Niagen Bioscience, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this Management's Discussion and Analysis (“MD&A”), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "expects," "anticipates," "intends," "estimates," "plans," "potential," "possible," "probable," "believes," "seeks," "may," "will," "should," "could," "predicts," "projects," "continue," "would" or the negative of such terms or other similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers should carefully review the risk factors and related notes set forth below in Part II, Item 1A, “Risk Factors” and included under Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on March 12, 2021 (our “Annual Report”). The following MD&A is intended to help readers understand the results of our operation and financial condition, and is provided as a supplement to, and should be read in conjunction with, our Interim Unaudited Financial Statements and the accompanying Notes to Interim Unaudited Financial Statements under Part 1, Item 1 of this Quarterly Report on Form 10-Q. Growth and percentage comparisons made herein generally refer to the three and six months ended June 30, 2021 compared with the three and six months ended June 30, 2020 unless otherwise noted. Unless otherwise indicated or unless the context otherwise requires, all references in this document to “we,” “us,” “our,” the “Company,” “ChromaDex” and similar expressions refer to ChromaDex Corporation, and depending on the context, its subsidiaries. Company Overview ChromaDex is a global bioscience company dedicated to healthy aging. The ChromaDex team, which includes world-renowned scientists, is pioneering research on nicotinamide adenine dinucleotide (“NAD+”), levels of which decline with age. NAD+ is an essential coenzyme and a key regulator of cellular metabolism. Best known for its role in cellular energy production, NAD+ is now thought to play an important role in healthy aging. Many cellular functions related to health and healthy aging are sensitive to levels of locally available NAD+ and this represents an active area of research in the field of NAD+. NAD+ levels are not constant, and in humans, NAD+ levels have been shown to decline by more than 50% from young adulthood to middle age. There are other causes of NAD+ depletion, such as poor diet, alcohol consumption and a number of disease states. NAD+ levels may also be increased, including through calorie restriction and moderate exercise. Healthy aging, mitochondrial health and NAD+ continue to be areas of focus in the research community. As of 2021, there were over 350 published human clinical studies related to NAD+ and its impact on health. The areas of study include understanding NAD+’s role in Alzheimer’s disease, Parkinson’s disease, neuropathy, sarcopenia, liver disease and heart failure. In 2013, ChromaDex commercialized NIAGEN® nicotinamide riboside (“NR”), a novel form of vitamin B3. Data from numerous preclinical studies, and confirmed in human clinical trials, show that NR is a highly efficient NAD+ precursor that significantly raises blood and tissue NAD+ levels. NIAGEN® is safe for human consumption. NIAGEN® has twice been successfully reviewed under the U.S. Food and Drug Administration’s new dietary ingredient (“NDI”) notification program, has been successfully notified to the U.S. Food and Drug Administration (the “FDA”) as generally recognized as safe (“GRAS”), and has been approved by Health Canada, the European Commission and the Therapeutic Goods Administration of Australia. Clinical studies of NIAGEN® have demonstrated a variety of outcomes including increased NAD+ levels, altered body composition, increased cellular metabolism and increased energy production. NIAGEN® is the trade name for our proprietary ingredient NR, and is protected by patents to which we are the exclusive licensee. ChromaDex is among the world leaders in the emerging NAD+ space. ChromaDex has amassed more than 225 research partnerships with leading universities and research institutions around the world including the National Institutes of Health, Cornell, Dartmouth, Harvard, Massachusetts Institute of Technology, University of Cambridge and the Mayo Clinic. Additional relationships are currently being developed. 