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CDXC > SEC Filings for CDXC > Form 10-K on 27-Mar-2014All Recent SEC Filings

Show all filings for CHROMADEX CORP.

Form 10-K for CHROMADEX CORP.


27-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of financial condition and results of operation, together with the financial statements and the related notes appearing in Item 8 of this report.

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. On December 3, 2012, we acquired Spherix, which provides scientific and regulatory consulting to the clients in the food, supplement and pharmaceutical industries to manage potential health and regulatory risks. In 2011, we launched the BluScience retail dietary supplement products containing one of the proprietary ingredients, pTeroPure, which we also sell as an ingredient for incorporation into the products of other companies. However, on March 28, 2013, we entered into an asset purchase and sale agreement with NeutriSci and consummated the sale of the BluScience consumer product line to NeutriSci.

The discussion and analysis of our financial condition and results of operations are based on the ChromaDex financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires making 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.

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By curtailing certain expenditures, we anticipate that our current cash, cash equivalents and cash generated from operations will be sufficient to meet our projected operating plans through March, 2015. We may, however, seek additional capital prior to March, 2015 both to meet our projected operating plans after March, 2015 and/or to fund our longer term strategic objectives.

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 those of our existing stockholders. 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 look for third party vendors to provide these services. These vendors may not be available, or charge fees that prevent us from pricing competitively within our markets.

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 product to be commercialized is our proprietary ingredient 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 U.S. Department of Agriculture 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.

Recent Developments

Subsequent to the year ended December 28, 2013, the Company assigned the Senior Note issued by NeutriSci to an unrelated third party for $1,250,000. $2,275,000 remained outstanding on the Senior Note at the date of the assignment. The Company also paid legal fees of $7,500 out of the proceeds of the purchase price. The Company also agreed to transfer to the third party a number of shares of preferred stock of NeutriSci having a value of $500,000 upon the earlier of
(a) December 31, 2014; or (b) the consummation by NeutriSci of any action resulting in the shares of its common stock being listed on an exchange. There is no recourse provision to the Company associated with the assignment of the note. In connection with the assignment of the note, the Company paid Palladium Capital Advisors, LLC as a placement agent a cash fee of $150,000 and agreed to transfer to Palladium an amount of shares of preferred stock of NeutriSci equal to $50,000 upon the consummation by NeutriSci of any action resulting in the shares of its common stock being listed on an exchange.

Results of Operations

Our net sales for the twelve-month periods ended December 28, 2013 and December 29, 2012 were $10,160,964 and $11,610,494, respectively. We incurred a net loss of $4,419,525 for the twelve-month period ended December 28, 2013 and a net loss of $11,662,426 for the twelve-month period ended December 29, 2012. This equated to a $0.04 loss per basic and diluted share for the twelve-month period ended December 28, 2013 versus a $0.13 loss per basic and diluted share for the twelve-month period ended December 29, 2012.

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Over the next two years, we plan to continue to increase research and development efforts for our line of proprietary ingredients, subject to available financial resources. We also intend to continue to expand our service capacity through hiring In addition, we plan to expand our chemical library program and to collaborate with a third party company to establish a Good Manufacturing Practice compliant pilot plant to support small to medium scale production of target compounds. There can be no assurance, however, that we will actually implement any of these plans.

                                                                            Twelve months ending
                                                            December 28,
                                                                2013           December 29, 2012      Change
Sales                                                       $  10,160,964     $        11,610,494            -12 %
Cost of sales                                                   7,027,828               9,335,057            -25 %
Gross profit                                                    3,133,136               2,275,437             38 %
Operating expenses -Sales and marketing                         2,357,605               5,520,141            -57 %
                   -General and administrative                  5,117,016               8,391,730            -39 %
                   -Loss from investment in affiliate              44,961                       -              -
Nonoperating       -Interest income                                 1,251                   3,014            -58 %
                   -Interest expenses                             (34,330 )               (29,006 )           18 %
Net loss                                                    $  (4,419,525 )   $       (11,662,426 )          -62 %

