ChromaDex Corporation (now identified in the request as Niagen Bioscience, Inc.) — Q2 2017 Form 10-Q
Reporting period: Three and six months ended July 1, 2017; comparative periods ended July 2, 2016. The filing is for ChromaDex Corporation, not under the Niagen Bioscience name. Unaudited consolidated statements.
Business context and financial performance
ChromaDex develops and commercializes proprietary ingredient technologies, provides standards and analytical, chemistry and regulatory services, and—following its March 2017 acquisition of Healthspan Research—sells consumer products. Reportable segments are Ingredients and Core Standards and Contract Services.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $5.31 million | $8.83 million | $9.76 million | $16.16 million |
| Gross profit | $2.26 million | $4.13 million | $4.02 million | $7.58 million |
| Gross margin | 42.6% | 46.7% | 41.2% | 46.9% |
| Operating income (loss) | $(2.72) million | $0.37 million | $(4.61) million | $0.83 million |
| Net income (loss) | $(2.76) million | $(0.08) million | $(4.69) million | $0.17 million |
| Loss per share, basic and diluted | $(0.07) | $(0.00) | $(0.12) | $0.00 |
Q2 sales fell 40% year over year. Ingredients revenue declined 52%, largely because the company did not ship NIAGEN to certain customers who had made large orders in the prior-year period. Core Standards and Contract Services revenue declined 11%, primarily on lower analytical testing and contract services sales. For the six months, segment revenue declined 53% and 12%, respectively.
Q2 operating expenses were $4.98 million, including $745,773 of “Other” expense from a litigation-related receivable write-off. General and administrative expense rose 15% to $2.66 million; the company attributed the increase primarily to legal costs. Six-month R&D expense increased 25% to $1.51 million, while six-month G&A increased 17% to $5.04 million.
Cash flow, liquidity and debt
- Cash was $14.14 million at July 1, 2017, compared with $1.64 million at December 31, 2016. Current assets were $27.38 million and current liabilities $6.26 million.
- Six-month operating cash outflow was $5.56 million, compared with $2.99 million in the prior-year period. Investing cash outflow was $0.48 million; financing provided $18.54 million. Cash increased by $12.50 million.
- The company raised approximately $19.9 million gross in the first two tranches of an agreement to issue up to $25 million of common stock; net proceeds reported in financing cash flow were $18.71 million. A third tranche of approximately $5.1 million remained subject to stockholder approval, expected at an August 10, 2017 special meeting.
- Management expected cash, operating cash generation and financing proceeds to fund projected operating plans through at least August 11, 2018, but warned additional financing might be needed and might not be available on acceptable terms.
- No borrowings were outstanding under the Western Alliance revolving credit facility as of July 1 or August 9, 2017. Capital lease obligations totaled approximately $692,000, including current maturities. The company also owed officer Robert Fried $100,000, due March 2018 without interest.
Material changes, outlook and risks
- The March acquisition of Healthspan was accounted for as an asset acquisition. ChromaDex issued 367,648 shares valued at about $1.0 million and recorded a $1.346 million consumer-product-business-model intangible asset. The filing identifies Robert Fried, a director, as a seller and as the company’s new President and Chief Strategy Officer.
- Share issuance under the financing agreement increased shares outstanding from 37.54 million at year-end 2016 to 45.57 million at July 1, 2017. The filing reported 46.09 million shares outstanding as of August 9.
- Management planned to continue increasing R&D for proprietary ingredients and, subject to available financial resources, marketing of the acquired consumer product business. No specific revenue or earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Gross margin weakened as lower analytical-services volume reduced labor utilization in the Core segment. Ingredients segment cost of sales as a percentage of revenue improved, which the company attributed to favorable pricing management.
- ChromaDex was in litigation with Elysium over alleged unpaid product and royalty amounts; Elysium asserted counterclaims. The company reported writing off about $746,000 of gross Elysium royalty receivables during Q2 and did not accrue a loss for the counterclaims, stating a loss was not considered probable and could not be reasonably estimated. Elysium also filed petitions seeking inter partes review of two licensed patents.
- Other disclosed risks include continued operating losses, dependence on significant customers and collection of receivables, customer concentration, financing and dilution risk, regulatory and product-liability exposure, supply constraints, and execution risks in consumer-product marketing. Customer C represented 48.8% of trade receivables at July 1; Customer F accounted for 11.9% of Q2 sales.
Important facts for investors to verify
- Whether the third financing tranche closed after the planned stockholder approval, and the resulting proceeds and share dilution.
- Current NIAGEN sales trends, customer order timing, and the company’s ability to replace or grow sales from customers that did not reorder.
- Collections, remaining receivables and allowance adequacy related to Elysium, plus developments and potential exposure in the litigation and patent reviews.
- Actual cash burn and whether the stated operating runway remains achievable, particularly if sales or financing differ from management’s assumptions.
- Whether Healthspan’s consumer business can grow without undermining ingredient-customer relationships, and whether planned R&D and marketing spending produces improved revenue and margins.