●
product sales and distribution.
The FDCA has been amended several times with respect to dietary supplements, most notably by the Dietary Supplement Health and Education Act of 1994 known as “DSHEA.”(“DSHEA”). DSHEA established a new framework for governing the composition and labeling of dietary supplements. Generally, under DSHEA, dietary ingredients that were marketed in the United States before October 15, 1994, may be used in dietary supplements without notifying the FDA. However, a “new” dietary ingredientan NDI (a dietary ingredient that was not marketed in the United States before October 15, 1994) is subject to a new dietary ingredient, or NDI notification that must be submitted to the FDA unless the ingredient has previously been “present in the food supply as an article used for food” without being “chemically altered.” An NDI notification must provide the FDA with evidence of a “history of use or other evidence of safety” establishing that the use of the dietary ingredient “will reasonably be expected to be safe.” An NDI notification must be submitted to the FDA at least 75 days before the initial marketing of the NDI. There can be no assurance that the FDA will accept the evidence of safety for any NDIs that we may want to commercialize, and the FDA’s refusal to accept such evidence could prevent the marketing of such dietary ingredients. The FDA is in the process of developing guidance for the industry that will aim to clarify the FDA’s interpretation of the NDI notification requirements, and this guidance may raise new and significant regulatory barriers for NDIs.
In order forFor any new ingredient developed by us to be used in conventional food or beverage products in the United States, the product would either have tomust be approved by the FDA as a food additive pursuant to a food additive petition or FAP,("FAP") or be generally recognized as safe or GRAS.("GRAS"). The FDA does not have to approve a company’s determination that an ingredient is GRAS. However, a company can notify the FDA of its determination. There can be no assurance that the FDA will approve any FAP for any ingredient that we may want to commercialize, or agree with our determination that an ingredient is GRAS, either of which could prevent the marketing of such ingredient.
U.S. Advertising RegulationRegulations
In addition to FDA regulations, the FTC regulates the advertising of dietary supplements, foods, cosmetics, and over-the-counter or OTC,("OTC"), drugs. In recent years, the FTC has instituted numerous enforcement actions against dietary supplement companies for failure to adequately substantiate claims made in advertising or for the use of false or misleading advertising claims. These enforcement actions have often resulted in consent decrees and the payment of civil penalties, restitution, or both, by the companies involved. We may be subject to regulation under various state and local laws that include provisions governing, among other things, the formulation, manufacturing, packaging, labeling, advertising and distribution of dietary supplements, foods, cosmetics and OTC drugs.
In addition, The National Advertising Division of the Council of Better Business Bureaus (the “NAD”) reviews national advertising for truthfulness and accuracy. The NADNational Advertising Division of the Council of Better Business Bureaus uses a form of alternative dispute resolution, working closely with in-house counsel, marketing executives, research and development departments and outside consultants to decide whether claims have been substantiated.
International Regulations
Our international sales for the consumer products segment and ingredients segment are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. In addition, the export by us of certain of our products that have not yet been cleared or approved for domestic distribution may be subject to FDA export restrictions. We may be unable to obtain on a timely basis, if at all, any foreign government or United States export approvals necessary for the marketing of our products abroad.
Regulation in Europe is exercised primarily through the European Union, which regulates the combined market of each of its member states. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to dietary ingredients.
Major Customers
For our ingredients segment, there were twoMajor customers who accounted for more than 10% the Company’s total sales in the last three years. In 2015, Customer B in our ingredients segment accounted for 11.0% of the Company’s total sales. Customer B accounted for less than 10% of the Company’s total sales for the years 2014 and 2013. During the year 2014, Customer A in our ingredients segment accounted for 10.2% of the Company’s total sales. Customer A accounted for less than 10% of the Company’s total sales for the years 2015 and 2013.were as follows:
| |
Major Customers | | |
| | |
A.S. Watson Group - Related Party | * | 19.4% |
Thorne Research | * | 10.2% |
Life Extension | 10.0% | * |
| | |
* Represents less than 10%. | | |
Generally, we do not depend upon a single customer, or a few customers, and the loss of any one or more would not have a material adverse effect on the ingredients segment or the Company. However, due to the volume of consumer products and ingredients we are selling in relation to the overall Company’s sales, we do expect that fewat times one or more of our customers at times may account for more than 10% of the Company’s sales.
For the core standards and contract services segment and the regulatory consulting segment, we did not have any customers who accounted for more than 10% of the Company’s total sales in the last three years.
Competitive Business Conditions
For our consumer products segment, we are in direct competition with Elysium Health who offers a similar product to our TRU NIAGEN®. There are also few resellers of NIAGEN® as consumer products that are our customers. We believe these resellers are focused on specific channels that we believe are complementary to our business.
For our ingredients segment, we face little direct competition as the new ingredients we offer such as NIAGEN® and pTeroPure® are backed by intellectual propertiesproperty exclusively licensed to us. We, however, face strong indirect competition from other ingredient suppliers who may supply alternative ingredients that may have similar characteristics compared to the ingredients we offer. Below is a list of some of the competitors for our ingredients segment.
Ingredients Business Segment Competitors
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Royal DSM (the Netherlands)
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Lonza Group Ltd (Switzerland)
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Sabinsa Corporation (India/USA)
For the coreanalytical reference standards and contract services segment, we face competition within the standardization and quality testing niche of the natural products market, though we know of no other companies that offer both reference standards and testing to their customers.market. Below is a current list of certain competitors. These competitors have already developed reference standards or contract services or are currently taking steps to develop botanical standards or contract services.standards. Of the competitors listed, some currently sell fine chemicals, which, by default, are sometimes used as reference standards, and others are closely aligned with our market niche so as to reduce any barriers to entry if these companies wish to compete. Some of these competitors currently offer similar services and have the scale and resources to compete with us for larger customer accounts. Because some of our competitors are larger in total size and capitalization, they likely have greater access to capital markets, and are in a better position than we are to compete nationally and internationally.
CoreAnalytical Reference Standards and Contract Services Segment Competitors
Eurofins (ERF)Extrasynthese (France)
Silliker Canada Co. (Canada)
For the regulatory consulting segment,operations there are numerous competitors, including some that are much larger companies with more resources. The success in winning and retaining clients is heavily dependent on the efforts and reputation of our consultants. We believe the barriers to entry in particular areas of our consulting expertise are low.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts, Including Duration
For our ingredients segment, weWe currently protect our intellectual property through patents, trademarks, designs and copyrights on our products and services. Our business strategiesstrategy is to use the intellectual property harnessed from our coreanalytical reference standards and contract services segment as the basis for providing new proprietary ingredients to our customers. Our strategy is to develop these proprietary ingredients on our own as well as to license our intellectual property to companies who will commercialize it. We anticipate that the net result will be a long termlong-term flow of intellectual property milestone and royalty payments forto us.
The following table sets forth our existing patents and those to which we have licensed rights:
| Title | Title | Filing Date | Issued Date | Expires | Licensor |
| 6,852,342 | | Compounds for altering food intake in humans | 3/26/2002 | 2/8/2005 | 2/12/2022 | Co-owned by Avoca, Inc. and ChromaDex |
| 7,205,284 | | Potent immunostimulants from microalgae | 7/10/2001 | 4/17/2007 | 3/9/2022 | Licensed from University of Mississippi |
| 7,776,326 | | Methods and compositions for treating neuropathies | 6/3/2005 | 8/17/2010 | 6/3/2025 | Licensed from Washington University |
| 7,846,452 | | Potent immunostimulatory extracts from microalgae | 7/28/2005 | 10/7/2010 | 7/28/2025 | Licensed from University of Mississippi |
| 8,106,184 | | Nicotinyl Riboside Compositions and Methods of Use | 11/17/2006 | 1/31/2012 | 11/17/2026 | Licensed from Cornell University |
| 8,114,626 | | Yeast strain and method for using the same to produce Nicotinamide Riboside | 3/26/2009 | 2/14/2012 | 3/26/2029 | Licensed from Dartmouth College |
| 8,133,917 | | Pterostilbene as an agonist for the peroxisome proliferator-activated receptor alpha isoform | 10/25/2010 | 3/13/2012 | 10/25/2030 | Licensed from the University of Mississippi and U.S. Department of Agriculture |
| 8,197,807 | | Nicotinamide Riboside Kinase compositions and Methods for using the same | 11/20/2007 | 6/12/2012 | 11/20/2027 | Licensed from Dartmouth College |
| 8,227,510 | | Combine use of pterostilbene and quercetin for the production ofto produce cancer treatment medicaments | 7/19/2005 | 7/24/2012 | 7/19/2025 | Licensed from Green Molecular S.L. |
| 8,252,845 | | Pterostilbene as an agonist for the peroxisome proliferator-activated receptor alpha isoform | 2/1/2012 | 8/28/2012 | 2/1/2032 | Licensed from the University of Mississippi and U.S. Department of Agriculture |
| 8,318,807 | | Pterostilbene Caffeine Co-Crystal Forms | 7/30/2010 | 11/27/2012 | 7/30/2030 | Licensed from Laurus Labs Private Limited |
| 8,383,086 | | Nicotinamide Riboside Kinase compositions and Methods for using the same | 4/12/2012 | 2/26/2013 | 4/12/2032 | Licensed from Dartmouth College |
8,399,712 | 8,524,782Pterostilbene cocrystals | 7/30/2010 | 3/19/2013 | 7/30/2020 | Licensed from Laurus Labs Private Limited |
8,524,782 | Key intermediate for the preparation of Stilbenes, solid forms of Pterostilbene, and methods for making the same | 6/1/2009 | 9/3/2013 | 6/1/2029 | Licensed from Laurus Labs Private Limited |
| 8,809,400 | | Method to Ameliorate Oxidative Stress and Improve Working Memory Via Pterostilbene Administration | 6/10/2008 | 8/19/2014 | 6/10/2028 | Licensed from the University of Mississippi and U.S. Department of Agriculture |
| 8,841,350 | | Method for treating non-melanoma skin cancer by inducing UDP-Glucuronosyltransferase activity using pterostilbene | 5/8/2012 | 9/22/2014 | 5/8/2032 | Co-owned by ChromaDex and University of California |
8,889,126 | Methods and compositions for treating neuropathies | 5/28/2010 | 11/18/2014 | 5/28/2030 | Licensed from Washington University |
9,000,147 | Nicotyl riboside compositions and methods of use | 1/17/2012 | 4/7/2015 | 1/17/2032 | Licensed from Cornell University |
9,028,887 | Method improve spatial memory via pterostilbene administration | 5/22/2014 | 5/12/2015 | 5/22/2034 | Licensed from the University of Mississippi and U.S. Department of Agriculture |
9,295,688 | Methods and compositions for treating neuropathies | 10/10/2014 | 3/29/2016 | 10/10/2034 | Licensed from Washington University |
9,321,797 | Nicotyl riboside compositions and methods of use | 11/17/2014 | 4/26/2016 | 11/17/2034 | Licensed from Cornell University |
9,439,875 | Anxiolytic effect of pterostilbene | 5/11/2011 | 9/13/2016 | 5/11/2031 | Licensed from the University of Mississippi and U.S. Department of Agriculture |
9,975,915 | Nicotinamide riboside kinase compositions and methods for using the same | 4/12/2012 | 2/26/2013 | 4/12/2032 | Licensed from Dartmouth College |
Manufacturing
For our ingredients segment and our core standards and contract services segment, weWe currently utilize third-party manufacturers to produce and supply the ingredients.dietary supplement, ingredients, products, and services. Following the receipt of products or product components from third-party manufacturers, we currently inspect products as needed. We expect to reserve the right to inspect and ensure conformance of each product and product component to our specifications. We will also consider manufacturing certain products or product components internally, if our capacity permits, when demand or quality requirements make it appropriate to do so.
For certain reference standards, ChromaDex Analytics operates laboratory operations and a manufacturing facility for our core standards and contract services segment. We currently maintain our own manufacturing equipment and have the ability to manufacture certain products in limited quantities, ranging from milligrams to kilograms. We intend to contract for the manufacturing of products that we develop and enter into strategic relationships or license agreements for sales and marketing of products that we develop when the quantities we require exceed our capacity at our Boulder, Colorado facility.
We intend to work with manufacturing companies that can meet the standards imposed by the FDA, the International Organization for Standardization or “ISO,” and the quality standards that we will require for our own internal policies and procedures. We expect to monitor and manage supplier performance through a corrective action program developed by us. We believe these manufacturing relationships can minimize our capital investment, help control costs, and allow us to compete with larger volume manufacturers of dietary supplements, phytochemicals and ingredients.
Following the receipt of products or product components from third-party manufacturers, we currently inspect products, as needed. We expect to reserve the right to inspect and ensure conformance of each product and product component to our specifications. We will also consider manufacturing certain products or product components internally, if our capacity permits, when demand or quality requirements make it appropriate to do so.
Sources and Availability of Raw Materials and the Names of Principal Suppliers
WeFor all three business segments, we believe that we have identified reliable sources and suppliers of ingredients, chemicals, phytochemicals and reference materials that will provide products in compliance with our guidelines.
Research and Development
For our ingredients segment, weWe have completed the first human clinical trial on our proprietary ingredient nicotinamide riboside (“NR”)NIAGEN® and the results demonstrated that a single dose of NRNIAGEN® resulted in statistically significant increases in the co-enzyme nicotinamide adenine dinucleotide (NAD+)NAD+ in healthy human volunteers. In addition, NR was also found to be safe as no adverse events were observed. In In 2015, NRNIAGEN® was recognized by the FDA as a “New Dietary Ingredient.” NRNIAGEN® was also “Generally Recognized Asas Safe” by an independent panel of expert toxicologists.toxicologists and in August 2016, the FDA issued a GRAS No Objection Letter.
We have also successfully conductedIn 2018, we completed a second human clinical trial together with the University of Mississippi, on our proprietary ingredient pterostilbene for its blood pressure lowering effects. We expect to conduct additional clinical trials on this compound and we anticipate entering the dietary supplement and, if clinical results are favorable, possibly the pharmaceutical markets as well. We also have completed a study on our proprietary ingredient pterostilbene with caffeine co-crystal. The first human study of this ingredient demonstrated that it delivers 30 percent more caffeine, stays in the blood stream longer, and is absorbed more slowly than ordinary caffeine. We anticipate conducting additional clinical trials on NR which evaluated the effect of repeated doses of NIAGEN® on NAD+ metabolite concentrations in blood, urine and other compoundsmuscle in healthy adults. This study evaluated the impacts of three dose levels of NIAGEN® compared to a placebo. One quarter of subjects received the low dose of NIAGEN® (100 mg), one quarter received the moderate dose of NIAGEN® (300 mg), one quarter received the higher dose of NIAGEN® (1,000 mg) and one quarter received the placebo. The results showed that NAD levels rose in response to the dose of NIAGEN® and the elevated blood NAD levels were sustained throughout the eight-week treatment period.
Through our pipelineresearch and development laboratory in Longmont, Colorado, we intend to provide differentiationmanufacture at a process scale for products that we are planning to take to market as we market these proprietary ingredients and support various health-related claims or obtain additional regulatory clearances.well as explore cost saving processes for existing products.
Research and development costs for our ingredients segment for the fiscal years ended January 2, 2016, January 3, 2015December 31, 2018, and December 28, 201330, 2017, were approximately $892,000, $514,000$5.5 million and $134,000,$4.0 million, respectively.
Environmental Compliance
We will incur significant expense in complying with GMPs and safe handling and disposal of materials used in our research and manufacturing activities. We do not anticipate incurring additional material expense in order to comply with Federal,federal, state and local environmental laws and regulations.
Working Capital
The Company’s working capital at the end of years 2015, 20142018 and 20132017 was approximately $4.4 million, $2.2$3.1 million and $1.6$7.4 million, respectively. The Company measures working capital by adding trade receivables and inventories, and subtracting accounts payable. The majorityMost of the working capital is consumed by our consumer products segment and ingredients segment as the operations require a large amount of inventory to be on hand. As the consumer products segment and ingredients segment grows,grow, more working capital will likely be needed to support the operations. As of January 2, 2016, the Company had approximately $7.2 million of inventory for our ingredients segment, which represented approximately 38% of the Company’s total assets.
Backlog Orders
For our consumer products segment where we ship products internationally to a distributor, we may have a backlog from time to time as the production of TRU NIAGEN® finished bottles require up to three months lead time by our third-party contract manufacturers. As of December 31, 2018, we did not have any backlog orders from the distributor as all orders received have been shipped. For products that are directly shipped to consumers, we have minimal backlog orders as we carry inventory on hand to ship upon the receipt of order.
For our ingredients segment, we also have minimal backlog orders as we carry inventory on hand for most of the ingredientsproducts we offer and we ship upon the receipt of customer’s purchase orders.order.
For the coreour analytical reference standards and contract services segment, we normally have a small backlog of orders for reference standards. These orders amount to approximately $25,000 or less. Because we carry 5,000 differentlist over 1,500 phytochemicals and 300 botanical reference standards,materials in our catalog, we may not always have the items in stock at the time of customers’ orders. These backlog orders are normally fulfilled within 2 to 3 months.
Facilities
For information on our facilities, see “Properties” in Item 2 of this Form 10-K.
Employees
As of January 2, 2016,December 31, 2018, ChromaDex (including Healthspan Research LLC and ChromaDex Analytics, and Spherix Consulting, Inc.) had 82approximately 100 employees, 80all of whom were full-time and 2 of whom were part-time.full-time. We consider our relationships with our employees to be satisfactory. None of our employees is covered by a collective bargaining agreement.
Financial Information about Geographic Areas
Please refer to Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K for financial information about geographic areas.
Available Information
Our Internet website address is www.chromadex.com. Information found on, or accessible through, our website is not a part of, and is not incorporated into, this Annual Report on Form 10-K. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practical after we file such material with, or furnish it to, the Securities and Exchange Commission. This information is also available in print to any shareholder who requests it, with any such requests addressed to ChromaDex Corporation, 10900 Wilshire Blvd. Ste 650, Los Angeles, CA 90024. Certain of these documents may also be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, and other information regarding issuers that file electronically with the SEC at www.sec.gov. We also make available free of charge on our website our Code of Business Conduct and Ethics, and the Charters of our Audit Committee, Nominating and Corporate Governance Committee, and Compensation Committee of our Board of Directors.
Investing in our common stock involves a high degree of risk. Current investors and potential investors should consider carefully the risks and uncertainties described below together with all other information contained in this Form 10-K before making investment decisions with respect to our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and our future growth prospects would be materially and adversely affected. Under these circumstances, the trading price and value of our common stock could decline, resulting in a loss of all or part of your investment. The risks and uncertainties described in this Form 10-K are not the only ones facing our Company. Additional risks and uncertainties of which we are not presently aware, or that we currently consider immaterial, may also affect our business operations.
Risks Related to our Company and our Business
Our cash flows and capital resources may be insufficient to make required payments on our indebtedness and future indebtedness.
On September 29, 2014, we entered into a loan and security agreement (the “Loan Agreement”) with Hercules Technology II, L.P., as lender (“Lender”) and Hercules Technology Growth Capital, Inc., as agent. Lender provided us with access to a term loan of up to $5 million. The first advance and second advance, if any, were to be repaid in equal monthly installments of principal and interest (mortgage style) through the loan’s maturity on April 1, 2018, following an initial interest-only period that was to conclude on October 31, 2015. 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 term loan bears interest at the rate per year equal to the greater of either (i) 9.35% plus the prime rate as reported in The Wall Street Journal minus 3.25%, or (ii) 9.35%.
On June 17, 2015, we and Hercules Technology II, L.P entered into Amendment No. 1 (the “Amendment”) to the Loan Agreement. Pursuant to the Amendment, the parties agreed that the interest only period would be extended to March 31, 2016, with monthly installements of principal and interest commencing on April 1, 2016. The maturity date remains unchanged at April 1, 2018 and any remaining principal balance of the loan and all unpaid interest is 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. For further details on the Loan Agreement, please refer to Note 7. Loan Payable appearing on Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
As of January 2, 2016 and March 16, 2016, we had $5.0 million of indebtedness under the Loan Agreement. Such indebtedness could have important consequences to you. For example, it could:
make it difficult for us to satisfy our other debt obligations;
make us more vulnerable to general adverse economic and industry conditions;
limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate requirements;
expose us to interest rate fluctuations because the interest rate on the debt under the Loan Agreement is variable;
require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for operations and other purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
place us at a competitive disadvantage compared to competitors that may have proportionately less debt and greater financial resources.
In addition, our ability to make scheduled payments or refinance our obligations depends on our successful financial and operating performance, cash flows and capital resources, which in turn depend upon prevailing economic conditions and certain financial, business and other factors, many of which are beyond our control. These factors include, among others:
economic and demand factors affecting our industry;
increased operating costs;
competitive conditions; and
other operating difficulties.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. In the event that we are required to dispose of material assets or operations to meet our debt service and other obligations, the value realized on such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not, among other things, be for a sufficient dollar amount. Our obligations pursuant to the Loan Agreement are secured by a security interest in all of our assets, exclusive of intellectual property. The foregoing encumbrances may limit our ability to dispose of material assets or operations. We also may not be able to restructure our indebtedness on favorable economic terms, if at all.
We may incur additional indebtedness in the future, including pursuant to the Loan Agreement. Our incurrence of additional indebtedness would intensify the risks described above.
The Loan Agreement contains various covenants limiting the discretion of our management in operating our business.
The Loan Agreement contains, subject to certain carve-outs, various restrictive covenants that limit our management's discretion in operating our business. In particular, these instruments limit our ability to, among other things:
make investments, including capital expenditures;
sell or acquire assets outside the ordinary course of business; and
make fundamental business changes.
If we fail to comply with the restrictions in the Loan Agreement, a default may allow the creditors under the relevant instruments to accelerate the related debt and to exercise their remedies under these agreements, which will typically include the right to declare the principal amount of that debt, together with accrued and unpaid interest and other related amounts, immediately due and payable, to exercise any remedies the creditors may have to foreclose on assets that are subject to liens securing that debt and to terminate any commitments they had made to supply further funds. The Loan Agreement governing our indebtedness also contains various covenants that may limit our ability to pay dividends.
We have a history of operating losses, and we may need additional financing to meet our future long-term capital requirements.requirements and may be unable to raise sufficient capital on favorable terms or at all.
We have a history of losses and may continue to incur operating and net losses for the foreseeable future. We incurred net losses of approximately $2,771,000, $5,388,000$33.3 million and $4,420,000$11.4 million for the years ended January 2, 2016, January 3, 2015December 31, 2018 and December 28, 2013,30, 2017, respectively. As of January 2, 2016,December 31, 2018, our accumulated deficit was approximately $42.3$90 million. We have not achieved profitability on an annual basis. We may not be able to reach a level of revenue to continue to achieve and sustain profitability. If our revenues grow slower than anticipated, or if operating expenses exceed expectations, then we may not be able to achieve and sustain profitability in the near future or at all, which may depress our stock price.
As of December 31, 2018, our cash and cash equivalents totaled approximately $22.6 million. While we anticipate that our current cash, cash equivalents and cash to be generated from operations will be sufficient to meet our projected operating plans through at least March 18, 2017,the next twelve months, 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. InIf adequate financing is not available, the event that we are unable to obtain additional financing, we may be unable to implement our business plan. Even with such financing, we have a history of operating lossesCompany will further delay, postpone or terminate product and there can be no assurance that we will ever become profitable.
Our short-term capital needs are uncertainservice expansion and we may needcurtail certain selling, general and administrative operations. The inability to raise additional funds. Basedfinancing may have a material adverse effect on current market conditions, such funds may not be available on acceptable terms or at all.the future performance of the Company.
We anticipate that our current cash and cash equivalents and cash generated from operationsOur capital requirements will be sufficient to implement our operating plan through at least March 18, 2017. depend on many factors.
Our capital requirements will depend on many factors, including:
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the revenues generated by sales of our products;
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the costs associated with expanding our sales and marketing efforts, including efforts to hire independent agents and sales representatives and obtain required regulatory approvals and clearances;
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the expenses we incur in developing and commercializing our products, including the cost of obtaining and maintaining regulatory approvals; and
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unanticipated general and administrative expenses.expenses, including expenses involved with our ongoing litigation with Elysium.
As a resultBecause of these factors, we may seek to raise additional capital prior to March 18, 2017within the next twelve months both to meet our projected operating plans after March 18, 2017the next twelve months and to fund our longer term strategic objectives. Additional capital may come from public and private equity or debt offerings, borrowings under lines of credit or other sources. These additional funds may not be available on favorable terms, or at all. There can be no assurance we will be successful in raising these additional funds. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities we issue may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products or proprietary technologies, or 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, execute our business plan, 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.
We are currently engaged in substantial and complex litigation with Elysium Health, Inc. and Elysium Health LLC ("Elysium"), the outcome of which could materially harm our business and financial results.
We are currently engaged in litigation with Elysium, a customer that represented 19% of our net sales for the year ended December 31, 2016. Elysium has made no purchases from us since August 9, 2016. The litigation includes multiple complaints and counterclaims by us and Elysium in venues in California and New York, as well as a patent infringement complaint filed by the Company and Trustees of Dartmouth College. For further details on this litigation, please refer to Part I, Item 3 of this Annual Report on Form 10-K.
The litigation is substantial and complex, and it has caused and could continue to cause us to incur significant costs, as well as distract our management over an extended period. The litigation may substantially disrupt our business and we cannot assure you that we will be able to resolve the litigation on terms favorable to us. If we are unsuccessful in resolving the litigation on favorable terms to us, we may be forced to pay compensatory and punitive damages and restitution for any royalty payments that we received from Elysium, which payments could materially harm our business, or be subject to other remedies, including injunctive relief. In addition, Elysium has not paid us approximately $2.7 million for previous purchase orders. We may not collect the full amount owed to us by Elysium, and as a result, we may have to write off a large portion of that amount as uncollectible expense. We cannot predict the outcome of our litigation with Elysium, which could have any of the results described above or other results that could materially adversely affect our business.
Interruptions in our relationships or declines in our business with major customers could materially harm our business and financial results.
One of our customers accounted for approximately 10% of our sales during the year ended December 31, 2018. Any interruption in our relationship or decline in our business with this customer or other customers upon whom we become highly dependent could cause harm to our business. Factors that could influence our relationship with our customers upon whom we may become highly dependent include:
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our ability to maintain our products at prices that are competitive with those of our competitors;
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our ability to maintain quality levels for our products sufficient to meet the expectations of our customers;
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our ability to produce, ship and deliver a sufficient quantity of our products in a timely manner to meet the needs of our customers;
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our ability to continue to develop and launch new products that our customers feel meet their needs and requirements, with respect to cost, timeliness, features, performance and other factors;
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our ability to provide timely, responsive and accurate customer support to our customers; and
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the ability of our customers to effectively deliver, market and increase sales of their own products based on ours.
In an effort to promote and better market our consumer products, we have made a strategic decision to not ship NIAGEN® to certain ingredient segment customers, which could potentially materially adversely affect our overall sales.
By developing and selling TRU NIAGEN®, our own consumer standalone NIAGEN® supplement product, we are in direct competition with some of our current ingredients segment customers that use NIAGEN® in the products that are sold to consumers. In an effort to promote and better market our consumer product, we have made a strategic decision not to ship NIAGEN® to certain ingredients segment customers, which will have a negative effect on our ingredient segment sales. For example, sales for our ingredients segment for the year ended December 31, 2018 decreased 23% compared to the year ended December 30, 2017. Additionally, as our own consumer product becomes more prominent and widely adopted by consumers, the competition with our consumer product could potentially further harm the sales of our ingredients segment business, and our sales of NIAGEN® for our ingredients segment may further decrease. The sales of our consumer product may not outweigh the decrease in sales of our ingredients segment, which would lead to an overall decrease in our sales. Sales for our ingredients segment represented approximately 27% of the Company’s revenue for 2018, and sales of NIAGEN® accounted for approximately 60% of our ingredient segment’s total sales in 2018, or 16% of our overall revenue, so any harm to our NIAGEN® ingredient sales, if not compensated for by sales of our consumer product, may materially adversely affect our business.
Our future success largely depends on sales of our TRU NIAGEN®product.
In connection with our strategic shift from an ingredient and testing company to a consumer focused company, we expect to generate a significant percentage of our future revenue from sales of our TRU NIAGEN® product. As a result, the market acceptance of TRU NIAGEN® is critical to our continued success, and if we are unable to expand market acceptance of TRU NIAGEN®, our business, results of operations, financial condition, liquidity and growth prospects would be materially adversely affected.
Decline in the state of the global economy and financial market conditions could adversely affect our ability to conduct business and our results of operations.
Global economic and financial market conditions, including disruptions in the credit markets and the impact of the global economic deterioration may materially impact our customers and other parties with whom we do business. These conditions could negatively affect our future sales of our ingredient linelines as many consumers consider the purchase of nutritional products discretionary. Decline in general economic and financial market conditions could materially adversely affect our financial condition and results of operations. Specifically, the impact of these volatile and negative conditions may include decreased demand for our products and services, a decrease in our ability to accurately forecast future product trends and demand, and a negative impact on our ability to timely collect receivables from our customers. The foregoing economic conditions may lead to increased levels of bankruptcies, restructurings and liquidations for our customers, scaling back of research and development expenditures, delays in planned projects and shifts in business strategies for many of our customers. Such events could, in turn, adversely affect our business through loss of sales.
We may need to increase the size of Successful Expansion of Operations.our organization, and we can provide no assurance that we will successfully expand operations or manage growth effectively.
Our significant increase in the scope and the scale of our product launch,launches, including the hiring of additional personnel, has resulted in significantly higher operating expenses. As a result, we anticipate that our operating expenses will continue to increase. Expansion of our operations may also cause a significant demand on our management, finances and other resources. Our ability to manage the anticipated future growth, should it occur, will depend upon a significant expansion of our accounting and other internal management systems and the implementation and subsequent improvement of a variety of systems, procedures and controls. There can be no assurance that significant problems in these areas will not occur. Any failure to expand these areas and implement and improve such systems, procedures and controls in an efficient manner at a pace consistent with our business could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that our attempts to expand our marketing, sales, manufacturing and customer support efforts will be successful or will result in additional sales or profitability in any future period. As a result of the expansion of our operations and the anticipated increase in our operating expenses, as well as the difficulty in forecasting revenue levels, we expect to continue to experience significant fluctuations in itsour results of operations.
Changes in our business strategy, including entering the consumer product market, or restructuring of our businesses may increase our costs or otherwise affect the profitability of our businesses.
As changes in our business environment occur we may adjust our business strategies to meet these changes or we may otherwise decide to restructure our operations or businesses or assets. In addition, external events including changing technology, changing consumer patterns and changes in macroeconomic conditions may impair the value of our assets. When these changes or events occur, we may incur costs to change our business strategy and may need to write down the value of assets. In any of these events, our costs may increase, we may have significant charges associated with the write-down of assets or returns on new investments may be lower than prior to the change in strategy or restructuring. For example, if we are not successful in developing our consumer product business, our sales may decrease and our costs may increase.
The success of our consumer product and ingredient business is linked to the size and growth rate of the vitamin, mineral and dietary supplement market and an adverse change in the size or growth rate of that market could have a material adverse effect on us.
An adverse change in the size or growth rate of the vitamin, mineral and dietary supplement market could have a material adverse effect on our business. Underlying market conditions are subject to change based on economic conditions, consumer preferences and other factors that are beyond our control, including media attention and scientific research, which may be positive or negative.
The future growth and profitability of our consumer product business will depend in large part upon the effectiveness and efficiency of our marketing efforts and our ability to select effective markets and media in which to market and advertise.
Our consumer products business success depends on our ability to attract and retain customers, which significantly depends on our marketing practices. Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing efforts, including our ability to:
| | ● | create greater awareness of our brand; |
| | ● | identify the most effective and efficient levels of spending in each market, media and specific media vehicle; |
| | ● | determine the appropriate creative messages and media mix for advertising, marketing and promotional expenditures; |
| | ● | effectively manage marketing costs (including creative and media) to maintain acceptable customer acquisition costs; |
| | ● | acquire cost-effective television advertising; |
| | ● | select the most effective markets, media and specific media vehicles in which to market and advertise; and |
| | ● | convert consumer inquiries into actual orders. |
Unfavorable publicity or consumer perception of our products and any similar products distributed by other companies could have a material adverse effect on our business.
We believe the nutritional supplement market is highly dependent upon consumer perception regarding the safety, efficacy and quality of nutritional supplements generally, as well as of products distributed specifically by us. Consumer perception of our products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, national media attention and other publicity regarding the consumption of nutritional supplements. We cannot assure you that future scientific research, findings, regulatory proceedings, litigation, media attention or other favorable research findings or publicity will be favorable to the nutritional supplement market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, such earlier research reports, findings or publicity could have a material adverse effect on the demand for our products and consequently on our business, results of operations, financial condition and cash flows.
Our dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or notif accurate or with merit, could have a material adverse effect on the demand for our products, the availability and pricing of our ingredients, and our business, results of operations, financial condition and cash flows. Further, adverse public reports or other media attention regarding the safety, efficacy and quality of nutritional supplements in general, or our products specifically, or associating the consumption of nutritional supplements with illness, could have such a material adverse effect. Any such adverse public reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately or as directed and the content of such public reports and other media attention may be beyond our control.
We may incur material product liability claims, which could increase our costs and adversely affect our reputation, revenues and operating income.
