UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For
the fiscal year ended December 31, 2016
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission file number 001-37752
CHROMADEX
CORPORATION
(Exact
name of Registrant as specified in its Charter)
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Delaware
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26-2940963
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(State or other
jurisdiction of incorporation)
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(I.R.S. Employer
Identification No.)
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10005 Muirlands Blvd. Suite G, Irvine,
California
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92618
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(Address of
Principal Executive Offices)
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(Zip
Code)
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Registrant's
telephone number, including area code (949) 419-0288
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of Each Exchange on Which Registered
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Common Stock,
$0.001 par value
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The NASDAQ Capital
Market
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Securities
registered pursuant to Section 12(g) of the Act:
None.
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes [ ] No [X
]
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No
[X]
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files). Yes [X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [
]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “accelerated
filer,” “large accelerated filer,” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer [ ]
Accelerated Filer
[X]
Non-accelerated
filer [ ]
Smaller Reporting
Company [ ]
(Do not
check if smaller reporting company)
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
As of
July 2, 2016, the last business day of the registrant’s most
recently completed second fiscal quarter, the aggregate market
value of the registrant’s common stock held by non-affiliates
of the registrant was approximately $145.4 million, based on the
closing price of the registrant’s common stock on the NASDAQ
Capital Market on July 2, 2016.
Number
of shares of common stock of the registrant outstanding as of
February 28, 2017: 37,907,736
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the Registrant’s proxy statement (the “Proxy
Statement”) to be filed with the Securities and Exchange
Commission (“SEC”) pursuant to Regulation 14A in
connection with the registrant’s 2017 Annual Meeting of
Stockholders, which will be filed subsequent to the date hereof,
are incorporated by reference into Part III of this Form
10
‑
K. Such
Proxy Statement will be filed with the SEC not later than 120 days
following the end of the registrant’s fiscal year ended
December 31, 2016.
T
ABLE OF CONTENTS
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Item
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PART I
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1
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2
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17
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32
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32
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32
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33
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PART II
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34
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36
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39
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51
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52
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85
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85
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88
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PART III
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90
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90
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90
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90
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90
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PART IV
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91
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92
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PART I
C
AUTIONARY NOTICE
REGARDING FORWARD LOOKING STATEMENTS
This
Annual Report on Form 10-K (the “Form 10-K”) contains
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, which are subject to the safe harbor created by those
sections.
We may,
in some cases, use words such as “anticipate,”
“believe,” “could,” “estimate,”
“expect,” “intend,” “intend,”
“may,” “plan,” “potential,”
“predict,” “project,” “should,”
“will,” “would” or the negative of these
terms, and similar expressions that convey uncertainty of future
events or outcomes to identify these forward-looking statements.
Any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements and
are based upon our current expectations, beliefs, estimates and
projections, and various assumptions, many of which, by their
nature, are inherently uncertain and beyond our control. Such
statements, include, but are not limited to, statements contained
in this Form 10-K relating to our business, business strategy,
products and services we may offer in the future, the outcome and
impact of litigation, the timing and results of future regulatory
filings, the timing and results of future clinical trials, our
ability to collect from major customers, sales and marketing
strategy and capital outlook. Forward-looking statements are based
on our current expectations and assumptions regarding our business,
the economy and other future conditions. Because forward looking
statements relate to the future, they are subject to inherent
uncertainties, risks and changes in circumstances that are
difficult to predict. Our actual results may differ materially from
those contemplated by the forward-looking statements. They are
neither statement of historical fact nor guarantees of assurance of
future performance. We caution you therefore against relying on any
of these forward-looking statements. Important factors that could
cause actual results to differ materially from those in the forward
looking statements include, but are not limited to, a decline in
general economic conditions nationally and internationally;
decreased demand for our products and services; market acceptance
of our products; the ability to protect our intellectual property
rights; impact of any litigation or infringement actions brought
against us; competition from other providers and products; risks in
product development; inability to raise capital to fund continuing
operations; changes in government regulation; the ability to
complete customer transactions and capital raising transactions,
and other factors (including the risks contained in Item 1A of this
Form 10-K under the heading “Risk Factors”) relating to
our industry, our operations and results of operations and any
businesses that may be acquired by us. Should one or more of these
risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may differ
significantly from those anticipated, believed, estimated,
expected, intended or planned.
Factors
or events that could cause our actual results to differ may emerge
from time to time, and it is not possible for us to predict all of
them, nor can we assess the impact of all factors on our business
or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in
any forward-looking statements we may make. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements. We cannot guarantee future results,
levels of activity, performance or achievements. Except as required
by applicable law, we undertake no obligation to and do not intend
to update any of the forward-looking statements to conform these
statements to actual results.
Item 1.
B
usiness
Company Overview
The
business of ChromaDex Corporation is conducted by our principal
subsidiaries, ChromaDex, Inc. and ChromaDex Analytics, Inc.
ChromaDex Corporation and its subsidiaries (collectively referred
to herein as “ChromaDex” or the “Company”
or, in the first person as “we” “us” and
“our”) is a natural products company that leverages its
complementary business units to discover, acquire, develop and
commercialize patented and proprietary ingredient technologies that
address the dietary supplement, food, beverage, skin care and
pharmaceutical markets. In addition to the Company’s
proprietary ingredient technologies segment, the Company also has a
core standards and contract services segment, which focuses on
natural product fine chemicals (known as
“phytochemicals”) and chemistry and analytical testing
services, and regulatory consulting segment. 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 business segments to
develop commercially viable proprietary ingredients. The
Company’s proprietary ingredient portfolio is backed with
clinical and scientific research, as well as extensive intellectual
property protection.
CORE
BUSINESS ACTIVITIES
PROPRIETARY INGREDIENTS
Through
our ingredients business segment, we develop and commercialize new
proprietary ingredients. One of our proprietary ingredients that we
commercialized under this business model is nicotinamide riboside
(“NR”), for which our brand name is NIAGEN®. NR is
found naturally in trace amounts in milk and other foods and is B3
vitamin. The potential beneficial effects of NR in humans include
increased anti-aging properties, fatty acid oxidation,
mitochondrial activity, resistance to negative consequences of
high-fat diets, protection against oxidative stress, prevention of
peripheral neuropathy and blocking muscle degeneration. Published
research has shown that NR is a potent precursor to the co-enzyme
nicotinamide adenine dinucleotide (“NAD+”) in the
mitochondria of animals. NAD+ is an important cellular co-factor
for improvement of mitochondrial performance and energy metabolism.
The Company has built a significant patent portfolio pertaining to
NR by separately acquiring patent rights from Cornell University,
Dartmouth College and Washington University. We have successfully
completed the first human clinical trial using NR and the results
demonstrated that a single dose of NR resulted in statistically
significant increases in NAD+ in healthy human volunteers. In
addition, NR was also found to be safe as no adverse events were
observed throughout the clinical trial. In 2015, NR was recognized
by the FDA as a “New Dietary Ingredient.” NR was also
“Generally Recognized As Safe” by an independent panel
of expert toxicologists and in August 2016, the U.S. FDA issued a
GRAS No Objection Letter. In 2016, we noted continued growth in the
number of published research studies, as well as subsequent media
attention regarding NR and NAD+ and their importance in healthy
aging. Since the launch of NIAGEN®, there have been more than
60 published studies involving NR. Over the past three years, we
have established over 100 collaborative agreements with leading
universities and research institutions to study the safety and
efficacy of NIAGEN®. For years 2016, 2015 and 2014,
NIAGEN® accounted for approximately 71%, 68% and 54% of our
ingredient segment’s total sales, respectively.
Another
one of our proprietary ingredients is pterostilbene, which is
marketed and sold under our brand name, pTeroPure®.
Pterostilbene is a polyphenol and a powerful antioxidant that shows
promise in a range of health related fields. We have exclusive
in-licensed patents and patents pending related to the use of
pterostilbene for a number of these benefits, and have filed
additional patents related to supplementary benefits, such as a
patent jointly filed with University of California at Irvine
related to its effects on non-melanoma skin cancer. We have
successfully conducted a clinical trial, together with the
University of Mississippi, related to its blood pressure lowering
effects and expect to conduct additional clinical trials on
pterostilbene and anticipate entering the dietary supplement and,
if clinical results are favorable, the pharmaceutical market. We
believe that we also have opportunities in the skin care market and
will continue to investigate developing these opportunities
internally or through third party partners. We anticipate
conducting additional clinical trials on NR, pterostilbene and
other compounds in our pipeline to provide differentiation as we
market these proprietary ingredients and support various
health-related claims or obtain additional regulatory
clearances.
ANALYTICAL & CHEMISTRY BASED SERVICES, REGULATORY CONSULTING
SERVICES AND NATURAL PRODUCT FINE CHEMICALS
Through
ChromaDex Analytics, Inc., a part of our core standards and
contract services business segment, we perform chemistry-based
analytical services at our laboratory in Boulder, Colorado,
supporting quality control or quality assurance activities for the
dietary supplement industry. On January 5, 2017, we opened a 10,000
square foot research and development laboratory in Longmont,
Colorado. The newly opened laboratory will support the discovery
and development of molecules and compounds that add to our
proprietary ingredient portfolio, while also allowing for the
expansion of existing analytical service offerings at our Boulder,
Colorado, location.
We are
a leading provider of research and quality-control products and
services to the natural products industry. Through our core
standards and contract services segment, customers worldwide in the
dietary supplement, food and beverage, cosmetic and pharmaceutical
industries use our products, which are small quantities of
highly-characterized, research-grade, plant-based materials, to
ensure the quality of their raw materials and finished products.
Customers also use our analytical chemistry services to support
their quality assurance activities, primarily to ensure the
identity, potency and safety of their consumer products. We have
conducted this core standards and contract services business since
1999.
We
believe there is a growing need at both the manufacturing and
government regulatory levels for reference standards, analytical
methods and other quality assurance methods to ensure that products
that contain plants, plant extracts and naturally occurring
compounds distributed to consumers are safe. We further believe
that this need is driven by the perception at the consumer level
regarding a lack of adequate quality controls related to certain
functional food or dietary supplement based products, as well as
increased effort on the part of the Food and Drug Administration
(“FDA”) to assure Good Manufacturing Practices
(“GMP”).
Our
core standards and contract service business segment provides us
with the opportunity to become aware of the results from research
and screening activities performed on thousands of potential
natural product candidates through our relationships with various
universities and research institutions. By selecting the most
promising ingredients leveraged from this market-based screening
model, which is grounded by primary research performed through
leading universities and institutions, followed by selective
investments in further research and development, new proprietary
ingredients can be identified and brought to various markets with a
much lower investment cost and an increased chance of
success.
Through
our regulatory consulting segment, we provide our clients in the
food, supplement and pharmaceutical industries with effective
scientific solutions to manage their potential health and
regulatory risks. Our science-based solutions are for both new and
existing products that may be subject to product liability and/or
exposed to changing scientific standards or public perceptions;
literature evaluations; and design and assessment of pre-clinical
and clinical safety testing. We specialize in regulatory
submissions for food and dietary supplement ingredients. For our
clients involved in drug development within the pharmaceutical
industry, we provide similar services as well as risk-based
strategies, including intellectual property data and compliance gap
identification, due diligence assessments and investigational new
drug writing. Through our regulatory consulting segment, we have
more efficiently advanced products in the dietary supplement, food
and beverage, animal health, cosmetic and pharmaceutical
markets.
PHARMACEUTICAL
The
Company is focused on developing and commercializing proprietary
NAD+ precursors for the treatment of several rare pediatric orphan
diseases such as Cockayne’s Syndrome.
Initial
proof of concept studies have identified, with focus on rare orphan
diseases linked to NAD+ depletion:
●
Cockayne Syndrome
(CS) - completed pre-IND metting with the FDA
●
Ataxia-telangiectasia
(AT)
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Mitochondrial
Myopathies(Mitochondrial disease)
Other
Orphan Diseases with connection to NAD+ depletion or mitochondrial
dysfunction:
●
Progeria
●
Duchenne Muscular
Dystrophy (DMD)
●
Friedreich’s
Ataxia (FA)
We also believe that these other diseases should be a good proof of
concept for other main stream NAD therapeutic platforms, with
multiple research-based Rx therapeutic targets where there is a
link between a disease or condition and NAD+
depletion:
●
Chemotherapy-induced
and diabetic-induced neuropathies
●
Fatty liver
disease
●
Neurodegenerative
diseases (Alzheimer’s)
●
Breast
cancer
We
completed our pre-IND meeting with the FDA in November 2016, The
FDA provided greater clarity on the requirements needed to file an
IND to initiate a Phase I/II clinical trial in patients with
Cockayne Syndrome. ChromaDex anticipates filing this IND in 2017.
The FDA has indicated it will consider a Fast Track designation for
NR at the time of the IND submission.
In 2014
the results of a mouse study performed in collaboration with
National Institute on Aging (NIA) at the National Institutes of
Health (NIH), were published in Cell Metabolism in November 2014.
The results indicated that NR was effective at restoring NAD+
levels in mitochondria and rescuing phenotypes associated with a
devastating accelerated aging disease known as Cockayne Syndrome
(CS).
For the
fiscal years ended December 31, 2016, January 2, 2016 and January
3, 2015, our revenues were approximately $26,811,000, $22,014,000
and $15,313,000, respectively. The following table summarizes the
Company’s total sales for each of the business segments in
the last 3 years.
|
Fiscal
Years
|
Ingredients
Segment
|
Core
Standards and
Contract
Services Segment
|
Regulatory
Consulting
Segment
|
Total
|
|
2016
|
$16.8
million
|
$9.4
million
|
$0.6
million
|
$26.8
million
|
|
2015
|
$12.5
million
|
$8.4
million
|
$1.1
million
|
$22.0
million
|
|
2014
|
$6.8
million
|
$7.5
million
|
$1.0
million
|
$15.3
million
|
Company Background
ChromaDex,
Inc. was originally formed as a California corporation on
February 19, 2000. On April 23, 2003, ChromaDex Inc.
acquired the research and development group of a competing natural
product company, Napro Biotherapeutics, located in Boulder,
Colorado. The assets acquired in this transaction were placed in a
newly-formed, wholly-owned subsidiary of ChromaDex named ChromaDex
Analytics, Inc., a Nevada corporation. On December 3, 2012,
ChromaDex, Inc. acquired Spherix Consulting Inc., a scientific and
regulatory consulting company located in the greater Washington
D.C. area and Spherix became a wholly-owned subsidiary of
ChromaDex, Inc. On December 31, 2016, Spherix Consulting, Inc.
merged into ChromaDex, Inc. and subsequently was
dissolved.
Business Model
Our
business model is to identify, acquire, reduce-to-practice, and
commercialize innovative new proprietary ingredients and
technologies, with an initial industry focus on the dietary
supplement, food, beverage, skin care and pharmaceutical markets.
We have an experienced team that is highly capable of advancing
products through development into commercialization with the
required regulatory approval, safety, toxicology, clinical trials,
supply chain management, manufacturing, and ultimately either
directly selling the products or licensing to third parties. Our
clinical trials will potentially reinforce the health benefits that
may be associated with our proprietary ingredients, improve the
quality or specificity of FDA approved claim we can make with
respect to these health benefits, and lead us toward pharmaceutical
applications for our proprietary ingredients.
We have
taken advantage of both supply chain needs and regulatory
requirements such as the GMPs for dietary supplements to build our
core standards and contract services segment. We believe that we
create value throughout the supply chain of the pharmaceutical,
dietary supplements, functional foods and personal care markets. We
do this by:
●
Combining the
analytical methodology and characterization of materials with the
technical support for the sale of reference materials by our
clients;
●
Helping companies
to comply with government regulations; and
●
Providing
value-added solutions to every layer of the supply chain in order
to increase the overall quality of products being
produced.
In
addition, through regulatory consulting segment, we provide product
regulatory approval and scientific advisory services to our clients
in the food, supplement and pharmaceutical industries with
effective solutions to manage potential health and regulatory
risks. Our science-based solutions are for both new and existing
products that may be subject to product liability and/or exposed to
changing scientific standards or public perceptions; literature
evaluations; and design and assessment of pre-clinical and clinical
safety testing. We specialize in regulatory submissions for food
and dietary supplement ingredients. For our clients involved in
drug development within the pharmaceutical industry, we provide
similar services as well as risk-based strategies, including
intellectual property data and compliance gap identification, due
diligence assessments and investigational new drug writing. By
providing a more comprehensive suite of science-based and
regulatory services, we will be able to more efficiently advance
products in the dietary supplement, food and beverage, animal
health, cosmetic and pharmaceutical markets.
We will
continue to expand this aspect of our business and, more
importantly, capitalize on additional opportunities in product
development and commercialization of various kinds of intellectual
property that we have largely discovered and acquired through the
sales process associated with our core standards and contract
services segment.
Our
core standards and contract services segment provides us with the
opportunity to become aware of the results from research and
screening activities performed on thousands of potential natural
product candidates through our relationships with various
universities and research institutions. By selecting the most
promising ingredients leveraged from this market-based screening
model, which is grounded by primary research performed through
leading universities and institutions, followed by selective
investments in further research and development, new proprietary
ingredient technologies can be identified and brought to various
markets with a much lower investment cost and an increased chance
of success.
We
continue to identify and in-license novel, proprietary ingredients
with significant potential health benefits. Among these
next generation compounds are pterostilbene and caffeine
co-crystal, which allows formulators of energy products to reduce
the amount of caffeine in their products, and anthocyanins, which
are compounds responsible for the dark pigment found in certain
berries and flowers. Like NIAGEN
®
and pTeroPure
®,
these compounds also have
potential in multiple markets.
Overview of our Products and Services
Current products
and services provided are as follows:
PROPRIETARY INGREDIENTS
●
Proprietary ingredient technologies
(ingredients segment).
We offer bulk raw materials for
inclusion in dietary supplements, food, beverage and cosmetic
products. This is an area where we are increasing our focus, as we
believe we can secure and defend our market positions through
patents and long-term manufacturing agreements with our customers
and vendors.
●
Nicotinamide riboside NIAGEN®
(ingredients segment)
. We are working to develop and conduct
additional clinical trials to validate the health benefits
associated with NR, a recently discovered vitamin found naturally
in milk. NR is the most efficient B3 vitamin to enhance NAD+
energetics. NR has shown promise for improving cardiovascular
health, glucose levels and cognitive function and has demonstrated
evidence of anti-aging effects.
●
Pterostilbene pTeroPure® (ingredients
segment).
Pterostilbene is a polyphenol and a powerful
antioxidant that shows promise in a range of health related fields.
We have exclusive in-licensed patents and patents pending related
to the use of pterostilbene for a number of these benefits, and
have filed additional patents related to supplementary benefits,
such as a patent jointly filed with University of California at
Irvine related to its effects on non-melanoma skin cancer. We have
successfully conducted a clinical trial, together with the
University of Mississippi, related to its blood pressure lowering
effects and expect to conduct additional clinical trials on
pterostilbene and anticipate entering the dietary supplement and,
if clinical results are favorable, the pharmaceutical
market.
●
Pterostilbene and
caffeine
co-crystal PURENERGY® (ingredients segment).
We are
working to develop and conduct additional clinical trials to
validate the benefits of the co-crystal ingredient comprised of
caffeine and pterostilbene. 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. With this ingredient, formulators of energy
products may have the ability to reduce the total amount of
caffeine in their products by as much as 50% without sacrificing
consumers’ expectations from such products.
