UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)      

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended OctoberApril 3, 20092010

Commission File Number: 000-53290

CHROMADEX CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Delaware 26-2940963
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
10005 Muirlands Blvd Suite G, Irvine, California 92618
(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (949)-429-0288

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer or smaller reporting company. See definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

 Accelerated filer  ¨

Non-accelerated filer  ¨

 Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of common stock of the registrant: 28,838,21628,950,346 outstanding as of November 16, 2009.May 17, 2010.

 

 

 


CHROMADEX CORPORATION

20092010 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION (UNAUDITED)

  

ITEM 1.

  FINANCIAL STATEMENTS:  
  CONSOLIDATED BALANCE SHEETS AS OF OCTOBERAPRIL 3, 20092010 AND JANUARY 3, 20092, 2010 (UNAUDITED)  3
  CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBERAPRIL 3, 20092010 AND SEPTEMBER 27, 2008APRIL 4, 2009 (UNAUDITED)  4
  CONSOLIDATED STATEMENTS OF OPERATIONSCASH FLOWS FOR THE NINETHREE MONTHS ENDED OCTOBERAPRIL 3, 20092010 AND SEPTEMBER 27, 2008APRIL 4, 2009 (UNAUDITED)  5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED OCTOBER 3, 2009 AND SEPTEMBER 27, 2008 (UNAUDITED)6
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  7-96

ITEM 2.

  MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  10-159

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  1514

ITEM 4(T).4.

  CONTROLS AND PROCEDURES  1615

PART II—OTHER INFORMATION

  

ITEM 1.

  

LEGAL PROCEEDINGS

16

ITEM 1A.

  17RISK FACTORS16

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

  1716

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

  17

ITEM 4.

  

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS[REMOVED AND RESERVED]

  17

ITEM 5.

  

OTHER INFORMATION

  17

ITEM 6.

  

EXHIBITS

  1718

SIGNATURES

  1819

PART I—FINANCIAL INFORMATION (UNAUDITED)

 

ITEM 1.FINANCIAL STATEMENTS

ChromaDex Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

As of OctoberApril 3, 20092010 and January 3, 20092, 2010

 

  October 3, 2009 January 3, 2009   April 3, 2010 January 2, 2010 

Assets

      

Current assets

   

Current Assets

   

Cash

  $501,425   $1,125,504    $538,675   $471,378  

Trade receivables, net

   499,727    349,052     768,517    497,928  

Inventories

   889,150    711,584     987,579    922,760  

Prepaid expenses and other

   107,791    112,609  

Prepaid expenses and other assets

   176,162    115,794  
              

Total current assets

   1,998,093    2,298,749     2,470,933    2,007,860  
              

Leasehold improvements and equipment, net

   1,123,506    1,294,062  

Leasehold Improvements and Equipment, net

   1,450,033    1,203,431  
              

Deposits and other noncurrent assets

   

Deposits and Other Noncurrent Assets

   

Deposits

   33,392    44,981     32,227    32,227  

Intangible assets, net

   352,447    445,318     333,601    321,490  
              
   385,839    490,299     365,828    353,717  
              
  $3,507,438   $4,083,110    $4,286,794   $3,565,008  
              

Liabilities and Stockholders’ Equity

      

Current liabilities

   

Current Liabilities

   

Accounts payable

  $473,576   $444,337    $878,605   $548,310  

Accrued expenses

   294,732    338,056     340,347    270,250  

Current maturities of capital lease obligations

   36,979    78,472     70,750    28,430  

Due to officers

   1,178,206    1,178,206     1,178,206    1,178,206  

Customer deposits and other

   186,541    34,260     109,987    126,518  
              

Total current liabilities

   2,170,034    2,073,331     2,577,895    2,151,714  
              

Capital lease obligations, less current maturities

   53,409    74,293     258,023    45,868  
              

Deferred rent

   173,579    186,323     318,082    319,973  
              

Stockholders’ equity

   

Common stock, $.001 par value; authorized 50,000,000 shares; issued and outstanding October 3, 2009 and January 3, 2009 28,838,216 shares

   28,838    28,838  

Stockholders’ Equity

   

Common stock, $.001 par value; authorized 50,000,000 shares; issued and outstanding April 3, 2010 and January 2, 2010 28,838,216 shares

   28,838    28,838  

Additional paid-in capital

   9,074,022    8,920,283     9,177,740    9,126,141  

Accumulated deficit

   (7,992,444  (7,199,958   (8,073,784  (8,107,526
              
   1,110,416    1,749,163     1,132,794    1,047,453  
              
  $3,507,438   $4,083,110    $4,286,794   $3,565,008  
              

See Notes to Consolidated Financial Statements.

