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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2024

or

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

For the transition period from to

Commission File Number: 001-39059

https://cdn.kscope.io/cfc571b5bf255096600fb33e19091a5b-img179644470_0.jpg 

AVITA MEDICAL, INC.

(Exact name of registrant as specified in its charter)

Delaware

85-1021707

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

28159 Avenue Stanford

Suite 220

Valencia, CA 91355

(Address of principal executive offices and Zip Code)

Registrant’s telephone number, including area code: (661) 367-9170

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

Title of each class

 

Trading

Symbol

 

Name of each exchange

on which registered

Common Stock, par value $0.0001 per share

 

RCEL

 

The Nasdaq Stock Market LLC

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

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

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

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

 

 

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

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

The number of shares of the registrant’s common stock, par value $0.0001, outstanding as of May 6, 2024 was 25,799,735

 

 


 

TABLE OF CONTENTS

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENT

 

3

 

 

 

PART I – FINANCIAL INFORMATION

 

4

 

 

Item 1.

Financial Statements

 

4

 

 

Consolidated Balance Sheets – As of March 31, 2024 (unaudited) and December 31, 2023 (audited)

 

4

 

 

Consolidated Statements of Operations for the three-months ended March 31, 2024 and 2023 (unaudited)

 

5

 

 

Consolidated Statements of Comprehensive Loss for the three-months ended March 31, 2024 and 2023 (unaudited)

 

6

 

 

Consolidated Statements of Stockholders’ Equity for the three-months ended March 31, 2024 and 2023 (unaudited)

 

7

 

 

Consolidated Statements of Cash Flows for the three-months ended March 31, 2024 and 2023 (unaudited)

 

8

 

 

Notes to Consolidated Financial Statements (unaudited)

 

9

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

Item 4.

Controls and Procedures

 

28

 

 

Part II – OTHER INFORMATION

 

29

 

 

Item 1.

Legal Proceedings

 

29

 

 

Item 1A

Risk Factors

 

29

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

29

 

 

Item 3.

Defaults Upon Senior Securities

 

29

 

 

Item 4.

Mine Safety Disclosures

 

29

 

 

Item 5.

Other Information

 

29

 

 

Item 6.

Exhibits

 

30

 

 

Signatures

 

31

 

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future revenues; solvency; future industry market conditions; future changes in our capacity and operations; future operating and overhead costs; intellectual property; regulatory and related approvals; the conduct or outcome of pre-clinical or clinical (human) studies; operational and management restructuring activities (including implementation of methodologies and changes in the board of directors); our ability to expand our sales organization to address effectively existing and new markets that we intend to target; future employment and contributions of personnel; tax and rising interest rates; productivity, business process, rationalization, investment, acquisition and acquisition integrations, consulting, operational, tax, financial and capital projects and initiatives; inflationary pressures on the U.S. and global economy; changes in the legal or regulatory environment; and future working capital, costs, revenues, business opportunities, cash flows, margins, earnings and growth. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

 

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential”, or “continue” or the negative of these terms or other similar expressions.

 

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including the factors described under the sections in this Quarterly Report on Form 10-Q titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for our management to predict all risk factors and uncertainties.

 

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

3


 

PART I – Financial Information

Item 1. FINANCIAL STATEMENTS

AVITA MEDICAL, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

 

As of

 

 

 

March 31, 2024

 

 

December 31, 2023

 

ASSETS

 

(unaudited)

 

 

(audited)

 

Cash and cash equivalents

 

$

16,951

 

 

$

22,118

 

Marketable securities

 

 

51,232

 

 

 

66,939

 

Accounts receivable, net

 

 

7,081

 

 

 

7,664

 

BARDA receivables

 

 

28

 

 

 

30

 

Prepaids and other current assets

 

 

3,523

 

 

 

1,659

 

Inventory

 

 

7,171

 

 

 

5,596

 

Total current assets

 

 

85,986

 

 

 

104,006

 

Plant and equipment, net

 

 

4,297

 

 

 

1,877

 

Operating lease right-of-use assets

 

 

3,275

 

 

 

2,440

 

Corporate-owned life insurance ("COLI") asset

 

 

2,880

 

