You should read the following discussion and analysis of financial condition and results of operation together with "Selected Financial Data," the consolidated financial statements and the related notes included elsewhere this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that impact our business. In particular, we encourage you to review the risks and uncertainties described in "Risk Factors" in Part I, Item 1A in this Form 10-K. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends.
Overview
The discussion and analysis of our financial condition and results of operations
are based on the
As of
Additional capital may come from public and/or private stock or debt offerings, borrowings under lines of credit or other sources. These additional funds may not be available on favorable terms, or at all. Further, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities we issue may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products or proprietary technologies, or to grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, obtain the required regulatory clearances or approvals, achieve long term strategic objectives, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. Any of these events could adversely affect our ability to achieve our development and commercialization goals, which could have a material and adverse effect on our business, results of operations and financial condition.
38 Table of Contents
Some of our operations are subject to regulation by various state and federal
agencies. Dietary supplements are subject to FDA,
Impact of COVID-19
The COVID-19 pandemic continues to drive global uncertainty and disruption, which has created headwinds for our business. Our ecommerce business continues to perform relatively well in this challenging environment.
Our retail business, including sales to
We have experienced shipment delays from our suppliers; however, we have not encountered any major disruptions in our supply chain. We have been maintaining adequate safety stocks to support our growth and we currently have adequate inventory on hand to meet our current demands. Overall, we believe the supply chain disruptions due to the COVID-19 pandemic will not have a material impact to our business operations.
In response to the outbreak, we prioritized the health and safety of our employees by closing our offices or enhancing safety protocols in place to ensure the well-being of our employees. We have been able to successfully conduct business virtually.
Results of Operations
Our losses per basic and diluted share were
(In thousands) Twelve months ending Dec. 31, 2020 Dec. 31, 2019 Sales$ 59,257 $ 46,291 Cost of sales 23,983 20,522 Gross profit 35,274 25,769 Operating expenses -Sales and marketing 20,948 18,216 -Research and development 3,732 4,420 -General and administrative 30,448 34,308 -Other - 125 Nonoperating -Interest expense, net (71 ) (847 ) Net loss$ (19,925 ) $ (32,147 )
The following table sets forth the computations of loss per share amounts
applicable to common stockholders for the years ended
39 Table of Contents Years Ended (In thousands, except per share data) 2020 2019 Net loss$ (19,925 ) $ (32,147 ) Basic and diluted loss per common share$ (0.33 ) $ (0.56 )
Basic and diluted weighted average common shares outstanding (1):
61,067 57,056 Potentially dilutive securities (2): Stock options 11,914 10,551 ____________
(1) Includes approximately 0.2 million shares of restricted stock for each of the
years 2020 and 2019, which are participating securities that feature voting
and dividend rights.
(2) Excluded from the computation of loss per share as their impact is
antidilutive.
Twelve months ending December December (In thousands) 31, 2020 31, 2019 Change Net sales: Consumer Products$ 47,090 $ 36,075 31 % Ingredients 9,198 6,196 48 % Analytical reference standards and services 2,969 4,020 -26 % Total net sales$ 59,257 $ 46,291 28 %
Total net sales increased by 28% for the twelve-month period ended
· The Company's TRU NIAGEN® sales for consumer products segment continue to increase after the Company's strategic shift towards consumer products in 2017. · The increase in sales for the ingredients segment is largely due to strong demand from our NIAGEN® ingredient customers, who resell NIAGEN® under their own brands. · The decrease in sales for the analytical reference standards and services is largely due to the spinoff of the regulatory consulting business unit inNovember 2019 . The regulatory consulting business generated net sales of approximately$0.7 million in 2019. In addition, sales of analytical reference standards decreased largely due to the effects of COVID-19. 40 Table of Contents Cost of Sales. Costs of sales include raw materials, labor, overhead, and delivery costs. Twelve months ending (In thousands) December 31, 2020 December 31, 2019 % of % of Amount net sales Amount net sales Cost of sales: Consumer Products$ 17,541 37 %$ 14,550 40 % Ingredients 3,593 39 % 2,980 48 % Analytical reference standards and services 2,849 96 % 2,992 74 % Total cost of sales$ 23,983 40 %$ 20,522 44 %