ChromaDex Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

For the Three Month Periods ending OctoberApril 3, 20092010 and September 27, 2008April 4, 2009

 

   Three Months Ended 
   October 3, 2009  September 27, 2008 

Sales

  $1,433,086   $1,069,003  

Cost of goods sold

   953,043    881,839  
         

Gross profit

   480,043    187,164  
         

Operating expenses:

   

Selling

   190,153    178,439  

General and administrative

   463,618    704,018  
         
   653,771    882,457  
         

Operating loss

   (173,728  (695,293
         

Nonoperating (income) expenses:

   

Interest expense

   3,938    27,208  

Interest income

   (122  (12,154
         
   3,816    15,054  
         

Net loss

  $(177,544 $(710,347
         

Basic and Diluted loss per common share

  $(0.01 $(0.02
         

Basic and Diluted average common shares outstanding

   28,838,216    28,600,943  
         

See Notes to Consolidated Financial Statements.

ChromaDex Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

For the Nine Month Periods ending October 3, 2009 and September 27, 2008

  Nine Months Ended   Three Months Ended 
  October 3, 2009 September 27, 2008   April 3, 2010 April 4, 2009 

Sales

  $4,222,929   $3,327,605    $1,937,592   $1,447,127  

Cost of goods sold

   2,797,168    2,375,017  

Cost of sales

   1,119,619    979,054  
              

Gross profit

   1,425,761    952,588     817,973    468,073  
              

Operating expenses:

      

Selling

   631,371    509,980  

Sales and marketing

   224,619    221,622  

General and administrative

   1,575,226    1,879,768     554,033    566,643  
              
   2,206,597    2,389,748     778,652    788,265  
              

Operating loss

   (780,836  (1,437,160

Operating income (loss)

   39,321    (320,192
              

Nonoperating (income) expenses:

      

Interest expense

   13,785    41,877     5,699    5,245  

Interest income

   (2,134  (24,108   (120  (1,595
              
   11,651    17,769     5,579    3,650  
              

Net loss

  $(792,487 $(1,454,929

Net income (loss)

  $33,742   $(323,842
              

Basic and Diluted loss per common share

  $(0.03 $(0.05

Basic and Diluted income (loss) per common share

  $0.00   $(0.01
              

Basic and Diluted average common shares outstanding

   28,838,216    28,126,540     28,838,216    28,838,216  
              

See Notes to Consolidated Financial Statements.

ChromaDex Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

For the NineThree Month Periods ending OctoberApril 3, 20092010 and September 27, 2008April 4, 2009

 

   Nine Months Ended 
   October 3, 2009  September 27, 2008 

Cash Flows from Operating Activities

   

Net loss

  $(792,487 $(1,454,929

Adjustments to reconcile net loss to net cash provided by operating activities:

   

Depreciation

   202,465    187,856  

Amortization of intangibles

   92,871    87,279  

Stock issued for services provided

   —      22,669  

Stock-based compensation expense

   153,739    77,459  

Due to officers

   —      10,384  

Interest added to notes payable

   —      20,740  

Changes in operating assets and liabilities:

   

Accounts receivable

   (150,675  (157,118

Inventories

   (177,566  (129,579

Prepaid expenses and other

   16,407    (76,053

Accounts payable

   29,239    (111,542

Deferred rent

   (12,744  (16,509

Accrued expenses

   (43,323  (38,006

Customer deposits and other

   152,281    (93,031
         

Net cash (used in) operating activities

   (529,793  (1,670,380
         

Cash Flows From Investing Activities

   

Purchases of leasehold improvements and equipment

   (36,909  (344,918

Purchases of intangible assets

   —      (78,275

Proceeds from return of purchased equipment

   5,000    —    
         

Net cash (used in) investing activities

   (31,909  (423,193
         

Cash Flows From Financing Activities

   

Proceeds from issuance of common stock

   —      4,265,086  

Principal payments on capital leases

   (62,377  (55,048
         

Net cash provided by (used in) financing activities

   (62,377  4,210,038  
         

Net increase (decrease) in cash

   (624,079  2,116,465  

Cash:

   

Beginning

   1,125,504    303,785  
         

Ending

  $501,425   $2,420,250  
         

Supplemental Disclosures of Cash Flow Information

   

Cash payments for interest

  $13,785   $21,137  

Supplemental Schedules of Noncash Financing Activities

   

Note payable incurred for repurchase of common stock

  $—     $959,617  

See Notes to Consolidated Financial Statements.

   Three Months Ended 
   April 3, 2010  April 4, 2009 

Cash Flows From Operating Activities

   

Net income (loss)

  $33,742   $(323,842

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

   

Depreciation

   74,633    67,926  

Amortization of intangibles

   17,889    30,958  

Share-based compensation expense

   51,599    46,962  

Changes in operating assets and liabilities:

   

Trade receivables

   (270,589  (105,318

Inventories

   (64,819  (81,305

Prepaid expenses and other assets

   (60,368  18,878  

Accounts payable

   330,295    53,864  

Accrued expenses

   70,097    31,936  

Customer deposits and other

   (16,531  17,288  

Deferred rent

   (1,891  (8,658
         

Net cash provided by (used in) operating activities

   164,057    (251,311
         

Cash Flows From Investing Activities

   

Purchases of leasehold improvements and equipment

   (56,277  (11,061

Purchase of intangible assets

   (30,000  —    
         

Net cash (used in) investing activities

   (86,277  (11,061
         

Cash Flows From Financing Activities

   

