Niagen Bioscience, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this Management's Discussion and Analysis (“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 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 “may,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate,” or “believe,” and 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 and related notes set forth below in Part II, Item 1A, “Risk Factors” and included under Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 10, 2020, as amended on May 18, 2020 (our “Annual Report”). The following MD&A is intended to help readers understand the results of our operation and financial condition, and is provided as a supplement to, and should be read in conjunction with, our Interim Unaudited Financial Statements and the accompanying Notes to Interim Unaudited Financial Statements under Part 1, Item 1 of this Quarterly Report on Form 10-Q. Growth and percentage comparisons made herein generally refer to the three and the six months ended June 30, 2020 compared with the three and the six months ended June 30, 2019 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. Company Overview ChromaDex is a science-based integrated nutraceutical company devoted to improving the way people age. ChromaDex scientists partner with leading universities and research institutions worldwide to discover, develop and create solutions to deliver the full potential of nicotinamide adenine dinucleotide ("NAD") and its impact on human health. NAD is an essential coenzyme and a key regulator of cellular metabolism. Best known for its role in cellular energy production, NAD is now 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. NAD levels are not constant, and in humans, NAD levels have been shown to decline by more than 50% from young adulthood to middle age. NAD continues to decline as humans grow older. There are other causes of NAD depletion, such as poor diet, alcohol consumption and a number of disease states. NAD levels may also be increased, including through calorie restriction and moderate exercise. Healthy aging, mitochondrial health and NAD continue to be areas of focus in the research community. As of 2020, there were over 350 published human clinical studies related to NAD. The areas of study include understanding NAD’s role in Alzheimer’s disease, Parkinson’s disease, neuropathy and heart failure. In 2013, ChromaDex commercialized NIAGEN® nicotinamide riboside ("NR"), a novel form of vitamin B3. Data from numerous preclinical studies, and confirmed in human clinical trials, show that NR is a highly efficient NAD precursor that significantly raises NAD levels. NIAGEN® is safe for human consumption. NIAGEN® has twice been successfully reviewed under the U.S. Food and Drug Administration’s new dietary ingredient (“NDI”) notification program, has been successfully notified to the U.S. Food and Drug Administration (the “FDA”) as generally recognized as safe (“GRAS”), and has been approved by Health Canada, the European Commission and the Therapeutic Goods Administration of Australia. Clinical studies of NIAGEN® have demonstrated a variety of outcomes including increased NAD levels, increased cellular metabolism and increased energy production. NIAGEN® is the trade name for our proprietary ingredient NR, and is protected by patents to which we are the exclusive licensee. ChromaDex is the world leader in the emerging NAD space. ChromaDex has amassed more than 200 research partnerships with leading universities and research institutions around the world including the National Institutes of Health, Cornell, Dartmouth, Harvard, Massachusetts Institute of Technology, University of Cambridge and the Mayo Clinic. Additional relationships are currently being developed. 24 Table of Contents 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 inventor of nicotinamide riboside, Dr. Rudi Tanzi, the co-chair of the department of neurology at Harvard Medical School and one of the world’s leading experts in food and nutrition, 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, and Dr. Brunie Felding, Associate Professor, Department of Molecular Medicine at Scripps Research Institute, California Campus. Impact of COVID-19 The COVID-19 pandemic continues to drive global uncertainty and disruption, which has created headwinds for our business. Our ecommerce business continues to perform relatively well in this challenging environment. Our retail business, including sales to A.S. Watson group and other partners in international markets, has been more impacted by the effects of COVID-19, due to store closures and reduced operating hours. To date, we have successfully navigated the business during the COVID-19 pandemic, managing our working capital effectively. We have experienced shipment delays from our