25 Table of Contents Our scientific advisory board is led by Chairman Dr. Roger Kornberg, Nobel Laureate Stanford Professor, Dr. Charles Brenner, one of the world’s recognized experts in NAD+ and inventor of nicotinamide riboside, Dr. Rudy Tanzi, the co-chair of the department of neurology at Harvard Medical School and one of the world’s leading experts in food and nutrition, Sir John Walker, Nobel Laureate and Emeritus Director, MRC Mitochondrial Biology Unit in the University of Cambridge, England, Dr. Bruce German, Chairman of food, nutrition and health at the University of California, Davis, Dr. Brunie Felding, Associate Professor, Department of Molecular Medicine at Scripps Research Institute, California Campus, and Dr. David Katz, the Founder and former director of Yale University’s Yale-Griffin Prevention Research Center; President and Founder of the non-profit True Health Initiative; and Founder and Chief Executive Officer of Diet ID, Inc. Impact of COVID-19 The worldwide outbreak of the 2019 coronavirus disease ("COVID-19") continues to drive global uncertainty and disruption, which has created headwinds for our business. Despite this, our e-commerce business continues to perform relatively well in this challenging environment. Our international retail business, including sales to A.S. Watson group and other partners in international markets, has been impacted by the effects of COVID-19, due to store closures and reduced operating hours; however, we are seeing signs of recovery. Our United States ("U.S.") retail operations are not a significant portion of our business today; however, we began distributing Tru Niagen® in 3,800+ U.S. Walmart™ stores beginning in June 2021. In general, the U.S. retail industry has recovered fairly well as the COVID-19 vaccine has been widely accessible and businesses continue to reopen and remain open. Global supply chains continue to be impacted by COVID-19, including challenges with transportation, logistics and production lead-times, as well as labor shortages and cost inflation. In the first quarter of 2021, we experienced delays due to global packaging shortages for our consumer products across our supply chain. These have been addressed in the second quarter and we have otherwise not encountered any major disruptions in our supply chain. It is our intention to maintain 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. Our primary focus throughout the COVID-19 pandemic has remained ensuring 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 adapted to the new environment and have been able to successfully conduct business virtually. Financial Condition and Results of Operations The discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues, if any, and expenses during the reporting periods. 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. On February 20, 2021, the Company entered into a Securities Purchase Agreement with EverFund pursuant to which the Company agreed to sell and issue approximately 3.8 million shares of common stock at a purchase price of $6.50 per share (the “financing”). On February 23, 2021, the Company closed the Financing and received proceeds of $24.9 million, net of offering costs. In June 2020, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR, Inc. (“B. Riley FBR”) and Raymond James & Associates, Inc. (“Raymond James” and together with B. Riley FBR, the “Sales Agents”) under which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $50.0 million from time to time through the Sales Agents (the “ATM Facility”). During the three months ended June 30, 2021, we sold an aggregate of 0.2 million shares of our common stock under the ATM Facility resulting in proceeds of $1.9 million, net of offering costs and commissions. The shares sold at an average price of $10.56 per share. As of June 30, 2021, approximately $47.8 million remains available under the ATM Facility. 26 Table of Contents As of June 30, 2021, the Company had approximately $38.8 million of cash and cash equivalents on hand. We anticipate that our current cash, cash equivalents, and available line of credit up to $7.0 million from Western Alliance Bank will be sufficient to meet our projected operating plans for at least the next twelve months. We may, however, seek additional capital in the next twelve months, both to meet our projected operating plans after the next twelve months and/or to fund our longer term strategic objectives. Additional capital may come from other public and/or private stock or debt offerings, borrowings under lines of credit or other sources. These additional funds may not be available on favorable terms, or at all. Further, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities we issue may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products or proprietary technologies, or to grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, obtain 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. Further, as a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. 