What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-04 compared with 2024-03-06 · 140 added, 111 removed, 202 unchanged (55% of the section changed)

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Risk Factors and Cautionary Notice Regarding Forward-Looking Statements.

ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., ChromaDex 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.

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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.

NAD+ levels may be increased with administration of NAD+ precursors, 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.

In 2013, we commercialized food-grade Niagen®, a proprietary form of NRC, a novel form of vitamin B3, as both a dietary and food ingredient.

In 2024, we launched Niagen+, a product line for healthcare practitioners and clinics, featuring pharmaceutical-grade Niagen®.

Nicotinamide riboside chloride 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 ingredients segment develops and commercializes proprietary-based ingredient technologies and supplies these ingredients as raw material to the manufacturers of consumer products and U.S.

FDA-registered 503B outsourcing facilities.

Pharmaceutical-grade Niagen® products are available exclusively at clinics with a prescription.

Our Analytical Reference Standards and Services segment focuses on natural product fine chemicals, known as phytochemicals, and related research and development services.

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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.

Joint Venture

On September 27, 2024, we notified Hong Kong (China) Taikuk Group Ltd ("Taikuk") that we would not extend the Blue Hat registration period for our joint venture ("JV"), which expired on October 1, 2024.

As a result, Blue Hat Registration is no longer possible, and no amounts related to the Blue Hat Registration Fee or the 11% non-voting interest have been or will be recognized.

On December 16, 2024, we exercised our Right of Repurchase, buying back the 11% non-voting interest from Taikuk for $1, effectively terminating the Shareholders Agreement.

The JV was originally formed on September 30, 2022, through our indirect wholly owned subsidiary, Asia Pacific Scientific, Inc., to commercialize Tru Niagen® and other nicotinamide riboside-containing products in Mainland China.

Taikuk agreed to contribute $1.0 million in exchange for an 11% non-voting equity interest, while we retained an 89% equity interest and full voting control.

The agreement was contingent on securing Blue Hat registration within 24 months, with an option to repurchase Taikuk’s interest if registration was not obtained.

With the expiration of the registration period, we have now fully regained ownership of the JV.

Amendment to the At Market Issuance Sales Agreement

On November 20, 2024, we entered into an amendment (the “Amendment”) to the At Market Issuance Sales Agreement, dated as of June 12, 2020 (the “Sales Agreement”) governing the Company’s “at-the-market” equity offering program for its common stock, par value $0.001 per share, in order to, among other things, revise the list of Sales Agents under the program to include Roth Capital Partners, LLC (“Roth Capital Partners”) and remove B.

Riley Securities, Inc.

Riley FBR, Inc.) as Sales Agent.

As a result of the Amendment, Raymond James & Associates, Inc.

and Roth Capital Partners will continue as the Sales Agents pursuant to the Sales Agreement.

Supplemental Agreement - Royalties

On November 27, 2024, we entered into a Supplemental Agreement (the “Supplemental Agreement”) with the Trustees of Dartmouth College (“Dartmouth,” and together with ChromaDex, the “Parties”).

The Supplemental Agreement supplements the exclusive license agreements entered into between the Parties dated July 13, 2012 (as amended and restated as of March 13, 2017 and December 29, 2020, the “2012 Agreement”) and May 16, 2014 (together with the 2012 Agreement, the “Exclusive License Agreements”) pursuant to which we received an exclusive license under Dartmouth-owned U.S.

patents (the “Dartmouth Patents”).

Under the Supplemental Agreement, Dartmouth agreed, subject to certain conditions specified in the Supplemental Agreement and the fulfillment of our obligations under the Agreement, (i) to waive certain accrued but unpaid royalties, license fees, and maintenance expenses owed by us under the Exclusive License Agreements, which totaled an aggregate of $3.5 million, and (ii) that no additional royalties, license fees, maintenance or other expenses or other payments will be assessed by Dartmouth or payable by the us to Dartmouth for the Dartmouth Patents after the effective date of the Agreement.

The waiver was contingent upon us securing a bond (the “Appeal Bond”) for the amount of the fee judgement, if any, related to the Delaware patent infringement case against Elysium Health, Inc.

filed by us and Dartmouth relating to the Dartmouth Patents.

On November 21, 2024, the Appeal Bond was secured through a letter of credit issued on our behalf.

