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Item 7. Management’s Discussion and Analysis

2022-03-14 compared with 2021-03-12 · 186 added, 143 removed, 117 unchanged (74% of the section changed)

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

You should read the following discussion and analysis of financial condition and results of operation together with “Selected Financial Data,” the consolidated financial statements and the related notes included elsewhere this Form 10-K.

This discussion contains forward-looking statements that involve risks and uncertainties.

When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that impact our business.

In particular, we encourage you to review the risks and uncertainties described in “Risk Factors” in Part I, Item 1A in this Form 10-K.

These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends.

ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., ChromaDex Analytics, Inc., ChromaDex Asia Limited and ChromaDex Europa B.V.

(collectively, “ChromaDex”, the “Company” or, in the first person as “we” “us” and “our”) are a global bioscience company dedicated to healthy aging.

The ChromaDex team, which includes world-renowned scientists, is pioneering research on nicotinamide adenine dinucleotide (“NAD+”), levels of which decline with age.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere this Form 10-K.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K.

We encourage you to review the risks and uncertainties described in Part I.

Risk Factors and Cautionary Notice Regarding Forward-Looking Statements.

ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., ChromaDex Analytics, Inc., ChromaDex Asia Limited, ChromaDex Europa B.V.

and ChromaDex Sağlik Ürünleri Anonim Şirketi (collectively, “ChromaDex”, the “Company” or, in the first person as “we” “us” and “our”) are a global bioscience company dedicated to healthy aging.

The ChromaDex team, which includes world-renowned scientists, is pioneering research on nicotinamide adenine dinucleotide (NAD+), an essential coenzyme which is found in every cell of human bodies and levels of which decline with age.

ChromaDex is the innovator behind NAD+ precursor nicotinamide riboside (NR), commercialized as the flagship ingredient NIAGEN®.

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Actual results may differ from these estimates under different assumptions or conditions.

As of December 31, 2020, cash and cash equivalents totaled approximately $16.7 million.

Subsequent to the year ended December 31, 2020, the Company entered into a Securities Purchase Agreement with an investor, pursuant to which the Company sold and issued an aggregate of $25.0 million of the Company’s common stock.

The Company anticipates that its current cash, cash equivalents and cash to be generated from operations, the $25.0 million received from the financing described above and available line of credit up to $7.0 million from Western Alliance Bank will be sufficient to meet its projected operating plans through at least the next twelve months from the issuance date of this report.

The Company may, however, seek additional capital within the next twelve months, both to meet its projected operating plans within the next twelve months and/or to fund its longer term strategic objectives.

In June 2020, we filed a $125.0 million registration statement on Form S-3 with the Commission, utilizing a “shelf” registration process.

Under this shelf registration process, we may sell securities from time to time, including up to $50.0 million pursuant to the At Market Issuance Sales Agreement, dated as of June 12, 2020, with B.

On February 20, 2021, we entered into a Securities Purchase Agreement with EverFund pursuant to which we agreed to sell and issue approximately 3.8 million shares of common stock at a purchase price of $6.50 per share (the Financing).

On February 23, 2021, we closed the Financing and received proceeds of $24.9 million, net of offering costs.

In June 2020, we entered into an At Market Issuance Sales Agreement (the Sales Agreement) with B.

Riley FBR, Inc.

and Raymond James & Associates, Inc.

As of December 31, 2020, we have not sold any securities pursuant to the ATM Facility.

Additional capital may come from public and/or private stock or debt offerings, borrowings under lines of credit or other sources.

Riley FBR) and Raymond James & Associates, Inc.

(“Raymond James” and together with B.

Riley FBR, Inc.

the “Sales Agents”) under which ChromaDex may offer and sell shares of our common stock having an aggregate offering price of up to $50.0 million from time to time through the Sales Agents (ATM Facility).

During the second quarter of 2021, we sold an aggregate of 0.2 million shares of our common stock under the ATM Facility resulting in proceeds of $1.9 million, net of offering costs and commissions.

The shares sold at an average price of $10.56 per share.

As of December 31, 2021, approximately $47.8 million remains available under the ATM Facility.

On December 11, 2021, we amended our financing agreement with Western Alliance Bank.

Pursuant to the amendment, the aggregate principal amount available to us under the line of credit increased from $7.0 million to $10.0 million, subject to the terms and conditions of the agreement, as amended, the maturity date was extended to November 12, 2023 and the applicable interest rate was reduced.