suppliers; however, we have not encountered any major disruptions in our supply chain. We have been increasing our overall inventory levels since 2018 in anticipation of high sales growth and have maintained adequate safety stocks to support such growth. We currently have adequate inventory on hand to meet our current demands. Overall, we believe the supply chain disruptions arising from COVID-19 will not have a material impact to our business operations. In response to the outbreak, we prioritized the health and safety of our employees by closing our offices or enhancing safety protocols in place to ensure the well-being of our employees. We have been able to successfully conduct business virtually. Financial Condition and Results of Operations The discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues, if any, and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. On April 27, 2020, the Company entered into a Securities Purchase Agreement with its existing stockholders Winsave Resources Limited and Pioneer Step Holdings Limited, pursuant to which the Company agreed to sell and issue an aggregate of $5.0 million of the Company’s common stock at a purchase price of $4.08 per share. The selling price was determined by the average closing price over the ten trading days immediately preceding the date of Securities Purchase Agreement. The financing closed on May 7, 2020, pursuant to which the Company issued approximately 1.2 million shares of its common stock. The Company received proceeds of $4.9 million, net of offering costs. In June 2020, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR, Inc. (“B. Riley FBR”) and Raymond James & Associates, Inc. (“Raymond James” and together with B. Riley FBR, the “Sales Agents”) under which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $50.0 million from time to time through the Sales Agents (the “ATM Facility”). As of June 30, 2020, the Company has not sold any shares of its common stock pursuant to the ATM Facility. 25 Table of Contents As of June 30, 2020, the Company had approximately $18.9 million of cash and cash equivalents on hand. We anticipate that our current cash, cash equivalents, cash to be generated from operations and available line of credit up to $7.0 million from Western Alliance Bank will be sufficient to meet our projected operating plans for 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. 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. Additional capital may come from other public and/or private stock or debt offerings, borrowings under lines of credit or other sources. These additional funds may not be available on favorable terms, or at all. Further, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities we issue may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products or proprietary technologies, or to grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, obtain the required regulatory clearances or approvals, achieve long term strategic objectives, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. Any of these events could adversely affect our ability to achieve our development and commercialization goals, which could have a material and adverse effect on our business, results of operations and financial condition. Further, as a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. If equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive. Our net sales and net loss for the three- and the six-month periods ending on June 30, 2020 and June 30, 2019 were as follows: Three months ending Six months ending (In thousands) Jun. 30, 2020 Jun. 30, 2019 Jun. 30, 2020 Jun. 30, 2019 Net sales $ 15,287 $ 11,101 $ 29,632 $ 21,149 Net loss (3,711 ) (7,755 ) (9,613 ) (16,092 ) Basic and diluted loss per common share $ (0.06 ) $ (0.14 ) $ (0.16 ) $ (0.29 ) Net Sales Net sales consist of gross sales less discounts and returns. Three months ending Six months ending (In thousands) Jun. 30, 2020 Jun. 30, 2019 Change Jun. 30, 2020 Jun. 30, 2019 Change Net sales: Consumer Products $ 11,720 $ 8,744 34 % $ 22,864 $ 16,198 41 % Ingredients 2,850 1,387 105 % 5,325 2,881 85 % Analytical reference standards and services 717 970 -26 % 1,443 2,070 -30 % Total net sales $ 15,287 $ 11,101 38 % $ 29,632 $ 21,149 40 % 26 Table of Contents Total net sales increased by 38% and 40% for the three- and six-month periods ended June 30, 2020, respectively, compared to the comparable periods in 2019. · The Company's TRU NIAGEN® sales for the consumer products segment continue to increase after the Company's strategic shift towards consumer products in 2017. · The increase in sales for the ingredients segment is largely due to strong demand from our NIAGEN® ingredient customers, who resell NIAGEN® under their own brands. · The decrease in sales for the analytical reference standards and