What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 79 added, 75 removed, 144 unchanged (52% of the section changed)

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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, 2023 compared with the three months ended March 31, 2022 unless otherwise noted.

Growth and percentage comparisons made herein generally refer to the three and six months ended June 30, 2023 compared with the three and six months ended June 30, 2022 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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NAD+ levels may be increased through supplementation with NAD+ precursors, such as nicotinamide riboside (NR), calorie restriction and moderate exercise.

We are at the forefront of exploring effective methods to increase NAD+ levels and support healthy aging.

In 2013, we commercialized Niagen®, a proprietary form of NR, a novel form of vitamin B3, and one of the most well-studied NAD+ precursors on the market as well as the most efficient.

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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, 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.

Roger Kornberg, Nobel Laureate Stanford Professor.

Other distinguished members include Dr.

Charles Brenner, Alfred E Mann Family Foundation Chair in the Department of Diabetes & Cancer Metabolism at City of Hope and one of the world’s recognized experts in NAD+ and discoverer of NR as a NAD+ precursor;

Rudy Tanzi, co-chair of the department of neurology at Harvard Medical School;

Sir John Walker, Nobel Laureate and Emeritus Director of the MRC Mitochondrial Biology Unit in the University of Cambridge, England;

Bruce German, Chairman of Food, Nutrition and Health at the University of California, Davis;

Brunie Felding, Associate Professor in the Department of Molecular Medicine at Scripps Research Institute, California Campus;

David Katz, 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.;

Vilhelm (Will) Bohr, M.D., Ph.D., D.Sc., former Chief of the Laboratory of Molecular Genetics at the National Institute on Aging of the National Institutes of Health.

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

During 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.

As of March 31, 2023, the Company's Unaudited Consolidated Balance Sheets include an ERTC benefit of $1.0 million and associated commissions payable of $0.2 million recorded within prepaid expenses and other current assets and accrued expenses, respectively.

During fiscal year 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.

As of June 30, 2023, the Company's Unaudited Condensed Consolidated Balance Sheets include an ERTC benefit of $0.9 million and associated commissions payable of $0.1 million recorded within prepaid expenses and other current assets and accrued expenses, respectively.

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

Other than the impacts to our Unaudited Consolidated Balance Sheets pertaining to the ERTC, the impact of COVID-19 did not have a material impact on our business during the three months ended March 31, 2023.

Other than the impacts to our Unaudited Condensed Consolidated Balance Sheets pertaining to the ERTC, the impact of COVID-19 did not have a material impact on our business during the three and six months ended June 30, 2023.

Any future developments and impacts of COVID-19, which are uncertain and cannot be predicted, including but not limited to impacts to our partners, can also exacerbate other risks discussed in Part II, Item 1A Risk Factors and throughout this report.

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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.

The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported net sales and expenses during the reporting periods.

On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below.

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

As of March 31, 2023, our cash and cash equivalents totaled approximately $23.1 million, of which $23.0 million was unrestricted.

As of June 30, 2023, our cash and cash equivalents totaled approximately $26.4 million, of which $26.3 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.

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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, 2023 and 2022 are as follows:

Three Months Ended March 31,

Our consolidated net sales and net loss for the three and six months ended on June 30, 2023 and 2022 are as follows:

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

(In thousands, except per share data) 2023 2022 2023 2022

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

Three Months Ended March 31,

(In thousands) 2023 2022 % Change

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

(In thousands) 2023 2022 % Change 2023 2022 % Change

Consumer Products $ 16,891 $ 14,520 16 % $ 34,524 $ 29,457 17 %

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Total net sales $ 20,323 $ 16,732 21 % $ 42,879 $ 33,991 26 %

Total net sales for the three months ended March 31, 2023 grew by $5.3 million, or 31%, compared to the same period in 2022.

Changes in sales for three months ended March 31, 2023 compared to the three months ended March 31, 2022 were driven by the following:

• Sales of Tru Niagen® increased $2.7 million, or 18%, for the three months ended March 31, 2023 compared to the same period in 2022.

This increase was primarily fueled by robust e-commerce sales, which accounted for approximately $1.3 million in higher sales, as well as $1.1 million in higher sales to A.S.

Watson, a related party.

In addition, we observed modest growth in sales to our distributor partners.

Looking ahead, we expect e-commerce sales to remain the primary catalyst for growth throughout 2023.

• For the three months ended March 31, 2023, total ingredients sales increased by approximately $2.7 million, representing growth of 189% compared to the same period in 2022.

This growth was solely attributed to sales of our Niagen® ingredient, which saw increased demand from existing partners as well as a new partner, while other ingredient sales experienced a slight decline.

• Sales through our analytical reference standards and services segment declined approximately $0.1 million for the three months ended March 31, 2023 compared to the same period in 2022.

The decline in sales is primarily attributable to lower demand for reference standards.

Total net sales increased by approximately $3.6 million and $8.9 million for the three and six months ended June 30, 2023, compared to the same periods in 2022, respectively.

Changes in net sales were driven by the following:

• Tru Niagen® sales were the largest contributor to total net sales growth, increasing $2.4 million and $5.1 million for the three and six months ended June 30, 2023 compared to the corresponding periods in 2022, respectively.

The elevated sales for both periods were primarily fueled by higher sales to A.S.

Watson, a related party, and strong performance in our e-commerce business.

For the three months ending June 30, 2023, sales to A.S.

Watson and sales from our e-commerce business accounted for approximately $1.5 million and $1.0 million in growth, respectively.

Similarly, for the six months ended June 30, 2023, sales to A.S.

Watson drove approximately $2.6 million in higher sales, while e-commerce sales added approximately $2.3 million.

Looking ahead, we expect e-commerce sales to be the primary catalyst for growth throughout 2023.

• For the three and six months ended June 30, 2023, total ingredients sales increased by approximately $1.2 million and $3.9 million compared to the same periods in 2022, respectively.

The growth in ingredients sales was largely driven by sales of our Niagen® ingredient, which experienced increased demand from existing partners and new partners, accounting for $1.0 million and $3.8 million of the growth during the three and six months ended June 30, 2023, respectively.

• Our analytical reference standards and services segment accounted for the smallest proportion of total sales, remaining relatively flat for the three months ended June 30, 2023, and experiencing a slight decline of $0.1 million for the six months ended June 30, 2023, compared to the corresponding periods in 2022.

Cost of Sales

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

Three Months Ended March 31,

Amount % of net sales

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

Amount % of net sales Amount % of net sales

(In thousands) 2023 2022 2023 2022 2023 2022 2023 2022

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Total cost of sales $ 7,967 $ 6,690 39 % 40 % $ 17,005 $ 13,417 40 % 39 %

Generally, cost of sales, as a percentage of net sales, slightly increased during the three months ended March 31, 2023 compared to the same period in 2022.

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 increased approximately 1% for the three months ended March 31, 2023 compared to the same period in 2022.

The slight increase is attributable to inflationary pressures and a shift in our business mix, with e-commerce sales accounting for approximately 69% of total Tru Niagen® sales during the three months ended March 31, 2023 compared to 73% during the same period in 2022.

As our e-commerce sales typically generate higher gross margins, a relative decrease in this business mix resulted in higher cost of sales, as a percentage of net sales.

• Cost of sales, as a percentage of net sales, for our ingredients segment declined 5% for the three months ended March 31, 2023, compared to the same period in 2022.

The improvement can be primarily attributed to the benefit of economies of scale resulting from higher sales volumes during the three months ended March 31, 2023.

• Cost of sales, as a percentage of net sales, for the analytical reference standards and services segment increased 10% for the three months ended March 31, 2023 compared to the same period in 2022.

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

Accordingly, with a decline in sales during the three months ended March 31, 2023, we experienced lower labor and overhead utilization rates resulting in higher cost of sales, as a percentage of net sales, compared to 2022.

Overall, cost of sales, as a percentage of net sales, remained relatively stable for the three and six months ended June 30, 2023 compared to the same periods in 2022.

During the three months ended June 30, 2023, all segments experienced substantially similar cost of sales, as a percentage of net sales, compared to the corresponding periods in 2022.

This can be attributed to our continuous efforts to optimize our supply chain amid the prevailing inflationary environment.

For the six months ended June 30, 2023, the ingredients segment saw a 3% decrease in cost of sales, as a percentage of net sales, while the analytical reference standards and services segment increased by 6% each compared to the same periods in 2022.

Cost of sales for each of these segments is primarily influenced by fixed supply chain overhead costs, which do not fluctuate with sales.

Consequently, with higher sales in the ingredients segment, we benefited from improved labor and overhead utilization rates.

Conversely, in the analytical reference standards and services segment, with lower sales, we experienced lower labor and overhead utilization rates.

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) 2023 2022 % Change

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

(In thousands) 2023 2022 % Change 2023 2022 % Change

Gross profit:

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Total gross profit $ 12,356 $ 10,042 23 % $ 25,874 $ 20,574 26 %

For details supporting the changes in gross profit, refer to the discussions above regarding changes in both our net sales and cost of sales for each segment.

For details supporting the changes in gross profit, refer to the preceding discussions regarding changes in both our net sales and cost of sales for each respective segment.

Operating Expenses-Sales and Marketing

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Sales and marketing expenses by reportable segment were as follows:

Three Months Ended March 31,

(In thousands) 2023 2022 % Change

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

Amount % of net sales Amount % of net sales

(In thousands) 2023 2022 2023 2022 2023 2022 2023 2022

Sales and marketing expenses:

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Total sales and marketing expenses $ 6,009 $ 8,021 30 % 48 % $ 13,883 $ 16,258 32 % 48 %

• Selling and marketing expense for our consumer products segment declined $0.3 million, or (4)%, for the three months ended March 31, 2023 compared to the same period in 2022.

This reduction can be attributed to a strategic shift in our marketing approach.

During the three months ended March 31, 2022, we launched a direct marketing campaign spanning multiple platforms including televised commercials.

In contrast, during the three months ended March 31, 2023, we pivoted our marketing efforts to focus on what we determined to be more efficient distribution channels and marketing campaigns, while investing in a strategic brand building event to drive awareness and sales of Tru Niagen on our largest e-commerce channel.

• Selling and marketing expense for our ingredients segment was nominal during each of the three months ended March 31, 2023 and 2022.

• Under our analytical reference standards and services segment, total selling and marketing expense decreased by approximately $56 thousand, or (40)%, during the three months ended March 31, 2023 compared to the same period in 2022.

The decrease is primarily a result of pragmatically managing expenses and focusing marketing efforts on our consumer products segment.

• For our consumer products segment, sales and marketing expense, as a percentage of net sales, improved 1,928 basis points and 1,452 basis points for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

This significant improvement can be attributed to a strategic shift in our marketing approach.

In the three and six months ended June 30, 2022, we launched an extensive direct marketing campaign across multiple platforms, including televised commercials.

However, during the three and six months ended June 30, 2023, we pivoted our marketing efforts towards what we believe to be more efficient distribution channels and marketing campaigns, while investing in a brand building event to boost awareness and drive sales of Tru Niagen® on our largest e-commerce channel.

• Sales and marketing expense for our ingredients segment remained nominal during each of the three and six months ended June 30, 2023 and 2022.

• For our analytical reference standards and services segment, sales and marketing expense, as a percentage of net sales, improved by 8% and 6% for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

This favorable change can be mainly attributed to a reduction in marketing spend as we strategically manage expenses and retain our marketing focus on our consumer products segment.

Operating Expenses-Research and Development

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Research and development expenses by reportable segment were as follows:

Three Months Ended March 31,

(In thousands) 2023 2022 % Change

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

(In thousands) 2023 2022 % Change 2023 2022 % Change

R&D expenses:

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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.

In total, we had higher R&D expenses for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily driven by inflationary pressures, including overall wage inflation, higher share-based compensation and the timing of projects.

In total, we had slightly higher R&D expenses for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022, primarily driven by inflationary pressures, such as overall wage inflation, as well as professional services and the 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 March 31,

(In thousands) 2023 2022 % Change

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

(In thousands) 2023 2022 % Change 2023 2022 % Change

General and administrative $ 7,298 $ 7,163 2 % $ 13,717 $ 16,112 (15) %

Total general and administrative expense for the three months ended March 31, 2023 declined $2.5 million compared to the same period in 2022.

The reduction in expense was primarily driven by lower legal expense of $1.5 million, lower share-based compensation of $0.7 million and lower severance and restructuring expense of $0.6 million, which was partially offset by an increased provision for doubtful trade receivables of $0.3 million.

Total general and administrative expense remained relatively flat increasing only $0.1 million for the three months ended June 30, 2023 compared to the same period in 2022, with the substantial drivers being an increase in severance and restructuring costs of $0.8 million largely offset by a decrease in legal expense of $0.6 million.

For the six months ended June 30, 2023, general and administrative expense declined by approximately $2.4 million compared to the same period in 2022.

The lower expense for the six month period was driven by a decrease in legal expense of $2.0 million, lower share-based compensation expense of $0.6 million and a decrease of $0.5 million related to lower executive headcount, partially offset by an increase of $0.8 million due to provisions for doubtful trade receivables.

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, 2023 and March 31, 2022, 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, 2023 and 2022.