As ana consumer product and ingredient supplier marketerwe market and manufacturer ofmanufacture products designed for human and animal consumption, we are subject to product liability claims if the use of our products is alleged to have resulted in injury. Our products consist of vitamins, minerals, herbs and other ingredients that are classified as foods,food ingredients, dietary supplements, or natural health products, and, in most cases, are not necessarily subject to pre-market regulatory approval in the United States. Some of our products contain innovative ingredients that do not have long histories of human consumption. Previously unknown adverse reactions resulting from human consumption of these ingredients could occur. In addition, the products we sell are produced by third-party manufacturers. As a marketer of products manufactured by third parties, we also may be liable for various product liability claims for products we do not manufacture. We may, in the future, be subject to various product liability claims, including, among others, that our products include inadequate instructions for use or inadequate warnings concerning possible side effects and interactions with other substances. A product liability claim against us could result in increased costs and could adversely affect our reputation with our customers, which, in turn, could have a materially adverse effect on our business, results of operations, financial condition and cash flows.
We acquire a significant amount of key ingredients for our products from foreign suppliers, and may be negatively affected by the risks associated with international trade and importation issues.
We acquire a significant amount of key ingredients for a number of our products from suppliers outside of the United States, particularly India and China. Accordingly, the acquisition of these ingredients is subject to the risks generally associated with importing raw materials, including, among other factors, delays in shipments, changes in economic and political conditions, quality assurance, nonconformity to specifications or laws and regulations, tariffs, trade disputes and foreign currency fluctuations. While we have a supplier certification program and audit and inspect our suppliers’ facilities as necessary both in the United States and internationally, we cannot assure you that raw materials received from suppliers outside of the United States will conform to all specifications, laws and regulations. There have in the past been quality and safety issues in our industry with certain items imported from overseas. We may incur additional expenses and experience shipment delays due to preventative measures adopted by the Indian and U.S. governments, our suppliers and our company.
The insurance industry has become more selective in offering some types of coverage and we may not be able to obtain insurance coverage in the future.
The insurance industry has become more selective in offering some types of insurance, such as product liability, product recall, property and directors’ and officers’ liability insurance. Our current insurance program is consistent with both our past level of coverage and our risk management policies. However, we cannot assure you that we will be able to obtain comparable insurance coverage on favorable terms, or at all, in the future. Certain of our customers as well as prospective customers require that we maintain minimum levels of coverage for our products. Lack of coverage or coverage below these minimum required levels could cause these customers to materially change business terms or to cease doing business with us entirely.
If we experience product recalls, we may incur significant and unexpected costs, and our business reputation could be adversely affected.
We may be exposed to product recalls and adverse public relations if our products are alleged to be mislabeled or to cause injury or illness, or if we are alleged to have violated governmental regulations. A product recall could result in substantial and unexpected expenditures, which would reduce operating profit and cash flow. In addition, a product recall may require significant management attention. Product recalls may hurt the value of our brands and lead to decreased demand for our products. Product recalls also may lead to increased scrutiny by federal, state or international regulatory agencies of our operations and increased litigation and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We depend on key personnel, the loss of any of which could negatively affect our business.
We depend greatly on Frank L. Jaksch Jr., Thomas C. VarvaroRobert N. Fried, Kevin M. Farr, Mark J. Friedman, Lisa Bratkovich and Troy A. RhonemusMatthew Roberts, who are our Executive Chairman of the Board, Chief Executive Officer, Chief Financial Officer, General Counsel, Chief Marketing Officer and Chief OperatingScientific Officer, respectively. We also depend greatly on other key employees, including key scientific and marketing personnel. In general, only highly qualified and trained scientists have the necessary skills to develop our products and provide our services. Only marketing personnel with specific experience and knowledge in health care are able to effectively market our products. In addition, some of our manufacturing, quality control, safety and compliance, information technology, sales and e-commerce related positions are highly technical as well. We face intense competition for these professionals from our competitors, customers, marketing partners and other companies throughout the industries in which we compete. Our success will depend, in part, upon our ability to attract and retain additional skilled personnel, which will require substantial additional funds. There can be no assurance that we will be able to find and attract additional qualified employees or retain any such personnel. Our inability to hire qualified personnel, the loss of services of our key personnel, or the loss of services of executive officers or key employees that may be hired in the future may have a material and adverse effect on our business.
Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control.
We are subject to the following factors, among others, that may negatively affect our operating results:
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the announcement or introduction of new products by our competitors;
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our ability to upgrade and develop our systems and infrastructure to accommodate growth;
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the decision by significant customers to reduce purchases;
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disputes and litigation with competitors;
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our ability to attract and retain key personnel in a timely and cost effectivecost-effective manner;
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the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure;
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regulation by federal, state or local governments; and
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general economic conditions as well as economic conditions specific to the healthcare industry.
As a result of our limited operating history and the nature of the markets in which we compete, it is extremely difficult for us to make accurate forecasts. We have based our current and future expense levels largely on our investment plans and estimates of future events although certain of our expense levels are, to a large extent, fixed. Assuming our products reach the market, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues relative to our planned expenditures would have an immediate adverse effect on our business, results of operations and financial condition. Further, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service or marketing decisions that could have a material and adverse effect on our business, results of operations and financial condition. Due to the foregoing factors, our revenues and operating results are and will remain difficult to forecast.
We face significant competition, including changes in pricing.
The markets for our products and services are both competitive and price sensitive. Many of our competitors have significant financial, operations, sales and marketing resources and experience in research and development. Competitors could develop new technologies that compete with our products and services or even render our products obsolete. If a competitor develops superior technology or cost-effective alternatives to our products and services, our business could be seriously harmed.
The markets for some of our products are also subject to specific competitive risks because these markets are highly price competitive. Our competitors have competed in the past by lowering prices on certain products. If they do so again, we may be forced to respond by lowering our prices. This would reduce sales revenues and increase losses. Failure to anticipate and respond to price competition may also impact sales and aggravate losses.
We believe that customers in our markets display a significant amount of loyalty to their supplier of a particular product. To the extent we are not the first to develop, offer and/or supply new products, customers may buy from our competitors or make materials themselves, causing our competitive position to suffer.
Many of our competitors are larger and have greater financial and other resources than we do.
Our products compete and will compete with other similar products produced by our competitors. These competitive products could be marketed by well-established, successful companies that possess greater financial, marketing, distributional, personnel and other resources than we possess. Using these resources, these companies can implement extensive advertising and promotional campaigns, both generally and in response to specific marketing efforts by competitors, and enter into new markets more rapidly to introduce new products. In certain instances, competitors with greater financial resources also may be able to enter a market in direct competition with us, offering attractive marketing tools to encourage the sale of products that compete with our products or present cost features that consumers may find attractive.
We may never develop any additional products to commercialize.
We have invested a substantial amount of our time and resources in developing various new products. Commercialization of these products will require additional development, clinical evaluation, regulatory approval, significant marketing efforts and substantial additional investment before they can provide us with any revenue. Despite our efforts, these products may not become commercially successful products for a number of reasons, including but not limited to:
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we may not be able to obtain regulatory approvals for our products, or the approved indication may be narrower than we seek;
our products may not prove to be safe and effective in clinical trials;
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we may experience delays in our development program;
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any products that are approved may not be accepted in the marketplace;
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we may not have adequate financial or other resources to complete the development or to commence the commercialization of our products or will not have adequate financial or other resources to achieve significant commercialization of our products;
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we may not be able to manufacture any of our products in commercial quantities or at an acceptable cost;
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rapid technological change may make our products obsolete;
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we may be unable to effectively protect our intellectual property rights or we may become subject to claims that our activities have infringed the intellectual property rights of others; and
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we may be unable to obtain or defend patent rights for our products.
We may not be able to partner with others for technological capabilities and new products and services.
Our ability to remain competitive may depend, in part, on our ability to continue to seek partners that can offer technological improvements and improve existing products and services that are offered to our customers. We are committed to attempting to keep pace with technological change, to stay abreast of technology changes and to look for partners that will develop new products and services for our customer base. We cannot assure prospective investors that we will be successful in finding partners or be able to continue to incorporate new developments in technology, to improve existing products and services, or to develop successful new products and services, nor can we be certain that newly-developednewly developed products and services will perform satisfactorily or be widely accepted in the marketplace or that the costs involved in these efforts will not be substantial.
If we fail to maintain adequate quality standards for our products and services, our business may be adverselyaffectedadversely affected and our reputation harmed.
Dietary supplement, nutraceutical, food and beverage, functional food, analytical laboratories, pharmaceutical and cosmetic customers are often subject to rigorous quality standards to obtain and maintain regulatory approval of their products and the manufacturing processes that generate them. A failure to maintain, or, in some instances, upgrade our quality standards to meet our customers’ needs, could cause damage to our reputation and potentially substantial sales losses.
Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain and may be inadequate, which would have a material and adverse effect on us.
Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology, including our licensed technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. For example, our pending United States and foreign patent applications may not issue as patents in a form that will be advantageous to us or may issue and be subsequently successfully challenged by others and invalidated. In addition, our pending patent applications include claims to material aspects of our products and procedures that are not currently protected by issued patents. Both the patent application process and the process of managing patent disputes can be time-consumingtime consuming and expensive. Competitors may be able to design around our patents or develop products which provide outcomes which are comparable or even superior to ours. Steps that we have taken to protect our intellectual property and proprietary technology, including entering into confidentiality agreements and intellectual property assignment agreements with some of our officers, employees, consultants and advisors, may not provide us with meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.
In the event a competitor infringes upon our licensed or pending patent or other intellectual property rights, enforcing those rights may be costly, uncertain, difficult and time consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management’s attention. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents rights against a challenge. The failure to obtain patents and/or protect our intellectual property rights could have a material and adverse effect on our business, results of operations and financial condition.
Our patents and licenses may be subject to challenge on validity grounds, and our patent applications may be rejected.
We rely on our patents, patent applications, licenses and other intellectual property rights to give us a competitive advantage. Whether a patent is valid, or whether a patent application should be granted, is a complex matter of science and law, and therefore we cannot be certain that, if challenged, our patents, patent applications and/or other intellectual property rights would be upheld. If one or more of those patents, patent applications, licenses and other intellectual property rights are invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive advantage we might otherwise have had.
We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from developing our products, require us to obtain licenses from third parties or to develop non-infringing alternatives and subject us to substantial monetary damages.
Third parties could, in the future, assert infringement or misappropriation claims against us with respect to products we develop. Whether a product infringes a patent or misappropriates other intellectual property involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual property rights of others. OurThere may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for use related to the use or manufacture of our products, and our potential competitors may assert that some aspect of our product infringes their patents. Because patent applications may take years to issue, there also may be applications now pending of which we are unaware that may later result in issued patents upon which our products could infringe. There also may be existing patents or pending patent applications of which we are unaware upon which our products may inadvertently infringe.
Any infringement or misappropriation claim could cause us to incur significant costs, place significant strain on our financial resources, divert management’s attention from our business and harm our reputation. If the relevant patents in such claim were upheld as valid and enforceable and we were found to infringe them, we could be prohibited from manufacturing or selling any product that is found to infringe unless we could obtain licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain such a license on terms acceptable to us, if at all, and we may not be able to redesign our products to avoid infringement.infringement, which could materially impact our revenue. A court could also order us to pay compensatory damages for such infringement, plus prejudgment interest and could, in addition, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, or selling products, and could enter an order mandating that we undertake certain remedial activities. Depending on the nature of the relief ordered by the court, we could become liable for additional damages to third parties.
The prosecution and enforcement of patents licensed to us by third parties are not within our control. Without these technologies, our productproducts may not be successful and our business would be harmed if the patents were infringed on or misappropriated without action by such third parties.
We have obtained licenses from third parties for patents and patent application rights related to the products we are developing, allowing us to use intellectual property rights owned by or licensed to these third parties. We do not control the maintenance, prosecution, enforcement or strategy for many of these patents or patent application rights and as such are dependent in part on the owners of the intellectual property rights to maintain their viability. If any third party licensor is unable to successfully maintain, prosecute or enforce the licensed patents and/or patent application rights related to our products, we may become subject to infringement or misappropriate claims or lose our competitive advantage. Without access to these technologies or suitable design-around or alternative technology options, our ability to conduct our business could be impaired significantly.
We may be subject to damages resulting from claims that we, our employees, or our independent contractors have wrongfully used or disclosed alleged trade secrets of others.
Some of our employees were previously employed at other dietary supplement, nutraceutical, food and beverage, functional food, analytical laboratories, pharmaceutical and cosmetic companies. We may also hire additional employees who are currently employed at other such companies, including our competitors. Additionally, consultants or other independent agents with which we may contract may be or have been in a contractual arrangement with one or more of our competitors. We may be subject to claims that these employees or independent contractors have used or disclosed such other party’s trade secrets or other proprietary information. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to our management. If we fail to defend such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to market existing or new products, which could severely harm our business.
Litigation may harm our business.
Substantial, complex or extended litigation could cause us to incur significant costs and distract our management. For example, lawsuits by employees, stockholders, collaborators, distributors, customers, competitors or others could be very costly and substantially disrupt our business. Disputes from time to time with such companies, organizations or individuals are not uncommon, and we cannot assure you that we will always be able to resolve such disputes or on terms favorable to us. As further described in Part I, Item 3 of this Annual Report on Form 10-K, we are currently involved in substantial and complex litigation with Elysium. Unexpected results could cause us to have financial exposure in these matters in excess of recorded reserves and insurance coverage, requiring us to provide additional reserves to address these liabilities, therefore impacting profits.
Our sales and results of operations for our analytical reference standards and services segment depend on our customers’ research and development efforts and their ability to obtain funding for these efforts.
Our analytical reference standards and services segment customers include researchers at pharmaceutical and biotechnology companies, chemical and related companies, academic institutions, government laboratories and private foundations. Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products. Our customers determine their research and development budgets based on several factors, including the need to develop new products, the availability of governmental and other funding, competition and the general availability of resources. As we continue to expand our international operations, we expect research and development spending levels in markets outside of the United States will become increasingly important to us.
Research and development budgets fluctuate due to changes in available resources, spending priorities, general economic conditions, institutional and governmental budgetary limitations and mergers of pharmaceutical and biotechnology companies. Our business could be harmed by any significant decrease in life science and high technology research and development expenditures by our customers. In particular, a small portion of our sales has been to researchers whose funding is dependent on grants from government agencies such as the United States National Institute of Health, the National Science Foundation, the National Cancer Institute and similar agencies or organizations. Government funding of research and development is subject to the political process, which is often unpredictable. Other departments, such as Homeland Security or Defense, or general efforts to reduce the United States federal budget deficit could be viewed by the government as a higher priority. Any shift away from funding of life science and high technology research and development or delays surrounding the approval of governmental budget proposals may cause our customers to delay or forego purchases of our products and services, which could seriously damage our business.
Some of our customers receive funds from approved grants at a particular time of year, many times set by government budget cycles. In the past, such grants have been frozen for extended periods or have otherwise become unavailable to various institutions without notice. The timing of the receipt of grant funds may affect the timing of purchase decisions by our customers and, as a result, cause fluctuations in our sales and operating results.
Demand for our products and services are subject to the commercial success of our customers’ products, which may vary for reasons outside our control.
Even if we are successful in securing utilization of our products in a customer’s manufacturing process, sales of many of our products and services remain dependent on the timing and volume of the customer’s production, over which we have no control. The demand for our products depends on regulatory approvals and frequently depends on the commercial success of the customer’s supported product. Regulatory processes are complex, lengthy, expensive, and can often take years to complete.
We may bear financial risk if we under-price our contracts or overrun cost estimates.
In cases where our contracts are structured as fixed price or fee-for-service with a cap, we bear the financial risk if we initially under-price our contracts or otherwise overrun our cost estimates. Such underpricing or significant cost overruns could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We rely on single or a limited number of third-party suppliers for the raw materials required to produce our products.
Our dependence on a limited number of third-party suppliers or on a single supplier, and the challenges we may face in obtaining adequate supplies of raw materials, involve several risks, including limited control over pricing, availability, quality and delivery schedules. We cannot be certain that our current suppliers will continue to provide us with the quantities of these raw materials that we require or satisfy our anticipated specifications and quality requirements. Any supply interruption in limited or sole sourced raw materials could materially harm our ability to manufacture our products until a new source of supply, if any, could be identified and qualified. Although we believe there are other suppliers of these raw materials, we may be unable to find a sufficient alternative supply channel in a reasonable time or on commercially reasonable terms. Any performance failure on the part of our suppliers could delay the development and commercialization of our products, or interrupt production of then existing products that are already marketed, which would have a material adverse effect on our business.
We maynot be successful in acquiring complementary businesses or products on favorable terms.
As part of our business strategy, we intend to consider acquisitions of similar or complementary businesses or products. No assurance can be given that we will be successful in identifying attractive acquisition candidates or completing acquisitions on favorable terms. In addition, any future acquisitions will be accompanied by the risks commonly associated with acquisitions. These risks include potential exposure to unknown liabilities of acquired companies or to acquisition costs and expenses, the difficulty and expense of integrating the operations and personnel of the acquired companies, the potential disruption to the business of the combined company and potential diversion of our management's time and attention, the impairment of relationships with and the possible loss of key employees and clients as a result of the changes in management, the incurrence of amortization expenses and write-downs and dilution to the shareholders of the combined company if the acquisition is made for stock of the combined company. In addition, successful completion of an acquisition may depend on consents from third parties, including regulatory authorities and private parties, which consents are beyond our control. There can be no assurance that products, technologies or businesses of acquired companies will be effectively assimilated into the business or product offerings of the combined company or will have a positive effect on the combined company's revenues or earnings. Further, the combined company may incur significant expense to complete acquisitions and to support the acquired products and businesses. Any such acquisitions may be funded with cash, debt or equity, which could have the effect of diluting or otherwise adversely affecting the holdings or the rights of our existing stockholders.
If we experience a significant disruption in our information technology systems or if we fail to implement new systems and software successfully, our business could be adversely affected.
We depend on information systems throughout our company to control our manufacturing processes, process orders, manage inventory, process and bill shipments and collect cash from our customers, respond to customer inquiries, contribute to our overall internal control processes, maintain records of our property, plant and equipment, and record and pay amounts due vendors and other creditors. If we were to experience a prolonged disruption in our information systems that involve interactions with customers and suppliers, it could result in the loss of sales and customers and/or increased costs, which could adversely affect our overall business operation.
If we are unable to establish or maintain sales, marketing and distribution capabilities or enter into and maintain arrangements with third parties to sell, market and distribute our products, our business may be harmed.
To achieve commercial success for our products, we must sell rights to our product lines and/or technologies at favorable prices, develop a sales and marketing force, or enter into arrangements with others to market and sell our products.prices. In addition to being expensive, developing and maintaining such a sales force is time-consuming, and could delay or limit the success of any product launch. We may not be able to develop this capacity on a timely basis or at all.time-consuming. Qualified direct sales personnel with experience in the phytochemicalnatural products industry are in high demand, and there can be no assurance that we will be able to hire or retain an effective direct sales team. Similarly, qualified independent sales representatives both within and outside the United States are in high demand, and we may not be able to build an effective network for the distribution of our product through such representatives. There can be no assurance that we will be able to enter into contracts with representatives on terms acceptable to us. Furthermore, there can be no assurance that we will be able to build an alternate distribution framework should we attempt to do so.
We may also need to contract with third parties in order to market our products. To the extent that we enter into arrangements with third parties to perform marketing and distribution services, our product revenue could be lower and our costs higher than if we directly marketed our products. Furthermore, to the extent that we enter into co-promotion or other marketing and sales arrangements with other companies, any revenue received will depend on the skills and efforts of others, and we do not know whether these efforts will be successful. If we are unable to establish and maintain adequate sales, marketing and distribution capabilities, independently or with others, we will not be able to generate product revenue, and may not become profitable.
Our sales and results of operations depend on our customers’ research and development efforts and their ability to obtain funding for these efforts.
Our customers include researchers at pharmaceutical and biotechnology companies, chemical and related companies, academic institutions, government laboratories and private foundations. Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products. Our customers determine their research and development budgets based on several factors, including the need to develop new products, the availability of governmental and other funding, competition and the general availability of resources. As we continue to expand our international operations, we expect research and development spending levels in markets outside of the United States will become increasingly important to us.
Research and development budgets fluctuate due to changes in available resources, spending priorities, general economic conditions, institutional and governmental budgetary limitations and mergers of pharmaceutical and biotechnology companies. Our business could be seriously harmednegatively impacted by any significant decrease in life science and high technology research and development expenditures by our customers. In particular, a small portion of our sales has been to researchers whose funding is dependent on grants from government agencies such as the United States National Institute of Health, the National Science Foundation, the National Cancer Institute and similar agencies or organizations. Government funding of research and development is subject to the political process, which is often unpredictable. Other departments, such as Homeland Security or Defense, or general efforts to reduce the United States federal budget deficit could be viewed by the government as a higher priority. Any shift away from funding of life science and high technology research and development or delays surrounding the approval of governmental budget proposals may cause our customers to delay or forego purchases of our products and services, which could seriously damage our business.
Some of our customers receive funds from approved grants at a particular time of year, many times set by government budget cycles. In the past, such grants have been frozen for extended periods or have otherwise become unavailable to various institutions without advance notice. The timing of the receipt of grant funds may affect the timing of purchase decisions by our customers and, as a result, cause fluctuations in our sales and operating results.
Demand for our products and services are subject to the commercial success of our customers’ products, which may vary for reasons outside our control.
Even if we are successful in securing utilization of our products in a customer’s manufacturing process, sales of many of our products and services remain dependent on the timing and volume of the customer’s production, over which we have no control. The demand for our products depends on regulatory approvals and frequently depends on the commercial success of the customer’s supported product. Regulatory processes are complex, lengthy, expensive, and can often take years to complete.
We may bear financial risk if we under-price our contracts or overrun cost estimates.cyber security threats.
In cases where our contracts are structured as fixed price or fee-for-service with a cap, we bear the financial risk if we initially under-price our contracts or otherwise overrun our cost estimates. Such under-pricing or significant cost overruns could have a material adverse effect onordinary course of our business, results of operations, financial conditionwe use our data centers and cash flows.
our networks to store and access our proprietary business information. We rely on singleface various cyber security threats, including cyber security attacks to our information technology infrastructure and attempts by others to gain access to our proprietary or a limited number of third-party suppliers for the raw materials required for the production of our products.
Our dependence on a limited number of third-party suppliers or on a single supplier, and the challenges we may face in obtaining adequate supplies of raw materials, involve several risks, including limited control over pricing, availability, quality and delivery schedules. We cannot be certain that our current suppliers will continue to provide us with the quantities of these raw materials that we require or satisfy our anticipated specifications and quality requirements. Any supply interruption in limited or sole sourced raw materials could materially harm our ability to manufacture our products until a new source of supply, if any, could be identified and qualified. Although we believe there are other suppliers of these raw materials, we may be unable to find a sufficient alternative supply channel in a reasonable time or on commercially reasonable terms. Any performance failure on the part of our suppliers could delay the development and commercialization of our products, or interrupt production of then existing products that are already marketed, which would have a material adverse effect on our business.
We may need to increase the size of our organization, and we may be unable to manage rapid growth effectively.
Our failure to manage growth effectively could have a material and adverse effect on our business, results of operations and financial condition. We anticipate that a period of significant expansion will be required to address possible acquisitions of business, products, or rights, and potential internal growth to handle licensing and research activities. This expansion will place a significant strain on management, operational and financial resources. To manage the expected growth of our operations and personnel, we must both improve our existing operational and financial systems,sensitive information. The procedures and controls we use to monitor these threats and implement new systems, procedures and controls. We must also expandmitigate our finance, administrative, and operations staff. Our current personnel, systems, procedures and controlsexposure may not adequately support future operations. Management may be unablesufficient to hire, train, retain, motivate and manage necessary personnel or to identify, manage and exploit existing and potential strategic relationships and market opportunities.
Risks Associated with Acquisition Strategy.
As part of our business strategy, we intend to consider acquisitions of similar or complementary businesses. No assurance can be given that we will be successful in identifying attractive acquisition candidates or completing acquisitions on favorable terms. In addition, any future acquisitions will be accompanied by the risks commonly associated with acquisitions. These risks include potential exposure to unknown liabilities of acquired companies or to acquisition costs and expenses, the difficulty and expense of integrating the operations and personnel of the acquired companies, the potential disruption to the business of the combined company and potential diversion of our management's time and attention, the impairment of relationships with and the possible loss of key employees and clients as aprevent cyber security incidents. The result of the changes in management, the incurrence of amortization expenses and dilution to the shareholders of the combined company if the acquisition is madethese incidents could include disrupted operations, lost opportunities, misstated financial data, liability for stock of the combined company. In addition, successful completion of an acquisition may depend on consents from third parties, including regulatory authorities and private parties, which consents are beyond our control. There can be no assurance that products, technologiesstolen assets or businesses of acquired companies will be effectively assimilated into the business or product offerings of the combined company or will have a positive effect on the combined company's revenues or earnings. Further, the combined company may incur significant expense to complete acquisitions and to support the acquired products and businesses. Any such acquisitions may be funded with cash, debt or equity, which could have the effect of diluting or otherwise adversely affecting the holdings or the rights of our existing stockholders.
If we experience a significant disruption in our information, technology systems or if we fail to implement new systems and software successfully, our business could be adversely affected.
We depend on information systems throughout our company to control our manufacturing processes, process orders, manage inventory, process and bill shipments and collect cash from our customers, respond to customer inquiries, contribute to our overall internal control processes, maintain records of our property, plant and equipment, and record and pay amounts due vendors and other creditors. If we were to experience a prolonged disruption in our information systems that involve interactions with customers and suppliers, it could result in the loss of sales and customers and/or increased costs which could adversely affect our overall business operation.arising from the implementation of additional security protective measures, litigation and reputational damage. Any remedial costs or other liabilities related to cyber security incidents may not be fully insured or indemnified by other means.
Risks Related to Regulatory Approval of Our Products and Other Government Regulations
We are subject to regulation by various federal, state and foreign agencies that require us to comply with a wide variety of regulations, including those regarding the manufacture of products, advertising and product label claims, the distribution of our products and environmental matters. Failure to comply with these regulations could subject us to fines, penalties and additional costs.
Some of our operations are subject to regulation by various United States federal agencies and similar state and international agencies, including the Department of Commerce, the FDA, the FTC, the Department of Transportation and the Department of Agriculture. These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, handling, sales and distribution of products. If we fail to comply with any of these regulations, we may be subject to fines or penalties, have to recall products and/or cease their manufacture and distribution, which would increase our costs and reduce our sales.
We are also subject to various federal, state, local and international laws and regulations that govern the handling, transportation, manufacture, use and sale of substances that are or could be classified as toxic or hazardous substances. Some risk of environmental damage is inherent in our operations and the products we manufacture, sell, or distribute. Any failure by us to comply with the applicable government regulations could also result in product recalls or impositions of fines and restrictions on our ability to carry on with or expand in a portion or possibly all of our operations. If we fail to comply with any or all of these regulations, we may be subject to fines or penalties, have to recall products and/or cease their manufacture and distribution, which would increase our costs and reduce our sales.
Government regulations of our customer’s business are extensive and are constantly changing. Changes in these regulations can significantly affect customer demand for our products and services.
The process by which our customer’scustomers’ industries are regulated is controlled by government agencies and depending on the market segment can be very expensive, time-consuming,time consuming, and uncertain. Changes in regulations or the enforcement practices of current regulations could have a negative impact on our customers and, in turn, our business. At this time, it is unknown how the FDA will interpret and to what extent it will enforce GMPs, regulations that will likely affect many of our customers. These uncertainties may have a material impact on our results of operations, as lack of enforcement or an interpretation of the regulations that lessens the burden of compliance for the dietary supplement marketplace may cause a reduced demand for our products and services.
Changes in government regulation or in practices relating to the pharmaceutical, dietary supplement, food and cosmetic industry could decrease the need for the services we provide.
Governmental agencies throughout the world, including in the United States, strictly regulate thesethe pharmaceutical, dietary supplement, food and cosmetic industries. Our business involves helping pharmaceutical and biotechnology companies navigate the regulatory drug approval process. Changes in regulation, such as a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, or an increase in regulatory requirements that we have difficulty satisfying or that make our services less competitive, could eliminate or substantially reduce the demand for our services. Also, if the government makes efforts to contain drug costs and pharmaceutical and biotechnology company profits from new drugs, our customers may spend less, or reduce their spending on research and development. If health insurers were to change their practices with respect to reimbursements for pharmaceutical products, our customers may spend less, or reduce their spending on research and development.
If we should in the future become required to obtain regulatory approval to market and sell our goods we will not be able to generate any revenues until such approval is received.
The pharmaceutical industry is subject to stringent regulation by a wide range of authorities. While we believe that, given our present business, we are not currently required to obtain regulatory approval to market our goods because, among other things, we do not (i) produce or market any clinical devices or other products, or (ii) sell any medical products or services to the customer, we cannot predict whether regulatory clearance will be required in the future and, if so, whether such clearance will at such time be obtained for any products that we are developing or may attempt to develop. Should such regulatory approval in the future be required, our goods may be suspended or may not be able to be marketed and sold in the United States until we have completed the regulatory clearance process as and if implemented by the FDA. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product or service and would require the expenditure of substantial resources.
If regulatory clearance of a good that we propose to propose to market and sell is granted, this clearance may be limited to those particular states and conditions for which the good is demonstrated to be safe and effective, which would limit our ability to generate revenue. We cannot ensure that any good that we develop will meet all of the applicable regulatory requirements needed to receive marketing clearance. Failure to obtain regulatory approval will prevent commercialization of our goods where such clearance is necessary. There can be no assurance that we will obtain regulatory approval of our proposed goods that may require it.
Risks Related to the Securities Markets and Ownership of our Equity Securities
The market price of our common stock may be volatile and adversely affected by several factors.
The market price of our common stock could fluctuate significantly in response to various factors and events, including, but not limited to:
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our ability to integrate operations, technology, products and services;
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our ability to execute our business plan;
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our operating results are below expectations;
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our issuance of additional securities, including debt or equity or a combination thereof,;
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announcements of technological innovations or new products by us or our competitors;
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acceptance of and demand for our products by consumers;
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media coverage regarding our industry or us;
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disputes with or our inability to collect from significant customers;
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loss of any strategic relationship;
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industry developments, including, without limitation, changes in healthcare policies or practices;
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economic and other external factors;
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reductions in purchases from our large customers;
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period-to-period fluctuations in our financial results; and
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whether an active trading market in our common stock develops and is maintained.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
Our common stock is and likely will remain subject to the SEC’s “penny stock” rules, which may make our shares more difficult to sell.
Because the price of our common stock is currently and is likely to remain less than $5.00 per share, it is expected to be classified as a “penny stock.” The SEC’s rules regarding penny stocks have the effect of reducing trading activity in our shares, making it more difficult for investors to sell them. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
make a special written suitability determination for the purchaser;
receive the purchaser’s written agreement to a transaction prior to sale;
provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies;
obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has received the required risk disclosure document before a transaction in a “penny stock” can be completed; and
give bid and offer quotations and broker and salesperson compensation information to the customer orally or in writing before or with the confirmation.
These rules make it more difficult for broker-dealers to effectuate customer transactions and trading activity in our securities and may result in a lower trading volume of our common stock and lower trading prices.
Our shares of common stock may be thinly traded, so you may be unable to sell at or near ask prices or at all.
We cannot predict the extent to which an active public market for our common stock will develop or be sustained. Our common stock is currently traded on the OTC Markets where they have historically been thinly traded, if at all, meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent.
This situation may be attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community who generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we have become more seasoned and viable. As a consequence, there may be periods of several days weeks or monthsweeks when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot assure you that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained or not diminish.
We have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our capital stock and do not anticipate paying cash dividends on our capital stock in the foreseeable future. The payment of dividends on our capital stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if the common stock price appreciates.
Comprehensive tax reform could adversely affect our business and financial condition.
On December 22, 2017, U.S. federal income tax signed into law (H.R. 1, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”), informally titled the Tax Cuts and Jobs Act, that significantly revises the Internal Revenue Code of 1986, as amended. The Tax Cuts and Jobs Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted taxable income (except for certain small businesses), limitation of the deduction for net operating losses carried forward from taxable years beginning after December 31, 2017 to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Cuts and Jobs Act is uncertain and our business and financial condition could be adversely affected. In addition, it is unknown if and to what extent various states will conform to the Tax Cuts and Jobs Act. The impact of the Tax Cuts and Jobs Act on holders of our common stock is likewise uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Our federal net operating losses (“NOL”s) generated in taxable years ending prior to 2018 could expire unused. Under the Tax Cuts and Jobs Act, federal NOLs incurred in taxable years ending after December 31, 2017, may be carried forward indefinitely, but the deductibility of federal NOLs generated in tax years beginning after December 31, 2017, is limited. It is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards, or NOLs, and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. In addition, we may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership some of which may be outside of our control. As a result, if we earn net taxable income, our ability to use our pre-ownership change NOL carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
Stockholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementary businesses.
If future operations or acquisitions are financed through the issuance of additional equity securities, stockholders could experience significant dilution. Securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our common stock. In addition, the issuance of shares of our common stock upon the exercise of outstanding options or warrants may result in dilution to our stockholders.
We may become involved in securities class action litigation that could divert management’s attention and harm our business.
The stock market in general, and the stocks of early stage companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of the companies involved. If these fluctuations occur in the future, the market price of our shares could fall regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. If the market price or volume of our shares suffers extreme fluctuations, then we may become involved in this type of litigation, which would be expensive and divert management’s attention and resources from managing our business.
As a public company, we may also from time to time make forward-looking statements about future operating results and provide some financial guidance to the public markets. The management has limited experience as a management team in a public company and as a result projectionsProjections may not be made in a timely manner or set atwe might fail to reach expected performance levels and could materially affect the price of our shares. Any failure to meet published forward-looking statements that adversely affect the stock price could result in losses to investors, stockholder lawsuits or other litigation, sanctions or restrictions issued by the SEC.