services is largely due to the spinoff of the regulatory consulting business unit in November 2019.The regulatory consulting business generated net sales of approximately $417,000 in the first half of 2019.In addition, sales of analytical reference standards decreased largely due to the effects of COVID-19. Cost of Sales Cost of sales include raw materials, labor, overhead, and delivery costs. Three months ending Six months ending (In thousands) Jun. 30, 2020 Jun. 30, 2019 Jun. 30, 2020 Jun. 30, 2019 Amount % of net sales Amount % of net sales Amount % of net sales Amount % of net sales Cost of sales: Consumer Products $ 4,339 37 % $ 3,519 40 % $ 8,641 38 % $ 6,590 41 % Ingredients 1,135 40 % 641 46 % 2,191 41 % 1,454 50 % Analytical reference standards and services 725 101 % 687 71 % 1,401 97 % 1,550 75 % Total cost of sales $ 6,199 41 % $ 4,847 44 % $ 12,233 41 % $ 9,594 45 % The cost of sales, as a percentage of net sales, decreased by 3% and 4% for the three- and six-month periods ended June 30, 2020, respectively, compared to the comparable periods in 2019. · The cost of sales, as a percentage of net sales, for the consumer products segment decreased by 3% for each of the three- and six-month periods ended June 30, 2020, compared to the comparable periods in 2019. Product cost savings initiatives and overall scale on our supply chain drove the decrease in cost of sales. · The cost of sales, as a percentage of net sales, for the ingredients segment decreased 6% and 9% for the three- and six-month periods ended June 30, 2020, compared to the comparable periods in 2019.A portion of this decrease was realized in the form of a rebate from a supplier for prior year efficiency initiatives, which was recorded in the second quarter of 2020.In addition, we had an inventory write off of approximately $154,000 related to our decision to wind down sales for a certain ingredient in the first half of 2019. · The cost of sales, as a percentage of net sales for the analytical reference standards and services segment, increased 30% and 22% for the three- and the six-month periods ended June 30, 2020, compared to the comparable periods in 2019.The decrease in sales of analytical reference standards and services due to the spinoff of the regulatory consulting business in November 2019 and the effects of COVID-19 led to a lower labor and overhead utilization rate, which resulted in our cost of sales increasing as a percentage of net sales. 27 Table of Contents 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. Three months ending Six months ending (In thousands) Jun. 30, 2020 Jun. 30, 2019 Change Jun. 30, 2020 Jun. 30, 2019 Change Gross profit: Consumer Products $ 7,381 $ 5,225 41 % $ 14,223 $ 9,608 48 % Ingredients 1,715 746 130 % 3,134 1,427 120 % Analytical reference standards and services (8 ) 283 -103 % 42 520 -92 % Total gross profit $ 9,088 $ 6,254 45 % $ 17,399 $ 11,555 51 % · The consumer products segment posted gross profit of $7.4 million and $14.2 million for the three- and the six-month periods ending June 30, 2020, an increase of 41% and 48%, respectively, compared to the comparable periods in 2019. The increased gross profit was due to higher sales, product cost savings initiatives and scale on our supply chain operations. · The ingredients segment posted gross profit of $1.7 million and $3.1 million for the three- and the six-month periods ending June 30, 2020, respectively, an increase of 130% and 120%, respectively, compared to the comparable periods in 2019. The increased gross profit for the ingredients segment was largely due to higher sales to key customers, scale on our supply chain operations, and a rebate related to savings from prior year efficiency initiatives. · The decreased gross profit for the analytical reference standards and services segment was largely due to the decreased sales resulting from the spinoff of the regulatory consulting business and the effects of COVID-19. Fixed supply chain labor and overhead costs make up a substantial portion of the costs and these fixed labor and overhead costs did not decrease in proportion to sales, yielding lower profit margin. Operating Expenses-Sales and Marketing Sales and marketing expenses consist of salaries, advertising, public relations and marketing expenses. Three months ending Six months ending (In thousands) Jun. 30, 2020 Jun. 30, 2019 Change Jun. 30, 2020 Jun. 30, 2019 Change Sales and marketing expenses: Consumer Products $ 4,743 $ 4,072 16 % $ 9,152 $ 7,989 15 % Ingredients 76 79 -4 % (8 ) 191 -104 % Analytical reference standards and services 140 157 -11 % 262 302 -13 % Total sales and marketing expenses $ 4,959 $ 4,308 15 % $ 9,406 $ 8,482 11 % 28 Table of Contents · For the consumer products segment, the increase during the three- and six-month periods ended June 30, 2020 is largely