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| CDXC > SEC Filings for CDXC > Form 10-Q on 9-Aug-2012 | All Recent SEC Filings |
9-Aug-2012
Quarterly Report
The Company has incurred a net loss of $8,425,810 for the six month period ended June 30, 2012. The loss for the six month period ended June 30, 2012 is largely due to sales and marketing expenses as well as sales promotions and sales discounts related to the launch of BluScience retail dietary supplement products at retail distribution channels. For the six months ended June 30, 2012, sales and marketing expenses for BluScience retail dietary supplement products segment totaled $2,715,564 and sales promotions, sales discounts and returns for BluScience retail dietary supplement products segment totaled $2,278,243. We expect the launch of BluScience (and future new products) to consume significant selling and marketing expenses. We are evaluating the revenues from BluScience and adjusting our expected expenditures in light of our remaining capital available and expected revenues to account for the possibility that we may not be able to raise additional capital in the near term. Another factor that contributed to the net loss is share-based compensation expense. Our share-based compensation expense totaled to $1,264,524 for the six months ended June 30, 2012. In addition to the stock option grants, the Company has been awarding shares of its common stock to both employees and non-employees as compensation for the services provided. Lastly, there were certain one-time severance payments due to the terminations of certain officers of the Company. Such severance payments totaled approximately $671,000 for the six months ended June 30, 2012.
Management's anticipation of future growth is largely related to the line of proprietary ingredients offered by the Company and the demand for BluScience retail dietary supplement products containing these ingredients.
Management believes it will be able to support operations of the Company with its current cash, cash equivalents and cash from operations through December, 2012. In addition, as of June 30, 2012, the Company has 8,339,278 warrants outstanding with an exercise price of $0.21 per share. Assuming the full exercise of the outstanding warrants for cash, the Company would receive additional proceeds of $1,751,248. There is no guarantee that the holders of these warrants will exercise any of the outstanding warrants for cash, and the Company will not receive any proceeds from any of the outstanding warrants until they are exercised. If the Company determines that it needs additional financing to further enable it to achieve its long-term strategic objectives, there can be no assurance that it will be available on terms favorable to it or at all. If adequate financing is not available, the Company will further delay, postpone or terminate product and service expansion and curtail selling, general and administrative operations, which commenced in the first and second quarters of 2012. The inability to raise additional financing may have a material adverse effect on the future performance of the Company.
Note 11. Income Taxes
At June 30, 2012 and December 31, 2011, the Company maintained a full valuation allowance against the entire net deferred income tax balance after considering relevant factors, including recent operating results, the likelihood of the utilization of net operating loss tax carry forwards, and the ability to generate future taxable income. The Company expects to maintain a full valuation allowance on its entire net deferred tax assets in 2012, resulting in an effective tax rate of zero for the six months ended June 30, 2012.
Note 12. Subsequent Events
On July 10, 2012, the Company awarded 500,000 shares of common stock to a consultant for certain advisory services to be provided.
On July 19, 2012, 535,714 of the Warrants with an exercise price of $0.21 per share have been exercised and the Company received proceeds of $112,500 from the exercise of the Warrants. These Warrants were issued during the year ended January 1, 2011, pursuant to the Subscription Agreement entered into by the Company on April 22, 2010.
On July 20, 2012, the Company awarded 55,000 shares of common stock to a consultant for certain investor relations services provided.
On July 31, 2012, 6,117 of the stock options granted to an employee with an exercise price of $0.50 per share have been exercised and the Company received proceeds of $3,059 from the exercise of the stock options.
On August 7, 2012, the Company awarded 110,294 shares of common stock to a consultant for certain legal services provided.
On August 7, 2012, the Company awarded 75,000 shares of common stock and warrants to purchase 250,000 shares of common stock with an exercise price of $0.75 and a term of 2 years to a consultant for certain investor relations services to be provided.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This Quarterly Report on Form 10-Q (the "Form 10-Q") contains "forward-looking statements," as defined in Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect the Company's current expectations of the future results of its operations, performance and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company has tried, wherever possible, to identify these statements by using words such as "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions. These statements reflect management's current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause the Company's actual results, performance or achievements in 2012 and beyond to differ materially from those expressed in, or implied by, such statements. Such statements, include, but are not limited to, statements contained in this Form 10-Q relating to our business, financial performance, business strategy, recently announced transactions and capital outlook. Important factors that could cause actual results to differ materially from those in the forward- looking statements include: a continued decline in general economic conditions nationally and internationally; decreased demand for our products and services; market acceptance of our products; the ability to protect our intellectual property rights; the impact of any litigation or infringement actions brought against us; competition from other providers and products; risks in product development; the inability to raise capital to fund continuing operations; changes in government regulation; the ability to complete customer transactions, and other factors relating to our industry, our operations and results of operations and any businesses that may be acquired by us. Should one or more of these or other risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned. Additional risks, uncertainties, and other factors are set forth under Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K filed with the Commission on March 15, 2012 and in future reports the Company files with the Commission. Readers of this Form 10-Q should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, the Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.