Net Sales

Net sales consist of gross sales less discounts and returns. Net sales decreased by 12% to $10,160,964 for the twelve-month period ended December 28, 2013 as compared to $11,610,494 for the twelve-month period ended December 29, 2012. The core standards, contract services and ingredients segment generated net sales of $9,074,531 for the twelve-month period ended December 28, 2013. This is an increase of 7%, compared to $8,458,082 for the twelve-month period ended December 29, 2012. This increase was largely due to increased sales of our proprietary ingredients and other bulk dietary supplement grade raw materials. The scientific and regulatory consulting segment generated net sales of $1,146,718 for the twelve-month period ended December 28, 2013. For the twelve-month period ended December 29, 2012, the scientific and regulatory consulting segment generated net sales of $69,718, which represents only about one month of operations since our acquisition of this business on December 3, 2012. The retail dietary supplement products segment generated negative net sales of $60,285 for the twelve-month period ended December 28, 2013. The gross sales for this segment were $557,111, however, sales deductions for discounts and returns, including additional trade accounts receivable allowance for possible future returns, totaled $617,396 and this has resulted in negative net sales. For the twelve-month period ended December 29, 2012, the retail dietary supplement products segment generated net sales of $3,082,694. The gross sales for this segment was $6,861,035, however, sales deductions for promotions discounts and returns totaled $3,778,341.

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Cost of Sales

Costs of sales include raw materials, labor, overhead, and delivery costs. Cost of sales for the twelve-month period ended December 28, 2013 was $7,027,828 as compared with $9,335,057 for the twelve-month period ended December 29, 2012. As a percentage of net sales, this represented an 11% decrease for the twelve-month period ended December 28, 2013 compared to the twelve-month period ended December 29, 2012. The cost of sales as a percentage of net sales for the core standards contract services and ingredients segment for the twelve-month period ended December 28, 2013 was 70% compared to 72% for the twelve-month period ended December 29, 2012. This percentage decrease in cost of sales is largely due to increased sales of chemical and analytical testing and contract services. Fixed labor costs make up the majority of costs for analytical testing and contract services and these fixed labor costs did not increase in proportion to sales. The cost of sales as a percentage of net sales for the scientific and regulatory consulting segment for the twelve-month period ended December 28, 2013 was 55% compared to 37% for the twelve-month period ended December 29, 2012, which represents only about one month of operations since our acquisition of this business on December 3, 2012. The cost of sales for the retail dietary supplement products segment was greater than net sales for twelve-month periods ended December 28, 2013 and December 29, 2012. This is due to promotions, discounted sales and returns, which resulted in substantially lower net sales compared to gross sales. The cost of sales for the retail dietary supplement products segment for the twelve-month periods ended December 28, 2013 and December 29, 2012 were $955 and $3,234,278, respectively, while the net sales were negative $60,285 and $3,082,694, respectively.

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 38% to $3,133,136 for the twelve-month period ended December 28, 2013 from $2,275,437 for the twelve-month period ended December 29, 2012. For the core standards, contract services and ingredients segment, our gross profit increased 12% to $2,679,695 for the twelve-month period ended December 28, 2013 from $2,383,032 for the twelve-month period ended December 29, 2012. The increased sale of analytical testing and contract services which resulted in a higher labor utilization rate as well as increased fixed cost coverage, was the key reason for the increase in gross profit. For the scientific and regulatory consulting segment, we had a gross profit of $514,681 for the twelve-month period ended December 28, 2013. For the twelve-month period ended December 29, 2012, the gross profit for this segment was $43,989, which represents only about one month of operations since our acquisition of this business on December 3, 2012. For the retail dietary supplement products segment, we had a gross loss of $61,240 for the twelve-month period ended December 28, 2013 and a gross loss of $151,584 for the twelve-month period ended December 29, 2012. The gross loss for the twelve-month period ended December 29, 2012 was due to the sales promotions and sales discounts we offered in relation to the launch of BluScience products.

