Niagen Bioscience, Inc. 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Form 10-Q and in our 2021 Annual Report on Form 10-K. All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are approximate. Growth and percentage comparisons made herein generally refer to the three months ended March 31, 2022 compared with the three months ended March 31, 2021 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. Special Note Regarding Forward Looking Statements Certain statements in this 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, as amended, 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 set forth below in Part II, Item 1A, “Risk Factors” and our financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on March 14, 2022 (Annual Report). Company Overview We 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 more than 50% from young adulthood to middle age. 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. In 2013, we commercialized Niagen®, a proprietary form of NR, a novel form of vitamin B3. Data from numerous preclinical studies and human clinical trials show that NR is a highly efficient NAD+ precursor that significantly raises NAD+ levels in blood and tissue. Niagen® is confirmed safe for human consumption as a dietary supplement and food ingredient. Niagen® has twice been successfully reviewed under the U.S. Food and Drug Administration’s (FDA) new dietary ingredient (NDI) notification program, it has been successfully notified to 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 protected by patents to which we are the owner or have exclusive rights. While best known for its role in cellular energy production, NAD+ is also 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+. To date, there are over 450 published human clinical studies related to NAD+ and its impact on health. These areas of study include understanding NAD+’s role in Alzheimer’s disease, Parkinson’s disease, neuropathy, sarcopenia, liver disease and heart failure. We are among the world leaders in the emerging NAD+ space. Through our ChromaDex External Research Program (CERP), we have amassed more than 250 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. The results of the 250+ research agreements have allowed CERP to help produce the trusted science behind Niagen® and continue to advance the understanding of NAD+ in health, diseases, and aging. We value and encourage strong scientific rigor behind our products and seek to continually develop additional relationships in pursuit of this. CERP is a vital component of our research and development platform along with our scientific advisory board. Our scientific advisory board supports the technical and intellectual property needs of investigators, presents research at conferences, and helps build and support the NAD+ and healthy aging research community. 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 discoverer of NR as a NAD+ precursor, Dr. Rudy Tanzi, the co-chair of the department of neurology at Harvard Medical School, 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 COVID-19 continues to drive global uncertainty and disruption, which has created headwinds for our business. Authorities have imposed, and businesses and individuals have implemented, numerous measures to try to contain the virus or treat its impact, such as travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, store closures and reduced operating hours, and vaccine requirements. These measures have impacted and may further impact our workforce and operations and those of our respective suppliers and partners. Our primary focus throughout the COVID-19 pandemic has remained ensuring the health and safety of our employees through office closures or implementing enhanced safety protocols to ensure the well-being of our employees. We have adapted to the new environment and have been able to successfully conduct business virtually. The degree to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including the duration and severity of the pandemic; surges related to new variants; the actions taken to contain the virus or treat its impact; other actions taken by governments, businesses, and individuals in response to the virus and resulting economic disruption; and how quickly and to what extent normal economic and operating conditions can resume. Additional impacts and risks may arise that we are not aware of or able to respond to effectively. We are similarly unable to predict the extent of the impact of the pandemic on our customers, suppliers, and other partners, but a material effect on these parties could also materially adversely affect us. The impact of COVID-19 can also exacerbate other risks discussed in Part II, Item 1A Risk Factors and throughout this report. Supply chain disruptions, inflation and changing prices We have experienced, and could in the future experience, global supply chain delays 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 components and packaging shortages for our consumer products across our supply chain. Supply chain delays, among other factors such as store closures, have impacted our sales to partners in international markets. These supply chain challenges were addressed in the second quarter of 2021 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 believe we have adequate inventory on hand to meet current demands. We have also recently experienced inflation in labor, raw materials and other costs. Inflation can also have a long-term impact as increasing costs may impact 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 also could have a negative impact on customer spending. We will continue to monitor this situation closely as conditions may become more challenging due to ongoing and uncertain economic factors. 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. As of March 31, 2022, our cash and cash equivalents totaled approximately $21.0 million. We anticipate that our current cash, cash equivalents, and cash to be generated from net sales will be sufficient to meet our projected operating plans for at least the next twelve months. In addition, we have an available line of credit up to $10.0 million, subject to certain terms and conditions, from Western Alliance Bank. 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. In June 2020, we 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 ChromaDex may offer and sell shares of our common stock having an aggregate offering price of up to $50.0 million from time to time through the Sales Agents (ATM Facility). As of March 31, 2022, approximately $47.8 million remains available under the ATM Facility. 