ChromaDex Corporation — Form 10-Q Summary
Period: Quarter ended June 30, 2019; filed August 7, 2019. Financial statements are unaudited. The filing describes ChromaDex as a nutraceutical company whose flagship ingredient is NIAGEN (nicotinamide riboside), sold to consumers as TRU NIAGEN.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $11.10 | $7.80 | $21.15 | $14.37 |
| Gross profit | $6.25 | $3.85 | $11.56 | $6.98 |
| Gross margin | 56.3% | 49.3% | 54.6% | 48.6% |
| Operating loss | $(7.18) | $(7.94) | $(15.55) | $(16.34) |
| Net loss | $(7.76) | $(8.05) | $(16.09) | $(16.49) |
| Loss per share, basic and diluted | $(0.14) | $(0.15) | $(0.29) | $(0.30) |
- Revenue mix and change: Q2 consumer-products sales increased 134% to $8.74 million; ingredient sales declined 52% to $1.39 million; analytical reference standards and services declined 19% to $0.97 million. Total sales rose 42%. Management attributed the shift to its strategic focus on consumer products and lower analytical standards sales.
- Costs and margins: Q2 operating expenses were $13.43 million, up from $11.78 million. Sales and marketing rose 14%, general and administrative rose 20%, and research and development fell 24%. Higher consumer-product sales and improved cost-of-sales ratios supported gross-margin expansion, but operating expenses remained above gross profit.
- Cash flow: Six-month operating cash use was $12.07 million versus $10.54 million in 2018; investing cash use was $0.37 million versus $1.27 million. Financing provided $9.58 million, primarily from convertible notes. Cash, including restricted cash, fell $2.86 million to $19.76 million.
- Liquidity and balance sheet: At June 30, cash was $19.76 million and current assets were $37.53 million, against current liabilities of $24.21 million. Inventory was $10.71 million. Total liabilities were $29.40 million and stockholders’ equity was $15.15 million, compared with $15.05 million and $27.18 million, respectively, at year-end 2018.
- Debt and leases: The company issued $10 million of 5% convertible notes in May; carrying value at June 30 was $9.99 million. Notes were amended to mature August 15, 2019 and automatically convert at the lower of $4.59 per share or the price in qualifying intervening equity financings. Issuance costs of about $0.6 million were recorded as interest expense. Operating lease liabilities totaled $1.85 million and finance lease liabilities $0.42 million.
Material changes, outlook, and notable items
- Management stated cash on hand and anticipated operating cash generation should fund projected operating plans for at least 12 months from the report date, while warning that it may seek additional capital. Financing may be unavailable or unfavorable and could dilute existing shareholders.
- Management expected consumer-products sales and gross profit to continue growing over the next 12 months. The filing gives no quantified revenue, earnings, or cash-flow guidance and cautions that interim results do not necessarily indicate full-year results.
- A $4 million upfront fee from Nestlé under a NIAGEN supply agreement is being recognized as products are delivered. Only about $127,000 had been recognized as revenue through June 30; $3.873 million remained deferred.
- One customer, related-party A.S. Watson Group, represented 17.2% of Q2 sales and 27.2% of trade receivables at June 30. Elysium represented 38.9% of trade receivables; the company disclosed an ongoing dispute and stated Elysium owed approximately $2.7 million for prior purchase orders.
- Significant litigation includes disputes with Elysium in California and New York and a patent case in Delaware, as well as claims by Covance and Novex. Management said it could not predict outcomes or reasonably estimate potential losses; it had not accrued losses for specified matters. The California Elysium case had a jury trial scheduled to begin October 15, 2019. Some Elysium claims in the New York action were dismissed, while other claims remained in discovery.
- Other risks include continued operating losses, dependence on TRU NIAGEN and customer concentration, competition between consumer and ingredient businesses, regulatory and product-liability exposure, supplier concentration, intellectual-property challenges, and possible dilution from notes, options, warrants, or future financing. The company reported disclosure controls effective at a reasonable assurance level and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether consumer-product growth and gross-margin gains persist, and whether they offset declining ingredient and analytical-services revenue.
- Cash burn, working-capital needs, and whether additional financing is required after the stated 12-month liquidity outlook.
- The conversion and dilution implications of the $10 million notes, including the final conversion price and shares issued.
- Customer concentration, collectability of receivables—especially the disclosed Elysium balance—and the timing and revenue treatment of the Nestlé agreement.
- Developments and potential financial exposure in the Elysium, Covance, and Novex proceedings; the filing does not provide a clear estimate of potential losses.