Unless
otherwise indicated or the context otherwise requires, references
to the “Company”, “ChromaDex”,
“we”, “us” and “our” refer to
ChromaDex Corporation and its consolidated
subsidiaries.
Company Overview
ChromaDex
is a science-based integrated nutraceutical company devoted to
improving the way people age. ChromaDex scientists partner with
leading universities and research institutions worldwide to
discover, develop and create solutions to deliver the full
potential of nicotinamide adenine dinucleotide ("NAD") and its
impact on human health.
NAD is
an essential coenzyme and a key regulator of cellular metabolism.
Best known for its role in cellular energy production, NAD is now
thought to play an important role in healthy aging. Many cellular
functions related to health and healthy aging are sensitive to
levels of locally available NAD and this represents an active area
of research in the field of NAD.
NAD
levels are not constant, and in humans, NAD levels have been shown
to decline by more than 50% from young adulthood to middle age. NAD
continues to decline as humans grow older. There are other causes
of reduced NAD levels such as over-nutrition, alcohol consumption
and a number of disease states. NAD may also be increased,
including through calorie restriction and exercise. Healthy aging,
mitochondria and NAD continue to be areas of focus in the research
community. As of 2019, there were over 250 published human clinical
studies on NAD. The areas of study include Alzheimer’s
disease, Parkinson’s disease, neuropathy and heart
failure.
In
2013, ChromaDex commercialized NIAGEN® nicotinamide riboside
("NR"), a novel form of vitamin B3. Data from numerous animal
studies, and confirmed in human clinical trials, show that NR is a
highly efficient NAD precursor that significantly raises NAD
levels. NIAGEN® is safe for human consumption. NIAGEN®
has twice been successfully reviewed under FDA's new dietary
ingredient (“NDI”) notification program, has been
successfully notified to the FDA as generally recognized as safe
(“GRAS”), and has been approved by Health Canada, the
European Commission and the Therapeutic Goods Administration of
Australia. Animal studies of NIAGEN® have demonstrated a
variety of outcomes ranging from increased NAD levels, increased
cellular metabolism and energy production to improvements in
insulin sensitivity. NIAGEN® is the trade name for our
proprietary ingredient NR, and is protected by patents to which we
are the exclusive licensee.
ChromaDex
is the world leader in the emerging NAD space. ChromaDex has
approximately 190 partnerships with leading universities and
research institutions around the world including the National
Institutes of Health, Cornell, Dartmouth, Harvard, Massachusetts
Institute of Technology, University of Cambridge and the Mayo
Clinic. Other relationships are currently being
developed.
Our
scientific advisory board is led by Chairman Dr. Roger Kornberg,
Nobel Laureate Stanford Professor, Dr. Charles Brenner, one of the
world’s recognized experts in NAD and inventor of
nicotinamide riboside, Dr. Rudi Tanzi, the co-chair of the
department of neurology at Harvard Medical School and one of the
world’s leading experts in food and nutrition, Sir John
Walker, Nobel Laureate and Emeritus Director, MRC Mitochondrial
Biology Unit in the University of Cambridge, England, Dr. Bruce
German, Chairman of food, nutrition and health at the University of
California, Davis, Dr. Brunie Felding, Associate Professor,
Department of Molecular Medicine at Scripps Research Institute,
California Campus and Dr. Robert Beudeker, Vice President of
Innovation, who leads the innovation program for human nutrition
and health at DSM.
STRATEGIC SHIFT TO GLOBAL CONSUMER PRODUCT COMPANY
The
acquisition of Healthspan Research LLC, a company that sold our TRU
NIAGEN® branded product direct to consumers, marked our
strategic shift from an ingredient and testing company to a global,
science-based integrated nutraceutical company. ChromaDex made the
strategic decision to commercialize TRU NIAGEN® as a consumer
brand for the product containing NIAGEN® ingredient, launching
in 2017.
In
connection with our strategic decision to grow our global consumer
brand, we have reduced the number of NIAGEN® resellers to just
a few. As expected, our ingredients segment net sales decreased 28%
in 2019, from $8.6 million in 2018 to $6.2 million. However, our
net sales of TRU NIAGEN® increased by $17.6 million, from
$18.5 million in 2018 to $36.1 million in 2019, to more than offset
the decrease in net sales of our ingredients segment.
We
began the international expansion of our TRU NIAGEN® brand
with the launch in Hong Kong and Macau with our strategic partner,
A.S. Watson Group, in 2017, followed by the launch in Singapore in
2018. In 2018, we also launched TRU NIAGEN® in New Zealand
with retail partner Matakana Superfoods and in Canada by making it
available at www.truniagen.ca and to healthcare practitioners at
Fullscript Canada after receiving regulatory approval for sale from
Health Canada.
We are currently selling cross border in China on
Tmall, and on Amazon in the United Kingdom, Canada and Japan. In
2019, we received a positive opinion from the European Food Safety
Authority on NR as a novel food ingredient for use in food
supplement and approval from the Australian Therapeutic Goods
Association for use in listed complementary medicines. We will
continue to focus on obtaining additional regulatory approvals
required to expand our marketing and distribution of our TRU
NIAGEN® brand in new strategic international
markets.
INGREDIENTS AND ANALYTICAL REFERENCE STANDARDS AND SERVICES
BUSINESS SEGMENTS
Through
our ingredients business segment, we will continue to sell
NIAGEN® in ingredient form to our strategic partners,
including Nestec Ltd. (“Nestlé”), a global leader
pioneering quality science-based nutritional health solutions. In
2018, we entered into a supply agreement with Nestlé, pursuant
to which Nestlé will be our exclusive customer for
NIAGEN® for human use in the (i) medical nutritional and (ii)
functional food and beverage categories in certain territories. As
consideration for the rights granted to Nestlé, we received an
upfront fee of $4 million. Following the launch of the products in
certain territories, Nestlé will additionally pay us a
one-time fee for a potential total aggregate payment of $6
million.
We are
a leading provider of research and quality-control products and
services to the natural products industry. Through our analytical
reference standards and services segment, customers worldwide in
the dietary supplement, food and beverage, cosmetic and
pharmaceutical industries use our products, which are small
quantities of highly-characterized, research-grade, plant-based
materials, to ensure the quality of their raw materials and
finished products. We have conducted this analytical reference
standards and services business since 1999.
For the
fiscal years ended December 31, 2019 and December 31, 2018, our
revenues were approximately $46.3 million and $31.6 million,
respectively. The following table summarizes the Company’s
total sales for each of the business segments in the last two
years. Please refer to Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K for
additional financial information for each of the business
segments.
|
Fiscal
Years
|
Consumer
Products
Segment
|
Ingredients
Segment
|
Analytical
Reference
Standards
and
Services
Segment
|
Total
|
|
2019
|
$36.1
million
|
$6.2
million
|
$4.0
million
|
$46.3
million
|
|
2018
|
$18.5
million
|
$8.6
million
|
$4.5
million
|
$31.6
million
|
Company Background
On May
21, 2008, Cody Resources, Inc., a Nevada corporation and a public
company, (“Cody”) entered into an Agreement and Plan of
Merger (the “Merger Agreement”), by and among Cody, CDI
Acquisition, Inc., a California corporation and wholly-owned
subsidiary of Cody (“Acquisition Sub”), and ChromaDex,
Inc. (the “Merger”). Subsequent to the signing of the
Merger Agreement, Cody merged with and into a Delaware corporation.
On June 20, 2008, Cody amended its articles of incorporation to
change its name to ChromaDex Corporation. ChromaDex Corporation was
traded on the Over the Counter market under the symbol "CDXC." On
April 25, 2016, ChromaDex Corporation became listed on the NASDAQ
Capital Market under the symbol "CDXC."
ChromaDex,
Inc., a wholly owned subsidiary of ChromaDex Corporation, was
originally formed as a California corporation on February 19,
2000.
On
March 12, 2017, ChromaDex Corporation acquired Healthspan Research
LLC, a consumer product company offering TRU NIAGEN® branded
products. This marked the strategic shift to become a global,
science-based integrated nutraceutical company. On September 5,
2017, the Company completed the sale of its operating assets that
were used with the Company's quality verification program testing
and analytical chemistry business for food and food related
products to Covance Laboratories Inc.
Business Market
According
to the data from Global Wellness Institute, the global wellness
industry market was approximately $4.2 trillion in 2017. Personal
care, beauty and anti-aging market was approximately $1.1 trillion,
healthy eating, nutrition and weight loss was approximately $702
billion and traditional and complementary medicine market was
approximately $360 billion.
According
to the data from Grand View Research, the global dietary
supplements market size was estimated at $123 billion in 2019, and
is expected to grow at a CAGR of 8.2% to about $232 billion by
2027.
Business Model
CONSUMER PRODUCTS SEGMENT
Our
business model is to sell TRU NIAGEN® to consumers worldwide.
As a world leader in the emerging NAD space and the science of
aging, we will continue to seek to discover and enhance patented
technology and evolve our TRU NIAGEN® products to improve
health by safely raising NAD levels. The TRU NIAGEN® brand is
built on scientific evidence, trust and the direct impact to our
consumers of aging better.
