Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
During 2024, we delivered 8.5% growth in net sales, with broad-based contributions by customer type. This growth was driven by a combination of commercial execution and demand for newer products, despite ongoing Medicare reimbursement uncertainty for the private office and associated care settings as well as a higher than normal level of customer and employee turnover in the middle of the year. Operating and financial highlights during the year include:
• Fourth quarter and full year 2024 net sales of $92.9 million and $348.9 million, respectively, reflecting 7.0% and 8.5% growth over the fourth quarter and full year 2023, respectively.
• GAAP net income for the fourth quarter and full year 2024 of $7.4 million and $42.0 million, respectively.
• Announced improved capital structure with new credit facilities that provide substantial interest savings over the Company’s prior indebtedness and access to additional capital in support of the Company’s strategic priorities
• Introduced e-commerce and account management platform, MIMEDX Connect, designed to streamline ordering, payment processing, and reimbursement submissions for our customers,
• Entered into an exclusive agreement providing the Company with rights to commercialize HELIOGEN, a 510(k) cleared, bovine-derived collagen matrix particulate that is indicated for the management of exudating wounds, which launched commercially during the second half of 2024
• Announced publication focused on surgical applications using MIMEDX placental-based allografts in Nature - Scientific Reports. The study adds to the Company’s growing body of evidence and expands the understanding of the regulatory capabilities of its DHACM and LHACM allografts on the fibrotic process
• Highlighted the publication of a feature article on placental allografts for patients with hard-to-heal, acute and chronic wounds, which was published in the New York Times: “Her Face Was Unrecognizable After an Explosion. A Placenta Restored It”
On April 13, 2025, new LCDs are currently scheduled to go into effect which will modify the reimbursement of skin substitutes in physician office settings. Among other changes, many allografts that have been covered will no longer be reimbursed for DFUs and/or VLUs. While EPIFIX and EPICORD continue to be covered under the new LCD, certain of our other products are not currently included. In the past LCDs have been delayed or terminated so there is no guarantee they will go into effect in April 2025
Overview
MIMEDX is a pioneer and leader in placental biologics focused on delivering innovative solutions to patients and the healthcare professionals who treat them. With more than a decade of experience helping clinicians manage acute and chronic wounds, MIMEDX has been dedicated to providing a leading portfolio of products for applications in the wound care, burn, and surgical sectors of healthcare. All of our products sold in the United States are regulated by the FDA. We apply Current Good Tissue Practices ( “CGTP” ) and other applicable quality standards in addition to terminal sterilization to produce our allografts.
Our Products
Our product portfolio is divided into two categories (1) Wound Care Products and (2) Surgical and Other Products.
The Wound Care products we manufacture include EPIFIX and EPIEFFECT, which are marketed for external use, such as in Advanced Wound Care applications. Within Surgical and Other, our product offering includes AMNIOFIX and AMNIOEFFECT, which are positioned for use in a variety of applications and surgical settings, including lower extremity repair, plastic surgery, vascular surgery and multiple orthopedic repairs and reconstructions. From time to time, we will also acquire, manufacture and market other products in the wound care, surgical or other products in response to market demands or to maintain our competitive position.
In 2024, we also launched HELIOGEN, a particulate xenograft product aimed at addressing complex wounds primarily in the surgical setting. HELIOGEN is a shelf-stable offering that contains Type I and Type III collagen and mimics the native composition of structural connective tissue, HELIOGEN is manufactured by Regenity Biosciences.
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This discussion, which presents our results for the fiscal years ended December 31, 2024 and 2023, should be read in conjunction with our Consolidated Financial Statements and the accompanying notes. Also, please refer to Part I, Item 1, Business , and Part I, Item 1A, Risk Factors , which include detailed discussions of various items impacting our business, results of operations and financial condition. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes. We also discuss certain performance metrics that management uses to assess the Company's performance.
Our Annual Report for the year ended December 31, 2023 (the “ 2023 Annual Report ”) includes a discussion and analysis of our total company financial condition and results of operations for 2023 compared to 2022 in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations .
Components of and Key Factors Influencing Our Results of Continuing Operations
In assessing the performance of our business, we consider a variety of performance and financial measures. We believe the items discussed below provide insight into the factors that affect these key measures.