●
Anthocyanin AnthOrigin™ (ingredients
segment)
. We plan to develop an extraction process to
concentrate the anthocyanins in Suntava® Purple Corn which
will be used to produce a concentrated anthocyanin ingredient. We
will utilize the expertise of a toll manufacturer to produce the
commercial ingredient. We believe there is a ready market for
cost-effective concentrated anthocyanins having application in
dietary supplements, sports nutrition, food & beverage and skin
care.
●
Spirulina Extract Immulina™ (ingredients
segment).
IMMULINA™ is a spirulina extract and the
predominant active compounds are Braun-type lipoproteins which are
useful for improving human immune function. These lipoproteins are
present at much greater levels than those found within commonly
used immune enhancing botanicals such as Echinacea and
ginseng.
ANALYTICAL & CHEMISTRY BASED SERVICES, REGULATORY CONSULTING
SERVICES AND NATURAL PRODUCT FINE
CHEMICALS
●
Supply of reference standards,
materials & kits (core standards and contract services
segment).
We supply a wide range of products necessary to
conduct quality control of raw materials and consumer products.
Reference standards and materials and the kits created from them
are used for research and quality control in the dietary
supplements, cosmetics, food and beverages, and pharmaceutical
industries.
●
Supply of fi
ne chemicals and phytochemicals (core
standards and contract services segment).
As demand for new
natural products and phytochemicals increases, we can scale up and
supply our core products in the gram to kilogram scale for
companies that require these products for research and new product
development.
●
Contract services
(core
standards and contract services segment)
. We provide a wide
range of contract services ranging from routine contract analysis
for the production of dietary supplements, cosmetics, foods and
other natural products to elaborate contract research for clients
in these industries.
●
Consulting
services
(regulatory consulting segment)
.
We provide a comprehensive range of consulting services in the
areas of regulatory support, new ingredient or product development,
risk management and litigation support. We provide and offer
product regulatory approval and scientific advisory
services.
●
Process development
(core
standards and contract services segment).
Developing cost
effective and efficient processes for manufacturing natural
products can be very difficult and time consuming. We assist
customers in creating processes for cost-effective manufacturing of
natural products, using “green chemistry.”
●
Quality verification seal program (core
standards and contract services segment).
We intend to
further develop and expand our offering of “ChromaDex®
Quality Verified Seal” program which currently includes (i)
supply chain facility audits and inspections to verify compliance
with Good Manufacturing Practices as specified by the FDA; (ii) a
comprehensive identity testing program for raw materials and
finished products; (iii) finished product testing for potential
contaminants such as microbials, heavy metals and residual
solvents; and (iv) provisions for ongoing monitoring to be
performed as part of a quality protocol design and managed by
ChromaDex.
●
Phytochemical libraries (core standards and
contract services segment).
We intend to continue investing
in the development of natural product based libraries by continuing
to create these libraries internally as well as through product
licensing.
●
Databases for cross-referencing phytochemicals
(core standards and contract services segment)
. We are
working on building a database for cross referencing phytochemicals
against an extensive list of plants, including links to references
to ethnopharmacological, ethnobotanical, and biological activity,
as well as clinical evidence.
Sales and Marketing Strategy
Our
sales structure for the ingredients segment and core standards and
contract services segment is based on a direct,
technically-oriented model. We recruit and hire sales and marketing
staff with appropriate commercial and scientific backgrounds. Our
sales staff currently operates out of our Irvine, California office
and performs sales duties by using combinations of telemarketing,
e-mail, tradeshows and customer visits. The Inside Sales portion of
the organization also has customer service responsibilities. All
sales and marking staff are compensated based on salary and
performance-based bonus.
The
regulatory consulting segment, operating out of Rockville,
Maryland, generates scientific and regulatory consulting revenue
from an existing well-established list of Fortune 1000 customers
and referrals. Our sales staff for the ingredients, reference
standards and analytical service business in Irvine, California
also generates leads for the regulatory consulting
segment.
USA and Canada:
For our
ingredients segment and core standards and contract services
segment, we employ a range of the following marketing activities to
promote and sell our products and services:
●
Catalogs, research publications,
brochures and flyers
●
Tradeshows and
conferences
●
Newsletters (via
e-mail)
●
Internet
●
Website
●
Advertising in trade
publications
●
Press releases
We
intend to continue to use a direct marketing approach to promote
our products and services to all markets that we target for direct
sales.
International:
For our
ingredients segment, most of our customers are based currently in
U.S. We are looking to expand into international markets through
our international business partners.
For our
core standards contract services segment,
we use international distributors
to market and sell to several foreign countries or markets. The use
of distributors in some international markets has proven to be more
effective than direct sales. Currently, we have distribution
agreements in place with the following distributors for the
following countries or regions:
●
Europe (LGC
Limited)
●
China (MeiTech International
LLC)
●
Japan (Wako Pure Chemical
Industries, Ltd.)
●
Korea (Dongmyung Scientific
Co.)
●
Brazil (JMC, Inc.)
●
Australia and New Zealand
(Phenomenex)
●
Taiwan (Uni Onward)
●
South Africa (Industrial
Analytical)
●
India
●
Indonesia, Malaysia, Singapore
and Thailand
●
Mexico
For our
regulatory consulting segment, we engage on consulting projects for
customers all over the world, including Europe, South America, and
Asia. Consulting revenues are generated from an existing
well-established list of Fortune 1000 customers and
referrals.
Business Market
According
to data from the Nutrition Business Journal, the US consumer
Dietary Supplement
market
is estimated to be $41 billion in 2016 and growing at 6.0% per
annum through 2020. This is the primary market that ChromaDex
services for both ingredients and analytical testing and standards.
The Dietary Supplement segment is part of the larger
US Nutrition Industry
which is
estimated at $195 billion for 2016 and forecasted to grow at a rate
of 8% through 2020. This larger segment includes Dietary
Supplements as well as functional foods and beverages and personal
care. This larger industry represents a secondary addressable
market for our ingredients and services. The quality control,
safety and assurance of the products in these markets are, as
previously noted, largely “under regulated.” This
scenario leads to the establishment of the basis of one of our
business strategies: concentration on the overall content of
products, as well as active/marker components, uniformity of
production, and toxicology of products in these markets in ways
similar to analysis by other companies focused in the
pharmaceutical industry. There is an increasing demand for new
products, ingredients and ideas for natural products. The pressure
for new, innovative products, which are “natural” or
“green” based, cuts across all markets including food,
beverage, cosmetic and pharmaceutical.
While
we believe that doctors and patients have become more receptive to
the use of botanical and herbal-based and natural and dietary
ingredients to prevent or treat illness and improve quality of
life, the medical establishment has conditioned its acceptance on
significantly improved demonstration of efficacy, safety and
quality control comparable to that imposed on pharmaceuticals.
Nevertheless, little is currently known about the constituents,
active compounds and safety of many botanical and herbal natural
ingredients and few qualified chemists and technology based
companies exist to supply the information and products necessary to
meet this burgeoning market need. Natural products are complex
mixtures of many compounds, with significant variability arising
from growing and extraction conditions. The following developments
are some that highlight the need for standards control and quality
assurance:
●
The
FDA
published its draft guidance for GMPs
for dietary supplements on March 13, 2003. The final rule from this
guidance was made effective in June 2007, and full compliance was
required by June 2010; and
●
Regulatory agencies around the
world have started to review the need for the regulation of herbal
and natural supplements and are considering regulations that will
include testing for the presence of toxic or adulterating
compounds, drug/compound interactions and evidence that the
products are biologically active for their intended
use.
Government Regulation
Some of
our operations for ingredients segment and core standards and
contract services segment are subject to regulation by various
United States federal agencies and similar state and international
agencies, including the FDA, the Federal Trade Commission
(“FTC”), the Department of Commerce, the Department of
Transportation, the Department of Agriculture and other state and
international agencies. These regulators govern a wide variety of
production activities, from design and development to labeling,
manufacturing, handling, selling and distributing of products. From
time to time, federal, state and international legislation is
enacted that may have the effect of materially increasing the cost
of doing business or limiting or expanding our permissible
activities. We cannot predict whether or when potential legislation
or regulations will be enacted, and, if enacted, the effect of such
legislation, regulation, implementation, or any implemented
regulations or supervisory policies would have on our financial
condition or results of operations. In addition, the outcome of any
litigation, investigations or enforcement actions initiated by
state or federal authorities could result in changes to our
operations being necessary and in increased compliance
costs.
U.S. FDA Regulation
In the
United States dietary supplements and food are subject to FDA
regulations. For example, the FDA’s final rule on GMPs for
dietary supplements published in June 2007 requires companies to
evaluate products for identity, strength, purity and composition.
These regulations in some cases, particularly for new ingredients,
require a notification that must be submitted to the FDA along with
evidence of safety. In addition, depending on the type of product,
whether a dietary supplement, cosmetic, food, or pharmaceutical,
the FDA, under the Food, Drug and Cosmetic Act, or FDCA, can
regulate:
●
product testing;
●
ingredient testing;
●
documentation process, batch
records, specifications;
●
product labeling;
●
product manufacturing and
storage;
●
New Dietary Ingredient (NDI)
status;
●
health claims, advertising and
promotion; and
●
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
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 ingredient
(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 for any new ingredient developed by us to be used in
conventional food or beverage products in the United States, the
product would either have to be approved by the FDA as a food
additive pursuant to a food additive petition, or FAP, or be
generally recognized as safe, or 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 Regulations
In
addition to FDA regulations, the FTC regulates the advertising of
dietary supplements, foods, cosmetics, and over-the-counter, or
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 NAD 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 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 three customers who accounted for
more than 10% the Company’s total sales in the last three
years. In 2016, Customer C accounted for 19.3% of the
Company’s total sales. In 2015, Customer B accounted for
11.0% of the Company’s total sales. In 2014, Customer A
accounted for 10.2% of the Company’s total
sales.
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 ingredients we are selling in relation to the overall
Company’s sales, we do expect that a few 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
ingredients segment, we face little direct competition as the
ingredients we offer, such as NIAGEN® and pTeroPure® are
backed by intellectual properties 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
●
Royal DSM (the
Netherlands)
●
Glanbia plc
(Ireland)
●
BASF (Germany)
●
Lonza Group Ltd
(Switzerland)
●
Sabinsa Corporation
(India/USA)
For the
core 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. 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.
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.
Core Standards and Contract Services Segment
Competitors
●
Sigma-Aldrich
(USA)
●
Phytolab
(Germany)
●
US Pharmacopoeia
(USA)
●
Extrasynthese
(France)
●
Covance
(USA)
●
Eurofins
(France)
●
Silliker Canada Co.
(Canada)
For
regulatory consulting segment, 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, we currently protect our intellectual property
through patents, trademarks, designs and copyrights on our products
and services. Our business strategy is to use the intellectual
property harnessed from our core 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 term flow of intellectual property
milestone and royalty payments to us.
The
following table sets forth our existing patents and those to which
we have licensed rights:
|
Patent Number
|
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 of 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
|
|
8,524,782
|
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
|
|
8,945,653
|
Extracted
whole kernels and improved processed and processable corn produced
thereby
|
5/23/2011
|
2/3/2015
|
5/23/2031
|
Licensed
from Suntava, LLC
|
|
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
|
|
9,439,875
|
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
|
Manufacturing
For our
ingredients segment and our core standards and contract services
segment, we currently utilize third-party manufacturers to produce
and supply the 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.
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.
For
certain reference standards, ChromaDex Analytics, Inc. 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. In addition, the new research and development laboratory
in Longmont, Colorado will allow us to manufacture at a process
scale for products that we are planning to take to market. 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.
Sources and Availability of Raw Materials and the Names of
Principal Suppliers
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, we have completed the first human clinical
trial on our proprietary ingredient NR and the results demonstrated
that a single dose of NR resulted in statistically significant
increases in the co-enzyme NAD+ in healthy human volunteers. In
addition, NR was also found to be safe as no adverse events were
observed.
In 2015, NR
was recognized by the FDA as a “New Dietary
Ingredient.” NR was also “Generally Recognized As
Safe” by an independent panel of expert toxicologists and in
August 2016, the U.S. FDA issued a GRAS No Objection
Letter.
We are
currently conducting a second human clinical trial on NR which will
evaluate the effect of repeated doses of NIAGEN® on NAD+
metabolite concentrations in blood, urine and muscle in healthy
adults. This study will evaluate the impacts of 3 dose levels of
NIAGEN® compared to a placebo. One quarter of subjects will
receive the low dose of NIAGEN® (100 mg), one quarter will
receive the moderate dose of NIAGEN® (300 mg), one quarter
will receive the higher dose of NIAGEN® (1,000 mg) and one
quarter will receive the placebo. The recruitment and dosing
portions of the trial are currently in the final stages as the last
participant is currently on study.
We have
also been working closely with the National Institute of Health
under a collaborative agreement on a therapeutic indication for NR
as a treatment of a rare pediatric orphan disease, Cockayne
Syndrome. We completed a pre-Investigational New Drug
(“IND”) meeting with the FDA in November 2016 and we
expect to file an IND application with the FDA in
2017.
We have
also successfully conducted a 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
and other compounds in our pipeline to provide differentiation as
we market these proprietary ingredients and support various
health-related claims or obtain additional regulatory
clearances.
Through
our newly opened research and development laboratory in Longmont,
Colorado, we intend to manufacture at a process scale for products
that we are planning to take to market as well as explore cost
saving processes for existing products.
We plan
to utilize our expertise in natural products to license and develop
new intellectual property that can be sold to clients in our target
industries.
Research
and development costs for our ingredients segment for the fiscal
years ended December 31, 2016, January 2, 2016 and January 3, 2015
were approximately $2,488,000, $892,000 and $514,000,
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, state and local
environmental laws and regulations.
Working Capital
The
Company’s working capital at the end of years 2016 and 2015
was approximately $7.8 million and $4.4 million, respectively. The
Company measures working capital by adding trade receivables and
inventories, and subtracting accounts payable. The majority of the
working capital is consumed by our ingredients segment as the
operations require a large amount of inventory to be on hand. As
the ingredients segment grows, more working capital will likely be
needed to support the operations. As of December 31, 2016, the
Company had approximately $7.0 million of inventory for our
ingredients segment, which represented approximately 36% of the
Company’s total assets.
Backlog Orders
For our
ingredients segment, we have minimal backlog orders as we carry
inventory on hand for most of the ingredients we offer and we ship
upon the receipt of customer’s purchase orders.
For the
core 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 list over 1,800
phytochemicals and 400 botanical reference 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
December 31, 2016, ChromaDex (including ChromaDex Analytics, Inc.)
had 93 employees, 84 of whom were full-time and 9 of whom were
part-time. We consider our relationships with our employees to be
satisfactory. None of our employees is covered by a collective
bargaining agreement.
Item 1A.
R
isk Factors
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
We have a history of net losses, may need additional financing to
meet our future short-term and long-term capital 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 $2,928,000, $2,771,000 and $5,388,000 for the years
ended December 31, 2016, January 2, 2016 and January 3, 2015,
respectively. We have not achieved profitability on an annual
basis. We may not be able to reach a level of revenue to achieve
profitability. If our revenues grow slower than anticipated, or if
operating expenses exceed expectations, then we may not be able to
achieve profitability in the near future or at all, which may
depress our stock price.
On November 4, 2016, we entered into a business financing agreement
with Western Alliance Bank, in order to establish a formula based
revolving credit line up to $5.0 million. As of December 31, 2016,
the Company failed to meet one of the covenants of the business
financing agreement, which was to at least meet 50% of projections
of EBDAS and was in default under the agreement (the
“Existing Default.”). On March 12, 2017, the Company
entered into a modification agreement with Western Alliance under
which Western Alliance waived the Existing Default. While we
anticipate that our current cash, cash equivalents, cash to be
generated from operations and the established $5.0 million
revolving credit line will be sufficient to meet our projected
operating plans through at least March 17, 2018, we may require
additional funds, either through additional equity or debt
financings or collaborative agreements or from other
sources.
Our capital requirements will depend on many factors,
including:
●
the
revenues generated by sales of our products;
●
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;
●
the
expenses we incur in developing and commercializing our products,
including the cost of obtaining and maintaining regulatory
approvals; and
●
unanticipated
general and administrative expenses.
As a
result of these factors, we may seek to raise additional capital
prior to March 17, 2018 both to meet our projected operating plans
after March 17, 2018 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 litigation with Elysium Health, LLC
that may harm our business, and a disruption in sales to or the
ability to collect from this customer or other significant
customers in the future, could also materially harm our financial
results.
We are currently engaged in litigation with Elysium Health, LLC
that represented 19% of our net sales for the year
ending December 31, 2016. For further details on this
litigation, please refer to Item 3 of this Annual Report on Form
10-K. This customer has not paid us approximately $3.0 million for
previous purchase orders. We may not collect the full amount owed
to us by this customer, and as a result, we may have to write off a
large portion of that amount as uncollectible expense. We may also
have to discount future sales, if any, to this
customer.
The litigation may turn out to be s
ubstantial and complex,
and it could cause us to incur significant costs and distract our
management over an extended period of time. 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.
The customer has filed a counterclaim
against us, and 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 the customer. We cannot guarantee that the customer
will continue to make purchases at previous volumes or prices,
which may harm our future sales if we cannot replace their volume
with other existing and new customers and which may materially
affect our future financial results.
Going forward, we may have additional customers which we become
highly dependent on. Factors that could influence our relationship
with our significant customer and other customers which we may
become highly dependent on include:
●
our
ability to maintain our products at prices that are competitive
with those of our competitors;
●
our
ability to maintain quality levels for our products sufficient to
meet the expectations of our customers;
●
our
ability to produce, ship and deliver a sufficient quantity of our
products in a timely manner to meet the needs of our
customers;
●
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;
●
our
ability to provide timely, responsive and accurate customer support
to our customers; and
●
the
ability of our customers to effectively deliver, market and
increase sales of their own products based on ours.
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 line 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 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
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 its
results of operations.
Changes in our business strategy 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 particular 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,
we may change the strategy of our ingredients segment by focusing
on selling products with our ingredients direct to consumers, and
may decide to invest in building a direct-to-consumer business. If
we are not successful in developing a direct-to-consumer business,
our sales may decrease and our costs may increase.
The success of our 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.
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 not 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 an
ingredient supplier, marketer and manufacturer of 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, 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.
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. Varvaro, Troy
A. Rhonemus and Robert N. Fried who are our Chief Executive
Officer, Chief Financial Officer, Chief Operating Officer, and
recently hired President and Chief Strategy 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:
●
the
announcement or introduction of new products by our
competitors;
●
our
ability to upgrade and develop our systems and infrastructure to
accommodate growth;
●
the
decision by significant customers to reduce purchases;
●
disputes and
litigation with significant customers, including the ongoing
litigation as described in Item 3 of this Annual Report on Form
10-K;
●
our
ability to attract and retain key personnel in a timely and cost
effective manner;
●
technical
difficulties;
●
the
amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations and
infrastructure;
●
regulation by
federal, state or local governments; and
●
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:
●
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;
●
we may
experience delays in our development program;
●
any
products that are approved may not be accepted in the
marketplace;
●
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;
●
we may
not be able to manufacture any of our products in commercial
quantities or at an acceptable cost;
●
rapid
technological change may make our products obsolete;
●
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
●
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-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 adversely 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-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. 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 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. 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
product 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. 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. 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 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
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
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.
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 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 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
not be successful in
acquiring complementary businesses on favorable
terms.
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 a result of the changes in management, the
incurrence of amortization expenses 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.
Our cash
flows and capital resources may be
insufficient to make required payments on future
indebtedness.