We
intend to expand to the worldwide NAD-related healthy aging market
by entering into new international markets. We will continue to
focus on obtaining additional regulatory approvals required to
expand our marketing and distribution of our TRU NIAGEN®
products in new international markets. We will utilize our
proprietary ecommerce platforms, and the ecommerce and brick and
mortar platforms of strategic regional and local partners. Our
United States ("U.S.") based business will continue to support our
global operations, including:
➢
Corporate
development and strategy
➢
Research and
development activities
➢
Global premium
brand management and brand guidelines
➢
Multi-platform
global marketing campaigns and know-how
➢
Build and evolve
propriety ecommerce platform and data analytics
➢
Global
manufacturing and supply chain operations
We
expect to continue to supply our international operations with
finished products manufactured in the U.S, and to continue to
provide all our marketing materials and know-how to our
international strategic partners.
INGREDIENTS SEGMENT
We will
continue to sell NIAGEN® in ingredient form to our strategic
partners. In addition, we will also continue to identify, acquire
and commercialize other innovative new proprietary ingredients and
technologies. We have an experienced team that is capable of
advancing products through development into commercialization with
the required regulatory approval, safety, toxicology, clinical
trials, supply chain management, manufacturing, and ultimately
either directly selling the products or licensing to third
parties.
ANALYTICAL REFERENCE STANDARDS AND SERVICES SEGMENT
We have
taken advantage of both supply chain needs and regulatory
requirements to build our analytical reference standards and
services segment. We believe that we create value throughout the
supply chain of the dietary supplements, functional foods and
personal care markets. We will capitalize on additional
opportunities in product development and commercialization of
various kinds of intellectual property that we have largely
discovered and acquired through the sales process associated with
this segment.
Overview of our Products and Services
Current
products and services
provided are as follows:
CONSUMER PRODUCTS
●
TRU NIAGEN® branded dietary
supplements. We currently offer our NIAGEN®
nicotinamide riboside through our TRU NIAGEN® finished
bottles. We will continue to build our TRU NIAGEN® as a global
brand and offer TRU NIAGEN® to consumers worldwide. We are
conducting additional clinical trials to further validate the
health benefits associated with NIAGEN® and TRU
NIAGEN®.
INGREDIENTS
●
Nicotinamide riboside NIAGEN®. We
will continue to develop and sell NIAGEN® in ingredient form
to strategic partners.
●
Spirulina Extract
Immulina™. IMMULINA™ is a spirulina
extract and the predominant active compounds are Braun-type
lipoproteins which are useful for improving human immune function.
These lipoproteins are present at much greater levels than those
found within commonly used immune enhancing botanicals such as
Echinacea and ginseng.
ANALYTICAL REFERENCE STANDARDS AND SERVICES
●
Supply of reference standards and fine
chemicals. We supply a wide range of products necessary to
conduct quality control of raw materials and consumer products.
Reference standards and fine chemicals are used for research and
quality control in the dietary supplements, cosmetics, food and
beverages, and pharmaceutical industries.
Sales and Marketing Strategy
For our
consumer products segment, we employ a variety of strategies to
drive sales and consumer awareness of TRU NIAGEN®, including
social media and internet advertising, managing websites,
influencers, paid spokespersons and talent, events and tradeshows,
e-mail, paid search, distribution of research publications and
press releases. We also have a customer care department that
handles day-to-day communications with our end customers addressing
any needs or concerns related to our TRU NIAGEN®
product.
For our
ingredients segment and analytical reference standards and services
segment, our strategy is based on a direct, technically-oriented
model. We recruit and hire sales and marketing staff with
appropriate commercial and scientific backgrounds.
USA:
For our
consumer products segment, we are distributing our TRU NIAGEN®
products direct to consumers through our propriety ecommerce
platform TRUNIAGEN.com, Amazon and other established internet
marketplaces. We also have specialty retailers and direct
healthcare practitioners who are authorized resellers of TRU
NIAGEN® in the U.S.
For our
ingredients segment and analytical reference standards and services
segment, we intend to
continue to use a direct marketing approach in the U.S. to promote
our products and services.
International:
For our
consumer products segment, we utilize strategic partners on a
regional or local country basis to expand our distribution of TRU
NIAGEN® products. Our strategic partnerships include brick and
mortar and/or ecommerce channels. We also are evaluating strategic
joint ventures to rapidly expand our distribution in Asia. We began
our international expansion of TRU NIAGEN® products with the
successful launch in Hong Kong and Macau with our strategic
partner, A.S. Watson Group in 2017, followed by the launch in
Singapore in 2018. In 2018, we also launched TRU NIAGEN® in
New Zealand with retail partner Matakana Superfoods and in Canada
by making it available at www.truniagen.ca and to healthcare
practitioners at Fullscript Canada after receiving regulatory
approval for sale from Health Canada. We are currently selling
cross border in China on Tmall, and on Amazon in the United
Kingdom, Canada and Japan. In 2019, we received a positive opinion
from the European Food Safety Authority on NR as a novel food
ingredient for use in food supplement and approval from the
Australian Therapeutic Goods Association for use in listed
complementary medicines. We will continue to focus on obtaining
additional regulatory approvals required to expand our marketing
and distribution of our TRU NIAGEN® brand in new strategic
international markets.
For our
ingredients segment, most of our customers are based currently in
the U.S.
For our
analytical reference standards and services segment outside of the
U.S., we use
international distributors to market and sell to several foreign
countries or markets. The use of distributors in some international
markets has proven to be more effective than direct
sales.
Government Regulation
Some of
our operations are subject to regulation by various United States
federal agencies and similar state and international agencies,
including the Food and Drug Administration (“FDA”), the
Federal Trade Commission (“FTC”), the Department of
Commerce, the Department of Transportation, the Department of
Agriculture and other state and international agencies. These
regulators govern a wide variety of production activities, from
design and development to labeling, manufacturing, handling,
selling and distributing of products. From time to time, federal,
state and international legislation is enacted that may have the
effect of materially increasing the cost of doing business or
limiting or expanding our permissible activities. We cannot predict
whether or when potential legislation or regulations will be
enacted, and, if enacted, the effect of such legislation,
regulation, implementation, or any implemented regulations or
supervisory policies would have on our financial condition or
results of operations. In addition, the outcome of any litigation,
investigations or enforcement actions initiated by state or federal
authorities could result in changes to our operations being
necessary and in increased compliance costs.
U.S. FDA Regulation
In the
United States dietary supplements and food are subject to FDA
regulations. For example, the FDA’s final rule on Good
Manufacturing Practices (“GMPs”) for dietary
supplements published in June 2007 requires companies to evaluate
products for identity, strength, purity and composition. These
regulations, in some cases, particularly for new ingredients,
require a notification that must be submitted to the FDA along with
evidence of safety. In addition, depending on the type of product,
whether a dietary supplement, cosmetic, food, or pharmaceutical,
the FDA, under the Food, Drug and Cosmetic Act (the "FDCA"), can
regulate:
●
documentation
process, batch records, specifications;
●
product
manufacturing and storage;
●
health claims,
advertising and promotion; and
●
product sales and
distribution.
The
FDCA has been amended several times with respect to dietary
supplements, most notably by the Dietary Supplement Health and
Education Act of 1994 (“DSHEA”). DSHEA established a
new framework for governing the composition and labeling of dietary
supplements. Generally, under DSHEA, dietary ingredients that were
marketed in the United States before October 15, 1994, may be
used in dietary supplements without notifying the FDA. However, an
NDI (a dietary ingredient that was not marketed in the United
States before October 15, 1994) is subject to NDI notification
that must be submitted to the FDA unless the ingredient has
previously been “present in the food supply as an article
used for food” without being “chemically
altered.” An NDI notification must provide the FDA with
evidence of a “history of use or other evidence of
safety” establishing that the use of the dietary ingredient
“will reasonably be expected to be safe.” An NDI
notification must be submitted to the FDA at least 75 days before
the initial marketing of the NDI. There can be no assurance that
the FDA will accept the evidence of safety for any NDIs that we may
want to commercialize, and the FDA’s refusal to accept such
evidence could prevent the marketing of such dietary ingredients.
The FDA is in the process of developing guidance for the industry
that will aim to clarify the FDA’s interpretation of the NDI
notification requirements, and this guidance may raise new and
significant regulatory barriers for NDIs.
For any
new ingredient developed by us to be used in conventional food or
beverage products in the United States, the product either must be
approved by the FDA as a food additive pursuant to a food additive
petition ("FAP") or be generally recognized as safe ("GRAS"). The
FDA does not have to approve a company’s determination that
an ingredient is GRAS. However, a company can notify the FDA of its
determination. There can be no assurance that the FDA will approve
any FAP for any ingredient that we may want to commercialize, or
agree with our determination that an ingredient is GRAS, either of
which could prevent the marketing of such ingredient.
U.S. Advertising Regulations
In
addition to FDA regulations, the FTC regulates the advertising of
dietary supplements, foods, cosmetics, and over-the-counter
("OTC"), drugs. In recent years, the FTC has instituted numerous
enforcement actions against dietary supplement companies for
failure to adequately substantiate claims made in advertising or
for the use of false or misleading advertising claims. These
enforcement actions have often resulted in consent decrees and the
payment of civil penalties, restitution, or both, by the companies
involved. We may be subject to regulation under various state and
local laws that include provisions governing, among other things,
the formulation, manufacturing, packaging, labeling, advertising
and distribution of dietary supplements, foods, cosmetics and OTC
drugs.
