Business context and reporting period
Niagen Bioscience’s supplied filing is a Form 10-Q filed under the name ChromaDex Corporation, for the quarter ended June 30, 2012; comparisons are with the three and six months ended July 2, 2011. The company supplied phytochemical standards, analytical and contract services, and proprietary ingredients, and had recently launched its BluScience dietary supplement line.
Financial performance and liquidity
| Metric | Q2 2012 | Six months 2012 |
|---|---|---|
| Net sales | $2.67 million, up 38% year over year | $4.46 million, down 0.5% |
| Gross profit and margin | $765,000; 28.6% (prior-year 30.0%) | $160,000; 3.6% (prior-year $1.60 million; 35.8%) |
| Operating expenses | $4.75 million | $8.57 million |
| Operating loss | $3.99 million | $8.41 million |
| Net loss | $3.99 million; $0.04 per share | $8.43 million; $0.10 per share |
Q2 net sales growth reflected core-segment growth and initial BluScience sales, but the six-month total was essentially flat as core standards, services and ingredients sales fell 11%. The six-month retail segment had $2.73 million in gross sales but $2.28 million of promotions, discounts and returns, leaving $450,000 net sales and a $970,000 gross loss. Across the company, six-month cost of sales rose to $4.30 million from $2.88 million.
Six-month operating cash use was $8.35 million, versus $1.06 million a year earlier; investing cash use was $14,000. Financing provided $10.16 million, primarily from equity offerings, and cash increased by $1.79 million to $2.21 million. At June 30, current assets were $8.98 million and current liabilities $4.25 million, including $5.25 million of inventory. Capital-lease obligations totaled approximately $248,000; the filing reports no other material borrowing. Accumulated deficit was $26.48 million.
Material changes and unusual items
- The company raised approximately $10.07 million net through a February registered offering and private placement, issuing about 14.9 million shares at $0.75 per share. Outstanding shares increased from 72.9 million at year-end to 90.3 million at June 30; 92.6 million were reported outstanding August 8.
- BluScience launch advertising drove six-month sales and marketing expense to $3.73 million, from $1.01 million. General and administrative expense increased to $4.85 million from $3.57 million, including approximately $671,000 of officer severance and $605,000 of investor-relations expense.
- Share-based compensation was $1.26 million for the six months. Former President William Spengler and former CEO/President Jeffrey Himmel and COO Debra Heim left during the period; related awards were forfeited and previously recognized expenses reversed.
- The company entered a license, supply and distribution agreement with OPKO Health for Latin America. A major shareholder, Dr. Phillip Frost, is OPKO’s chairman and CEO; the filing said no transactions with OPKO had occurred by June 30.
Outlook, risks and contingencies
Management expected available cash, cash equivalents and operating cash to support projected operations through December 2012, but said additional financing might be needed sooner or for longer-term plans. Management was reviewing and reducing BluScience marketing and inventory plans; it warned that financing might not be available on acceptable terms or at all and that spending, expansion or operations could be curtailed. The company estimated $1.75 million of potential proceeds if all 8.34 million outstanding $0.21 warrants were exercised, with no assurance of exercise. It also cited risks involving product acceptance, competition, regulation, intellectual property, customer transactions and production capacity. The filing reported no legal proceedings and no off-balance-sheet arrangements beyond ordinary operating leases; disclosure controls were assessed as effective.
Investor verification priorities
- Verify BluScience sell-through, retailer orders, discounting and returns, and whether marketing reductions improve the retail segment’s gross economics.
- Track cash burn, inventory levels and whether the stated December 2012 operating runway or additional financing assumptions were achieved.
- Review dilution from the 2012 share issuance, warrant exercises and subsequent share-based awards.
- Assess whether the core business can restore gross margins as analytical testing and contract-services sales change.
- Confirm subsequent developments in the OPKO arrangement, leadership changes and any financing or production-capacity plans.