As a result, for the year ended December 31, 2024, we reversed $3.5 million of previously accrued royalties, license fees, and maintenance expenses under accrued expenses in our Consolidated Balance Sheets and recorded a reduction in royalty expense, license fees, and maintenance expenses in general and administrative expenses in our Consolidated Statements of Operations.

Information regarding the Delaware patent infringement case against Elysium Health, Inc.

is set forth under the heading “ Legal Proceedings ” in Note 16, Commitments and Contingencies , in Notes to the Consolidated Financial Statements in Item 8 of Part II of this Form 10-K,

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.

Effective January 1, 2025, the Company entered into a Tenth 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.

Pursuant to the Tenth Amendment and the manufacturing and supply agreement with the aforementioned third party, the Company is committed to purchase approximately $4.8 million of total inventory between January 1, 2025 and March 31, 2025.

The Grace Manufacturing Agreement is set to expire on March 31, 2025, subject to further renewal of the Agreement to be negotiated by the parties.

Additionally, under the Tenth Amendment, the Company and Grace maintain a binding six-month rolling forecast, which is updated monthly.

As of December 31, 2024, this forecast obligates the Company to purchase approximately $11.2 million of total inventory between January 1, 2025 and June 30, 2025.

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.

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

Results of Operations

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Nonoperating expenses:

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

Interest income, net 1,129 661

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

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

Income before provision for income taxes 8,855 (4,938)

Provision for income taxes 305 0 —

Net income (loss) $ 8,550 $ (4,938)

Our income (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) 2024 2023

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):

Net income (loss) 8,550 (4,938)

Weighted average common shares outstanding for basic earnings per share (1) 75,929 74,985

incremental shares from assumed exercise of options and assumed vesting of restricted stock (2) 2,196 —

Adjusted weighted average common shares outstanding for diluted earnings per share 78,125 74,985

Earnings (Loss) Per Share:

Basic net income (loss) per common share $ 0.11 $ (0.07)

Diluted net income (loss) per common share $ 0.11 $ (0.07)

(1) Includes a weighted average of approximately 167,000 and 174,000 nonvested shares of restricted stock for the years ended December 31, 2024 and 2023, respectively, which are participating securities that feature voting and dividend rights.

(2) Options and restricted stock outstanding, which are anti-dilutive and therefore not factored into the weighted average common shares amount above, for the years ended December 31, 2024 and 2023 were as follows:

Year Ended December 31,

(In thousands) 2024 2023

Stock options 4,087 11,622

Restricted stock units — 589

(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.

Net sales consist of gross sales less discounts and returns.

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Total net sales $ 99,597 $ 83,570 19 %

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.

In 2024, our total net sales increased 19%, up $16.0 million, from 2023.

• In 2024, Tru Niagen® sales increased by $7.2 million, or 10%, compared to 2023.

This growth was primarily driven by a $6.7 million increase in sales from our e-commerce business, along with higher sales to distributor partners.

These gains were partially offset by a decline of approximately $0.3 million in sales to A.S.

Watson, which was considered a related party for part of the year.

• In 2024, total ingredient sales were the primary driver of overall sales growth, increasing by $8.7 million, or 78%, compared to 2023.

This growth was primarily attributed to the expansion of new partnerships and the strengthening of existing ones, particularly within our food-grade Niagen® ingredient business, which contributed $7.0 million in higher net sales.

Additionally, the launch of our pharmaceutical-grade Niagen® ingredient in 2024 generated $1.7 million in new sales.

• Net sales for our analytical reference standards and services segment increased slightly by $0.1 million in 2024 compared to 2023, primarily due to higher sales of quality-control reference standard products.

Sales in this segment fluctuate based on the timing of customer projects.

Cost of Sales.

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Total cost of sales $ 38,011 38 % $ 32,790 39 % (100)

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

Total cost of sales, as a percentage of net sales, remained relatively stable improving a slight 100 basis points in 2024 compared to 2023.

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

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For the year ended December 31, 2024, our consumer products segment maintained a stable cost of sales, as a percentage of net sales, at 36% compared to the same period in 2023.

• 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.

• Cost of sales as a percentage of net sales in our ingredients segment is influenced by various factors, including inventory purchase costs, fixed supply chain overhead, and transportation and storage expenses.