Securities and Exchange Commission.
We have a significant number of outstanding options and warrants, and future sales of these shares could adversely affect the market price of our common stock.
As of January 2, 2016,December 31, 2018, we had outstanding options exercisable for an aggregate of 15,734,755approximately 9.1 million shares of common stock at a weighted average exercise price of $1.15$3.79 per share and outstanding warrants exercisable for an aggregate of 1,269,020approximately 0.2 million shares of common stock at a weighted average exercise price of $1.34$3.69 per share. The holders may sell many of these shares in the public markets from time to time, without limitations on the timing, amount or method of sale. As and when our stock price rises, if at all, more outstanding options and warrants will be in-the-money and the holders may exercise their options and warrants and sell a large number of shares. This could cause the market price of our common stock to decline.
Unresolved Staff Comments
None.
As of January 2, 2016,December 31, 2018, we lease (i) approximately 10,000 square feet of office space in Los Angeles, California with three years remaining on the lease approximately, (ii) 15,000 square feet of office space in Irvine, California with 5nine months remaining on the lease, (iii) approximately 10,000 square feet of space for research and development laboratory in Longmont, Colorado with six years remaining on the lease, and (iv) approximately 13,000 square feet of space for laboratory manufacturing in Boulder, Colorado with 4 months remaining on the lease, and approximately 1,7002,300 square feet of office space in Rockville, Maryland with 4 monthstwo years remaining on the lease. We also rent an apartment with approximately 1,000 square feet in Foothill Ranch, California, and an apartment with less than 1,100 square feet in Longmont, Colorado. WeThe below table illustrates the use the apartments to accommodateof each property by our traveling employees to each of our California and Colorado locations. business segments.
Business Segment | Property Used |
Consumer Products | All properties |
Ingredients | All properties |
Analytical Reference Standards and Services | Irvine, CA, Longmont, CO and Rockville, MD |
We do not own any real estate. For the year ended January 2, 2016,December 31, 2018, our total annual rental expense was approximately $536,000$791,000.
Subsequent to the year ended January 2, 2016, we entered into a lease amendment to extend the term of the lease for our research facility located in Boulder, Colorado through April 2023.Subsequent to the year ended January 2, 2016, we entered into a lease amendment to lease an office space of approximately 2,300 square feet located in Rockville, Maryland through April 2021.
Elysium Health, LLC
WeOn December 29, 2016, ChromaDex, Inc. filed a complaint in the United States District Court for the Central District of California, naming Elysium Health, Inc. (together with Elysium Health, LLC, “Elysium”) as defendant (the “Complaint”). On January 25, 2017, Elysium filed an answer and counterclaims in response to the Complaint (together with the Complaint, the “California Action”). Over the course of the California Action, the parties have each filed amended pleadings several times and have each engaged in several rounds of motions to dismiss and one round of motion for judgment on the pleadings with respect to various claims. Most recently, on November 27, 2018, ChromaDex, Inc. filed a fifth amended complaint that added an individual, Mark Morris, as a defendant. Elysium and Morris (“the Defendants”) moved to dismiss on December 21, 2018. The court denied Defendants’ motion on February 4, 2019.
Following the court’s February 4, 2019 order, the claims that ChromaDex, Inc. presently asserts in the California Action, among other allegations, are that (i) Elysium breached the Supply Agreement, dated June 26, 2014, by and between ChromaDex, Inc. and Elysium (the “pTeroPure® Supply Agreement”), by failing to make payments to ChromaDex, Inc. for purchases of pTeroPure® and by improper disclosure of confidential ChromaDex, Inc. information pursuant to the pTeroPure® Supply Agreement, (ii) Elysium breached the Supply Agreement, dated February 3, 2014, by and between ChromaDex, Inc. and Elysium, as amended (the “NIAGEN® Supply Agreement”), by failing to make payments to ChromaDex, Inc. for purchases of NIAGEN® and by improper disclosure of confidential ChromaDex, Inc. information pursuant to the NIAGEN® Supply Agreement, (iii) Defendants willfully and maliciously misappropriated ChromaDex, Inc. trade secrets concerning its ingredient sales business under both the California Uniform Trade Secrets Act and the Federal Defend Trade Secrets Act, (iv) Morris breached two confidentiality agreements he signed by improperly stealing confidential ChromaDex, Inc. documents and information, (v) Morris breached his fiduciary duty to ChromaDex, Inc. by lying to and competing with ChromaDex, Inc. while still employed there, and (vi) Elysium aided and abetted Morris’s breach of fiduciary duty. ChromaDex, Inc. is seeking damages and interest for Elysium’s alleged breaches of the NIAGEN® Supply Agreement and pTeroPure® Supply Agreement and Morris’s alleged breaches of his confidentiality agreements, compensatory damages and interest, punitive damages, injunctive relief, and attorney’s fees for Defendants’ alleged willful and malicious misappropriation of ChromaDex, Inc.’s trade secrets, and compensatory damages and interest, disgorgement of all benefits received, and punitive damages for Morris’s alleged breach of his fiduciary duty and Elysium’s aiding and abetting of that alleged breach. Defendants filed their answer to ChromaDex, Inc.'s fifth amended complaint on February 19, 2019.
Among other allegations, the claims that Elysium presently alleges in the California Action are that (i) ChromaDex, Inc. breached the NIAGEN® Supply Agreement by not involvedissuing certain refunds or credits to Elysium, by not supplying NIAGEN® manufactured according to the defined standard, by distributing the NIAGEN® product specifications attached to the parties’ agreement to other customers, and by failing to provide Elysium with information concerning the quality and identity of NIAGEN® pursuant to the NIAGEN® Supply Agreement, (ii) ChromaDex, Inc. breached the implied covenant of good faith and fair dealing pursuant to the NIAGEN® Supply Agreement, (iii) ChromaDex, Inc. fraudulently induced Elysium into entering into the Trademark License and Royalty Agreement, dated February 3, 2014, by and between ChromaDex, Inc. and Elysium (the “License Agreement”), (iv) ChromaDex, Inc.’s conduct constitutes misuse of its patent rights, and (v) ChromaDex, Inc. was unjustly enriched by the royalties Elysium paid pursuant to the License Agreement. Elysium is seeking damages for ChromaDex, Inc.’s alleged breaches of the NIAGEN® Supply Agreement and pTeroPure® Supply Agreement, and compensatory damages, punitive damages, and/or rescission of the License Agreement and restitution of any royalty payments conveyed by Elysium pursuant to the License Agreement, and a declaratory judgment that ChromaDex, Inc. has engaged in anypatent misuse. ChromaDex, Inc. answered Elysium’s present allegations on August 24, 2018. The parties are currently in discovery.
(B) Patent Office Proceedings
On July 17, 2017, Elysium filed petitions with the U.S. Patent and Trademark Office for inter partes review of U.S. Patents 8,197,807 (the “’807 Patent”) and 8,383,086 (the “’086 Patent”), patents to which ChromaDex, Inc. is the exclusive licensee. The Patent Trial and Appeal Board (“PTAB”) denied institution of the inter partes review for the ’807 Patent on January 18, 2018. On January 29, 2018, the PTAB granted institution of the inter partes review as to claims 1, 3, 4, and 5 and denied institution as to claim 2 of the ’086 Patent. Based upon a recent U.S. Supreme Court decision, and solely on a procedural basis, the PTAB was required to include claim 2 in the trial of the inter partes review. The matter was heard on October 2, 2018. The PTAB issued its written decision on January 16, 2019, upholding claim 2 of the ’086 Patent which relates to the use of isolated NR in a pharmaceutical composition as valid. Elysium is now prevented from raising invalidity arguments against the ’086 Patent in the ongoing patent litigation in Delaware that it brought or could have brought before the PTAB in its inter partes review.
(C) Southern District of New York Action
On September 27, 2017, Elysium Health Inc. ("Elysium Health") filed a complaint in the United States District Court for the Southern District of New York, against ChromaDex, Inc. (the “Elysium SDNY Complaint”). Elysium Health alleges in the Elysium SDNY Complaint that ChromaDex, Inc. made false and misleading statements in a citizen petition to the Food and Drug Administration it filed on or about August 18, 2017. Among other allegations, Elysium Health avers that the citizen petition made Elysium Health’s product appear dangerous, while casting ChromaDex, Inc.’s own product as safe. The Elysium SDNY Complaint asserts four claims for relief: (i) false advertising under the Lanham Act, 15 U.S.C. § 1125(a); (ii) trade libel; (iii) deceptive business practices under New York General Business Law § 349; and (iv) tortious interference with prospective economic relations. ChromaDex, Inc. denies the claims in the Elysium SDNY Complaint and intends to defend against them vigorously. On October 26, 2017, ChromaDex, Inc. moved to dismiss the Elysium SDNY Complaint on the grounds that, inter alia, its statements in the citizen petition are immune from liability under the Noerr-Pennington Doctrine, the litigation privilege, and New York’s Anti-SLAPP statute, and that the Elysium SDNY Complaint failed to state a claim. Elysium Health opposed the motion on November 2, 2017. ChromaDex, Inc. filed its reply on November 9, 2017.
On October 26, 2017, ChromaDex, Inc. filed a complaint in the United States District Court for the Southern District of New York against Elysium Health (the “ChromaDex SDNY Complaint”). ChromaDex, Inc. alleges that Elysium Health made material false and misleading statements to consumers in the promotion, marketing, and sale of its health supplement product, Basis, and asserts five claims for relief: (i) false advertising under the Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under 15 U.S.C. § 1125(a); (iii) deceptive practices under New York General Business Law § 349; (iv) deceptive practices under New York General Business Law § 350; and (v) tortious interference with prospective economic advantage. On November 16, 2017, Elysium Health moved to dismiss for failure to state a claim. ChromaDex, Inc. opposed the motion on November 30, 2017 and Elysium Health filed a reply on December 7, 2017.
On November 3, 2017, the Court consolidated the Elysium SDNY Complaint and the ChromaDex SDNY Complaint actions under the caption In re Elysium Health-ChromaDex Litigation, 17-cv-7394, and stayed discovery in the consolidated action pending a Court-ordered mediation. The mediation was unsuccessful. On September 27, 2018, the Court issued a combined ruling on both parties’ motions to dismiss. For ChromaDex’s motion to dismiss, the Court converted the part of the motion on the issue of whether the citizen petition is immune under the Noerr-Pennington Doctrine into a motion for summary judgment, and requested supplemental evidence from both parties, which were submitted on October 29, 2018. The Court otherwise denied the motion to dismiss. On January 3, 2019, the Court granted ChromaDex, Inc.’s motion for summary judgment under the Noerr-Pennington Doctrine and dismissed all claims in the Elysium SDNY Complaint. Elysium moved for reconsideration on January 17, 2019. The Court denied Elysium’s motion for reconsideration on February 6, 2019, and issued an amended final order granting ChromaDex, Inc.’s motion for summary judgment as on February 7, 2019.
The Court granted in part and denied in part Elysium’s motion to dismiss, sustaining three grounds for ChromaDex’s Lanham Act claims while dismissing two others, sustaining the claim under New York General Business Law § 349, and dismissing the claims under New York General Business Law § 350 and for tortious interference. Elysium filed an answer and counterclaims on October 10, 2018, alleging claims for (i) false advertising under the Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under 15 U.S.C. § 1125(a); and (iii) deceptive practices under New York General Business Law § 349. ChromaDex answered Elysium’s counterclaims on November 2, 2018. The parties are conferring on a proposed scheduling order.
The Company is unable to predict the outcome of these matters and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to the legal proceedings which managementdiscussed herein. As of December 31, 2018, ChromaDex, Inc. did not accrue a potential loss for the California Action or the Elysium SDNY Complaint because ChromaDex, Inc. believes maythat the allegations are without merit and thus it is not probable that a liability has been incurred.
(D) Delaware – Patent Infringement Action
On September 17, 2018, ChromaDex, Inc. and Trustees of Dartmouth College filed a patent infringement complaint in the United States District Court for the District of Delaware against Elysium Health, Inc. The complaint alleges that Elysium’s BASIS® dietary supplement violates U.S. Patents 8,197,807 (the “’807 Patent”) and 8,383,086 (the “’086 Patent”) that comprise compositions containing isolated nicotinamide riboside held by Dartmouth and licensed exclusively to ChromaDex, Inc. On October 23, 2018, Elysium filed an answer to the complaint. The answer asserts various affirmative defenses and denies that Plaintiffs are entitled to any relief.
On November 7, 2018, Elysium filed a motion to stay the patent infringement proceedings pending resolution of (1) the inter partes review of the ’807 Patent and the ’086 Patent before the Patent Trial and Appeal Board (“PTAB”) and (2) the outcome of the litigation in the California Action. ChromaDex, Inc. filed an opposition brief on November 21, 2018 detailing the issues with Elysium’s motion to stay. In particular, ChromaDex, Inc. argued that given claim 2 of the ’086 Patent was only included in the PTAB’s inter partes review for procedural reasons the PTAB was unlikely to invalidate claim 2 and therefore litigation in Delaware would continue regardless. In addition, ChromaDex, Inc. argued that the litigation in the California Action is unlikely to have a material adversesignificant effect on our business, financial condition, operations, cash flows, or prospects. However, the Company fromongoing patent litigation. After the PTAB released its written decision upholding claim 2 of the ’086 Patent proving right ChromaDex, Inc.’s prediction ChromaDex, Inc. informed the Delaware court of the PTAB’s decision on January 17, 2019. Both Elysium and ChromaDex, Inc. have informed the court that they are available for oral argument on the motion to stay, and though the court’s docket is very crowded, ChromaDex, Inc. currently anticipates a ruling this spring.
Covance Laboratories Inc.
On January 10, 2019, Covance Laboratories Inc. (“Covance”) filed a complaint in the United States District Court for the District of Delaware against ChromaDex, Inc. and ChromaDex Analytics, Inc. (collectively “ChromaDex”). The complaint alleges that ChromaDex breached an Asset Purchase Agreement (“APA”), dated August 21, 2017, between Covance and ChromaDex in which Covance purchased certain assets related to ChromaDex’s Lab Business for $7,500,000. Specifically, the complaint alleges that ChromaDex failed to deliver to Covance its entire ComplyID library. On February 4, 2019, ChromaDex filed an answer to the complaint. The answer asserts various affirmative defenses and denies that Covance is entitled to any relief.
From time to time iswe are involved in legal proceedings arising in the ordinary course of our business, which can include employment claims, product claims and patent infringements.business. We do not believe that any of these claims and proceedings against us as they arise arethere is no other litigation pending that is likely to have, individually or in the aggregate, a material adverse effect on our financial condition or results of operations.
Not applicable.
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Since November 2014, we haveApril 25, 2016, our common stock has been quotedtraded on the top tier of the OTC Markets Group, Inc. (the “OTCQX”The NASDAQ Capital Market (“NASDAQ”) under the symbol “CDXC.” From April 2010 to November 2014, we have been quoted on the middle tier of the OTC Markets Group, Inc. (the “OTCQB”) under the symbol “CDXC.” OTCQX and OTCQB are networks of securities dealers who buy and sell stock. The dealers are connected by a computer network that provides information on current “bids” and “asks”, as well as volume information.
The following table sets forth the range of high and low closing bid quotations for ChromaDex common stock for each of the periods indicated as reported by OTCQX and OTCQB. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Fiscal Year Ending January 2, 2016 | |
Quarter Ended | | High | | | Low | |
January 2, 2016 | | $ | 1.52 | | | $ | 1.12 | |
October 3, 2015 | | $ | 1.42 | | | $ | 1.02 | |
July 4, 2015 | | $ | 1.48 | | | $ | 1.13 | |
April 4, 2015 | | $ | 1.54 | | | $ | 0.85 | |
Fiscal Year Ending January 3, 2015 | |
Quarter Ended | | High | | | CLow | |
January 3, 2015 | | $ | 1.25 | | | $ | 0.84 | |
September 27, 2014 | | $ | 1.46 | | | $ | 1.02 | |
June 28, 2014 | | $ | 1.90 | | | $ | 1.21 | |
March 29, 2014 | | $ | 2.08 | | | $ | 1.41 | |
On March 10, 2016,February 28, 2019, the closing bid quotationsale price was $1.49.$3.49.
Penny Stock
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer’s account.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.
Performance Graph
The chart below compares the annual percentage change in the cumulative total return on our common stock with the NASDAQ Capital Market Composite Index and the S&P SmallCap 600 Health Care Index. The chart shows the value as of January 2, 2016, of $100 invested on January 1, 2011. The stock price performance below is not necessarily indicative of future performance.
| | 1/1/11 | | | 12/31/11 | | | 12/29/12 | | | 12/28/13 | | | 1/3/15 | | | 1/2/16 | |
| | | | | | | | | | | | | | | | | | |
ChromaDex Corporation | | | 100.00 | | | | 40.44 | | | | 40.85 | | | | 117.65 | | | | 66.18 | | | | 89.71 | |
NASDAQ Composite | | | 100.00 | | | | 100.62 | | | | 116.97 | | | | 166.27 | | | | 188.90 | | | | 200.15 | |
S&P SmallCap 600 Health Care | | | 100.00 | | | | 90.92 | | | | 104.60 | | | | 149.33 | | | | 158.97 | | | | 180.15 | |
Holders of Our Common Stock
As of March 10, 2016,February 28, 2019, we had approximately 6451 registered holders of record of our common stock.
DividendsDividend Policy
We have not declared or paid any cash dividends on our common stock during either of the two most recent fiscal years and have no current intention to pay any cash dividends. Our ability to pay cash dividends is governed by applicable provisions of Delaware law and is subject to the discretion of our Board of Directors.
Other than as previously disclosed in our past Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, the Company did not have any sales of unregistered securities for the period covered by this Annual Report on Form 10-K.
The annual financial information set forth below has been derived from our audited consolidated financial statements. The information should be read in connection with, and is qualified in its entirety by reference to, Management’s Discussion and Analysis, the consolidated financial statements and notes included elsewhere in this report and in our SEC filings.Not Applicable.
| | Years Ended |
| | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Consolidated Statement of Operations Data | | | | | | | | | | | | | | | |
Sales, net | | $ | 22,014,140 | | | $ | 15,313,179 | | | $ | 10,160,964 | | | $ | 11,610,494 | | | $ | 8,112,610 | |
Cost of sales | | | 13,533,132 | | | | 9,987,514 | | | | 7,027,828 | | | | 9,335,057 | | | | 5,640,791 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 8,481,008 | | | | 5,325,665 | | | | 3,133,136 | | | | 2,275,437 | | | | 2,471,819 | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | 2,326,788 | | | | 2,136,584 | | | | 2,357,605 | | | | 5,520,141 | | | | 2,539,252 | |
Research and development | | | 891,601 | | | | 513,671 | | | | 134,040 | | | | 141,573 | | | | 96,788 | |
General and administrative | | | 7,416,451 | | | | 7,860,930 | | | | 4,982,976 | | | | 8,250,157 | | | | 7,700,018 | |
Loss from investment in affiliate | | | - | | | | 45,829 | | | | 44,961 | | | | - | | | | - | |
Operating expenses | | | 10,634,840 | | | | 10,557,014 | | | | 7,519,582 | | | | 13,911,871 | | | | 10,336,058 | |
| | | | | | | | | | | | | | | | | | | | |
Operating loss | | | (2,153,832 | ) | | | (5,231,349 | ) | | | (4,386,446 | ) | | | (11,636,434 | ) | | | (7,864,239 | ) |
| | | | | | | | | | | | | | | | | | | | |
Nonoperating income (expenses): | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 3,325 | | | | 2,013 | | | | 1,251 | | | | 3,014 | | | | 1,397 | |
Interest expense | | | (616,033 | ) | | | (158,849 | ) | | | (34,330 | ) | | | (29,006 | ) | | | (32,142 | ) |
Nonoperating expenses | | | (612,708 | ) | | | (156,836 | ) | | | (33,079 | ) | | | (25,992 | ) | | | (30,745 | ) |
| | | | | | | | | | | | | | | | | | | | |
Loss before income taxes | | | (2,766,540 | ) | | | (5,388,185 | ) | | | (4,419,525 | ) | | | (11,662,426 | ) | | | (7,894,984 | ) |
Provision for income taxes | | | (4,527 | ) | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (2,771,067 | ) | | $ | (5,388,185 | ) | | $ | (4,419,525 | ) | | $ | (11,662,426 | ) | | $ | (7,894,984 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Basic and Diluted loss per common share | | $ | (0.03 | ) | | $ | (0.05 | ) | | $ | (0.04 | ) | | $ | (0.13 | ) | | $ | (0.12 | ) |
| | | | | | | | | | | | | | | | | | | | |
Basic and Diluted weighted average | | | | | | | | | | | | | | | | | | | | |
common shares outstanding | | | 107,632,022 | | | | 106,459,379 | | | | 99,987,443 | | | | 90,268,802 | | | | 68,306,812 | |
| | At The End of Year |
| | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Consolidated Balance Sheet Data | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Cash | | $ | 5,549,672 | | | $ | 3,964,750 | | | $ | 2,261,336 | | | $ | 520,000 | | | $ | 420,152 | |
| | | | | | | | | | | | | | | | | | | | |
Working capital (1) | | | 4,400,432 | | | | 2,189,442 | | | | 1,602,008 | | | | 3,717,610 | | | | 1,379,025 | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | | 18,749,209 | | | | 11,516,847 | | | | 8,986,892 | | | | 9,034,521 | | | | 6,269,905 | |
| | | | | | | | | | | | | | | | | | | | |
Long term debt | | | 3,345,335 | | | | 1,977,113 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Total stockholders' equity | | $ | 5,274,674 | | | $ | 3,998,391 | | | $ | 5,665,451 | | | $ | 3,993,329 | | | $ | 2,561,286 | |
| | | | | | | | | | | | | | | | | | | | |
(1) Trade receivables plus inventories less accounts payable. | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended |
| | | 2015 | | | | 2014 | | | | 2013 | | | | 2012 | | | | 2011 | |
Consolidated Cash Flow Data | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net cash used in operating activities | | $ | (2,111,138 | ) | | $ | (2,580,406 | ) | | $ | (3,906,011 | ) | | $ | (10,119,713 | ) | | $ | (4,098,829 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | (647,731 | ) | | | 1,590,275 | | | | 998,651 | | | | (76,565 | ) | | | (176,663 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by financing activities | | $ | 4,343,791 | | | $ | 2,693,545 | | | $ | 4,648,696 | | | $ | 10,296,126 | | | $ | 2,469,185 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of financial condition and results of operation together with “Selected Financial Data,” the consolidated financial statements and the related notes appearingincluded elsewhere this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that impact our business. In particular, we encourage you to review the risks and uncertainties described in “Risk Factors” in Part I, Item 8 of1A in this report.Form 10-K. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends.
Overview
WeChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., Healthspan Research, LLC and ChromaDex Analytics, Inc. (collectively, the “Company” “ChromaDex” or, in the first person as “we” “us” and “our”) are a natural productsscience-based integrated nutraceutical company that leverage our complementary business unitsdevoted to improving the way people age. ChromaDex scientists partner with leading universities and research institutions worldwide to discover, acquire, develop and commercialize patentedcreate products to deliver the full potential of nicotinamide adenine dinucleotide ("NAD") and proprietaryits impact on human health. Our flagship ingredient, technologies that address the dietary supplement, food, beverage, skin careNIAGEN® nicotinamide riboside, a precursor to NAD sold directly to consumers as TRU NIAGEN®, is backed with clinical and pharmaceutical markets. In addition to our ingredient technologies unit, wescientific research, as well as intellectual property protection. The Company also have business units focusedhas analytical reference standards and services segment, which focuses 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 our relationships with leading universities and research institutions, we are able to discover and license early stage, intellectual property-backed ingredient technologies. We then utilize our in-house chemistry, regulatory and safety consulting business units to develop commercially viable ingredients. Our ingredient portfolio is backed by clinical and scientific research, as well as extensive intellectual property protection.consulting.
The discussion and analysis of our financial condition and results of operations are based on the ChromaDex financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues, if any, and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We anticipateDecember 31, 2018, cash and cash equivalents totaled approximately $22.6 million. The Company anticipates that ourits current cash, cash equivalents and cash to be generated from operations will be sufficient to meet ourits projected operating plans through at least March 18, 2017. Wethe next twelve months from the issuance date of this report. The Company may, however, seek additional capital prior to March 18, 2017,in the next twelve months, both to meet ourits projected operating plans after March 18, 2017the next twelve months and/or to fund ourits 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 for the twelve-month periods ended January 2, 2016, January 3, 2015 and December 28, 2013 were approximately $22,014,000, $15,313,000 and $10,161,000, respectively. We incurred a net loss of approximately $2,771,000, $5,388,000 and $4,420,000 for the twelve-month periods ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively. This equated to $0.03, $0.05 and $0.04 losses per basic and diluted share were $0.61 and $0.26 for the twelve-month periods ended January 2, 2016, January 3, 2015December 31, 2018 and December 28, 2013,30, 2017, respectively.
Over the next two years, we plan to continue to increase marketing, research and development efforts for our line of proprietary ingredients, subject to available financial resources. flagship ingredient, NIAGEN® nicotinamide riboside, and our consumer branded product TRU NIAGEN®.
(In thousands) | |
| | |
Sales | $31,557 | $21,201 |
Cost of sales | 15,502 | 10,724 |
Gross profit | 16,055 | 10,477 |
Operating expenses -Sales and marketing | 16,537 | 4,459 |
-Research and development | 5,478 | 4,007 |
-General and administrative | 27,137 | 17,642 |
-Other | 75 | 746 |
Nonoperating -Interest expense, net | (79) | (153) |
-Other | (65) | - |
Loss from continuing operations | (33,316) | (16,530) |
Income (loss) from discontinued operations, net | - | 5,152 |
Net loss | $(33,316) | $(11,378) |
| | Twelve months ending | |
| | Jan. 2, 2016 | | | Jan. 3, 2015 | | | Dec. 28, 2013 | |
Sales | | $ | 22,014,140 | | | $ | 15,313,179 | | | $ | 10,160,964 | |
Cost of sales | | | 13,533,132 | | | | 9,987,514 | | | | 7,027,828 | |
Gross profit | | | 8,481,008 | | | | 5,325,665 | | | | 3,133,136 | |
Operating expenses -Sales and marketing | | | 2,326,788 | | | | 2,136,584 | | | | 2,357,605 | |
-Research and development | | | 891,601 | | | | 513,671 | | | | 134,040 | |
-General and administrative | | | 7,416,451 | | | | 7,860,930 | | | | 4,982,976 | |
-Loss from investment in affiliate | | | - | | | | 45,829 | | | | 44,961 | |
Nonoperating -Interest income | | | 3,325 | | | | 2,013 | | | | 1,251 | |
-Interest expenses | | | (616,033 | ) | | | (158,849 | ) | | | (34,330 | ) |
Provision for income taxes | | | (4,527 | ) | | | - | | | | - | |
Net loss | | $ | (2,771,000 | ) | | $ | (5,388,185 | ) | | $ | (4,419,525 | ) |
Year Ended January 2, 2016 Compared to Year Ended January 3, 2015
Net Sales.Net sales consist of gross sales less discounts and returns.
| | Twelve months ending | | |
| | January 2, 2016 | | | January 3, 2015 | | | Change | | |
(In thousands) | | | | |
Net sales: | | | | | | | | | | |
Consumer Products | | $18,451 | $5,465 | 238% |
Ingredients | | $ | 12,542,000 | | | $ | 6,857,000 | | | | 83 | % | 8,565 | 11,153 | -23% |
Core standards and contract services | | | 8,419,000 | | | | 7,487,000 | | | | 12 | % | |
Scientific and regulatory consulting | | | 1,053,000 | | | | 969,000 | | | | 9 | % | |
Analytical reference standards and services | | 4,541 | 4,583 | -1% |
| | | | | | | | | | | | | |
Total net sales | | $ | 22,014,000 | | | $ | 15,313,000 | | | | 44 | % | $31,557 | $21,201 | 49% |
●
The Company's TRU NIAGEN® sales for consumer products segment increased after the Company's strategic shift towards consumer products in 2017. The Company expects the sales for the consumer products segment to continue to grow over the next twelve months.
●
The decrease in sales for the ingredients segment is mainly due to decreased sales of NIAGEN®. The Company made a strategic decision to transition from an ingredient company to a consumer-facing company that has resulted in a shift in our sales away from resellers of NIAGEN® to our TRU NIAGEN® branded consumer product
· | The increase in sales for the ingredients segment is due to increased sales throughout most of the ingredients we sell, with “NIAGEN®” contributing a majority of the increase.
|
· | 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 decrease in sales for the analytical reference standards and services segment is primarily due to decreased sales of regulatory consulting and other research and development services.
· | The increase in sales for the scientific and regulatory consulting segment is due to the timing of completion of consulting projects for customers. |
Cost of Sales. Costs of sales include raw materials, labor, overhead, and delivery costs.
| | Twelve months ending | | |
| | January 2, 2016 | | | January 3, 2015 | | |
(In thousands) | | | |
| | Amount | | | % of net sales | | | Amount | | | % of net sales | | | | | |
Cost of sales: | | | | | | | | | | | | | |
Consumer Products | | $7,222 | 39% | $2,190 | 40% |
Ingredients | | $ | 6,664,000 | | | | 53 | % | | $ | 4,257,000 | | | | 62 | % | 4,831 | 56% | 5,492 | 49% |
Core standards and contract services | | | 6,347,000 | | | | 75 | % | | | 5,141,000 | | | | 69 | % | |
Scientific and regulatory consulting | | | 522,000 | | | | 50 | % | | | 589,000 | | | | 61 | % | |
Analytical reference standards and services | | 3,449 | 76% | 3,042 | 66% |
| | | | | | | | | | | | | | | | | |
Total cost of sales | | $ | 13,533,000 | | | | 61 | % | | $ | 9,987,000 | | | | 65 | % | $15,502 | 49% | $10,724 | 51% |
The cost of sales, as a percentage of net sales, decreased 4%2%.
· | The decrease in cost of sales, as a percentage of net sales, for the ingredients segment is largely due to price reductions from our suppliers through increased purchase volumes. |
· | The increase in cost as a percentage of net sales for the core standards and contract services segment is mainly due to increased costs in fine chemical reference standards as we reduced the carrying values for the portion of the inventory that are considered slow-moving and obsolete. |
TableThe cost of Contentssales, as a percentage of net sales, for the consumer products segment decreased 1%. Compared to the other segments, the consumer products segment experienced better margins due to the positive impact of TRU NIAGEN® consumer product sales.
· | The percentage decrease in cost of sales for the scientific and regulatory consulting segment is largely due to higher utilizations of in-house consulting labor versus 3rd party consultants. |
●
The cost of sales, as a percentage of net sales, for the ingredients segment increased 7%. The increase is largely due to a write off of our inventory of approximately $442,000 in 2018.
●
The cost of sales, as a percentage of net sales for the analytical reference standards and services segment, increased 10%. The decrease in other research and development services sales led to a lower labor utilization rate, which resulted in increasing our cost of sales as a percentage of sales.
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.
| | Twelve months ending | | |
| | January 2, 2016 | | | January 3, 2015 | | | Change | | |
(In thousands) | | | | |
Gross profit: | | | | | | | | | | |
Consumer Products | | $11,229 | $3,275 | 243% |
Ingredients | | $ | 5,878,000 | | | $ | 2,600,000 | | | | 126 | % | 3,734 | 5,661 | -34% |
Core standards and contract services | | | 2,072,000 | | | | 2,346,000 | | | | -12 | % | |
Scientific and regulatory consulting | | | 531,000 | | | | 380,000 | | | | 40 | % | |
Analytical reference standards and services | | 1,092 | 1,541 | -29% |
| | | | | | | | | | | | | |
Total gross profit | | $ | 8,481,000 | | | $ | 5,326,000 | | | | 59 | % | $16,055 | $10,477 | 53% |
| | | | | | | | | | | | | |
· | The increased gross profit for the ingredients segment is due to the increased sales of the ingredient portfolio we offer, as well as lower prices from our suppliers as a result of increased purchase volumes. |
●
The consumer products segment posted gross profit of $11.2 million in 2018. The Company expects the sales and gross profit for consumer products segment to continue to grow over the next twelve months.
· | The decreased gross profit for the core standards and contract services segment is largely due to increased costs in fine chemical reference standards as we reduced the carrying values for the portion of the inventory that are considered slow-moving and obsolete. |
●
The decreased gross profit for the ingredients segment was largely due to a decrease in sales as the Company transitions from an ingredient company to a consumer driven nutraceutical company. In addition, we had a write off of our inventory of approximately $442,000 in 2018.
· | The increased gross profits for the scientific and regulatory consulting segment are largely due to higher utilizations of in-house consulting labor. |
●
The decreased gross profit for the analytical reference standards and services segment is largely due to the decreased sale of other research and development services. Fixed labor costs make up the majority of costs of other services and these fixed labor costs did not decrease in proportion to sales, hence yielding lower profit margin.
