Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context otherwise requires, all references in this section to the “Company,” “we,” “us” or “our” refer to the business of Navitas and its subsidiaries. Throughout this section, unless otherwise noted, “Navitas” refers to Navitas Semiconductor Corporation and its consolidated subsidiaries.
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this annual report on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs and that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Risk Factors” and “Cautionary Statement About Forward-Looking Statements” sections and elsewhere in this annual report, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
Navitas Semiconductor Corporation, a Delaware holding company, operates through its wholly owned subsidiaries, including Navitas Semiconductor Limited and GeneSiC Semiconductor LLC (“GeneSiC”). Originally founded in 2014 as the legacy Navitas Semiconductor business, we were previously an SEC registrant named Live Oak Acquisition Corp. II (“Live Oak”). On October 19, 2021, we completed a business combination (which we refer to as the “Business Combination”) in which, among other transactions, Live Oak acquired Navitas Semiconductor Limited and its subsidiaries, changed our name to Navitas Semiconductor Corporation. We acquired GeneSiC Semiconductor in August 2022. Further details about the Business Combination and the acquisition of GeneSiC Semiconductor can be found in our SEC filings.
Founded in 2014, Navitas is a U.S.-based developer of gallium nitride power integrated circuits that provide superior efficiency, performance, size and sustainability relative to existing silicon technology. Our solutions offer faster charging, higher power density and greater energy savings compared to silicon-based power systems with the same output power. By unlocking this speed and efficiency, we believe we are leading a revolution in high-frequency, high-efficiency and high-density power electronics to electrify our world for a cleaner tomorrow. We maintain operations around the world,
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including the United States, Ireland, Germany, Italy, Belgium, China, Taiwan, Thailand, South Korea, and the Philippines, with principal executive offices in Torrance, California.
We design, develop and market next-generation power semiconductors including gallium nitride (“GaN”) power integrated circuits (“ICs”), silicon carbide (“SiC”) and associated high-speed silicon system controllers, and digital isolators used in power conversion and charging. Power supplies incorporating our products may be used in a wide variety of electronics products including mobile phones, consumer electronics, data centers, solar inverters and electric vehicles. We utilize a fabless business model, working with third parties to manufacture, assemble and test our designs. Our fabless model allows us to run the business today with minimal capital expenditures.
Our go-to-market strategy is based on partnering with leading manufacturers and suppliers through focused product development, addressing both mainstream and emerging applications. We consider ourselves to be a pioneer in the GaN market with a proprietary, proven GaN power IC platform that is shipping in mass production to tier-1 companies including Samsung, Dell, Lenovo, LG, Xiaomi, OPPO, Amazon, vivo, and Motorola. Most of the products we ship today are used primarily as components in mobile device chargers. Charger manufacturers we ship to today are worldwide, supporting major international mobile brands. Other emerging applications will also be addressed across the world.
In support of our technology leadership, we have formed relationships with numerous Tier 1 manufacturers and suppliers over the past eight years, gaining significant traction in mobile and consumer charging applications. Navitas GaN has entered mass production and is being utilized by 9 out of the top 10 global mobile OEMs for the development of smartphones and laptops, with all 10 out of 10 currently in progress . In addition, our supply chain partners have committed manufacturing capacity in excess of what we consider to be necessary to support our continued growth and expansion.
A core strength of our business lies in our industry leading IP position. In addition to our comprehensive patent portfolio, our biggest proprietary advantage is our process design kit (PDK), the ‘how-to’ guide for Navitas designers to create new GaN based devices and circuits. Our GaN power IC inventions and intellectual property translate across all of our target markets from mobile, consumer, EV, enterprise, and renewables. We evaluate various complementary technologies and look to improve our PDK, in order to keep introducing newer genera tions of GaN technology. In the years ended December 31, 2024 and 2023, research and development expenses represented approximately 91% and 87%, respectively, of our revenue. Navitas’ research and development activities are located primarily in the US and China.