In 2024, cost of sales as a percentage of net sales improved by 600 basis points compared to 2023, primarily due to better labor and overhead utilization rates driven by higher sales, as well as shifts in product mix following the launch of our pharmaceutical-grade Niagen®.

• Cost of sales as a percentage of net sales in our analytical reference standards and services segment is influenced by various factors, including inventory purchase costs, fixed supply chain overhead, and transportation and storage expenses.

In 2024, cost of sales as a percentage of net sales improved by 1,400 basis points compared to 2023, primarily due to a restructuring of supply chain overhead costs related to reference standards, which resulted in cost efficiencies.

This realignment also impacted sales and marketing expense.

Gross Profit (Loss).

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Operating Expenses - Sales and Marketing.

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

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

Sales and marketing expense by reportable segment is as follows:

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(in basis points)

Sales and marketing expenses:

Advertising expenses:

Consumer Products $ 11,102 14 % $ 10,259 15 % (100)

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Analytical reference standards and services — — — — 0

Total advertising expenses $ 11,102 11 % $ 10,259 12 % (100)

Marketing expenses:

Consumer Products $ 8,346 11 % $ 7,354 11 % 0

Ingredients 195 1 — — 100

Analytical reference standards and services 4 — 10 — 0

Total marketing expenses $ 8,545 9 % $ 7,364 9 % 0

Selling expenses:

Consumer Products $ 9,285 12 % $ 8,401 12 % 0

Ingredients 40 — 52 — 0

Analytical reference standards and services 497 17 362 12 500

Total selling expenses $ 9,822 10 % $ 8,815 11 % (100)

Total sales and marketing expenses:

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

Consumer Products $ 28,733 37 % $ 26,014 37 % 0

Ingredients 235 1 52 — 100

Analytical reference standards and services 501 17 372 13 400

Total sales and marketing expenses $ 29,469 30 % $ 26,438 32 % (200)

Total sales and marketing expenses increased by $3.0 million, or 11%, to $29.5 million in 2024 compared to $26.4 million in 2023.

As a percentage of net sales, total sales and marketing expenses improved by 200 basis points to 30% in 2024 from 32% in 2023.

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.

• For our consumer products segment, sales and marketing expenses increased by $2.7 million to $28.7 million in 2024 compared to $26.0 million in 2023, remaining at 37% of net sales in both years.

◦ Advertising expenses increased by $0.8 million to $11.1 million in 2024 from $10.3 million in 2023.

However, as a percentage of net sales, advertising expenses declined by 100 basis points to 14% in 2024, reflecting a higher return on advertising spend.

◦ Marketing expenses increased by $1.0 million to $8.3 million in 2024 compared to $7.4 million in 2023, while remaining at 11% of net sales in both years.

The increase was driven by higher investments in public relations, headcount, website developments and promotional activities.

◦ Selling expenses increased by $0.9 million to $9.3 million in 2024 compared to $8.4 million in 2023.

As a percentage of net sales, selling expenses remained at 12%, consistent with 2023.

• For our ingredients segment, sales and marketing expense increased to $235,000 in 2024 from $52,000 in 2023, reflecting increased promotional activities as well as the launch of the pharmaceutical-grade Niagen® ingredient.

As a percentage of net sales, sales and marketing expenses remained low at 1%.

◦ Marketing expenses increased to $195,000 in 2024 due to efforts in building brand awareness for the Niagen Plus product line featuring pharmaceutical-grade Niagen®.

◦ Selling expenses decreased in 2024 from 2023, though they remained minimal in absolute dollars and as a percentage of net sales.

• For our analytical reference standards and services segment, sales and marketing expense increased to $501,000 in 2024 from $372,000 in 2023.

As a percentage of net sales, these expenses increased by 400 basis points to 17% in 2024 from 13% in 2023.

◦ Marketing expenses decreased in 2024 from 2023, though they remained minimal in absolute dollars and as a percentage of net sales.

◦ Selling expenses increased by $135,000 to $497,000 in 2024 from $362,000 in 2023.

As a percentage of net sales, selling expenses increased by 500 basis points, primarily due to realignment of internal employee structures.

This realignment also contributed to improvements in cost efficiencies in cost of sales.

Operating Expenses - Research and Development.

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Total R&D expenses $ 6,016 $ 4,958 21 %

• 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.