For more information, see Note 9, Line of Credit, in the Notes to the Consolidated Financial Statements, included in Part II, Item 8 of this Form 10-K.

Effective as of August 2, 2021, we entered into a Seventh Amendment (Seventh Amendment) to the Manufacturing and Supply Agreement (such agreement as amended, the “Grace Manufacturing Agreement”), originally effective in January 2016 with W.R.

In January 2019, Grace was issued patents related to the manufacturing of the crystalline form of NR (Grace Patents).

Pursuant to the Seventh Amendment, we are committed to purchase approximately $18.0 million of total inventory between January 1, 2022 and December 31, 2022 and $3.5 million of inventory from January 1, 2023 through June 30, 2023.

The Grace Manufacturing Agreement will expire on June 30, 2023, subject to further renewal of the agreement to be negotiated by the parties.

As of December 31, 2021, our cash and cash equivalents totaled approximately $28.2 million.

We anticipate that our current cash, cash equivalents and cash to be generated from net sales will be sufficient to meet our projected operating plans through at least the next twelve months from the issuance date of this report.

Additionally, we have a line of credit up to $10.0 million available to us from Western Alliance Bank.

We may, however, seek additional capital within the next twelve months, both to meet our projected operating plans after the next twelve months and/or to fund our longer term strategic objectives.

Additional capital may come from other public and/or private stock or debt offerings, borrowings under lines of credit or other sources.

These additional funds may not be available on favorable terms, or at all.

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In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products or proprietary technologies, or to grant licenses on terms that are not favorable to us.

If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, obtain the required regulatory clearances or approvals, achieve long term strategic objectives, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements.

If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, obtain required regulatory clearances or approvals, achieve long term strategic objectives, capitalize on future opportunities, or respond to competitive pressures or unanticipated customer requirements.

Any of these events could adversely affect our ability to achieve our development and commercialization goals, which could have a material and adverse effect on our business, results of operations and financial condition.

Further, as a result of the 2019 coronavirus disease and its variants (COVID-19) pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability.

There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur.

If equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive.

Some of our operations are subject to regulation by various state and federal agencies.

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Impact of COVID-19

The COVID-19 pandemic continues to drive global uncertainty and disruption, which has created headwinds for our business.

Our ecommerce business continues to perform relatively well in this challenging environment.

Our retail business, including sales to A.S.

Watson group and other partners in international markets, has been more impacted by the effects of COVID-19, due to store closures and reduced operating hours.

To date, we have successfully navigated the business during the COVID-19 pandemic, managing our working capital effectively.

We have experienced shipment delays from our suppliers;

however, we have not encountered any major disruptions in our supply chain.

We have been maintaining adequate safety stocks to support our growth and we currently have adequate inventory on hand to meet our current demands.

Overall, we believe the supply chain disruptions due to the COVID-19 pandemic will not have a material impact to our business operations.

In response to the outbreak, we prioritized the health and safety of our employees by closing our offices or enhancing safety protocols in place to ensure the well-being of our employees.

We have been able to successfully conduct business virtually.

R esults of Operations

Our losses per basic and diluted share were $0.33 and $0.56 for the twelve-month periods ended December 31, 2020 and December 31, 2019, respectively.

The worldwide outbreak of COVID-19 continues to drive global uncertainty and disruption, which has created headwinds for our business.

Authorities have imposed, and businesses and individuals have implemented, numerous measures to try to contain the virus or treat its impact, such as travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, store closures and reduced operating hours, and vaccine requirements.

These measures have impacted and may further impact our workforce and operations and those of our respective suppliers and partners.

In particular, we have experienced, and could in the future experience, global supply chain delays including challenges with transportation, logistics and production lead-times, as well as labor shortages and cost inflation.

In the first quarter of 2021, we experienced delays due to global components and packaging shortages for our consumer products across our supply chain.

These challenges were addressed in the second quarter and we have otherwise not encountered any major disruptions in our supply chain.

It is our intention to maintain adequate safety stocks to support our growth and we currently believe we have adequate inventory on hand to meet current demands.

We will continue to monitor the situation closely as conditions may become more challenging due to ongoing and uncertain economic factors.

Additionally, our sales to partners in international markets have been impacted by the effects of COVID-19.

Our primary focus throughout the COVID-19 pandemic has remained ensuring the health and safety of our employees through office closures or implementing enhanced safety protocols to ensure the well-being of our employees.