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 other macroeconomic factors such as rising interest rates, inflation and geopolitical uncertainties, 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. We currently have three operating segments which offer differentiated services. First, through our Consumer Products segment we provide finished dietary supplement products that contain the Company's proprietary ingredients directly to consumers and distributors. We deliver Niagen® as the sole active ingredient in our consumer product Tru Niagen® which is offered in both convenient capsules and stickpacks. Additionally, beginning in April 2022, we launched our new consumer product, Tru Niagen® Immune, a combination of immune-boosting nutrition with Niagen® in capsule form. Second, our ingredients segment develops and commercializes proprietary-based ingredient technologies and supplies these ingredients as raw material to the manufacturers of consumer products. Finally, our Analytical Reference Standards and Services segment focuses on natural product fine chemicals, known as phytochemicals, and related research and development services. The results of these segments and our consolidated operations are detailed in the discussion that follows. Our consolidated net sales and net loss for the three months ended on March 31, 2022 and 2021 are as follows: Three Months Ended March 31, (In thousands) 2022 2021 Net sales $ 17,259 $ 14,683 Net loss (7,740) (7,381) Basic and diluted loss per common share $ (0.11) $ (0.12) 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 March 31, (In thousands) 2022 2021 % Change Net sales: Consumer Products $ 14,937 $ 12,437 20 % Ingredients 1,427 1,315 9 Analytical reference standards and services 895 931 (4) Total net sales $ 17,259 $ 14,683 18 % Total net sales increased approximately 18% for the three months ended March 31, 2022, compared to the same period in 2021. Changes in sales for the periods indicated were driven by the following: • Tru Niagen® sales for our Consumer Products segment increased $2.5 million, or 20%, compared to the same period in the prior year. The increase primarily related to higher e-commerce sales of approximately $1.3 million, and increased sales to A.S. Watson, a related party, of approximately $1.0 million for the three months ended March 31, 2022 compared to same period in 2021. The lower sales to A.S. Watson in the prior year were largely due to shipment delays we experienced in the first quarter of 2021 surrounding COVID-19 supply chain issues which were resolved in the second quarter of 2021. • Total ingredient sales increased $0.1 million, or 9%, compared to the same period in the prior year driven by an increase in other ingredient sales of approximately $0.2 million which was partially offset by lower Niagen ingredient sales of $0.1 million due to competitive pricing measures for the three months ended March 31, 2022 compared to same period in 2021. • Analytical reference standards and services segment experienced a lower demand for research and development services which was partially offset by increased demand for reference standards during the three months ended March 31, 2022 compared to same period in 2021 resulting in slightly lower total sales year over year. 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 March 31, Amount % of net sales (In thousands) 2022 2021 2022 2021 Cost of sales: Consumer Products $ 5,252 $ 4,203 35 % 34 % Ingredients 722 563 51 43 Analytical reference standards and services 753 683 84 73 Total cost of sales $ 6,727 $ 5,449 39 % 37 % Overall, cost of sales, as a percentage of net sales, slightly increased for the three months ended March 31, 2022 compared to the same period in 2021. Changes in cost of sales were primarily driven by the following: • Cost of sales, as a percentage of net sales, for our consumer products segment remained substantially similar year over year. • Cost of sales, as a percentage of net sales, for our ingredients segment increased 8% for the three months ended March 31, 2022, compared to the same period in 2021 primarily as a result of increasing our supply chain head count as we scale the business. • Cost of sales, as a percentage of net sales, for the analytical reference standards and services segment increased 11% for the three months ended March 31, 2022 compared to the same period in 2021. Cost of sales for our analytical reference standards and services segment are largely driven by fixed supply chain labor costs which do not increase in proportion to sales. We increased our supply chain head count in order to scale the business. Accordingly, as sales decreased and our supply chain labor head count increased for the three months ended March 31, 2022, we experienced lower labor and overhead utilization rates resulting in increased cost of sales, as a percentage of net sales, compared to the same period in 2021. 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 March 31, (In thousands) 2022 2021 % Change Gross profit: Consumer Products $ 9,685 $ 8,234 18 % Ingredients 705 752 (6) Analytical reference standards and services 142 248 (43) Total gross profit $ 10,532 $ 9,234 14 % For details supporting the changes in gross margin, refer to the discussions above regarding changes in our net sales and cost of sales for each segment. • The consumer products segment posted gross profit of $9.7 million, an 18% increase for the three months ended March 31, 2022 compared to the same period in 2021. • The ingredients segment posted gross profit of $0.7 million for the three months ended March 31, 2022, a decrease of 6% compared to the same period in 2021. • The analytical reference standards and services segment saw a 43% decrease in gross profit for the three months ended March 31, 2022, compared to the same period in 2021. 