cyber-security market, and protected connected objects and information using RFID embedded security. Our Premises segment included the Company's solutions to address the premises security market for government and enterprise, including access control, video surveillance, analytics, audio, access readers and identities.
As disclosed in Note 3, Discontinued Operations , on September 6, 2024, we completed the sale of our Physical Security Business (as defined below), which historically represented primarily our Premises segment. As a result, we currently have one reportable segment: the IoT Business segment.
The IoT Business segment develops, manufactures, and supplies specialty IoT solutions tailored for the healthcare industry and other high-value end markets. Our specialty RFID IoT devices, including NFC, HF, DF, UHF and BLE are attached to or embedded into physical items, such as syringes, pill containers, wine bottles, and sports jerseys, providing those items with a unique digital identity. These devices enable unique and secure digital interaction with the physical world while simultaneously capturing relevant data which can then be analyzed and managed by the end customer. We sell our products across multiple industries, focusing on pharmaceutical and medical devices, consumer electronics, mobile devices, wine and spirits, luxury goods, libraries, and logistics.
Recent Developments
Closing of Asset Sale
On September 6, 2024, the Company completed the Asset Sale pursuant to the Purchase Agreement by and between the Company and Buyer. As consideration for the Asset Sale, the Company received approximately $143.9 million in cash.
In connection with the closing of the Asset Sale, the Company and Buyer entered into a transition services agreement (the “Transition Services Agreement”). The Transition Services Agreement outlines the information technology, people, and facility support the Company will provide to Buyer for a period of 12 months to 18 months after the transaction closing date.
In addition, at the closing of the Asset Sale, unvested restricted stock units (“RSUs”) held by employees who became employed by the Buyer (or an affiliate of Buyer) became fully vested, while RSUs held by our remaining employees and non-employee directors continue to vest according to their terms.
Following the completion of the Asset Sale, we continue to be a public company operating under the name Identiv, Inc. and continue to own the assets and liabilities of our business that were not sold to Buyer, which we refer to herein as the “IoT Business”. The discussion in this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, unless otherwise noted, relates solely to the Company’s continuing operations.
Factors Affecting Our Performance
Market Adoption
Our financial performance depends on the pace, scope and depth of end-user adoption of our RFID products in multiple industries. That pace, scope and depth has resulted in large fluctuations in our operating results. For example, adoption of BLE devices, which accelerated in 2023, significantly declined to date in 2024, as we have experienced lower unit sales of BLE transponder products to one of our customers undergoing a technology transition. We do not expect to resume shipments to this customer while they continue their technology transition. As a result, we have experienced a corresponding decrease in utilization in our production facilities in Southeast Asia.
We believe significant improvement in chip capabilities at lower costs has accelerated the opportunities for product engineers to integrate RFID into their products to create new and more engaging customer experiences, reduce counterfeiting, and ensure proper product use and adherence. Though we believe the number of opportunities for RFID-based solutions has increased, the evaluation period and customer adoption originally expected for certain applications has taken longer than we anticipated.
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We believe the underlying, long-term trend is continued RFID adoption across multiple verticals, but regulated industries like healthcare take longer to optimize the technology and fully understand the benefits. We also believe that expanding use cases fosters adoption across verticals and into other markets.
If RFID market adoption, and adoption of our products specifically, does not meet our expectations then our growth prospects and operating results will be adversely affected. If we are unable to meet end-user or customer volume or performance expectations, then our business prospects may be adversely affected. In contrast, if our RFID sales exceed expectations, then our revenue and profitability may be positively affected.
Given the uncertainties of the specific timing of our new customer deployments, we cannot assure you that we have appropriate inventory and capacity levels or that we will not experience inventory shortfalls or overages in the future or acquire inventory at costs to maintain gross margins. We attempt to mitigate those risks by being deeply embedded in our customers’ design cycles, working with our chip partners on long lead time components, managing our limited capital equipment needs within a short cycle and future proofing our facilities to accommodate several scenarios for growth potential.
If end users with sizable projects change or delay them, we may experience significant fluctuation in revenue on a quarterly or annual basis, and we anticipate that uncertainty to continue to characterize our business for the foreseeable future.