Principal payments on capital leases

   (10,483  (20,144
         

Net cash (used in) financing activities

   (10,483  (20,144
         

Net increase (decrease) in cash

   67,297    (282,516

Cash:

   

Beginning

   471,378    1,125,504  
         

Ending

  $538,675   $842,988  
         

Supplemental Disclosures of Cash Flow Information

   

Cash payments for interest

  $5,699   $5,245  

Supplemental Schedule of Noncash Investing Activity

   

Capital lease obligation incurred for the purchase of equipment

  $264,958   $—    

ChromaDex Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Interim Financial Statements

The accompanying financial statements of ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc. and ChromaDex Analytics, Inc. (the “Company”) include all adjustments, consisting of normal recurring adjustments and accruals, that in the opinion of the management of the Company are necessary for a fair presentation of our financial position as of OctoberApril 3, 20092010 and results of operations and cash flows for the three and nine months ended OctoberApril 3, 20092010 and September 27, 2008.April 4, 2009. These unaudited interim financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended January 3, 20092, 2010 appearing in the Company’s Annual Report on Form 10-K filed with the Commission on March 31, 2010 and as amended by the Form 10-K/A filed with the Commission on April 3, 2009.30, 2010. Operating results for the ninethree months ended OctoberApril 3, 20092010 are not necessarily indicative of the results to be achieved for the full year ending on January 2, 2010.1, 2011. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Note 2. Nature of Business and Significant Accounting Policies

Nature of business: The Company creates and supplies botanical reference standards along with related phytochemical products and services. The Company’s main priority is to create industry-accepted information, and to provide products and services to every layer of the functional food, pharmaceutical, personal care and dietary supplement markets. The Company provides these services at various terms with payment terms of primarily net 30 days.

Basis of presentation: The financial statements and accompanying notes have been prepared on a consolidated basis and reflect the consolidated financial position of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated from these financial statements. The Company’s fiscal year ends on the Saturday closest to December 31 and the Company’s normal fiscal quarters end on the Saturday 13 weeks after the last fiscal year end or fiscal quarter end. TheEvery fifth or sixth fiscal year, for 2008 included 53 weeks instead of the normal 52 weeks, and consequently the fourth fiscal quarter of the fiscal year for 2008 included 14 weeks instead of the normal 13 weeks. The inclusion of an extra week occurs every fifth or sixth fiscal year due to the Company’s floating year-end date. The fiscal year for 2009 includes2014 will include 53 weeks instead of the normal 52 weeks, and consequently the fiscal quarters for the fiscal year for 2009 each include 13 weeks.

Earnings per share: Potentially dilutive common shares consist of the incremental common shares issuable upon the exercise of common stock options and warrants for all periods. For allthe periods ended OctoberApril 3, 20092010 and September 27, 2008,April 4, 2009, the basic and diluted shares reported are equal asbecause the common share equivalents are anti-dilutive due to the net losseshigher exercise prices than the market price of the shares for each period. Below is a tabulationthe period ended April 3, 2010 and for the period ended April 4, 2009. Due to options and warrants being out of the money, there are no potentially dilutive securities for the periods ended OctoberApril 3, 20092010 and September 27, 2008.April 4, 2009.

   Three Months ending  Nine Months ending
   October 3, 2009  September 27, 2008  October 3, 2009  September 27, 2008

Basic average common shares outstanding

  28,838,216  28,600,943  28,838,216  28,126,540

Warrants and options in the money, net

  —    532,336  —    532,336
            

Weighted average common shares outstanding assuming dilution

  28,838,216  29,133,279  28,838,216  28,658,876
            

Note 3. Leasehold Improvements and Equipment

Leasehold improvements and equipment consisted of the following:

 

   October 3, 2009  January 3, 2009

Laboratory equipment

  $2,054,476  $2,055,101

Leasehold Improvements

   185,124   140,022

Computer equipment

   208,499   205,933

Furniture and fixtures

   15,308   15,308

Office equipment

   3,445   3,445

Construction in Progress

   96,331   111,465
        
   2,563,183   2,531,274

Less accumulated depreciation

   1,439,677   1,237,212
        
  $1,123,506  $1,294,062
        

The Company plans on having additional $120,000 in Construction in Progress Leasehold Improvements during the fourth fiscal quarter which ends on January 2, 2010. The asset cost for this Construction in Progress Leasehold Improvements will be reimbursed by the landlord, Railhead Partners, LLC, pursuant to the Second Amendment to Lease Agreement dated as of April 27, 2009, by and between Railhead Partners, LLC and Chromadex Analytics, Inc. The details of this agreement are set forth in the Company’s Current Report on Form 8-K filed with the Commission on April 28, 2009. The reimbursed cost from the landlord will be recognized as a liability and amortized over the life of the leasehold.

