Business context and reporting period
This is ChromaDex Corporation’s unaudited Form 10-Q for the three months ended March 31, 2018, compared with the three months ended April 1, 2017. The company develops and sells nutraceutical ingredients, consumer products and scientific/reference-standard services. Its flagship ingredient is NIAGEN® (nicotinamide riboside), also sold directly to consumers as TRU NIAGEN®. The filing registrant is ChromaDex Corporation; the supplied company name, Niagen Bioscience, is not the name shown on this filing.
Financial results and position
| Metric | Q1 2018 | Comparable period |
|---|---|---|
| Net sales | $6.567 million | $3.368 million |
| Gross profit / margin | $3.137 million / 47.8% | $1.618 million / 48.0% |
| Operating expenses | $11.536 million | $3.391 million |
| Operating loss | $8.399 million | $1.773 million |
| Net loss | $8.443 million | $1.929 million |
| Basic and diluted loss per share | $0.15 | $0.05 |
| Net cash used in operating activities | $3.989 million | $0.051 million |
Cash was $41.037 million at March 31, 2018, down $4.352 million from December 30, 2017. Investing activities used $0.161 million and financing activities used $0.202 million. Total assets were $57.445 million and total liabilities were $10.781 million. Current assets were $52.582 million versus current liabilities of $10.084 million. The company reported $0 of borrowings on its revolving credit facility; it had access to a facility of up to $5 million, subject to its terms. Capital lease obligations totaled $0.458 million, including current maturities.
Material changes versus the prior comparable period
- Sales increased 95%, driven primarily by TRU NIAGEN consumer product sales of $3.031 million, compared with $14,000 in the prior period. NIAGEN ingredient sales were $1.263 million, up from $0.968 million.
- Ingredients-segment sales rose 14% to $2.368 million; core standards and contract services sales fell 9% to $1.168 million.
- Gross margin was approximately flat. Ingredients costs included a $312,000 write-off of NIAGEN-related inventory; lower consulting-service sales also reduced utilization and segment profitability.
- Operating expenses increased substantially, particularly sales and marketing ($3.269 million versus $0.405 million) and general and administrative ($6.828 million versus $2.322 million). Management cited consumer marketing investment, legal costs, share-based compensation and e-commerce technology spending. Legal expense was approximately $3.0 million, compared with $0.6 million.
- Share-based compensation expense rose to $1.258 million from $0.320 million. Weighted-average shares increased to 54.858 million from 38.031 million.
- Operating cash use rose to $3.989 million from $0.051 million, alongside the larger net loss. Accounts payable growth partly offset cash use.
Outlook, commentary, risks and unusual items
Management stated that cash, cash equivalents and cash expected from operations should fund projected plans through at least May 11, 2019, while noting it may seek additional capital earlier for longer-term plans. It expects consumer-product sales and gross profit to continue growing over the next 12 months and plans to increase marketing and R&D investment in NIAGEN and TRU NIAGEN over the next two years. These are management expectations, not quantified financial guidance.
Key risks include continued losses and cash consumption; the need for potentially dilutive or otherwise costly financing; reliance on major customers and the commercial success of TRU NIAGEN; competition between the company’s consumer and ingredient businesses; regulatory and product-safety requirements; supplier concentration; and intellectual-property challenges. Two customers accounted for approximately 24% of quarterly sales. A related-party customer represented 12.3% of sales, and Customer C accounted for 46.8% of trade receivables.
ChromaDex and Elysium are involved in litigation in California and New York, including contract and royalty disputes, counterclaims, and patent-related proceedings. The filing says Elysium had not paid approximately $2.7 million for prior purchase orders. Elysium’s patent review of one licensed patent proceeded on certain claims; review of another was not instituted. The company said it could not predict the outcomes or reasonably estimate possible losses and recorded no potential loss for the identified counterclaims or Elysium’s New York complaint, which it believed lacked merit.
Other notable items: adoption of ASC 606 increased opening retained earnings by $164,000; the company repurchased 74,379 shares for tax withholding at an average $5.44 per share; and it amended a Los Angeles office lease through October 2021, with additional monthly payments of approximately $9,000–$11,000. Management reported disclosure controls effective at a reasonable assurance level and no material first-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether TRU NIAGEN growth and gross profit can offset elevated marketing, legal and administrative spending.
- The trajectory of operating cash use and the assumptions behind the stated cash runway through May 11, 2019.
- Customer concentration, collection of receivables, and the status and potential exposure of the Elysium disputes, including the approximately $2.7 million unpaid balance.
- The impact of the NIAGEN inventory write-off and the sustainability of margins across segments.
- Potential dilution from outstanding options and warrants, and any future financing needs or terms.