cdxc10q_apr42015.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 April 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 o
 
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 o

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  o Accelerated filer  x
Non-accelerated filer  o Smaller reporting company  o
(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 o  No x
 
Number of shares of common stock of the registrant: 107,421,275 outstanding as of May 13, 2015.

 


 

 

CHROMADEX CORPORATION
 
2015 QUARTERLY REPORT ON FORM 10-Q
 
TABLE OF CONTENTS
 
PART I  –
FINANCIAL INFORMATION (UNAUDITED)
 
  1
    Condensed Consolidated Balance Sheets as of April 4, 2015 (Unaudited) and January 3, 2015 (Audited) 1
    Condensed Consolidated Statements of Operations for the three months ended April 4, 2015 and March 29, 2014 (Unaudited) 2
    Condensed Consolidated Statements of Stockholders Equity for the three months ended April 4, 2015 (Unaudited) 3
    Condensed Consolidated Statements of Cash Flows for the three months ended April 4, 2015 and March 29, 2014 (Unaudited) 4
    Notes to Condensed Consolidated Financial Statements (Unaudited) 5
  14
  20
  20
     
PART II  –
OTHER INFORMATION
 
  21
  21
  21
  21
  21
  22
  23
 
 
-i-


PART I – FINANCIAL INFORMATION (UNAUDITED)
 
ITEM 1.     FINANCIAL STATEMENTS

ChromaDex Corporation and Subsidiaries
           
             
Condensed Consolidated Balance Sheets
           
April 4, 2015 and January 3, 2015
           
             
   
April 4,
2015
   
January 3,
2015
 
Assets
   Unaudited      Audited  
             
Current Assets
           
Cash
  $ 3,215,839     $ 3,964,750  
Trade receivables, less allowance for doubtful accounts and returns
               
   April 4, 2015 $51,000; January 3, 2015 $38,000
    2,234,453       1,906,709  
Inventories
    3,231,696       3,734,341  
Prepaid expenses and other assets
    374,350       292,891  
Total current assets
    9,056,338       9,898,691  
                 
Leasehold Improvements and Equipment, net
    1,579,994       1,264,660  
                 
Other Noncurrent Assets
               
Deposits
    57,560       57,435  
Intangible assets, net
    290,937       296,061  
Total other noncurrent assets
    348,497       353,496  
                 
Total assets
  $ 10,984,829     $ 11,516,847  
                 
Liabilities and Stockholders' Equity
               
                 
Current Liabilities
               
Accounts payable
  $ 2,640,950     $ 3,451,608  
Accrued expenses
    1,003,579       853,685  
Current maturities of loan payable
    452,672       223,358  
Current maturities of capital lease obligations
    207,413       148,278  
Customer deposits and other
    393,352       234,435  
Deferred rent, current
    73,942       69,456  
Total current liabilities
    4,771,908       4,980,820  
                 
Loan payable, less current maturities, net
    1,794,747       1,977,113  
                 
Capital lease obligations, less current maturities
    610,738       423,015  
                 
Deferred rent, less current
    118,651       137,508  
                 
Total liabilities
    7,296,044       7,518,456  
                 
Commitments and contingencies
               
                 
Stockholders' Equity
               
Common stock, $.001 par value; authorized 150,000,000 shares;
               
   issued and outstanding April 4, 2015 105,987,058 and
               
   January 3, 2015 105,271,058 shares
    105,987       105,271  
Additional paid-in capital
    44,132,635       43,417,442  
Accumulated deficit
    (40,549,837 )     (39,524,322 )
Total stockholders' equity
    3,688,785       3,998,391  
                 
Total liabilities and stockholders' equity
  $ 10,984,829     $ 11,516,847  
 
See Notes to Condensed Consolidated Financial Statements.