   April 3, 2010  January 2, 2010

Laboratory equipment

  $2,330,933  $2,063,860

Leasehold improvements

   337,684   332,702

Computer equipment

   209,916   208,499

Furniture and fixtures

   15,308   15,308

Office equipment

   3,445   3,445

Construction in progress

   133,794   86,031
        
   3,031,080   2,709,845

Less accumulated depreciation

   1,581,047   1,506,414
        
  $1,450,033  $1,203,431
        

Note 4. Share-based Compensation

 

  For the three months ended  For the nine months ended  For the three months ended
  October 3, 2009  September 27, 2008  October 3, 2009  September 27, 2008  April 3, 2010  April 4, 2009

Options granted

   —     —     919,301   1,827,987   —     355,000

Options forfeited

   29,411   16,507   74,833   31,507   —     —  

Total share-based compensation expense

  $55,947  $43,685  $153,739  $77,459  $51,599  $46,962

Weighted average grant date fair value, options

  $—    $—    $0.12  $0.40  $—    $0.19

Total unrecognized compensation cost

  $526,927  $624,743  $526,927  $624,743  $423,035  $595,351

Remaining weighted average period cost will be recognized over

   2.81   3.50   2.81   3.50   2.38   3.10

Note 5. Management’s Plans for Continuing Operations

The Company has earned a net profit of $33,742 for the three month period ended April 3, 2010 and it incurred a net loss of $792,487 for the nine month period ended October 3, 2009 and a net loss of $2,104,476$907,568 for the year ended January 3, 2009.2, 2010. The lossprofit for the ninethree month period ended OctoberApril 3, 2009 reflects2010 is due to an increase in sales coupled with a decrease in labor and a decrease in overhead costs related to reporting, legal, accounting and compliance as a public reporting entity, and thepercentage of sales. The Company expects that as sales continue to incur significantgrow, labor and overhead costs as a percentage of sales will continue to decrease as future costs associated with being a public reporting entity. In addition management has invested heavilygrowth in additional personnel and selling expenses over the past 18 months to implement its business plan. This has resulted in higherNet Sales will likely require lower direct labor indirect overhead, selling, and advertising expenses versus prior years. Management has also implemented additional strategic operational

structure changes, which it believes will allow the Company to achieve profitability with future growth without incurring significant additionalvariable overhead costs. Management’s anticipation of future growth is largely related to the Food and Drug Administration’s (FDA’s) guideline releases in the dietary supplement industry and the market’s trend towards green chemistry in the food and cosmetic sector. The Company has implemented a comprehensive marketing plan design targeted on leveraging its capabilities concurrent with the FDA’s guideline releases. The Company has also expanded its marketing plan to target the pharmaceutical and cosmetic sectors to support the reference standards, analytical services and discovery libraries product lines. In addition, the Company’s new line of bulk raw food grade material is expect to contribute to the Net Sales growth, but at a lower gross margin.

Subsequent to the period ended April 3, 2010, the Company entered into a Subscription Agreement with certain investors to issue and sell, in a private placement transaction, an aggregate of 26,249,983 newly issued shares of the Company’s common stock for an aggregate purchase price of $3,674,998 or $0.14 per share. The Company has also agreed to issue 26,249,983 warrants to purchase Company common stock at an exercise price of $0.21 per share. More information regarding this capital raise is set forth in Note 6. “Subsequent Events” of this Quarterly Report on Form 10-Q. The Company believes thethis capital to be raised during the year ended January 3, 2009, will be sufficient to implement its current business plan through March, 2010, however,December, 2011. However, if the Company determines that it needs additional financing to further enable 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 may have to delay, postpone or terminate product and service expansion and curtail general and administrative operations in order to maintain sufficient operating capital throughout 2010.after December, 2011. The inability to raise additional financing may have a material adverse effect on the future performance of the Company.

Note 6. Subsequent Events

In May 2009,On April 22, 2010, the FASB issued The Subsequent Events and Disclosures TopicCompany entered into a Subscription Agreement (the “Subscription Agreement”) with certain investors named therein (the “Subscribers”). Under the terms of the FASB Accounting Standards CodificationSubscription Agreement, the Company has agreed to issue and sell to the Subscribers, in a private placement transaction (the “Subsequent Events Topic”“Private Placement”). The Subsequent Events Topic establishes general standards, an aggregate of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are26,249,983 newly issued or are available to be issued. The Subsequent Events Topic requires the disclosureshares (the “Private Placement Shares”) of the date through whichCompany’s common stock for an entityaggregate purchase price of $3,674,998 or $0.14 per share. The Company has evaluated subsequent eventsalso agreed to issue to each Subscriber an immediately exercisable warrant (collectively, the “Warrants”) to purchase Company common stock (collectively, the “Warrant Shares”) equal to the number of Private Placement Shares purchased by such Subscriber at an exercise price of $0.21 per share. Assuming the full exercise of the Warrants for cash, the Company would receive additional proceeds of $5,512,496, for an aggregate of $9,187,494 in proceeds from the purchase of the Private Placement Shares and the basisexercise of the Warrants. There is no guarantee that transactions contemplated by the Subscription Agreement will be consummated or that, if consummated, the Subscribers will exercise any of the Warrants and the Company will not receive any proceeds from any of the Warrants until they are exercised. The closing of the Private Placement is subject to, among other conditions, receipt of stockholder approval of an amendment to the Company’s certificate of incorporation, as amended, to increase the number of authorized common stock from 50 million to 150 million shares (the “Stockholder Approval Condition”). If approved, the Warrants to purchase 26,249,983 shares of common stock will be issued at an exercise price of $0.21 per share and will be valued for that date—thataccounting purposes at the closing. More information regarding this Subscription Agreement is whether that date representsset forth in Current Report on Form 8-K filed with the dateCommission on April 26, 2010. The full details of the financial statements were issued or were availableSubscription Agreement and the Private Placement are not summarized in this Quarterly Report on Form 10-Q, and the Company refers you to be issued. This disclosure is intendedthe full Form 8-K filed with the Commission on April 26, 2010 for additional information about the Private Placement.