In
addition, The National Advertising Division of the Council of
Better Business Bureaus reviews national advertising for
truthfulness and accuracy. The National Advertising Division of the
Council of Better Business Bureaus uses a form of alternative
dispute resolution, working closely with in-house counsel,
marketing executives, research and development departments and
outside consultants to decide whether claims have been
substantiated.
International Regulations
Our
international sales for the consumer products segment and
ingredients segment are subject to foreign government regulations,
which vary substantially from country to country. The time required
to obtain approval by a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may
differ. We may be unable to obtain on a timely basis, if at all,
any foreign government approvals necessary for the marketing of our
products abroad.
Regulation
in Europe is exercised primarily through the European Union, which
regulates the combined market of each of its member states. Other
countries, such as Switzerland, have voluntarily adopted laws and
regulations that mirror those of the European Union with respect to
dietary ingredients.
Major Customers
Major
customers who accounted for more than 10% of the Company’s
total sales were as follows:
|
|
|
|
Major
Customers
|
|
|
|
|
|
|
|
A.S.
Watson Group - Related Party
|
15.8%
|
*
|
|
Life
Extension
|
*
|
10.0%
|
|
|
|
|
|
*
Represents less than 10%.
|
|
|
Generally,
we do not depend upon a single customer, or a few customers, and
the loss of any one or more would not have a material adverse
effect on the Company. However, due to the volume of consumer
products and ingredients we are selling in relation to the overall
Company’s sales, we do expect that at times one or more of
our customers may account for more than 10% of the Company’s
sales.
Competitive Business Conditions
For our
consumer products segment, we are in direct competition with
Elysium Health who offers a similar product to our TRU
NIAGEN®. There are also a few resellers of NIAGEN® as
consumer products that are our customers. We believe these
resellers are focused on specific channels that we believe are
complementary to our business.
For our
ingredients segment, we face little direct competition as the
ingredients we offer are backed by intellectual property
exclusively licensed to us. We, however, face strong indirect
competition from other ingredient suppliers who may supply
alternative ingredients that may have similar characteristics to
ingredients we offer. Below is a list of some of the competitors
for our ingredients segment.
Ingredients Business Segment Competitors
●
Royal DSM (the
Netherlands)
●
Lonza Group Ltd
(Switzerland)
●
Sabinsa Corporation
(India/USA)
For our
consumer products segment, we employ a variety of strategies to
drive sales and consumer awareness of TRU NIAGEN®, including
social media and internet advertising, managing websites,
influencers, paid spokespersons and talent, events and tradeshows,
e-mail, paid search, distribution of research publications and
press releases. We also have a customer care department that
handles day-to-day communications with our end customers addressing
any needs or concerns related to our TRU NIAGEN®
product.
Analytical Reference Standards and Services Segment
Competitors
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty
Agreements or Labor Contracts, Including Duration
We
currently protect our intellectual property through patents,
trademarks, designs and copyrights on our products and services.
Our business strategy is to use the intellectual property harnessed
from our analytical reference standards and services segment as the
basis for providing new proprietary ingredients to our customers.
Our strategy is to develop these proprietary ingredients on our own
as well as to license our intellectual property to companies who
will commercialize it. We anticipate that the net result will be a
long-term flow of intellectual property milestone and royalty
payments to us.
The
following table sets forth our existing patents and those to which
we have licensed rights:
|
Patent Number
|
Title
|
Filing Date
|
Issued Date
|
Expires
|
Licensor
|
|
7,205,284
|
Potent
immunostimulants from microalgae
|
7/10/2001
|
4/17/2007
|
3/9/2022
|
Licensed
from University of Mississippi
|
|
7,776,326
|
Methods
and compositions for treating neuropathies
|
6/3/2005
|
8/17/2010
|
6/3/2025
|
Licensed
from Washington University
|
|
7,846,452
|
Potent
immunostimulatory extracts from microalgae
|
7/28/2005
|
10/7/2010
|
7/28/2025
|
Licensed
from University of Mississippi
|
|
8,106,184
|
Nicotinyl
Riboside Compositions and Methods of Use
|
11/17/2006
|
1/31/2012
|
11/17/2026
|
Licensed
from Cornell University
|
|
8,114,626
|
Yeast
strain and method for using the same to produce Nicotinamide
Riboside
|
3/26/2009
|
2/14/2012
|
3/26/2029
|
Licensed
from Dartmouth College
|
|
8,133,917
|
Pterostilbene
as an agonist for the peroxisome proliferator-activated receptor
alpha isoform
|
10/25/2010
|
3/13/2012
|
10/25/2030
|
Licensed
from the University of Mississippi and U.S. Department of
Agriculture
|
|
8,197,807
|
Nicotinamide
Riboside Kinase compositions and Methods for using the
same
|
11/20/2007
|
6/12/2012
|
11/20/2027
|
Licensed
from Dartmouth College
|
|
8,252,845
|
Pterostilbene
as an agonist for the peroxisome proliferator-activated receptor
alpha isoform
|
2/1/2012
|
8/28/2012
|
2/1/2032
|
Licensed
from the University of Mississippi and U.S. Department of
Agriculture
|
|
8,318,807
|
Pterostilbene
Caffeine Co-Crystal Forms
|
7/30/2010
|
11/27/2012
|
7/30/2030
|
Licensed
from Laurus Labs Private Limited
|
|
8,383,086
|
Nicotinamide
Riboside Kinase compositions and Methods for using the
same
|
4/12/2012
|
2/26/2013
|
4/12/2032
|
Licensed
from Dartmouth College
|
|
8,399,712
|
Pterostilbene
cocrystals
|
7/30/2010
|
3/19/2013
|
7/30/2020
|
Licensed
from Laurus Labs Private Limited
|
|
8,524,782
|
Key
intermediate for the preparation of Stilbenes, solid forms of
Pterostilbene, and methods for making the same
|
6/1/2009
|
9/3/2013
|
6/1/2029
|
Licensed
from Laurus Labs Private Limited
|
|
8,809,400
|
Method
to Ameliorate Oxidative Stress and Improve Working Memory Via
Pterostilbene Administration
|
6/10/2008
|
8/19/2014
|
6/10/2028
|
Licensed
from the University of Mississippi and U.S. Department of
Agriculture
|
|
8,841,350
|
Method
for treating non-melanoma skin cancer by inducing
UDP-Glucuronosyltransferase activity using
pterostilbene
|
5/8/2012
|
9/22/2014
|
5/8/2032
|
Co-owned
by ChromaDex and University of California
|
|
8,889,126
|
Methods
and compositions for treating neuropathies
|
5/28/2010
|
11/18/2014
|
5/28/2030
|
Licensed
from Washington University
|
|
9,000,147
|
Nicotyl
riboside compositions and methods of use
|
1/17/2012
|
4/7/2015
|
1/17/2032
|
Licensed
from Cornell University
|
|
9,028,887
|
Method
improve spatial memory via pterostilbene
administration
|
5/22/2014
|
5/12/2015
|
5/22/2034
|
Licensed
from the University of Mississippi and U.S. Department of
Agriculture
|
|
9,295,688
|
Methods
and compositions for treating neuropathies
|
10/10/2014
|
3/29/2016
|
10/10/2034
|
Licensed
from Washington University
|
|
9,321,797
|
Nicotyl
riboside compositions and methods of use
|
11/17/2014
|
4/26/2016
|
11/17/2034
|
Licensed
from Cornell University
|
|
9,439,875
|
Anxiolytic
effect of pterostilbene
|
5/11/2011
|
9/13/2016
|
5/11/2031
|
Licensed
from the University of Mississippi and U.S. Department of
Agriculture
|
|
9,975,915
|
Nicotinamide
riboside kinase compositions and methods for using the
same
|
4/12/2012
|
2/26/2013
|
4/12/2032
|
Licensed
from Dartmouth College
|
|
10,000,520
|
B-vitamin
and amino acid conjugates ofnicotinoyl ribosides and reduced
nicotinoyl ribosides, derivatives thereof, and methods of
preparation thereof
|
3/16/2017
|
6/19/2018
|
3/16/2037
|
Co-owned
by ChromaDex and The Queen’s University of
Belfast
|
Manufacturing
We
currently utilize third-party manufacturers to produce and supply
dietary supplement, ingredients, products, and services. Following
the receipt of products or product components from third-party
manufacturers, we inspect and ensure conformance of each product
and product component to our specifications. We will also consider
manufacturing certain products or product components internally, if
our capacity permits, when demand or quality requirements make it
appropriate to do so.
We
intend to work with manufacturing companies that can meet the
standards imposed by the FDA, the International Organization for
Standardization and the quality standards that we will require for
our own internal policies and procedures. We expect to monitor and
manage supplier performance through a corrective action program
developed by us. We believe these manufacturing relationships can
minimize our capital investment, help control costs, and allow us
to compete with larger volume manufacturers of dietary supplements,
phytochemicals and ingredients.
