UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
FORM 10-Q
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2017
Commission
File Number:
001-37752
CHROMADEX CORPORATION
(Exact
Name of Registrant as Specified in its Charter)
Delaware
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26-2940963
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(State
or other jurisdiction of incorporation or
organization)
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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
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
X
No
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
X
No
Indicate
by check mark whether the registrant is a large accelerated filer,
accelerated filer, non-accelerated filer, smaller reporting company
or emerging growth company. See definition of “large
accelerated filer, accelerated filer, smaller reporting company and
emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer
____
Accelerated filer
X
Non-accelerated
filer
____ Smaller
reporting company ____
(Do not
check if smaller reporting
company)
Emerging growth company ____
If an
emerging growth company, indicate by checkmark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes ___
No
X
As of August 9, 2017 there were 46,093,894 shares of the
registrant’s common stock issued and
outstanding.
CHROMADEX CORPORATION
QUARTERLY
REPORT ON FORM 10-Q
TABLE OF CONTENTS
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1
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2
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3
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4
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5
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6
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15
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21
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21
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22
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23
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23
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39
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39
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39
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39
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40
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PART I – FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
ChromaDex
Corporation and Subsidiaries
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Condensed
Consolidated
B
alance
Sheets
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July
1, 2017 and December 31, 2016
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Assets
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Current
Assets
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Cash
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$
14,138,607
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$
1,642,429
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Trade receivables,
net of allowances of $736,000 and $1,081,000,
respectively
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4,579,253
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5,852,030
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Inventories
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7,794,182
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7,912,630
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Prepaid expenses
and other assets
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864,935
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329,854
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Total
current assets
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27,376,977
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15,736,943
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Leasehold
Improvements and Equipment, net
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3,372,879
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3,111,374
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Deposits
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402,497
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397,207
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Intangible assets,
net
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1,767,811
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486,226
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Longterm
investment
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-
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20,318
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Total
assets
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$
32,920,164
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$
19,752,068
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Liabilities
and Stockholders' Equity
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Current
Liabilities
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Accounts
payable
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$
3,131,759
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$
5,978,288
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Accrued
expenses
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2,111,205
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2,170,172
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Current maturities
of capital lease obligations
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299,103
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255,461
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Customer deposits
and other
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503,850
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389,010
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Deferred rent,
current
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114,101
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76,219
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Due to
officer
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100,000
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-
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Total
current liabilities
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6,260,018
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8,869,150
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Capital lease
obligations, less current maturities
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393,184
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343,589
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Deferred rent, less
current
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547,539
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564,971
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Total
liabilities
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7,200,741
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9,777,710
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Commitments and
contingencies
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Stockholders'
Equity
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Common stock, $.001
par value; authorized 150,000,000 shares;
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issued
and outstanding July 1, 2017 45,571,891 shares and
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December
31, 2016 37,544,531 shares
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45,572
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37,545
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Additional paid-in
capital
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75,590,304
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55,160,387
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Accumulated
deficit
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(49,916,453
)
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(45,223,574
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Total
stockholders' equity
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25,719,423
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9,974,358
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Total
liabilities and stockholders' equity
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$
32,920,164
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$
19,752,068
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See Notes to
Consolidated Financial Statements.
ChromaDex
Corporation and Subsidiaries
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C
ondensed Consolidated Statements of
Operations
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For
the Three Month Periods Ended July 1, 2017 and July 2,
2016
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Sales,
net
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$
5,306,855
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$
8,829,579
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Cost of
sales
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3,044,086
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4,702,132
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Gross
profit
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2,262,769
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4,127,447
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Operating
expenses:
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Sales and
marketing
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728,299
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698,031
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Research and
development
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849,962
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751,726
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General and
administrative
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2,657,573
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2,306,559
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Other
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745,773
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-
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Operating
expenses
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4,981,607
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3,756,316
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Operating
income (loss)
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(2,718,838
)
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371,131
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Nonoperating
expense:
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Interest expense,
net
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(45,286
)
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(144,786
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Loss on debt
extinguishment
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-
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(313,099
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Nonoperating
expenses
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(45,286
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(457,885
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Loss before
taxes
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(2,764,124
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(86,754
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Provision for
taxes
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-
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4,087
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Net
loss
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$
(2,764,124
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$
(82,667
)
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Basic and diluted
loss per common share
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$
(0.07
)
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$
(0.00
)
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Basic and diluted
weighted average common shares outstanding
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42,121,150
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36,990,032
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See Notes to
Consolidated Financial Statements.
ChromaDex
Corporation and Subsidiaries
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C
ondensed Consolidated Statements of
Operations
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For
the Six Month Periods Ended July 1, 2017 and July 2,
2016
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Sales,
net
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$
9,755,977
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$
16,161,524
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Cost of
sales
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5,740,555
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8,582,658
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Gross
profit
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4,015,422
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7,578,866
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Operating
expenses:
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Sales and
marketing
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1,324,461
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1,242,753
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Research and
development
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1,514,152
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1,215,798
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General and
administrative
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5,040,719
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4,295,118
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Other
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745,773
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-
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Operating
expenses
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8,625,105
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6,753,669
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Operating
income (loss)
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(4,609,683
)
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825,197
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Nonoperating
expense:
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Interest expense,
net
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(83,196
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(332,487
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Loss on debt
extinguishment
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-
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(313,099
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Nonoperating
expenses
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(83,196
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(645,586
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Income (loss)
before income taxes
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(4,692,879
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179,611
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Provision for
taxes
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(6,653
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Net
income (loss)
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$
(4,692,879
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$
172,958
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Basic earnings
(loss) per common share
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$
(0.12
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$
0.00
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Diluted earnings
(loss) per common share
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$
(0.12
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$
0.00
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Basic weighted
average common shares outstanding
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40,075,920
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36,702,037
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Diluted weighted
average common shares outstanding
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40,075,920
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37,470,066
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See Notes to
Consolidated Financial Statements.
ChromaDex
Corporation and Subsidiaries
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C
ondensed Consolidated Statement of Stockholders'
Equity
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For
the Six Month Period Ended July 1, 2017
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Balance, January 1,
2017
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37,544,531
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$
37,545
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$
55,160,387
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$
(45,223,574
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9,974,358
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Issuance
of common stock associated with
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the
acquisition of Healthspan Research LLC
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367,648
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367
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999,635
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-
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1,000,002
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Exercise of stock
options
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3,202
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3
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6,620
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-
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6,623
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Vested restricted
stock
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2,667
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3
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(3
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-
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-
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Share-based
compensation
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-
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-
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319,830
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-
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319,830
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Net
loss
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-
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-
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-
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(1,928,755
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(1,928,755
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Balance, April 1,
2017
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37,918,048
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$
37,918
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$
56,486,469
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$
(47,152,329
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$
9,372,058
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Issuance
of common stock,
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net
of offering costs of $1,184,000
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7,649,968
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7,650
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18,698,634
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-
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18,706,284
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Exercise of stock
options
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1,875
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2
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5,342
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-
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5,344
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Vested restricted
stock
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2,000
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2
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(2
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-
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-
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Share-based
compensation
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-
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-
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399,861
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-
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399,861
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Net
loss
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-
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-
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-
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(2,764,124
)
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(2,764,124
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Balance,
July 1, 2017
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45,571,891
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$
45,572
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$
75,590,304
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$
(49,916,453
)
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$
25,719,423
|
See Notes to
Consolidated Financial Statements.
ChromaDex
Corporation and Subsidiaries
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C
ondensed Consolidated Statements of Cash
Flows
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For
the Six Month Periods Ended July 1, 2017 and July 2,
2016
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Cash Flows From
Operating Activities
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Net
income (loss)
|
$
(4,692,879
)
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$
172,958
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Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
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Depreciation
of leasehold improvements and equipment
|
264,235
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159,370
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Amortization
of intangibles
|
89,803
|
38,415
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Share-based
compensation expense
|
719,691
|
657,637
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Allowance
for doubtful trade receivables
|
(344,055
)
|
29,649
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Loss
from disposal of equipment
|
1,452
|
-
|
Non-cash
loss on debt extinguishment
|
-
|
32,007
|
Non-cash
financing costs
|
56,587
|
94,080
|
Changes
in operating assets and liabilities:
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|
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Trade
receivables
|
1,628,288
|
(4,372,837
)
|
Inventories
|
179,362
|
3,628,678
|
Prepaid
expenses and other assets
|
(554,679
)
|
(266,831
)
|
Accounts
payable
|
(2,950,302
)
|
(3,892,582
)
|
Accrued
expenses
|
(62,174
)
|
634,562
|
Customer
deposits and other
|
114,840
|
(9,150
)
|
Deferred
rent
|
20,451
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106,657
|
Due
to officer
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(32,500
)
|
-
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Net
cash used in operating activities
|
(5,561,880
)
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(2,987,387
)
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Cash Flows From
Investing Activities
|
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Purchases
of leasehold improvements and equipment
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(295,078
)
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(231,201
)
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Purchases
of intangible assets
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(183,958
)
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(195,000
)
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Net
cash used in investing activities
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(479,036
)
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(426,201
)
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Cash Flows From
Financing Activities
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Proceeds
from issuance of common stock, net of issuance costs
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18,706,284
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5,720,000
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Proceeds
from exercise of stock options
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11,966
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622,384
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Payment
of debt issuance costs
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(42,279
)
|
-
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Principal
payment on loan payable
|
-
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(5,000,000
)
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Principal
payments on capital leases
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(138,877
)
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(108,249
)
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Net
cash provided by financing activities
|
18,537,094
|
1,234,135
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Net increase
(decrease) in cash
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12,496,178
|
(2,179,453
)
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Cash Beginning of
Period
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1,642,429
|
5,549,672
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Cash Ending of
Period
|
$
14,138,607
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$
3,370,219
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Supplemental
Disclosures of Cash Flow Information
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Cash
payments for interest
|
$
26,611
|
$
239,839
|
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Supplemental
Schedule of Noncash Investing Activity
|
|
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Noncash
consideration transferred for the acquisition of Healthspan
Research LLC
|
$
1,187,430
|
$
-
|
Capital
lease obligation incurred for the purchase of
equipment
|
$
232,114
|
$
-
|
Inventory
supplied to Healthspan Research LLC for equity interest, at
cost
|
$
-
|
$
20,318
|
Retirement
of fully depreciated equipment - cost
|
$
55,947
|
$
28,083
|
Retirement
of fully depreciated equipment - accumulated
depreciation
|
$
(55,947
)
|
$
(28,083
)
|
See Notes to
Consolidated Financial Statements.
N
ote 1.
Interim
Financial Statements
The
accompanying financial statements of ChromaDex Corporation and its
wholly owned subsidiaries, ChromaDex, Inc., Healthspan Research,
LLC, ChromaDex Analytics, Inc. and ChromaPharma, Inc. (collectively
referred to herein as “ChromaDex” or the
“Company” or, in the first person as “we”,
“us” and “our”) include all adjustments,
consisting of normal recurring adjustments and accruals, that, in
the opinion of the management of the Company, are necessary for a
fair presentation of the Company’s financial position as of
July 1, 2017 and results of operations and cash flows for the three
and six months ended July 1, 2017 and July 2, 2016. These unaudited
interim financial statements should be read in conjunction with the
Company’s audited financial statements and the notes thereto
for the year ended December 31, 2016 appearing in the
Company’s Annual Report on Form 10-K filed with the
Securities and Exchange Commission (the “Commission”)
on March 16, 2017. Operating results for the six months ended July
1, 2017 are not necessarily indicative of the results to be
achieved for the full year ending on December 30, 2017. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
(“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could
differ from those estimates.
The
balance sheet at December 31, 2016 has been derived from the
audited financial statements at that date, but does not include all
of the information and footnotes required by GAAP for complete
financial statements.
Note
2.
Nature
of Business and Liquidity
Nature of business
:
The Company is a natural products
company that discovers, acquires, develops and commercializes
patented and proprietary ingredient technologies that address the
dietary supplement, food, beverage, skin care and pharmaceutical
markets. With the acquisition of Healthspan Research, LLC in March
2017, the Company now has a consumer product, which it plans to
further develop and market. Along with the Company's ingredients
segment that includes our consumer product business, 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 a 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 its business 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 loss from operations of
approximately $4,610,000 and net loss of approximately $4,693,000
for the six-month period ended July 1, 2017. As of July 1, 2017,
the cash and cash equivalents totaled approximately $14.1
million.
On
April 26, 2017, the Company entered into a Securities Purchase
Agreement with certain purchasers named therein, pursuant to which
the Company agreed to sell and issue up to $25.0 million of its
Common Stock in three tranches. The first and second tranche closed
on April 27, 2017 and May 24, 2017, respectively, and the Company
received $3.5 million and $16.4 million, respectively. The third
tranche is expected to close following a related stockholder
approval at the Company's special meeting on August 10,
2017.
While
we anticipate that our current cash, cash equivalents, cash to be
generated from operations and the funds from the financing
transaction described above will be sufficient to meet our
projected operating plans through at least August 11, 2018, we may
require additional funds, either through additional equity or debt
financings or collaborative agreements or from other sources. We
have no commitments to obtain such additional financing, and we may
not be able to obtain any such additional financing on terms
favorable to us, or at all. If adequate financing is not available,
the Company will further delay, postpone or terminate product and
service expansion and curtail certain selling, general and
administrative operations. The inability to raise additional
financing may have a material adverse effect on the future
performance of the Company.
Note
3.
Significant
Accounting Policies
Basis of presentation
: The financial statements and
accompanying notes have been prepared on a consolidated basis and
reflect the consolidated financial position of the Company and its
wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated from these financial
statements. The Company’s fiscal year ends on the Saturday
closest to December 31, and the Company's normal fiscal quarters
end on the Saturday 13 weeks after the last fiscal year end or
fiscal quarter end. Every fifth or sixth fiscal year, the inclusion
of an extra week occurs due to the Company’s floating
year-end date. The fiscal year 2016 ended on December 31, 2016
consisted of normal 52 weeks. The fiscal year 2017 ending on
December 30, 2017 will also include the normal 52
weeks.
Adopted Accounting Pronouncements Fiscal 2017
: In January
2017, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a
Business. The ASU 2017-01 clarifies the definition of a business
with the objective of adding guidance to assist companies and other
reporting organizations with evaluating whether transactions should
be accounted for as acquisitions of assets or businesses. The
Company early adopted the amendments in this ASU effective as of
January 1, 2017. On March 12, 2017, the Company acquired all of the
outstanding equity interests of Healthspan Research, LLC
("Healthspan") pursuant to a Membership Interest Purchase Agreement
by and among (i) Robert Fried, Jeffrey Allen and Dr. Charles
Brenner (the “Sellers”) and (ii) ChromaDex Corporation.
Under ASU 2017-01, this transaction was treated as an acquisition
of assets, rather than a business. For details on the acquisition
of Healthspan, please refer to
Note 5. Acquisition and Related Party
Transaction
appearing later on this report.
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.
The Company adopted the amendments in this ASU effective as of
January 1, 2017. The adoption of ASU 2016-09 did not have a
material effect 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. The
Company adopted the amendments in this ASU effective as of January
1, 2017. The adoption of ASU 2015-11 did not have a material effect
on our consolidated financial statements.
Recent accounting standards
: In May 2014, the FASB issued
ASU 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.
Note
4.
Earnings
Per Share Applicable to Common Stockholders
The
following table sets forth the computations of earnings per share
amounts applicable to common stockholders for the three and six
months ended July 1, 2017 and July 2, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
(2,764,124
)
|
$
(82,667
)
|
$
(4,692,879
)
|
$
172,958
|
|
|
|
|
|
Basic weighted
average common shares outstanding (1):
|
42,121,150
|
36,990,032
|
40,075,920
|
36,702,037
|
|
|
|
|
|
Basic earnings
(loss) per common share
|
$
(0.07
)
|
$
(0.00
)
|
$
(0.12
)
|
$
0.00
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of
stock options, net
|
-
|
-
|
-
|
726,879
|
Dilutive effect of
warrants, net
|
-
|
-
|
-
|
41,750
|
|
|
|
|
|
Diluted weighted
average common shares outstanding :
|
42,121,150
|
36,990,032
|
40,075,920
|
37,470,666
|
|
|
|
|
|
Diluted earnings
(loss) per common share
|
$
(0.07
)
|
$
(0.00
)
|
$
(0.12
)
|
$
0.00
|
|
|
|
|
|
Potentially
dilutive securities, total (2):
|
|
|
|
|
Stock
options
|
5,965,172
|
5,126,943
|
5,965,172
|
4,400,064
|
Warrants
|
470,444
|
487,111
|
470,444
|
445,361
|
(1)
Includes
approximately 0.5 million weighted average nonvested shares of
restricted stock for the three and six month periods ending July 1,
2017, respectively, and approximately 0.4 million weighted average
nonvested shares of restricted stock for the three and six month
periods ending July 2, 2016, respectively. These shares are
participating securities that feature voting and dividend
rights.
(2)
Excluded from the
computation of diluted earnings (loss) per share as their impact is
antidilutive.
Note
5.
Asset
Acquisition and Related Party Transaction
On
March 12, 2017, the Company acquired all of the outstanding equity
interests of Healthspan from Robert Fried, Jeffrey Allen and Dr.
Charles Brenner (the "Sellers"). Robert Fried is a member of the
Board of Directors ("Board") of the Company, a position he has held
since July 2015.
Upon
the closing of, and as consideration for, the acquisition, the
Company issued an aggregate of 367,648 shares of the
Company’s common stock to the Sellers. The fair value of
these shares was approximately $1.0 million based on the closing
price of $2.72 per share on March 12, 2017. Also on March 12, 2017,
the Company appointed Robert Fried as President and Chief Strategy
Officer, effective immediately. Mr. Fried continues to serve as a
member of the Board, but resigned as a member of the Nominating and
Corporate Governance Committee of the Board.
Healthspan
was formed in August 2015 to offer and sell finished bottle
products that contain NIAGEN® directly to consumers through
internet-based selling platforms. NIAGEN® is the leading
ingredient the Company currently sells. Prior to the acquisition,
the Company has supplied certain amount of NIAGEN® to
Healthspan as a raw material inventory in exchange for a 4% equity
interest in Healthspan. An additional 5% equity interest was
received for granting certain exclusive rights to resell
NIAGEN®.
The
Company acquired the consumer product business model that
Healthspan has established. Included in the business model acquired
is the know-how marketing to date, and the designs and procedures
needed to operate a consumer product business. This transaction was
accounted for as an acquisition of assets. An intangible asset of
approximately $1.35 million was recorded as a result of this
acquisition, which is the difference of consideration transferred
and the net amount of assets acquired and liabilities
assumed.
(A) Consideration transferred
|
|
|
|
(B) Net amount of assets and liabilities
|
|
|
|
|
|
|
|
|
Fair value
|
|
Assets
acquired
|
|
Fair value
|
Common Stock
|
$
1,000,000
|
|
|
Cash and cash equivalents
|
|
$
19,000
|
Transaction costs
|
178,000
|
|
|
Trade receivables
|
|
11,000
|
Previously held equity interest
|
20,000
|
|
|
Inventory
|
|
61,000
|
|
|
|
|
|
|
|
|
$ 1,198,000
|
|
Liabilities
assumed
|
|
|
|
|
|
|
Due to officer
|
|
(132,000)
|
|
|
|
|
Accounts payable
|
|
(74,000)
|
|
|
|
|
Credit card payable
|
|
(30,000)
|
|
|
|
|
Other accrued expenses
|
|
(3,000)
|
Consumer product business model,
|
|
|
|
|
|
|
intangible asset (A) -(B)
|
$ 1,346,000
|
|
|
Net assets
|
|
$ (148,000)
|
|
|
|
|
|
|
|
The
acquired intangible asset is considered to have a useful life of 10
years as we believe the economic benefits from the acquisition will
last at least 10 years. The expense is amortized using the
straight-line method over the useful life and the Company
recognized an amortization expense of approximately $41,000 for the
six months ended July 1, 2017.
In
cancellation of a loan owed by Healthspan to Mr. Fried prior to the
acquisition, the Company repaid $32,500 to Mr. Fried on March 13,
2017 and will also repay $100,000 on March 12, 2018. No interest is
to be paid for the outstanding $100,000 due to Mr.
Fried.
Note
6.
Trade
Receivables Allowances
The
allowance amounts for the periods ended July 1, 2017 and December
31, 2016 are as follows:
|
|
|
Allowances related
to
|
|
|
Customer
C
|
$
500,000
|
$
800,000
|
Customer
E
|
184,000
|
198,000
|
Other
allowances
|
52,000
|
83,000
|
|
$
736,000
|
$
1,081,000
|
Note
7.
Inventories
The
amounts of major classes of inventory as of July 1, 2017 and
December 31, 2016 are as follows:
|
|
|
Bulk
ingredients
|
$
6,833,000
|
$
7,044,000
|
Reference
standards
|
1,052,000
|
1,033,000
|
Dietary supplement
- finished bottles
|
23,000
|
-
|
Dietary supplement
- work-in-process
|
48,000
|
-
|
|
7,956,000
|
8,077,000
|
Less valuation
allowance
|
(162,000
)
|
(164,000
)
|
|
$
7,794,000
|
$
7,913,000
|
Note
8.
Employee
Share-Based Compensation
Stock Option Plans
On June
20, 2017, the stockholders of the Company approved the ChromaDex
Corporation 2017 Equity Incentive Plan (the "2017 Plan"). The 2017
Plan is intended to be the successor to the ChromaDex Corporation
Second Amended and Restated 2007 Equity Incentive Plan (the "2007
Plan"). Under the 2017 Plan, the Company is authorized to issue
stock options that total no more than the sum of (i) 3,000,000 new
shares, (ii) approximately 384,000 unallocated shares remaining
available for the grant of new awards under the 2007 Plan, and
(iii) any returning shares from the 2007 Plan or the 2017 Plan,
such as forfeited, cancelled, or expired shares.
Share-Based Compensation for Robert Fried
On
March 12, 2017, the Board appointed Robert Fried, as President and
Chief Strategy Officer. In connection with his appointment as
President and Chief Strategy Officer, the Company granted an option
to purchase up to 500,000 shares of ChromaDex common stock under
the 2007 Plan, subject to monthly vesting over a three-year period.
The Company also granted 166,667 shares of restricted stock,
subject to annual vesting over a three-year period. The fair value
measured for the granted restricted stock was approximately
$453,000 and the expense is amortized over the vesting period of
three years.
Service Period Based Stock Options
The
following table summarizes activity of service period based stock
options granted to employees at July 1, 2017 and changes during the
six months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2016
|
4,281,151
|
$
3.52
|
6.36
|
|
|
|
|
|
|
|
|
Options
Granted
|
693,334
|
2.89
|
10.00
|
$
1.85
|
|
Options
Exercised
|
(3,202
)
|
2.07
|
|
|
$
3,000
|
Options
Forfeited
|
(33,419
)
|
3.53
|
|
|
|
Outstanding at July
1, 2017
|
4,937,864
|
$
3.43
|
6.40
|
|
$
3,072,000
|
|
|
|
|
|
|
Exercisable at July
1, 2017
|
3,348,382
|
$
3.43
|
5.09
|
|
$
2,246,000
|
The
aggregate intrinsic values in the table above are based on the
Company’s stock price of $3.82, which is the closing price of
the Company’s stock on the last day of business for the
period ended July 1, 2017.
The
fair value of the Company’s stock options was estimated at
the date of grant using the Black-Scholes option pricing model. The
table below outlines the weighted average assumptions for options
granted to employees during the six months ended July 1,
2017.
Six Months Ended
July 1, 2017
|
|
|
Expected
term
|
|
|
Expected
volatility
|
|
73
%
|
Expected
dividends
|
|
0.00
%
|
Risk-free
rate
|
|
2.13
%
|
As of
July 1,
2017, there was
approximately $3,081,000 of total unrecognized compensation
expected to be recognized over a weighted average period of 2.4
years.
Employee Share-Based Compensation
The
Company recognized compensation expense of approximately $371,000
and $677,000 in general and administrative expenses in the
statement of operations for the three and six months ended July 1,
2017, respectively, and approximately $314,000 and $621,000 for the
three and six months ended July 2, 2016, respectively.
Note
9.
Stock
Issuance
On
April 26, 2017, the Company entered into a Securities Purchase
Agreement (the "SPA") with certain purchasers named therein,
pursuant to which the Company agreed to sell and issue up to $25.0
million of its common stock at a purchase price of $2.60 per share
in three tranches of approximately $3.5 million, $16.4 million and
$5.1 million, respectively. The first two tranches closed during
the three months ended July 1, 2017, whereby approximately 7.6
million shares were issued for proceeds of $19.9 million. The third
tranche is expected to close following a related stockholder
approval at the Company's special meeting on August 10,
2017.
Note
10.
Business
Segments
Since
the year ended December 31, 2016, the Company has made operational
changes to merge its scientific and regulatory consulting segment
into core standards and contract services segment. Additionally,
the consumer product operations recently acquired in connection
with the Healthspan acquisition are categorized as a part of the
ingredients segment.
As a
result, the Company has the following two reportable
segments:
●
Ingredients segment
develops and commercializes proprietary-based ingredient
technologies and supplies these ingredients to consumers in
finished products or as raw materials 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 (i) supply of phytochemical
reference standards, (ii) analytical and chemistry based services
and (iii) scientific and regulatory consulting.
The
“Corporate and other” classification includes corporate
items not allocated by the Company to each reportable segment.
Further, there are no intersegment sales that require elimination.
The Company evaluates performance and allocates resources based on
reviewing gross margin by reportable segment.
