ChromaDex Corporation (now identified in the request as Niagen Bioscience) — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended October 1, 2016; filed November 10, 2016. The filing registrant is ChromaDex Corporation. Financial statements are unaudited.
Business context
The company develops and commercializes proprietary ingredient technologies, including NIAGEN and PTEROPURE, and provides phytochemical standards and contract services, analytical testing, and scientific and regulatory consulting.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $5.01 million | $6.29 million | $21.17 million | $17.65 million |
| Gross profit | $2.04 million | $2.48 million | $9.62 million | $6.88 million |
| Gross margin | 40.8% | 39.5% | 45.5% | 39.0% |
| Operating income (loss) | $(0.95) million | $0.18 million | $(0.12) million | $(0.91) million |
| Net income (loss) | $(0.95) million | $(0.004) million | $(0.78) million | $(1.34) million |
- Q3 sales fell 20% year over year, primarily because ingredient sales—especially NIAGEN—declined. Nine-month sales rose 20%, reflecting higher NIAGEN and PTEROPURE sales.
- For the nine months, cost of sales decreased to 55% of revenue from 61%; management attributed margin improvement to supplier price reductions from higher purchase volumes and better utilization in contract services.
- Q3 operating expenses increased to $2.99 million from $2.30 million, including higher research and development spending. Nine-month R&D expense rose to $1.99 million from $0.49 million.
- Nine-month operating cash use was $3.13 million, versus $1.26 million in 2015. Investing cash use was $1.15 million; financing provided $0.99 million. Cash declined $3.28 million to $2.26 million.
- At October 1, current assets were $15.49 million and current liabilities $6.36 million, implying working capital of about $9.13 million. Total liabilities were $6.91 million. The Hercules term loan had been repaid; remaining capital lease obligations totaled about $0.50 million.
- Accounts receivable was $6.51 million, net of a $0.60 million allowance; inventory was $6.31 million. One customer represented 48.8% of receivables at quarter-end.
Material changes, outlook, and risks
- On June 14, 2016, the company repaid the Hercules loan; the payoff resulted in a $313,099 noncash accounting loss on extinguishment. The payoff also included a $91,093 prepayment fee and a $187,500 end-of-term charge.
- After quarter-end, the company entered into a formula-based revolving credit facility of up to $5.0 million with Western Alliance Bank. It is secured by substantially all personal property, including intellectual property, bears a floating rate based on the greater of 3.50% or prime plus 2.50 percentage points, and includes quick-ratio, EBDAS, and minimum-revenue covenants. The filing does not establish that the full commitment is available to draw.
- Management expected cash, operating cash generation, and the new facility to fund projected plans through at least November 11, 2017, but warned that additional financing may be needed and may not be available on acceptable terms. If funding is insufficient, expansion plans and some operating activities could be delayed or curtailed. This is management’s estimate, not a guarantee.
- The company invested about $629,000 in a Longmont pilot plant during the nine-month period and planned approximately $600,000 of additional investment over the following six months, subject to resources. It also planned to continue increasing proprietary-ingredient R&D, subject to available financing.
- A significant customer dispute over supply-agreement terms had left approximately $3.0 million unpaid for prior orders. The company said it might not collect the full balance and could face reduced future orders or pricing. Customer concentration and collection risk are material considerations.
- Other risks include continued operating losses and accumulated deficit of $43.1 million, dependence on customers and suppliers, product and regulatory risks, and possible dilution from future financing. The company disclosed a related-party arrangement with Healthspan Research, managed and majority-owned by a company director.
- The company reported no legal proceeding believed likely to have a material adverse effect. It provided no formal financial guidance; the filing cautions that interim results do not necessarily indicate full-year results.
Most important facts for investors to verify
- Status and collectability of the disputed approximately $3.0 million customer balance, subsequent payments, and any effect on future orders or pricing.
- Actual borrowing availability, borrowing-base limits, interest costs, and compliance with Western Alliance facility covenants.
- Cash burn, receivables and inventory conversion, and whether the stated runway and planned pilot-plant spending remain achievable.
- Drivers and sustainability of the nine-month revenue and gross-margin improvement, given the sharp Q3 sales decline.
- Customer concentration, potential financing needs and dilution, and the terms and governance of the Healthspan related-party arrangement.