ChromaDex Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended July 2, 2011; filed August 11, 2011. The filing identifies the issuer as ChromaDex Corporation, consistent with the company’s name at the time of filing.
Business context
The company supplied phytochemical reference standards, analytical and contract services, and proprietary ingredients and retail products for dietary supplement, food and beverage, pharmaceutical, and cosmetic markets. Management was investing in proprietary ingredients and retail-product launches, expanding sales and marketing, and planning to grow service capacity.
Financial performance and liquidity
- Second-quarter revenue: $1.94 million, down 5% from $2.03 million in the prior-year quarter. The filing attributes the decline primarily to lower domestic reference-standard sales.
- Second-quarter gross profit and margin: $581,000 and approximately 30%, compared with $776,000 and approximately 38% a year earlier. Net loss was $1.84 million, versus $304,000; loss per share was $0.03 versus $0.01.
- Six-month revenue: $4.48 million, up 13% from $3.97 million. Growth was attributed mainly to proprietary ingredients and bulk dietary-supplement raw materials. Gross profit was $1.60 million, nearly flat year over year, and gross margin was approximately 36%, down from approximately 40%.
- Six-month operating results: Operating loss was $2.98 million versus $254,000; net loss was $3.00 million versus $270,000. Loss per share was $0.05 versus $0.01.
- Expenses: Six-month sales and marketing expense rose to $1.01 million from $453,000; general and administrative expense rose to $3.57 million from $1.39 million. Share-based compensation was $1.51 million, up from $282,000, and was a major factor in the expense increase.
- Cash flow: Six-month operating cash use was $1.06 million, compared with $1.47 million. Investing cash use was $118,000; financing provided $996,000, mainly from warrant exercises. Cash declined by $182,000 to $2.04 million.
- Balance sheet at July 2: Current assets were $5.53 million and current liabilities $2.19 million. Accounts payable increased to $1.36 million from $515,000 at January 1. Total capital-lease obligations were approximately $239,000. Stockholders’ equity was $4.48 million.
Changes, outlook, and risks
- Higher costs of sales reflected more outsourced contract services and a greater mix of higher-raw-material-cost proprietary ingredients. Management expected increased sales of these products to pressure gross margin over the following 12 months.
- Management expected significant share-based compensation expense to continue over the next two years. Six-month expense included $1.51 million; the filing reported $3.43 million of unrecognized employee option and restricted-stock compensation and $1.10 million related to nonemployee awards.
- Management stated that available cash and expected operating cash flows should support projected plans through December 2011, but it might seek financing earlier for post-December operations and longer-term objectives. That assessment depended on cash generation and was not a guarantee of funding.
- The company had 15.77 million warrants exercisable at $0.21 per share that could yield approximately $3.31 million if exercised for cash; exercise was not assured. Inadequate financing could require delayed or curtailed expansion or operations.
- Planned initiatives included further research and development and marketing for proprietary products, expanded service capacity, chemical-library development, and establishing or partnering for GMP-compliant pilot production.
- Risks cited included demand and product acceptance, competition, intellectual-property protection and litigation, product-development and regulatory risks, access to capital, and the ability to establish production capacity. Management noted uncertainty about FDA enforcement and interpretation of dietary-supplement Good Manufacturing Practices.
- The filing reported no legal proceedings, defaults on senior securities, or material changes in internal control. Management concluded disclosure controls were effective as of July 2, 2011.
Key facts for investors to verify
- Whether proprietary-ingredient and retail-product sales can sustain growth while improving or stabilizing gross margins.
- Cash burn, working-capital requirements, and the assumptions behind management’s stated funding runway through December 2011.
- Whether warrant exercises or other financing provide needed capital, and the potential dilution from equity awards and warrants.
- The scale and duration of share-based compensation and its effect on reported losses.
- Progress on production capacity, regulatory compliance, and the company’s planned product and service expansions.