We have adapted to the new environment and been able to successfully conduct business virtually.

The degree to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including the duration and severity of the pandemic;

surges related to new variants;

the actions taken to contain the virus or treat its impact;

other actions taken by governments, businesses, and individuals in response to the virus and resulting economic disruption;

and how quickly and to what extent normal economic and operating conditions can resume.

Additional impacts and risks may arise that we are not aware of or able to respond to effectively.

We are similarly unable to predict the extent of the impact of the pandemic on our customers, suppliers, and other partners, but a material effect on these parties could also materially adversely affect us.

The impact of COVID-19 can also exacerbate other risks discussed in this Risk Factors section and throughout this report.

Results of Operations

Our results of operations for the years ended December 31, 2021 and 2020 are as follows:

Year Ended December 31,

(In thousands) 2021 2020

Twelve months ending

Sales $ 67,449 $ 59,257

Cost of sales 25,959 23,983

Gross profit 41,490 35,274

Operating expenses

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Interest expense, net (55) (71)

The following table sets forth the computations of loss per share amounts applicable to common stockholders for the years ended December 31, 2020 and December 31, 2019.

Net loss $ (27,128) $ (19,925)

Our loss per share applicable to common stockholders for the years indicated is calculated as follows:

Year Ended December 31,

(In thousands, except per share data) 2021 2020

Net loss $ (27,128) $ (19,925)

Basic and diluted loss per common share $ (0.40) $ (0.33)

Basic and diluted weighted average common shares outstanding (1):

67,185 61,067

Potentially dilutive securities (2):

Stock options 10,536 11,914

Includes approximately 0.2 million shares of restricted stock for each of the years 2020 and 2019, which are participating securities that feature voting and dividend rights.

Restricted stock units 115 —

(1) Includes approximately 0.2 million nonvested shares of restricted stock for the year ended December 31, 2021 and December 31, 2020 which are participating securities that feature voting and dividend rights.

(2) Excluded from the computation of loss per share as their impact is antidilutive.

Net sales consist of gross sales less discounts and returns.

Twelve months ending

(In thousands)

December 31, 2020

December 31, 2019

Our total net sales grew from $21.2 million in 2017 to $67.4 million in 2021, representing a 26% compound annual growth rate.

Our total net sales by reportable segment for the years ended December 31, 2021 and 2020 are as follows:

Year Ended December 31,

(In thousands) 2021 2020 Change

Consumer Products $ 56,705 $ 47,090 20 %

Ingredients 7,407 9,198 (19)

Analytical reference standards and services 3,337 2,969 12

Total net sales $ 67,449 $ 59,257 14 %

Total net sales increased by 28% for the twelve-month period ended December 31, 2020, compared to the comparable period in 2019.

The Company’s TRU NIAGEN® sales for consumer products segment continue to increase after the Company’s strategic shift towards consumer products in 2017.

The increase in sales for the ingredients segment is largely due to strong demand from our NIAGEN® ingredient customers, who resell NIAGEN® under their own brands.

The decrease in sales for the analytical reference standards and services is largely due to the spinoff of the regulatory consulting business unit in November 2019.

The regulatory consulting business generated net sales of approximately $0.7 million in 2019.

In addition, sales of analytical reference standards decreased largely due to the effects of COVID-19.

In 2021, our total net sales increased by 14%, up $8.2 million, from 2020.

• In 2021, our e-commerce sales for TRU NIAGEN® increased approximately $7.3 million, or 21%, from 2020.

Additionally, we began distributing TRU NIAGEN® at Walmart stores across the United States in June 2021.

• In 2021, our ingredients segment experienced a 19% decrease in overall net sales from 2020.

The decrease was primarily driven by lower demand in our other ingredients category.

Other ingredient sales decreased approximately $1.4 million while NIAGEN® ingredient sales decreased $0.4 million in 2021 compared to 2020.

The decline in sales was partially attributable to terminated sales of NIAGEN® to Thorne Research Inc., a former customer who filed a petition on December 1, 2020 for inter partes review of the ‘086 Patent which ChromaDex Inc.

exclusively licenses from Dartmouth College.

For more information, see Note 15, Commitments and Contingencies, Legal Proceedings in the Notes to the Consolidated Financial Statements, included in Part II, Item 8 of this Form 10-K.

• Net sales for our analytical reference standards and services segment increased during 2021 compared to 2020 primarily due to increased demand for reference standards in 2021.