 
-1-

 
ChromaDex Corporation and Subsidiaries
           
             
Condensed Consolidated Statements of Operations (Unaudited)
           
For the Three Month Periods Ended April 4, 2015 and March 29, 2014
       
             
   
April 4,
2015
   
March 29,
2014
 
             
Sales, net
  $ 5,260,971     $ 3,074,138  
Cost of sales
    3,333,347       2,089,130  
                 
Gross profit
    1,927,624       985,008  
                 
Operating expenses:
               
Sales and marketing
    585,777       464,567  
General and administrative
    2,247,931       2,337,663  
Loss from investment in affiliate
    -       21,543  
Operating expenses
    2,833,708       2,823,773  
                 
Operating loss
    (906,084 )     (1,838,765 )
                 
Nonoperating income (expense):
               
Interest income
    718       640  
Interest expense
    (120,149 )     (9,891 )
Nonoperating expenses
    (119,431 )     (9,251 )
                 
Net loss
  $ (1,025,515 )   $ (1,848,016 )
                 
                 
Basic and Diluted loss per common share
  $ (0.01 )   $ (0.02 )
                 
                 
Basic and Diluted weighted average common shares outstanding
    107,198,597       106,076,361  
 
See Notes to Condensed Consolidated Financial Statements.
 
 
-2-

 
ChromaDex Corporation and Subsidiaries
 
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
 
For the Three Month Period Ended April 4, 2015
 
                           
Total
Stockholders'
Equity
 
               
Additional
Paid-in Capital
   
Accumulated
Deficit
     
   
Common Stock
             
   
Shares
   
Amount
             
Balance, January 3, 2015
    105,271,058     $ 105,271     $ 43,417,442     $ (39,524,322 )   $ 3,998,391  
                                         
Share-based compensation
    216,000       216       715,693       -       715,909  
                                         
Vested restricted stock
    500,000       500       (500 )     -       -  
                                         
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  
 
See Notes to Condensed Consolidated Financial Statements.
 
 
-3-


ChromaDex Corporation and Subsidiaries
           
             
Condensed Consolidated Statements of Cash Flows (Unaudited)
           
For the Three Month Periods Ended April 4, 2015 and March 29, 2014
       
             
   
April 4,
2015
   
March 29,
2014
 
             
Cash Flows From Operating Activities
           
  Net loss
  $ (1,025,515 )   $ (1,848,016 )
  Adjustments to reconcile net loss to net cash
               
    used in operating activities:
               
    Depreciation of leasehold improvements and equipment
    66,902       50,919  
    Amortization of intangibles
    10,124       7,633  
    Share-based compensation expense
    715,909       999,661  
    Allowance for doubtful trade receivables
    13,526       7,110  
    Gain on sale of equipment
    -       (103 )
    Loss from disposal of equipment
    17,475       -  
    Loss from investment in affiliate
    -       21,543  
    Non-cash financing costs
    46,948       -  
  Changes in operating assets and liabilities:
               
    Trade receivables
    (341,270 )     (835,758 )
    Other receivable
    -       215,000  
    Inventories
    502,645       (288,652 )
    Prepaid expenses and other assets
    (81,584 )     (123,367 )
    Accounts payable
    (810,658 )     481,159  
    Accrued expenses
    149,894       74,894  
    Customer deposits and other
    158,917       (157,020 )
    Deferred rent
    (14,371 )     (9,788 )
Net cash used in operating activities
    (591,058 )     (1,404,785 )
                 
Cash Flows From Investing Activities
               
  Purchases of leasehold improvements and equipment
    (95,778 )     (14,623 )
  Purchases of intangible assets
    (5,000 )     (5,000 )
  Proceeds from sale of equipment
    -       1,356  
  Proceeds from investment in affiliate
    -       1,092,500  
Net cash (used in) provided by investing activities
    (100,778 )     1,074,233  
                 
Cash Flows From Financing Activities
               
  Proceeds from exercise of stock options
    -       27,100  
  Principal payments on capital leases
    (57,075 )     (33,346 )
Net cash used in financing activities
    (57,075 )     (6,246 )
                 
Net decrease in cash
    (748,911 )     (336,798 )
                 
Cash Beginning of Period
    3,964,750       2,261,336  
                 
Cash Ending of Period
  $ 3,215,839     $ 1,924,538  
                 
Supplemental Disclosures of Cash Flow Information
               
  Cash payments for interest
  $ 73,202     $ 9,891  
                 
Supplemental Schedule of Noncash Investing Activity
               
  Capital lease obligation incurred for purchases of equipment
  $ 303,933     $ -  
                 
Supplemental Schedule of Noncash Share-based Compensation
               
  Changes in prepaid expenses associated with share-based compensation
  $ -     $ 49,718  
 
See Notes to Condensed Consolidated Financial Statements.