Net sales
Our net sales are derived from selling to a wide range of customers, including hospitals, wound care centers and private physician offices that have clinicians using our suite of products to aid in the management of patients with chronic or hard-to-heal wounds. These customers choose products like ours based upon a variety of factors, including clinical efficacy, availability, handling characteristics, and reimbursement coverage and payer sources. Net sales are recognized based on the consideration we expect to receive from the sale at the point in time when control of the goods is transferred to the customer, which generally occurs upon our delivery to a third-party carrier or implantation for consignment arrangements. Net sales consists of the gross selling price of the product, less any discounts, rebates and other customer incentives, fees paid to GPOs, and returns.
Cost of goods sold and gross profit
Cost of goods sold includes product testing costs, quality assurance costs, personnel costs, manufacturing costs, raw materials and product costs, depreciation and facility costs associated with our manufacturing and warehouse facilities. Fluctuations in our cost of goods sold correspond with the fluctuations in these costs as well as sales volume.
Gross profit is calculated as net sales less cost of goods sold. Gross margin is calculated as gross profit divided by net sales. Our gross margin is affected by product and geographic sales mix, realized pricing of our products, the efficiency of our manufacturing operations and the costs of materials used to make our products. Regulatory actions, including with respect to reimbursement for our products, may require costly expenditures or result in pricing pressure, and may decrease our gross profit and gross margin.
Selling, general and administrative expense
Selling, general and administrative expense consists of both selling and marketing (“ S&M ”) and general and administrative (“ G&A ”) expenses. S&M includes costs to execute our sales strategy, which includes personnel costs pertaining to our sales force and sales support functions, including salaries, commissions and other incentive compensation, commissions to sales agents, customer support, travel expenses, and bad debt expense. G&A expense reflects costs related to functions which support our business, such as legal, finance, human resources, and other such functions, including personnel costs associated with these functions, insurance, and certain professional fees. We expect our S&M expense to fluctuate based on revenue fluctuations, geographic changes, and any changes to the size of our headcount, particularly that of our sales and marketing forces. Certain of these costs scale with sales, but can fluctuate depending on sales mix. For example, we pay sales agents a greater commission than our internal sales force, meaning that we could incur greater commission expenses if a greater proportion of our sales are through sales agents. We expect our G&A expense to fluctuate based on headcount.
Research and development expense
Research and development expense relates to our investments to expand our product pipeline and platforms, including historically through clinical trials, as well as expenditures in improvements to our manufacturing process and the enhancement of existing products. Our research and development costs also include expenses such as salaries and benefits related to our research department, consulting costs and advisory costs, and regulatory costs.
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We expense research and development costs as incurred. Fluctuations in research and development expenses can be impacted by the timing and cadence of our clinical trials.
Investigation, restatement and related (benefit) expense
Investigation, restatement and related expense primarily related to legal fees that were advanced to certain former officers and directors of the Company under certain indemnification agreements and our liability from legal proceedings that were taken against us. These costs ceased during the year ended December 31, 2024 and are not expected to reoccur.
Interest expense, net
We incur interest expense primarily through stated interest on our outstanding term and revolving loans, to the extent that they are outstanding. The interest on our term and revolving loans are currently tied to applicable Secured Overnight Financing Rates (“ SOFR ”). Increases in SOFR could cause our interest expense to increase. Other activity influencing interest expense relates to the amortization of deferred financing costs and original issue discount associated with credit facilities outstanding. This amount is presented net of interest income, which we generate from our treasury management.
Income Tax Provision
We generate tax liability primarily in the United States and in various states in which we have nexus. Across these jurisdictions, we have net operating losses, research and development tax credit carryforwards, and other deferred tax assets which materially defray our liability. Large fluctuations in our effective tax rate are generally driven by changes in our expectations of the realizability of our deferred tax assets. See “ Critical Accounting Estimates ” for further details. Our effective tax rate is also impacted by other permanent items, primarily executive compensation limitations and windfall or shortfall on the vesting of stock awards.
Results of Continuing Operations for 2024 Compared to 2023
Year Ended December 31,
(in thousands)
2024 2023 $ Change % Change
Net sales $ 348,879 $ 321,477 $ 27,402 8.5 %
Cost of sales 60,073 54,634 5,439 10.0 %
Gross profit 288,806 266,843 21,963 8.2 %
Selling, general and administrative 225,087 211,124 13,963 6.6 %
Research and development 12,341 12,665 (324) (2.6) %
Investigation, restatement and related (8,698) 5,176 (13,874) nm
Amortization of intangible assets 765 762 3 0.4 %
Impairment of intangible assets 446 — 446 100.0 %
Interest expense, net (1,006) (6,457) 5,451 (84.4) %
Other expense, net (565) (26) (539) nm
Income tax provision benefit (expense)
(15,296) 36,806 (52,102) nm
Net income (loss) from continuing operations $ 41,998 $ 67,439 $ (25,441) (37.7) %
Net Sales
We recorded net sales for the year ended December 31, 2024 of $348.9 million, an increase of $27.4 million, or 8.5%, over net sales for the year ended December 31, 2023 net sales of $321.5 million.