Operating Expenses – Sales and Marketing. Sales and Marketing Expenses consist of salaries, advertising and marketing expenses.
| | Twelve months ending | |
| | January 2, 2016 | | | January 3, 2015 | | | Change | |
Sales and marketing expenses: | | | | | | | | | |
Ingredients | | $ | 1,112,000 | | | $ | 1,081,000 | | | | 3 | % |
Core standards and contract services | | | 1,202,000 | | | | 976,000 | | | | 23 | % |
Scientific and regulatory consulting | | | 13,000 | | | | 80,000 | | | | -84 | % |
| | | | | | | | | | | | |
Total sales and marketing expenses | | $ | 2,327,000 | | | $ | 2,137,000 | | | | 9 | % |
| | | | | | | | | | | | |
· | For the ingredients segment, we were able to maintain sales and marketing expenses at a similar level to 2014 despite the significant increase in sales. We do anticipate some increased expenses going forward as we increase marketing efforts for our proprietary ingredients. |
| |
(In thousands) | | | |
Sales and marketing expenses: | | | |
Consumer Products | $15,063 | $2,673 | 464% |
Ingredients | 727 | 1,280 | -43% |
Analytical reference standards and services | 747 | 506 | 48% |
| | | |
Total sales and marketing expenses | $16,537 | $4,459 | 271% |
· | For the core standards and contract services segment, the increases are largely due to hiring additional sales and marketing staff and making certain operational changes. Wages and travel expenses for sales and marketing staff increased by approximately $164,000 in 2015, compared to 2014.● For the consumer products segment, the Company has increased staffing as well as direct marketing expenses associated with social media and other customer awareness and acquisition programs. The Company plans to continue to invest in building out our own global branded consumer product business. |
Table of ContentsFor the ingredients segment, the decrease in 2018 is largely due to decreased marketing efforts as the Company shifts towards consumer products.
· | For the scientific and regulatory consulting segment, we had significantly reduced sales and marketing expenses compared to 2014 and plan on continuing to do so in the future. |
●
For the analytical reference standards and services segment, the increase is mainly due to increased marketing efforts.
Operating Expenses – Research and Development. Research and Development Expenses mainly consist of clinical trials and process development expenses for our line of proprietary ingredients.expenses.
| | Twelve months ending | | |
(In thousands) | | | | |
Research and development expenses: | | |
Consumer Products | | $3,852 | $1,104 | 249% |
Ingredients | | 1,626 | 2,903 | -44% |
| | January 2, 2016 | | | January 3, 2015 | | | Change | | |
Research and development expenses: | | | | | | | | | | |
Ingredients | | $ | 892,000 | | | $ | 514,000 | | | | 74 | % | |
Total research and development expenses | | $5,478 | $4,007 | 37% |
· | All our research and development efforts are for the ingredients segment. In 2015, we increased our research and development efforts with a focus on our “NIAGEN®” brand.-39-
|
●
In 2017, we began allocating the research and development expenses related to our NIAGEN® branded ingredient to the consumer products and ingredients segment, based on revenues recorded. Previously, these expenses were recorded all in the ingredients segment. Overall, we increased our research and development efforts and we plan to continue to increase research and development efforts for our flagship ingredient, NIAGEN® nicotinamide riboside. In 2018, we focused on technology development to lower production costs as well as obtaining international regulatory approvals.
Operating Expenses – General and Administrative. General and Administrative Expenses consist of general company administration, IT, accounting and executive management.management expenses.
| | Twelve months ending | |
| | January 2, 2016 | | | January 3, 2015 | | | Change | |
| | | | | | | | | |
General and administrative | | $ | 7,416,000 | | | $ | 7,861,000 | | | | -6 | % |
| |
(In thousands) | | | |
| | | |
General and administrative | $27,137 | $17,642 | 54% |
The following expenses contributed to the increase in general and administrative expenses in 2018:
· | One of the factors that contributed to the decrease in general and administrative expenses was a decrease in share-based compensation. In 2015, our share-based compensation decreased to approximately $1,978,000, compared to approximately $2,917,000 in 2014. |
●
An increase in legal expenses. Our legal expenses increased to approximately $9.8 million in 2018 compared to approximately $5.1 million in 2017. The ongoing litigation with Elysium and our increased efforts to file and maintain patents related to the proprietary ingredient technologies were the main reasons for the increase in legal expenses.
●
An increase in share-based compensation. Our share-based compensation recorded as general and administrative expense increased to approximately $5.6 million in 2018 compared to approximately $4.6 million in 2017.
●
An increase in information and technology expense. Our information and technology expense increased to approximately $1.5 million in 2018, compared to approximately $0.8 million in 2017. We invested in additional staff as well as external consulting in developing and maintaining our Ecommerce platform, which we use to sell our branded consumer product TRU NIAGEN®.
●
An increase in royalties we paid to patent holders. Our royalty expense increased to approximately $1.6 million in 2018, compared to approximately $0.9 million in 2017. The increases are due to increased sales for licensed products in 2018.
Operating Expenses – Other. Other expense consists of reserve placed against escrow receivable and loss from an ongoing litigation with Elysium.
| |
(In thousands) | | | |
| | | |
Other | $75 | $746 | -90% |
●
In 2014, we had higher share-based compensation expenses as we awarded an aggregate of 1,090,000 shares of restricted stock2017, in relation to the Company’s officers and membersongoing litigation, the Company incurred a write-off of approximately $746,000 in gross trade receivable from Elysium related to royalties billed as part of the board of directors. The fair values of these restricted stock awards were approximately $1,537,000 in aggregate, which were expensed over a period of six months from January 2, 2014 to July 1, 2014.existing Trademark License and Royalty Agreement.
Nonoperating – Interest Income. Interest income consists of interest earned on money market accounts. Interest income for the twelve-month period ended January 2, 2016, was approximately $3,000, a slight increase compared to approximately $2,000 for the twelve-month period ended January 3, 2015.
Nonoperating – Interest Expense.Expense, net. Interest expense, net consists of interest on loan payable and capital leases.leases offset by interest income.
| | Twelve months ending | |
| | January 2, 2016 | | | January 3, 2015 | | | Change | |
| | | | | | | | | |
Interest expense | | $ | 616,000 | | | $ | 159,000 | | | | 287 | % |
| |
(In thousands) | | | |
| | | |
Interest expense, net | $79 | $153 | -48% |
· | The increase in interest expense was mainly related to the Term Loan Agreement dated September 29, 2014, between the Company and Hercules Technology II, L.P, which the Company drew down first $2.5 million on September 29, 2014 and second $2.5 million on June 18, 2015. For more information on this term loan, please refer to Note 7 of Financial Statements appearing in Part II, Item 8 of this report. |
Depreciation and Amortization.For the twelve-month period ended January 2, 2016,December 31, 2018, we recorded approximately $286,000$0.6 million in depreciation compared to approximately $223,000$0.5 million for the twelve-month period ended January 3, 2015.December 30, 2017. We depreciate our assets on a straight-line basis, based on the estimated useful lives of the respective assets. We amortize intangible assets using a straight-line method, generally over 10 years. For licensed patent rights, the useful lives are 10 years or the remaining term of the patents underlying licensing rights, whichever is shorter. The useful lives of subsequent milestone payments that are capitalized are the remaining useful life of the initial licensing payment that was capitalized. In the twelve-month period ended January 2, 2016,December 31, 2018, we recorded amortization on intangible assets of approximately $45,000$0.2 million compared to approximately $36,000$0.2 million for the twelve-month period ended January 3, 2015.December 30, 2017.
Income Taxes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At January 2, 2016December 31, 2018 and January 3, 2015,December 30, 2017, the Company maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of 0.2% for 2015 and 0% for 2014.each of 2018 and 2017. As defined in ASC 740, Income Taxes, future realization of the tax benefit will depend on the existence of sufficient taxable income, including the expectation of continued future taxable income.
Net cash used in operating activities.Net cash used in operating activities for the twelve-month period ended January 2, 2016December 31, 2018 was approximately $2,111,000$20.9 million as compared to approximately $2,580,000$9.8 million for the twelve-month period ended January 3, 2015.December 30, 2017. Along with the net loss, an increase in inventories and trade receivables werewas the largest usesuse of cash during the twelve-month period ended January 2, 2016.December 31, 2018. Net cash used in operating activities for the twelve-month period ended January 3, 2015December 30, 2017 largely reflects increasea decrease in inventories, trade receivablesaccounts payable along with the net loss, as well.loss.
We expect our operating cash flows to fluctuate significantly in future periods as a result of fluctuations in our operating results, shipment timetables, accounts receivable collections, inventory management, and the timing of our payments, among other factors.
Net cash provided by (used in) investing activities. Net cash used in investing activities. Net cash used by investing activities was approximately $648,000$1.8 million for the twelve-month period ended January 2, 2016,December 31, 2018, compared to approximately $1,590,000$4.6 million provided by for the twelve-month period ended January 3, 2015.December 30, 2017. Net cash used inby investing activities for the twelve-month period ended January 2, 2016December 31, 2018, mainly consisted of purchases of leasehold improvements and equipment and intangible assets.assets, as well as a long-term related party investment. Net cash provided by investing activities for the twelve-month period ended January 3, 2015 principallyDecember 30, 2017, mainly consisted of proceeds received from unrelated third parties from the assignmentdisposal of the Senior Noteassets, offset by purchases of leasehold improvements and the sale of the Preferred Shares. NeutriSci originally issued the Senior Noteequipment and the Preferred Shares to the Company as a part of the consideration for the purchase of BluScience product line.intangible assets.
Net cash provided by financing activities.Net cash provided byused in financing activities was approximately $4,344,000$90,000 for the twelve-month period ended January 2, 2016,December 31, 2018, compared to approximately $2,694,000$48.9 million provided financing activities for the twelve-month period ended January 3, 2015.December 30, 2017. Net cash used in financing activities for 2018 primarily consisted of repurchase of common stock and principal payments on capital leases, partially offset by proceeds from the exercise of stock options. Net cash provided by financing activities for the twelve-month period ended January 2, 20162017 mainly consisted of proceeds from the 2nd draw of the term loan we entered into with Hercules Technology II, L.P, as well as proceeds from issuanceissuances of our common stock and warrants through a private offering to our existing stockholders. Net cash providedexercise of stock options, offset by financing activities for the twelve-month period ended January 3, 2015 mainly consisted of proceeds from the loan we entered into with Hercules Technology II, L.P.principal payments on capital leases.
Trade Receivables. As of January 2, 2016,December 31, 2018, we had approximately $2,451,000$4.4 million in trade receivables as compared to approximately $1,907,000$5.3 million as of January 3, 2015. This increase was largely due to the increase in our ingredients segment sales.December 30, 2017.
Inventories. As of January 2, 2016,December 31, 2018, we had approximately $8,174,000$8.2 million in inventory, compared to approximately $3,734,000$5.8 million as of January 3, 3015. This increase was mainly due to increase in inventory for the ingredients business segment, as we were able to obtain a favorable purchase price from the supplier by increasing the purchase volume.December 30, 2017. As of January 2, 2016,December 31, 2018, our inventory consisted of approximately $7,174,000$2.3 million of bulk ingredients, approximately $5.2 million of consumer products and approximately $1,000,000$0.7 million of phytochemical reference standards. Bulk ingredients are proprietary compounds sold to customers in larger quantities, typically in kilograms. These ingredients are used by our customers in the dietary supplement, food and beverage, animal health, cosmetic and pharmaceutical industries to manufacture their final products. Consumer products inventory consists of TRU NIAGEN® branded finished bottles of dietary supplement products and related work-in-process inventory. Phytochemical reference standards are small quantities of plan-based compounds typically used to research an array of potential attributes or for quality control purposes. The Company has approximately 5,000 defined standardscurrently lists over 1,500 phytochemicals and 300 botanical reference materials in our catalog and holds a lot of these standards as inventory in small quantities, mostly in grams and milligrams.
Our normal operating cycle for reference standards is currently longer than one year. Due to the large number of different items we carry, certain groups of these reference standards have a sales frequency that is slower than others and varies greatly year to year. In addition, for certain reference standards, the cost saving is advantageous when purchased in larger quantities and we have taken advantage of such opportunities when available. Such factors have resulted in an operating cycle to be more than one year on average. The Company gains competitive advantage through the broad offering of reference standards and it is critical for the Company to continue to expand its library of reference standards it offers for the growth of business. Nevertheless, the Company has recently made changes in its reference standards inventory purchasing practice, which the management believes will result in an improved turnover rate and shorter operating cycle without impacting our competitive advantage.
The Company regularly reviews inventories on hand and reduces the carrying value for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The reduction of the carrying value for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.
We strive to optimize our supply chain as we constantly search for better and more reliable sources and suppliers of bulk ingredients and phytochemical reference standards.suppliers. By doing so, we believe we can lower the costs of our inventory which we can then pass along the savings to our customers.and yield higher gross profit. In addition, we are working with our suppliers and partners to develop more efficient manufacturing methods of the raw materials, in an effort to lower the costs of our inventory.
Accounts Payable. As of January 2, 2016,December 31, 2018, we had $6,224,000$9.5 million in accounts payable compared to approximately $3,452,000$3.7 million as of January 3, 2015. ThisDecember 30, 2017. The increase was primarilymainly due the purchase ofto an increase in inventory for our ingredients business segment and reflects the timing of payments related.higher advertising and legal expenses.
Advances from CustomersContract liabilities and customer deposits. As of January 2, 2016,December 31, 2018, we had approximately $272,000$0.3 million in advances from customerscontract liabilities and customer deposits compared to approximately $243,000$0.3 million as of January 3, 2015.December 30, 2017. These advancesdeposits are for large-scale consulting projects, contract services and contract research projects where we require a deposit before beginning work. This increase was due to obtaining more of such large-scale projects during the 2nd half of the twelve-month period ended January 2, 2016.
Year Ended January 3, 2015 Compared to Year Ended December 28, 2013
Net Sales. Net sales consist of gross sales less discounts and returns.
| | Twelve months ending | |
| | January 3, 2015 | | | December 28, 2013 | | | Change | |
Net sales: | | | | | | | | | |
Ingredients | | $ | 6,857,000 | | | $ | 2,430,000 | | | | 182 | % |
Core standards and contract services | | | 7,487,000 | | | | 6,644,000 | | | | 13 | % |
Scientific and regulatory consulting | | | 969,000 | | | | 1,147,000 | | | | -16 | % |
Other | | | - | | | | (60,000 | ) | | | -100 | % |
| | | | | | | | | | | | |
Total net sales | | $ | 15,313,000 | | | $ | 10,161,000 | | | | 51 | % |
| | | | | | | | | | | | |
· | The increase in sales for the ingredients segment was due to increased sales of most of the ingredients we sell, “NIAGEN®” in particular, which we launched in the third quarter of 2013. |
· | The increase in sales for the core standards and contract services segment was due to increased sales of both phytochemical reference standards and contract services. |
· | The decrease in sales for the scientific and regulatory consulting segment was due to our having completed fewer consulting projects in 2014, than in 2013. |
· | In 2013, we had net sales of approximately ($60,000) related to our BluScience retail consumer line, which is represented as “Other” in the above table. On March 28, 2013, the Company entered into an asset purchase and sale agreement with NeutriSci International Inc. and consummated the sale of BluScience product line to NeutriSci. |
Cost of Sales. Costs of sales include raw materials, labor, overhead, and delivery costs.
| | Twelve months ending | |
| | January 3, 2015 | | | December 28, 2013 | |
| | Amount | | | % of net sales | | | Amount | | | % of net sales | |
Cost of sales: | | | | | | | | | | | | |
Ingredients | | $ | 4,257,000 | | | | 62 | % | | $ | 1,501,000 | | | | 62 | % |
Core standards and contract services | | | 5,141,000 | | | | 69 | % | | | 4,894,000 | | | | 74 | % |
Scientific and regulatory consulting | | | 589,000 | | | | 61 | % | | | 632,000 | | | | 55 | % |
Other | | | - | | | | - | | | | 1,000 | | | | -2 | % |
| | | | | | | | | | | | | | | | |
Total cost of sales | | $ | 9,987,000 | | | | 65 | % | | $ | 7,028,000 | | | | 69 | % |
| | | | | | | | | | | | | | | | |
· | The cost of sales as a percentage of net sales for the ingredients segment was identical at 62% for both 2014 and 2013. |
· | The decrease in cost of sales as a percentage of net sales for the core standards and contract services segment was largely due to increased sales in analytical testing and contract services area, which the sales increased about 13% in 2014 compared to 2013. Fixed labor costs make up the majority of costs for analytical testing and contract services and these fixed labor costs did not increase in proportion to sales. |
· | The increase in cost of sales as a percentage of net sales for the scientific and regulatory consulting segment was largely due to completing fewer consulting projects during 2014 than during 2013. |
· | In 2013, we had cost of sales of approximately $1,000 related to our BluScience retail consumer line, which is represented as “Other” in the above table. On March 28, 2013, the Company entered into an asset purchase and sale agreement with NeutriSci International Inc. and consummated the sale of BluScience product line to NeutriSci.
|
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.
| | Twelve months ending | |
| | January 3, 2015 | | | December 28, 2013 | | | Change | |
Gross profit: | | | | | | | | | |
Ingredients | | $ | 2,600,000 | | | $ | 929,000 | | | | 180 | % |
Core standards and contract services | | | 2,346,000 | | | | 1,750,000 | | | | 34 | % |
Scientific and regulatory consulting | | | 380,000 | | | | 515,000 | | | | -26 | % |
Other | | | - | | | | (61,000 | ) | | | -100 | % |
| | | | | | | | | | | | |
Total gross profit | | $ | 5,326,000 | | | $ | 3,133,000 | | | | 70 | % |
· | The increased sales throughout our ingredient portfolio, especially for our recently launched “NIAGEN®” was the main factor for the increase in gross profit for the ingredients segment. |
· | The increased sales of analytical testing and contract services which resulted in a higher labor utilization rate as well as increased fixed cost coverage, was the primary reason for the increase in gross profit for the core standards and contract services segment. |
· | For the scientific and regulator consulting segment, the decrease in sales which resulted in a lower labor utilization rate was the reason for the decrease in gross profit. |
· | In 2013, we had gross profit of approximately ($61,000) related to our BluScience retail consumer line, which is represented as “Other” in the above table. On March 28, 2013, the Company entered into an asset purchase and sale agreement with NeutriSci International Inc. and consummated the sale of BluScience product line to NeutriSci. |
Operating Expenses – Sales and Marketing. Sales and Marketing Expenses consist of salaries, advertising and marketing expenses.
| | Twelve months ending | |
| | January 3, 2015 | | | December 28, 2013 | | | Change | |
Sales and marketing expenses: | | | | | | | | | |
Ingredients | | $ | 1,081,000 | | | $ | 752,000 | | | | 44 | % |
Core standards and contract services | | | 976,000 | | | | 1,460,000 | | | | -33 | % |
Scientific and regulatory consulting | | | 80,000 | | | | 15,000 | | | | 433 | % |
Other | | | - | | | | 131,000 | | | | -100 | % |
| | | | | | | | | | | | |
Total sales and marketing expenses | | $ | 2,137,000 | | | $ | 2,358,000 | | | | -9 | % |
| | | | | | | | | | | | |
· | For the ingredients segment, the increase was largely due to increased marketing efforts for our line of proprietary ingredients. |
· | For the core standards and contract services segment, the decrease was largely due to reduction of sales and marketing staff and a decrease in marketing and advertising spend. |
· | For the scientific and regulatory consulting segment, the increase was largely due to our increased marketing efforts to raise the awareness of our consulting services within the industry. |
· | In 2013, we had sales and marketing expenses of approximately $131,000 related to our BluScience retail consumer line, which are represented as “Other” in the above table. On March 28, 2013, the Company entered into an asset purchase and sale agreement with NeutriSci International Inc. and consummated the sale of BluScience product line to NeutriSci. |
Operating Expenses – Research and Development. Research and Development Expenses mainly consist of clinical trials and process development expenses for our line of proprietary ingredients.
| | Twelve months ending | |
| | January 3, 2015 | | | December 28, 2013 | | | Change | |
Research and development expenses: | | | | | | | | | |
Ingredients | | $ | 514,000 | | | $ | 134,000 | | | | 284 | % |
· | All our research and development efforts are for the ingredients segment. In 2014, we significantly increased our research and development efforts for our line of proprietary ingredients compared to 2013. In 2014, we conducted safety studies related to our “NIAGEN®” as well as a human clinical trial study on “PURENERGY®.”
|
Operating Expenses – General and Administrative. General and Administrative Expenses consist of general company administration, IT, accounting and executive management.
| | Twelve months ending | |
| | January 3, 2015 | | | December 28, 2013 | | | Change | |
| | | | | | | | | |
General and administrative | | $ | 7,861,000 | | | $ | 4,983,000 | | | | 58 | % |
· | One of the factors that contributed to this increase was an increase in share-based compensation expense. Our share-based compensation expense for the twelve-month period ended January 3, 2015 was approximately $2,917,000 as compared to approximately $1,288,000 for the twelve-month period ended December 28, 2013. During the twelve-month period ended January 3, 2015, the Company recognized expenses for the 1,090,000 shares of restricted stock granted to the Company’s officers and members of the board of directors, which resulted in the increase in share-based compensation expenses. |
· | Another factor that contributed to the increase was an increase in expenses related to the patents we license, including maintenance, consulting, filing and related royalty expenses. Our patent related expenses increased to approximately $815,000 as compared to $294,000 for the twelve-month period ended December 28, 2013. |
· | In addition, during the twelve-month period ended January 3, 2015, there was an increase of approximately $176,000 in wages and related expenses as a result of hiring additional personnel to support our operations. There was also one-time expense for $125,000 during the twelve-month period ended January 3, 2015, which we have paid as a settlement fee to a certain claimant. |
Nonoperating – Interest Income. Interest income consists of interest earned on money market accounts. Interest income for the twelve-month period ended January 3, 2015, was approximately $2,000 as compared to $1,000 for the twelve-month period ended December 28, 2013.
Nonoperating – Interest Expense. Interest expense consists of interest on loan payable and capital leases.
| | Twelve months ending | |
| | January 3, 2015 | | | December 28, 2013 | | | Change | |
| | | | | | | | | |
Interest expense | | $ | 159,000 | | | $ | 34,000 | | | | 368 | % |
· | The increase was largely related to the Loan Agreement the Company entered into with Hercules Technology II, L.P., which the Company has drawn down $2.5 million on September 29, 2014. |
Depreciation and Amortization. For the twelve-month period ended January 3, 2015, we recorded approximately $223,000 in depreciation compared to approximately $246,000 for the twelve-month period ended December 28, 2013. In the twelve-month period ended January 3, 2015, we recorded amortization on intangible assets of approximately $36,000 compared to approximately $24,000 for the twelve-month period ended December 28, 2013.
Income Taxes. At January 3, 2015 and December 28, 2013, the Company maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of zero for 2014 and 2013.
Net cash used in operating activities. Net cash used in operating activities for the twelve-month period ended January 3, 2015 was approximately $2,580,000 as compared to approximately $3,906,000 for the twelve-month period ended December 28, 2013. Along with the net loss, an increase in inventories and trade receivables were the largest uses of cash during the twelve-month period ended January 3, 2015. Net cash used in operating activities for the twelve-month period ended December 28, 2013 largely reflects decrease in accounts payable and increase in inventories, along with the net loss.
Net cash provided by investing activities. Net cash provided by investing activities was approximately $1,590,000 for the twelve-month period ended January 3, 2015, compared to approximately $999,000 for the twelve-month period ended December 28, 2013. Net cash provided by investing activities for the twelve-month period ended January 3, 2015 mainly consisted of proceeds received from unrelated third parties from the assignment of the Senior Note and the sale of the Preferred Shares. NeutriSci originally issued the Senior Note and the Preferred Shares to the Company as a part of the consideration for the purchase of BluScience product line. Net cash provided investing activities for the twelve-month period ended December 28, 2013 mainly consisted of cash consideration received from NeutriSci from the sale of BluScience product line as well as a repayment received from the Senior Note issued by NeutriSci.
Net cash provided by financing activities. Net cash provided by financing activities was approximately $2,694,000 for the twelve-month period ended January 3, 2015, compared to approximately $4,649,000 for the twelve-month period ended December 28, 2013. Net cash provided by financing activities for the twelve-month period ended January 3, 2015 mainly consisted of proceeds from the loan we entered into with Hercules Technology II, L.P. Net cash provided by financing activities for the twelve-month period ended December 28, 2013 mainly consisted of proceeds from issuance of our common stock through a private offering as well as from the exercise of warrants.
LiquidityLiquidity and Capital Resources
For the twelve-month periods ended January 2, 2016, January 3, 2015December 31, 2018, and December 28, 2013,30, 2017, the Company has incurred operating losses from continuing operations of approximately $2,154,000, $5,231,000$33.3 million and $4,386,000,$16.5 million, respectively. Net cash used in operating activities for the twelve-month periods ended January 2, 2016, January 3, 2015December 31 2018, and December 28, 201330, 2017, was approximately $2,111,000, $2,580,000$20.9 million and $3,906,000,$9.8 million, respectively. The losses and the uses of cash 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.placements.
Our Board of Directors periodically reviews our capital requirements in light of our proposed business plan. Our future capital requirements will remain dependent upon a variety of factors, including cash flow from operations, the ability to increase sales, increasing our gross profits from current levels, reducing sales and administrative expenses as a percentage of net sales, continued development of customer relationships, and our ability to market our new products successfully. However, based on our results from operations, we may determine that we need additional financing to implement our business plan. Additional financing may come from public and private equity or debt offerings, borrowings under lines of credit or other sources. These additional funds may not be available on favorable terms, or at all. There can be no assurance that any such financingwe will be available on terms favorable to us or at all.successful in raising these additional funds. Without adequate financing we may have to further delay or terminate product or service expansion plans. Any inability to raise additional financing would have a material adverse effect on us.
While we anticipateDecember 31, 2018, the cash and cash equivalents totaled approximately $22.6 million. The Company anticipates that ourits current cash, cash equivalents and cash to be generated from operations will be sufficient to meet ourits projected operating plans through at least March 18, 2017, wethe next twelve months from the issuance date of this report. The Company may, however, seek additional capital prior to March 18, 2017,within the next twelve months, both to meet ourits projected operating plans through and after March 18, 2017 andthe next twelve months and/or to fund ourits longer term strategic objectives. To the extent we are unable to raise additional cash or generate sufficient revenue to meet our projected operating plans prior to March 18, 2017, we will revise our projected operating plans accordingly.
Dividend Policy
We have not declared or paid any cash dividends on our common stock. We presently intend to retain earnings for use in our operations and to finance our business. Any change in our dividend policy is within the discretion of our board of directors and will depend, among other things, on our earnings, debt service and capital requirements, restrictions in financing agreements, if any, business conditions, legal restrictions and other factors that our board of directors deems relevant.
Off-Balance Sheet Arrangements
During the fiscal years ended January 2, 2016December 31, 2018 and January 3, 2015,December 30, 2017, we had no off-balance sheet arrangements other than ordinary operating leases as disclosed in the accompanying financial statements.
Contractual Obligations and Commitments.Commitments
The following table summarizes our contractual obligations and other commitments as of January 2, 2016:December 31, 2018:
| | Payments due by period | | |
(In thousands) | | | | | | | |
| | Total | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | |
| | | | | | | | | | | | | | | | | | | |
Loan payable | | $ | 5,188,000 | | | $ | 1,370,000 | | | $ | 1,992,000 | | | $ | 1,826,000 | | | $ | - | | | $ | - | | |
Capital leases | | | 754,000 | | | | 268,000 | | | | 247,000 | | | | 198,000 | | | | 41,000 | | | | - | | $340 | $196 | $126 | $18 | $- |
Operating leases | | | 994,000 | | | | 355,000 | | | | 225,000 | | | | 233,000 | | | | 181,000 | | | | - | | 2,428 | 787 | 733 | 627 | 138 | 143 |
Purchase obligations | | | 4,228,000 | | | | 3,592,000 | | | | 636,000 | | | | - | | | | - | | | | - | | 4,365 | - |
Total | | $ | 11,164,000 | | | $ | 5,585,000 | | | $ | 3,100,000 | | | $ | 2,257,000 | | | $ | 222,000 | | | $ | - | | $7,133 | $5,348 | $859 | $645 | $138 | $143 |
Loan payable.
We have entered into a Loan and Security Agreement with Hercules Technology II, L.P. The $5 million term loan, on which only interest is due through March 31, 2016, will begin to amortize in installment payments of principal and interest starting in April 2016 and continuing through April 2018. There is also an additional $187,500 end of term charge we will be required to pay.
Capital leases. We lease equipment under capitalized lease obligations with a term of typically 4 or 5 years. We make monthly instalmentinstallment payments for these leases.
Operating leases. We lease our office and research facilities in California, Colorado and Maryland under operating lease agreements that expire onat various dates from April 2016September 2019 through September 2019.February 2024. We make monthly payments on these leases.
Purchase obligations. We enter into purchase obligations with various vendors for goods and services that we need for our operations. The purchase obligations for goods and services include inventory, research and development, and outsourced laboratory services.supplies.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates, including those related to the valuation of share-based payments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that of ourOur significant accounting policies which are described in Note 2 of the Financial Statements, set forth in Item 8 of this Form 10-K.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Financial Statements and Supplementary Data
The financial statements are set forth in the followingpages listed below.
| Page |
Reports of Independent Registered Public Accounting Firm | 46 |
Consolidated Balance Sheets at December 31, 2018 and December 30, 2017 | 48 |
Consolidated Statements of Operations for the Years Ended December 31, 2018 and December 30, 2017 | 49 |
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and December 30, 2017 | 50 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and December 30, 2017 | 51 |
Notes to Consolidated Financial Statements | 52 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
ChromaDex Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ChromaDex Corporation and Subsidiaries (the “Company”) as of December 31, 2018 and December 30, 2017, the related consolidated statements of operations,stockholders’ equity and cash flows for each of the two years in the period ended December 31 2018, and the related notes(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and December 30, 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 7, 2019, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Marcum llp
/s/ Marcum LLP
We have served as the Company’s auditor since 2013.
New York, NY
March 7, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors of
ChromaDex Corporation
Opinion on Internal Control over Financial Reporting
We have audited ChromaDex Corporation's (the “Company”) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of December 31, 2018 and December 30, 2017 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years then ended of the Company and our report dated March 7, 2019 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.
/s/ Marcum LLP
Marcum llp
New York, NY
March 7, 2019
ChromaDex Corporation and Subsidiaries
| | |
Consolidated Balance Sheets | | |
December 31, 2018 and December 30, 2017 | | |
(In thousands, except per share data) | | |
| | |
| | |
Assets | | |
| | |
Current Assets | | |
Cash, including restricted cash of $0.2 million and $0, respectively | $22,616 | $45,389 |
Trade receivables, net of allowances of $0.5 million and $0.7 million, respectively; | | |
Receivables from Related Party: $0.7 million and $1.0 million, respectively | 4,359 | 5,338 |
Contract assets | 56 | - |
Receivable held at escrow, net of allowance of $0.1 million | 677 | - |
Inventories | 8,249 | 5,796 |
Prepaid expenses and other assets | 577 | 655 |
Total current assets | 36,534 | 57,178 |
| | |
Leasehold Improvements and Equipment, net | 3,585 | 2,872 |
Deposits | 243 | 272 |
Receivable Held at Escrow | - | 750 |
Intangible Assets, net | 1,547 | 1,652 |
Other Long-term Assets
| 323 | - |
| | |
Total assets | $42,232 | $62,724 |
| | |
Liabilities and Stockholders' Equity | | |
| | |
Current Liabilities | | |
Accounts payable | $9,548 | $3,719 |
Accrued expenses | 4,313 | 3,645 |
Current maturities of capital lease obligations | 173 | 196 |
Contract liabilities and customer deposits | 275 | 314 |
Deferred rent, current | 131 | 114 |
Due to officer | - | 100 |
Total current liabilities | 14,440 | 8,088 |
| | |
Capital Lease Obligations, Less Current Maturities | 137 | 310 |
Deferred Rent, Less Current | 477 | 492 |
| | |
Total liabilities | 15,054 | 8,890 |
| | |
Commitments and Contingencies | | |
| | |
Stockholders' Equity | | |
Common stock, $.001 par value; authorized 150,000 shares; | | |
issued and outstanding December 31, 2018 55,089 shares and | | |
December 30, 2017 54,697 shares | 55 | 55 |
Additional paid-in capital | 116,876 | 110,380 |
Accumulated deficit | (89,753) | (56,601) |
Total stockholders' equity | 27,178 | 53,834 |
| | |
Total liabilities and stockholders' equity | $42,232 | $62,724 |
See Notes to Consolidated Financial Statements.
ChromaDex Corporation and Subsidiaries | | |
| | |
Consolidated Statements of Operations | | |
Years Ended December 31, 2018 and December 30, 2017 | | |
(In thousands, except per share data) | | |
| | |
| | |
| | |
Sales, net | $31,557 | $21,201 |
Cost of sales | 15,502 | 10,724 |
| | |
Gross profit | 16,055 | 10,477 |
| | |
Operating expenses: | | |
Sales and marketing | 16,537 | 4,459 |
Research and development | 5,478 | 4,007 |
General and administrative | 27,137 | 17,642 |
Other | 75 | 746 |
Operating expenses | 49,227 | 26,854 |
| | |
Operating loss | (33,172) | (16,377) |
| | |
Nonoperating expense: | | |
Interest expense, net | (79) | (153) |
Other | (65) | - |
Nonoperating expenses | (144) | (153) |
| | |
Loss from continuing operations | (33,316) | (16,530) |
| | |
Loss from discontinued operations | - | (315) |
Gain on sale of discontinued operations | - | 5,467 |
Income from discontinued operations, net | - | 5,152 |
| | |
Net loss | $(33,316) | $(11,378) |
| | |
Basic and diluted earnings (loss) per common share: | | |
Loss from continuing operations | $(0.61) | $(0.37) |
Earnings from discontinued operations | $- | $0.11 |
| | |
Basic and diluted loss per common share | $(0.61) | $(0.26) |
| | |
Basic and diluted weighted average common shares outstanding | 55,006 | 44,599 |
See Notes to Consolidated Financial Statements.