On
November 4, 2016, we entered into entered into a business financing
agreement (the “Financing Agreement”) with Western
Alliance Bank (“Western Alliance”), in order to
establish a formula based revolving credit line pursuant to which
the Company may borrow an aggregate principal amount of up to
$5,000,000, subject to the terms and conditions of the Financing
Agreement. The interest rate will be calculated at a floating rate
per month equal to (a) the greater of (i) 3.50% per year or (ii)
the Prime Rate published in the Money Rates section of the Western
Edition of The Wall Street Journal, or such other rate of interest
publicly announced by Lender as its Prime Rate, plus (b) 2.50
percentage points. Any borrowings, interest or other fees or
obligations that the Company owes Western Alliance pursuant to the
Financing Agreement (the “Obligations”) will be become
due and payable on November 4, 2018. For further details on the
Loan Agreement, please refer to Note 8. Loan Payable appearing in
Item 8 of this Annual Report on Form 10-K.
As of
December 31, 2016 and March 15, 2017, we did not have any
indebtedness under the Financing Agreement. However, we may incur
indebtedness in the future and 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 Financing 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 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;
●
pricing
pressures;
●
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
Financing 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. Our incurrence of
additional indebtedness would intensify the risks described
above.
The Financing
Agreement contains various covenants limiting
the discretion of our management in operating our
business.
The
Financing Agreement contains various restrictive covenants that
limit our management's discretion in operating our business. In
particular, these instruments limit our ability to, among other
things:
●
incur
additional debt;
●
grant
liens on assets;
●
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 Financing 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.
If we are unable to maintain sales, marketing and distribution
capabilities or 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 our
product lines and/or technologies at favorable prices. In addition
to being expensive, maintaining such a sales force is
time-consuming. Qualified direct sales personnel with experience in
the natural 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.
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 customers’ industries are regulated is
controlled by government agencies and depending on the market
segment can be very expensive, 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 the United States,
strictly regulate these 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:
●
our ability to
integrate operations, technology, products and
services;
●
our ability to
execute our business plan;
●
our operating results are
below expectations;
●
our issuance of
additional securities, including debt or equity or a combination
thereof,;
●
announcements of
technological innovations or new products by us or our
competitors;
●
media coverage regarding
our industry or us;
●
litigation;
●
disputes with or our
inability to collect from significant customers;
●
loss of any strategic
relationship;
●
industry developments,
including, without limitation, changes in healthcare policies or
practices;
●
economic and other
external factors;
●
reductions in purchases
from our large customers;
●
period-to-period
fluctuations in our financial results; and
●
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 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. 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 or weeks 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.
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 projections may not be made timely or set at 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.
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
December 31, 2016, we had outstanding options exercisable for an
aggregate of 5,210,334 shares of common stock at a weighted
average exercise price of $3.47 per share and outstanding warrants
exercisable for an aggregate of 470,444 shares of common stock at a
weighted average exercise price of $4.15 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.
Item 1B.
U
nresolved Staff
Comments
None.
Item 2.
P
roperties
As of
December 31, 2016, we lease approximately 15,000 square feet of
office space in Irvine, California with 3 years remaining on the
lease, approximately 13,000 square feet of space for laboratory in
Boulder, Colorado with 6 years remaining on the lease,
approximately 10,000 square feet of space for research and
development laboratory in Longmont, Colorado with 7 years remaining
on the lease and approximately 2,300 square feet of office space in
Rockville, Maryland with 4 years remaining on the lease. The below
table illustrates the use of each property by our business
segments.
|
Business
Segment
|
Property
Used
|
|
Ingredients
|
All
properties
|
|
Core
Standards and Contract Services
|
Irvine,
CA, Boulder, CO and Longmont, CO
|
|
Regulatory
Consulting
|
Primarily
Rockville, MD
|
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. We use the apartments to accommodate
our traveling employees to each of our California and Colorado
locations. We do not own any real estate. For the year ended
December 31, 2016, our total annual rental expense was
approximately $606,000
.
Item 3.
L
egal
Proceedings
On December 29, 2016, ChromaDex, Inc. filed a complaint (the
“Complaint”) in the United States District Court for
the Central District of California, naming Elysium Health, Inc. as
defendant. Among other allegations, ChromaDex, Inc. alleges in the
Complaint that (i) Elysium breached the Supply Agreement, dated
June 26, 2014, by and between ChromaDex, Inc. and Elysium Health,
LLC (“Elysium”) (the
“pTeroPure
®
Supply Agreement”), by failing
to make payments to ChromaDex, Inc. for purchases of
pTeroPure® 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® pursuant
to the NIAGEN® Supply Agreement, (iii) Elysium breached the
Trademark License and Royalty Agreement, dated February 3, 2014, by
and between ChromaDex, Inc. and Elysium (the “License
Agreement”), by failing to make payments to ChromaDex, Inc.
for royalties due pursuant to the License Agreement and (iv)
certain officers of Elysium made false promises and representations
to induce ChromaDex, Inc. into providing large supplies of
pTeroPure
®
and NIAGEN® to Elysium pursuant
to the pTeroPure
®
Supply Agreement and NIAGEN®
Supply Agreement. ChromaDex, Inc. is seeking punitive damages,
money damages and interest.
On January 25, 2017, Elysium filed an answer and counterclaims (the
“Counterclaim”) in response to the Complaint. Among
other allegations, Elysium alleges in the Counterclaim that (i)
ChromaDex, Inc. breached the NIAGEN® Supply Agreement by not
issuing certain refunds or credits to Elysium and for violating
certain confidential information provisions, (ii) ChromaDex, Inc.
breached the implied covenant of good faith and fair dealing
pursuant to the NIAGEN® Supply Agreement, (iii) ChromaDex,
Inc. breached certain confidential provisions of the
pTeroPure
®
Supply Agreement, (iv) ChromaDex, Inc.
fraudulently induced Elysium into entering into the License
Agreement (the “Fraud Claim”), (v) ChromaDex,
Inc.’s conduct constitutes misuse of its patent rights (the
“Patent Claim”) and (vi) ChromaDex, Inc. has engaged in
unlawful or unfair competition under California state law (the
“Unfair Competition Claim”). 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.
On February 15, 2017, ChromaDex, Inc. filed an amended complaint
(the “Amended Complaint”). In the Amended Complaint,
ChromaDex, Inc. re-alleges the claims in the Complaint, and also
alleges that Elysium willfully and maliciously misappropriated
ChromaDex, Inc.’s trade secrets. On February 15, 2017,
ChromaDex, Inc. also filed a motion to dismiss the Fraud Claim, the
Patent Claim and the Unfair Competition Claim. While ChromaDex,
Inc. expresses no opinion as to the ultimate outcome of this
matter, ChromaDex, Inc. believes Elysium’s allegations are
without merit and will vigorously defend against them.
As
of December 31, 2016, ChromaDex, Inc. did not accrue a potential
loss for the Counterclaim because ChromaDex, Inc. believes that the
allegations are without merit and thus it is not probable that a
liability had been incurred, and the amount of loss cannot be
reasonably estimated.
From
time to time we are involved in legal proceedings arising in the
ordinary course of our business. We believe that there 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.
Item 4.
M
ine Safety
Disclosures
Not
applicable.
PART II
Item 5.
M
arket for
Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Since
April 25, 2016, our common stock has been traded on The NASDAQ
Capital Market (“NASDAQ”) under the symbol
“CDXC.” From November 10, 2014 to April 22, 2016, our
common stock had been traded on the top tier of the OTC Markets
Group, Inc. (the “OTCQX”) under the symbol
“CDXC.”
On
April 13, 2016, the Company effected a 1-for-3 reverse stock split.
All information presented herein has been retrospectively adjusted
to reflect the reverse stock split as if it took place as of the
earliest period presented. An additional 1,632 shares were issued
to round up fractional shares as a result of the reverse stock
split.
The
following table sets forth the range of high and low sale prices of
our common stock for each of the periods indicated as reported by
NASDAQ and OTCQX. Closing sale prices were used for the period when
our common stock was traded on NASDAQ and closing bid quotations
were used for the period when our common stock was traded on OTCQX.
These prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
|
Fiscal Year Ending
December 31, 2016
|
||
|
Quarter
Ended
|
High
|
Low
|
|
December 31,
2016
|
$
3.31
|
$
2.31
|
|
October 1,
2016
|
$
4.39
|
$
2.88
|
|
July 2,
2016
|
$
5.76
|
$
2.84
|
|
April 2,
2016
|
$
4.77
|
$
3.60
|
|
Fiscal Year Ending
January 2, 2016
|
||
|
Quarter
Ended
|
High
|
Low
|
|
January 2,
2016
|
$
4.56
|
$
3.36
|
|
October 3,
2015
|
$
4.26
|
$
3.06
|
|
July 4,
2015
|
$
4.44
|
$
3.39
|
|
April 4,
2015
|
$
4.62
|
$
2.55
|
On
March 9, 2017, the closing sale price was $2.71.
Securities Authorized for Issuance under Equity Compensation
Plans
Information
about our equity compensation plans is incorporated herein by
reference to Item 12 of Part III of this Annual
Report.
Performance Graph
The
performance graph 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 Small Cap 600 Health
Care Index. The chart shows the value as of December 31, 2016, of
$100 invested on December 31, 2011. The stock price performance
below is not necessarily indicative of future
performance.
The
performance graph below is not “soliciting material,”
shall not be deemed “filed” with the SEC and shall not
be incorporated by reference into any of our filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended, whether made before or after the date hereof
and irrespective of any general incorporation language in any such
filing, except as shall be expressly set forth by specific
reference in such filing.
Holders of Our Common Stock
As of
March 9, 2017, we had approximately 51 registered holders of record
of our common stock.
Dividend 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.
Recent Sales of Unregistered Securities
None.
Item 6. Selected Financial
D
ata
The
annual financial information set forth below has been derived from
our audited consolidated financial statements. The information
should be read together with, and is qualified in its entirety by
reference to, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” the
consolidated financial statements and notes included elsewhere in
this Form 10-K and in our SEC filings. The selected financial data
in this section are not intended to replace our consolidated
financial statements and the related notes. Our historical results
are not necessarily indicative of the results that may be expected
in the future and results of interim periods are not necessarily
indicative of the results for the entire year.
|
|
Years
Ended
|
||||
|
|
2016
|
2015
|
2014
|
2013
|
2012
|
|
Consolidated
Statement of Operations Data
|
|
|
|
|
|
|
Sales,
net
|
$
26,811,086
|
$
22,014,140
|
$
15,313,179
|
$
10,160,964
|
$
11,610,494
|
|
Cost of
sales
|
14,889,954
|
13,533,132
|
9,987,514
|
7,027,828
|
9,335,057
|
|
|
|
|
|
|
|
|
Gross
profit
|
11,921,132
|
8,481,008
|
5,325,665
|
3,133,136
|
2,275,437
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
Sales and
marketing
|
2,250,589
|
2,326,788
|
2,136,584
|
2,357,605
|
5,520,141
|
|
Research and
development
|
2,522,768
|
891,601
|
513,671
|
134,040
|
141,573
|
|
General and
administrative
|
9,393,209
|
7,416,451
|
7,860,930
|
4,982,976
|
8,250,157
|
|
Loss from
investment in affiliate
|
-
|
-
|
45,829
|
44,961
|
-
|
|
Operating
expenses
|
14,166,566
|
10,634,840
|
10,557,014
|
7,519,582
|
13,911,871
|
|
|
|
|
|
|
|
|
Operating
loss
|
(2,245,434
)
|
(2,153,832
)
|
(5,231,349
)
|
(4,386,446
)
|
(11,636,434
)
|
|
|
|
|
|
|
|
|
Nonoperating income
(expenses):
|
|
|
|
|
|
|
Interest
income
|
2,247
|
3,325
|
2,013
|
1,251
|
3,014
|
|
Interest
expense
|
(371,899
)
|
(616,033
)
|
(158,849
)
|
(34,330
)
|
(29,006
)
|
|
Loss on debt
extinguishment
|
(313,099
)
|
-
|
-
|
-
|
-
|
|
Nonoperating
expenses
|
(682,751
)
|
(612,708
)
|
(156,836
)
|
(33,079
)
|
(25,992
)
|
|
|
|
|
|
|
|
|
Loss before income
taxes
|
(2,928,185
)
|
(2,766,540
)
|
(5,388,185
)
|
(4,419,525
)
|
(11,662,426
)
|
|
Provision for
income taxes
|
-
|
(4,527
)
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
Net
loss
|
$
(2,928,185
)
|
$
(2,771,067
)
|
$
(5,388,185
)
|
$
(4,419,525
)
|
$
(11,662,426
)
|
|
|
|
|
|
|
|
|
Basic and Diluted
loss per common share
|
$
(0.08
)
|
$
(0.08
)
|
$
(0.15
)
|
$
(0.13
)
|
$
(0.39
)
|
|
Basic and Diluted
weighted average
|
|
|
|
|
|
|
common
shares outstanding
|
37,294,321
|
35,877,341
|
35,486,460
|
33,329,148
|
30,089,601
|
Item
7.
M
anagement’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 included 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 1A in this 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
We are
a natural products company that leverage our 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 our ingredient technologies segment, we also have
core standards and contract services segment, which focuses on
natural product fine chemicals (known as
“phytochemicals”) and analytical testing services, and
regulatory consulting segment. 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
with clinical and scientific research, as well as extensive
intellectual property protection.
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.
On November 4, 2016, we entered into a business financing agreement
with Western Alliance Bank, in order to establish a formula based
revolving credit line up to $5.0 million. As of December 31, 2016,
the Company failed to meet one of the covenants of the business
financing agreement, which was to at least meet 50% of projections
of EBDAS and was in default under the agreement (the
“Existing Default.”). On March 12, 2017, the Company
entered into a modification agreement with Western Alliance under
which Western Alliance waived the Existing Default. As of March 15,
2017, we have not borrowed from this revolving credit line.
We
anticipate that our
current cash, cash equivalents, cash to be generated from
operations and the established $5.0 million revolving credit line
will be sufficient to meet our projected operating plans through at
least March 17, 2018. We may, however, seek additional capital
prior to March 17, 2018, both to meet our projected operating plans
after March 17, 2018 and/or to fund our longer term strategic
objectives.
Additional
capital may come from public and/or private stock or debt
offerings, borrowings under lines of credit or other sources. These
additional funds may not be available on favorable terms, or at
all. Further, if we issue equity or debt securities to
raise additional funds, our existing stockholders may experience
dilution and the new equity or debt securities we issue may have
rights, preferences and privileges senior to those of our existing
stockholders. In addition, if we raise additional funds through
collaboration, licensing or other similar arrangements, it may be
necessary to relinquish valuable rights to our products or
proprietary technologies, or to grant licenses on terms that are
not favorable to us. If we cannot raise funds on acceptable terms,
we may not be able to develop or enhance our products, obtain the
required regulatory clearances or approvals, achieve long term
strategic objectives, take advantage of future opportunities, or
respond to competitive pressures or unanticipated customer
requirements. Any of these events could adversely affect our
ability to achieve our development and commercialization goals,
which could have a material and adverse effect on our business,
results of operations and financial condition.
Some of
our operations are subject to regulation by various state and
federal agencies. 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 December 31, 2016, January
2, 2016 and January 3, 2015 were approximately $26,811,000,
$22,014,000 and $15,313,000, respectively. We incurred a net loss
of approximately $2,928,000, $2,771,000 and $5,388,000 for the
twelve-month periods ended December 31, 2016, January 2, 2016 and
January 3, 2015, respectively. This equated to $0.08, $0.08 and
$0.15 losses per basic and diluted share for the twelve-month
periods ended December 31, 2016, January 2, 2016 and January 3,
2015, respectively.
Over
the next two years, we plan to continue to increase research and
development efforts for our line of proprietary ingredients,
subject to available financial resources.
Year Ended December 31, 2016 Compared to Year Ended January 2,
2016
Net Sales.
Net sales consist of gross sales less discounts
and returns.
●
The increase in sales for
the ingredients segment is due to increased sales of
“NIAGEN®” and
“PTEROPURE®.”
●
The increase in sales for
the core standards and contract services segment is primarily due
to increased sales of analytical testing and contract
services.
●
The decrease in sales for
the scientific and regulatory consulting segment is primarily due
to a further emphasis on intercompany work supporting our
ingredients segment.
Cost of Sales.
Costs of sales include raw materials, labor,
overhead, and delivery costs.
The
cost of sales, as a percentage of net sales, decreased
5%.
●
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 cost of sales, as a
percentage of net sales for the core standards and contract
services segment, decreased 6%. The increase in analytical testing
and contract services sales led to a higher labor utilization rate,
which resulted in lowering our cost of sales as a percentage of net
sales.
●
The percentage increase
in cost of sales for the scientific and regulatory consulting
segment is largely due to a further emphasis on intercompany work.
Fixed labor costs make up the majority of costs for the consulting
segment.
Gross Profit.
Gross profit is net sales less the cost of
sales and is affected by a number of factors including product mix,
competitive pricing and costs of products and
services.
●
The gross profit for the
ingredients segment increased due to the increased sales of the
ingredient portfolio we offer, coupled with lower prices from our
suppliers due to increased purchase volumes.
●
The increased gross
profit for the core standards and contract services segment is
largely due to the increased sale of analytical testing and
contract services. Fixed labor costs make up the majority of costs
for analytical testing and contract services and these fixed labor
costs did not increase in proportion to sales, hence yielding
higher profit margin.
●
The decreased gross
profit for the scientific and regulatory consulting segment is
largely due to a greater focus on intercompany work supporting our
ingredients segment.
Operating Expenses – Sales and Marketing.
Sales and
Marketing Expenses consist of salaries, advertising and marketing
expenses.
●
For the ingredients
segment, the increase is largely due to increased marketing efforts
to raise the consumer awareness for our line of proprietary
ingredients.
●
For the core standards
and contract services segment, the decrease is largely due to
making certain operational changes as certain personnel who were
previously assigned to the sales and marketing group were moved to
an administrative group. We do anticipate increased expenses going
forward as we increase marketing efforts and hire additional
staff.
●
For the scientific and
regulatory consulting segment, we had limited sales and marketing
expenses.
Operating Expenses – Research and Development.
Research and Development Expenses consist of clinical trials and
process development expenses.
●
For the ingredients
segment, we increased our research and development efforts with a
focus on our “NIAGEN®” brand. Subject to available
financial resources, we plan to continue to increase research and
development efforts for our line of proprietary
ingredients.
●
For the core standards
and contract services segment, the expense is mainly associated
with exploring processes to develop certain compounds at a larger
scale.
Operating Expenses – General and Administrative.
General and Administrative Expenses consist of general company
administration, IT, accounting and executive management
expenses.
|
|
Twelve months
ending
|
||
|
|
December
31, 2016
|
January 2,
2016
|
Change
|
|
|
|
|
|
|
General
and administrative
|
$
9,393,000
|
$
7,416,000
|
27
%
|
|
|
|
|
|
●
One of the factors that
contributed to the increase in general and administrative expenses
was an increase in bad debt expense. Our bad debt expense for 2016
increased to approximately $870,000 compared to $379,000 for 2015.
In December 2016, we recorded an allowance of $500,000 for a
certain doubtful account against bad debt expenses.
●
Another factor that
contributed to the increase was an increase in patent maintenance
expense. Our patent maintenance expense for 2016 increased to
approximately $652,000 compared to approximately $371,000 for
2015.
●
Another factor that
contributed to the increase was an increase of approximately
$531,000 in expenses associated with administrative staff. We made
certain operational changes as certain personnel who were
previously assigned to our sales and marketing group were moved to
an administrative group in 2016.
●
Another factor that
contributed to the increase in general and administrative expense
was an increase in royalties we pay to patent holders as the sales
for licensed products increased in 2016. For 2016, royalty expense
increased to approximately $713,000, compared to approximately
$526,000 for 2015.