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

For the year ended December 31, 2024, total R&D expenses increased by $1.1 million compared to 2023, reflecting increased investment in key R&D initiatives, including support for the launch of the Niagen Plus product line featuring pharmaceutical-grade Niagen®.

This increase was partially offset by a $0.3 million refund related to a discontinued R&D project.

Operating Expenses - General and Administrative.

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General and administrative $ 18,375 $ 24,983 (26) %

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.

Total general and administrative expenses decreased by $6.6 million, or 26%, for the year ended December 31, 2024, compared to 2023.

This decrease was primarily driven by a $3.7 million net reduction in royalty expenses due to the reversal of previously recognized royalties, a $2.2 million reduction in credit loss expense resulting from a recovery of credit losses compared to higher provisions in the prior year, and a $1.5 million decrease in executive and administrative wages.

These reductions were partially offset by a $0.8 million increase in professional and consulting service expenses.

For additional details regarding the reversed royalty expense and recovery of credit losses see Note 16, Commitments and Contingencies, under the headings Royalties and Legal Proceedings, respectively 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 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.

Interest income, net consists of interest earned from bank deposit accounts and investments in money market funds managed by banks less interest expenses from the line of credit arrangement and finance leases.

Interest income, net totaled $1.1 million and $0.7 million for the years ended December 31, 2024 and 2023, respectively.

Net Income (Loss).

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

Since 2020, total net loss has improved from $(19.9) million to a net income of $8.6 million in 2024.

For the year ended December 31, 2024, net income (loss) improved $13.5 million, or 273%, compared to prior year ended December 31, 2023.

Depreciation and Amortization.

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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.

For the year ended December 31, 2024, the Company’s effective tax rate was 3.5%.

The Company reduced its valuation allowance by approximately $2.1 million to $44.3 million as of December 31, 2024 from $46.4 million as of December 31, 2023.

For the year ended December 31, 2023, the Company maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of 0%.

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.

As of December 31, 2024, we had approximately $7.8 million in trade receivables, reflecting an increase from approximately $5.2 million as of December 31, 2023.

The increase in trade receivables is primarily attributed to variations in the timing of customer orders and collections.

As of December 31, 2024, we had approximately $9.2 million in inventory, compared to approximately $14.5 million as of December 31, 2023.

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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.

These ingredients are used by our customers in the dietary supplement, food and beverage industries to manufacture their final products and 503B outsourcing facilities which are able to compound our ingredient into intravenous and injectable forms.

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

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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.

For the year ended December 31, 2024, we recorded a net income of approximately $8.6 million and operating activities provided cash of $12.1 million.

However, from inception through December 31, 2024, we have incurred aggregate losses of $181.9 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.

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Our cash and cash equivalents as of December 31, 2024 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.

Additionally, as of December 31, 2024, we had purchase obligations of approximately $11.2 million related to inventory purchase commitments and approximately $2.9 million related to future minimum lease obligations to be paid over six months and four years, respectively.

As of December 31, 2024 and 2023, we had no material off-balance sheet arrangements and no borrowings outstanding under our line of credit.

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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 provided by operating activities.

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

Net cash provided by operating activities was $12.1 million for the year ended December 31, 2024, compared to $7.1 million for the year ended December 31, 2023, representing an increase of $5.0 million.

This improvement was primarily driven by a $13.5 million increase in net income, partially offset by a $3.5 million reversal of previously accrued royalties, a $2.2 million reduction in credit loss expense due to a recovery of credit losses compared to higher provisions in the prior year, and a $3.5 million relative increase in trade receivables.

We expect operating cash flows to fluctuate in future periods due to variations in operating results, shipment schedules, trade receivable collections, inventory management, and payment timing, 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.

Net cash used in investing activities was approximately $0.1 million for each of the years ended December 31, 2024 and 2023.

Net cash provided by financing activities.

Financing cash flows consist primarily of 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 $5.4 million for the year ended December 31, 2024, compared to net cash used in financing activities of $0.1 million for the year ended December 31, 2023.

The increase was primarily driven by $5.4 million in proceeds from stock option exercises in 2024, compared to no exercise activity in 2023.

Dividend Policy

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

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

On an ongoing basis, we evaluate these estimates, including those related to 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.

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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.

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.

We recognized no revenue under bill-and-hold arrangements during each of the years ended December 31, 2024 and 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