Three distinct business segments
ChromaDex, Inc. (NASDAQ: CDXC) is an ingredient technology business based in Irvine, California, comprised of three segments. Their natural product fine chemicals segment includes the largest phytochemical catalog in the world. Their analytical and chemistry based services was acquired in 2003 and is located in Boulder, Colorado. Products are tested for identity, potency, contaminants and label claims. Spherix Consulting was acquired in 2012 and is based in Rockville, Maryland. This segment does regulatory and safety testing.
Their various business units discover, acquire, develop and commercialize patented and proprietary ingredient technologies. They supply compounds and chemicals to other companies for use in the dietary supplement, food, beverage, skin care and pharmaceutical markets. Their relationship with various universities and research institutions allows them to become aware of and acquire early stage ingredient technologies that are protected by intellectual property.
NIAGEN nicotinamide riboside is the reason for increased sales in the ingredient segment
Record revenue and quarterly net income was reported May 12, 2016. Led by Niagen, ingredient sales rose by 72%.
"The ingredients segment generated record net sales of $4.6 million for Q1 2016, an increase of 72%, compared to $2.7 million for Q1 2015."
It's also worth noting that the reference standards and analytical services business segment also had record revenue in Q1 of $2.6 million.
A look at the most recent 10-Q filed for the three-month period ended April 2, 2016 and April 4, 2015 shows net sales and gross profit up. There is finally net income instead of loss. Research and development costs are likely up due to clinical trials.
Following is a breakdown of the net sales by business segment. The ingredient segment shows the most growth and appears to be driving rising revenues:
Consumers seeking the potential Niagen health benefits are driving this growth. ChromaDex holds the patents to Niagen and is supplying it to a number of different vendors, both online and brick and mortar. It's a vitamin B3 metabolite that's a precursor to NAD+ that's supposed to push NAD+ levels higher than Niacin without the flushing. Most are familiar with doctors prescribing the use of Niacin at high doses years ago for lowering cholesterol levels before statins came on the market. Everyone ran to statins to get away from the flushing. For Niagen to push NAD+ levels higher for Mitochondrial health is something that's only recently started being tested in humans. The concept of maintaining, enhancing and inducing creation of new mitochondria is fascinating. We all want to live healthier lives with better cognitive function while aging well. But, slowing, or reversing some of the ravages of aging? That's dreamland for most. However, what if it does work? Do you want to wait and find out 20 years later without having tried it? No, and many are willing to give it a shot. That's why sales are shooting up. This is the stuff of dreams and hope until we start looking at the science closer. Quality human trials need to be completed for definitive answers and they've started.
ChromaDex is directly funding their own human studies and had over 70 collaborations with leading researchers and Universities who are in the process of publishing preclinical studies that are now transitioning to collaborative human studies with ChromaDex's Niagen being used in these studies. From what I've seen done so far, they are quick trials.
Supplement companies don't have the same hoops to jump through as companies working to bring new drugs to market and the majority of them never bother with the expense of clinical trials. ChromaDex is different since they look at the science behind their ingredients. And, there is some serious science backing the theories behind Niagen being an anti-aging vitamin.
Currently, PubMed lists 176 studies published on nicotinamide riboside. (Do a search for nicotinamide riboside when you open the PubMed page.) There are eight ongoing/completed human trials that can be found on clinical trials.gov.
A study of the Pharmacokinetics of Three Dosages of Niagen in Healthy Subjects (14NBHC) was completed successfully and showed that Niagen effectively increases NAD+ and is safe in humans. This was a small study and more trial results are needed and should be coming soon from a couple of other studies on larger participant size.
A Phase II randomized, double blind, placebo controlled trial being conducted in Canada has a primary completion date of December 2016. The estimated enrollment is 140 healthy adults aged 40 to 60 and they are testing 100, 300 and 1,000 mg.
Elysium Health and KGK Synergize Inc. are conducting a Phase I randomized, double blind, placebo controlled study in Canada with a primary completion date of June 2016. The estimated enrollment is 120 healthy adults aged 60 to 80 and they are testing "Basis" at 250 and 500 mg. Basis 250 mg is a combination of 250 mg nicotinamide riboside and 50 mg Pterostilbene.