Cost of Sales.

Costs of sales include raw materials, labor, overhead and delivery costs.

Twelve months ending

(In thousands)

December 31, 2020

December 31, 2019

The following table sets forth our total cost of sales by reportable segment:

Year Ended December 31,

2021 2020 Change

(In thousands) Amount % of

net sales Amount % of

net sales % of

Cost of sales:

Consumer Products $ 19,864 35 % $ 17,541 37 % (2) %

Ingredients 3,233 44 3,593 39 5

Analytical reference standards and services 2,862 86 2,849 96 (10)

Total cost of sales $ 25,959 38 % $ 23,983 40 % (2) %

The cost of sales, as a percentage of net sales, decreased 4% for the twelve-month period ended December 31, 2020 compared to the comparable period in 2019.

The cost of sales, as a percentage of net sales, for the consumer products segment decreased 3% for the twelve-month period ended December 31, 2020 compared to the comparable period in 2019.

Product cost savings initiatives and overall scale on our supply chain drove the decrease in cost of sales.

The cost of sales, as a percentage of net sales, for the ingredients segment decreased 9% for the twelve-month period ended December 31, 2020 compared to the comparable period in 2019.

In 2020, we were able to lower our cost of NIAGEN® ingredient through supply chain cost savings initiatives, which resulted in a decrease in cost of sales.

Also, a portion of this decrease was realized in the form of a rebate from a supplier for prior year efficiency initiatives, which was recorded in the second quarter of 2020.

In addition, we had an inventory write off of approximately $0.2 million related to our decision to wind down sales for a certain ingredient in the first quarter of 2019.

The cost of sales, as a percentage of net sales for the analytical reference standards and services segment, increased 22% for the twelve-month period ended December 31, 2020 compared to the comparable period in 2019.

The decrease in sales of analytical reference standards and services due to the spinoff of the regulatory consulting business in November 2019 and the effects of COVID-19 led to a lower labor and overhead utilization rate, which resulted in our cost of sales increasing as a percentage of net sales.

Total cost of sales, as a percentage of net sales, decreased 2% in 2021 compared to 2020 as scale, product mix and cost saving initiatives more than offset inflationary pressures across global supply chains.

During 2021, we continued to explore cost saving processes and opportunities and benefit from favorable product mix.

• Cost of sales, as a percentage of net sales, for the consumer products segment decreased 2% in 2021 compared to 2020.

The decreases were driven by favorable product mix, continued cost saving initiatives and overall efficiencies of our supply chain.

• Cost of sales, as a percentage of net sales, for the ingredients segment increased by 5% in 2021 compared to 2020.

The relative increase is primarily attributable to a rebate recorded in the second quarter of 2020 from a supplier for efficiency initiatives.

No similar rebates were recorded in 2021.

• The fluctuation in cost of sales, as a percentage of net sales, for the analytical reference standards and services segment is largely driven by our fixed supply chain labor and overhead costs which do not increase in proportion to sales.

Accordingly, as sales increased in 2021 we experienced increased utilization rates and a decrease in cost of sales, as a percentage of net sales, of 10% compared to 2020.

Gross Profit.

Gross profit is net sales less the cost of sales and is affected by a number of factors including product mix, competitive pricing and costs of products, labor, overhead, services and delivery.

Twelve months ending

(In thousands)

December 31, 2020

December 31, 2019

Gross profit is net sales less the cost of sales and is affected by a number of factors including business and product mix, competitive pricing and costs of products, labor, overhead, services and delivery.

Our overall gross profit increased $6.2 million, or 18%, in 2021 compared to 2020 and overall gross margin percentage was up 200 basis points for the same period.

The following table sets forth our total gross profit by reportable segment:

Year Ended December 31,

(In thousands) 2021 2020 Change

Gross profit:

Consumer Products $ 36,841 $ 29,549 25 %

Ingredients 4,174 5,605 (26)

Analytical reference standards and services 475 120 296

Total gross profit $ 41,490 $ 35,274 18 %

The consumer products segment posted gross profit of $29.5 million for the twelve-month period ending December 31, 2020, an increase of 37% compared to the comparable period in 2019.

The increased gross profit was due to higher sales, product cost savings initiatives and scale on our supply chain operations.

The ingredients segment posted gross profit of $5.6 million for the twelve-month period ending December 31, 2020, an increase of 74% compared to the comparable period in 2019.