Three months
ended
|
|
|
|
|
July 1,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
3,004,656
|
$
2,302,199
|
$
-
|
$
5,306,855
|
Cost of
sales
|
1,356,845
|
1,687,241
|
-
|
3,044,086
|
|
|
|
|
|
Gross
profit
|
1,647,811
|
614,958
|
-
|
2,262,769
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Sales and
marketing
|
453,668
|
274,631
|
-
|
728,299
|
Research and
development
|
849,962
|
-
|
-
|
849,962
|
General and
administrative
|
-
|
-
|
2,657,573
|
2,657,573
|
Other
|
745,773
|
-
|
-
|
745,773
|
Operating
expenses
|
2,049,403
|
274,631
|
2,657,573
|
4,981,607
|
|
|
|
|
|
Operating
income (loss)
|
$
(401,592
)
|
$
340,327
|
$
(2,657,573
)
|
$
(2,718,838
)
|
Three months
ended
|
|
|
|
|
July 2,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
6,241,749
|
$
2,587,830
|
$
-
|
$
8,829,579
|
Cost of
sales
|
3,034,389
|
1,667,743
|
-
|
4,702,132
|
|
|
|
|
|
Gross
profit
|
3,207,360
|
920,087
|
-
|
4,127,447
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Sales and
marketing
|
399,700
|
298,331
|
-
|
698,031
|
Research and
development
|
736,726
|
15,000
|
-
|
751,726
|
General and
administrative
|
-
|
-
|
2,306,559
|
2,306,559
|
Operating
expenses
|
1,136,426
|
313,331
|
2,306,559
|
3,756,316
|
|
|
|
|
|
Operating
income (loss)
|
$
2,070,934
|
$
606,756
|
$
(2,306,559
)
|
$
371,131
|
Six months
ended
|
|
|
|
|
July 1,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
5,089,059
|
$
4,666,918
|
$
-
|
$
9,755,977
|
Cost of
sales
|
2,271,612
|
3,468,943
|
-
|
5,740,555
|
|
|
|
|
|
Gross
profit
|
2,817,447
|
1,197,975
|
-
|
4,015,422
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Sales and
marketing
|
759,013
|
565,448
|
-
|
1,324,461
|
Research and
development
|
1,514,152
|
-
|
-
|
1,514,152
|
General and
administrative
|
-
|
-
|
5,040,719
|
5,040,719
|
Other
|
745,773
|
-
|
-
|
745,773
|
Operating
expenses
|
3,018,938
|
565,448
|
5,040,719
|
8,625,105
|
|
|
|
|
|
Operating
income (loss)
|
$
(201,491
)
|
$
632,527
|
$
(5,040,719
)
|
$
(4,609,683
)
|
Six months
ended
|
|
|
|
|
July 2,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
10,842,375
|
$
5,319,149
|
$
-
|
$
16,161,524
|
Cost of
sales
|
5,133,551
|
3,449,107
|
-
|
8,582,658
|
|
|
|
|
|
Gross
profit
|
5,708,824
|
1,870,042
|
-
|
7,578,866
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Sales and
marketing
|
731,443
|
511,310
|
-
|
1,242,753
|
Research and
development
|
1,200,798
|
15,000
|
-
|
1,215,798
|
General and
administrative
|
-
|
-
|
4,295,118
|
4,295,118
|
Operating
expenses
|
1,932,241
|
526,310
|
4,295,118
|
6,753,669
|
|
|
|
|
|
Operating
income (loss)
|
$
3,776,583
|
$
1,343,732
|
$
(4,295,118
)
|
$
825,197
|
|
|
|
|
|
At July 1,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
13,413,963
|
$
3,982,296
|
$
15,523,905
|
$
32,920,164
|
|
|
|
|
|
At December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
13,257,289
|
$
3,918,440
|
$
2,576,339
|
$
19,752,068
|
Disclosure of major customers
Major
customers who accounted for more than 10% of the Company’s
total sales were as follows:
|
|
|
Major
Customers
|
|
|
|
|
|
|
|
|
|
Customer C
(Ingredients segment)
|
*
|
34.5
%
|
*
|
31.3
%
|
Customer F
(Ingredients and Core segment)
|
11.9
%
|
*
|
*
|
*
|
|
|
|
|
|
* Represents less
than 10%.
|
|
|
|
|
Major
customers who accounted for more than 10% of the Company’s
total trade receivables were as follows:
|
Percentage of the
Company's Total Trade Receivables
|
|
|
|
Major
Customers
|
|
|
|
|
|
Customer C
(Ingredients segment)
|
48.8
%
|
45.8
%
|
Customer D
(Ingredients and Core segment)
|
*
|
10.2
%
|
|
|
|
* Represents less
than 10%.
|
|
|
Note
11.
Commitments
and Contingencies
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.
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. On March 1, 2017, Elysium filed a motion to
dismiss ChromaDex, Inc.'s fraud and trade secret misappropriation
causes of action. On March 6, 2017, Elysium filed a first amended
counterclaim. On March 20, 2017, ChromaDex, Inc. moved to dismiss
Elysium's amended fraud, patent misuse and the Unfair Competition
Claim. On May 10, 2017, the court ruled on the motions to dismiss,
denying ChromaDex, Inc.’s motion as to Elysium’s fraud
and patent misuse claims and granting ChromaDex, Inc.’s
motion with prejudice as to Elysium’s Unfair Competition
Claim. With respect to Elysium’s motion, the court granted
the motion with prejudice as to ChromaDex, Inc.’s fraud claim
and granted with leave to amend the motion as to ChromaDex,
Inc.’s trade secret misappropriation claims. On May 24, 2017,
ChromaDex, Inc. answered the first amended counterclaim and
asserted several affirmative defenses. Also on May 24, 2017,
ChromaDex, Inc. filed a second amended complaint, amending the
trade secret misappropriation claims and addressing Elysium’s
patent misuse counterclaim. On June 7, 2017, ChromaDex, Inc. filed
a third amended complaint dismissing the trade secret
misappropriation claims and asserting two breach of contract claims
for Elysium’s failure to pay for the product delivered. On
June 16, 2017, Elysium answered the third amended complaint. On
July 17, 2017, Elysium filed petitions with the U.S. Patent and
Trademark Office for inter partes review of U.S. Patent No.
8,197,807 and 8,383,086, patents to which ChromaDex, Inc. is the
exclusive licensee.
As of
July 1, 2017, 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.
Lease
Subsequent
to the period ended July 1, 2017, the Company entered into a lease
for an office space located in Los Angeles, California through
September 2021. Pursuant to the lease, the Company will make
monthly lease payments ranging from approximately $11,000 to
$21,000, as the payments escalate during the term of the
lease.
Employment agreement with Robert Fried
On
March 12, 2017, the Company entered into an Employment Agreement
(the "Fried Agreement") with Robert Fried. Mr. Fried is entitled to
receive certain severance payments per the terms of the Fried
Agreement. The key terms of the Fried Agreement, including the
severance terms are as follows:
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 the Company 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 Common Stock under the 2007 plan, subject
to monthly vesting over a three-year period; and (iv) 166,667
shares of restricted Common Stock, subject to annual vesting over a
three-year period.
Subject
to 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 Common Stock, subject to annual vesting over a
two-year period, (ii) on March 12, 2019, 166,666 shares of
restricted 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 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 in
control of the Company, (b) Mr. Fried’s death, (c) Mr.
Fried’s disability, (d) termination by the Company 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
the Company or any of its subsidiaries though such
event.
The
severance terms of the Fried Agreement provide that if (i) Mr.
Fried’s employment is terminated by the Company without
cause, for death or disability, or Mr. Fried resigns for good
reason, or (ii) (a) a change in control of the Company occurs and
(b) within one month prior to the date of such change in control or
twelve months after the date of such change in control R.
Fried’s employment is terminated by the Company other than
for cause, then, subject to executing a release, Mr. Fried will
receive (w) continuation of his base salary for 12 months, (x)
health care continuation coverage payments premiums for 12 months,
(y) a prorated annual cash bonus earned for the fiscal year in
which such termination or resignation occurs, and (z) an extended
exercise period for his options
Note
12.
Other
Expense
Loss from an ongoing litigation, Elysium Health, Inc.
During
the three months ended July 1, 2017, the Company, in relation to
the ongoing litigation, incurred a write-off of approximately
$746,000 in gross trade receivable from Elysium Health, Inc.
related to royalties. As a result of this write-off and after
further analysis, the Company made an adjustment to the total
allowance amount from ($800,000) to ($500,000).
I
TEM
2.
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements in this Management's Discussion and Analysis
(“MD&A”), other than purely historical information,
including estimates, projections, statements relating to our
business plans, objectives and expected operating results, and the
assumptions upon which those statements are based, are
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements generally can
be identified by the use of forward-looking terminology such as
“may,” “would,” “expect,”
“intend,” “could,” “estimate,”
“should,” “anticipate,” or
“believe,” and similar
expressions. Forward-looking statements are based on
current expectations and assumptions that are subject to risks and
uncertainties which may cause actual results to differ materially
from the forward-looking statements. We undertake no
obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events,
or otherwise. Readers should carefully review the risk
factors and related notes
set forth below in Part II,
Item 1A, “Risk Factors” and included under Part I, Item
1A, “Risk Factors” of our Annual Report on Form 10-K
for the year ended December 31, 2016 filed with the Securities and
Exchange Commission on March 16, 2017 (our “Annual
Report”).
The following MD&A is intended to help readers understand the
results of our operation and financial condition, and is provided
as a supplement to, and should be read in conjunction with, our
Interim Unaudited Financial Statements and the accompanying Notes
to Interim Unaudited Financial Statements under Part 1, Item 1 of
this Quarterly Report on Form 10-Q.
Growth and percentage comparisons made herein generally refer to
the three and six months ended July 1, 2017 compared with the three
and six months ended July 2, 2016 unless otherwise noted. Unless
otherwise indicated or unless the context otherwise requires, all
references in this document to “we,” “us,”
“our,” the “Company,” and similar
expressions refer to ChromaDex Corporation, and depending on the
context, its subsidiaries.
Company Overview
The
business of ChromaDex Corporation is conducted by our principal
subsidiaries, ChromaDex, Inc., Healthspan Research, LLC, ChromaDex
Analytics, Inc. and ChromaPharma, Inc. The Company is a natural
products company that leverages its complementary business units to
discover, acquire, develop and commercialize patented and
proprietary ingredient technologies that address the dietary
supplement, food, beverage, skin care and pharmaceutical markets.
With the recent acquisition of Healthspan Research, LLC, the
Company is also selling consumer products. Along with our
ingredients segment that includes our consumer product business,
the Company also has a core standards and contract services
segment, which focuses on (i) natural product fine chemicals (known
as “phytochemicals”) (ii) chemistry and analytical
testing services, and (iii) scientific and regulatory consulting.
As a result of the Company’s relationships with leading
universities and research institutions, the Company is able to
discover and license early stage, intellectual property-backed
ingredient technologies. The Company then utilizes the
Company’s 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.
The
discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been
prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”). The preparation of these financial
statements requires our management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported
revenues, if any, and expenses during the reporting periods. On an
ongoing basis, we evaluate such estimates and judgments, including
those described in greater detail below. We base our estimates on
historical experience and on various other factors that we believe
are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
As of
July 1, 2017, the Company had approximately $14.1 million cash and
cash equivalents on hand. On April 26, 2017, the Company entered
into a Securities Purchase Agreement with certain purchasers named
therein, pursuant to which the Company agreed to sell and issue up
to $25.0 million of its Common Stock in three tranches. The first
and second tranche closed on April 27, 2017 and May 24, 2017,
respectively, and the Company received $3.5 million and $16.4
million, respectively. The third tranche is expected to close
following a related stockholder approval at the Company's special
meeting on August 10, 2017. We anticipate that our current cash,
cash equivalents, cash to be generated from operations and the
funds from the financing transaction described above will be
sufficient to meet our projected operating plans through at least
August 11, 2018. We may, however, seek additional capital prior to
August 11, 2018, both to meet our projected operating plans after
August 11, 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. If we are unable to
establish small to medium scale production capabilities through our
own plant or though collaboration, we may be unable to fulfill our
customers’ requirements. This may cause a loss of future
revenue streams as well as require us to look for third-party
vendors to provide these services. These vendors may not be
available, or charge fees that prevent us from pricing
competitively within our markets.
Financial Condition and Results of Operations
The
discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been
prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”). The preparation of these financial
statements requires our management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported
revenues, if any, and expenses during the reporting periods. On an
ongoing basis, we evaluate such estimates and judgments, including
those described in greater detail below. We base our estimates on
historical experience and on various other factors that we believe
are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
Some of
our operations are subject to regulation by various state and
federal agencies. In addition, we expect a significant increase in
the regulation of our target markets. Dietary supplements are
subject to Food and Drug Administration (the “FDA”),
Federal Trade Commission 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.
Our net
sales and net income (loss) for the three- and six-month periods
ending on July 1, 2017 and July 2, 2016 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
5,307,000
|
$
8,830,000
|
$
9,756,000
|
$
16,162,000
|
Net income
(loss)
|
(2,764,000
)
|
(83,000
)
|
(4,693,000
)
|
173,000
|
|
|
|
|
|
Basic earnings
(loss) per common share
|
$
(0.07
)
|
$
(0.00
)
|
$
(0.12
)
|
$
0.00
|
Diluted earnings
(loss) per common share
|
$
(0.07
)
|
$
(0.00
)
|
$
(0.12
)
|
$
0.00
|
Over
the next twelve months, we plan to continue to increase research
and development efforts for our line of proprietary ingredients,
subject to available financial resources.
Net Sales
Net
sales
consist of gross
sales less discounts and returns.
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
Ingredients
|
$
3,005,000
|
$
6,242,000
|
-52
%
|
$
5,089,000
|
$
10,842,000
|
-53
%
|
Core
standards and contract services
|
2,302,000
|
2,588,000
|
-11
%
|
4,667,000
|
5,320,000
|
-12
%
|
|
|
|
|
|
|
|
Total
net sales
|
$
5,307,000
|
$
8,830,000
|
-40
%
|
$
9,756,000
|
$
16,162,000
|
-40
%
|
●
The decrease in
sales for the ingredients segment for the three and six months
ended July 1, 2017 is mainly due to decreased sales of
“NIAGEN
®.
”
During the six months ended July 1, 2017, we did not ship
NIAGEN® to certain customers that placed large orders during
the six months ended July 2, 2016.
●
The decrease in
sales for the core standards and contract services segment is
primarily due to decreased sales of analytical testing and contract
services.
Cost of Sales
Cost of
sales include raw
materials, labor, overhead, and
delivery costs.
|
|
|
|
July 1,
2017
|
July 2,
2016
|
July 1, 2017
|
July 2, 2016
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
Ingredients
|
$
1,357,000
|
45
%
|
$
3,035,000
|
49
%
|
$
2,272,000
|
45
%
|
$
5,134,000
|
47
%
|
Core
standards and contract services
|
1,687,000
|
73
%
|
1,667,000
|
64
%
|
3,469,000
|
74
%
|
3,449,000
|
65
%
|
|
|
|
|
|
|
|
|
|
Total
cost of sales
|
$
3,044,000
|
57
%
|
$
4,702,000
|
53
%
|
$
5,741,000
|
59
%
|
$
8,583,000
|
53
%
|
The
cost of sales, as a percentage of net sales, increased 4% and 6%
for the three- and six-month periods ended July 1, 2017,
respectively, compared to the comparable periods in
2016.
●
The cost of sales,
as a percentage of net sales, for the ingredients segment decreased
4% and 2% for the three- and six-month periods, respectively, as we
were able to manage favorable pricing levels.
●
The cost of sales,
as a percentage of net sales for the core standards and contract
services segment, increased 9% for both the three- and six-month
periods ended July 1, 2017, compared to the comparable periods in
2016. The decrease in analytical testing and contract services
sales led to a lower labor utilization rate, which resulted in
increasing our cost of sales as a percentage of net
sales.
Gross Profit
Gross
profit is net sales less the cost of sales and is affected by a
number of factors including product mix, competitive pricing and
costs of products and services.
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
Ingredients
|
$
1,648,000
|
$
3,207,000
|
-49
%
|
$
2,817,000
|
$
5,709,000
|
-51
%
|
Core
standards and contract services
|
615,000
|
920,000
|
-33
%
|
1,198,000
|
1,870,000
|
-36
%
|
|
|
|
|
|
|
|
Total
gross profit
|
$
2,263,000
|
$
4,127,000
|
-45
%
|
$
4,015,000
|
$
7,579,000
|
-47
%
|
●
The decreased gross
profit for the ingredients segment for the three and six months
ended July 1, 2017 is due to the decreased sales of
“NIAGEN
®.
”
●
The decreased gross
profit for the core standards and contract services segment is
largely due to the decreased 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 decrease in proportion to sales, hence yielding lower
profit margin.
Operating Expenses-Sales and Marketing
Sales
and marketing expenses
consist of salaries, advertising
and marketing expenses.
|
|
|
|
|
|
|
|
|
|
Sales
and marketing expenses:
|
|
|
|
|
|
|
Ingredients
|
$
454,000
|
$
400,000
|
14
%
|
$
759,000
|
$
732,000
|
4
%
|
Core
standards and contract services
|
274,000
|
298,000
|
-8
%
|
565,000
|
511,000
|
11
%
|
|
|
|
|
|
|
|
Total
sales and marketing expenses
|
$
728,000
|
$
698,000
|
4
%
|
$
1,324,000
|
$
1,243,000
|
7
%
|
●
For the ingredients
segment, the increase for the three and six months ended July 1,
2017 is largely due to marketing expenses related to our recently
acquired consumer product business through Healthspan Research LLC.
Subject to available financial resources, we plan to increase our
marketing efforts for our consumer product business.
●
For the core
standards and contract services segment, the decrease for the three
months ended July 1, 2017 is largely due to decreased marketing
efforts, while the increase for the six months ended July 1, 2017
is mainly due to hiring additional staff.
Operating Expenses-Research and Development
Research
and development expenses mainly consist of clinical trials and
process development expenses.
|
|
|
|
|
|
|
|
|
|
Research
and development expenses:
|
|
|
|
|
|
|
Ingredients
|
$
850,000
|
$
737,000
|
15
%
|
$
1,514,000
|
$
1,201,000
|
26
%
|
Core
standards and contract services
|
-
|
15,000
|
-100
%
|
-
|
15,000
|
-100
%
|
|
|
|
|
|
|
|
Total
sales and marketing expenses
|
$
850,000
|
$
752,000
|
13
%
|
$
1,514,000
|
$
1,216,000
|
25
%
|
●
For the ingredients
segment, we increased our research and development efforts for the
ingredients segment 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, we explored processes to
develop certain compounds at a larger scale during the three months
ended July 2, 2016.
Operating Expenses-General and Administrative
General
and administrative
expenses consist of general
company administration, IT, accounting and executive
management.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
$
2,658,000
|
$
2,307,000
|
15
%
|
$
5,041,000
|
$
4,295,000
|
17
%
|
●
The increase was
primarily related to legal expenses. For the three- and six-month
periods ended July 1, 2017, our legal expenses increased to
approximately $522,000 and $953,000, respectively, compared to
approximately $69,000 and $80,000, respectively, for the comparable
periods in 2016. The ongoing litigation with Elysium Health, Inc.
was the main reason for the increase in legal
expenses.
Operating Expense-Other
Other
expense
consists of loss from an ongoing litigation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
$
746,000
|
$
-
|
|
$
746,000
|
$
-
|
|
●
During the three
months ended July 1, 2017, the Company, in relation to ongoing
litigation, incurred a write-off of approximately $746,000 in gross
trade receivable from Elysium Health, Inc. related to
royalties.
Non-operating Expenses- Interest Expense, net
Interest
expense consists of interest on loan
payable and capital
leases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
$
45,000
|
$
145,000
|
-69
%
|
$
83,000
|
$
332,000
|
-75
%
|
The
decrease in interest expense was mainly due to the term loan from
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.
Income Taxes
At July
1, 2017 and July 2, 2016, the Company maintained a full valuation
allowance against the entire deferred income tax balance which
resulted in an effective tax rate of approximately 0% and 4% for
the six-month periods ended July 1, 2017 and July 2, 2016,
respectively.
Depreciation and Amortization
Depreciation
expense for the six-month period ended July 1, 2017 was
approximately $264,000 as compared to $159,000 for the six-month
period ended July 2, 2016. We depreciate our assets on a
straight-line basis, based on the estimated useful lives of the
respective assets.
Amortization
expense of intangible assets for the six-month period ended July 1,
2017 was approximately $90,000 as compared to $38,000 for the
six-month period ended July 2, 2016. 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.
Liquidity and Capital Resources
From
inception through July 1, 2017, we have incurred aggregate losses
of approximately $50 million. These losses are primarily due to
expenses associated with the development and expansion of our
operations. These operations have been financed through capital
contributions, the issuance of common stock and warrants through
private placements, and the issuance of debt.
Our
board of directors periodically reviews our capital requirements in
light of our proposed business plan. Our future capital
requirements will remain dependent upon a variety of factors,
including cash flow from operations, the ability to increase sales,
increasing our gross profits from current levels, reducing selling
and administrative expenses as a percentage of net sales, continued
development of customer relationships, and our ability to market
our new products successfully. However, based on our results from
operations, we may determine that we need additional financing to
implement our business plan. There can be no assurance that any
such financing will be available on terms favorable to us or at
all. Without adequate financing we may have to further delay or
terminate product and service expansion and curtail certain
selling, general and administrative expenses. Any inability to
raise additional financing would have a material adverse effect on
us.
On
April 26, 2017, the Company entered into a Securities Purchase
Agreement (the "Purchase Agreement") with certain purchasers named
therein, pursuant to which the Company agreed to sell and issue up
to $25.0 million of its Common Stock in three tranches. The first
and second tranche closed on April 27, 2017 and May 24, 2017,
respectively, and the Company received $3.5 million and $16.4
million, respectively. The third tranche is expected to close
following a related stockholder approval at the Company's special
meeting on August 10, 2017.
While
we anticipate that our current cash, cash equivalents, cash to be
generated from operations and the funds from the financing
transaction described above will be sufficient to meet our
projected operating plans through at least August 11, 2018, we may
require additional funds, either through additional equity or debt
financings or collaborative agreements or from other sources. We
have no commitments to obtain such additional financing, and we may
not be able to obtain any such additional financing on terms
favorable to us, or at all. If adequate financing is not available,
the Company will further delay, postpone or terminate product and
service expansion and curtail certain selling, general and
administrative operations. The inability to raise additional
financing may have a material adverse effect on the future
performance of the Company.
Net cash used in operating activities
Net
cash used in operating activities for the six months ended July 1,
2017 was approximately $5,562,000 as compared to approximately
$2,987,000 for the six months ended July 2, 2016. Along with the
net loss, a decrease in accounts payable and an increase in prepaid
expenses were the largest uses of cash during the six-month period
ended July 1, 2017, partially offset by the decrease in trade
receivables. Net cash used in operating activities for the six
months ended July 2, 2016 largely reflects a decrease in accounts
payable and an increase in trade receivables along with the net
loss.
We
expect our operating cash flows to fluctuate significantly in
future periods as a result of fluctuations in our operating
results, shipment timetables, accounts receivable collections,
inventory management, and the timing of our payments, among other
factors.
Net cash used in investing activities
Net
cash used in investing activities was approximately $479,000 for
the six months ended July 1, 2017, compared to approximately
$426,000 for the six months ended July 2, 2016. Net cash used in
investing activities for the six months ended July 1, 2017
consisted of purchases of leasehold improvements and equipment and
intangible assets. Net cash used in investing activities for the
six months ended July 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 $18,537,000
for the six months ended July 1, 2017, compared to approximately
$1,234,000 for the six months ended July 2, 2016. Net cash provided
by financing activities for the six months ended July 1, 2017
mainly consisted of proceeds from issuance of our common stock
pursuant to the Purchase Agreement. Net cash provided by financing
activities for the six months ended July 2, 2016 mainly consisted
of proceeds from the issuance 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.
Contractual Obligations and Commitments
During
the six months ended July 1, 2017, there were no material changes
outside of the ordinary course of business in the specified
contractual obligations disclosed in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” as contained in our Annual Report, other than as
disclosed in “Item 1 Financial Statements” of this
Quarterly Report.
Off-Balance Sheet Arrangements
During
the six months ended July 1, 2017, we had no material off-balance
sheet arrangements other than with respect to ordinary operating
leases as disclosed in the “Financial Statements and
Supplementary Data” section of our Annual
Report.
I
TEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our
capital lease obligations bear interest at a fixed rate and
therefore have no exposure to changes in interest
rates.
The
Company’s cash investments consist of short term, high liquid
investments in money market funds managed by banks. Due to the
short-term duration of our investment portfolio and the relatively
low risk profile of our investments, a sudden change in interest
rates would not have a material effect on either the fair market
value of our portfolio, or our operating results or cash
flows.
Foreign Currency Risk
All of
our long-lived assets are located within the United States and we
do not hold any foreign currency denominated financial
instruments.
Effects of Inflation
We do
not believe that inflation and changing prices during the six
months ended July 1, 2017 and July 2, 2016 had a significant impact
on our results of operations.
I
TEM 4. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the supervision of our Chief Executive Officer
and Chief Financial Officer (our principal executive officer and
principal financial officer, respectively), evaluated the
effectiveness of our disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended,
as of the end of the period covered by this Quarterly Report on
Form 10-Q. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control
objectives. In addition, the design of disclosure controls and
procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment
in evaluating the benefits of possible controls and procedures
relative to their costs.
Based on our evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of July 1, 2017, our
disclosure controls and procedures are designed at a reasonable
assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we
file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC
rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
An
evaluation was also performed under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of any change in our internal
control over financial reporting (as defined in Rule
13a−15(f) promulgated under the Securities Exchange Act of
1934, as amended) that occurred during our last fiscal quarter and
that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. There were
no changes in internal control over financial reporting that
occurred during the Company’s second fiscal quarter that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II - OTHER INFORMATION
I
TEM 1. LEGAL
PROCEEDINGS
As
previously disclosed, 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.