due to increased staffing as well as direct marketing expenses associated with social media, public relations and other customer awareness and acquisition programs. · For the ingredients segment, selling and marketing expenses decreased slightly.We reversed approximately $114,000 of certain accrued commission expense during the first quarter of 2020, as we were no longer obligated to pay the commission. · For the analytical reference standards and services segment, the decrease in selling and marketing expenses during the three- and six-month periods ended June 30, 2020 is mainly due to our efforts to optimize our spending during the COVID-19 pandemic. Operating Expenses-Research and Development Research and development expenses mainly consist primarily of clinical trials, regulatory approvals, product development and process development expenses. Three months ending Six months ending (In thousands) Jun. 30, 2020 Jun. 30, 2019 Change Jun. 30, 2020 Jun. 30, 2019 Change Research and development expenses: Consumer Products $ 805 $ 875 -8 % $ 1,587 $ 1,844 -14 % Ingredients 137 194 -29 % 274 393 -30 % Total research and development expenses $ 942 $ 1,069 -12 % $ 1,861 $ 2,237 -17 % · We are allocating the research and development expenses related to our NIAGEN® branded ingredient to the consumer products and ingredients segment, based on revenues recorded. Overall, we decreased our research and development efforts during the three- and the six-month periods ended June 30, 2020 as we evaluate and realign the priorities of our ongoing research and development efforts of our flagship ingredient, NIAGEN® nicotinamide riboside. Operating Expenses-General and Administrative General and administrative expenses consist of general company administration, legal, royalties, IT, accounting and executive management expenses. Three months ending Six months ending (In thousands) Jun. 30, 2020 Jun. 30, 2019 Change Jun. 30, 2020 Jun. 30, 2019 Change General and administrative $ 6,874 $ 7,932 -13 % $ 15,709 $ 16,263 -3 % 29 Table of Contents · The decrease in general and administrative expenses for the three- and six-month periods ended June 30, 2020, compared to the comparable periods in 2019 was largely due to a decrease in legal expenses.Our legal expenses decreased to approximately $1.8 million and $4.2 million in the three- and six-month periods ended June 30, 2020, compared to approximately $2.9 million and $6.2 million in the comparable periods in 2019. · During the three- and six-month periods ended June 30, 2020, we incurred approximately $0.3 million and $1.2 million, respectively, of severance and restructuring expenses.These expenses relate to realignment of the business operations to reduce redundancies and improve efficiencies as we scale the business. Non-operating Expenses-Interest Expense, net Interest expense, net consists of interest earned from bank deposit accounts less interest expenses on convertible notes and finance leases. Three months ending Six months ending (In thousands) Jun. 30, 2020 Jun. 30, 2019 Change Jun. 30, 2020 Jun. 30, 2019 Change Interest expense, net $ (24 ) $ (575 ) Not Meaningful $ (36 ) $ (540 ) Not Meaningful • In the second quarter of 2019, we incurred debt issuance costs of approximately $0.6 million in connection with the issuance of convertible promissory notes in the aggregate principal amount of $10.0 million to Winsave Resources Limited and Pioneer Step Holdings Limited. The issuance costs were recorded as a debt discount and have been amortized as interest expense using the effective interest method. We did not incur debt issuance costs in the three- or six-month periods ended June 30, 2020. 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, 2020, and June 30, 2019, 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 the six-month periods ended June 30, 2020, and June 30, 2019, respectively. As defined in ASC 740, Income Taxes, future realization of the tax benefit will depend on the existence of sufficient taxable income, including the expectation of continued future taxable income. Depreciation and Amortization Depreciation expense for the six-month period ended June 30, 2020 was approximately $432,000 as compared to $363,000 for the six-month period ended June 30, 2019. We depreciate our assets on a straight-line basis, based on the estimated useful lives of the respective assets. Amortization expense of intangible assets for the six-month period ended June 30, 2020 was approximately $122,000 as compared to $122,000 for the six-month period ended June 30, 2019. 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. 