The increased gross profit for the ingredients segment was largely due to higher sales to key customers, scale on our supply chain operations, a rebate related to savings from prior year efficiency initiatives, and the absence of $0.2 million inventory write-off related to our decision to wind down sales for a certain ingredient in the first quarter of 2019.

The decreased gross profit for the analytical reference standards and services segment was largely due to the decreased sales resulting from the spinoff of the regulatory consulting business and the effects of COVID-19.

Fixed supply chain labor and overhead costs make up a substantial portion of the costs and these fixed labor and overhead costs did not decrease in proportion to sales, yielding lower profit margin.

For details supporting year-over-year changes in gross profit refer to the discussions above regarding changes in our net sales and cost of sales for each segment.

Operating Expenses - Sales and Marketing.

Sales and Marketing Expenses consist of salaries, advertising, public relations and marketing expenses.

Twelve months ending

(In thousands)

December 31, 2020

December 31, 2019

Sales and marketing expense consists of salaries, advertising, public relations and marketing expenses.

Sales and marketing expense by reportable segment is as follows:

Year Ended December 31,

(In thousands) 2021 2020 Change

Sales and marketing expenses:

Consumer Products $ 27,821 $ 20,323 37 %

Ingredients 46 41 12

Analytical reference standards and services 485 584 (17)

Total sales and marketing expenses $ 28,352 $ 20,948 35 %

For the consumer products segment, the increase during the twelve-month period ended December 31, 2020 is largely due to increased staffing as well as direct marketing expenses associated with social media, public relations and other customer awareness and acquisition programs.

For the ingredients segment, selling and marketing expenses decreased by 83% during the twelve-month period ended December 31, 2020 compared to comparable period in 2019.

We reversed approximately $114,000 of certain accrued commission expense during the first quarter of 2020, as we were no longer obligated to pay the commission.

For the analytical reference standards and services segment, the selling and marketing expenses decreased by 7% during the twelve-month period ended December 31, 2020.

The selling expense in 2020 were less due to decreased sales.

• We continue to focus our primary marketing efforts on our consumer products segment to increase consumer awareness of TRU NIAGEN®.

In 2021, we increased sales and marketing expense by approximately $7.5 million compared to 2020 which is largely attributable to direct marketing expenses associated with social media, public relations and other customer awareness and acquisition programs, as well as increased staffing.

• For the ingredients segment, sales and marketing expenses were substantially similar totaling $46,000 in 2021 and $41,000 in 2020.

• For the analytical reference standards and services segment, sales and marketing expenses decreased by approximately $0.1 million in 2021 compared to 2020.

The lower sales and marketing expense is related to our continued strategic focus on our consumer products segment.

Operating Expenses - Research and Development.

Research and Development Expenses consist primarily of clinical trials, regulatory approvals, product development and process development expenses.

Twelve months ending

(In thousands)

December 31, 2020

December 31, 2019

Research and development expense consists primarily of clinical trials, product development and process development expenses.

Year Ended December 31,

(In thousands) 2021 2020 Change

Research and development expenses:

Consumer Products $ 3,427 $ 2,972 15 %

Ingredients 405 443 (9)

Total research and development expenses $ 3,832 $ 3,415 12 %

We allocate the research and development expenses related to our NIAGEN® branded ingredient to the consumer products and ingredients segment, based on revenues recorded.

Overall, we decreased our research and development efforts during the twelve-month period ended December 31, 2020 as we evaluate and realign the priorities of our ongoing research and development efforts of our flagship ingredient, NIAGEN® nicotinamide riboside.

• We allocate research and development expenses related to our NIAGEN® branded ingredient to our consumer products and ingredients segments based on net sales recorded.

Overall, research and development expense slightly increased in 2021 compared to 2020 as we increased investments and acceleration of our research and development pipeline and timing of projects.

Operating Expenses - General and Administrative.

General and Administrative Expenses consist of general company administration, legal, royalties, IT, accounting and executive management expenses.

Twelve months ending

(In thousands)

December 31, 2020

December 31, 2019

General and administrative expense consists of general company administration, legal, royalties, information technology, accounting and executive management expenses.

General and administrative expense is not allocated by segment and is instead classified under our Corporate and Other category.