At June 30, 2023 and June 30, 2022, 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, 2023 and 2022.

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 each of the three months ended March 31, 2023 and 2022.

Depreciation and Amortization (in thousands)

Depreciation expense was approximately $460 and $413 for the six months ended June 30, 2023 and 2022, 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 $41 thousand and $49 thousand for the three months ended March 31, 2023 and 2022, respectively.

Amortization expense of intangible assets was approximately $80 and $99 for the six months ended June 30, 2023 and 2022, 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 three months ended March 31, 2023 was approximately $0.2 million compared to $0.3 million for the three months ended March 31, 2022.

Amortization expense of right of use assets for the six months ended June 30, 2023 was approximately $344 compared to $468 for the six months ended June 30, 2022.

Liquidity and Capital Resources

From inception through March 31, 2023, we have incurred aggregate losses of approximately $187.4 million.

From inception through June 30, 2023, we have incurred aggregate losses of approximately $189.6 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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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.

Our future capital requirements will be influenced by several factors, including cash flows from operations, sales growth, optimized gross profit margins, reduced selling and marketing expense as a percentage of net sales, continued customer relationship development, and the ability to successfully market new and existing products.

However, based on our results from operations, we may determine that we need additional financing to implement our long-term business plan.

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

As of March 31, 2023, we had cash and cash equivalents of $23.1 million, including $152 thousand of restricted cash, no material off-balance sheet arrangements and no outstanding borrowings under our line of credit with Western Alliance Bank.

Additionally, as of March 31, 2023, we had purchase obligations of $15.5 million related to inventory purchase commitments and future minimum lease obligations of $4.7 million to be paid over approximately nine months and six years, respectively.

As of June 30, 2023, we had cash and cash equivalents of $26.4 million, including $152 thousand of restricted cash, no material off-balance sheet arrangements and no outstanding borrowings under our line of credit with Western Alliance Bank.

Additionally, as of June 30, 2023, we had purchase obligations of $8.2 million related to inventory purchase commitments and future minimum lease obligations of $4.5 million to be paid over approximately 6 months and six years, respectively.

We anticipate that our current unrestricted cash and cash equivalents of $26.3 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.

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 March 31, 2023.

Furthermore, in June 2023, we filed a new $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 approximately $47.8 million, pursuant to the ATM Facility, of which the full amount remains available as of June 30, 2023.

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 provided by and used in operating activities is net loss adjusted for certain non-cash items and changes in operating assets and liabilities.

Net cash provided by operating activities was approximately $2.8 million for the three months ended March 31, 2023 compared to net cash used in operating activities of $7.2 million for the three months ended March 31, 2022.

The change in cash from operating activities of $10.0 million was primarily driven by improvements in our net loss of $5.8 million paired with improved cash flow management related to our inventory, which was an inflow of $2.8 million for the three months ended March 31, 2023 compared to a cash outflow of $1.7 million for the three months ended March 31, 2022, a positive $4.5 million impact.

Net cash provided by operating activities was approximately $6.1 million for the six months ended June 30, 2023 compared to net cash use of $11.0 million for the six months ended June 30, 2022.

The $17.1 million positive change was primarily driven by a $10.0 million improvement in net loss paired with improved cash flow management related to inventory.

Specifically, inventory management resulted in a positive impact of $4.9 million, with a net cash inflow of $2.7 million for the six months ended June 30, 2023 compared to a net cash outflow of $2.2 million for the six months ended June 30, 2022.

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 $91 thousand for the three months ended March 31, 2023 compared to $25 thousand for the three months ended March 31, 2022.

The increase in cash used of $66 thousand during the three months ended March 31, 2023, compared to the same period in 2022 is attributable to a modest increase in purchases of leasehold improvements and equipment.

Cash used in investing activities was approximately $0.1 million for each of the six months ended June 30, 2023 and 2022.

Net cash used in financing activities:

Financing cash flows consist primarily of the repayment of short-term and long-term debt.

Cash used in financing activities was nominal during each of the three months ended March 31, 2023 and March 31, 2022 consisting entirely of repayments for finance leases.

Cash used in financing activities was nominal during each of the six months ended June 30, 2023 and June 30, 2022 consisting entirely of repayments for finance leases.

Critical Account Estimates

There have been no changes to critical accounting estimates from those disclosed in our 2022 Form 10-K.

There have been no material changes to critical accounting estimates from those disclosed in our 2022 Form 10-K.

Quantitative and Qualitative Disclosures About Market Risk

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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