30 Table of Contents Amortization expense of right of use assets for the six-month period ended June 30, 2020 was approximately $187,000 as compared to $279,000 for the six-month period ended June 30, 2019. Liquidity and Capital Resources From inception through June 30, 2020, we have incurred aggregate losses of approximately $131.5 million. These losses are primarily due to expenses associated with the development and expansion of our operations. These operations have been financed through capital contributions, the issuance of common stock and warrants through private placements, and the issuance of debt. Our board of directors periodically reviews our capital requirements in light of our proposed business plan. Our future capital requirements will remain dependent upon a variety of factors, including cash flow from operations, the ability to increase sales, increasing our gross profits from current levels, reducing selling and administrative expenses as a percentage of net sales, continued development of customer relationships, and our ability to market our new products successfully. However, based on our results from operations, we may determine that we need additional financing to implement our 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. On April 27, 2020, the Company entered into a Securities Purchase Agreement with its existing stockholders, Winsave Resources Limited and Pioneer Step Holdings Limited, pursuant to which the Company agreed to sell and issue an aggregate of $5.0 million of the Company’s common stock at a purchase price of $4.08 per share. The selling price was determined by the average closing price over the ten trading days immediately preceding the date of Securities Purchase Agreement. The financing closed on May 7, 2020, pursuant to which the Company issued approximately 1.2 million shares of its common stock. The Company received proceeds of $4.9 million, net of offering costs. While we anticipate that our current cash, cash equivalents, cash to be generated from operations and available line of credit up to $7.0 million from Western Alliance Bank will be sufficient to meet our projected operating plans for at least the next twelve months, we may seek additional funds, either through additional equity or debt financings or collaborative agreements or from other sources. 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. As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. If equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive. Net cash provided by (used in) operating activities Net cash used in operating activities for the six months ended June 30, 2020 was approximately $6.8 million as compared to approximately $12.1 million for the six months ended June 30, 2019. Along with the net loss, a decrease in allowance for doubtful trade receivables and an increase in inventories were the largest uses of cash during the six-month period ended June 30, 2020, partially offset by a decrease in trade receivables, an increase in accrued expenses and noncash share-based compensation expense. Net cash used in operating activities for the six months ended June 30, 2019 largely reflects the net loss, partially offset by an increase in deferred revenue and noncash share-based compensation expense. 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. Net cash provided by (used in) investing activities Net cash used in investing activities was approximately $0.1 million for the six months ended June 30, 2020, compared to approximately $0.4 million for the six months ended June 30, 2019. Net cash used in investing activities for the six months ended June 30, 2020 mainly consisted of purchases of leasehold improvements and equipment. Net cash used in investing activities for the six months ended June 30, 2019 also consisted of purchases of leasehold improvements and equipment. 31 Table of Contents Net cash provided by (used in) financing activities Net cash provided by financing activities was approximately $7.0 million for the six months ended June 30, 2020, compared to approximately $9.6 million for the six months ended June 30, 2019. Net cash provided by financing activities for the six months ended June 30, 2020 primarily consisted of proceeds from the issuance of common stock and the exercise of stock options. Net cash provided by financing activities for the six months ended June 30, 2019 consisted of proceeds from the sale of convertible notes and the exercise of stock options. Contractual Obligations and Commitments During the six months ended June 30, 2020, there were no material changes outside of the ordinary course of business in the specified contractual obligations disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as contained in our Annual Report, other than as disclosed in “Item 1 Financial Statements” of this Quarterly Report. Off-Balance Sheet Arrangements During the six months ended June 30, 2020, we had no material off-balance sheet arrangements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.