ChromaDex Corporation and Subsidiaries | | | | | |
Consolidated Statement of Stockholders' Equity | | | | | |
Years Ended December 31, 2018 and December 30, 2017 | | | | |
(In thousands) | | | | | |
| | | | | |
| | | | | |
| | | | |
| | | | | |
| | | | | |
Balance, December 31, 2016 | 37,545 | $37 | $55,160 | $(45,223) | $9,974 |
| | | | | |
Issuance of common stock, net of | | | | | |
offering costs of $1,420 | 15,593 | 16 | 47,579 | - | 47,595 |
| | | | | |
Exercise of stock options | 885 | 1 | 3,037 | - | 3,038 |
| | | | | |
Vested restricted stock | 674 | 1 | (1) | - | - |
| | | | | |
Share-based compensation | | | 4,605 | - | 4,605 |
| | | | | |
Net loss | - | - | - | (11,378) | (11,378) |
| | | | | |
Balance, December 30, 2017 | 54,697 | $55 | $110,380 | $(56,601) | $53,834 |
| | | | | |
Adjustment to retained earnings: | | | | | |
cumulative effect of initially applying ASC 606 | - | - | - | 164 | 164 |
| | | | | |
Exercise of stock options | 132 | - | 529 | - | 529 |
| | | | | |
Repurchase of common stock | (75) | - | (404) | - | (404) |
| | | | | |
Vested restricted stock | 2 | - | - | - | - |
| | | | | |
Share-based compensation | 333 | - | 6,371 | - | 6,371 |
| | | | | |
Net loss | - | - | - | (33,316) | (33,316) |
| | | | | |
Balance, December 31, 2018 | 55,089 | $55 | $116,876 | $(89,753) | $27,178 |
See Notes to Consolidated Financial Statements.
ChromaDex Corporation and Subsidiaries | | |
| | |
Consolidated Statements of Cash Flows | | |
Years Ended December 31, 2018 and December 30, 2017 | | |
(In thousands) | | |
| | |
| | |
| | |
Cash Flows From Operating Activities | | |
Net loss | $(33,316) | $(11,378) |
Adjustments to reconcile net loss to net cash used in operating activities: | | |
Depreciation of leasehold improvements and equipment | 607 | 510 |
Amortization of intangibles | 235 | 206 |
Share-based compensation expense | 6,371 | 4,605 |
Allowance for doubtful trade receivables | (132) | (411) |
Gain from disposal of assets | - | (5,467) |
Loss from disposal of equipment | 1 | 5 |
Non-cash financing costs | 70 | 121 |
Other Non-cash expense | 65 | - |
Changes in operating assets and liabilities: | | |
Trade receivables | 1,111 | 937 |
Inventories | (2,453) | 2,177 |
Prepaid expenses and other assets | 65 | (296) |
Accounts payable | 5,829 | (2,364) |
Accrued expenses | 668 | 1,472 |
Customer deposits and other | 69 | (68) |
Deferred rent | 2 | 180 |
Due to officer | (100) | (33) |
Net cash used in operating activities | (20,908) | (9,804) |
| | |
Cash Flows From Investing Activities | | |
Proceeds from disposal of assets, net of transaction costs | - | 5,953 |
Purchases of leasehold improvements and equipment | (1,321) | (1,167) |
Purchases of intangible assets | (131) | (184) |
Investment in other long-term assets
| (323) | - |
Net cash (used in) provided by investing activities | (1,775) | 4,602 |
| | |
Cash Flows From Financing Activities | | |
Proceeds from issuance of common stock, net of issuance costs | - | 46,594 |
Proceeds from exercise of stock options | 529 | 3,038 |
Repurchase of common stock | (404) | - |
Payment of debt issuance costs | (19) | (75) |
Principal payments on capital leases | (196) | (608) |
Net cash (used in) provided by financing activities | (90) | 48,949 |
| | |
Net increase (decrease) in cash | (22,773) | 43,747 |
| | |
Cash Beginning of Year | 45,389 | 1,642 |
| | |
Cash Ending of Year, including restricted cash $0.2 million for 2018 | $22,616 | $45,389 |
| | |
Supplemental Disclosures of Cash Flow Information | | |
Cash payments for interest | $41 | $57 |
| | |
Supplemental Schedule of Noncash Operating Activity | | |
Adjustment to retained earnings - cumulative effect of initially applying ASC 606 | $164 | $- |
| | |
Supplemental Schedule of Noncash Investing Activity | | |
Noncash consideration transferred for the acquisition of Healthspan Research LLC | $- | $1,187 |
Capital lease obligation incurred for the purchase of equipment | $- | $515 |
Receivable from disposal of assets held at escrow | $- | $750 |
Retirement of fully depreciated equipment - cost | $- | $57 |
Retirement of fully depreciated equipment - accumulated depreciation | $- | $(57) |
See Notes to Consolidated Financial Statements.
Note 1.
Nature of Business and Liquidity
Nature of business: ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., Healthspan Research, LLC and ChromaDex Analytics, Inc. (collectively, the “Company” or, in the first person as “we” “us” and “our”) are a science-based integrated nutraceutical company devoted to improving the way people age. The Company's scientists partner with leading universities and research institutions worldwide to discover, develop and create products to deliver the full potential of NAD and identify and develop novel, science-based ingredients. Its flagship ingredient, NIAGEN® nicotinamide riboside, a precursor to NAD sold directly to consumers as TRU NIAGEN®, is backed with clinical and scientific research, as well as intellectual property protection. The Company also has analytical reference standards and services segment, which focuses on natural product fine chemicals (known as “phytochemicals”), chemistry services, and regulatory consulting.
Liquidity: The Company has incurred a net loss of approximately $33.3 million for the year ended December 31, 2018, and net loss of approximately $11.4 million for the year ended December 30, 2017. As of December 31, 2018, cash and cash equivalents totaled approximately $22.6 million, which includes restricted cash of approximately $0.2 million.
The Company anticipates that its current cash, cash equivalents and cash to be generated from operations will be sufficient to meet its projected operating plans through at least the next twelve months from the issuance date of this report. The Company may, however, seek additional capital within the next twelve months, both to meet its projected operating plans within the next twelve months and/or to fund its longer term strategic objectives.
Note 2.
Significant Accounting Policies
Significant accounting policies involveare as follows:
Basis of presentation: The financial statements and accompanying notes have been prepared on a consolidated basis and reflect the greatest degreeconsolidated 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 2018 ended on December 31, 2018 and the fiscal year 2017 ended on December 30, 2017.
Change in Fiscal Year: On January 25, 2018, the Board of Directors of ChromaDex Corporation approved a resolution to change the Company’s fiscal year from a 52/53-week fiscal year that ends on the Saturday closest to December 31 to a calendar year. As such, the Company’s 2018 fiscal year was extended from December 29, 2018 to December 31, 2018, with subsequent fiscal years beginning on January 1 and ending on December 31 of each year. Effective fiscal year 2018, the Company’s quarterly results are for the periods ending March 31, June 30, September 30 and December 31.
Adopted Accounting Standards in Fiscal 2018:
Revenue from Contracts with Customers, Topic 606: Effective the first day of fiscal year 2018, the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 ("ASC 606"). ASC 606 supersedes nearly all existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles ("GAAP"). The core principle of ASC 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and complexity. Accordingly,estimates may be required within the revenue recognition process than required under previous GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The Company adopted ASC 606 using the modified retrospective transition method. Under this method, the Company elected to apply the modified retrospective method to contracts that are not complete as of the first day of fiscal year 2018. The adoption of ASC 606 resulted in an adjustment to opening retained earnings of $164,000. See Note 10, Contract Assets and Contract Liabilities for additional disclosure regarding the opening balance adjustment.
For the year ended December 31, 2018, approximately $30.6 million of the Company's total revenue of $31.6 million, or 97% of the total revenue, was as a result of shipping physical goods to the customers. For such revenue streams, the performance obligations are typically satisfied upon shipment of physical goods. Typical payment terms for such revenue streams are upon shipment or net 30 to 60 days. We require customers that are not creditworthy to make advance payments prior to shipment. The Company is taking the practical expedient on not adjusting the promised amount of consideration for the effects of a significant financing component, since the Company expects the customer to pay for the transferred goods within one year. There are obligations for the Company to accept returns and provide refunds for the goods that are shipped, if the customer claims that the Company has not fully fulfilled the performance obligations. Returns, refunds and allowances related to sales including a reserve for estimated variable consideration for the returns, refunds and allowances are recorded as reduction of revenue. The Company uses historical rates when estimating returns, refunds and allowances. The Company also elected to account for shipping and handling activities performed as cost of sales under a fulfillment cost and any fee received for shipping and handling as part of the transaction price and recognize revenue when control of the good transfers. The related fulfillment costs are accrued at the time of revenue recognition.
The Company also has revenue streams for providing consulting services to its clients. For the year ended December 31, 2018, our revenue from these streams was approximately $1.0 million, or 3% of the total revenue. For these consulting services, the performance obligations are typically satisfied over time as the policies we believeconsulting services are performed. Payment terms for these projects vary based on the most criticalnature of the projects, from advance payment at the beginning of the project to aidnet 30 days from the completion of the project. The Company typically requires advance payments from customers for large-scale consulting projects that have a contract duration of 30 days or longer. The original expected duration of these contracts are typically one year or less. As such, the Company is applying an optional exemption from ASC 606 to not make the disclosures related to the remaining performance obligations. The Company is also taking the practical expedient on not adjusting the promised amount of consideration for the effects of a significant financing component, since the Company expects the customer to pay for the transferred services within one year. If contracts are terminated prior to the completion, the Company typically has a right to bill the customer for all services that have been performed through the termination date.
These consulting projects typically have one common performance obligation for our clients, thus the Company typically does not allocate the transaction price over many performance obligations. Some of these consulting projects require measurement of the progress toward complete satisfaction of the performance obligation. The Company uses a cost-to-cost method to measure such progress, which is an input method that recognizes revenue on the bases of direct measurements for the costs incurred to date in fully understandingrelation to the total estimated costs to complete the performance obligation. Any costs that do not depict the Company's performance in transferring control of the consulting services to the customer have been excluded.
Improvements to Non-employee Share-Based Payment Accounting: In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting,” which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and evaluatingservices from non-employees. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company early-adopted the amendments in this ASU effective as of October 1, 2018. The adoption of ASU 2017-08 did not have a material effect on our consolidated financial conditionstatements.
SEC Disclosure Update and Simplification: In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5, 2018. The adoption of this guidance did not have a material effect on our consolidated financial statements.
Restricted Cash: In November 2016, ASU 2016-18 was issued related to the inclusion of restricted cash in the statement of cash flows. The new guidance requires that a statement of cash flows present the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The adoption of this guidance results in the inclusion of operations.the restricted cash balances within the overall cash balance and removal of the changes in restricted cash activity. The Company adopted ASU 2016-18 effective January 1, 2018. The adoption of ASU 2016-18 did not have a material impact on our consolidated financial statements.
Use of accounting estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue recognition: The Company recognizes sales and the related cost of sales atwhen the timeperformance obligations are satisfied. The performance obligations are typically satisfied upon shipment of physical goods or as the merchandise is shippedservices are performed over time. In addition to customers or service is performed, when eachthe satisfaction of the performance obligations, the following conditions have been met:are required for revenue recognition: an arrangement exists, delivery has occurred, there is a fixed price, and collectability is reasonably assured. Discounts, returns and allowances related to sales, including an estimated reserve for the returns and allowances, are recorded as reduction of revenue.
ShippingWith the adoption of ASC 606 as of January 1, 2018, the Company elected to account for shipping and handling activities performed as cost of sales under a fulfillment cost and any fee received for shipping and handling as part of the transaction price and recognize revenue when control of the good transfers. For fiscal year 2017, shipping and handling fees billed to the customers and the cost of shipping and handling fees billed to customers are both included in Netnet sales. Shipping and handling fees not billed to customers and the associated cost included in net sales for the years ending December 31, 2018 and December 30, 2017 are recognized as cost of sales.follows:
(In thousands) | | |
Shipping and handling fees billed | $287 | $137 |
Cost of shipping and handling fees billed | - | $185 |
Taxes collected from customers and remitted to governmental authorities are excluded from revenue, which is presented on a net basis in the statement of operations.
Restricted cash: The Company classifies cash as restricted if the withdrawal or its usage is restricted for more than three months. In connection with a lease amendment entered on November 9, 2018 to lease additional office space located in Los Angeles, California through October 2021, the Company delivered a letter of credit issued by a bank to the landlord in the amount of $152,000. The issuing bank required a collateral for the letter of credit and the Company made a deposit covering the letter of credit amount with the issuing bank. The letter of credit expires on October 18, 2019.
Trade accounts receivable, net: Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on monthly and quarterly reviews of all outstanding amounts. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. The allowance amounts for the periods ended December 31, 2018 and December 30, 2017 are as follows:
(In thousands) | | |
Allowances Related to | | |
Elysium Health | $500 | $500 |
Other Allowances | 37 | 169 |
| $537 | $669 |
Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received.
Credit risk: Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and trade receivables. For cash and cash equivalents, the Company has them either in a form of bank deposits or highly liquid debt instruments in investment-grade pursuant to the Company's investment policy. Accounts at each institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. As of December 31, 2018, we held a total deposit of approximately $20.1 million with one institution and $2.3 million with another institution which exceeded the FDIC limit. We also have $0.7 million escrow receivable held at a different institution. We, however, believe we have very little credit risk exposure for our cash and cash equivalents. Our trade receivables are derived from sales to our customers. We assess credit risk of our customers through quantitative and qualitative analysis. From this analysis, we establish credit limits and manage the risk exposure. We, however, incur credit losses due to bankruptcy or other failure of the customer to pay.
Inventories: Inventories are comprised of raw materials, work-in-processwork 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.net realizable value. The inventory on the balance sheet is reflectedrecorded net of valuation allowances. Labor and overhead has been added to inventory that was manufactured or characterized by the Company. The amounts of major classes of inventory for the periods ended December 31, 2018 and December 30, 2017 are as follows:
(In thousands) | | |
Bulk ingredients | $2,385 | $4,159 |
Reference standards | 848 | 1,027 |
Consumer Products - Finished Goods | 2,450 | 503 |
Consumer Products - Work in Process | 2,794 | 249 |
| 8,477 | 5,938 |
Less valuation allowance | 228 | 142 |
| $8,249 | $5,796 |
Our normal operating cycle for reference standards is currently longer than one year. The Company regularly reviews inventories on hand and reduces the carrying value for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The reduction of the carrying value for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.
Share-based compensation
: The Company has an Equity Incentive Plan under which the Board of Directors may grant restricted stock or stock options to employees and non-employees. For employees, share-based compensation cost is recorded for all option grants and awards of non-vested stock based on the grant date fair value of the award, and is recognized over the period the employee is required to provide services for the award. For non-employees, share-based compensation cost is recorded for all option grants and awards of non-vested stock and is remeasured over the vesting term as earned. The expense is recognized over the period the non-employee is required to provide services for the award.
The Company recognizes compensation expense over the requisite service period using the straight-line method for option grants without performance conditions. For stock options that have both service and performance conditions, the Company recognizes compensation expense using the graded attribution method. Compensation expense for stock options with performance conditions is recognized only for those awards expected to vest.
From time to time, the Company awards shares of its common stock to non-employees for services provided or to be provided. The fair value of the awards are measured either based on the fair market value of stock at the date of grant or the value of the services provided, based on which is more reliably measurable. Since these stock awards are fully vested and non-forfeitable, upon issuance the measurement date for the award is usually reached on the date of the award.
Interest Rate Risk
The Company had an outstanding loan payable of $5.0 million at January 2, 2016. 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 through April 1, 2018, following an initial interest-only period until March 31, 2016.
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, our operating results or our 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 years ended January 2, 2016, January 3, 2015 and December 28, 2013 had a significant impact on our results of operations.
The financial statements are set forth in the pages listed below.
| Page |
Report of Independent Registered Public Accounting Firm | 49 |
Consolidated Balance Sheets at January 2, 2016 and January 3, 2015 | 50 |
Consolidated Statements of Operations for the Years Ended January 2, 2016, January 3, 2015 and December 28, 2013 | 51 |
Consolidated Statements of Stockholders’ Equity for the Years Ended January 2, 2016, January 3, 2015 and December 28, 2013 | 52 |
Consolidated Statements of Cash Flows for the Years Ended January 2, 2016, January 3, 2015 and December 28, 2013 | 53 |
Notes to Consolidated Financial Statements | 55 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Shareholders of
ChromaDex Corporation
We have audited the accompanying consolidated balance sheets of ChromaDex Corporation and Subsidiaries (the “Company”) as of January 2, 2016 and January 3, 2015, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended January 2, 2016, January 3, 2015 and December 28, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ChromaDex Corporation and Subsidiaries, as of January 2, 2016 and January 3, 2015, and the consolidated results of its operations and its cash flows for the years ended January 2, 2016, January 3, 2015 and December 28, 2013 in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ChromaDex Corporation and Subsidiaries’ internal control over financial reporting as of January 2, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 and our report dated March 17, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Marcum llp
Marcum LLP
New York, NY
March 17, 2016
ChromaDex Corporation and Subsidiaries | | | | | | |
Consolidated Balance Sheets | | | | | | |
January 2, 2016 and January 3, 2015 | | | | | | |
| | | | | | |
| | 2015 | | | 2014 | |
Assets | | | | | | |
| | | | | | |
Current Assets | | | | | | |
Cash | | $ | 5,549,672 | | | $ | 3,964,750 | |
Trade receivables, net of allowances of $367,000 and $38,000, respectively | | | 2,450,591 | | | | 1,906,709 | |
Inventories | | | 8,173,799 | | | | 3,734,341 | |
Prepaid expenses and other assets | | | 373,567 | | | | 292,891 | |
Total current assets | | | 16,547,629 | | | | 9,898,691 | |
| | | | | | | | |
Leasehold Improvements and Equipment, net | | | 1,788,645 | | | | 1,264,660 | |
Deposits | | | 58,883 | | | | 57,435 | |
Intangible assets, net | | | 354,052 | | | | 296,061 | |
| | | | | | | | |
Total assets | | $ | 18,749,209 | | | $ | 11,516,847 | |
| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
| | | | | | | | |
Current Liabilities | | | | | | | | |
Accounts payable | | $ | 6,223,958 | | | $ | 3,451,608 | |
Accrued expenses | | | 1,302,865 | | | | 853,685 | |
Current maturities of loan payable | | | 1,528,578 | | | | 223,358 | |
Current maturities of capital lease obligations | | | 219,689 | | | | 148,278 | |
Customer deposits and other | | | 272,002 | | | | 234,435 | |
Deferred rent, current | | | 39,529 | | | | 69,456 | |
Total current liabilities | | | 9,586,621 | | | | 4,980,820 | |
| | | | | | | | |
Loan payable, less current maturities, net | | | 3,345,335 | | | | 1,977,113 | |
Capital lease obligations, less current maturities | | | 444,589 | | | | 423,015 | |
Deferred rent, less current | | | 97,990 | | | | 137,508 | |
| | | | | | | | |
Total liabilities | | | 13,474,535 | | | | 7,518,456 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
| | | | | | | | |
Stockholders' Equity | | | | | | | | |
Common stock, $.001 par value; authorized 150,000,000 shares; | | | | | | | | |
issued and outstanding 2015 108,010,766 and 2014 105,271,058 shares | | | 108,011 | | | | 105,271 | |
Additional paid-in capital | | | 47,462,052 | | | | 43,417,442 | |
Accumulated deficit | | | (42,295,389 | ) | | | (39,524,322 | ) |
Total stockholders' equity | | | 5,274,674 | | | | 3,998,391 | |
Total liabilities and stockholders' equity | | $ | 18,749,209 | | | $ | 11,516,847 | |
See Notes to Consolidated Financial Statements.
ChromaDex Corporation and Subsidiaries | | | | | | | | �� | |
Consolidated Statements of Operations | | | | | | | | | |
Years Ended January 2, 2016, January 3, 2015 and December 28, 2013 | | | | | | | | | |
| | | | | | | | | |
| | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | |
Sales, net | | $ | 22,014,140 | | | $ | 15,313,179 | | | $ | 10,160,964 | |
Cost of sales | | | 13,533,132 | | | | 9,987,514 | | | | 7,027,828 | |
| | | | | | | | | | | | |
Gross profit | | | 8,481,008 | | | | 5,325,665 | | | | 3,133,136 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Sales and marketing | | | 2,326,788 | | | | 2,136,584 | | | | 2,357,605 | |
Research and development | | | 891,601 | | | | 513,671 | | | | 134,040 | |
General and administrative | | | 7,416,451 | | | | 7,860,930 | | | | 4,982,976 | |
Loss from investment in affiliate | | | - | | | | 45,829 | | | | 44,961 | |
Operating expenses | | | 10,634,840 | | | | 10,557,014 | | | | 7,519,582 | |
| | | | | | | | | | | | |
Operating loss | | | (2,153,832 | ) | | | (5,231,349 | ) | | | (4,386,446 | ) |
| | | | | | | | | | | | |
Nonoperating income (expense): | | | | | | | | | | | | |
Interest income | | | 3,325 | | | | 2,013 | | | | 1,251 | |
Interest expense | | | (616,033 | ) | | | (158,849 | ) | | | (34,330 | ) |
Nonoperating expenses | | | (612,708 | ) | | | (156,836 | ) | | | (33,079 | ) |
| | | | | | | | | | | | |
Loss before income taxes | | | (2,766,540 | ) | | | (5,388,185 | ) | | | (4,419,525 | ) |
Provision for income taxes | | | (4,527 | ) | | | - | | | | - | |
| | | | | | | | | | | | |
Net loss | | $ | (2,771,067 | ) | | $ | (5,388,185 | ) | | $ | (4,419,525 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Basic and Diluted loss per common share | | $ | (0.03 | ) | | $ | (0.05 | ) | | $ | (0.04 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Basic and Diluted weighted average common shares outstanding | | | 107,632,022 | | | | 106,459,379 | | | | 99,987,443 | |
| | | | | | | | | | | | |
See Notes to Consolidated Financial Statements. | | | | | | | | | | | | |
ChromaDex Corporation and Subsidiaries | | | | | | | | | | | | | | | |
Consolidated Statement of Stockholders' Equity | | | | | | | | | | | | | | | |
Years Ended January 2, 2016, January 3, 2015 and December 28, 2013 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Total | |
| | Common Stock | | | Additional | | | Accumulated | | | Stockholders' | |
| | Shares | | | Amount | | | Paid-in Capital | | | Deficit | | | Equity | |
Balance, December 29, 2012 | | | 92,140,062 | | | $ | 92,140 | | | $ | 33,617,801 | | | $ | (29,716,612 | ) | | $ | 3,993,329 | |
| | | | | | | | | | | | | | | | | | | | |
Issuance of common stock, net of | | | | | | | | | | | | | | | | | | | | |
offering costs of $20,000 | | | 3,529,411 | | | | 3,529 | | | | 2,976,471 | | | | - | | | | 2,980,000 | |
| | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 276,038 | | | | 276 | | | | 138,093 | | | | - | | | | 138,369 | |
| | | | | | | | | | | | | | | | | | | | |
Exercise of warrants | | | 7,979,227 | | | | 7,979 | | | | 1,630,769 | | | | - | | | | 1,638,748 | |
| | | | | | | | | | | | | | | | | | | | |
Share-based compensation | | | 600,000 | | | | 600 | | | | 1,333,930 | | | | - | | | | 1,334,530 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (4,419,525 | ) | | | (4,419,525 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance, December 28, 2013 | | | 104,524,738 | | | | 104,525 | | | | 39,697,063 | | | | (34,136,137 | ) | | | 5,665,451 | |
| | | | | | | | | | | | | | | | | | | | |
Issuance of warrant | | | - | | | | - | | | | 246,189 | | | | - | | | | 246,189 | |
| | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 534,715 | | | | 535 | | | | 466,614 | | | | - | | | | 467,149 | |
| | | | | | | | | | | | | | | | | | | | |
Issuance of unvested restricted stock | | | 1,186,000 | | | | 1,186 | | | | - | | | | - | | | | 1,186 | |
| | | | | | | | | | | | | | | | | | | | |
Unvested restricted stock | | | (1,186,000 | ) | | | (1,186 | ) | | | - | | | | - | | | | (1,186 | ) |
| | | | | | | | | | | | | | | | | | | | |
Share-based compensation | | | 85,000 | | | | 85 | | | | 2,861,208 | | | | - | | | | 2,861,293 | |
| | | | | | | | | | | | | | | | | | | | |
Stock issued to settle outstanding payable balance | | | 126,605 | | | | 126 | | | | 146,368 | | | | - | | | | 146,494 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (5,388,185 | ) | | | (5,388,185 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance, January 3, 2015 | | | 105,271,058 | | | $ | 105,271 | | | $ | 43,417,442 | | | $ | (39,524,322 | ) | | $ | 3,998,391 | |
| | | | | | | | | | | | | | | | | | | | |
Issuance of common stock, net of | | | | | | | | | | | | | | | | | | | | |
offering costs of $25,000 | | | 1,600,000 | | | | 1,600 | | | | 1,973,293 | | | | - | | | | 1,974,893 | |
| | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 120,708 | | | | 121 | | | | 94,725 | | | | - | | | | 94,846 | |
| | | | | | | | | | | | | | | | | | | | |
Vested restricted stock | | | 684,000 | | | | 684 | | | | (684 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Share-based compensation | | | 335,000 | | | | 335 | | | | 1,977,276 | | | | - | | | | 1,977,611 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (2,771,067 | ) | | | (2,771,067 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance, January 2, 2016 | | | 108,010,766 | | | $ | 108,011 | | | $ | 47,462,052 | | | $ | (42,295,389 | ) | | $ | 5,274,674 | |
| | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements. | | | | | | | | | | | | | | | | | | | | |
ChromaDex Corporation and Subsidiaries | | | | | | | | | |
Consolidated Statements of Cash Flows | | | | | | | | | |
Years Ended January 2, 2016, January 3, 2015 and December 28, 2013 | | | | | | | | | |
| | | | | | | | | |
| | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | |
Cash Flows From Operating Activities | | | | | | | | | |
Net loss | | $ | (2,771,067 | ) | | $ | (5,388,185 | ) | | $ | (4,419,525 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
Depreciation of leasehold improvements and equipment | | | 285,536 | | | | 222,721 | | | | 246,175 | |
Amortization of intangibles | | | 45,014 | | | | 35,589 | | | | 23,532 | |
Share-based compensation expense | | | 1,977,611 | | | | 2,916,924 | | | | 1,287,917 | |
Allowance for doubtful trade receivables | | | 329,844 | | | | 28,779 | | | | (441,340 | ) |
Loss from disposal of equipment | | | 19,643 | | | | 20,400 | | | | 66,378 | |
Loss from impairment of intangibles | | | 19,495 | | | | - | | | | - | |
Loss from investment in affiliate | | | - | | | | 45,829 | | | | 44,961 | |
Non-cash financing costs | | | 188,442 | | | | 49,527 | | | | - | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Trade receivables | | | (873,726 | ) | | | (1,096,695 | ) | | | 1,560,070 | |
Other receivable | | | - | | | | 215,000 | | | | (215,000 | ) |
Inventories | | | (4,439,458 | ) | | | (1,530,216 | ) | | | (466,352 | ) |
Prepaid expenses and other assets | | | (82,124 | ) | | | (91,053 | ) | | | (62,913 | ) |
Accounts payable | | | 2,772,350 | | | | 2,157,192 | | | | (1,618,450 | ) |
Accrued expenses | | | 449,180 | | | | 196,978 | | | | (204,891 | ) |
Customer deposits and other | | | 37,567 | | | | (311,609 | ) | | | 235,777 | |
Deferred rent | | | (69,445 | ) | | | (51,587 | ) | | | 57,650 | |
Net cash used in operating activities | | | (2,111,138 | ) | | | (2,580,406 | ) | | | (3,906,011 | ) |
| | | | | | | | | | | | |
Cash Flows From Investing Activities | | | | | | | | | | | | |
Purchases of leasehold improvements and equipment | | | (525,231 | ) | | | (123,096 | ) | | | (137,349 | ) |
Purchase of intangible assets | | | (122,500 | ) | | | (130,000 | ) | | | (89,000 | ) |
Proceeds from sales of assets | | | - | | | | - | | | | 1,000,000 | |
Proceeds from sales of equipment | | | - | | | | 1,356 | | | | - | |
Proceeds from investment in affiliate | | | - | | | | 1,842,015 | | | | 225,000 | |
Net cash provided by (used in) investing activities | | | (647,731 | ) | | | 1,590,275 | | | | 998,651 | |
Cash Flows From Financing Activities | | | | | | | | | | | | |
Proceeds from issuance of common stock, net of issuance costs | | | 1,974,893 | | | | - | | | | 2,980,000 | |
Proceeds from exercise of stock options | | | 94,846 | | | | 467,149 | | | | 138,369 | |
Proceeds from exercise of warrants | | | - | | | | - | | | | 1,638,748 | |
Proceeds from loan payable | | | 2,500,000 | | | | 2,500,000 | | | | - | |
Payment of debt issuance costs | | | (15,000 | ) | | | (102,866 | ) | | | - | |
Principal payments on capital leases | | | (210,948 | ) | | | (170,738 | ) | | | (108,421 | ) |
Net cash provided by financing activities | | | 4,343,791 | | | | 2,693,545 | | | | 4,648,696 | |
| | | | | | | | | | | | |
Net increase in cash | | | 1,584,922 | | | | 1,703,414 | | | | 1,741,336 | |
| | | | | | | | | | | | |
Cash Beginning of Year | | | 3,964,750 | | | | 2,261,336 | | | | 520,000 | |
| | | | | | | | | | | | |
Cash Ending of Year | | $ | 5,549,672 | | | $ | 3,964,750 | | | $ | 2,261,336 | |
| | | | | | | | | | | | |
Supplemental Disclosures of Cash Flow Information | | | | | | | | | | | | |
Cash payments for interest | | $ | 427,591 | | | $ | 74,996 | | | $ | 34,330 | |
| | | | | | | | | | | | |
Supplemental Schedule of Noncash Investing Activity | | | | | | | | | | | | |
Capital lease obligation incurred for the purchase of equipment | | $ | 303,933 | | | $ | 322,802 | | | $ | 302,017 | |
Retirement of fully depreciated equipment - cost | | $ | 121,213 | | | $ | 56,110 | | | $ | - | |
Retirement of fully depreciated equipment - accumulated depreciation | | $ | (121,213 | ) | | $ | (56,110 | ) | | $ | - | |
| | | | | | | | | | | | |
Supplemental Schedule of Noncash Operating Activity | | | | | | | | | | | | |
Stock issued to settle outstanding payable balance | | $ | - | | | $ | 146,494 | | | $ | - | |
| | | | | | | | | | | | |
Supplemental Schedule of Noncash Share-based Compensation | | | | | | | | | | | | |
Stock awards issued for services rendered in prior period | | $ | - | | | $ | - | | | $ | 14,560 | |
Changes in prepaid expenses associated with share-based compensation | | $ | - | | | $ | 55,631 | | | $ | 32,053 | |
Warrant issued, related to loan payable | | $ | - | | | $ | 246,189 | | | $ | - | |
| | | | | | | | | | | | |
Supplemental Schedule of Noncash Activities Related to | | | | | | | | | | | | |
Sale of BluScience Consumer Product Line | | | | | | | | | | | | |
Assets transferred | | $ | - | | | $ | - | | | $ | 3,526,677 | |
Liabilities transferred | | $ | - | | | $ | - | | | $ | 368,873 | |
Carrying value of long-term investment in affiliate, net of $1,000,000 cash proceeds | | $ | - | | | $ | - | | | $ | 2,157,804 | |
| | | | | | | | | | | | |
See Notes to Consolidated Financial Statements. | | | | | | | | | | | | |
Note 1. Nature of Business and Liquidity
Nature of business: ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., ChromaDex Analytics, Inc. and Spherix Consulting, Inc. (collectively, the “Company”) are 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 by clinical and scientific research, as well as extensive intellectual property protection.
Liquidity: The Company has incurred a loss from operations of approximately $2.2 million and a net loss of approximately $2.8 million for the year ended January 2, 2016, and net losses of approximately $5.4 million and $4.4 million for the years ended January 3, 2015 and December 28, 2013, respectively. As of January 2, 2016, the cash and cash equivalents totaled approximately $5,550,000.
While we anticipate that our current cash, cash equivalents and cash to be generated from operations will be sufficient to meet our projected operating plans through at least March 18, 2017, 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 2. Significant Accounting Policies
Significant accounting policies are as follows:
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. The fiscal year ended January 2, 2016 (referred to as 2015) consisted of 52 weeks, the fiscal year ended January 3, 2015 (referred to as 2014) consisted of 53 weeks and the fiscal year ended December 28, 2013 (referred to as 2013) consisted of 52 weeks. 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 2016 will include 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.
The Company early adopted the amendments in this ASU effective as of April 4, 2015. As of January 2, 2016 and January 3, 2015, the Company had unamortized debt issuance costs of approximately $65,000 and $91,000, 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 | |
Use of accounting estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Changes in accounting estimates: During the year ended January 3, 2015, the Company evaluated assumptions for estimating the fair value of the Company’s stock options. The Company uses the Black-Scholes based option valuation model, which requires assumptions on (i) volatility, (ii) expected dividends, (iii) expected term and (iv) risk-free rate. While evaluating the assumptions on volatility, the Company determined that the historical volatility the Company’s common stock needs to be considered when estimating the expected volatility. Previously, the Company calculated expected volatility based principally on the volatility rates of similarly situated publicly held companies, as the historical measurement period that was available to compute the volatility rate of the Company’s common stock was shorter than the expected life of the options.