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. Our net sales and net loss for the three and six months ended on June 30, 2021 and 2020 are as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2021 2020 2021 2020 Net sales $ 17,699 $ 15,287 $ 32,382 $ 29,632 Net loss (5,566) (3,711) (12,947) (9,613) Basic and diluted loss per common share $ (0.08) $ (0.06) $ (0.20) $ (0.16) Net Sales Net sales consist of gross sales less discounts and returns. The following table sets forth our total net sales by reportable segment: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2021 2020 % Change 2021 2020 % Change Net sales: Consumer Products $ 15,396 $ 11,720 31 % $ 27,833 $ 22,864 22 % Ingredients 1,504 2,850 (47) 2,819 5,325 (47) Analytical reference standards and services 799 717 11 1,730 1,443 20 Total net sales $ 17,699 $ 15,287 16 % $ 32,382 $ 29,632 9 % 27 Table of Contents Total net sales increased by approximately 16% and 9% for the three and six months ended June 30, 2021, compared to the same period in 2020, respectively. Changes in sales for the periods indicated were primarily driven by the following: • TRU NIAGEN® sales for the consumer products segment continues to increase after the Company's strategic shift towards consumer products in 2017. Our e-commerce sales for TRU NIAGEN® increased approximately $2.5 million, or 31% for the three months ended June 30, 2021 compared to same period in 2020 and $3.9 million, or 24% for the six months ended June 30, 2021 compared to the same period in 2020. Additionally, we began distributing TRU NIAGEN® at Walmart™ stores across the United States beginning in June 2021. • Our ingredients segment has seen decreased sales in the first half of 2021 compared to the first half of 2020. In 2021, the Company did not ship NIAGEN® to Thorne Research Inc., a former customer who filed a petition on December 1, 2020 for IPR of the ‘086 Patent which ChromaDex Inc. exclusively licenses from Dartmouth College. For more information, see Note 12, Commitments and Contingencies, Legal Proceedings in the Notes to the Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q. • The analytical reference standards and services segment experienced increased demand from existing customers in the first half of 2021 driving the increase in sales. Due to the effects of COVID-19, the Company saw lower demand for analytical reference standards during 2020. Cost of Sales Cost of sales include raw materials, labor, overhead, and delivery costs. The following table sets forth our total cost of sales by reportable segment: Three Months Ended June 30, Six Months Ended June 30, Amount % of net sales Amount % of net sales (In thousands) 2021 2020 2021 2020 2021 2020 2021 2020 Cost of sales: Consumer Products $ 5,547 $ 4,339 36 % 37 % $ 9,750 $ 8,641 35 % 38 % Ingredients 675 1,135 45 40 1,238 2,191 44 41 Analytical reference standards and services 667 725 83 101 1,350 1,401 78 97 Total cost of sales $ 6,889 $ 6,199 39 % 41 % $ 12,338 $ 12,233 38 % 41 % Cost of sales, as a percentage of net sales, decreased by 2% and 3% for the three and six months ended June 30, 2021, compared to the same period in 2020, respectively. Changes in cost of sales were primarily driven by the following: • Cost of sales, as a percentage of net sales, for the consumer products segment decreased by 1% and 3% for the three and six months ended June 30, 2021, respectively, compared to the same period in 2020. The decreases were driven by our product mix, cost savings initiatives and overall efficiencies of our supply chain. • Cost of sales, as a percentage of net sales, for the ingredients segment increased by 5% and 3% for the three and six months ended June 30, 2021, compared to the comparable period in 2020. Costs were lower in the prior year due to a rebate from a supplier for efficiency initiatives, which was recorded in the second quarter of 2020. • Cost of sales, as a percentage of net sales for the analytical reference standards and services segment, decreased 18% and 19% for the three and six months ended June 30, 2021, compared to the comparable period in 2020. The increase in sales of analytical reference standards led to a higher labor and overhead utilization rate, which resulted in our cost of sales decreasing as a percentage of net sales. 28 Table of Contents Gross Profit Gross profit is net sales less the cost of sales and is affected by a number of factors including business and product mix, competitive pricing and costs of products, labor, overhead, services and delivery. The following table sets forth our total gross profit by reportable segment: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2021 2020 % Change 2021 2020 % Change Gross profit: Consumer Products $ 9,849 $ 7,381 33 % $ 18,083 $ 14,223 27 % Ingredients 829 1,715 (52) 1,581 3,134 (50) Analytical reference standards and services 132 (8) 1,750 380 42 805 Total gross profit $ 10,810 $ 9,088 19 % $ 20,044 $ 17,399 15 % • The consumer products segment posted gross profit of $9.8 million and $18.1 million for the three and six months ended June 30, 2021, an increase of 33% and 27%, respectively, compared to the comparable periods in 2020. The increased gross profit was due to higher sales, product mix, cost savings initiatives and efficiencies within our supply chain operations. • The ingredients segment posted gross profit of $0.8 million and $1.6 million for the three and