Equity Method Investment
In October 2024, the Company began applying the equity method of accounting for its related party investment, in accordance with Accounting Standards Codification (“ASC”) 323, Investments—Equity Method and Joint Ventures. Under ASC 323, an investor must use the equity method when it has significant influence over the investee, typically indicated by ownership of 20% to 50 % of the voting stock or other qualitative factors (e.g. board representation). The Company holds a 13.5% ownership stake in the investment and as part of the October 2024 transaction, received the option to appoint a representative to the investee’s board of directors. As a result, the Company remeasured its investment to its fair value of $5.55 per share as of the change in accounting and recognized its proportionate share of the investee’s earnings and losses for the period from November through December 2024, resulting in a net gain of $3.9 million for the year ended December 31, 2024. This amount is included in “Equity method investment gain” on the Statements of Operations.
May 2023 Public Offering
On May 26, 2023, the Company completed an underwritten public offering (the “May 2023 Public Offering”) of 10,000,000 shares of its Class A common stock at a public offering price of $8.00 per share, before deducting underwriting discounts and commissions. In connection with the May 2023 Public Offering, the Company granted the underwriters of the offering a 30-day option to purchase up to an additional 1,500,000 shares of the Company’s Class A common stock (the “Option Shares”) from the Company at the same public offering price. On June 1, 2023, the underwriters exercised in full their option to purchase the Option Shares. The sale of the Option Shares closed on June 5, 2023. After deducting underwriting discounts and commissions and before deducting offering expenses payable by the Company, the Company received net proceeds of $75.6 million and $11.3 million from the May 2023 Public Offering and sale of the Option Shares,
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respectively. The total net proceeds received by the Company after deducting offering expenses was $86.5 million. The Company intends to use the net proceeds for working capital and other general corporate purposes, including potential acquisitions or strategic manufacturing investments.
Buyout of Elevation Semiconductor
On January 19, 2023, the Company announced an agreement to acquire the remaining minority interest in its silicon control IC joint venture from Halo Microelectronics International Corporation (“Halo”). Total consideration for the joint venture interests and certain intellectual property rights purchased from Halo, and certain other interests and agreements of Halo and joint venture employees, was approximately $22.4 million in Navitas stock. As Navitas was already the majority shareholder, financial results from the joint venture have already been reflected in Navitas’ historical financial statements. The transaction was completed on February 13, 2023. In connection with the purchase of intellectual property, the Company recognized an intangible asset at its estimated fair value of $4.4 million related to acquired intellectual property.
Acquisition of GeneSiC
On August 15, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire 100% of the outstanding shares of GeneSiC Semiconductor Inc. (“GeneSiC”) for $146.3 million of equity, $97.1 million of cash consideration, and potential future earn-out payments of up to an aggregate of $25.0 million in cash. GeneSiC was a silicon carbide (“SiC”) pioneer with deep expertise in SiC power device design and process, based in Dulles, Virginia. The future earn-out payments were fair valued at $0.6 million, for a total merger consideration of $244.0 million.
During the Company’s second quarter of 2023, the Company received information regarding products shipped by GeneSiC to a distributor prior to the Company’s acquisition of GeneSiC. GeneSiC had the option, but not the obligation, to accept returns sold to the distributor. The Company determined that a $1.7 million return liability should have been recorded as of the close of the acquisition on August 15, 2022. The Company recorded the return liability as a purchase price adjustment as of June 30, 2023, resulting in an increase to goodwill and accounts payable and other accrued expenses of $1.7 million.
Acquisition of VDDTech
On June 10, 2022, the Company’s wholly owned subsidiary, Navitas Semiconductor Limited, acquired all of the capital stock of VDDTECH srl, a private Belgian company (“VDDTech”), for approximately $1.9 million in cash and stock. Based in Mont-Saint-Guibert, Belgium, VDDTech creates advanced digital-isolators for next-generation power conversion. VDDTech’s net assets and operating results since the acquisition date are included in the Company’s Consolidated Balance Sheets and Consolidated Statement of Operations for the year ended December 31, 2024.