The cost of sales, as a percentage of net sales, decreased 4% for the
twelve-month period ended
· The cost of sales, as a percentage of net sales, for the consumer products segment decreased 3% for the twelve-month period endedDecember 31, 2020 compared to the comparable period in 2019. Product cost savings initiatives and overall scale on our supply chain drove the decrease in cost of sales. · The cost of sales, as a percentage of net sales, for the ingredients segment decreased 9% for the twelve-month period endedDecember 31, 2020 compared to the comparable period in 2019. In 2020, we were able to lower our cost of NIAGEN® ingredient through supply chain cost savings initiatives, which resulted in a decrease in cost of sales. Also, a portion of this decrease was realized in the form of a rebate from a supplier for prior year efficiency initiatives, which was recorded in the second quarter of 2020. In addition, we had an inventory write off of approximately$0.2 million related to our decision to wind down sales for a certain ingredient in the first quarter of 2019. · The cost of sales, as a percentage of net sales for the analytical reference standards and services segment, increased 22% for the twelve-month period endedDecember 31, 2020 compared to the comparable period in 2019. The decrease in sales of analytical reference standards and services due to the spinoff of the regulatory consulting business inNovember 2019 and the effects of COVID-19 led to a lower labor and overhead utilization rate, which resulted in our cost of sales increasing as a percentage of net sales. 41 Table of Contents
Gross Profit. Gross profit is net sales less the cost of sales and is affected by a number of factors including product mix, competitive pricing and costs of products, labor, overhead, services and delivery.
Twelve months ending December December (In thousands) 31, 2020 31, 2019 Change Gross profit: Consumer Products$ 29,549 $ 21,525 37 % Ingredients 5,605 3,216 74 % Analytical reference standards and services 120 1,028 -88 % Total gross profit$ 35,274 $ 25,769 37 % · The consumer products segment posted gross profit of$29.5 million for the twelve-month period endingDecember 31, 2020 , an increase of 37% compared to the comparable period in 2019. The increased gross profit was due to higher sales, product cost savings initiatives and scale on our supply chain operations. · The ingredients segment posted gross profit of$5.6 million for the twelve-month period endingDecember 31, 2020 , an increase of 74% compared to the comparable period in 2019. The increased gross profit for the ingredients segment was largely due to higher sales to key customers, scale on our supply chain operations, a rebate related to savings from prior year efficiency initiatives, and the absence of$0.2 million inventory write-off related to our decision to wind down sales for a certain ingredient in the first quarter of 2019. · The decreased gross profit for the analytical reference standards and services segment was largely due to the decreased sales resulting from the spinoff of the regulatory consulting business and the effects of COVID-19. Fixed supply chain labor and overhead costs make up a substantial portion of the costs and these fixed labor and overhead costs did not decrease in proportion to sales, yielding lower profit margin.
Operating Expenses - Sales and Marketing. Sales and Marketing Expenses consist of salaries, advertising, public relations and marketing expenses.
Twelve months ending December December (In thousands) 31, 2020 31, 2019 Change Sales and marketing expenses: Consumer Products$ 20,323 $ 17,343 17 % Ingredients 41 245 -83 % Analytical reference standards and services 584 628 -7 % Total sales and marketing expenses$ 20,948 $ 18,216 15 % · For the consumer products segment, the increase during the twelve-month period endedDecember 31, 2020 is largely due to increased staffing as well as direct marketing expenses associated with social media, public relations and other customer awareness and acquisition programs. · For the ingredients segment, selling and marketing expenses decreased by 83% during the twelve-month period endedDecember 31, 2020 compared to comparable period in 2019. We reversed approximately$114,000 of certain accrued commission expense during the first quarter of 2020, as we were no longer obligated to pay the commission. · For the analytical reference standards and services segment, the selling and marketing expenses decreased by 7% during the twelve-month period endedDecember 31, 2020 . The selling expense in 2020 were less due to decreased sales. 42 Table of Contents
Operating Expenses - Research and Development. Research and Development Expenses consist primarily of clinical trials, regulatory approvals, product development and process development expenses.