For stock options granted during the years ended January 2, 2016 and January 3, 2015, the Company calculated the expected volatility rate based on the combined volatilities of publicly held companies in similar industries and volatility of the Company’s common stock. Based on the expected term of stock options, a 20~100% weight was assigned to the volatility of the Company’s common stock as the historical volatility of the Company’s common stock from June 2008 through April 2010 was exceptionally high due to a thinly traded market. Below table illustrates the Company’s historical volatility and the average daily trading volume of the Company’s common stock from June 2008 through April 2010 and from April 2010 through December 2015.
Period | | Volatility | | | Average Daily Trading Volume | |
6/20/2008 ~ 4/19/2010 | | | 402 | % | | | 11,455 | |
4/20/2010 ~ 1/2/2016 | | | 74 | % | | | 147,703 | |
The weighted average expected volatilities for the stock options granted during the twelve-month period ended January 2, 2016 and January 3, 2015 following the update to our estimate are approximately 76% and 75%, respectively. The weighted average expected volatility would have been approximately 30~40% for these two years, had we computed solely based on the volatility rates of similarly situated public companies. For the year ended December 28, 2013, the weighted average expected volatility the Company used to estimate the fair value of the Company’s stock options granted was approximately 33%.
The following is a pro-forma disclosure of our historical calculation of estimated volatility over the expected term based on a grant with an expected term of 6 years:
Fiscal Year 2013 | | | Fiscal Year 2013 | |
Name | | Use | | | Volatility | | | Name | | Use | | | Volatility | |
Covance, Inc. | | | 50 | % | | | 35 | % | | ChromaDex Corp. | | | 20 | % | | | 243 | % |
Sigma-Aldrich Corp. | | | 50 | % | | | 30 | % | | Covance Inc. | | | 40 | % | | | 35 | % |
| | | | | | | | | | Sigma-Aldrich Corp. | | | 40 | % | | | 30 | % |
Weighted Average | | | | | | | 33 | % | | Weighted Average | | | | | | | 75 | % |
The change in our estimate of volatility did not result to a material additional expense to our statement of operations.
Revenue recognition: The Company recognizes sales and the related cost of sales at the time the merchandise is shipped to customers or service is performed, when each of the following conditions have been met: an arrangement exists, delivery has occurred, there is a fixed price, and collectability is reasonably assured. Discounts, returns and allowances related to sales, including an estimated reserve for the returns and allowances, are recorded as reduction of revenue.
Shipping and handling fees billed to customers and the cost of shipping and handling fees billed to customers are included in net sales. For the years ending in January 2, 2016, January 3, 2015 and December 28, 2013, shipping and handling fees billed to customers were approximately $113,000, $115,000 and $110,000, respectively, and the cost of shipping and handling fees billed to customers were approximately, $112,000, $130,000 and $128,000, respectively. Shipping and handling fees not billed to customers are recognized as cost of sales.
Taxes collected from customers and remitted to governmental authorities are excluded from revenue, which is presented on a net basis in the statement of operations.
Cash concentration: The Company maintains substantially all of its cash in three different accounts in one bank.
Trade accounts receivable: Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on monthly and quarterly reviews of all outstanding amounts. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received.
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. The inventory on the balance sheet is recorded net of valuation allowances. Labor and overhead has been added to inventory that was manufactured or characterized by the Company. The amounts of major classes of inventory for the periods ended January 2, 2016 and January 3, 2015 are as follows:
| | 2015 | | | 2014 | |
Reference standards | | $ | 1,239,338 | | | $ | 1,760,305 | |
Bulk ingredients | | | 7,195,461 | | | | 2,298,036 | |
| | | 8,434,799 | | | | 4,058,341 | |
Less valuation allowance | | | 261,000 | | | | 324,000 | |
| | $ | 8,173,799 | | | $ | 3,734,341 | |
Our normal operating cycle for reference standards is currently longer than one year. The Company has approximately 5,000 defined reference standards and holds a lot of these standards as inventory in small quantities, mostly in grams and milligrams. Due to the large number of different items we carry, certain groups of these reference standards have sales frequency that is slower than others and varies greatly year to year. In addition, for certain reference standards, the cost saving is advantageous when purchased in larger quantities and we have taken advantage of such opportunities when available. Such factors have resulted in an operating cycle to be more than one year on average. The Company gains competitive advantage through the broad offering of reference standards and it is critical for the Company to continue to expand its library of reference standards it offers for the growth of business. Nevertheless, the Company has recently made changes in its reference standards inventory purchasing practice, which the management believes will result in an improved turnover rate and shorter operating cycle without impacting our competitive advantage.
The Company regularly reviews inventories on hand and reduces the carrying value for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The reduction of the carrying value for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.
Intangible assets: Intangible assets include licensing rights and are accounted for based on the fair value of consideration given or the fair value of the net assets acquired, whichever is more reliable. Intangible assets with finite useful lives are amortized using the straight-line method over a period of 10 years, or, for licensed patent rights, the remaining term of the patents underlying licensing rights (considered to be the remaining useful life of the license)., whichever is shorter. The useful lives of subsequent milestone payments that are capitalized are the remaining useful life of the initial licensing payment that was capitalized.
Leasehold improvements and equipment, net: Leasehold improvements and equipment are carried at cost and depreciated on the straight-line method over the lesser of the estimated useful life of each asset or lease term. Leasehold improvements and equipment are comprised of leasehold improvements, laboratory equipment, furniture and fixtures, and computer equipment. Depreciation on equipment under capital lease is included with depreciation on owned assets. Maintenance and repairs are charged to operating expenses as they are incurred. Improvements and betterments, which extend the lives of the assets, are capitalized. Useful lives of leasehold improvements and equipment for each of the category are as follows:
| Useful Life |
Leasehold improvements | Until the end of the lease term |
Computer equipment | 3 to 5 years |
Furniture and fixtures | 7 years |
Laboratory equipment | 10 years |
Long-lived assets are reviewed for impairment on a periodic basis and when changes in circumstances indicate the possibility that the carrying amount may not be recoverable. Long-lived assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the forecast of undiscounted future cash flows is less than the carrying amount of the assets, an impairment charge would be recognized to reduce the carrying value of the assets to fair value. If a possible impairment is identified, the asset group’s fair value is measured relying primarily on a discounted cash flow methodology.
Customer deposits and other: Customer deposits and other represent either (i) cash received from customers in advance of product shipment or delivery of services; or (ii) cash received from government as research grants, which the Company has yet to complete the research activities.services.
The cash received from government as research grants is recognized as a liability until the research is performed. Other than a nominal management fee, which the Company is entitled to earn when the research is performed, the research activities related to the grants are excluded from revenue and are presented on a net basis in the statement of operations.
Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred liabilities are recognized for taxable temporary temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company has not recorded a reserve for any tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The Company files tax returns in all appropriate jurisdictions, which include a federal tax return and various state tax returns. Open tax years for these jurisdictions are 20122015 to 2015,2018, which statutes expire in 20162019 to 2019,2022, respectively. When and if applicable, potential interest and penalty costs are accrued as incurred, with expenses recognized in general and administrative expenses in the statements of operations. As of January 2, 2016,December 31, 2018, the Company has no liability for unrecognized tax benefits.
Research and development costs: Research and development costs consist of direct and indirect costs associated with the development of the Company’s technologies. These costs are expensed as incurred.
Advertising:The Company expenses the production costs of advertising the first time the advertising takes place. Advertising expense for the periods ended January 2, 2016, January 3, 2015December 31, 2018 and December 28, 201330, 2017 were approximately $104,000, $171,000$8,764,000 and $355,000,$1,914,000, respectively.
Share-based compensation: The Company has an Equity Incentive Plan under which the Board of Directors may grant restricted stock or stock options to employees and non-employees. ForEffective October 1, 2018, the Company adopted ASU 2018-07, by which the accounting for share-based payments to non-employees and employees is substantially aligned. The ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. Consistent with the accounting requirement for employee share-based payment awards, non-employee share-based payment awards now within the scope of Topic 718 are measured at grant-date fair value of the equity instruments that the Company is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. There was no cumulative effect of the adoption of this standard.
Share-based compensation cost is recorded for all option grants and awards of non-vested stock based on the grant date fair value of the award, and is recognized over the service period the employee is required to provide services for the award. For non-employees,Prior to October 1, 2018, share-based compensation cost is recorded for all option grants and awards of non-vested stock and isnon-employees was remeasured over the vesting term as earned. The expense is recognized over the period the non-employee is required to provide services for the award.
The fair value of the Company’s stock options is estimated at the date of grant using the Black-Scholes based option valuation model. For theThe volatility assumption please refer tois based on the earlier section “Changes in accounting estimates”historical volatility of this note.the Company's common stock. The dividend yield assumption is based on the Company’s history and expectation of future dividend payouts on the common stock. The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term. For the expected term, the Company uses SEC Staff Accounting Bulletin No. 107 simplified method since most of the options granted werefor “plain vanilla” options with following characteristics: (i) the share options are granted at the market price on the grant date; (ii) exercisability is conditional on performing service through the vesting date on most options; (iii) Ifif an employee terminates service prior to vesting, the employee would forfeit the share options; (iv) if an employee terminates service after vesting, the employee would have 30 to 90 days to exercise the share options; and (v) the share options are nontransferable and nonhedgeable.
Market conditions that affect vesting of stock options are considered in the grant-date fair value. The issues surrounding the valuation for such awards can be complex and consideration needs to be given for how the market condition should be incorporated into the valuation of the award. The Company considers using other valuation techniques, such as Monte Carlo simulations based on a lattice approach, to value awards with market conditions.
The Company recognizes compensation expense over the requisite service period using the straight-line method for option grants without performance conditions. For stock options that have both service and performance conditions, the Company recognizes compensation expense using the graded attribution method. Compensation expense for stock options with performance conditions is recognized only for those awards expected to vest.
Effective January 1, 2017, the Company recognizes forfeitures when they occur.
From time to time, the Company awards shares of its common stock to non-employees for services provided or to be provided. The fair value of the awards are measured either based on the fair market value of stock at the date of grant or the value of the services provided, based on which is more reliably measureable.measurable. Since these stock awards are fully vested and non-forfeitable, upon issuance the measurement date for the award is usually reached on the date of the award.
Fair Value Measurement: The Company follows the provisions of the accounting standard which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Financial instruments: The estimated fair value of financial instruments has been determined based on the Company’s assessment of available market information and appropriate valuation methodologies. The fair value of the Company’s financial instruments that are included in current assets and current liabilities are recorded at cost in the consolidated balance sheets. The estimated fair value of these financial instruments approximates their carrying value due to their short-term nature.
The carrying amounts reported in the balance sheet for capital lease obligations are present values of the obligations, excluding the interest portion. Capital lease obligations with maturities less than one year are classified as current liabilities.
The carrying amounts reported in the balance sheet for loan payable are present values net of discount, excluding the interest portion. The carrying value of long-term portion of the loan payable approximates fair value because the Company’s interest rate yield based on the credit rating of the Company is believed to be near current market rates. The long-term portion of the Company’s loan payable is considered a Level 3 liability within the fair value hierarchy. Loan payable with maturities less than one year are classified as current liabilities.
Recent accounting standards: In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-012016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities and all nonpublic business entities upon issuance. We are currently evaluating the impact of our pending adoption of ASU 2014-092016-02 on our consolidated financial statements.
Note 3.
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 years ended January 2, 2016, January 3, 2015December 31, 2018 and December 28, 2013.
| | Years Ended | |
| | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | |
Net loss | | $ | (2,771,067 | ) | | $ | (5,388,185 | ) | | $ | (4,419,525 | ) |
| | | | | | | | | | | | |
Basic and diluted loss per common share | | $ | (0.03 | ) | | $ | (0.05 | ) | | $ | (0.04 | ) |
| | | | | | | | | | | | |
Weighted average common shares outstanding (1): | | | 107,632,022 | | | | 106,459,379 | | | | 99,987,443 | |
| | | | | | | | | | | | |
Potentially dilutive securities (2): | | | | | | | | | | | | |
Stock options | | | 15,734,755 | | | | 13,974,052 | | | | 13,160,955 | |
Warrants | | | 1,269,020 | | | | 469,020 | | | | - | |
Convertible debt | | | 773,395 | | | | 773,395 | | | | - | |
| | | | | | | | | | | | |
(1) Includes 1,214,127, 1,623,186 and 500,000 weighted average nonvested shares of restricted stock | |
for the years 2015, 2014 and 2013, 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. | | | | | |
30, 2017.
Note 4. Intangible Assets | |
(In thousands, except per share data) | | |
| | |
Net loss | $(33,316) | $(11,378) |
| | |
Basic and diluted loss per common share | $(0.61) | $(0.26) |
| | |
Basic and diluted weighted average common shares outstanding (1): | 55,006 | 44,599 |
| | |
Potentially dilutive securities (2): | | |
Stock options | 9,089 | 6,534 |
Warrants | 204 | 470 |
| | |
(1) Includes approximately 0.2 million and 0.5 million nonvested restricted stock for the years 2018 and 2017, 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.
| | |
Intangible assets consisted of the following:
(In thousands) | | | | Weighted Average Total Amortization Period |
| 2015 | 2014 | | |
Healthspan Research LLC Acquisition (See Note 9) | | $1,346 | 10 years |
License agreements and other | | 1,625 | 1,494 | 9 years |
Less accumulated depreciation | | (1,424) | (1,189) | |
| Gross Carrying | Accumulated | Net | Gross Carrying | Accumulated | Net | $1,547 | $1,651 | |
| Amount | Amortization | Amount | Amortization | Amount | |
| | | | | | |
Amortized intangible assets: | | | | | | |
License agreements and other | $1,249,500 | $ 895,458 | $ 354,052 | $1,205,275 | $ 909,224 | $ 296,061 | |
Amortization expenses on amortizable intangible assets included in the consolidated statement of operations for the years ended January 2, 2016, January 3, 2015December 31, 2018 and December 28, 201330, 2017 were approximately $45,000, $36,000$235,000 and $24,000,$206,000, respectively. The unamortized expense is expected to be recognized over a weighted average period of 8.2 years as of January 2, 2016.
In December 2015, the Company decided to discontinue its efforts to commercialize and market products associated with the patent the Company licensed from the Research Foundation of State University of New York in June 2008. The Company paid a license fee of approximately $78,000 and the licensed rights to the patent were recognized as intangible assets with an estimated fair value of approximately $78,000 and a useful life of 10 years. At January 2, 2016, the Company determined that these assets no longer had any carrying value as the Company discontinued its operations related to these assets.
Estimated aggregate amortization expense for each of the next five years is as follows:
Years ending December: | | | |
2016 | | $ | 45,000 | |
2017 | | | 45,000 | |
2018 | | | 45,000 | |
2019 | | | 45,000 | |
2020 | | | 42,000 | |
Thereafter | | | 132,000 | |
| | $ | 354,000 | |
(In thousands) Years ending December: | |
2019 | $246 |
2020 | 241 |
2021 | 222 |
2022 | 185 |
2023 | 156 |
Thereafter | 497 |
| $1,547 |
Note 5.
Leasehold Improvements and Equipment, Net
Leasehold improvements and equipment consisted of the following:
| | 2015 | | | 2014 | |
| | | | | | |
Laboratory equipment | | $ | 3,737,908 | | | $ | 3,151,748 | |
Leasehold improvements | | | 513,453 | | | | 495,240 | |
Computer equipment | | | 404,228 | | | | 329,737 | |
Furniture and fixtures | | | 17,056 | | | | 13,039 | |
Office equipment | | | 21,547 | | | | 7,877 | |
Construction in progress | | | 4,420 | | | | 68,141 | |
| | | 4,698,612 | | | | 4,065,782 | |
Less accumulated depreciation | | | 2,909,967 | | | | 2,801,122 | |
| | $ | 1,788,645 | | | $ | 1,264,660 | |
(In thousands) | | | Useful Life |
| | | |
Laboratory equipment | $2,755 | $1,869 | 10 years |
Leasehold improvements | 2,127 | 1,699 | Lesser of lease term or estimated useful life |
Computer equipment | 604 | 511 | 3 to 5 years |
Furniture and fixtures | 120 | 90 | 7 years |
Office equipment | 23 | 18 | 10 years |
Construction in progress | 7 | 131 | |
| 5,636 | 4,318 | |
Less accumulated depreciation | 2,051 | 1,446 | |
| $3,585 | $2,872 | |
Depreciation expenses on leasehold improvements and equipment included in the consolidated statement of operations for the years ended January 2, 2016, January 3, 2015December 31, 2018 and December 28, 201330, 2017 were approximately $286,000, $223,000$607,000 and $246,000,$510,000, respectively.
The Company leases equipment under capitalized lease obligations with a total cost of approximately $1,137,000$871,000 and 1,074,000$871,000 and accumulated amortization of $231,000$213,000 and $243,000$126,000 as of January 2, 2016December 31, 2018 and January 3, 2015,December 30, 2017, respectively.
Note 6.
Capitalized Lease Obligations
Minimum future lease payments under capital leases as of January 2, 2016,December 31, 2018, are as follows:
Year ending December: | | | | |
2016 | | $ | 267,601 | | |
2017 | | | 246,752 | | |
2018 | | | 197,899 | | |
(In thousands) Year ending December: | | |
2019 | | | 41,304 | | $196 |
2020 | | 126 |
2021 | | 18 |
Total minimum lease payments | | | 753,556 | | 340 |
Less amount representing interest at a rate of approximately 8.6% per year | | | 89,278 | | |
Less amount representing interest at a rate of approximately 9.9% per year | | 29 |
Present value of net minimum lease payments | | | 664,278 | | 310 |
Less current portion | | | 219,689 | | 173 |
Long-term obligations under capital leases | | $ | 444,589 | | $137 |
| | | | | |
Interest expenses related to capital leases were approximately $62,000, $47,000$41,000 and $34,000$57,000 for the years ended January 2, 2016, January 3, 2015December 31, 2018 and December 28, 2013,30, 2017, respectively.
Note 7. Loan Payable
Loan payable asLine of January 2, 2016 consists of the following:
Principal amount payable for following years ending December | | | |
2016 | | $ | 1,370,454 | |
2017 | | | 1,991,688 | |
2018 | | | 1,637,858 | |
Total principal payments | | | 5,000,000 | |
Accrued end of term charge | | | 68,082 | |
Total loan payable | | | 5,068,082 | |
Less unamortized debt discount | | | 194,169 | |
Less current portion | | | 1,528,578 | |
Loan payable – long term | | $ | 3,345,335 | |
The total interest expenses related the term loan, including cash interest payments, the amortizations of debt issuance costs and debt discount, and the accrual of end of term charge were approximately $554,000 and $112,000 for the years ended January 2, 2016 and January 3, 2015, respectively.
On September 29, 2014,November 4, 2016, the Company entered into a loan and securitybusiness financing agreement (the “Loan(“Financing Agreement”) with Hercules Technology II, L.P.Western Alliance Bank (“Western Alliance”), as lender (“Lender”) and Hercules Technology Growth Capital, Inc., as agent. Lender provided us with accessin order to establish a term loanformula based revolving credit line pursuant to which the Company may borrow an aggregate principal amount of up to $5 million. The first $2.5 million$5,000,000, subject to the terms and conditions of the term loan was funded at closing. The first advance was to be repaid in equal monthly installments of principal and interest (mortgage style) through the loan’s maturity on April 1,Financing Agreement. In June 2018, following an initial interest-only period that was to conclude on October 31, 2015. In connection with the loan, the Company paid a $50,000 facility chargenotified Western Alliance that it did not intend to Lender and recorded as debt issuance cost.
The term loan bears interest atdraw from the rate per year equal toline of credit established by the greater of either (i) 9.35% plus the prime rate as reported in The Wall Street Journal minus 3.25%, or (ii) 9.35%. The interest rate as of January 2, 2016 was 9.60%.Financing Agreement. The Company may prepay all, but no less than all, of thepreviously did not have any outstanding loan balance, subject to prepayment chargespayable from this line of 3% during the first twelve months following closing, 2% during the next twelve months and 1% thereafter. On the earliest to occur of the (a) the loan maturity date, (b) the date the Company prepays the outstanding loan balance or (c) the date the outstanding loan balance becomes due and payable, the Company will pay Lender an end of term charge equal to 3.75% of all amounts drawn under the loan.
The Loan Agreement further provides that, subject to certain conditions, any regularly scheduled installment of principal due to Lender may be paid, in whole or in part at the option of the Company or Lender, by converting a portion of the principal of the term loan into shares of the Company’s common stock (the “Conversion Shares”) at a conversion price of $1.293, in lieu of payment in cash. The aggregate principal amount to be paid in Conversion Shares shall not exceed $1,000,000. Of this amount 50% shall convert at the Lender’s option and 50% shall convert at the Company’s option.
Pursuant to the Loan Agreement, the Company issued Lender a warrant (the “Warrant”) to purchase 419,020 shares of our common stock at an exercise price of $1.062 per share, subject to customary anti-dilution provisions. The Warrant is exercisable and expires five years from the date of issuance.
In connection with the Loan Agreement, the Company granted first priority liens and security interest in substantially all of our assets, exclusive of intellectual property and 35% of the capital stock of any foreign subsidiary, as collateral for the obligations under the Loan Agreement. The Loan Agreement also contains representations and warranties by the Company and Lender, indemnification provisions in favor of Lender and customary covenants, and events of default. Upon the occurrence of an event of default, a default interest rate of an additional 4% will be applied to the outstanding loan balances, and Lender may terminate its lending commitment, declare all outstanding obligations immediately due and payable, and take such other actions as set forth in the Loan Agreement. We are currently in compliance with all loan covenants.
On June 17, 2015, the Company and Hercules Technology II, L.P entered into Amendment No. 1 (the “Amendment”) to the Loan Agreement. Pursuant to the Amendment, the parties agreed that the interest only period shall be extended to March 31, 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.
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 $94,000 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.credit arrangement.
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 reflected the change prospectively as yield adjustments, based on the revised terms.
Debt Issuance Costs and End of Term Charge
The Company incurred debt issuance costs of approximately $103,000 and $15,000 for the first and second advance, respectively,$272,000 in connection with this term loan. Theline of credit arrangement and had an unamortized balance of approximately $65,000 as of the termination date. For the line of credit arrangement, the Company elected a policy to keep the debt issuance costs are being amortized as interest expense using the effective interest method over the terman asset, regardless of the loan. Amortization of debt issuance costs were $41,000 and $12,000 for the years ended January 2, 2016 and January 3, 2015 and the remaining unamortized debt issuance costs of $65,000 are presented as a direct deduction from the carrying amount of the debt liability. In addition, the Company will paywhether an end of term charge of $188,000, which is 3.75% of the $5.0 million drawn under the loan. 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 accrued $58,000 and $10,000 of this fee during the years ended January 2, 2016 and January 3, 2015, respectively.
Warrant Issued to Lender
The Company determined the Warrant issued to Lender during the year ended January 3, 2015 to be equity classified. The Company estimated the fair value of this Warrant as of the issuance date using a Black-Scholes option pricing model with the following assumptions:
| | September 29, 2014 | |
Fair value of common stock | | $ | 1.08 | |
Volatility | | | 72.40 | % |
Expected dividends | | | 0.00 | % |
Contractual term | | 5.0 years | |
Risk-free rate | | | 1.76 | % |
The Company utilized this fair value in its allocation of the loan proceeds between loan payable and the Warrant which was performed on a relative fair value basis. The fair value of the Warrant to purchase 419,020 shares of our common stock was approximately $273,000. Ultimately, the Company allocated $246,000 to the Warrant and recognized this amount in additional paid in capital. Accordingly, this amount is recognizeddrawn. The unamortized deferred asset was expensed immediately on the termination date as a debt discount and is being amortized as interest expense using the effective interest method over the term of the loan. Amortizations of this debt discount were $90,000 and $28,000 for the years ended January 2, 2016 and January 3, 2015, respectively.other non-operating expense.
Note 8.
Income Taxes
The provision for income tax consists of following:
| | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | |
Current | | | | | | | | | |
Federal | | $ | - | | | $ | - | | | $ | - | |
State | | | 4,527 | | | | - | | | | - | |
Deferred (net of valuation allowance) | | | | | | | | | | | | |
Federal | | | - | | | | - | | | | - | |
State | | | - | | | | - | | | | - | |
Income tax provision | | $ | 4,527 | | | $ | - | | | | - | |
At January 2, 2016December 31, 2018 and January 3, 2015,December 30, 2017, the Company maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rates of 0.2%, 0% and 0% for both years 2015, 20142018 and 2013,2017. At December 31, 2018 and December 30, 2017, we recorded a valuation allowance of $21.9 million and $12.9 million, respectively. The valuation allowance increased by $381,000 as of January 2, 2016.$9.0 million during 2018.
A reconciliation of income taxes computed at the statutory Federal income tax rate to income taxes as reflected in the financial statements is summarized as follows:
| | 2015 | | | 2014 | | | 2013 | | | |
| | | | | | | | | | |
Federal income tax expense at statutory rate | | | (34.0 | )% | | | (34.0 | )% | | | (34.0 | )% | (21.0)% | (34.0)% |
State income tax, net of federal benefit | | | (5.1 | )% | | | (5.3 | )% | | | (4.3 | )% | (6.6)% | (5.3)% |
Permanent differences | | | 5.7 | % | | | 2.7 | % | | | 2.6 | % | 1.1% | 7.6% |
Change in tax rates | | | 0.7 | % | | | (6.1 | )% | | | (3.7 | )% | |
Expirations of net operating losses | | | 17.4 | % | | | 0.0 | % | | | 0.0 | % | |
Changes of state net operating losses | | (0.5)% | 1.3% |
Change in stock options and restricted stock | | 0.0% | (1.3)% |
Change in valuation allowance | | | 13.7 | % | | | 42.8 | % | | | 39.2 | % | 27.1% | (23.1)% |
Remeasurement of deferred taxes asset / liability | | 0.0% | 53.4% |
Other | | | 1.8 | % | | | (0.1 | )% | | | 0.2 | % | (0.1)% | 1.4% |
Effective tax rate | | | 0.2 | % | | | 0.0 | % | | | 0.0 | % | 0.0% |
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law, which included, among other things, a reduction of the federal corporate income tax rate to 21%. Under ASC 740, Accounting for Income Taxes, the Company is required to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. In 2017, the Company’s gross deferred tax assets have been revalued from 34% to 21% and as a result, the deferred tax assets of approximately $19.1 million have been revalued to approximately $13.0 million with a corresponding decrease to the Company’s valuation allowance.
The deferred income tax assets and liabilities consisted of the following components as of January 2, 2016December 31, 2018 and January 3, 2015:December 30, 2017:
| | 2015 | | | 2014 | | |
(In thousands) | | | |
| | | | | | | |
Deferred tax assets: | | | | | | | |
Net operating loss carryforward | | $ | 10,860,000 | | | $ | 10,593,000 | | $17,957 | $9,963 |
Capital loss carryforward | | | 808,000 | | | | 808,000 | | |
Stock options and restricted stock | | | 3,048,000 | | | | 2,934,000 | | 2,654 | 1,873 |
Inventory reserve | | | 249,000 | | | | 226,000 | | 222 | 143 |
Allowance for doubtful accounts | | | 144,000 | | | | 15,000 | | 168 | 183 |
Accrued expenses | | | 277,000 | | | | 125,000 | | 831 | 674 |
Deferred revenue | | | - | | | | 4,000 | | 19 |
Leasehold improvements and equipment | | 4 | - |
Intangibles | | | 23,000 | | | | 26,000 | | 46 | 27 |
Deferred rent | | | 54,000 | | | | 81,000 | | 168 | 166 |
| | | 15,463,000 | | | | 14,812,000 | | 22,069 | 13,048 |
Less valuation allowance | | | (15,050,000 | ) | | | (14,669,000 | ) | (21,932) | (12,904) |
| | | 413,000 | | | | 143,000 | | 137 | 144 |
| | | | | | | | | |
Deferred tax liabilities: | | | | | | | | | |
Leasehold improvements and equipment | | | (284,000 | ) | | | (108,000 | ) | - | (9) |
Prepaid expenses | | | (129,000 | ) | | | (35,000 | ) | (137) | (135) |
| | | (413,000 | ) | | | (143,000 | ) | (137) | (144) |
| | | | | | | | | |
| | $ | - | | | $ | - | | $- |
The Company has tax net operating loss carryforwards for federal and state income tax purposes of approximately $29,006,000$68.3 million and $23,610,000,$58.9 million, respectively which begin to expire in the year ending December 31, 2023 and 2016,2022, respectively. In addition, the Company has tax capitalThe federal net operating loss carrycarryforward of $28.3 million from 2018 can be carried forward availableindefinitely but is limited to offset future federal80% of taxable capital income of approximately $2,065,000 which will expire in the year ending December 31, 2019.income.
Under the Internal Revenue Code, certain ownership changes may subject the Company to annual limitations on the utilization of its net operating loss carryforward. The Company has determined that the stock issued in the year of 2018 did not create a change in control under the Internal Revenue Code Section 382. The Company will continue to analyze the potential impact of any additional transactions undertaken upon the utilization of the net operating losses on a go forward basis.
The Company is currently not under examination by the Internal Revenue Service or any other jurisdictions for any tax years. The Company has not identified any uncertain tax positions requiring a reserve as of January 2, 2016December 31, 2018 and January 3,December 30, 2017.
Note 9.
Related Party Transactions
Sale of consumer products
| Net sales Year ended Dec. 31, 2018 | | Net sales Year ended Dec. 30, 2017 | | Trade receivable at Dec. 31, 2018 | | Trade receivable at Dec. 30, 2017 |
A.S. Watson Group | $2.9 million | | $4.1 million | | $0.7 million | | $1.0 million |
Horizon Ventures | $0.4 million | | - | | - | | - |
Total | $3.3 million | | $4.1 million | | $0.7 million | | $1.0 million |
*A.S. Watson Group and Horizon Ventures are related parties through common ownership of an enterprise that beneficially owns more than 10% of the common stock of the Company. |
Asset acquisition
On March 12, 2017, the Company acquired all of the outstanding equity interests of Healthspan from Robert Fried, Jeffrey Allen and Dr. Charles Brenner (the "Sellers"). Robert Fried is a member of the Board of Directors ("Board") of the Company, a position he has held since July 2015.
Upon the closing of, and as consideration for, the acquisition, the Company issued an aggregate of 367,648 shares of the Company’s common stock to the Sellers. The fair value of these shares was approximately $1.0 million based on the closing price of $2.72 per share on March 12, 2017. Mr. Fried continues to serve as a member of the Board and is the Chief Executive Officer of the Company.
Healthspan was formed in August 2015 to offer and sell finished bottle product TRU NIAGEN® directly to consumers through internet-based selling platforms. TRU NIAGEN® is currently the Company's leading product. Prior to the acquisition, the Company has supplied certain amount of NIAGEN® to Healthspan as a raw material inventory in exchange for a 4% equity interest in Healthspan. An additional 5% equity interest was received for granting certain exclusive rights to resell NIAGEN® prior to the total acquisition on March 12, 2017.
This transaction was accounted for as an acquisition of assets. An intangible asset of approximately $1.35 million was recorded as a result of this acquisition, which is the difference of consideration transferred and the net amount of assets acquired and liabilities assumed.
(A) Consideration transferred | | (B) Net amount of assets and liabilities |
| | | |
| | Assets acquired | |
Common Stock | $1,000,000 | Cash and cash equivalents | $19,000 |
Transaction costs | 178,000 | Trade receivables | 11,000 |
Previously held equity interest | 20,000 | Inventory | 61,000 |
| | | |
| $1,198,000 | Liabilities assumed | |
| | Due to officer | (132,000) |
| | Accounts payable | (74,000) |
| | Credit card payable | (30,000) |
| | Other accrued expenses | (3,000) |
Consumer product business model, | | | |
intangible asset (A) -(B) | $1,346,000 | Net assets | $(148,000) |
The acquired intangible asset is considered to have a useful life of 10 years. The expense is amortized using the straight-line method over the useful life and the Company recognized an amortization expense of approximately $135,000 and $109,000 for the years ended December 31, 2018 and December 30, 2017, respectively.
In cancellation of a loan owed by Healthspan to Mr. Fried prior to the acquisition, the Company repaid $32,500 to Mr. Fried on March 13, 2017 and also repaid $100,000 on March 9, 2018. No interest was paid for the $100,000 repaid on March 9, 2018.
Note 10.
Contract Assets and Contract Liabilities
Our contract assets consist of unbilled amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Our contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue.
Net contract assets (liabilities) consisted of the following:
(In thousands) | | Opening Balance Adjustment | | | | |
Contract Assets | $- | $56 | $56 | $(314) | $314 | $56 |
Contract Liabilities - Open Projects (3) | 186 | (108) | 78 | (154) | 177 | 101 |
Contract Liabilities - Other Customer Deposits (4) | 128 | - | 128 | (125) | 171 | 174 |
Net Contract Assets (Liabilities) | $(314) | $164 | $(150) | $(35) | $(34) | $(219) |
| | | | | | |
(1) For contract assets, the amount represents amount billed to the customer. | | | | |
For contract liabilities, the amount represents reductions for revenue recognized. | | | |
(2) For contract assets, the amount represents revenue recognized during the period using the cost-to-cost method. | |
For contract liabilities, the amount represents advance payments received during the period. | | |
(3) Contract liablities from ongoing consulting projects. | | | | | |
(4) Other customer deposts include payments received for orders not fulfilled and other advance payments. | | |
In the year ended December 31, 2018, we recognized revenue of approximately $95,000 related to our adjusted contract liabilities at the beginning of the fiscal year 2018.
Note 11.
Discontinued Operations
On September 5, 2017, the Company completed the sale of its operating assets that were used with the Company's quality verification program testing and analytical chemistry business for food and food related products (the "Lab Business") to Covance Laboratories Inc. ("Covance") (the “Lab Business Sale”). In consideration of the Lab Business Sale, the Company received $6.75 million from Covance and additional cash consideration of $0.8 million is currently held in escrow to satisfy any potential indemnification claims by Covance. In 2017, the Company recorded a gain of approximately $5.5 million from the disposal.