RFID Device Production Transition
We are currently in the process of transitioning our RFID device production from our manufacturing facility in Singapore to our manufacturing facility in Thailand. The majority of RFID device production was transferred to Thailand in 2024. We expect to complete this transition in June 2025. If the customers currently supported in Singapore do not transition their production to Thailand as expected, this could have a negative impact on our operating results. In addition, when all of our production has been transferred to Thailand, we will only be maintaining or producing products from one location.
Focus on High-Margin Opportunities
To strengthen and grow our core channel business, we are prioritizing higher margin opportunities with existing customers and channel partners. Higher margin opportunities often involve complex devices as compared to standard specification products, and require a certain amount of customization for the customer. Increasing technological complexity often necessitates more development resources and longer evaluation periods to ensure the product meets customer needs. In choosing to prioritize higher margin opportunities, we may decide not to support low-margin projects that may generate revenue. This could result in a negative impact on our operating results.
Competitive Landscape
We have seen a large increase in global production capacity at several of our RFID competitors. This has resulted in competitive pricing pressure, and, in response, we have begun to exit some of our lowest margin business. This has had, and we expect will continue to have, a negative impact on our operating results.
Impacts of Macroeconomic Conditions and Other Factors on our Business
We conduct operations internationally with sales in the Americas, Europe and the Middle East, and Asia-Pacific regions. Our manufacturing operations and third-party contract manufacturers are in China, Singapore, and Thailand. We purchase certain products and key components from a limited number of sources that depend on the supply chain, including freight, to receive components, transport finished goods and deliver our products across the world. In view of the rapidly changing business environment, we have experienced delays and reductions in customer orders, shifting supply chain availability, component shortages, and other production-related challenges. We continue to monitor the global supply chain and its effect on our financial position, results of operations, and cash flows.
We have also recently been, and expect to continue to be, impacted by other adverse macroeconomic conditions, including but not limited to, inflation, foreign currency fluctuations, tariffs, global trade disruption, and the slowdown of economic activity around the globe. These conditions may also impact our customers, suppliers, contract manufacturers, logistics providers, and distributors, causing increases in cost of materials and higher shipping and transportation rates, which then impacts the pricing of our products. Price increases may not successfully offset cost increases or may cause us to lose market share and, in turn, may adversely impact our financial position, results of operations, and cash flows.
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Effects of Asset Sale
Our business has and will continue to be affected by the Asset Sale. The Asset Sale included assets and operations that had historically represented the majority of our revenues, representing approximately 63% of our 2023 revenue, as well as a substantial portion of our assets, representing approximately 47% of our assets as of December 31, 2023. The gross margin profile of our continuing business has and will continue to be significantly lower than our historical total gross margins across a lower revenue base. As a result, our loss from continuing operations has and we expect it will continue to increase substantially.
For additional information regarding the risks related to our continuing business, see “Risks Related to our Business, Products, and Industry” under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Results of Operations
Our results of operations for the years ended December 31, 2024 and 2023 is as follows (in thousands, except percentages).
Year Ended December 31,
2024
2023
% Change
Net revenue
26,628
43,445
(39
%)
Gross profit
340
6,010
(94
%)
Gross profit margin
1
%
14
%
Operating expenses:
Research and development
3,887
4,399
(12
%)
Selling and marketing
5,727
5,627
2
%
General and administrative
18,147
9,332
94
%
Restructuring and severance
540
157
244
%
Total operating expenses
28,301
19,515
45
%
Loss from continuing operations
(27,961
)
(13,505
)
Non-operating income (expense):
Interest income (expense), net
1,352
(427
)
(417
%)
Gain on investment
—
132
(100
%)
Foreign currency gains (losses), net
788
(10
)
(7,980
%)
Loss from continuing operations before income tax provision
(25,821
)
(13,810
)
Income tax provision
(90
)
(65
)
38
%
Net loss from continuing operations
(25,911
)
(13,875
)
Net income (loss) from discontinued operations, net of tax:
Income (loss) from Physical Security Business, net of tax
(2,778
)
8,386
(133
%)
Gain on sale of Physical Security Business, net of tax
103,509
—
100
%
Total income from discontinued operations, net of tax
100,731
8,386
Net income (loss)
$
74,820
$
(5,489
)
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Geographic net revenue based on each customer’s ship-to location is as follows (in thousands):
Year Ended December 31,
2024
2023
% Change
Americas
$
12,022
$
22,266
(46
)%
Europe and the Middle East
7,591
12,281
(38
)%
Asia-Pacific
7,015
8,898
(21
)%
Total
$
26,628
$
43,445
(39
)%
As a percentage of net revenue:
Americas
45
%
52
%
Europe and the Middle East
29
%
28
%
Asia-Pacific
26
%
20
%
Total
100
%
100
%
Fiscal 2024 Compared with Fiscal 2023
Net Revenue
Net revenue was $26.6 million in 2024, a decrease of $16.8 million compared with $43.4 million in 2023. Net revenue in the Americas in 2024 decreased 46% compared with 2023. Net revenue in Europe, the Middle East, and the Asia-Pacific in 2024 was $14.6 million, a decrease of 31% compared with $21.2 million in 2023. The decrease was primarily due to substantially lower unit sales of RFID transponder products to one of our customers undergoing a technology transition to their next-generation (Gen 3) chip. We do not expect shipments to this customer while they work on producing their Gen 3 chip.
