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, 2023 , 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 months ended March 31, 2024 compared with the three months ended March 31, 2023 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, 2023 filed with the Securities and Exchange Commission on March 6, 2024 (Annual Report). Company Overview We are a global bioscience company dedicated to healthy aging. Our team, which includes world-renowned scientists, is pioneering research on nicotinamide adenine dinucleotide (NAD+), an essential coenzyme that is a key regulator of cellular metabolism and is found in every cell of the human body. NAD+ levels in humans have been shown to decline by 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 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, as both a dietary and food ingredient. It remains one of the most well-studied and efficient NAD+ precursors on the market. 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. 25 Table of Contents 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 and 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. 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 March 31, 2024, our cash and cash equivalents totaled approximately $27.6 million, of which $27.4 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. 26 Table of Contents Our consolidated net sales and net loss for the three months ended on March 31, 2024 and 2023 are as follows: Three Months Ended March 31, (In thousands, except per share data) 2024 2023 Net sales $ 22,153 $ 22,556 Net loss (492) (1,902) Basic and diluted loss per common share $ (0.01) $ (0.03) Net Sales Net sales consist of gross sales less discounts and returns. The following table sets forth our total net sales by reportable segment: Three Months Ended March 31, (In thousands) 2024 2023 % Change Net sales: Consumer Products $ 17,351 $ 17,633 (2) % Ingredients 4,088 4,124 (1) % Analytical reference standards and services 714 799 (11) % Total net sales $ 22,153 $ 22,556 (2) % Total net sales decreased by approximately $0.4 million for the three months ended March 31, 2024, compared to the same period in 2023. Changes in net sales were driven by the following: • Tru Niagen® net sales decreased by $0.3 million for the three months ended March 31, 2024 compared to the corresponding period in 2023. This decrease primarily resulted from lower sales to A.S. Watson, a related party, which declined by $0.7 million, largely due to timing of sales, as well as a modest decrease of $0.2 million in sales to other distributor partners. However, this decline was partially offset by an increase of $0.6 million in e-commerce sales. • For the three months ended March 31, 2024, total ingredients sales remained relatively consistent compared to the corresponding period in 2023. This stability stemmed from a modest increase of $0.2 million in Niagen ingredient sales, which was offset by an equal decline of $0.2 million in sales of other ingredients, as compared to the same period in 2023. • Our analytical reference standards and services segment, which constituted the smallest proportion of total sales, declined a modest $0.1 million during the three months ended March 31, 2024 compared to the corresponding period in 2023. 27 Table of Contents Cost of Sales Cost of sales include raw materials, labor, overhead, and delivery costs. The following table sets forth our total cost of sales by reportable segment: Three Months Ended March 31, Amount % of net sales (In thousands) 2024 2023 2024 2023 Cost of sales: Consumer Products $ 6,154 $ 6,404 35 % 36 % Ingredients 1,837 1,881 45 46 Analytical reference standards and services 706 753 99 94 Total cost of sales $ 8,697 $ 9,038 39 % 40 % Overall, cost of sales, as a percentage of net sales, remained relatively stable for the three months ended March 31, 2024 compared to the same period in 2023. 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 can fluctuate due to business mix, product mix, inflationary costs, and optimization efforts in our supply chain, among other factors. For the three months ended March 31, 2024, our consumer products segment maintained relatively stable cost of sales, as a percentage of net sales, compared to the same period in 2023, improving approximately 100 basis points. • Cost of sales, as a percentage of net sales, in our ingredients segment and our analytical reference standards and services segment are predominantly influenced by fixed supply chain overhead costs, which remain constant regardless of sales fluctuations. Consequently, increased sales result in improved labor and overhead utilization rates, while decreased sales lead to lower utilization rates. In the ingredients segment, both net sales and cost of sales remained relatively consistent during the three months ended March 31, 2024 with an improvement of approximately 100 basis points in cost of sales as a percentage of net sales, compared to the same period in 2023. For the analytical reference standards and services segment, which experienced modestly lower sales and costs of sales for the three months ended March 31, 2024, compared to the same period in 2023, there was an observed increase of 500 basis points in cost of sales as a percentage of net sales. Gross Profit Gross profit is net sales less the cost of sales and is affected by a number of factors, including business and product mix, competitive pricing and costs of products, labor, overhead, services and delivery. The following table sets forth our total gross profit by reportable segment: Three Months Ended March 31, (In thousands) 2024 2023 % Change Gross profit: Consumer Products $ 11,197 $ 11,229 — % Ingredients 2,251 2,243 — Analytical reference standards and services 8 46 (83) Total gross profit $ 13,456 $ 13,518 — % For details supporting the changes in gross profit, refer to the preceding discussions outlining the changes in both our net sales and cost of sales for each respective segment. 