(In thousands) | | | |
(A) Consideration received | | (C) Carrying value of the Lab Business | |
| | | |
| | Assets disposed | |
Cash payment | $6,750 | Leasehold improvements and equipment, net | $1,427 |
Cash payment held in escrow (1) | 750 | Prepaid expenses | 11 |
Additional earnout payment | - | Deposits | 20 |
| $7,500 | | |
| | Liabilities disposed | |
| | Deferred revenue | (7) |
(B) Selling costs |
| Deferred rent | (215) |
| | | |
Legal | $428 | | |
Financial consulting | 250 | | |
Other | 118 | | |
| $796 | Net assets | $1,236 |
| | | |
Gain from disposal (A) - (B) - (C) | $5,468 | | |
(1) $750,000 held in escrow to satisfy any indemnification claims.
The sale of the Lab Business qualified as a discontinued operation as the sale represented a strategic shift that had a major effect on operations and financial results.
The results of operations from the discontinued operations for the years ended December 31, 2018 and December 30, 2017 are as follows:
Statements of Operations - Discontinued operations | |
Years Ended December 31, 2018 and December 30, 2017 | |
(In thousands) | | |
| | |
| | |
Sales | $- | $2,821 |
Cost of sales | - | 2,479 |
| | |
Gross profit | - | 342 |
| | |
Operating expenses: | | |
Sales and marketing | - | 482 |
General and administrative | - | 150 |
Operating expenses | - | 632 |
| | |
Operating loss | - | (290) |
| | |
Nonoperating expenses: | | |
Interest expense, net | - | (25) |
Nonoperating expenses | - | (25) |
| | |
Loss from discontinued operations | $- | $(315) |
Depreciation, capital expenditures and significant noncash investing activities of the discontinued operations for the years ended December 31, 2018 and December 30, 2017 are as follows:
Discontinued operations | | |
Depreciation, amortization, captial expenditures and significant noncash operating and investing activities | | |
Years Ended December 31, 2018 and December 30, 2017 | | |
(In thousands) | | |
| 2018 | 2017 |
| | |
Depreciation | $- | $169 |
Purchase of leasehod improvements and equipment | $- | $111 |
| | |
Noncash investing activity | | |
Retirement of fully depreciated equipment - cost | $- | $56 |
Retirement of fully depreciated equipment - accumulated depreciation | $- | $(56) |
| | |
Stock Option Plans
At the discretion of the Company’s compensation committee (the “Compensation Committee”), and with the approval of the Company’s board of directors (the “Board of Directors”), the Company may grant options to purchase the Company’s common stock to certain individuals from time to time. Management and the Compensation Committee determine the terms of awards which include the exercise price, vesting conditions and expiration dates at the time of grant. Expiration dates for stock options are not to exceed 10 years from their date of issuance.
On June 20, 2017, the stockholders of the Company approved the ChromaDex Corporation 2017 Equity Incentive Plan (the "2017 Plan"). The Company's Board of Directors amended the 2017 Plan in January 2018 and the stockholders of the Company under itsapproved an amendment to the 2017 plan on June 22, 2018. The 2017 Plan is the successor to the ChromaDex Corporation Second Amended and Restated 2007 Equity Incentive Plan (the "2007 Plan"). As of December 31, 2018, under the 2017 Plan, the Company is authorized to issue stock options that total no more than 20%the sum of (i) 9,000,000 new shares, (ii) approximately 384,000 unallocated shares remaining available for the sharesgrant of common stock issued and outstanding, as determined on a fully diluted basis. Beginning in 2007, stock options were no longer issuablenew awards under the Company’s 2000 Non-Qualified Incentive Stock Plan.2007 Plan, (iii) any returning shares from the 2007 Plan or the 2017 Plan, such as forfeited, cancelled, or expired shares and (iv) 500,000 shares pursuant to an inducement award. The remaining amountnumber of shares available for issuance under the Second Amended and Restated 2007 Equity Incentive2017 Plan totaled 3,321,226approximately 4.9 million shares at January 2, 2016. December 31, 2018.
General Vesting Conditions
The stock option awards generally vest ratably over a three to four-year period following grant date after a passage of time. However, some stock option awards are market or performance based and vest based on the achievement of certain criteriatriggering events established by the Compensation Committee, subject to approval by the Board of Directors.
The fair value of the Company’s stock options that are not market based was estimated at the date of grant using the Black-Scholes based option valuation model. The table below outlines the weighted average assumptions for options granted to employees during the years ended January 2, 2016, January 3, 2015December 31, 2018 and December 28, 2013.30, 2017.
Year Ended December | | 2015 | | | 2014 | | | 2013 | | | |
Expected term | | 5.8 years | | | 5.8 years | | | 6.0 years | | |
Expected Volatility | | | 75.8 | % | | | 74.6 | % | | | 32.8 | % | |
Expected dividends | | | 0.0 | % | | | 0.0 | % | | | 0.00 | % | |
Volatility | | 69% | 71% |
Dividend Yield | | 0% |
Risk-free rate | | | 1.7 | % | | | 1.9 | % | | | 1.5 | % | 3% | 2% |
1) Service Period Based Stock Options
The majority of options granted by the Company are comprised of service based options granted to employees.options. These options vest ratably over a defined period following grant date after a passage of a service period.
The following table summarizes service period based stock options activity:activity (in thousands except per share data and remaining contractual term):
| | | | | Weighted Average | | |
| | | | | | | | Remaining | | | | | Aggregate |
| | Number of | | | Exercise | | | Contractual | | | Fair | | Intrinsic |
| | Shares | | | Price | | | Term | | | Value | | Value |
Outstanding at December 29, 2012 | | | 12,202,558 | | | $ | 1.08 | | | | 8.25 | | | | | |
| | | | | | | | | | | | | | | | |
Options Granted | | | 805,000 | | | | 0.81 | | | | 10.00 | | | $ | 0.29 | | |
Options Exercised | | | (26,038 | ) | | | 0.51 | | | | | | | | | | |
Options Expired | | | (75,000 | ) | | | 0.50 | | | | | | | | | | |
Options Forfeited | | | (792,865 | ) | | | 1.19 | | | | | | | | | | |
Outstanding at December 28, 2013 | | | 12,113,655 | | | $ | 1.06 | | | | 7.43 | | | | | | |
| | | | | | | | | | | | | | | | | |
Options Granted | | | 2,233,987 | | | | 1.39 | | | | 10.00 | | | $ | 0.90 | | |
Options Classification from Employee to Non- Employee | | | (113,151 | ) | | | 0.76 | | | | 8.68 | | | | | | |
Options Exercised | | | (534,715 | ) | | | 0.87 | | | | | | | | | | |
Options Expired | | | (253,900 | ) | | | 1.00 | | | | | | | | | | |
Options Forfeited | | | (722,275 | ) | | | 1.13 | | | | | | | | | | |
Outstanding at January 3, 2015 | | | 12,723,601 | | | $ | 1.13 | | | | 7.00 | | | | | | |
| | | | | | | | | | | | | | | | | |
Options Granted | | | 2,191,685 | | | | 1.22 | | | | 10.00 | | | $ | 0.76 | | |
Options Classification from Employee to Non- Employee | | | (1,542,071 | ) | | | 0.93 | | | | 7.78 | | | | | | |
Options Exercised | | | (120,708 | ) | | | 0.79 | | | | | | | | | | |
Options Forfeited | | | (310,274 | ) | | | 1.31 | | | | | | | | | | |
Outstanding at January 2, 2016 | | | 12,942,233 | | | $ | 1.17 | | | | 6.44 | | | | | | $ 2,123,923 |
| | | | | | | | | | | | | | | | | |
Exercisable at January 2, 2016 | | | 10,034,596 | | | $ | 1.16 | | | | 5.73 | | | | | | $ 1,921,746 |
| | | |
| | | | | |
| | | | | |
| | | | | |
Outstanding at December 31, 2016 | 5,144 | $3.49 | 6.17 | | |
| | | | | |
Options Granted | 1,285 | 3.48 | 10.00 | $2.31 | |
Options Exercised | (885) | 3.43 | | | $2,479 |
Options Expired | (3) | 4.50 | | | |
Options Forfeited | (74) | 3.88 | | | |
Outstanding at December 30, 2017 | 5,467 | $3.49 | 6.41 | | $13,101 |
| | | | | |
Options Granted | 3,071 | 4.29 | 10.00 | $2.74 | |
Options Exercised | (131) | 4.02 | | | $109 |
Options Expired | (245) | 4.50 | | | |
Options Forfeited | (139) | 4.21 | | | |
Outstanding at December 31, 2018 | 8,023 | $3.75 | 7.11 | | $2,207* |
| | | | | |
Exercisable at December 31, 2018 | 4,351 | $3.47 | 5.32 | | $1,802* |
*The aggregate intrinsic values in the table above are based on the Company’s closing stock price of $1.22$3.43 on the last day of business for the year ended January 2, 2016. The aggregate intrinsic values for options exercised during the years ended January 2, 2016, January 3, 2015, and December 28, 2013 were approximately $58,000, $156,000 and $7,000 respectively.31, 2018.
2) Performance Based Stock Options
The Company also grants stock option awards that are performance based and vest based on the achievement of certain criteria established from time to time by the Compensation Committee. If these performance criteria are not met, the compensation expenses are not recognized and the expenses that have been recognized will be reversed.
The following table summarizes performance based stock options activity:activity (in thousands except per share data and remaining contractual term):
| | | | | Weighted Average | | | | | | | |
| | | | | | | | Remaining | | | | | | Aggregate | | | | | |
| | Number of | | | Exercise | | | Contractual | | | Fair | | | Intrinsic | | | | | | |
| | Shares | | | Price | | | Term | | | Value | | | Value | | | | | |
Outstanding at December 29, 2012 | | | 145,834 | | | $ | 1.59 | | | | 8.27 | | | | | | | | |
Outstanding at December 31, 2016 | | 67 | $1.89 | 6.08 | | |
Options Granted | | | 200,000 | | | | 0.63 | | | | 10.00 | | | $ | 0.22 | | | | | - | | |
Options Exercised | | | - | | | | - | | | | | | | | | | | | | - | | |
Options Forfeited | | | (145,834 | ) | | | 1.59 | | | | | | | | | | | | | - | | |
Outstanding at December 28, 2013 | | | 200,000 | | | $ | 0.63 | | | | 9.08 | | | | | | | | | |
Outstanding at December 30, 2017 | | 67 | $1.89 | 5.08 | | |
Options Granted | | | - | | | | - | | | | | | | | | | | | | - | | |
Options Exercised | | | - | | | | - | | | | | | | | | | | | | - | | |
Options Forfeited | | | - | | | | - | | | | | | | | | | | | | - | | |
Outstanding at January 3, 2015 | | | 200,000 | | | $ | 0.63 | | | | 8.08 | | | | | | | | | |
Options Granted | | | - | | | | - | | | | | | | | | | | | | |
Options Exercised | | | - | | | | - | | | | | | | | | | | | | |
Options Forfeited | | | - | | | | - | | | | | | | | | | | | | |
Outstanding at January 2, 2016 | | | 200,000 | | | $ | 0.63 | | | | 7.08 | | | | | | | $ | 118,000 | | |
Outstanding at December 31, 2018 | | 67 | $1.89 | 4.08 | | $103 |
| | | | | | | | | | | | | | | | | | | | | |
Exercisable at January 2, 2016 | | | 145,833 | | | $ | 0.63 | | | | 7.08 | | | | | | | $ | 86,041 | | |
Exercisable at December 31, 2018 | | 67 | $1.89 | 4.08 | | $103 |
3) Market Based Stock Options
The Company also grants stock option awards that are market based which have vesting conditions associated with a service condition as well as performance of the Company's stock price. The following table summarizes market based stock options activity (in thousands except per share data and remaining contractual term):
| | | |
| | | | | |
| | | | | |
| | | | | |
Outstanding at December 31, 2016 | - | $- | - | | |
Options Granted | 1,000 | 4.24 | 10.00 | $3.04 | |
Options Exercised | - | - | | | |
Options Forfeited | - | - | | | |
Outstanding at December 30, 2017 | 1,000 | $4.24 | 9.24 | | |
Options Granted | - | - | | | |
Options Exercised | - | - | | | |
Options Forfeited | - | - | | | |
Outstanding at December 31, 2018 | 1,000 | $4.24 | 8.24 | | $0 |
| | | | | |
Exercisable at December 31, 2018 | 389 | $4.24 | 8.24 | | $0 |
The aggregate intrinsic value in the table above are, based on the Company’s closing stock price of $1.22$3.43 on the last day of business for the period ended January 2, 2016.December 31, 2018.
The fair value of options granted during the period ended December 30, 2017 was measured using Monte Carlo simulations based on a lattice approach with following assumptions:
| Volatility: | 67% | |
| Contractual Term: | 10 years | |
| Risk Free Rate: | 2.4% | |
| Cost of Equity: | 15.7% | |
For the contractual term, we are using 10 years as this is not a "plain vanilla" option. SEC Staff Accounting Bulletin No. 107 simplified method for estimating the expected term can be only used if the option is a "plain vanilla" option.
As of January 2, 2016,December 31, 2018, there was approximately $1,805,000$9.6 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the plans for employee stock options. That cost is expected to be recognized over a weighted average period of 2.362.0 years.
Restricted Stock Awards
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:(in thousands except per share fair value):
| | | | | Weighted Average | | | |
| | | | | Award-Date | | | |
| | Shares | | | Fair Value | | |
Unvested shares at December 29, 2012 | | | 500,000 | | | $ | 0.69 | | |
Unvested shares at December 31, 2016 | | 360 | $3.20 |
Granted | | | - | | | | - | | 500 | 5.08 |
Vested | | | - | | | | - | | (675) | 4.59 |
Forfeited | | | - | | | | - | | - |
Unvested shares at December 28, 2013 | | | 500,000 | | | $ | 0.69 | | |
Unvested shares at December 30, 2017 | | 185 | $3.28 |
Granted | | | 1,090,000 | | | | 1.41 | | - |
Vested | | | - | | | | - | | (2) | 5.28 |
Forfeited | | | - | | | | - | | - |
Unvested shares at January 3, 2015 | | | 1,590,000 | | | $ | 1.18 | | |
Granted | | | - | | | | - | | |
Vested | | | (520,000 | ) | | | 1.41 | | |
Forfeited | | | - | | | | - | | |
Unvested shares at January 2, 2016 | | | 1,070,000 | | | $ | 1.07 | | |
Unvested shares at December 31, 2018 | | 183 | $3.25 |
| | | | | | | | | |
Expected to Vest as of January 2, 2016 | | | 1,070,000 | | | $ | 1.07 | | |
Expected to Vest as of December 31, 2018 | | 183 | $3.25 |
During the year ended December 30, 2017, the Company granted 500,000 shares of restricted stock award to the Company's President and Chief Operating Officer Robert Fried, which vested during the year ended December 30, 2017. The expense for vested restricted stock was approximately $2.5 million and was recognized during the year ended December 30, 2017.
During the year ended January 2, 2016, several members ofDecember 30, 2017, the Company’s Board of Directors (the “Board”)Company's former Chief Financial Officer, Thomas Varvaro resigned from the Board and received immediate vesting of theirhis unvested restricted stock of 520,000166,668 shares. The expense for the vested restricted stock was approximately $0.5 million and was recognized prior to the fiscal year 2017.
Performance Stock Awards
During the fiscal year 2018, the Compensation Committee of the Board of Directors of the Company approved grants of an aggregate total of 333,334 shares of fully vested stock to Robert Fried, the Company’s Chief Executive Officer. The shares were granted pursuant to his employment agreement, which provided the stock grant upon the achievement of certain performance goals. The expense for the awarded shares was approximately $1.3 million and was recognized during the fiscal year ended January 3, 2015.
On January 2, 2014, the Company awarded an aggregate of 1,090,000 shares of restricted stock to the Company’s officers and members of the Board. The award includes the vested shares described above for members who resigned from the Board. These shares were to vest upon the earlier to occur of the following: (i) the market price of the Company’s stock exceeds a certain price, or (ii) one of other certain triggering events, including the termination of the officers and members of the board of directors without cause for any reason. The fair values of these restricted stock awards were $1,536,900 in aggregate, and they were based on the trading price of the Company’s common stock on the date of grant. The expense related to the restricted stock award has been amortized over the period of six months through July 1, 2014, as the Company determined the requisite service period to be 6 months as that is when they are eligible to vest.2018.
Subsequent to the year ended January 2, 2016, the Company and each of the executives and members of the Board amended the restricted stock awards to provide that the awards shall not vest upon the market price of the Company’s stock exceeding a certain price or listing of the Company’s stock on a national securities exchange.
Employee Option and Restricted StockTotal Share-based Compensation
The Company recognized share-based compensation expense of approximately $1,543,000, $2,747,000$6.4 million and $958,000 in general and administrative expenses$4.6 million in the statement of operations for the years ended January 2, 2016, January 3, 2015December 31, 2018 and December 28, 2013,30, 2017, respectively.
Note 13.
Stock Option Plan
At the discretion of management, working with the Compensation Committee, and with approval of the Board of Directors, the Company may grant options to purchase the Company’s common stock to certain individuals from time to time who are not employees of the Company. These options are granted under the Second Amended and Restated 2007 Equity Incentive Plan of the Company and are granted on the same terms as those being issued to employees. Stock options granted to non-employees are accounted for using the fair value approach. The fair value of non-employee option grants are estimated using the Black-Scholes option-pricing model and are re-measured over the vesting term until earned. The estimated fair value is expensed over the applicable service period.
The following table summarizes activity of stock options granted to non-employees:
| | | | | Weighted Average | | |
| | | | | | | | Remaining | | Aggregate |
| | Number of | | | Exercise | | | Contractual | | Intrinsic |
| | Shares | | | Price | | | Term | | Value |
Outstanding at December 29, 2012 | | | 1,097,300 | | | $ | 1.23 | | | | 5.26 | | |
Options Granted | | | - | | | | - | | | | | | |
Options Exercised | | | (250,000 | ) | | | 0.50 | | | | | | |
Options Forfeited | | | - | | | | - | | | | | | |
Outstanding at December 28, 2013 | | | 847,300 | | | $ | 1.44 | | | | 5.74 | | |
Options Granted | | | 90,000 | | | | 1.24 | | | | 10.00 | | |
Options Classification from Employee to Non-Employee | | | 113,151 | | | | 0.76 | | | | 8.68 | | |
Options Exercised | | | - | | | | - | | | | | | |
Options Forfeited | | | - | | | | - | | | | | | |
Outstanding at January 3, 2015 | | | 1,050,451 | | | $ | 1.35 | | | | 5.46 | | |
Options Granted | | | - | | | | - | | | | | | |
Options Classification from Employee to Non-Employee | | | 1,542,071 | | | | 0.93 | | | | 7.78 | | |
Options Exercised | | | - | | | | - | | | | | | |
Options Forfeited | | | - | | | | - | | | | | | |
Outstanding at January 2, 2016 | | | 2,592,522 | | | $ | 1.10 | | | | 6.04 | | $550,111 |
| | | | | | | | | | | | | |
Exercisable at January 2, 2016 | | | 2,558,772 | | | $ | 1.10 | | | | 6.00 | | $549,961 |
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 theFiscal year ended January 2, 2016.2017
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 twelve-month period ended January 2, 2016.
In addition, 24,000 shares of restricted stock that were granted to a certain non-employee during the fiscal year ended January 3, 2015 became vested during the twelve-month period ended January 2, 2016. The fair value of these vested restricted shares was approximately $30,000, 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:
| | | | | Weighted Average | |
| | Shares | | | Fair Value | |
Unvested shares at December 29, 2012 | | | - | | | $ | - | |
Granted | | | - | | | | - | |
Vested | | | - | | | | - | |
Forfeited | | | - | | | | - | |
Unvested shares at December 28, 2013 | | | - | | | $ | - | |
Granted | | | 96,000 | | | | 1.30 | |
Vested | | | (20,000 | ) | | | 1.17 | |
Forfeited | | | - | | | | - | |
Unvested shares at January 3, 2015 | | | 76,000 | | | $ | 0.90 | |
Granted | | | 140,000 | | | | 0.86 | |
Vested | | | (164,000 | ) | | | 1.21 | |
Forfeited | | | - | | | | - | |
Unvested shares expected to vest at January 2, 2016 | | | 52,000 | | | $ | 1.22 | |
| | | | | | | | |
As of January 2, 2016, there was approximately $63,000 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 2.2 years as of January 2, 2016.
There were also stock awards made in 2014, which the Company has recognized a portion of the expense in 2015 as the required service periods extended into 2015. During the twelve months ended January 3, 3015, the Company awarded an aggregate of 65,000 shares and recognized a total expense of approximately $129,000. During the twelve months ended December 28, 2013, the Company awarded an aggregate of 600,000 shares and recognized a total expense of approximately $325,000.
Warrant Awards
On October 27, 2014, the Company awarded a warrant to purchase 50,000 shares of the Company’s common stock with an exercise price of $1.10 per share. The term of the warrant was 2 years. This warrant has not been exercised as of January 2, 2016.
On August 7, 2012, the Company awarded a warrant to purchase 250,000 shares of the Company’s common stock with an exercise price of $0.75 per share. The term of the warrant was 2 years. On December 9, 2013, the non-employee who held the warrant elected a cashless exercise pursuant to the provisions of the warrant and received 74,186 shares of common stock in lieu of 250,000 shares for a cash payment of $0.75 per share. The intrinsic value of the warrant exercised was approximately $91,000.
Non-Employee Option, Stock, Restricted Stock and Warrant Awards
For non-employee share-based compensation, the Company recognized share-based compensation expense of approximately $435,000, $170,000 and $330,000 in general and administrative expenses in the statement of operations for the years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively.
On November 4, 2015,April 26, 2017, the Company entered into a Securities Purchase Agreements (“SPAs”)Agreement with certain existing stockholderspurchasers named therein, pursuant to raise $2,000,000 in a registered direct offering. Pursuant to the SPAs,which the Company sold a totalagreed to sell and issue up to $25.0 million of 200,000 Unitsits common stock at a purchase price of $10.00$2.60 per Unit, with each Unit consistingshare in three tranches of eightapproximately $3.5 million, $16.4 million and $5.1 million, respectively. All three tranches closed during the year ended December 30, 2017, whereby approximately 9.6 million shares were issued for proceeds of $23.7 million, net of offering costs.
On November 3, 2017 the Company’sCompany entered into a Securities Purchase Agreement for the sale of approximately $23.0 million of its common stock andin a warrant to purchase fourprivate placement, in return for which the purchasers received approximately 5.6 million shares of common stock (800,000 total) with an exerciseat a per share price of $1.50$4.10. The private placement closed during the year ended December 30, 2017 and a term of 3 years. The aggregate estimated fair value of the warrants was approximately $489,000 and these warrants were determined to be classified as equity. The fair value was estimated at the date of issuance using the Black-Scholes based valuation model. The table below outlines the assumptions for the warrants issued.
| | November 9, 2015 | |
Fair value of common stock | | $ | 1.47 | |
Volatility | | | 62.26 | % |
Expected dividends | | | 0.00 | % |
Contractual term | | 3.0 years | |
Risk-free rate | | | 1.27 | % |
In Fiscal Year 2014, the Company issued 126,605 shares of common stock to vendors to settle outstanding payables balances of approximately $146,000.
In Fiscal Year 2013, the Company sold approximately 3.5 million shares with grossreceived proceeds of approximately $3.0$22.9 million, to two strategic accredited investors pursuant to a subscription agreement. A total placement agent feenet of $20,000 was incurred in connection with the investments.offering costs.
The following table summarizes activity of warrants at January 2, 2016, January 3, 2015December 31, 2018 and December 28, 201330, 2017 and changes during the years then ended:ended (in thousands except per share data and remaining contractual term):
| | | | | Weighted Average | | | | | | |
| | | | | | | | Remaining | | | Aggregate | | | |
| | Number of | | | Exercise | | | Contractual | | | Intrinsic | | | | |
| | Shares | | | Price | | | Term | | | Value | | | | |
Outstanding at December 29, 2012 | | | 10,056,914 | | | $ | 0.72 | | | | 0.44 | | | | | |
Outstanding and exercisable at December 31, 2016 | | 470 | 4.15 | 2.17 |
Warrants Issued | | | | | | | | | | | | | | | | - | |
Warrants Exercised | | | (8,338,564 | ) | | | 0.25 | | | | | | | | | - | |
Warrants Expired | | | (1,718,350 | ) | | | 3.00 | | | | | | | | | - | |
Outstanding at December 28, 2013 | | | - | | | | - | | | | - | | | | - | | |
| | | | | | | | | | | | | | | | | |
Outstanding and exercisable at December 30, 2017 | | 470 | 4.15 | 1.17 |
Warrants Issued | | | 469,020 | | | | 1.07 | | | | 4.68 | | | | | | - | |
Warrants Exercised | | | - | | | | - | | | | | | | | | | - | |
Warrants Expired | | | - | | | | - | | | | | | | | | | (266) | 4.50 | |
Outstanding and exercisable at January 3, 2015 | | | 469,020 | | | | 1.07 | | | | 4.43 | | | | | | |
Warrants Issued | | | 800,000 | | | | 1.50 | | | | | | | | | | |
Warrants Exercised | | | - | | | | - | | | | | | | | | | |
Warrants Expired | | | - | | | | - | | | | | | | | | | |
Outstanding and exercisable at January 2, 2016 | | | 1,269,020 | | | $ | 1.34 | | | | 3.07 | | | $ | 72,205 | | |
Outstanding and exercisable at December 31, 2018 | | 204 | $3.69 | 0.57 |
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 year ended January 2, 2016.Lease
The Company leases its office and research facilities in California, Colorado and Maryland under operating lease agreements that expire at various dates from April 2016September 2019 through September 2019.February 2024. Monthly lease payments range from $1,424$4,000 per month to $23,472$48,000 per month, and minimum lease payments escalate during the terms of the leases. Generally accepted accounting principles require total minimum lease payments to be recognized as rent expense on a straight-line basis over the term of the lease. The excess of such expense over amounts required to be paid under the lease agreement is carried as a liability on the Company’s consolidated balance sheet.
Minimum future rental payments under all of the leases as of January 2, 2016December 31, 2018 are as follows:
Fiscal years ending: | | | |
2016 | | $ | 355,000 | |
2017 | | | 225,000 | |
2018 | | | 233,000 | |
2019 | | | 181,000 | |
| | $ | 994,000 | |
(In thousands) Fiscal years ending: | |
2019 | $787 |
2020 | 733 |
2021 | 627 |
2022 | 138 |
2023 | 143 |
Thereafter | 24 |
| $2,452 |
Rent expense was approximately $536,000, $537,000,$791,000 and $519,000$729,000 for the years ended January 2, 2016, January 3, 2015December 31, 2018 and December 28, 2013,30, 2017, respectively.
Subsequent toDuring the year ended January 2, 2016,December 31, 2018, the Company entered into a lease amendmentamendments to extend the term of the lease for its research facilityadditional office space located in Boulder, ColoradoLos Angeles, California through April 2023.October 2021. Pursuant to the lease, amendment, the Company will make additional monthly lease payments rangeranging from $23,472approximately $25,000 to $27,210,$27,000, as the payments escalate during the term of the lease.
Subsequent Pursuant to the year ended January 2, 2016, the Company entered into a lease amendment to lease an office space located in Rockville, Maryland through April 2021. Pursuant toterm of the lease amendment, the landlord provided tenant improvements for approximately $70,000 in 2018. The landlord provided lease incentive (a) has been recorded as leasehold improvement asset and is amortized over the lease term which is through October 2021; and (b) has been recorded as deferred rent and is amortized as reductions to lease expense over the lease term.
Purchase obligations
The Company will make monthly leaseenters into purchase obligations with various vendors for goods and services that we need for our operations. The purchase obligations for goods and services include inventory, research and development, and laboratory supplies. Minimum future payments range from $3,450 to $3,883,under purchase obligations as the payments escalate during the term of the lease.December 31, 2018 are as follows:
(In thousands) Fiscal year ending: | |
2019 | $4,365,000 |
| $4,365,000 |
Royalty
The Company has 11nine licensing agreements with leading research universities and other patent holders, pursuant to which the Company acquired patents related to certain products the Company offers to its customers. These agreements afford for future royalty payments based on contractual minimums and expire at various dates from December 31, 2019 through April 12,an estimated year of 2032. Yearly minimum royalty payments including license maintenance fees range from $5,000$10,000 per year to $50,000$100,000 per year, however, these minimum payments escalate each year with a maximum of $200,000$150,000 per year. In addition, the Company is required to pay a range of 2% to 8%5% of sales related to the licensed products under these agreements. Total royalty expenses including license maintenance fees from continuing operations for the years ended January 2, 2016, January 3, 2015December 31, 2018 and December 28, 201330, 2017 were approximately $583,000, $323,000$1.7 million and $111,000,$1.0 million, respectively under these agreements. Minimum royalties including license maintenance fees for the next five years are as follows:
Fiscal years ending: | | | |
2016 | | $ | 308,000 | |
2017 | | | 365,000 | |
2018 | | | 403,000 | |
2019 | | | 539,000 | |
2020 | | | 374,000 | |
| | $ | 1,989,000 | |
(In thousands) Fiscal years ending: | |
2019 | $333 |
2020 | 367 |
2021 | 385 |
2022 | 386 |
2023 | 388 |
| $1,859 |
Supply agreement with Nestlé
On December 19, 2018, the Company entered into a supply agreement with Nestec Ltd. (“Nestlé”), pursuant to which Nestlé will be our exclusive customer for NIAGEN® ingredient for human use in the (i) medical nutritional and (ii) functional food and beverage categories in certain territories. As consideration for the rights granted to Nestlé, we received an upfront fee of $4 million in January 2019. Following the launch of the products in certain territories, Nestlé will additionally pay us a one-time fee for a potential total aggregate payment of $6 million.
Legal proceedings – Elysium Health, LLC
(A) California Action
On December 29, 2016, ChromaDex, Inc. filed a complaint in the United States District Court for the Central District of California, naming Elysium Health, Inc. (together with Elysium Health, LLC, “Elysium”) as defendant (the “Complaint”). On January 25, 2017, Elysium filed an answer and counterclaims in response to the Complaint (together with the Complaint, the “California Action”). Over the course of the California Action, the parties have each filed amended pleadings several times and have each engaged in several rounds of motions to dismiss and one round of motion for judgment on the pleadings with respect to various claims. Most recently, on November 27, 2018, ChromaDex, Inc. filed a fifth amended complaint that added an individual, Mark Morris, as a defendant. Elysium and Morris (“the Defendants”) moved to dismiss on December 21, 2018. The court denied Defendants’ motion on February 4, 2019.
Following the court’s February 4, 2019 order, the claims that ChromaDex, Inc. presently asserts in the California Action, among other allegations, are that (i) Elysium breached the Supply Agreement, dated June 26, 2014, by and between ChromaDex, Inc. and Elysium (the “pTeroPure® Supply Agreement”), by failing to make payments to ChromaDex, Inc. for purchases of pTeroPure® and by improper disclosure of confidential ChromaDex, Inc. information pursuant to the pTeroPure® Supply Agreement, (ii) Elysium breached the Supply Agreement, dated February 3, 2014, by and between ChromaDex, Inc. and Elysium, as amended (the “NIAGEN® Supply Agreement”), by failing to make payments to ChromaDex, Inc. for purchases of NIAGEN® and by improper disclosure of confidential ChromaDex, Inc. information pursuant to the NIAGEN® Supply Agreement, (iii) Defendants willfully and maliciously misappropriated ChromaDex, Inc. trade secrets concerning its ingredient sales business under both the California Uniform Trade Secrets Act and the Federal Defend Trade Secrets Act, (iv) Morris breached two confidentiality agreements he signed by improperly stealing confidential ChromaDex, Inc. documents and information, (v) Morris breached his fiduciary duty to ChromaDex, Inc. by lying to and competing with ChromaDex, Inc. while still employed there, and (vi) Elysium aided and abetted Morris’s breach of fiduciary duty. ChromaDex, Inc. is seeking damages and interest for Elysium’s alleged breaches of the NIAGEN® Supply Agreement and pTeroPure® Supply Agreement and Morris’s alleged breaches of his confidentiality agreements, compensatory damages and interest, punitive damages, injunctive relief, and attorney’s fees for Defendants’ alleged willful and malicious misappropriation of ChromaDex, Inc.’s trade secrets, and compensatory damages and interest, disgorgement of all benefits received, and punitive damages for Morris’s alleged breach of his fiduciary duty and Elysium’s aiding and abetting of that alleged breach. Defendants filed their answer to ChromaDex, Inc.'s fifth amended complaint on February 19, 2019.
Among other allegations, the claims that Elysium presently alleges in the California Action are that (i) ChromaDex, Inc. breached the NIAGEN® Supply Agreement by not issuing certain refunds or credits to Elysium, by not supplying NIAGEN® manufactured according to the defined standard, by distributing the NIAGEN® product specifications attached to the parties’ agreement to other customers, and by failing to provide Elysium with information concerning the quality and identity of NIAGEN® pursuant to the NIAGEN® Supply Agreement, (ii) ChromaDex, Inc. breached the implied covenant of good faith and fair dealing pursuant to the NIAGEN® Supply Agreement, (iii) ChromaDex, Inc. fraudulently induced Elysium into entering into the Trademark License and Royalty Agreement, dated February 3, 2014, by and between ChromaDex, Inc. and Elysium (the “License Agreement”), (iv) ChromaDex, Inc.’s conduct constitutes misuse of its patent rights, and (v) ChromaDex, Inc. was unjustly enriched by the royalties Elysium paid pursuant to the License Agreement. Elysium is seeking damages for ChromaDex, Inc.’s alleged breaches of the NIAGEN® Supply Agreement and pTeroPure® Supply Agreement, and compensatory damages, punitive damages, and/or rescission of the License Agreement and restitution of any royalty payments conveyed by Elysium pursuant to the License Agreement, and a declaratory judgment that ChromaDex, Inc. has engaged in patent misuse. ChromaDex, Inc. answered Elysium’s present allegations on August 24, 2018. The parties are currently in discovery.