Our sales by product category were as follows (amounts in thousands):
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Year Ended December 31, % of net sales
Change
2024 2023 2024 2023 $ %
Wound $ 231,004 $ 205,660 66 % 64 % $ 25,344 12.3 %
Surgical 117,875 115,817 34 % 36 % $ 2,058 1.8 %
Net sales
$ 348,879 $ 321,477 100 % 100 % $ 27,402 8.5 %
Net sales in the Wound category were $231.0 million for the year ended December 31, 2024, a $25.3 million, or 12.3% increase, compared to $205.7 million for the year ended December 31, 2023. The increase was primarily driven by sales of EPIEFFECT, partially offset by commercial challenges associated with competitive behavior in the marketplace as well as headwinds relating to turnover of certain of our sales team and customers.
Net sales in the Surgical category grew by $2.1 million, or 1.8%, to $117.9 million for the year ended December 31, 2024, compared to $115.8 million for the year ended December 31, 2023. The increase reflects growing sales volume contributions from AMNIOEFFECT, partially offset by lower AXIOFILL compared to the prior year due to regulatory headwinds. In addition, Surgical sales for the year ended December 31, 2023 reflects $3.3 million of sales of our dental product which we have since discontinued.
Gross Margin and Cost of Sales
Gross margin in 2024 was 82.8%, compared to 83.0% in 2023. The decrease in margin was driven by the amortization of various intangible assets acquired during 2024. This effect was offset by a favorable product mix and our continued execution on scrap improvement projects, partially offset by throughput pressures.
Cost of sales for the year ended December 31, 2024 was $60.1 million, an increase of $5.4 million, or 10.0%, compared to $54.6 million for the year ended December 31, 2023. The increase in cost of sales was driven by the increase in sales volume and the changes in margins noted above.
Selling, General and Administrative Expense
SG&A expense increased $14.0 million, or 6.6%, to $225.1 million for December 31, 2024, compared to $211.1 million for December 31, 2023. The following table shows the composition of this expense between selling and marketing (“ S&M ”) and general and administrative (“ G&A ”) components (amounts in thousands):
Year Ended December 31, Change
2024 2023 $
%
Selling and marketing
$ 175,562 $ 161,833 $ 13,729 8.5 %
General and administrative
49,525 49,291 234 0.5 %
Selling, general and administrative
$ 225,087 $ 211,124 $ 13,963 6.6 %
Sales and marketing expenses increased $13.7 million, or 8.5%, year over year, which was driven by increases in commissions due to higher sales and higher effective commission rates. General and administrative expense increased $0.2 million, or 0.5%, year-over-year. The increase was driven by general increases in salaries from merit increases, offset by reductions in severance expense and professional services.
Research and Development Expense
Our research and development (“ R&D ”) expense was $12.3 million for the year ended December 31, 2024, compared to $12.7 million for the year ended December 31, 2023. The decrease in R&D expense related to the timing of our product development activities, which primarily related to EPIEFFECT in 2023.
Investigation, Restatement and Related Expense
Investigation, restatement, and related expenses for the year ended December 31, 2024 was a benefit of $8.7 million, compared to expense of $5.2 million for the year ended December 31, 2023. The benefit was resulted from various settlements related to former officers and other related matters during 2024. This was offset by the last material payment towards the resolution of matters stemming from the findings of our historical Audit Committee investigation during the year ended December 31, 2024. We do not expect activity to be material in future periods.
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Amortization of Intangible Assets
Amortization expense related to intangible assets were $0.8 million for each of the years ended December 31, 2024 and 2023.
Impairment of Intangible Assets
Impairment for the year ended December 31, 2024 was $0.4 million, which relates to abandoned patents.
Interest Expense, Net
Interest expense decreased $5.5 million to $1.0 million for the year ended December 31, 2024 from $6.5 million for the year ended December 31, 2023. The decrease was the result of a decrease in outstanding debt and lower rates under the Citizens Credit Facilities after the Debt Refinancing Transactions (as defined below) was completed in January 2024. Improvements in our treasury management further aided the decrease. This decrease was partially offset by a $1.4 million loss on extinguishment of debt due to repaying and terminating a previous loan agreement during the first quarter of 2024.