●
Also, there were one-time
expenses of approximately $89,000 associated with the initial
listing of the Company’s stock in the NASDAQ Capital Market
in 2016.
●
These increases in
expenses were offset by the decrease in share-based compensation
expense. For 2016, our share-based compensation expense decreased
to approximately $1,194,000 compared to approximately $1,978,000
for 2015.
Nonoperating – Interest Income.
Interest income
consists of interest earned on money market accounts. Interest
income for the twelve-month period ended December 31, 2016, was
approximately $2,000, a slight decrease compared to approximately
$3,000 for the twelve-month period ended January 2,
2016.
Nonoperating – Interest Expense.
Interest expense
consists of interest on loan payable and capital
leases.
|
|
Twelve months
ending
|
||
|
|
December
31, 2016
|
January 2,
2016
|
Change
|
|
|
|
|
|
|
Interest
expense
|
$
372,000
|
$
616,000
|
-40
%
|
|
|
|
|
|
●
The decrease 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 an initial $2.5 million on
September 29, 2014 and a second $2.5 million on June 18, 2015. The
Company fully repaid the loan on June 14, 2016.
Depreciation and Amortization.
For the twelve-month period
ended December 31, 2016, we recorded approximately $332,000 in
depreciation compared to approximately $286,000 for the
twelve-month period ended January 2, 2016. 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 December 31,
2016, we recorded amortization on intangible assets of
approximately $88,000 compared to approximately $45,000 for the
twelve-month period ended January 2, 2016.
Income Taxes.
At December 31, 2016 and January 2, 2016, the
Company maintained a full valuation allowance against the entire
deferred income tax balance which resulted in an effective tax rate
of 0% for 2016 and 0.2% for 2015.
Net cash used in operating activities.
Net cash used in
operating activities for the twelve-month period ended December 31,
2016 was approximately $2,937,000 as compared to approximately
$2,111,000 for the twelve-month period ended January 2, 2016. Along
with the net loss, an increase in trade receivables were the
largest uses of cash during the twelve-month period ended December
31, 2016. Net cash used in operating activities for the
twelve-month period ended January 2, 2016 largely reflects increase
in inventories, trade receivables along with the net loss, as
well.
We
expect our operating cash flows to fluctuate significantly in
future periods as a result of fluctuations in our operating
results, shipment timetables, accounts receivable collections,
inventory management, and the timing of our payments, among other
factors.
Net cash used in investing activities.
Net cash used in
investing activities was approximately $1,725,000 for the
twelve-month period ended December 31, 2016, compared to
approximately $648,000 for the twelve-month period ended January 2,
2016. Net cash used in investing activities for the twelve-month
period ended December 31, 2016 mainly consisted of purchases of
leasehold improvements and equipment and intangible assets. Net
cash used in investing activities for the twelve-month period ended
January 2, 2016 also consisted of purchases of leasehold
improvements and equipment and intangible assets.
Net cash provided by financing activities.
Net cash provided
by financing activities was approximately $754,000 for the
twelve-month period ended December 31, 2016, compared to
approximately $4,344,000 for the twelve-month period ended January
2, 2016. Net cash provided by financing activities for 2016 mainly
consisted of proceeds from issuances of our common stock and
warrants through a private offering to our existing stockholders
and exercise of stock options, offset by principal payments on loan
payable and capital leases. Net cash provided by financing
activities for 2015 consisted of proceeds from loan payable and
issuances of our common stock and warrants through a private
offering to our existing stockholders.
Trade Receivables.
As of December 31, 2016, we had
approximately $5,852,000 in trade receivables as compared to
approximately $2,451,000 as of January 2, 2016. This increase was
largely due to the increase in our ingredients segment
sales.
Inventories.
As of December 31, 2016, we had approximately
$7,913,000 in inventory, compared to approximately $8,174,000 as of
January 2, 2016. As of December 31, 2016, our inventory consisted
of approximately $7,016,000 of bulk ingredients and approximately
$897,000 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. 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 currently lists over 1,800
phytochemicals and 400 botanical reference materials in our catalog
and holds a lot of these 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 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. By doing so, we believe we
can lower the costs of our inventory, which we can then pass along
the savings to our customers. 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 December 31, 2016, we had $5,978,000
in accounts payable compared to approximately $6,224,000 as of
January 2, 2016.
Advances from Customers
. As of December 31, 2016, we had
approximately $389,000 in advances from customers compared to
approximately $272,000 as of January 2, 2016. These advances 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 2
nd
half of the
twelve-month period ended December 31, 2016.
Year Ended January 2, 2016 Compared to Year Ended January 3,
2015
Net Sales.
Net sales consist of gross sales less discounts
and returns.
●
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 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.
The
cost of sales, as a percentage of net sales, decreased
4%.
●
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.
●
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.
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.
●
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 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 increased gross
profits for the scientific and regulatory consulting segment are
largely due to higher utilizations of in-house consulting
labor.
Operating Expenses – Sales and Marketing.
Sales and
Marketing Expenses consist of salaries, advertising and marketing
expenses.
●
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.
●
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 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.
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
2, 2016
|
January 3,
2015
|
Change
|
|
Research
and development expenses:
|
|
|
|
|
Ingredients
|
$
892,000
|
$
514,000
|
74
%
|
|
|
|
|
|
●
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.
Operating Expenses – General and Administrative.
General and Administrative Expenses consist of general company
administration, IT, accounting and executive management
expenses.
|
|
Twelve months
ending
|
||
|
|
January
2, 2016
|
January 3,
2015
|
Change
|
|
|
|
|
|
|
General
and administrative
|
$
7,416,000
|
$
7,861,000
|
-6
%
|
|
|
|
|
|
●
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.
In
2014, we had higher share-based compensation expenses as we awarded
an aggregate of 1,090,000 shares of restricted stock to the
Company’s officers and members 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.
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.
Interest expense
consists of interest on loan payable and capital
leases.
|
|
Twelve months
ending
|
||
|
|
January
2, 2016
|
January 3,
2015
|
Change
|
|
|
|
|
|
|
Interest
expense
|
$
616,000
|
$
159,000
|
287
%
|
|
|
|
|
|
●
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, we recorded approximately $286,000 in
depreciation compared to approximately $223,000 for the
twelve-month period ended January 3, 2015. In the twelve-month
period ended January 2, 2016, we recorded amortization on
intangible assets of approximately $45,000 compared to
approximately $36,000 for the twelve-month period ended January 3,
2015.
Income Taxes.
At January 2, 2016 and January 3, 2015, 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.
Net cash used in operating activities.
Net cash used in
operating activities for the twelve-month period ended January 2,
2016 was approximately $2,111,000 as compared to approximately
$2,580,000 for the twelve-month period ended January 3, 2015. 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 2, 2016. Net cash used in operating activities for the
twelve-month period ended January 3, 2015 largely reflects increase
in inventories, trade receivables along with the net loss, as
well.
Net cash provided by (used in) investing activities.
Net
cash used in investing activities was approximately $648,000 for
the twelve-month period ended January 2, 2016, compared to
approximately $1,590,000 provided by for the twelve-month period
ended January 3, 2015. Net cash used in investing activities for
the twelve-month period ended January 2, 2016 mainly consisted of
purchases of leasehold improvements and equipment and intangible
assets. Net cash provided by investing activities for the
twelve-month period ended January 3, 2015 principally 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 by financing activities.
Net cash provided
by financing activities was approximately $4,344,000 for the
twelve-month period ended January 2, 2016, compared to
approximately $2,694,000 for the twelve-month period ended January
3, 2015. Net cash provided by financing activities for the
twelve-month period ended January 2, 2016 mainly consisted of
proceeds from the 2
nd
draw of the term
loan we entered into with Hercules Technology II, L.P, as well as
proceeds from issuance of our common stock and warrants through a
private offering to our existing stockholders. 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.
L
iquidity
and Capital Resources
For the
twelve-month periods ended December 31, 2016, January 2, 2016 and
January 3, 2015, the Company has incurred operating losses of
approximately $2,245,000, $2,154,000 and $5,231,000, respectively.
Net cash used in operating activities for the twelve-month periods
ended December 31, 2016, January 2, 2016 and January 3, 2015 was
approximately $2,937,000, $2,111,000 and $2,580,000, 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.
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
we will be 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.
On November 4, 2016, we entered into a business financing agreement
with Western Alliance Bank, in order to establish a formula based
revolving credit line up to $5.0 million. As of December 31, 2016,
the Company failed to meet one of the covenants of the business
financing agreement, which was to at least meet 50% of projections
of EBDAS and was in default under the agreement (the
“Existing Default.”). On March 12, 2017, the Company
entered into a modification agreement with Western Alliance under
which Western Alliance waived the Existing Default. While, we
anticipate that our current cash, cash equivalents, cash to be
generated from operations and the established $5.0 million
revolving credit line will be sufficient to meet our projected
operating plans through at least March 17, 2018, we may seek
additional capital prior to March 17, 2018, both to meet our
projected operating plans through and after March 17, 2018 and to
fund our longer term strategic objectives. To the extent we are
unable to raise additional cash or generate sufficient revenue to
meet our projected operating plans prior to March 17, 2018, 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 December 31, 2016 and January 2, 2016, we
had no off-balance sheet arrangements other than ordinary operating
leases as disclosed in the accompanying financial
statements.
Contractual Obligations and Commitments
The
following table summarizes our contractual obligations and other
commitments as of December 31, 2016:
|
|
Payments due by period
|
|||||
|
|
Total
|
2017
|
2018
|
2019
|
2020
|
2021
|
|
|
|
|
|
|
|
|
|
Capital
leases
|
670,000
|
297,000
|
248,000
|
89,000
|
36,000
|
-
|
|
Operating
leases
|
2,949,000
|
682,000
|
682,000
|
644,000
|
479,000
|
462,000
|
|
Purchase
obligations
|
3,524,000
|
3,096,000
|
428,000
|
-
|
-
|
-
|
|
Total
|
$
7,143,000
|
$
4,075,000
|
$
1,358,000
|
$
733,000
|
$
515,000
|
$
462,000
|
Capital leases.
We lease equipment under capitalized lease
obligations with a term of typically 4 or 5 years. We make monthly
instalment payments for these leases.
Operating leases.
We lease our office and research
facilities in California, Colorado and Maryland under operating
lease agreements that expire at various dates from September 2017
through 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.
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 our significant accounting policies, which are
described in Note 2 of the Financial Statements, set forth in Item
8, the following accounting policies involve the greatest degree of
judgment and complexity. Accordingly, these are the policies we
believe are the most critical to aid in fully understanding and
evaluating our consolidated financial condition and results 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 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.
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.
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, or market. The
inventory on the balance sheet is reflected net of valuation
allowances. Labor and overhead has been added to inventory that was
manufactured or characterized by the Company.
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.
Item 7A.
Q
uantitative and Qualitative
Disclosures About Market Risk
Interest Rate Risk
We may become exposed to risks associated with changes in interest
rates in connection with our credit facility with Western Alliance.
As of December 31, 2016, we did not have an outstanding loan
payable balance, however, we established a formula based revolving
credit line with Western Alliance Bank, pursuant to which we may
borrow an aggregate principal amount of up to $5,000,000, subject
to certain terms and conditions. If we decide to borrow from this
credit line, the interest rate will be calculated at a floating
rate per month equal to the greater of 3.50% per year or the Prime
Rate published in the Money Rates section of the Western Edition of
The Wall Street Journal, or such other rate of interest publicly
announced by Lender as its Prime Rate, plus 2.50 percentage points,
plus an additional 5.00 percentage points during any period that an
event of default has occurred and is continuing. If the Prime Rate
rises, we will incur more interest expenses. Any borrowing,
interest or other fees or obligations that we owe Western Alliance
will become due and payable on November 4,
2018.
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 has had a material effect on our results
of operations or financial condition during the periods
presented.
Item 8.
F
inancial
Statements and Supplementary Data
The
financial statements are set forth in the pages listed
below.
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
53
|
|
Consolidated
Balance Sheets at December 31, 2016 and January 2,
2016
|
54
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2016,
January 2, 2016 and January 3, 2015
|
55
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended
December 31, 2016, January 2, 2016 and January 3, 2015
|
56
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2016,
January 2, 2016 and January 3, 2015
|
57
|
|
Notes
to Consolidated Financial Statements
|
58
|
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 December 31, 2016 and January 2, 2016, and the related
consolidated statements of operations, stockholders’ equity
and cash flows for the years ended December 31, 2016, January 2,
2016 and January 3, 2015. 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of ChromaDex Corporation and Subsidiaries, as of
December 31, 2016 and January 2, 2016, and the consolidated results
of its operations and its cash flows for the years ended December
31, 2016, January 2, 2016 and January 3, 2015 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 December 31, 2016, based on criteria
established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 16, 2017 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
16, 2017
See Notes to
Consolidated Financial Statements.
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. and ChromaDex Analytics, Inc.
(collectively, the “Company” or, in the first person as
“we” “us” and “our”) 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 proprietary ingredient
technologies segment, the Company also has core standards and
contract services segment, which focuses on natural product fine
chemicals (known as “phytochemicals”) and chemistry and
analytical testing services, and regulatory consulting segment. 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 business segments to develop commercially viable
proprietary ingredients. The Company’s proprietary ingredient
portfolio is backed with clinical and scientific research, as well
as extensive intellectual property protection.
Liquidity
: The Company has incurred a loss from operations
of approximately $2.2 million and a net loss of approximately $2.9
million for the year ended December 31, 2016, and net losses of
approximately $2.8 million and $5.4 million for the years ended
January 2, 2016 and January 3, 2015, respectively. As of December
31, 2016, the cash and cash equivalents totaled approximately $1.6
million.
On November 4, 2016, the Company entered into a business financing
agreement with Western Alliance Bank, in order to establish a
formula based revolving credit line up to $5.0 million. As of
December 31, 2016, the Company failed to meet one of the covenants
of the business financing agreement, which was to at least meet 50%
of projections of Earnings Before Depreciation, Amortization and
Share-based Compensation (“EBDAS”) and was in default
under the agreement (the “Existing Default.”). On March
12, 2017, the Company entered into a modification agreement with
Western Alliance under which Western Alliance waived the Existing
Default. As of March 15, 2017, we have not borrowed from this
revolving credit line.
The
Company anticipates that its current cash, cash equivalents, cash
to be generated from operations and the established $5.0 million
revolving credit line will be sufficient to meet its projected
operating plans through at least March 17, 2018. The Company may,
however, seek additional capital prior to March 17, 2018, both to
meet its projected operating plans after March 17, 2018 and/or to
fund its longer term strategic objectives.
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 December 31, 2016 (referred to
as 2016) consisted of 52 weeks, the fiscal year ended January 2,
2016 (referred to as 2015) consisted of 52 weeks and the fiscal
year ended January 3, 2015 (referred to as 2014) consisted of 53
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 2017 will include 52 weeks.
Changes in accounting principle:
In September 2016, the
Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts
and Cash Payments. The ASU is issued to clarify whether certain
items, including debt prepayments and extinguishment costs, should
be categorized as operating, investing or financing in the
statement of cash flows, The amendments in this ASU clarify that
debt extinguishment costs should be classified as financing cash
outflows. The Company early adopted the amendments in this ASU
effective as of October 1, 2016. For the year ended December 31,
2016, the Company incurred loss of approximately $313,000 on debt
extinguishment and approximately $281,000 were paid in
cash.
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 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 December 31, 2016, January 2, 2016 and January
3, 2015, shipping and handling fees billed to customers were
approximately $110,000, $113,000 and $115,000, respectively, and
the cost of shipping and handling fees billed to customers were
approximately, $108,000, $112,000 and $130,000, 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 its cash in two
banks.
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, 2016 and
January 2, 2016 are as follows:
|
|
2016
|
2015
|
|
Allowances Related
to
|
|
|
|
Customer
C
|
$
800,000
|
$
-
|
|
Customer
E
|
198,000
|
-
|
|
Customer
A
|
-
|
329,000
|
|
Other
Allowances
|
83,000
|
38,000
|
|
|
$
1,081,000
|
$
367,000
|
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,
2016, we held a total deposit of approximately $1.5 million with
one institution which exceeded the FDIC limit. 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 primarily finished goods. They are stated at the lower
of cost, determined by the first-in, first-out 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 December 31, 2016 and
January 2, 2016 are as follows:
|
|
2016
|
2015
|
|
Bulk
ingredients
|
$
7,044,000
|
$
7,196,000
|
|
Reference
standards
|
1,033,000
|
1,239,000
|
|
|
8,077,000
|
8,435,000
|
|
Less valuation
allowance
|
164,000
|
261,000
|
|
|
$
7,913,000
|
$
8,174,000
|
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.
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.
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.
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 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 2013 to 2016, which statutes expire in
2017 to 2020, 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 December 31, 2016, 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 December 31, 2016,
January 2, 2016 and January 3, 2015 were approximately $58,000,
$104,000 and $171,000, 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.
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 fair value of the Company’s stock options is estimated at
the date of grant using the Black-Scholes based option valuation
model. The volatility assumption is based on the historical
volatility of 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 were
“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) If 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 days to exercise the share
options; and (v) the share options are nontransferable and
nonhedgeable.
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 measureable. 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 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.
The
carrying amounts reported in the balance sheet for loan payable are
present values net of discount, excluding the interest portion. The
carrying value 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 Company’s loan
payable is considered a Level 3 liability within the fair value
hierarchy.
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. Generally Accepted
Accounting Principles ("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 July
2015, the FASB issued ASU 2015-11, Inventory (Topic 330) -
Simplifying the Measurement of Inventory, which requires that
inventories, other than those accounted for under
Last-In-First-Out, will be reported at the lower of cost or net
realizable value. Net realizable value is the estimated selling
price less costs of completion, disposal and transportation. ASU
2015-11 is effective for annual periods beginning after December
15, 2016, and interim periods within those annual periods. We are
currently evaluating the impact of our pending adoption of ASU
2015-11.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU
2016-02 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 2016-02 on our
consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09, Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting to simplify the accounting for stock
compensation. It focuses on income tax accounting, award
classification, estimating forfeitures, and cash flow presentation.
ASU 2016-09 is effective for annual periods beginning after
December 15, 2016, and interim periods within those annual periods.
We are currently evaluating the impact of our pending adoption of
ASU 2016-09.
Note 3. Reverse Stock Split
On
April 13, 2016, the Company effected a 1-for-3 reverse stock split.
All information presented herein has been retrospectively adjusted
to reflect the reverse stock split as if it took place as of the
earliest period presented. An additional 1,632 shares were issued
to round up fractional shares as a result of the reverse stock
split.
Note 4. Loss Per Share Applicable to Common
Stockholders
The
following table sets forth the computations of loss per share
amounts applicable to common stockholders for the years ended
December 31, 2016, January 2, 2016 and January 3,
2015.
|
|
Years
Ended
|
||
|
|
2016
|
2015
|
2014
|
|
|
|
|
|
|
Net
loss
|
$
(2,928,185
)
|
$
(2,771,067
)
|
$
(5,388,185
)
|
|
|
|
|
|
|
Basic and diluted
loss per common share
|
$
(0.08
)
|
$
(0.08
)
|
$
(0.15
)
|
|
|
|
|
|
|
Weighted average
common shares outstanding (1):
|
37,294,321
|
35,877,341
|
35,486,460
|
|
|
|
|
|
|
Potentially
dilutive securities (2):
|
|
|
|
|
Stock
options
|
5,210,334
|
5,244,918
|
4,658,017
|
|
Warrants
|
470,444
|
423,007
|
156,340
|
|
Convertible
debt
|
-
|
257,798
|
257,798
|
(1)
Includes
approximately 0.4 million, 0.4 million and 0.5 million nonvested
restricted stock
for the years 2016,
2015 and 2014, respectively, which are participating securities
that feature
voting and dividend
rights
.