General and administrative expense is as follows:

Year Ended December 31,

(In thousands) 2021 2020 Change

General and administrative $ 36,379 $ 30,765 18 %

The following expenses contributed to the decrease in general and administrative expenses for the twelve-month period ended December 31, 2020, compared to the comparable period in 2019:

A decrease in legal expenses.

Our legal expense decreased to approximately $8.6 million in the twelve-month period ended December 31, 2020 compared to approximately $11.3 million in the comparable period in 2019.

A decrease in bad debt expense.

Our bad debt expense decreased to an insignificant amount in the twelve-month period ended December 31, 2020 compared to approximately $2.2 million in 2019.

This is due to recording a write off of $2.2 million related to the trade receivable from Elysium Health in 2019 by increasing the allowance from $0.5 million to the entire trade receivable balance of $2.7 million.

We placed a reserve for the entire outstanding balance as it was no longer deemed collectible.

Increased general and administrative expense for 2021 was primarily attributable to increased legal expenditures.

Our legal expense increased to approximately $16.4 million in 2021 from approximately $8.6 million in 2020 due to increased activity in our ongoing litigation.

For additional details see Note 15, Commitments and Contingencies, Legal Proceedings in the Notes to the Consolidated Financial Statements, included in Part II, Item 8 of this Form 10-K.

Nonoperating - Interest Expense, net.

Interest expense, net consists of interest earned from bank deposit accounts less interest expenses from convertible notes, the line of credit arrangement and finance leases.

Twelve months ending

(In thousands)

December 31, 2020

December 31, 2019

Interest expense, net

In the second and third quarter of 2019, we incurred debt issuance costs of approximately $0.8 million in connection with the issuance of convertible promissory notes in the aggregate principal amount of $10.0 million to Winsave Resources Limited and Pioneer Step Holdings Limited.

The issuance costs were recorded as a debt discount and have been amortized as interest expense using the effective interest method.

Interest expense, net consists of interest earned from bank deposit accounts less interest expenses from the line of credit arrangement and finance leases.

Interest expense, net totaled approximately $55,000 and $71,000 for the years ended December 31, 2021 and 2020, respectively.

Depreciation and Amortization.

For the twelve-month period ended December 31, 2020, we recorded approximately $0.9 million in depreciation compared to approximately $0.8 million for the twelve-month period ended December 31, 2019.

Depreciation expense was approximately $0.9 million for both of the years ended December 31, 2021 and 2020.

We depreciate our assets on a straight-line basis, based on the estimated useful lives of the respective assets.

Amortization expense of intangible assets was approximately $0.2 million for both of the years ended December 31, 2021 and 2020.

We amortize intangible assets using a straight-line method, generally over 10 years.

For licensed patent rights, the useful lives are 10 years or the remaining term of the patents underlying licensing rights, whichever is shorter.

The useful lives of subsequent milestone payments that are capitalized are the remaining useful life of the initial licensing payment that was capitalized.

In the twelve-month period ended December 31, 2020, we recorded amortization on intangible assets of approximately $0.2 million compared to approximately $0.2 million for the twelve-month period ended December 31, 2019.

The useful life of subsequent milestone payments that are capitalized match the remaining useful life of the initial licensing payment that was originally capitalized.

Amortization expense of right-of-use assets for the year ended December 31, 2021 was approximately $0.5 million as compared to $0.4 million for the year ended December 31, 2020.

Income Taxes.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

At December 31, 2020 and December 31, 2019, the Company maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of 0% for each of 2020 and 2019.

At December 31, 2021 and 2020, we maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of approximately 0% for both of the years ended December 31, 2021 and 2020.

As defined in ASC 740, Income Taxes, future realization of the tax benefit will depend on the existence of sufficient taxable income, including the expectation of continued future taxable income.

Net cash provided by (used in) operating activities.

Net cash used in operating activities for the twelve-month period ended December 31, 2020 was approximately $10.6 million as compared to approximately $20.4 million for the twelve-month period ended December 31, 2019.

Along with the net loss, an increase in trade receivables and payments on operating leases were the largest use of cash during the twelve-month period ended December 31, 2020.

Net cash used in operating activities for the twelve-month period ended December 31, 2019 largely reflects an increase in inventories along with the net loss.

We expect our operating cash flows to fluctuate significantly in future periods as a result of fluctuations in our operating results, shipment timetables, accounts receivable collections, inventory management, and the timing of our payments, among other factors.

Net cash provided by (used in) investing activities.