28 Table of Contents Operating Expenses-Sales and Marketing Sales and marketing expenses consist of salaries, advertising, public relations and marketing expenses. Sales and marketing expenses by reportable segment were as follows: Three Months Ended March 31, Amount % of net sales (In thousands) 2024 2023 2024 2023 Sales and marketing expenses: Consumer Products $ 6,596 $ 7,773 38 % 44 % Ingredients 12 18 — — Analytical reference standards and services 132 83 18 10 Total sales and marketing expenses $ 6,740 $ 7,874 30 % 35 % • For our consumer products segment, sales and marketing expense, as a percentage of net sales, improved 600 basis points for the three months ended March 31, 2024, compared to the same period in 2023. This change can be attributed to an investment made during the three months ended March 31, 2023. Specifically, we invested in a strategic brand-building event aimed at enhancing awareness and driving sales of Tru Niagen on our largest e-commerce platform. However, during the three months ended March 31, 2024, we did not undertake a similar brand-building event and instead prioritized our investments in more efficient, direct return distribution channels and marketing campaigns. During fiscal year 2024, we expect our sales and marketing spend to increase with similar efficiencies compared to 2023. • Sales and marketing expense for our ingredients segment remained minimal throughout the three months ended March 31, 2024 and 2023. • For our analytical reference standards and services segment, sales and marketing expense, as a percentage of net sales, increased 800 basis points for the three months ended March 31, 2024, compared to the same period in 2023. This change was driven by increases in employee related expenses. 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 March 31, (In thousands) 2024 2023 % Change R&D expenses: Consumer Products $ 1,695 $ 967 75 % Ingredients 400 226 77 Total R&D expenses $ 2,095 $ 1,193 76 % We allocate R&D expenses related to our Niagen® branded ingredient to the consumer products and ingredients segment, based on recorded revenues. During the three months ended March 31, 2024, we invested in strategic R&D initiatives to support future launches, leading to a $0.9 million increase in R&D expenses. R&D expenses fluctuate based on the timing of projects, clinical trials and headcount. 29 Table of Contents Operating Expenses-General and Administrative General and administrative expense consists of general company administration, legal, royalties, IT, accounting and executive management expenses. General and administrative expenses are not allocated by segment and instead are classified under our Corporate and Other category. General and administrative expense for the periods indicated were as follows: Three Months Ended March 31, (In thousands) 2024 2023 % Change General and administrative $ 5,352 $ 6,419 (17) % Total general and administrative expense decreased by $1.1 million during the three months ended March 31, 2024, compared to the corresponding period in 2023. The reduction in expense for the three months ended March 31, 2024 was primarily attributable lower executive and other administrative headcount expenses of $0.5 million, a reduction in provisions for credit losses of $0.3 million, lower severance and restructuring expense of $0.2 million and lower share-based compensation expense of $0.1 million. Income Taxes Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At March 31, 2024 and March 31, 2023, 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, 2024 and 2023. 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. During the first quarter of 2024, the Company was notified that it was selected for examination by the Internal Revenue Service (IRS) for its federal income tax return for the fiscal year 2021 period. The Company is not currently under examination by any other major income tax jurisdiction. Depreciation and Amortization Depreciation expense was approximately $178,000 and $228,000 for the three months ended March 31, 2024 and 2023, 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 $38,000 and $41,000 for the three months ended March 31, 2024 and 2023, respectively. We amortize intangible assets using a straight-line method, generally over 10 years. For licensed patent rights, the useful lives are 10 years or the remaining term of the patents underlying licensing rights, whichever is shorter. The useful lives of subsequent milestone payments that are capitalized are the remaining useful life of the initial licensing payment that was capitalized. Amortization expense of right of use assets for the three months ended March 31, 2024 was approximately $174,000 compared to $171,000 for the three months ended March 31, 2023. Liquidity and Capital Resources From inception through March 31, 2024, we have incurred aggregate losses of approximately $191.0 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, primarily through the issuance of common stock in private placements, and cash generated from sales. 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. 30 Table of Contents As of March 31, 2024, we had cash and cash equivalents of $27.6 million, including $152,000 of restricted cash, no material off-balance sheet arrangements and no outstanding borrowings under our line of credit with Western Alliance Bank. Our cash and cash equivalents as of March 31, 2024 consisted of bank deposits and short-term investments of highly liquid investment-grade debt instruments with an original maturity of three months or less. Additionally, as of March 31, 2024, we had purchase obligations of $12.5 million related to inventory purchase commitments and future minimum lease obligations of $3.6 million to be paid over approximately nine months and five years, respectively. 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 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. 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 operating activities: Cash provided by 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 $0.3 million for the three months ended March 31, 2024 compared to $2.8 million for the three months ended March 31, 2023. The $2.5 million reduction in cash provided by operating activities was primarily driven by relatively greater reductions in accounts payable of $1.6 million and lower reductions in inventory and prepaid expenses and other assets of $0.7 million and $0.5 million, respectively. 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 $41,000 and $91,000 for the three months ended March 31, 2024 and 2023, respectively. 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, 2024 and March 31, 2023 consisting entirely of repayments for finance leases and payment of debt issuance costs. Critical Account Estimates There have been no material changes to critical accounting estimates from those disclosed in our 2023 Form 10-K. 31 Table of Contents ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.