ChromaDex Corporation (Nasdaq: CDXC) — Q2 2021 Form 10-Q
Filing identity: The filing names ChromaDex Corporation as the registrant; TRU NIAGEN is its flagship consumer product. Reporting period ended June 30, 2021. Financial statements are unaudited.
Business context and financial performance
ChromaDex sells TRU NIAGEN consumer products and NIAGEN ingredients, and provides analytical reference standards and services. Dollar amounts below are in millions unless noted.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $17.7 | $15.3 | $32.4 | $29.6 |
| Gross profit | $10.8 | $9.1 | $20.0 | $17.4 |
| Gross margin | 61.1% | 59.4% | 61.9% | 58.7% |
| Operating loss | $(5.6) | $(3.7) | $(12.9) | $(9.6) |
| Net loss | $(5.6) | $(3.7) | $(12.9) | $(9.6) |
| Loss per share, basic and diluted | $(0.08) | $(0.06) | $(0.20) | $(0.16) |
Q2 sales increased 16% year over year; first-half sales rose 9%. Consumer-products sales grew 31% in Q2 and 22% in the first half. Ingredients sales declined 47% in both comparisons, primarily as the company did not ship NIAGEN to former customer Thorne. Analytical reference standards and services sales rose 11% in Q2 and 20% in the first half. Consumer products generated most revenue: $15.4 million of Q2 sales and $27.8 million of first-half sales.
Cash, liquidity and capital
At June 30, cash, including $0.2 million restricted, was $38.8 million, versus $16.7 million at year-end 2020. First-half operating cash use was $13.3 million, compared with $6.8 million in 2020; investing cash use was $0.3 million. Financing provided $35.7 million, including $24.9 million net proceeds from a February stock sale, $1.9 million net from Q2 ATM sales, and $9.0 million from option exercises. The company reported no material off-balance-sheet arrangements.
Management said cash, expected operating cash generation and up to $7.0 million available under its Western Alliance Bank line of credit were expected to fund projected plans for at least 12 months from the financial statement issuance date. It may seek additional capital. Approximately $47.8 million remained available under the $50 million ATM facility at June 30. The filing reports lease obligations, including $3.5 million of operating lease liabilities; it does not provide a clear outstanding balance for borrowings under the credit line.
Costs, balance sheet and notable changes
Sales and marketing expense rose 26% in Q2 and 33% in the first half, reflecting consumer-product marketing and staffing. General and administrative expense increased 32% and 18%, respectively, largely because legal expense rose to $4.2 million in Q2 and $9.2 million in the first half. First-half net loss widened to $12.9 million from $9.6 million. At June 30, total assets were $65.8 million, total liabilities $23.7 million and stockholders’ equity $42.1 million. No cash debt balance is specified in the supplied financial statements; reported finance lease obligations were small.
Common shares outstanding were 68.0 million at June 30, up from 61.9 million at December 31, 2020, primarily reflecting the February financing, ATM issuance and option exercises. The filing reports an accumulated deficit of $154.8 million.
Outlook, risks and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management described e-commerce as performing relatively well, international retail as affected by COVID-related store disruptions but showing signs of recovery, and the June 2021 launch in more than 3,800 Walmart U.S. stores as a new distribution channel. Management said packaging delays experienced in Q1 had been addressed in Q2 and that inventory was adequate for current demand.
- Supply commitment after quarter-end: An August 2, 2021 amendment to the Grace manufacturing agreement requires approximately $18.0 million of inventory purchases in 2022 and $3.5 million in the first half of 2023. The agreement expires June 30, 2023, subject to renewal terms to be negotiated.
- Litigation and patent risk: The company is involved in substantial disputes with Elysium, including California litigation, New York litigation and patent litigation. Thorne challenged two licensed patents through inter partes review; the PTAB instituted review of the ’086 patent in June 2021. The company said it could not reasonably estimate possible losses and had not accrued a potential loss for the Elysium matters.
- Regulatory: The company received an FDA/FTC warning letter in November 2020 and a further FTC warning letter in April 2021 concerning COVID-related statements about NR research. It removed specified social media material, but disputed that its statements were unlawful. TRU NIAGEN is not approved to prevent, treat, mitigate, diagnose or cure COVID-19 or other disease.
- Customer and control risks: A.S. Watson, a related party, accounted for 16.5% of Q2 sales and 13.8% of first-half sales; it represented 37.5% of trade receivables at June 30. Disclosure controls were deemed ineffective because a material weakness relating to timely identification and recording of a potential customer refund liability remained unremediated; management expected remediation before year-end 2021.
- Other contingency: Rejuvenation Therapeutics sought a refund of approximately $1.6 million and sued in May 2021; ChromaDex recorded a $0.5 million return liability. The company also disclosed a disputed $1.6 million sublicense-fee demand and a former-employee dispute, which it said it did not expect to be material.
Most important facts for investors to verify
- Whether consumer-product growth, including Walmart distribution, offsets continued weakness in ingredient sales and supports improved operating performance.
- Cash burn, receivable collections and inventory requirements relative to management’s 12-month liquidity outlook and any future financing or dilution.
- Potential financial and operational effects of Elysium and Thorne litigation, patent review outcomes, and the FTC matter.
- Execution and funding of the $21.5 million Grace inventory-purchase commitment and the company’s reliance on a key supplier.
- Progress in remediating the material weakness and maintaining effective financial reporting controls.