Income Tax Provision
Our effective tax rates for 2024 and 2023 was 26.7% and (120.2)%, respectively, on income from continuing operations before income tax provision of $57.3 million and $30.6 million for 2024 and 2023, respectively.
Our effective tax rate in 2024 was favorably impacted by vestings of restricted stock, offset by executive compensation deduction limitations.
Our effective tax rate for the year ended December 31, 2023 was significantly impacted by the reversal of a valuation allowance. In the period, the Company noted that it was no longer in a cumulative three-year loss on a continuing operations basis, after excluding the effects of permanent book-tax differences. The absence of such negative evidence, coupled with our expectation for future taxable income generation, led to a change in our assessment of the realizability of our deferred tax assets.
Liquidity and Capital Resources
We require capital for our operating activities, including costs associated with the sale of product through direct and indirect sales channels, research and development activities, compliance costs, costs to sell and market our products, regulatory fees, and legal and consulting fees in connection with ongoing litigation and other matters. We generally fund our operating capital requirements through our operating activities and cash reserves. We expect to use capital to invest in the broadening of our product portfolio, including through potential acquisitions, licensing agreements or other arrangements, the international expansion of our business and certain capital projects.
As of December 31, 2024, we had $104.4 million of cash and cash equivalents.
Our net working capital at December 31, 2024 was $146.3 million, an increase of $28.0 million from $118.3 million at December 31, 2023. Our current ratio was 4.2 to 1 and 3.6 to 1 as of as of December 31, 2024 and 2023, respectively. We had no borrowings outstanding and $75 million of availability under our Revolving Credit Facility (as defined below).
The Company is currently paying its obligations in the ordinary course of business. We believe that our anticipated cash from operating activities, existing cash and cash equivalents, and available credit under the Citizens Credit Agreement, as defined below, will enable us to meet our operational liquidity needs for the twelve months following the filing date of this Annual Report.
Contractual Obligations
Contractual obligations associated with ongoing business activities are expected to result in cash payments in future periods. See Item 8, Note 18, Commitments and Contingencies , in the Consolidated Financial Statements for more information regarding our contractual commitments.
Citizens Loan Facilities
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On January 19, 2024, we entered into a Credit Agreement (the “ Citizens Credit Agreement ”) with a syndicate of banks comprised of Citizens Bank, N.A. as administrative agent (the “ Agent ”), and Bank of America, N.A. The Citizens Credit Agreement was designed to simultaneously improve our capital structure, providing the ability to refinance the $50 million senior secured term loan under the Hayfin Loan Agreement (as defined below) at lower interest rates and have access to additional borrowing capacity that could be deployed in the future in support of our organic and potential inorganic growth objectives.
The Citizens Credit Agreement provides for senior secured credit facilities in an aggregate principal amount of up to $95.0 million consisting of: (i) a $75.0 million senior secured revolving credit facility (the “ Revolving Credit Facility ”) with a $10.0 million letter of credit sublimit and a $10.0 million swingline loan sublimit, and (ii) a $20.0 million senior secured term loan facility (the “ Term Loan Facility ” and, together with the Revolving Credit Facility, the “ Credit Facilities ”). All obligations are required to be paid in full on January 19, 2029 (the “ Maturity Date ”), and are guaranteed by certain of our subsidiaries, and secured by substantially all of the assets of the Company and the guarantors pursuant to a customary security agreement. Subject to the terms of the Citizens Credit Agreement, we have the option to obtain one or more incremental term loan facilities and/or increase the commitments under the Revolving Credit Facility in an aggregate principal amount equal to the greater of (i) $50.0 million and (ii) 1.00 times the Company’s Consolidated EBITDA as defined therein, each subject to the existing or any new lenders’ election to extend additional term loans or revolving commitments.
At our option, borrowings under the Citizens Credit Agreement (other than any swingline loan) will bear interest at a rate per annum equal to (i) the Alternate Base Rate, as defined therein, or (ii) a Term SOFR as defined therein, in each case plus an applicable margin ranging from 1.25% and 2.50% with respect to Alternate Base Rate borrowings and 2.25% and 3.50% for Term SOFR borrowings. Swingline loans will bear interest at a rate per annum equal to one-month Term SOFR plus the applicable margin. The applicable margin will be determined based on the Company’s consolidated total net leverage ratio.
