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CDXC > SEC Filings for CDXC > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for CHROMADEX CORP.

Form 10-Q for CHROMADEX CORP.


8-Nov-2012

Quarterly Report


Note 10. Management's Plans for Continuing Operations

The Company has incurred a net loss of $9,963,844 for the nine-month period ended September 29, 2012. The loss for the nine-month period ended September 29, 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 nine months ended September 29, 2012, sales and marketing expenses for BluScience retail dietary supplement products segment totaled $3,003,706 and sales promotions, sales discounts and returns for BluScience retail dietary supplement products segment totaled $3,308,613. 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 $2,189,917 for the nine months ended September 29, 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 nine months ended September 29, 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.

By curtailing certain expenditures, management believes it will be able to support operations of the Company with its current cash, cash equivalents and cash from operations through March, 2013. In addition, as of September 29, 2012, the Company has 7,803,564 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 $1,638,748. 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 shall require additional financing to further enable it to achieve its long-term strategic objectives, there can be no assurance that such financing 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 certain 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 September 29, 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 nine months ended September 29, 2012.

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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 for the year ending December 31, 2011 and 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.

By curtailing certain expenditures, we anticipate that our current cash, cash equivalents and cash generated from operations, the capital raised during the nine months ended September 29, 2012 (see Liquidity and Capital Resources below) will be sufficient to meet our projected operating plans through the end of March, 2013. We may, however, seek additional capital prior to the end of March, 2013, both to meet our projected operating plans through and after March, 2013 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.

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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, was launched early this year at Walgreens, a national drug store chain with more than 8,000 stores. Along with the launch at Walgreens, our BluScience products also entered another national drug store chain, a regional superstore chain, a specialty health and nutrition chain, a leading online retailer and other specialty stores. The BluScience marketing program and inventory production has been significantly adjusted downward to incur fewer cash expenditures in light of our remaining capital available and expected revenues. 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 to enter the Latin American market and we see its market a as potentially offering the Company 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 $8,087,860 for the nine-month period ended September 29, 2012 as compared to $6,304,789 for the nine-month period ended October 1, 2011. We incurred a net loss of $9,963,844 for the nine-month period ended September 29, 2012 as compared with a net loss of $5,403,866 incurred for the nine-month period ended October 1, 2011. This equated to a $0.11 loss per basic and diluted share for the nine-month period ended September 29, 2012 as compared with a $0.08 loss per basic and diluted share for the nine-month period ended October 1, 2011. For the three-month period ended September 29, 2012, we generated net sales of $3,632,244 and a net loss of $1,538,034 as compared to net sales of $1,827,568 and a net loss of $2,404,912 for the three-month period ended October 1, 2011. This was a $0.02 loss per basic and diluted share for the three-month period ended September 29, 2012, as compared with a $0.03 loss per basic and diluted share for the three-month period ended October 1, 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.

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Net Sales

Net sales consist of gross sales less promotions, discounts and returns. Net sales increased by 99% to $3,632,244 for the three-month period ended September 29, 2012 as compared to $1,827,568 for the three-month period ended October 1, 2011. The core standards, contract services and ingredients segment generated net sales of $1,989,910 for the three-month period ended September 29, 2012. This is an increase of 9%, compared to $1,817,804 for three-month period ended October 1, 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 $1,642,334 for the three-month period ended September 29, 2012. The gross sales for this segment was $2,672,703, however, sales deductions for promotions, discounts and returns totaled $1,030,369. Of the sales deductions amount of $1,030,369, $900,000 represents a return reserve against a hold on the receivables placed by a certain retailer. The hold is placed as an offset in the event of future returns of our products. For the three-month period ended October 1, 2011, the retail dietary supplement products segment only had net sales of $9,764 as we had just begun generating initial sales for our BluScience product line.

For the nine-month period ended September 29, 2012, net sales increased by 28% to $8,087,860 as compared to $6,304,789 for the nine-month period ended October 1, 2011. The core standards, contract services and ingredients segment generated net sales of $5,995,243 for the nine-month period ended September 29, 2012. This is a decrease of 5%, compared to $6,295,025 for the nine-month period ended October 1, 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 $2,092,617 for the nine-month period ended September 29, 2012. The gross sales for this segment was $5,401,230, however, sales deductions for promotions discounts and returns totaled $3,308,613. For the nine-month period ended October 1, 2011, the retail dietary supplement products segment only had net sales of $9,764 as we had just begun generating initial sales for our BluScience product line.

Cost of Sales

Cost of sales include raw materials, labor, overhead, and delivery costs. Cost of sales for the three-month period ended September 29, 2012 was $2,377,991 as compared with $1,361,101 for the three-month period ended October 1, 2011. As a percentage of net sales, this represented a 9% decrease for the three-month period ended September 29, 2012 compared to the three-month period ended October 1, 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 September 29, 2012 was 77% compared to 70% for the three months ended October 1, 2011. For the three-month period ended September 29, 2012, there were certain maintenance expenses for our laboratory equipment which contributed to the this percentage increase in cost of sales. The cost of sales as a percentage of net sales for the retail dietary supplement products segment for the three-month period ended September 29, 2012 was 51%. For the three-month period ended October 1, 2011, the retail dietary supplement products segment generated net sales of $9,764 while incurring a cost of $86,616, which is mostly related to a write-off of initial lots of BluScience inventory that did not meet required internal quality control specifications.

