ChromaDex Corporation — Form 10-Q Summary
Period: Fiscal quarter ended April 1, 2017; comparisons are with the three months ended April 2, 2016. The filing identifies the registrant as ChromaDex Corporation, not Niagen Bioscience, Inc.
Business context
ChromaDex develops and commercializes proprietary ingredients, including NIAGEN (nicotinamide riboside), and sells reference standards, analytical and contract services, and regulatory consulting. Its March 2017 acquisition of Healthspan added a direct-to-consumer (DTC) supplement business. The company reports Ingredients and Core Standards and Contract Services segments.
Financial performance and position
| Metric | Q1 2017 | Prior comparable quarter |
|---|---|---|
| Net sales | $4.45 million | $7.33 million |
| Gross profit / margin | $1.75 million / 39.4% | $3.45 million / 47.1% |
| Operating income (loss) | $(1.89) million | $454,000 |
| Net income (loss) | $(1.93) million | $256,000 |
| Basic and diluted loss per share | $(0.05) | Income per share of $0.01 |
| Net cash used in operating activities | $51,000 | $2.90 million |
- Sales fell 39%. Ingredients revenue declined 55% to $2.08 million, primarily because certain customers did not repeat large NIAGEN orders from the prior-year quarter. Core Standards and Contract Services revenue fell 13% to $2.36 million, mainly on lower analytical testing and contract-service sales.
- Gross margin contracted by about 7.7 percentage points. Management attributed the deterioration in Core Standards and Contract Services margins to lower service sales and fixed labor costs that did not decline proportionately. Ingredients margin improved slightly.
- Operating expenses rose 22% to $3.64 million. General and administrative expense increased 20%, mainly reflecting legal costs of approximately $432,000 versus $12,000 a year earlier; R&D expense increased 43% to $664,000.
- Cash was $1.19 million at quarter-end, down from $1.64 million at December 31, 2016. Current assets were $15.59 million and current liabilities $10.74 million. Inventory was $8.94 million; accounts payable rose to $7.87 million from $5.98 million.
- Total liabilities were $11.68 million, including approximately $641,000 of capital lease obligations. The company reported no borrowings under its $5 million Western Alliance revolving facility at April 1, 2017.
- Investing activities used $346,000, mainly for equipment, leasehold improvements and intangible assets. Financing activities used $61,000, principally for capital-lease payments.
Material changes, outlook and risks
- On March 12, 2017, ChromaDex acquired Healthspan in an asset acquisition, issuing 367,648 shares valued at approximately $1.0 million and recording a $1.35 million DTC business-model intangible asset. Board member Robert Fried, a Healthspan seller and former majority owner, became President and Chief Strategy Officer. The company also owes him $100,000, payable in March 2018 without interest.
- Management planned a U.S. DTC NIAGEN launch in the second half of 2017, subject to marketing development and fulfillment readiness. It also planned to increase proprietary-ingredient R&D, subject to available resources, and anticipated filing an IND for Cockayne Syndrome in 2017. These are plans, not assurances of launch, approval or commercial success.
- After quarter-end, the company agreed to issue up to $25 million of common stock at $2.60 per share in three tranches. The first tranche closed April 27, 2017 for $3.5 million (1,346,154 shares); later tranches of approximately $16.4 million and $5.1 million remained conditional. Management said available cash, operating cash generation and financing proceeds were expected to fund projected plans through at least May 12, 2018, while warning that further financing might be needed.
- The company reported ongoing litigation with Elysium Health concerning alleged unpaid product and royalty amounts, contract and trade-secret claims, and counterclaims. The filing says Elysium had not paid approximately $3.0 million for prior purchase orders. ChromaDex had not accrued a loss on the counterclaims, citing its view that a loss was not probable and that the amount could not be reasonably estimated; outcomes remain uncertain.
- Customer concentration is a material exposure: one unnamed customer represented 53.1% of trade receivables at April 1, 2017. The filing also highlights the risk that launching its own DTC product could compete with existing ingredient customers, alongside financing, execution, regulatory, product-liability, supply and intellectual-property risks.
Important facts for investors to verify
- Whether the second and third financing tranches closed, on what terms, and the resulting share dilution and governance changes.
- Subsequent sales, receivable collections and customer concentration, including the collectability of the disputed Elysium balance.
- Progress, spending and commercial results for the planned DTC launch, and any effects on ingredient-customer relationships.
- Developments and potential financial exposure in the Elysium litigation and counterclaims.
- Whether cash burn, inventory levels and gross margins improve enough to support operations beyond management’s stated runway estimate.