You should read the following discussion and analysis of the financial condition and results of operations of the Company together with the financial statements and the related notes presented in Item 1 of this Form 10-Q.
Overview
We supply phytochemical reference standards, which are small quantities of plant-based compounds typically used to research an array of potential attributes, and reference materials, related contract services, and proprietary ingredients. We perform chemistry-based analytical services at our laboratory in Boulder, Colorado, typically in support of quality control or quality assurance activities within the dietary supplement industry. We have recently developed and launched the BluScience line of new retail dietary supplement products containing one of these proprietary ingredients, pTeroPure, which we also sell as an ingredient for incorporation into the products of other companies.
The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues, if any, and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We anticipate that our current cash, cash equivalents and cash generated from operations, the capital raised during the six months ended June 30, 2012 (see Liquidity and Capital Resources below) will be sufficient to meet our projected operating plans through the end of December, 2012. We may, however, seek additional capital prior to the end of December, 2012, both to meet our projected operating plans through and after December, 2012 and/or to fund our longer term strategic objectives. Our recent financing did not produce sufficient capital, together with revenues generated and expenses incurred, to meet our revised operating plans and accordingly, we are in the process of reviewing our operating plans and commitments.
Additional capital may come from public and/or private stock or debt offerings, borrowings under lines of credit or other sources. These additional funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities we issue may have rights, preferences and privileges senior to our common stock. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products or proprietary technologies, or to grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, obtain the required regulatory clearances or approvals, achieve long term strategic objectives, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. Any of these events could adversely affect our ability to achieve our development and commercialization goals, which could have a material and adverse effect on our business, results of operations and financial condition. If we are unable to establish small to medium scale production capabilities through our own plant or though collaboration we may be unable to fulfill our customers' requirements. This may cause a loss of future revenue streams as well as require us to seek third party vendors to provide these services. These vendors may not be available, or may charge fees that prevent us from pricing our products competitively within our markets.
Our new dietary supplement product line based on the ingredient pTeroPure, BluScience, has recently been launched at 1,400 GNC corporate-owned stores nationwide. Along with the launch at GNC, our BluScience products also entered Walgreens, a national drug store chain with more than 8,000 stores, and a leading online retailer, drugstore.com. In addition, during the six months ended June 30, 2012, initial orders have been shipped to another national drug store chain, a regional superstore chain, a specialty health and nutrition chain and other specialty stores. The BluScience marketing program and inventory production for the balance of 2012 are in the process of being reviewed and adjusted downward. There are currently five specific products in the range (HeartBlu, EternalBlu, Blu2Go, MemoryBlu and TrimBlu), each of which is directed toward providing a specific health benefit which we believe there is evidence that pTeroPure supports. In addition, each of the products in the range is co-formulated with other ingredients that also support or enhance that product's particular health benefit.
We have licensed to OPKO Health, Inc. ("OPKO"), a multi-national biopharmaceutical and diagnostics company, certain new product offerings and health care technologies for distribution and business development throughout Latin America. The initial products to be commercialized are BluScience products, as well as our proprietary product pterostilbene. We believe that partnering with OPKO provides a unique opportunity as we see Latin America as offering significant long-term economic prospects.
Some of our operations are subject to regulation by various state and federal agencies. In addition, we expect a significant increase in the regulation of our target markets. Dietary supplements are subject to FDA, FTC and USDA regulations relating to composition, labeling and advertising claims. These regulations may in some cases, particularly with respect to those applicable to new ingredients, require a notification that must be submitted to the FDA along with evidence of safety. There are similar regulations related to food additives.
Results of Operations
We generated net sales of $4,455,617 for the six month period ended June 30, 2012 as compared to $4,477,221 for the six month period ended July 2, 2011. We incurred a net loss of $8,425,810 for the six month period ended June 30, 2012 and incurred a net loss of $2,998,954 for the six month period ended July 2, 2011. This equated to a $0.10 loss per basic and diluted share for the six month period ended June 30, 2012 versus a $0.05 loss per basic and diluted share for the six month period ended July 2, 2011. For the three month period ended June 30, 2012, we generated net sales of $2,670,611 and a net loss of $3,993,957 as compared to net sales of $1,937,976 and a net loss of $1,842,569 for the three month period ended July 2, 2011. This was a $0.04 loss per basic and diluted share for the three month period ended June 30, 2012, versus a $0.03 loss per basic and diluted share for the three month period ended July 2, 2011.
