What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-08-10 · 119 added, 80 removed, 185 unchanged (52% of the section changed)

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.

The following Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included in this Form 10-Q and the Consolidated Financial Statements and notes thereto 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 and six months ended June 30, 2022 compared with the three and six months ended June 30, 2021 unless otherwise noted.

Growth and percentage comparisons made herein generally refer to the three and nine months ended September 30, 2022 compared with the three and nine months ended September 30, 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.

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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.

Niagen® has also been approved for inclusion in medical foods by both the Brazilian Health Regulatory Agency (ANVISA) and the Food Standards Australia New Zealand (FSANZ).

Clinical studies of Niagen® have demonstrated a variety of outcomes including increased NAD+ levels, altered body composition, increased cellular metabolism and increased energy production.

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We have adapted and have been able to successfully conduct business virtually.

Under the Coronavirus Aid, Relief, and Economic Security Act the employee retention tax credit (ERTC) was established and subsequently amended by other Acts.

During the third quarter of 2022, we evaluated our eligibility for the ERTC and determined that we qualified in all three quarters of 2020 and the first three quarters in 2021.

As a result, during August 2022, we filed a claim for the ERTC.

As of September 30, 2022, we recognized approximately $2.1 million in Other income - Employee Retention Tax Credit in our Unaudited Condensed Consolidated Statements of Operations to reflect the ERTC.

For further discussion, see Note 11, Employee Retention Tax Credit .

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;

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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, transportation and other costs.

Inflation can also have a long-term impact as increasing costs may impact our ability to maintain satisfactory margins.

We have also experienced inflation in labor, raw materials, transportation and other costs.

Inflation can have a long-term impact as increasing costs may affect our ability to maintain satisfactory margins.

We may be unsuccessful in passing these increases on to our customers or finding other mitigating solutions.

Furthermore, increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on customer spending.

Furthermore, increases in inflation may not be matched by growth in consumer income, which could have a negative impact on customer spending.

If customer sales diminish, we may be required to scale back production volumes which could negatively impact any economies of scale we have previously benefited from.

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Recent Activities

Joint Venture Agreement with Related Parties

On May 19, 2022, we entered into an agreement to form a joint venture (the “JV”) to expand our market strategy to include opportunities in Mainland China and its territories, excluding Hong Kong, Macau and Taiwan (the “Territory”), subject to the terms and satisfaction of the conditions contained therein.

The JV agreement is among Crystal Lake Developments Limited (Crystal Lake), Pioneer Idea Holdings Limited (Pioneer Idea), and Hong Kong (China) Taikuk Group Ltd (Taikuk).

Joint Venture Agreement

On May 19, 2022, we entered into an agreement to form a joint venture (the “May JV Agreement”) to expand our market strategy to include opportunities in Mainland China and its territories, excluding Hong Kong, Macau and Taiwan (the “Territory”).

The May JV Agreement was among us, Crystal Lake Developments Limited (Crystal Lake), Pioneer Idea Holdings Limited (Pioneer Idea), and Hong Kong (China) Taikuk Group Ltd (Taikuk).

Crystal Lake is indirectly wholly-owned by Li Ka-Shing, and Pioneer Idea is indirectly owned by Solina Chau, and each of Mr.

Chau own through affiliated entities more than 5% of our common stock.

The business of the JV will be to market, sell and distribute Tru Niagen® and other products containing NR (the “Products”) developed by us in the Territory.

The JV agreement will have an initial term of 20 years, unless earlier terminated.

Crystal Lake, Pioneer Idea and Taikuk have each agreed to contribute $1.8 million, $1.2 million and $1.0 million, respectively into the JV.

In addition, we have agreed to pay $1.0 million to Taikuk and Taikuk will receive an additional 5% non-voting equity interest in the JV for introducing the parties.

Following the closing of the formation of the JV (the “Closing”), each of the parties will hold the following interest in the JV:

us (71%), Crystal Lake (10.8%), Pioneer Idea (7.2%) and Taikuk (a 11% non-voting interest).

We will have the right to elect three of the five directors in the JV, and Pioneer Idea will have the right to elect the other two directors, with each director having one vote.