Operating Expenses - Sales and Marketing

Sales and Marketing Expenses consist of salaries, advertising and marketing expenses. Sales and marketing expenses for the twelve-month period ended December 28, 2013 were $2,357,605 as compared to $5,520,141 for the twelve-month period ended December 29, 2012. For the core standards, contract services and ingredients segment, sales and marketing expenses for the twelve-month period ended December 28, 2013, slightly decreased to $2,211,741 compared to $2,227,934 for the twelve-month period ended December 29, 2012. For the scientific and regulatory consulting segment, sales and marketing expenses for the twelve-month period ended December 28, 2013 were $14,705. The scientific and regulatory consulting segment did not have any sales and marketing expenses for the comparable period in 2012. For the retail dietary supplement products segment, sales and marketing expenses for the twelve-month period ended December 28, 2013 decreased to $131,159 compared to $3,292,207 for the twelve-month period ended December 29, 2012. During the twelve-month period ended December 29, 2012, we conducted a national advertising campaign through television and radio media in support of the launch of the BluScience products. We did not conduct such an advertising campaign during the twelve-month period ended December 28, 2013.

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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 twelve-month period ended December 28, 2013 decreased to $5,117,016 as compared to $8,391,730 for the twelve-month period ended December 29, 2012. One of the factors that contributed to this decrease was a decrease in share-based compensation expense. Our share-based compensation expense for the twelve-month period ended December 28, 2013 was $1,287,917 as compared to $2,703,253 for the twelve-month period ended December 29, 2012. Another factor that contributed to the decrease in general and administrative expenses was a decrease in investor relations expense. Our investor relations expenses for the twelve-month period ended December 28, 2013 was $234,419 as compared to $987,399 for the twelve-month period ended December 29, 2012. Another factor that contributed to this decrease was departures of certain officers who were with the Company during the twelve-month period ended December 29, 2012. The Company did not hire new officers to fill the vacated positions. There were also one-time severance expenses of approximately $671,000 incurred due to the terminations of certain officers during the twelve-month period ended December 29, 2012. The Company did not incur such expenses in the twelve-month period ended December 28, 2013.

Nonoperating - Interest Income

Interest income consists of interest earned on money market accounts. Interest income for the twelve-month period ended December 28, 2013, was $1,251 as compared to $3,014 for the twelve-month period ended December 29, 2012.

Nonoperating - Interest Expense

Interest expense consists of interest on capital leases. Interest expense for the twelve-month period ended December 28, 2013, was $34,330 as compared to $29,006 for the twelve-month period ended December 29, 2012.

Depreciation and Amortization

For the twelve-month period ended December 28, 2013, we recorded approximately $246,175 in depreciation compared to approximately $328,099 for the twelve-month period ended December 29, 2012. We depreciate our assets on a straight-line basis, based on the estimated useful lives of the respective assets. We amortize intangible assets using a straight-line method over 10 years. In the twelve-month period ended December 28, 2013, we recorded amortization on intangible assets of approximately $23,532 compared to approximately $15,934 for the twelve-month period ended December 29, 2012.

Income Taxes

At December 28, 2013 and December 29, 2012, the Company maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of zero for 2013 and 2012.

Liquidity and Capital Resources

From inception and through December 28, 2013, we have incurred aggregate losses of approximately $34 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.

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Our 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. Any inability to raise additional financing would have a material adverse effect on us.

During the twelve-month period ended December 28, 2013, the Company sold an aggregate of 3,529,411 shares of the Company's common stock at a price per share of $0.85 to certain strategic accredited investors for gross proceeds of $3,000,000 or $2,980,000 after deducting offering costs.

Subsequent to the year ended December 28, 2013, the Company assigned the Senior Note issued by NeutriSci to an unrelated third party for $1,250,000. $2,275,000 remained outstanding on the Senior Note at the date of the assignment. The Company also paid legal fees of $7,500 out of the proceeds of the purchase price. The Company also agreed to transfer to the third party an amount of shares of preferred stock of NeutriSci equal to $500,000 upon the earlier of (a) December 31, 2014; or (b) the consummation by NeutriSci of any action resulting in the shares of its common stock being listed on an exchange. There is no recourse provision to the Company associated with the assignment of the note. In connection with the assignment of the note, the Company paid Palladium Capital Advisors, LLC ("Palladium") as a placement agent a cash fee of $150,000 and agreed to transfer to Palladium an amount of shares of preferred stock of NeutriSci equal to $50,000 upon the consummation by NeutriSci of any action resulting in the shares of its common stock being listed on an exchange.

While we anticipate that our current levels of capital, along with curtailment of certain expenses, will be sufficient to meet our projected operating plans through the end of March, 2015, we may seek additional capital prior to March, 2015, both to meet our projected operating plans through and after March, 2015 and to fund our longer term strategic objectives. To the extent we are unable to raise additional cash or generate sufficient revenue to meet our projected operating plans prior to March, 2015, we will revise our projected operating plans accordingly.