Gross Profit and Gross Margin
Gross profit for 2024 was $0.3 million compared to $6.0 million in 2023. Gross profit represents net revenue less direct cost of product sales, manufacturing overhead, other costs directly related to preparing the product for sale including freight, scrap, and inventory adjustments, where applicable.
Gross profit margin in 2024 decreased to 1.3% from 13.8% in 2023. The decrease in gross profit margin was primarily attributable to substantially lower unit sales to one of our customers, as discussed above, resulting in underutilization of our manufacturing production facilities in Singapore and Thailand. In addition, we recorded a charge to cost of revenue of approximately $1.1 million in the fourth quarter of 2024, which included a $0.8 million of inventory on hand designated specifically for one customer that phased out of a legacy program earlier than expected, and $0.2 million attributable to customer specific manufacturing equipment that cannot re-purposed for other customer orders.
We expect there will be variation in our gross profit from period to period, as our gross profit has been and will continue to be affected primarily by varying mix among our products. Within each product category, gross margins have tended to be consistent, but over time may be affected by a variety of factors, including, without limitation, competition, product pricing, the volume of sales in any given quarter, manufacturing volumes, product configuration and mix, the availability of new products, product enhancements, risk of inventory write-downs and the cost and availability of components. We expect gross product margins to increase overall after our RFID transponder production in transitioned from Singapore to our Thailand production facility. We anticipate this transition to be complete in the second half of 2025.
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Operating Expenses
Information about our operating expenses for the years ended December 31, 2024 and 2023 is set forth below.
Research and Development
Year Ended December 31,
2024
2023
$ Change
% Change
($ in thousands)
Research and development expenses
$
3,887
$
4,399
$
(512
)
(12
)%
Percentage of revenue
15
%
10
%
Research and development expenses consist primarily of employee compensation and fees for the development of our products. We focus the majority of our research and development activities on the continued development of existing products and the development of new offerings for emerging market opportunities.
Research and development expenses in 2024 decreased compared with 2023 primarily due to lower headcount and payroll related costs related to reductions at our Singapore facility as we transition production and other operating related costs to our Thailand facility.
Selling and Marketing
Year Ended December 31,
2024
2023
$ Change
% Change
($ in thousands)
Selling and marketing expenses
$
5,727
$
5,627
$
100
2
%
Percentage of revenue
22
%
13
%
Selling and marketing expenses consist primarily of employee compensation as well as amortization expense of certain intangible assets, customer lead generation activities, tradeshow participation, advertising and other marketing and selling costs.
Selling and marketing expenses in 2024 increased compared with 2023 primarily due to higher public relations costs partially offset by lower travel related costs year over year.
General and Administrative
Year Ended December 31,
2024
2023
$ Change
% Change
($ in thousands)
General and administrative expenses
$
18,147
$
9,332
$
8,815
94
%
Percentage of revenue
68
%
21
%
General and administrative expenses consist primarily of compensation expenses for employees performing administrative functions, and professional fees incurred for legal, auditing and other consulting services.
General and administrative expenses in 2024 increased compared with 2023 primarily due to higher payroll related costs, higher stock-based compensation expense, and higher professional services fees of $6.2 million associated with strategic review-related activities incurred in 2024.
25
Restructuring and Severance
Year Ended December 31,
2024
2023
$ Change
% Change
($ in thousands)
Restructuring and severance expenses
$
540
$
157
$
383
244
%
Restructuring expenses incurred in 2024 and 2023 consisted of severance related costs.
