ChromaDex Corporation (Nasdaq: CDXC) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. The filing identifies the issuer as ChromaDex Corporation; it describes a bioscience company focused on healthy aging, including its NIAGEN ingredient and TRU NIAGEN consumer supplements, plus analytical reference standards and services.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $17.3 million | $14.2 million | $49.7 million | $43.8 million |
| Gross profit | $10.6 million | $8.5 million | $30.6 million | $25.9 million |
| Gross margin | 61.1% | 59.6% | 61.6% | 59.0% |
| Operating expenses | $19.4 million | $12.7 million | $52.4 million | $39.6 million |
| Operating loss | $(8.8) million | $(4.2) million | $(21.8) million | $(13.8) million |
| Net loss / diluted loss per share | $(8.9) million / $(0.13) | $(4.2) million / $(0.07) | $(21.8) million / $(0.33) | $(13.8) million / $(0.23) |
- Revenue mix: Q3 consumer products sales were $14.8 million, ingredients $1.8 million, and analytical reference standards and services $0.7 million. For the nine months, those segments generated $42.6 million, $4.6 million, and $2.5 million, respectively.
- Cash flow: Operating activities used $19.2 million in the first nine months, versus $10.6 million in the comparable 2020 period. Investing activities used $0.4 million; financing activities provided $36.0 million. Cash increased by $16.4 million to $33.1 million, including $0.2 million restricted cash.
- Liquidity and obligations: Current assets were $52.8 million and current liabilities $17.8 million at September 30. Total liabilities were $25.0 million, including $3.3 million of operating lease obligations and $4.3 million of deferred revenue. The filing reports a credit line of up to $7.0 million, expiring November 12, 2021, and says the company was seeking an extension. Management expected cash and available credit to support projected operations for at least 12 months.
- Financing: February’s stock financing generated $24.9 million net proceeds; the ATM generated $1.9 million net proceeds in Q2. Approximately $47.8 million remained available under the ATM at quarter-end. Common shares outstanding were 68.1 million at September 30 and 68.3 million as of November 2.
Material changes versus the prior comparable period
- Sales grew 22% in Q3 and 13% for the nine months. Consumer products sales rose 24% and 23%, respectively, supported by e-commerce growth and the June 2021 launch in more than 3,800 Walmart stores.
- Nine-month ingredients sales fell 33%, partly reflecting lower first-half demand and no 2021 shipments to Thorne Research. Q3 ingredients sales increased 18% as demand from existing customers improved.
- Operating expenses rose 54% in Q3 and 32% for the nine months. General and administrative expense increased 70% and 33%, largely due to legal costs, which reached $5.6 million in Q3 and $14.8 million for the nine months. Sales and marketing spending also increased as the company invested in consumer-product marketing.
- Net loss widened to $8.9 million in Q3 and $21.8 million for the nine months. The nine-month operating cash outflow also increased year over year.
Outlook, risks, contingencies and unusual items
- Management did not provide specific revenue or earnings guidance. It said existing cash and available credit were expected to fund projected operating plans for at least 12 months, while noting that additional capital might be sought for longer-term plans. The credit line’s imminent expiration and extension discussions are relevant to that outlook.
- COVID-19 continued to affect international retail sales through lockdowns and store disruptions, while supply chains faced transport, labor, lead-time and cost pressures. The company reported that earlier component and packaging delays had been addressed and that inventory was adequate for current demand.
- Under an amendment to its Grace manufacturing agreement, the company committed to purchase approximately $18.0 million of inventory during 2022 and $3.5 million from January through June 2023. Grace is its exclusive NR manufacturer, making supply continuity and the purchase commitment important risks.
- In the California Elysium trial, the jury awarded ChromaDex approximately $3.0 million for Elysium’s supply-agreement breaches, and awarded Elysium $625,000 for refunds or credits and $250,000 in fraudulent-inducement damages plus $1.025 million punitive damages. ChromaDex sought prejudgment interest on its award; it was evaluating a contingent payment to counsel, with the amount not yet determined.
- Separately, a federal court granted Elysium summary judgment in September 2021 that the asserted NR patent claims were invalid; ChromaDex filed an appeal on November 2. Elysium-related New York litigation and Thorne patent proceedings also remained relevant. The filing says the potential loss in the New York action could not be reasonably estimated.
- Rejuvenation Therapeutics sought a refund of approximately $1.6 million and filed suit; ChromaDex had recorded a $0.5 million return liability and said it believed the claims were without merit. The company also disclosed a disputed $1.6 million sublicense-fee claim from a licensor, which it believed it did not owe.
- The company received FDA/FTC and subsequent FTC warning letters concerning COVID-related statements about NR research. It said it removed certain social media posts and press releases, while disputing some of the FTC’s assertions. TRU NIAGEN is not approved to prevent, treat, diagnose, mitigate or cure COVID-19 or other diseases.
- Management reported that disclosure controls and procedures were ineffective as of September 30 due to an unremediated material weakness concerning identification and disclosure of contingencies. The company expected remediation before year-end 2021, subject to effective operation and testing of controls.
- A full valuation allowance against deferred tax assets resulted in an approximately 0% effective tax rate. The company reported an accumulated deficit of $163.6 million and a history of operating losses.
Most important facts for investors to verify
- Whether the Western Alliance credit line was extended after its November 12, 2021 expiration, and whether management’s cash-runway expectations remain supported by actual cash burn.
- Subsequent developments in Elysium litigation, the patent appeal, Thorne IPRs, and any resulting damages, legal costs or contingent counsel payments.
- Progress in remediating the material weakness in internal controls and whether the company later concluded the controls were effective.
- Ability to meet the $21.5 million Grace inventory purchase commitment and manage supplier concentration and working-capital needs.
- Whether consumer-product growth, including Walmart distribution, can outpace rising marketing and legal costs and improve the path toward profitability.
- Customer concentration and collection risk: A.S. Watson represented 14.3% of nine-month sales and 43.6% of trade receivables at September 30.