Business context and reporting period
This is ChromaDex Corporation’s unaudited Form 10-Q for the quarter ended June 29, 2013 (fiscal Q2) and the six months then ended. The filing identifies ChromaDex—not Niagen Bioscience—as the registrant. ChromaDex supplied botanical reference materials, ingredients, analytical and contract services, and scientific and regulatory consulting. It sold its BluScience consumer-product line to NeutriSci on March 28, 2013.
Key financial metrics
| Metric | Three months ended June 29, 2013 | Six months ended June 29, 2013 |
|---|---|---|
| Revenue | $2.707 million | $5.041 million |
| Gross profit / margin | $0.961 million / 35.5% | $1.634 million / 32.4% |
| Operating income (loss) | $(1.013) million | $0.462 million |
| Net income (loss) | $(0.990) million | $0.479 million |
| Net income (loss) per share | $(0.01) | $0.00 |
| Operating cash flow | $(2.086) million for the six months |
At June 29, 2013, cash was $0.827 million, current assets $6.268 million, and current liabilities $3.362 million. Total assets were $10.945 million and stockholders’ equity $7.192 million. Capital lease obligations totaled approximately $0.349 million; the filing reports no other conventional borrowing. The $2.403 million NeutriSci note is a receivable, not company debt. Cash increased $0.307 million from year-end despite operating cash use, supported by $1.722 million of financing cash flow, primarily warrant exercises. The company had 100.807 million shares outstanding at quarter-end and 101.307 million as of August 12, 2013.
Material changes versus comparable periods
- Q2 revenue rose 1% year over year; six-month revenue rose 13%. Core standards, contract services and ingredients revenue increased 16% in both periods, with management citing analytical testing, contract services and ingredient sales. The acquired consulting business contributed $0.203 million of Q2 revenue and $0.446 million for six months.
- Q2 gross profit increased 26% to $0.961 million. Six-month gross profit rose to $1.634 million from $0.160 million, with lower relative costs in the core business and the addition of consulting; the prior-year period included substantial BluScience launch promotions and related losses.
- Operating expenses declined year over year, notably as BluScience advertising ceased after the sale and general and administrative costs fell. Q2 nevertheless recorded a net loss. Six-month net income of $0.479 million included a $2.892 million gain on the BluScience sale; excluding that gain, management reported a six-month operating loss of $2.430 million.
- Six-month operating cash use improved from $8.352 million in 2012 to $2.086 million in 2013. The prior period included a $10.158 million equity-offering financing inflow, versus no such issuance proceeds in 2013.
Outlook, commentary, risks and unusual items
- The BluScience sale had estimated total consideration of about $6.05 million: $0.5 million cash received by June 29, further cash due, a $2.5 million senior convertible secured note payable in six quarterly installments beginning August 15, 2013, and NeutriSci preferred shares recorded at $2.679 million. The note’s June 29 carrying value was $2.403 million, including accrued interest. A $0.25 million receivable remained on the balance sheet; NeutriSci paid $0.2 million on July 12. ChromaDex also retained a 6% royalty on future BluScience net sales and a supply agreement for pTeroPure.
- Management said current cash, operating cash, expected NeutriSci receipts and expenditure reductions were expected to support planned operations through December 2013. It cautioned that additional financing might be needed and may not be available on acceptable terms; absent financing, expansion and some operations could be delayed, curtailed or terminated.
- On July 9, 2013, Thorne Research agreed to purchase and market NIAGEN™ for the U.S. and Canadian direct-to-healthcare-practitioner channel, subject to a $3.5 million minimum purchase over three years. On August 1, ChromaDex entered an exclusive worldwide license concerning specified patent rights and products including pterostilbene, with royalties, minimum payments and milestone obligations.
- The company’s $2.679 million NeutriSci equity investment was accounted for using the cost method while management assessed whether equity-method accounting applied. A change in that conclusion could require retrospective adjustment. Management reported no impairment at June 29.
- Risks highlighted include uncertain demand and product acceptance, competition, intellectual-property protection, regulation, product development and the availability of capital. Management stated disclosure controls were effective; no material change in internal control was reported, and the filing lists no legal proceedings.
Important facts for investors to verify
- Whether NeutriSci made the scheduled cash and note payments, and the collectability and conversion terms of the note and value of the equity investment.
- Whether the NeutriSci investment requires equity-method accounting and whether its recorded value remains supportable.
- Actual operating cash burn, available liquidity and financing needs after the stated December 2013 runway estimate.
- Whether Thorne met the NIAGEN purchase commitment and whether the post-quarter license arrangements generated material costs, milestones or revenue.
- Underlying profitability excluding the one-time BluScience-sale gain, and the sustainability of revenue and margins after the consumer-product line divestiture.