Niagen Bioscience, Inc. (ChromaDex Corporation) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The filing identifies the registrant as ChromaDex Corporation, not Niagen Bioscience, Inc. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
ChromaDex describes itself as a science-based nutraceutical company. Its principal business includes TRU NIAGEN consumer products and NIAGEN ingredient sales, alongside analytical reference standards and services.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net sales | $14.345 million | $10.048 million; up 43% |
| Gross profit / margin | $8.311 million / 57.9% | $5.301 million / 52.8% |
| Operating expenses | $14.201 million | $13.673 million |
| Operating loss | $(5.890) million | $(8.372) million |
| Net loss / loss per share | $(5.902) million / $(0.10) | $(8.337) million / $(0.15) |
| Operating cash flow | $(5.221) million | $(3.048) million |
| Cash, including restricted cash | $13.608 million | $18.812 million at Dec. 31, 2019 |
| Current assets / current liabilities | $29.147 million / $14.466 million | $33.518 million / $15.063 million at Dec. 31, 2019 |
| Total liabilities | $19.062 million | $19.802 million at Dec. 31, 2019 |
- Consumer products revenue increased 50% to $11.144 million; ingredients revenue increased 66% to $2.475 million. Analytical reference standards and services revenue fell 34% to $0.726 million.
- Gross margin improved, reflecting higher sales and better margins in consumer products and ingredients. The analytical segment’s gross profit fell to $0.050 million as lower sales reduced labor utilization.
- Cash declined $5.204 million during the quarter. Investing cash outflow was $0.020 million; financing cash inflow was $0.037 million.
- The balance sheet reports lease obligations, not material conventional borrowings: operating lease liabilities were $1.301 million and finance lease liabilities were $0.242 million. The company also disclosed access to a Western Alliance Bank line of credit of up to $7 million.
Material changes and unusual items
- General and administrative expense included approximately $1.0 million of severance and restructuring costs.
- Share-based compensation was $1.873 million, compared with $2.029 million in Q1 2019.
- The company reported a $2.708 million decrease in the allowance for doubtful trade receivables in its cash-flow reconciliation; the filing also states that approximately $2.7 million owed by Elysium had previously been written off as uncollectible.
- Q1 2020 consumer-products sales were up 10% from Q4 2019 and 50% from Q1 2019, according to management. The filing attributes lower A.S. Watson sales to Hong Kong store closures and reduced operating hours.
Outlook, risks, and contingencies
- Management expected cash on hand, future operating cash generation, the subsequent $5 million equity financing, and the available credit line to fund projected plans for at least 12 months from the filing date. It also said further capital may be needed; no formal revenue or earnings guidance was provided.
- The private placement with existing stockholders closed May 7, 2020: approximately 1.2 million shares were issued at $4.08 per share for $5.0 million. This provided liquidity but diluted existing shareholders.
- COVID-19 created uncertainty around demand, customer operations, supplier shipments, and capital markets. Management reported no major supply-chain disruption and said inventory was adequate for current demand, but could not predict the pandemic’s overall effect.
- Significant Elysium litigation remained unresolved across California, New York, and Delaware. The Federal Circuit affirmed the validity of a patent claim in March 2020; the California trial was adjourned amid COVID-19 and mediation. The company said it could not estimate potential losses and had not accrued a loss for the described litigation.
- A licensor asserted that $1.6 million plus interest in sublicense fees was owed; ChromaDex disputed the claim and said it did not expect the resolution to be material.
- Management concluded disclosure controls were ineffective at March 31, 2020 because of an unremediated material weakness related to disclosure of reasonably possible losses under ASC 450. The company expected remediation before year-end 2020.
Most important facts for investors to verify
- Whether Q1 revenue growth and gross-margin improvement continued, particularly in TRU NIAGEN consumer products and ingredient sales.
- Cash burn, collections, inventory needs, access to the $7 million credit line, and whether additional financing is required.
- The financial and operational effects of COVID-19, including A.S. Watson sales and supplier delays.
- Developments and potential financial exposure in the Elysium litigation and the disputed $1.6 million sublicense-fee claim.
- Progress in remediating the material weakness in disclosure controls and the extent of future share dilution from financing and equity awards.