(2)
Excluded from the
computation of loss per share as their impact is
antidilutive.
Note 5. Intangible Assets
Intangible
assets
consisted of the
following:
|
|
2016
|
2015
|
Remaining
Weighted
Average
Amortization
Period
as
of
December
31, 2016
|
|
|
|
|
|
|
License agreements
and other
|
$
1,469,000
|
$
1,249,000
|
5.4 years
|
|
Less accumulated
depreciation
|
983,000
|
895,000
|
|
|
|
$
486,000
|
$
354,000
|
|
Amortization
expenses
on amortizable intangible assets included in the consolidated
statement of operations for the years ended December 31, 2016,
January 2, 2016 and January 3, 2015 were approximately $88,000,
$45,000 and $36,000, respectively.
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. The loss from impairment of these assets recorded
for the year ended January 2, 2016 was approximately
$19,000.
Estimated
aggregate amortization
expense for each of the next five
years is as follows:
|
Years ending
December:
|
|
|
2017
|
$
94,000
|
|
2018
|
94,000
|
|
2019
|
94,000
|
|
2020
|
89,000
|
|
2021
|
70,000
|
|
Thereafter
|
45,000
|
|
|
$
486,000
|
|
|
|
Note 6. Leasehold Improvements and Equipment,
Net
Leasehold
improvements and
equipment consisted of the
following:
|
|
2016
|
2015
|
Useful
Life
|
|
|
|
|
|
|
Laboratory
equipment
|
$
3,851,000
|
$
3,739,000
|
10
years
|
|
Leasehold
improvements
|
1,721,000
|
513,000
|
Lesser of lease
term or estimated useful life
|
|
Computer
equipment
|
441,000
|
404,000
|
3 to 5
years
|
|
Furniture and
fixtures
|
42,000
|
17,000
|
7
years
|
|
Office
equipment
|
28,000
|
22,000
|
10
years
|
|
Construction in
progress
|
170,000
|
4,000
|
|
|
|
6,253,000
|
4,699,000
|
|
|
Less accumulated
depreciation
|
3,142,000
|
2,910,000
|
|
|
|
$
3,111,000
|
$
1,789,000
|
|
Depreciation
expenses on leasehold improvements and equipment included in the
consolidated statement of operations for the years ended December
31, 2016, January 2, 2016 and January 3, 2015 were approximately
$332,000, $286,000 and $223,000, respectively.
The
Company leases equipment under capitalized lease obligations with a
total cost of approximately $1,214,000 and $1,137,000 and
accumulated amortization of $277,000 and $231,000 as of December
31, 2016 and January 2, 2016, respectively.
Note 7. Capitalized Lease Obligations
Minimum
future lease
payments
under capital leases as of December 31, 2016, are as
follows:
|
Year ending
December:
|
|
|
2017
|
$
297,000
|
|
2018
|
249,000
|
|
2019
|
89,000
|
|
2020
|
35,000
|
|
Total minimum lease
payments
|
670,000
|
|
Less amount
representing interest at a rate of approximately 8.9% per
year
|
71,000
|
|
Present value of
net minimum lease payments
|
599,000
|
|
Less current
portion
|
255,000
|
|
Long-term
obligations under capital leases
|
$
344,000
|
|
|
|
Interest
expenses related to capital
leases were approximately $48,000,
$62,000 and $47,000 for the years ended December 31, 2016, January
2, 2016 and January 3, 2015, respectively.
Note 8. Loan Payable
8A. Line of
Credit
– Western Alliance
Bank
On
November 4, 2016, the Company entered into a business financing
agreement (“Financing Agreement”) with Western Alliance
Bank (“Western Alliance”), in order to establish a
formula based revolving credit line pursuant to which the Company
may borrow an aggregate principal amount of up to $5,000,000,
subject to the terms and conditions of the Financing Agreement.
Upon execution of the Financing Agreement, the Company paid a
$25,000 facility fee and a $900 due diligence fee to Western
Alliance. The Company also paid a consulting fee of $100,000 to
Trump Securities LLC and Credo 180, LLC pursuant to an exclusive
placement and advisory agreement by and among the Company. In
addition, there was approximately $52,000 of due diligence and
legal fees the Company incurred associated with the Financing
Agreement. As of December 31, 2016, the Company did not have any
outstanding loan payable from this line of credit
arrangement.
The
interest rate will be calculated at a floating rate per month equal
to (a) the greater of (i) 3.50% per year or (ii) the Prime Rate
published in the Money Rates section of the Western Edition of The
Wall Street Journal, or such other rate of interest publicly
announced by Lender as its Prime Rate, plus (b) 2.50 percentage
points, plus an additional 5.00 percentage points during any period
that an event of default has occurred and is continuing. The
Company’s obligations under the Financing Agreement are
secured by a security interest in substantially all of the
Company’s current and future personal property assets,
including intellectual property.
Any
borrowings, interest or other fees or obligations that the Company
owes Western Alliance pursuant to the Financing Agreement will be
become due and payable on November 4, 2018. If the Financing
Agreement is terminated prior to November 4, 2017, the Company will
pay a termination fee of $50,000 to Western Alliance, provided that
such termination fee will be waived in the event that the Company
refinances with Western Alliance.
The
Financing Agreement includes quick ratio, EBDAS and minimum revenue
financial covenants. As of December 31, 2016, the Company failed to
meet one of the covenants, which was to at least meet 50% of
projections of EBDAS and was in default under the Financing
Agreement (the “Existing Default.”). On March 12, 2017,
the Company entered into Second Business Financing Modification
Agreement with Western Alliance under which Western Alliance waived
the Existing Default.
Debt Issuance Costs
The
Company incurred debt issuance costs of approximately $177,000 in
connection with this line of credit arrangement and had an
unamortized balance of approximately $161,000 as of December 31,
2016. For the line of credit arrangement, the Company has elected a
policy to keep the debt issuance costs as an asset, regardless of
whether an amount is drawn. The remaining unamortized deferred
asset will be amortized over the remaining life of the line of
credit arrangement.
8B. Term Loan – Hercules
Technology II, L.P.
On June
14, 2016, the Company repaid $4,851,542 owed to Hercules Funding II
LLC (“Hercules”), under the Company’s loan and
security agreement with Hercules dated as of September 29, 2014
(the “Loan Agreement”).
The
payoff amount was comprised of the following:
|
Payoff Amount
|
|
|
|
|
|
Principal
|
$
4,554,659
|
|
Accrued
interest
|
15,790
|
|
End
of term charge
|
187,500
|
|
Prepayment
fee
|
91,093
|
|
Other
fees
|
2,500
|
|
|
|
|
Total
|
$
4,851,542
|
Upon
receipt of the payoff Amount, the Loan Agreement
terminated.
The
Loan Agreement initially provided the Company with access to a term
loan of up to $5 million. The first $2.5 million of the term loan
was funded at the closing of the Loan Agreement, and was repayable
in installments over 30 months, following an initial interest-only
period of twelve months after closing. The Company drew down the
remaining $2.5 million of the term loan on June 17, 2015 and the
interest-only period was extended to March 31, 2016. In connection
with the loan, the Company paid an aggregate of $65,000 in facility
charges to Hercules and granted Hercules first priority liens and a
security interest in substantially all of its assets.
The
Loan Agreement also provided (i) a borrower option to repay
principal in common stock up to an aggregate amount of $500,000 at
a conversion price of $3.879 per share and (ii) a lender option to
receive principal repayments in common stock up to an aggregate
amount of $500,000 at a conversion price of $3.879 per share,
subject to certain conditions. However, no principal was repaid in
common stock. On the commitment date, no separate accounting was
required for the conversion feature.
In
connection with the termination of the Loan Agreement,
Hercules’s commitments to extend further credit to the
Company terminated, all obligations, covenants, debts and
liabilities of the Company under the Loan Agreement were satisfied
and discharged in full, all documents entered into in connection
with the Loan Agreement, other than a warrant issued pursuant to
the Loan Agreement, were terminated, all liens or security
interests granted to secure the obligations under the Loan
Agreement terminated and all guaranties of the Company’s
obligations under the Loan Agreement terminated.
The
payoff amount, excluding the accrued interest to date, was
$4,835,752 and the net carrying amount of the debt on the
extinguishment date was $4,522,653. The difference of $313,099 was
recognized as a non-operating loss in the statement of operations
during the year ended December 31, 2016.
|
Net Carrying Amount
|
Payoff Amount (Excluding
Interest)
|
|||
|
|
|
|
|
|
|
Principal
|
$
4,554,659
|
|
Principal
|
$
4,554,659
|
|
Accrued
end of term charge
|
103,909
|
|
End
of term charge
|
187,500
|
|
Deferred
financing cost
|
(45,606
)
|
|
Prepayment
fee
|
91,093
|
|
Warrant
discount
|
(90,309
)
|
|
Other
fees
|
2,500
|
|
|
|
|
|
|
|
Total
|
$
4,522,653
|
|
Total
|
$
4,835,752
|
|
|
(A)
|
|
|
(B)
|
|
|
|
|
|
|
|
Loss
on debt extinguishment
|
$
(313,099
)
|
|
|
|
|
|
(A) - (B)
|
|
|
|
The term loan bore interest at the rate per year equal to 9.35%
from September 29, 2014 to December 16, 2015 and 9.60% from
December 17, 2015 to June 14, 2016. 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 $324,000, $554,000
and $112,000 for the years ended December 31, 2016, January 2, 2016
and January 3, 2015, respectively.
Warrant Issued
to
Lender
Pursuant
to the Loan Agreement, the Company issued Lender a warrant (the
“Warrant”) to purchase 139,674 shares of our common
stock at an exercise price of $3.186 per share, subject to
customary anti-dilution provisions. The Warrant is exercisable and
expires five years from the date of issuance.
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
|
$
3.24
|
|
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 139,674 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 was recognized as a debt discount and was
being amortized as interest expense using the effective interest
method over the term of the loan. Amortizations of this debt
discount were $39,000, $90,000 and $28,000 for the years ended
December 31, 2016, January 2, 2016 and January 3, 2015,
respectively.
Debt Issuance Costs and
End of Term
Charge
The Company incurred debt issuance costs of approximately $118,000
in connection with this term loan. The debt issuance costs were
being amortized as interest expense using the effective interest
method over the term of the loan. In addition, the Company was
obligated to pay 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
was being accrued as additional interest expense using the
effective interest rate method over the term of the loan. When the
Company paid off the debt on June 14, 2016, there were
approximately $46,000 debt issuance costs that had not been
amortized and $84,000 end of term charge remaining to be accrued.
These unamortized debt issuance costs and the end of term charge
remaining to be accrued were part of the loss on debt
extinguishment recognized in 2016. Interest expense recorded in
relation to amortization of debt issuance costs and the accrual of
the end of term charge prior to the payoff was $55,000, $99,000 and
$22,000 for the years ended December 31, 2016, January 2, 2016 and
January 3, 2015, respectively.
Note 9. Income Taxes
The
provision for income tax consists of following:
|
|
2016
|
2015
|
2014
|
|
Current
|
|
|
|
|
Federal
|
$
-
|
$
-
|
$
-
|
|
State
|
-
|
4,527
|
-
|
|
Deferred (net of
valuation allowance)
|
|
|
|
|
Federal
|
-
|
-
|
-
|
|
State
|
-
|
-
|
-
|
|
Income tax
provision
|
$
-
|
$
4,527
|
$
-
|
|
|
|
|
|
At December 31, 2016 and January 2, 2016, the Company maintained a
full valuation allowance against the entire deferred income tax
balance which resulted in an effective tax rates of 0%, 0.2% and 0%
for years 2016, 2015 and 2014, respectively. At December 31, 2016
and January 2, 2016, we recorded a valuation allowance of $15.5
million and $15.0 million, respectively. The valuation allowance
increased by $0.5 million during 2016.The valuation allowance
increased by $0.5 million during 2016.
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:
|
|
2016
|
2015
|
2014
|
|
|
|
|
|
|
Federal income tax
expense at statutory rate
|
(34.0
)%
|
(34.0
)%
|
(34.0
)%
|
|
State income tax,
net of federal benefit
|
(5.3
)%
|
(5.1
)%
|
(5.3
)%
|
|
Permanent
differences
|
8.4
%
|
5.7
%
|
2.7
%
|
|
Change in tax
rates
|
(0.3
)%
|
0.7
%
|
(6.1
)%
|
|
Expirations of
state net operating losses
|
1.8
%
|
17.4
%
|
0.0
%
|
|
Change in stock
options and restricted stock
|
11.8
%
|
0.0
%
|
0.0
%
|
|
Change in valuation
allowance
|
16.4
%
|
13.7
%
|
42.8
%
|
|
Other
|
1.2
%
|
1.8
%
|
(0.1
)%
|
|
Effective tax
rate
|
0.0
%
|
0.2
%
|
0.0
%
|
|
|
|
|
|
The
deferred income
tax
assets and liabilities consisted of the following components as of
December 31, 2016 and January 2, 2016:
|
|
2016
|
2015
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss
carryforward
|
$
11,023,000
|
$
10,860,000
|
|
Capital loss
carryforward
|
811,000
|
808,000
|
|
Stock options and
restricted stock
|
2,694,000
|
3,048,000
|
|
Inventory
reserve
|
195,000
|
249,000
|
|
Allowance for
doubtful accounts
|
425,000
|
144,000
|
|
Accrued
expenses
|
487,000
|
277,000
|
|
Deferred
revenue
|
13,000
|
-
|
|
Intangibles
|
29,000
|
23,000
|
|
Deferred
rent
|
252,000
|
54,000
|
|
|
15,929,000
|
15,463,000
|
|
Less valuation
allowance
|
(15,530,000
)
|
(15,050,000
)
|
|
|
399,000
|
413,000
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
Leasehold
improvements and equipment
|
(282,000
)
|
(284,000
)
|
|
Prepaid
expenses
|
(117,000
)
|
(129,000
)
|
|
|
(399,000
)
|
(413,000
)
|
|
|
|
|
|
|
$
-
|
$
-
|
The
Company has tax net operating loss carryforwards for federal and
state income tax purposes of approximately $29,701,000 and
$23,382,000, respectively which begin to expire in the year ending
December 31, 2023 and 2017, respectively. In
addition
,
the Company has
tax capital loss carry forward available to offset future federal
taxable capital income of approximately $2,065,000 which will
expire in the year ending December 31, 2019.
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 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 has not identified any uncertain tax positions requiring a
reserve as of December 31, 2016 and January 2, 2016.
Note 10. Share-Based Compensation
10A. Employee
Share-Based
Compensation
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. The
Company, under its Second Amended and Restated 2007 Equity
Incentive Plan, is authorized to issue stock options that total no
more than 20% of the shares of common stock issued and outstanding,
as determined on a fully diluted basis.
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 were granted under the Second Amended and Restated
2007 Equity Incentive Plan of the Company and were granted on the
same terms as those being issued to employees.
The
remaining amount available for issuance under the Second Amended
and Restated 2007 Equity Incentive Plan totaled 993,305 at December
31, 2016.
General Vesting Conditions
The
stock option awards generally vest ratably over a four-year period
following grant date after a passage of time. However, some stock
option awards are performance based and vest based on the
achievement of certain criteria established by the Compensation
Committee, subject to approval by the Board of
Directors.
The
fair value of the Company’s stock options 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 December
31, 2016, January 2, 2016 and January 3, 2015.
|
Year Ended
December
|
2016
|
2015
|
2014
|
|
Expected
term
|
6
years
|
6
years
|
6
years
|
|
Expected
Volatility
|
73.2
%
|
75.8
%
|
74.6
%
|
|
Expected
dividends
|
0.0
%
|
0.0
%
|
0.0
%
|
|
Risk-free
rate
|
1.4
%
|
1.7
%
|
1.9
%
|
1)
Service Period Based Stock Options
The
majority of options granted by the Company are
comprised of service based options
granted to employees. 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:
The
aggregate
intrinsic
values in the table above are based on the Company’s closing
stock price of $3.31 on the last day of business for the year ended
December 31, 2016.
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:
The
aggregate intrinsic value in the table above are, based on the
Company’s closing stock price of $3.31 on the last day of
business for the period ended December 31, 2016.
As of
December 31, 2016, there was approximately $2,280,000 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 2.75 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:
|
|
|
Weighted
Average
|
|
|
|
Award-Date
|
|
|
Shares
|
Fair
Value
|
|
Unvested shares at
December 28, 2013
|
166,668
|
$
2.07
|
|
Granted
|
363,339
|
4.23
|
|
Vested
|
-
|
-
|
|
Forfeited
|
-
|
-
|
|
Unvested shares at
January 3, 2015
|
530,007
|
$
3.54
|
|
Granted
|
-
|
-
|
|
Vested
|
(173,336
)
|
4.23
|
|
Forfeited
|
-
|
-
|
|
Unvested shares at
January 2, 2016
|
356,671
|
$
3.21
|
|
Granted
|
-
|
-
|
|
Vested
|
(6,668
)
|
4.23
|
|
Forfeited
|
-
|
-
|
|
Unvested shares at
December 31, 2016
|
350,003
|
$
3.20
|
|
|
|
|
|
Expected to Vest as
of December 31, 2016
|
350,003
|
$
3.20
|
During the years ended December 31, 2016 and January 2, 2016,
several members of the Company’s Board of Directors (the
“Board”) resigned from the Board and received immediate
vesting of their unvested restricted stock of 6,668 shares and
173,336 shares, respectively. The expense for the vested restricted
stock was approximately $761,000 and was all recognized during the
fiscal year ended January 3, 2015.
On
January 2, 2014, the Company awarded an aggregate of 363,339 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
approximately $1,537,000 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.
During
the year ended December 31, 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. No separate accounting was done related to this
amendment.
Employee Option and Restricted
Stock
Compensation
The
Company recognized share-based compensation expense of
approximately $1,133,000, $1,543,000 and $2,747,000 in general and
administrative expenses in the statement of operations for the
years ended December 31, 2016, January 2, 2016 and January 3, 2015,
respectively.
10B. Non-Employee Share-Based Compensation
Stock Option
Plan
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 28, 2013
|
282,440
|
$
4.32
|
5.74
|
|
|
Options
Granted
|
30,001
|
3.72
|
10.00
|
|
|
Options
Classification from Employee
to
Non-Employee
|
37,717
|
2.28
|
8.68
|
|
|
Options
Exercised
|
-
|
-
|
|
|
|
Options
Forfeited
|
-
|
-
|
|
|
|
Outstanding at
January 3, 2015
|
350,158
|
$
4.05
|
5.46
|
|
|
Options
Granted
|
-
|
-
|
|
|
|
Options
Classification from Employee
to
Non-Employee
|
514,024
|
2.79
|
7.78
|
|
|
Options
Exercised
|
-
|
-
|
|
|
|
Options
Forfeited
|
-
|
-
|
|
|
|
Outstanding at
January 2, 2016
|
864,182
|
$
3.31
|
6.04
|
|
|
Options
Granted
|
40,000
|
2.85
|
10.00
|
|
|
Options
Exercised
|
(41,667
)
|
1.92
|
|
$
98,000
|
|
Options
Forfeited
|
-
|
-
|
|
|
|
Outstanding at
December 31, 2016
|
862,515
|
$
3.35
|
5.23
|
$
353,000
|
|
|
|
|
|
|
|
Exercisable at
December 31, 2016
|
825,848
|
$
3.37
|
5.03
|
$
336,000
|
The
aggregate intrinsic values in the table above are, based on the
Company’s closing stock price of $3.31 on the last day of
business for the year ended December 31, 2016.