Over the next two years, we plan to increase research and development efforts for our line of proprietary ingredients and we plan to seek to increase marketing and sales related efforts for these products, including our new dietary supplement product line BluScience, subject to available financial resources. However, we presently do not have available the necessary resources (financial and otherwise) to do so. We also intend to continue to expand our service capacity through hiring and to implement accreditation and certification programs related to quality initiatives. In addition, we plan to expand our chemical library program and to either establish a GMP compliant pilot plant to support small to medium scale production of target compounds or collaborate with a company that has these capabilities. There can be no assurance, however, that we will actually implement any of these plans.
Net Sales
Net sales consist of gross sales less promotions, discounts and returns. Net sales increased by 38% to $2,670,611 for the three month period ended June 30, 2012 as compared to $1,937,976 for the three month period ended July 2, 2011. The core standards, contract services and ingredients segment generated net sales of $2,150,585 for the three month period ended June 30, 2012. This is an increase of 11%, compared to $1,937,976 for three month period ended July 2, 2011. This increase was largely due to increased sales of our proprietary ingredients and other bulk dietary supplement grade raw materials. The retail dietary supplement products segment generated net sales of $520,026 for the three month period ended June 30, 2012. For the three month period ended July 2, 2011, the retail dietary supplement products segment did not have any sales.
For the six month period ended June 30, 2012, net sales slightly decreased by 0.5% to $4,455,617 as compared to $4,477,221 for the six month period ended July 2, 2011. The core standards, contract services and ingredients segment generated net sales of $4,005,333 for the six month period ended June 30, 2012. This is a decrease of 11%, compared to $4,477,221 for the six month period ended July 2, 2011. This decrease was primarily due to decreased sales of analytical testing and contract services. The retail dietary supplement products segment generated net sales of $450,284 for the six month period ended June 30, 2012. The gross sales for this segment was $2,728,527, however, sales deductions for promotions and discounts related to the launch of our BluScience products to retail distribution channels totaled $2,278,243. For the six month period ended July 2, 2011, the retail dietary supplement products segment did not have any sales.
Cost of Sales
Cost of sales include raw materials, labor, overhead, and delivery costs. Cost of sales for the three month period ended June 30, 2012 was $1,905,916 versus $1,357,058 for the three month period ended July 2, 2011. As a percentage of net sales, this represented a 1% increase for the three month period ended June 30, 2012 compared to the three month period ended July 2, 2011. The cost of sales as a percentage of net sales for the core standards, contract services and ingredients segment for the three month period ended June 30, 2012 was 71% compared to 70% for the three months ended July 2, 2011. The cost of sales as a percentage of net sales for the retail dietary supplement products segment for the three month period ended June 30, 2012 was 73%. For the three month period ended July 2, 2011, the retail dietary supplement products segment did not have any sales and there was only a small amount of $4,687 in related costs.
Cost of sales for the six month period ended June 30, 2012 was $4,295,136 versus $2,875,907 for the six month period ended July 2, 2011. As a percentage of net sales, this represented 32% increase for the six month period ended June 30, 2012 compared to the six month period ended July 2, 2011. The cost of sales as a percentage of net sales for the core standards contract services and ingredients segment for the six month period ended June 30, 2012 was 72% compared to 64% for the six month ended July 2, 2011. This percentage increase in cost of sales is a result of decreased sales of analytical testing and contract services. Analytical testing and contract services consist of fixed labor costs that make up the majority of costs and these fixed costs did not decrease in proportion to sales. The cost of sales for the retail dietary supplement products segment for the six month period ended June 30, 2012 was $1,420,311 despite net sales of $450,284. This is due to gross sales of $2,728,527 and the cost of sales as a percentage of gross sales was 52% for the six month period ended June 30, 2012. For the six month period ended July 2, 2011, the retail dietary supplement products segment did not have any sales and there was only a small amount of $4,687 in related costs.
Gross Profit (Loss)
Gross profit (loss) is net sales less the cost of sales and is affected by a number of factors including product mix, competitive pricing and costs of products and services. Our gross profit increased 32% to $764,695 for the three month period ended June 30, 2012 from $580,918 for the three month period ended July 2, 2011. For the core standards, contract services and ingredients segment, our gross profit increased 6% to $622,382 for the three month period ended June 30, 2012 from $585,605 for the three month period ended July 2, 2011. The increase in net sales was the primary cause for the increase in gross profit. For the retail dietary supplement products segment, we had a gross profit of $142,313 for the three month period ended June 30, 2012. For the three month period ended July 2, 2011, the retail dietary supplement products segment had a gross loss of $4,687.
Our gross profit decreased 90% to $160,481 for the six month period ended June 30, 2012 from $1,601,314 for the six month period ended July 2, 2011. For the core standards, contract services and ingredients segment, our gross profit decreased 30% to $1,130,508 for the six month period ended June 30, 2012 from $1,606,001 for the six month period ended July 2, 2011. The decrease in net sales was the primary cause for the decrease in gross profit. For the retail dietary supplement products segment, we had a gross loss of $970,027 for the six month period ended June 30, 2012. This was due to the sales promotions and sales discounts we offered in relation to the launch of our BluScience products to retail distribution channels. For the six month period ended July 2, 2011, the retail dietary supplement products segment had a gross loss of $4,687.