On May 4, 2010, the Company filed with the Commission a definitive proxy statement relating to alert all usersits 2010 annual meeting of financial statements that an entity has not evaluated subsequent events after that date instockholders, including proposals on (i) the setStockholder Approval Condition and (ii) certain amendments to the Company’s Second Amended and Restated 2007 Equity Incentive Plan to increase the number of financial statements being presented. The Subsequent Events Topic is effective on a prospective basisshares of the Company’s common stock reserved for interim or annual periods ending after June 15, 2009. We adopted the provisions of The Subsequent Events Topic and it had no effect on our financial position or results of operations. We evaluated for disclosure any subsequent events through the November 17, 2009 filing date of this document, and determined that there are no material events that warrant disclosure.issuance under such plan.

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 20092010 and beyond to differ materially from those expressed in, or implied by, such statements. TheseSuch 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, inability for us to complete the transactions contemplated by the Subscription Agreement; decreased demand for our products and services; market acceptance of our products; the ability to protect our intellectual property rights; impact of any litigation or infringement actions brought against us; competition from other providers and products; risks in product development; inability to raise capital to fund continuing operations; changes in government regulation, the ability to complete customer transactions and capital raising transactions, and other factors (including the risks contained in the section of this report entitled “Risk 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 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, factors and other risks are set forth under Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the Commission on March 31, 2010, as amended by the Form 10-K Amendment filed with the Commission on April 3, 200930, 2010, and in future reports the Company files with the Commission. Readers of this Quarterly Report on 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 ChromaDex together with the financial statements and the related notes presented in Item 1 of this report.

Overview

ChromaDex Corporation and its subsidiaries (collectively, “ChromaDex”, or the “Company”) supplies phytochemical reference standards and reference materials, related contract services, and products for the dietary supplement, nutraceutical, food and beverage, functional food, pharmaceutical and cosmetic markets. ChromaDex’s coreOur business strategy is to use the intellectual property harnessed by its expertise in the area ofidentify, acquire, reduce-to-practice, and commercialize innovative new natural products and in“green chemistry” (environmentally safe) technologies, with an initial industry focus on the creation of reference materialsdietary supplement, cosmetic, food and beverage markets, as well as novel pharmaceuticals. We plan to utilize our experienced management team to commercialize these natural product technologies by advancing them through the industry asproper regulatory approval processes, arranging for reliable and cost-effective manufacturing, and ultimately either selling or licensing the basis for providing newproduct lines to third parties and alternative, “green”, mass marketable products to its customers. The Company’s strategy is to license its intellectual property (“IP”) to companies who will commercialize it. The Company anticipates that the net result will be a long term flow of intellectual property milestone and royalty payments for the Company.

The discussion and analysis of our financial condition and results of operations are based on the ChromaDexCompany’s 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.

We believe that our current cash, cash equivalents and cash generated from operations, and the capital to be raised pursuant to the Subscription Agreement entered into the by the Company on April 22, 2010 (see “Liquidity and Capital Resources” in Item 2 of this Form 10-Q) will be sufficient to meet our projected operating plans through March, 2010.December, 2011. We intend tomay, however, seek additional capital prior to the end of March, 2010December, 2011 both to meet our projected operating plans after March, 2010December, 2011 and to fund our longer term strategic objectives. To the extent we are unable to raise additional cash or generate sufficient net income prior to March, 2010December, 2011 to meet our projected operating plans, or are unable to consummate the transactions contemplated by the Subscription Agreement, we will revise our projected operating plans accordingly. Additional capital may come from public and 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 shareholdersstockholders may experience dilution and the new equity or debt securities we issue may have rights, preferences and privileges senior to those of our existing shareholders.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 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 a collaboration we may be unable to fulfill our customer’s 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.

The Food and Drug Administration (“FDA”)FDA is currently in the process of starting to regulate the dietary supplement market under the new Good Manufacturing Practices (“GMPs”). The GMPs call for a three year phase in period and as of June, 2009, both large and medium manufacturers are held accountable under these new regulations. In June, 2010, small manufacturers will be held accountable as well. At this time, it is unknown to what extent the FDA will enforce the regulations and how they will be interpreted upon enforcement. These uncertainties may have a material adverse effect on the results of operations for ChromaDex as lack of enforcement or an interpretation of the regulations that lessens the burden of compliance for the dietary supplement marketplace may cause a reduced demand for ChromaDex’s products and services.