 

 

2,475

 

Intangible assets, net

 

 

542

 

 

 

487

 

Other long-term assets

 

 

401

 

 

 

355

 

Total assets

 

$

97,381

 

 

$

111,640

 

LIABILITIES, NON-QUALIFIED DEFERRED COMPENSATION PLAN SHARE AWARDS AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

4,477

 

 

 

3,793

 

Accrued wages and fringe benefits

 

 

5,803

 

 

 

7,972

 

Current non-qualified deferred compensation ("NQDC") liability

 

 

429

 

 

 

168

 

Other current liabilities

 

 

1,153

 

 

 

1,266

 

Total current liabilities

 

 

11,862

 

 

 

13,199

 

Long-term debt

 

 

41,301

 

 

 

39,812

 

Non-qualified deferred compensation liability

 

 

3,913

 

 

 

3,663

 

Contract liabilities

 

 

349

 

 

 

357

 

Operating lease liabilities, long term

 

 

2,532

 

 

 

1,702

 

Warrant liability

 

 

4,028

 

 

 

3,158

 

Total liabilities

 

 

63,985

 

 

 

61,891

 

Non-qualified deferred compensation plan share awards

 

 

827

 

 

 

693

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock, $0.0001 par value per share, 200,000,000 shares authorized, 25,789,051 and 25,682,078, shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

 

 

3

 

 

 

3

 

Preferred stock, $0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding at March 31, 2024 and December 31, 2023

 

 

-

 

 

 

-

 

Company common stock held by the non-qualified deferred compensation plan

 

 

(944

)

 

 

(1,130

)

Additional paid-in capital

 

 

353,205

 

 

 

350,039

 

Accumulated other comprehensive loss

 

 

(3,068

)

 

 

(1,887

)

Accumulated deficit

 

 

(316,627

)

 

 

(297,969

)

Total stockholders' equity

 

 

32,569

 

 

 

49,056

 

Total liabilities, non-qualified deferred compensation plan share awards and stockholders' equity

 

$

97,381

 

 

$

111,640

 

 

 

 

 

 

 

 

 

The accompanying notes form part of the unaudited Consolidated Financial Statements.

4


 

AVITA MEDICAL, INC.

Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three-Months Ended

 

 

 

March 31, 2024

 

March 31, 2023

 

 

 

 

 

 

 

Revenues

 

$

11,104

 

$

10,550

 

Cost of sales

 

 

(1,513

)

 

(1,667

)

Gross profit

 

 

9,591

 

 

8,883

 

BARDA income

 

 

-

 

 

627

 

Operating expenses:

 

 

 

 

 

Sales and marketing

 

 

(12,640

)

 

(6,540

)

General and administrative

 

 

(8,963

)

 

(8,295

)

Research and development

 

 

(5,194

)

 

(4,586

)

Total operating expenses

 

 

(26,797

)

 

(19,421

)

Operating loss

 

 

(17,206

)

 

(9,911

)

Interest expense

 

 

(1,356

)

 

(4

)

Other income (expense), net

 

 

(66

)

 

725

 

Loss before income taxes

 

 

(18,628

)

 

(9,190

)

Income tax expense

 

 

(30

)

 

(30

)

Net loss

 

$

(18,658

)

$

(9,220

)

Net loss per common share:

 

 

 

 

 

Basic and Diluted

 

$

(0.73

)

$

(0.37

)

Weighted-average common shares:

 

 

 

 

 

Basic and Diluted

 

 

25,637,783

 

 

25,202,088

 

 

The accompanying notes form part of the unaudited Consolidated Financial Statements.

5


 

AVITA MEDICAL, INC.

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three-Months Ended

 

 

 

March 31, 2024

 

 

March 31, 2023

 

 

 

 

 

 

 

 

Net loss

 

$

(18,658

)

 

$

(9,220

)

Foreign currency translation loss

 

 

-

 

 

 

(11

)

Change in fair value due to credit risk on Long-term debt

 

 

(1,092

)

 

 

-

 

Net unrealized gain/(loss) on marketable securities, net of tax

 

 

(89

)

 

 

242

 

Comprehensive loss

 

$

(19,839

)

 

$

(8,989

)

 

The accompanying notes form part of the unaudited Consolidated Financial Statements.