The
fair value of the Company’s stock options 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 non-employees during the years ended
December 31, 2016 and January 3, 2015.
|
Year Ended
December
|
2016
|
2015
|
2014
|
|
Expected
Term
|
5 years
|
N/A
|
5 years
|
|
Expected
Volatility
|
72.5
%
|
N/A
|
83.1
%
|
|
Expected
dividends
|
0.0
%
|
N/A
|
0.0
%
|
|
Risk-free
rate
|
2.0
%
|
N/A
|
1.6
%
|
As of
December 31, 2016, there was approximately $62,000 of total
unrecognized compensation expense related to non-vested share-based
compensation arrangements granted under the plans for non-employee
stock options. That cost is expected to be recognized over a
weighted average period of 1.79 years.
Stock and Restricted
Stock
Awards
Restricted
stock awards granted by the Company to non-employees generally
feature time vesting service conditions, specified in the
respective service agreements. Restricted stock awards issued to
non-employees are accounted for at current fair value through the
vesting period. The following table summarizes activity of
restricted stock awards issued to non-employees:
|
|
|
Weighted
Average
|
|
|
Shares
|
Fair
Value
|
|
Unvested shares at
December 28, 2013
|
-
|
$
-
|
|
Granted
|
32,000
|
3.90
|
|
Vested
|
(6,667
)
|
3.51
|
|
Forfeited
|
-
|
-
|
|
Unvested shares at
January 3, 2015
|
25,333
|
$
2.70
|
|
Granted
|
46,668
|
2.58
|
|
Vested
|
(54,668
)
|
3.63
|
|
Forfeited
|
-
|
-
|
|
Unvested shares at
January 2, 2016
|
17,333
|
$
3.66
|
|
Granted
|
-
|
-
|
|
Vested
|
(7,333
)
|
3.79
|
|
Forfeited
|
-
|
-
|
|
Unvested shares
expected to vest at December 31, 2016
|
10,000
|
$
3.31
|
As of
December 31, 2016, there was approximately $33,000 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 1.2 years as of December 31, 2016.
The
Company did not award any stock grants to non-employees in 2016.
For the years ended January 2, 2016 and January 3, 2015, the
Company awarded 116,668 and 21,667 shares of the Company’s
common stock to non-employees and recognized expenses of $361,000
and $129,000, respectively.
Non-Employee Option, Stock, Restricted Stock and Warrant
Awards
For
non-employee share-based compensation, the Company recognized
share-based compensation expense of approximately $61,000, $435,000
and $170,000 in general and administrative expenses in the
statement of operations for the years ended December 31, 2016,
January 2, 2016 and January 3, 2015, respectively.
Note 11. Stock Issuance
On
March 11, 2016, the Company entered into a Securities Purchase
Agreement (“SPA”) to raise $500,000 in a registered
direct offering. Pursuant to the SPA, the Company sold a total of
128,205 Units at a purchase price of $3.90 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 (64,103
total) with an exercise price of $4.80 and a term of 3 years. The
estimated fair value of the warrant was approximately $108,000 and
the warrant was 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 warrant issued.
|
|
March 11,
2016
|
|
Fair value of
common stock
|
$
4.41
|
|
Contractual
term
|
3.0 years
|
|
Volatility
|
60
%
|
|
Risk-free
rate
|
1.16
%
|
|
Expected
dividends
|
0
%
|
On June
3, 2016, the Company entered into additional SPAs to raise
$5,250,000 in a registered direct offering. Pursuant to the SPAs,
the Company sold a total of 1,117,022 shares of the Company’s
common stock at a purchase price of $4.70 per share.
In
Fiscal Year 2015, the Company entered into SPAs with certain
existing stockholders to raise $2,000,000 in a registered direct
offering. Pursuant to the SPAs, the Company sold a total of 200,000
Units at a purchase price of $10.00 per Unit, with each Unit
consisting of 2.667 shares of the Company’s common stock and
a warrant to purchase 1.333 shares of common stock (266,667 total)
with an exercise price of $4.50 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
|
$
4.41
|
|
Contractual
term
|
3.0 years
|
|
Volatility
|
62
%
|
|
Risk-free
rate
|
1.27
%
|
|
Expected
dividends
|
0
%
|
In
Fiscal Year 2014, the Company issued 42,202 shares of common stock
to vendors to settle outstanding payables balances of approximately
$146,000.
Note 12. Warrants
The
following table summarizes activity of warrants at December 31,
2016, January 2, 2016 and January 3, 2015 and changes during the
years then ended:
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Remaining
|
Aggregate
|
|
|
Number
of
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
Shares
|
Price
|
Term
|
Value
|
|
Outstanding at
December 28, 2013
|
-
|
$
-
|
-
|
-
|
|
|
|
|
|
|
|
Warrants
Issued
|
156,341
|
3.21
|
4.68
|
|
|
Warrants
Exercised
|
-
|
-
|
|
|
|
Warrants
Expired
|
-
|
-
|
|
|
|
Outstanding and
exercisable at January 3, 2015
|
156,341
|
3.21
|
4.43
|
|
|
Warrants
Issued
|
266,667
|
4.50
|
|
|
|
Warrants
Exercised
|
-
|
-
|
|
|
|
Warrants
Expired
|
-
|
-
|
|
|
|
Outstanding and
exercisable at January 2, 2016
|
423,008
|
4.02
|
3.07
|
|
|
Warrants
Issued
|
64,103
|
4.80
|
|
|
|
Warrants
Exercised
|
-
|
-
|
|
|
|
Warrants
Expired
|
(16,667
)
|
3.30
|
|
|
|
Outstanding and
exercisable at December 31, 2016
|
470,444
|
$
4.15
|
2.17
|
$
17,000
|
The
aggregate intrinsic values in the table above are based on the
Company’s closing stock price of $3.31 on the last day of
business for the year ended December 31, 2016.
The
fair values of warrants issued were estimated at the date of
issuance using the Black-Scholes based valuation model. The table
below outlines the weighted average assumptions for the warrants
issued during the years ended December 31, 2016, January 2, 2016
and January 3, 2015.
|
|
2016
|
2015
|
2014
|
|
Fair value of
common stock
|
$
4.41
|
$
4.41
|
$
3.20
|
|
Contractual
term
|
3.0 years
|
3.0 years
|
4.7 years
|
|
Volatility
|
60
%
|
62
%
|
72
%
|
|
Risk-free
rate
|
1.16
%
|
1.27
%
|
1.62
%
|
|
Expected
dividends
|
0
%
|
0
%
|
0
%
|
Note 13. Commitments and Contingencies
Lease
The
Company leases its office and research facilities in California,
Colorado and Maryland under operating lease agreements that expire
at various dates from September 2017 through February 2024. Monthly
lease payments range from $1,460 per month to $23,472 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 December 31,
2016 are as follows:
|
Fiscal years
ending:
|
|
|
2017
|
$
682,000
|
|
2018
|
682,000
|
|
2019
|
644,000
|
|
2020
|
479,000
|
|
2021
|
462,000
|
|
Thereafter
|
737,000
|
|
|
$
3,686,000
|
|
|
|
Rent
expense was approximately $606,000, $536,000, and $537,000 for the
years ended December 31, 2016, January 2, 2016 and January 3, 2015,
respectively.
As of
December 31, 2016, deferred rent from these operating lease
agreements increased to $641,000 compared to $138,000 as of January
2, 2016. In February 2016, the Company renewed its lease for its
laboratory facility located in Boulder, Colorado. Pursuant to the
term of the renewal, the landlord made improvements to the
facility’s HVAC system for approximately $180,000. Also, in
April 2016, the Company entered into a lease to lease its research
facility located in Longmont, Colorado. Pursuant to the term of the
lease, the landlord provided tenant improvements for approximately
$352,000. These landlord provided lease incentives (a) have been
recorded as leasehold improvement assets and are amortized over the
respective lease terms which are through April 2023 and February
2024, respectively;and (b) have been recorded as deferred rent and
are amortized as reductions to lease expense over the lease
terms.
Purchase obligations
The
Company enters 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. Minimum future
payments under purchase obligations as of December 31, 2016 are as
follows:
Royalty
The
Company has 10 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, 2032. Yearly minimum
royalty payments including license maintenance fees range from
$10,000 per year to $50,000 per year, however, these minimum
payments escalate each year with a maximum of $200,000 per year. In
addition, the Company is required to pay a range of 2% to 8% of
sales related to the licensed products under these agreements.
Total royalty expenses including license maintenance fees from
continuing operations for the years ended December 31, 2016,
January 2, 2016 and January 3, 2015 were approximately $773,000,
$583,000 and $323,000, respectively under these agreements. Minimum
royalties including license maintenance fees for the next five
years are as follows:
Legal proceedings
On December 29, 2016, ChromaDex, Inc. filed a complaint (the
“Complaint”) in the United States District Court for
the Central District of California, naming Elysium Health, Inc. as
defendant. Among other allegations, ChromaDex, Inc. alleges in the
Complaint that (i) Elysium breached the Supply Agreement, dated
June 26, 2014, by and between ChromaDex, Inc. and Elysium Health,
LLC (“Elysium”) (the
“pTeroPure
®
Supply Agreement”), by failing
to make payments to ChromaDex, Inc. for purchases of
pTeroPure® 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® pursuant
to the NIAGEN® Supply Agreement, (iii) Elysium breached the
Trademark License and Royalty Agreement, dated February 3, 2014, by
and between ChromaDex, Inc. and Elysium (the “License
Agreement”), by failing to make payments to ChromaDex, Inc.
for royalties due pursuant to the License Agreement and (iv)
certain officers of Elysium made false promises and representations
to induce ChromaDex, Inc. into providing large supplies of
pTeroPure
®
and NIAGEN® to Elysium pursuant
to the pTeroPure
®
Supply Agreement and NIAGEN®
Supply Agreement. ChromaDex, Inc. is seeking punitive damages,
money damages and interest.
On January 25, 2017, Elysium filed an answer and counterclaims (the
“Counterclaim”) in response to the Complaint. Among
other allegations, Elysium alleges in the Counterclaim that (i)
ChromaDex, Inc. breached the NIAGEN® Supply Agreement by not
issuing certain refunds or credits to Elysium and for violating
certain confidential information provisions, (ii) ChromaDex, Inc.
breached the implied covenant of good faith and fair dealing
pursuant to the NIAGEN® Supply Agreement, (iii) ChromaDex,
Inc. breached certain confidential provisions of the
pTeroPure
®
Supply Agreement, (iv) ChromaDex, Inc.
fraudulently induced Elysium into entering into the License
Agreement (the “Fraud Claim”), (v) ChromaDex,
Inc.’s conduct constitutes misuse of its patent rights (the
“Patent Claim”) and (vi) ChromaDex, Inc. has engaged in
unlawful or unfair competition under California state law (the
“Unfair Competition Claim”). 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.
On February 15, 2017, ChromaDex, Inc. filed an amended complaint
(the “Amended Complaint”). In the Amended Complaint,
ChromaDex, Inc. re-alleges the claims in the Complaint, and also
alleges that Elysium willfully and maliciously misappropriated
ChromaDex, Inc.’s trade secrets. On February 15, 2017,
ChromaDex, Inc. also filed a motion to dismiss the Fraud Claim, the
Patent Claim and the Unfair Competition Claim. While ChromaDex,
Inc. expresses no opinion as to the ultimate outcome of this
matter, ChromaDex, Inc. believes Elysium’s allegations are
without merit and will vigorously defend against them.
As
of December 31, 2016, ChromaDex, Inc. did not accrue a potential
loss for the Counterclaim because ChromaDex, Inc. believes that the
allegations are without merit and thus it is not probable that a
liability had been incurred, and the amount of loss cannot be
reasonably estimated.
From
time to time we are involved in legal proceedings arising in the
ordinary course of our business. We believe that there 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
December 31, 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. On April 25, 2016, Mr. Jaksch’s
base salary increased to $370,000 as the Company’s common
stock was listed on Nasdaq Stock Market.
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. On April 25, 2016, Mr.
Varvaro’s base salary increased to $300,000 as the
Company’s common stock was listed on Nasdaq Stock
Market.
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. On April 25,
2016, Mr. Rhonemus’ base salary increased to $235,000 as the
Company’s common stock was listed on Nasdaq Stock
Market.
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.
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.
Note 14. Related Party Transactions
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 direct response channels.
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 up to a certain amount, and in exchange
for an additional 5% equity interest in Healthspan, the Company
will grant to Healthspan certain exclusive rights to resell
NIAGEN®. 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.
During
the year ended December 31, 2016, the Company shipped NIAGEN®
to Healthspan to satisfy part of our obligation to supply a certain
amount of NIAGEN® in exchange for the 4% equity interest in
Healthspan, which our cost was approximately $20,000. This was
recorded as a long-term investment at our cost.
The
Company accounts for its ownership interest under the cost method
of accounting as the Company does not have an ability to exercise
significant influence on Healthspan.
S
ubsequent
to the year ended December 31,
2016, the Company acquired all of the outstanding equity interests
of Healthspan. Please refer to Note 17. Subsequent Events for more
details on the acquisition of
Healthspan
.
Note 15. Business Segmentation and Geographical
Distribution
The
Company has the following three reportable segments:
●
Ingredients segment
develops and commercializes proprietary-based ingredient
technologies and supplies these ingredients to the manufacturers of
consumer products in various industries including the nutritional
supplement, food and beverage and animal health
industries.
●
Core standards, and
contract services segment includes supply of phytochemical
reference standards, which are small quantities of plant-based
compounds typically used to research an array of potential
attributes, reference materials, and related contract
services.
●
Scientific and regulatory
consulting segment which consist of providing scientific and
regulatory consulting to the clients in the food, supplement and
pharmaceutical industries to manage potential health and regulatory
risks.
The
“Other” classification includes corporate items not
allocated by the Company to each reportable segment. Further, there
are no intersegment sales that require elimination. The Company
evaluates performance and allocates resources based on reviewing
gross margin by reportable segment.
|
At December 31,
2016
|
|
Core
Standards
|
Scientific
and
|
|
|
|
|
Ingredients
|
and Contract
Services
|
Regulatory
Consulting
|
|
|
|
|
segment
|
segment
|
segment
|
Other
|
Total
|
|
|
|
|
|
|
|
|
Total
assets
|
$
13,257,289
|
$
3,806,248
|
$
112,192
|
$
2,576,339
|
$
19,752,068
|
|
At January 2,
2016
|
|
Core
Standards
|
Scientific
and
|
|
|
|
|
Ingredients
|
and Contract
Services
|
Regulatory
Consulting
|
|
|
|
|
segment
|
segment
|
segment
|
Other
|
Total
|
|
|
|
|
|
|
|
|
Total
assets
|
$
9,105,502
|
$
3,306,624
|
$
111,765
|
$
6,225,318
|
$
18,749,209
|
Revenues
from international sources for the ingredients segment approximated
$502,000, $277,000 and $35,000 for the years ended December 31,
2016, January 2, 2016
and January 3, 2015, respectively.
Revenues from international sources for the core standards and
contract services segment approximated $1,720,000, $1,651,000 and
$1,756,000 for the years ended December 31, 2016, January 2,
2016
and January 3,
2015, respectively. Revenues from international sources for the
scientific and regulatory consulting segment approximated $154,000,
$283,000 and $104,000 for the years ended December 31, 2016,
January 2, 2016
and
January 3, 2015, respectively. International sources which the
Company generates revenue include Europe, North America, South
America, Asia, and Oceania.
The
Company’s long-lived assets are located within the United
States.
Disclosure of
major
customers
Major
customers who accounted for more than 10% of the Company’s
total sales were as follows:
Major
customers who accounted for more than 10% of the Company's total
trade receivables were as follows:
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
|
At December 31, 2016
|
At January 2, 2016
|
|
|
|
|
|
Vendor
A (Ingredients segment)
|
39.5
%
|
78.7
%
|
|
Vendor
B (Ingredients segment)
|
20.8
%
|
*
|
|
|
|
|
|
*
Represents less than 10%.
|
|
|
Note 16. Quarterly Financial Information (unaudited)
|
|
Three Months
Ended
|
|||
|
|
April 2,
2016
|
July
2, 2016
|
October 1,
2016
|
December 31,
2016
|
|
|
|
|
|
|
|
Sales,
net
|
$
7,331,945
|
$
8,829,579
|
$
5,007,450
|
$
5,642,112
|
|
Cost of
sales
|
3,880,526
|
4,702,132
|
2,964,980
|
3,342,316
|
|
|
|
|
|
|
|
Gross
profit
|
3,451,419
|
4,127,447
|
2,042,470
|
2,299,796
|
|
|
|
|
|
|
|
Operating
expenses
|
2,997,353
|
3,756,316
|
2,989,186
|
4,423,711
|
|
|
|
|
|
|
|
Operating
income (loss)
|
454,066
|
371,131
|
(946,716
)
|
(2,123,915
)
|
|
|
|
|
|
|
|
Nonoperating
expenses
|
(187,701
)
|
(457,885
)
|
(10,827
)
|
(26,338
)
|
|
Provision for
income taxes
|
(10,740
)
|
4,087
|
3,153
|
3,500
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
255,625
|
$
(82,667
)
|
$
(954,390
)
|
$
(2,146,753
)
|
|
|
|
|
|
|
|
Basic earnings
(loss) per common share
|
$
0.01
|
$
(0.00
)
|
$
(0.03
)
|
$
(0.06
)
|
|
|
|
|
|
|
|
Diluted earnings
(loss) per common share
|
$
0.01
|
$
(0.00
)
|
$
(0.03
)
|
$
(0.06
)
|
|
|
|
|
|
|
|
Basic weighted
average common shares outstanding
|
36,414,041
|
36,990,032
|
37,868,672
|
37,904,534
|
|
|
|
|
|
|
|
Diluted weighted
average common shares outstanding
|
37,472,579
|
36,990,032
|
37,868,672
|
37,904,534
|
|
|
|
|
|
|
|
|
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
|
$
(0.03
)
|
$
(0.01
)
|
$
(0.00
)
|
$
(0.04
)
|
|
|
|
|
|
|
|
Basic and Diluted
weighted average
|
|
|
|
|
|
common
shares outstanding
|
35,732,866
|
35,803,298
|
35,814,305
|
36,158,895
|
|
|
|
|
|
|
|
|
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
|
$
(0.05
)
|
$
(0.05
)
|
$
(0.02
)
|
$
(0.03
)
|
|
|
|
|
|
|
|
Basic and Diluted
weighted average
|
|
|
|
|
|
common
shares outstanding
|
35,358,787
|
35,395,195
|
35,536,800
|
35,643,016
|
Note 17. Subsequent
Events
Acquisition of Healthspan
Research, LLC
On
March 12, 2017, ChromaDex Corporation acquired all of the
outstanding equity interests of Healthspan Research, LLC
(“Healthspan”) pursuant to a Membership Interest
Purchase Agreement (the “Purchase Agreement”) by and
among (i) Robert Fried, Jeffrey Allen and Dr. Charles Brenner (the
“Sellers”) and (ii) ChromaDex Corporation (the
“Acquisition”). Pursuant to the Purchase Agreement,
ChromaDex purchased all of the outstanding membership interests
from the Sellers.