Sources and Availability of Raw Materials
For all
three business segments, and subject to the risks related to our
Company and our Business recited below, we believe that we have
identified reliable sources and suppliers of ingredients,
chemicals, phytochemicals and reference materials that will provide
products in compliance with our guidelines.
Research and Development
We have
completed the first human clinical trial on our proprietary
ingredient NIAGEN® and the results demonstrated that a single
dose of NR resulted in statistically significant increases in the
co-enzyme NAD+ in healthy human volunteers. In addition, no adverse
events were observed. In 2015, NIAGEN® was
recognized by the FDA as a “New Dietary Ingredient.”
NIAGEN® was also “Generally Recognized as Safe” by
an independent panel of expert toxicologists and in August 2016,
the FDA issued a GRAS No Objection Letter.
In
2018, we completed a second human clinical trial on NR which
evaluated the effect of repeated doses of NIAGEN® on NAD+
metabolite concentrations in blood, urine and muscle in healthy
adults. This study evaluated the impacts of three dose levels of
NIAGEN® compared to a placebo. One quarter of subjects
received the low dose of NIAGEN® (100 mg), one quarter
received the moderate dose of NIAGEN® (300 mg), one quarter
received the higher dose of NIAGEN® (1,000 mg) and one quarter
received the placebo. The results showed that NAD levels rose in
response to the dose of NIAGEN® and the elevated blood NAD
levels were sustained throughout the eight-week treatment
period.
Through
our research and development laboratory in Longmont, Colorado, we
intend to manufacture at a process scale for products that we are
planning to take to market as well as explore cost saving processes
for existing products.
Research
and development costs for the fiscal years ended December 31, 2019,
and December 31, 2018, were approximately $4.4 million and $5.5
million, respectively.
Environmental Compliance
We will
incur significant expense in complying with GMPs and safe handling
and disposal of materials used in our research and manufacturing
activities. We do not anticipate incurring additional material
expense to comply with federal, state and local environmental laws
and regulations.
Working Capital
The
Company’s working capital at the end of years 2019 and 2018
was approximately $4.1 million and $3.1 million, respectively. The
Company measures working capital by adding trade receivables and
inventories, and subtracting accounts payable. Most of the working
capital is consumed by our consumer products segment and
ingredients segment as the operations require a large amount of
inventory to be on hand. As the consumer products segment and
ingredients segment grow, more working capital will likely be
needed to support the operations.
Backlog Orders
For our
consumer products segment where we ship products internationally to
distributors, we may have a backlog from time to time as the
production of TRU NIAGEN® finished bottles require up to three
months lead time by our third-party contract manufacturers. As of
December 31, 2019 we had approximately $1.3 million backlog orders
from the distributors that have not been shipped. For products that
are directly shipped to consumers, we have minimal backlog orders
as we carry inventory on hand to ship upon the receipt of
order.
For our
ingredients segment, we also have minimal backlog orders as we
carry inventory on hand for most of the products we offer and we
ship upon the receipt of customer’s order.
For our
analytical reference standards and services segment, we normally
have a small backlog of orders for reference standards. These
orders amount to approximately $25,000 or less. Because we list
over 1,500 phytochemicals and 300 botanical reference materials in
our catalog, we may not always have the items in stock at the time
of customers’ orders. These backlog orders are normally
fulfilled within 2 to 3 months.
Facilities
For
information on our facilities, see “Properties” in Item
2 of this Form 10-K.
Employees
As of
December 31, 2019, ChromaDex (including Healthspan Research LLC and
ChromaDex Analytics, Inc.) had approximately 110 employees, all of
whom were full-time. We consider our relationships with our
employees to be satisfactory. None of our employees is covered by a
collective bargaining agreement.
Financial Information about Geographic Areas
Please
refer to Item 8 Financial Statements and Supplementary Data of this
Annual Report on Form 10-K for financial information about
geographic areas.
Available Information
Our Internet website address is www.chromadex.com. Information
found on, or accessible through, our website is not a part of, and
is not incorporated into, this Annual Report on Form 10-K. We make
available free of charge on our website our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practical
after we file such material with, or furnish it to, the Securities
and Exchange Commission. This information is also available in
print to any stockholder who requests it, with any such requests
addressed to ChromaDex Corporation, 10900 Wilshire Blvd. Ste 600,
Los Angeles, CA 90024. Certain of these documents may also be
obtained by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet website that contains reports, and other
information regarding issuers that file electronically with the SEC
at www.sec.gov. We
also make available free of charge on our website our Code of
Business Conduct and Ethics, and the Charters of our Audit
Committee, Nominating and Corporate Governance Committee, and
Compensation Committee of our Board of
Directors.
Investing in our common stock involves a high degree of risk.
Current investors and potential investors should consider carefully
the risks and uncertainties described below together with all other
information contained in this Form 10-K before making investment
decisions with respect to our common stock. If any of the following
risks occurs, our business, financial condition, results of
operations and our future growth prospects would be materially and
adversely affected. Under these circumstances, the trading price
and value of our common stock could decline, resulting in a loss of
all or part of your investment. The risks and uncertainties
described in this Form 10-K are not the only ones facing our
Company. Additional risks and uncertainties of which we are not
presently aware, or that we currently consider immaterial, may also
affect our business operations.
Risks Related to our Company and our Business
We have a history of 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
a history of losses and may continue to incur operating and net
losses for the foreseeable future. We incurred net losses of
approximately $32.1 million and $33.3 million for the years ended
December 31, 2019 and December 31, 2018, respectively. As of
December 31, 2019, our accumulated deficit was approximately $121.9
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.
As of
December 31, 2019, our cash and cash equivalents totaled
approximately $18.8 million. While we anticipate that our current
cash, cash equivalents and cash to be generated from operations
will be sufficient to meet our projected operating plans through at
least the next twelve months, we may require additional funds,
either through additional equity or debt financings or
collaborative agreements or from other sources. We have no
commitments to obtain such additional financing, and we may not be
able to obtain any such additional financing on terms favorable to
us, or at all. 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, including expenses involved
with our ongoing litigation with Elysium.
Because
of these factors, we may seek to raise additional capital within
the next twelve months both to meet our projected operating plans
after the next twelve months and to fund our longer term strategic
objectives. Additional capital may come from public and private
equity or debt offerings, borrowings under lines of credit or other
sources. These additional funds may not be available on favorable
terms, or at all. There can be no assurance we will be successful
in raising these additional funds. Furthermore, if we issue equity
or debt securities to raise additional funds, our existing
stockholders may experience dilution and the new equity or debt
securities we issue may have rights, preferences and privileges
senior to those of our existing stockholders. In addition, if we
raise additional funds through collaboration, licensing or other
similar arrangements, it may be necessary to relinquish valuable
rights to our products or proprietary technologies, or grant
licenses on terms that are not favorable to us. If we cannot raise
funds on acceptable terms, we may not be able to develop or enhance
our products, obtain the required regulatory clearances or
approvals, execute our business plan, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
customer requirements. Any of these events could adversely affect
our ability to achieve our development and commercialization goals,
which could have a material and adverse effect on our business,
results of operations and financial condition.
We are currently engaged in substantial and complex litigation with
Elysium Health, Inc. and Elysium Health LLC ("Elysium"), the
outcome of which could materially harm our business and financial
results.
We are currently engaged in litigation with Elysium, a customer
that represented 19% of our net sales for the year ended December
31, 2016. Elysium has made no purchases from us since August 9,
2016. The litigation includes multiple complaints and counterclaims
by us and Elysium in venues in California and New York, as well as
a patent infringement complaint filed by the Company and Trustees
of Dartmouth College. For further details on this litigation,
please refer to Part I, Item 3 of this Annual Report on Form
10-K.
The litigation is substantial and complex, and it has caused and
could continue to cause us to incur significant costs, as well as
distract our management over an extended period. The litigation may
substantially disrupt our business and we cannot assure you that we
will be able to resolve the litigation on terms favorable to us. If
we are unsuccessful in resolving the litigation on favorable terms
to us, we may be forced to pay compensatory and punitive damages
and restitution for any royalty payments that we received from
Elysium, which payments could materially harm our business, or be
subject to other remedies, including injunctive relief. In
addition, Elysium has not paid us approximately $2.7 million for
previous purchase orders. We may not collect the full amount owed
to us by Elysium, and as a result, we wrote off the full amount as
uncollectible expense. We cannot predict the outcome of our
litigation with Elysium, which could have any of the results
described above or other results that could materially adversely
affect our business.
Interruptions in our relationships or declines in our business with
major customers could materially harm our business and financial
results.
One of our customers accounted for approximately 16% of our sales
during the year ended December 31, 2019. Any interruption in our
relationship or decline in our business with this customer or other
customers upon whom we become highly dependent could cause harm to
our business. Factors that could influence our relationship with
our customers upon whom we may become highly dependent
include:
●
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.
Our financial condition and results of operations for fiscal 2020
may be adversely affected by the recent COVID-19
outbreak.