6


 

AVITA MEDICAL, INC.

Consolidated Statements of Stockholders’ Equity

(In thousands, except shares)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Company common stock held by the NQDC Plan

 

Additional
Paid-in Capital

 

Accumulated Other
Comprehensive
Gain (Loss)

 

Accumulated
Deficit

 

Total
Stockholders'
Equity

 

Balance at December 31, 2023

 

25,682,078

 

$

3

 

$

(1,130

)

$

350,039

 

$

(1,887

)

$

(297,969

)

$

49,056

 

Net loss

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(18,658

)

 

(18,658

)

Stock-based compensation

 

-

 

 

-

 

 

-

 

 

2,585

 

 

-

 

 

-

 

 

2,585

 

Exercise of stock options

 

106,973

 

 

-

 

 

-

 

 

631

 

 

-

 

 

-

 

 

631

 

Distribution/diversification of Company common stock held by the NQDC Plan

 

-

 

 

-

 

 

186

 

 

78

 

 

-

 

 

-

 

 

264

 

Change in redemption value of share awards in NQDC plan

 

-

 

 

-

 

 

-

 

 

(128

)

 

-

 

 

-

 

 

(128

)

Net unrealized loss on marketable securities

 

-

 

 

-

 

 

-

 

 

-

 

 

(89

)

 

-

 

 

(89

)

Change in fair value due to credit risk on Long-term debt

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,092

)

 

-

 

 

(1,092

)

Balance at March 31, 2024

 

25,789,051

 

$

3

 

$

(944

)

$

353,205

 

$

(3,068

)

$

(316,627

)

$

32,569

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Company common stock held by the NQDC Plan

 

Additional
Paid-in Capital

 

Accumulated Other
Comprehensive
Gain (Loss)

 

Accumulated
Deficit

 

Total
Stockholders'
Equity

 

Balance at December 31, 2022

 

25,208,436

 

$

3

 

$

(127

)

$

339,825

 

$

7,627

 

$

(262,588

)

$

84,740

 

Net loss

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(9,220

)

 

(9,220

)

Stock-based compensation

 

-

 

 

-

 

 

-

 

 

2,197

 

 

-

 

 

-

 

 

2,197

 

Exercise of stock options

 

31,675

 

 

-

 

 

-

 

 

171

 

 

-

 

 

-

 

 

171

 

Company common stock held by the NQDC Plan

 

87,650

 

 

-

 

 

(765

)

 

765

 

 

-

 

 

-

 

 

-

 

Change in redemption value of share awards in NQDC plan

 

-

 

 

-

 

 

-

 

 

(558

)

 

-

 

 

-

 

 

(558

)

Other comprehensive gain

 

-

 

 

-

 

 

-

 

 

-

 

 

231

 

 

-

 

 

231

 

Balance at March 31, 2023

 

25,327,761

 

$

3

 

$

(892

)

$

342,400

 

$

7,858

 

$

(271,808

)

$

77,561

 

 

The accompanying notes form part of the unaudited Consolidated Financial Statements.

7


 

AVITA Medical, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three-Months Ended

 

 

 

March 31, 2024

 

 

March 31, 2023

 

Cash flow from operating activities:

 

 

 

 

 

 

Net loss

 

$

(18,658

)

 

$

(9,220

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Change in fair value of long-term debt

 

 

397

 

 

 

-

 

Change in fair value of warrant liability

 

 

870

 

 

 

-

 

Depreciation and amortization

 

 

203

 

 

 

135

 

Stock-based compensation

 

 

2,591

 

 

 

2,640

 

Non-cash lease expense

 

 

214

 

 

 

167

 

Remeasurement and foreign currency transaction gain

 

 

-

 

 

 

(2

)

Excess and obsolete inventory related charges

 

 

83

 

 

 

67

 

BARDA deferred costs

 

 

-

 

 

 

(64

)

Contract cost amortization

 

 

-

 

 

 

85

 

Provision for credit losses

 

 

80

 

 

 

172

 

Amortization of premium of marketable securities

 

 

(677

)

 

 

(328

)

Non-cash changes in the fair value of NQDC plan

 

 

278

 

 

 

610

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Trade and other receivables

 

 

503

 

 

 

(1,158

)

BARDA receivables

 

 

2

 

 

 

382

 

Prepaids and other current assets

 

 

(1,864

)

 

 

12

 

Inventory

 

 

(1,659

)

 

 

(754

)

Operating lease liability

 

 

(224

)

 

 

(156

)

Corporate-owned life insurance ("COLI") asset

 

 

(215

)

 

 

(526

)

Other long-term assets

 

 

(46

)

 

 

(109

)

Accounts payable and accrued expenses

 

 

(763

)

 

 

778

 

Accrued wages and fringe benefits

 

 

(2,170

)

 

 

(2,957

)

Current non-qualified deferred compensation liability

 

 

473

 

 

 

748

 

Other current liabilities

 

 

(109

)

 

 

958

 

Non-qualified deferred compensation plan liability

 

 

(165

)

 

 

(237

)

Contract liabilities

 

 

(8

)

 

 

(316

)

Net cash used in operations

 

$

(20,864

)

 

$

(9,073

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of marketable securities

 

 

(2,904

)

 

 

(5,183

)

Maturities of marketable securities

 

 

19,200

 

 

 

24,271

 

Purchase of plant and equipment

 

 

(1,147

)

 

 

(284

)

Patent filing fees

 

 

(83

)

 

 

(17

)

Net cash provided by investing activities

 

$

15,066

 

 

$

18,787

 

Cash flow from financing activities:

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

631

 

 

 

171

 

Net cash provided by financing activities

 

$

631

 

 

$

171

 

Effect of foreign exchange rate on cash and cash equivalents

 

 

-

 

 

 

1

 

Net increase/(decrease) in cash and cash equivalents

 

 

(5,167

)

 

 

9,886

 

Cash and cash equivalents beginning of the period

 

$

22,118

 

 

$

18,164

 

Cash and cash equivalents end of the period

 

$

16,951

 

 

$

28,050

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Income taxes paid during the period

 

$

17

 

 

$

9

 

Interest paid during the period

 

$

1,355

 

 

$

4

 

Non-cash investing activities:

 

 

 

 

 

 

Plant and equipment purchases not yet paid

 

$

74

 

 

$

9

 

Right-of-use-asset obtained in exchange for lease liabilities

 

$

1,053

 

 

$

-

 

 

 

 

 

 

 

 

 

The accompanying notes form part of the unaudited Consolidated Financial Statements.

8


 

AVITA MEDICAL, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1. The Company

Nature of the Business

 

AVITA Medical, Inc. and its subsidiaries (collectively, “AVITA Medical”, “we”, “our”, “us”, or “Company”) is a commercial-stage regenerative medicine company transforming the standard of care in wound management and skin restoration with innovative devices. At the forefront of the Company's portfolio is its patented and proprietary RECELL®System (“RECELL System” or “RECELL”), approved by the FDA for the treatment of thermal burn wounds and full-thickness skin defects ("FTSD"), and for repigmentation of stable depigmented vitiligo lesions. RECELL harnesses the regenerative properties of a patient’s own skin to create an autologous skin cell suspension, Spray-On Skin Cells, delivering a transformative solution at the point of care. This breakthrough technology serves as the catalyst for a new treatment paradigm enabling improved clinical outcomes.

 

On January 10, 2024, the Company entered into an exclusive multi-year distribution agreement with Stedical Scientific, Inc.

("Stedical") to commercialize PermeaDerm® Biosynthetic Wound Matrix ("PermeaDerm") in the United States (the "Stedical Agreement"). PermeaDerm is cleared by the FDA as a transparent matrix for use in the treatment of a variety of wound types until healing is achieved. Under the terms of the agreement, the Company holds the exclusive rights to market, sell, and distribute PermeaDerm products, including any future enhancements or modifications, within the United States. The initial term is for five years, with the option to renew for an additional five years, contingent upon meeting certain minimum requirements.

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited Consolidated Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the Consolidated Financial Statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. The information included in this quarterly report on Form 10-Q should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2023 filed with the SEC on February 22, 2024 and the Australian Securities Exchange ("ASX") on February 23, 2024 (the “2023 Annual Report").

