SEC Filing Summary: ChromaDex Corporation (CDXC), Q1 2021
Filing identity: The supplied filing is ChromaDex Corporation’s Form 10-Q for the quarter ended March 31, 2021; it is not filed under the name Niagen Bioscience, Inc. Figures are unaudited and in U.S. dollars unless noted.
Business context and reporting period
ChromaDex describes itself as a bioscience company focused on healthy aging. Its principal consumer product, TRU NIAGEN, contains its proprietary nicotinamide riboside ingredient, NIAGEN. The company also sells ingredients and analytical reference standards and services. This report compares the three months ended March 31, 2021 with the same period in 2020.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $14.683 million | $14.345 million | Up 2% |
| Gross profit | $9.234 million | $8.311 million | Up 11% |
| Gross margin | 62.9% | 57.9% | Up about 5 percentage points |
| Operating expenses | $16.596 million | $14.201 million | Up 17% |
| Operating loss | $7.362 million | $5.890 million | Loss widened |
| Net loss | $7.381 million | $5.902 million | Loss widened |
| Loss per share, basic and diluted | $0.12 | $0.10 | Loss per share increased |
| Cash used in operating activities | $5.405 million | $5.221 million | Use increased |
Consumer-products revenue rose 12% to $12.437 million; ingredients revenue fell 47% to $1.315 million; analytical reference standards and services revenue rose 28% to $0.931 million. Management attributed the ingredients decline largely to lower NIAGEN ingredient sales, including no shipments to former customer Thorne. Consumer-products gross profit benefited from higher sales, product mix, cost savings and supply-chain scale.
Cash, including $0.2 million of restricted cash, was $44.691 million at March 31, 2021, up from $16.697 million at year-end 2020. Working capital was approximately $43.5 million. Total liabilities were $25.161 million; these included $1.432 million of operating lease obligations and $0.036 million of finance lease obligations. The filing reports an available line of credit of up to $7.0 million. It does not identify material conventional borrowings on the balance sheet.
Financing cash flow included $24.9 million net proceeds from a February common-stock sale to EverFund and $8.6 million from option exercises. The company issued approximately 3.8 million shares at $6.50 per share in the financing. Shares outstanding were 67.702 million at quarter-end, compared with 61.881 million at December 31, 2020.
Material changes versus the prior comparable period
- Sales increased modestly, while gross profit and gross margin improved.
- Operating and net losses widened as operating expenses rose. Sales and marketing expense increased 41% to $6.258 million, largely reflecting consumer-product marketing and staffing. General and administrative expense rose 8% to $9.514 million.
- Legal expense increased to approximately $5.0 million from $2.4 million, principally due to litigation. The company reported no significant severance and restructuring expense in Q1 2021, versus approximately $1.0 million in Q1 2020.
- Operating cash use was broadly similar year over year. The increase in receivables and inventory used cash in Q1 2021, partly offset by higher accounts payable and accrued expenses.
- Cash and stockholders’ equity increased substantially, primarily following the equity financing and option exercises.
Outlook, commentary, risks and unusual items
- Liquidity outlook: Management expects existing cash, cash equivalents and the available credit line to fund projected operating plans for at least 12 months from issuance of the financial statements. It may seek additional capital for longer-term objectives; availability and terms are not assured. No specific revenue or earnings guidance is provided.
- COVID-19 and supply chain: Management said e-commerce continued to perform relatively well, while international retail sales were affected by store closures and reduced hours. Packaging shortages delayed consumer-product supply in Q1 but were addressed in Q2; the company reported adequate inventory for current demand and did not expect supply disruptions to have a material business impact. COVID-19 remains a risk to demand, supply and financing conditions.
- Legal matters: ChromaDex is involved in substantial litigation with Elysium across California, New York and Delaware, including patent-related disputes. Outcomes and potential losses could not be predicted or reasonably estimated; no loss accrual was recorded for the specified Elysium proceedings. A September 2021 trial was scheduled in the California action and a September 2021 trial in the Delaware patent action; the New York trial was expected to be rescheduled for November or December 2021.
- Other contingencies: A customer, Rejuvenation Therapeutics, sought a refund of approximately $1.6 million; ChromaDex recorded a return liability of approximately $0.5 million. A former employee made employment-related claims, with no lawsuit filed as of the report. A licensor asserted a $1.6 million sublicense-fee claim, which the company disputed.
- Regulatory communications: The company received an FDA/FTC warning letter in November 2020 concerning COVID-19-related statements about NR research, and a further FTC warning letter on April 30, 2021. The company said it removed or requested removal of certain social-media posts and disputed that its statements violated applicable law. It cautions that TRU NIAGEN is not approved to prevent, treat, diagnose or cure COVID-19 or other diseases.
- Controls: Management concluded disclosure controls and procedures were not effective at March 31, 2021 due to a material weakness. The weakness involved failure to disclose and record a liability related to the Rejuvenation refund request in the Q3 2020 filing. Remediation was in progress, with completion expected before year-end 2021; management said the current-quarter financial statements fairly present the company’s financial position and results.
- Other risks: The company has a history of losses and an accumulated deficit of $149.2 million, depends on consumer-product marketing and a limited supplier base, and faces customer concentration, patent/IP, regulatory, dilution and litigation risks. It reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for ChromaDex Corporation (Nasdaq: CDXC), not Niagen Bioscience, Inc.
- Track whether consumer-product growth and improved gross margin can offset declining ingredient sales and rising marketing, legal and administrative costs.
- Review cash burn, the terms and availability of the Western Alliance credit line, and any future financing or dilution.
- Monitor the Elysium litigation, the Thorne patent-review proceedings, and the potential financial effects of customer and licensor disputes.
- Follow the FTC warning-letter matter and any further regulatory action, and verify completion and effectiveness of the disclosed controls remediation.
- Assess customer and supplier concentration, including A.S. Watson’s 10.6% share of Q1 sales and the company’s disclosed reliance on a limited number of raw-material suppliers.