Twelve months ending December December (In thousands) 31, 2020 31, 2019 Change Research and development expenses: Consumer Products$ 3,245 $ 3,699 -12 % Ingredients 487 721 -32 % Total research and development expenses$ 3,732 $ 4,420 -16 % · We allocate the research and development expenses related to our NIAGEN® branded ingredient to the consumer products and ingredients segment, based on revenues recorded. Overall, we decreased our research and development efforts during the twelve-month period endedDecember 31, 2020 as we evaluate and realign the priorities of our ongoing research and development efforts of our flagship ingredient, NIAGEN® nicotinamide riboside.
Operating Expenses - General and Administrative. General and Administrative Expenses consist of general company administration, legal, royalties, IT, accounting and executive management expenses.
Twelve months ending (In thousands) December 31, 2020 December 31, 2019 Change General and administrative $ 30,448 $ 34,308 -11 %
The following expenses contributed to the decrease in general and administrative
expenses for the twelve-month period ended
· A decrease in legal expenses. Our legal expense decreased to approximately$8.6 million in the twelve-month period endedDecember 31, 2020 compared to approximately$11.3 million in the comparable period in 2019. · A decrease in bad debt expense. Our bad debt expense decreased to an insignificant amount in the twelve-month period endedDecember 31, 2020 compared to approximately$2.2 million in 2019. This is due to recording a write off of$2.2 million related to the trade receivable fromElysium Health in 2019 by increasing the allowance from$0.5 million to the entire trade receivable balance of$2.7 million . We placed a reserve for the entire outstanding balance as it was no longer deemed collectible.
Nonoperating - Interest Expense, net. Interest expense, net consists of interest earned from bank deposit accounts less interest expenses from convertible notes, the line of credit arrangement and finance leases.
Twelve months ending (In thousands) December 31, 2020 December 31, 2019 Change Interest expense, net $ 71 $ 847 -92 % · In the second and third quarter of 2019, we incurred debt issuance costs of approximately$0.8 million in connection with the issuance of convertible promissory notes in the aggregate principal amount of$10.0 million toWinsave Resources Limited andPioneer Step Holdings Limited . The issuance costs were recorded as a debt discount and have been amortized as interest expense using the effective interest method. 43 Table of Contents
Depreciation and Amortization. For the twelve-month period ended
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
Net cash provided by (used in) operating activities. Net cash used in operating
activities for the twelve-month period ended
We expect our operating cash flows to fluctuate significantly in future periods as a result of fluctuations in our operating results, shipment timetables, accounts receivable collections, inventory management, and the timing of our payments, among other factors.
Net cash provided by (used in) investing activities. Net cash used in investing
activities was approximately
Net cash provided by (used in) financing activities. Net cash provided by
financing activities was approximately
Trade Receivables. As of
44 Table of Contents
Inventories. As of
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 are working 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
Liquidity and Capital Resources
For the twelve-month period ended
Our Board of Directors periodically reviews our capital requirements in light of our proposed business plan. Our future capital requirements will remain dependent upon a variety of factors, including cash flow from operations, the ability to increase sales, increasing our gross profits from current levels, reducing sales and administrative expenses as a percentage of net sales, continued development of customer relationships, and our ability to market our new products successfully. However, based on our results from operations, we may determine that we need additional financing to implement our business plan. Additional financing may come from public and private equity or debt offerings, borrowings under lines of credit or other sources. These additional funds may not be available on favorable terms, or at all. There can be no assurance we will be successful in raising these additional funds. Without adequate financing we may have to further delay or terminate product or service expansion plans. Any inability to raise additional financing would have a material adverse effect on us.
As of
45 Table of Contents 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.
Off-Balance Sheet Arrangements
During the fiscal years ended
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and other commitments
as of
Payments due by period (In thousands) Total 2021 2022 2023 2024 2025 Operating leases$ 1,836 $ 655 $ 299 $ 308 $ 310 $ 263 Finance leases 53 32 21 - - - Purchase obligations 17,251 17,251 - - - - Total$ 19,140 $ 17,938 $ 320 $ 308 $ 310 $ 263
Operating leases. We lease our offices and research facilities in
Finance leases. We lease equipment under finance lease obligations with a term of typically two to four years. We make monthly installment payments for these leases.
Purchase obligations. We enter into purchase obligations with various vendors for goods and services that we need for our operations. The purchase obligations for goods and services include inventory, advertising, research and development, and laboratory supplies.
Critical Accounting Policies
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
Our significant accounting policies are described in Note 3 of the Financial Statements, set forth in Item 8 of this Form 10-K.
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