We are required to pay a quarterly commitment fee on any unused portion of the Revolving Credit Facility, letter of credit fees, and other customary fees to the Agent and the Lenders. The Term Loan Facility will amortize on a quarterly basis at 1.25% (for year one and two), 1.875% (for year three and four), and 2.5% (for year five) based on the aggregate principal amount outstanding under the Term Loan Facility at inception, with the remainder due on the Maturity Date. We must make mandatory prepayments in connection with certain asset dispositions and casualty events, subject in each case to customary reinvestment rights. We may prepay borrowings under the Credit Facilities at any time, without premium or penalty, and may, at our option, reduce the aggregate unused commitments under the Revolving Credit Facility in whole or in part, in each case subject to the terms of the Credit Agreement. We must also comply with certain financial covenants, including a maximum total net leverage ratio and a minimum consolidated fixed charge coverage ratio, as well as other customary restrictive covenants.
In addition, on January 19, 2024, we borrowed $30.0 million under the Revolving Credit Facility and $20.0 million under the Term Loan Facility. Proceeds from the initial drawings under the Credit Facilities, together with cash on hand, were used to repay in full the $50.0 million principal amount and other obligations under that certain Loan Agreement, dated as of June 30, 2020 (as amended from time to time), by and among the Company, the guarantors party thereto, the lenders party thereto and Hayfin Services LLP, as administrative and collateral agent (as amended from time to time, the “ Hayfin Loan Agreement ”) and to pay related fees, premiums, costs and expenses (collectively with the entry into the Citizens Credit Agreement and the initial borrowings thereunder, the “ Debt Refinancing Transactions ”).
In February 2024, we repaid the initial $30.0 million drawing under the Revolving Credit Facility. There were no borrowings on the Revolving Credit Facility outstanding as of December 31, 2024.
Discussion of Cash Flows for 2024 Compared to 2023
Operating Activities from Continuing Operations
During the year ended December 31, 2024, net cash provided by operating activities of continuing operations increased $32.2 million to $67.1 million compared to cash provided of $34.9 million for the year ended December 31, 2023. The increase in cash provided by operating activities was primarily as a result of year-over-year increases in net sales, which drove increases in collections from customers.
Investing Activities
During the year ended December 31, 2024, net cash used in investing activities was $9.6 million, a increase of $7.4 million, compared to $2.2 million for the year ended December 31, 2023. The primary reason for the increase was our investments to expand our product portfolio through various acquisitions during 2024. This was offset by a decrease in capital expenditures, year over year.
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Financing Activities
During the year ended December 31, 2024, net cash used in financing activities was $34.2 million, an increase of $25.6 million compared to $8.6 million for the year ended December 31, 2023. During 2024, we entered into the Citizens Credit Agreement, as described above. The cash used during 2024 was due to the repayment of the initial $30.0 million drawing under the Revolving Credit Facility, deferred financing costs and other payments made as part of the Debt Refinancing Transactions, as described above. Other activity contributing to the increase included stock repurchases for tax withholdings upon vesting of employee awards of $2.6 million, proceeds from exercise of stock options of $1.4 million, and scheduled payments on our Term Loan Facility under the Citizen’s Credit Agreement of $1.0 million. The increase was offset by the repurchase of our historical Series B Preferred Stock of $9.5 million during 2023.
Critical Accounting Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“ GAAP ”). The preparation of these financial statements requires that we make judgments and estimates which may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We derive these judgments and estimates on historical experience and other relevant factors which we believe to be reasonable. Actual results may differ from these estimates.
Share-Based Compensation
Description
We measure the fair value of stock options and other stock-based awards granted to employees on the grant date and recognize the assessed fair value as share-based compensation expense, straight-line, over the requisite service period to achieve the award based on the vesting requirements to the extent that the achievement of performance conditions associated with such awards, as applicable, are determined to be “probable.”
Judgments and Uncertainties
Share-based payment arrangements are measured at fair value on the grant date. The fair value of restricted stock units and performance stock units are generally measured at the last trading price on the grant date. Options are measured using an appropriate option pricing model using applicable inputs as of the grant date. In each case, the grant date fair value is adjusted for the presence of any market conditions.