Non-operating Income (Expense)
Information about our non-operating income (expense) for the years ended December 31, 2024 and 2023 is set forth below.
Year Ended December 31,
2024
2023
$ Change
% Change
($ in thousands)
Interest income (expense), net
$
1,352
$
(427
)
$
1,779
417
%
Gain on investment
$
—
$
132
$
(132
)
(100
)%
Foreign currency gains (losses), net
$
788
$
(10
)
$
798
(7980
)%
Interest income (expense), net consists of interest income generated on our cash equivalents and interest costs on our financial liabilities. The increase in interest income (expense), net in 2024 was primarily attributable to interest earned on our money market accounts and treasury bills partially offset by interest on our financial liabilities (amounts outstanding under our revolving loan facility were fully paid down in the third quarter of 2024). In February 2025, we did not renew our revolving loan facility with our lender.
Gain on investment is associated with additional proceeds received in 2023 in connection with the acquisition of a private company that we had previously invested in, which had been fully impaired and had no carrying value.
Changes in currency valuation in the periods mainly were the result of favorable exchange rate movements between the U.S. dollar, the Euro and the Thai Baht. Our foreign currency gains and losses primarily result from the valuation of current assets and liabilities denominated in a currency other than the functional currency of the respective entity in the local financial statements.
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Income Tax Provision
Year Ended December 31,
2024
2023
$ Change
% Change
($ in thousands)
Income tax provision
$
90
$
65
$
25
38
%
As of December 31, 2024, our deferred tax assets are fully offset by a valuation allowance. Accounting Standards Codification (“ASC”) 740, Income Taxes , provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting our future results, we provided a full valuation allowance against all of our net U.S. and foreign deferred tax assets. We reassess the need for our valuation allowance on a quarterly basis. If it is later determined that a portion or all of the valuation allowance is not required, it generally will be a benefit to the income tax provision in the period such determination is made.
We recorded an income tax provision during the year ended December 31, 2024. The effective tax rate for the year ended December 31, 2024 differs from the federal statutory rate of 21% primarily due to the change in the valuation allowance, stock-based compensation, and the provisions in certain foreign jurisdictions. The effective tax rate for the year ended December 31, 2023 differs from the federal statutory rate of 21% primarily due to a change in valuation allowance, and the provision or benefit in certain foreign jurisdictions, which are subject to higher tax rates.
27
Income (Loss) from Discontinued Operations, net of tax
Year Ended December 31,
2024
2023
$ Change
% Change
($ in thousands)
Income (loss) from Physical Security Business, net of tax
$
(2,778
)
$
8,386
$
(11,164
)
(133
)%
Gain on sale of Physical Security Business, net of tax
$
103,509
$
—
$
103,509
100
%
Income (loss) from discontinued operations consists of the results of operations, net of tax, as well as the gain on sale of our Physical Security Business which we disclosed as discontinued operations. See Note 3, Discontinued Operations .
Liquidity and Capital Resources
As of December 31, 2024, our working capital, defined as current assets less current liabilities, was $144.9 million, an increase of $96.2 million compared to $48.7 million as of December 31, 2023. As of December 31, 2024, our cash and cash equivalents balance was $135.6 million.
On February 8, 2017, we entered into a Loan and Security Agreement (as amended or amended and restated from time to time, the “Loan Agreement”) with East West Bank (“EWB”). Following subsequent amendments, the Loan Agreement provided a $20.0 million revolving loan facility (at prime minus 0.25%) maturing on February 8, 2025. Upon the closing of the Asset Sale, as discussed in Note 3, Discontinued Operations , we and EWB terminated the Loan Agreement, with EWB releasing all liens on our net assets.
On November 7, 2024, we announced that our board of directors authorized the Stock Repurchase Program. Under the Stock Repurchase Program, effective November 15, 2024, we may repurchase up to $10 million of shares of common stock on a discretionary basis from time to time through open market repurchases, privately negotiated transactions, or other means. The timing and amount of shares repurchased depends on a number of factors, including stock price, trading volume, general market and business conditions, liquidity and capital needs, and other factors. The Stock Repurchase Program does not obligate us to repurchase any specific dollar amount or acquire any specific number of shares of common stock. The Stock Repurchase Program has no expiration date and may be suspended or discontinued at any time without notice. During the quarter ended December 31, 2024, we repurchased 463,779 shares of common stock under the Stock Repurchase Program for total consideration of approximately $1.9 million.