Certain material corporate actions will require unanimous approval of the board of the JV.

The Closing is subject to certain customary closing conditions and is expected to occur by the end of the third quarter of 2022.

Prior to being able to commercialize the Products in the Territory, the JV will have to obtain all applicable regulatory approvals, including “Blue Hat” or health food registration with the PRC State Administration for Market Regulation for Products in the name of the Company or its designee (collectively, the “Blue Hat Registration”).

Prior to the JV obtaining the Blue Hat Registration, we will supply the Products to the JV who will appoint a third party sub-distributor to sell the Products in the Territory.

Once Blue Hat Registration is obtained, we will license to the JV certain intellectual property relating to the Products for the JV to manufacture and sell the Products in the Territory.

If the Blue Hat Registration is not obtained within 24 months of Closing (which deadline for obtaining the Blue Hat Registration may be extended by an additional 12 months upon consent of the parties), the JV may repurchase the 11% non-voting interest owned by Taikuk for two dollars.

As of the date of this report, the JV has not yet launched.

Ka-Shing and Ms.

Chau own through affiliated entities more than 5% of the Company’s common stock.

On September 30, 2022, we entered into a Termination Agreement for the purpose of terminating the May JV Agreement.

The Termination Agreement was approved by the Audit Committee of the Board in accordance with the our Related-Persons Transaction Policy.

In connection with the Termination Agreement, on September 30, 2022, Asia Pacific Scientific, Inc., our indirect wholly owned subsidiary, and Hong Kong (China) Taikuk Group Ltd (Taikuk) entered into a shareholders agreement (the “Shareholders Agreement”) pursuant to which Taikuk has agreed to contribute $1.0 million (the “Subscription Price”) in exchange for an 11% non-voting equity interest in ChromaDex Asia Pacific Ventures Limited, a subsidiary of Asia Pacific Scientific, Inc.

(the “Joint Venture” or “JV”).

Additionally, we shall pay $1.0 million in cash to Taikuk (the “Taikuk Fee”) upon the closing of the Shareholders Agreement (the “Closing”).

We have mutually agreed with Taikuk that no exchange of funds for the Taikuk Fee and Subscription Price was necessary and, accordingly, no cash has or will exchange hands related to these provisions of the Shareholders Agreement.

The purpose of the JV is to commercialize Tru Niagen® and other products containing nicotinamide riboside to be developed by us in the ordinary course (the “Products”) in the Territory.

The Shareholders Agreement has an initial term of 20 years, unless earlier terminated.

We indirectly own an 89% equity interest (and all of the voting interests) in the JV and have the right to elect all three directors of the JV.

Prior to being able to commercialize the Products in the Territory, the JV will have to obtain all applicable regulatory approvals, including “Blue Hat” or health food registration with the Peoples Republic of China State Administration for Market Regulation for Products in our name or our designee (collectively, the “Blue Hat Registration”).

Upon completion of Blue Hat Registration, we shall make a payment of $1.0 million in cash to Taikuk (the “Blue Hat Registration Fee”).

If the Blue Hat Registration is not obtained within 24 months of the Closing (which may be extended by an additional 12 months upon consent of the parties), the JV may repurchase the 11% non-voting interest purchased by Taikuk for $1 (the “Right of Repurchase”).

The Right of Repurchase functions as a performance vesting condition under ASC 718 and the 11% non-voting equity interest is accounted for as nonemployee share-based compensation.

The equity interest will only vest if Blue Hat Registration is achieved, at which time the minority interest will be recorded.

Consequently, no amounts related to the Blue Hat Registration Fee or the 11% non-voting interest have been recognized in the Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022.

The fair value of the 11% non-voting interest and corresponding share-based compensation expense of $1.0 million was determined as of the grant date of September 30, 2022 and based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs.

The most significant of these inputs were the combined weighted averages of the a) discount rate at 27.5%, b) present value of estimated future cash flows of $3.9 million and c) the present value of the terminal value at $5.6 million.

