ChromaDex Corporation — Q2 2018 Form 10-Q
Business context and period: The filing is for the quarter and six months ended June 30, 2018; financial statements are unaudited. ChromaDex describes itself as a science-based nutraceutical company, with NIAGEN® nicotinamide riboside as its flagship ingredient and TRU NIAGEN® as its consumer product. The company reports consumer products, ingredients, and core standards and contract services segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $7.80 | $4.22 | $14.37 | $7.59 |
| Gross profit | $3.85 | $2.11 | $6.98 | $3.73 |
| Gross margin | 49.3% | 50.0% | 48.6% | 49.1% |
| Operating expenses | $11.78 | $4.76 | $23.32 | $8.15 |
| Operating loss | $(7.94) | $(2.65) | $(16.34) | $(4.42) |
| Net loss | $(8.05) | $(2.76) | $(16.49) | $(4.69) |
| Basic and diluted loss per share | $(0.15) | $(0.07) | $(0.30) | $(0.12) |
| Operating cash used | — | $10.54 | $5.56 |
Balance sheet and liquidity: At June 30, 2018, cash was $33.39 million, down from $45.39 million at December 30, 2017. Current assets were $46.49 million and current liabilities $10.96 million. Total liabilities were $11.67 million, including $0.41 million of capital lease obligations; the company reported no borrowings under its revolving credit line and notified the lender in June that it would not draw on the facility. Total assets were $52.17 million, versus $62.72 million at year-end. Management said available cash and expected operating cash generation should fund projected operating plans through at least August 10, 2019, while noting it may seek additional capital.
Material changes and operating trends
- Sales rose 85% in Q2 and 89% for the first half year over year. Consumer products sales were $3.73 million in Q2 and $6.76 million for the half, compared with $0.14 million and $0.16 million, respectively, in 2017. Ingredients sales were nearly flat in Q2 and up 6% for the half; core standards and contract services sales declined 2% and 5%, respectively.
- Operating expenses increased substantially, led by sales and marketing ($3.77 million in Q2; $7.04 million for the half) and general and administrative expense ($6.60 million; $13.42 million). Management attributed G&A growth to increased legal costs, share-based compensation, e-commerce technology investment, and royalties.
- Gross margin was slightly lower overall. Ingredient costs rose, including a $0.31 million NIAGEN-related inventory write-off in Q1 2018. Lower consulting and other services activity reduced labor utilization and segment gross profit.
- Operating cash use increased year over year. Inventory growth used cash, partly offset by higher accounts payable and noncash share-based compensation. Investing cash use was $1.27 million, mainly for equipment and leasehold improvements; financing cash use was $0.19 million, including a $0.40 million common-stock repurchase, partly offset by option exercises.
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 and NIAGEN research and development. The filing provides no specific revenue, earnings, or margin guidance and cautions that interim results are not necessarily indicative of full-year results.
- Principal risks include continued losses and cash burn, possible need for financing and resulting dilution, execution and marketing risks in the consumer-product strategy, customer concentration, regulatory and product-safety risks, and dependence on suppliers and intellectual property.
- ChromaDex and Elysium Health are involved in extensive litigation in California and New York, and Elysium has challenged claims of a licensed patent in a patent review proceeding. The company said it could not predict outcomes or reasonably estimate potential losses. It also disclosed that Elysium had not paid approximately $2.7 million for prior purchase orders; collectability is uncertain.
- Two customers represented approximately 24% of Q2 sales. A customer involved in ongoing litigation represented 43.5% of trade receivables at June 30, 2018, making collection and concentration important risks to monitor.
- The company adopted ASC 606 using the modified retrospective method, recording a $0.164 million increase to opening retained earnings. It expensed $0.065 million of unamortized credit-facility issuance costs when the facility was terminated. A fully vested CEO restricted-stock award generated approximately $0.6 million of Q2 expense; the amended CEO agreement also provides for salary increases, options, and performance-based equity.
Important facts for investors to verify
- Whether TRU NIAGEN sales growth continues and can offset the strategic shift’s potential impact on ingredient customers.
- Cash burn, inventory levels, and progress toward management’s stated liquidity runway; whether additional financing becomes necessary.
- Customer concentration, the status and collectability of the approximately $2.7 million Elysium receivable, and any developments affecting other concentrated receivables.
- Updates and potential financial consequences from the Elysium litigation and patent review; no loss range is provided in this filing.
- Whether higher marketing, legal, research, and share-based compensation expenses translate into stronger sales and improving margins.