ChromaDex Corporation — Q1 2014 Form 10-Q
Entity and period: The supplied filing is for ChromaDex Corporation, not Niagen Bioscience, Inc. It covers the unaudited quarter ended March 29, 2014; the comparable quarter ended March 30, 2013. The filing was signed May 8, 2014.
Business context
ChromaDex develops and commercializes ingredient technologies and provides phytochemical reference standards, analytical and contract services, and scientific and regulatory consulting. The filing reports three operating segments: core standards and contract services, ingredients, and scientific and regulatory consulting. Fiscal 2014 is a 53-week year ending January 3, 2015.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $3.074 million | $2.335 million |
| Gross profit | $985,008 | $672,840 |
| Gross margin | 32.0% | 28.8% |
| Operating loss | $1.839 million | $1.416 million |
| Net loss | $1.848 million | $1.424 million |
| Basic and diluted loss per share | $0.02 | $0.02 |
| Net cash used in operating activities | $1.405 million | $706,000 |
Sales increased 32%. Ingredients revenue rose 97% to $1.136 million, primarily from newly launched NIAGEN and PURENERGY; core standards and contract services revenue increased 10% to $1.736 million. Consulting revenue fell 17% to $202,000 due to client-related project delays. Gross profit rose 46%, but operating and net losses widened as general and administrative costs increased.
Gross margin improved about 3.2 percentage points. Sales and marketing expense declined to $465,000 from $729,000, while general and administrative expense increased to $2.338 million from $1.360 million. The increase included share-based compensation expense of approximately $1.000 million versus $352,000, including expense associated with 1.09 million restricted shares granted to officers and directors. Research and development expense increased to $84,788 from $7,350.
Financial position and liquidity
- Cash was $1.925 million at March 29, 2014, down from $2.261 million at December 28, 2013. Operating activities used $1.405 million; investing activities provided $1.074 million, largely from assignment of a NeutriSci note; financing activities used $6,000.
- Current assets were $6.421 million and current liabilities $3.236 million, for working capital of approximately $3.184 million. Total assets were $8.472 million and total liabilities $3.677 million.
- Capital lease obligations totaled approximately $386,000, including $136,000 current. No other conventional borrowing balance is identified in the reported balance sheet.
- Management said that, after curtailing certain expenditures, existing cash and cash generated from operations were expected to support operations through March 2015. It cautioned that additional financing might be needed and was not assured on favorable terms or at all.
Material changes, outlook and risks
- The filing attributes ingredient growth to NIAGEN and PURENERGY launches. Management planned to continue ingredient research and development, expand service capacity and the chemical library, and pursue a third-party collaboration to establish a GMP-compliant pilot plant; implementation was not assured and was subject to available resources.
- No formal revenue or earnings guidance is provided. Management said it might seek additional capital before March 2015 for ongoing plans or longer-term objectives. If funding or sufficient revenue is unavailable, it may delay or curtail product and service expansion and reduce certain expenses. Equity financing could dilute shareholders; other arrangements could require concessions on valuable rights.
- Liquidity risk is heightened by recurring losses and operating cash use. Management cited risks including demand and market acceptance, competition, intellectual-property protection, litigation, product development, regulatory changes, customer transactions and access to capital. It also warned that inability to establish production capacity or secure suitable third-party vendors could constrain customer fulfillment.
- The BluScience product line had been sold to NeutriSci in 2013. ChromaDex assigned the NeutriSci senior note to a third party for $1.25 million; the filing records $1.0925 million of net proceeds after fees against the investment carrying value. ChromaDex also agreed to transfer preferred shares valued at $500,000 to the buyer under specified future conditions, and shares valued at $50,000 to the placement agent upon a specified listing event. The investment was carried at $774,000; management reported no other-than-temporary impairment.
- Subsequent to quarter-end, the company entered a capital lease for laboratory equipment, with approximately $223,000 to be recorded and total payments of approximately $271,000 over 60 months.
- The company said disclosure controls were effective and that it had implemented a remediation plan for a previously identified material weakness concerning accounting for asset sales involving noncash consideration and equity-method investments. The remediation was operating effectively as of quarter-end.
- The filing reports no legal proceedings management believed would have a material adverse effect and no off-balance-sheet arrangements other than ordinary operating leases.
Important facts for investors to verify
- Confirm the filing’s issuer: the document identifies ChromaDex Corporation, despite the request metadata naming Niagen Bioscience, Inc.
- Assess whether the stated runway through March 2015 remains achievable given quarterly operating cash use, working-capital needs and management’s reliance on expense curtailment.
- Track whether NIAGEN and PURENERGY sales growth translates into sustainable margins and cash generation, and whether delayed consulting projects resume.
- Review share-based compensation, potential dilution, and the timing and terms of the restricted-stock awards and outstanding options.
- Verify the status and value of the NeutriSci investment and the conditional preferred-share transfers, as well as the new equipment lease commitment.