Niagen Bioscience, Inc. 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Form 10-Q and in our 2021 Annual Report on Form 10-K. All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are approximate. Growth and percentage comparisons made herein generally refer to the three and six months ended June 30, 2022 compared with the three and six months ended June 30, 2021 unless otherwise noted. Unless otherwise indicated or unless the context otherwise requires, all references in this document to “we,” “us,” “our,” the “Company,” “ChromaDex” and similar expressions refer to ChromaDex Corporation, and depending on the context, its subsidiaries. Special Note Regarding Forward Looking Statements Certain statements in this MD&A, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “expects,” “anticipates,” “intends,” “estimates,” “plans,” “potential,” “possible,” “probable,” “believes,” “seeks,” “may,” “will,” “should,” “could,” “predicts,” “projects,” “continue,” “would” or the negative of such terms or other similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers should carefully review the risk factors set forth below in Part II, Item 1A, “Risk Factors” and our financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on March 14, 2022 (Annual Report). Company Overview We are a global bioscience company dedicated to healthy aging. Our team, which includes world-renowned scientists, is pioneering research on nicotinamide adenine dinucleotide (NAD+), an essential coenzyme that is a key regulator of cellular metabolism and is found in every cell of the human body. NAD+ levels in humans have been shown to decline by more than 50% from young adulthood to middle age. In addition to age, other factors linked to NAD+ depletion include poor diet, excess alcohol consumption and a number of disease states. NAD+ levels may be increased through supplementation with NAD+ precursors, such as nicotinamide riboside (NR), calorie restriction and moderate exercise. In 2013, we commercialized Niagen®, a proprietary form of NR, a novel form of vitamin B3. Data from numerous preclinical studies and human clinical trials show that NR is a highly efficient NAD+ precursor that significantly raises NAD+ levels in blood and tissue. Niagen® is confirmed safe for human consumption as a dietary supplement and food ingredient. Niagen® has twice been successfully reviewed under the U.S. Food and Drug Administration’s (FDA) new dietary ingredient (NDI) notification program, it has been successfully notified to the FDA as generally recognized as safe (GRAS), and has been approved by Health Canada, the European Commission and the Therapeutic Goods Administration of Australia. Clinical studies of Niagen® have demonstrated a variety of outcomes including increased NAD+ levels, altered body composition, increased cellular metabolism and increased energy production. Niagen® is protected by patents to which we are the owner or have exclusive rights. While best known for its role in cellular energy production, NAD+ is also thought to play an important role in healthy aging. Many cellular functions related to health and healthy aging are sensitive to levels of locally available NAD+ and this represents an active area of research in the field of NAD+. To date, there are over 450 published human clinical studies related to NAD+ and its impact on health. These areas of study include understanding NAD+’s role in Alzheimer’s disease, Parkinson’s disease, neuropathy, sarcopenia, liver disease and heart failure. 25 We are among the world leaders in the emerging NAD+ space. Through our ChromaDex External Research Program (CERP), we have amassed more than 250 research partnerships with leading universities and research institutions around the world including the National Institutes of Health, Cornell, Dartmouth, Harvard, Massachusetts Institute of Technology, University of Cambridge, the Mayo Clinic, Chiba University and Sun Yat-sen University. The results of the 250+ research agreements have allowed CERP to help produce the trusted science behind Niagen® and continue to advance the understanding of NAD+ in health, diseases, and aging. We value and encourage strong scientific rigor behind our products and seek to continually develop additional relationships in pursuit of this. CERP is a vital component of our research and development platform along with our scientific advisory board. Our scientific advisory board supports the technical and intellectual property needs of investigators, presents research at conferences, and helps build and support the NAD+ and healthy aging research community. Our scientific advisory board is led by Chairman Dr. Roger Kornberg, Nobel Laureate Stanford Professor, Dr. Charles Brenner, one of the world’s recognized experts in NAD+ and discoverer of NR as a NAD+ precursor, Dr. Rudy Tanzi, the co-chair of the department of neurology at Harvard Medical School, Sir John Walker, Nobel Laureate and Emeritus Director, MRC Mitochondrial Biology Unit in the University of Cambridge, England, Dr. Bruce German, Chairman of food, nutrition and health at the University of California, Davis, Dr. Brunie Felding, Associate Professor, Department of Molecular Medicine at Scripps Research Institute, California Campus, and Dr. David Katz, the Founder and former director of Yale University’s Yale-Griffin Prevention Research Center; President and Founder of the non-profit True Health Initiative; and Founder and Chief Executive Officer of Diet ID, Inc. Impact of COVID-19 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. 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 and have 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 Part II, Item 1A Risk Factors and throughout this report. Supply chain disruptions, inflation and changing prices 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 supply chain challenges were addressed in the second quarter of 2021 and we have otherwise not encountered any major disruptions in our supply chain. Supply chain delays, among other factors such as store closures, have impacted our sales to partners in international markets. 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 have also recently experienced inflation in labor, raw materials, transportation and other costs. Inflation can also have a long-term impact as increasing costs may impact our ability to maintain satisfactory margins. We may be unsuccessful in passing these increases on to our customers or finding other mitigating solutions. Furthermore, increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on customer spending. If customer sales diminish, we may be required to scale back production volumes which could negatively impact any economies of scale we have previously benefited from. We have also seen changing prices due to other macroeconomic factors including rising interest rates, fluctuations in currency exchange rates and geopolitical uncertainties such as those surrounding Russia’s invasion of Ukraine. We will continue to monitor changing prices and inflationary pressures closely as conditions may become more challenging due to ongoing and uncertain economic factors. 26 Recent Activities Joint Venture Agreement with Related Parties On May 19, 2022, we entered into an agreement to form a joint venture (the “JV”) to expand our market strategy to include opportunities in Mainland China and its territories, excluding Hong Kong, Macau and Taiwan (the “Territory”), subject to the terms and satisfaction of the conditions contained therein. The JV agreement is among Crystal Lake Developments Limited (Crystal Lake), Pioneer Idea Holdings Limited (Pioneer Idea), and Hong Kong (China) Taikuk Group Ltd (Taikuk). Crystal Lake is indirectly wholly-owned by Li Ka Shing, and Pioneer Idea is indirectly owned by Solina Chau, and each of Mr. Li and Ms. Chau own through affiliated entities more than 5% of our common stock. The business of the JV will be to market, sell and distribute Tru Niagen® and other products containing NR (the “Products”) developed by us in the Territory. The JV agreement will have an initial term of 20 years, unless earlier terminated. Crystal Lake, Pioneer Idea and Taikuk have each agreed to contribute $1.8 million, $1.2 million and $1.0 million, respectively into the JV. In addition, we have agreed to pay $1.0 million to Taikuk and Taikuk will receive an additional 5% non-voting equity interest in the JV for introducing the parties. Following the closing of the formation of the JV (the “Closing”), each of the parties will hold the following interest in the JV: us (71%), Crystal Lake (10.8%), Pioneer Idea (7.2%) and Taikuk (a 11% non-voting interest). We will have the right to elect three of the five directors in the JV, and Pioneer Idea will have the right to elect the other two directors, with each director having one vote. Certain material corporate actions will require unanimous approval of the board of the JV. The Closing is subject to certain customary closing conditions and is expected to occur by the end of the third quarter of 2022. Prior to being able to commercialize the Products in the Territory, the JV will have to obtain all applicable regulatory approvals, including “Blue Hat” or health food registration with the PRC State Administration for Market Regulation for Products in the name of the Company or its designee (collectively, the “Blue Hat Registration”). Prior to the JV obtaining the Blue Hat Registration, we will supply the Products to the JV who will appoint a third party sub-distributor to sell the Products in the Territory. Once Blue Hat Registration is obtained, we will license to the JV certain intellectual property relating to the Products for the JV to manufacture and sell the Products in the Territory. If the Blue Hat Registration is not obtained within 24 months of Closing (which deadline for obtaining the Blue Hat Registration may be extended by an additional 12 months upon consent of the parties), the JV may repurchase the 11% non-voting interest owned by Taikuk for two dollars. As of the date of this report, the JV has not yet launched. Financial Condition and Results of Operations The discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues, if any, and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. As of June 30, 2022, our cash and cash equivalents totaled approximately $17.1 million, of which $16.9 million was unrestricted. We anticipate that our current unrestricted cash and cash equivalents and cash to be generated from net sales will be sufficient to meet our financial obligations as they become due over at least the next twelve months. Additionally, we have begun implementing plans to minimize expenses and reduce our cash burn rate for the second half of fiscal year 2022. We may, however, seek additional capital in 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 entered into an At Market Issuance Sales Agreement (the Sales Agreement) with B. Riley FBR, Inc. (B. Riley FBR) and Raymond James & Associates, Inc. (“Raymond James” and together with B. Riley FBR, 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). As of June 30, 2022, approximately $47.8 million remains available under the ATM Facility. Our potential use of the ATM facility is subject to the satisfaction of various conditions in the ATM Facility agreement as well market conditions. As a result, our ability to rely on the ATM Facility to raise liquidity is limited to a material extent. 27 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. Further, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities we issue may have rights, preferences and privileges senior to those of our existing stockholders. 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. 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 COVID-19 pandemic and other macroeconomic factors such as rising interest rates, inflation and geopolitical uncertainties, 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. We currently have three operating segments which offer differentiated services. Through our Consumer Products segment we provide finished dietary supplement products that contain the Company's proprietary ingredients directly to consumers and distributors. We deliver Niagen® as the sole active ingredient in our consumer product Tru Niagen® which is offered in both convenient capsules and stickpacks. Additionally, beginning in April 2022, we launched our new consumer product, Tru Niagen® Immune, a combination of immune-boosting nutrition with Niagen® in capsule form. Our ingredients segment develops and commercializes proprietary-based ingredient technologies and supplies these ingredients as raw material to the manufacturers of consumer products. Finally, our Analytical Reference Standards and Services segment focuses on natural product fine chemicals, known as phytochemicals, and related research and development services. The results of these segments and our consolidated operations are detailed in the discussion that follows. Our consolidated net sales and net loss for the three and six months ended on June 30, 2022 and 2021 are as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 2022 2021 Net sales $ 16,732 $ 17,699 $ 33,991 $ 32,382 Net loss (6,397) (5,566) (14,137) (12,947) Basic and diluted loss per common share $ (0.09) $ (0.08) $ (0.21) $ (0.20) 28 Net Sales Net sales consist of gross sales less discounts and returns. The following table sets forth our total net sales by reportable segment: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 % Change 2022 2021 % Change Net sales: Consumer Products $ 14,520 $ 15,396 (6) % $ 29,457 $ 27,833 6 % Ingredients 1,464 1,504 (3) % 2,891 2,819 3 % Analytical reference standards and services 748 799 (6) % 1,643 1,730 (5) % Total net sales $ 16,732 $ 17,699 (5) % $ 33,991 $ 32,382 5 % Total net sales decreased approximately 5% for the three months ended June 30, 2022 compared to the same period in 2021, while total net sales increased approximately 5% for the six months ended June 30, 2022 compared to the same period in 2021. Changes in sales for the periods indicated were driven by the following: • Tru Niagen® sales for our Consumer Products segment decreased $0.9 million, or (6)%, for the three months ended June 30, 2022 compared to the same period in the prior year. The decrease is related to the initial shelf stocking in Wal-Mart to support our launch in the prior year quarter driving increased sales for the three months ended June 30, 2021, paired with a decline in sales to A.S. Watson, a related party, of $1.4 million for the three months ended June 30, 2022 compared to the prior year quarter to better align purchases with anticipated consumer demand during the key selling season in late 2022. These declines were largely offset by higher e-commerce sales of approximately $1.4 million for the three months ended June 30, 2022 compared to the same period in 2021. For the six months ended June 30, 2022 total consumer product sales increased $1.6 million, or 6%, compared to the same period in 2021. The higher sales were primarily related to increased e-commerce sales of $2.6 million, largely offset by lower sales to Wal-Mart, following the initial shelf stocking sales in 2021. • Total ingredient sales remained relatively stable with a decrease of approximately $40 thousand, or (3)%, for the three months ended June 30, 2022 and an increase of $72 thousand, or 3%, for the six months ended June 30, 2022, each compared to the corresponding periods in 2021. For the three and six months ended June 30, 2022, Niagen® ingredient sales increased $173 thousand and $101 thousand, respectively, compared to the corresponding periods in 2021, while all other ingredient sales decreased $213 thousand and $29 thousand, respectively, during the same periods. • Analytical reference standards and services segment sales decreased $51 thousand and $87 thousand for the three and six months ended June 30, 2022 compared to the same periods in 2021, respectively. The decreased sales are attributable to lower research and development sales throughout 2022 compared to 2021, primarily due to the timing of project requests from customers. 29 Cost of Sales Cost of sales include raw materials, labor, overhead, and delivery costs. The following table sets forth our total cost of sales by reportable segment: Three Months Ended June 30, Six Months Ended June 30, Amount % of net sales Amount % of net sales (In thousands) 2022 2021 2022 2021 2022 2021 2022 2021 Cost of sales: Consumer Products $ 5,218 $ 5,547 36 % 36 % $ 10,470 $ 9,750 36 % 35 % Ingredients 681 675 47 45 1,403 1,238 49 44 Analytical reference standards and services 791 667 106 83 1,544 1,350 94 78 Total cost of sales $ 6,690 $ 6,889 40 % 39 % $ 13,417 $ 12,338 39 % 38 % Overall, cost of sales, as a percentage of net sales, slightly increased during the three and six months ended June 30, 2022 compared to the same periods in 2021. Changes in cost of sales were primarily driven by the following: • Cost of sales, as a percentage of net sales, for our consumer products segment remained substantially similar for the three months ended June 30, 2022 and 2021 and increased approximately 1% for the six months ended June 30, 2022 compared to the same period in 2021. The increase is primarily attributable to a shift in our business mix as we experienced higher business-to-business sales during the six months ended June 30, 2021 resulting in greater cost saving benefits from economies of scale on our overall supply chain overhead costs compared to the same period in the current year. • Cost of sales, as a percentage of net sales, for our ingredients segment increased 2% and 5% for the three and six months ended June 30, 2022, compared to the comparable periods in 2021, respectively. The increase is primarily a result of higher supply chain overhead costs, as we increased headcount to scale the business, paired with higher costs of raw materials. • Cost of sales, as a percentage of net sales, for the analytical reference standards and services segment increased 23% and 16% for the three and six months ended June 30, 2022 compared to the same periods in 2021, respectively. Cost of sales for our analytical reference standards and services segment are largely driven by fixed supply chain overhead costs which do not increase in proportion to sales. During the first six months of 2022, we increased our supply chain headcount in order to scale the business, increasing our overheads costs. Accordingly, as sales decreased and our supply chain labor head count increased during 2022, we experienced lower labor and overhead utilization rates resulting in increased cost of sales, as a percentage of net sales, compared to 2021. Gross Profit 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. The following table sets forth our total gross profit by reportable segment: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 % Change 2022 2021 % Change Gross profit: Consumer Products $ 9,302 $ 9,849 (6) % $ 18,987 $ 18,083 5 % Ingredients 783 829 (6) 1,488 1,581 (6) Analytical reference standards and services (43) 132 (133) 99 380 (74) Total gross profit $ 10,042 $ 10,810 (7) % $ 20,574 $ 20,044 3 % For details supporting the changes in gross profit, refer to the discussions above regarding changes in both our net sales and cost of sales for each segment. 30 Operating Expenses-Sales and Marketing Sales and marketing expenses consist of salaries, advertising, public relations and marketing expenses. Sales and marketing expenses by reportable segment were as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 % Change 2022 2021 % Change Sales and marketing expenses: Consumer Products $ 7,864 $ 6,190 27 % $ 15,938 $ 12,301 30 % Ingredients — 1 (100) 24 11 118 Analytical reference standards and services 157 41 283 296 178 66 Total sales and marketing expenses $ 8,021 $ 6,232 29 % $ 16,258 $ 12,490 30 % • During fiscal year 2022, for our consumer products segment, we launched a direct marketing campaign spanning multiple platforms including Amazon marketplaces, televised commercials, social media, public relations and other customer awareness and acquisition programs in addition to increasing our staffing. These focused marketing efforts drove increased sales and marketing expense of approximately $1.7 million and $3.6 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. We anticipate these expenses will decrease during the second half of 2022 as we shift our focus to efficient distribution channels and marketing campaigns, coupled with overall expense management. • For the ingredients segment, selling and marketing expenses were nominal during the three months ended June 30, 2022 and 2021. Sales and marketing expense increased during the six months ended June 30, 2022 compared to the same period in the prior year largely due to higher commissionable sales for other ingredients. • For the analytical reference standards and services segment, total selling and marketing expenses increased approximately $0.1 million for each of the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The increase was primarily driven by headcount increases. Operating Expenses-Research and Development Research and development (R&D) expenses consist primarily of headcount, clinical trials, product development and process development expenses. Research and development expenses by reportable segment were as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 % Change 2022 2021 % Change R&D expenses: Consumer Products $ 1,113 $ 926 20 % $ 2,115 $ 1,644 29 % Ingredients 132 78 69 208 147 41 Total R&D expenses $ 1,245 $ 1,004 24 % $ 2,323 $ 1,791 30 % We allocate R&D expenses related to our Niagen® branded ingredient to the consumer products and ingredients segment, based on revenues recorded. Overall, we had higher R&D expenses for the three and six months ended June 30, 2022 compared to the comparable period in 2021 due to increased staffing of research scientists, share-based compensation and timing of projects. 31 Operating Expenses-General and Administrative General and administrative expense consists of general company administration, legal, royalties, IT, accounting and executive management expenses. General and administrative expenses are not allocated by segment and instead are classified under our Corporate and Other category. General and administrative expense for the periods indicated were as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 % Change 2022 2021 % Change General and administrative 7,163 9,128 (22) % 16,112 18,679 (14) % The decline in general and administrative expense for the three and six months ended June 30, 2022, compared to the comparable periods in 2021 was primarily driven by lower legal expense of $2.4 million and $5.1 million related to litigation which was partially offset by increased investments in technology and increased staffing in key functional areas to support growth. For additional details regarding our litigation see Note 10, Commitments and Contingencies, Legal Proceedings in the Notes to the Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 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 June 30, 2022 and June 30, 2021, we maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of approximately 0% for the three and six months ended June 30, 2022 and 2021. 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. Depreciation and Amortization Depreciation expense was approximately $0.4 million for both of the six months ended June 30, 2022 and 2021. 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 $99 thousand for the six months ended June 30, 2022 compared to $121 thousand for the six months ended June 30, 2021. 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. Amortization expense of right of use assets for the six months ended June 30, 2022 was approximately $0.5 million as compared to $0.3 million for the six months ended June 30, 2021. Liquidity and Capital Resources From inception through June 30, 2022, we have incurred aggregate losses of approximately $183.1 million. These losses are primarily due to expenses associated with the development and expansion of our operations and investments to protect our intellectual property, including litigation-related expenses. Historically, these operations have been financed through capital contributions, the issuance of common stock and warrants through private placements and the issuance of debt. Our board of directors periodically reviews our capital 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 selling and administrative expenses as a percentage of net sales, continued development of customer relationships, and our ability to market our new products successfully. However, based on our results from operations, we may determine that we need additional financing to implement our long-term business plan. There can be no assurance that any such financing will be available on terms favorable to us or at all. Without adequate financing we may have to delay or terminate product and service expansion and curtail certain selling, general and administrative expenses. Any inability to raise additional financing would have a material adverse effect on us. 32 As of June 30, 2022, we had cash and cash equivalents of $17.1 million, no material off-balance sheet arrangements, no outstanding borrowings under our line of credit with Western Alliance Bank, purchase obligations of $15.1 million related to inventory purchase commitments to be paid over approximately one year and future minimum lease obligations of $5.3 million to be paid over approximately six years. We anticipate that our current unrestricted cash and cash equivalents of $16.9 million and cash to be generated from net sales will be sufficient to meet our financial obligations as they become due over at least the next twelve months and beyond. However, we may seek additional funds to support both our short-term and long-term operating objectives, either through additional equity or debt financings or collaborative agreements or from other sources. Furthermore, 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 ATM Facility, of which approximately $47.8 million remains available as of June 30, 2022. Our potential use of the ATM facility is subject to the satisfaction of various conditions in the ATM Facility agreement as well market conditions. As a result, our ability to rely on the ATM Facility to raise liquidity is limited to a material extent. As a result of the COVID-19 pandemic and other macroeconomic factors such as rising interest rates, inflation and geopolitical uncertainties, 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. 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 $11.0 million and $13.3 million for the six months ended June 30, 2022 and 2021, respectively. The decrease in cash used for the six months ended June 30, 2022 compared to June 30, 2021 of $2.3 million was primarily driven by the timing of collections for our trade receivables accounting for $4.3 million which was partially offset by increases in our inventories of $1.7 million. 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. Cash used in investing activities: Investing cash flows consist primarily of capital expenditures and investment activities. Cash used in investing activities was approximately $110 thousand for the six months ended June 30, 2022 compared to $311 thousand for the six months ended June 30, 2021. The decrease in cash used during the six months ended June 30, 2022 of $201 thousand compared to the same period in 2021 is attributable to fewer purchases of leasehold improvements and equipment. Net cash used in and 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. Cash used in financing activities was approximately $7 thousand for the six months ended June 30, 2022, compared to net cash provided by financing activities of approximately $35.7 million for the six months ended June 30, 2021. The difference in cash activities is largely attributable to proceeds from the issuance of common stock pursuant to the Securities Purchase Agreement with EverFund, the ATM Facility transaction, as well as the exercise of employee stock options, all of which occurred during the six months ended June 30, 2021 with no similar activity during the six months ended June 30, 2022. Critical Account Estimates There have been no changes to critical accounting estimates from those disclosed in our 2021 Form 10-K. 33