The company received New Dietary Ingredient NDI status from the FDA for their patented and proprietary lead ingredient, NIAGEN nicotinamide riboside, in November 2015. November was a busy month for them. They also entered into a Materials Cooperative Research and Development Agreement MCRADA with the National Institute on Aging NIA, a part of the National Institutes of Health NIH. And, of potential significance is the joint development agreement with The Procter & Gamble Company (NYSE: PG) "P&G".
"This agreement positions our innovative new ingredient to be included in a number of P&G products, some of which are among the highest volume consumer products in the world. Working with P&G over the past year on a series of assessments has provided for an excellent foundation for this exclusive joint development collaboration."
In January 2016, the company announced that an independent scientific panel of experts determined that Niagen, ChromaDex's patented and proprietary lead ingredient, is Generally Recognized As Safe GRAS.
There is a lot more to this company that can be found by visiting their website and reading the SEC filings. They came to my attention due to my interest in Niagen - nicotinamide riboside which may become a billion dollar ingredient if the science proves it out. Following is from the press release put out March 17, 2016:
"Perhaps the most unrealized value for ChromaDex shareholders may lie in NR's pharmaceutical applications. We have been working closely with the NIH on a therapeutic indication for NR as a treatment of a rare pediatric orphan disease, Cockayne Syndrome. We expect to file for orphan designation as well as an IND with the FDA in 2016. Collaborators such as NIH are currently performing pre-clinical studies on the use of NR to treat several other orphan diseases."
"The excitement continues to build surrounding the peer-reviewed published research and commentary of NR's potential health benefits as a precursor to the co-enzyme nicotinamide adenine dinucleotide (NAD+). We continue to build upon our already significant patent portfolio surrounding NR and NAD+ precursors, putting us in the enviable position of 'gatekeeper' to the entire NAD+ precursor category. Our vision is that NIAGEN will become part of an important NAD+ nutrient deficiency story similar to Vitamin C, Vitamin D, folic acid and Omega-3 fatty acids. A new vitamin of this magnitude is the type of opportunity that comes along once every 25+ years. All of the important pieces of the puzzle - peer reviewed science, media attention to NAD+ story, and the rise of the treatment of aging as disease - are creating a perfect storm for NIAGEN to become the next billion dollar ingredient."
Interview with CEO Frank Jaksch regarding questions that arose from an article published June 20, 2016
First of all, thank you, Frank for taking the time to speak to me on such short notice. It is greatly appreciated.
Q: In reviewing SEC filings and related exhibits, it seems to me you co-founded the company in late 1999, well before you went public. I see the first licensing agreement with the University of Mississippi in August 2000 after having given them $525,000 for joint research in November 1999. Who was your founding partner and what was the primary focus of the company at that time?
"FJ: My co-founding partner was Mark Germain.
In the early years, ChromaDex focused on developing a catalog of phytochemicals, compounds isolated from botanicals, for research and quality control (reference standards). However, from the inception, our business model was designed to expand beyond the natural product chemical and service business into the natural product, novel ingredient business. ChromaDex was started as collaboration with the University of Mississippi, as they had one of the most active natural products research centers in the world.
ChromaDex is a 17-year-old business that was not a public company for the first 9 years of operation. Over 17 years, ChromaDex has developed a tremendous brand reputation as a leader in the natural products chemistry arena, and we have thousands of customers all over the world. The fine chemical, chemistry services and regulatory consulting businesses represented $9.5 million in revenue in 2015 (as per our 2015 10-K). ChromaDex has a rather unique business model, the natural product chemistry business generates a tremendous amount of market intelligence, primarily information coming from our University and research institute customers, which we use to identify valuable early stage research, and then license the patents/intellectual property to develop novel ingredients for the supplement, food, beverage, nutrition, skin care and even pharmaceutical markets. ChromaDex went public through a reverse merger and raised money in 2008, to start developing our novel ingredients business. We launched our first ingredient, pTeroPure pterostilbene in 2010, and have since launched five other ingredients, including our flagship Niagen nicotinamide riboside. All based on university licensed intellectual property."