Results of Operations
Revenue
We design, develop and manufacture GaN ICs, SiC MOSFETs and Schottky MPS diodes that deliver best-in-class performance, ruggedness and quality. Our revenue represents the sale of semiconductors through specialized distributors to original equipment manufacturers (“OEMs”), their suppliers and other end customers.
Our revenues fluctuate in response to a combination of factors, including the following:
• our overall product mix and sales volumes;
• gains and losses in market share and design win traction;
• pace at which technology is adopted in our end markets;
• the stage of our products in their respective life cycles;
• the effects of competition and competitive pricing strategies;
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• availability of specialized field application engineering resources supporting demand creation and end customer adoption of new products;
• achieving acceptable yields and obtaining adequate production capacity from our wafer foundries and assembly and test subcontractors;
• market acceptance of our end customers’ products; governmental regulations influencing our markets; and
• the global and regional economic cycles;
• declines in average selling prices due product advances and market competition;
• changes in customer and distributor relationships including the impact of the Q4 2024 disengagement with a significant distributor and the ability to replace the associated volumes with a combination existing and new distributors;
• seasonal demand patterns particularly in mobile and consumer markets.
Our product revenue is recognized when the customer obtains control of the product and the timing of recognition is based on the contractual shipping terms of a contract. We provide a non-conformity warranty which is not sold separately and does not represent a separate performance obligation. Our product revenue is diversified across the United States, Europe, and Asia. We consider the domicile of our end customers, rather than the distributors we sell to directly to be the basis of attributing revenues from external customers to individual countries. Revenue for the twelve months ended December 31, 2024 and 2023, excluding channel inventories, were attributable to end customers in the following countries:
Year Ended December 31,
Country 2024 2023
China 60 % 62 %
United States 16 % 13 %
Asia excluding China 15 % 8 %
Europe* 8 % 17 %
All others 1 % — %
Total 100 % 100 %
*Impractical to disclose revenue percentages by individual countries within Europe and therefore is presented in total.
Cost of Revenues
Cost of revenues consists primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead (which includes depreciation and amortization) associated with such purchases, final test and wafer level yield fallout, inventory impairments, consumables, system and shipping costs. Cost of revenues also includes compensation related to personnel associated with manufacturing, including costs related to cash and stock-based employee compensation.
Research and Development Expense
Costs related to research, design and development of our products are expensed as incurred. Research and development expense consists primarily of pre-production costs related to the design and development of our products and technologies, including costs related to cash and stock-based employee compensation, benefits and related costs of sustaining our engineering teams, project material costs, third-party fees paid to consultants, prototype development expenses, write-offs of material to be utilized in research and development, and other costs incurred in the product design and development process.
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Selling, General and Administrative Expense
Selling, general and administrative costs include employee compensation, including cash and stock-based compensation and benefits for executive, finance, business operations, sales, field application engineers and other administrative personnel. In addition, it includes marketing and advertising, IT, outside legal, tax and accounting services, insurance, and occupancy costs and related overhead based on headcount. Selling, general and administrative costs are expensed as incurred.
Interest Income (Expense), net
Interest income (expense), net primarily consists of interest associated with our royalty agreement .
Dividend Income
Dividend income consist of income earned on money market treasury funds that are recorded as cash equivalents.
Income Taxes
Legacy N avitas is a dual domesticated corporation for Ireland and U.S. federal income tax purposes. Refer to Note 14 - “Provision for Income Taxes”, in our accompanying consolidated fina ncial statements elsewhere in this annual report.