(B) Patent Office Proceedings
On July 17, 2017, Elysium filed petitions with the U.S. Patent and Trademark Office for inter partes review of U.S. Patents 8,197,807 (the “’807 Patent”) and 8,383,086 (the “ ’086 Patent”), patents to which ChromaDex, Inc. is the exclusive licensee. The Patent Trial and Appeal Board (“PTAB”) denied institution of the inter partes review for the ’807 Patent on January 18, 2018. On January 29, 2018, the PTAB granted institution of the inter partes review as to claims 1, 3, 4, and 5 and denied institution as to claim 2 of the ’086 Patent. Based upon a recent U.S. Supreme Court decision, and solely on a procedural basis, the PTAB was required to include claim 2 in the trial of the inter partes review. The matter was heard on October 2, 2018. The PTAB issued its written decision on January 16, 2019, upholding claim 2 of the ’086 Patent which relates to the use of isolated NR in a pharmaceutical composition as valid. Elysium is now prevented from raising invalidity arguments against the ’086 Patent in the ongoing patent litigation in Delaware that it brought or could have brought before the PTAB in its inter partes review.
(C) Southern District of New York Action
On September 27, 2017, Elysium Health Inc. (“Elysium Health”) filed a complaint in the United States District Court for the Southern District of New York, against ChromaDex, Inc. (the “Elysium SDNY Complaint”). Elysium Health alleges in the Elysium SDNY Complaint that ChromaDex, Inc. made false and misleading statements in a citizen petition to the Food and Drug Administration it filed on or about August 18, 2017. Among other allegations, Elysium Health avers that the citizen petition made Elysium Health’s product appear dangerous, while casting ChromaDex, Inc.’s own product as safe. The Elysium SDNY Complaint asserts four claims for relief: (i) false advertising under the Lanham Act, 15 U.S.C. § 1125(a); (ii) trade libel; (iii) deceptive business practices under New York General Business Law § 349; and (iv) tortious interference with prospective economic relations. ChromaDex, Inc. denies the claims in the Elysium SDNY Complaint and intends to defend against them vigorously. On October 26, 2017, ChromaDex, Inc. moved to dismiss the Elysium SDNY Complaint on the grounds that, inter alia, its statements in the citizen petition are immune from liability under the Noerr-Pennington Doctrine, the litigation privilege, and New York’s Anti-SLAPP statute, and that the Elysium SDNY Complaint failed to state a claim. Elysium Health opposed the motion on November 2, 2017. ChromaDex, Inc. filed its reply on November 9, 2017.
On October 26, 2017, ChromaDex, Inc. filed a complaint in the United States District Court for the Southern District of New York against Elysium Health (the “ChromaDex SDNY Complaint”). ChromaDex, Inc. alleges that Elysium Health made material false and misleading statements to consumers in the promotion, marketing, and sale of its health supplement product, Basis, and asserts five claims for relief: (i) false advertising under the Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under 15 U.S.C. § 1125(a); (iii) deceptive practices under New York General Business Law § 349; (iv) deceptive practices under New York General Business Law § 350; and (v) tortious interference with prospective economic advantage. On November 16, 2017, Elysium Health moved to dismiss for failure to state a claim. ChromaDex, Inc. opposed the motion on November 30, 2017 and Elysium Health filed a reply on December 7, 2017.
On November 3, 2017, the Court consolidated the Elysium SDNY Complaint and the ChromaDex SDNY Complaint actions under the caption In re Elysium Health-ChromaDex Litigation, 17-cv-7394, and stayed discovery in the consolidated action pending a Court-ordered mediation. The mediation was unsuccessful. On September 27, 2018, the Court issued a combined ruling on both parties’ motions to dismiss. For ChromaDex’s motion to dismiss, the Court converted the part of the motion on the issue of whether the citizen petition is immune under the Noerr-Pennington Doctrine into a motion for summary judgment, and requested supplemental evidence from both parties, which were submitted on October 29, 2018. The Court otherwise denied the motion to dismiss. On January 3, 2019, the Court granted ChromaDex, Inc.’s motion for summary judgment under the Noerr-Pennington Doctrine and dismissed all claims in the Elysium SDNY Complaint. Elysium moved for reconsideration on January 17, 2019. The Court denied Elysium’s motion for reconsideration on February 6, 2019, and issued an amended final order granting ChromaDex, Inc.’s motion for summary judgment as on February 7, 2019.
The Court granted it part and denied in part Elysium's motion to dismiss, sustaining three grounds for ChromaDex’s Lanham Act claims while dismissing two others, sustaining the claim under New York General Business Law § 349, and dismissing the claims under New York General Business Law § 350 and for tortious interference. Elysium filed an answer and counterclaims on October 10, 2018, alleging claims for (i) false advertising under the Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under 15 U.S.C. § 1125(a); and (iii) deceptive practices under New York General Business Law § 349. ChromaDex, Inc. answered Elysium’s counterclaims on November 2, 2018. The parties are conferring on a proposed scheduling order.
The Company fromis unable to predict the outcome of these matters and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to the legal proceedings discussed herein. As of December 31, 2018, ChromaDex, Inc. did not accrue a potential loss for the California Action or the Elysium SDNY Complaint because ChromaDex, Inc. believes that the allegations are without merit and thus it is not probable that a liability has been incurred.
(D) Delaware – Patent Infringement Action
On September 17, 2018, ChromaDex, Inc. and Trustees of Dartmouth College filed a patent infringement complaint in the United States District Court for the District of Delaware against Elysium Health, Inc. The complaint alleges that Elysium’s BASIS® dietary supplement violates U.S. Patents 8,197,807 (the “’807 Patent”) and 8,383,086 (the “’086 Patent”) that comprise compositions containing isolated nicotinamide riboside held by Dartmouth and licensed exclusively to ChromaDex, Inc. On October 23, 2018, Elysium filed an answer to the complaint. The answer asserts various affirmative defenses and denies that Plaintiffs are entitled to any relief.
On November 7, 2018, Elysium filed a motion to stay the patent infringement proceedings pending resolution of (1) the inter partes review of the ’807 Patent and the ’086 Patent before the Patent Trial and Appeal Board (“PTAB”) and (2) the outcome of the litigation in the California Action. ChromaDex, Inc. filed an opposition brief on November 21, 2018 detailing the issues with Elysium’s motion to stay. In particular, ChromaDex, Inc. argued that given claim 2 of the ’086 Patent was only included in the PTAB’s inter partes review for procedural reasons the PTAB was unlikely to invalidate claim 2 and therefore litigation in Delaware would continue regardless. In addition, ChromaDex, Inc. argued that the litigation in the California Action is unlikely to have a significant effect on the ongoing patent litigation. After the PTAB released its written decision upholding claim 2 of the ’086 Patent proving right ChromaDex, Inc.’s prediction ChromaDex, Inc. informed the Delaware court of the PTAB’s decision on January 17, 2019. Both Elysium and ChromaDex, Inc. have informed the court that they are available for oral argument on the motion to stay, and though the court’s docket is very crowded, ChromaDex, Inc. currently anticipates a ruling this spring.
Legal proceedings – Covance Laboratories Inc.
On January 10, 2019, Covance Laboratories Inc. (“Covance”) filed a complaint in the United States District Court for the District of Delaware against ChromaDex, Inc. and ChromaDex Analytics, Inc. (collectively “ChromaDex”). The complaint alleges that ChromaDex breached an Asset Purchase Agreement (“APA”), dated August 21, 2017, between Covance and ChromaDex in which Covance purchased certain assets related to ChromaDex’s Lab Business for $7,500,000. Specifically, the complaint alleges that ChromaDex failed to deliver to Covance its entire ComplyID library. On February 4, 2019, ChromaDex filed an answer to the complaint. The answer asserts various affirmative defenses and denies that Covance is entitled to any relief.
From time to time iswe are involved in legal proceedings arising in the ordinary course of our business, which can include employment claims, product claims and patent infringements.business. We do not believe that any of these claims and proceedings against us as they arise arethere is no other litigation pending that is likely to have, individually or in the aggregate, a material adverse effect on our financial condition or results of operations.
Severance payments to executive officers
As of January 2, 2016, the Company has three executive officers, Frank Jaksch, Jr., Chief Executive Officer, Thomas Varvaro, Chief Financial Officer and Troy A. Rhonemus, Chief Executive Officer. Upon termination, Mr. Jaksch, Mr. Varvaro and Mr. Rhonemus will receive severance payments per the terms of the respective employment agreements entered with the Company. The key terms of the employment agreements, including the severance terms are as follows:
Employment Agreement with Frank L. Jaksch Jr.
On April 19, 2010, the Company entered into an Amended and Restated Employment Agreement (the “Jaksch Agreement”) with Frank L. Jaksch Jr. The Jaksch Agreement automatically renews unless terminated in accordance with its terms. On January 2, 2014, the Board approved raising the annual base salary of Mr. Jaksch to $275,000 per year and the annual cash bonus target up to 50% of his base salary. On March 14, 2016, the Board increased the base salary of Mr. Jaksch to $320,000.
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The severance terms provide that in the event Mr. Jaksch’s employment with the Company is terminated voluntarily, he will be entitled to any accrued but unpaid base salary, any stock vested through the date of his termination and a pro-rated portion of 50% of his salary for the bonus. In addition, if Mr. Jaksch leaves the Company for “Good Reason”, (as defined in Jaksch Agreement), he will also be entitled to severance equal to 50% of his salary, and he will be deemed to have been employed for the entirety of such year. Severance will then consist of 16 weeks of paid salary, unless Mr. Jaksch signs a release, in which case he will receive compensation up to 12 months paid salary.
In the event the Company terminates Mr. Jaksch’s employment “without Cause” (as defined in the Jaksch Agreement), Mr. Jaksch will be entitled to severance in the form of any stock vested through the date of his termination and continuation of his base salary for a period of eight weeks, or, if Mr. Jaksch enters into a standard separation agreement, Mr. Jaksch will receive continuation of base salary and health benefits, together with applicable fringe benefits until 24 months from the date of termination (the “Severance Period”), and he will receive a bonus of 50% of his base salary as well as the full vesting of any otherwise unvested stock.
Employment Agreement with Thomas C. Varvaro
On April 19, 2010, the Company entered into an Amended and Restated Employment Agreement (the “Varvaro Agreement”) with Thomas C. Varvaro. The Varvaro Agreement automatically renews unless terminated in accordance with its terms. On January 2, 2014, the Board approved raising the annual base salary of Mr. Varvaro to $225,000 per year and raising the annual cash bonus target up to 40% of his base salary. On March 14, 2016, the Board increased the base salary of Mr. Varvaro to $250,000.
The severance terms provide that in the event Mr. Varvaro’s employment with us is terminated voluntarily, he will be entitled to any accrued but unpaid base salary, any stock vested through the date of his termination and a pro-rated portion of 40% of his salary for the bonus. In addition, if Mr. Varvaro leaves the Company for “Good Reason” (as defined in the Varvaro Agreement), he will also be entitled to severance equal to 50% of his salary, and he shall be deemed to have been employed for the entirety of such year. Severance will then consist of 16 weeks of paid salary, unless Mr. Varvaro signs a release, in which case he will receive compensation up to 12 months paid salary.
In the event the Company terminates Mr. Varvaro’s employment “without Cause,” Mr. Varvaro will be entitled to severance in the form of any stock vested through the date of his termination and continuation of his base salary for a period of eight weeks, or, if Mr. Varvaro enters into a standard separation agreement, Mr. Varvaro will receive continuation of base salary and health benefits, together with applicable fringe benefits until 24 months from the date of termination (the “Severance Period”), will receive a bonus of 40% of his base salary as well as the full vesting of any otherwise unvested stock.
Employment Agreement with Troy A. Rhonemus
On March 6, 2014, the Company entered into an Employment Agreement (the “Rhonemus Agreement”) with Mr. Troy Rhonemus pursuant to which Mr. Rhonemus was appointed to serve as the Chief Operating Officer of the Company. On March 17, 2015, the Board increased the base salary to $190,000. The Rhonemus Agreement provides for an annual cash bonus (based on performance targets) of up to 30% of his base salary. On March 14, 2016, the Board increased the base salary of Mr. Rhonemus to $210,000.
Upon termination, Mr. Rhonemus will be entitled to any accrued but unpaid base salary and any accrued but unpaid welfare and retirement benefits up to the termination date. In addition, if Mr. Rhonemus leaves the Company for “Good Reason” (as defined in the Rhonemus Agreement), he will also be entitled to severance equal to two weeks of base salary for each full year of service to a maximum of eight weeks of the base salary.
Note 16.
In the event the Company terminates Mr. Rhonemus’ employment “without Cause,” Mr. Rhonemus will be entitled to severance equal to two weeks of base salary for each full year of service to a maximum of eight weeks of the base salary, or, if Mr. Rhonemus enters into a standard separation agreement, Mr. Rhonemus will receive continuation of base salary and health benefits, together with applicable fringe benefits as provided until the expiration of the term or renewal term then in effect, however, that in the case of medical and dental insurance, until the expiration of 12 months from the date of termination.
On August 28, 2015, the Company entered into an Exclusive Supply Agreement (the “Supply Agreement”) with Healthspan Research, LLC (“Healthspan”). Under the terms of the Supply Agreement, Healthspan agreed to purchase NIAGEN® from the Company and the Company granted to Healthspan worldwide rights for resale of specific dietary supplements containing NIAGEN® in certain markets.
Pursuant to the terms of the Supply Agreement, in exchange for a 4% equity interest in Healthspan, the Company agreed to initially supply NIAGEN® to Healthspan free of charge and thereafter at a fixed price and, in exchange for an additional 5% equity interest in Healthspan, the Company will grant to Healthspan certain exclusive rights to resell NIAGEN® in certain direct response channels. Healthspan will pay the Company royalties on the cumulative worldwide net sales of its finished products containing NIAGEN®. The exclusivity rights will remain for so long as Healthspan meets certain minimum purchase requirements. In the event that, during the initial term, the Company terminates the exclusivity rights due to failure to meet the minimum purchase requirements or for any reason other than a material breach of the Supply Agreement by Healthspan, then the 5% equity interest shall be automatically redeemed for a purchase price of $1.00 effective upon the date of termination of the exclusivity rights.
In connection with the foregoing, also on August 28, 2015, the Company and Healthspan entered into an interest purchase agreement and limited liability company agreement pursuant to which the Company was issued 9% of the outstanding equity interests of Healthspan. Rob Fried, a director of the Company, is the manager of Healthspan and owns 91% of the outstanding equity interests of Healthspan. The Supply Agreement, interest purchase agreement and limited liability company agreement were unanimously approved by the independent directors of the Company.
As of January 2, 2016, the Company had not shipped any NIAGEN® to Healthspan and Healthspan did not issue any equity interests to the Company. Accordingly, there is no accounting recognition of this arrangement for the twelve-month period ended on January 2, 2016.
Since the year ended December 28, 2013, theThe Company has generated significant revenue from its ingredients operations and has made operational changes, including changes in the organizational structure to support the ingredients operations. As a result, on December 29, 2013, the Company began segregating its financial results for ingredients operations, and 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. |
segments for the years ended December 31, 2018 and December 30, 2017:
● Consumer products segment: provides finished dietary supplement products that contain the Company's proprietary ingredients directly to consumers as well as to distributors.
· | 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. |
● Ingredients segment: develops and commercializes proprietary-based ingredient technologies and supplies these ingredients as raw materials to the manufacturers of consumer products in various industries including the nutritional supplement, food, beverage and animal health industries.
● Analytical reference standards and services segment: includes (i) supply of phytochemical reference standards, (ii) scientific and regulatory consulting and (iii) other research and development services.
The “Other”“Corporate and 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. The discontinued operations are not included in following statement of operations for business segments.
Year ended January 2, 2016 | | Ingredients | | | Core Standards and Contract Services | | | Regulatory | | | | | | | |
| | segment | | | segment | | | Consulting segment | | | Other | | | Total | |
| | | | | | | | | | | | | | | |
Net sales | | $ | 12,542,314 | | | $ | 8,418,672 | | | $ | 1,053,154 | | | $ | - | | | $ | 22,014,140 | |
Cost of sales | | | 6,664,164 | | | | 6,346,903 | | | | 522,065 | | | | - | | | | 13,533,132 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 5,878,150 | | | | 2,071,769 | | | | 531,089 | | | | - | | | | 8,481,008 | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | 1,111,993 | | | | 1,201,455 | | | | 13,340 | | | | - | | | | 2,326,788 | |
Research and development | | | 891,601 | | | | - | | | | - | | | | - | | | | 891,601 | |
General and administrative | | | - | | | | - | | | | - | | | | 7,416,451 | | | | 7,416,451 | |
Operating expenses | | | 2,003,594 | | | | 1,201,455 | | | | 13,340 | | | | 7,416,451 | | | | 10,634,840 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | $ | 3,874,556 | | | $ | 870,314 | | | $ | 517,749 | | | $ | (7,416,451 | ) | | $ | (2,153,832 | ) |
Year ended | | | | | Core Standards and | | | | | | | | | | | | | | |
January 3, 2015 | | Ingredients | | | Contract Services | | | Regulatory | | | | | | | | |
| | segment | | | segment | | | Consulting segment | | | Other | | | Total | | |
December 31, 2018 | | | | | | |
(In thousands) | | | | | |
| | | | | | | | | | | | | | | | |
Net sales | | $ | 6,857,177 | | | $ | 7,487,189 | | | $ | 968,813 | | | $ | - | | | $ | 15,313,179 | | $18,451 | $8,565 | $4,541 | $- | $31,557 |
Cost of sales | | | 4,257,347 | | | | 5,141,667 | | | | 588,500 | | | | - | | | | 9,987,514 | | 7,222 | 4,831 | 3,449 | - | 15,502 |
| | | | | | | | | | | | | | | | | | | | | | �� | |
Gross profit | | | 2,599,830 | | | | 2,345,522 | | | | 380,313 | | | | - | | | | 5,325,665 | | 11,229 | 3,734 | 1,092 | - | 16,055 |
| | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | 1,081,209 | | | | 975,800 | | | | 79,575 | | | | - | | | | 2,136,584 | | 15,063 | 727 | 747 | - | 16,537 |
Research and development | | | 513,671 | | | | - | | | | - | | | | - | | | | 513,671 | | 3,852 | 1,626 | -
| 5,478 |
General and administrative | | | - | | | | - | | | | - | | | | 7,860,930 | | | | 7,860,930 | | - | 27,137 |
Loss from investment in affiliate | | | - | | | | - | | | | - | | | | 45,829 | | | | 45,829 | | |
Other | | | 75 |
Operating expenses | | | 1,594,880 | | | | 975,800 | | | | 79,575 | | | | 7,906,759 | | | | 10,557,014 | | 18,915 | 2,353 | 747 | 27,212 | 49,227 |
| | | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | $ | 1,004,950 | | | $ | 1,369,722 | | | $ | 300,738 | | | $ | (7,906,759 | ) | | $ | (5,231,349 | ) | $(7,686) | $1,381 | $345 | $(27,212) | $(33,172) |
Year ended | | | | | |
December 30, 2017 | | | | | |
(In thousands) | | | | | |
| | | | | |
Net sales | $5,465 | $11,153 | $4,583 | $- | $21,201 |
Cost of sales | 2,190 | 5,492 | 3,042 | - | 10,724 |
| | | | | |
Gross profit | 3,275 | 5,661 | 1,541 | - | 10,477 |
| | | | | |
Operating expenses: | | | | | |
Sales and marketing | 2,673 | 1,280 | 506 | - | 4,459 |
Research and development | 1,104 | 2,903 | -
| -
| 4,007 |
General and administrative | - | - | - | 17,642 | 17,642 |
Other | - | 746 | - | - | 746 |
Operating expenses | 3,777 | 4,929 | 506 | 17,642 | 26,854 |
| | | | | |
Operating income (loss) | $(502) | $732 | $1,035 | $(17,642) | $(16,377) |
| | | | | |
At December 31, 2018 | | | | | |
(In thousands) | | | | | |
| | | | | |
Total assets | $7,407 | $5,412 | $1,213 | $28,200 | $42,232 |
| | | | | |
At December 30, 2017 | | | | | |
(In thousands) | | | | | |
| | | | | |
Total assets | $3,399 | $9,742 | $2,559 | $47,024 | $62,724 |
Year ended | | | | | | | | | | | | | | | |
December 28, 2013 | | | | | Core Standards and Contract Servicessegment | | | Scientific and RegulatoryConsulting segment | | | Other | | | Total | |
| | | | | | | | | | | | | | | |
Net sales | | $ | 2,430,699 | | | $ | 6,643,832 | | | $ | 1,146,718 | | | $ | (60,285 | ) | | $ | 10,160,964 | |
Cost of sales | | | 1,501,187 | | | | 4,893,649 | | | | 632,037 | | | | 955 | | | | 7,027,828 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit (loss) | | | 929,512 | | | | 1,750,183 | | | | 514,681 | | | | (61,240 | ) | | | 3,133,136 | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | 752,121 | | | | 1,459,620 | | | | 14,705 | | | | 131,159 | | | | 2,357,605 | |
Research and development | | | 134,040 | | | | - | | | | - | | | | - | | | | 134,040 | |
General and administrative | | | - | | | | - | | | | - | | | | 4,982,976 | | | | 4,982,976 | |
Loss from investment in affiliate | | | - | | | | - | | | | - | | | | 44,961 | | | | 44,961 | |
Operating expenses | | | 886,161 | | | | 1,459,620 | | | | 14,705 | | | | 5,159,096 | | | | 7,519,582 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | $ | 43,351 | | | $ | 290,563 | | | $ | 499,976 | | | $ | (5,220,336 | ) | | $ | (4,386,446 | ) |
| | | | | | | | | | | | | | | | | | | | |
Disaggregation of revenue
We disaggregate our revenue from contracts with customers by type of goods or services for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below.
Year Ended December 31, 2018 (In thousands) | Consumer Products Segment | | Analytical Reference Standards and Services Segment | |
| | | | |
TRU NIAGEN®, Consumer Product | $18,451 | $- | $- | $18,451 |
NIAGEN® Ingredient | - | 5,169 | - | 5,169 |
Subtotal NIAGEN Related | $18,451 | $5,169 | $- | $23,620 |
| | | | |
Other Ingredients | - | 3,396 | - | 3,396 |
Reference Standards | - | - | 3,455 | 3,455 |
Consulting and Other | - | - | 1,086 | 1,086 |
Subtotal Other Goods and Services | $- | $3,396 | $4,541 | $7,937 |
| | | | |
Total Net Sales | $18,451 | $8,565 | $4,541 | $31,557 |
Year Ended December 30, 2017 (In thousands) | | | Analytical Reference Standards and Services Segment | |
| | | | |
TRU NIAGEN®, Consumer Product | $5,465 | $- | $- | $5,465 |
NIAGEN® Ingredient | - | 7,752 | - | 7,752 |
Subtotal NIAGEN Related | $5,465 | $7,752 | $- | $13,217 |
| | | | |
Other Ingredients | - | 3,401 | - | 3,401 |
Reference Standards | - | - | 3,058 | 3,058 |
Consulting and Other | - | - | 1,525 | 1,525 |
Subtotal Other Goods and Services | $- | $3,401 | $4,583 | $7,984 |
| | | | |
Total Net Sales | $5,465 | $11,153 | $4,583 | $21,201 |
| | | | |
At January 2, 2016 | | | | | Core Standards and Contract Servicessegment | | | Scientific and RegulatoryConsulting segment | | | Other | | | Total | |
| | | | | | | | | | | | | | | |
Total assets | | $ | 9,105,502 | | | $ | 3,306,624 | | | $ | 111,765 | | | $ | 6,225,318 | | | $ | 18,749,209 | |
| | | | | | | | | | | | | | | | | | | | |
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At January 3, 2015 | | | | | Core Standards and Contract Servicessegment | | | Scientific and Regulatory Consulting segment | | | Other | | | Total | |
| | | | | | | | | | | | | | | |
Total assets | | $ | 3,757,073 | | | $ | 3,220,518 | | | $ | 105,711 | | | $ | 4,433,545 | | | $ | 11,516,847 | |
| | | | | | | | | | | | | | | | | | | | |
Revenues from international sources for the ingredients segment approximated $277,000, $35,000 and $22,000 for the years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively. Revenues from international sources for the core standards and contract services segment approximated $1,651,000, $1,756,000 and $1,488,000 for the years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively. Revenues from international sources for the scientific and regulatory consulting segment approximated $283,000, $104,000 and $450,000 for the years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively.
Revenues from International Sources | Year ended Dec. 31, 2018 | Year ended Dec. 30, 2017 |
Consumer Products Segment | $4.2 million | $4.2 million |
Ingredients Segment | $0.6 million | $0.4 million |
Analytical Reference Standards and Services Segment | $1.7 million | $1.0 million |
Total | $6.5 million | $5.6 million |
| | |
*International sources which the Company generates revenue include Europe, North America, South America, Asia and Oceania. |
Long-lived assets
The Company’s long-lived assets are located within the United States.
Disclosure of major customers
During the year ended January 2, 2016 Customer B in our ingredients segmentMajor customers who accounted for 11.0% of the Company’s total sales. Customer B accounted for lessmore than 10% of the Company’s total sales were as follows:
| |
Major Customers | | |
| | |
A.S. Watson Group - Related Party | * | 19.4% |
Thorne Research | * | 10.2% |
Life Extension | 10.0% | * |
| | |
* Represents less than 10%. | | |
Major customers who accounted for more than 10% of the years ended January 3, 2015 and December 28, 2013.Company’s total trade receivables were as follows:
| Percentage of the Company's Total Trade Receivables |
Major Customers | | |
| | |
A.S. Watson Group - Related Party | 15.9% | 18.1% |
Thorne Research | * | 13.4% |
Elysium Health (1) | 51.2% | 41.8% |
| | |
* Represents less than 10%. | | |
(1) There is ongoing litigation with Elysium Health | |
Disclosure of major vendors
Major vendors who accounted for more than 10% of the Company's total accounts payable were as follows:
| Percentage of the Company's Total Accounts Payable |
Major Vendors | | |
| | |
Vendor A | 36.8% | * |
Vendor C | * | 14.5% |
Vendor D | * | 10.4% |
Vendor E | 13.2% | 10.3% |
| | |
* Represents less than 10%. | | |
Loss from an ongoing litigation, Elysium
During the year ended January 3, 2015, Customer ADecember 30, 2017, the Company incurred a write-off of approximately $746,000 in our ingredients segment accounted for 10.2% ofgross trade receivable from Elysium related to royalties, due to inherent uncertainty about collecting all damages sought by the Company, as well as the Company’s decision to not seek damages for any unpaid royalty payments under the License Agreement in connection with the defense of Elysium’s claims for patent misuse and unjust enrichment. As a result of this write-off and after further analysis, the Company made an adjustment to the total sales. Customer A accounted for less than 10% of the Company’s total sales for the years ended January 2, 2016 and December 28, 2013.allowance amount from ($800,000) to ($500,000).
Note 15. Quarterly Financial Information (unaudited)
| | Three Months Ended | |
| | April 4, 2015 | | | July 4, 2015 | | | October 3, 2015 | | | January 2,, 2016 | |
| | | | | | | | | | | | |
Sales, net | | $ | 5,260,971 | | | $ | 6,101,380 | | | $ | 6,287,309 | | | $ | 4,364,480 | |
Cost of sales | | | 3,333,347 | | | | 3,630,688 | | | | 3,805,679 | | | | 2,763,418 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 1,927,624 | | | | 2,470,692 | | | | 2,481,630 | | | | 1,601,062 | |
| | | | | | | | | | | | | | | | |
Operating expenses | | | 2,833,708 | | | | 2,654,752 | | | | 2,304,500 | | | | 2,841,880 | |
| | | | | | | | | | | | | | | | |
Operating income (loss) | | | (906,084 | ) | | | (184,060 | ) | | | 177,130 | | | | (1,240,818 | ) |
| | | | | | | | | | | | | | | | |
Nonoperating expenses | | | (119,431 | ) | | | (131,132 | ) | | | (180,846 | ) | | | (181,299 | ) |
Provision for income taxes | | | - | | | | - | | | | - | | | | (4,527 | ) |
| | | | | | | | | | | | | | | | |
Net loss | | $ | (1,025,515 | ) | | $ | (315,192 | ) | | $ | (3,716 | ) | | $ | (1,426,644 | ) |
| | | | | | | | | | | | | | | | |
Basic and Diluted loss per common share | | $ | (0.01 | ) | | $ | (0.00 | ) | | $ | (0.00 | ) | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | |
Basic and Diluted weighted average | | | | | | | | | | | | | | | | |
common shares outstanding | | | 107,198,597 | | | | 107,409,894 | | | | 107,442,916 | | | | 108,476,686 | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | |
| | March 29, 2014 | | | June 28, 2014 | | | September 27, 2014 | | | January 3, 2015 | |
| | | | | | | | | | | | | | | | |
Sales, net | | $ | 3,074,138 | | | $ | 3,856,154 | | | $ | 4,139,710 | | | $ | 4,243,177 | |
Cost of sales | | | 2,089,130 | | | | 2,457,388 | | | | 2,616,764 | | | | 2,824,232 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 985,008 | | | | 1,398,766 | | | | 1,522,946 | | | | 1,418,945 | |
| | | | | | | | | | | | | | | | |
Operating expenses | | | 2,823,773 | | | | 3,040,194 | | | | 2,170,380 | | | | 2,522,667 | |
| | | | | | | | | | | | | | | | |
Operating loss | | | (1,838,765 | ) | | | (1,641,428 | ) | | | (647,434 | ) | | | (1,103,722 | ) |
| | | | | | | | | | | | | | | | |
Nonoperating expenses | | | (9,251 | ) | | | (11,714 | ) | | | (12,219 | ) | | | (123,652 | ) |
| | | | | | | | | | | | | | | | |
Net loss | | $ | (1,848,016 | ) | | $ | (1,653,142 | ) | | $ | (659,653 | ) | | $ | (1,227,374 | ) |
| | | | | | | | | | | | | | | | |
Basic and Diluted loss per common share | | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | |
Basic and Diluted weighted average | | | | | | | | | | | | | | | | |
common shares outstanding | | | 106,076,361 | | | | 106,185,584 | | | | 106,610,400 | | | | 106,929,049 | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | |
| | March 30, 2013 | | | June 29, 2013 | | | September 28, 2013 | | | December 28, 2013 | |
| | | | | | | | | | | | | | | | |
Sales, net | | $ | 2,334,566 | | | $ | 2,706,896 | | | $ | 2,718,207 | | | $ | 2,401,295 | |
Cost of sales | | | 1,661,726 | | | | 1,746,158 | | | | 1,968,020 | | | | 1,651,924 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 672,840 | | | | 960,738 | | | | 750,187 | | | | 749,371 | |
| | | | | | | | | | | | | | | | |
Operating expenses | | | 2,089,325 | | | | 1,973,839 | | | | 1,991,960 | | | | 1,464,458 | |
| | | | | | | | | | | | | | | | |
Operating loss | | | (1,416,485 | ) | | | (1,013,101 | ) | | | (1,241,773 | ) | | | (715,087 | ) |
| | | | | | | | | | | | | | | | |
Nonoperating expenses | | | (7,587 | ) | | | (7,765 | ) | | | (8,490 | ) | | | (9,237 | ) |
| | | | | | | | | | | | | | | | |
Net loss | | $ | (1,424,072 | ) | | $ | (1,020,866 | ) | | $ | (1,250,263 | ) | | $ | (724,324 | ) |
| | | | | | | | | | | | | | | | |
Basic and Diluted loss per common share | | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | |
Basic and Diluted weighted average | | | | | | | | | | | | | | | | |
common shares outstanding | | | 94,626,120 | | | | 99,833,963 | | | | 101,309,939 | | | | 104,179,748 | |
Note 16. Subsequent Events
Subsequent to the year ended January 2, 2016, the Company entered into Securities Purchase Agreement (“SPA”) with an existing stockholder to raise $500,000 in a registered direct offering. Pursuant to the SPA, the Company sold a total of 384,615 Units at a purchase price of $1.30 per Unit, with each Unit consisting of one share of the Company’s common stock and a warrant to purchase one half of a share of common stock with an exercise price of $1.60 and a term of 3 years. The offering was made pursuant to a prospectus supplement dated March 11, 2016 and an accompanying prospectus dated May 8, 2015 pursuant to the Company’s shelf registration statement on Form S-3 that was filed with the Securities and Exchange Commission on May 8, 2015 and became effective on June 5, 2015 (File No. 333-203204). The prospectus supplement registered the shares of common stock issued in the offering and the common stock underlying the warrants.
On March 14, 2016, the Board of Directors increased the base salaries of Frank L. Jaksch Jr., Thomas C. Varvaro and Troy A. Rhonemus, the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, respectively. Effective as of March 14, 2016, the base salary for Mr. Jaksch increased from $275,000 to $320,000, an increase of 16.4%, the base salary for Mr. Varvaro increased from $225,000 to $250,000, an increase of 11.1%, and the base salary for Mr. Rhonemus increased from $190,000 to $210,000, an increase of 10.5%.