As our previously unremitted earnings have been subjected to U.S. federal income tax, we expect any repatriation of these earnings to the U.S. would not incur significant additional taxes related to such amounts. However, our estimates are provisional and subject to further analysis. Generally, most of our foreign subsidiaries have accumulated deficits and cash and cash equivalents that are held outside the United States are typically not cash generated from earnings that would be subject to tax upon repatriation if transferred to the United States. We have access to the cash held outside the United States to fund domestic operations and obligations without any material income tax consequences. As of December 31, 2024, the amount of cash included at such subsidiaries was $15.4 million. We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business.
We have historically incurred operating losses and negative cash flows from operating activities, and we expect to continue to incur losses in the future. As of December 31, 2024, we had a total accumulated deficit of $340.1 million. During the year ended December 31, 2024, we had a loss from continuing operations of $25.9 million which included strategic review-related costs of $6.2 million.
We believe our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to satisfy our working capital needs to fund operations for the next twelve months and beyond. We may also use cash to acquire or invest in complementary businesses, technologies, services or products that would change our cash requirements. We may also choose to finance our business through public or private equity offerings, debt financings or other arrangements. However, there can be no assurance that additional capital will be available to us or that such capital will be available to us on acceptable terms. If we raise funds by issuing equity securities, dilution to stockholders could result. Debt or any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings could impose significant restrictions on our operations. The incurrence of additional indebtedness or the issuance of certain debt or equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely affect our ability to conduct our business. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. If we are not able to secure additional funding when needed, we may have to curtail or reduce the scope of our business or forgo potential business opportunities.
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The following summarizes our cash flows for the years ended December 31, 2024 and 2023 (in thousands):
Year Ended December 31,
2024
2023
Net cash provided by (used in) operating activities
$
(15,433
)
$
1,157
Net cash provided by (used in) investing activities
141,493
(4,152
)
Net cash provided by (used in) financing activities
(13,634
)
10,073
Effect of exchange rates on cash, cash equivalents, and restricted cash
(864
)
169
Net increase in cash, cash equivalents, and restricted cash
111,562
7,247
Cash, cash equivalents, and restricted cash, beginning of year
24,384
17,137
Cash, cash equivalents, and restricted cash, end of year
$
135,946
$
24,384
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Cash flows from operating activities
Cash used in operating activities in 2024 of $15.4 million was primarily due to certain non-cash items of $90.9 million, consisting primarily of the gain on sale of our Physical Security Business of $103.5 million, as well as depreciation, amortization and stock-based compensation, partially offset by net income of $74.8 million and an increase in cash from net changes in operating assets and liabilities of $0.6 million.
Cash provided by operating activities in 2023 of $1.2 million was primarily due to a net loss of $5.5 million, more than offset by adjustments for certain non-cash items of $6.6 million, consisting primarily of depreciation, amortization, stock-based compensation and gain on investment.
Cash flows from investing activities
Cash provided by investing activities in 2024 was $141.5 million which related primarily to net proceeds received in connection with the sale of our Physical Security Business in the third quarter of 2024, partially offset by capital expenditures for our manufacturing facility in Thailand.
Cash used in investing activities in 2023 of $4.2 million was due to capital expenditures in our manufacturing facility in Thailand, partially offset by $0.1 million related to additional proceeds received from an investment.
Cash flows from financing activities
Cash used in financing activities in 2024 was $13.6 million, which consisted of net repayments of $10.1 million under our revolving loan facility with our lender, net share settlements of RSUs of $1.6 million, and repurchases of our common stock of $1.9 million.
Cash provided by financing activities in 2023 was primarily due to net borrowings of $9.9 million under our revolving loan facility with our lender, proceeds received from the exercise of warrants of $1.0 million, partially offset by net share settlements of RSUs of $0.8 million.
Contractual Obligations
We lease facilities, certain equipment, and automobiles under non-cancelable operating lease agreements. See Note 14, Leases , in the accompanying notes to our consolidated financial statements.
Purchases for inventories are highly dependent upon forecasts of customer demand. Due to the uncertainty in demand from our customers, we may have to change, reschedule, or cancel purchases or purchase orders from our suppliers. These changes may lead to vendor cancellation charges on these orders or contractual commitments. See Note 16, Commitments and Contingencies , in the accompanying notes to our consolidated financial statements.