six months ended June 30, 2021, a decrease of 52% and 50%, respectively, compared to the comparable period in 2020. The decreased gross profit for the ingredients segment was largely due to lower sales in 2021 compared to 2020, paired with lower expenses in 2020 due to a supplier rebate recorded during the second quarter of 2020. • The increased gross profit for the analytical reference standards and services segment was primarily driven by increased sales paired with fixed supply chain labor and overhead costs which did not increase in proportion to sales, yielding higher profit margin. These fixed labor and overhead costs make up a substantial portion of the costs of sales. Operating Expenses-Sales and Marketing Sales and marketing expenses consist of salaries, advertising, public relations and marketing expenses. Sales and marketing expenses by reportable segment were as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2021 2020 % Change 2021 2020 % Change Sales and marketing expenses: Consumer Products $ 6,190 $ 4,743 31 % $ 12,301 $ 9,152 34 % Ingredients 1 76 (99) 11 (8) 238 Analytical reference standards and services 41 140 (71) 178 262 (32) Total sales and marketing expenses $ 6,232 $ 4,959 26 % $ 12,490 $ 9,406 33 % • For the consumer products segment, the increase during the three and six months ended June 30, 2021 is largely due to direct marketing expenses associated with social media, public relations and other customer awareness and acquisition programs, as well as increased staffing. • For the ingredients segment, selling and marketing expenses were approximately $1k and $11k during the three and six months ended June 30, 2021. The credit to expense for the six months ended June 30, 2020 relates to a reversal of approximately $114,000 of certain accrued commission expense during the first quarter of 2020, as we were no longer obligated to pay the commission. During the first half of 2021, we continued to decrease our sales and marketing efforts within our ingredients segment to continue our strategic focus on our consumer products segment. • For the analytical reference standards and services segment, the selling and marketing expenses decreased by 71% and 32% during the three and six months ended June 30, 2021. During the first half of 2021, we continued to decrease our sales and marketing efforts within our analytical reference standards and services segment to continue our strategic focus on our consumer products segment. 29 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. Research and development expenses by reportable segment were as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2021 2020 % Change 2021 2020 % Change Research and development expenses: Consumer Products $ 926 $ 765 21 % $ 1,644 $ 1,453 13 % Ingredients 78 130 (40) 147 251 (41) Total research and development expenses $ 1,004 $ 895 12 % $ 1,791 $ 1,704 5 % 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, our research and development expenses remained substantially similar for the three and six months ended June 30, 2021 compared to the comparable periods in 2020. Operating Expenses-General and Administrative General and administrative expenses consist 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 expenses for the periods indicated were as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2021 2020 % Change 2021 2020 % Change General and administrative 9,128 6,921 32 % 18,679 15,866 18 % • The increase in general and administrative expenses for the three and six months ended June 30, 2021, compared to the comparable period in 2020 was largely due to an increase in legal expenses. Our legal expenses increased to approximately $4.2 million and $9.2 million in the three and six months ended June 30, 2021, compared to approximately $1.8 million and $4.2 million in the comparable periods in 2020 due to increased activity in our ongoing litigations. For additional details see Note 12, Commitments and Contingencies, Legal Proceedings in the Notes to the Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q. • For the three and six months ended June 30, 2021, we did not incur significant severance and restructuring expenses while we incurred approximately $0.3 million and $1.2 million in the comparable periods in 2020. These expenses relate to realignment of the business operations to reduce redundancies and improve efficiencies as we scale the business. 30 Table of Contents 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 June 30, 2021 and June 30, 2020, we maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of approximately 0% for the three and six months ended June 30, 2021, and June 30, 2020, respectively. 