 
-4-

 
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 April 4, 2015 and results of operations and cash flows for the three months ended April 4, 2015 and March 29, 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 three months ended April 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 discovers, acquires, develops and commercializes proprietary-based ingredient technologies through its business model that utilizes its wholly owned business units, including ingredient technologies, catalog of natural product fine chemicals, chemistry and analytical testing services, and product regulatory and safety consulting services.  The Company provides science-based solutions to the nutritional supplement, food and beverage, animal health, cosmetic and pharmaceutical industries.
 
Liquidity:  The Company has incurred a loss from operations of approximately $906,000 and a net loss of approximately $1,026,000 for the three-month period ended April 4, 2015.  As of April 4, 2015, the cash and cash equivalents totaled approximately $3,216,000.
 
The Company has approximately $2,500,000 of available credit on its term loan that can be drawn down by July 31, 2015.  While we anticipate that our current cash and cash equivalents on hand, cash generated from operations and the available credit on the term loan that can be drawn down will be sufficient to meet our projected operating plans through at least May 15, 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.  For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  Early adoption of the amendments is permitted for financial statements that have not been previously issued.
 
 
-5-


The Company early adopted the amendments in this ASU effective as of April 4, 2015.  As of April 4, 2015 and January 3, 2015, the Company had unamortized debt issuance costs of $80,455 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 April 4, 2015 and January 3, 2015 are as follows:

   
April 4, 2015
   
January 3, 2015
 
Reference standards
  $ 1,718,313     $ 1,760,305  
Bulk ingredients
    1,956,383       2,298,036  
      3,674,696       4,058,341  
Less valuation allowance
    443,000       324,000  
    $ 3,231,696     $ 3,734,341  
 
 
-6-


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 months ended April 4, 2015 and March 29, 2014:
 
   
Three Months Ended
 
   
April 4,
2015
   
March 29,
2014
 
             
Net loss
  $ (1,025,515 )   $ (1,848,016 )
                 
Basic and diluted loss per common share
  $ (0.01 )   $ (0.02 )
                 
Weighted average common shares outstanding (1):
    107,198,597       106,076,361  
                 
Potentially dilutive securities (2):
               
  Stock options
    14,146,969       13,326,655  
  Warrants
    469,020       -  
  Convertible Debt
    773,395       -  
 
                 
(1) Includes 1,554,088 and 1,542,088 weighted average nonvested shares of restricted stock for the three months ended April 4, 2015 and March 29, 2014, respectively, which are participating securities that feature voting and dividend rights.
                 
(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:
 
   
April 4,
2015
   
January 3, 2015
 
             
Laboratory equipment
  $ 3,514,733     $ 3,151,748  
Leasehold improvements
    495,240       495,240  
Computer equipment
    333,567       329,737  
Furniture and fixtures
    13,039       13,039  
Office equipment
    7,877       7,877  
Construction in progress
    28,737       68,141  
      4,393,193       4,065,782  
Less accumulated depreciation
    2,813,199       2,801,122  
    $ 1,579,994     $ 1,264,660  
 
Depreciation expense on leasehold improvements and equipment included in the consolidated statement of operations for the three months ended April 4, 2015 and March 29, 2014 was approximately $67,000 and $51,000, respectively.

 
-7-

 
Note 6.                      Loan Payable
 
Loan payable as of April 4, 2015 consists of the following:
 
Principal amount payable for following years ending December
     
  2015
  $ 223,358  
  2016
    867,247  
  2017
    1,035,995  
  2018
    373,400  
Total principal payments
    2,500,000  
Accrued end of term charge
    20,425  
Total loan payable
    2,520,425  
Less unamortized debt issuance costs and debt discount
    273,006  
Less current portion
    452,672  
Loan payable – long term
  $ 1,794,747  
 
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 $106,000 for the three months ended April 4, 2015.  For the three months ended March 29, 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
 
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 three months ended April 4, 2015.
 
Three Months Ended April 4, 2015
 
Expected volatility
75%
Expected dividends
0.00%
Expected term
 6.1 years
Risk-free rate
1.68%
 
The weighted average grant date fair value of options granted during the three months ended April 4, 2015 was $0.85.
 
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.
 
