What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-06 compared with 2023-03-08 · 138 added, 156 removed, 175 unchanged (63% of the section changed)

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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 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 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 up to 65% between ages 30 and 70.

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.

We are at the forefront of exploring effective methods to increase NAD+ levels and support healthy aging.

In 2013, we commercialized Niagen®, a proprietary form of NR, a novel form of vitamin B3, and one of the most well-studied and efficient NAD+ precursors on the market.

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

We deliver Niagen® as the sole active ingredient in our consumer product Tru Niagen®.

We additionally offer consumer products containing Niagen® in combination with other nutrients, such as, but not limited to, Tru Niagen® Immune.

Our ingredients segment develops and commercializes proprietary-based ingredient technologies and supplies these ingredients as raw material to the manufacturers of consumer products.

Our Analytical Reference Standards and Services segment focuses on 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.

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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.

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.

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.

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 net sales and expenses during the reporting periods.

On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below.

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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.

Lease Amendment

On October 11, 2023, we entered into a lease amendment for our existing lease in Los Angeles, California.

In accordance with Accounting Standards Codification (ASC) 842, the amended lease agreement is considered modified and subject to lease modification guidance.

The right-of-use (ROU) asset and lease liability related to the lease agreement were remeasured based on the change in the lease conditions, which included rent abatement totaling approximately $355,000.

The reassessed value of the ROU asset and lease liability as of the modification date was $1.0 million and $1.2 million, respectively.

The lease term remained unchanged and extends through March 31, 2027 and provides one option to extend for an additional five years.

Purchase Commitments

Effective November 2, 2023, the Company entered into a Ninth Amendment to the Manufacturing and Supply Agreement (the “Grace Manufacturing Agreement”), initially effective in January 2016.

In January 2019, Grace was issued patents related to the crystalline form of NR chloride which limit the Company’s ability to find alternatives for supply (Grace Patents).

In December 2023, the Company and Grace executed a Limited Licensing Agreement.

Pursuant to this agreement, the Company is authorized to procure NR supply from a designated third party in explicitly defined quantities for purchase in 2024.

Any acquisitions of NR within the stipulated quantity from this third-party source will result in a corresponding reduction of the minimum purchase commitment quantities that the Company has established directly with Grace for the same specific period.

Additionally, the Company has entered into a manufacturing and supply agreement with the aforementioned third party, committing to the purchase of the full allowable amount during the specified period.

Pursuant to the Ninth Amendment and the manufacturing and supply agreement with the aforementioned third party, the Company is committed to purchase approximately $15.9 million of total inventory between January 1, 2024 and December 31, 2024, which is the only future purchase commitment with Grace and the third-party.

The Grace Manufacturing Agreement is set to expire on December 31, 2024, subject to potential renewal, the terms of which will be negotiated by both parties.

Any failure to extend the Grace Manufacturing Agreement on satisfactory terms could potentially have a material adverse impact on the Company’s financial results and strategic position, as outlined in Item 1A.

Risk Factors in this Annual Report on Form 10-K, "We rely on a single supplier, W.R.

Grace, for NR and a limited number of third-party suppliers for the raw materials required to produce our products."

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, 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.

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 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.

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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.

As of December 31, 2023, the Company's Consolidated Balance Sheets include an ERTC benefit of $0.9 million and associated commissions payable of $0.1 million recorded within prepaid expenses and other current assets and accrued expenses, respectively.

On September 14, 2023, the IRS announced an immediate halt in processing new claims for the employee retention credit until at least the end of the year, citing ongoing concerns about improper claims.

The IRS guaranteed ongoing processing of existing claims, albeit at a reduced pace and with increased compliance scrutiny.

To date, we have not received communications from the IRS regarding our existing claims.

Nevertheless, we are diligently monitoring the situation to ensure continued compliance.

For further discussion, see Note 17, 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;

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 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.

Other than the impacts to our Condensed Consolidated Balance Sheets pertaining to the ERTC, the impact of COVID-19 did not have a material impact on our business during the year ended December 31, 2023.

Any future developments and impacts of COVID-19, which cannot be predicted, including impacts to our partners, can also exacerbate other risks discussed in Part II, Item 1A Risk Factors and throughout this report.

Inflation and changing prices

We have 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.

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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.

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

Interest income (expense), net 3 (55)

Interest income, net 661 3

Net loss $ (4,938) $ (16,540)

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Restricted stock units 589 650

(1) Includes approximately 0.2 million nonvested shares of restricted stock for the year ended December 31, 2022 and December 31, 2021 which are participating securities that feature voting and dividend rights.

(1) Includes a weighted average of approximately 174,000 and 183,000 nonvested shares of restricted stock for the years ended December 31, 2023 and December 31, 2022, respectively, which are participating securities that feature voting and dividend rights.

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

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In 2023, our total net sales increased by 16%, up $11.5 million, from 2022.

• 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.

• In 2023, Tru Niagen® sales remained the leading contributor to total net sales growth, increasing $9.4 million, or 16%, compared to 2022.

This growth was primarily driven by strong performance from our e-commerce business which accounted for $6.0 million in higher sales, paired with $2.8 million in higher sales to A.S.

Watson, a related party.

Additionally, in 2022, our distributor partners were negatively impacted by COVID-19 headwinds and other macroeconomic factors.

During 2023, we remained committed to working with these partners and as those headwinds subsided, we observed a resurgence in sales to these partners which accounted for the remaining growth in 2023.

• In 2023, total ingredients sales increased $2.4 million, or 27%, compared to 2022.

This increase was driven by the development of new partnerships and strengthened existing ones, specifically in our Niagen® ingredient business, resulting in $4.3 million of higher net sales compared to 2022.

Net sales for our other ingredients also saw a modest $0.1 million increase.

However, these gains were partially offset by lower sales to Nestlé (NHSc) in 2023, as NHSc had made a $2.0 million upfront minimum purchase in the fourth quarter of 2022 which was not met with similar activity in 2023.

• Net sales for our analytical reference standards and services segment moderately decreased by $0.3 million during 2023 compared to 2022 primarily due to lower demand for quality-control reference standard products which fluctuates based on the timing of projects for our customers.

Cost of Sales.

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net sales % of

net sales (in basis points)

Cost of sales:

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Total cost of sales $ 32,790 39 % $ 29,253 41 % (200)

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

Total cost of sales, as a percentage of net sales, improved 200 basis points in 2023 compared to 2022.

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 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 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.

• Cost of sales, as a percentage of net sales, for our consumer products segment can fluctuate due to business mix, product mix, inflationary costs, and optimization efforts in our supply chain, among other factors.

For the year ended December 31, 2023, our consumer products segment maintained a stable cost of sales, as a percentage of net sales, at 36% compared to the same period in 2022.

• Cost of sales, as a percentage of net sales, in our ingredients segment and our analytical reference standards and services segment are predominantly influenced by fixed supply chain overhead costs, which remain relatively constant regardless of sales fluctuations.

Consequently, higher net sales result in improved labor and overhead utilization rates, while lower net sales lead to lower utilization rates.

In the ingredients segment, higher sales during the year ended December 31, 2023 contributed to an improvement of 600 basis points in cost of sales as a percentage of net sales compared to the year ended December 31, 2022.

For the analytical reference standards and services segment, lower sales for the year ended December 31, 2023 drove a decline in efficiencies resulting in an increase of 900 basis points in cost of sales as a percentage of net sales compared to the year ended December 31, 2022.

Gross Profit (Loss).

Gross profit (loss) 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.

Since 2019, total gross profit grew from $25.8 million to $50.8 million in 2023, representing a 15% compound annual growth rate.

For fiscal year 2023 gross profit increased $8.0 million, or 19%, compared to 2022.

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:

Our overall gross margin percentage remained strong at 60.8% for fiscal year 2023, increasing 140 basis points compared to 2022.

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

Year Ended December 31,

($ In thousands) 2023 2022 % Change

Gross profit:

Gross profit (loss):

Consumer Products $ 44,773 $ 38,384 17 %

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Total gross profit $ 50,780 $ 42,797 19 %

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.

For details supporting year-over-year changes in gross profit (loss) 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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net sales % of

(in basis points)

Sales and marketing expenses:

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Total sales and marketing expenses $ 26,438 32 % $ 28,313 39 % (700)

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

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.

Total sales and marketing expense, as a percentage of net sales, improved 700 basis points in 2023 compared to 2022.

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

• For our consumer products segment, sales and marketing expense, as a percentage of net sales, improved 900 basis points in 2023 compared to 2022.

This significant improvement can be attributed to a strategic shift in our marketing approach, beginning in the third quarter of 2022.

During the year ended December 31, 2023, we continued to focus our marketing efforts on what we believe to be more efficient distribution channels and marketing campaigns, while beginning to scale up our investments in the second half of 2023.

Moreover, during the year ended December 31, 2022, we launched an extensive direct marketing campaign across multiple platforms, including televised commercials and we did not invest in a campaign of this magnitude during the year ended December 31, 2023.

However, during 2023 we did invest in a brand building event to boost awareness and drive sales of Tru Niagen in our largest e-commerce channel, leading to efficiencies.

• Sales and marketing expense for our ingredients segment remained minimal for each of the years ended December 31, 2023 and 2022.

• For our analytical reference standards and services segment, sales and marketing expense, as a percentage of net sales, improved by 600 basis points for the year ended December 31, 2023 compared to 2022.

This favorable change can be primarily attributed to a reduction in marketing spend as we strategically manage expenses and maintain our marketing focus on our consumer products segment.

Operating Expenses - Research and Development.

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:

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:

Year Ended December 31,

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Total R&D expenses $ 4,958 $ 4,826 3 %

• 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.

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

In total, we experienced slightly higher R&D expenses for the year ended December 31, 2023 compared to 2022.

This increase was primarily driven by inflationary pressures, such as overall wage inflation, as well as professional services and the timing of projects.

Further, in the second half of 2023 we began to ramp up our R&D efforts surrounding important R&D initiatives, these increases were partially offset by a refund of $0.3 million related to a discontinued R&D project.

Operating Expenses - General and Administrative.

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 for the periods indicated is as follows:

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 years indicated were as follows:

Year Ended December 31,

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General and administrative $ 24,983 $ 28,286 (12) %

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.

Total general and administrative expense decreased $3.3 million, or 12%, during the year ended December 31, 2023 compared to 2022.

The reduction in expense was primarily attributable to lower legal expense of $2.5 million, a reduction in executive and other administrative wages of $1.2 million, lower share-based compensation expense of $0.6 million, partially offset by an increase of $0.9 million related to a provision for doubtful trade receivables.

For additional details regarding our litigation see Note 16, 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 the line of credit arrangement and finance leases.

Interest expense, net totaled approximately $3,000 and $55,000 for the years ended December 31, 2022 and 2021, respectively.

Nonoperating income - Interest Income, net.

Interest income, net consists of interest earned from bank deposit accounts, investments in money market funds managed by banks and low-risk, fixed-income investments with maturities of three months or less when purchased less interest expenses from the line of credit arrangement and finance leases.

Interest income, net totaled $661,000 and $3,000 for the years ended December 31, 2023 and 2022, respectively.

Net loss is gross profit (loss) less total operating expenses plus nonoperating income, net.

Since 2019, total net loss has improved from $(32.1) million to $(4.9) million in 2023, representing a 31% compound annual growth rate.

For the year ended December 31, 2023, net loss improved $11.6 million, or (70)%, compared to prior year ended December 31, 2022.

Depreciation and Amortization.

Depreciation expense was approximately $0.9 million for both of the years ended December 31, 2022 and 2021.

Depreciation expense was $870,000 and $869,000 for the years ended December 31, 2023 and 2022, respectively.

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 each of the years ended December 31, 2022 and 2021.

Amortization expense of intangible assets was $158,000 and $186,000 for the years ended December 31, 2023 and 2022, respectively.

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

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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, 2022 was approximately $0.8 million as compared to $0.5 million for the year ended December 31, 2021.

During the year ended December 31, 2023, we identified intangible assets which were impaired due to the cessation of use of certain intellectual properties, resulting in an impairment charge of $3,000 and the removal of the intangible balances from the gross asset and accumulated amortization amounts approximating $630,000 and $627,000, respectively.

Amortization expense of right-of-use assets for the year ended December 31, 2023 was $677,000 compared to $829,000 for the year ended December 31, 2022.

Income Taxes.

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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 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 $15.1 million and $24.2 million in 2022 and 2021, respectively.

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.

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 $0.3 million and $0.4 million in 2022 and 2021, respectively.

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.

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 $7.7 million and $36.1 million in 2022 and 2021, respectively.

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, 2023, we had approximately $5.2 million in trade receivables, reflecting a decrease from approximately $8.5 million as of December 31, 2022.

This reduction in trade receivables is primarily attributed to variations in the timing of customer orders and collections, notably influenced by the absence of an upfront minimum purchase by NHSc, which occurred in the fourth quarter of 2022.

As of December 31, 2023, we had approximately $14.5 million in inventory, compared to approximately $14.7 million as of December 31, 2022.

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Reference standards are small quantities of plant-based compounds typically used to research an array of potential attributes or for quality control purposes.

The Company currently lists over 1,750 phytochemicals and 400 botanical reference materials in our catalog and holds a lot of these as inventory in small quantities, mostly in grams and milligrams.

The Company boasts an extensive catalog featuring a wide array of phytochemicals and botanical reference materials.

Our on hand inventory includes a variety of these substances, stocked in small quantities predominantly measured in grams and milligrams.

The Company regularly reviews inventories on hand and reduces the carrying value for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration.

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By doing so, we believe we can lower the costs of our inventory and yield higher gross profit.

In addition, we are working with our suppliers and partners to develop more efficient manufacturing methods in an effort to lower the costs of our inventory.

In addition, we continuously work with our suppliers and partners to develop more efficient manufacturing methods in an effort to lower the costs of our inventory.

Accounts Payable.

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Liquidity and Capital Resources

For the year ended December 31, 2022, we incurred losses from operations of approximately $16.5 million.

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 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.

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.

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 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).

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.

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 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, 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.

For the year ended December 31, 2023, we incurred a net loss of approximately $4.9 million, however, during the same period the Company’s operating activities provided cash of $7.1 million.

From inception through December 31, 2023, we have incurred aggregate losses of $190.5 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, primarily through the issuance of common stock in private placements, and cash generated from sales.

Our board of directors periodically reviews our capital requirements in light of our proposed business plan.

Our future capital requirements will be influenced by several factors, including cash flows from operations, sales growth, optimized gross profit margins, reduced selling and marketing expense as a percentage of net sales, continued customer relationship development, and the ability to successfully market new and existing products.

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.

As of December 31, 2023, our cash and cash equivalents totaled approximately $27.3 million, including $152,000 of restricted cash.

Our cash and cash equivalents as of December 31, 2023 consisted of bank deposits and short-term investments of highly liquid investment-grade debt instruments with an original maturity of three months or less.

Additionally, as of December 31, 2023, we had purchase obligations of approximately $15.9 million related to inventory purchase commitments and approximately $3.7 million related to future minimum lease obligations to be paid over one year and five years, respectively.

As of December 31, 2023 and 2022, we had no material off-balance sheet arrangements and 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 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.

As a result of various macroeconomic factors such as rising interest rates, inflation, bank failures and geopolitical uncertainties, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability.

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 provided by (used in) operating activities.

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

Net cash provided by operating activities was approximately $7.1 million for the year ended December 31, 2023 compared to a net cash use of $15.1 million for the year ended December 31, 2022.

The $22.2 million positive change was primarily driven by an $11.6 million improvement in net loss coupled with reduced trade receivables contributing $5.6 million to the positive cash improvement.

Further, lower prepaid expenses and other assets, along with enhanced cash flow management related to inventory resulted in positive impacts of $1.5 million and $1.2 million, respectively.

Additionally, increases in accrued expenses and accounts payable had a positive cash impact of $1.3 million each.

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 $0.1 million and $0.3 million for the years ended December 31, 2023 and 2022, respectively.

The slight decrease in cash used during the year ended December 31, 2023 compared to 2022 was largely due to fewer purchases of leasehold improvements and equipment in 2023.

Net cash (used in) 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 used in financing activities was $0.1 million for the year ended December 31, 2023 compared to net cash provided by financing activities of $7.7 million for year ended December 31, 2022.

The decrease in cash provided during the year ended December 31, 2023 compared to 2022 was primarily due to decreased proceeds from issuance of our common stock as we did not have similar issuances in 2023.

Dividend Policy

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Revenue recognition :

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.

We recognize revenue in accordance with Financial Accounting Standards Board (FASB) Topic 606 - Revenue for Contracts from Customers which 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.

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(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.

We recognized $1.7 million revenue under bill-and-hold arrangements during the year ended December 31, 2022 and no revenue under bill-and-hold arrangements during the year ended December 31, 2023.

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