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 March 31, (In thousands) 2022 2021 % Change Sales and marketing expenses: Consumer Products $ 8,074 $ 6,111 32 % Ingredients 24 10 140 Analytical reference standards and services 139 137 1 Total sales and marketing expenses $ 8,237 $ 6,258 32 % • For the consumer products segment, we increased our direct marketing efforts through Amazon marketplaces, televised commercials, social media, public relations and other customer awareness and acquisition programs as well as increased staffing resulting in total increased marketing expenditures of approximately $1.7 million for the three months ended March 31, 2022 compared to the same period in 2021. • For the ingredients segment, selling and marketing expenses were approximately $24,000 during the three months ended March 31, 2022. This is a slight increase from the same period in the prior year due to higher commissionable sales for other ingredients. • For the analytical reference standards and services segment, total selling and marketing expenses were substantially similar year over year. Operating Expenses-Research and Development Research and development (R&D) expenses consist primarily of clinical trials, product development and process development expenses. Research and development expenses by reportable segment were as follows: Three Months Ended March 31, (In thousands) 2022 2021 % Change R&D expenses: Consumer Products $ 1,002 $ 718 40 % Ingredients 76 69 10 Total R&D expenses $ 1,078 $ 787 37 % We allocate R&D expenses related to our Niagen® branded ingredient to the consumer products and ingredients segment, based on revenues recorded. Overall, we had higher R&D expenses for the three months ended March 31, 2022 compared to the comparable period in 2021 due to increased staffing of research scientists and share-based compensation as well as timing of projects. 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 periods indicated were as follows: Three Months Ended March 31, (In thousands) 2022 2021 % Change General and administrative 8,949 9,551 (6) % The decrease in general and administrative expense for the three months ended March 31, 2022, compared to the comparable period in 2021 was primarily driven by lower legal expense of $2.7 million related to litigation which was largely offset by increased severance and restructuring expense as well as investments in technology and increased staffing in key functional areas to support growth. For additional details regarding our litigation see Note 10, Commitments and Contingencies, L egal Proceedings in the Notes to the Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Severance and restructuring expenses relate to changes in our executive team. 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 March 31, 2022 and March 31, 2021, 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 months ended March 31, 2022, and 2021, 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 $0.2 million for both of the three months ended March 31, 2022 and 2021. 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 $49 thousand and $60 thousand for the three months ended March 31, 2022 and 2021, 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 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 three months ended March 31, 2022 was approximately $0.3 million as compared to $0.1 million for the three months ended March 31, 2021. Liquidity and Capital Resources From inception through March 31, 2022, we have incurred aggregate losses of approximately $176.7 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, 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 long-term business plan. There can be no assurance that any such financing will be available on terms favorable to us or at all. Without adequate financing we may have to delay or terminate product and service expansion and curtail certain selling, general and administrative expenses. Any inability to raise additional financing would have a material adverse effect on us. As of March 31, 2022, we had cash and cash equivalents totaling approximately $21.0 million, no material off-balance sheet arrangements, no outstanding borrowings under our line of credit up to $10.0 million with Western Alliance Bank, purchase obligations of $18.6 million related to inventory purchase commitments to be paid over approximately one year and future minimum lease obligations of $5.5 million to be paid over approximately six years. While we anticipate that our current cash, cash equivalents, and cash to be generated from net sales will be sufficient to meet our projected operating plans for at least the next twelve months and beyond, 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. Furthermore, 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, pursuant to the ATM Facility, of which approximately $47.8 million remains available as of March 31, 2022. As a result of the COVID-19 pandemic and other macroeconomic factors such as rising interest rates, inflation and geopolitical uncertainties, 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. Net cash used in operating activities: Cash used in operating activities is net loss adjusted for certain non-cash items and changes in operating assets and liabilities. Net cash used in operating activities was approximately $7.2 million and $5.4 million for the three months ended March 31, 2022 and 2021, respectively. The increase in cash used for the three months ended March 31, 2022 compared to March 31, 2021 of $1.8 million was primarily due to increases in our net loss and inventories paired with a decrease in our accounts payable which were partially offset by an increase in accrued expenses. 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. Cash used in investing activities: Investing cash flows consist primarily of capital expenditures and investment activities. Cash used in investing activities was approximately $25 thousand and $46 thousand for the three months ended March 31, 2022 and 2021, respectively. The decrease in cash used during the three months ended March 31, 2022 compared to March 31, 2021 of $21 thousand is attributable to fewer purchases of leasehold improvements and equipment. Net cash used in and 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. Cash used in financing activities was approximately $3 thousand for the three months ended March 31, 2022, compared to net cash provided by financing activities of approximately $33.4 million for the three months ended March 31, 2021. The difference in cash activities is largely attributable to proceeds from the issuance of common stock pursuant to the Securities Purchase Agreement with EverFund as well as the exercise of employee stock options, both of which occurred during the three months ended March 31, 2021 but not during the three months ended March 31, 2022. Critical Account Estimates There have been no changes to critical accounting estimates from those disclosed in our 2021 Form 10-K.