 
-8-


The following table summarizes our stock option activity during the three months ended April 4, 2015:
 
         
Weighted Average
   
Aggregate
Intrinsic
Value
 
   
Number of
Shares
   
Exercise
Price
   
Remaining
Contractual
Term
     
Outstanding at January 3, 2015
    12,723,601     $ 1.13       7.00        
                               
Options Granted
    185,000       1.29       10.00        
Options Classification from Employee to Non-Employee
    (451,738 )     0.88                
Options Exercised
    -       -                
        Options Forfeited
    (12,083 )     1.14                
Outstanding at April 4, 2015
    12,444,780     $ 1.14       6.75     $ 5,237,000  
                                 
Exercisable at April 4, 2015
    9,608,011     $ 1.14       6.21     $ 3,981,000  
 
The aggregate intrinsic values in the table above are based on the Company’s closing stock price of $1.55 on the last day of business for the period ended April 4, 2015.
 
Certain employees who were previously classified as employees under the share-based compensation plan have been reclassified to non-employees during the three months ended April 4, 2015 as they became consultants.  There was no impact on accounting as the options were fully vested.
 
As of April 4, 2015, there was approximately $1,434,000 of total unrecognized compensation expense expected to be recognized over a weighted average period of 2.39 years.
 
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 April 4, 2015 and changes during the three months then ended:
 
   
Shares
   
Weighted Average
Award-Date
Fair Value
 
Unvested shares at January 3, 2015
    1,590,000     $ 1.18  
                 
Granted
    -       -  
Vested
    (500,000 )     1.41  
Forfeited
    -       -  
Unvested shares at April 4, 2015
    1,090,000     $ 1.08  
                 
Expected to Vest as of April 4, 2015
    1,090,000     $ 1.08  
 
Employee Option and Restricted Stock Compensation
 
The Company recognized compensation expense of approximately $378,000 and $950,000 in general and administrative expenses in the statement of operations for the three months ended April 4, 2015 and March 29, 2014, respectively.

 
-9-


7B. Non-Employee Share-Based Compensation
 
Stock Option Plans
 
The following table summarizes activity of stock options granted to non-employees at April 4, 2015 and changes during the three months then ended:
 
         
Weighted Average
       
   
Number of
Shares
   
Exercise
Price
   
Remaining
Contractual
Term
   
Aggregate
Intrinsic
Value
 
Outstanding at January 3, 2015
    1,050,451     $ 1.35       5.46        
                               
Options Granted
    -       -                
Options Classification from Employee to Non-Employee
    451,738       0.88                
Options Exercised
    -       -                
Options Forfeited
    -       -                
Outstanding at April 4, 2015
    1,502,189     $ 1.21       6.07     $ 506,000  
                                 
Exercisable at April 4, 2015
    1,434,689     $ 1.21       5.91     $ 485,000  
 
The aggregate intrinsic values in the table above are based on the Company’s closing stock price of $1.55 on the last day of business for the period ended April 4, 2015.
 
As of April 4, 2015, there was approximately $67,000 of total unrecognized compensation expense expected to be recognized over a weighted average period of 1.44 years.
 
Stock Awards
 
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 fully vested and non-forfeitable and the remaining 140,000 shares can be surrendered and forfeited if the Company delivers termination notices for any reason prior to May 28, 2015.  The fair value of the awards for the fully vested 210,000 shares was $180,600, and was measured based on the trading price of the Company’s stock on the date of grant.  This fair value was expensed immediately on the date of grant.  The expense for the remaining forfeitable 140,000 shares are recognized ratably through May 28, 2015.  The fair values will be remeasured until the shares are fully vested.
 
As of April 4, 2015, there was approximately $98,000 of total unrecognized compensation expense related to the stock awards to non-employees.  That cost is expected to be recognized over a period of approximately 2 months as of April 4, 2015.
 
Restricted Stock
 
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.  The fair value of vested non-employee restricted shares awarded during the three months ended April 4, 2015 was approximately $7,000, which represents the market value of the Company’s common stock on respective vesting dates charged to expense.

 
-10-

 
The following table summarizes activity of restricted stock awards issued to non-employees at April 4, 2015 and changes during the three months then ended:
 
         
Weighted Average
 
   
Shares
   
Fair Value
 
Unvested shares at January 3, 2015
    76,000     $ 0.90  
                 
Granted
    -       -  
Vested
    (6,000 )     1.23  
Forfeited
    -       -  
Unvested shares expected to vest at April 4, 2015
    70,000     $ 1.55  
 
As of April 4, 2015, there was approximately $108,000 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 2.9 years as of April 4, 2015.
 