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. On March 1, 2017, Elysium filed a motion to
dismiss ChromaDex, Inc.'s fraud and trade secret misappropriation
causes of action. On March 6, 2017, Elysium filed a first amended
counterclaim. On March 20, 2017, ChromaDex, Inc. moved to dismiss
Elysium's amended fraud, patent misuse and the Unfair Competition
Claim. On May 10, 2017, the court ruled on the motions to dismiss,
denying ChromaDex, Inc.’s motion as to Elysium’s fraud
and patent misuse claims and granting ChromaDex, Inc.’s
motion with prejudice as to Elysium’s Unfair Competition
Claim. With respect to Elysium’s motion, the court granted
the motion with prejudice as to ChromaDex, Inc.’s fraud claim
and granted with leave to amend the motion as to ChromaDex,
Inc.’s trade secret misappropriation claims. On May 24, 2017,
ChromaDex, Inc. answered the first amended counterclaim and
asserted several affirmative defenses. Also on May 24, 2017,
ChromaDex, Inc. filed a second amended complaint, amending the
trade secret misappropriation claims and addressing Elysium’s
patent misuse counterclaim. On June 7, 2017, ChromaDex, Inc. filed
a third amended complaint dismissing the trade secret
misappropriation claims and asserting two breach of contract claims
for Elysium’s failure to pay for the product delivered. On
June 16, 2017, Elysium answered the third amended complaint. On
July 17, 2017, Elysium filed petitions with the U.S. Patent and
Trademark Office for inter partes review of U.S. Patent No.
8,197,807 and 8,383,086, patents to which ChromaDex, Inc. is the
exclusive licensee. While ChromaDex, Inc. expresses no opinion as
to the ultimate outcome of these matters, ChromaDex, Inc. believes
Elysium’s allegations are without merit and will vigorously
defend against them.
As of
July 1, 2017, 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.
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 and in our Annual
Report, together with all other information contained in this Form
10-Q and our Annual Report, including our financial statements, the
related notes and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” before
making investment decisions with respect to our common stock. If
any of the following risks actually occur, our business, financial
condition, results of operations and future growth prospects would
likely be materially and adversely affected. Under these
circumstances, the trading price and value of our common stock
could decline, and you may lose all or part of your investment. The
risks and uncertainties described in this Form 10-Q and in our
Annual Report 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 impair our business
operations. The risk factors set forth below that are marked with
an asterisk (*) contain changes to the similarly titled risk
factors included in Part I, Item 1A of our Annual
Report.
Risks Related to our Company and our Business
*We have a history of operating losses, may need additional
financing to meet our future long-term capital requirements and may
be unable to raise sufficient capital on favorable terms or at
all.
We have
recorded a net loss of approximately $4,693,000 for the six months
ended July 1, 2017, and 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. As of July 1,
2017, our accumulated deficit was approximately $49.9 million. We
have not achieved profitability on an annual basis. We may not be
able to reach a level of revenue to continue to achieve and sustain
profitability. If our revenues grow slower than anticipated, or if
operating expenses exceed expectations, then we may not be able to
achieve and sustain profitability in the near future or at all,
which may depress our stock price.
On
April 26, 2017, the Company entered into a Securities Purchase
Agreement with certain purchasers named therein, pursuant to which
the Company agreed to sell and issue up to $25.0 million of its
Common Stock in three tranches. The first and second tranche closed
on April 27, 2017 and May 24, 2017, respectively, and the Company
received $3.5 million and $16.4 million, respectively. The third
tranche is expected to close following a related stockholder
approval at the Company's special meeting on August 10,
2017.
While
we anticipate that our current cash, cash equivalents, cash to be
generated from operations and the funds from the financing
transaction described above will be sufficient to meet our
projected operating plans through at least August 2018, the third
tranche of the financing transaction is not certain to close and we
may require additional funds, either through additional equity or
debt financings or collaborative agreements or from other sources.
We have no commitments to obtain such additional financing, and we
may not be able to obtain any such additional financing on terms
favorable to us, or at all. If adequate financing is not available,
the Company will further delay, postpone or terminate product and
service expansion and curtail certain selling, general and
administrative operations. The inability to raise additional
financing may have a material adverse effect on the future
performance of the Company.
* Our capital requirements will depend on many
factors.
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 August 2018 both to meet our projected operating plans
after August 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, a
customer that represented 19% of our net sales for the year
ending December 31, 2016. For further details on this
litigation, please refer to Part II, Item 1 of this Quarterly
Report on Form 10-Q. This customer has not paid us approximately
$2.7 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 has and could continue to
cause us to incur significant costs, as well as 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. Elysium has made no purchases from us
since August 9, 2016. It is likely that the customer will not make
any future purchases from us or, even if it does, those purchases
may not be at previous volumes or prices. This 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 upon whom we become
highly dependent. Factors that could influence our relationship
with our significant customer and other customers upon whom we may
become highly dependent 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 lines 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 our
results of operations.
*Changes in our business strategy, including entering the consumer
product market, or restructuring of our businesses may increase our
costs or otherwise affect the profitability of our
businesses.
As
changes in our business environment occur we may adjust our
business strategies to meet these changes or we may otherwise
decide to restructure our operations or 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,
if we are not successful in developing our consumer product
business, our sales may decrease and our costs may
increase.
*The success of our ingredient and consumer product 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.
*Our future growth and profitability of our consumer product
business will depend in large part upon the effectiveness and
efficiency of our marketing expenditures and our ability to select
effective markets and media in which to advertise.
Our business success depends on our ability to attract and retain
customers, which significantly depends on our marketing practices.
Our future growth and profitability will depend in large part upon
the effectiveness and efficiency of our marketing expenditures,
including our ability to:
●
create greater awareness of our brand;
●
identify the most effective and efficient levels of spending in
each market, media and specific media vehicle;
●
determine the appropriate creative messages and media mix for
advertising, marketing and promotional expenditures;
●
effectively manage marketing costs (including creative and media)
in order to maintain acceptable customer acquisition
costs;
●
acquire cost-effective television advertising;
●
select the most effective markets, media and specific media
vehicles in which to advertise; and
●
convert consumer inquiries into actual orders.
Unfavorable publicity or consumer perception of our products and
any similar products distributed by other companies could have a
material adverse effect on our business.
We
believe the nutritional supplement market is highly dependent upon
consumer perception regarding the safety, efficacy and quality of
nutritional supplements generally, as well as of products
distributed specifically by us. Consumer perception of our products
can be significantly influenced by scientific research or findings,
regulatory investigations, litigation, national media attention and
other publicity regarding the consumption of nutritional
supplements. We cannot assure you that future scientific research,
findings, regulatory proceedings, litigation, media attention or
other favorable research findings or publicity will be favorable to
the nutritional supplement market or any particular product, or
consistent with earlier publicity. Future research reports,
findings, regulatory proceedings, litigation, media attention or
other publicity that are perceived as less favorable than, or that
question, such earlier research
reports, findings or publicity
could have a material adverse effect on the demand for our products
and consequently on our business, results of operations, financial
condition and cash flows.
Our
dependence upon consumer perceptions means that adverse scientific
research reports, findings, regulatory proceedings, litigation,
media attention or other publicity, whether or 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 and consumer product supplier we market and
manufacture 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.
*If we experience product recalls, we may incur significant and
unexpected costs, and our business reputation could be adversely
affected.
We may be exposed to product recalls and adverse public relations
if our products are mislabeled or alleged to cause injury or
illness, or if we are alleged to have violated governmental
regulations. A product recall could result in substantial and
unexpected expenditures, which would reduce operating profit and
cash flow. In addition, a product recall may require significant
management attention. Product recalls may hurt the value of our
brands and lead to decreased demand for our products. Product
recalls also may lead to increased scrutiny by federal, state or
international regulatory agencies of our operations and increased
litigation and could have a material adverse effect on our
business, results of operations, financial condition and cash
flows.
*Marketing our consumer products could put us in direct competition
with our current ingredients segment customers and could
potentially harm the sales of our ingredients segment
business.
By
developing and selling our own consumer standalone NIAGEN®
supplement product, we may be in direct competition with some of
our current ingredients segment customers that use NIAGEN® in
the products that are sold to consumers. As our own consumer
product becomes more prominent and widely adopted by consumers,
this competition could potential harm the sales of our ingredients
segment business, and our sales of NIAGEN® for our ingredients
segment may decrease. Sales for our ingredients segment represented
approximately 63% of the Company’s revenue for 2016, and
sales of NIAGEN® accounted for approximately 71% of our
ingredient segment’s total sales in 2016, or 45% of our
overall revenue, so any harm to our NIAGEN® ingredient sales
may materially and negatively affect our business.
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 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;
●
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
products 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.
As of
July 1, 2017 and August 9, 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;
●
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:
●
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 in the United States,
strictly regulate the pharmaceutical, dietary supplement, food and
cosmetic industries. Our business involves helping pharmaceutical
and biotechnology companies navigate the regulatory drug approval
process. Changes in regulation, such as a relaxation in regulatory
requirements or the introduction of simplified drug approval
procedures, or an increase in regulatory requirements that we have
difficulty satisfying or that make our services less competitive,
could eliminate or substantially reduce the demand for our
services. Also, if the government makes efforts to contain drug
costs and pharmaceutical and biotechnology company profits from new
drugs, our customers may spend less, or reduce their spending on
research and development. If health insurers were to change their
practices with respect to reimbursements for pharmaceutical
products, our customers may spend less, or reduce their spending on
research and development.
If we should in the future become required to obtain regulatory
approval to market and sell our goods we will not be able to
generate any revenues until such approval is received.
The
pharmaceutical industry is subject to stringent regulation by a
wide range of authorities. While we believe that, given our present
business, we are not currently required to obtain regulatory
approval to market our goods because, among other things, we do not
(i) produce or market any clinical devices or other products, or
(ii) sell any medical products or services to the customer, we
cannot predict whether regulatory clearance will be required in the
future and, if so, whether such clearance will at such time be
obtained for any products that we are developing or may attempt to
develop. Should such regulatory approval in the future be required,
our goods may be suspended or may not be able to be marketed and
sold in the United States until we have completed the regulatory
clearance process as and if implemented by the FDA. Satisfaction of
regulatory requirements typically takes many years, is dependent
upon the type, complexity and novelty of the product or service and
would require the expenditure of substantial
resources.
If
regulatory clearance of a good that we propose to propose to market
and sell is granted, this clearance may be limited to those
particular states and conditions for which the good is demonstrated
to be safe and effective, which would limit our ability to generate
revenue. We cannot ensure that any good that we develop will meet
all of the applicable regulatory requirements needed to receive
marketing clearance. Failure to obtain regulatory approval will
prevent commercialization of our goods where such clearance is
necessary. There can be no assurance that we will obtain regulatory
approval of our proposed goods that may require it.
Risks Related to the Securities Markets and Ownership of our Equity
Securities
The market price of our common stock may be volatile and adversely
affected by several factors.
The
market price of our common stock could fluctuate significantly in
response to various factors and events, including, but not limited
to:
●
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;
●
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. 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
July 1, 2017, we had outstanding options exercisable for an
aggregate of 5,965,172 shares of common stock at a weighted
average exercise price of $3.41 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.
I
TEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
On
April 26, 2017, the Company entered into a Securities Purchase
Agreement with certain purchasers named therein (the
“Purchasers”), pursuant to which the Company agreed to
sell and issue up to $25.0 million of its common stock at a
purchase price of $2.60 per share in three tranches of
approximately $3.5 million, $16.4 million and $5.1 million,
respectively. The first tranche closed on April 27, 2017, pursuant
to which the Company issued 1,346,154 shares of its common stock.
The second tranche closed on May 24, 2017, pursuant to which the
Company issued 6,303,814 shares of its common stock. The third
tranche is expected to close following a related stockholder
approval at the Company's special meeting on August 10,
2017.
The
shares of the Company’s common stock sold pursuant to the
Securities Purchase Agreement were not registered under the
Securities Act, or any state securities laws. The Company had
relied on the exemption from the registration requirements of the
Securities Act by virtue of Section 4(a)(2) thereof and Rule 506 of
Regulation D thereunder. In connection with the Purchasers’
execution of the Securities Purchase Agreement, the
Purchasers’ represented to the Company that they are each an
“accredited investor” as defined in Regulation D of the
Securities Act and that the securities purchased by them were
acquired solely for their own account and for investment purposes
and not with a view to the future sale or
distribution.
I
TEM 3. DEFAULTS UPON SENIOR
SECURITIES
None.
I
TEM
4.
MINE SAFETY
DISCLOSURES
Not
applicable.
I
TEM 5. OTHER
INFORMATION
None.
Exhibit
No
.
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Description
of Exhibits
|
|
|
|
|
|
Agreement
and Plan of Merger, dated as of May 21, 2008, by and among Cody
Resources, Inc., CDI Acquisition, Inc. and ChromaDex, Inc., as
amended on June 10, 2008 (incorporated by reference to, and filed
as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed with the Commission on June 24, 2008)
|
|
|
Amended
and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to, and filed as Exhibit 3.1 to the
Registrant’s Annual Report on Form 10-K filed with the
Commission on March 16, 2017)
|
|
|
Bylaws
of the Registrant (incorporated by reference to, and filed as
Exhibit 3.2 to the Registrant’s Current Report on Form 8-K
filed with the Commission on June 24, 2008)
|
|
|
Certificate
of Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant (incorporated by reference to, and
filed as Exhibit 3.1 to the Registrant’s Current Report on
Form 8-K filed with the Commission on April 12, 2016)
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|
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Amendment
to Bylaws of the Registrant (incorporated by reference to, and
filed as Exhibit 3.1 to the Registrant’s Current Report on
Form 8-K filed with the Commission on July 19, 2016)
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|
|
Form of
Stock Certificate representing shares of the Registrant’s
Common Stock (incorporated by reference to, and filed as Exhibit
4.1 to the Registrant’s Annual Report on Form 10-K filed with
the Commission on April 3, 2009)
|
|
|
Investor’s
Rights Agreement, effective as of December 31, 2005, by and between
The University of Mississippi Research Foundation and the
Registrant (incorporated by reference to, and filed as Exhibit 4.1
to the Registrant’s Current Report on Form 8-K filed with the
Commission on June 24, 2008)
|
|
|
Tag-Along
Agreement effective as of December 31, 2005, by and among the
Registrant, 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 to,
and filed as Exhibit 4.2 to the Registrant’s Current Report
on Form 8-K filed with the Commission on June 24,
2008)
|
|
|
Form of
Stock Certificate representing shares of the Registrant’s
Common Stock effective as of January 1, 2016 (incorporated by
reference to, and filed as Exhibit 4.4 to the Registrant’s
Annual Report on Form 10-K filed with the Commission on March 17,
2016)
|
|
|
Third Business Financing Modification Agreement, dated as of April
19, 2017, between Western Alliance Bank and ChromaDex
Corporation
❖
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|
|
Securities
Purchase Agreement dated April 26, 2017, by and among the Company
and the purchasers named therein (incorporated by reference to, and
filed as Exhibit 99.1 to the Registrant’s Current Report on
Form 8-K filed with the Commission on April 27, 2017)
|
|
|
Registration
Rights Agreement dated April 29, 2017, by and among the Company and
the purchasers named therein (incorporated by reference to, and
filed as Exhibit 99.1 to the Registrant’s Current Report on
Form 8-K filed with the Commission on May 2, 2017)
|
|
|
First
Amendment to Securities Purchase Agreement dated May 24, 2017, by
and among the Company and the purchasers named therein
(incorporated by reference to, and filed as Exhibit 99.1 to the
Registrant’s Current Report on Form 8-K filed with the
Commission on May 25, 2017)
|
|
|
License Agreement dated June 9, 2017, by and between ChromaPharma,
Inc. and the Scripps Research Institute
❖
(1)
|
|
|
Research
Funding Agreement dated June 9, 2017, by and between ChromaPharma,
Inc. and the Scripps Research Institute
❖
(1)
|
|
|
Fourth Business Financing Modification Agreement, dated as of July
13, 2017, between Western Alliance Bank and ChromaDex
Corporation
❖
|
|
|
Amended and Restated Non-Employee Director Compensation
Policy
❖+
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|
|
Certification of the Chief Executive Officer pursuant to Rule
13a-14(A) of the Securities Exchange Act of 1934, as
amended
❖
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|
Certification of the Chief Financial Officer pursuant to Rule
13a-14(A) of the Securities Exchange Act of 1934, as
amended
❖
|
|
|
Certification pursuant to 18 U.S.C. Section 1350 (as adopted
pursuant to Section 906 of the Sarbanes−Oxley Act of
2002)
❖
|
101.INS
|
|
XBRL
Instance Document
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
❖
Filed herewith.
+
Indicates management contract or
compensatory plan or arrangement.
(1) A
redacted version of this Exhibit is filed herewith. An un-redacted
version of this Exhibit has been separately filed with the
Commission pursuant to an application for confidential treatment.
The confidential portions of the Exhibit have been omitted and are
marked by an asterisk.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
C
HROMADEX
CORPORATION
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Date: August 10,
2017
|
By:
|
/s/
THOMAS
C. VARVARO
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|
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Thomas C.
Varvaro
|
|
|
|
Chief Financial
Officer
|
|
|
|
(principal
financial and accounting officer and duly authorized on behalf of
the registrant)
|
|
-40-
Exhibit 10.1
THIRD BUSINESS FINANCING MODIFICATION AGREEMENT
This
Third Business Financing Modification Agreement (this
“Agreement”) is entered into as of April 19, 2017, by
and among CHROMADEX CORPORATION, a Delaware corporation, CHROMADEX,
INC., a California corporation, CHROMADEX ANALYTICS, INC., a Nevada
corporation (“Existing Borrowers”) and HEALTHSPAN
RESEARCH LLC, a Delaware limited liability company (“New
Borrower”, and together with Existing Borrowers, each, a
“Borrower” and collectively, “Borrowers”),
and WESTERN ALLIANCE BANK, an Arizona corporation
(“Lender”).
1.
DESCRIPTION OF EXISTING
INDEBTEDNESS
: Among other indebtedness which may be owing by
Borrowers to Lender, Existing Borrowers are indebted to Lender
pursuant to, among other documents, a Business Financing Agreement,
dated November 4, 2016, by and among Existing Borrowers and Lender,
as may be amended from time to time, including, without limitation,
by that certain First Business Financing Modification Agreement
dated as of February 16, 2017, and that certain Second Business
Financing Modification Agreement dated as of March 12, 2017 (the
“Business Financing Agreement”). Capitalized terms used
without definition herein shall have the meanings assigned to them
in the Business Financing Agreement.
Hereinafter, all
indebtedness owing by Borrowers to Lender under the Existing
Documents (defined herein) shall be referred to as the
“Obligations” and the Business Financing Agreement and
any and all other Loan Documents executed by Borrowers in favor of
Lender in connection therewith shall be referred to as the
“Existing Documents.”
2.
ACKNOWLEDGMENT OF
DEFAULTS
. Borrowers hereby acknowledge that they are
currently in default under the Business Financing Agreement due to
(i) Borrowers’ failure to maintain the minimum Quick Ratio as
required by Section 4.12(a) of the Business Financing Agreement (as
in effect prior to the date hereof) for the measuring periods ended
January 31, 2017, and February 28, 2017 and (ii) Borrowers’
failure to make New Borrower a Borrower under the Business
Financing Agreement on or prior to April 11, 2017 as required by
the Second Business Financing Modification Agreement (collectively,
the “Existing Defaults”).
3.
WAIVER OF EXISTING
DEFAULTS
. On the date of this Agreement, Lender hereby
waives the Existing Defaults. Nothing contained herein shall
constitute or effect a continuing waiver or a course of conduct
waiving these or any other provision of the Business Financing
Agreement.
4.
NEW BORROWER
JOINDER
. From and after the date hereof, New Borrower hereby
absolutely and unconditionally: (i) joins as and becomes a party to
the Business Financing Agreement as a Borrower thereunder, (ii)
assumes all of the obligations, liabilities and indemnities of a
Borrower under the Business Financing Agreement and all other Loan
Documents, and (iii) covenants and agrees to be bound by and adhere
to all of the terms, covenants, waivers, releases, agreements and
conditions of or respecting the Borrowers with respect to the
Business Financing Agreement and the other Loan Documents and all
of the representations and warranties contained in the Business
Financing Agreement and the other Loan Documents with respect to
the Borrowers; and (iv) hereby grants to Lender a continuing
security interest in all of such New Borrower’s now owned and
existing and hereafter acquired and arising Collateral, as
collateral security for the prompt and complete payment and
performance when due (whether at the stated maturity, by
acceleration or otherwise under the Loan Documents) of all of the
Obligations. New Borrower hereby authorizes Lender to file at any
time uniform commercial code financing statements in such
jurisdictions and offices as Lender deems reasonably necessary in
connection with the perfection of a security interest in all of
such New Borrower’s now owned or hereafter arising or
acquired Collateral. New Borrower has read the Business Financing
Agreement and affirmatively grants to Lender a security interest in
New Borrower’s Collateral as set forth in said Business
Financing Agreement and the Loan Documents.
5.
DESCRIPTION OF CHANGE IN
TERMS
.
A.
Modifications to Business
Financing Agreement and all Existing Documents
:
(i)
Section 4.12(a) of the Business Financing Agreement hereby is
amended and restated in its entirety and replaced with the
following:
“(a) Quick
Ratio, at all times when any Advances are outstanding, but tested
at each Month End (when Advances are outstanding during such month
of measurement at any time), not less than 0.8 to
1.0.”
(ii)
The third sentence of Section 1.1 of the Business Financing
Agreement hereby is amended and restated in its entirety and
replaced with the following:
“It shall be
a condition to each Advance that (a) an Advance Request acceptable
to Lender has been received by Lender, (b) all of the
representations and warranties set forth in Section 3 are true and
correct in all material respects on the date of such Advance as
though made at and as of each such date, (c) Borrowers shall
deliver to Lender evidence, in form and substance satisfactory to
Lender in its good faith business discretion, that Borrowers have
maintained a Quick Ratio of not less than 0.8 to 1.0 for each of
the three (3) months immediately preceding the date of such request
for an Advance, and (d) no Default has occurred and is continuing,
or would result from such Advance.”
6.
CONSISTENT CHANGES
.
The Existing Documents are each hereby amended wherever necessary
to reflect the changes described above.
7.
PAYMENT OF MODIFICATION
FEE AND DOCUMENTATION FEE
. Borrowers shall pay Lender (i) a
modification fee in the amount of $7,500 plus (ii) all
out-of-pocket expenses (including but not limited to reasonable
legal fees and due diligence fees (if any)) incurred by Lender in
connection with the execution of this Agreement.
8.
NO DEFENSES OF
BORROWERS/GENERAL RELEASE
. Each Borrower agrees that, as of
this date, it has no defenses against the obligations to pay any
amounts presently due under the Obligations. Each Borrower (each, a
“Releasing Party”) acknowledges that Lender would not
enter into this Agreement without Releasing Party’s assurance
that it has no claims against Lender or any of Lender’s
officers, directors, employees or agents. Except for the
obligations arising hereafter under this Agreement, each Releasing
Party releases Lender, and each of Lender’s and
entity’s officers, directors and employees from any known or
unknown claims that Releasing Party now has against Lender of any
nature, including any claims that Releasing Party, its successors,
counsel, and advisors may in the future discover they would have
now had if they had known facts not now known to them, whether
founded in contract, in tort or pursuant to any other theory of
liability, including but not limited to any claims arising out of
or related to the Agreement or the transactions contemplated
thereby. Releasing Party waives the provisions of California Civil
Code section 1542, which states:
A
GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER, MUST HAVE
MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE
DEBTOR.
The
provisions, waivers and releases set forth in this section are
binding upon each Releasing Party and its shareholders, agents,
employees, assigns and successors in interest. The provisions,
waivers and releases of this section shall inure to the benefit of
Lender and its agents, employees, officers, directors, assigns and
successors in interest. The provisions of this section shall
survive payment in full of the Obligations, full performance of all
the terms of this Agreement and the Business Financing Agreement,
and/or Lender’s actions to exercise any remedy available
under the Business Financing Agreement or otherwise.
9.
CONTINUING
VALIDITY
. Borrowers understand and agree that in modifying
the existing Business Financing Agreement, Lender is relying upon
Borrowers’ representations, warranties, and agreements, as
set forth in the Existing Documents. Except as expressly modified
pursuant to this Agreement, the terms of the Existing Documents
remain unchanged and in full force and effect. Lender’s
agreement to modifications to the existing Business Financing
Agreement pursuant to this Agreement in no way shall obligate
Lender to make any future modifications to the Business Financing
Agreement. Nothing in this Agreement shall constitute a
satisfaction of the
Obligations. It is
the intention of Lender and Borrowers to retain as liable parties
all makers and endorsers of Existing Documents, unless the party is
expressly released by Lender in writing. No maker, endorser, or
guarantor will be released by virtue of this Agreement except in
accordance with the terms of this Agreement. The terms of this
paragraph apply not only to this Agreement, but also to any
subsequent Business Financing modification agreements.
10.
REFERENCE
PROVISION
.
A. In
the event the Jury Trial waiver is not enforceable, the parties
elect to proceed under this Judicial Reference
Provision.
B. With
the exception of the items specified in Section 8(c) below, any
controversy, dispute or claim (each, a “Claim”) between
the parties arising out of or relating to this Agreement or any
other document, instrument or agreement between the undersigned
parties (collectively in this Section, the “Loan
Documents”), will be resolved by a reference proceeding in
California in accordance with the provisions of Sections 638 et
seq. of the California Code of Civil Procedure (“CCP”),
or their successor sections, which shall constitute the exclusive
remedy for the resolution of any Claim, including whether the Claim
is subject to the reference proceeding. Except as otherwise
provided in the Loan Documents, venue for the reference proceeding
will be in the state or federal court in the county or district
where the real property involved in the action, if any, is located
or in the state or federal court in the county or district where
venue is otherwise appropriate under applicable law (the
“Court”).