Results of Operations
The tables and discussion below present our results for the years ended December 31, 2024 and 2023 (in thousands):
Year Ended December 31, Change
$ Change
%
(dollars in thousands) 2024 2023
Net revenues
$ 83,302 $ 79,456 $ 3,846 5 %
Cost of revenues (exclusive of amortization of intangibles included below) 54,963 48,392 6,571 14 %
Operating expenses:
Research and development 76,002 68,825 7,177 10 %
Selling, general and administrative 62,863 61,551 1,312 2 %
Amortization of intangible assets 18,926 18,820 106 1 %
Restructuring expense 1,223 — 1,223 — %
Total operating expenses 159,014 149,196 9,818 7 %
Loss from operations (130,675) (118,132) (12,543) 11 %
Other income (expense), net:
Interest (expense) income, net (150) 1,314 (1,464) (111) %
Dividend income 5,233 4,054 1,179 29 %
Gain (loss) from change in fair value of earnout liabilities 36,644 (33,788) 70,432 (208) %
Other income 102 84 18 21 %
Total other income (expense), net 41,829 (28,336) 70,165 (248) %
Loss before income taxes (88,846) (146,468) 57,622 (39) %
Income tax benefit (342) (517) 175 (34) %
Equity method investment gain 3,905 — 3,905 — %
Net loss $ (84,599) $ (145,951) $ 61,352 (42) %
Less: net loss attributable to noncontrolling interest — (518) 518 (100) %
Net loss attributable to controlling interest $ (84,599) $ (145,433) $ 60,834 (42) %
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Comparison of the Years ended December 31, 2024 and 2023
Revenue
Net revenues for the twelve months ended December 31, 2024 were $83.3 million compared to $79.5 million for the twelve months ended December 31, 2023, an increase of $3.8 million, or 5%. The increase was driven primarily by the growth in mobile markets.
Cost of Revenues
Cost of revenues for the twelve months ended December 31, 2024 was $55.0 million, an increase of $6.6 million or 14% compared to the twelve months ended December 31, 2023. The increase was primarily driven by a $5.0 million inventory reserve related to a distributor disengagement and an increase in revenue from the mobile market.
Research and Development Expense
Research and development expense for the twelve months ended December 31, 2024 of $76.0 million increased by $7.2 million, or 10%, when compared to the twelve months ended December 31, 2023, primarily driven by an increase in product and package development as it relates to EV, enterprise and solar, coupled with a one-time $1.7 million project expense, a $2.0 million other asset impairment, as well as other R&D material purchases.
Selling, General and Administrative Expense
Selling, general and administrative expense for the twelve months ended December 31, 2024 of $62.9 million increased by $1.3 million, or 2%, when compared to the twelve months ended December 31, 2023. The increase is primarily driven by a $7.5 million bad debt expense due to a distributor disengagement. These expenses were largely offset by a decrease in stock-based compensation of approximately $8.0 million.
Amortization of Definite-Lived Intangible Assets
Amortization of definite-lived intangible assets for the twelve months ended December 31, 2024 of $18.9 million increased by $0.1 million, or 1%, when compared to the twelve months ended December 31, 2023. Amortization of intangible assets remained fairly consistent as we did not acquire new intangible assets.
Restructuring Expenses
We announced a cost-reduction plan (“2024 Restructuring Plan”). The 2024 Restructuring Plan includes a reduction in headcount with the majority of the costs consisting of employee severance and benefits. We incurred $1.2 million related to this plan for the twelve months ended December 31, 2024.
Other Income (Expense), net
Net interest income (expense), net for the twelve months ended December 31, 2024 o f $(0.2) million compared to income of $1.3 million for the twelve months ended December 31, 2023. The $0.2 million expense as of December 31, 2024 is primarily due to interest associated with our royalty agreement. The $1.3 million interest income in 2023 was due the interest rate received on money markets funds.
Dividend income consists of income earned on our money market treasury funds that are recorded as cash equivalents in our Consolidated Balance Sheets. Increase of $1.2 million in dividend income from December 31, 2023 to December 31, 2024 is primarily due to the timing of when we transferred money into our money market treasury funds. As a result, the prior-year figure reflects only nine months of activity compared to twelve months in the current year.