Q: In looking at shares held in 2001, it clearly shows 100% held by family with you holding 61% of the shares. I don't see any mention of anyone other than family. You were basically a family business in 2001? Is that correct?
"FJ: Correct. The company was closely held by the Jaksch and Germain families. When the internet bubble burst in early 2000, it made it virtually impossible to raise money for a start-up. During the first few years, the co-founders self-funded ChromaDex, and grew the company based on revenue growth."
Q: I see a licensing agreement with Bayer Innovation, Federal Republic of Germany dated in October 2003 and another one with the University of Texas System in August 2005. These agreements were all signed before you went public in June 2008. In looking at Barry Honig filings, I see he filed a Form 3 for ChromaDex shares in October 2011. These timelines would indicate it's safe to say ChromaDex isn't a Barry Honig business. However, I would like to know the history behind your investment into Pershing Gold.
"FJ: Your timeline on our business development, becoming a public company and Mr. Honig's investment is correct. When we did the financing which involved Mr. Honig, ChromaDex was an 11-year-old business that I founded long before Mr. Honig became an investor, so I am not sure how anything they alleged in the article about me could be true.
In 2010, I was an investor in an enterprise known as Empire Sports and Entertainment, that business failed in 2011 and the company that would later become Sagebrush Gold and then Pershing Gold. I sold my shares in 2013 and took a loss on this investment."
Q: From what I see in the filing your IR firm sent me, HealthSpan Research, LLC has only placed a few small orders and isn't a distributor of ChromaDex product. HealthSpan simply uses ingredients in their own consumer product. And, HealthSpan isn't your largest customer. Your filings show the ingredient sector has an increasing pattern of growth in the last 5 quarters. And, your press releases have lead me to believe it's due to Niagen sales. I'd like to guess that your largest customer might be Elysium since I've seen them advertising quite a bit about a combination product and found a supply agreement with them in your filings. Whomever your largest customer is, are they related to Barry Honig or any of your directors?
"FJ: Correct on your first point. HealthSpan, a consumer products company, is not among ChromaDex's 20 largest customers. A description of the Company's transactions with HealthSpan is included in the Company's filings with the Securities and Exchange Commission (SEC).
The single large customer referred to by The Bleecker Report is not HealthSpan. Our policy is to not disclose the identity of our customers without their expressed consent.
As stated in our May 12, 2016 press release, the ingredients segment of ChromaDex generated record net sales of $4.6 million for Q1 2016, an increase of 72%, compared to $2.7 million for Q1 2015. The core standards and services segment posted record sales of $2.6 million for Q1 2016, an increase of 12% as compared to $2.3 million for Q1 2015. This data is also in our 10-Q and 10-K filings.
Our largest current ingredient customer has no affiliation with Mr. Honig."
Q: Why was William Smithburg chosen to replace outgoing director Hugh Dunkerley who recently resigned from the company due to legal issues unrelated to ChromaDex?
"FJ: Mr. Smithburg has been a longstanding shareholder of ChromaDex and has followed our business closely. As outlined in our June 7, 2016 Press Release, with his extensive and relevant resume, we felt he was outstanding as a ChromaDex director."
Q: ChromaDex filings indicate that Margie Chassman hasn't been a 10% holder since 2010. Her own Form 3 shows her initial purchase putting her over 10% status was filed in June 2008. Did she and her husband try to manipulate the company during that two-year period of ownership?
"FJ: Absolutely not."
Q: From the terms of the 8-K filed with the SEC in November 2015 outlining the 2015 equity offering, it seems that the claim of "Honig/Brauser (with Frost) bought $2 million in stock directly from ChromaDex at a price of just $1.50 (plus a pile of free warrants)" in the recent article might be misleading in that it didn't consider the r/s. Would you mind responding to this claim about the equity offering?
"FJ: This statement is misleading because the author stated the incorrect share price and neglected to reference the 1:3 reverse stock split the Company effected in April of 2016. The equity offering price per share was $1.25 ($3.75 post split) and included 50% warrant coverage at $1.50 ($4.50 post split). The terms of this offering were fully disclosed to the public in the Company's FORM 8-K filed with the SEC on November 5, 2015."