C. The
matters that shall not be subject to a reference are the following:
(i) nonjudicial foreclosure of any security interests in real or
personal property, (ii) exercise of self-help remedies (including,
without limitation, set-off), (iii) appointment of a receiver and
(iv) temporary, provisional or ancillary remedies (including,
without limitation, writs of attachment, writs of possession,
temporary restraining orders or preliminary injunctions). This
reference provision does not limit the right of any party to
exercise or oppose any of the rights and remedies described in
clauses (i) and (ii) or to seek or oppose from a court of competent
jurisdiction any of the items described in clauses (iii) and (iv).
The exercise of, or opposition to, any of those items does not
waive the right of any party to a reference pursuant to this
reference provision as provided herein.
D. The
referee shall be a retired judge or justice selected by mutual
written agreement of the parties. If the parties do not agree
within ten (10) days of a written request to do so by any party,
then, upon request of any party, the referee shall be selected by
the Presiding Judge of the Court (or his or her representative). A
request for appointment of a referee may be heard on an ex parte or
expedited basis, and the parties agree that irreparable harm would
result if ex parte relief is not granted. Pursuant to CCP Sec.
170.6, each party shall have one peremptory challenge to the
referee selected by the Presiding Judge of the Court (or his or her
representative).
E. The
parties agree that time is of the essence in conducting the
reference proceedings. Accordingly, the referee shall be requested,
subject to change in the time periods specified herein for good
cause shown, to (i) set the matter for a status and trial-setting
conference within fifteen (15) days after the date of selection of
the referee, (ii) if practicable, try all issues of law or fact
within one hundred twenty (120) days after the date of the
conference and (iii) report a statement of decision within twenty
(20) days after the matter has been submitted for
decision.
F. The
referee will have power to expand or limit the amount and duration
of discovery. The referee may set or extend discovery deadlines or
cutoffs for good cause, including a party’s failure to
provide requested discovery for any reason whatsoever. Unless
otherwise ordered based upon good cause shown, no party shall be
entitled to “priority” in conducting discovery,
depositions may be taken by either party upon seven (7) days
written notice, and all other discovery shall be responded to
within fifteen (15) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be
submitted to the referee whose decision shall be final and
binding.
G.
Except as expressly set forth herein, the referee shall determine
the manner in which the reference proceeding is conducted including
the time and place of hearings, the order of presentation of
evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings
conducted before the referee, except for trial, shall be conducted
without a court reporter, except that when any party so requests, a
court reporter will be used at any hearing conducted before the
referee, and the referee will be provided a courtesy copy of the
transcript. The party making such a request shall have the
obligation to arrange for and pay the
court reporter.
Subject to the referee’s power to award costs to the
prevailing party, the parties will equally share the cost of the
referee and the court reporter at trial.
H. The
referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law
in the State of California will be applicable to the reference
proceeding. The referee shall be empowered to enter equitable as
well as legal relief, enter equitable orders that will be binding
on the parties and rule on any motion which would be authorized in
a court proceeding, including without limitation motions for
summary judgment or summary adjudication. The referee shall issue a
decision at the close of the reference proceeding which disposes of
all claims of the parties that are the subject of the reference.
Pursuant to CCP Sec. 644, such decision shall be entered by the
Court as a judgment or an order in the same manner as if the action
had been tried by the Court and any such decision will be final,
binding and conclusive. The parties reserve the right to appeal
from the final judgment or order or from any appealable decision or
order entered by the referee. The parties reserve the right to
findings of fact, conclusions of laws, a written statement of
decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
I. If
the enabling legislation which provides for appointment of a
referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by
reference procedure will be resolved and determined by arbitration.
The arbitration will be conducted by a retired judge or justice, in
accordance with the California Arbitration Act Sec.1280 through
Sec.1294.2 of the CCP as amended from time to time. The limitations
with respect to discovery set forth above shall apply to any such
arbitration proceeding.
J. THE
PARTIES RECOGNIZE AND AGREE THAT ALL CONTROVERSIES, DISPUTES AND
CLAIMS RESOLVED UNDER THIS REFERENCE PROVISION WILL BE DECIDED BY A
REFEREE AND NOT BY A JURY. AFTER CONSULTING (OR HAVING HAD THE
OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER OWN CHOICE,
EACH PARTY KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF
ALL PARTIES, AGREES THAT THIS REFERENCE PROVISION WILL APPLY TO ANY
CONTROVERSY, DISPUTE OR CLAIM BETWEEN OR AMONG THEM ARISING OUT OF
OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS.
11.
CONDITIONS
. The
effectiveness of this Agreement is conditioned upon Lender’s
receipt of the following, in form and substance satisfactory to
Lender:
(a)
this Agreement, duly executed by Borrowers;
(b) a
certificate of each Borrower with respect to incumbency and
resolutions authorizing the execution and delivery of this
Agreement;
(c) an
Intellectual Property Security Agreement, duly executed by New
Borrower;
(d)
payment of a modification fee in the amount of Seven Thousand Five
Hundred Dollars ($7,500), which may be debited from any of
Borrowers' accounts,
(e)
payment of all reasonable expenses incurred by Lender in connection
with the execution hereof, which may be debited from any of
Borrowers' accounts; and
(f)
such other documents, and completion of such other matters, as
Lender may reasonably deem necessary or appropriate.
12.
NOTICE OF FINAL
AGREEMENT
. BY SIGNING THIS DOCUMENT EACH PARTY REPRESENTS
AND AGREES THAT: (A) THIS WRITTEN AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES, (B) THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES, AND (C) THIS WRITTEN AGREEMENT MAY
NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OR UNDERSTANDINGS OF THE
PARTIES.
13.
COUNTERSIGNATURE
.
This Agreement shall become effective only when executed by Lender
and Borrowers.
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Balance of Page Intentionally
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]
IN
WITNESS WHEREOF, Borrowers and Lender have executed this Agreement
on the date and year above written.
BORROWERS:
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CHROMADEX CORPORATION
,
a
Delaware corporation
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By:
/s/ Thomas C.
Varvaro
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Name:
Thomas C. Varvaro
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Title:
CFO
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CHROMADEX, INC.
,
a
California corporation
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By:
/s/ Thomas C.
Varvaro
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Name:
Thomas C. Varvaro
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Title:
CFO
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CHROMADEX ANALYTICS, INC.
,
a
Nevada corporation
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By:
/s/ Thomas C.
Varvaro
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Name:
Thomas C. Varvaro
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Title:
CFO
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HEALTHSPAN RESEARCH LLC
,
a
Delaware limited liability company
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By:
/s/ Thomas C.
Varvaro
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Name:
Thomas C. Varvaro
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Title:
CFO
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[
Signature
Page to Third Business Financing Modification
Agreement
]
[
Signatures
continued on the next page
]
IN
WITNESS WHEREOF, Borrowers and Lender have executed this Agreement
on the date and year above written.
LENDER:
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WESTERN ALLIANCE BANK
,
an
Arizona corporation
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By:
/s/ Justin
Vogel
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Name:
Justin Vogel
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Title:
Vice President
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[
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Agreement
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Exhibit
10.5
***Text
Omitted and Filed Separately
with
the Securities and Exchange Commission.
Confidential
Treatment Requested
Under
17 C.F.R. Sections 200.80(b)(4)
and
240.24b-2
|
LICENSE AGREEMENT
This
License Agreement is effective as of June 5, 2017 (the
“Effective Date”), by and between THE SCRIPPS RESEARCH
INSTITUTE, a California nonprofit public benefit corporation
("TSRI"), and ChromaPharma, Inc. a Nevada corporation ("Licensee"),
each located at the respective address set forth in Section 13.17
below, with respect to the facts set forth below.
RECITALS
A. TSRI
is engaged in fundamental scientific biomedical and biochemical
research including research relating to fundamental scientific
biomedical and biochemical research including research relating to
breast cancer and NAD+/NADH redox balancing.
B.
Licensee is engaged in the discovery and development of therapeutic
drugs.
C. TSRI
has disclosed to Licensee certain technology and TSRI has the right
to grant a license to the technology, subject to certain rights of
the U.S. Government resulting from the receipt by TSRI of certain
funding from the U.S. Government.
D. TSRI
desires to grant to Licensee, and Licensee wishes to acquire from
TSRI, an exclusive license to certain patent rights of TSRI, all
subject to the terms and conditions set forth herein.
NOW,
THEREFORE, in consideration of the mutual covenants and conditions
set forth herein, TSRI and Licensee hereby agree as
follows:
1.
Definitions
.
Capitalized terms shall have the meaning set forth
herein.
1.1
Affiliate
. The term
"Affiliate" shall mean any entity which directly or indirectly
controls, or is controlled by Licensee. The term "control" as used
herein means (a) in the case of corporate entities, direct or
indirect ownership of at least fifty percent (50%) of the stock or
shares entitled to vote for the election of directors; or (b) in
the case of non-corporate entities, direct or indirect ownership of
at least fifty percent (50%) of the equity interests with the power
to direct the management and policies of such non-corporate
entities. The term “Licensee” as used throughout this
Agreement also includes its Affiliates.
1.2
Challenge
. Licensee
or a Sublicensee will be deemed to have made a "Challenge" of the
Licensed Patent Rights if Licensee or a Sublicensee: (a) institutes
or maintains, or causes its counsel to institute or maintain on
Licensee's or such Sublicensee's behalf, any interference,
opposition, re-examination, post-grant review or similar proceeding
with respect to any Licensed Patent Right with the U.S. Patent and
Trademark Office or any foreign patent office; or (b) makes any
filing or institutes or maintains any legal proceeding, or causes
its counsel to make any filing or institute or maintain any legal
proceeding on Licensee's or such Sublicensee's behalf, with a court
or other governmental body (including, without limitation, the U.S.
Patent and Trademark Office or any foreign patent office) in which
one or more claims or allegations challenges the validity or
enforceability of any Licensed Patent Right.
1.3
Confidential
Information
. The term "Confidential Information" shall mean
any and all proprietary or confidential information of TSRI or
Licensee that such party (the “Disclosing Party”)
discloses to the other party (the “Receiving Party”)at
any time and from time to time during the term of this Agreement.
The provisions of this Agreement shall be considered the
Confidential Information of both parties. Information shall not be
considered confidential to the extent that the Receiving Party can
establish by competent proof that such information:
(a) is
publicly available through no fault of the Receiving Party, either
before or after it becomes known to the Receiving
Party;
(b) was
known to the Receiving Party prior to the date of this Agreement,
which knowledge was acquired independently and not from the
Disclosing Party (or the Disclosing Party's employees);
or
(c) is
subsequently disclosed to the Receiving Party in good faith by a
third party who is not under any obligation to maintain the
confidentiality of such information, and without breach of this
Agreement by the Receiving Party.
Specific
Confidential Information disclosed to a Receiving Party shall not
be deemed to be within any of the foregoing exceptions merely
because it is (i) embraced by more general information in the
public domain or in the Receiving Party’s possession; (ii) a
combination of features or data that can be pieced together by
combining individual features or data from multiple sources in the
public domain or in the Receiving Party’s possession to
reconstruct the Confidential Information, but none of which shows
the entire combination; and/or (iii) a selection or part of a
document or embodiment where other information in the same document
or embodiment becomes part of the public domain or in the Receiving
Party’s possession.
1.4
Derivative Product
.
The term “Derivative Product” shall mean products that
are not Licensed Products, but are in the Field and share an active
pharmacophore or mechanism of action with any Licensed Product. If
a product can be characterized as a Licensed Product and a
Derivative Product, then such product shall be considered a
Licensed Product.
1.5
Field
. The term
"Field" shall mean the prevention, treatment or amelioration of a
specific disease, symptom, state of health, or medical- or
health-related condition in humans and/or animals utilizing
Nicotinamide Riboside or any NAD+ precursors limited to the patent
in Exhibit B for the treat of breast cancer.
1.6
Licensed Biological
Materials
. The term “Licensed Biological
Materials” shall mean the materials identified in Exhibit A
(which will be supplied by TSRI to Licensee), together with any
progeny or mutants of such materials, or unmodified derivatives of
such materials (defined as substances created by Licensee that
constitute an unmodified functional sub-unit or product expressed
by such materials) in the Field.
1.7
Licensed Patent
Rights
. The term “Licensed Patent Rights” shall
mean:
(a) the
patent application(s) set forth in Exhibit B of this
Agreement;
(b) the
foreign counterpart applications of the respective
applications
referenced in
sub-clause (a) above, but only to the extent the claims of such
foreign applications are entitled to the priority date of the
respective applications referenced in sub-clause (a)
above;
(c)
divisionals, substitutions (only those claims of such substitutions
that disclose the same subject matter that is covered by the
application for which it is substituted), and continuations of any
applications referenced in sub-clauses (a) and (b) above, provided
the claims of such applications are entitled to the priority date
of the respective applications referenced in sub-clause (a)
above;
(d) any
claim(s) of a continuation-in-part application of any application
set forth in sub-clauses (a) and (c) above that are entitled to the
priority date of the respective applications referenced in
sub-clause (a) above;
(e) the
patents issued from the applications referenced in sub-clauses (a)
– (c) above and any reissues, reexaminations, renewals and
patent term extensions of such patents; and
(f) any
claim(s) of a patent issued from a continuation-in-part application
referenced in sub-clause (d) above that are entitled to the
priority date of the respective applications referenced in
sub-clause (a) above, and any claim(s) of a reissue, reexamination,
renewal and patent term extension of a patent issued from a
continuation-in-part application referenced in sub-clause (d) above
that are entitled to the priority date of the respective
applications referenced in sub-clause (a) above.
1.8
Licensed Product
.
The term "Licensed Product" shall mean any product (a) the
manufacture, use, sale, offer for sale or importation of which
would, in the absence of the license granted by this Agreement,
infringe any of the Licensed Patent Rights, (b) that is comprised
of, utilizes or incorporates any of the Licensed Biological
Materials, and/or (c) that is discovered, developed or made using a
Licensed Process or any of the Licensed Biological Materials, or
using any data or results produced or generated by using a Licensed
Process or any of the Licensed Biological Materials within the
Field.
1.9
Licensed Product
Data
. The term “Licensed Product Data” shall
mean any data, information or other materials exclusively
controlled by Licensee, including without limitation pre
-clinical, clinical and
other regulatory data, generated or produced by or on behalf of
Licensee directly relating to a Licensed Product and which is
generated or produced after the Effective Date.
1.10
Licensed Process
.
The term “Licensed Process” shall mean any method or
process claimed in the Licensed Patent Rights.
1.11
Licensed Service
.
The term “Licensed Service” shall mean the performance
of a service for a third party in the Field, which performance uses
or incorporates a Product, Licensed Process or Licensed Biological
Material.
1.12
Major Market
Country
. The term "Major Market Country" shall mean any of
the following countries: the United States of America, the United
Kingdom, France, Italy, Spain, Germany, Ireland and
Japan.
1.13
Net Sales
. The term
"Net Sales" shall mean the gross amounts invoiced by Licensee and
its Sublicensees, or any of them, on all sales of Products,
Licensed Processes and Licensed Services, less the following items,
to the extent directly applicable to such sales of Products,
Licensed Processes or Licensed Services (if not previously deducted
from the amount invoiced): […***…]. Net Sales shall
include all consideration charged by Licensee or Sublicensees in
exchange for any Products, Licensed Processes or Licensed Services,
including without limitation any monetary payments or, with regard
to any other property paid in exchange for any Products, Licensed
Processes or Licensed Services, an amount in cash equal to the fair
market value of such property. For purposes of determining Net
Sales, a sale shall be deemed to have occurred when
[…***…]. Sales of Products by Licensee to a Sublicensee
or Affiliate for resale or by a Sublicensee to an Affiliate of
Licensee for resale shall be excluded, and only the subsequent sale
of such Products by such Affiliates or Sublicensees to unrelated
parties shall be deemed Net Sales hereunder.
The
deductible items listed [...***...] above shall be either (i)
included as line items on the invoice, or (ii) documented as being
specifically attributable to actual sales of Products, Licensed
Processes or Licensed Services in accordance with United States
Generally Accepted Accounting Principles
(
“GAAP”) or International Financing
Reporting Standards (“IFRS”), as applicable,
consistently applied throughout the organization of the selling
party, and provided that such amounts are included in the quarterly
Royalty Reports that Licensee sends to TSRI pursuant to Section
5.3. If Licensee or other selling party receives refunds or
reimbursements of any amounts deducted as set forth herein, then
such refunded or reimbursed amounts shall be considered Net Sales
in the applicable reporting period in which such refunded or
reimbursed amounts are received.
1.14
Product
. The term
“Product” shall mean a Licensed Product and/or
Derivative Product, as applicable.
1.15
Royalty Report
. The
term “Royalty Report” shall have the meaning ascribed
to such term as provided in Section 5.3.
1.16
Research Funding
Agreement
. The term “Research Funding Agreement”
shall mean the Research Funding Agreement between the parties dated
June 1, 2017 for sponsored research in the laboratory of Brunhilde
Felding.
1.17
Sublicensee
. The
term “Sublicensee” shall mean any third party to whom
Licensee grants a sublicense or similar rights with respect to the
rights conferred upon Licensee under this Agreement, as
contemplated by Section 2.3. In addition, “Sublicensee”
shall include any and all further third party Sublicensees that may
be permitted under Section 2.3.
1.18
Sublicense
Revenues
. The term “Sublicense Revenue” shall
mean all revenues and other consideration paid to Licensee or to an
Affiliate in consideration of (a) the
***Confidential Treatment
Requested
grant
of rights that includes a sublicense to the Licensed Patent Rights
and/or Licensed Biological Materials, (b) the grant of distribution
or marketing rights with respect to Products and/or Licensed
Biological Materials, and/or (c) the sale or other transfer of that
portion of Licensee’s or an Affiliate’s business or
assets that relates to the rights granted under this Agreement.
Without limiting the generality of the foregoing, Sublicense
Revenues shall include without limitation all upfront fees, license
fees, milestone payments, technology access fees, premiums above
the fair market value on sales of debt or equity securities of
Licensee or of an Affiliate, annual maintenance fees, and any other
payments with respect to such sublicense, distribution or marketing
rights or sale or other transfer. Sublicense Revenues include
amounts received from a Sublicensee under the terms of the
agreement in which the sublicense is granted and under the terms of
other agreements entered into between Licensee and Sublicensee as
part of the same transaction as the agreement that includes the
grant of the sublicense. However, Sublicense Revenues shall
exclude: (i) royalties on a Sublicensee’s sales of Products,
Licensed Services or Licensed Processes; and (ii) payments for debt
or equity securities of Licensee or of an Affiliate that are at or
below the fair market value of such securities as of the date of
receipt of such payments as mutually determined by the parties. Any
non-cash Sublicense Revenues received by Licensee or by an
Affiliate shall be valued at its fair market value as of the date
of receipt as mutually determined by the parties.
1.19
Valid Claim
. The
term "Valid Claim" shall mean a claim of an issued and unexpired
patent within the Licensed Patent Rights that has not been held
invalid or unenforceable by a court or other appropriate
governmental body of competent jurisdiction in a ruling that is
unappealed or unappealable within the time allowed for appeal. The
term “Valid Claim” shall also include the claims of a
pending patent application within the Licensed Patent Rights which
have not been pending for a period of more than seven (7) years
from the date of first examination on the merits of that patent
application.
2.
Grant
of License
.
2.1
Grant of Exclusive License
Under Licensed Patent Rights
. TSRI hereby grants and
Licensee accepts, subject to the terms and conditions of this
Agreement, an exclusive (except as specified in Sections 2.5 and
2.6), worldwide, royalty-bearing license, with limited rights to
sublicense pursuant to Section 2.3, under the Licensed Patent
Rights to make. have made, use, have used, sell, have sold, offer
to sell and import Products, Licensed Processes and Licensed
Services in the Field.
2.2
Grant of License for Licensed Biological
Materials
. TSRI hereby grants
and Licensee accepts, subject to the terms and conditions of this
Agreement a non-exclusive license to the Licensed Biological
Materials to make and have made, to use and have used, to sell and
have sold, to offer to sell and to import any Licensed Biological
Materials in the Field and to create any progeny, mutant, or
derivative work thereof. Except for the license and sub-license
rights granted pursuant to this Agreement, TSRI shall not grant a
license to the Licensed Biological Materials to any party except to
other nonprofit or academic institutions, pursuant to Section 2.6,
(collectively, the “Research Institutions”) solely for
research and educational use,
provided
that
any such license
to the Licensed Biological Materials granted to the Research
Institutions shall prohibit the commercialization of such Licensed
Biological Materials by such Research Institutions and shall not in
any way limit Licensee’s commercialization rights under this
Agreement.
2.3
Sublicensing
.
Licensee shall have the right to grant
and authorize sublicenses to any party with respect to the rights
conferred upon Licensee under this Agreement only with TSRI’s
prior written consent, which will not be unreasonably withheld.
Sublicensees shall not have the right to further sublicense without
TSRI’s prior written consent, which will not be unreasonably
withheld. Any sublicense granted under this Section 2.3 shall be
subject in all respects to the applicable provisions contained in
this Agreement (including without limitation the provisions
regarding governmental interest, reservation of rights, development
efforts, reporting, audit rights, indemnity, insurance, Challenges,
warranty disclaimer, limitation of liability, confidentiality, and
rights upon expiration or termination)
.
In the event of a conflict between this Agreement
and the terms of any sublicense, the terms of this Agreement shall
control. Licensee shall forward to TSRI a copy of any and all fully
executed sublicense agreements within
[
…***…
] days of
execution.
Licensee shall at all times be and remain
responsible for the compliance by Sublicensees with the terms and
conditions of this Agreement, including without limitation the
payment of all amounts that may become due hereunder as a result of
any Sublicensees’ activities.
2.4
No Other License.
This Agreement confers no license or rights by implication,
estoppel or otherwise under any patent applications or patents or
intellectual property of TSRI other than the Licensed Patent Rights
regardless of whether such patent applications, patents or
intellectual property are dominant or subordinate to the Licensed
Patent Rights.
2.5
Governmental
Interest
. Licensee and TSRI acknowledge that TSRI has
received, and expects to continue to receive, funding from the
United States Government in support of TSRI’s research
activities. Licensee and TSRI acknowledge and agree that their
respective rights and obligations under this Agreement shall be
subject to the rights of the United States Government, existing and
as amended, which may arise or result from TSRI’s receipt of
research support from the United States Government, including
without limitation 37 C.F.R. Part 401, the National Institutes of
Health (“NIH”) Grants Policy Statement and the NIH
Guidelines for Obtaining and Disseminating Biomedical Research
Resources.
2.6
Reservation of
Rights
. Notwithstanding the exclusive license granted under
Section 2.1, TSRI reserves the right to use for any internal
research and educational purposes any Licensed Patent Rights and/or
Licensed Biological Materials licensed hereunder, without TSRI
being obligated to pay Licensee any royalties or other compensation
or to account to Licensee in any way. In addition, TSRI reserves
the right to grant non-exclusive licenses to use the Licensed
Patent Rights and/or Licensed Biological Materials for internal
research and educational purposes to other nonprofit or academic
institutions, without the other nonprofit or academic institution
being obligated to pay Licensee any royalties or other compensation
or to account to Licensee in any way. With regard the Licensed
Biological Materials inside the Field, TSRI reserves the right to
grant non-exclusive licenses for internal research and educational
purposes to other nonprofit or academic institutions, without the
other nonprofit or academic institution being obligated to pay
Licensee any royalties or other compensation or to account to
Licensee in any way, […***…].
3.
Royalties and Other
Payments
.
3.1
License
Issue Fee
. Licensee shall pay
to TSRI a noncreditable, nonrefundable license issue fee in the
amount of [
…***…
]
within fifteen (15) days of the Effective Date. Failure of Licensee
to make this payment shall render this Agreement null and void
(
ab
initio)
.
3.2
Annual Fee
.
Licensee shall pay to TSRI a nonrefundable minimum annual fee in
the initial amount of fifty thousand U.S. Dollars ($50,000). The
first payment is due on June 1, 2018 and on June 1 of each
subsequent calendar year until June 1, 2020, at which time the
amount of the minimum annual fee shall become one hundred thousand
U.S. Dollars ($100,000) and shall remain that amount which will be
due on June 1 of each subsequent calendar year during the remaining
term of this Agreement. The minimum annual fee shall be credited
against running royalties due for that calendar year and
Licensee’s Royalty Reports shall reflect such a credit. The
minimum annual fee shall not be credited against any milestone
payments, Sublicense Payments, royalties due for any preceding or
subsequent calendar year or against any other amounts due by
Licensee under this Agreement.
3.3
Running Royalties
.
In the Field, Licensee shall pay to TSRI running royalties on a
Licensed Product and country-by country basis, on a Licensed
Process and country-by country basis, and on a Licensed Service and
country-by-country basis, in the amount of (a) […***…]
percent ([…***…]%)] of Net Sales of Licensed Products,
Licensed Processes and Licensed Services in all countries in which
the manufacture, use, sale, offer for sale or import of such
Licensed Product, Licensed Process or Licensed Service would, in
the absence of the license under the Licensed Patent Rights granted
by this Agreement, infringe one or more Valid Claims in that
country, or when the Licensed Product, Licensed Process or Licensed
Service would not infringe a Valid Claim in the country of sale,
but would infringe at least one Valid Claim in any Major Market
Country, and (b) Licensee shall pay to TSRI running royalties on a
Derivative Product and country-by country basis of Net Sales of
Derivative products at […***…]% of the Licensed Product
royalty rate set forth in this Section 3.3 (a).
3.4
Royalty Payments
.
