Business context and reporting period
This is ChromaDex Corporation’s unaudited Form 10-Q for the quarter ended September 28, 2013, with comparisons to September 29, 2012. The filing describes a natural-products business spanning ingredient technologies, analytical and contract services, and scientific and regulatory consulting. ChromaDex sold its BluScience consumer product line to NeutriSci in March 2013. The issuer named in the filing is ChromaDex Corporation; the request metadata identifies Niagen Bioscience, so the entity relationship should be verified.
Financial performance and position
| Metric | Three months ended September 28, 2013 | Nine months ended September 28, 2013 |
|---|---|---|
| Net sales | $2.72 million, down 25% year over year | $7.76 million, down 4% |
| Gross profit / margin | $0.75 million / 27.6%, versus $1.25 million / 34.5% | $2.38 million / 30.7%, versus $1.41 million / 17.5% |
| Operating loss | $1.24 million, versus $1.53 million | $3.67 million, versus $9.94 million |
| Net loss | $1.25 million, versus $1.54 million; loss per share $0.01 | $3.70 million, versus $9.96 million; loss per share $0.04 versus $0.11 |
| Operating cash flow | Not separately reported for the quarter | Cash used: $2.17 million, versus $9.37 million |
At September 28, 2013, cash was $1.09 million, current assets $4.68 million, and current liabilities $4.11 million (current ratio approximately 1.14). Total assets were $7.78 million and stockholders’ equity $3.27 million. Capital lease obligations totaled approximately $322,000; the filing reports no other material borrowing balance. Nine-month investing cash flow was positive $1.04 million, mainly reflecting BluScience sale proceeds, while financing cash flow was positive $1.70 million, largely from warrant and option exercises. Cash increased $567,000 from year-end 2012.
Material changes versus prior comparable periods
- Quarterly sales fell as BluScience contributed no sales after its sale; core ingredients and services sales rose 18%, and consulting contributed $363,000.
- For the nine months, core standards, contract services and ingredients sales rose 17% to $7.01 million, while BluScience recorded negative net sales of $60,000 after promotions and return allowances. Consulting contributed $809,000.
- Nine-month gross profit improved substantially, reflecting higher core analytical and contract-service sales and lower cost of sales as a share of sales. Quarterly gross profit declined because the prior-year quarter included BluScience gross profit.
- Operating expenses declined year over year, particularly sales and marketing, following the end of BluScience launch advertising; lower share-based compensation, investor-relations spending and officer-related costs also reduced general and administrative expense.
- Outstanding common shares increased from 92.1 million at December 29, 2012 to 100.8 million at September 28, 2013, primarily through warrant exercises and share-based compensation.
Outlook, risks, contingencies and unusual items
- Management expected available cash, operating cash flows, BluScience-related receipts, expense reductions and a subsequent equity raise to fund current operating plans through December 2014. The October 2013 stock sales raised $3.0 million gross, or $2.98 million after offering costs. Additional financing may be needed; availability and terms are uncertain.
- The company reported a material weakness in internal control over financial reporting and concluded disclosure controls were ineffective. The weakness concerned accounting for asset sales involving non-cash consideration.
- Prior 2013 interim statements were deemed unreliable and require restatement. Applying cost-recovery accounting to the BluScience sale and the equity method to the NeutriSci investment reduced previously reported first-quarter and six-month earnings by $2.89 million and $2.92 million, respectively; the filing states the corrections are non-cash.
- The BluScience sale consideration included cash, a $2.5 million secured convertible note and NeutriSci preferred shares. Note collectability and equity value were significantly uncertain; the note repayment schedule was amended after quarter-end, with 6% annual interest and payments extending through 2015. ChromaDex reported a 20.1% NeutriSci ownership interest and a $1.90 million investment carrying value.
- Management cited risks including demand and market acceptance, competition, product development, intellectual-property protection, regulation, financing access, and ability to establish production capacity. It planned further ingredient research and development and service-capacity expansion, subject to resources; no specific revenue or earnings guidance was provided.
- The company abandoned certain LIMS modules and recognized a $68,378 disposal loss. It reported no legal proceedings and no off-balance-sheet arrangements other than ordinary operating leases.
Important facts for investors to verify
- Confirm the issuer’s identity and its relationship, if any, to Niagen Bioscience, given the filing names ChromaDex Corporation.
- Review the amended 2013 first- and second-quarter filings and the remediation of the material weakness; assess whether controls were subsequently deemed effective.
- Track cash burn, working-capital needs, dilution from the October 2013 financing, and whether management’s December 2014 funding estimate was achieved.
- Verify collections under the amended NeutriSci note, the value and impairment status of the investment, and any royalties or supply-agreement sales.
- Assess whether core ingredient, analytical-service and consulting growth can offset the discontinued BluScience business and support improved profitability.