Our
financial condition and results of operations for fiscal year 2020
may be adversely affected by the recent COVID-19 (also known as
coronavirus) outbreak. The ongoing coronavirus outbreak emanating
from China at the beginning of 2020 has resulted in increased
travel restrictions and extended shutdowns of certain businesses in
the region. A significant portion of our sales are to customers in
Asia and we also have suppliers in Asia. In 2019, approximately 16%
of our revenue was attributed to sales in the Asia region.
Consequently, we are susceptible to factors adversely affecting
this region. The effects could include restrictions on our ability
to travel to support our customers or suppliers located in Asia,
disruptions in our ability to distribute our products in the Asia
region, and/or temporary closures of the facilities of our
customers or suppliers. Disruption to the operations of our
customers or suppliers would likely impact our sales and operating
results. The extent to which the coronavirus impacts our results
will depend on future developments, which are highly uncertain and
cannot be predicted, including new information which may emerge
concerning the severity of the coronavirus and the actions to
contain the coronavirus or treat its impact, among
others.
Our future success largely depends on sales of our TRU
NIAGEN®
product.
In
connection with our strategic shift from an ingredient and testing
company to a consumer focused company, we expect to generate a
significant percentage of our future revenue from sales of our TRU
NIAGEN® product. As a result, the market acceptance of TRU
NIAGEN® is critical to our continued success, and if we are
unable to expand market acceptance of TRU NIAGEN®, our
business, results of operations, financial condition, liquidity and
growth prospects would be materially adversely
affected.
Decline in the state of the global
economy and financial market conditions could adversely affect our
ability to conduct business and our results of
operations.
Global
economic and financial market conditions, including disruptions in
the credit markets and the impact of the global economic
deterioration may materially impact our customers and other parties
with whom we do business. These conditions could negatively affect
our future sales of our ingredient 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 businesses or assets. In
addition, external events including changing technology, changing
consumer patterns and changes in macroeconomic conditions may
impair the value of our assets. When these changes or events occur,
we may incur costs to change our business strategy and may need to
write down the value of assets. In any of these events, our costs
may increase, we may have significant charges associated with the
write-down of assets or returns on new investments may be lower
than prior to the change in strategy or restructuring. For example,
if we are not successful in developing our consumer product
business, our sales may decrease and our costs may
increase.
The success of our consumer product and ingredient business is
linked to the size and growth rate of the vitamin, mineral and
dietary supplement market and an adverse change in the size or
growth rate of that market could have a material adverse effect on
us.
An
adverse change in the size or growth rate of the vitamin, mineral
and dietary supplement market could have a material adverse effect
on our business. Underlying market conditions are subject to change
based on economic conditions, consumer preferences and other
factors that are beyond our control, including media attention and
scientific research, which may be positive or
negative.
The future growth and profitability of our consumer product
business will depend in large part upon the effectiveness and
efficiency of our marketing efforts and our ability to select
effective markets and media in which to market and
advertise.
Our consumer products business success depends on our ability to
attract and retain customers, which significantly depends on our
marketing practices. Our future growth and profitability will
depend in large part upon the effectiveness and efficiency of our
marketing efforts, including our ability to:
●
create greater awareness of our brand;
●
identify the most effective and efficient levels of spending in
each market, media and specific media vehicle;
●
determine the appropriate creative messages and media mix for
advertising, marketing and promotional expenditures;
●
effectively manage marketing costs (including creative and media)
to maintain acceptable customer acquisition costs;
●
acquire cost-effective television advertising;
●
select the most effective markets, media and specific media
vehicles in which to market and advertise; and
●
convert consumer inquiries into actual orders.
Unfavorable publicity or consumer perception of our products and
any similar products distributed by other companies could have a
material adverse effect on our business.
We
believe the nutritional supplement market is highly dependent upon
consumer perception regarding the safety, efficacy and quality of
nutritional supplements generally, as well as of products
distributed specifically by us. Consumer perception of our products
can be significantly influenced by scientific research or findings,
regulatory investigations, litigation, national media attention and
other publicity regarding the consumption of nutritional
supplements. We cannot assure you that future scientific research,
findings, regulatory proceedings, litigation, media attention or
other favorable research findings or publicity will be favorable to
the nutritional supplement market or any 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, if 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 a
consumer product and ingredient 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 food
ingredients, dietary supplements, or natural health products, and,
in most cases, are not necessarily subject to pre-market regulatory
approval in the United States. Some of our products contain
innovative ingredients that do not have long histories of human
consumption. Previously unknown adverse reactions resulting from
human consumption of these ingredients could occur. In addition,
the products we sell are produced by third-party manufacturers. As
a marketer of products manufactured by third parties, we also may
be liable for various product liability claims for products we do
not manufacture. We may, in the future, be subject to various
product liability claims, including, among others, that our
products include inadequate instructions for use or inadequate
warnings concerning possible side effects and interactions with
other substances. A product liability claim against us could result
in increased costs and could adversely affect our reputation with
our customers, which, in turn, could have a materially adverse
effect on our business, results of operations, financial condition
and cash flows.
We acquire ingredients for our
products from foreign suppliers, and may be negatively affected by
the risks associated with international trade and importation
issues.
We
acquire ingredients for a number of our products from suppliers
outside of the United States. 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, health epidemics affecting the
region of such suppliers (including the coronavirus), 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 U.S. governments, our
suppliers and our company.
The insurance industry has become
more selective in offering some types of coverage and we may not be
able to obtain insurance coverage in the
future.
The
insurance industry has become more selective in offering some types
of insurance, such as product liability, product recall, property
and directors’ and officers’ liability insurance. Our
current insurance program is consistent with both our past level of
coverage and our risk management policies. However, we cannot
assure you that we will be able to obtain comparable insurance
coverage on favorable terms, or at all, in the
future. Certain of our customers as well as prospective
customers require that we maintain minimum levels of coverage for
our products. Lack of coverage or coverage below these minimum
required levels could cause these customers to materially change
business terms or to cease doing business with us
entirely.
If we experience product recalls, we may incur significant and
unexpected costs, and our business reputation could be adversely
affected.
We may be exposed to product recalls and adverse public relations
if our products are alleged to be mislabeled or to cause injury or
illness, or if we are alleged to have violated governmental
regulations. A product recall could result in substantial and
unexpected expenditures, which would reduce operating profit and
cash flow. In addition, a product recall may require significant
management attention. Product recalls may hurt the value of our
brands and lead to decreased demand for our products. Product
recalls also may lead to increased scrutiny by federal, state or
international regulatory agencies of our operations and increased
litigation and could have a material adverse effect on our
business, results of operations, financial condition and cash
flows.
We depend on key personnel, the
loss of any of which could negatively affect our
business.
We
depend greatly on Frank L. Jaksch Jr., Robert N. Fried, Kevin M.
Farr, and Mark J. Friedman, who are our Executive Chairman of the
Board, Chief Executive Officer, Chief Financial Officer and General
Counsel, 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 competitors;
●
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.
In
addition, we may never achieve technical feasibility under the
supply agreement with Nestec Ltd., and therefore Nestec Ltd. may
never commercialize a product using NIAGEN®.
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 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. There may be third-party patents or
patent applications with claims to materials, formulations, methods
of manufacture or methods for use related to the use or manufacture
of our products, and our potential competitors may assert that some
aspect of our product infringes their patents. Because patent
applications may take years to issue, there also may be
applications now pending of which we are unaware that may later
result in issued patents upon which our products could infringe.
There also may be existing patents or pending patent applications
of which we are unaware upon which our products may inadvertently
infringe.
Any
infringement or misappropriation claim could cause us to incur
significant costs, place significant strain on our financial
resources, divert management’s attention from our business
and harm our reputation. If the relevant patents in such claim were
upheld as valid and enforceable and we were found to infringe them,
we could be prohibited from manufacturing or selling any product
that is found to infringe unless we could obtain licenses to use
the technology covered by the patent or are able to design around
the patent. We may be unable to obtain such a license on terms
acceptable to us, if at all, and we may not be able to redesign our
products to avoid infringement, which could materially impact our
revenue. A court could also order us to pay compensatory damages
for such infringement, plus prejudgment interest and could, in
addition, treble the compensatory damages and award attorney fees.
These damages could be substantial and could harm our reputation,
business, financial condition and operating results. A court also
could enter orders that temporarily, preliminarily or permanently
enjoin us and our customers from making, using, or selling
products, and could enter an order mandating that we undertake
certain remedial activities. Depending on the nature of the relief
ordered by the court, we could become liable for additional damages
to third parties.
The prosecution and enforcement of patents licensed to us by third
parties are not within our control. Without these technologies, our
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. If any third party licensor is unable to successfully
maintain, prosecute or enforce the licensed patents and/or patent
application rights related to our products, we may become subject
to infringement or misappropriate claims or lose our competitive
advantage. Without access to these technologies or suitable
design-around or alternative technology options, our ability to
conduct our business could be impaired significantly.
We may be subject to damages resulting from claims that we, our
employees, or our independent contractors have wrongfully used or
disclosed alleged trade secrets of others.
Some of
our employees were previously employed at other dietary supplement,
nutraceutical, food and beverage, functional food, analytical
laboratories, pharmaceutical and cosmetic companies. We may also
hire additional employees who are currently employed at other such
companies, including our competitors. Additionally, consultants or
other independent agents with which we may contract may be or have
been in a contractual arrangement with one or more of our
competitors. We may be subject to claims that these employees or
independent contractors have used or disclosed such other
party’s trade secrets or other proprietary information.