Licensee shall pay to TSRI all royalties required by this Section 3
within […***…] days after the end of each calendar
quarter, based upon Net Sales during the immediately preceding
calendar quarter. Licensee shall make all such royalty payments
itself to TSRI, and/or cause its Affiliates or Sublicensees to pay
to TSRI all royalties resulting from Net Sales by its Affiliates or
Sublicensees, within the time period specified in the preceding
sentence.
3.5
Royalty Credit
. If
Licensee is required, upon the advice of patent counsel, to obtain
a license under patent rights of one or more third parties that
would, in the absence of such license, be infringed by
Licensee’s practice of the inventions claimed by the Licensed
Patent Rights in the manufacture, use or sale of a Product, such
that the total royalties paid by Licensee to such third parties and
to TSRI for that Product exceeds […***…] percent
([…***…]%) of Net Sales of such Product in a particular
royalty reporting period, then License shall be entitled to deduct
from the royalties due to TSRI under Section 3.3 with respect to
sales of that Product up to […***…] percent
([…***…]%) of the royalties Licensee actually paid to
such third parties in excess of […***…] percent
([…***…]%) of Net Sales of such Product in that
reporting period. The above offset right is subject to
the
requirement
that (i) the royalties paid to TSRI hereunder with respect to such
Product shall not be reduced below […***…] percent
([…***…]%) of the royalties for that Product that would
otherwise be due hereunder without such credit, and (ii) all such
third parties who license patent rights to Licensee for that
Product similarly agree to a royalty stacking credit in their
license agreements with Licensee. For clarity, only one of
Licensee, its Affiliates or Sublicensees may exercise such right to
deduct with respect to a given third-party royalty obligation.
Notwithstanding the above, Licensee, its Affiliates or its
Sublicensees shall have no right to deduct or offset any royalties
or other amounts with respect to a) third party composition of
matter IP, b) generic or other competitive products and/or c) any
third party technology that is involved in any cross license or
similar arrangements (whether in the same or related transactions)
where Licensee, its Affiliates or its Sublicensees grant or provide
to such third party or agents licenses, options or other rights to
existing or future technology, intellectual property, research or
development activities or other information or materials. Licensee
will give TSRI prior written notice of any third party license that
would satisfy the above requirements for a royalty credit
sufficiently in advance of deducting such credit from royalties due
to TSRI hereunder in order to allow TSRI and Licensee to mutually
determine whether the requirements of this Section have been
satisfied.
3.6
No Multiple Royalties
. No
multiple royalties shall be due because any Licensed Product,
Licensed Service or Licensed Process is covered by more than one of
the Licensed Patent Rights or can be categorized as a Licensed
Product and a Derivative Product. In such case, Licensee shall pay
only one royalty at the applicable rate pursuant to Section 3.4
above. If both Sections 3.3 (a) and 3.3 (b) are applicable to a
given Product, then Licensee shall pay the rate specified in
Section 3.3 (a).
3.7
Arms-Length
Transactions
. On sales of Products, Licensed Services or
Licensed Processes which are made in other than an
arm’s-length transaction, the value of the Net Sales
attributed under this Section 3 to such a transaction shall be that
which would have been received in an arm’s-length
transaction, based on sales of like quality and quantity products,
services or processes on or about the time of such
transaction.
3.8
Payment Increase in the
Event of a Challenge
.
3.8.1
Increase
.
Notwithstanding anything to the contrary in this Agreement, in the
event Licensee or a Sublicensee directly or indirectly institutes
or makes any Challenges, the amount of the minimum annual fee and
the milestone payments and the percentage rates for royalties and
Sublicense Payments required under Sections 3 and 4 of this
Agreement shall be doubled during the pendency of such Challenges
from the date the challenging party first institutes or makes such
Challenges and during the pendency of such Challenges, and shall
continue to apply after the conclusion of such Challenges in the
event that at least one (1) Valid Claim that covers a Licensed
Product, Licensed Service or Licensed Process is held to be valid
and enforceable.
3.8.2
No Right to Recoup
.
In the event Licensee or a Sublicensee directly or indirectly
institutes or makes any Challenges, Licensee shall have no right to
recoup, recover, set-off or otherwise get reimbursement of any
royalties, annual fees, Sublicense Payments, equity issuances to
TSRI, milestone payments, patent costs or other monies paid
hereunder to TSRI prior to or during the period of such Challenges.
Licensee hereby voluntarily and irrevocably waives any right to
seek return of such royalties, annual fees, Sublicense Payments,
equity issuances,
***Confidential Treatment
Requested
milestone payments,
patent costs or other monies in the event Licensee or a Sublicensee
directly or indirectly institutes or makes any
Challenges.
3.8.3
Pre-Challenge
Requirements
. Licensee will provide written notice to TSRI
at least one hundred eighty (180) days prior to Licensee or a
Sublicensee instituting or making any Challenges, and Licensee
agrees that the challenging party will not institute such Challenge
for at least one hundred eighty (180) days after the date of such
notice. Licensee will include with such written notice a list of
all prior art and a description of the other facts and arguments
that support its contention that any of the Licensed Patent Rights
are invalid or unenforceable. During such one hundred eighty (180)
day period, the parties will discuss the same and attempt in good
faith to mutually resolve such issues.
3.8.4
Reasonable
Provisions
. The parties agree that neither of them is
entering into this Agreement with the anticipation that Challenges
will be instituted or made by Licensee or any of its Sublicensees
against TSRI, and consequently the percentage rates for royalties
and Sublicense Payments and the other financial terms and
conditions herein reflect that understanding. Licensee and TSRI
further agree that if the parties did expect that such Challenges
would be made against TSRI, the percentage rates for royalties and
Sublicense Payments and the other financial terms and conditions
herein would be significantly higher. Accordingly, the parties
agree that the provisions for increasing the percentage rates for
royalties and Sublicense Payments and the other amounts specified
in Section 3.8.1 and the other provisions of this Section 3.8 are
reasonable and reflect a mutual adjustment of certain financial
provisions of this Agreement to accommodate those situations in
which a Challenge is made against TSRI in lieu of increasing the
percentage rates for royalties and Sublicense Payments and the
other financial terms and conditions of this Agreement as of the
Effective Date.
3.9
Duration of Royalty
Obligations
. The royalty obligations of Licensee as to each
Product, Licensed Service or Licensed Process shall continue on a
country-by-country basis until (a) the later of (i) the expiration
of the last to expire Valid Claim that covers such Licensed
Product, Licensed Service or Licensed Process in that country, or
when a Licensed Product, Licensed Service or Licensed Process is
not covered by a Valid Claim in the country of sale but is covered
by at least one Valid Claim in a Major Market Country, upon the
expiration of the last to expire Valid Claim that covers such
Licensed Product, Licensed Service or Licensed Process in a Major
Market Country, and (ii) the fifteenth (15
th
) anniversary of the
first commercial sale of such Product, Licensed Service or Licensed
Process in such country, or (b) for a Product, Licensed Service or
Licensed Process in any country in which the manufacture, use or
sale of such Licensed Product, Licensed Service or Licensed Process
is not covered by a Valid Claim but utilizes, is comprised of or
incorporates Licensed Biological Materials, is a Derivative
Product, or was discovered, developed or made using any Licensed
Process or Licensed Biological Material, fifteen (15) years after
the date of the first commercial sale of such Product, Licensed
Service or Licensed Process in such country.
4.
Additional
Consideration
.
4.1
Sublicense
Payments
. All Sublicense Revenues shall be reported and
Sublicense Payments (defined below) paid to TSRI by Licensee within
[…***…] days of Licensee’s receipt of such
Sublicense Revenues. Licensee’s reports to TSRI regarding
Sublicense Revenues shall contain an explanation and calculation of
the amount of Sublicense Payments due
***Confidential Treatment
Requested
to TSRI
pursuant to the schedule below. Licensee’s obligation to pay
Sublicense Payments to TSRI shall continue for as long as royalties
are due to TSRI pursuant to Section 3.9. Licensee shall pay to TSRI
a non-creditable, non-refundable percentage of Sublicense Revenues
according to the following schedule (“Sublicense
Payments”):
Date of Agreement with Third Party/Sublicensee
|
Percent of Sublicense Revenue Payable to TSRI*
|
Before IND approval of Phase 1 clinical trials of a Product covered
by such sublicense
|
[…***…]%
|
After IND approval of Phase 1 clinical trials, but prior to first
dosing in IND approved study, of a Product covered by such
sublicense
|
[…***…]%
|
After first dosing in IND approved study of a Product covered by
such sublicense
|
[…***…]%
|
*In the
event that Sublicense is with respect to a Derivative Product,
Licensee shall pay to TSRI a reduced percentage of Sublicense
Revenue equal to […***…] percent ([…***…]%)
of the rates set forth in the table above. For example, if a
Sublicense is granted with respect to a Derivative Product prior to
IND approval of Phase 1 Clinical Trial for such Derivative Product,
Licensee shall pay to TSRI Sublicense Revenues equal to
[…***…]%.
4.2
Product Development
Milestones
. Licensee shall pay to TSRI the following
non-creditable, non-refundable amounts for the achievement of the
following product development milestone events within
[…***…] days of the first occurrence of each milestone
for each Product to meet such milestone as follows:
Milestone
|
Payment
|
[…***…]
|
U.S.
$[…***…]
|
[…***…]
|
U.S.
$[…***…]
|
[…***…]
|
U.S.
$[…***…]
|
[…***…]
|
U.S.
$[…***…]
|
[…***…]
|
U.S.
$[…***…]
|
[…***…]
|
U.S.
$[…***…]
|
*In the
event that the product development milestone achieved in the Field
is with respect to a Derivative Product, Licensee shall pay to TSRI
a reduced milestone payment equal to […***…] percent
([…***…]%) of the amounts set forth in the table above.
For example, upon Initiation of the Phase 1 Trial for such
Derivative Product, Licensee shall pay to TSRI a milestone payment
equal to […***…] dollars
($[…***…]).
For purposes of this Section 4.2, the following
definitions shall apply:
(a) The
term “Initiation” means, with respect to a clinical
trial, the first dosing of the first patient in such
trial.
(b) The
term “Phase 1 Trial” means a human clinical trial that
would satisfy the requirements for a Phase 1 study as defined in 21
C.F.R. §312.21(a) (or its successor regulation), or its
foreign equivalent.
(c) The
term “Phase 2 Trial” means a human clinical trial that
would satisfy the requirements for a Phase 2 study as defined in 21
C.F.R. §312.21(b) (or its successor regulation), or its
foreign equivalent.
(d) The
term “Phase 3 Trial” means a human clinical trial that
would satisfy the requirements for a Phase 3 study as defined in 21
C.F.R. §312.21(c) (or its successor regulation), or its
foreign equivalent.
5.
Development and
Commercialization Activities
.
5.1
Development Plan and
Benchmarks
. Attached hereto as Exhibit C is Licensee’s
development plan under which Licensee intends to bring the subject
matter of the Licensed Patent Rights to the point of commercial use
(“Commercial Development Plan”). Pursuant to the
Commercial Development Plan, Licensee shall achieve the Benchmarks
specified in Exhibit D within the time periods set forth in Exhibit
D (“Benchmarks”). In addition, Licensee shall use
commercially reasonable efforts, itself or through its
Sublicensees, to develop and obtain regulatory approvals to market
and sell Products, Licensed Services and Licensed Processes in the
Field as promptly as is reasonably and commercially feasible, and,
subject to obtaining necessary regulatory approvals, to produce and
sell reasonable quantities of Products, Licensed Services and
Licensed Processes sufficient to meet market demands.
5.2
Progress Reports
.
Licensee shall keep TSRI generally informed as to Licensee’s
progress with respect to its development of Products, Licensed
Services and Licensed Processes, including without limitation its
regulatory filings and approvals, marketing, production, sale and
its efforts to sublicense the Licensed Patent Rights or Licensed
Biological Materials. Licensee shall also provide to TSRI written
annual reports on its progress in the development and
commercialization of Products, Licensed Services and Licensed
Processes in the Field by June 30 of each calendar year. These
progress reports shall include without limitation: progress on
research and development; status of applications for regulatory
approvals; progress towards achieving the
Benchmarks;
manufacturing; sublicensing; marketing; importing; sales efforts
during the preceding calendar year as well as plans for the present
calendar year; and a summary of the results of animal experiments
and IND-enabling studies, and the Licensed Product Data from the
preceding calendar year and analyses thereof that will provide
meaningful understanding of the current status of Licensee’s
development of Products, Licensed Services and Licensed Processes.
If reported progress in these annual reports differs from that
projected in the Commercial Development Plan and Benchmarks,
Licensee shall explain the reasons for such differences in its
annual reports. Licensee agrees to provide any additional
information reasonably required by TSRI to evaluate
Licensee’s performance under this Agreement. Licensee shall
also report to TSRI the dates that Licensee or its Sublicensees
achieve the events described on Exhibit E attached hereto within
[…***…] days of such occurrences.
5.3
Commercial Development
Obligation
. In order to maintain the license granted
hereunder in force, Licensee shall […***…] develop
Licensed Patent Rights which are licensed hereunder into
commercially viable Licensed Products, as promptly as is reasonably
and commercially feasible, and thereafter to produce and sell
reasonable quantities of Licensed Products. The parties hereto
acknowledge and agree that achievement of mutually agreeable
milestones shall be evidence of compliance by Licensee with its
commercial development obligations hereunder. Notwithstanding the
foregoing, if Licensee believes that it cannot, within the exercise
of prudent and reasonable business judgment, perform any mutually
agreed upon milestones within the time period required therefor,
Licensee may request, no more than one time per milestone, an
extension of time for the performance date to a date that Licensee
believes to be reasonable and prudent and TSRI shall agree to any
requested extension which is not more than one (l) year in length
from the originally required date and will not unreasonably
withhold consent to requests for longer extensions. In the event
TSRI has a reasonable basis to believe that Licensee is not using
reasonable efforts and due diligence as required hereunder, upon
notice by TSRI to Licensee which specifies the basis for such
belief, TSRI and Licensee shall negotiate in good faith to attempt
to mutually resolve the issue. In the event TSRI and Licensee
cannot agree upon any matter related to Licensee's commercial
development obligations, the parties agree to utilize an arbitrator
mutually agreed to by the parties in order to resolve the matter.
If the arbitrator determines that Licensee has not complied with
its obligations hereunder, and such default is not cured within
sixty (60) days after the arbitrator's decision, TSRI may terminate
Licensee's rights under this Agreement.
5.4
Royalty Reports
.
Licensee shall submit to TSRI, no later than […***…]
days after the end of each calendar quarter, a royalty report (the
"Royalty Report") setting forth for such quarter at least the
following information on a country-by-country and Licensed Product,
Derivative Product, Licensed Service and Licensed Process
basis:
(a) the
number of units of Licensed Products and Derivative Products sold
by Licensee and its Sublicensees;
(b) the
gross amounts due or invoiced for such Licensed Products and
Derivative Products sold by Licensee and its
Sublicensees;
(c) the
gross amounts due or invoiced for all Licensed Processes and
Derivative Products used or sold by Licensee and its
Sublicensees;
(d) the
gross amounts due or invoiced for all Licensed Services performed
by Licensee and its Sublicensees;
(e) a
detailed listing of any royalty credits permitted under Section 3.5
and deductions applicable to determine Net Sales of Products,
Licensed Services and Licensed Processes pursuant to Section 1.13,
and any refunds or reimbursed amounts previously deducted which are
deemed Net Sales pursuant to Section 1.13; and
(f) the
amount of royalties due under Section 3, or if no royalties are due
to TSRI for any reporting period, the statement that no royalties
are due and a detailed explanation why they are not due for that
quarterly period.
Each
Royalty Report shall be certified as correct by an officer of
Licensee.
5.5
Payments
. Licensee
shall pay to TSRI with each Royalty Report the amount of royalties
due with respect to such quarter. If multiple technologies are
covered by the licenses granted hereunder and Products, Licensed
Services or Licensed Processes are based on different technologies,
Licensee shall specify which Licensed Patent Rights and Licensed
Biological Materials are utilized for each Product, Licensed
Service or Licensed Process included in the Royalty Report. All
payments due under this Agreement shall be deemed received when
funds are credited to TSRI’s bank account and shall be
payable by check or wire transfer in United States Dollars to an
account designated by TSRI.
5.6
Foreign Sales
. The
remittance of royalties payable on sales outside the United States
shall be payable to TSRI in United States Dollar equivalents at the
official rate of exchange of the currency of the country from which
the royalties are payable, as quoted in The Wall Street Journal for
the last business day of the calendar quarter in which the
royalties are payable. If the transfer of or the conversion into
the United States Dollar equivalents of any such remittance in any
such instance is not lawful or possible, the payment of such part
of the royalties as is necessary shall be made by the deposit
thereof, in the currency of the country where the sale was made on
which the royalty was based, to the credit and account of TSRI or
its nominee in any commercial bank or trust company designated by
TSRI and located in that country, prompt written notice of which
shall be given by Licensee to TSRI.
6.
Record
Keeping
. Licensee shall keep, and shall require its
Affiliates and its Sublicensees to keep, accurate records (together
with supporting documentation) of all Products, Licensed Services
and Licensed Processes made, used and sold under this Agreement, as
appropriate to determine the amount of royalties (including the
calculations of royalty credits), product development milestone
payments and other monies due to TSRI hereunder, as well as records
regarding Sublicense Revenues, Sublicense Payments and
Licensee’s compliance with this Agreement. Such records shall
be retained for at least five (5) years following the end of the
reporting period to which such records relate. Such records shall
be available, upon prior written notice to Licensee, during normal
business hours for examination and copying by TSRI and/or its
designated certified public accountant for the purpose of verifying
the accuracy of Licensee’s reports and payments hereunder and
its compliance with this Agreement. In conducting
examinations
pursuant to this Section, TSRI and/or its accountant shall have
access to, and such accountant may disclose to TSRI, all records
which TSRI or its accountant reasonably believes to be relevant to
the calculation of royalties and other payments under Section 3,
other consideration under Section 4, other financial obligations
under this Agreement and to Licensee’s compliance with this
Agreement. These examinations shall be at TSRI’s expense,
except that if an examination shows an underreporting or
underpayment of […***…] percent ([…***…]%)
or more for any […***…] month period, then Licensee
shall pay the cost of such examination (including without
limitation TSRI’s attorney’s fees, accountant’s
fees and other costs), as well as any additional payments that
would have been payable to TSRI had Licensee reported correctly,
plus interest on such amounts at the rate of […***…]
percent ([…***…]%) per month. All payments due
hereunder shall be made within thirty (30) days of Licensee’s
receipt of a copy of the audit report. TSRI may exercise its audit
rights under this Section 6 no more frequently than once in any
calendar year.
7.
Patent
Matters
.
7.1
Patent Prosecution and
Maintenance
. From and after the date of this Agreement, the
provisions of this Section 7 shall control the prosecution of any
patent application and maintenance of any patent included within
Licensed Patent Rights. TSRI shall (a) direct and control the
preparation, filing and prosecution of the United States and
foreign patent applications within Licensed Patent Rights
(including without limitation any reissues, reexaminations, appeals
to appropriate patent offices and/or courts, post-issuance
proceedings, interferences and foreign oppositions); and (b)
maintain the patents issuing therefrom. TSRI shall have the right,
in its sole discretion, to use TSRI’s Office of Patent
Counsel (“OPC”) in lieu of or in addition to outside
patent counsel for the patent prosecution and maintenance described
herein. The fees and expenses associated with such work done by
TSRI’s OPC and its outside patent counsel shall be paid by
Licensee as set forth below.
7.2
Information to
Licensee
. TSRI shall keep Licensee timely informed with
regard to the patent application and maintenance processes. TSRI
shall deliver to Licensee copies of all patent applications,
amendments, related correspondence and other related patent
documents. Licensee shall have full rights of consultation with
TSRI’s OPC and with TSRI’s outside patent counsel on
all matters relating to the prosecution and maintenance of the
Licensed Patent Rights.
7.3
Patent Costs
.
Licensee acknowledges and agrees that the licenses granted
hereunder are in partial consideration for Licensee’s
assumption of patent fees and expenses as described herein.
Licensee shall pay to TSRI all fees and expenses for the work
referenced in Sections 7.1 and 7.2. In addition, Licensee agrees to
reimburse and pay TSRI for all patent fees and expenses previously
incurred by TSRI’s OPC and its outside patent counsel with
respect to the Licensed Patent Rights before the Effective Date.
Licensee shall pay to TSRI all such past and future patent fees and
expenses associated with the work on the Licensed Patent Rights
performed by TSRI’s OPC and/or its outside patent counsel
within thirty (30) days after Licensee receives an invoice
itemizing such expenses. Failure of Licensee to pay patent fees and
expenses as set forth in this Section 7.3 shall immediately relieve
TSRI from its obligation to incur any further patent fees and
expenses. For clarity, if Licensee does not pay any patent fees and
expenses due to TSRI (for work performed by TSRI’s OPC or by
outside patent counsel) within thirty (30) days after
Licensee’s receipt of an itemized invoice therefor, TSRI
shall have the right, in its sole discretion, to cease all patent
prosecution and maintenance and allow Licensed Patent Rights to go
abandoned.
***Confidential Treatment
Requested
Such
action by TSRI shall not constitute a breach of this Agreement.
Licensee may elect with a minimum of […***…]
days’ prior written notice to TSRI, to discontinue payment
for the filing, prosecution and/or maintenance of any patent
application and/or patent within Licensed Patent Rights. Licensee
shall remain liable for all patent prosecution and maintenance fees
and costs incurred prior to the date of such notice of election and
during such […***…]-day notice period. Any such patent
application or patent so elected shall immediately be excluded from
the definition of Licensed Patent Rights and from the scope of the
licenses granted under this Agreement, and all rights relating
thereto shall revert exclusively to TSRI.
7.4
Ownership
. TSRI exclusively
owns all right, title and interest in and to the Licensed Patent
Rights set forth in Exhibit B Part 1. The Licensed Patent Rights
developed under the Research Funding Agreement are jointly owned by
TSRI and Licensee as set forth in Exhibit B Part 2 and the Licensed
Biological Materials are also jointly owned and set forth in
Exhibit A.
7.5
TSRI Right to Pursue
Patent
. If at any time during the term of this Agreement,
Licensee's rights with respect to any of the Licensed Patent Rights
are terminated, TSRI has the right, but not the obligation, to take
whatever action TSRI deems appropriate to obtain or maintain the
corresponding patent protection. If TSRI pursues such patent
protection under this Section 7.5, Licensee agrees to cooperate
fully, including by providing, at no charge to TSRI, all
appropriate technical data and executing all necessary legal
documents.
7.6
Infringement
Actions
.
7.6.1
Prosecution of
Infringements
. Licensee agrees to promptly notify TSRI in
the event that Licensee becomes aware of any infringement or
threatened infringement by a third party of any of the Licensed
Patent Rights. In order to maintain the licenses granted hereunder
in force, Licensee shall prosecute any and all infringements of any
Licensed Patent Rights by third parties, unless otherwise agreed in
writing by TSRI and Licensee. Licensee may enter into settlements,
stipulated judgments or other arrangements respecting such
infringement, at its own expense, but only with TSRI’s prior
written consent if such settlements, stipulated judgments or other
arrangements would affect TSRI’s business or its rights in
the Licensed Patent Rights. Licensee shall hold TSRI harmless from
all liabilities and expenses with respect to such infringements.
Failure on the part of Licensee to prosecute any such infringement
shall be grounds for termination of the licenses granted to
Licensee hereunder, with respect to the country in which such
infringement occurs, at TSRI’s option. If Licensee fails to
prosecute any such infringement, Licensee shall promptly notify
TSRI in writing. In such events, TSRI will have the right, but not
the obligation, to prosecute such infringement itself.
7.6.2
Allocation of
Recovery
. Any damages, settlements or other recovery from an
infringement action undertaken by Licensee pursuant to Section
7.6.1 shall first be used to reimburse the parties for the fees and
expenses incurred in such action, and shall thereafter be allocated
between and paid to the parties as follows: […***…]
percent ([…***…]%) to TSRI, and […***…]
percent ([…***…]%) to Licensee. If Licensee fails to
prosecute any such action or fails to prosecute such action to
completion, and TSRI instead prosecutes such action, then any
damages or other recoveries net of the parties’ fees and
expenses incurred in such infringement action shall be allocated
entirely to TSRI.
7.6.3
Defense of
Infringements
. Licensee shall, at its expense, have
the
***Confidential Treatment
Requested
first
right, but not the obligation, to defend any suits against Licensee
or Sublicensees alleging infringement of any third party
intellectual property right due to Licensee’s or its
Sublicensee’s practice of the Licensed Patent Rights or its
development or commercialization of Licensed Products, Licensed
Services or Licensed Processes. Licensee shall promptly notify TSRI
in writing of such claims, and TSRI and Licensee shall confer with
each other and cooperate during the defense of any such action.
TSRI shall, at its expense, have the right to retain separate
independent counsel to assist in defending any such actions. In no
event shall TSRI have any liability whatsoever for any damages,
litigation costs or other amounts due to any third party (except
for costs of TSRI’s own counsel as provided above). If the
third party intellectual property right is held not to be infringed
or is held unenforceable or invalid, any recovery of damages with
respect to such suit shall first be applied to reimburse all
litigation fees and expenses of TSRI, next to reimburse all
litigation fees and expenses of Licensee, and thereafter Licensee
shall be entitled to keep the remaining balance from any such
recovery. For clarity, the parties agree that this Section 7.6.3
shall in no way limit Licensee's obligations under Section 8.1 to
indemnify, defend and hold harmless Indemnitees (as defined in
Section 8.1 below) with respect to third party claims alleging
infringement of such third party's intellectual property
rights.
8.
Indemnity and
Insurance
.