Non-Employee Option, Stock and Restricted Stock Compensation
 
The Company recognized share-based compensation expense of approximately $338,000 and $50,000 in general and administrative expenses in the statement of operations for the three months ended April 4, 2015 and March 29, 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.
 
 
-11-

 
Three months ended
April 4, 2015
       
Core Standards and
Contract Services
segment
   
Scientific and
Regulatory
Consulting segment
             
   
Ingredients
segment
           
Other
   
Total
 
                               
Net sales
  $ 2,680,341     $ 2,300,043     $ 280,587     $ -     $ 5,260,971  
Cost of sales
    1,603,176       1,573,784       156,387       -       3,333,347  
                                         
Gross profit
    1,077,165       726,259       124,200       -       1,927,624  
                                         
Operating expenses:
                                       
Sales and marketing
    274,624       310,944       209       -       585,777  
General and administrative
    -       -       -       2,247,931       2,247,931  
Operating expenses
    274,624       310,944       209       2,247,931       2,833,708  
                                         
Operating income (loss)
  $ 802,541     $ 415,315     $ 123,991     $ (2,247,931 )   $ (906,084 )
 
Three months ended
March 29, 2014
       
Core Standards and
Contract Services
segment
   
Scientific and
Regulatory
Consulting segment
             
                           
   
Ingredients
segment
           
Other
   
Total
 
                               
Net sales
  $ 1,136,309     $ 1,735,883     $ 201,946     $ -     $ 3,074,138  
Cost of sales
    718,177       1,193,635       177,318       -       2,089,130  
                                         
Gross profit
    418,132       542,248       24,628       -       985,008  
                                         
Operating expenses:
                                       
Sales and marketing
    239,960       212,775       11,832       -       464,567  
General and administrative
    -       -       -       2,337,663       2,337,663  
Loss from investment in affiliate
    -       -       -       21,543       21,543  
Operating expenses
    239,960       212,775       11,832       2,359,206       2,823,773  
                                         
Operating income (loss)
  $ 178,172     $ 329,473     $ 12,796     $ (2,359,206 )   $ (1,838,765 )
 
At April 4, 2015
       
Core Standards and
Contract Services
segment
   
Scientific and
Regulatory
Consulting segment
             
   
Ingredients
segment
           
Other
   
Total
 
                               
Total assets
  $ 3,407,868     $ 3,620,787     $ 79,778     $ 3,876,396     $ 10,984,829  
 
At January 3, 2015
       
Core Standards and
Contract Services
segment
   
Scientific and
Regulatory
Consulting segment
             
   
Ingredients
segment
           
Other
   
Total
 
                               
Total assets
  $ 3,757,073     $ 3,220,518     $ 105,711     $ 4,433,545     $ 11,516,847  
 
 
-12-


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.
 
Note 10.                      Subsequent Events
 
On April 16, 2015, the Board of Directors (the “Board”) appointed Jeff Baxter to serve as a member of the Board.
 
Also on April 16, 2015, Mark Germain resigned from the Board.  Mr. Germain’s resignation was not as a result of any disagreements with the Company’s operations, policies or practices.  The Board approved granting Mr. Germain 125,000 shares as compensation for his services to the Company.  These shares vested immediately.  Effective April 16, 2015 upon his resignation from the Board, the Board authorized immediate vesting of Mr. Germain’s 10,000 shares of restricted stock and options to purchase 751,024 shares of common stock which were previously granted.

 
-13-


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.

 
-14-


Overview
 
We discover, acquire, develop and commercialize proprietary-based ingredient technologies through our business model which utilizes our wholly-owned synergistic business units. These units include the supply of phytochemical reference standards, which are small quantities of plant-based compounds typically used to research an array of potential attributes, and reference materials, related contract services, and proprietary ingredients.  We perform chemistry-based analytical services at our laboratory in Boulder, Colorado, typically in support of quality control or quality assurance activities within the dietary supplement industry. Through our subsidiary Spherix Consulting, Inc., we also provide scientific and regulatory consulting to clients in the food, supplement and pharmaceutical industries to manage potential health and regulatory risks.
 
The discussion and analysis of our financial condition and results of operations 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 $2,500,000 of available credit on its term loan that can be drawn down by July 31, 2015.  We anticipate that our current cash and cash equivalents on hand, cash generated from operations and the available credit on the term loan that can be drawn down will be sufficient to meet our projected operating plans through at least May 15, 2016.  We may, however, seek additional capital prior to May 15, 2016, both to meet our projected operating plans after May 15, 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.
 
