Business context and reporting period
The supplied filing is ChromaDex Corporation’s unaudited Form 10-Q for the quarter ended September 29, 2012—not a filing identified as Niagen Bioscience, Inc. Investors should verify the entity and period before relying on this summary. ChromaDex supplied phytochemical standards, analytical services and ingredients, and had recently launched its BluScience dietary-supplement line.
Financial performance and position
For the three months ended September 29, 2012, sales were $3.63 million, gross profit $1.25 million, operating loss $1.53 million and net loss $1.54 million ($0.02 per share). For the nine months, sales were $8.09 million, gross profit $1.41 million, operating loss $9.94 million and net loss $9.96 million ($0.11 per share). The filing reports no income tax expense for the nine-month period, reflecting a full valuation allowance against deferred tax assets.
- Margins: Gross margin was approximately 34.5% for the quarter and 17.5% for the nine months, compared with approximately 25.5% and 32.8%, respectively, in the corresponding 2011 periods.
- Cash flow: Nine-month operating cash use was $9.37 million; investing cash use was $66,000; financing provided $10.25 million. Cash rose to $1.24 million from $420,000 at December 31, 2011.
- Liquidity and working capital: Current assets were $8.27 million and current liabilities $3.90 million. Inventory was $5.44 million. Receivables were reported net of a $920,000 allowance, including a $900,000 retailer hold related to potential product returns.
- Debt: The balance sheet showed approximately $225,000 of capital-lease obligations, including current maturities. The filing reports no other significant borrowing balance.
- Equity: Stockholders’ equity was $5.23 million. The company had 91.65 million shares outstanding at quarter-end and 92.64 million as of November 7, 2012.
Material changes versus prior comparable periods
Quarterly sales nearly doubled year over year, chiefly as BluScience retail sales grew; quarterly net loss narrowed from $2.40 million to $1.54 million. Nine-month sales increased 28%, but net loss widened from $5.40 million to $9.96 million and gross profit fell 32%. The core standards, services and ingredients segment’s nine-month sales declined 5%; BluScience generated $2.09 million in net sales but recorded a $167,000 gross loss. BluScience sales deductions for promotions, discounts and returns were $3.31 million for the nine months, including the retailer-related $900,000 reserve.
Sales and marketing expense increased to $4.53 million for the nine months, including $3.00 million for BluScience. General and administrative expense rose to $6.83 million, including approximately $671,000 of officer severance and $908,000 of investor-relations expense. The company raised approximately $10.07 million net through a registered offering and private placement; the resulting share issuance materially increased the share count.
Outlook, risks and unusual items
Management said that, after curtailing certain spending, available capital and expected operating cash could support operations through March 2013. This was an estimate, not a guarantee; management said it might seek financing earlier, and acknowledged that the recent financing had not provided enough capital for revised operating plans. If financing or revenue proved inadequate, the company might further reduce, delay or terminate expansion and marketing plans. Management specifically said it lacked resources to continue BluScience inventory development and marketing at then-current spending levels.
- Key risks identified include weak product demand or market acceptance, competition, intellectual-property disputes, regulation, product-development and customer-transaction risks, and inability to raise capital. Dietary-supplement labeling, composition and advertising are subject to FDA, FTC and USDA rules.
- The 7.80 million outstanding warrants exercisable at $0.21 per share could provide approximately $1.64 million if exercised for cash; exercise was not assured.
- Share-based compensation was $2.19 million for the nine months. Officer departures led to forfeitures and reversals of some previously recognized compensation expense.
- A related-party agreement with OPKO covered Latin American licensing, supply and distribution; the filing reported no transactions under that agreement through quarter-end. A separate OPKO consulting agreement expired October 10, 2012, and the company issued OPKO 500,000 shares for the consulting services. OPKO’s chairman and CEO beneficially owned 16.6% of ChromaDex at quarter-end.
- The company reported no legal proceedings, defaults upon senior securities or material changes in internal control; management concluded disclosure controls were effective as of September 29, 2012.
Investor verification points
- Confirm that ChromaDex Corporation, rather than Niagen Bioscience, is the intended issuer and that the 2012 reporting period is correct.
- Review the retailer’s $900,000 receivable hold and related return reserve, subsequent collections, and any actual product returns.
- Assess BluScience sell-through, promotional deductions, segment gross profitability and inventory levels, including whether inventory required further write-downs.
- Check cash burn, financing availability and actual liquidity against management’s conditional March 2013 runway estimate.
- Review the effect of equity offerings, warrants, options and share-based compensation on dilution, and verify any subsequent warrant exercises or financing.