8.1
Indemnity
. Licensee
hereby agrees to indemnify, defend (by counsel reasonably
acceptable to TSRI) and hold harmless TSRI and any parent,
subsidiary or other affiliated entity of TSRI and their respective
trustees, directors, officers, employees, scientists, agents,
students, successors, assigns and other representatives
(collectively, the “Indemnitees”) from and against all
damages, liabilities, losses and other expenses, including without
limitation reasonable attorney’s fees, expert witness fees
and costs incurred by the Indemnitees, with respect to any third
party claim, suit or action asserted against any of the
Indemnitees, whether or not a lawsuit or other proceeding is filed
(collectively “Claims”), that arise out of or relate to
(a) Licensee’s or any of its Sublicensees’ practice of
any invention claimed by the Licensed Patent Rights or use of
Licensed Biological Materials, (b) alleged defects or other
problems with any of the Products, Licensed Services or Licenses
Processes manufactured, sold, distributed or rendered by or on
behalf of Licensee or any Sublicensee, including without limitation
any personal injuries, death or property damages related thereto,
(c) the research, development, manufacture, use, marketing,
advertising, distribution, sale or importation of any Product,
Licensed Service or Licensed Process by or on behalf of Licensee or
any of its Sublicensees, (d) the negligent or willful acts or
omissions of Licensee or any of its Sublicensees, (e) any
allegations that the Products, Licensed Services or Licensed
Processes developed, manufactured, sold, distributed or rendered by
or on behalf of Licensee or any Sublicensee and/or any trademarks,
service marks, logos, symbols, slogans or other materials used in
connection with or to market Products, Licensed Services or
Licensed Processes violate or infringe upon the trademarks, service
marks, trade dress, trade names, copyrights, patents, works of
authorship, inventorship rights, trade secrets, database rights,
rights under unfair competition laws, rights of publicity, privacy
or defamation, or any other intellectual or industrial property
right of any third party, (f) Licensee’s or any
Sublicensee’s failure to comply with any applicable laws,
rules or regulations, and/or (g) the labeling, packaging or patent
marking of any Product or containers thereof by or on behalf of
Licensee or any Sublicensee. Licensee shall not enter into any
settlement, stipulated judgment or other arrangement with respect
to such Claims that (i) imposes any obligation on Indemnitees, (ii)
does not unconditionally release Indemnitees from all liability, or
(iii) would have an adverse effect on TSRI’s reputation or
business, without TSRI’s prior written consent.
Notwithstanding the above,
Indemnitees, at
their expense, shall have the right to retain separate independent
counsel to assist in defending any such Claims. In the event
Licensee fails to promptly indemnify and defend such Claims and/or
pay Indemnitees’ expenses as provided above, Indemnitees
shall have the right, but not the obligation, to defend themselves,
and in that case, Licensee shall reimburse Indemnitees for all of
their reasonable attorney’s fees, costs and damages incurred
in settling or defending such Claims within thirty (30) days of
each of Indemnitees’ written requests. This indemnity shall
be a direct payment obligation and not merely a reimbursement
obligation of Licensee to Indemnitees.
8.2
Insurance
.
8.2.1
TSRI as Additional
Insured
. Licensee shall name and cause TSRI and Indemnitees
to be named as “additional insureds” on any commercial
general liability and product liability insurance policies
maintained by Licensee, its Affiliates and Sublicensees applicable
to the Products, Licensed Services, Licensed Processes and Licensed
Biological Materials.
8.2.2
Coverages
.
Beginning at the initiation of the first clinical trial involving
any Product, Licensed Process, Licensed Service or Licensed
Biological Material and continuing throughout the time any Product,
Licensed Process or Licensed Service is being commercially
distributed or sold by Licensee or a Sublicensee, Licensee shall,
at its sole expense, procure and maintain commercial general
liability insurance with reputable insurers in amounts not less
than $10,000,000 per occurrence and $10,000,000 annual aggregate.
Prior to the initiation of the first clinical trial involving any
Product, Licensed Process, Licensed Service or Licensed Biological
Material, Licensee shall, at its sole expense, procure and maintain
commercial general liability insurance with reputable insurers in
amounts not less than $5,000,000 per occurrence and $5,000,000
annual aggregate. Such commercial general liability insurance shall
provide coverage, to the extent available, for: (i) product
liability; (ii) completed operations; (iii) clinical trials, as
applicable; (iv) broad form property damage; (v) advertising
injury; (vi) premises operation; (vii) personal injury; and (viii)
contractual liability coverage for Licensee’s indemnification
and other obligations under this Agreement. If Licensee desires to
self insure all or part of the limits described above, such
self-insurance program must be approved in advance by TSRI in its
sole discretion. The insurance coverage amounts specified herein or
the maintenance of such insurance policies shall not in any way
limit Licensee’s indemnity or other liability under this
Agreement.
8.2.3
Waiver of
Subrogation
. Licensee, on behalf of itself and its insurance
carriers, waives any and all claims and rights of recovery against
TSRI and the Indemnitees, including without limitation all rights
of subrogation, with respect to either party’s performance
under this Agreement or for any loss of or damage to Licensee or
its property or the property of others under its control.
Licensee’s commercial general liability insurance policy
shall also include a waiver of subrogation consistent with this
Section in favor of TSRI and the Indemnitees. Licensee shall be
responsible for obtaining such waiver of subrogation from its
insurance carriers. Licensee’s insurance policies shall be
primary and not contributory to any insurance carried by its
Sublicensees or by TSRI. At the time when Licensee sends its annual
progress report to TSRI under Section 5.2 and upon TSRI’s
additional request, Licensee shall deliver to TSRI copies of
insurance certificates and endorsements that comply with the
requirements of this Section 8.2.
8.2.4
Cancellation/Changes in
Coverages
. Licensee shall, to the extent possible, provide
TSRI with written notice at least […***…] days prior to
the cancellation, non-renewal or material change in any insurance
required by this Section 8.2. If Licensee does not obtain
replacement insurance providing comparable coverage within such
[…***…] day period (or prior to the cancellation,
non-renewal or material change in the existing policy), TSRI shall
have the right to terminate this Agreement if Licensee fails to
cure within […***…] days of TSRI’s written notice
of intent to terminate.
8.2.5
Continuation of Coverage
.
Licensee shall maintain such commercial general liability and
product liability insurance beyond the expiration or termination of
this Agreement during (a) the period that any Product, Licensed
Process or Licensed Service is being commercially distributed or
sold by or on behalf of Licensee or a Sublicensee; and (b) a
reasonable period after the period referred to in sub-clause (a)
above, which in no event shall be less than fifteen (15)
years.
9.
Disclaimer and
Limitation of Liability
.
9.1
Disclaimer
. TSRI
MAKES NO WARRANTIES OR REPRESENTATIONS CONCERNING LICENSED PATENT
RIGHTS, LICENSED BIOLOGICAL MATERIALS OR ANY OTHER MATTER
WHATSOEVER, INCLUDING WITHOUT LIMITATION ANY EXPRESS, IMPLIED OR
STATUTORY WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS, TITLE, ACCURACY OR
ARISING OUT OF COURSE OF CONDUCT OR TRADE CUSTOM OR USAGE, AND
DISCLAIMS ALL SUCH EXPRESS, IMPLIED OR STATUTORY WARRANTIES. TSRI
MAKES NO WARRANTY OR REPRESENTATION AS TO THE VALIDITY, SCOPE OR
ENFORCEABILITY OF ANY OF THE LICENSED PATENT RIGHTS OR LICENSED
BIOLOGICAL MATERIALS, OR THAT ANY PRODUCT, LICENSED PROCESS,
LICENSED SERVICE, LICENSED PATENT RIGHTS OR LICENSED BIOLOGICAL
MATERIALS WILL NOT INFRINGE ANY THIRD PARTY RIGHTS, OR THAT NO
THIRD PARTY IS IN ANY WAY INFRINGING UPON OR MAY INFRINGE UPON ANY
LICENSED PATENT RIGHTS OR LICENSED BIOLOGICAL MATERIALS COVERED BY
THIS AGREEMENT. FURTHER, TSRI HAS MADE NO INVESTIGATION AND MAKES
NO REPRESENTATION OR WARRANTY THAT THE LICENSED PATENT RIGHTS OR
LICENSED BIOLOGICAL MATERIALS ARE SUITABLE FOR LICENSEE’S
PURPOSES.
9.2
Limitation of
Liability
. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY
INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES
(INCLUDING WITHOUT LIMITATION DAMAGES FOR LOST PROFITS OR EXPECTED
SAVINGS) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ITS
SUBJECT MATTER, EXCEPT WITH RESPECT TO LICENSEE’S INDEMNITY
OBLIGATIONS UNDER SECTION 8.1. TSRI’S AGGREGATE LIABILITY, IF
ANY, FOR ALL DAMAGES OR OTHER RELIEF OF ANY KIND RELATING TO THIS
AGREEMENT OR ITS SUBJECT MATTER SHALL NOT EXCEED THE AMOUNT PAID BY
LICENSEE TO TSRI UNDER THIS AGREEMENT. THE FOREGOING EXCLUSIONS AND
LIMITATIONS SHALL APPLY TO ALL CLAIMS AND ACTIONS OF ANY KIND AND
ON ANY THEORY OF LIABILITY, WHETHER BASED ON CONTRACT, TORT
(INCLUDING WITHOUT LIMITATION NEGLIGENCE OR STRICT LIABILITY),
OR
***Confidential Treatment
Requested
ANY
OTHER GROUNDS, AND REGARDLESS OF WHETHER A PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE
OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. THE PARTIES FURTHER
AGREE THAT EACH WARRANTY DISCLAIMER, EXCLUSION OF DAMAGES OR OTHER
LIMITATION OF LIABILITY HEREIN IS INTENDED TO BE SEVERABLE AND
INDEPENDENT OF THE OTHER PROVISIONS BECAUSE THEY EACH REPRESENT
SEPARATE ELEMENTS OF RISK ALLOCATION BETWEEN THE
PARTIES.
10.
Confidentiality and
Publicity
.
10.1
Treatment of Confidential
Information
. The parties agree that during the term of this
Agreement, and for a period of five (5) years after this Agreement
terminates, a party receiving Confidential Information of the other
party will (a) maintain in confidence such Confidential Information
to the same extent such party maintains its own proprietary
information, but with no less than a reasonable degree of care; (b)
not disclose such Confidential Information to any third party
without the other party’s prior written consent; and (c) not
use such Confidential Information for any purpose except those
permitted by this Agreement. Notwithstanding the foregoing,
i
f a party is required by law,
regulation or court order to disclose Confidential Information of
the other party, the party required to make such disclosure shall
(i) promptly send a copy of the order or notice to the other party
not less than ten (10) days before the proposed disclosure (or such
shorter period of time as may be reasonably practical under the
circumstances);
(ii) reasonably
cooperate with the other party if the other party
wishes to object or condition such disclosure through a protective
order or otherwise; (iii) limit the extent of such disclosure to
the minimum required to comply with the order or notice; and (iv)
use reasonable efforts to seek confidential treatment (i.e., filing
“under seal”) for that disclosure. In addition, a party
may disclose Confidential Information of the other party to its
Affiliates and employees, to Sublicensees and potential
Sublicensees, to investors or potential investors of a party in
connection with due diligence or similar investigations or in
confidential financing documents, to an organization to whom TSRI
intends to assign or transfer or does assign or transfer this
Agreement or the payment obligations due hereunder to TSRI, or to
TSRI’s Assignee, in each case, that any such agrees in
writing to be bound by terms of confidentiality and non-use at
least as stringent as those set forth in this Section 10.1, but
with no further right to disclose or otherwise distribute the other
party’s Confidential Information.
10.2
Publications
.
Licensee agrees that TSRI shall have the right to publish in
accordance with its general policies, and that this Agreement shall
not restrict, in any fashion, TSRI’s right to publish.
Notwithstanding the foregoing, TSRI agrees to provide Licensee a
copy of any proposed publication that uses material provided to
TSRI under the Material Transfer Agreement between TSRI and
ChromaDex corporation dated June 13, 2013 (“Material Transfer
Agreement”), pursuant to the terms set forth in Section 4.1
of the Material Transfer Agreement.
10.3
Publicity
. Except
as otherwise required by law, no party shall originate or
distribute any publication, news release or other public
announcement, written or oral, whether in the public press,
stockholders' reports or otherwise, relating to this Agreement or
to any sublicense hereunder, or to the performance hereunder or
under any such sublicense agreements, without the prior written
approval of the other party, which approval shall not be
unreasonably withheld. Scientific publications published in
accordance with Section 10.2 of this Agreement shall not be
construed as publicity governed by this Section 10.3.
11.
Term
and Termination
.
11.1
Term
. Unless
terminated sooner in accordance with the terms set forth herein,
this Agreement shall expire upon such time that no further
royalties are due to TSRI pursuant to Section 3.9.
11.2
Termination Upon Mutual
Agreement
. This Agreement may be terminated by mutual
written consent of both parties.
11.3
Termination by
TSRI
. TSRI has the right to immediately terminate this
Agreement as follows (unless a further cure period is provided
below):
(a) If
Licensee does not make a payment due hereunder and fails to cure
such non-payment (including the payment of interest in accordance
with Section 13.2) within thirty (30) days after the date of
TSRI’s written notice of such non-payment;
(b) If
Licensee defaults upon its indemnification or insurance obligations
under Section 8;
(c) As
provided in Section 5.3;
(d)
Upon TSRI’s written notice to Licensee in the event Licensee
becomes insolvent, has a petition in bankruptcy filed for or
against it, has a receiver appointed over any of Licensee’s
assets, makes an assignment for the benefit of creditors, or has
any other proceedings filed against Licensee under any bankruptcy
or insolvency laws;
(e) If
Licensee is convicted of a felony relating to the development,
manufacture, use, marketing, distribution or sale of Products,
Licensed Services, Licensed Processes or Licensed Biological
Materials;
(f)
In the event Licensee or a Sublicensee
directly or indirectly institutes or makes any
Challenges;
(g)
In the event Licensee does not cure any defaults in its payments as
set forth in the Research Funding Agreement; or
(h)
Except as provided in subparagphs (a) – (h) above, if
Licensee defaults in the performance of any other obligations under
this Agreement and the default has not been remedied within thirty
(30) days after the date of TSRI’s written notice of such
default.
11.4
Rights Upon
Expiration
. Upon the expiration of this Agreement, neither
party shall have any further rights or obligations, other than the
obligation of Licensee to make any and all reports and payments due
under Sections 3, 4, 7 and 11.8 with respect to events that
occurred prior to such expiration in accordance with Sections 3.4,
4, 5.4, 5.5, 5.6 and 7.3 (all
of
which Sections referenced in this sentence shall survive such
expiration for such purposes). Notwithstanding the above, Sections
1, 2.4, 2.5, 2.6, 6, 7.4, 8, 9, 10, 11.5, 12.2 and 13 shall also
survive the expiration of this Agreement.
11.5
Rights Upon
Termination
. Notwithstanding any other provision of this
Agreement, upon any termination of this Agreement prior to the
regularly scheduled expiration date of this Agreement, the licenses
granted hereunder shall terminate and revert to TSRI, and all
sublicenses granted by Licensee shall also automatically terminate.
Except as otherwise provided in Section 11.7 of this Agreement with
respect to work-in-progress, upon such termination, Licensee and
its Sublicensees shall have no further right to develop,
manufacture, market, distribute or sell any Product, Licensed
Service, Licensed Process, or to otherwise practice or use any
Licensed Patent Rights or Licensed Biological Materials. Upon any
such termination, Licensee shall promptly return all materials,
samples, documents, information and other items which embody or
disclose any Licensed Patent Rights or Licensed Biological
Materials; provided, however, that Licensee shall not be obligated
to provide TSRI with Licensee’s proprietary information which
Licensee can show that it independently developed, other than the
Licensed Product Data or that which is jointly owned in accordance
with the Research Funding Agreement. Upon any termination of this
Agreement, TSRI shall have the right, and Licensee hereby grants to
TSRI upon such termination, a non-exclusive, worldwide, fully
paid-up license, with the right to sublicense, to use the Licensed
Product Data in order to research, have researched, develop, have
developed, make, have made, use, have used, sell, have sold, offer
to sell, import and have imported Products, Licensed Services,
Licensed Processes and/or Licensed Biological Materials in the
Field, and the right to reference any Licensed Product Data
contained in any of Licensee’s regulatory filings with the
FDA (as defined in Section 4.3) or with any equivalent foreign
agency or governmental authority with respect to TSRI’s or
its sublicensees’ development or commercialization
activities. Any such termination shall not relieve either party
from any obligations accrued to the date of such termination,
including without limitation the obligation of Licensee to make any
and all reports and payments due under Sections 3, 4, 7 and 11.8
with respect to events that occurred prior to such termination or
as provided in Section 11.7, in accordance with Sections 3.6, 4,
5.4, 5.5, 5.6 and 7.3 (all of which Sections referenced in this
sentence shall survive such termination for such purposes). In
addition, Sections 1, 2.4, 2.5, 2.6, 3.2, 6, 7.4, 8, 9, 10, 11.6,
11.7, 12.2 and 13 shall also survive the termination of this
Agreement.
11.6
Work-in-Progress
.
Upon any early termination of the licenses granted hereunder,
Licensee shall be entitled to finish any work-in-progress and to
sell any completed inventory of Products which remain on hand as of
the termination date, so long as Licensee sells such inventory in
the normal course of business and at regular selling prices and
pays to TSRI the royalties applicable to such subsequent sales in
accordance with the provisions of this Agreement, provided that no
such sales shall be permitted following the date that is six (6)
months after the termination date.
11.7
Final Royalty
Report
. Upon termination or expiration of this Agreement,
Licensee shall promptly submit a final report to TSRI, and any
payments due to TSRI under this Agreement that accrued prior to
such termination or expiration shall be paid by Licensee to TSRI at
the time of delivery of the final report.
12.
Assignment;
Successors
.
12.1
Assignment
. Any and
all assignments of this Agreement or any rights granted hereunder
by Licensee without TSRI’s prior written consent are
void.
12.2
Binding Upon Successors
and Assigns
. Subject to the limitations on assignment in
Section 12.1, this Agreement shall be binding upon and inure to the
benefit of any successors in interest and assigns of TSRI and
Licensee. Any successor or assignee of Licensee's interest shall
expressly assume in writing the performance of all the terms and
conditions of this Agreement to be performed by Licensee and such
written assumption shall be delivered to TSRI as a condition to
TSRI’s agreement to consent to any such
assignment.
13.
General
Provisions
.
13.1
Independent
Contractors
. The relationship between TSRI and Licensee is
that of independent contractors. TSRI and Licensee are not joint
venturers, partners, principal and agent, master and servant,
employer and employee, and have no other relationship other than
independent contracting parties. TSRI and Licensee shall have no
power to bind or obligate each other in any manner, other than as
is expressly set forth in this Agreement.
13.2
Late Payments
. Late
payments of any and all amounts due hereunder shall bear interest
from the due date until the date paid at a rate of one percent (1%)
per month, or Two Hundred Fifty Dollars ($250), whichever is
greater.
13.3
Governmental Approvals and
Compliance
. Licensee shall, at its expense, be responsible
for obtaining all necessary governmental approvals for the
development, production, distribution, performance, sale and use of
any Product, Licensed Service or Licensed Process, and shall comply
with all applicable laws, rules and regulations in conducting its
activities under this Agreement. Licensee shall, at its expense,
also be responsible for any warning labels, packaging and
instructions produced or distributed with respect to the use of
Products, Licensed Services or Licensed Processes and for the
quality control for any Products, Licensed Services or Licensed
Processes.
13.4
Patent Marking
. To
the extent required by applicable law, Licensee and its
Sublicensees shall properly mark all Products or their containers
in accordance with the applicable patent marking laws. Upon
TSRI’s request, Licensee shall provide to TSRI copies of its
patent marking of all Products. To the extent Licensee or a
Sublicensee marks any Licensed Products by referencing the Licensed
Patent Rights thereon, Licensee represents and warrants that such
Licensed Products are covered by a claim of the applicable
referenced Licensed Patent Rights.
13.5
No Use of Name
. The
use of the name "The Scripps Research Institute", "Scripps",
“TSRI” or any variation thereof in connection with the
marketing, advertising, distribution, sale or performance of
Products, Licensed Services or Licensed Processes is expressly
prohibited.
13.6
U.S. Manufacture
.
To the extent commercially practicable, Licensee agrees that it and
its Sublicensees will abide by the Preference for United States
Industry
as set
forth in 37 C.F.R. Section 401.14 (I), which requires that any
Product or Licensed Process sold in the United States shall be
manufactured substantially in the United States.
13.7
Foreign
Registration
. Licensee agrees, at its expense, to register
this Agreement with any foreign governmental agency which requires
such registration.
13.8
Use of Biological
Materials
. Licensee agrees that its and its
Sublicensees’ use of any Licensed Biological Materials shall
comply with all applicable laws, rules, regulations and guidelines.
Licensee agrees that the Licensed Biological Materials will not be
used for research involving human subjects or clinical trials in
the United States without complying with 21 C.F.R. Part 50 and 45
C.F.R. Part 46. Licensee agrees that the Licensed Biological
Materials will not be used for research involving human subjects or
clinical trials outside of the United States without complying with
the applicable foreign laws, rules and regulations.
13.9
Dispute Resolution
.
Any dispute or claim between the parties arising out of or relating
to this Agreement, including without limitation the breach thereof,
shall be resolved according to the following dispute resolution
procedures:
(a)
Such dispute shall be first addressed by the representatives of
TSRI and Licensee who have primary responsibility for managing this
Agreement.
(b) If
the dispute is not resolved by such representatives within fifteen
(15) days after the date either party gives written notice that
such dispute exists, then the dispute shall be referred to and
addressed by the senior management of each party.
(c) If
such dispute is not resolved by the parties’ senior
management within thirty (30) days after the date the dispute is
referred to them, then the dispute shall be submitted to mediation.
The mediator shall be a retired judge or other neutral third party
mutually selected by TSRI and Licensee who has at least ten (10)
years experience in mediating or arbitrating cases in the
bio-pharmaceutical industry and regarding the same or substantially
similar subject matter as the dispute between Licensee and TSRI. If
the parties are unable to agree on such mediator within twenty (20)
days after they exchange initial lists of potential mediators, a
mediator with the same qualifications will be selected by the JAMS
office in San Diego located at 401 B Street, San Diego, CA 92101
(after consultation with the parties).
(d) The
location of the mediation shall be in the County of San Diego,
California. TSRI and Licensee hereby irrevocably submit to the
exclusive jurisdiction and venue of the mediator mutually selected
by the parties or to the neutral mediator selected by JAMS of San
Diego for purposes of the mediation, and to the exclusive
jurisdiction and venue of the federal and state courts located in
San Diego County, California for any action or proceeding regarding
this Agreement in the event mediation is unsuccessful as provided
in sub-clause (e) below, or as provided in sub-clause (f) below,
and waive any right to contest or otherwise object to such
exclusive jurisdiction or venue, including without limitation any
claim that such exclusive venue is not a convenient
forum.
(e) If
the dispute is not resolved through mediation, either party
may
refer
the dispute to a court of competent jurisdiction in San Diego
County, California.
(f)
Notwithstanding anything to the contrary in this Agreement, prior
to or while a mediation proceeding is pending, either party has the
right to seek and obtain injunctive and other equitable relief from
a court of competent jurisdiction to enforce that party’s
rights hereunder.
13.10
Entire Agreement;
Modification
. This Agreement and all of the attached
Exhibits (which are incorporated herein) set forth the entire
agreement between the parties as to the subject matter hereof, and
supersede all prior or contemporaneous agreements or
understandings, whether oral or written, regarding this subject
matter. This Agreement cannot be amended except by a written
instrument signed by both parties.
13.11
California Law
.
This Agreement shall be construed and enforced according to the
laws of the State of California without regard to its conflicts or
choice of law rules.
13.12
Headings
. The
headings for each Section in this Agreement have been inserted for
convenience of reference only and are not intended to limit or
expand on the meaning of the language contained in the particular
Section.
13.13
Severability
. If
any provision of this Agreement is judicially determined to be
invalid, void or unenforceable, the remaining provisions shall
remain in full force and effect, and the stricken provision shall
be revised in a manner that best reflects the original intent of
the parties.
13.14
No Waiver
. The
failure of a party to enforce any of its rights hereunder or at law
or in equity shall not be deemed a waiver or a continuing waiver of
any of its rights or remedies against the other party, unless such
waiver is in writing and signed by the waiving party.
13.15
Name
. Whenever
there has been an assignment by Licensee as permitted by this
Agreement, the term "Licensee" as used in this Agreement shall also
include and refer to, if appropriate, such assignee.
13.16
Attorneys'
Fees
.
. In the
event of a dispute between the parties or any default hereunder,
the party prevailing in the resolution of such dispute or default
shall be entitled to recover its reasonable attorneys' fees and
other costs incurred in connection with resolving such dispute or
default, in addition to any other relief to which it is entitled.
Notwithstanding anything to the contrary herein, the parties agree
that this Section 13.16 shall not apply and attorney’s fees
and costs shall not be awarded to either party with respect to any
Challenge or any action where Licensee or a Sublicensee alleges
that it is not required to comply with or perform some or all of
the provisions of this Agreement based upon a good faith claim that
any of the Licensed Patent Rights are invalid or unenforceable.
TSRI and Licensee each represent that it has been represented by
its own counsel in the negotiation and execution of this Agreement.
Each party further represents that it has relied solely on the
advice and representation of its respective counsel in agreeing to
this Section 14.16 and all of the other provisions of this
Agreement.
13.17
Notices
. Any
notices required or permitted by this Agreement shall be in writing
and shall be delivered as follows, with notice deemed given as
indicated: (a) by personal delivery, when received; (b) by
overnight courier guaranteeing next-day delivery, upon the next
business day immediately following delivery to such overnight
courier; or (c) by registered or certified mail, return receipt
requested and postage prepaid, upon verification of receipt.