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During the twelve months ended December 31, 2024, we recognized a $36.6 million gain from a decrease in fair value of our earnout liabilities. The gain of $36.6 million in our earn-out liability was primarily a result of the decrease of the closing price of our Class A common stock listed on the Nasdaq, resulting in a decrease in the estimated fair value of the earnout shares from $5.50 as of December 31, 2023 to $1.18 as of December 31, 2024 .
Income Tax Benefit
Income tax benefit for the twelve months ended December 31, 2024 was $0.3 million while for the twelve months ended December 31, 2023, income tax benefit was $0.5 million. We expect our tax rate to remain close to zero in the near term due to full valuation allowances against deferred tax assets.
Equity method investment gain
In October 2024, we began applying the equity method to account for our joint venture investment. We adjusted the investment to its fair value of $5.55 per share as of the accounting change and recognized our proportionate share of the joint venture’s loss from the period November through December 2024, resulting in a net gain of $3.9 million for the year ended December 31, 2024.
Liquidity and Capital Resources
Our primary use of cash is to fund our operating expenses, working capital requirements, and outlays for strategic investments and acquisitions. In addition, we use cash to conduct research and development, incur capital expenditures.
We expect to continue to incur net operating losses and negative cash flows from operations and we expect our research and development expenses, general and administrative expenses and capital expenditures will remain relatively flat.
As December 31, 2024 , we had cash and cash equival ents of $86.7 million. We currently expect to fund our cash requirements through the use of cash and cash equivalents on hand. We believe that our current levels of cash and cash equivalents are sufficient to finance our operations, working capital requirements and capital expenditures for the foreseeable future.
We expect our operating and capital expenditures to remain relatively flat. If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through additional equity or debt financing or from other sources. If we raise additional funds through the issuance of equity, the percentage ownership of our equity holders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing equity holders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility and would also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us.
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Cash Flows
The followin g table summarizes our consolidated cash flows for the periods presented (in thousands):
Year Ended December 31,
2024 2023
Consolidated Statements of Cash Flows Data:
Net cash used in operating activities $ (58,823) $ (41,379)
Net cash used in investing activities $ (9,271) $ (5,782)
Net cash provided by financing activities $ 3,495 $ 89,663
We derive liquidity primarily from cash on hand and equity financing activities. As of December 31, 2024, our balance of cash and cash equivalents was $86.7 million, which is a decrease of $65.2 million or 43% co mpared to December 31, 2023.
Operating Activities
For the year ended December 31, 2024, net cash used in operating activities was $58.8 million, which primarily reflects a net loss of $84.6 million, adjusted for non-cash stock-based compensation of $43.0 million, non-cash gains of $40.5 million in earnout and our equity investment due to changes in fair value, $7.9 million of non-cash bonus accruals, $7.7 million for our allowance for credit losses, a $2.0 million impairment of other asset, and an aggregate cash used in operating assets and liabilities of $1.9 million. Specifically, the changes reflect a $2.8 million decrease in accounts payable, accrued compensation and other accrued expenses, $11.0 million decrease in customer deposit and deferred revenue, $1.7 million decrease in operating lease liability, partially offset by a $4.2 million decrease in accounts receivable, $6.8 million decrease in inventories, a decrease of $0.6 million in other assets, and a $2.1 million decrease in prepaid expenses and other current assets.