Litigation may be necessary to defend against these claims. Even if
we are successful in defending against these claims, litigation
could result in substantial costs and be a distraction to our
management. If we fail to defend such claims, in addition to paying
monetary damages, we may lose valuable intellectual property rights
or personnel. A loss of key personnel or their work product could
hamper or prevent our ability to market existing or new products,
which could severely harm our business.
Litigation may harm our business.
Substantial,
complex or extended litigation could cause us to incur significant
costs and distract our management. For example, lawsuits by
employees, stockholders, collaborators, distributors, customers,
competitors or others could be very costly and substantially
disrupt our business. Disputes from time to time with such
companies, organizations or individuals are not uncommon, and we
cannot assure you that we will always be able to resolve such
disputes or on terms favorable to us. As further described in Part
I, Item 3 of this Annual Report on Form 10-K, we are currently
involved in substantial and complex litigation with Elysium.
Unexpected results could cause us to have financial exposure in
these matters in excess of recorded reserves and insurance
coverage, requiring us to provide additional reserves to address
these liabilities, therefore impacting profits.
Our sales and results of operations for our analytical reference
standards and services segment depend on our customers’
research and development efforts and their ability to obtain
funding for these efforts.
Our
analytical reference standards and services segment customers
include researchers at pharmaceutical and biotechnology companies,
chemical and related companies, academic institutions, government
laboratories and private foundations. Fluctuations in the research
and development budgets of these researchers and their
organizations could have a significant effect on the demand for our
products. Our customers determine their research and development
budgets based on several factors, including the need to develop new
products, the availability of governmental and other funding,
competition and the general availability of resources. As we
continue to expand our international operations, we expect research
and development spending levels in markets outside of the United
States will become increasingly important to us.
Research
and development budgets fluctuate due to changes in available
resources, spending priorities, general economic conditions,
institutional and governmental budgetary limitations and mergers of
pharmaceutical and biotechnology companies. Our business could be
harmed by any significant decrease in life science and high
technology research and development expenditures by our customers.
In particular, a small portion of our sales has been to researchers
whose funding is dependent on grants from government agencies such
as the United States National Institute of Health, the National
Science Foundation, the National Cancer Institute and similar
agencies or organizations. Government funding of research and
development is subject to the political process, which is often
unpredictable. Other departments, such as Homeland Security or
Defense, or general efforts to reduce the United States federal
budget deficit could be viewed by the government as a higher
priority. Any shift away from funding of life science and high
technology research and development or delays surrounding the
approval of governmental budget proposals may cause our customers
to delay or forego purchases of our products and services, which
could seriously damage our business.
Some of
our customers receive funds from approved grants at a particular
time of year, many times set by government budget cycles. In the
past, such grants have been frozen for extended periods or have
otherwise become unavailable to various institutions without
notice. The timing of the receipt of grant funds may affect the
timing of purchase decisions by our customers and, as a result,
cause fluctuations in our sales and operating results.
Demand for our products and services are subject to the commercial
success of our customers’ products, which may vary for
reasons outside our control.
Even if
we are successful in securing utilization of our products in a
customer’s manufacturing process, sales of many of our
products and services remain dependent on the timing and volume of
the customer’s production, over which we have no control. The
demand for our products depends on regulatory approvals and
frequently depends on the commercial success of the
customer’s supported product. Regulatory processes are
complex, lengthy, expensive, and can often take years to
complete.
We may bear financial risk if we under-price our contracts or
overrun cost estimates.
In
cases where our contracts are structured as fixed price or
fee-for-service with a cap, we bear the financial risk if we
initially under-price our contracts or otherwise overrun our cost
estimates. Such underpricing or significant cost overruns could
have a material adverse effect on our business, results of
operations, financial condition and cash flows.
We rely on single or a limited number of third-party suppliers for
the raw materials required to produce our products.
Our
dependence on a limited number of third-party suppliers or on a
single supplier, and the challenges we may face in obtaining
adequate supplies of raw materials, involve several risks,
including limited control over pricing, availability, health
epidemics affecting the region of such suppliers (including the
coronavirus), 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 or products on
favorable terms.
As part of our business strategy, we intend to consider
acquisitions of similar or complementary businesses or products. No
assurance can be given that we will be successful in identifying
attractive acquisition candidates or completing acquisitions on
favorable terms. In addition, any future acquisitions will be
accompanied by the risks commonly associated with acquisitions.
These risks include potential exposure to unknown liabilities of
acquired companies or to acquisition costs and expenses, the
difficulty and expense of integrating the operations and personnel
of the acquired companies, the potential disruption to the business
of the combined company and potential diversion of our management's
time and attention, the impairment of relationships with and the
possible loss of key employees and clients as a result of the
changes in management, the incurrence of amortization expenses and
write-downs and dilution to the shareholders of the combined
company if the acquisition is made for stock of the combined
company. In addition, successful completion of an acquisition may
depend on consents from third parties, including regulatory
authorities and private parties, which consents are beyond our
control. There can be no assurance that products, technologies or
businesses of acquired companies will be effectively assimilated
into the business or product offerings of the combined company or
will have a positive effect on the combined company's revenues or
earnings. Further, the combined company may incur significant
expense to complete acquisitions and to support the acquired
products and businesses. Any such acquisitions may be funded with
cash, debt or equity, which could have the effect of diluting or
otherwise adversely affecting the holdings or the rights of our
existing stockholders.
If we experience a significant disruption in our information
technology systems or if we fail to implement new systems and
software successfully, our business could be adversely
affected.
We
depend on information systems throughout our company to control our
manufacturing processes, process orders, manage inventory, process
and bill shipments and collect cash from our customers, respond to
customer inquiries, contribute to our overall internal control
processes, maintain records of our property, plant and equipment,
and record and pay amounts due vendors and other creditors. If we
were to experience a prolonged disruption in our information
systems that involve interactions with customers and suppliers, it
could result in the loss of sales and customers and/or increased
costs, which could adversely affect our overall business
operation.
If we are unable to 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.
Our business could be negatively impacted by cyber security
threats.
In the
ordinary course of our business, we use our data centers and our
networks to store and access our proprietary business information.
We face various cyber security threats, including cyber security
attacks to our information technology infrastructure and attempts
by others to gain access to our proprietary or sensitive
information. Information security risks have significantly
increased in recent years in part due to the proliferation of new
technologies and the increased sophistication and activities of
organized crime, hackers, data and related privacy breaches,
terrorists and other external parties, including foreign private
parties and state actors. The procedures and controls we use to
monitor these threats and mitigate our exposure may not be
sufficient to prevent cyber security incidents. The result of these
incidents could include disrupted operations, lost opportunities,
misstated financial data, liability for stolen assets or
information, theft of our intellectual property, loss of data and
other personally identifiable information, increased costs arising
from the implementation of additional security protective measures,
litigation and reputational damage. Any remedial costs or other
liabilities related to cyber security incidents may not be fully
insured or indemnified by other means.
Compliance with global privacy and data security requirements could
result in additional costs and liabilities to us or inhibit our
ability to collect and, if applicable, process data globally, and
the failure to comply with such requirements could have a material
adverse effect on our business, financial condition or results of
operations.
The
regulatory framework for the collection, use, safeguarding,
sharing, transfer and other processing of information worldwide is
rapidly evolving and is likely to remain uncertain for the
foreseeable future. For example, the European Union’s General
Data Protection Regulation (“GDPR”) imposes strict
obligations on the processing of personal data, including, without
limitation, personal health data, and the free movement of such
data. The GDPR applies to any company established in the European
Union as well as any company outside the European Union that
processes personal data in connection with the offering of goods or
services to individuals in the European Union or the monitoring of
their behavior. The GDPR provides data protection obligations for
processors and controllers of personal data, including, for
example, obligations relating to: processing health and other
sensitive data; obtaining consent of individuals; providing notice
to individuals regarding data processing activities; respondingto
data subject requests; taking certain measures when engaging
third-party processors; notifying data subjects and regulators of
data breaches; implementing safeguards to protect the security and
confidentiality of personal data; and transferring personal data to
countries outside the European Union, including the U.S. The GDPR
imposes fines for breaches of data protection requirements and
provides other remedies for parties who suffer harm as a result of
a data breach. The GDPR and other changes in laws or regulations
associated with the enhanced protection of certain types of
sensitive data, such as healthcare data or other personal
information from our clinical trials, could require us to change
our business practices or lead to government enforcement actions,
private litigation or significant penalties against us and could
have a material adverse effect on our business, financial condition
or results of operations.
Additionally,
California recently enacted legislation that has been dubbed the
first “GDPR-like” law in the U.S. Known as the
California Consumer Privacy Act (the “CCPA”), it
creates new individual privacy rights for consumers (as that word
is broadly defined in the law) and places increased privacy and
security obligations on entities handling personal data of
consumers. The CCPA, which went into effect on January 1, 2020,
requires covered companies to provide new disclosures to California
consumers, and provides such consumers new ways to opt-out of
certain sales of personal information. The CCPA provides for
penalties for violations, as well as other remedies for parties who
suffer harm as a result of a data breach, which may increase data
breach litigation. The CCPA may increase our compliance costs and
potential liability.