Notices shall be sent to the respective addresses set forth below,
unless subsequently changed by written notice to the other
party:
For
TSRI: The
Scripps Research Institute
10550
North Torrey Pines Road, TPC-9
La
Jolla, California 92037
Attention: Vice
President, Business Development
with a
copy
to:
The Scripps Research Institute
10550
North Torrey Pines Road, TPC-8
La
Jolla, California 92037
Attention: Chief
Business Counsel
For
Licensee:
ChromaPharma, Inc.
10005
Muirlands Blvd, Suite G
Irvine,
California 92618
Attention: Chief
Financial Officer
13.18
Counterparts
. This
Agreement may be executed in several counterparts that together
shall constitute originals and one and the same
instrument.
13.19
Cumulative
Remedies
. The rights and remedies stated in this Agreement
shall be cumulative and in addition to any other rights and
remedies the parties may have at law or in equity.
IN
WITNESS WHEREOF, the parties have executed this Agreement by their
duly authorized representatives as of the Effective
Date.
TSRI:
|
LICENSEE:
|
|
|
THE
SCRIPPS RESEARCH INSTITUTE
|
ChromaPharma,
Inc.
|
|
|
By:
/s/ Matt
Tremblay
|
By:
/s/ Tom
Varvaro
|
|
Tom
Varvaro
|
|
|
Title:
Vice President, Business Development
|
Title:
CFO 6/9/2017
|
EXHIBIT A
LICENSED BIOLOGICAL MATERIALS
None.
EXHIBIT B
LICENSED PATENT RIGHTS
[…***…]
***Confidential Treatment
Requested
EXHIBIT C
COMMERCIAL DEVELOPMENT PLAN
None.
EXHIBIT D
BENCHMARKS
[
…
***…]
***Confidential Treatment
Requested
EXHIBIT E
REPORTING EVENTS
Licensee shall
notify TSRI in writing of each of the following events with respect
to each Product, Licensed Service and Licensed Process in a Major
Market Country within […***…] days of such
occurrence:
***Confidential Treatment
Requested
|
Exhibit
10.
6
***Text
Omitted and Filed Separately
with
the Securities and Exchange Commission.
Confidential
Treatment Requested
Under
17 C.F.R. Sections 200.80(b)(4)
and
240.24b-2
|
RESEARCH FUNDING
AGREEMENT
by and
between
THE
SCRIPPS RESEARCH INSTITUTE
a
California nonprofit
public
benefit corporation
and
ChromaPharma,
Inc.
A
Nevada corporation
RESEARCH
FUNDING AGREEMENT
This
Agreement is entered into this 5
th
day of June, 2017
(the “Effective Date”), by and between The Scripps
Research Institute, a California nonprofit public benefit
corporation located at 10550 North Torrey Pines Road, La Jolla,
California 92037 ("TSRI"), and ChromaPharma, Inc., a Nevada
for-profit corporation located at 10005 Muirlands Blvd., Suite G,
Irvine, CA 92618 USA ("Sponsor"), with respect to the facts set
forth below.
RECITALS
A. TSRI
is engaged in fundamental scientific biomedical and biochemical
research including research relating to breast cancer, as more
particularly described herein.
B. Sponsor
is engaged in research and development of proprietary health,
wellness and nutritional ingredients, that creates science-based
solutions to dietary supplement, food and beverage, skin care,
sports nutrition, and pharmaceutical products
.
C. Sponsor
desires to provide certain funding as part of TSRI’s research
activities described above.
D. Subject
to any non-exclusive rights of the U.S. Government, TSRI is
granting to Sponsor an exclusive license to certain intellectual
property arising from the Research Program, in accordance with a
separate License Agreement between the parties, with an Effective
Date of June 1, 2017.
AGREEMENT
NOW,
THEREFORE, in consideration of the mutual covenants and conditions
outlined herein, TSRI and Sponsor hereby agree as
follows:
1.
DEFINITIONS
.
1.1
Affiliate
.
The term "Affiliate" shall mean any entity which directly or
indirectly controls, or is controlled by Sponsor. The term
"control" as used herein means (a) in the case of corporate
entities, direct or indirect ownership of at least fifty percent
(50%) of the stock or shares entitled to vote for the election of
directors; or (b) in the case of non-corporate entities, direct or
indirect ownership of at least fifty percent (50%) of the equity
interest with the power to direct the management and policies of
such non-corporate entities. Unless otherwise specified, the term
Sponsor includes Affiliates.
1.2
Agreement Number
.
This Agreement is TSRI number SFP-2235.
1.3
Biological
Materials
. The term “Biological Materials” shall
mean any Technology in the form of tangible materials together with
any progeny, mutants, or derivatives thereof developed in
performance of the Research Program.
1.4
Confidential
Information
. The term "Confidential Information" shall mean
any and all proprietary information of TSRI or Sponsor which may be
exchanged between the parties at any time and from time to time
during the term hereof. The fact that a party may have marked or
identified as confidential or proprietary any specific information
shall be indicative that such party believes such information to be
confidential or proprietary, but the failure to so mark information
shall not conclusively determine that such information was or was
not considered confidential information by such party. Confidential
Information shall also include any information which, given the
circumstances surrounding the disclosure, would be considered
confidential by the disclosing party. Information shall not be
considered confidential to the extent that it:
a. Is
publicly disclosed through no fault of any party hereto, either
before or after it becomes known to the receiving party;
or
b. Was
known to the receiving party prior to the Effective Date, which
knowledge was acquired independently and not from the other party
hereto (including such party's employees); or
c. Is
subsequently disclosed to the receiving party in good faith by a
third party who has a right to make such disclosure;
or
d. Has
been published by a third party as a matter of right.
1.5
Patent
Rights
. The term “Patent Rights” shall
mean:
(a)
U.S. patents or patent application(s) directed to the
Technology;
(b)
Foreign counterpart patents or patent applications claiming and
entitled to the priority date of the respective patents and patent
application(s) referenced in sub-clause (a) above;
(c)
Divisionals and continuations of any patents or patent applications
referenced in sub-clauses (a) and (b) above;
(d) Any
claim(s) of a continuation-in-part claiming and entitled to the
priority date of the respective patents and patent application(s)
referenced in sub-clause (a) above; and
(e)
Reissues, reexaminations, renewals and patent term extensions of
the patents referenced in sub-clauses (a) - (d) above.
1.6
Principal
Investigator
. The term "Principal Investigator" shall mean
[…***…], together with such replacement persons
selected in accordance with the provisions of Section 2.2
hereof.
1.7
Research
Program
. The term "Research Program" shall mean the research
program to be undertaken by TSRI under the direction and control of
the Principal Investigator as expressly set forth on Exhibit A
hereto.
1.8
Research
Tool
. The term “Research Tool” shall mean any
Technology which is designed or utilized for basic research
purposes or internal drug discovery purposes and which is not
utilized to produce, or incorporated into, a product.
1.9
Technology
.
The term "Technology" shall mean any invention, discovery,
know-how, Biological Material, software, information and data,
whether patentable or not, conceived and reduced to practice during
the performance of the Research Program.
2.
CONDUCT
OF RESEARCH PROGRAM
.
2.1
Conduct
of Research Program
. TSRI hereby agrees to use reasonable
efforts to perform the Research Program subject to the provisions
of this Agreement. Notwithstanding the foregoing, TSRI makes no
warranties or representations regarding its ability to achieve, nor
shall it be bound to accomplish, any particular research objective
or results.
2.2
Supervision
of Research Program
. TSRI agrees that the Research Program
at TSRI shall be conducted by or under the direct supervision of
the Principal Investigator. In the event that the Principal
Investigator leaves TSRI, or terminates his/her involvement in the
Research Program, TSRI shall use its best efforts to find a
replacement Principal Investigator acceptable to Sponsor, which
acceptance shall not be unreasonably withheld. In the event that
TSRI shall fail to appoint a replacement Principal Investigator
reasonably acceptable to Sponsor, Sponsor shall have a right to
terminate this Agreement upon delivery to TSRI of written notice of
intent to terminate pursuant to this Section 2.2, which notice
must be delivered to TSRI not less than […***…]
days nor more than […***…] days after delivery by
TSRI to Sponsor of the name of the replacement Principal
Investigator.
2.3
Reports
.
TSRI agrees that within […***…] days following the last
day of each calendar year during the term of this Agreement, TSRI
shall furnish Sponsor with a written report summarizing the results
of the research included within the scope of the Research Program
conducted by TSRI, during the immediately preceding calendar year,
including but not limited to all data, conclusions, results,
observations and a detailed description of all procedures. All such
reports shall be treated as Confidential Information by Sponsor.
TSRI further agrees to furnish Sponsor with written milestone
updates every […***…] months.
***Confidential Treatment
Requested
2.4
Financial
and Staffing Obligations
(a)
Contributions of Parties
to Research Program
. Contributions in the form of financial
support, equipment, personnel, technology and other necessary
components for the conduct of the Research Program shall be made by
the parties in accordance with the terms set forth on
Exhibit B. All payments due to TSRI by Sponsor shall be
payable in U.S. Dollars in quarterly installments in advance,
within […***…] days of the dates set forth in the
following payment schedule:
1
st
payment: $[…***…] (USD)
|
due:
within (10) days of the Effective Date
|
2
nd
payment: $[…***…] (USD)
|
due:
January 1, 2018
|
3
rd
payment: $[…***…] (USD)
|
due:
upon completion of Year 1 Milestones as described in Exhibit A and
a technical review by ChromaDex with a decision to fund year
2
|
4
th
payment $[…***…]
|
due six
months after the 3
rd
payment
|
5
th
payment: $[…***…] (USD)
|
due:
upon completion of Year 2 Milestones as described in Exhibit A and
a technical review by ChromaDex with a decision to fund year
3
|
6
th
payment $[…***…]
|
due six
months after payment 5
|
Each
payment must reference the Research Project title, Agreement Number
and Principal Investigator for purposes of identification. Payments
under this Section 2.4.a shall be sent to:
The
Scripps Research Institute
10550
North Torrey Pines Road, TPC-7
La
Jolla, California 92037
Attn:
Vice President, Sponsored Programs
Fax
No.: (858) 784-8037
With a copy
to:
The Scripps
Research Institute
10550
North Torrey Pines Road, TPC-9
La
Jolla, California 92037
Attn:
Director, Technology Development
Fax
No.: (858) 784-9910
TSRI
shall not be obligated to perform any of the research specified
herein or to take any other action required under this Agreement if
the funding is not provided as set forth in Exhibit B
and
***Confidential Treatment
Requested
in
accordance with the payment schedule as set forth in this Section
2.4(a). Furthermore, should Sponsor fail to make the first payment
to TSRI in accordance with this Section 2.4(a), TSRI shall have the
right to immediately terminate this Agreement and this Agreement
shall be null and void
ab
initio
.
(b)
Capital Equipment
.
Equipment purchased by TSRI with funds provided by Sponsor shall be
the property of TSRI. All capital equipment provided under this
Agreement by Sponsor for the use of TSRI remains the property of
the Sponsor unless other disposition is mutually agreed upon in
writing by the parties. If title to this equipment remains with the
Sponsor, Sponsor is responsible for maintenance and repair of the
equipment, insuring the equipment against damage or loss, and the
costs of its transportation to and from the site where it will be
used.
(c)
Indirect Cost
Adjustment.
TSRI shall have the right to adjust the payment
amounts referenced above to reflect changes in the indirect cost
rate negotiated between TSRI and the U.S. Government and that will
be in effect during the quarter that the work is performed. TSRI
will notify Sponsor in writing of any change in the indirect cost
rate before the effective date of such change. The corresponding
direct costs will remain fixed as specified in Exhibit
B.
3.
TECHNOLOGY
DISCLOSURE AND GRANT OF LICENSE
.
3.1
Disclosure
of Technology
. After Principal Investigator submits an
invention disclosure covering any Technology to TSRI’s Office
of Technology Development, TSRI shall disclose such Technology in
writing to Sponsor (the “Technology Disclosure”). TSRI
shall use reasonable efforts to provide a Technology Disclosure
that contains sufficient detail to enable Sponsor to evaluate the
advisability of exercising the option granted hereunder with
respect to such Technology. All such Technology Disclosures shall
be maintained in confidence by Sponsor.
3.2
Option
.
Sponsor shall have a period of […***…] days from
receipt of the Technology Disclosure from TSRI (the “Option
Period”) within which to exercise its Option with respect to
TSRI’s rights to the particular Technology disclosed therein.
Upon delivery of written notice that Sponsor waives its Option, or
upon the failure of Sponsor to exercise its Option in writing
during the Option Period, either party may license the Technology
to third parties as it sees fit.
3.3
Exercise
of Option
. Sponsor shall exercise its Option by delivering
to TSRI a written notice within the Option Period which specifies
the particular Technology for which the Option is being exercised.
Upon such notification, TSRI and Sponsor shall amend the license
agreement between the parties with an Effective Date of June 1,
2017 (“License Agreement”), in writing (to update and
replace the applicable exhibits of the License Agreement), to
include Technology, at the same terms and conditions as the License
Agreement and for no additional consideration payable to
TSRI.
***Confidential Treatment
Requested
4.
INTERESTS
AND RIGHTS IN INTELLECTUAL PROPERTY
.
4.1
Title
.
TSRI shall retain sole ownership and title to TSRI Technology and
to all intellectual property rights related thereto. TSRI shall, in
the good faith exercise of its discretion, undertake reasonable
efforts to preserve and maintain its ownership and title as TSRI
deems appropriate. Ownership of and title to Technology shall be
vested jointly in TSRI and Sponsor, with each owning an undivided
interest therein.
4.2
Governmental
Interest
. TSRI and Sponsor
acknowledge that TSRI has received, and expects to continue to
receive, funding from the United States Government in support of
TSRI's research activities. TSRI and Sponsor acknowledge and agree
that their respective rights and obligations pursuant to this
Agreement shall be subject to the rights of the United States
Government, existing and as amended, which may arise or result from
TSRI’s receipt of research support from the United States
Government, including but not limited to, 37 CFR 401, the NIH
Grants Policy Statement and the NIH Guidelines for Obtaining and
Disseminating Biomedical Research Resources.
4.3
Reservation
of Rights
. TSRI reserves the right to use for any research
or educational purposes any Patent Rights, Biological Materials, or
Research Tools, without TSRI being obligated to pay Sponsor any
royalties or other compensation.
5.
CONFIDENTIALITY
AND PUBLICATION
.
5.1
Treatment of Confidential
Information
. The parties agree that during the term of this
Agreement, and for a period of five (5) years after this Agreement
terminates, a party receiving Confidential Information of the other
party will (a) maintain in confidence such Confidential
Information to the same extent such party maintains its own
proprietary information; (b) not disclose such Confidential
Information to any third party without the prior written consent of
the other party; and (c) not use such Confidential Information
for any purpose except those permitted by this
Agreement.
If
Confidential Information is required to be disclosed by law or
court order, the Party required to make such disclosure shall limit
the same to the minimum required to comply with the law or court
order, and shall use reasonable efforts to attempt to seek
confidential treatment for that disclosure, and prior to making
such disclosure that Party shall notify the other party, not later
than ten (10) days (or such shorter period of time as may be
reasonably practicable under the circumstances) before the
disclosure in order to allow that other Party to comment and/or to
obtain a protective or other order, including extensions of time
and the like, with respect to such disclosure.
5.2
Publications
.
Sponsor acknowledges that it is the general policy of TSRI to
encourage publication of research results in technical or
scientific journals; and Sponsor agrees that TSRI shall have a
right to publish in accordance with its general policy. TSRI shall
submit to Sponsor copies of proposed publications which describe
Technology and afford Sponsor a period of thirty (30) days to
review the publication to (i) ascertain whether Sponsor’s
Confidential Information would be disclosed by the publication; and
(ii) ascertain whether or not the
publication
discloses any Technology to which Sponsor wishes to exercise its
Option. If such publication discloses Sponsor’s Confidential
Information and upon Sponsor’s written request, TSRI shall
remove such Confidential Information or delay publication for up to
an additional sixty (60) days to allow Sponsor to protect its
Confidential Information by filing a patent application(s). In the
event that Sponsor identifies any Technology to which it wishes to
exercise its Option, Sponsor shall notify TSRI of such in writing.
Upon such notification, TSRI shall (i) file any patent applications
necessary to protect the proprietary positions of both parties in
the Technology at Sponsor’s sole expense; and (ii) provide
Sponsor with a Technology Disclosure in accordance with Section
3.2. Absent receipt by TSRI of any written instruction by Sponsor
within the thirty (30) day period, TSRI shall be free to publish
the proposed publication.
5.3
Publicity
. Except
as otherwise provided herein or required by law, no party shall
originate any publication, news release or other public
announcement, written or oral, whether in the public press,
stockholders' reports, or otherwise, relating to this Agreement or
to the performance hereunder without the prior written approval of
the other party, which approval shall not be unreasonably withheld.
Scientific publications published in accordance with
Section 5.2 of this Agreement shall not be construed as
publicity governed by this Section 5.3.
6.
WARRANTY
AND DISCLAIMER
.
TSRI
hereby represents and warrants that it has full right and power to
enter into this Agreement. TSRI MAKES NO OTHER WARRANTIES
CONCERNING PATENT RIGHTS, TECHNOLOGY, RESEARCH
TOOLS, BIOLOGICAL MATERIALS OR ANY
OTHER MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION, ANY EXPRESS
OR IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR ARISING OUT OF
COURSE OF CONDUCT OR TRADE CUSTOM OR USAGE, AND TSRI DISCLAIMS ALL
SUCH EXPRESS OR IMPLIED WARRANTIES. TSRI MAKES NO WARRANTY OR
REPRESENTATION AS TO THE VALIDITY OR SCOPE OF PATENT RIGHTS, OR
THAT ANY PRODUCT, PROCESS, SERVICE, BIOLOGICAL MATERIAL, OR
RESEARCH TOOL WILL BE FREE FROM AN INFRINGEMENT ON PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, OR THAT NO THIRD
PARTIES ARE IN ANY WAY INFRINGING UPON ANY PATENT RIGHTS,
TECHNOLOGY
,
RESEARCH
TOOLS
OR BIOLOGICAL
MATERIALS COVERED BY THIS AGREEMENT. FURTHER, TSRI HAS MADE NO
INVESTIGATION AND MAKES NO REPRESENTATION THAT THE PATENT RIGHTS,
RESEARCH TOOLS OR BIOLOGICAL MATERIALS ARE SUITABLE FOR
SPONSOR’S PURPOSES.
IN NO
EVENT SHALL TSRI BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL,
EXEMPLARY OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION,
DAMAGES FOR LOSS OF PROFITS OR EXPECTED SAVINGS OR OTHER ECONOMIC
LOSSES, OR FOR INJURY TO PERSONS OR PROPERTY) ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR ITS SUBJECT MATTER. TSRI’S
AGGREGATE LIABILITY, IF ANY, FOR ALL DAMAGES OF ANY KIND RELATING
TO THIS AGREEMENT OR ITS SUBJECT MATTER SHALL NOT EXCEED THE AMOUNT
PAID BY SPONSOR TO TSRI UNDER THIS AGREEMENT. THE FOREGOING
EXCLUSIONS AND LIMITATIONS SHALL APPLY TO ALL CLAIMS AND ACTIONS OF
ANY KIND AND ON ANY THEORY OF LIABILITY, WHETHER BASED ON CONTRACT,
TORT (INCLUDING, BUT NOT LIMITED TO NEGLIGENCE OR STRICT
LIABILITY), OR ANY OTHER GROUNDS, AND REGARDLESS OF WHETHER TSRI
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL
PURPOSE
OF ANY LIMITED REMEDY. THE PARTIES FURTHER AGREE THAT EACH WARRANTY
DISCLAIMER, EXCLUSION OF DAMAGES OR OTHER LIMITATION OF LIABILITY
HEREIN IS INTENDED TO BE SEVERABLE AND INDEPENDENT OF THE OTHER
PROVISIONS SINCE THEY EACH REPRESENT SEPARATE ELEMENTS OF RISK
ALLOCATION BETWEEN THE PARTIES.
7.
TERM
AND TERMINATION
.
7.1
Term
.
Unless terminated sooner, the initial term of this Agreement shall
commence on the Effective Date and shall continue for three
years.
7.2
Termination
by Sponsor.
Sponsor may terminate this Agreement by giving
ninety (90) days advance written notice of termination to
TSRI.
7.3
Termination
Upon Default
. Except as specified in Section 7.5, the
failure of a party to perform any obligation required of it to be
performed hereunder, including payment obligations under Section
2.4(a), and the failure to cure within sixty (60) days after
receipt of notice from the other party specifying in reasonable
detail the nature of such default, shall constitute an event of
default hereunder. For clarity, TSRI shall not be obligated to
perform any of the research specified herein or to take any other
action required under this Agreement if the funding is not provided
as set forth in Exhibit B. Upon the occurrence of an event of
default, the non-defaulting party may deliver to the defaulting
party written notice of intent to terminate, such termination to be
effective upon the date set forth in such notice. Such termination
rights shall be in addition to and not in substitution for any
other remedies that may be available to the non-defaulting party
serving such notice against the defaulting party. Termination
pursuant to this Section 7.4 shall not relieve the defaulting
party of liability and damages to the non-defaulting party for
breach of this Agreement. Waiver by any party of a single default
or a succession of defaults shall not deprive such party of any
right to terminate this Agreement arising by reason of any
subsequent default.
7.4
Termination
Upon Insolvency
. This Agreement may be terminated as to any
party ("Insolvent Party") by another party giving written notice of
termination to the Insolvent Party upon the filing of bankruptcy or
bankruptcy of the Insolvent Party or the appointment of a receiver
of any of the Insolvent Party's assets, or the making by the
Insolvent Party of any assignment for the benefit of creditors, or
the institution of any proceedings against the Insolvent Party
under any bankruptcy law. Termination shall be effective upon the
date specified in this notice.
7.5
Effect
of Expiration or Termination
.
a.
Termination
Upon Default of Sponsor
. Upon the termination of this
Agreement by reason of a default by Sponsor, neither party shall
have any further rights or obligations with respect to this
Agreement, other than the obligation of Sponsor to make any and all
final payments accrued prior to the date of termination, the
obligation of the parties to make all reports required hereunder,
and except as provided below. Upon such termination of this
Agreement, the parties shall continue to abide by their
non-disclosure obligations as described in Section 5.1 and
each party hereto shall fulfill any other obligations incurred
prior to such
termination.
Any such termination of this Agreement shall not constitute the
termination of any license or any other agreements between the
parties which are then in effect except as expressly provided
therein. In addition, upon such termination, Sections 4, 6, 7 and 9
shall survive any such termination.
b.
Expiration
or Termination upon Default of TSRI
. Upon the expiration of
this Agreement at its regularly scheduled expiration date, or upon
a termination of this Agreement on account of a default by TSRI,
then TSRI shall make the disclosures required by Section 3.2
for TSRI Technology conceived or reduced to practice up to the date
of said expiration or termination;[…***…].
Additionally, each party shall perform all other obligations up to
the date of said expiration or termination; and the parties shall
continue to abide by their non-disclosure obligations described in
Section 5.1; and any previously existing license agreements or
other agreements between the parties shall continue in effect. In
addition, upon such expiration or termination, Sections 4, 6, 7 and
9 shall survive.
8.
ASSIGNMENT;
SUCCESSORS
.
8.1
Assignment
.
Any and all assignments of this Agreement or any rights granted
hereunder by Sponsor without the prior written consent of TSRI are
void except a) to an Affiliate of Sponsor; and b) Sponsor may
assign this Agreement and its rights and obligations hereunder in
connection with the transfer or sale of all or substantially all of
Sponsor’s business or assets to a third party, whether by
merger, sale of stock, sale of assets or otherwise, subject to
Section 8.2 hereof.
8.2
Binding
Upon Successors and Assigns
. Subject to the limitations on
assignment set forth herein, this Agreement shall be binding upon
and inure to the benefit of any successors in interest and assigns
of TSRI and Sponsor. Any such successor to or assignee of a party's
interest shall expressly assume in writing the performance of all
the terms and conditions of this Agreement to be performed by such
party and such written assumption shall be delivered to the other
Party.
9.0
GENERAL
PROVISIONS
.
9.1
Independent
Contractors
. The relationship between TSRI and Sponsor is
that of independent contractors. TSRI and Sponsor are not joint
venturers, partners, principal and agent, master and servant,
employer or employee, and have no other relationship other than
independent contracting parties. TSRI and Sponsor shall have no
power to bind or obligate each other in any manner, other than as
is expressly set forth in this Agreement.
***Confidential Treatment
Requested
9.2
Dispute Resolution
.
Any dispute or claim between the parties arising out of or relating
to this Agreement, including without limitation the breach thereof,
shall be resolved according to the following dispute resolution
procedures:
(a) Such
dispute shall be first addressed by the representatives of TSRI and
Sponsor who have primary responsibility for managing this
Agreement.
(b)
If the
dispute is not resolved by such representatives within
[
…***…
] days
after the date either party gives written notice that such dispute
exists, then the dispute shall be referred to and addressed by the
senior management of each party.
(c)
If such
dispute is not resolved by the parties’ senior management
within thirty (30) days after the date the dispute is referred to
them, then the dispute shall be submitted to mediation. The
mediator shall be a retired judge or other neutral third party
mutually selected by TSRI and Sponsor who has at least ten (10)
years experience in mediating or arbitrating cases in the
bio-pharmaceutical industry and regarding the same or substantially
similar subject matter as the dispute between Sponsor and TSRI. If
the parties are unable to agree on such mediator within
[
…***…
] days
after they exchange initial lists of potential mediators, a
mediator with the same qualifications will be selected by the JAMS
office in San Diego located at 401 B Street, San Diego, CA 92101
(after consultation with the parties).