Cost of sales for the nine-month period ended September 29, 2012 was $6,673,127 as compared with $4,237,008 for the nine-month period ended October 1, 2011. As a percentage of net sales, this represented 15% increase for the nine-month period ended September 29, 2012 compared to the nine-month period ended October 1, 2011. The cost of sales as a percentage of net sales for the core standards contract services and ingredients segment for the nine-month period ended September 29, 2012 was 74% compared to 66% for the nine-month period ended October 1, 2011. This percentage increase in cost of sales is a result of decreased sales of analytical testing and contract services coupled with an increase in fixed labor costs that make up the majority of costs for analytical testing and contract services. These fixed labor costs did not decrease in proportion to sales, but rather increased as the wages increased. The cost of sales for the retail dietary supplement products segment for the nine-month period ended September 29, 2012 was $2,259,184 despite net sales of $2,092,617. This is due to gross sales of $5,401,230 and the cost of sales as a percentage of gross sales was 42% for the nine-month period ended September 29, 2012. For the nine-month period ended October 1, 2011, the retail dietary supplement products segment generated net sales of $9,764 while incurring a cost of $91,303, which is mostly related to a write-off of initial lots of BluScience inventory that did not meet required internal quality control specifications.

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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 169% to $1,254,253 for the three-month period ended September 29, 2012 from $466,467 for the three-month period ended October 1, 2011. For the core standards, contract services and ingredients segment, our gross profit decreased 17% to $450,792 for the three-month period ended September 29, 2012 from $543,319 for the three-month period ended October 1, 2011. The increase in costs such as laboratory equipment maintenance expenses and fixed labor costs for analytical testing and contract services was the primary cause for the decrease in gross profit. For the retail dietary supplement products segment, we had a gross profit of $803,461 for the three-month period ended September 29, 2012. For the three-month period ended October 1, 2011, the retail dietary supplement products segment had a gross loss of $76,852.

Our gross profit decreased 32% to $1,414,733 for the nine-month period ended September 29, 2012 from $2,067,781 for the nine-month period ended October 1, 2011. For the core standards, contract services and ingredients segment, our gross profit decreased 26% to $1,581,300 for the nine-month period ended September 29, 2012 from $2,149,320 for the nine-month period ended October 1, 2011. The decrease in net sales coupled with the increase in costs caused the decrease in gross profit. For the retail dietary supplement products segment, we had a gross loss of $166,567 for the nine-month period ended September 29, 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 nine-month period ended October 1, 2011, the retail dietary supplement products segment had a gross loss of $81,539.

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 September 29, 2012 was $802,171 as compared to $650,516 for the three-month period ended October 1, 2011. For the core standards, contract services and ingredients segment, sales and marketing expenses for the three-month period ended September 29, 2012 increased to $514,029 as compared to $390,524 for the three-month period ended October 1, 2011. This increase was primarily due to an increase in sales staff and increased marketing efforts for our proprietary ingredient, pterostilbene. For the retail dietary supplement products segment, sales and marketing expenses for the three-month period ended September 29, 2012, increased to $288,142 compared to $259,992 for the three-month period ended October 1, 2011. The sales and marketing expenses for the three-month period ended September 29, 2012 are mostly comprised of on-going sales commissions and co-op advertisings with retailers, whereas the sales and marketing expenses for the three-month period ended October 1, 2011 are mostly comprised of certain pre-launch marketing expenses for our BluScience products.

Sales and marketing expenses for the nine-month period ended September 29, 2012 was $4,529,251 as compared to $1,661,998 for the nine-month period ended October 1, 2011. For the core standards, contract services and ingredients segment, sales and marketing expenses for the nine-month period ended September 29, 2012, increased to $1,525,545 compared to $1,306,397 for the nine-month period ended October 1, 2011. For the retail dietary supplement products segment, sales and marketing expenses for the nine-month period ended September 29, 2012, increased to $3,003,706 as compared to $355,601 for the nine-month period ended October 1, 2011. This increase was mainly due to our national advertising campaign through television and radio media during the first six months of 2012, 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-month period ended September 29, 2012 decreased to $1,983,720 as compared to $2,213,636 for the three-month period ended October 1, 2011. One of the factors that contributed to this decrease was a departure of a certain officer who was with the Company during the three-month period ended October 1, 2011. The Company did not hire a new officer to fill the vacated position and this led to a decrease in wages and other related overhead expenses.

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General and administrative expenses for the nine-month period ended September 29, 2012 increased to $6,829,359 as compared to $5,786,204 for the nine-month period ended October 1, 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 nine-month period ended September 29, 2012 were approximately $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 nine-month period ended September 29, 2012 were $907,793 as compared to $389,700 for the nine-month period ended October 1, 2011. Lastly, we had additional executive management and administrative staff during the first six months of 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 nine-month periods ended September 29, 2012 were $469 and $2,725 as compared to $295 and $1,159 for the three- and nine-month periods ended October 1, 2011.

Non-operating Expenses- Interest Expense

Interest expense consists of interest on capital leases. Interest expense for the three- and nine-month periods ended September 29, 2012, were $6,865 and $22,692 as compared to $7,522 and $24,604 for the three- and nine-month periods ended October 1, 2011.

Depreciation and Amortization

Depreciation expense for the nine-month period ended September 29, 2012, was approximately $247,227 as compared to $247,024 for the nine-month period ended October 1, 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 nine-month period ended September 29, 2012, was approximately $11,277 as compared to $55,843 for the nine-month period ended October 1, 2011. We amortize intangible assets using a straight-line method over 10 years.

Liquidity and Capital Resources

From inception and through September 29, 2012, we have incurred aggregate losses of approximately $28 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 through 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 . . .

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