Niagen Bioscience, Inc. 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and accompanying notes, which appear elsewhere in this Quarterly Report on Form 10-Q. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2022 , as well as subsequent reports we may file from time to time on Form 10-Q and Form 8-K, for additional information. 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, 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. 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, 2022 filed with the Securities and Exchange Commission on March 8, 2023 (Annual Report). 25 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 up to 65% between ages 30 and 70. 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. 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. 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, the Turkish Ministry of Agriculture and the Therapeutic Goods Administration (TGA) 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. 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 475 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 275 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, the Mayo Clinic, Chiba University and Sun Yat-sen University. The results of the 275+ 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. 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; Dr. 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; Dr. Bruce German, Chairman of Food, Nutrition and Health at the University of California, Davis; Dr. Brunie Felding, Associate Professor in the Department of Molecular Medicine at Scripps Research Institute, California Campus; Dr. 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.; and Dr. 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. 26 Impact of COVID-19 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. 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 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. Inflation and changing prices We have 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 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. We have also seen changing prices due to other macroeconomic factors including rising interest rates, fluctuations in currency exchange rates and geopolitical uncertainties such as those surrounding Russia’s invasion of Ukraine. We will continue to monitor changing prices and inflationary pressures 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 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. 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 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. 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. We currently have three operating segments which offer differentiated services. 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®. 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. 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. 27 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 Net sales $ 20,323 $ 16,732 $ 42,879 $ 33,991 Net loss (2,191) (6,397) (4,093) (14,137) Basic and diluted loss per common share $ (0.03) $ (0.09) $ (0.05) $ (0.21) Net Sales Net sales consist of gross sales less discounts and returns. The following table sets forth our total net sales by reportable segment: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2023 2022 % Change 2023 2022 % Change Net sales: Consumer Products $ 16,891 $ 14,520 16 % $ 34,524 $ 29,457 17 % Ingredients 2,704 1,464 85 % 6,828 2,891 136 % Analytical reference standards and services 728 748 (3) % 1,527 1,643 (7) % Total net sales $ 20,323 $ 16,732 21 % $ 42,879 $ 33,991 26 % 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. 28 Cost of Sales Cost of sales include raw materials, labor, overhead, and delivery costs. The following table sets forth our total cost of sales by reportable segment: Three Months Ended June 30, Six Months Ended June 30, Amount % of net sales Amount % of net sales (In thousands) 2023 2022 2023 2022 2023 2022 2023 2022 Cost of sales: Consumer Products $ 5,959 $ 5,218 35 % 36 % $ 12,363 $ 10,470 36 % 36 % Ingredients 1,232 681 46 47 3,113 1,403 46 49 Analytical reference standards and services 776 791 107 106 1,529 1,544 100 94 Total cost of sales $ 7,967 $ 6,690 39 % 40 % $ 17,005 $ 13,417 40 % 39 % 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 Gross profit is net sales less the cost of sales and is affected by a number of factors, including business and product mix, competitive pricing and costs of products, labor, overhead, services and delivery. The following table sets forth our total gross profit by reportable segment: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2023 2022 % Change 2023 2022 % Change Gross profit: Consumer Products $ 10,932 $ 9,302 18 % $ 22,161 $ 18,987 17 % Ingredients 1,472 783 88 3,715 1,488 150 Analytical reference standards and services (48) (43) (12) (2) 99 (102) Total gross profit $ 12,356 $ 10,042 23 % $ 25,874 $ 20,574 26 % 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. 29 Operating Expenses-Sales and Marketing Sales and marketing expenses consist of salaries, advertising, public relations and marketing expenses. Sales and marketing expenses by reportable segment were as follows: Three Months Ended June 30, Six Months Ended June 30, Amount % of net sales Amount % of net sales (In thousands) 2023 2022 2023 2022 2023 2022 2023 2022 Sales and marketing expenses: Consumer Products $ 5,892 $ 7,864 35 % 54 % $ 13,665 $ 15,938 40 % 54 % Ingredients 19 — 1 — 37 24 1 1 Analytical reference standards and services 98 157 13 21 181 296 12 18 Total sales and marketing expenses $ 6,009 $ 8,021 30 % 48 % $ 13,883 $ 16,258 32 % 48 % • 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 Research and development (R&D) expenses consist primarily of headcount, clinical trials, product development and process development expenses. Research and development expenses by reportable segment were as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2023 2022 % Change 2023 2022 % Change R&D expenses: Consumer Products $ 1,169 $ 1,113 5 % $ 2,136 $ 2,115 1 % Ingredients 196 132 48 422 208 103 Total R&D expenses $ 1,365 $ 1,245 10 % $ 2,558 $ 2,323 10 % 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 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. 30 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 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 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. Income Taxes Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At June 30, 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 (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 $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. For licensed patent rights, the useful lives are 10 years or the remaining term of the patents underlying licensing rights, whichever is shorter. The useful lives of subsequent milestone payments that are capitalized are the remaining useful life of the initial licensing payment that was capitalized. Amortization expense of right of use assets for the six months ended June 30, 2023 was approximately $344 compared to $468 for the six months ended June 30, 2022. Liquidity and Capital Resources 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. 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 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. 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. 31 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 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. As a result, our ability to rely on the ATM Facility to raise liquidity is limited to a material extent. As a result of various macroeconomic factors such as rising interest rates, inflation, bank failures and geopolitical uncertainties, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability. 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 provided by and used in operating activities: 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 $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. Cash used in investing activities: Investing cash flows consist primarily of capital expenditures and investment activities. 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 six months ended June 30, 2023 and June 30, 2022 consisting entirely of repayments for finance leases. Critical Account Estimates There have been no material changes to critical accounting estimates from those disclosed in our 2022 Form 10-K. 32 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.