(d)
The
location of the mediation shall be in the County of San Diego,
California. TSRI and Sponsor hereby irrevocably submit to the
exclusive jurisdiction and venue of the mediator mutually selected
by the parties or to the neutral mediator selected by JAMS of San
Diego for purposes of the mediation, and to the exclusive
jurisdiction and venue of the federal and state courts located in
San Diego County, California for any action or proceeding regarding
this Agreement in the event mediation is unsuccessful as provided
in sub-clause (e) below, or as provided in sub-clause (f) below,
and waive any right to contest or otherwise object to such
exclusive jurisdiction or venue, including without limitation any
claim that such exclusive venue is not a convenient
forum.
(e)
If the
dispute is not resolved through mediation, either party may refer
the dispute to a court of competent jurisdiction in San Diego
County, California.
(f)
Notwithstanding
anything to the contrary in this Agreement, prior to or while a
mediation proceeding is pending, either party has the right to seek
and obtain injunctive and other equitable relief from a court of
competent jurisdiction to enforce that party’s rights
hereunder.
9.3
Entire Agreement;
Modification
. This Agreement and all of the attached
Exhibits set forth the entire agreement and understanding between
the parties as to the subject matter hereof, and supersede all
prior or contemporaneous written or oral agreements. There shall be
no amendments or modifications to this Agreement, except by a
written document which is signed by both parties.
***Confidential Treatment
Requested
9.4
California Law
.
This Agreement shall be construed and enforced in accordance with
the laws of the State of California notwithstanding any conflicts
or choice of laws provisions.
9.5
No Use of Name
. The
use of the name "The Scripps Research Institute", "Scripps",
“TSRI” or any variation thereof in connection with the
advertising, sale or performance of Products, Processes, Services,
Biological Materials or Research Tools is expressly
prohibited.
9.6
Headings
. The
headings for each article and section in this Agreement have been
inserted for the convenience of reference only and are not intended
to limit or expand on the meaning of the language contained in the
particular article or section.
9.7
Severability
.
Should any one or more of the provisions of this Agreement be held
invalid or unenforceable by a court of competent jurisdiction, it
shall be considered severed from this Agreement and shall not serve
to invalidate the remaining provisions thereof. The parties shall
make a good faith effort to replace any invalid or unenforceable
provision with a valid and enforceable one such that the objectives
contemplated by them when entering this Agreement may be
realized.
9.8
No Waiver
. Any
delay in enforcing a party's rights under this Agreement or any
waiver as to a particular default or other matter shall not
constitute a waiver of such party's rights to the future
enforcement of its rights under this Agreement, excepting only as
to an express written and signed waiver as to a particular matter
for a particular period of time.
9.9
Attorneys' Fees
. In
the event of a dispute among the parties hereto or in the event of
any default hereunder, the party prevailing in the resolution of
any such dispute or default shall be entitled to recover its
reasonable attorneys' fees and other costs incurred in connection
with resolving such dispute or default.
9.10
Notices
.
Any notices required by this Agreement shall be in writing, shall
specifically refer to this Agreement and shall be sent by
registered or certified airmail, postage prepaid, or by telefax,
telex or cable, charges prepaid, or by overnight courier, postage
prepaid, and shall be forwarded to the respective addresses set
forth below unless subsequently changed by written notice to the
other party:
FOR
TSRI:
The Scripps
Research Institute
10550
North Torrey Pines Road, TPC-9
La
Jolla, California 92037
Attn:
Director, Technology Development
Fax
No.: (858) 784-9910
With a
copy
to:
The Scripps Research Institute
10550
North Torrey Pines Road, TPC-8
La
Jolla, California 92037
Attention: Chief
Business Counsel
Fax
No.: (858) 784-9910
FOR
SPONSOR:
ChromaPharma,
Inc.
10005
Muirlands Blvd, Ste G
Irvine,
CA 92618, USA
Attention: Tom
Varvaro
Fax
No.: (949) 419-0288
Email:
tom.varvaro@chromadex.com
Notices
shall be deemed delivered upon the earlier of (i) when
received; (ii) three (3) days after deposit into the U.S.
mail; (iii) the date notice is sent via telefax, telex or
cable; or (iv) the day immediately following delivery to an
overnight courier guaranteeing next-day delivery (except Sunday and
holidays).
9.11
Compliance
with U.S. Laws
. Nothing contained in this Agreement shall
require or permit TSRI or Sponsor to do any act inconsistent with
the requirements of any United States law, regulation or executive
order as the same may be in effect from time to time.
9.12
Indemnity.
Sponsor
shall indemnify, defend (by counsel reasonably acceptable to TSRI)
and hold harmless TSRI and any parent, subsidiary or other
affiliated entity of TSRI and their trustees, directors, officers,
employees, scientists, agents, successors, assigns and other
representatives (collectively, the “Indemnitees”) from
and against all claims, suits, actions, damages, liabilities,
losses and other expenses, including without limitation reasonable
attorney’s fees, expert witness fees and costs incurred by or
asserted against the Indemnitees, whether or not a lawsuit or other
proceeding is filed (collectively “Claim”), that arise
out of or relate to any allegations regarding Sponsor’s use
of the Technology or the exercise of its non-exclusive license
rights under Section 3.1(b). Sponsor shall not enter into any
settlement of such Claims that imposes any obligation on TSRI, that
does not unconditionally release TSRI from all liability or that
would have an adverse effect on TSRI’s reputation or business
without TSRI’s prior written consent. Notwithstanding the
above, Indemnitees, at their expense, shall have the right to
retain separate independent counsel to assist in defending any such
Claims. In the event Sponsor fails to promptly indemnify and defend
such Claims and/or pay Indemnitees’ expenses as provided
above, Indemnitees shall have the right to defend themselves, and
in that case, Sponsor shall reimburse Indemnitees for all of their
reasonable attorney’s fees, costs and damages incurred in
settling or defending such Claims within thirty (30) days of each
of Indemnitees’ written requests. This indemnity shall be a
direct payment obligation and not merely a reimbursement obligation
of Sponsor to Indemnitees.
IN
WITNESS WHEREOF, the parties have executed this Agreement by their
duly authorized representatives as of the date set forth
above.
TSRI:
SPONSOR:
THE SCRIPPS
RESEARCH
INSTITUTE
CHROMAPHARMA, INC.
By:_
/s/ Matt Tremblay
By:
/s/ Tom Varvaro
Title: Vice
President, Business
Development
Title:
CFO
6/9/17
EXHIBIT
A
RESEARCH PROGRAM
“NICOTINAMIDE RIBOSIDE FOR ENHANCEMENT OF ENDOCRINE THERAPY
AND PREVENTION OF RELAPSE IN BREAST CANCER”
Milestones and Tranched Research Funding by Year
Yr
|
Specific
Aims and Milestones
|
Research
Payment
|
1
|
[
…***…]
|
$[
…***…
]
|
2
|
[
…***…
]
|
$[
…***…
]
|
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***Confidential Treatment
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***Confidential Treatment
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EXHIBIT B
BUDGET
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***Confidential Treatment
Requested
Exhibit 10.7
FOURTH BUSINESS FINANCING MODIFICATION AGREEMENT
This
Fourth Business Financing Modification Agreement (this
“Agreement”) is entered into as of July 13, 2017, by
and among CHROMADEX CORPORATION, a Delaware corporation, CHROMADEX,
INC., a California corporation, CHROMADEX ANALYTICS, INC., a Nevada
corporation and HEALTHSPAN RESEARCH LLC, a Delaware limited
liability company (each, a “Borrower” and collectively,
“Borrowers”), and WESTERN ALLIANCE BANK, an Arizona
corporation (“Lender”).
1.
DESCRIPTION OF EXISTING
INDEBTEDNESS
: Among other indebtedness which may be owing by
Borrowers to Lender, Borrowers are indebted to Lender pursuant to,
among other documents, a Business Financing Agreement, dated
November 4, 2016, by and among Borrowers and Lender, as may be
amended from time to time, including, without limitation, by that
certain First Business Financing Modification Agreement dated as of
February 16, 2017, and that certain Second Business Financing
Modification Agreement dated as of March 12, 2017 and that certain
Third Business Financing Modification Agreement dated as of April
19, 2017 (the “Business Financing Agreement”).
Capitalized terms used without definition herein shall have the
meanings assigned to them in the Business Financing
Agreement.
Hereinafter, all
indebtedness owing by Borrowers to Lender under the Existing
Documents (defined herein) shall be referred to as the
“Obligations” and the Business Financing Agreement and
any and all other Loan Documents executed by Borrowers in favor of
Lender in connection therewith shall be referred to as the
“Existing Documents.”
2.
DESCRIPTION OF CHANGE IN
TERMS
.
A.
Modifications
to Business Financing Agreement and all Existing
Documents
:
(i)
Section 4.13 of the Business Financing Agreement hereby is amended
and restated in its entirety and replaced with the
following:
“
4.13
Not make or contract to make, without
Lender’s prior written consent, capital expenditures,
including leasehold improvements, in any fiscal year in excess of
$750,000 or incur liability for rentals of personal property (but
excluding real property leases) in an amount which, together with
capital expenditures, shall in any fiscal year exceed such
sum.”
(ii)
Section 12.1 of the Business Financing Agreement hereby is amended
by amending and restating clause (c) of the definition of
“Permitted Indebtedness” in its entirety to read as
follows:
“(c) Purchase
money indebtedness (including capital leases) incurred to acquire
capital assets in ordinary course of business and not exceeding
$750,000”
3.
CONSISTENT CHANGES
.
The Existing Documents are each hereby amended wherever necessary
to reflect the changes described above.
4.
PAYMENT OF DOCUMENTATION
FEE
. Borrowers shall pay Lender all out-of-pocket expenses
(including but not limited to reasonable legal fees and due
diligence fees (if any)) incurred by Lender in connection with the
execution of this Agreement.
5.
NO DEFENSES OF
BORROWERS/GENERAL RELEASE
. Each Borrower agrees that, as of
this date, it has no defenses against the obligations to pay any
amounts presently due under the Obligations. Each Borrower (each, a
“Releasing Party”) acknowledges that Lender would not
enter into this Agreement without Releasing Party’s assurance
that it has no claims against Lender or any of Lender’s
officers, directors, employees or agents. Except for the
obligations arising hereafter under this Agreement, each Releasing
Party releases Lender, and each of Lender’s and
entity’s officers, directors and employees from any known or
unknown claims that Releasing Party
now has against
Lender of any nature, including any claims that Releasing Party,
its successors, counsel, and advisors may in the future discover
they would have now had if they had known facts not now known to
them, whether founded in contract, in tort or pursuant to any other
theory of liability, including but not limited to any claims
arising out of or related to the Agreement or the transactions
contemplated thereby. Releasing Party waives the provisions of
California Civil Code section 1542, which states:
A
GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER, MUST HAVE
MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE
DEBTOR.
The
provisions, waivers and releases set forth in this section are
binding upon each Releasing Party and its shareholders, agents,
employees, assigns and successors in interest. The provisions,
waivers and releases of this section shall inure to the benefit of
Lender and its agents, employees, officers, directors, assigns and
successors in interest. The provisions of this section shall
survive payment in full of the Obligations, full performance of all
the terms of this Agreement and the Business Financing Agreement,
and/or Lender’s actions to exercise any remedy available
under the Business Financing Agreement or otherwise.
6.
CONTINUING
VALIDITY
. Borrowers understand and agree that in modifying
the existing Business Financing Agreement, Lender is relying upon
Borrowers’ representations, warranties, and agreements, as
set forth in the Existing Documents. Except as expressly modified
pursuant to this Agreement, the terms of the Existing Documents
remain unchanged and in full force and effect. Lender’s
agreement to modifications to the existing Business Financing
Agreement pursuant to this Agreement in no way shall obligate
Lender to make any future modifications to the Business Financing
Agreement. Nothing in this Agreement shall constitute a
satisfaction of the Obligations. It is the intention of Lender and
Borrowers to retain as liable parties all makers and endorsers of
Existing Documents, unless the party is expressly released by
Lender in writing. No maker, endorser, or guarantor will be
released by virtue of this Agreement except in accordance with the
terms of this Agreement. The terms of this paragraph apply not only
to this Agreement, but also to any subsequent Business Financing
modification agreements.
7.
REFERENCE
PROVISION
.
A.
In
the event the Jury Trial waiver is not enforceable, the parties
elect to proceed under this Judicial Reference
Provision.
B.
With
the exception of the items specified in Section 8(c) below, any
controversy, dispute or claim (each, a “Claim”) between
the parties arising out of or relating to this Agreement or any
other document, instrument or agreement between the undersigned
parties (collectively in this Section, the “Loan
Documents”), will be resolved by a reference proceeding in
California in accordance with the provisions of Sections 638 et
seq. of the California Code of Civil Procedure (“CCP”),
or their successor sections, which shall constitute the exclusive
remedy for the resolution of any Claim, including whether the Claim
is subject to the reference proceeding. Except as otherwise
provided in the Loan Documents, venue for the reference proceeding
will be in the state or federal court in the county or district
where the real property involved in the action, if any, is located
or in the state or federal court in the county or district where
venue is otherwise appropriate under applicable law (the
“Court”).
C.
The
matters that shall not be subject to a reference are the following:
(i) nonjudicial foreclosure of any security interests in real or
personal property, (ii) exercise of self-help remedies (including,
without limitation, set-off), (iii) appointment of a receiver and
(iv) temporary, provisional or ancillary remedies (including,
without limitation, writs of attachment, writs of possession,
temporary restraining orders or preliminary injunctions). This
reference provision does not limit the right of any party to
exercise or oppose any of the rights and remedies described in
clauses (i) and (ii) or to seek or oppose from a court of competent
jurisdiction any of the items described in clauses (iii) and (iv).
The exercise of, or opposition to, any of those items does not
waive the right of any party to a reference pursuant to this
reference provision as provided herein.
D.
The
referee shall be a retired judge or justice selected by mutual
written agreement of the parties. If the parties do not agree
within ten (10) days of a written request to do so by any party,
then, upon request of any party, the referee shall be selected by
the Presiding Judge of the Court (or his or her representative). A
request for appointment of a referee may be heard on an ex parte or
expedited basis, and the parties agree that irreparable harm would
result if ex parte relief is not granted. Pursuant to CCP Sec.
170.6, each party shall have one peremptory challenge to the
referee selected by the Presiding Judge of the Court (or his or her
representative).
E.
The
parties agree that time is of the essence in conducting the
reference proceedings. Accordingly, the referee shall be requested,
subject to change in the time periods specified herein for good
cause shown, to (i) set the matter for a status and trial-setting
conference within fifteen (15) days after the date of selection of
the referee, (ii) if practicable, try all issues of law or fact
within one hundred twenty (120) days after the date of the
conference and (iii) report a statement of decision within twenty
(20) days after the matter has been submitted for
decision.
F.
The
referee will have power to expand or limit the amount and duration
of discovery. The referee may set or extend discovery deadlines or
cutoffs for good cause, including a party’s failure to
provide requested discovery for any reason whatsoever. Unless
otherwise ordered based upon good cause shown, no party shall be
entitled to “priority” in conducting discovery,
depositions may be taken by either party upon seven (7) days
written notice, and all other discovery shall be responded to
within fifteen (15) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be
submitted to the referee whose decision shall be final and
binding.
G.
Except
as expressly set forth herein, the referee shall determine the
manner in which the reference proceeding is conducted including the
time and place of hearings, the order of presentation of evidence,
and all other questions that arise with respect to the course of
the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a
court reporter, except that when any party so requests, a court
reporter will be used at any hearing conducted before the referee,
and the referee will be provided a courtesy copy of the transcript.
The party making such a request shall have the obligation to
arrange for and pay the court reporter. Subject to the
referee’s power to award costs to the prevailing party, the
parties will equally share the cost of the referee and the court
reporter at trial.
H.
The
referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law
in the State of California will be applicable to the reference
proceeding. The referee shall be empowered to enter equitable as
well as legal relief, enter equitable orders that will be binding
on the parties and rule on any motion which would be authorized in
a court proceeding, including without limitation motions for
summary judgment or summary adjudication. The referee shall issue a
decision at the close of the reference proceeding which disposes of
all claims of the parties that are the subject of the reference.
Pursuant to CCP Sec. 644, such decision shall be entered by the
Court as a judgment or an order in the same manner as if the action
had been tried by the Court and any such decision will be final,
binding and conclusive. The parties reserve the right to appeal
from the final judgment or order or from any appealable decision or
order entered by the referee. The parties reserve the right to
findings of fact, conclusions of laws, a written statement of
decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
I.
If
the enabling legislation which provides for appointment of a
referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by
reference procedure will be resolved and determined by arbitration.
The arbitration will be conducted by a retired judge or justice, in
accordance with the California Arbitration Act Sec.1280 through
Sec.1294.2 of the CCP as amended from time to time. The limitations
with respect to discovery set forth above shall apply to any such
arbitration proceeding.
J.
THE
PARTIES RECOGNIZE AND AGREE THAT ALL CONTROVERSIES, DISPUTES AND
CLAIMS RESOLVED UNDER THIS REFERENCE PROVISION WILL BE DECIDED BY A
REFEREE AND NOT BY A JURY. AFTER CONSULTING (OR HAVING HAD THE
OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER OWN CHOICE,
EACH PARTY KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF
ALL PARTIES, AGREES THAT THIS REFERENCE PROVISION WILL APPLY TO ANY
CONTROVERSY, DISPUTE OR CLAIM BETWEEN OR AMONG THEM ARISING OUT OF
OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS.
8.
CONDITIONS
. The
effectiveness of this Agreement is conditioned upon Lender’s
receipt of the following, in form and substance satisfactory to
Lender:
(a) this
Agreement, duly executed by Borrowers;
(b) payment
of all reasonable expenses incurred by Lender in connection with
the execution hereof, which may be debited from any of Borrowers'
accounts; and
(c) such
other documents, and completion of such other matters, as Lender
may reasonably deem necessary or appropriate.
9.
NOTICE OF FINAL
AGREEMENT
. BY SIGNING THIS DOCUMENT EACH PARTY REPRESENTS
AND AGREES THAT: (A) THIS WRITTEN AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES, (B) THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES, AND (C) THIS WRITTEN AGREEMENT MAY
NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OR UNDERSTANDINGS OF THE
PARTIES.
10.
COUNTERSIGNATURE
.
This Agreement shall become effective only when executed by Lender
and Borrowers.
[
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]
IN
WITNESS WHEREOF, Borrowers and Lender have executed this Agreement
on the date and year above written.
BORROWERS:
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CHROMADEX CORPORATION
,
a
Delaware corporation
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By:
/s/ Thomas C.
Varvaro
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Name:
Thomas C. Varvaro
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Title:
CFO
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CHROMADEX, INC.
,
a
California corporation
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By:
/s/ Thomas C.
Varvaro
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Name:
Thomas C. Varvaro
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Title:
CFO
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CHROMADEX ANALYTICS, INC.
,
a
Nevada corporation
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By:
/s/ Thomas C.
Varvaro
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Name:
Thomas C. Varvaro
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Title:
CFO
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HEALTHSPAN RESEARCH LLC
,
a
Delaware limited liability company
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By:
/s/ Thomas C.
Varvaro
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Name:
Thomas C. Varvaro
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Title:
CFO
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[
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Agreement
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IN
WITNESS WHEREOF, Borrowers and Lender have executed this Agreement
on the date and year above written.
LENDER:
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WESTERN ALLIANCE BANK
,
an
Arizona corporation
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By:
/s/ Grant
Simon
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Name:
Grant Simon
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Title:
AVP
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[
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Agreement
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Exhibit 10.8
ChromaDex Corporation
Amended and Restated Non-Employee Director Compensation
Policy
Adopted: November 8, 2016
Amended and Restated: November 16, 2016
Amended and Restated: April 6, 2017
Effective Date: July 3, 2016
Each
member of the Board of Directors (the “
Board
”) who is
a member as of November 8, 2016 or thereafter and who is not also
serving as an employee of ChromaDex Corporation
(“
ChromaDex
”)
or any of its subsidiaries (each such member, an
“
Eligible
Director
”) will receive the compensation described in
this Amended and Restated Non-Employee Director Compensation Policy
(the “
Director Compensation
Policy
”) for his or her Board service.
The
Director Compensation Policy may be amended at any time in the sole
discretion of the Board or the Compensation Committee of the
Board.
Annual Cash Compensation
Effective
July 3, 2016, the annual cash compensation amount set forth below
is payable in equal quarterly installments, payable in arrears in
the week following the last day of each fiscal quarter in which the
service occurred. If an Eligible Director joins the Board or a
committee of the Board (“
Committee
”) at
a time other than effective as of the first day of a fiscal
quarter, each annual retainer set forth below will be pro-rated
based on days served in the applicable fiscal year, with the
pro-rated amount paid for the first fiscal quarter in which the
Eligible Director provides the service, and regular full quarterly
payments thereafter. All annual cash retainer fees are vested upon
payment.
1.
Annual Board Service
Retainer
:
a.
Eligible Directors other than the Chairman: $30,000
b.
Chairman: $60,000
2.
Annual Committee Chair Service
Retainer
:
a.
Chairman of the Audit Committee: $20,000
b.
Chairman of the Compensation Committee: $15,000
c.
Chairman of the Nominating & Corporate Governance Committee:
$10,000
3.
Annual Committee Member Service
Retainer
:
a.
Non-Chairman Member of the Audit Committee: $10,000
b.
Non-Chairman Member of the Compensation Committee:
$7,500
c.
Non-Chairman Member of the Nominating & Corporate Governance
Committee: $5,000
Equity Compensation
The
equity compensation set forth below will be granted under
ChromaDex’s 2017 Equity Incentive Plan (the
“
Plan
”), and
will be documented on the applicable form of equity award agreement
most recently approved for use by the Board (or a duly authorized
committee thereof) for Eligible Directors. All stock options
granted under the Director Compensation Policy will be nonstatutory
stock options, with an exercise price per share equal to 100% of
the Fair Market Value (as defined in the Plan) of the underlying
Common Stock on the date of grant, and a term of ten years from the
date of grant (subject to earlier termination in connection with a
termination of service as provided in the Plan).
1.
Initial Option Grant
: Unless
otherwise determined by the Board, on the date of the Eligible
Director’s initial election or appointment to the Board (or,
if such date is not a market trading day, the first market trading
day thereafter), the Eligible Director automatically will be
granted, without further action by the Board or Compensation
Committee of the Board, a stock option to purchase 40,000 shares of
Common Stock (subject to Section [9(a)] of the Plan relating to
Capitalization Adjustments (as defined in the Plan) after the
adoption date of the Director Compensation Policy) (the
“
Initial
Option Grant
”). The Initial Option Grant will vest in
a series of three substantially equal annual installments after the
date of grant, such that the Initial Option Grant will be fully
vested on the third anniversary of the date of grant, subject to
the Eligible Director’s Continuous Service (as defined in the
Plan) on each applicable vesting date.
2.
Annual Option
Grant
: Unless otherwise determined by the Board, on the date
of each ChromaDex annual stockholder meeting, each Eligible
Director automatically, and without further action by the Board or
Compensation Committee of the Board, will be granted a stock option
to purchase 20,000 shares of Common Stock (subject to Section
[9(a)] of the Plan relating to Capitalization Adjustments after the
adoption date of the Director Compensation Policy) (the
“
Annual
Option Grant
”). The Annual Option Grant will become
fully vested on the first anniversary of the date of grant, subject
to the Eligible Director’s Continuous Service (as defined in
the Plan) on that vesting date. For fiscal year 2016, the Annual
Option Grant will be granted on November 16, 2016 to each Eligible
Director that has provided Continuous Service (as defined in the
Plan) since July 3, 2016.
Expenses
The
Company will reimburse Eligible Directors for ordinary, necessary
and reasonable out-of-pocket travel expenses to cover in-person
attendance at and participation in Board and/or Committee meetings;
provided
, that Eligible
Directors timely submit to the Company appropriate documentation
substantiating such expenses in accordance with the Company’s
travel and expense policy, as in effect from time to
time.
Exhibit 31.1
Certification
of the Chief Executive Officer
Pursuant
to
Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934,
as amended,
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
I,
Frank L. Jaksch, Jr., certify that:
1. I
have reviewed this Quarterly Report on Form 10−Q of ChromaDex
Corporation;
2.
Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a−15(e)
and 15d−15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over
financial reporting; and
5. The
registrant’s other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial
information; and
(b) Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s
internal control over financial reporting.
Date:
August 10, 2017
/s/
FRANK L. JAKSCH, JR.
Frank
L. Jaksch, Jr.
Chief
Executive Officer
Exhibit 31.2
Certification
of the Chief Financial Officer
Pursuant
to
Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934,
as amended,
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
I,
Thomas C. Varvaro, certify that:
1. I
have reviewed this Quarterly Report on Form 10−Q of ChromaDex
Corporation;
2.
Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a−15(e)
and 15d−15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over
financial reporting; and
5. The
registrant’s other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial
information; and
(b) Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s
internal control over financial reporting.
Date:
August 10, 2017
/s/
THOMAS C. VARVARO
Thomas
C. Varvaro
Chief
Financial Officer
Exhibit 32.1
Certification
Pursuant to 18 U.S.C. Section 1350
(as
adopted pursuant to Section 906 of the Sarbanes−Oxley Act of
2002)
In
connection with this Quarterly Report of ChromaDex Corporation (the
“Company”) on Form 10−Q for the quarter ended
July 1, 2017 as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), we, Frank L. Jaksch,
Jr., Chief Executive Officer of the Company, and Thomas C. Varvaro,
Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes−Oxley Act of 2002, that, to our
knowledge:
1. The
Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended;
and
2. The
information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Date:
August 10, 2017
/s/
FRANK L. JAKSCH, JR.
Frank
L. Jaksch, Jr.
Chief
Executive Officer
/s/
THOMAS C. VARVARO
Thomas
C. Varvaro
Chief
Financial Officer
The
foregoing certification is being furnished solely pursuant to 18
U.S.C. Section 1350 and is not being filed as part of the Report or
as a separate disclosure document.