 
-15-


Results of Operations
 
Our net sales and net loss for the three-month periods ending on April 4, 2015 and March 29, 2014 were as follows:
 
   
Three months ending
 
   
April 4, 2015
   
March 29, 2014
 
             
Net sales
  $ 5,261,000     $ 3,074,000  
Net loss
    (1,026,000 )     (1,848,000 )
                 
Basic and Diluted loss per common share
  $ (0.01 )   $ (0.02 )
 
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
 
   
April 4, 2015
   
March 29, 2014
   
Change
 
Net sales:
                 
  Ingredients
  $ 2,680,000     $ 1,136,000       136 %
  Core standards and contract services
    2,300,000       1,736,000       32 %
  Scientific and regulatory consulting
    281,000       202,000       39 %
                         
     Total net sales
  $ 5,261,000     $ 3,074,000       71 %
 
 
·
The increase in sales for the ingredients segment is due to increased sales throughout most of the ingredients we sell, including “NIAGEN®,” “PURENERGY®,” and “PTEROPURE®.”
 
 
·
The increase in sales for the core standards and contract services segment is primarily due to increased sales of analytical testing and contract services.
 
 
·
The increase in sales for the scientific and regulatory consulting segment is mainly due to completion of more consulting projects during the three-month period ended April 4, 2015.  In the comparable period in 2014, we did not complete as many projects due to client related delays.
 
 
-16-


Cost of Sales
 
Cost of sales include raw materials, labor, overhead, and delivery costs.
 
   
Three months ending
 
   
April 4, 2015
   
March 29, 2014
 
   
Amount
   
% of
net sales
   
Amount
   
% of
net sales
 
Cost of sales:
                       
  Ingredients
  $ 1,603,000       60 %   $ 718,000       63 %
  Core standards and contract services
    1,574,000       68 %     1,194,000       69 %
  Scientific and regulatory consulting
    156,000       56 %     177,000       88 %
                                 
     Total cost of sales
  $ 3,333,000       63 %   $ 2,089,000       68 %
 
The cost of sales, as a percentage of net sales, decreased 5% for the three-month period ended April 4, 2015 compared to the three-month period ended March 29, 2014.
 
 
·
The decrease in cost of sales, as a percentage of net sales, for the ingredients segment is 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 68% from 69%.  The increase in analytical testing and contract services sales led to a higher labor utilization rate, which resulted in lowing our cost of sales as a percentage of net sales.  However, this was offset by increased costs in fine chemical reference standards as additional reserves were placed for the portion of the inventory that are considered slow-moving and obsolete.
 
 
·
The percentage decrease in cost of sales for the scientific and regulatory consulting segment is largely due to increased sales as fixed labor costs make up the majority of costs for the consulting segment.
 
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.
 
   
Three months ending
 
   
April 4, 2015
   
March 29, 2014
   
Change
 
Gross profit:
                 
  Ingredients
  $ 1,077,000     $ 418,000       158 %
  Core standards and contract services
    727,000       542,000       34 %
  Scientific and regulatory consulting
    124,000       25,000       396 %
                         
     Total gross profit
  $ 1,928,000     $ 985,000       96 %
 
 
·
The increased gross profit for the ingredients segment is due to the increased sales throughout the ingredient portfolio we offer, as well as obtaining lower prices from our suppliers as a result of increased purchase volumes.
 
 
·
The increased gross profit for the core standards and contract services segment is largely due to the increased sale of analytical testing and contract services.  Fixed labor costs make up the majority of costs for analytical testing and contract services and these fixed labor costs did not increase in proportion to sales, hence yielding a more profit.
 
 
·
The increased gross profit for the scientific and regulatory consulting segment is due to the increase in sales which resulted in a higher labor utilization rate.
 
 
-17-


Operating Expenses-Sales and Marketing
 
Sales and Marketing Expenses consist of salaries, advertising and marketing expenses.
 
   
Three months ending
 
   
April 4, 2015
   
March 29, 2014
   
Change
 
Sales and marketing expenses:
                 
  Ingredients
  $ 275,000     $ 240,000       15 %
  Core standards and contract services
    311,000       213,000       46 %
  Scientific and regulatory consulting
    -       12,000       -100 %
                         
     Total sales and marketing expenses
  $ 586,000     $ 465,000       26 %
 
 
·
For the ingredients segment, the increase is largely due to increased marketing efforts for our line of proprietary ingredients.
 