Net cash used in investing activities was approximately $0.2 million for the twelve-month period ended December 31, 2020, compared to approximately $0.2 million for the twelve-month period ended December 31, 2019.

Net cash used in investing activities for the twelve-month period ended December 31, 2020, mainly consisted of purchases of leasehold improvements and equipment.

Net cash used in investing activities for the twelve-month period ended December 31, 2019, mainly consisted of purchases of leasehold improvements and equipment, offset by proceeds from disposal of assets held at escrow.

Net cash provided by (used in) financing activities.

Net cash provided by financing activities was approximately $8.7 million for the twelve-month period ended December 31, 2020, compared to approximately $16.9 million for the twelve-month period ended December 31, 2019.

Net cash provided by financing activities for 2020 primarily consisted of proceeds from issuance of our common stock and exercise of stock options, offset by principal payments on finance leases.

Net cash used in financing activities for 2019 mainly consisted of proceeds from issuances of our common stock, sale of convertible notes and exercise of stock options, offset by principal payments on finance leases.

Net cash used in operating activities.

Cash used in operating activities is net loss adjusted for certain non-cash items and changes in operating assets and liabilities.

Net cash used in operating activities was approximately $24.2 million and $10.6 million in 2021 and 2020, respectively.

The increase in cash used during the year ended December 31, 2021 compared to 2020 was primarily due to the increase in our net loss of $7.2 million as well as changes in working capital.

Changes in working capital was driven by timing of trade receivable collections and increased inventory.

We expect our operating cash flows to fluctuate significantly in future periods as a result of fluctuations in our operating results, shipment timetables, trade receivable collections, inventory management, and the timing of our payments, among other factors.

Net cash used in investing activities.

Investing cash flows consist primarily of capital expenditures and investment activities.

Net cash used in investing activities was approximately $0.4 million and $0.2 million in 2021 and 2020, respectively.

The increase in cash used during the year ended December 31, 2021 compared to 2020 was primarily due to increased purchases of leasehold improvements and equipment in 2021.

Net cash provided by financing activities.

Financing cash flows consist primarily of proceeds from issuance of our common stock, exercise of stock options through employee equity incentive plans and repayment of short-term and long-term debt.

Net cash provided by financing activities was approximately $36.1 million and $8.7 million in 2021 and 2020, respectively.

The increase in cash provided during the year ended December 31, 2021 compared to 2020 was primarily due to increased proceeds from issuance of our common stock of $21.8 million and higher proceeds related to the exercise of employee stock options of $5.4 million.

Trade Receivables.

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As of December 31, 2021, we had approximately $13.6 million in inventory, compared to approximately $11.7 million as of December 31, 2020.

As of December 31, 2020, our inventory consisted of approximately $8.1 million of consumer products, approximately $3.1 million of bulk ingredients and approximately $0.5 million of reference standards.

As of December 31, 2021, our inventory consisted of approximately $11.0 million of consumer products, $2.1 million of bulk ingredients and $0.5 million of reference standards.

Consumer products inventory consists of TRU NIAGEN® branded finished bottles of dietary supplement products and related work-in-process inventory.

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Liquidity and Capital Resources

For the twelve-month period ended December 31, 2020, the Company incurred losses from operations of approximately $19.9 million.

Net cash used in operating activities for the twelve-month period ended December 31, 2020 was approximately $10.6 million.

The losses and the uses of cash are primarily due to expenses associated with the development and expansion of our operations, as well as legal expenses.

For the year ended December 31, 2021, we incurred losses from operations of approximately $27.1 million.

Net cash used in operating activities for the year ended December 31, 2021 was approximately $24.2 million.

The losses and the uses of cash are primarily due to expenses associated with the development and expansion of our operations, as well as legal expenditures.

These operations have been financed through capital contributions, primarily through the issuance of common stock in private placements.

Our Board of Directors periodically reviews our capital requirements in light of our proposed business plan.

Additionally, as of December 31, 2021, we had purchase obligations of approximately $23.2 million related to inventory purchases which are to be placed over two years and approximately $5.5 million in future minimum lease obligations to be paid over seven years.

Our Board of Directors periodically reviews our material cash requirements in light of our proposed business plan.

Our future capital requirements will remain dependent upon a variety of factors, including cash flow from operations, the ability to increase sales, increasing our gross profits from current levels, reducing sales and administrative expenses as a percentage of net sales, continued development of customer relationships, and our ability to market our new products successfully.