Once Blue Hat Registration is complete and certain distribution agreements relating to the commercialization of the Products in the Territory are assigned and entered into (the “Distribution Agreements”), Taikuk would be entitled to certain royalty payments based on our and the JV’s net revenue for sales of the Products in the Territory under the Distribution Agreements.

Operating activity under the JV was not material during the three months ended September 30, 2022.

Securities Purchase Agreement and Registration Rights Agreement - Related Parties

On September 30, 2022, we entered into a Securities Purchase Agreement with Pioneer Step Holdings Limited (Pioneer Step), Champion River Ventures Limited (Champion) and Robert Fried (collectively, the “Purchasers”) pursuant to which we agreed to sell and issue approximately 2.5 million shares of common stock at a price of $1.25 per share (the “Financing”).

Champion and Pioneer Step are related parties.

Fried is our Chief Executive Officer.

The transaction and related agreements were approved by the Audit Committee of the Board in accordance with our Related-Persons Transaction Policy.

On October 7, 2022, we closed the Financing and received proceeds of approximately $2.9 million, net of offering costs of $0.2 million.

Additionally, in connection with the Financing, we entered into a Registration Rights Agreement with the Purchasers.

In the event of certain specified defaults under the agreement, we would be required to pay liquidating damages to the Purchasers equal to 1.0% of the aggregate purchase price per month for each default (up to a maximum of 5.0% of such aggregate purchase price).

For further discussion, see Note 12, Subsequent Events .

NHSc Agreement

On October 10, 2022, we and Société des Produits Nestlé SA, a société anonyme organized under the laws of Switzerland (NHSc), as successor-in-interest to NESTEC Ltd., entered into an amended and restated supply agreement (the “Supply Agreement”), which amends and restates the supply agreement, dated December 19, 2018, entered into by us and NESTEC Ltd.

Pursuant to the Supply Agreement, NHSc and its affiliates will exclusively purchase nicotinamide riboside chloride (NRCL) from us and NHSc and its affiliates will have the non-exclusive right to manufacture, market, distribute, and sell products using NRCL for human use in the (i) medical nutritional, (ii) functional food and beverage and (iii) multi-ingredient dietary supplements categories sold under one of the NHSc brands (the “Approved Products”) world-wide, but excluding certain countries and ingredient combinations.

The term of the Supply Agreement is five years, unless earlier terminated, and is subject to automatic extensions provided certain minimum purchases by NHSc are met.

As consideration for the rights granted to NHSc under the Supply Agreement, NHSc agreed to an initial purchase commitment of NRCL equal to approximately $2 million.

The Supply Agreement additionally provides for NHSc to pay a royalty to us at tiered percentage rates in the low-single digits based on worldwide annual net sales of the Approved Products, subject to certain deductions.

Furthermore, the Supply Agreement provides for NHSc to pay us two separate one-time milestone payments in the low seven figures depending on whether NHSc achieves certain net sales targets in any contract year.

In connection with the entry into the Supply Agreement, we entered into a Securities Purchase Agreement with NHSc, pursuant to which NHSc agreed to purchase 3.8 million shares of common stock at a price of $1.31 which is equal to the volume weighted average price of our common stock for the ten trading days preceding October 10, 2022 (the “Securities Purchase Agreement”).

On October 17, 2022, we closed the Securities Purchase Agreement and received proceeds of approximately $4.8 million , net of offering costs of $0.2 million.

Financial Condition and Results of Operations

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Actual results may differ from these estimates under different assumptions or conditions.

As of June 30, 2022, our cash and cash equivalents totaled approximately $17.1 million, of which $16.9 million was unrestricted.

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.

Additionally, we have begun implementing plans to minimize expenses and reduce our cash burn rate for the second half of fiscal year 2022.

As of September 30, 2022, our cash and cash equivalents totaled approximately $13.3 million, of which $13.1 million was unrestricted.

Subsequent to September 30, 2022, we closed two separate securities purchase agreements and received proceeds of approximately $7.7 million, net of offering costs of $0.4 million.

For further discussion of the securities purchase agreements, see Note 12, Subsequent Events .

We anticipate that our current unrestricted cash and cash equivalents, cash generated from the securities purchase agreements 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.

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.

