Business context and reporting period
This is ChromaDex Corporation’s unaudited Form 10-Q for the three months ended March 30, 2013, compared with the three months ended March 31, 2012. The filing identifies ChromaDex Corporation as the registrant; it does not identify Niagen Bioscience as the filer. ChromaDex supplied phytochemical standards, ingredients and services, and had acquired Spherix Consulting in December 2012. On March 28, 2013, it sold its BluScience consumer-product line to NeutriSci.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $2.335 million | $1.785 million |
| Gross profit (loss) | $673 thousand | $(604) thousand |
| Gross margin | 28.8% | (33.8)% |
| Operating income (loss) | $1.475 million | $(4.425) million |
| Net income (loss) | $1.469 million | $(4.432) million |
| Basic / diluted EPS | $0.02 / $0.01 | $(0.05) / $(0.05) |
| Cash from (used in) operations | $(706) thousand | $(4.656) million |
Q1 2013 net income included a $2.892 million gain on the BluScience sale. Excluding that gain, the company reported an operating loss of $1.416 million. The company attributed ongoing losses partly to share-based compensation, BluScience returns allowances, and investment in personnel and marketing. The effective tax rate was zero, with a full valuation allowance against deferred tax assets.
Financial position and liquidity
At March 30, 2013, cash was $967 thousand, total current assets $5.690 million, total assets $10.717 million, current liabilities $3.646 million, and stockholders’ equity $6.734 million. Cash increased from $520 thousand at December 29, 2012. Current assets included $1.210 million of current note receivable and a $500 thousand non-trade receivable related to the sale. Inventory fell to $1.573 million from $5.205 million, principally following transfer of BluScience inventory to NeutriSci.
Capital lease obligations totaled approximately $318 thousand, including current maturities; the filing reports no other conventional borrowings. Operating cash use was partly offset by $453 thousand of investing cash inflow, mainly sale proceeds, and $700 thousand of financing cash inflow, mainly warrant exercises. The company had accumulated losses of approximately $28 million.
Material changes and unusual items
- Net sales rose 31%. Core standards, contract services and ingredients sales increased 16% to $2.152 million; the newly reported scientific and regulatory consulting segment contributed $243 thousand.
- BluScience recorded negative net sales of $60 thousand: $557 thousand of gross sales were more than offset by $617 thousand of promotions, discounts and returns. The segment was sold near quarter-end.
- The approximately $6.05 million sale consideration comprised $500 thousand received by quarter-end, $500 thousand due within 60 days, a $2.5 million senior convertible secured note, and NeutriSci preferred shares valued at $2.679 million. The note is payable in six quarterly installments beginning August 15, 2013. ChromaDex also retained a 6% royalty on future BluScience net sales and a supply agreement for pTeroPure.
- Warrant exercises generated $717 thousand and added 3.4 million shares during the quarter. Shares outstanding were 96.0 million at March 30, versus 92.1 million at December 29; the filing reported 99.1 million outstanding as of May 9.
Outlook, risks and contingencies
Management said that expense reductions, cash, operating cash generation and expected BluScience sale payments should support projected operations through December 2013. This is not a formal earnings forecast, and management cautioned that additional financing may be needed. It warned that financing might not be available on acceptable terms or at all, potentially requiring further cuts or delays to expansion plans. Possible warrant proceeds were not assured.
Management intended to develop proprietary ingredients, expand service capacity, and pursue a GMP-compliant pilot plant or third-party collaboration, subject to resources; it stated the company did not then have the financial and other resources needed for planned research and development expansion. Risks cited include demand and market acceptance, competition, intellectual property and litigation, product development, regulation, and access to capital. The company reported effective disclosure controls, no material change in internal control, and no legal proceedings.
Important facts for investors to verify
- Whether the $500 thousand sale receivable was collected and whether NeutriSci made the scheduled note installments; the note and equity consideration create counterparty and valuation exposure.
- Whether the 2013 profit is sustainable: it depended on the one-time sale gain, while operating cash flow remained negative and management disclosed financing risk.
- The basis for BluScience return allowances and the implications of its negative net sales before the line’s sale.
- Actual warrant exercises and resulting dilution after March 30; the filing reports further warrant and option exercises through May 9, 2013.
- Whether management’s expected funding runway through December 2013 and planned operating changes were achieved.