Q: Has the company been doing heavy promotion as implied by the recent negative article?
"FJ: The article is implying that our recent valuation is due to heavy promotion, which is false. The author cites a few examples of paid promotion that were from 4 or 5 years ago, as well as several examples that have nothing to do with us. ChromaDex has not done any paid promotion since 2012. I am not sure how anyone could view this as "heavy" and in any way relevant to our current valuation."
Q: I suspect that clinical trials in your sector might be much lower and less time consuming than those done in the biotech space. Could you add some commentary to that?
"FJ: Yes, that is correct, the type of studies we do are not multi-year and multi-million dollar budget studies. It is also important to note that many of the university studies we are collaborating on are entirely or partially grant funded."
Q: Would you please comment on the company's current financial situation, specifically related to cash on hand and how much more it might need via a capital raise?
"FJ: The Bleecker Street article seems to question the Company's financial situation by looking only at the cash position at the end of Q1 2016. We believe ChromaDex is in the best financial condition it's ever been in, so let's take a closer look at the entire picture:
- The Company's cash position at end of Q1 2016 was indeed $3.0M as disclosed in our Form Q1 10-Q
- As per the 10-Q filing, the company had bulk ingredient inventory of $5.7M which was taken into COGS at favorable unit costs. The Company made an investment decision to use cash for these inventories in late 2015. This inventory position, while above normal operating levels will be converted to cash through the normal sales cycle and the inventories are expected to return to normal operating levels during 2016
- During May, the Company paid off the Hercules debt facility of ~$4.8M from the proceeds of an equity transaction completed on June 6, 2016 at $4.70 per common share without warrant coverage and virtually no fees. The retiring of this loan, makes the Company debt free except for normal accounts payable and other operating commitments.
- During the course of 2015, the Company started the transition to positive Quarterly EBITDA and net income breakeven. In Q1 2016, the Company had a positive EBITDA and generated net income.
- We believe that the above positions have strengthened the Company's balance sheet and have us on very solid financial footing for the balance of 2016 and into 2017. Additionally, with the elimination of secured debt, we believe that we have improved the Company's overall credit profile."
Q: In seeing how quickly you and your IR contact responded to my queries, I have to wonder why you didn't respond to the author of the negative piece published on June 20, 2016 when he reached out to you in advance of publication?
"FJ: We did not respond, because as far as we know the Company was never contacted by the author. We did receive a note from one of our ex-IR firms letting us know that they had received an e-mail late on Sunday night before the article published first thing on Monday morning, so I am not sure how they expected to receive a response under those circumstances."
Thank you for your time and help in understanding some of the issues raised in the recent article published on June 20, 2016. I've been following the company due to the ingredient Niagen and was quite surprised to see the negativity and wanted to research it myself and report to investors. I'm not an investor myself and I'm not being paid by anyone other than Seeking Alpha for my writing on ChromaDex. My primary focus is on the science behind Niagen.
A high percentage of the company sales are due to Niagen and any drop in Niagen sales could temporarily drop the share price. I say temporarily since Niagen isn't the only product, service, or ingredient they supply. Fortunately, there is diversity in their ingredient portfolio as well as growth in both the phytochemical reference standards and analytical testing business, which are very relevant in today's safety and quality-conscience environment.
Additionally, the joint development agreement with P&G may not be successful at producing a product with Niagen that clearly shows consumer benefit.
The negative article that came out on 6.20.16 caused the share price to drop dramatically. It's impossible to say whether or not the shares bounce back up or continue to drop in the short term.
Based on the above interview with the CEO, it seems the negative article was a clear distortion of facts filled with unrelated information. The author of the negative article stated they shorted the stock ahead of publication.
ChromaDex has a solid history as a company with a good business plan. The products are desired by consumers and their services are requested by other companies. The price dropped due to being targeted by a short and distort campaign and should be going up again.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CDXC over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Please check with your doctor before taking any new supplements since I’m not an md or a nutritionist. I do, however, take the combo capsule Elysium sells marketed as Basis, which includes Niagen/Nicotinamide Riboside “NR” and Pterostilbene.