ChromaDex Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017; comparative periods ended October 1, 2016. The filing is by ChromaDex Corporation, whose proprietary ingredient portfolio includes NIAGEN.
Business context
The company develops and commercializes ingredient technologies, including NIAGEN, and, following its March 2017 acquisition of Healthspan Research, sells finished NIAGEN-containing consumer supplements. On September 5, 2017, it sold its analytical testing Lab Business to Covance and said it would focus on proprietary ingredients and consumer products.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $6.085 million | $3.937 million | $13.671 million | $17.212 million |
| Gross profit | $2.915 million | $1.863 million | $6.642 million | $8.380 million |
| Gross margin | 47.9% | 47.3% | 48.6% | 48.7% |
| Operating loss | $(3.177) million | $(0.924) million | $(7.599) million | $(0.733) million |
| Net income (loss) | $2.137 million | $(0.954) million | $(2.556) million | $(0.781) million |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $(6.037) million | $(3.128) million |
Q3 net income included a $5.467 million gain on the Lab Business sale; continuing operations lost $3.221 million in the quarter and $7.708 million in the nine-month period. Thus, reported quarterly profit did not reflect profitable continuing operations.
- Revenue and segments: Q3 sales rose 55%, principally as consumer products contributed $2.647 million; ingredients sales were $2.460 million and core standards and contract services were $0.977 million. Nine-month sales fell 21%: ingredients revenue declined 45% to $7.393 million, while consumer products contributed $2.803 million. Management attributed lower ingredient sales partly to deliberately limiting NIAGEN sales to certain customers to promote TRU NIAGEN.
- Expenses and margins: Q3 operating expenses increased to $6.092 million from $2.787 million; nine-month expenses increased to $14.241 million from $9.114 million. Higher legal, sales and marketing, R&D, and general and administrative costs contributed. The filing identifies a one-time $183,000 NIAGEN inventory write-off in Q3.
- Liquidity and debt: At September 30, cash was $24.000 million and current assets were $36.259 million versus current liabilities of $7.209 million. Total liabilities were $8.064 million, including $551,640 of capital lease obligations. The company reported no borrowings under its $5 million revolving credit facility at September 30 or November 8.
- Cash flows and capital: Nine-month investing cash flow was positive $4.897 million, including Lab Business sale proceeds; financing cash flow was positive $23.497 million, mainly from common-stock issuance. The company raised $23.7 million net in three equity-offering tranches during the period. Shares outstanding rose to 47.65 million from 37.54 million at year-end 2016.
Changes, outlook, risks, and unusual items
- The Lab Business sale generated $6.75 million cash consideration, of which $750,000 was held in escrow through March 2019; the company may also receive up to $1.0 million in contingent earnout payments, not recognized as of the filing. The reported gain was approximately $5.5 million.
- After quarter-end, the company agreed to a private placement of approximately $23 million, or about 5.6 million shares at $4.10 each, expected to close around November 17, subject to customary conditions. Management expected existing cash, operating cash generation, and proceeds from that placement to fund projected operating plans into 2019; additional financing may still be needed, and no other financing was committed.
- Management expected consumer-product sales and gross profit to grow over the next 12 months and planned to continue investing in marketing and R&D, subject to available resources. No quantified revenue or earnings guidance was provided.
- Customer concentration is material: related-party Customer G represented 37.8% of Q3 sales and 30.3% of trade receivables at September 30. Q3 sales under its agreement were approximately $2.3 million, with $1.5 million receivable. The filing also reports Customer C at 45.4% of trade receivables.
- ChromaDex and Elysium are engaged in significant litigation, including contract, royalty, patent, and related claims; Elysium also challenged two licensed patents and filed a New York action. The company recorded no loss accrual for the claims described, stating loss was not considered probable and could not be reasonably estimated. Litigation costs contributed to higher G&A, and approximately $746,000 of Elysium royalty receivables was written off during the nine months.
- The acquisition of Healthspan was a related-party transaction: director Robert Fried was a seller and became President and Chief Strategy Officer. The company issued approximately $1.0 million of stock consideration and owes Fried a further $100,000, due in March 2018 without interest.
- Key risks include continuing operating losses, dependence on concentrated customers, the strategic trade-off between ingredient sales and direct consumer products, financing needs, product and regulatory risks, supply constraints, and the outcome and cost of Elysium litigation. The company reported effective disclosure controls and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the approximately $23 million post-quarter private placement closed on the stated terms, and the resulting dilution and cash runway.
- Whether consumer-product growth and margins compensate for reduced NIAGEN ingredient sales, including the effects of customer concentration and the Customer G receivable.
- Cash burn and operating expenses relative to management’s projected runway into 2019.
- Developments in Elysium litigation and patent review, including potential financial exposure and recoverability of disputed receivables.
- Release of the $750,000 escrow and whether the company qualifies for any of the up-to-$1.0 million Lab Business earnout.