ChromaDex Corporation (Nasdaq: CDXC) — Q3 2019 Form 10-Q
Entity note: The supplied filing is for ChromaDex Corporation, not a registrant named Niagen Bioscience, Inc. The financial statements are unaudited and cover the quarter and nine months ended September 30, 2019; dollar amounts below are in millions unless noted.
Business context and reporting period
ChromaDex describes itself as a science-based nutraceutical company focused on NAD-related products. Its flagship ingredient is NIAGEN nicotinamide riboside, sold directly to consumers as TRU NIAGEN. The company reports Consumer Products, Ingredients, and Analytical Reference Standards and Services segments. It has been shifting its strategy toward consumer products, particularly TRU NIAGEN.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $12.1 | $8.1 | $33.2 | $22.5 |
| Gross profit | $6.7 | $4.4 | $18.3 | $11.3 |
| Gross margin | 56.0% | 53.7% | 55.1% | 50.4% |
| Operating loss | $(6.9) | $(8.6) | $(22.4) | $(24.9) |
| Net loss | $(7.2) | $(8.6) | $(23.3) | $(25.1) |
| Basic and diluted loss per share | $(0.12) | $(0.16) | $(0.41) | $(0.46) |
- Cash flow: Nine-month operating cash use was $19.8 million, versus $15.8 million in 2018. Investing cash use was $0.5 million; financing provided $16.6 million. Cash, including restricted cash, declined to $18.9 million from $22.6 million at December 31, 2018.
- Balance sheet and liquidity: Current assets were $36.4 million and current liabilities $11.0 million at September 30, 2019. Total assets were $43.1 million, total liabilities $16.0 million, and stockholders’ equity $27.1 million. Inventory was $9.8 million. The filing states cash and expected operating cash generation should fund projected plans for at least the next 12 months, while noting that further capital may be sought.
- Debt and leases: The $10.0 million convertible notes plus accrued interest converted into approximately 2.3 million common shares in August at $4.465 per share. The company also issued approximately 1.6 million shares for gross proceeds of $7.0 million and net proceeds of $6.8 million. At quarter-end, operating and finance lease liabilities were approximately $1.7 million and $0.4 million, respectively.
Material changes versus the prior comparable period
- Q3 sales increased 48%; nine-month sales also increased 48%. Consumer Products revenue grew 86% in Q3 and 116% for the nine months, reaching $9.7 million and $25.9 million, respectively.
- Ingredients revenue declined 33% in Q3 and 42% for the nine months, reflecting the strategic shift toward consumer products. Analytical reference standards and services revenue rose 5% in Q3 but fell 7% for the nine months.
- Gross profit rose 55% in Q3 and 61% year to date, with gross margin improving in both periods. The company attributed margin performance to consumer-product mix, higher-margin ingredient focus, and improved consulting utilization.
- Operating and net losses narrowed, but operating expenses rose 5% in Q3 and 12% for the nine months. General and administrative expense increased 18% in Q3 and 20% year to date, including higher legal costs, royalties, and share-based compensation.
- Operating cash use worsened despite the narrower net loss, principally reflecting increases in receivables and inventory and lower accounts payable. Cash fell by $3.7 million over the nine-month period.
Outlook, risks, contingencies, and unusual items
- Outlook: No quantified full-year revenue or earnings guidance is provided. Management expects Consumer Products sales and gross profit to continue growing over the next 12 months. It says existing cash and expected operating cash generation should support projected plans for at least 12 months, but additional financing may be needed for longer-term plans.
- Subsequent credit facility: After quarter-end, the company entered into a formula-based revolving credit agreement with Western Alliance Bank for up to $7.0 million, subject to conditions. The facility is secured by substantially all current and future personal property, including intellectual property, carries financial covenants, and matures November 12, 2021.
- Customer concentration: A.S. Watson Group, a related party, accounted for 18.8% of Q3 sales and 16.5% of nine-month sales; it represented 32.1% of trade receivables at September 30. The filing also identifies Elysium as 37.5% of trade receivables and notes ongoing disputes and collection uncertainty.
- Litigation: Several proceedings involve Elysium, including California commercial and trade-secret claims, New York litigation, and a stayed Delaware patent case. The company says it cannot predict outcomes or reasonably estimate possible losses; it had not accrued a loss for the specified Elysium matters. A separate Covance dispute was settled October 24, 2019. Novex litigation was ongoing, with no loss accrued as management considered the allegations without merit.
- Unusual financing expense: Convertible-note issuance costs and a triggered down-round feature generated approximately $0.8 million of nine-month interest expense. The down-round adjustment lowered the conversion price from $4.59 to $4.465.
- Key risks: Continuing losses and cash burn; possible need for further financing and dilution; dependence on TRU NIAGEN growth; competition between consumer products and ingredient customers; customer concentration and receivable collection; complex litigation; regulatory and product-liability exposure; and supply-chain dependence. The company reported disclosure controls effective at a reasonable-assurance level and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Confirm that the filing and ticker being reviewed match the intended issuer: this document identifies ChromaDex Corporation (CDXC).
- Track whether strong TRU NIAGEN growth continues to offset declining Ingredients revenue and whether segment-level gross margins hold.
- Reconcile operating cash burn, inventory and receivables growth, and the stated 12-month liquidity outlook with subsequent cash and financing disclosures.
- Review the terms, availability, collateral, covenants, and actual use of the post-quarter $7.0 million credit facility.
- Monitor A.S. Watson and Elysium receivable balances, customer concentration, litigation developments, and any resulting collection losses or legal costs.
- Assess ongoing share dilution, including the 2019 stock issuance and note conversion, as well as outstanding options.