Niagen Bioscience, Inc. quarterly report, Q2 FY2014

Business context and reporting period

The filing is an unaudited Form 10-Q for the quarter ended June 28, 2014, filed by ChromaDex Corporation. The request identifies Niagen Bioscience, Inc.; investors should verify the issuer identity and corporate history. ChromaDex develops and commercializes ingredient technologies and provides reference-standard, analytical-testing, and scientific/regulatory consulting services. Fiscal 2014 is a 53-week year ending January 3, 2015.

Financial performance and position

For the six months, operating cash use was $1.948 million; investing activities provided $1.000 million, chiefly from the NeutriSci note assignment; financing activities used $33,000. Cash declined by $981,000 to $1.281 million. At June 28, current assets were $6.582 million and current liabilities $3.980 million (current ratio approximately 1.65). Total liabilities were $4.560 million, including $564,000 of capital-lease obligations; the filing reports no other conventional borrowings. Accounts payable was $2.758 million and inventory $2.873 million.

Material changes versus comparable periods

• Second-quarter sales rose 42% year over year; first-half sales rose 37%. First-half gross profit increased 46%, while net loss widened from $2.445 million to $3.501 million.
• Ingredients revenue grew 155% in the quarter and 128% in the first half, primarily from recently launched NIAGEN and PURENERGY. First-half core standards and contract services revenue increased 6%; consulting revenue increased 7%.
• First-half general and administrative expense increased to $4.806 million from $2.702 million, including $2.036 million of share-based compensation versus $728,000 a year earlier. R&D expense rose to $208,000 from $37,000.
• First-half cash use from operations improved modestly from $2.086 million. The period-end cash balance nevertheless fell from $2.261 million at December 28, 2013.

Outlook, risks, contingencies and unusual items

• Management said current cash and cash generated from operations, with spending curtailments, were expected to support operations through March 2015. Additional financing may be needed; availability and terms are not assured. If financing is unavailable, the company may delay or curtail expansion and expenses.
• Management planned to continue increasing R&D for proprietary ingredients over the next two years, subject to financial resources. The filing gives no numerical revenue or earnings guidance.
• A $125,000 legal settlement was paid and expensed in the first half. Management did not expect ordinary-course legal matters to have a material adverse effect.
• The BluScience sale consideration included a NeutriSci investment. The company reported a $774,000 carrying value, discontinued equity-method accounting after assigning the senior note, and stated that no other-than-temporary impairment was identified at quarter-end. Preferred shares promised to the note buyer and placement agent had not been transferred by June 28, 2014.
• A laboratory-equipment capital lease added approximately $223,000 of obligations, payable over 60 months. The company also issued shares to settle vendor amounts and issued equity awards; these contributed to dilution and compensation expense.
• Risks cited include financing needs, product-market acceptance, competition, intellectual-property protection, regulation, product development, customer demand and production capacity. Management reported disclosure controls were effective and no material change in internal control during the quarter.

Important facts for investors to verify

• Confirm the issuer and its relationship to the company named in the request; this filing names ChromaDex Corporation.
• Assess whether cash generation, collections and inventory management can sustain operations beyond management’s March 2015 estimate, and whether additional financing is required.
• Track NIAGEN and PURENERGY sales, customer concentration, segment margins and the ability to scale production profitably.
• Review the drivers and recurrence of G&A costs, especially share-based compensation, R&D spending and the legal settlement.
• Verify the NeutriSci investment’s recoverability and the status and terms of the promised share transfers.
• Consider dilution: 106.5 million common shares were reported outstanding as of August 11, 2014, and options and other equity awards were also outstanding.