 
·
For the core standards and contract services segment, the increase is largely due to hiring two additional sales and marketing staff and making certain operational changes.
 
 
·
For the scientific and regulatory consulting segment, we did not incur any sales and marketing expenses for the three-month period ended April 4, 2015.
 
Operating Expenses-General and Administrative
 
General and Administrative Expenses consist of research and development, general company administration, IT, accounting and executive management. 
 
   
Three months ending
 
   
April 4, 2015
   
March 29, 2014
   
Change
 
                   
     General and administrative
  $ 2,248,000     $ 2,338,000       -4 %
 
One of the factors that contributed to the decrease in general and administrative expense was a decrease in share-based compensation.  For the three-month period ended April 4, 2015, our share-based compensation decreased to approximately $716,000, compared to approximately $1,000,000 for the comparable period in 2014.
 
Non-operating income- Interest Income
 
Interest income consists of interest earned on money market accounts. Interest income for the three-month period ended April 4, 2015 was approximately $1,000, essentially equal to approximately $1,000 for the three-month period ended March 29, 2014.
 
Non-operating Expenses- Interest Expense
 
Interest expense consists of interest on loan payable and capital leases.
 
   
Three months ending
 
   
April 4, 2015
   
March 29, 2014
   
Change
 
                   
     Interest expense
  $ 120,000     $ 10,000       1100 %
 
The increase in interest expense was largely related to the Term Loan Agreement dated September 29, 2014, between the Company and Hercules Technology II, L.P., under which the Company has the right to draw down up to $5.0 million; the Company drew down $2.5 million of that total on September 29, 2014.
 
 
-18-


Depreciation and Amortization
 
Depreciation expense for the three-month period ended April 4, 2015, was approximately $67,000 as compared to $51,000 for the three-month period ended March 29, 2014. We depreciate our assets on a straight-line basis, based on the estimated useful lives of the respective assets.  Amortization expense of intangible assets for the three-month period ended April 4, 2015, was approximately $10,000 as compared to $8,000 for the three-month period ended March 29, 2014.  We amortize intangible assets using a straight-line method over 10 years.
 
Liquidity and Capital Resources
 
From inception and through April 4, 2015, we have incurred aggregate losses of approximately $41 million. These losses are primarily due to expenses associated with the development and expansion of our operations. These operations have been financed through capital contributions, the issuance of common stock and warrants through private placements, and the issuance of debt.
 
Our board of directors periodically reviews our capital requirements in light of our proposed business plan. Our future capital requirements will remain dependent upon a variety of factors, including cash flow from operations, the ability to increase sales, increasing our gross profits from current levels, reducing selling and administrative expenses as a percentage of net sales, continued development of customer relationships, and our ability to market our new products successfully. However, based on our results from operations, we may determine that we need additional financing to implement our business plan.  There can be no assurance that any such financing will be available on terms favorable to us or at all. Without adequate financing we may have to further delay or terminate product and service expansion and curtail certain selling, general and administrative expenses. Any inability to raise additional financing would have a material adverse effect on us.

The Company has approximately $2,500,000 of available credit on its term loan that can be drawn down by July 31, 2015.  While we anticipate that our current cash and cash equivalents on hand, and cash generated from operations and the available credit on the term loan that can be drawn down will be sufficient to meet our projected operating plans through at least May 15, 2016, we may seek additional capital prior to May 15, 2016, both to meet our projected operating plans through and after May 15, 2016 and to fund our longer term strategic objectives. To the extent we are unable to raise additional cash or generate sufficient revenue to meet our projected operating plans prior to May 15, 2016, we will revise our projected operating plans accordingly.

Net cash used in operating activities

Net cash used in operating activities for the three months ended April 4, 2015 was approximately $591,000 as compared to approximately $1,405,000 for the three months ended March 29, 2014.  Along with the net loss, decrease in accounts payable and increase in trade receivables were the largest uses of cash during the three-month period ended April 4, 2015.  Net cash used in operating activities for the three months ended March 29, 2014 largely reflects an increase in trade receivables and an increase in inventories along with the net loss.