Upon
the closing of, and as consideration for, the Acquisition,
ChromaDex Corporation issued an aggregate of 367,648 unregistered
shares of ChromaDex Corporation’s common stock to the Sellers
(the “Stock Consideration”) and, in cancellation of a
loan owed by Healthspan to Mr. Fried, paid $32,500 to Mr. Fried and
will also pay Mr. Fried $100,000 on March 12, 2018. The issuance of
the Stock Consideration was not registered under the Securities Act
of 1933, as amended (the “Securities Act”), and
therefore may not be offered or sold in the United States absent
registration or an applicable exemption from registration
requirements. ChromaDex Corporation is relying on the exemption
from federal registration under Section 4(a)(2) of the Securities
Act and/or Rule 506 promulgated thereunder.
Hiring of Robert Fried as
President and Chief Strategy
Officer
Also on
March 12, 2017, the Board of Directors (“Board”) of
ChromaDex Corporation appointed Robert Fried, a member of the Board
since July 2015, as President and Chief Strategy Officer, effective
immediately. Mr. Fried will continue to serve as a member of the
Board, but resigned as a member of the Nominating and Corporate
Governance Committee of the Board.
In
connection with his appointment as President and Chief Strategy
Officer, ChromaDex and Mr. Fried entered into an Executive
Employment Agreement (the “Employment Agreement”).
Pursuant to the Employment Agreement, Mr. Fried is entitled to: (i)
an annual base salary of $300,000; (ii) an annual cash bonus equal
to (a) 1% of net direct-to-consumer sales of products with
nicotinamide riboside as a lead ingredient by ChromaDex plus (b) 2%
of direct to consumer net sales of products with nicotinamide
riboside as a lead ingredient for the portion of such sales that
exceeded prior year sales plus (c) 1% of the gross profit derived
from nicotinamide riboside ingredient sales to dietary supplement
producers; (iii) an option to purchase up to 500,000 shares of
ChromaDex common stock under the ChromaDex Second Amended and
Restated 2007 Equity Incentive Plan or any subsequent equity plan
(the “Plan”), subject to monthly vesting over a
three-year period; and (iv) 166,667 shares of restricted ChromaDex
Corporation common stock, subject to annual vesting over a
three-year period.
Subject
to requisite stockholder approval and Mr. Fried’s continuous
service through such date, Mr. Fried is also eligible to receive
(i) on March 12, 2018, 166,667 shares of restricted ChromaDex
Corporation common stock, subject to annual vesting over a two-year
period, (ii) on March 12, 2019, 166,666 shares of restricted
ChromaDex Corporation common stock that vest in full on the one
year anniversary of the grant date and (iii) up to 500,000 shares
of fully-vested restricted ChromaDex Corporation common stock that
will be granted upon the achievement of certain performance
goals.
Item 9.
C
hanges in and
Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Evaluation of Disclosure Controls and Procedures
Our
management, with the participation of our principal executive
officer and principal financial officer carried out an evaluation
of the effectiveness of our disclosure controls and procedures as
of December 31, 2016. Pursuant to Rule13a−15(e) promulgated
by the Commission pursuant to the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) “disclosure
controls and procedures” means controls and other procedures
that are designed to insure that information required to be
disclosed by us in the reports that we file with the Commission is
recorded, processed, summarized and reported within the time
periods specified in the Commission’s rules and forms.
“Disclosure controls and procedures” include, without
limitation, controls and procedures designed to insure that
information that we are required to disclose in the reports we file
with the Commission is accumulated and communicated to our
principal executive officer and principal financial officer as
appropriate to allow timely decisions regarding required
disclosure. Based on their evaluation, our principal executive
officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of December
31, 2016.
Inherent Limitations on Disclosure Controls and
Procedures
The
effectiveness of our disclosure controls and procedures is subject
to various inherent limitations, including cost limitations,
judgments used in decision making, assumptions about the likelihood
of future events, the soundness of our systems, the possibility of
human error, and the risk of fraud. Moreover, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions and the risk that the degree of compliance with policies
or procedures may deteriorate over time. Because of these
limitations, there can be no assurance that any system of
disclosure controls and procedures, no matter how well conceived,
will be successful in preventing all errors or fraud or in making
all material information known in a timely manner to the
appropriate levels of management.
Changes in Internal Control over Financial Reporting
There
were no change in internal controls over financial reporting (as
defined in Rule 13a−15(f) promulgated under the Exchange Act)
that occurred during our fourth fiscal quarter that have materially
affected or are reasonably likely to materially affect our internal
control over financial reporting.
Management Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule
13a-15(f) and 15d-(f) under the Exchange Act. Our internal control
over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external
purposes in accordance with U.S. generally accepted accounting
principles. Our internal control over financial reporting include
those policies and procedures that:
(i)
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
our assets;
(ii)
provide reasonable assurance that transactions are recorded as
necessary to permit the preparation of our consolidated financial
statements in accordance with U.S. generally accepted accounting
principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and
directors; and
(iii)
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the consolidated
financial statements.
Our
management, including the undersigned principal executive officer
and principal financial officer, assessed the effectiveness of our
internal control over financial reporting as of December 31,
2016. In conducting its assessment, our management used the
criteria issued by the Committee of Sponsoring Organizations of the
Treadway Commission in
Internal
Control—Integrated Framework in 2013
. Based on this
assessment, our management concluded that, as of December 31,
2016, our internal control over financial reporting was effective
based on those criteria.
Inherent Limitations on Internal Control
Internal
control over financial reporting cannot provide absolute assurance
of achieving financial reporting objectives because of its inherent
limitations, including the possibility of human error and
circumvention by collusion or overriding of control. Accordingly,
even an effective internal control system may not prevent or detect
material misstatements on a timely basis. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that the controls may become inadequate because of changes in
conditions or that the degree of compliance with the policies or
procedures may deteriorate. Accordingly, our internal control over
financial reporting is designed to provide reasonable assurance of
achieving their objectives.
Attestation Report of the Registered Public Accounting
Firm
The
effectiveness of our internal control over financial reporting has
been audited by Marcum LLP, an independent registered public
accounting firm, as stated in their attestation report herein,
which expresses an unqualified opinion on the effectiveness of our
internal control over financial reporting as of December 31,
2016.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
To the
Audit Committee of the
Board
of Directors and Shareholders of
ChromaDex
Corporation
We have
audited ChromaDex Corporation and Subsidiaries’ (the
“Company”) internal control over financial reporting as
of December 31, 2016, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013. 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
conducted our audit 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 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.
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.
In our
opinion, ChromaDex Corporation and Subsidiaries maintained, in all
material aspects, effective internal control over financial
reporting as of December 31, 2016, based on criteria established in
Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in
2013.
We have
also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the
consolidated balance sheets as of December 31, 2016 and January 2,
2016 and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the years ended
December 31, 2016, January 2, 2016 and January 3, 2015 of the
Company and our report dated March 16, 2017
expressed an unqualified opinion
on those financial statements.
/s/
Marcum LLP
Marcum
LLP
New
York, NY
March
16, 2017
Acquisition of Healthspan
Research, LLC
On
March 12, 2017, ChromaDex Corporation acquired all of the
outstanding equity interests of Healthspan Research, LLC
(“Healthspan”) pursuant to a Membership Interest
Purchase Agreement (the “Purchase Agreement”) by and
among (i) Robert Fried, Jeffrey Allen and Dr. Charles Brenner (the
“Sellers”) and (ii) ChromaDex Corporation (the
“Acquisition”). Pursuant to the Purchase Agreement,
ChromaDex purchased all of the outstanding membership interests
from the Sellers.
Upon
the closing of, and as consideration for, the Acquisition,
ChromaDex Corporation issued an aggregate of 367,648 unregistered
shares of ChromaDex Corporation’s common stock to the Sellers
(the “Stock Consideration”) and, in cancellation of a
loan owed by Healthspan to Mr. Fried, paid $32,500 to Mr. Fried and
will also pay Mr. Fried $100,000 on March 12, 2018. The issuance of
the Stock Consideration was not registered under the Securities Act
of 1933, as amended (the “Securities Act”), and
therefore may not be offered or sold in the United States absent
registration or an applicable exemption from registration
requirements. ChromaDex Corporation is relying on the exemption
from federal registration under Section 4(a)(2) of the Securities
Act and/or Rule 506 promulgated thereunder.
Hiring of Robert Fried as
President and Chief Strategy
Officer
Also on
March 12, 2017, the Board of Directors (“Board”) of
ChromaDex Corporation appointed Robert Fried, a member of the Board
since July 2015, as President and Chief Strategy Officer, effective
immediately. Mr. Fried will continue to serve as a member of the
Board, but resigned as a member of the Nominating and Corporate
Governance Committee of the Board.
Mr.
Fried, age 57, has served as a director of ChromaDex since July
2015. Mr. Fried served as Chairman of the Board of Directors of
IDI, Inc. (formerly Tiger Media, Inc.), an information solutions
provider focused on the data fusion market and formerly a Chinese
advertising company prior to its merger with the parent company of
Interactive Data, LLC, from 2011 until June 2015. From 2007 through
2009, he was the president, Chief Executive Officer and a director
of Ideation Acquisition Corporation, a special purpose acquisition
company. Mr. Fried is the founder and Chief Executive Officer of
Feeln, a subscription streaming video service, which was acquired
by Hallmark Cards Inc. in 2012. Since then, Mr. Fried manages
digital businesses for Hallmark including Feeln, Hallmark e-cards,
and Hallmark Print on Demand. Mr. Fried is also an Academy Award
winning motion picture producer whose credits include Rudy,
Collateral, Boondock Saints, So I Married an Axe Murderer,
Godzilla, and numerous others. From December 1994 until June 1996,
he was President and Chief Executive Officer of Savoy Pictures, a
unit of Savoy Pictures Entertainment, Inc., which was sold in 1996
to Silver King Communications, which is now a part of InterActive
Corp. Mr. Fried has also held several executive positions including
Executive Vice President in charge of Production for Columbia
Pictures, Director of Film Finance and Special Projects for
Columbia Pictures, and Director of Business Development at
Twentieth Century Fox. Mr. Fried holds an M.S. from Cornell
University and an M.B.A. from the Columbia University Graduate
School of Business.
In
connection with his appointment as President and Chief Strategy
Officer, ChromaDex and Mr. Fried entered into an Executive
Employment Agreement (the “Employment Agreement”).
Pursuant to the Employment Agreement, Mr. Fried is entitled to: (i)
an annual base salary of $300,000; (ii) an annual cash bonus equal
to (a) 1% of net direct-to-consumer sales of products with
nicotinamide riboside as a lead ingredient by ChromaDex plus (b) 2%
of direct to consumer net sales of products with nicotinamide
riboside as a lead ingredient for the portion of such sales that
exceeded prior year sales plus (c) 1% of the gross profit derived
from nicotinamide riboside ingredient sales to dietary supplement
producers; (iii) an option to purchase up to 500,000 shares of
ChromaDex common stock under the ChromaDex Second Amended and
Restated 2007 Equity Incentive Plan or any subsequent equity plan
(the “Plan”), subject to monthly vesting over a
three-year period; and (iv) 166,667 shares of restricted ChromaDex
Corporation common stock, subject to annual vesting over a
three-year period. Subject to requisite stockholder approval and
Mr. Fried’s continuous service through such date, Mr. Fried
is also eligible to receive (i) on March 12, 2018, 166,667 shares
of restricted ChromaDex Corporation common stock, subject to annual
vesting over a two-year period, (ii) on March 12, 2019, 166,666
shares of restricted ChromaDex Corporation common stock that vest
in full on the one year anniversary of the grant date and (iii) up
to 500,000 shares of fully-vested restricted ChromaDex Corporation
common stock that will be granted upon the achievement of certain
performance goals. Any unvested options or shares of restricted
stock will vest in full upon (a) a change of control of ChromaDex
Corporation, (b) Mr. Fried’s death, (c) Mr. Fried’s
disability, (d) termination by ChromaDex Corporation of Mr.
Fried’s employment without cause or (e) Mr. Fried’s
resignation for good reason, subject in each case to Mr.
Fried’s continuous service as an employee or consultant of
ChromaDex Corporation or any of its subsidiaries though such
event.
If (i)
Mr. Fried’s employment is terminated by ChromaDex Corporation
without cause, for death or disability, or Mr. Fried resigns for
good reason, or (ii) (a) a change of control of ChromaDex
Corporation occurs and (b) within one month prior to the date of
such change of control or twelve months after the date of such
change of control R. Fried’s employment is terminated by
ChromaDex Corporation other than for cause, then, subject to
executing a release, Mr. Fried will receive (w) continuation of his
base salary for 12 months, (x) COBRA premiums for 12 months, (y) a
prorated annual cash bonus and (z) an extended exercise period for
his options.
Mr.
Fried is a party to ChromaDex Corporation’s form of indemnity
agreement for directors and officers. Mr. Fried will receive no
additional compensation for his service on the Board.
The
foregoing summary of the Employment Agreement does not purport to
be complete and is qualified in its entirety by reference to the
complete Employment Agreement, a copy of which is attached hereto
as Exhibit 10.65, and is incorporated herein by
reference.
Prior to the Acquisition, Mr. Fried owned approximately 84.7% of
the outstanding equity interest of Healthspan. On August 28, 2015,
ChromaDex entered into an Exclusive Supply Agreement (the
“Supply Agreement”) with Healthspan. Under the terms of
the Supply Agreement, Healthspan agreed to purchase NIAGEN®
from ChromaDex and ChromaDex granted to Healthspan worldwide rights
for resale of specific dietary supplements containing NIAGEN®
in certain direct response channels. Pursuant to the terms of the
Supply Agreement, in exchange for a 4% equity interest in
Healthspan, ChromaDex agreed to initially supply NIAGEN® to
Healthspan up to a certain amount, and in exchange for an
additional 5% equity interest in Healthspan, ChromaDex would grant
to Healthspan certain exclusive rights to resell NIAGEN®. In
connection with the foregoing, also on August 28, 2015, ChromaDex
and Healthspan entered into an interest purchase agreement and
limited liability company agreement pursuant to which ChromaDex was
issued 9% of the outstanding equity interests of Healthspan. During
the year ended December 31, 2016, ChromaDex shipped NIAGEN® to
Healthspan to satisfy part of its obligation to supply a certain
amount of NIAGEN® in exchange for the 4% equity interest in
Healthspan, which ChromaDex’s cost was approximately
$
20,000
.
In connection with the Acquisition, Mr. Fried received 339,595
unregistered shares of ChromaDex’s common stock and, in
cancellation of a loan owed by Healthspan to Mr. Fried, a cash
payment of $32,500, and will receive an additional cash payment of
$100,000 on March 12, 2018.
There
are no arrangements or understandings between Mr. Fried and any
other persons pursuant to which he was selected as ChromaDex
Corporation’s President and Chief Strategy Officer. There are
also no family relationships between Mr. Fried and any of ChromaDex
Corporation’s directors or executive officers and he has no
direct or indirect material interest in any transaction required to
be disclosed pursuant to Item 404(a) of Regulation S-K, other than
the transactions listed above.
Cash Bonuses
On March 14, 2017, the Board approved 2016 incentive cash bonus
payments to our executive officers. The bonus payments were
based on an assessment of the achievement of corporate goals set
out and approved by the Board of Directors in 2016. The 2016 cash
bonuses approved for each of our named executive officers were as
follows:
|
Name
|
2016
Cash Bonus
|
|
Frank L. Jaksch,
Jr.
|
$
122,562
|
|
Thomas
Varvaro
|
$
79,500
|
|
Troy
Rhonemus
|
$
46,706
|
PART III
Information
required by this item will be contained in the Proxy Statement
under the headings “Management and Corporate
Governance,” and “Section 16(a) Beneficial Ownership
Reporting Compliance,” and is incorporated herein by
reference.
The
information required by this item regarding executive compensation
is incorporated by reference to the information set forth in the
sections titled “Executive Compensation” in the Proxy
Statement.
Item 12.
Security Ownership of
Certain Beneficial Owners and Management and
Related Stockholder Matters
The
information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by
reference to the information set forth in the section titled
“Security Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement.
The
information required by Item 201(d) of Regulation S-K is
incorporated by reference to the information set forth in the
section titled “Executive Compensation” in the Proxy
Statement.
The
information required by this item regarding certain relationships
and related transactions and director independence is incorporated
by reference to the information set forth in the sections titled
“Certain Relationships and Related Transactions” and
“Management and Corporate Governance – Director
Independence,” respectively, in the Proxy
Statement.
The
information required by this item regarding principal accountant
fees and services is incorporated by reference to the information
set forth in the section titled “Audit Fees” in the
Proxy Statement.
PART IV
(a)(1) Financial
Statements
Reference
is made to Item 8 of this Form 10-K.
(a)(2) Financial Statement Schedules
All
schedules have been omitted because they are not required or
because the required information is given in the Financial
Statements or Notes thereto set forth under Part II, Item 8 of this
Form 10-K.
(a)(3) List of
Exhibits
Reference
is made to the Exhibit Index immediately following the signature
page of this Form 10-K. The exhibits listed in the Exhibit Index
are filed or incorporated by reference as part of this Form
10-K.
