ChromaDex Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing is by ChromaDex Corporation, the company behind NIAGEN and TRU NIAGEN. Financial amounts below are in U.S. dollars; statement amounts are in millions unless noted.
Business context and financial performance
ChromaDex is shifting from an ingredient-focused business toward a consumer-driven nutraceutical company. Its flagship ingredient is NIAGEN nicotinamide riboside, sold directly to consumers as TRU NIAGEN. The business reports consumer products, ingredients, and core standards and services segments.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $8.12 | $6.08 | $22.49 | $13.67 |
| Gross profit | $4.36 | $2.92 | $11.34 | $6.64 |
| Gross margin | 53.7% | 47.9% | 50.4% | 48.6% |
| Operating loss | $(8.60) | $(3.18) | $(24.93) | $(7.60) |
| Net income (loss) | $(8.61) | $2.14 | $(25.10) | $(2.56) |
| Loss per share, basic | $(0.16) | $0.05 earnings | $(0.46) | $(0.06) |
- Q3 sales increased 33% year over year; nine-month sales increased 65%. Consumer products sales rose 97% in Q3 and 328% for the nine months, to $5.23 million and $11.99 million, respectively.
- Ingredient sales declined 24% in Q3 and 4% for the nine months. Management attributed the trend primarily to its strategic shift toward its own branded consumer product and lower NIAGEN ingredient sales.
- Operating expenses rose to $12.96 million in Q3 and $36.28 million for the nine months. Sales and marketing and general and administrative costs increased substantially, including consumer-product marketing, litigation and patent legal costs, and share-based compensation.
- Q3 2017 net income included a $5.47 million gain on sale of discontinued operations; the 2018 quarter had no discontinued-operations income. Nine-month 2017 results also included that gain.
Cash flow, liquidity, and debt
- Cash was $28.21 million at September 30, 2018, down from $45.39 million at December 30, 2017. Current assets were $41.49 million and current liabilities $12.96 million, giving working capital of approximately $28.53 million.
- Operating cash use was $15.77 million for the first nine months, versus $6.04 million in the comparable 2017 period. Capital expenditures and intangible purchases used $1.36 million; financing activities used $0.05 million. Cash decreased $17.18 million during the period.
- Total liabilities were $13.62 million. Capital lease obligations totaled approximately $0.36 million, including current maturities; the filing reports no material conventional borrowings outstanding. Accounts payable increased to $8.89 million from $3.72 million.
- Management said available cash and expected operating cash generation should fund projected operating plans through at least November 8, 2019, while also noting the possibility of seeking additional capital before then for longer-term plans. There is no quantified financial guidance in the filing.
Management outlook, risks, and unusual items
- Management expects consumer-product sales and gross profit to continue growing over the next 12 months and plans continued investment in TRU NIAGEN marketing, research and development, technology, and international regulatory approvals. These statements are expectations, not guaranteed outcomes.
- Consumer products generated most of the growth, but the pivot carries execution risk: ChromaDex’s consumer brand competes with some ingredient customers, and management’s decision not to supply certain ingredient customers may further reduce ingredient sales.
- Customer concentration is material. One customer represented 11.8% of Q3 sales; a related-party customer represented 11.6% of nine-month sales. Customer C accounted for 46.8% of trade receivables at September 30, 2018, and the filing notes ongoing litigation with that customer. Elysium separately had not paid approximately $2.7 million for previous orders, according to the risk disclosures.
- ChromaDex and Elysium are involved in extensive disputes in California and New York, patent proceedings, and a Delaware patent-infringement action filed with Dartmouth. The company says it cannot predict outcomes or reasonably estimate potential losses; it had not accrued a potential loss for specified Elysium claims as of September 30.
- Other significant risks include continuing operating losses, potential financing needs and dilution, dependence on TRU NIAGEN market acceptance, dietary-supplement regulation, product and supply risks, and the validity and enforcement of licensed patents.
- Inventory included a $312,000 NIAGEN-related write-off in Q1 2018. Share-based compensation was $4.39 million for the nine months; unrecognized employee option compensation was approximately $9.5 million. The company adopted ASC 606 in 2018, recording a $164,000 opening retained-earnings adjustment.
Important facts for investors to verify
- Whether consumer-product growth and improved gross margins can continue, and whether they offset declining ingredient revenue and the associated customer channel conflict.
- Cash burn and working-capital trends, including the rise in accounts payable and inventory, against management’s stated cash runway and possible financing needs.
- Customer concentration, collectability of receivables—especially the large balance attributed to Customer C—and the status and potential financial effects of related litigation.
- Progress and outcomes in the Elysium disputes and patent proceedings, including whether any claims, counterclaims, or patent challenges lead to liabilities or affect ChromaDex’s intellectual-property position.
- Future operating-expense levels, particularly marketing, legal, and stock-based compensation, and resulting dilution from outstanding options and warrants.