Our other long-term liabilities include gross unrecognized tax benefits, and related interest and penalties. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities.
Off-Balance Sheet Arrangements
We have not entered into off-balance sheet arrangements, or issued guarantees to third parties.
Climate Change
We believe that neither climate change, nor governmental regulations related to climate change, have had a material effect on our business, financial condition or results of operations.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The preparation of these financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the
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reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors, which we believe are reasonable based upon the information available to us at the time these estimates, judgments and assumptions are made. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
We recognize revenue when we transfer control of promised products to our customers in an amount that reflects the consideration we expect to receive in exchange for those products. For contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation, generally on a relative basis using its standalone selling price. The stated contract value is generally the transaction price to be allocated to the separate performance obligations. Revenue is recognized net of any taxes collected from our customers that are subsequently remitted to governmental authorities.
Provision for Credit Losses
Our provision for credit losses is based on our assessment of the collectibility of customer accounts. We regularly review our receivables that remain outstanding past their applicable payment terms and establish an allowance and potential write-offs by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. Although we expect to collect net amounts due as stated on the consolidated balance sheets, actual collections may differ from these estimated amounts.
Inventory Valuation
Inventories are stated at the lower of cost (using average cost or standard cost, as applicable) or net realizable value (market). We typically plan our production and inventory levels based on internal forecasts of customer demand, which can be highly unpredictable and can fluctuate significantly. We regularly review inventory quantities on hand and record an estimated provision for excess inventory based on judgment and assumptions involving an evaluation of technical obsolescence and our ability to sell based primarily on historical sales patterns and expectations for future demand. Actual demand and market conditions may differ from the projections utilized by management in establishing our inventory reserves. If we were to use different assumptions or utilize different estimates, the amount and timing of our inventory write-downs could be materially different. Adverse changes in our inventory valuations could have a material effect on our operating results and financial position.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s assessment of estimated current and future income taxes to be paid. We are subject to income taxes in the United States and in numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits.
Deferred tax assets and liabilities arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which are expected to result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, for all material jurisdictions, we consider all available positive and negative evidence, including scheduled reversals of deferred tax balances, projected future taxable income, tax-planning strategies and results of recent operations. In projecting future taxable income, we begin with historical results and incorporate assumptions about the amount of future state, federal and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we use to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating results.
As of December 31, 2024, we have federal and state income tax net operating loss (“NOL”) carryforwards of $70.3 million and $25.0 million, respectively, which will expire at various dates.
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We believe that it is more likely than not that the benefit from these NOL carryforwards will not be realized. Accordingly, we have provided a full valuation allowance on any potential deferred tax assets relating to these NOL carryforwards. If our assumptions change and we determine we will be able to realize these NOLs, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets as of December 31, 2024, will be accounted for as a reduction of income tax expense.
The calculation of our tax liabilities involves evaluating uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including the resolution of any related appeals or litigation processes, on the basis of the technical merits.
We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a tax payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is made available.
We believe that none of the unrecognized tax benefits, excluding the associated interest and penalties, which are insignificant, may be recognized by the end of 2024.
We consider the earnings of all our non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. Should we decide to repatriate foreign earnings, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and long-term operating lease liabilities on our consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives and initial direct costs incurred. Our lease terms may include options to extend the lease when it is reasonably certain that they we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which is accounted for as a single lease component.
Stock-based Compensation
We recognize stock-based compensation expense for all share-based payment awards in accordance with ASC 718, Compensation – Stock Compensation . Stock-based compensation expense for expected-to-vest awards is valued under the single-option approach and amortized on a straight-line basis, net of estimated forfeitures. We utilize the Black Scholes pricing model in order to determine the fair value of stock-based option awards. The Black Scholes pricing model requires various highly subjective assumptions including volatility, expected option life, and risk-free interest rate. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. In addition, we estimate the expected forfeiture rate and recognize expense only for those expected-to-vest shares. If our actual forfeiture rate is materially different from our estimate, our recorded stock-based compensation expense and operating results could be different.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, in the accompanying notes to our consolidated financial statements in Item 8 of Part II of this Annual Report for a description of recent accounting pronouncements, which is incorporated herein by reference.
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10b5-1 Trading Plans
From time to time, our executive officers and directors have, and we expect they will in the future, enter into written trading plans pursuant to Rule 10b5-1 of the Securities and Exchange Act of 1934.
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