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CDXC > SEC Filings for CDXC > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for CHROMADEX CORP.

Form 10-Q for CHROMADEX CORP.


8-May-2014

Quarterly Report


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 2014 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 28, 2013 and filed with the Commission on March 27, 2014 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.

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Overview

We discover, acquire, develop and commercializes proprietary-based ingredient technologies through our unique business model which utilizes its wholly-owned synergistic business units. These units include the supply of 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. Through our subsidiary Spherix Consulting, Inc., we also provide scientific and regulatory consulting to the clients in the food, supplement and pharmaceutical industries to manage potential health and regulatory risks.

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 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.

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.

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Results of Operations

We generated net sales of $3,074,138 for the three-month period ended March 29, 2014 as compared to $2,334,566 for the three-month period ended March 30, 2013. We incurred a net loss of $1,848,016 for the three-month period ended March 29, 2014 as compared with a net loss of $1,424,072 incurred for the three-month period ended March 30, 2013. This equated to a $0.02 basic and diluted loss per share for the three-month period ended March 29, 2014 as compared with a $0.02 basic and diluted loss per share for the three-month period ended March 30, 2013.

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 additional staff. 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.

Net Sales

Net sales consist of gross sales less discounts and returns. Net sales increased by 32% to $3,074,138 for the three-month period ended March 29, 2014 as compared to $2,334,566 for the three-month period ended March 30, 2013. The core standards and contract services segment generated net sales of $1,735,883 for the three-month period ended March 29, 2014. This is an increase of 10%, compared to $1,573,561 for three-month period ended March 30, 2013. Sales for both phytochemical references standards and contract services increased for the three-month period ended March 29, 2014, compared to the three-month period ended March 30, 2013. The ingredients segment generated net sales of $1,136,309 for the three-month period ended March 29, 2014. This is an increase of 97%, compared to $577,953 for the three-month period ended March 30, 2013. This increase was largely due to the sales of our recently launched ingredients, "NIAGEN" and "PURENERGY," which we did not have any sales for the comparable period in 2013. The scientific and regulatory consulting segment generated net sales of $201,946 for the three-month period ended March 29, 2014. This is a decrease of 17%, compared to $243,338 for the three-month period ended March 30, 2013. There were fewer consulting projects completed during the three-month period ended March 29, 2014 resulting from client related delays.

Cost of Sales

Cost of sales include raw materials, labor, overhead, and delivery costs. Cost of sales for the three-month period ended March 29, 2014 was $2,089,130 as compared with $1,661,726 for the three-month period ended March 30, 2013. As a percentage of net sales, this represented a 3% decrease for the three-month period ended March 29, 2014 compared to the three-month period ended March 30, 2013. The cost of sales as a percentage of net sales for the core standards and contract services segment for the three-month period ended March 29, 2014 was 69% compared to 73% for the three months ended March 30, 2013. This percentage decrease in cost of sales is largely due to increased sales of 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 ingredients segment for the three-month period ended March 29, 2014 was 63%. This percentage was also 63% for the comparable period in 2013. The cost of sales as a percentage of net sales for the scientific and regulatory consulting segment for the three-month period ended March 30, 2013 was 89% compared to 60% for the three month ended March 30, 2013. The percentage increase in cost of sales is largely due to decreased sales as fixed labor costs make up the majority of costs for the consulting segment.

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Gross Profit

Gross profit 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 to $985,008 for the three-month period ended March 29, 2014 from $672,840 for the three-month period ended March 30, 2013. Overall, we increased a fixed labor cost coverage during 2014 as a result of the following changes in our revenue mix. For the core standards and contract services segment, our gross profit increased 28% to $542,248 for the three-month period ended March 29, 2014 from $422,020 for the three-month period ended March 30, 2013. 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 ingredients segment, our gross profit increased to $418,132 for the three-month period ended March 29, 2014 from $215,510 for the three-month period ended March 30, 2013. The increased sales from the recently launched ingredients, "NIAGEN" and "PURENERGY" was the main reason for the increase in gross profit. For the scientific and regulatory consulting segment, our gross profit decreased 74% to $24,628 for the three month period ended March 29, 2014 from $96,550 for the three-month period ended March 30, 2013. The decrease in sales which resulted in a lower labor utilization rate was the reason for the decrease in gross profit.