For the year ended December 31, 2023, net cash used in operating activities was $41.4 million, which primarily reflects a net loss of $146.0 million, adjusted for non-cash stock-based compensation of $54.0 million, non-cash losses of $33.8 million in earnout due to changes in fair value, $2.8 million of non-cash bonus accruals, and an aggregate cash provided in operating assets and liabilities of $2.8 million. Specifically, the changes reflect $16.7 million increase in accounts receivable and $3.2 million increase inventory, both as a result of higher revenues, $2.6 million increase in prepaids and other current assets, and a $2.5 million increase in other assets, partially offset by an increase of $13.7 million in accounts payable primarily due to timing of disbursements and higher inventory, and an increase of $10.5 million in deferred revenue.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2024 of $9.3 million was primarily due to purchases of fixed assets of $6.8 million and $2.5 million cash funding of a joint venture.
Net cash used in investing activities for the year ended December 31, 2023 of $5.8 million was primarily due to purchases of fixed assets of $4.8 million and $1.0 million cash funding of a joint venture.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2024 of $3.5 million was primarily the result of proceeds from stock option exercises of $0.8 million and proceeds from our employee stock purchase plan of $2.7 million.
Net cash provided by financing activities for the year ended December 31, 2023 of $89.7 million was primarily the result of proceeds from the issuance of common stock in our May 2023 public offering, net of issuance costs, of $86.5
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million, proceeds from the issuance of common stock in connection with stock option exercises of $1.9 million and proceeds from our employee stock purchase plan of $1.3 million.
Contractual Obligations, Commitments and Contingencies
In the ordinary course of business, we enter into contractual arrangements that may require future cash payments. As of December 31, 2024 , our non-cancellable contractual arrangements consisted of lease obligations and an agreement for the purchase of equipment. Refer to Note 9 - “Leases” for further information on our minimum future payments related to lease obligations. In December 2024, we entered into an agreement with a vendor for the purchase of equipment, requiring quarterly installment payments. Refer to Note 15 - “Commitments and Contingencies” for additional details on purchase obligations.
Off-Balance Sheet Commitments and Arrangements
As of December 31, 2024 , we did not have any off-balance sheet arrangements as discussed in Instruction 8 to Item 303(b) of Regulation S-K.
Critical Accounting Policies
The preparation of our financial statements and related disclosures in accordance with U.S. GAAP requires our management to make judgments, assumptions and estimates that affect the amounts reported in our accompanying consolidated financial statements and the accompanying notes included elsewhere in this annual report. Our management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain.
We utilize the following critical accounting policies in the preparation of our financial statements. In addition to our critical accounting policies below, see Note 2 - “Significant Accounting Policies” in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.
Revenue Recognition
Revenue is recognized when a customer obtains control of products or services in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of ASC 606, “Revenue from Contracts with Customers” , we perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) we satisfy performance obligations. We recognize revenue when the control of the promised goods or services is transferred to customers in an amount that reflects the consideration we expect to receive in exchange for such goods or services.
The majority of our revenue is derived from the sale of semiconductor products. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled.
Revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which is defined by the commercial terms of each purchase but typically occurs at shipment. In
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determining whether control has transferred, we consider if there is a present right to payment and legal title, and whether risks and rewards of ownership have transferred to the customer. Refer to Note 2 - “Significant Accounting Policies” to our consolidated financial statements included elsewhere in this annual report for additional discussion of our revenue recognition policy.
Business Combinations
We account for business combinations using the acquisition method of accounting, in accordance with ASC 805 , “Business Combinations” . The acquisition method requires identifiable assets acquired and liabilities assumed be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. This judgment and determination affects the amount of consideration paid that is allocatable to assets and liabilities acquired in the business purchase transaction. Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include, but are not limited to, future expected cash inflows and outflows, expected technology life cycle, and discount rates. We estimate the useful lives of the intangible assets based on the expected period over which we anticipate generating economic benefit from the asset. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Valuation of Inventory
We assess inventory to address potential obsolescence and declining values through periodic assessments, considering factors including estimates for future demand and net realizable value. Identified impaired inventory items are adjusted to reflect net realizable values. Changes in assumptions of product demand, the future salability of inventory, and the net realizable value of obsolete and unmarketable inventory could have a significant impact on the amount of the reserve recorded. These assumptions include the assessment of market conditions and trends, expected demand inclusive of sales forecasts, anticipated sales and market prices, and product obsolescence.
