What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-08 compared with 2022-03-14 · 164 added, 136 removed, 167 unchanged (64% of the section changed)

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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.

ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., ChromaDex International, Inc., ChromaDex Analytics, Inc., ChromaDex Asia Limited, Asia Pacific Scientific, Inc., 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®.

Nicotinamide riboside and other NAD+ precursors are protected by ChromaDex’s patent portfolio.

ChromaDex delivers NIAGEN® as the sole active ingredient in its consumer product, TRU NIAGEN®.

The Company also has an analytical reference standards and services segment, which focuses on natural product fine chemicals (known as “phytochemicals”) and related chemistry services.

The ChromaDex 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 with age, among other factors, and may be increased through supplementation with NAD+ precursors.

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

Nicotinamide riboside and other NAD+ precursors are protected by ChromaDex’s patent and/or licensed rights portfolio.

The Company delivers Niagen® as the sole active ingredient in its consumer product Tru Niagen®.

The Company further develops and commercializes proprietary-based ingredient technologies and supplies these ingredients as raw materials to the manufacturers of consumer products.

Additionally, the Company offers natural product fine chemicals, known as phytochemicals, and related research and development services.

Our operations are subject to regulation by various state and federal agencies.

Dietary supplements are subject to FDA, FTC and U.S.

Department of Agriculture regulations relating to composition, labeling and advertising claims.

These regulations may in some cases, particularly with respect to those applicable to new ingredients, require a notification that must be submitted to the FDA along with evidence of safety and similar regulations exist related to food additives.

The discussion and analysis of our financial condition and results of operations are based on the ChromaDex 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.

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.

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.

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 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.

Dietary supplements are subject to FDA, FTC and U.S.

Department of Agriculture regulations relating to composition, labeling and advertising claims.

These regulations may in some cases, particularly with respect to those applicable to new ingredients, require a notification that must be submitted to the FDA along with evidence of safety.

There are similar regulations related to food additives.

Recent Activities

Securities Purchase Agreement and Registration Rights Agreement - Related Parties

On September 30, 2022, we entered into a Securities Purchase Agreement with Pioneer Step Holdings Limited (Pioneer Step), Champion River Ventures Limited (Champion) and Robert Fried (collectively, the “Purchasers”) pursuant to which we agreed to sell and issue approximately 2.5 million shares of common stock at a price of $1.25 per share (the “Financing”).

Champion is indirectly owned by Li Ka-Shing and Pioneer Step is indirectly owned by Solina Chau, and each of Mr.

Ka-Shing and Ms.

Chau own through affiliated entities more than 5% of the Company’s common stock.

Pursuant to previous agreements, each of Pioneer Step and Champion have appointed a member of our Board.

Fried is our Chief Executive Officer.

The transaction and related agreements were approved by the Audit Committee of the Board in accordance with our Related-Persons Transaction Policy.

On October 7, 2022, we closed the Financing and received proceeds of approximately $2.9 million, net of offering costs of $0.2 million.

In connection with the Financing, on September 30, 2022, we also entered into a Registration Rights Agreement with the Purchasers (the “Registration Rights Agreement”), pursuant to which we agreed to (i) file one or more registration statements with the SEC to cover the resale of the shares of Common Stock issued to the Purchasers, (ii) use reasonable best efforts to have all such registration statements declared effective within the timeframes set forth in the Registration Rights Agreement, and (iii) use commercially reasonable efforts to keep such registration statements effective during the timeframes set forth in the Registration Rights Agreement.

We filed a Registration Statement registering the resale of the shares of Common Stock in November 2022.

In the event that such registration statement subsequently becomes unavailable, or the Purchasers are unable to sell the shares of Common Stock issued pursuant to the Financing due to failure by us to satisfy the current public information requirement of Rule 144 under the Securities Act, we would be required to pay liquidated damages to the Purchasers equal to 1.0% of the aggregate purchase price per month for each default (up to a maximum of 5.0% of such aggregate purchase price)

Joint Venture

On September 30, 2022, Asia Pacific Scientific, Inc., an indirect wholly owned subsidiary of the Company, and Hong Kong (China) Taikuk Group Ltd (Taikuk) entered into a shareholders agreement pursuant to which, among other details, Taikuk will receive an 11% non-voting equity interest in ChromaDex Asia Pacific Ventures Limited, a subsidiary of Asia Pacific Scientific, Inc.

(the “Joint Venture” or “JV”).

We indirectly own an 89% equity interest (and all of the voting interests) in the JV and have the right to elect all three directors of the JV.

The purpose of the JV is to commercialize Tru Niagen® and other products containing nicotinamide riboside to be developed by us (the “Products”) in Mainland China and its territories, excluding Hong Kong, Macau and Taiwan (the “Territory”).

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 Peoples Republic of China State Administration for Market Regulation for Products in our name or our designee (collectively, the “Blue Hat Registration”).

For further discussion, see Note 12, Joint Venture .

Supply Agreement and Securities Purchase Agreement - NHSc

On October 10, 2022, we along with Société des Produits Nestlé SA, a société anonyme organized under the laws of Switzerland (NHSc), as successor-in-interest to NESTEC Ltd., entered into an amended and restated supply agreement (the “Supply Agreement”), which amends and restates the supply agreement, dated December 19, 2018, entered into by the Company and NESTEC Ltd.

Pursuant to the Supply Agreement, NHSc and its affiliates will exclusively purchase nicotinamide riboside chloride (NRCL) from us and NHSc and its affiliates will have the non-exclusive right to manufacture, market, distribute, and sell products using NRCL for human use in the (i) medical nutritional, (ii) functional food and beverage and (iii) multi-ingredient dietary supplements categories sold under one of the NHSc brands (the “Approved Products”) world-wide, but excluding certain countries and ingredient combinations.

For further discussion, see Note 14, NHSc Revenue .

In connection with the entry into the Supply Agreement, we entered into a Securities Purchase Agreement with NHSc, pursuant to which NHSc agreed to purchase 3.8 million shares of common stock at a price of $1.31 which is equal to the volume weighted average price of our common stock for the ten trading days preceding October 10, 2022 (the “Securities Purchase Agreement”).

On October 17, 2022, we closed the Securities Purchase Agreement and received proceeds of approximately $4.8 million, net of offering costs of $0.2 million.

Purchase Commitment

Effective as of December 14, 2022, we entered into an Eighth Amendment (Eighth Amendment) to the Manufacturing and Supply Agreement (such agreement as amended, the “Grace Manufacturing Agreement”), originally effective in January 2016 with W.R.

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

Pursuant to the Eighth Amendment, we are committed to purchase approximately $18.0 million of total inventory during fiscal year 2023, which is our only future purchase commitment with Grace.

The Grace Manufacturing Agreement will expire on December 31, 2023, subject to further renewal of the agreement to be negotiated by the parties.

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.

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, remote working policies, quarantines, and store closures and reduced operating hours, among other measures.

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;

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

Today, many of our employees continue to work remotely efficiently and we plan to continue to offer this flexible work environment.

Under the Coronavirus Aid, Relief, and Economic Security Act the employee retention tax credit (ERTC) was established and subsequently amended by other Acts.

During the third quarter of 2022, we evaluated our eligibility for the ERTC and determined that we qualified in all three quarters of 2020 and the first three quarters in 2021.

As a result, during August 2022, we filed a claim for the ERTC.

During 2022, we recognized approximately $2.1 million in Other income - Employee Retention Tax Credit in our Consolidated Statements of Operations to reflect the ERTC.

As of December 31, 2022, we have received $0.6 million of the ERTC claimed.

Subsequent to December 31, 2022, the Company received an additional $0.8 million related to the ERTC.

For further discussion, see Note 18, Employee Retention Tax Credit .

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

surges related to new variants;

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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.

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 in the past 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.

Supply chain delays, among other factors such as store closures, impacted sales to our partners in international markets during the year ended December 31, 2022.

While these headwinds appear to have mostly subsided for our partners, they could still affect future sales.

We continue to collaborate with these partners and strive to maintain adequate safety stocks to sustain growth and prevent disruptions caused by supply chain delays.

We believe we have adequate inventory on hand to fulfill current demands.

We have also experienced inflation in labor, raw materials, transportation and other costs.

Inflation can have a long-term impact as increasing costs may affect 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 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.

Results of Operations

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General and administrative 28,286 36,379

Interest expense, net (55) (71)

Nonoperating expenses:

Other income, net - Employee Retention Tax Credit 2,085 —

Interest income (expense), net 3 (55)

Net loss $ (16,540) $ (27,128)

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Our total net sales grew from $31.6 million in 2018 to $72.1 million in 2022, representing a 18% compound annual growth rate.

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

Total net sales by reportable segment for the years ended December 31, 2022 and 2021 are as follows:

Year Ended December 31,

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In 2022, our total net sales increased by 7%, up $4.6 million, from 2021.

• 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.

• In 2022, Tru Niagen® sales continued to see steady e-commerce growth with $3.4 million, or 8%, higher sales compared to 2021 paired with $0.7 million in increased sales to A.S.

This growth was partially offset by declines of $0.7 million in business-to-business sales to our distributor partners.

Our distributor partners have experienced lower growth during fiscal year 2022 due to COVID-19 headwinds and other macroeconomic factors.

We remain committed to working with these partners to collectively maximize sales while simultaneously continuing to grow our e-commerce channels.

• In 2022, our ingredients segment experienced a $1.3 million, or 18%, increase in overall net sales compared to 2021.

The increase in sales during 2022 was largely driven by the amended and restated supply agreement with Nestlé (NHSc) including a $2.0 million upfront minimum purchase in the fourth quarter of 2022.

In the future, we anticipate NHSc may purchase Niagen® in smaller batch quantities.

The NHSc purchase was partially offset by a decline in sales of other, non-Niagen®, ingredients.

• Net sales for our analytical reference standards and services segment moderately decreased during 2022 compared to 2021 primarily due to a decline in demand for research and development services in 2022.

Cost of Sales.

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Total cost of sales $ 29,253 41 % $ 25,959 38 % 3 %

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.

Total cost of sales, as a percentage of net sales, increased 3% in 2022 compared to 2021.

Changes in cost of sales, as a percentage of net sales, were primarily driven by the following:

During 2022, 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 consumer products segment remained substantially similar with only a 1% increase in 2022 compared to 2021.

The minor increase is attributable to increases in our supply chain headcount, including overall wage inflation, and other inflationary pressures, partially offset by a shift in our business mix as we experienced elevated e-commerce sales which provide higher gross margins during the year ended December 31, 2022 compared to the same period in 2021.

• Cost of sales, as a percentage of net sales, for the ingredients segment increased by 7% in 2022 compared to 2021.

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.

The increase is primarily a result of increases in supply chain headcount, including overall wage inflation, paired with higher costs of raw materials and customer mix.

• Cost of sales, as a percentage of net sales, for the analytical reference standards and services segment increased 10% in 2022 compared to the same period in 2021.

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.

Additionally, during fiscal year 2022, we increased our supply chain headcount to scale the business based on strong growth in 2021 and were impacted by overall wage inflation, increasing these overheads costs.

Accordingly, due to the increased head count for supply chain labor paired with a decrease in sales during 2022, we experienced lower labor and overhead utilization rates resulting in higher 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.

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.

Since 2018, total gross profit grew from $16.1 million to $42.8 million in 2022, representing a 22% compound annual growth rate.

For fiscal year 2022 gross profit increased $1.3 million, or 3%, compared to 2021.

Our overall gross margin percentage remained strong at 59.4% for fiscal year 2022, however it declined 210 basis points compared to 2021 largely due to increases in supply chain headcount to scale the business, including higher wages, and other inflationary pressures.

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

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Total gross profit $ 42,797 $ 41,490 3 %

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.

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

Operating Expenses - Sales and Marketing.

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Year Ended December 31,

(In thousands) 2021 2020 Change

2022 2021 Change

(In thousands) Amount % of

net sales Amount % of

net sales % of

Sales and marketing expenses:

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• 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.

In 2022, we pivoted our marketing efforts to focus on the most efficient distribution channels and marketing campaigns which resulted in lower selling and marketing expenses as a percentage of net sales by 3%.

• For the ingredients segment, sales and marketing expenses were substantially similar totaling $51,000 in 2022 and $46,000 in 2021 with approximately no change when compared as a percentage of net sales.

• For the analytical reference standards and services segment, sales and marketing expenses increased by approximately $0.1 million in 2022 compared to 2021 as costs were impacted by overall wage inflation.

Operating Expenses - Research and Development.

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

Research and development (R&D) expense consists primarily of clinical trials, product development and process development expenses.

Research and development expenses by reportable segment are as follows:

Year Ended December 31,

(In thousands) 2022 2021 Change

Research and development expenses:

R&D expenses:

Consumer Products $ 4,214 $ 3,427 23 %

Ingredients 612 405 51

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

• 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.

Total R&D expenses $ 4,826 $ 3,832 26 %

• We allocate R&D expenses related to our Niagen® branded ingredient to the consumer products and ingredients segment, based on revenues recorded.

Overall, R&D expenses increased approximately $1.0 million in 2022 compared to 2021 largely due to increased headcount, share-based compensation and timing of projects.

Operating Expenses - General and Administrative.

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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:

General and administrative expense for the periods indicated is as follows:

Year Ended December 31,

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General and administrative $ 28,286 $ 36,379 (22) %

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.

The decline in general and administrative expense for 2022, compared to 2021, of $8.1 million was driven by lower legal expense of $9.9 million which was partially offset by higher severance and restructuring expense of $0.7 million paired with investments in technology, overall wage inflation and higher royalties expense.

For additional details regarding our litigation see Note 17, 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.

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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.

Amortization expense of intangible assets was approximately $0.2 million for each of the years ended December 31, 2022 and 2021.

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

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Net cash used in operating activities was approximately $15.1 million and $24.2 million in 2022 and 2021, 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.

The decrease in cash used during the year ended December 31, 2022 compared to 2021 was primarily driven by improvements in our net loss of $8.5 million excluding Other income from the Employee Retention Tax Credit of $2.1 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.

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Net cash used in investing activities was approximately $0.3 million and $0.4 million in 2022 and 2021, 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.

The slight decrease in cash used during the year ended December 31, 2022 compared to 2021 was primarily due to fewer purchases of leasehold improvements and equipment in 2022.

Net cash provided by financing activities.

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Net cash provided by financing activities was approximately $7.7 million and $36.1 million in 2022 and 2021, 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.

The decrease in cash provided during the year ended December 31, 2022 compared to 2021 was primarily due to decreased proceeds from issuance of our common stock of $19.0 million and no proceeds related to the exercise of employee stock options resulting in a decrease of $9.5 million.

Trade Receivables.

As of December 31, 2022, we had approximately $8.5 million in trade receivables as compared to approximately $5.2 million as of December 31, 2021.

The increase in 2022 is driven by the timing of customer orders and collections, including the upfront minimum purchase by NHSc during the fourth quarter of 2022.

As of December 31, 2022, we had approximately $14.7 million in inventory, compared to approximately $13.6 million as of December 31, 2021.

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Accounts Payable.

As of December 31, 2021, we had $10.4 million in accounts payable compared to approximately $9.4 million as of December 31, 2020.

As of December 31, 2022, we had $9.7 million in accounts payable compared to approximately $10.4 million as of December 31, 2021 driven by the timing of purchases and payments to our vendors.

Liquidity and Capital Resources

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Net cash used in operating activities for the year ended December 31, 2022 was approximately $15.1 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.

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.

However, based on our results from operations, we may determine that we need additional financing to implement our business plan.

Additional financing may come from public and private equity or debt offerings, borrowings under lines of credit or other sources.

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

There can be no assurance we will be successful in raising these additional funds.

Without adequate financing we may have to further delay or terminate product or service expansion plans.

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

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.

The losses and the uses of cash are primarily attributable 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, and cash generated from net sales.

As of December 31, 2022, we had purchase obligations of approximately $18.0 million related to inventory purchase commitments and approximately $4.9 million related to future minimum lease obligations to be paid over one year and six years, respectively.

As of December 31, 2022 and 2021, 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 have an available line of credit with Western Alliance Bank for up to $10.0 million, subject to certain terms and conditions which as of December 31, 2022 allows for $6.1 million of borrowing.

As of December 31, 2022, unrestricted cash and cash equivalents totaled approximately $20.3 million and we had no borrowings outstanding under our line of credit.

We anticipate that our current unrestricted cash and 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 these financial statements.

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.

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(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, 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 as market conditions.

As a result, our ability to rely on the ATM Facility to raise liquidity is limited to a material extent.

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

However, based on our results from operations, we may determine that we need additional financing to implement our business plan.

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, 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.

Dividend Policy

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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.

Contractual Obligations and Commitments

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

(In thousands) 2022 2023 2024 2025 2026 Thereafter Total

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

Finance leases 20 — — — — — 20

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

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

Operating leases.

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.

Finance leases.

We lease equipment under finance lease obligations with a term of typically two to four years.

We make monthly installment payments for these leases.

Purchase obligations.

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

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The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures.

On an ongoing basis, we evaluate these estimates, including those related to the valuation of share-based payments.

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

On an ongoing basis, we evaluate these estimates, including those related to the valuation of share-based payments and deferred revenue recognition.

We base our estimates on historical experience and other various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

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

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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.

Beginning in fiscal year 2018, we adopted Financial Accounting Standards Board (FASB) Topic 606 - Revenue for Contracts from Customers which amended revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and across all industries.

The revenue standard provides a five-step framework for recognizing revenue as control of promised goods or services is transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

To determine revenue recognition for arrangements that are within the scope of the revenue standard, we perform the following five step analyses:

(i) identify the contract;

(ii) identify the performance obligations;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or as) we satisfy a performance obligation.

We recognize 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.

Whenever we determine that goods or services promised in a contract should be accounted for as a combined performance obligation over time, we determine the period over which the performance obligations will be performed and revenue will be recognized.

If we determine that the performance obligation is satisfied over time, any upfront payment received is initially recorded as deferred revenue on our consolidated balance sheets.

Revenue is then recognized utilizing the output method based on an estimated rate to allocate the transaction price for this performance obligation as products or services are supplied over the duration of the contract.

We believe this most appropriately depicts our performance towards complete satisfaction of the performance obligation to our customer.

Certain judgments affect the application of our revenue recognition policy.

For example, when utilizing the output method, we estimate total delivery volume based on our current operating plan, forecast inputs received from the customer for expected purchases, minimum purchase commitments by the customer and historical experience with similar customer contracts.

Accordingly, we may recognize a different amount of deferred revenue over the next 12-month period if our plan changes in the future or if our customer informs us of changes to their expected purchases.

As of December 31, 2022 and 2021, we held deferred revenue balances of $4.0 million and $4.3 million, respectively.

We may periodically enter into bill-and-hold arrangements upon request by certain customers according to the terms in the contract.

Under the terms, the customer makes a fixed commitment to purchase our goods, however the customer delays the physical transfer of the goods until a later date.

In such instances, revenue is recognized when a customer obtains control of the promised goods and we have satisfied all of our performance obligations.

We consider indicators of the transfer of control, which include, but are not limited to, the following:

(i) we have a present right to payment for the asset, (ii) the customer has legal title to the asset, (iii) we have transferred physical possession of the asset, (iv) the customer has the significant risks and rewards of ownership of the asset and (v) the customer has accepted the asset.

In addition, all of the following criteria in a bill-and-hold arrangement must be met to further indicate a customer has obtained control of the goods:

(i) the reason for the bill-and-hold arrangement must be substantive, (ii) the requested goods must be identified separately as belonging to the customer, (iii) the requested goods must be ready for physical transfer to the customer, and (iv) we cannot have the ability to use the goods or direct the goods to another customer.

Revenue under bill-and-hold arrangements was $1.7 million for the year ended December 31, 2022.

There was no revenue under bill-and-hold arrangements for the year ended December 31, 2021.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-K

Item 7. Management’s Discussion and Analysis