Business context and reporting period
The supplied filing is ChromaDex Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020—not a filing under the name “Niagen Bioscience, Inc.” ChromaDex describes itself as a science-based nutraceutical company, with consumer products including TRU NIAGEN, NIAGEN ingredient sales, and analytical reference standards and services. Financial amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $14.18 | $12.05 | $43.81 | $33.20 |
| Gross profit | $8.45 | $6.75 | $25.85 | $18.30 |
| Gross margin | 59.6% | 56.0% | 59.0% | 55.1% |
| Operating loss | $(4.20) | $(6.89) | $(13.77) | $(22.44) |
| Net loss | $(4.22) | $(7.20) | $(13.83) | $(23.29) |
| Loss per diluted share | $(0.07) | $(0.12) | $(0.23) | $(0.41) |
For the nine months ended September 30, 2020, net cash used in operations was $10.62 million, investing activities used $0.18 million, and financing activities provided $7.47 million. Cash, including restricted cash of approximately $0.2 million, was $15.48 million at September 30, 2020, down $3.33 million from year-end 2019.
At September 30, 2020, current assets were $30.73 million and current liabilities were $13.02 million (current ratio approximately 2.36). Total assets were $37.42 million and total liabilities were $17.93 million. The balance sheet reports lease obligations, but no convertible notes outstanding; the company disclosed an available Western Alliance Bank line of credit of up to $7.0 million. Operating and finance lease liabilities totaled approximately $1.83 million.
Changes versus comparable periods
- Sales increased 18% in Q3 and 32% for the nine-month period. Consumer products sales rose 22% and 34%, respectively; ingredient sales rose 22% and 66%. Analytical reference standards and services sales fell 30% in both comparisons.
- Gross margin improved by about 3.6 percentage points in Q3 and 3.9 points for the nine-month period. Management attributed gains primarily to higher sales, supply-chain cost savings and scale; the nine-month ingredient comparison also benefited from a supplier rebate for prior-year efficiencies.
- Operating and net losses narrowed, alongside lower operating expenses. General and administrative expense fell 18% in Q3 and 8% for nine months, largely due to lower legal costs. Sales and marketing expense increased 13% and 12%, while research and development expense decreased 16% in both comparisons.
- Operating cash use improved from $19.83 million to $10.62 million for the nine months. Financing cash inflows were lower year over year, as 2019 included $10.0 million of convertible-note proceeds.
- Shares issued and outstanding increased from 59.56 million at December 31, 2019 to 61.59 million at September 30, 2020. The company raised $4.9 million net in a May 2020 stock sale to existing stockholders and reported no sales under its $50 million ATM facility by quarter-end.
Outlook, management commentary, risks and unusual items
- Management said cash, expected operating cash generation and the available credit line were expected to fund projected operating plans for at least the next 12 months. It also said additional capital may be sought within the next 12 months, particularly for longer-term objectives. No revenue or earnings guidance was provided; the filing cautions that nine-month results are not necessarily indicative of full-year results.
- COVID-19 had affected retail sales, including through store closures and reduced hours, while e-commerce was performing relatively well. The company reported supplier shipment delays but no major supply-chain disruptions, and said inventory was adequate for current demand.
- The company’s revised manufacturing agreement with W.R. Grace runs through December 31, 2021, with potential two-year renewals to be negotiated. Grace is identified as the exclusive NR manufacturer. A third-quarter supply agreement amendment also created approximately $18.3 million of inventory purchase obligations through December 2021, including $3.7 million due in the final three months of 2020.
- ChromaDex remains involved in extensive litigation with Elysium in California and New York and in a patent infringement action in Delaware. The company said it could not reasonably estimate possible losses and had not accrued a loss for the discussed proceedings. Separately, a licensor asserted $1.6 million plus interest in alleged sublicense fees; ChromaDex disputed the obligation and did not expect the matter to be material.
- Other notable items include $1.5 million of severance and restructuring expense for the nine-month period and a $2.737 million reduction in the allowance for doubtful trade receivables reflected in the cash-flow reconciliation. Management stated that the disclosure-control remediation addressing a previously identified material weakness was operating effectively as of September 30, 2020.
- Key risks include continued operating losses and potential financing needs, customer concentration (A.S. Watson accounted for 12.9% of nine-month sales), reliance on a limited supplier base, COVID-19 effects, litigation uncertainty, and possible dilution from future equity financing and outstanding options.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for ChromaDex Corporation (Nasdaq: CDXC), notwithstanding the request metadata naming Niagen Bioscience, Inc.
- Assess the sustainability of sales growth and gross-margin gains, including the contribution of supplier rebates and the performance of the analytical standards business.
- Review the cash-burn rate, availability and covenants of the $7.0 million credit line, planned capital needs, and potential use of the ATM or shelf registration.
- Track the $18.3 million inventory purchase commitment, Grace manufacturing arrangements, and any changes in NR supply or renewal terms.
- Monitor developments in the Elysium litigation and the disputed sublicense-fee claim, including any change in the company’s ability to estimate or accrue potential losses.
- Check customer concentration, related-party sales and receivables, and the collection status of trade receivables.