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Item 2. Management’s Discussion and Analysis

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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.

Growth and percentage comparisons made herein generally refer to the three and the nine months ended September 30, 2020 compared with the three and the nine months ended September 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.

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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.

Rudy 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.

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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.

We have been maintaining adequate safety stocks to support our growth and 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.

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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.

As of June 30, 2020, the Company had approximately $18.9 million of cash and cash equivalents on hand.

As of September 30, 2020, the Company has not sold any shares of its common stock pursuant to the ATM Facility.

As of September 30, 2020, the Company had approximately $15.5 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.

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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:

Effective as of September 17, 2020, the Company entered into a Sixth Amendment (the “Sixth Amendment”) to the Manufacturing and Supply Agreement (such agreement as amended, the “Grace Manufacturing Agreement”), originally effective in January 2016 with W.R.

In January 2019, Grace was issued patents related to the manufacturing of the crystalline form of NR (the “Grace Patents”).

Pursuant to the Sixth Amendment, the Grace Manufacturing Agreement expires on December 31, 2021, subject to additional two-year renewal periods to be negotiated by the parties.

In addition, the Grace Manufacturing Agreement may be terminated by (a) the Company by providing 12 months’ notice prior to the end of the current term, (b) Grace by providing 12 months’ notice of its intent to cease manufacture of NR (a “Market Exit”) and (c) a party in the case of (1) a material breach by the other party that is not cured within 30 days, (2) three material breaches by the other party in any 12 month period, or (3) bankruptcy of the other party.

In the event that certain conditions are met, then the Company will become a licensee of the Grace Patents.

Our net sales and net loss for the three- and the nine-month periods ending on September 30, 2020 and September 30, 2019 were as follows:

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Total net sales

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.

Total net sales increased by 18% and 32% for the three- and nine-month periods ended September 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.

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 $0.7 million in the first nine months of 2019.In addition, sales of analytical reference standards decreased largely due to the effects of COVID-19.

Cost of Sales

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Total cost of sales

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.

The cost of sales, as a percentage of net sales, decreased by 4% for each of the three- and nine-month periods ended September 30, 2020, 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% and 2% for the three- and nine-month periods ended September 30, 2020, respectively, 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.

The cost of sales, as a percentage of net sales, for the ingredients segment decreased 10% and 9% for the three- and nine-month periods ended September 30, 2020, respectively, compared to the comparable periods in 2019.

In 2020, we were able to lower supply cost of NIAGEN® ingredient through supply chain cost savings initiatives, which resulted in decrease of cost of sales.

Also, 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 $0.2 million related to our decision to wind down sales for a certain ingredient in the first quarter of 2019.

The cost of sales, as a percentage of net sales for the analytical reference standards and services segment, increased 22% for each of the three- and the nine-month periods ended September 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.

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.

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Total gross profit

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 consumer products segment posted gross profit of $7.5 million and $21.7 million for the three- and the nine-month periods ending September 30, 2020, an increase of 29% and 41%, 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 ingredients segment posted gross profit of $0.9 million and $4.0 million for the three- and the nine-month periods ending September 30, 2020, respectively, an increase of 46% and 97%, 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.

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Total sales and marketing expenses

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.

For the consumer products segment, the increase during the three- and nine-month periods ended September 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 increased slightly by 4% during the three-month period ended September 30, 2020 and decreased by 83% during the nine-month period ended September 30, 2020, compared to comparable periods in 2019.

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 selling and marketing expenses increased by 22% during the three-month period ended September 30, 2020 and decreased by 3% during the nine-month period ended September 30, 2020.

During the three-month period ended September 30, 2020, we increased our sales and marketing efforts to increase the sales of our analytical reference standards business.

Operating Expenses-Research and Development

Research and development expenses mainly consist primarily of clinical trials, regulatory approvals, product development and process development expenses.

Research and development expenses consist primarily of clinical trials, regulatory approvals, product development and process development expenses.

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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.

Overall, we decreased our research and development efforts during the three- and the nine-month periods ended September 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

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General and administrative

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.

The decrease in general and administrative expenses for the three- and nine-month periods ended September 30, 2020, compared to the comparable periods in 2019 was largely due to a decrease in legal expenses.

Our legal expenses decreased to approximately $1.9 million and $6.1 million in the three- and nine-month periods ended September 30, 2020, compared to approximately $2.9 million and $9.1 million in the comparable periods in 2019.

During the three- and nine-month periods ended September 30, 2020, we incurred approximately $0.2 million and $1.5 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

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Interest expense, net

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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.

In the second and third quarter of 2019, we incurred debt issuance costs of approximately $0.8 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.

We did not incur debt issuance costs in the three- or nine-month periods ended September 30, 2020.

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.

At September 30, 2020, and September 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 nine-month periods ended September 30, 2020, and September 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.

Depreciation expense for the nine-month period ended September 30, 2020 was approximately $652,000 as compared to $559,000 for the nine-month period ended September 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.

Amortization expense of intangible assets for the nine-month period ended September 30, 2020 was approximately $182,000 as compared to $184,000 for the nine-month period ended September 30, 2019.

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

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The useful lives of subsequent milestone payments that are capitalized are the remaining useful life of the initial licensing payment that was capitalized.

Amortization expense of right of use assets for the six-month period ended June 30, 2020 was approximately $187,000 as compared to $279,000 for the six-month period ended June 30, 2019.

Amortization expense of right of use assets for the nine-month period ended September 30, 2020 was approximately $284,000 as compared to $423,000 for the nine-month period ended September 30, 2019.

Liquidity and Capital Resources

From inception through June 30, 2020, we have incurred aggregate losses of approximately $131.5 million.

From inception through September 30, 2020, we have incurred aggregate losses of approximately $135.7 million.

These losses are primarily due to expenses associated with the development and expansion of our operations.

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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.

Net cash used in operating activities for the nine months ended September 30, 2020 was approximately $10.6 million as compared to approximately $19.8 million for the nine months ended September 30, 2019.

Along with the net loss, a decrease in allowance for doubtful trade receivables and a decrease in accounts payable were the largest uses of cash during the nine-month period ended September 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 nine months ended September 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.

Net cash used in investing activities was approximately $0.2 million for the nine months ended September 30, 2020, compared to approximately $0.5 million for the nine months ended September 30, 2019.

Net cash used in investing activities for the nine months ended September 30, 2020 mainly consisted of purchases of leasehold improvements and equipment.

Net cash used in investing activities for the nine months ended September 30, 2019 also consisted of purchases of leasehold improvements and equipment.

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.

Net cash provided by financing activities was approximately $7.5 million for the nine months ended September 30, 2020, compared to approximately $16.6 million for the nine months ended September 30, 2019.

Net cash provided by financing activities for the nine months ended September 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 nine months ended September 30, 2019 consisted of proceeds from the sale of convertible notes, the issuance of common stock 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.

During the nine months ended September 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.

During the nine months ended September 30, 2020, we had no material off-balance sheet arrangements.

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