Business context and reporting period
ChromaDex Corporation’s unaudited Form 10-Q covers the three months ended April 2, 2016, compared with the three months ended April 4, 2015. The company develops and commercializes ingredient technologies and also provides phytochemical standards, analytical and contract services, and scientific and regulatory consulting.
Financial results and condition
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $7.332 million | $5.261 million; up 39% |
| Gross profit and margin | $3.451 million; 47.1% | $1.928 million; 36.6% |
| Operating income (loss) | $454,000 | $(906,000) |
| Net income (loss) | $256,000 | $(1.026) million |
| Diluted earnings (loss) per share | $0.01 | $(0.03) |
| Operating cash flow | $(2.896) million | $(591,000) |
| Cash and cash equivalents, period-end | $2.996 million | $5.550 million at January 2, 2016 |
| Total assets / liabilities, period-end | $16.534 million / $10.106 million | $18.749 million / $13.475 million at January 2, 2016 |
Cash used in investing was $32,000; financing provided $374,000, including $480,000 net proceeds from a registered offering and $94,000 from option exercises. Current assets were $14.374 million against current liabilities of $6.707 million. Loan payable was $4.853 million principal, plus accrued end-of-term charge and net of debt costs as presented; capital lease obligations totaled approximately $611,000. Total debt and lease obligations were therefore approximately $5.46 million before debt-cost adjustments.
Material changes versus the prior comparable period
- Ingredients sales rose 72% to $4.601 million, mainly on increased NIAGEN sales. Core standards and contract services sales grew 12% to $2.584 million; scientific and regulatory consulting sales declined 47% to $148,000, reflecting project timing and a greater emphasis on internal support for ingredients.
- Gross margin improved as a share of sales, with management citing supplier price reductions from higher purchase volumes and better labor utilization in analytical and contract services.
- Research and development expense increased 283% to $464,000, focused on NIAGEN. General and administrative expense fell 6% to $1.989 million, primarily due to lower share-based compensation; sales and marketing expense declined 7% to $545,000.
- Operating cash use increased substantially. Management attributed the quarter’s cash use principally to lower accounts payable and higher trade receivables. Cash fell $2.554 million from January 2.
Outlook, risks, contingencies, and unusual items
- Management said available cash and expected operating cash generation should fund projected operating plans through at least May 13, 2017, but noted that additional capital may be needed. No financing commitments were in place; unavailable or unfavorable financing could force delayed expansion or expense cuts.
- Management planned continued R&D investment in proprietary ingredients and investment in a pilot plant, subject to available financial resources. It anticipated higher marketing and general and administrative expenses as operations grow. The filing provides no quantified revenue or earnings guidance.
- Customer concentration increased: one ingredients-segment customer accounted for 27.4% of sales, versus no customer above 10% in the prior-year quarter.
- The term loan is repayable through April 1, 2018 and has a variable rate with a stated floor of 9.35%; the filing warns that increases in the prime rate could raise interest expense. Interest expense rose 57% to $188,000.
- The company reported a 1-for-3 reverse stock split effective April 13, 2016, retrospectively reflected in the filing. It also entered lease amendments extending Boulder laboratory space through April 2023 and Rockville office space through April 2021, and subsequently leased Longmont office and laboratory space through September 2023.
- A related-party supply arrangement with Healthspan Research, whose manager and majority owner was a company director, includes NIAGEN supply and resale terms. The company recorded approximately $20,000 of free NIAGEN supplied during the quarter as a long-term investment.
- The company reported no legal proceedings believed to be materially adverse and no changes to the risk factors in its most recent Form 10-K.
Important facts for investors to verify
- Whether the strong sales growth and gross-margin improvement, particularly in NIAGEN, continue beyond this quarter.
- Whether customer concentration and receivables collection create further cash-flow volatility; operating cash use substantially exceeded reported net income.
- Whether the May 13, 2017 liquidity estimate remains reasonable given cash depletion, debt service, planned investment, and the need for potential additional financing.
- The full economic terms and related-party safeguards of the Healthspan arrangement, and the impact of expanded lease commitments.
- The loan’s applicable interest rate and repayment schedule, including exposure to prime-rate increases.