ChromaDex Corporation — Q1 2019 Form 10-Q
Filing identity: The supplied filing is for ChromaDex Corporation, not Niagen Bioscience, Inc. It reports unaudited results for the three months ended March 31, 2019, compared with the same period in 2018.
Business context and reporting period
ChromaDex describes itself as a science-based nutraceutical company. Its flagship ingredient is NIAGEN (nicotinamide riboside), sold to consumers in TRU NIAGEN products. The company also operates ingredients and analytical reference standards and services segments. In January 2019 it began consolidating its Hong Kong subsidiary, ChromaDex Asia Limited.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $10.05 million | $6.57 million |
| Gross profit | $5.30 million | $3.14 million |
| Gross margin | 52.8% | 47.8% |
| Operating loss | $(8.37) million | $(8.40) million |
| Net loss | $(8.34) million | $(8.44) million |
| Loss per share, basic and diluted | $(0.15) | $(0.15) |
| Net cash used in operating activities | $(3.05) million | $(3.99) million |
Cash, including restricted cash, was $19.33 million at March 31, 2019, down from $22.62 million at year-end 2018. Total current assets were $34.78 million and current liabilities were $15.55 million. The filing reports lease obligations rather than material conventional borrowings: operating lease liabilities were $2.02 million and finance lease liabilities were $0.26 million at quarter-end. Total liabilities were $20.95 million, up from $15.05 million at year-end, primarily reflecting adoption of lease accounting and the $4 million Nestlé advance recorded as deferred revenue.
Material changes versus the prior comparable period
- Sales increased 53%. Consumer products sales rose 146% to $7.45 million, while ingredients sales declined 37% to $1.49 million and analytical reference standards and services sales declined 6% to $1.10 million.
- Gross profit increased 69%, and gross margin improved by about five percentage points. Consumer products generated $4.38 million of gross profit; ingredients and analytical services gross profit fell to $0.68 million and $0.24 million, respectively.
- Operating loss was broadly unchanged despite higher sales. Operating expenses increased 19% to $13.67 million: sales and marketing rose 28%, research and development fell 19%, and general and administrative rose 22% to $8.33 million.
- Management attributed higher general and administrative expense principally to increased share-based compensation, patent royalties and legal costs. Legal expense was approximately $3.2 million versus $3.0 million.
- Operating cash use improved by approximately $0.94 million year over year. The 2019 quarter included $3.96 million of deferred revenue from Nestlé, partly offsetting cash uses including increased receivables and inventory.
Outlook, commentary, risks and unusual items
- Management expected available cash and cash generated from operations to fund projected operating plans for at least the next 12 months, but said it may seek additional capital for longer-term plans. It cautioned financing may not be available on favorable terms or at all.
- Management expected consumer-products sales and gross profit to continue growing over the next 12 months, and planned continued marketing and R&D investment in NIAGEN and TRU NIAGEN. The filing provides no quantified revenue or earnings guidance.
- The company received a $4 million upfront fee from Nestlé in January under a supply agreement granting Nestlé exclusivity for NIAGEN for human use in specified categories and territories. It recognized approximately $38,000 as revenue in Q1 and recorded $3.962 million as deferred revenue.
- On May 9, 2019, after quarter-end, the company entered into an agreement to sell approximately $10 million of convertible notes in a private placement, expected to close around May 17. The notes were to convert automatically 45 days after closing at $4.59 per share, or at a lower price if a qualifying common-stock financing occurred during that period. This was a subsequent event, not quarter-end cash.
- Material risks include continuing operating losses and cash burn; dependence on TRU NIAGEN and customer acceptance; customer concentration; supplier, regulatory and product-liability risks; and potential dilution from financing and equity awards.
- Multiple disputes with Elysium remain active, including California litigation, New York litigation, and Delaware patent litigation. The PTAB upheld a relevant patent claim, but appeals and other proceedings continued. The company also disclosed a Covance dispute concerning delivery of a laboratory library and a Utah false-advertising action brought by Novex. Management said it could not reasonably estimate possible losses and had not accrued losses for specified matters it considered not probable.
- Share-based compensation was $2.03 million, including approximately $0.7 million for a fully vested restricted-stock award to the CEO. The company adopted the lease accounting standard in 2019 and recognized right-of-use assets and operating lease liabilities.
Most important facts for investors to verify
- Confirm the issuer: this filing is ChromaDex Corporation (Nasdaq: CDXC), notwithstanding the request’s Niagen Bioscience name.
- Track whether rapid TRU NIAGEN growth can continue and offset the decline in ingredient sales, while improving overall profitability.
- Assess cash consumption, the timing and completion of the proposed convertible-note financing, and potential dilution or future funding needs.
- Review customer concentration, including A.S. Watson at 12.8% of Q1 sales, and the recoverability of receivables; Elysium represented 42.0% of trade receivables at March 31 amid ongoing litigation.
- Monitor the Elysium, Covance and Novex proceedings, patent outcomes, and any change in the company’s ability to estimate or accrue potential losses.