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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 June 30, 2022, approximately $47.8 million remains available under the ATM Facility.

As of September 30, 2022, approximately $47.8 million remains available under the ATM Facility.

Our potential use of the ATM facility is subject to the satisfaction of various conditions in the ATM Facility agreement as well market conditions.

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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.

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.

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

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 and six months ended on June 30, 2022 and 2021 are as follows:

Three Months Ended June 30, Six Months Ended June 30,

Our consolidated net sales and net loss for the three and nine months ended on September 30, 2022 and 2021 are as follows:

Three Months Ended September 30, Nine Months Ended September 30,

(In thousands) 2022 2021 2022 2021

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Basic and diluted loss per common share $ (0.01) $ (0.13) $ (0.22) $ (0.33)

During the three and nine months ended September 30, 2022, we recognized $2.1 million in Other income related to the ERTC.

Excluding the ERTC, our net loss for the three and nine months ended September 30, 2022 is $(3.1) million and $(17.2) million, respectively, and basic and diluted loss per common share is $(0.04) and $(0.25), respectively.

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,

Three Months Ended September 30, Nine Months Ended September 30,

(In thousands) 2022 2021 % Change 2022 2021 % Change

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Total net sales $ 17,063 $ 17,308 (1) % $ 51,054 $ 49,690 3 %

Total net sales decreased approximately 5% for the three months ended June 30, 2022 compared to the same period in 2021, while total net sales increased approximately 5% for the six months ended June 30, 2022 compared to the same period in 2021.

Total net sales remained relatively flat for the three months ended September 30, 2022 compared to the same period in 2021, declining approximately 1%, while total net sales for the nine months ended September 30, 2022 compared to the same period in 2021 increased approximately 3%.

Changes in sales for the periods indicated were driven by the following:

• Tru Niagen® sales for our Consumer Products segment decreased $0.9 million, or (6)%, for the three months ended June 30, 2022 compared to the same period in the prior year.

The decrease is related to the initial shelf stocking in Wal-Mart to support our launch in the prior year quarter driving increased sales for the three months ended June 30, 2021, paired with a decline in sales to A.S.

Watson, a related party, of $1.4 million for the three months ended June 30, 2022 compared to the prior year quarter to better align purchases with anticipated consumer demand during the key selling season in late 2022.

These declines were largely offset by higher e-commerce sales of approximately $1.4 million for the three months ended June 30, 2022 compared to the same period in 2021.

For the six months ended June 30, 2022 total consumer product sales increased $1.6 million, or 6%, compared to the same period in 2021.

The higher sales were primarily related to increased e-commerce sales of $2.6 million, largely offset by lower sales to Wal-Mart, following the initial shelf stocking sales in 2021.

• Total ingredient sales remained relatively stable with a decrease of approximately $40 thousand, or (3)%, for the three months ended June 30, 2022 and an increase of $72 thousand, or 3%, for the six months ended June 30, 2022, each compared to the corresponding periods in 2021.

For the three and six months ended June 30, 2022, Niagen® ingredient sales increased $173 thousand and $101 thousand, respectively, compared to the corresponding periods in 2021, while all other ingredient sales decreased $213 thousand and $29 thousand, respectively, during the same periods.

• Analytical reference standards and services segment sales decreased $51 thousand and $87 thousand for the three and six months ended June 30, 2022 compared to the same periods in 2021, respectively.

The decreased sales are attributable to lower research and development sales throughout 2022 compared to 2021, primarily due to the timing of project requests from customers.

• Tru Niagen® sales continue to see steady e-commerce growth during the three and nine months ended September 30, 2022 with approximately $0.8 million and $3.4 million in higher sales compared to the same periods in 2021, respectively.

This growth was largely offset by declines in business-to-business sales to our distributor partners during the three and nine months ended September 30, 2022 with approximately $1.0 million and $1.6 million lower sales compared to the same periods in 2021, respectively.

Our distributor partners have experienced lower growth during fiscal year 2022 due to COVID-19 headwinds and other macroeconomic factors.

We remain committed to working with these partners to collectively maximize sales while simultaneously continuing to grow our e-commerce channels.

