Business context and reporting period
ChromaDex Corporation (Nasdaq: CDXC) is a bioscience company focused on healthy aging. Its principal business includes Tru Niagen consumer products containing nicotinamide riboside (NR), NR ingredient sales, and analytical reference standards and services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $17.1 million | $17.3 million | $51.1 million | $49.7 million |
| Gross profit | $10.2 million | $10.6 million | $30.8 million | $30.6 million |
| Gross margin | 59.8% | 61.1% | 60.3% | 61.6% |
| Operating expenses | $13.3 million | $19.4 million | $48.0 million | $52.4 million |
| Operating loss | $3.1 million | $8.8 million | $17.2 million | $21.8 million |
| Net loss | $1.0 million | $8.9 million | $15.1 million | $21.8 million |
| Loss per share, basic and diluted | $0.01 | $0.13 | $0.22 | $0.33 |
Q3 and nine-month 2022 net loss included a $2.1 million Employee Retention Tax Credit (ERTC) benefit recorded in other income. Excluding that benefit, management reported net losses of approximately $3.1 million for Q3 and $17.2 million for the nine-month period.
For the first nine months, operating cash use was $14.8 million, compared with $19.2 million in 2021; investing cash use was $0.2 million. Cash and cash equivalents totaled $13.3 million at September 30, including $0.2 million restricted; unrestricted cash was $13.1 million. The company had no outstanding bank-line borrowings. Total liabilities were $24.6 million and stockholders’ equity was $21.0 million. Operating lease obligations were $4.4 million; future minimum operating lease payments were $5.0 million.
Changes versus the prior comparable period
- Q3 sales declined 1% year over year; nine-month sales increased 3%. Consumer Products sales fell 1% in Q3 but rose 3% year to date. Ingredients sales increased 2% in both periods, while Analytical Reference Standards and Services sales declined 9% in Q3 and 6% year to date.
- Management attributed consumer-product growth in e-commerce to higher sales, partly offset by weaker distributor sales. Distributor partners faced COVID-related and broader macroeconomic headwinds.
- Gross margin decreased about 1.3 percentage points in Q3 and 1.3 points year to date, with cost inflation, higher ingredient costs and lower utilization in the analytical services segment among the cited factors.
- Operating expenses decreased, principally due to lower legal costs. Q3 sales and marketing expense also fell after the company shifted marketing toward channels it considered more efficient; year-to-date sales and marketing and R&D expenses increased.
- Cash declined by $15.0 million from December 31, 2021. Unlike the prior-year period, the company had no comparable equity offering or option-exercise proceeds in the first nine months of 2022.
Outlook, liquidity, risks and unusual items
- Liquidity: Management identified recurring losses, operating cash outflows, COVID-19 effects and inflation as conditions raising substantial doubt about the company’s ability to meet obligations. It nevertheless expected unrestricted cash, subsequent financing proceeds and cash from sales to cover obligations for at least 12 months from issuance of the statements. Management said additional capital may be sought for longer-term plans. The $10 million bank facility was subject to conditions and allowed $4.3 million of borrowing at the time; approximately $47.8 million remained under the ATM program, whose availability management said was materially limited by conditions and market factors.
- Subsequent financing: Two post-quarter stock purchases closed in October 2022, producing approximately $7.7 million net proceeds in total: $2.9 million net from a related-party financing and $4.8 million net from NHSc. These transactions increased the share count and are relevant to dilution.
- NHSc agreement: An amended five-year supply agreement provides for NHSc and affiliates to exclusively purchase NR chloride from ChromaDex for covered products, subject to exclusions. It includes an initial purchase commitment of approximately $2.0 million, low-single-digit tiered royalties and potential low-seven-figure milestone payments. The amounts of any future royalties or milestones depend on sales and targets.
- China joint venture: The company replaced its earlier JV agreement with an arrangement under which it owns 89% and holds all voting interests; Taikuk is to receive an 11% non-voting interest subject to China’s “Blue Hat” registration. The registration is required before commercialization; a $1.0 million fee would be payable upon registration. The interest’s estimated $1.0 million compensation expense was not recognized because the performance condition had not been met.
- Legal and intellectual-property exposure: The California Elysium action was stayed pending a Federal Circuit appeal. The related SDNY action was dismissed with prejudice under a settlement, which was appealed and cross-appealed. In Thorne-related patent proceedings, the PTAB held one challenged patent claim unpatentable and found challenged claims of another patent not unpatentable; appeals were filed. ChromaDex’s Delaware patent case against Elysium also remained subject to appeal after an adverse summary judgment ruling. Outcomes and possible financial effects are uncertain.
- Other risks: Management cited inflation, supply-chain and labor costs, dependence on Tru Niagen and major customers, competition, regulatory and product-liability exposure, and uncertainty around patent rights. The filing provides no quantified full-year revenue or earnings guidance.
- ERTC: The company filed its claim in August 2022 and recognized approximately $2.1 million for eligible 2020 and 2021 quarters; collection timing was not specified.
Important facts for investors to verify
- Whether sales growth, distributor demand and e-commerce economics support improved gross margins and reduced operating losses.
- Actual cash burn and the timing of ERTC receipts, inventory commitments of $11.7 million, and any additional financing needs or dilution.
- Whether the NHSc purchase commitment, royalties and potential milestones translate into material revenue, and the related share issuance’s effect on ownership.
- Progress, regulatory approvals, costs and any contingent payments associated with the China JV.
- Developments in Elysium and Thorne litigation and patent appeals, including any resulting financial exposure or effect on competitive positioning.