Results of Operations

ChromaDex generated net sales of $4,222,929 for the nine month period ended October 3, 2009 and $3,327,605 for the nine month period ended September 27, 2008. ChromaDex incurred a net loss of $792,487 for the nine month period ended October 3, 2009 and had a net loss of $1,454,929 for the nine month period ended September 27, 2008. This equated to a $0.03 loss per basic and diluted share for the nine month period ended October 3, 2009 versus a $0.05 loss per basic and diluted share for the nine month period ended September 27, 2008. For the three month period ended October 3, 2009, ChromaDex generated net sales of $1,433,086 and a net loss of $177,544 versus net sales of $1,069,003 and a net loss of $710,347 for

the three month period ended September 27, 2008. This was a $0.01 loss per basic and diluted share for the three month period ended October 3, 2009 versus a $0.02 loss per basic and diluted share for the three month period ended September 27, 2008.

Over the next threetwelve months, assuming the sufficiency of our cash resources, we plan to continue expandingexpand our service capacity through hiring and implementingto implement accreditation and certification programs related to quality initiatives based on customer demand.initiatives. In addition, we plan to continue expandingexpand our chemical library program and to either establish a GMP compliant pilot plant to support small to medium scale production of target compounds or partner through a collaboration with a company that has these capabilities throughcapabilities. We also intend to increase the research and development of our new bulk food grade raw material line as well as increase marketing and sales related to these products.

Results of Operations

ChromaDex generated net sales of $1,937,592 for the three month period ended April 3, 2010 and $1,447,127 for the three month period ended April 4, 2009. ChromaDex earned a collaboration.net profit of $33,742 for the three month period ended April 3, 2010 and incurred a net loss of $323,842 for the three month period ended April 4, 2009. This equated to a $0.00 income per basic and diluted share for the three month period ended April 3, 2010 versus a $0.01 loss per basic and diluted share for the three month period ended April 4, 2009.

Net Sales

Net Sales consist of Gross sales less returns and discounts.Net sales increased by 34% to $1,433,086$1,937,592 for the three month period ended OctoberApril 3, 20092010 as compared to $1,069,003$1,447,127 for the three month period ended September 27, 2008. For the nine month period ended October 3, 2009, net sales increased by 27% to $4,222,929 as compared to $3,327,605 for the nine month period ended September 27, 2008.April 4, 2009. This increase was due to our additionalnew service offerings, increased sales of bulk food grade raw materials, and increased demand for each of our existing products and services.

Costs of Sales

Costs of Sales include raw materials, labor, overhead, and delivery costs.Cost of sales for the three and nine month periodsperiod ended OctoberApril 3, 2009 were $953,043 and $2,797,168 respectively2010 was $1,119,619 versus $881,839 and $2,375,017$979,054 for the three and nine month periodsperiod ended September 27, 2008.April 4, 2009. As a percentage of net sales, this represented a 16%10% decrease for the three month period ended OctoberApril 3, 20092010 compared withto the three month period ended September 27, 2008.April 4, 2009. This percentage decrease in cost of sales is a result of fixed labor and overhead costs that make up the majority of our expenses. These fixed expenses did not increase in proportion to sales as we were able to achieve growth in sales without an increase of certain labor and overhead costs. Despite this significant decrease,However, during the cost of sales as a percentage of net sales decreased by just 5% for the ninethree month period ended OctoberApril 3, 2009 compared with the nine month period ended September 27, 2008. This was largely due to increased2010, sales of high volume products, primarily consisting of ingredientsbulk food grade materials for dietary supplements and foods during the nine month period ended October 3, 2009.increased. These high volume products have significantly higher raw material costs associated with them. The Company expects to see a significant increase in the sales of these high volume products for the remainder of 2009 and throughout 2010. TheseIncreases in sales of these types of products will likely cause the Company to experience lower gross margins as a percentage of sales during this time period.

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 156%75% to $480,043$817,973 for the three month period ended OctoberApril 3, 20092010 from $187,164$468,073 for the three month period ended September 27, 2008.April 4, 2009. The increase in sales coupled with a decrease in labor and overhead costs contributed to this increase in gross profit. For the nine month period ended October 3, 2009, gross profit increased 50% to $1,425,761 from $952,588 for the nine month period ended September 27, 2008. Again, increasedas a percentage of sales coupled with only a marginal increase in labor and overhead costs contributed to this increase in gross profit. The Company expects that as sales continue to grow, labor and overhead costs as a percentage of sales will continue to decrease as future growth in Net Sales will likely require lower direct labor and variable overhead costs. Raw materials costs as a percentage of sales are expected to increase as sales of the high volume bulk food grade materials continue to grow.

