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 Asia Pacific Ventures Limited, ChromaDex Europa B.V., ChromaDex Trading (Shanghai) Co., Ltd. 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 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 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 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.
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.
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Recent Activities
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. (formerly B. 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,
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Purchase Commitments
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). 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 NRC and a limited number of third-party suppliers for the raw materials required to produce our products. "
Results of Operations
Our results of operations for the years ended December 31, 2024 and 2023 are as follows:
Year Ended December 31,
(In thousands) 2024 2023
Sales $ 99,597 $ 83,570
Cost of sales 38,011 32,790
Gross profit 61,586 50,780
Operating expenses
Sales and marketing 29,469 26,438
Research and development 6,016 4,958
General and administrative 18,375 24,983
Nonoperating expenses:
Interest income, net 1,129 661
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
Numerator:
Net income (loss) 8,550 (4,938)
Denominator:
Weighted average common shares outstanding for basic earnings per share (1) 75,929 74,985
Plus: 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
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Net Sales. Net sales consist of gross sales less discounts and returns. Our total net sales grew from $59.3 million in 2020 to $99.6 million in 2024, representing a 14% compound annual growth rate.
Total net sales by reportable segment for the years ended December 31, 2024 and 2023 are as follows:
Year Ended December 31,
($ In thousands) 2024 2023 % Change
Net sales:
Consumer Products $ 76,772 $ 69,528 10 %
Ingredients 19,814 11,137 78
Analytical reference standards and services 3,011 2,905 4
Total net sales $ 99,597 $ 83,570 19 %
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.
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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,
2024 2023 Change
( $ In thousands) Amount % of
net sales Amount % of
net sales % of
net sales (in basis points)
Cost of sales:
Consumer Products $ 27,478 36 % $ 24,755 36 % —
Ingredients 7,808 39 4,980 45 (600)
Analytical reference standards and services 2,725 91 3,055 105 (1,400)
Total cost of sales $ 38,011 38 % $ 32,790 39 % (100)
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:
• 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, 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 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). 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 2020, total gross profit grew from $35.3 million to $61.6 million in 2024, representing a 15% compound annual growth rate. For fiscal year 2024 gross profit increased $10.8 million, or 21%, compared to 2023. Our overall gross margin percentage remained strong at 61.8% for fiscal year 2024, increasing 100 basis points compared to 2023.
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The following table sets forth our total gross profit (loss) by reportable segment:
Year Ended December 31,
($ In thousands) 2024 2023 % Change
Gross profit (loss):
Consumer Products $ 49,294 $ 44,773 10 %
Ingredients 12,006 6,157 95
Analytical reference standards and services 286 (150) 291
Total gross profit $ 61,586 $ 50,780 21 %
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, marketing expenses and commissions. Sales and marketing expense by reportable segment is as follows:
Year Ended December 31,
2024 2023 Change
($ In thousands) Amount % of
net sales Amount % of
net sales % of
net sales
(in basis points)
Advertising expenses:
Consumer Products $ 11,102 14 % $ 10,259 15 % (100)
Ingredients — — — — 0
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:
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)
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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 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 $362,000 in 2023. As a percentage of net sales, selling expenses increased by 500 basis points, primarily due to realignment of internal employee structures. This realignment also contributed to improvements in cost efficiencies in cost of sales.
Operating Expenses - Research and Development. Research and development (R&D) expenses consist primarily of headcount, clinical trials, product development and process development expenses. Research and development expenses by reportable segment were as follows:
Year Ended December 31,
($ In thousands) 2024 2023 % Change
R&D expenses:
Consumer Products $ 4,782 $ 4,273 12 %
Ingredients 1,234 685 80
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 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 $0.3 million refund related to a discontinued R&D project.
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Operating Expenses - General and Administrative. General and administrative expense consists of general company administration, legal, royalties, IT, accounting and executive management expenses. General and administrative expenses are not allocated by segment and instead are classified under our Corporate and Other category. General and administrative expense for the years indicated were as follows:
Year Ended December 31,
($ In thousands) 2024 2023 % Change
General and administrative $ 18,375 $ 24,983 (26) %
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 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. Depreciation expense was $663,000 and $870,000 for the years ended December 31, 2024 and 2023, 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 $151,000 and $158,000 for the years ended December 31, 2024 and 2023, 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, 2024 was $670,000 compared to $677,000 for the year ended December 31, 2023.
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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. 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, 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.
Inventories. As of December 31, 2024, we had approximately $9.2 million in inventory, compared to approximately $14.5 million as of December 31, 2023. As of December 31, 2024, our inventory consisted of approximately $7.9 million of consumer products, $0.8 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 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. 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, 2024, we had $8.5 million in accounts payable compared to approximately $10.2 million as of December 31, 2023 driven by the timing of purchases and payments to our vendors.
Liquidity and Capital Resources
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. 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.
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As of December 31, 2024, our cash and cash equivalents totaled approximately $44.7 million, including $152,000 of restricted cash. 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, 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.
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 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 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
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 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.
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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.
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, 2024 and 2023, we held deferred revenue balances of $2.6 million and $3.3 million, respectively.
We may periodically enter into bill-and-hold arrangements upon request by certain customers according to the terms in the contract. Under the terms, the customer makes a fixed commitment to purchase our goods, however the customer delays the physical transfer of the goods until a later date. In such instances, revenue is recognized when a customer obtains control of the promised goods and we have satisfied all of our performance obligations. We consider indicators of the transfer of control, which include, but are not limited to, the following: (i) we have a present right to payment for the asset, (ii) the customer has legal title to the asset, (iii) we have transferred physical possession of the asset, (iv) the customer has the significant risks and rewards of ownership of the asset and (v) the customer has accepted the asset.
In addition, all of the following criteria in a bill-and-hold arrangement must be met to further indicate a customer has obtained control of the goods: (i) the reason for the bill-and-hold arrangement must be substantive, (ii) the requested goods must be identified separately as belonging to the customer, (iii) the requested goods must be ready for physical transfer to the customer, and (iv) we cannot have the ability to use the goods or direct the goods to another customer. We recognized no revenue under bill-and-hold arrangements during each of the years ended December 31, 2024 and 2023.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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