Net cash used in operating activities

Net cash used in operating activities for the twelve-month period ended December 28, 2013 was approximately $3,906,000 as compared to approximately $10,120,000 for the twelve-month period ended December 29, 2012. Along with the net loss, a decrease in accounts payable and an increase in inventories were the largest uses of cash during the twelve-month period ended December 28, 2013. Net cash used in operating activities for the twelve-month period ended December 29, 2012 largely reflects increase in inventories and trade receivables, along with the net loss.

We expect our operating cash flows to fluctuate significantly in future periods as a result of fluctuations in our operating results, shipment timetables, accounts receivable collections, inventory management, and the timing of our payments, among other factors.

Net cash provided by (used in) investing activities

Net cash provided by investing activities was approximately $999,000 for the twelve-month period ended December 28, 2013, compared to approximately $77,000 used in for the twelve-month period ended December 29, 2012. Net cash provided by investing activities for the twelve-month period ended December 28, 2013 mainly consisted of proceeds from the sale of the BluScience consumer product line. Net cash used in investing activities for the twelve-month period ended December 29, 2012 mainly consisted of purchases of leasehold improvements and equipment as well as purchases of intangible assets.

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Net cash provided by financing activities

Net cash provided by financing activities was approximately $4,649,000 for the twelve-month period ended December 28, 2013, compared to approximately $10,296,000 for the twelve-month period ended December 29, 2012. Net cash provided by financing activities for the twelve-month period ended December 28, 2013 consisted of proceeds from issuance of our common stock through a private offering as well as from the exercise of warrants. Net cash provided by financing activities for the twelve-month period ended December 29, 2012 mainly consisted of proceeds from issuance of our common stock through registered direct offering and private placement.

Dividend Policy

We have not declared or paid any cash dividends on our common stock. We presently intend to retain earnings for use in our operations and to finance our business. Any change in our dividend policy is within the discretion of our board of directors and will depend, among other things, on our earnings, debt service and capital requirements, restrictions in financing agreements, if any, business conditions, legal restrictions and other factors that our board of directors deems relevant.

Trade Receivables

As of December 28, 2013, we had $838,793 in trade receivables as compared to $1,940,539 as of December 29, 2012. This decrease was largely due to our sale of the BluScience product line in 2013, as we no longer generate any sales related to the BluScience product line.

Other Receivable

As of December 28, 2013, we had $215,000 in other receivable. This amount was from a legal settlement agreement related to a lawsuit over the violation of the Company's trademarks. The counterparty had already remitted the payment to a third party escrow agent prior to December 28, 2013 and this payment was deposited by the Company on January 14, 2014. As of December 29, 2012, the Company did not have any other receivable.

Inventories

As of December 28, 2013, we had $2,204,125 in inventory, compared to $5,205,304 as of December 29, 2012. This decrease was mainly due to the sale of the BluScience product line and its assets in 2013. As of December 28, 2013, our inventory consisted of approximately $1,518,000 of phytochemical reference standards and approximately $686,000 of bulk ingredients. Phytochemical reference standards are small quantities of plan-based compounds typically used to research an array of potential attributes or for quality control purposes. The Company has approximately 4,500 defined standards and holds a lot of these standards as inventory in small quantities, mostly in grams and milligrams. Bulk ingredients are proprietary compounds sold to customers in larger quantities, typically in kilograms. These ingredients are used by our customers in the dietary supplement, food and beverage, animal health, cosmetic and pharmaceutical industries to manufacture their final products.

The Company regularly reviews inventories on hand and records a provision for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The provision for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.

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Accounts Payable

As of December 28, 2013, we had $1,440,910 in accounts payable compared to $3,428,233 as of December 29, 2012. This decrease was primarily due to the timing of payments related to our purchases of inventory and services.

Advances from Customers

As of December 28, 2013, we had $546,044 in advances from customers compared to $310,267 as of December 29, 2012. These advances are for large-scale contract services and contract research projects where we require a deposit before beginning work. This increase was due to an increase in the number of large-scale research projects during the last six months of 2013.

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