 

There have been no changes to the Company’s significant accounting policies as described in the 2023 Annual Report that have had a material impact on the Company’s Consolidated Financial Statements. See the summary of the Company’s significant accounting policies set forth in the notes to its Consolidated Financial Statements included in the 2023 Annual Report.

 

Principles of Consolidation

 

The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

 

Recent Accounting Pronouncements

 

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly reviewed by the Chief Operating Decision Maker ("CODM") and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. The ASU also allows, in addition to the measure that is most consistent with GAAP, the disclosure of additional measures of segment profit or loss that are used by the CODM in assessing segment performance and deciding how to allocate resources. All disclosure requirements under ASU 2023-07 are also required for public entities with a single reportable segment. The ASU is effective for the Company’s 2023 Annual Report on Form 10-K for the fiscal year ending December 31, 2025, and subsequent interim periods, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and disclosures.

 

9


 

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments require (i) enhanced disclosures in connection with an entity's effective tax rate reconciliation and (ii) income taxes paid disaggregated by jurisdiction. The amendments are effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and disclosures.

 

Use of Estimates

 

The preparation of the accompanying Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts (including estimate of the average selling price for PermeaDerm sales, allowance for credit losses, reserves for inventory excess and obsolescence, carrying value of long-lived assets, the useful lives of long-lived assets, accounting for marketable securities, income taxes, fair value of the debt, fair value of warrants and stock-based compensation) and related disclosures. Estimates have been prepared on the basis of the current and available information. However, actual results could differ from estimated amounts.

 

Foreign Currency Translation and Foreign Currency Transactions

 

The financial position and results of operations of the Company’s operating non-U.S. subsidiaries are generally determined using the respective local currency as the functional currency of that subsidiary. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each period end. Income statement accounts are translated at the average rate of exchange prevailing during the period. Adjustments arising from the use of differing exchange rates from period to period are included in Other comprehensive gain (loss) in Stockholders’ Equity. Gains and losses resulting from foreign currency transactions are included in earnings in the Consolidated Statement of Operations. Gains and losses resulting from foreign currency transactions were minimal for the three-months ended March 31, 2024 and 2023.

 

The Company’s non-operating subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period and nonmonetary assets and liabilities at historical rates. Gains and losses resulting from these remeasurements are included in earnings in the Consolidated Statement of Operations. Gains and losses for remeasurement and foreign currency transactions were minimal during the three-months ended March 31, 2024 and 2023.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash held at deposit institutions and cash equivalents. Cash equivalents consist primarily of money market funds. Cash equivalents also includes short-term highly liquid investments with original maturities of three months or less from the date of purchase. The Company holds cash at deposit institutions in the amount of $4.9 million and $10.7 million as of March 31, 2024 and December 31, 2023, respectively. The Company does not have cash on deposit denominated in foreign currency in foreign institutions as of March 31, 2024. As of December 31, 2023, the Company had $69,000 of cash on deposit denominated in foreign currencies in foreign institutions. As of March 31, 2024 and December 31, 2023, the Company held cash equivalents in the amount of $12.0 million and $11.4 million, respectively.

 

Concentrations

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, trade receivables and debt and other liabilities. As of March 31, 2024 and December 31, 2023, substantially all the Company’s cash was deposited in accounts at financial institutions, and amounts exceed federally insured limits and are subject to the risk of bank failure.

 

As of March 31, 2024 and December 31, 2023, no single commercial customer accounted for more than 10% of net accounts receivable or more than 10% of revenues for the three-months ended March 31, 2024 and 2023.

