Niagen Bioscience, Inc. annual report, FY2019

Business context and reporting period

This is ChromaDex Corporation’s Form 10-K for the fiscal year ended December 31, 2019—not a standalone fourth-quarter report. The company, traded as CDXC, sells TRU NIAGEN® consumer supplements, NIAGEN® ingredient products, and analytical reference standards and services. Its strategy is shifting toward a global consumer-products business. The filing identifies the registrant as ChromaDex Corporation.

Financial performance and position

• Revenue grew 47%; TRU NIAGEN consumer-product sales rose 96% to $36.1 million. Ingredient sales fell 28% to $6.2 million, and analytical reference standards and services sales fell 11% to $4.0 million.
• Gross margin improved about 4.8 percentage points. Operating expenses rose to $57.1 million, including $34.3 million in general and administrative expenses; higher legal costs, bad-debt expense and royalties were notable factors.
• Cash and cash equivalents were $18.8 million at year-end, including $0.2 million restricted, down from $22.6 million. Inventory increased to $11.5 million from $8.2 million; accounts payable was $9.6 million.
• Current assets were $33.5 million and current liabilities $15.1 million. The company separately reported working capital of $4.1 million using its stated measure of trade receivables plus inventory less accounts payable.
• No borrowings were outstanding on the $7.0 million revolving credit facility at year-end. The $10.0 million convertible notes issued in 2019, plus accrued interest, converted into approximately 2.3 million common shares. Finance-lease liabilities were $0.3 million; operating-lease liabilities were $1.4 million.
• Net cash provided by financing activities was $16.9 million, principally from a $6.8 million net common-stock offering and $10.0 million of convertible-note proceeds. The notes’ conversion is reflected as a noncash financing transaction.

Material changes versus 2018

• Revenue mix shifted further toward consumer products: TRU NIAGEN sales increased by $17.6 million, more than offsetting lower ingredient and analytical-services sales.
• General and administrative expenses increased 26% to $34.3 million. The company recorded about $2.2 million of bad-debt expense related to Elysium receivables and incurred approximately $11.3 million in legal expenses, versus $9.8 million in 2018.
• Research and development expense declined 19% to $4.4 million; sales and marketing expense increased 10% to $18.2 million. Advertising expense was $6.7 million, down from $8.8 million.
• Interest expense, net increased to $0.8 million from $0.1 million, including amortization of discounts and issuance costs on the short-term convertible notes.
• Cash used in operations remained substantial, though slightly lower than in 2018. The company raised equity and convertible-note financing during 2019.

Outlook, risks, contingencies and unusual items

• Management said year-end cash, cash equivalents and expected operating cash flows should fund projected plans for at least 12 months from the filing’s issuance date. It may seek additional capital; financing may be unavailable or dilutive. Management planned continued marketing and R&D investment in NIAGEN and TRU NIAGEN and expected consumer-product sales to continue growing over the next 12 months.
• COVID-19 was identified as a potential 2020 risk: approximately 16% of 2019 revenue came from Asia, where the company also had suppliers. The filing cited possible distribution, customer, supplier and travel disruptions.
• Customer concentration is material: related-party A.S. Watson Group generated 15.8% of 2019 sales and represented 39.0% of year-end trade receivables. A separate Elysium receivable balance of approximately $2.7 million was fully reserved as uncollectible; the company had ceased sales to Elysium in 2016.
• Extensive litigation with Elysium and a separate Lanham Act action brought by Novex remained unresolved. The company said potential losses could not be reasonably estimated and did not accrue a loss for the identified proceedings. The filing describes competing claims and a patent dispute; outcomes could affect costs, operations and intellectual-property rights.
• The Nestlé supply agreement provided for a $4.0 million upfront fee received in January 2019, recognized as revenue as product is delivered; $3.873 million remained deferred at year-end. A further payment could bring aggregate consideration to $6.0 million following qualifying product launches.
• Other commitments include $11.5 million of purchase obligations due in 2020, in addition to operating- and finance-lease payments. The company also guaranteed a former business unit’s lease; it did not consider payment probable at the transaction date.
• A former chief marketing officer’s post-year-end separation agreement provided for approximately $350,000 in salary continuation, accelerated vesting of about 94,000 options and up to 12 months of health-insurance premiums.
• The company reported an unqualified audit opinion and effective internal control over financial reporting. It adopted lease-accounting guidance in 2019, recognizing right-of-use assets and lease liabilities.

Most important facts for investors to verify

1. Whether TRU NIAGEN growth can translate into lower operating losses and positive operating cash flow, given continuing annual losses and significant marketing and legal expenses.
2. Cash runway assumptions, access to additional financing, and compliance with the revolving facility’s liquidity and quick-ratio covenants.
3. Inventory levels, turnover and recoverability, including the increase to $11.5 million and the stated need for substantial inventory to support growth.
4. Receivable quality and customer concentration, especially A.S. Watson’s related-party sales and receivables and the Elysium balance write-off.
5. Developments in Elysium and Novex litigation, including any effect on legal costs, patent rights, potential liabilities or commercial activity.
6. Timing and conditions for Nestlé product deliveries, recognition of deferred revenue, and any additional milestone payment.
7. The extent of COVID-19-related effects on Asian revenue, distribution and suppliers, which management said were uncertain.