• Total ingredient sales remained relatively flat, increasing approximately $30 thousand, or 2%, for the three months ended September 30, 2022 and $102 thousand, or 2%, for the nine months ended September 30, 2022, each compared to the same periods in 2021, respectively.

During the three and nine months ended September 30, 2022, we continue to see modest growth in Niagen® ingredient sales compared to the same periods in 2021, which are being partially offset by slight declines for all other ingredient sales due to demand from customers.

• Analytical reference standards and services segment sales decreased $64 thousand and $151 thousand for the three and nine months ended September 30, 2022 compared to the same periods in 2021, respectively.

The decline in sales are generally attributable to lower demand for research and development services throughout 2022 compared to 2021, primarily due to the timing of project requests from customers.

Cost of Sales

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The following table sets forth our total cost of sales by reportable segment:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

Amount % of net sales Amount % of net sales

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Total cost of sales $ 6,856 $ 6,730 40 % 39 % $ 20,273 $ 19,068 40 % 38 %

Overall, cost of sales, as a percentage of net sales, slightly increased during the three and six months ended June 30, 2022 compared to the same periods 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 for the three months ended June 30, 2022 and 2021 and increased approximately 1% for the six months ended June 30, 2022 compared to the same period in 2021.

The increase is primarily attributable to a shift in our business mix as we experienced higher business-to-business sales during the six months ended June 30, 2021 resulting in greater cost saving benefits from economies of scale on our overall supply chain overhead costs compared to the same period in the current year.

• Cost of sales, as a percentage of net sales, for our ingredients segment increased 2% and 5% for the three and six months ended June 30, 2022, compared to the comparable periods in 2021, respectively.

The increase is primarily a result of higher supply chain overhead costs, as we increased headcount to scale the business, paired with higher costs of raw materials.

• Cost of sales, as a percentage of net sales, for the analytical reference standards and services segment increased 23% and 16% for the three and six months ended June 30, 2022 compared to the same periods in 2021, respectively.

Generally, cost of sales, as a percentage of net sales, saw slight increases during the three and nine months ended September 30, 2022 compared to the same periods in 2021.

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 remained flat for the three months ended September 30, 2022 and 2021 and increased roughly 1% for the nine months ended September 30, 2022 compared to the same period in 2021.

The minor increase is attributable to increases in our supply chain headcount, including overall wage inflation, and other inflationary pressures, partially offset by a shift in our business mix as we experienced elevated e-commerce sales which provide higher gross margins during the nine months ended September 30, 2022 compared to the same period in 2021.

• Cost of sales, as a percentage of net sales, for our ingredients segment increased 8% and 6% for the three and nine months ended September 30, 2022, compared to the same periods in 2021, respectively.

The increase is primarily a result of higher supply chain overhead costs, as we modestly increased headcount to scale the business and were impacted by overall wage inflation, paired with higher costs of raw materials.

• Cost of sales, as a percentage of net sales, for the analytical reference standards and services segment increased 7% and 13% for the three and nine months ended September 30, 2022 compared to the same periods in 2021, respectively.

Cost of sales for our analytical reference standards and services segment are largely driven by fixed supply chain overhead costs which do not increase in proportion to sales.

During the first six months of 2022, we increased our supply chain headcount in order to scale the business, increasing our overheads costs.

Accordingly, as sales decreased and our supply chain labor head count increased during 2022, we experienced lower labor and overhead utilization rates resulting in increased cost of sales, as a percentage of net sales, compared to 2021.

Additionally, during fiscal year 2022, we increased our supply chain headcount in order to scale the business and were impacted by overall wage inflation, increasing these overheads costs.

Accordingly, due to the increased head count for supply chain labor paired with a decrease in sales during 2022, we experienced lower labor and overhead utilization rates resulting in higher cost of sales, as a percentage of net sales, compared to 2021.