 

10


 

3. Marketable Securities

 

The following table summarizes the amortized cost and estimated fair values of securities available-for-sale:

 

 

 

As of March 31, 2024

 

 

 

Amortized
Cost

 

 

Gross
Unrealized
Holding
Gains

 

 

Gross
Unrealized
Holding
Losses

 

 

Carrying
Value

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

12,018

 

 

$

-

 

 

$

-

 

 

$

12,018

 

Total cash equivalents

 

$

12,018

 

 

$

-

 

 

$

-

 

 

$

12,018

 

Current marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

51,225

 

 

$

11

 

 

$

(4

)

 

$

51,232

 

Total current marketable securities

 

$

51,225

 

 

$

11

 

 

$

(4

)

 

$

51,232

 

 

 

 

As of December 31, 2023

 

 

 

Amortized
Cost

 

 

Gross
Unrealized
Holding
Gains

 

 

Gross
Unrealized
Holding
Losses

 

 

Carrying
Value

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

8,427

 

 

$

-

 

 

$

-

 

 

$

8,427

 

U.S. Treasury securities

 

 

2,992

 

 

 

-

 

 

 

-

 

 

 

2,992

 

Total cash equivalents

 

$

11,419

 

 

$

-

 

 

$

-

 

 

$

11,419

 

Current marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

65,145

 

 

$

100

 

 

$

(3

)

 

$

65,242

 

U.S. Government agency obligations

 

 

1,699

 

 

 

-

 

 

 

(2

)

 

 

1,697

 

Total current marketable securities

 

$

66,844

 

 

$

100

 

 

$

(5

)

 

$

66,939

 

 

The maturities of our available-for-sale securities are summarized in the following table using contractual maturities. Actual maturities may differ from contractual maturities due to obligations that are called or prepaid.

 

 

 

As of March 31, 2024

 

 

As of December 31, 2023

 

(in thousands)

 

Amortized
Cost

 

 

Carrying
Value

 

 

Amortized
Cost

 

 

Carrying
Value

 

Due in one year or less

 

$

51,225

 

 

$

51,232

 

 

$

66,844

 

 

$

66,939

 

 

Unrealized gains and losses, net of any related tax effects for available-for-sale securities are excluded from earnings and are included in other comprehensive loss and reported as a separate component of stockholders' equity until realized. Realized gains and losses on marketable securities are included in Other income (expense), net, in the accompanying Consolidated Statements of Operations. The Company had net unrealized gains of $7,000 and $95,000 as of March 31, 2024 and December 31, 2023, respectively. The Company did not have sales of investments during the three-months ended March 31, 2024 and 2023 that resulted in realized gains or losses. As of March 31, 2024, and December 31, 2023, the Company did not recognize credit losses. The Company has accrued interest income receivable of $182,000 and $227,000 as of March 31, 2024, and December 31, 2023, respectively, in Prepaids and other current assets.

4. Fair Value Measurements

 

ASC 820, Fair Value Measurement, the authoritative guidance on fair value measurements establishes a framework with respect to measuring assets and liabilities at fair value on a recurring basis and non-recurring basis. Under the framework, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as of the measurement date. The framework also establishes a three-tier hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs

11


 

that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability and are developed based on the best information available in the circumstances. The hierarchy consists of the following three levels:

 

Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

 

Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3: Inputs are unobservable inputs for the asset or liability

 

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis, based on the three-tier fair value hierarchy:

 

 

As of March 31, 2024

 

(in thousands)

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

Money market funds

$

12,018

 

$

-

 

$

-

 

$

12,018

 

Total cash equivalents

$

12,018

 

$

-

 

$

-

 

$

12,018

 

Current marketable securities:

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

-

 

$

51,232

 

$

-

 

$

51,232

 

Total current marketable securities

$

-

 

$

51,232

 

$

-

 

$

51,232

 

Total marketable securities and cash equivalents

$

12,018

 

$

51,232

 

$

-

 

$

63,250

 

Financial liabilities:

 

 

 

 

 

 

 

 

Long-term debt

$

-

 

$

-

 

$

41,301

 

$

41,301

 

Warrant liability

 

-

 

 

-

 

 

4,028

 

$

4,028

 

Non-qualified deferred compensation plan liability

 

-

 

 

4,342

 

 

-

 

$

4,342

 

Total financial liabilities

$

-

 

$

4,342

 

$

45,329

 

$

49,671

 

Financial assets:

 

 

 

 

 

 

 

 

Corporate-owned life insurance policies

$

-

 

$

2,880

 

$

-

 

$

2,880

 

Total financial assets

$

-

 

$

2,880

 

$

-

 

$

2,880

 

 

 

As of December 31, 2023

 

(in thousands)

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

Money market funds

$

8,427

 

$

-

 

$

-

 

$

8,427

 

U.S. Treasury securities

 

-

 

 

2,992

 

 

-

 

 

2,992

 

Total cash equivalents

$

8,427

 

$

2,992

 

$

-

 

$

11,419

 

Current marketable securities:

 

 

 

 

 

 

 

 

U.S. Treasury securities

$

-

 

$

65,242

 

$

-

 

$

65,242

 

U.S. Government agency obligations

 

-

 

 

1,697

 

 

-

 

 

1,697

 

Total current marketable securities

$

-

 

$

66,939

 

$

-

 

$

66,939

 

Total marketable securities and cash equivalents

$

8,427

 

$

69,931

 

$

-

 

$

78,358

 

Financial liabilities:

 

 

 

 

 

 

 

 

Long-term debt

$

-

 

$

-

 

$

39,812

 

$

39,812

 

Warrant liability

 

-

 

 

-

 

 

3,158

 

 

3,158

 

Non-qualified deferred compensation plan liability

 

-

 

 

3,831

 

 

-

 

$

3,831

 

Total financial liabilities

$

-

 

$

3,831

 

$

42,970

 

$

46,801

 

Financial assets:

 

 

 

 

 

 

 

 

Corporate-owned life insurance policies

$

-

 

$

2,475

 

$

-

 

$

2,475

 

Total financial assets

$

-

 

$

2,475

 

$

-

 

$

2,475

 

 

12


 

The following table presents the summary of changes in the fair value of our Level 3 financial instruments:

 

 

As of March 31, 2024

 

 

As of December 31, 2023

 

 

Long-term debt

 

 

Warrant liability

 

 

Long-term debt

 

 

Warrant liability

 

Balance beginning of period

$

39,812

 

 

$

3,158

 

 

$

-

 

 

$

-

 

Fair value on issuance date

 

 

 

 

 

 

 

37,575

 

 

 

2,425

 

Change in fair value in earnings

 

397

 

 

 

870

 

 

 

1,616

 

 

 

733

 

Change in fair value in other comprehensive loss

 

1,092

 

 

 

-

 

 

 

621

 

 

 

-

 

Balance end of period, at fair value

$

41,301

 

 

$

4,028

 

 

$

39,812

 

 

$

3,158

 

 

The Company’s Level 1 assets include money market instruments and are valued based upon observable market prices. Level 2 assets consist of U.S Treasury securities and U.S. Government Agency obligations. Level 2 securities are valued based upon observable inputs that include reported trades, broker/dealer quotes, bids and offers. The corporate-owned life insurance contracts are recorded at cash surrender value, which approximates the fair value and is categorized as Level 2. Non-qualified deferred compensation plan liability is measured at fair value based on quoted prices of identical instruments to the investment vehicles selected by the participants and its recorded as Level 2. There were no transfers between fair value measurement levels during the period ended March 31, 2024 and December 31, 2023.

Long-term debt

The fair value of the debt was determined using a Monte Carlo Simulation ("MCS") in order to predict the probability of different outcomes. The valuation was performed based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the debt is recorded in the Consolidated Balance Sheets. The fair value is estimated by the Company each reporting period and the change in the fair value is recorded in both earnings and other comprehensive income depending on the instrument's inherent credit risk and market risk related to the debt valuation.

 

As the debt is subject to net revenue requirements, the valuation of the debt was determined using the Monte Carlo Simulation (“MCS”). The underlying metric to be simulated is the projected Trailing Twelve Month (“TTM”) revenues at each quarter end through the maturity date of October 18. 2028. Based on the simulated metric, the different levels of simulated TTM revenues may trigger different discounted cash flow scenarios in which the TTM revenues are lower than the targeted revenues per the Credit Agreement or TTM is equal to or higher than the targeted revenues per the Credit Agreement. The MCS performs 100,000 iterations of various simulated revenues to determine the fair value of the debt.

The below assumptions were used in the Monte Carlo simulation

 

 

March 31, 2024

 

 

December 31, 2023

 

Risk-free interest rate

 

4.20

%

 

 

3.81

%

Revenue volatility