Niagen Bioscience, Inc. quarterly report, Q2 FY2015

Business context and reporting period

This is ChromaDex Corporation’s unaudited Form 10-Q for the quarter ended July 4, 2015, with comparisons to the quarter ended June 28, 2014, and six-month comparisons for the same periods. The filing describes a natural-products business spanning proprietary ingredients, phytochemical standards and contract services, and scientific and regulatory consulting. The registrant in this filing is ChromaDex Corporation.

Financial results and liquidity

• Cash was $5.70 million at July 4, 2015, up from $3.96 million at January 3, 2015. Current assets were $12.31 million and current liabilities $5.03 million.
• Six-month operating cash outflow was $0.50 million, compared with $1.95 million in the prior-year period. Investing used $0.16 million; financing provided $2.39 million, chiefly from the second $2.5 million loan advance. Cash increased $1.73 million over the six months.
• Loan principal outstanding was $5.0 million; the balance-sheet carrying amount of long-term loan payable was $4.63 million, net of discounts and issuance costs. Capital lease obligations totaled about $0.77 million.

Material changes versus prior comparable periods

• Sales rose 58% in the quarter and 64% for the six months. Ingredient sales increased 98% and 113%, respectively; management cited higher sales across products including NIAGEN, PURENERGY and PTEROPURE. Core standards and contract services sales rose 28% and 30%.
• Gross profit increased 77% in the quarter and 84% for the six months. Total cost of sales fell as a share of sales by about 4 and 5 percentage points, respectively, reflecting ingredient purchasing scale and better utilization in service operations.
• Operating expenses declined 13% in the quarter and 6% for the six months. General and administrative expense fell 18% and 11%, partly because share-based compensation was lower than in 2014.
• The net loss narrowed from $1.65 million to $0.32 million for the quarter and from $3.50 million to $1.34 million for the six months. Interest expense increased substantially following the term loan financing.

Outlook, risks and unusual items

• Management expected cash on hand and cash generated from operations to support projected operating plans through at least December 31, 2016, but said additional capital could be needed and was not committed. If financing or revenue is inadequate, the company may delay or curtail expansion and certain operating activities.
• The $5 million Hercules loan matures April 1, 2018. Its interest-only period was extended to March 31, 2016, and may extend to June 30, 2016 if consolidated revenue reaches at least $11.5 million for the six months ending December 31, 2015. Interest is variable-rate, so higher prime rates could increase expense.
• Management planned to increase research and development for proprietary ingredients over the next two years, subject to available resources, and anticipated higher marketing expense as it promoted those ingredients.
• Risks cited include demand and product acceptance, competition, intellectual-property protection and litigation, product development, regulation of dietary supplements and food additives, manufacturing capacity, and access to capital. The company reported no legal proceedings it believed would have a material adverse effect.
• Inventory valuation allowance increased to $564,000 from $324,000, including additional reserves for slow-moving or obsolete fine-chemical reference standards. The company also adopted new debt-issuance-cost presentation guidance early; this reclassified amounts on the balance sheet without changing recognition or measurement.

Important facts for investors to verify

• Whether revenue growth, especially in proprietary ingredients, persists and converts into improved operating results and cash generation.
• Cash consumption, receivables collection, inventory quality and the adequacy of the increased inventory valuation allowance.
• Loan interest rate, repayment terms, revenue condition for the possible interest-only extension, and any future financing needs or dilution.
• Whether the reported cash runway through December 2016 remains achievable under actual operating performance and capital requirements.
• The filing reports 106,290,803 shares outstanding at July 4, 2015 and 107,444,481 at August 12, 2015; investors should verify the intervening share-count change and potential dilution from outstanding options, warrants and convertible debt.