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Any inability to raise additional financing would have a material adverse effect on us.

As of December 31, 2020, the cash and cash equivalents totaled approximately $16.7 million.

As of December 31, 2021, cash and cash equivalents totaled approximately $28.2 million and we had no borrowings outstanding under our line of credit with Western Alliance Bank.

Additionally, as of December 31, 2021, we had purchase obligations of approximately $23.2 million related to inventory purchase commitments and approximately $5.5 million in future minimum lease obligations to be paid over two and seven years, respectively.

As of December 31, 2021 and 2020, we had no material off-balance sheet arrangements.

Additionally, we have a line of credit up to $10.0 million available to us from Western Alliance Bank.

We may, however, seek additional capital within the next twelve months, both to meet our projected operating plans after the next twelve months and/or to fund our longer term strategic objectives.

In June 2020, we filed a $125 million registration statement on Form S-3 with the Commission, utilizing a “shelf” registration process.

Under this shelf registration process, we may sell securities from time to time, including up to $50.0 million pursuant to the ATM Facility.

As of December 31, 2020, we have not sold any securities pursuant to the ATM Facility.

D ividend Policy

Under this shelf registration process, we may sell securities from time to time, including up to $50 million pursuant to the At Market Issuance Sales Agreement, dated as of June 12, 2020, with B.

Riley FBR, Inc.

and Raymond James & Associates, Inc.

(ATM Facility).

During the second quarter of 2021, we sold an aggregate of 0.2 million shares of our common stock under the ATM Facility resulting in proceeds of $1.9 million, net of offering costs of $0.3 million.

The shares sold at an average price of $10.56 per share.

As of December 31, 2021, approximately $47.8 million remains available under the ATM Facility.

Dividend Policy

We have not declared or paid any cash dividends on our common stock.

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Any change in our dividend policy is within the discretion of our board of directors and will depend, among other things, on our earnings, debt service and capital requirements, restrictions in financing agreements, if any, business conditions, legal restrictions and other factors that our board of directors deems relevant.

Off-Balance Sheet Arrangements

During the fiscal years ended December 31, 2020 and December 31, 2019, we had no material off-balance sheet arrangements.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and other commitments as of December 31, 2021:

Payments due by period

(In thousands)

(In thousands) 2022 2023 2024 2025 2026 Thereafter Total

Operating leases $ 694 $ 949 $ 1,159 $ 1,141 $ 906 $ 677 $ 5,526

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Purchase obligations 19,710 3,500 — — — — 23,210

Total $ 20,424 $ 4,449 $ 1,159 $ 1,141 $ 906 $ 677 $ 28,756

Operating leases.

We lease our offices and research facilities in California and Colorado under operating lease agreements that expire in October 2021 and October 2025, respectively.

Under operating lease agreements, we lease a research facility in Colorado that expires in October 2025 and office spaces in Los Angeles, California and Orange County, California.

Our Los Angeles office lease expires in March 2027.

We are currently in the process of transitioning from one office to another office within Orange County.

Our current office lease in Irvine, California is month-to-month and our new office lease in Tustin, California will begin in July 2022 and expire in June 2028.

We make monthly payments on these leases.

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Purchase obligations.

We enter into purchase obligations with various vendors for goods and services that we need for our operations.

The purchase obligations for goods and services include inventory, advertising, research and development, and laboratory supplies.

Critical Accounting Policies

From time to time, we enter into purchase obligations with various vendors for goods and service that we need for our operations.

The purchase obligations for goods and services primarily consist of inventory.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S.

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Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 3 of the Financial Statements, set forth in Item 8 of this Form 10-K.

For a summary of our significant accounting policies, including the accounting policy discussed below see Note 3 of the Financial Statements, set forth in Item 8 of this Form 10-K.

Revenue recognition :

Beginning in fiscal year 2018, we adopted Accounting Standards Update (ASU) No.

2014-09, Revenue from Contracts with Customers (Topic 606).

Our revenue recognition policies under Topic 606 are described below.

The Company recognizes sales and the related cost of sales when the performance obligations are satisfied.

The performance obligations are typically satisfied upon shipment of physical goods or as the services are performed over time.

In addition to the satisfaction of the performance obligations, the following conditions are required for revenue recognition:

an arrangement exists, there is a fixed price, and collectability is reasonably assured.

Discounts, returns and allowances related to sales, including an estimated reserve for the returns and allowances, are recorded as reduction of revenue.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis