Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere this Form 10-K. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K. We encourage you to review the risks and uncertainties described in Part I. Item 1A. Risk Factors and Cautionary Notice Regarding Forward-Looking Statements.
Overview
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. 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. 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 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 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. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Recent Activities
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.
37
Table of Contents
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
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, 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 .
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. 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 and the current conflict in the Middle East. We will continue to monitor changing prices and inflationary pressures closely as conditions may become more challenging due to ongoing and uncertain economic factors.
38
Table of Contents
Results of Operations
Our results of operations for the years ended December 31, 2023 and 2022 are as follows:
Year Ended December 31,
(In thousands) 2023 2022
Sales $ 83,570 $ 72,050
Cost of sales 32,790 29,253
Gross profit 50,780 42,797
Operating expenses
Sales and marketing 26,438 28,313
Research and development 4,958 4,826
General and administrative 24,983 28,286
Nonoperating expenses:
Other income, net - Employee Retention Tax Credit — 2,085
Interest income, net 661 3
Net loss $ (4,938) $ (16,540)
Our loss per share applicable to common stockholders for the years indicated is calculated as follows:
Year Ended December 31,
(In thousands, except per share data) 2023 2022
Net loss $ (4,938) $ (16,540)
Basic and diluted loss per common share $ (0.07) $ (0.24)
Basic and diluted weighted average common shares outstanding (1): 74,985 69,729
Potentially dilutive securities (2):
Stock options 11,622 10,438
Restricted stock units 589 650
(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.
39
Table of Contents
Net Sales. Net sales consist of gross sales less discounts and returns. Our total net sales grew from $46.3 million in 2019 to $83.6 million in 2023, representing a 13% compound annual growth rate.
Total net sales by reportable segment for the years ended December 31, 2023 and 2022 are as follows:
Year Ended December 31,
($ In thousands) 2023 2022 % Change
Net sales:
Consumer Products $ 69,528 $ 60,110 16 %
Ingredients 11,137 8,736 27
Analytical reference standards and services 2,905 3,204 (9)
Total net sales $ 83,570 $ 72,050 16 %
In 2023, our total net sales increased by 16%, up $11.5 million, from 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.
40
Table of Contents
Cost of Sales. Costs of sales include raw materials, labor, overhead and delivery costs. The following table sets forth our total cost of sales by reportable segment:
Year Ended December 31,
2023 2022 Change
( $ In thousands) Amount % of
net sales Amount % of
net sales % of
net sales (in basis points)
Cost of sales:
Consumer Products $ 24,755 36 % $ 21,726 36 % —
Ingredients 4,980 45 4,465 51 (600)
Analytical reference standards and services 3,055 105 3,062 96 900
Total cost of sales $ 32,790 39 % $ 29,253 41 % (200)
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:
• 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 $8.0 million, or 19%, compared to 2022. Our overall gross margin percentage remained strong at 60.8% for fiscal year 2023, increasing 140 basis points compared to 2022.
41
Table of Contents
The following table sets forth our total gross profit (loss) by reportable segment:
Year Ended December 31,
($ In thousands) 2023 2022 % Change
Gross profit (loss):
Consumer Products $ 44,773 $ 38,384 17 %
Ingredients 6,157 4,271 44
Analytical reference standards and services (150) 142 (206)
Total gross profit $ 50,780 $ 42,797 19 %
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. Sales and marketing expense consists of salaries, advertising, public relations and marketing expenses. Sales and marketing expense by reportable segment is as follows:
Year Ended December 31,
2023 2022 Change
($ In thousands) Amount % of
net sales Amount % of
net sales % of
net sales
(in basis points)
Sales and marketing expenses:
Consumer Products $ 26,014 37 % $ 27,661 46 % (900)
Ingredients 52 — 51 1 (100)
Analytical reference standards and services 372 13 601 19 (600)
Total sales and marketing expenses $ 26,438 32 % $ 28,313 39 % (700)
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.
42
Table of Contents
Operating Expenses - Research and Development. Research and development (R&D) expenses consist primarily of headcount, clinical trials, product development and process development expenses. Research and development expenses by reportable segment were as follows:
Year Ended December 31,
($ In thousands) 2023 2022 % Change
R&D expenses:
Consumer Products $ 4,273 $ 4,214 1 %
Ingredients 685 612 12
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 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 $0.3 million related to a discontinued R&D project.
Operating Expenses - General and Administrative. General and administrative expense consists of general company administration, legal, royalties, IT, accounting and executive management expenses. General and administrative expenses are not allocated by segment and instead are classified under our Corporate and Other category. General and administrative expense for the years indicated were as follows:
Year Ended December 31,
($ In thousands) 2023 2022 % Change
General and administrative $ 24,983 $ 28,286 (12) %
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 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. 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.
43
Table of Contents
Depreciation and Amortization. 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 $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. For licensed patent rights, the useful lives are 10 years or the remaining term of the patents underlying licensing rights, whichever is shorter. The useful life of subsequent milestone payments that are capitalized match the remaining useful life of the initial licensing payment that was originally capitalized. 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. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2023 and 2022, we maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of approximately 0% for both of the years ended December 31, 2023 and 2022. 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.
Trade Receivables. 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.
Inventories. As of December 31, 2023, we had approximately $14.5 million in inventory, compared to approximately $14.7 million as of December 31, 2022. As of December 31, 2023, our inventory consisted of approximately $9.5 million of consumer products, $4.5 million of bulk ingredients and $0.5 million of reference standards. Consumer products inventory consists of Tru Niagen® branded finished bottles of dietary supplement products and related work-in-process inventory. Bulk ingredients are proprietary compounds sold to customers in larger quantities, typically in kilograms. These ingredients are used by our customers in the dietary supplement, food and beverage industries to manufacture their final products. 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 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. The reduction of the carrying value for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.
We strive to optimize our supply chain as we constantly search for better and more reliable sources and suppliers. By doing so, we believe we can lower the costs of our inventory and yield higher gross profit. 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. As of December 31, 2023, we had $10.2 million in accounts payable compared to approximately $9.7 million as of December 31, 2022 driven by the timing of purchases and payments to our vendors.
44
Table of Contents
Liquidity and Capital Resources
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.
Table of Contents
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
We have not declared or paid any cash dividends on our common stock. We presently intend to retain earnings for use in our operations and to finance our business. 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.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. 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 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. For a summary of our significant accounting policies, including the accounting policy discussed below, see Note 2 of the Financial Statements, set forth in Item 8 of this Form 10-K.
Revenue recognition : 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. 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. 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.
Table of Contents
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, 2023 and 2022, we held deferred revenue balances of $3.3 million and $4.0 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. 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
47
Table of Contents