Niagen Bioscience, Inc. (then ChromaDex Corporation) — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016 (52 weeks). The filing is for ChromaDex Corporation, not under the current Niagen Bioscience name; it reports annual results, with quarterly data also provided.
Business context
The company developed and commercialized proprietary ingredients, notably nicotinamide riboside (NIAGEN), and also provided phytochemical reference standards, analytical and contract services, and regulatory consulting. NIAGEN generated approximately 71% of ingredient-segment sales. The company said FDA had recognized NR as a New Dietary Ingredient and issued a GRAS no-objection letter in August 2016.
Financial performance and liquidity
| Metric | FY 2016 | Prior comparable year |
|---|---|---|
| Net sales | $26.81 million | $22.01 million |
| Gross profit | $11.92 million; 44.5% margin | $8.48 million; 38.5% margin |
| Operating loss | $2.25 million | $2.15 million |
| Net loss | $2.93 million; $0.08 per share | $2.77 million; $0.08 per share |
| Cash used in operating activities | $2.94 million | $2.11 million |
| Cash at year-end | $1.64 million | $5.55 million |
- Revenue rose 22%. Ingredient sales increased 34% to $16.78 million, core standards and contract services rose 11% to $9.37 million, and consulting declined 37% to $0.67 million.
- Gross margin improved as supplier pricing and greater purchase volumes benefited ingredients, while higher utilization supported service margins. Research and development expense rose 183% to $2.52 million; general and administrative expense rose 27% to $9.39 million.
- Year-end total assets were $19.75 million; total liabilities were $9.78 million and stockholders’ equity was $9.97 million. The company had no loan payable outstanding after repaying its Hercules term loan in June 2016; capital lease obligations totaled about $0.60 million.
- Current assets were $15.74 million and current liabilities $8.87 million. The filing separately reports $7.79 million of “working capital,” defined as receivables plus inventory less accounts payable, rather than the conventional current-assets-minus-current-liabilities measure.
- Receivables increased to $5.85 million from $2.45 million. Inventory was $7.91 million, including about $7.04 million in bulk ingredients. Cash declined by $3.91 million during the year.
- FY 2016 fourth-quarter sales were $5.64 million and net loss was $2.15 million, compared with $4.36 million sales and $1.43 million net loss in the prior-year fourth quarter.
Material changes and notable items
- Customer C accounted for 19.3% of 2016 sales and 45.8% of year-end receivables. The filing identifies this customer as Elysium in its litigation disclosure and says approximately $3.0 million was unpaid; an $800,000 allowance was recorded against Customer C receivables.
- The company raised approximately $5.75 million through stock offerings in 2016 and repaid the $4.55 million Hercules principal balance, plus fees and accrued amounts. It recorded a $313,000 loss on debt extinguishment.
- In November 2016, it established a formula-based revolving credit line of up to $5.0 million with Western Alliance Bank. The company breached an EBDAS covenant at year-end; the lender waived that default on March 12, 2017. No amount was drawn as of March 15, 2017.
- R&D spending increased substantially, principally for NIAGEN. The company reported a second repeated-dose NR human study nearing completion and planned to file an IND for Cockayne Syndrome in 2017 after an FDA pre-IND meeting.
Outlook, risks and contingencies
Management expected available cash, operating cash generation and the credit line to fund projected operating plans through at least March 17, 2018, while noting that additional capital might be needed. It planned continued investment in proprietary-ingredient R&D, subject to financial resources; no specific revenue or earnings guidance was provided.
- Customer litigation: ChromaDex sued Elysium over alleged unpaid NIAGEN and pTeroPure purchases and royalties; Elysium counterclaimed, including claims concerning refunds, confidentiality, patent misuse, fraud and unfair competition. ChromaDex added a trade-secret misappropriation claim. The outcome and any financial exposure were uncertain; no counterclaim loss was accrued.
- Concentration and collection: Elysium’s sales contribution, large unpaid balance and significant share of receivables create customer and credit risk. The filing cautions that purchases and collections may be disrupted.
- Funding and execution: The company had a history of annual losses and negative operating cash flow. Growth plans, inventory requirements, rising R&D costs and possible future financing needs could pressure liquidity and dilute shareholders.
- Other risks: Dependence on limited suppliers, product quality and liability exposure, regulatory and advertising requirements, market acceptance of supplements, intellectual-property protection, competition, and significant inventory and receivables judgments.
- Subsequent event: On March 12, 2017, the company acquired Healthspan Research, LLC, issuing 367,648 shares and making specified cash payments. It also appointed Healthspan’s former majority owner, Robert Fried, as President and Chief Strategy Officer under a compensation arrangement that included salary, sales-related bonuses and equity awards.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and financial-reporting controls were effective at year-end.
Most important facts for investors to verify
- Current status and resolution of the Elysium litigation, collections of the disputed balance, and any continuing sales or royalty relationship.
- Receivables aging, the adequacy of the $800,000 Customer C allowance, and subsequent cash collections from major customers.
- Cash burn, actual availability and covenant terms of the Western Alliance facility, and whether further financing is required.
- NIAGEN clinical and regulatory milestones, including the planned Cockayne Syndrome IND, and the evidence supporting commercial health claims.
- Inventory turnover and obsolescence exposure, supplier concentration, and the margin and cash-flow contribution of each segment.
- Terms, dilution and related-party governance implications of the Healthspan acquisition and Robert Fried’s employment and equity compensation.