ChromaDex Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 3, 2015; comparative periods ended September 27, 2014. The interim financial statements are unaudited. The filing identifies the registrant as ChromaDex Corporation.
Business context
ChromaDex develops and commercializes proprietary ingredient technologies for dietary supplement, food, beverage, skin care and pharmaceutical markets. Its businesses also include natural-product reference standards and contract services, analytical testing, and scientific and regulatory consulting.
Financial performance
| Metric | Three months ended Oct. 3, 2015 | Prior comparable quarter | Nine months ended Oct. 3, 2015 | Prior comparable nine months |
|---|---|---|---|---|
| Net sales | $6.287 million | $4.140 million | $17.650 million | $11.070 million |
| Gross profit | $2.482 million | $1.523 million | $6.880 million | $3.907 million |
| Gross margin | 39.5% | 36.8% | 39.0% | 35.3% |
| Operating income (loss) | $177,130 | ($647,434) | ($913,014) | ($4.128 million) |
| Net income (loss) | ($3,716) | ($659,653) | ($1.344 million) | ($4.161 million) |
| Loss per share | $0.00, rounded | ($0.01) | ($0.01) | ($0.04) |
- Quarterly sales rose 52%; nine-month sales rose 59%. Ingredients drove growth: segment sales increased 104% for the quarter and 109% for the nine months, attributed to stronger sales across products including NIAGEN, PURENERGY and PTEROPURE.
- Quarterly gross margin improved, while core standards and contract services gross profit fell 41% year over year. Management cited inventory reserves for slow-moving or obsolete fine chemicals, low labor utilization relative to fixed costs, and a one-time severance payment.
- Nine-month operating loss narrowed substantially, reflecting higher gross profit and lower general and administrative expense, including lower share-based compensation. Interest expense increased to $434,000 from $34,000 for the nine months, largely because of the Hercules term loan.
Cash flow, balance sheet and liquidity
- Cash was $4.709 million at October 3, 2015, versus $3.965 million at January 3, 2015. Current assets were $13.034 million and current liabilities $5.881 million; working capital was approximately $7.153 million.
- For the nine months, operating cash outflow was $1.258 million, compared with $2.335 million in the prior period. Investing activities used $350,000; financing activities provided $2.352 million, primarily from the second $2.5 million loan advance. Cash increased $744,000 overall.
- Total liabilities were $10.711 million. The term loan had $5.0 million principal outstanding, with $4.226 million reported as long-term carrying value and $599,000 as current maturities. Capital lease obligations totaled approximately $717,000.
- Management stated that cash on hand, the subsequent financing and expected operating cash generation were anticipated to fund projected operating plans through at least December 31, 2016. It cautioned that additional financing may be needed and may not be available on acceptable terms or at all.
Changes, outlook, risks and unusual items
- After quarter-end, the company raised $2.0 million in a registered direct offering to existing stockholders. The 200,000 units were priced at $10 each; each included eight common shares and a three-year warrant for four shares at a $1.50 exercise price.
- The $5.0 million Hercules loan matures April 1, 2018. Its interest-only period runs through March 31, 2016, with a possible extension to June 30, 2016 if consolidated revenue reaches at least $11.5 million for the six months ending December 31, 2015. The loan rate is variable, subject to a 9.35% floor.
- A September 2015 take-or-pay agreement requires purchases of at least approximately $6.1 million of nicotinamide riboside chloride at a fixed price. About $1.0 million had been purchased by October 3; if the supplier makes the required volume available, the company may owe for any shortfall in purchases.
- A related-party agreement with Healthspan granted the company a 9% equity interest in exchange for product supply and certain resale rights. A company director manages Healthspan and owns 91%. No NIAGEN had been shipped and no accounting was recorded for the agreement by October 3.
- Key risks identified include demand and market acceptance, competition, intellectual property protection and litigation, product development, regulation of dietary supplements and food ingredients, customer transactions, and access to capital. One ingredients customer represented 19.1% of quarterly sales.
- The filing reports no legal proceedings believed likely to have a material adverse effect, no significant off-balance-sheet arrangements beyond ordinary operating leases, and effective disclosure controls as of October 3, 2015. Management planned to increase research and development for proprietary ingredients, subject to available resources.
Important facts for investors to verify
- Whether the company met the $11.5 million six-month revenue condition for extending the loan’s interest-only period.
- Purchases, availability, and any remaining take-or-pay exposure under the $6.1 million nicotinamide riboside chloride agreement.
- Cash burn, collections and inventory needs, including the adequacy of the inventory valuation allowance, which increased to $695,000 from $324,000.
- Whether the $2.0 million offering and subsequent operating cash flows supported management’s stated liquidity outlook, and the resulting share and warrant dilution.
- Revenue concentration and margin trends, particularly ingredients growth and the pressure on core standards and contract services profitability.
- Terms, sales performance, related-party governance and fulfillment of minimum purchase conditions under the Healthspan arrangement.