Operating Expenses—Sales and Marketing

Sales and Marketing Expenses consist of salaries, commissions to employees and advertising and marketing.marketing expenses. Sales and marketing expenses for the three and nine month periodsperiod ended OctoberApril 3, 20092010 were $190,153 and $631,371$224,619 as compared to $178,439 and $509,980$221,622 for the three and nine month periodsperiod ended September 27, 2008.April 4, 2009. This slight increase was primarily due to our increased advertising and marketing efforts across different customer sectors, such as well as wagesacademic institutions, contract research organizations, sports nutrition, legal consultants and commissions associated with the expansion of our sales staff.government agencies.

Operating Expenses—General and Administrative

General and Administrative Expenses consist of research and development, general company administration, IT, accounting and executive management.management compensation. General and administrative expenses for the three and nine month periodsperiod ended OctoberApril 3, 20092010 were $463,618 and $1,575,226$554,033 as compared to $704,018 and $1,879,768 for the three and nine month periods ended September 27, 2008. This decrease for the nine month period was primarily due to one-time legal and accounting costs related to a private placement and our merger into a wholly owned subsidiary of Cody Resources, Inc. during the nine month period ended September 27, 2008. The decrease$566,643 for the three month period ended April 4, 2009. One of the factors that contributed to this slight decrease was due mainly to legal and accounting costs incurred for a private placement during the three month period ended September 27, 2008.decrease in amortization expenses of a certain intangible asset. This intangible asset became fully amortized as of December, 2009.

Non-operating Expenses—Interest Expense

Interest expense consists of interest on capital leases and notes payable.. Interest expense for the three and nine month periodsperiod ended OctoberApril 3, 2009 were $3,938 and $13,7852010 was $5,699 compared to $27,208 and $41,877$5,245 for the three and nine month periodsperiod ended September 27, 2008. ForApril 4, 2009. This increase was due to a new capital lease obligation incurred for the purchase of equipment during the three and nine month periodsperiod ended OctoberApril 3, 2009, the interest expense occurred was primarily due to capital lease obligations as compared to interest expense for the three and nine month periods ended September 27, 2008 which was primarily due to the note payable issued to Bayer AG on June 18, 2008, in conjunction with ChromaDex’s repurchase of ChromaDex, Inc. shares prior to our merger into a wholly owned subsidiary of Cody Resources, Inc. This note was repaid on December 19, 2008.2010.

Non-operating Expenses—Interest Income

Interest income consists of interest earned on money market accounts.accounts. Interest income for the three and nine month periodsperiod ended OctoberApril 3, 2009, were $122 and $2,1342010, was $120 as compared to $12,154 and $24,108$1,595 for the three and nine month periodsperiod ended September 27, 2008.April 4, 2009. This decrease was primarily due to falling interest rates and a decrease in cash balance in our money market accounts.

Depreciation and Amortization

For the ninethree month period ended OctoberApril 3, 2009,2010, we recorded approximately $202,465$74,633 in depreciation. 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 ninethree month period ended OctoberApril 3, 2009,2010, we recorded an amortization for intangible assets of approximately $92,871. We test intangible assets for impairment on the last day of the fiscal year annually and based on events or changes in circumstances as they occur.$17,899.

Liquidity and Capital Resources

Since inception and through OctoberApril 3, 2009,2010, we have incurred aggregate losses of approximately $8.0$8.1 million. These losses are primarily due to overhead costs and general and administrative expenses associated with the development and expansion of our operations. These operations have been financed through capital contributions and the issuance of common stock.

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 administration 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, and there can be no assurance that it will be available on terms favorable to us or at all. If adequate financing is not available, we may have to delay, postpone or terminate product and service expansion and curtail general and administrative operations in order to maintain sufficient operating capital. The inability to raise additional financing may have a material adverse effect on us. We intend tomay seek additional capital prior to March, 2010December, 2011 both to meet our projected operating plans after March, 2010December, 2011 and to fund our longer term strategic objectives. To the extent we are unable to raise additional cash or generate net income prior to March, 2010December, 2011 to meet our projected operating plans, we will revise our projected operating plans accordingly.

On April 22, 2010, we entered into a subscription agreement (the “Subscription Agreement”) with certain investors (the “Subscribers”). Under the terms of the Subscription Agreement, we have agreed to issue and sell to the Subscribers, in a private placement transaction (the “Private Placement”), an aggregate of 26,249,983 newly issued shares (the “Private Placement Shares”) of our common stock for an aggregate purchase price of $3,674,998 or $0.14 per share. We have also agreed to issue to each Subscriber an immediately exercisable warrant (collectively the “Warrants”) to purchase our common stock equal to the number of Private Placement Shares purchased by such Subscriber at an exercise price of $0.21 per share. Assuming the full exercise of the Warrants for cash, we would receive additional proceeds of $5,512,496, for an aggregate of $9,187,494 in proceeds from the purchase of the Private Placement Shares and the exercise of the Warrants. There is no guarantee that transactions contemplated by the Subscription Agreement will be consummated or that, if consummated, the Subscribers will exercise any of the Warrants and that we will receive any proceeds from any of the Warrants until they are exercised. The closing of the Private Placement is subject to, among other conditions, receipt of stockholder approval of an amendment to our certificate of incorporation, as amended, to increase the number of shares of authorized common stock from 50 million to 150 million shares.

Net cash used inprovided by (used in) operating activities

Net cash provided by operating activities for the three months ended April 3, 2010 was $164,000 compared to $251,000 used in operating activities for the ninethree months ended October 3, 2009 and September 27, 2008 were $530,000 and $1,670,000, respectively.April 4, 2009. The decrease inpositive net cash used inprovided by operating activities for the three months ended April 3, 2010 is largely reflectsdue to a decrease in the net lossprofit adjusted for non-cash items and an increase in cash provided by customer deposits, accounts payable and prepaid expenses.accrued expenses, during this time period.

We expect that our operating cash flows may 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 used in investing activities

Net cash used in investing activities was $32,000$86,000 for the ninethree months ended OctoberApril 3, 2009,2010, compared to $423,000$11,000 for the ninethree months ended September 27, 2008.April 4, 2009. The decreaseincrease in cash used in investing activities mainly reflects the timing of purchases of equipment for our service business as well as purchases of intangible assets.

Net cash used in financing activities

Net cash used in financing activities was $62,000$10,000 for the ninethree months ended OctoberApril 3, 2009,2010, compared to $4.2 million provided$20,000 for the ninethree months ended September 27, 2008. The netApril 4, 2009. Net cash provided byused in financing activities for the nine months ended September 27, 2008, mainlyboth periods consisted of net proceeds from a private placement.principal payments on capital leases.

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 ninethree months ended OctoberApril 3, 2009,2010, 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 filed with the Commission on March 31, 2010 as amended by the Form 10-K/A filed with the Commission on April 3, 2009.30, 2010.

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4(T).     CONTROLS AND PROCEDURES

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of OctoberApril 3, 2009.2010. Pursuant to Rule13a-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, “disclosure controls and procedures” means controls and other procedures that are designed to insure that information required to be disclosed by the Company in the reports that it files with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time limits specified in the Commission’s rules and forms. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to insure that information the Company is required to disclose in the reports it files with the Commission is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. Based on the Company’s evaluation, its Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of OctoberApril 3, 2009.2010.

Changes in Internal Controls

There was no change in internal controls over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934) that occurred during the Company’s thirdfirst fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

None.

 

ITEM 1A.RISK FACTORS

The 2009 Form 10-K includes detailed disclosure about the risks faced by the Company’s business. Such risks have not materially changed since January 2, 2010, except as described below. Events or circumstances arising from one or more of these risks, together with the risks we identify in our 2009 Form 10-K, could adversely affect our business, financial condition, operating results and prospects and the value and price of our common stock could decline. The risks identified below and in our 2009 Form 10-K are not intended to be a comprehensive list of all risks we face and additional risks that we may currently view as not material may also impair our business operations and results.

Subscription Agreement Subject to Conditions

The Subscription Agreement is subject to numerous conditions, many of which are outside of our control and might not be fulfilled. We cannot assure you that the transactions contemplated by the Subscription Agreement will close in the near term or at all. If we fail to consummate the Subscription Agreement or otherwise fail to raise sufficient capital, we may have to delay, postpone or terminate product and service expansion and curtail general and administrative operations in order to maintain sufficient operating capital. The inability to raise additional financing may have a material adverse effect on our business, financial condition, business strategy or results of operations. Even if we were to consummate the transactions contemplated by the Subscription Agreement, we may need to raise additional capital in the future and there can be no assurance that we would be able to do so in the amounts required and in a timely manner, or at all. Failure to raise future additional capital may have a material adverse effect on our business, financial condition, business strategy or results of operations.

Dilution Resulting from Investment

Consummation of the transactions contemplated by the Subscription Agreement will involve the issuance of a substantial number of shares of our common stock and warrants to purchase common stock. If the transactions contemplated by the Subscription Agreement are consummated, our current stockholders’ ownership interest in us will be reduced, and if the warrants to exercise common stock that we are issuing pursuant to the Subscription Agreement are exercised in accordance with their terms, our current stockholders’ ownership interest in us will be reduced even further. As a result of the sale of such a large number of shares of our common stock and securities convertible into common stock, the market price of our common stock could decline.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS[REMOVED AND RESERVED]

None.

ITEM 5.OTHER INFORMATION

Not applicable.None.

ITEM 6.EXHIBITS

 

Exhibit No.

  

Description of Exhibits

10.1Patent License Agreement dated March 25, 2010 between The University of Mississippi and ChromaDex Corporation*
31.1  Certification of the Chief Executive Officer pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended
31.2  Certification of the Chief Financial Officer pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended
32.1  Certification pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

*This Exhibit has been filed separately with the Commission pursuant to an application for confidential treatment. The confidential portions of this Exhibit have been omitted and are marked by an asterisk.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    

ChromaDex Corporation.

(Registrant)

Date:

 

November 17, 2009May 18, 2010

   

/s/ THOMAS C. VARVARO

    

Thomas C. Varvaro.

Chief Financial Officer

 

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