We are subject to financial and operating covenants in our business
financing agreement with Western Alliance Bank (the “Credit
Agreement”) and any failure to comply with such covenants, or
obtain waivers in the event of non-compliance, could limit our
borrowing availability under the Credit Agreement, resulting in our
being unable to borrow under the Credit Agreement and materially
adversely impact our liquidity. In addition, our operations may not
provide sufficient cash to meet the repayment obligations of debt
incurred under the Credit Agreement.
The
Credit Agreement contains affirmative and restrictive covenants,
including covenants regarding delivery of financial statements,
maintenance of inventory, payment of taxes, maintenance of
insurance, dispositions of property, business combinations or
acquisitions and incurrence of additional indebtedness, among other
customary covenants, in each case subject to limited
exceptions.
There
can be no assurance that we will be able to comply with the
financial and other covenants in the Credit Agreement. Our failure
to comply with these covenants could cause us to be unable to
borrow under the Credit Agreement and may constitute an event of
default which, if not cured or waived, could result in the
acceleration of the maturity of any indebtedness then outstanding
under the Credit Agreement, which would require us to pay all
amounts then outstanding. If we are unable to repay those amounts,
Western Alliance Bank could proceed against the collateral granted
to them to secure that debt, which would seriously harm our
business. Such an event could materially adversely affect our
financial condition and liquidity. Additionally, such events of
non-compliance could impact the terms of any additional borrowings
and/or any credit renewal terms. Any failure to comply with such
covenants may be a disclosable event and may be perceived
negatively. Such perception could adversely affect the market price
for our common stock and our ability to obtain financing in the
future.
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;
●
acceptance of and
demand for our products by consumers;
●
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.
Changes in tax laws or regulations that are applied adversely to us
or our customers may have a material adverse effect on our
business, cash flow, financial condition or results of
operations.
New
income, sales, use or other tax laws, statutes, rules, regulations
or ordinances could be enacted at any time, which could adversely
affect our business operations and financial performance. Further,
existing tax laws, statutes, rules, regulations or ordinances could
be interpreted, changed, modified or applied adversely to us. For
example, legislation enacted in 2017 informally titled the Tax Cuts
and Jobs Act enacted many significant changes to the U.S. tax laws.
Future guidance from the Internal Revenue Service and other tax
authorities with respect to the Tax Cuts and Jobs Act may affect
us, and certain aspects of the Tax Cuts and Jobs Act could be
repealed or modified in future legislation. In addition, it is
uncertain if and to what extent various states will conform to the
Tax Cuts and Jobs Act or any newly enacted federal tax legislation.
Changes in corporate tax rates, the realization of net deferred tax
assets relating to our operations, the taxation of foreign
earnings, and the deductibility of expenses under the Tax Cuts and
Jobs Act or future reform legislation could have a material impact
on the value of our deferred tax assets, could result in
significant one-time charges, and could increase our future U.S.
tax expense.
Our ability to use our net operating loss carryforwards and certain
other tax attributes may be limited.
Our
federal net operating losses (“NOL”s) generated in
taxable years ending prior to 2018 could expire unused. Under the
Tax Cuts and Jobs Act, federal NOLs incurred in taxable years
ending after December 31, 2017, may be carried forward
indefinitely, but the deductibility of federal NOLs generated in
tax years beginning after December 31, 2017, is limited. It is
uncertain if and to what extent various states will conform to the
Tax Cuts and Jobs Act. In addition, under Sections 382 and 383
of the Internal Revenue Code of 1986, as amended, and corresponding
provisions of state law, if a corporation undergoes an
“ownership change,” which is generally defined as a
greater than 50% change (by value) in its equity ownership over a
three-year period, the corporation’s ability to use its
pre-change NOL carryforwards, or NOLs, and other pre-change tax
attributes (such as research tax credits) to offset its post-change
income or taxes may be limited. We may experience ownership changes
in the future as a result of subsequent shifts in our stock
ownership some of which may be outside of our control. As a result,
if we earn net taxable income, our ability to use our pre-ownership
change NOL carryforwards to offset U.S. federal taxable income may
be subject to limitations, which could potentially result in
increased future tax liability to us. In addition, at the state
level, there may be periods during which the use of NOLs is
suspended or otherwise limited, which could accelerate or
permanently increase state taxes owed.
Stockholders may experience significant dilution if future equity
offerings are used to fund operations or acquire complementary
businesses.
If
future operations or acquisitions are financed through the issuance
of additional equity securities, stockholders could experience
significant dilution. Securities issued in connection with future
financing activities or potential acquisitions may have rights and
preferences senior to the rights and preferences of our common
stock. In addition, the issuance of shares of our common stock upon
the exercise of outstanding options or warrants may result in
dilution to our stockholders.
We may become involved in securities class action litigation that
could divert management’s attention and harm our
business.
The
stock market in general, and the stocks of early stage companies in
particular, have experienced extreme price and volume fluctuations.
These fluctuations have often been unrelated or disproportionate to
the operating performance of the companies involved. If these
fluctuations occur in the future, the market price of our shares
could fall regardless of our operating performance. In the past,
following periods of volatility in the market price of a particular
company’s securities, securities class action litigation has
often been brought against that company. If the market price or
volume of our shares suffers extreme fluctuations, then we may
become involved in this type of litigation, which would be
expensive and divert management’s attention and resources
from managing our business.
As a
public company, we may also from time to time make forward-looking
statements about future operating results and provide some
financial guidance to the public markets. Projections may not be
made in a timely manner or we might fail to reach expected
performance levels and could materially affect the price of our
shares. Any failure to meet published forward-looking statements
that adversely affect the stock price could result in losses to
investors, stockholder lawsuits or other litigation, sanctions or
restrictions issued by the Securities and Exchange
Commission.
We have a significant number of outstanding options. Future sales
of these shares could adversely affect the market price of our
common stock.
As of
December 31, 2019, we had outstanding options for an aggregate
of approximately 10.6 million shares of common stock at a
weighted average exercise price of $3.89 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
will be in-the-money and the holders may exercise their options and
sell a large number of shares. This could cause the market price of
our common stock to decline.
Our amended and restated bylaws, as amended (our
“Bylaws”) provide that the Court of Chancery of the
State of Delaware is the exclusive forum for certain disputes
between us and our stockholders, which could limit our
stockholders’ ability to obtain a favorable judicial forum
for disputes with us or our directors, officers or
employees.
Our Bylaws provide that the Court of Chancery of the State of
Delaware will be the sole and exclusive forum for (i) any
derivative action or proceeding brought on our behalf,
(ii) any action asserting a claim of breach of a fiduciary
duty owed by any of our directors or officers to our company or our
stockholders, (iii) any action asserting a claim against our
company arising pursuant to any provision of the Delaware General
Corporation Law or our amended and restated certificate of
incorporation or Bylaws, or (iv) any action asserting a claim
against our company governed by the internal affairs doctrine. This
choice of forum provision does not apply to suits brought to
enforce a duty or liability created by the Securities Act of 1933,
as amended, or the Exchange Act, or any other claim for which the
federal courts have exclusive
jurisdiction.
This choice of forum provision may limit a stockholder’s
ability to bring certain claims in a judicial forum that it finds
favorable for disputes with us or any of our directors, officers,
other employees or stockholders, which may discourage lawsuits with
respect to such claims, although our stockholders will not be
deemed to have waived our compliance with federal securities laws
and the rules and regulations thereunder. If a court were to find
this choice of forum provision to be inapplicable or unenforceable
in an action, we may incur additional costs associated with
resolving such action in other jurisdictions, which could adversely
affect our business and financial condition.
Item
3.
Legal
Proceedings
(A) California Action
On December 29, 2016, ChromaDex, Inc. filed a complaint in the
United States District Court for the Central District of
California, naming Elysium Health, Inc. (together with Elysium
Health, LLC, “Elysium”) as defendant (the
“Complaint”). On January 25, 2017, Elysium filed an
answer and counterclaims in response to the Complaint (together
with the Complaint, the “California Action”). Over the
course of the California Action, the parties have each filed
amended pleadings several times and have each engaged in several
rounds of motions to dismiss and one round of motion for judgment
on the pleadings with respect to various claims. Most recently, on
November 27, 2018, ChromaDex, Inc. filed a fifth amended complaint
that added an individual, Mark Morris, as a defendant. Elysium and
Morris (“the Defendants”) moved to dismiss on December
21, 2018. The court denied Defendants’ motion on February 4,
2019. Defendants filed their answer to ChromaDex, Inc.'s fifth
amended complaint on February 19, 2019. ChromaDex, Inc. filed an
answer to Elysium’s restated counterclaims on March 5, 2019.
Discovery closed on August 9, 2019.