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,

Three Months Ended September 30, Nine Months Ended September 30,

(In thousands) 2022 2021 % Change 2022 2021 % Change

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Sales and marketing expenses by reportable segment were as follows:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(In thousands) 2022 2021 % Change 2022 2021 % Change

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Total sales and marketing expenses $ 5,868 $ 7,221 (19) % $ 22,126 $ 19,711 12 %

• During fiscal year 2022, for our consumer products segment, we launched a direct marketing campaign spanning multiple platforms including Amazon marketplaces, televised commercials, social media, public relations and other customer awareness and acquisition programs in addition to increasing our staffing.

These focused marketing efforts drove increased sales and marketing expense of approximately $1.7 million and $3.6 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

We anticipate these expenses will decrease during the second half of 2022 as we shift our focus to efficient distribution channels and marketing campaigns, coupled with overall expense management.

• For the ingredients segment, selling and marketing expenses were nominal during the three months ended June 30, 2022 and 2021.

Sales and marketing expense increased during the six months ended June 30, 2022 compared to the same period in the prior year largely due to higher commissionable sales for other ingredients.

• For the analytical reference standards and services segment, total selling and marketing expenses increased approximately $0.1 million for each of the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

Beginning in the third quarter of 2022, we pivoted our marketing efforts to focus on the most efficient distribution channels and marketing campaigns.

In line with this shift, we saw a decline in marketing expense of $1.4 million for the three months ended September 30, 2022, compared to the same period in 2021.

While our marketing efforts in the first half of 2022 helped drive our increased e-commerce sales, we ultimately increased marketing expense by approximately $2.3 million for the nine months ended September 30, 2022, compared to the same period in 2021.

Going into the fourth quarter of 2022, we plan to continue our focus on the most efficient distribution channels and marketing campaigns.

• For the ingredients segment, selling and marketing expense was nominal during the three months ended September 30, 2022 and 2021.

During the nine months ended September 30, 2022 sales and marketing expense increased compared to the same period in the prior year largely due to higher commissionable sales for other ingredients.

• For the analytical reference standards and services segment, total selling and marketing expense increased marginally during the three months ended September 30, 2022, and approximately $0.1 million for the nine months ended September 30, 2022, compared to the same periods in 2021.

The increase was primarily driven by headcount increases.

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Research and development expenses by reportable segment were as follows:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(In thousands) 2022 2021 % Change 2022 2021 % Change

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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 and six months ended June 30, 2022 compared to the comparable period in 2021 due to increased staffing of research scientists, share-based compensation and timing of projects.

Overall, we had higher R&D expenses for the three and nine months ended September 30, 2022 compared to the comparable period in 2021 due to increased headcount, share-based compensation and timing of projects.

Operating Expenses-General and Administrative

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General and administrative expense for the periods indicated were as follows:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(In thousands) 2022 2021 % Change 2022 2021 % Change

General and administrative $ 6,180 $ 11,202 (45) % $ 22,292 $ 29,881 (25) %

The decline in general and administrative expense for the three and six months ended June 30, 2022, compared to the comparable periods in 2021 was primarily driven by lower legal expense of $2.4 million and $5.1 million related to litigation which was partially offset by increased 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, 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 decline in general and administrative expense for the three months ended September 30, 2022, compared to the comparable period in 2021, was primarily driven by $4.4 million of lower legal expense paired with $0.5 million of lower share-based compensation expense.

The decline in general and administrative expense for the nine months ended September 30, 2022, compared to the comparable period in 2021, was also driven by lower legal expense of $9.5 million which was partially offset by increased investments in technology and increased headcount in key functional areas to support growth, along with overall wage inflation.

For additional details regarding our litigation see Note 10, Commitments and Contingencies , Legal Proceedings in the Notes to the Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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, 2022 and June 30, 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 and six months ended June 30, 2022 and 2021.

At September 30, 2022 and September 30, 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 and nine months ended September 30, 2022 and 2021.

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, 2022 and 2021.

Depreciation expense was approximately $0.6 million and $0.7 million for the nine months ended September 30, 2022 and 2021, 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 approximately $99 thousand for the six months ended June 30, 2022 compared to $121 thousand for the six months ended June 30, 2021.

Amortization expense of intangible assets was approximately $0.1 million and $0.2 million for the nine months ended September 30, 2022 and 2021, respectively.

We amortize intangible assets using a straight-line method, generally over 10 years.