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

Net cash (used in) provided by investing activities

Net cash used in investing activities was approximately $101,000 for the three months ended April 4, 2015, compared to approximately $1,074,000 provided by for the three months ended March 29, 2014.  Net cash used in investing activities for the three months ended April 4, 2015 mainly consisted of purchases of leasehold improvements and equipment.  Net cash provided by investing activities for the three months ended March 29, 2014 mainly consisted of proceeds received from the assignment of the Senior Note issued by NeutriSci to an unrelated third party.  NeutriSci originally issued the Senior Note to the Company as a part of the consideration for the purchase of the BluScience product line.

Net cash used in financing activities

Net cash used in financing activities was approximately $57,000 for the three months ended April 4, 2015, compared to approximately $6,000 for the three months ended March 29, 2014.  Net cash used in financing activities for the three months ended April 4, 2015 mainly consisted of principal payments on capital leases.  Net cash used in financing activities for the three months ended March 29, 2014 mainly consisted of principal payments on capital leases, offset by proceeds from exercise of stock options.
 
 
-19-


Dividend policy
 
We have not declared or paid any dividends on our common stock. We presently intend to retain earnings for use in our operations and to finance our business. Any change in our dividend policy is within the discretion of our Board of Directors and will depend, among other things, on our earnings, debt service and capital requirements, restrictions in financing agreements, if any, business conditions, legal restrictions and other factors that our Board of Directors deems relevant.
 
Off-Balance Sheet Arrangements
 
During the three months ended April 4, 2015, we had no off-balance sheet arrangements other than ordinary operating leases as disclosed in the “Financial Statements and Supplementary Data” section of the Company’s Annual Report on Form 10-K for the year ending January 3, 2015 and filed with the Commission on March 19, 2015.
 
ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk
 
The Company had an outstanding loan payable of $2.5 million at April 4, 2015.  Interest is payable monthly at the greater of either (i) 9.35% plus the prime rate as reported in The Wall Street Journal (the “Prime Rate”) minus 3.25%, or (ii) 9.35%. If the Prime Rate rises, the Company will incur more interest expenses.  The loan is repayable in installments over 30 months, following an initial interest-only period until September 2015.
 
Our capital lease obligations bear interest at a fixed rate and therefore have no exposure to changes in interest rates.

The Company’s cash consists of short term, high liquid investments in money market funds managed by banks.  Due to the short-term duration of our investment portfolio and the relatively low risk profile of our investments, a sudden change in interest rates would not have a material effect on either the fair market value of our portfolio, or our operating results or cash flows.
 
Foreign Currency Risk

All of our long-lived assets are located within the United States and we do not hold any foreign currency denominated financial instruments.
 
Effects of Inflation
 
We do not believe that inflation and changing prices during the three months ended April 4, 2015 and March 29, 2014 had a significant impact on our results of operations.

ITEM 4.      CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report. They have concluded that, based on such evaluation, our disclosure controls and procedures were effective as of April 4, 2015.
 
Changes in Internal Control over Financial Reporting
 
There was no change in internal control over financial reporting (as defined in Rule 13a−15(f) promulgated under the Securities Exchange Act of 1934) that occurred during the Company’s first fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
 
 
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PART II - OTHER INFORMATION
 
ITEM 1.      LEGAL PROCEEDINGS
 
We are not involved in any legal proceedings which management believes may have a material adverse effect on our business, financial condition, operations, cash flows, or prospects.  The Company from time to time is involved in legal proceedings in the ordinary course of our business, which can include employment claims, product claim, patent infringement, etc. We do not believe that any of these claims and proceedings against us as they arise are likely to have, individually or in the aggregate, a material adverse effect on our financial condition or results of operations.
 
ITEM 2.      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
On January 27, 2015, we issued 350,000 shares of common stock to consultants as a part of compensation for certain services to be provided.  140,000 of these shares can be surrendered and forfeited if the Company delivers termination notices for any reason prior to May 28, 2015.
 
ITEM 3.      DEFAULTS UPON SENIOR SECURITIES
 
None.

ITEM 4.      MINE SAFETY DISCLOSURES
 
Not applicable.

ITEM 5.      OTHER INFORMATION
 
None.

 
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ITEM 6.      EXHIBITS
 
Exhibit No.                      Description of Exhibits
 
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)
 
 
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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:           May 14, 2015                                                                                      /s/ THOMAS C. VARVARO
Thomas C. Varvaro
Duly Authorized Officer and Chief Financial Officer