Niagen Bioscience, Inc. annual report, FY2018

Business context and reporting period

This is ChromaDex Corporation’s audited Form 10-K for the fiscal year ended December 31, 2018—not a standalone fourth-quarter report. The filing identifies the issuer as ChromaDex Corporation (Nasdaq: CDXC); it does not identify the company as Niagen Bioscience, Inc. ChromaDex sells TRU NIAGEN® consumer supplements, NIAGEN® ingredients, and analytical reference standards and services.

Financial performance and position

Sales by segment: consumer products $18.5 million (up 238%); ingredients $8.6 million (down 23%); analytical reference standards and services $4.5 million (down 1%). Consumer products generated $11.2 million of gross profit, while ingredient and analytical-services gross profit fell to $3.7 million and $1.1 million, respectively.

Sales and marketing expense rose to $16.5 million from $4.5 million, and general and administrative expense rose to $27.1 million from $17.6 million. Management attributed the increases chiefly to consumer-brand advertising and customer acquisition, legal expenses, share-based compensation, e-commerce investment, and royalties. Advertising expense was $8.8 million versus $1.9 million; legal expense was approximately $9.8 million versus $5.1 million.

At year-end, cash and cash equivalents were $22.6 million, down from $45.4 million. Current assets were $36.5 million and current liabilities $14.4 million. Inventory was $8.2 million, up from $5.8 million; accounts payable rose to $9.5 million from $3.7 million. Working capital, as the company specifically defines it as trade receivables plus inventory less accounts payable, was approximately $3.1 million versus $7.4 million. Total liabilities were $15.1 million. Capital-lease obligations totaled $0.3 million; the company reported no borrowings under its $5 million credit facility and said it would not draw on it.

Material changes and notable items

• The shift toward a direct-to-consumer brand materially changed the revenue mix: TRU NIAGEN sales more than offset lower ingredient sales, but consumer marketing costs expanded sharply.
• Operating cash outflow more than doubled year over year; increased inventory was a major cash use. Financing provided only about $0.5 million from option exercises, offset by share repurchases and lease payments; 2017 financing had included substantial equity issuance.
• In December 2018, ChromaDex signed a supply agreement making Nestlé the exclusive NIAGEN ingredient customer for human use in specified medical-nutrition and functional-food-and-beverage categories in certain territories. ChromaDex received a $4 million upfront fee in January 2019; a further payment could bring aggregate consideration to $6 million after product launches.
• The company sold its Lab Business to Covance in 2017 for $7.5 million, including $0.75 million held in escrow; the 2017 results included a $5.5 million disposal gain. In January 2019, Covance sued alleging ChromaDex failed to deliver its full ComplyID library. ChromaDex denied liability.
• FY 2018 statements reflect adoption of ASC 606, including a $164,000 opening retained-earnings adjustment. Fiscal 2018 ended December 31 after the company changed to a calendar fiscal year; fiscal 2017 ended December 30.

Outlook, risks and contingencies

Management expected consumer-product sales and gross profit to continue growing over the following 12 months and planned further marketing and R&D investment. It stated that available cash and expected operating cash generation should fund projected plans for at least 12 months from the report’s issuance, while also noting it may seek additional capital. No specific revenue, earnings, or cash-flow guidance was provided.

Key risks include continued losses and cash burn, dependence on TRU NIAGEN market acceptance, uncertain ability to obtain future financing, inventory and supplier risks, regulatory and advertising-claim requirements, and competition. The company reported accumulated deficit of approximately $89.8 million and a full valuation allowance against deferred tax assets.

Substantial litigation with Elysium spans California and Delaware proceedings and New York counterclaims. ChromaDex reported approximately $2.7 million owed by Elysium for prior orders; Elysium represented 51.2% of year-end trade receivables, and the company had a $0.5 million allowance specifically related to Elysium. The company could not reasonably estimate potential loss ranges and had not accrued a loss for specified Elysium matters. Separately, a patent-review decision upheld one patent claim, and a New York court dismissed Elysium’s claims concerning ChromaDex’s FDA citizen petition; other disputes remained active.

Other commitments included $4.4 million of 2019 purchase obligations, $2.4 million of operating-lease payments, and $0.3 million of capital-lease payments. Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.

Important facts for investors to verify

• Confirm the issuer and reporting period: the filing is ChromaDex Corporation’s FY 2018 10-K, not a Niagen Bioscience filing or a Q4-only report.
• Track whether consumer-sales growth and improved gross margin can offset steep marketing, legal, and administrative costs and reduce losses and cash burn.
• Review cash runway, working-capital needs, inventory aging and conversion, and the possibility and dilution terms of additional financing.
• Monitor collection of Elysium receivables, litigation developments and potential exposure, and the Covance dispute; the filing does not provide a clear estimate of possible losses.
• Verify the timing and conditions for Nestlé’s additional potential payment and the commercial impact of its limited-territory/category exclusivity.