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. Depreciation and Amortization Depreciation expense was approximately $0.4 million for both of the six months ended June 30, 2021 and June 30, 2020. We depreciate our assets on a straight-line basis, based on the estimated useful lives of the respective assets. Amortization expense of intangible assets was approximately $0.1 million for both of the six months ended June 30, 2021 and June 30, 2020. 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 lives of subsequent milestone payments that are capitalized are the remaining useful life of the initial licensing payment that was capitalized. Amortization expense of right of use assets for the six months ended June 30, 2021 was approximately $0.3 million as compared to $0.2 million for the six months ended June 30, 2020. Liquidity and Capital Resources From inception through June 30, 2021, we have incurred aggregate losses of approximately $154.8 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. These operations have been financed through capital contributions, the issuance of common stock and warrants through private placements, and the issuance of debt. 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 selling 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. 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. Pursuant to the Financing on February 23, 2021, we received proceeds of $24.9 million, net of offering costs. Additionally, in June 2021, under the ATM facility, we received proceeds of $1.9 million, net of offering costs and commissions. While we anticipate that our current cash, cash equivalents, and available line of credit up to $7.0 million from Western Alliance Bank will be sufficient to meet our projected operating plans for at least the next twelve months, we may seek additional funds, either through additional equity or debt financings or collaborative agreements or from other sources. In June 2020, we filed a $125.0 million registration statement on Form S-3 with the Commission, utilizing a “shelf” registration process. Under this shelf registration process, we may sell securities from time to time, including up to $50.0 million, of which approximately $47.8 million remains available, pursuant to the ATM Facility. As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. 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. 31 Table of Contents Net cash used in operating activities Net cash used in operating activities for the six months ended June 30, 2021 was approximately $13.3 million as compared to approximately $6.8 million for the six months ended June 30, 2020. Along with the net loss, increases in our trade receivables and inventories and a decrease in our accrued expenses were the largest uses of cash during the six months ended June 30, 2021, partially offset by an increase in accounts payable and noncash share-based compensation expense. Net cash used in operating activities for the six months ended June 30, 2020 largely reflects the net loss, a decrease in allowance for doubtful trade receivables and an increase in inventories, partially offset by a decrease in trade receivables, increase in accrued expenses and noncash share-based compensation expense. We expect our operating cash flows to fluctuate significantly in future periods as a result of fluctuations in our operating results, shipment timetables, trade receivable collections, inventory management, and the timing of our payments, among other factors. Net cash used in investing activities Net cash used in investing activities was approximately $0.3 million for the six months ended June 30, 2021, compared to approximately $0.1 million for the six months ended June 30, 2020. Net cash used in investing activities for the six months ended June 30, 2021 and 2020 mainly consisted of purchases of leasehold improvements and equipment. Net cash provided by financing activities Net cash provided by financing activities was approximately $35.7 million for the six months ended June 30, 2021, compared to approximately $7.0 million for the six months ended June 30, 2020. Net cash provided by financing activities for the six months ended June 30, 2021 primarily consisted of proceeds from the issuance of common stock pursuant to the Financing, ATM Facility transaction and the exercise of stock options. Net cash provided by financing activities for the six months ended June 30, 2020 consisted of proceeds from the issuance of common stock and the exercise of stock options. Contractual Obligations and Commitments During the six months ended June 30, 2021, there were no material changes outside of the ordinary course of business in the specified contractual obligations disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as contained in our Annual Report, other than as disclosed in “Item 1 Financial Statements” of this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements During the six months ended June 30, 2021, we had no material off-balance sheet arrangements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 32 Table of Contents