Stock-Based Compensation
We account for awards of stock-based compensation under our employee stock-based compensation plan using the fair value method. Accordingly, we estimate fair value of our stock-based awards and amortized this fair value to stock-based compensation expense over the requisite service period or vesting terms.
RSUs - The fair value per unit of each RSU grant award is determined on the grant date based on the Company’s stock price. Stock-based compensation is recognized on a straight-line basis over the requisite service period of the award. Forfeitures are recognized as they occur.
ESPP - We currently use the Black-Scholes option-pricing model to estimate the fair value of our Employee Stock Purchase Plan (ESPP) awards and amortize the expense over the requisite service period. The ESPP awards require management to make assumptions and to apply judgment in determining the fair value of the awards. The most significant assumptions and judgments include the expected volatility, risk-free interest rate, expected dividend rate and expected term of the award, in addition to the fair value of the underlying common stock.
LTIPs - The fair value for each tranche of the Long-term Incentive Plan Stock Option (“LTIP”) awards was determined using Black-Scholes model and a Monte Carlo simulation estimated at the initial grant date. We utilized the services of a professional valuation firm to develop the grant date fair value. The LTIP awards vest based on the achievement of certain market (stock price hurdles) and performance conditions (revenue and/or EBITDA targets). During the years ended December 31, 2024 and 2023, the LTIP awards require management to make assumptions and to apply judgment in determining the timing and amount of the recognition of the awards. The most significant assumptions and judgments include management’s forecasts related to award performance conditions, including whether certain
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performance conditions are probable. Awards are not recognized until they are deemed to be probable to vest, and awards may be derecognized if they are determined to be no longer probable.
Earnout Shares
Certain shareholders of the Company are eligible to receive up to 10,000,000 Earnout Shares of the Company's Class A common stock, contingent upon the fulfillment of Earnout Milestones. These milestones consist of three distinct criteria, with each criterion granting eligible stockholders 3,333,333 earn-out shares upon meeting the specified conditions. Each Earnout Milestone is deemed achieved if, at any time within 150 days following the Business Combination and before October 19, 2026, the volume-weighted average price of the Company's Class A common stock reaches or exceeds $12.50, $17.00, or $20.00 for any twenty trading days within a thirty trading day period, respectively.
These earnout shares have been categorized into two components: (i) the “Vested Shares” - those associated with stockholders with vested equity at the closing of the Business Combination that will be earned upon achievement of the Earnout Milestones. Any forfeited shares from unvested holders will be reallocated among the remaining earnout holders and (ii) the “Unvested Shares” - those associated with stockholders with unvested equity at the closing of the Business Combination which are subject to forfeiture if the employee leaves prior to the achievement of the Earnout Milestones. As the implicit service period has passed, these shares now remain contingent solely on meeting the earnout performance condition. The Vested Shares are classified as liabilities in the Consolidated Balance Sheets and the Unvested Shares are equity-classified stock-based compensation to be recognized over time (see Note 10 - “Stock-based Compensation”). The earnout liability was initially measured at fair value at the closing of the Business Combination and subsequently remeasured at the end of each reporting period. The change in fair value of the earn-out liability is recorded as part of “Other income (expense), net” in the consolidated statement of operations.
The estimated fair value of the earnout liability was determined using a Monte Carlo analysis of 20,000 simulations of the future path of the Company’s stock price over the earnout period. The assumptions utilized in the calculation are based on the achievement of certain stock price milestones including projected stock price, volatility, and risk-free rate.
Recently Issued and Adopted Accounting Standards
See Not e 2 - “Significant Accounting Policies” to our consolidated financial statements included elsewhere in this annual report for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company” as defined in Item 10 of Regulation S-K, we are exempt from the disclosure requirements of this item in our Form 10-K.
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