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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, 2022 was approximately $0.5 million as compared to $0.3 million for the six months ended June 30, 2021.

Amortization expense of right of use assets for the nine months ended September 30, 2022 was approximately $0.6 million as compared to $0.4 million for the nine months ended September 30, 2021.

Liquidity and Capital Resources

From inception through June 30, 2022, we have incurred aggregate losses of approximately $183.1 million.

From inception through September 30, 2022, we have incurred aggregate losses of approximately $184.1 million.

These losses are primarily due to expenses associated with the development and expansion of our operations and investments to protect our intellectual property, including litigation-related expenses.

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Any inability to raise additional financing would have a material adverse effect on us.

As of June 30, 2022, we had cash and cash equivalents of $17.1 million, no material off-balance sheet arrangements, no outstanding borrowings under our line of credit with Western Alliance Bank, purchase obligations of $15.1 million related to inventory purchase commitments to be paid over approximately one year and future minimum lease obligations of $5.3 million to be paid over approximately six years.

We anticipate that our current unrestricted cash and cash equivalents of $16.9 million 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.

As of September 30, 2022, we had cash and cash equivalents of $13.3 million, no material off-balance sheet arrangements and no outstanding borrowings under our line of credit with Western Alliance Bank.

Additionally, as of September 30, 2022, we had purchase obligations of $11.7 million related to inventory purchase commitments and future minimum lease obligations of $5.0 million to be paid over approximately nine months and six years, respectively.

Subsequent to September 30, 2022, we closed two separate securities purchase agreements and received proceeds of approximately $7.7 million, net of offering costs of $0.4 million.

For further discussion of the securities purchase agreements, see Note 12, Subsequent Events in the Notes to the Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We anticipate that our current unrestricted cash and cash equivalents of $13.1 million, cash generated from the securities purchase agreements 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.

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 June 30, 2022.

Our potential use of the ATM facility is subject to the satisfaction of various conditions in the ATM Facility agreement as well market conditions.

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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 $11.0 million and $13.3 million for the six months ended June 30, 2022 and 2021, respectively.

The decrease in cash used for the six months ended June 30, 2022 compared to June 30, 2021 of $2.3 million was primarily driven by the timing of collections for our trade receivables accounting for $4.3 million which was partially offset by increases in our inventories of $1.7 million.

Net cash used in operating activities was approximately $14.8 million and $19.2 million for the nine months ended September 30, 2022 and 2021, respectively.

The decrease in cash used for the nine months ended September 30, 2022, compared to September 30, 2021, of $4.4 million was primarily driven by improvements in our net loss of $4.6 million, excluding Other income from the Employee Retention Tax Credit of $2.1 million, which was partially offset by changes in working capital.

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.

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Investing cash flows consist primarily of capital expenditures and investment activities.

Cash used in investing activities was approximately $110 thousand for the six months ended June 30, 2022 compared to $311 thousand for the six months ended June 30, 2021.

The decrease in cash used during the six months ended June 30, 2022 of $201 thousand compared to the same period in 2021 is attributable to fewer purchases of leasehold improvements and equipment.

Cash used in investing activities was approximately $0.2 million for the nine months ended September 30, 2022 compared to $0.4 million for the nine months ended September 30, 2021.

The decrease in cash used during the nine months ended September 30, 2022 of $245 thousand compared to the same period in 2021 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 $7 thousand for the six months ended June 30, 2022, compared to net cash provided by financing activities of approximately $35.7 million for the six months ended June 30, 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, the ATM Facility transaction, as well as the exercise of employee stock options, all of which occurred during the six months ended June 30, 2021 with no similar activity during the six months ended June 30, 2022.

Cash used in financing activities was approximately $25 thousand for the nine months ended September 30, 2022, compared to net cash provided by financing activities of approximately $36.0 million for the nine months ended September 30, 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, the ATM Facility transaction, as well as the exercise of employee stock options, all of which occurred during the nine months ended September 30, 2021 and no similar financing activity occurred during the nine months ended September 30, 2022.

Critical Account Estimates

There have been no changes to critical accounting estimates from those disclosed in our 2021 Form 10-K.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis