cdxc10q_july42015.htm


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 July 4, 2015

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) 419-0288

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   X    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                      [X]
Non-accelerated filer     [   ]   Smaller reporting company    [   ]
(Do not check if smaller reporting company)    
 
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: 107,444,481 outstanding as of August 12, 2015.

 
 




CHROMADEX CORPORATION
 
2015 QUARTERLY REPORT ON FORM 10-Q
 
TABLE OF CONTENTS
 
 
     
   
     
  Condensed Consolidated Balance Sheets as of July 4, 2015 (Unaudited) and January 3, 2015  1
  Condensed Consolidated Statements of Operations for the three months ended July 4, 2015 and June 28, 2014 (Unaudited)  2
  Condensed Consolidated Statements of Operations for the six months ended July 4, 2015 and June 28, 2014 (Unaudited)  3
  Condensed Consolidated Statements of Stockholders Equity for the six months ended July 4, 2015 (Unaudited)  4
  Condensed Consolidated Statements of Cash Flows for the six months ended July 4, 2015 and June 28, 2014 (Unaudited)  5
  Notes to Condensed Consolidated Financial Statements (Unaudited)  6
     
   15
   20
   20
     
 
   21
   21
   21
   21
   21
   22
   23

 
PART I – FINANCIAL INFORMATION (UNAUDITED)
 
ITEM 1.     FINANCIAL STATEMENTS
ChromaDex Corporation and Subsidiaries
 
   
Condensed Consolidated Balance Sheets
 
July 4, 2015 and January 3, 2015
 
             
   
July 4, 2015
   
January 3, 2015
 
Assets
  (Unaudited)        
             
Current Assets
           
Cash
  $ 5,699,248     $ 3,964,750  
Trade receivables, less allowance for doubtful accounts and returns July 4, 2015 $41,000; January 3, 2015 $38,000
    3,099,235       1,906,709  
Inventories
    3,089,033       3,734,341  
Prepaid expenses and other assets
    427,248       292,891  
    Total current assets
    12,314,764       9,898,691  
                 
Leasehold Improvements and Equipment, net
    1,552,250       1,264,660  
Deposits
    57,560       57,435  
Intangible assets, net
    298,020       296,061  
                 
    Total assets
  $ 14,222,594     $ 11,516,847  
                 
Liabilities and Stockholders' Equity
               
                 
Current Liabilities
               
Accounts payable
  $ 3,094,543     $ 3,451,608  
Accrued expenses
    1,281,598       853,685  
Current maturities of loan payable
    148,591       223,358  
Current maturities of capital lease obligations
    211,932       148,278  
Customer deposits and other
    229,184       234,435  
Deferred rent, current
    66,299       69,456  
    Total current liabilities
    5,032,147       4,980,820  
                 
Loan payable, less current maturities, net
    4,629,023       1,977,113  
Capital lease obligations, less current maturities
    556,029       423,015  
Deferred rent, less current
    108,933       137,508  
                 
    Total liabilities
    10,326,132       7,518,456  
                 
Commitments and contingencies
               
                 
Stockholders' Equity
               
Common stock, $.001 par value; authorized 150,000,000 shares;
               
   issued and outstanding July 4, 2015 106,290,803 and
               
   January 3, 2015 105,271,058 shares
    106,291       105,271  
Additional paid-in capital
    44,655,200       43,417,442  
Accumulated deficit
    (40,865,029 )     (39,524,322 )
    Total stockholders' equity
    3,896,462       3,998,391  
                 
    Total liabilities and stockholders' equity
  $ 14,222,594     $ 11,516,847  
 
See Notes to Condensed Consolidated Financial Statements.


ChromaDex Corporation and Subsidiaries
 
   
 
For the Three Month Periods Ended July 4, 2015 and June 28, 2014
 
             
   
July 4, 2015
   
June 28, 2014
 
             
Sales, net
  $ 6,101,380     $ 3,856,154  
Cost of sales
    3,630,688       2,457,388  
                 
    Gross profit
    2,470,692       1,398,766  
                 
Operating expenses:
               
Sales and marketing
    639,748       571,548  
General and administrative
    2,015,004       2,468,646  
    Operating expenses
    2,654,752       3,040,194  
                 
    Operating loss
    (184,060 )     (1,641,428 )
                 
Nonoperating income (expense):
               
Interest income
    645       305  
Interest expense
    (131,777 )     (12,019 )
Nonoperating expenses
    (131,132 )     (11,714 )
                 
    Net loss
  $ (315,192 )   $ (1,653,142 )
                 
                 
Basic and Diluted loss per common share
  $ (0.00 )   $ (0.02 )
                 
Basic and Diluted weighted average common shares outstanding
    107,409,894       106,185,584  
 
See Notes to Condensed Consolidated Financial Statements.
 
-2-

 
ChromaDex Corporation and Subsidiaries
 
   
 
For the Six Month Periods Ended July 4, 2015 and June 28, 2014
 
             
   
July 4, 2015
   
June 28, 2014
 
             
Sales, net
  $ 11,362,351     $ 6,930,292  
Cost of sales
    6,964,035       4,546,518  
                 
    Gross profit
    4,398,316       2,383,774  
                 
Operating expenses:
               
Sales and marketing
    1,225,525       1,036,115  
General and administrative
    4,262,935       4,806,309  
Loss from investment in affiliate
    -       21,543  
    Operating expenses
    5,488,460       5,863,967  
                 
    Operating loss
    (1,090,144 )     (3,480,193 )
                 
Nonoperating income (expense):
               
Interest income
    1,363       945  
Interest expense
    (251,926 )     (21,910 )
    Nonoperating expenses
    (250,563 )     (20,965 )
                 
    Net loss
  $ (1,340,707 )   $ (3,501,158 )
                 
                 
Basic and Diluted loss per common share
  $ (0.01 )   $ (0.03 )
                 
Basic and Diluted weighted average common shares outstanding
    107,304,245       106,130,972  
 
See Notes to Condensed Consolidated Financial Statements.

 
ChromaDex Corporation and Subsidiaries
 
 
For the Six Month Period Ended July 4, 2015
 
                               
   
Common Stock
   
Additional
Paid-in Capital
   
Accumulated
Deficit
   
Total
Stockholders'
Equity
 
   
Shares
   
Amount
             
Balance, January 3, 2015
    105,271,058     $ 105,271     $ 43,417,442     $ (39,524,322 )   $ 3,998,391  
                                         
Share-based compensation
    210,000       210       715,699       -       715,909  
                                         
Vested restricted stock
    506,000       506       (506 )     -       -  
                                         
Net loss
    -       -       -       (1,025,515 )     (1,025,515 )
                                         
Balance, April 4, 2015
    105,987,058       105,987       44,132,635       (40,549,837 )     3,688,785  
                                         
Exercise of stock options
    22,745       23       15,578       -       15,601  
                                         
Share-based compensation
    125,000       125       507,143       -       507,268  
                                         
Vested restricted stock
    156,000       156       (156 )     -       -  
                                         
Net loss
    -       -       -       (315,192 )     (315,192 )
                                         
Balance, July 4, 2015
    106,290,803     $ 106,291     $ 44,655,200     $ (40,865,029 )   $ 3,896,462  
 
See Notes to Condensed Consolidated Financial Statements.


ChromaDex Corporation and Subsidiaries
 
   
 
For the Six Month Periods Ended July 4, 2015 and June 28, 2014
 
             
   
July 4, 2015
   
June 28, 2014
 
             
Cash Flows From Operating Activities
           
  Net loss
  $ (1,340,707 )   $ (3,501,158 )
  Adjustments to reconcile net loss to net cash
               
    used in operating activities:
               
    Depreciation of leasehold improvements and equipment
    137,279       106,832  
    Amortization of intangibles
    20,541       15,713  
    Share-based compensation expense
    1,223,177       2,036,269  
    Allowance for doubtful trade receivables
    3,365       16,167  
    Gain on exchange of equipment
    -       (17,301 )
    Loss from disposal of equipment
    18,226       -  
    Loss from investment in affiliate
    -       21,543  
    Non-cash financing costs
    92,143       -  
  Changes in operating assets and liabilities:
               
    Trade receivables
    (1,195,891 )     (1,298,535 )
    Other receivable
    -       215,000  
    Inventories
    645,308       (668,903 )
    Prepaid expenses and other assets
    (134,482 )     (96,032 )
    Accounts payable
    (357,065 )     1,445,848  
    Accrued expenses
    427,913       81,701  
    Customer deposits and other
    (5,251 )     (282,774 )
    Deferred rent
    (31,732 )     (22,524 )
Net cash used in operating activities
    (497,176 )     (1,948,154 )
                 
Cash Flows From Investing Activities
               
  Purchases of leasehold improvements and equipment
    (139,162 )     (23,370 )
  Purchases of intangible assets
    (22,500 )     (70,000 )
  Proceeds from sale of equipment
    -       1,356  
  Proceeds from investment in affiliate
    -       1,092,500  
Net cash provided by (used in) investing activities
    (161,662 )     1,000,486  
                 
Cash Flows From Financing Activities
               
  Proceeds from exercise of stock options
    15,601       45,095  
  Proceeds from loan payable
    2,500,000       -  
  Payment of debt issuance cost
    (15,000 )     -  
  Principal payments on capital leases
    (107,265 )     (78,136 )
Net cash provided by (used in) financing activities
    2,393,336       (33,041 )
                 
Net increase (decrease) in cash
    1,734,498       (980,709 )
                 
Cash Beginning of Period
    3,964,750       2,261,336  
                 
Cash Ending of Period
  $ 5,699,248     $ 1,280,627  
                 
Supplemental Disclosures of Cash Flow Information
               
  Cash payments for interest
  $ 159,783     $ 21,910  
                 
Supplemental Schedule of Noncash Investing Activity
               
  Capital lease obligation incurred for purchases of equipment
  $ 303,933     $ 222,629  
  Retirement of fully depreciated equipment
  $ -     $ 56,110  
                 
Supplemental Schedule of Noncash Operating Activity
               
  Stock issued to settle outstanding payable balance
  $ -     $ 128,494  
                 
Supplemental Schedule of Noncash Share-based Compensation
               
  Changes in prepaid expenses associated with share-based compensation
  $ -     $ 55,631  
                 
See Notes to Condensed Consolidated Financial Statements.
 
 
Note 1. Interim Financial Statements
 
The accompanying financial statements of ChromaDex Corporation (the “Company”) and its wholly owned subsidiaries, ChromaDex, Inc., ChromaDex Analytics, Inc. and Spherix Consulting, Inc. 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 the Company’s financial position as of July 4, 2015 and results of operations and cash flows for the three and six months ended July 4, 2015 and June 28, 2014. 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, 2015 appearing in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “Commission”) on March 19, 2015. Operating results for the six months ended July 4, 2015 are not necessarily indicative of the results to be achieved for the full year ending on January 2, 2016.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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.
 
The balance sheet at January 3, 2015 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
 
Note 2. Nature of Business and Liquidity
 
Nature of business:  The Company is a natural products company that leverages its complementary business units to discover, acquire, develop and commercialize patented and proprietary ingredient technologies that address the dietary supplement, food, beverage, skin care and pharmaceutical markets.  In addition to the Company’s ingredient technologies unit, the Company also has business units focused on natural product fine chemicals (known as “phytochemicals”), chemistry and analytical testing services, and product regulatory and safety consulting (known as Spherix Consulting).  As a result of the Company’s relationships with leading universities and research institutions, the Company is able to discover and license early stage, Intellectual Property-backed ingredient technologies.  The Company then utilizes the Company’s in-house chemistry, regulatory and safety consulting business units to develop commercially viable ingredients.  The Company’s ingredient portfolio is backed with clinical and scientific research, as well as extensive Intellectual Property protection.
 
Liquidity:  The Company has incurred a loss from operations of approximately $1,090,000 and a net loss of approximately $1,341,000 for the six-month period ended July 4, 2015.  As of July 4, 2015, the cash and cash equivalents totaled approximately $5,699,000.
 
While we anticipate that our current cash and cash equivalents on hand and cash generated from operations will be sufficient meet our projected operating plans through at least December 31, 2016, we may require additional funds, either through additional equity or debt financings or collaborative agreements or from other sources. We have no commitments to obtain such additional financing, and we may not be able to obtain any such additional financing on terms favorable to us, or at all. If adequate financing is not available, the Company will further delay, postpone or terminate product and service expansion and curtail certain selling, general and administrative operations.  The inability to raise additional financing may have a material adverse effect on the future performance of the Company.
 
Note 3. Significant Accounting Policies
 
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.    Every fifth or sixth fiscal year, the inclusion of an extra week occurs due to the Company’s floating year-end date. The fiscal year 2014 ended on January 3, 2015 consisted of 53 weeks. The fiscal year 2015 ending on January 2, 2016 will include the normal 52 weeks.
 
Changes in accounting principle: In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.  The amendments in this ASU require that debt issuance costs related to a debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs have not changed.

 
-6-

 
The Company early adopted the amendments in this ASU effective as of April 4, 2015.  As of July 4, 2015 and January 3, 2015, the Company had unamortized debt issuance costs of $85,161 and $91,361, respectively.  The Company had previously presented the debt issuance costs as other noncurrent assets in its consolidated balance sheet as of January 3, 2015 in the Company’s Annual Report on Form 10-K filed with the Commission on March 19, 2015.  The early adoption has resulted in adjustments to the Company’s consolidated balance sheet as of January 3, 2015, by reclassifying the debt issuance costs as a direct deduction from the carrying amount of the debt liability.  Below are the effects of the change on the consolidated balance sheet as of January 3, 2015.

ChromaDex Corporation and Subsidiaries
 
   
Condensed Consolidated Balance Sheet
 
January 3, 2015
 
                   
   
Previously
Reported
   
Adjustments
   
As Adjusted
 
Assets
                 
                   
Current Assets
  $ 9,898,691     $ -     $ 9,898,691  
                         
Leasehold Improvements and Equipment, net
    1,264,660       -       1,264,660  
                         
Other Noncurrent Assets
    444,857       (91,361 )     353,496  
                         
Total assets
  $ 11,608,208     $ (91,361 )   $ 11,516,847  
                         
Liabilities and Stockholders' Equity
                       
                         
Current Liabilities
  $ 4,980,820     $ -     $ 4,980,820  
                         
Loan payable, less current maturities, net
    2,068,474       (91,361 )     1,977,113  
                         
Capital lease obligations, less current maturities
    423,015       -       423,015  
                         
Deferred rent, less current
    137,508       -       137,508  
                         
Total liabilities
    7,609,817       (91,361 )     7,518,456  
                         
Total stockholders' equity
    3,998,391       -       3,998,391  
                         
Total liabilities and stockholders' equity
  $ 11,608,208     $ (91,361 )   $ 11,516,847  

Inventories:  Inventories are comprised of raw materials, work-in-process and finished goods.  They are stated at the lower of cost, determined by the first-in, first-out method (FIFO) method, or market.  Labor and overhead has been added to inventory that was manufactured or characterized by the Company.  The amounts of major classes of inventory as of July 4, 2015 and January 3, 2015 are as follows:

   
July 4, 2015
   
January 3, 2015
 
Natural product fine chemicals
  $ 1,695,315     $ 1,760,305  
Bulk ingredients
    1,957,718       2,298,036  
      3,653,033       4,058,341  
Less valuation allowance
    564,000       324,000  
    $ 3,089,033     $ 3,734,341  

 
Note 4. Loss Per Share Applicable to Common Stockholders
 
The following table sets forth the computations of loss per share amounts applicable to common stockholders for the three and six months ended July 4, 2015 and June 28, 2014:
 
   
Three Months Ended
   
Six Months Ended
 
   
July 4, 2015
   
June 28, 2014
   
July 4, 2015
   
June 28, 2014
 
                         
Net loss
  $ (315,192 )   $ (1,653,142 )   $ (1,340,707 )   $ (3,501,158 )
                                 
Basic and diluted loss per common share
  $ (0.00 )   $ (0.02 )   $ (0.01 )   $ (0.03 )
                                 
Weighted average common shares outstanding (1):
    107,409,894       106,185,584       107,304,245       106,130,972  
                                 
Potentially dilutive securities (2):
                               
  Stock options
    14,120,114       14,686,002       14,120,114       14,686,002  
  Warrants
    469,020       -       469,020       -  
  Convertible Debt
    773,395       -       773,395       -  
 
(1) Includes 1,230,484 and 1,600,879 weighted average nonvested shares of restricted stock for the three months ended July 4, 2015 and June 28, 2014, respectively, and 1,392,285 and 1,571,483 weighted average nonvested shares of restricted stock for the six months ended July 4, 2015 and June 28, 2014, respectively, which are participating securities
(2) Excluded from the computation of loss per share as their impact is antidilutive.
 
Note 5. Leasehold Improvements and Equipment
 
Leasehold improvements and equipment consisted of the following:
 
             
   
July 4, 2015
   
January 3, 2015
 
             
Laboratory equipment
  $ 3,530,714     $ 3,151,748  
Leasehold improvements
    503,343       495,240  
Computer equipment
    347,786       329,737  
Furniture and fixtures
    13,039       13,039  
Office equipment
    21,547       7,877  
Construction in progress
    18,948       68,141  
      4,435,377       4,065,782  
Less accumulated depreciation
    2,883,127       2,801,122  
    $ 1,552,250     $ 1,264,660  
 
Depreciation expense on leasehold improvements and equipment included in the consolidated statement of operations for the six months ended July 4, 2015 and June 28, 2014 was approximately $137,000 and $107,000, respectively.
 
Note 6. Loan Payable
 
On June 17, 2015, the Company and Hercules Technology II, L.P entered into Amendment No. 1 (the “Amendment”) to the Loan and Security Agreement entered into by the parties on September 29, 2014 (the “Agreement”). The terms of the Agreement provided the Company with access to a term loan of up to $5 million. The first $2.5 million of the term loan was funded at closing. The remaining $2.5 million of the term loan was to be drawn down in part or in full at our option at any time but no later than July 31, 2015.  The first advance and second advance, if any, were to be repaid in equal monthly installments through the loan’s maturity on April 1, 2018, following an initial interest-only period that was to conclude on October 31, 2015.

 
-8-

 
Pursuant to the Amendment, the parties agreed that the interest only period shall be extended to March 31, 2016, provided however that if the Company’s consolidated revenue is equal to or greater than $11.5 million for the six months ending December 31, 2015, then the interest-only period shall be extended to June 30, 2016.  The maturity date remains unchanged at April 1, 2018 and any remaining principal balance of the loan and all unpaid interest shall be due on the maturity date.  The Amendment became effective on June 18, 2015 upon the funding of the full amount of the $2.5 million second advance and payment of a nonrenewable facility fee of $15,000 to the Agent.

The second advance of $2.5 million is treated as if the Company entered into a separate loan.  The facility fee of $15,000 is treated as debt issuance costs and are being amortized as interest expense using the effective interest method over the term of the loan.  There is also additional $93,750 end of term charge the Company will pay, which is 3.75% of the $2.5 million drawn.  The end of term charge is being accrued as additional interest expense using the effective interest rate method over the term of the loan.

The Company determined that the amended terms of the first advance of $2.5 million on September 29, 2014 were not substantially different from the original terms.  The Company therefore did not apply debt extinguishment treatment, but rather accounted for prospectively as yield adjustments, based on the revised terms.

Loan payable as of July 4, 2015 consists of the following:
 
Principal amount payable for following years ending December
     
  2015
  $ -  
  2016
    905,393  
  2017
    1,945,650  
  2018
    2,148,957  
Total principal payments
    5,000,000  
Accrued end of term charge
    31,410  
Total loan payable
    5,031,410  
Less unamortized debt issuance costs and debt discount
    253,796  
Less current portion
    148,591  
Loan payable – long term
  $ 4,629,023  
         
The total interest expenses related to the term loan, including cash interest payments, the amortizations of debt issuance costs and debt discount, and the accrual of the end of term charge were approximately $115,000 and $221,000 for the three and six months ended July 4, 2015.  For the three and six months ended June 28, 2014, the Company did not have any interest expense related to loan payable as the Company did not have any outstanding balance.
 
Note 7. Share-Based Compensation
 
7A. Employee Share-Based Compensation
 
Stock Option Plans
 
Service Period Based Stock Options
 
The majority of options granted by the Company feature service conditions.  Accordingly, these options vest ratably over specified periods of approximately 3 to 5 years following the date of grant.
 
The following table summarizes our stock option activity during the six months ended July 4, 2015:
 
         
Weighted Average
       
               
Remaining
   
Aggregate
 
   
Number of
   
Exercise
   
Contractual
   
Intrinsic
 
   
Shares
   
Price
   
Term
   
Value
 
Outstanding at January 3, 2015
    12,723,601     $ 1.13       7.00        
                               
    Options Granted
    225,000       1.28       10.00        
    Options Classification from Employee
       to Non-Employee
    (1,202,762 )     0.91                
    Options Exercised
    (22,745 )     0.69                
    Options Forfeited
    (56,193 )     1.18                
    Outstanding at July 4, 2015
    11,666,901     $ 1.16       6.46     $ 2,231,000  
                                 
Exercisable at July 4, 2015
    9,508,077     $ 1.16       6.01     $ 1,862,000  
                                 
 
 
-9-

 
The aggregate intrinsic values in the table above are based on the Company’s closing stock price of $1.22 on the last day of business for the period ended July 4, 2015.
 
Certain employees who were previously classified as employees under the share-based compensation plan have been reclassified to non-employees during the six months ended July 4, 2015 as they became consultants.  There was no impact on accounting as the options were fully vested.
 
The fair value of the Company’s stock options was estimated at the date of grant using the Black-Scholes option pricing model.  The table below outlines the weighted average assumptions for options granted to employees during the six months ended July 4, 2015.
 
Six Months Ended July 4, 2015
     
Expected volatility
    75 %
Expected dividends
    0.00 %
Expected term
 
6.0 years
 
Risk-free rate
    1.72 %
 
The weighted average grant date fair value of options granted during the six months ended July 4, 2015 was $0.85.
 
As of July 4, 2015, there was approximately $1,173,000 of total unrecognized compensation expense expected to be recognized over a weighted average period of 2.45 years.
 
Stock Award
 
On April 16, 2015, the Company awarded 125,000 shares of the Company’s common stock that were fully vested and non-forfeitable to Mark Germain, who resigned from the Board.  These shares were granted as compensation for his services as a director of the Company through April 16, 2015.  The fair value of the award, which amounted to approximately $154,000 was based on the trading price of the Company’s stock on the date of grant.  The expense related to this stock award was immediately recognized.
 
Restricted Stock
 
Restricted stock awards granted by the Company to employees have vesting conditions that are unique to each award.
 
The following table summarizes activity of restricted stock awards granted to employees at July 4, 2015 and changes during the six months then ended:
 
         
Weighted Average
 
         
Award-Date
 
   
Shares
   
Fair Value
 
Unvested shares at January 3, 2015
    1,590,000     $ 1.18  
                 
Granted
    -       -  
Vested
    (510,000 )     1.41  
      Forfeited
    -       -  
Unvested shares at July 4, 2015
    1,080,000     $ 1.08  
                 
Expected to Vest as of July 4, 2015
    1,080,000     $ 1.08  

On February 25, 2015, former members of the Company’s Board of Directors (the “Board”), Michael Brauser and Barry Honig, resigned from the Board.  The Board made a resolution that 250,000 shares of unvested restricted stock held by Mr. Brauser and 250,000 shares of unvested restricted stock held by Mr. Honig are immediately vested on the date of resignation.  The expense for these vested restricted stock was recognized during the fiscal year ended January 3, 2015.
 
On April 16, 2015, a former member of the Board, Mark Germain, resigned from the Board.  The Board made a resolution that 10,000 shares of unvested restricted stock held by Mr. Germain are immediately vested on the date of resignation.  The expense for these vested restricted stock was recognized during the fiscal year ended January 3, 2015.
 
Employee Option, Stock and Restricted Stock Compensation
 
The Company recognized compensation expense of approximately $442,000 and $820,000 in general and administrative expenses in the statement of operations for the three and six months ended July 4, 2015, respectively, and approximately $1,021,000 and $1,970,000 for the three and six months ended June 28, 2014, respectively.
 
7B. Non-Employee Share-Based Compensation
 
Stock Option Plans
 
The following table summarizes activity of stock options granted to non-employees at July 4, 2015 and changes during the six months then ended:
 
         
Weighted Average
       
               
Remaining
   
Aggregate
 
   
Number of
   
Exercise
   
Contractual
   
Intrinsic
 
   
Shares
   
Price
   
Term
   
Value
 
Outstanding at January 3, 2015
    1,050,451     $ 1.35       5.46        
                               
Options Granted
    -       -                
Options Classification from Employee
    to Non-Employee
    1,202,762       0.91                
Options Exercised
    -       -                
     Options Forfeited
    -       -                
Outstanding at July 4, 2015
    2,253,213     $ 1.12       6.28     $ 473,000  
                                 
Exercisable at July 4, 2015
    2,196,963     $ 1.11       6.21     $ 473,000  
 
The aggregate intrinsic values in the table above are based on the Company’s closing stock price of $1.22 on the last day of business for the period ended July 4, 2015.
 
As of July 4, 2015, there was approximately $38,000 of total unrecognized compensation expense expected to be recognized over a weighted average period of 1.19 years.

Stock and Restricted Stock Awards
 
Restricted stock awards granted by the Company to non-employees generally feature time vesting service conditions, specified in the respective service agreements.  Restricted stock awards issued to non-employees are accounted for at current fair value through the vesting period.  On January 27, 2015, the Company awarded 350,000 shares of the Company’s common stock to non-employees.  210,000 of these shares were treated as stock awards as the shares vested immediately on the date of award, and the remaining 140,000 shares, which were initially treated as unvested restricted stock, vested on May 28, 2015.  The fair values of the awards, which totaled approximately $350,000, were measured based on the trading prices of the Company’s stock on the date of award and the date vested.  The expense related to these stock awards were fully recognized during the six-month period ended July 4, 2015.
 
In addition, 12,000 shares of restricted stock that were granted to a certain non-employee during the fiscal year ended January 3, 2015 became vested during the six-month period ended July 4, 2015.  The fair value of these vested restricted shares was approximately $15,000, which represents the market value of the Company’s common stock on respective vesting dates charged to expense.
 
The following table summarizes activity of restricted stock awards issued to non-employees at July 4, 2015 and changes during the six months then ended:
 
         
Weighted Average
 
   
Shares
   
Fair Value
 
Unvested shares at January 3, 2015
    76,000     $ 0.90  
                 
Granted
    140,000       0.86  
Vested
    (152,000 )     1.21  
     Forfeited
    -       -  
Unvested shares expected to vest at July 4, 2015
    64,000     $ 1.22  
                 
As of July 4, 2015, there was approximately $78,000 of total unrecognized compensation expense related to the restricted stock award to a non-employee.  That cost is expected to be recognized over a period of 2.7 years as of July 4, 2015.
 
 
-11-

 
Non-Employee Option, Stock and Restricted Stock Compensation
 
The Company recognized share-based compensation expense of approximately $65,000 and $403,000 in general and administrative expenses in the statement of operations for the three and six months ended July 4, 2015 and approximately $16,000 and $66,000 for the three and six months ended June 28, 2014, respectively.
 
Note 8. Business Segments
 
The Company has following three reportable segments.
 
·
Ingredients segment develops and commercializes proprietary-based ingredient technologies and supplies these ingredients to the manufacturers of consumer products in various industries including the nutritional supplement, food and beverage and animal health industries.
 
·
Core standards, and contract services segment includes supply of phytochemical reference standards, which are small quantities of plant-based compounds typically used to research an array of potential attributes, reference materials, and related contract services.
 
·
Scientific and regulatory consulting segment which consist of providing scientific and regulatory consulting to the clients in the food, supplement and pharmaceutical industries to manage potential health and regulatory risks.
 
The “Other” classification includes corporate items not allocated by the Company to each reportable segment. Further, there are no intersegment sales that require elimination.  The Company evaluates performance and allocates resources based on reviewing gross margin by reportable segment.
 
Three months ended
             
 
             
July 4, 2015
 
 
   
 
   
 
             
   
Ingredients
segment
   
Core Standards and
Contract Services
segment
   
Scientific and
Regulatory
Consulting segment
   
Other
   
Total
 
                               
Net sales
  $ 3,411,636     $ 2,371,477     $ 318,267     $ -     $ 6,101,380  
Cost of sales
    1,869,205       1,635,294       126,189       -       3,630,688  
                                         
Gross profit
    1,542,431       736,183       192,078       -       2,470,692  
                                         
Operating expenses:
                                       
Sales and marketing
    298,281       336,392       5,075       -       639,748  
General and administrative
    -       -       -       2,015,004       2,015,004  
Operating expenses
    298,281       336,392       5,075       2,015,004       2,654,752  
                                         
Operating income (loss)
  $ 1,244,150     $ 399,791     $ 187,003     $ (2,015,004 )   $ (184,060 )
                                         


Three months ended
       
 
   
 
             
June 28, 2014
 
 
   
 
   
 
             
   
Ingredients
segment
   
Core Standards and Contract Services
segment
   
Scientific and
Regulatory
Consulting segment
   
Other
   
Total
 
                               
Net sales
  $ 1,721,872     $ 1,856,950     $ 277,332     $ -     $ 3,856,154  
Cost of sales
    1,043,538       1,295,530       118,320       -       2,457,388  
                                         
Gross profit
    678,334       561,420       159,012       -       1,398,766  
                                         
Operating expenses:
                                       
Sales and marketing
    310,386       221,797       39,365       -       571,548  
General and administrative
    -       -       -       2,468,646       2,468,646  
Operating expenses
    310,386       221,797       39,365       2,468,646       3,040,194  
                                         
Operating income (loss)
  $ 367,948     $ 339,623     $ 119,647     $ (2,468,646 )   $ (1,641,428 )
                                         
 
Six months ended
             
 
             
July 4, 2015
 
 
   
 
   
 
             
   
Ingredients
segment
   
Core Standards and Contract Services segment
   
Scientific and
Regulatory
Consulting segment
   
Other
   
Total
 
                               
Net sales
  $ 6,091,977     $ 4,671,520     $ 598,854     $ -     $ 11,362,351  
Cost of sales
    3,472,381       3,209,078       282,576       -       6,964,035  
                                         
Gross profit
    2,619,596       1,462,442       316,278       -       4,398,316  
                                         
Operating expenses:
                                       
Sales and marketing
    572,905       647,336       5,284       -       1,225,525  
General and administrative
    -       -       -       4,262,935       4,262,935  
Operating expenses
    572,905       647,336       5,284       4,262,935       5,488,460  
                                         
Operating income (loss)
  $ 2,046,691     $ 815,106     $ 310,994     $ (4,262,935 )   $ (1,090,144 )
                                         

Six months ended
             
 
             
June 28, 2014
 
 
   
 
   
 
             
   
Ingredients
segment
   
Core Standards and Contract Services
segment
   
Scientific and
Regulatory
Consulting segment
   
Other
   
Total
 
                               
Net sales
  $ 2,858,181     $ 3,592,833     $ 479,278     $ -     $ 6,930,292  
Cost of sales
    1,761,715       2,489,165       295,638       -       4,546,518  
                                         
Gross profit
    1,096,466       1,103,668       183,640       -       2,383,774  
                                         
Operating expenses:
                                       
Sales and marketing
    550,346       434,572       51,197       -       1,036,115  
General and administrative
    -       -       -       4,806,309       4,806,309  
Loss from investment in affiliate
    -       -       -       21,543       21,543  
Operating expenses
    550,346       434,572       51,197       4,827,852       5,863,967  
                                         
Operating income (loss)
  $ 546,120     $ 669,096     $ 132,443     $ (4,827,852 )   $ (3,480,193 )
 
 
-13-

 
         
Core Standards and
   
Scientific and
             
At July 4, 2015
 
Ingredients
   
Contract Services
   
Regulatory
Consulting
             
   
segment
   
segment
   
segment
   
Other
   
Total
 
                               
Total assets
  $ 4,275,827     $ 3,406,936     $ 185,357     $ 6,354,474     $ 14,222,594  
                                         

         
Core Standards and
   
Scientific and
             
At January 3, 2015
 
Ingredients
   
Contract Services
   
Regulatory
Consulting
             
   
segment
   
segment
   
segment
   
Other
   
Total
 
                               
Total assets
  $ 3,757,073     $ 3,220,518     $ 105,711     $ 4,433,545     $ 11,516,847  
                                         
 
Note 9. Commitments and Contingencies
 
Capitalized Lease Obligations
 
On January 31, 2015, the Company entered into a financing transaction to purchase laboratory equipment.  Under the lease terms, the Company will make monthly lease payments, including interest, of approximately $7,000 for 48 months, for a total payment of approximately $356,000.  The Company has recorded a capital lease of approximately $304,000.  The equipment will be utilized in our core standards and contract services segment.
 
Subsequent to July 4, 2015, the Company entered into a financing transaction to purchase laboratory equipment.  Under the lease terms, the Company will make monthly lease payments, including interest, of approximately $5,000 for 60 months, for a total payment of approximately $276,000.  The Company will record a capital lease of approximately $243,000.  The equipment will be utilized in our core standards and contract services segment.
 
Note 10. Subsequent Events
 
On July 6, 2015, the Board of Directors (the “Board”) granted approximately 917,000 and 675,000 stock options to the Company’s employees and members of the Board, respectively, with an exercise price of $1.22 per share.
 
On July 9, 2015, the Board appointed Robert Fried to serve as a member of the Board.  Also on July 9, 2015, Glenn Halpryn resigned from the Board.  On July 30, 2015, the Board awarded 200,000 stock options to Robert Fried with an exercise price of $1.10 per share.
 

 
-14-

 
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 2015 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 January 3, 2015 and filed with the Commission on March 19, 2015 and in future reports the Company files with the Commission. Readers of this Form 10−Q should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, the Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

You should read the following discussion and analysis of the financial condition and results of operations of the Company together with the financial statements and the related notes presented in Item 1 of this Form 10-Q. Overview
 
The Company is a natural products company that leverages its complementary business units to discover, acquire, develop and commercialize patented and proprietary ingredient technologies that address the dietary supplement, food, beverage, skin care and pharmaceutical markets.  In addition to the Company’s ingredient technologies unit, the Company also has business units focused on natural product fine chemicals, chemistry and analytical testing services, and product regulatory and safety consulting.  As a result of the Company’s relationships with leading universities and research institutions, the Company is able to discover and license early stage, Intellectual Property-backed ingredient technologies.  The Company then utilizes the Company’s in-house chemistry, regulatory and safety consulting business units to develop commercially viable ingredients.  The Company’s ingredient portfolio is backed with clinical and scientific research, as well as extensive Intellectual Property protection.
 
The discussion and analysis of our financial condition and results of operations is 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.
 
The Company has approximately $5,699,000 cash and cash equivalents on hand as of July 4, 2015.  We anticipate that our current cash and cash equivalents on hand, and cash generated from operations will be sufficient to meet our projected operating plans through at least December 31, 2016.  We may, however, seek additional capital prior to December 31, 2016, both to meet our projected operating plans after December 31, 2016 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.  Further, 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.

Results of Operations
 
Our net sales and net loss for the three- and six-month periods ending on July 4, 2015 and June 28, 2014 were as follows:

   
Three months ending
   
Six months ending
 
   
July 4, 2015
   
June 28, 2014
   
July 4, 2015
   
June 28, 2014
 
                         
Net sales
  $ 6,101,000     $ 3,856,000     $ 11,362,000     $ 6,930,000  
Net loss
    (315,000 )     (1,653,000 )     (1,341,000 )     (3,501,000 )
                                 
Basic and Diluted loss per common share
  $ (0.00 )   $ (0.02 )   $ (0.01 )   $ (0.03 )

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.
 
Net Sales
 
Net sales consist of gross sales less discounts and returns.

   
Three months ending
   
Six months ending
 
   
July 4, 2015
   
June 28, 2014
   
Change
   
July 4, 2015
   
June 28, 2014
   
Change
 
Net sales:
                                   
  Ingredients
  $ 3,412,000     $ 1,722,000       98 %   $ 6,092,000     $ 2,858,000       113 %
  Core standards and contract services
    2,371,000       1,857,000       28 %     4,671,000       3,593,000       30 %
  Scientific and regulatory consulting
    318,000       277,000       15 %     599,000       479,000       25 %
                                                 
     Total net sales
  $ 6,101,000     $ 3,856,000       58 %   $ 11,362,000     $ 6,930,000       64 %
                                                 

 
·
The increases in sales for the ingredients segment are due to increased sales throughout most of the ingredients we sell, including “NIAGEN®,” “PURENERGY®,” and “PTEROPURE®.”
 
·
The increases in sales for the core standards and contract services segment are primarily due to increased sales of analytical testing and contract services.
 
·
The increases in sales for the scientific and regulatory consulting segment are mainly due to completion of more consulting projects during the three- and six-month periods ended July 4, 2015.  In the comparable periods in 2014, we did not complete as many projects due to client related delays.
 
Cost of Sales
 
Cost of sales include raw materials, labor, overhead, and delivery costs.

   
Three months ending
   
Six months ending
 
   
July 4, 2015
   
June 28, 2014
   
July 4, 2015
   
June 28, 2014
 
   
Amount
   
% of
net sales
   
Amount
   
% of
net sales
   
Amount
   
% of
net sales
   
Amount
   
% of
net sales
 
Cost of sales:
                                               
  Ingredients
  $ 1,869,000       55 %   $ 1,044,000       61 %   $ 3,472,000       57 %   $ 1,762,000       62 %
  Core standards and contract services
    1,636,000       69 %     1,295,000       70 %     3,209,000       69 %     2,489,000       69 %
  Scientific and regulatory consulting
    126,000       40 %     118,000       43 %     283,000       47 %     296,000       62 %
                                                                 
     Total cost of sales
  $ 3,631,000       60 %   $ 2,457,000       64 %   $ 6,964,000       61 %   $ 4,547,000       66 %
                                                                 
 
The cost of sales, as a percentage of net sales, decreased 4% and 5% for the three- and six-month periods ended July 4, 2015, respectively, compared to the comparable periods in 2014.
 
·
The decreases in cost of sales, as a percentage of net sales, for the ingredients segment are largely due to the increased purchase volume, which enabled us to obtain lower prices from our suppliers as a result.
 
·
The cost of sales as a percentage of net sales for the core standards and contract services segment slightly decreased to 69% from 70% for the three-month period ended July 4, 2015 and was identical at 69% for the six-month period ended July 4, 2015 compared to the comparable p