S
IGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto
duly authorized, on the 16th day of March 2017.
|
|
|
|
|
|
|
CHROMADEX
CORPORATION
|
|
|
|
|
By:
|
/s/
FRANK L. JAKSCH JR.
|
|
|
|
Frank
L. Jaksch Jr.
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|||
KNOW ALL PERSONS BY THESE PRESENTS,
that each person whose
signature appears below constitutes and appoints Frank L. Jaksch
Jr. and Thomas C. Varvaro, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including
post-effective amendments) to this report, and to file the same,
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
FRANK L. JAKSCH JR.
|
|
Chief
Executive Officer and Director
|
|
March
16, 2017
|
|
Frank
L. Jaksch Jr.
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
THOMAS C. VARVARO
|
|
Chief
Financial Officer and Secretary
|
|
March
16, 2017
|
|
Thomas
C. Varvaro
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/ ROBERT
FRIED
|
|
President, Chief
Strategy Officer and Director
|
|
March 16,
2017
|
|
Robert
Fried
|
|
|
|
|
|
|
|
|
|
|
|
/s/
STEPHEN ALLEN
|
|
Chairman
of the Board and Director
|
|
March
16, 2017
|
|
Stephen
Allen
|
|
|
|
|
|
|
|
|
|
|
|
/s/
STEPHEN BLOCK
|
|
Director
|
|
March
16, 2017
|
|
Stephen
Block
|
|
|
|
|
|
|
|
|
|
|
|
/s/
JEFF BAXTER
|
|
Director
|
|
March
16, 2017
|
|
Jeff
Baxter
|
|
|
|
|
|
|
|
|
|
|
|
/s/
KURT GUSTAFSON
|
|
Director
|
|
March
16, 2017
|
|
Kurt
Gustafson
|
|
|
|
|
EXHIBIT INDEX
|
Exhibit
No.
|
|
Description
|
|
2.1
|
|
Agreement
and Plan of Merger, dated as of May 21, 2008, among Cody, CDI
Acquisition, Inc. and ChromaDex, Inc. as amended on June 10, 2008
(incorporated by reference from, and filed as Exhibit 2.1 to the
Company’s Current Report on Form 8-K filed with the
Commission on June 24, 2008)
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of ChromaDex Corporation,
a Delaware corporation
❖
|
|
3.2
|
|
Certificate
of Amendment to the Certificate of Incorporation of ChromaDex
Corporation, a Delaware corporation (incorporated by reference
from, and filed as Exhibit 3.1 to the Company’s Current
Report on Form 8-K filed with the Commission on April 12,
2016)
|
|
3.3
|
|
Bylaws
of ChromaDex Corporation, a Delaware corporation (incorporated by
reference from, and filed as Exhibit 3.2 to the Company’s
Current Report on Form 8-K filed with the Commission on June 24,
2008)
|
|
3.4
|
|
Amendment
to Bylaws of ChromaDex Corporation, a Delaware corporation
(incorporated by reference from, and filed as Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed with the
Commission on July 19, 2016)
|
|
4.1
|
|
Form of
Stock Certificate representing shares of ChromaDex Corporation
Common Stock (incorporated by reference from, and filed as Exhibit
4.1 of the Company’s Annual Report on Form 10-K filed with
the Commission on April 3, 2009)
|
|
4.2
|
|
Investor’s
Rights Agreement, effective as of December 31, 2005, by and between
The University of Mississippi Research Foundation and ChromaDex
(incorporated by reference from, and filed as Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed with the
Commission on June 24, 2008)
|
|
4.3
|
|
Tag-Along
Agreement effective as of December 31, 2005, by and among the
Company, Frank Louis Jaksch, Snr. & Maria Jaksch, Trustees of
the Jaksch Family Trust, Margery Germain, Lauren Germain, Emily
Germain, Lucie Germain, Frank Louis Jaksch, Jr., and the University
of Mississippi Research Foundation (incorporated by reference from,
and filed as Exhibit 4.2 to the Company’s Current Report on
Form 8-K filed with the Commission on June 24, 2008)
|
|
4.4
|
|
Form of
Stock Certificate representing shares of ChromaDex Corporation
Common Stock (New design effective as of January 1, 2016,
incorporated as by reference from and filed as Exhibit 4.4 to the
Company’s Annual Report on Form 10-K filed with the
Commission on March 17, 2016)
|
|
10.1
|
|
ChromaDex,
Inc. 2000 Non-Qualified Incentive Stock Option Plan effective
October 1, 2000 (incorporated by reference from, and filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the Commission on June 24, 2008)(1)+
|
|
10.2
|
|
Second
Amended and Restated 2007 Equity Incentive Plan effective March 13,
2007, as amended May 20, 2010 (incorporated by reference from, and
filed as Appendix B to the Company’s Current Definitive Proxy
Statement on Schedule 14A filed with the Commission on May 4,
2010)(1)+
|
|
10.3
|
|
Form of
Stock Option Agreement under the ChromaDex, Inc. Second Amended and
Restated 2007 Equity Incentive Plan (incorporated by reference
from, and filed as Exhibit 10.3 to the Company’s Current
Report on Form 8-K filed with the Commission on June 24,
2008)(1)+
|
|
10.4
|
|
Form of
Restricted Stock Purchase Agreement under the ChromaDex, Inc. 2007
Equity Incentive Plan (incorporated by reference from, and filed as
Exhibit 10.4 to the Company’s Current Report on Form 8-K
filed with the Commission on June 24, 2008)(1)+
|
|
10.5
|
|
Amended
and Restated Employment Agreement dated April 19, 2010, by and
between Frank L. Jaksch, Jr. and ChromaDex, Inc. (incorporated by
reference from, and filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on April 22,
2010)(1)+
|
|
10.6
|
|
Amended
and Restated Employment Agreement dated April 19, 2010, by and
between Thomas C. Varvaro and ChromaDex, Inc. (incorporated by
reference from, and filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed with the Commission on April 22,
2010)(1)+
|
|
10.7
|
|
Standard
Industrial/Commercial Multi-Tenant Lease – Net dated December
19, 2006, by and between ChromaDex, Inc. and SCIF Portfolio II, LLC
(incorporated by reference from, and filed as Exhibit 10.7 to the
Company’s Current Report on Form 8-K filed with the
Commission on June 24, 2008)
|
|
10.8
|
|
First
Amendment to Standard Industrial/Commercial Multi-Tenant Lease,
made as of July 18, 2008, between SCIF Portfolio II, LLC
(“Lessor”) and ChromaDex, Inc. (“Lessee”)
(incorporated by reference from, and filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the
Commission on July 23, 2008)
|
|
10.9
|
|
Second
Amendment to Standard Industrial/Commercial Multi-Tenant Lease,
made as of May 7, 2013, between SCIF Portfolio II, LLC
(“Lessor”) and ChromaDex, Inc. (“Lessee”)
(incorporated by reference from, and filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the
Commission on May 7, 2013)
|
|
10.10
|
|
First
Amendment to Standard Industrial/Commercial Multi-Tenant Lease,
made as of July 18, 2008, between SCIF Portfolio II, LLC
(“Lessor”) and ChromaDex, Inc. (“Lessee”)
(incorporated by reference from, and filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the
Commission on July 23, 2008)
|
|
10.11
|
|
Lease
Agreement dated October 26, 2001, by and between Railhead Partners,
LLC and NaPro BioTherapeutics, Inc., as assigned to ChromaDex
Analytics, Inc. on April 9, 2003 and amended on September 24, 2003
(incorporated by reference from, and filed as Exhibit 10.8 to the
Company’s Current Report on Form 8-K filed with the
Commission on June 24, 2008)
|
|
10.12
|
|
Second
Addendum to Lease Agreement, made as of April 27, 2009, by and
between Railhead Partners, LLC and ChromaDex Analytics, Inc.
(incorporated by reference from, and filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the
Commission on April 28, 2009)
|
|
10.13
|
|
Third
Addendum to Lease Agreement, made as of February 29, 2016, by and
between Railhead Partners, LLC and ChromaDex Analytics, Inc.
(incorporated by reference from, and filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the
Commission on March 3, 2016)
|
|
10.14
|
|
Licensing
Agreement Nutraceutical Standards effective as of December 31, 1999
between the University of Mississippi Research Foundation and
ChromaDex (incorporated by reference from, and filed as Exhibit
10.9 to the Company’s Current Report on Form 8-K filed with
the Commission on June 24, 2008)
|
|
10.15
|
|
Equity
Based License Agreement dated October 25, 2001, by and between the
Company and Bayer Innovation, as amended as of October 30, 2003
(incorporated by reference from, and filed as Exhibit 10.10 to the
Company’s Current Report on Form 8-K filed with the
Commission on June 24, 2008)
|
|
10.16
|
|
Stock
Redemption Agreement, dated June 18, 2008 between ChromaDex, Inc.
and Bayer Innovation GmbH (formerly named Bayer Innovation
Beteiligungsgesellschaft mbH) (incorporated by reference from, and
filed as Exhibit 10.13 to the Company’s Current Report on
Form 8-K filed with the Commission on June 24, 2008)
|
|
10.17
|
|
License
Agreement, dated March 25, 2010 between the University of
Mississippi and ChromaDex, Inc. (incorporated by reference from,
and filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q filed with the Commission on May 18, 2010)*
|
|
10.18
|
|
First
Amendment to License Agreement, made as of June 3, 2011 between the
University of Mississippi and ChromaDex, Inc. (incorporated by
reference from, and filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on August
11, 2011)*
|
|
10.19
|
|
Restated
and Amended License Agreement, effective as of June 3, 2015 between
the University of Mississippi and ChromaDex, Inc. (incorporated by
reference from, and filed as Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on August
13, 2015)*
|
|
10.20
|
|
License
Agreement, dated July 5, 2011 between ChromaDex, Inc. and Cornell
University (incorporated by reference from, and filed as Exhibit
10.1 to the Company’s Quarterly Report on Form 10-Q filed
with the Commission on November 10, 2011)*
|
|
10.21
|
|
Exclusive
License Agreement, dated September 8, 2011 between the Regents of
the University of California and ChromaDex, Inc. (incorporated by
reference from, and filed as Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on November
10, 2011)*
|
|
10.22
|
|
First
Amendment to the License Agreement, effective as of September 5,
2014 between the Regents of the University of California and
ChromaDex, Inc. (incorporated by reference from, and filed as
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
filed with the Commission on November 6, 2014)*
|
|
10.23
|
|
Second
Amendment to the License Agreement, effective as of December 31,
2015, between the Regents of the University of California and
ChromaDex, Inc. (incorporated by reference from, and filed as
Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q
filed with the Commission on November 10, 2016)*
|
|
10.24
|
|
Exclusive
License Agreement, dated July 13, 2012 between Dartmouth College
and ChromaDex, Inc. (incorporated by reference from, and filed as
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q
filed with the Commission on November 10, 2016)
|
|
10.25
|
|
Exclusive
License Agreement, dated March 7, 2013 between Washington
University and ChromaDex, Inc. (incorporated by reference from, and
filed as Exhibit 10.4 to the Company’s Quarterly Report on
Form 10-Q filed with the Commission on November 10,
2016)
|
|
10.26
|
|
Amendment
#1 to Exclusive License Agreement, effective as of December 15,
2015, between Washington University and ChromaDex, Inc.
(incorporated by reference from, and filed as Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q filed with the
Commission on November 10, 2016)
|
|
10.27
|
|
Niagen
Supply Agreement, dated July 9, 2013, by and between ChromaDex,
Inc. and Thorne Research, Inc. (incorporated by reference from, and
filed as Exhibit 99.1 to the Company’s Current Report on Form
8-K filed with the Commission on July 12, 2013)
|
|
10.28
|
|
Addendum
to the Nicotinamide Riboside Supply Agreement, dated July 24, 2015,
by and between ChromaDex, Inc. and Thorne Research, Inc.
(incorporated by reference from, and filed as Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q filed with the
Commission on November 10, 2016)*
|
|
10.29
|
|
Second
Addendum to the Nicotinamide Riboside Supply Agreement, dated
September 14, 2016, by and between ChromaDex, Inc. and Thorne
Research, Inc. (incorporated by reference from, and filed as
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
filed with the Commission on November 10, 2016)*
|
|
10.30
|
|
License
Agreement, made as of August 1, 2013, between Green Molecular S.L.,
Inc. and ChromaDex, Inc. (incorporated by reference from, and filed
as Exhibit 10.6 to the Company’s Quarterly Report on Form
10-Q filed with the Commission on November 10, 2016)
|
|
10.31
|
|
NIAGEN®
Supply Agreement by and between ChromaDex, Inc. and 5Linx
Enterprises, Inc. effective as of January 3, 2014 (incorporated by
reference from, and filed as Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on May 8,
2014)*
|
|
10.32
|
|
Purenergy
Supply Agreement by and between ChromaDex, Inc. and 5Linx
Enterprises, Inc. effective as of January 3, 2014 (incorporated by
reference from, and filed as Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on May 8,
2014)*
|
|
10.33
|
|
Addendum
to NIAGEN® Supply Agreement, effective as of June 26, 2014,
between 5Linx Enterprises, Inc. and ChromaDex, Inc. (incorporated
by reference from, and filed as Exhibit 10.4 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on May 12,
2016)
|
|
10.34
|
|
First
Amendment to NIAGEN® Supply Agreement, effective as of March
31, 2015, between 5Linx Enterprises, Inc. and ChromaDex, Inc.
(incorporated by reference from, and filed as Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q filed with the
Commission on May 12, 2016)*
|
|
10.35
|
|
Second
Amendment to NIAGEN® Supply Agreement, effective as of March
3, 2016, between 5Linx Enterprises, Inc. and ChromaDex, Inc.
(incorporated by reference from, and filed as Exhibit 10.6 to the
Company’s Quarterly Report on Form 10-Q filed with the
Commission on May 12, 2016)*
|
|
10.36
|
|
Employment
Agreement by and between ChromaDex Corp. and Troy Rhonemus dated
March 6, 2014 (incorporated by reference from, and filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K filed with
the Commission on March 10, 2014)+
|
|
10.37
|
|
Exclusive
License Agreement, effective as of May 16, 2014 between Dartmouth
College and ChromaDex, Inc. (incorporated by reference from, and
filed as Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q filed with the Commission on August 12,
2014)*
|
|
10.38
|
|
First
Amendment to Exclusive License Agreement, effective as of June 13,
2016, between Dartmouth College and ChromaDex, Inc. (incorporated
by reference from, and filed as Exhibit 10.10 to the
Company’s Quarterly Report on Form 10-Q filed with the
Commission on November 10, 2016)*
|
|
10.39
|
|
Loan
and Security Agreement by and between ChromaDex Corporation and
Hercules Technology II, L.P., as Lender and Hercules Technology
Growth Capital, Inc., as agent dated September 29, 2014
(incorporated by reference from, and filed as Exhibit 10.39 to the
Company’s Annual report on Form 10-K filed with the
Commission on March 19, 2015)
|
|
10.40
|
|
Amendment
No. 1 to Loan and Security Agreement by and between ChromaDex
Corporation and Hercules Technology II, L.P., as Lender and
Hercules Technology Growth Capital, Inc., as agent dated June 17,
2015 (incorporated by reference from and filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed with the
Commission on June 19, 2015)
|
|
10.41
|
|
License
Agreement, effective as of October 15, 2014 between University of
Mississippi and ChromaDex, Inc. (incorporated by reference from,
and filed as Exhibit 10.40 to the Company’s Annual report on
Form 10-K filed with the Commission on March 19,
2015)*
|
|
10.42
|
|
First
Amendment to Exclusive License Agreement, effective as of July 6,
2015, between University of Mississippi and ChromaDex, Inc.
(incorporated by reference from, and filed as Exhibit 10.7 to the
Company’s Quarterly report on Form 10-Q filed with the
Commission on November 10, 2016)
|
|
10.43
|
|
Exclusive
License and Supply Agreement, effective as of May 12, 2015 between
Suntava, Inc. and ChromaDex, Inc. (incorporated by reference from,
and filed as Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q filed with the Commission on August 13,
2015)*
|
|
10.44
|
|
Exclusive
Supply Agreement, effective as of August 27, 2015 between
Healthspan Research, LLC and ChromaDex, Inc. (incorporated by
reference from, and filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on November
12, 2015)*
|
|
10.45
|
|
Limited
Liability Company Agreement, effective as of August 27, 2015
between Healthspan Research LLC and ChromaDex, Inc. (incorporated
by reference from, and filed as Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on November
12, 2015)*
|
|
10.46
|
|
Interest
Purchase Agreement, effective as of August 27, 2015 between
Healthspan Research LLC and ChromaDex, Inc. (incorporated by
reference from, and filed as Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-Q filed with the Commission on November
12, 2015)*
|
|
10.47
|
|
Take or
Pay Purchase Agreement for nicotinamide riboside chloride,
effective as of September 21, 2015, between W.R. Grace & Co.
Conn. And ChromaDex, Inc. (incorporated by reference from, and
filed as Exhibit 10.4 to the Company’s Quarterly Report on
Form 10-Q filed with the Commission on November 12,
2015)*
|
|
10.48
|
|
Supply
Agreement, effective as of August 28, 2015 and First Addendum to
Supply Agreement, effective as of September 30, 2015 between
Nectar7 LLC and ChromaDex, Inc. (incorporated by reference from,
and filed as Exhibit 10.5 to the Company’s Quarterly Report
on Form 10-Q filed with the Commission on November 12,
2015)*
|
|
10.49
|
|
Second
Addendum to Supply Agreement, effective as of January 28, 2016,
between Nectar7 LLC and ChromaDex, Inc. (incorporated by reference
from, and filed as Exhibit 10.9 to the Company’s Quarterly
Report on Form 10-Q filed with the Commission on November 10,
2016)*
|
|
10.50
|
|
Form of
Securities Purchase Agreement, dated as of November 4, 2015,
between existing stockholders and ChromaDex Corporation.
(incorporated by reference from and filed as Exhibit 10.01 to the
Company’s Current Report on Form 8-K filed with the
Commission on November 5, 2015)
|
|
10.51
|
|
Form of
Warrant under the Securities Purchase Agreement, dated as of
November 4, 2015, between existing stockholders and ChromaDex
Corporation (incorporated by reference from and filed as Exhibit
10.02 to the Company’s Current Report on Form 8-K filed with
the Commission on November 5, 2015)
|
|
10.52
|
|
Joint
Development Agreement, effective as of October 30, 2015, between
the Procter & Gamble Company and ChromaDex, Inc.*
|
|
10.53
|
|
Form of
Securities Purchase Agreement, dated as of March 11, 2016, between
an existing stockholder and ChromaDex Corporation (incorporated by
reference from and filed as Exhibit 10.01 to the Company’s
Current Report on Form 8-K filed with the Commission on March 11,
2016)
|
|
10.54
|
|
Form of
Warrant under the Securities Purchase Agreement, dated as of March
11, 2016, between an existing stockholder and ChromaDex Corporation
(incorporated by reference from and filed as Exhibit 10.02 to the
Company’s Current Report on Form 8-K filed with the
Commission on March 11, 2016)
|
|
10.55
|
|
Lease
Agreement, made as of April 14, 2016, by and between Longmont
Diagonal Investments LLC and ChromaDex Analytics, Inc.
(incorporated by reference from and filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the
Commission on April 20, 2016)
|
|
10.56
|
|
Supply
Agreement, effective as of February 3, 2014, between Elysium
Health, Inc. and ChromaDex, Inc. (incorporated by reference from,
and filed as Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q filed with the Commission on May 12,
2016)*
|
|
10.57
|
|
Supply
Agreement, effective as of June 26, 2014, between Elysium Health,
Inc. and ChromaDex, Inc. (incorporated by reference from, and filed
as Exhibit 10.2 to the Company’s Quarterly Report on Form
10-Q filed with the Commission on May 12, 2016)*
|
|
10.58
|
|
Amendment
to Supply Agreement, effective as of February 19, 2016, between
Elysium Health, Inc. and ChromaDex, Inc. (incorporated by reference
from, and filed as Exhibit 10.3 to the Company’s Quarterly
Report on Form 10-Q filed with the Commission on May 12,
2016)*
|
|
10.59
|
|
Form of
Securities Purchase Agreement, dated as of June 3, 2016, between an
existing stockholder and ChromaDex Corporation (incorporated by
reference from and filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on June 6,
2016)
|
|
10.60
|
|
Business
Financing Agreement, dated as of November 4, 2016, between Western
Alliance Bank and ChromaDex Corporation
❖
|
|
10.61
|
|
First
Business Financing Modification Agreement, dated as of February 16,
2017, between Western Alliance Bank and ChromaDex
Corporation
❖
|
|
10.62
|
|
Second
Business Financing Modification Agreement, dated as of March 12,
2017, between Western Alliance Bank and ChromaDex
Corporation
❖
|
|
10.63
|
|
Form of
Indemnity Agreement, between ChromaDex Corporation and each of its
existing directors and executive officers. (incorporated by
reference from and filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on December
16, 2016)+
|
|
10.64
|
|
Amended
and Restated Non-Employee Director Compensation Policy
❖
+
|
|
10.65
|
|
Executive
Employment Agreement, dated as of March 12, 2017, between Robert
Fried and ChromaDex Corporation
❖
+
|
|
21.1
|
|
Subsidiaries
of ChromaDex Corporation
❖
|
|
23.1
|
|
Consent
of Marcum, LLP, Independent Registered Public Accounting
Firm
❖
|
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to §240.13a-14 or
§240.15d-14 of the Securities Exchange Act of 1934, as
amended
❖
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to §240.13a-14 or
§240.15d-14 of the Securities Exchange Act of 1934, as
amended
❖
|
|
32.1
|
|
Certification
pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002)
❖
|
_________
❖
Filed herewith.
(1)
Plan and related
Forms were assumed by ChromaDex Corporation pursuant to Agreement
and Plan of Merger, dated as of May 21, 2008, among ChromaDex
Corporation (formerly Cody Resources, Inc.), CDI Acquisition, Inc.
and ChromaDex, Inc.
+
Indicates
management contract or compensatory plan or
arrangement.
*
This Exhibit has
been granted confidential treatment and has been filed separately
with the Commission. The confidential portions of this Exhibit have
been omitted and are marked by an asterisk.
-97-