Operating Expenses-Sales and Marketing

Sales and Marketing Expenses consist of salaries, advertising and marketing expenses. Sales and marketing expenses for the three-month period ended March 29, 2014 was $464,567 as compared to $729,424 for the three-month period ended March 30, 2013. For the core standards and contract services segment, sales and marketing expenses for the three-month period ended March 29, 2014 decreased to $212,775 as compared to $384,943 for the three-month period ended March 30, 2013. This decrease was largely due to operational changes in sales and marketing staff and a decrease in marketing and advertising spend. For the ingredients segment, sales and marketing expenses for the three-month period ended March 29, 2014 increased to $239,960 as compared to $211,834 for the three-month period ended March 30, 2013. The increase was largely due to increased marketing efforts for our line of proprietary ingredients. For the scientific and regulatory consulting segment, sales and marketing expenses for the three-month period ended March 29, 2014 was $11,832, compared to $1,488 for the three-month period ended March 30, 2013. Lastly, we incurred $131,159 in sales and marketing expenses for our BluScience product line during the three-month period ended March 30, 2013. We did not have such expenses for the comparable period in 2014 as we sold the BluScience product line on March 28, 2013.

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 March 29, 2014 increased to $2,337,663 as compared to $1,359,901 for the three-month period ended March 30, 2013. One of the factors that contributed to this increase is an increase in share-based compensation. For the three-month period ended March 29, 2014, our share-based compensation increased to $999,661 compared to $351,590 for the comparable period in 2013. During the three-month period ended March 29, 2014, the Company granted 1,090,000 shares of restricted stock to the Company's officers and members of the board of directors, which resulted in the increase in share-based compensation expense. Another factor that contributed to the increase in general and administrative expenses is an increase in research and development expenses for our line of proprietary ingredients. Our research and development expenses increased to $84,788 for the three month period ended March 29, 2014, as compared to $7,350 for the three-month period ended March 30, 2013.

Non-operating income- Interest Income

Interest income consists of interest earned on money market accounts. Interest income for the three-month period ended March 29, 2014 was $640 as compared to $204 for the three-month period ended March 30, 2013.

Non-operating Expenses- Interest Expense

Interest expense consists of interest on capital leases. Interest expense for the three-month period ended March 29, 2014 was $9,891 as compared to $7,791 for the three-month period ended March 30, 2013.

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Depreciation and Amortization

Depreciation expense for the three-month period ended March 29, 2014, was approximately $50,919 as compared to $79,184 for the three-month period ended March 30, 2013. 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 three-month period ended March 29, 2014, was approximately $7,633 as compared to $4,964 for the three-month period ended March 30, 2013. We amortize intangible assets using a straight-line method over 10 years.

Liquidity and Capital Resources

From inception and through March 29, 2014, we have incurred aggregate losses of approximately $36 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.

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 and service expansion and curtail certain selling, general and administrative expenses. Any inability to raise additional financing would have a material adverse effect on us.

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 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 three months ended March 29, 2014 was approximately $1,405,000 as compared to approximately $706,000 for the three months ended March 30, 2013. Along with the net loss, an increase in trade receivables and inventories were the largest uses of cash during the three months ended March 29, 2014. Net cash used in operating activities for the three months ended March 30, 2013 largely reflects a decrease in accounts payable 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 investing activities

Net cash provided by investing activities was approximately $1,074,000 for the three months ended March 29, 2014, compared to approximately $453,000 for the three months ended March 30, 2013. Net cash provided by investing activities for the three months ended March 29, 2014 mainly consisted of proceeds from the assignment of the Senior Note issued by NeutriSci to an unrelated third party. NeutriSci originally issued the Senior Note to the Company as a part of the consideration for the purchase of the BluScience product line. Net cash provided by investing activities for the three months ended March 30, 2013 mainly consisted of cash consideration received from NeutriSci from the sale of BluScience product line.

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Net cash provided by (used in) financing activities

Net cash used in financing activities was approximately $6,000 for the three months ended March 29, 2014, compared to approximately $700,000 provided by for the three months ended March 30, 2013. Net cash used in financing activities for the three months ended March 29, 2014 mainly consisted of principal payments on capital leases. Net cash provided by financing activities for the three months ended March 30, 2013 mainly consisted of proceeds from exercise of warrants.

Dividend policy

We have not declared or paid any 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.

Off-Balance Sheet Arrangements

During the three months ended March 29, 2014, we had no off-balance sheet arrangements other than ordinary operating leases as disclosed in the "Financial Statements and Supplementary Data" section of the Company's Annual Report on Form 10-K for the year ending December 28, 2013 and filed with the Commission on March 27, 2014.

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