Subsequent to the determination of fair value, we recognize expense to the extent we evaluate that performance conditions associated with share-based payment arrangements are probable of occurring. We determine probable performance based on actual performance to date, internally-developed budgets and forecasts for periods covered by the relevant performance condition, and other evidence deemed relevant to this determination. We re-evaluate our probability assessments at least quarterly, with any revisions reflected as a cumulative adjustment to expense. Because of the cumulative nature of adjustments, during any period in which we re-evaluate probability, the adjustments could significantly impact our results of operations.
Sensitivity of Estimate to Change
As of December 31, 2024, all outstanding performance stock unit awards vest on the basis of stipulated revenue targets in addition to continued employment. Cumulative expense recognized for unvested performance stock unit awards was $5.9 million as of December 31, 2024. This was based on determinations regarding probable resolution or the extent of probable resolution of relevant performance conditions to earn such awards.
If it is subsequently determined that the performance conditions associated with the performance stock unit awards are no longer probable of being met, or performance conditions which were determined to be probable of occurring do not actually occur, we could reverse up to this amount of expense in the period such determination is made. Furthermore, if probable levels of achievement are later determined to be greater, or actual achievement exceeds the level of achievement assessed as probable, we could record increases to expense to reflect this level of achievement. As of December 31, 2024, a revision of expense to reflect the maximum hypothetical attainment of all unvested performance stock units would result in a $7.8 million increase to expense. Conversely, a revision of expense to reflect that no shares are probable of vesting would result in a $5.9 million decrease to expense. The amount of any incremental expense recognition or reversal will depend on the magnitude and timing of such change in estimate. With the amount of units awarded, any change in the probability has the potential to be material to the financial statements.
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Net Sales
Description
We record estimates for returns and allowances as a reduction to net sales based on our expectation for such returns.
Judgments and Uncertainties
We sell our products to individual customers and independent distributors (collectively referred to as “ customers ”). Customers obtain and use products either through ship and bill sales or consignment arrangements. We recognize revenue as performance obligations are fulfilled, which generally occurs upon the shipment of product to customers for ship and bill sales or upon implantation for consignment sales. We recognize revenue based on consideration we expect to receive from the sale. This consists of the gross selling price of the product, less any discounts, rebates, fees paid to GPOs, and an expectation for sales returns.
We maintain a return policy that allows our customers to return product for any reason within 30 days of sale, and to return product that is damaged or non-conforming, ordered in error, or due to recall at any time.
We derive an expectation for product returns based on historical return patterns and other discrete factors which influence return activity, such as changes in our regulatory environment, product recalls, changes in reimbursement rates, changes in reimbursement eligibility and rules, and other factors also impact return patterns. Determinations involving other factors are based on our estimates for product at customer sites that are eligible for return.
Additions or reversals to our return allowance, as determined necessary, are accounted for prospectively and recorded as a decrease or increase to net sales, respectively. Actual returns are recorded against the recorded accrual.
Sensitivity of Estimate to Change
We have accrued $2.0 million for sales returns as of December 31, 2024. Changes in return patterns or unforeseen changes in regulations or identified product recalls could cause returns significantly in excess of this estimate.
Income Taxes
Description
We have $28.8 million of net deferred tax assets available to us to defray future tax liability, including net operating loss carryforwards, research and development tax credits, and other future deductions and credits. We record a valuation allowance to offset our gross deferred tax asset to the extent that realization is not likely.
Judgments and Uncertainties
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Transactions which result in lower taxable income in the future give rise to deferred tax assets. GAAP requires that the net balance of deferred tax assets reflect the extent of utilization which is ‘more likely than not’. This is accomplished through a valuation allowance recorded against gross deferred tax assets.
We evaluate our ability to recover deferred tax assets based on projected future taxable income, scheduled reversals of deferred tax liabilities, tax planning strategies, and our recent operating results. Judgment is required to determine whether the totality of this evidence suggests that we can recover our deferred tax assets in the future.
Sensitivity of Estimate to Change
As of December 31, 2024, we had $0.5 million in valuation allowances recorded against our deferred tax assets balance of $28.8 million. The amount and extent of the valuation allowance necessary to reflect the extent of realization of these deferred tax assets being more likely than not may change due to changes in tax law, a revision to our expectation regarding taxable income in the future, taxable income generated in a period in which we had not previously anticipated taxable income, a change in scheduled reversals of deferred tax liabilities, and other changes.
Recently Adopted Accounting Pronouncements
See Item 8, Note 2, Significant Accounting Policies , in the Consolidated Financial Statements for recently adopted accounting pronouncements.
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