Operating Expenses-Sales and Marketing
Sales and Marketing Expenses consist of salaries, commissions to brokers and advertising and marketing expenses. Sales and marketing expenses for the three month period ended June 30, 2012 was $1,868,418 as compared to $565,975 for the three month period ended July 2, 2011. For the core standards, contract services and ingredients segment, sales and marketing expenses for the three month period ended June 30, 2012 slightly increased to $536,572 compared to $473,064 for the three month period ended July 2, 2011. For the retail dietary supplement products segment, sales and marketing expenses for the three month period ended June 30, 2012, increased to $1,331,846 compared to $92,911 for the three month period ended July 2, 2011. This increase was mainly due to our national advertising campaign through television and radio media as well as co-op advertising with retailers in support of the launch of BluScience products.
Sales and marketing expenses for the six month period ended June 30, 2012 was $3,727,080 as compared to $1,011,482 for the six month period ended July 2, 2011. For the core standards, contract services and ingredients segment, sales and marketing expenses for the six month period ended June 30, 2012, increased to $1,011,516 compared to $915,873 for the six month period ended July 2, 2011. For the retail dietary supplement products segment, sales and marketing expenses for the six month period ended June 30, 2012, increased to $2,715,564 compared to $95,609 for the six month period ended July 2, 2011. This increase was mainly due to our national advertising campaign through television and radio media as well as co-op advertising with retailers in support of the launch of BluScience products.
Operating Expenses-General and Administrative
General and Administrative Expenses consist of research and development, general company administration, IT, accounting and executive management. General and administrative expenses for the three and six month periods ended June 30, 2012 were $2,883,728 and $4,845,639 as compared to $1,849,733 and $3,572,568 for the three and six month periods ended July 2, 2011. One of the factors that contributed to this increase was certain one-time severance payments made due to the terminations of certain officers of the Company. Severance expenses incurred due to the terminations of certain officers for the three and six month periods ended June 30, 2012 were approximately $361,000 and $671,000. Another factor that contributed to the increase in general and administrative expenses was the increase in investor relations expenses for the purpose of increasing market and shareholder awareness. Our investor relations expenses for the three and six month periods ended June 30, 2012 were $286,752 and $605,293 as compared to $93,653 and $172,602 for the three and six month periods ended July 2, 2011. Lastly, we had additional executive management and administrative staff during the six month period ended June 30, 2012, to support the launch of BluScience, which led to an increase in general and administrative expenses.
Non-operating income- Interest Income
Interest income consists of interest earned on money market accounts. Interest income for the three and six month periods ended June 30, 2012 were $1,056 and $2,255 as compared to $430 and $864 for the three and six month periods ended July 2, 2011.
Non-operating Expenses- Interest Expense
Interest expense consists of interest on capital leases. Interest expense for the three and six month periods ended June 30, 2012, were $7,562 and $15,827 as compared to $8,209 and $17,082 for the three and six month periods ended July 2, 2011.
Depreciation and Amortization
Depreciation expense for the six month period ended June 30, 2012, was approximately $166,748 as compared to $165,878 for the six month period ended July 2, 2011. We depreciate our assets on a straight-line basis, based on the estimated useful lives of the respective assets. Amortization expense of intangible assets for the six month period ended June 30, 2012, was approximately $6,799 as compared to $36,850 for the six month period ended July 2, 2011. We amortize intangible assets using a straight-line method over 10 years.
Liquidity and Capital Resources
From inception and through June 30, 2012, we have incurred aggregate losses of approximately $26.5 million. These losses are primarily due to expenses associated with the development and expansion of our operations. These operations have been financed through capital contributions and the issuance of common stock and warrants through private placements and our registered direct offering.
The Board of Directors periodically reviews our capital requirements in light of our proposed business plan. Our future capital requirements will remain dependent upon a variety of factors, including cash flow from operations, the ability to increase sales, increasing our gross profits from current levels, reducing sales and administrative expenses as a percentage of net sales, continued development of customer relationships, and our ability to market our new products successfully. However, based on our results from operations, we may determine that we need additional financing to implement our business plan. There can be no assurance that any such financing will be available on terms favorable to us or at all. Without adequate financing we may have to further delay or terminate product or service expansion plans. In particular, we do not presently have resources to continue costly BluScience related inventory development, marketing, and media programs at the current spending levels. Any inability to raise additional financing would have a material adverse effect on us.
During the six month period ended June 30, 2012, we sold 9,966,666 shares of our common stock at a price per share of $0.75 for gross proceeds of $7,475,000, or . . .
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