On August 16, 2019, the parties filed motions for partial summary
judgment as to certain claims and counterclaims. The parties filed
opposition briefs on August 28, 2019, and reply briefs on September
4, 2019. On October 9, 2019, among other things, the court vacated
the previously scheduled trial date, ordered supplemental briefing
with respect to certain issues related to summary judgment. Elysium
filed its opening supplemental brief on October 30, 2019, ChromaDex
filed its opening supplemental brief on November 18, 2019, and
Elysium filed a reply brief on November 27, 2019, and the court
heard argument on January 13, 2020. On January 16, 2020, the court
granted both parties’ motions for summary judgment in part
and denied both in part. On ChromaDex’s motion, the court
granted summary judgment in favor of ChromaDex on Elysium’s
counterclaims for (i) breach of contract related to manufacturing
NIAGEN® according to the defined standard, selling NIAGEN and
ingredients that are substantially similar to pterostilbene to
other customers, distributing the NIAGEN® product
specifications, and failing to provide information concerning the
quality and identity of NIAGEN®, and (ii) breach of the
implied covenant of good faith and fair dealing. The court denied
summary judgment on Elysium’s counterclaims for (i)
fraudulent inducement of the Trademark License and Royalty
Agreement, dated February 3, 2014, by and between ChromaDex, Inc.
and Elysium (the “License Agreement”), (ii) patent
misuse, and (iii) unjust enrichment. On Elysium’s motion, the
court granted summary judgment in favor of Elysium on
ChromaDex’s claim for damages related to $110,000 in avoided
costs arising from documents that Elysium used in violation of the
Supply Agreement, dated February 3, 2014, by and between ChromaDex,
Inc. and Elysium, as amended (the “NIAGEN® Supply
Agreement”). The court denied summary judgment on
Elysium’s counterclaim for breach of contract related to
certain refunds or credits to Elysium. The court also denied
summary judgment on ChromaDex’s breach of contract claim
against Morris and claims for disgorgement of $8.3 million in
Elysium’s resale profits, $600,000 for a price discount
received by Elysium, and $684,781 in Morris’s
compensation.
Following the court’s January 16, 2020 order, the claims that
ChromaDex, Inc. presently asserts in the California Action, among
other allegations, are that (i) Elysium breached the Supply
Agreement, dated June 26, 2014, by and between ChromaDex, Inc. and
Elysium (the “pTeroPure® Supply Agreement”), by
failing to make payments to ChromaDex, Inc. for purchases of
pTeroPure® and by improper disclosure of confidential
ChromaDex, Inc. information pursuant to the pTeroPure® Supply
Agreement, (ii) Elysium breached the NIAGEN® Supply Agreement,
by failing to make payments to ChromaDex, Inc. for purchases of
NIAGEN®, (iii) Defendants willfully and maliciously
misappropriated ChromaDex, Inc. trade secrets concerning its
ingredient sales business under both the California Uniform Trade
Secrets Act and the Federal Defend Trade Secrets Act, (iv) Morris
breached two confidentiality agreements he signed by improperly
stealing confidential ChromaDex, Inc. documents and information,
(v) Morris breached his fiduciary duty to ChromaDex, Inc. by lying
to and competing with ChromaDex, Inc. while still employed there,
and (vi) Elysium aided and abetted Morris’s breach of
fiduciary duty. ChromaDex, Inc. is seeking damages and interest for
Elysium’s alleged breaches of the NIAGEN® Supply
Agreement and pTeroPure® Supply Agreement and Morris’s
alleged breaches of his confidentiality agreements, compensatory
damages and interest, punitive damages, injunctive relief, and
attorney’s fees for Defendants’ alleged willful and
malicious misappropriation of ChromaDex, Inc.’s trade
secrets, and compensatory damages and interest, disgorgement of all
benefits received, and punitive damages for Morris’s alleged
breach of his fiduciary duty and Elysium’s aiding and
abetting of that alleged breach.
The claims that Elysium presently alleges in the California Action
are that (i) ChromaDex, Inc. breached the NIAGEN® Supply
Agreement by not issuing certain refunds or credits to Elysium,
(ii) ChromaDex, Inc. fraudulently induced Elysium into entering
into the License Agreement, (iv) ChromaDex, Inc.’s conduct
constitutes misuse of its patent rights, and (v) ChromaDex, Inc.
was unjustly enriched by the royalties Elysium paid pursuant to the
License Agreement. Elysium is seeking damages for ChromaDex,
Inc.’s alleged breaches of the NIAGEN® Supply Agreement,
and compensatory damages, punitive damages, and/or rescission of
the License Agreement and restitution of any royalty payments
conveyed by Elysium pursuant to the License Agreement, and a
declaratory judgment that ChromaDex, Inc. has engaged in patent
misuse.
On January 17, 2020, Elysium moved to substitute its counsel. The
same day, the court ordered hearing on that motion for January 21,
2020, and granted Elysium’s motion at the hearing. On January
23, 2020, the court issued a scheduling order that, among other
things, set trial on the remaining claims to begin on May 12,
2020.
(B) Patent Office Proceedings
On July 17, 2017, Elysium filed petitions with the U.S. Patent and
Trademark Office for inter
partes review of U.S.
Patents 8,197,807 (the “’807 Patent”) and
8,383,086 (the “’086 Patent”), patents to which
ChromaDex, Inc. is the exclusive licensee. The Patent Trial and
Appeal Board (“PTAB”) denied institution of
the inter
partes review for the
’807 Patent on January 18, 2018. On January 29, 2018, the
PTAB granted institution of the inter
partes review as to claims
1 and 3-5 and denied institution as to claim 2 of the ’086
Patent. Based upon a recent U.S. Supreme Court decision, and solely
on a procedural basis, the PTAB was required to include claim 2 in
the trial of the inter
partes review. The matter
was heard on October 2, 2018. The PTAB issued its written decision
on January 16, 2019, upholding claim 2 of the ’086 Patent
which relates to the use of isolated NR in a pharmaceutical
composition as valid. Elysium is now prevented from raising
invalidity arguments against the ’086 Patent in the ongoing
patent litigation in Delaware that it brought or could have brought
before the PTAB in its inter
partes review. Elysium
appealed the PTAB’s decision with respect to claim 2 on March
6, 2019. A cross-appeal with respect to claims 1 and 3–5 was
filed on March 20, 2019. Elysium filed its opening brief on June
17, 2019. Dartmouth moved to voluntarily dismiss its cross-appeal
on August 14, 2019. The motion was granted on August 18, 2019.
Dartmouth’s response brief was filed on August 28, 2019.
Elysium’s reply brief was filed on October 9,
2019. Oral
argument on Elysium’s appeal was heard on March 5, 2020. On
March 6, 2020, the United States Court of Appeals for the Federal
Circuit affirmed the PTAB’s decision, rejecting Elysium's
attempt to invalidate claim 2 of the '086 patent.
(C) Southern District of New York Action
On September 27, 2017, Elysium Health Inc. ("Elysium Health") filed
a complaint in the United States District Court for the Southern
District of New York, against ChromaDex, Inc. (the “Elysium
SDNY Complaint”). Elysium Health alleges in the Elysium SDNY
Complaint that ChromaDex, Inc. made false and misleading statements
in a citizen petition to the Food and Drug Administration it filed
on or about August 18, 2017. Among other allegations, Elysium
Health avers that the citizen petition made Elysium Health’s
product appear dangerous, while casting ChromaDex, Inc.’s own
product as safe. The Elysium SDNY Complaint asserts four claims for
relief: (i) false advertising under the Lanham Act, 15 U.S.C.
§ 1125(a); (ii) trade libel; (iii) deceptive business
practices under New York General Business Law § 349; and (iv)
tortious interference with prospective economic relations.
ChromaDex, Inc. denies the claims in the Elysium SDNY Complaint and
intends to defend against them vigorously. On October 26, 2017,
ChromaDex, Inc. moved to dismiss the Elysium SDNY Complaint on the
grounds that, inter alia, its statements in the citizen petition
are immune from liability under the Noerr-Pennington Doctrine, the
litigation privilege, and New York’s Anti-SLAPP statute, and
that the Elysium SDNY Complaint failed to state a claim. Elysium
Health opposed the motion on November 2, 2017. ChromaDex, Inc.
filed its reply on November 9, 2017.
On October 26, 2017, ChromaDex, Inc. filed a complaint in the
United States District Court for the Southern District of New York
against Elysium Health (the “ChromaDex SDNY
Complaint”). ChromaDex, Inc. alleges that Elysium Health made
material false and misleading statements to consumers in the
promotion, marketing, and sale of its health supplement product,
Basis, and asserts five claims for relief: (i) false advertising
under the Lanham Act, 15 U.S.C. §1125(a); (ii) unfair
competition under 15 U.S.C. § 1125(a); (iii) deceptive
practices under New York General Business Law § 349; (iv)
deceptive practices under New York General Business Law § 350;
and (v) tortious interference with prospective economic advantage.
On November 16, 2017, Elysium Health moved to dismiss for failure
to state a claim. ChromaDex, Inc. opposed the motion on November
30, 2017 and Elysium Health filed a reply on December 7,
2017.
On November 3, 2017, the Court consolidated the Elysium SDNY
Complaint and the ChromaDex SDNY Complaint actions under the
caption In re Elysium Health-ChromaDex Litigation, 17-cv-7394, and
stayed discovery in the consolidated action pending a Court-ordered
mediation. The mediation was unsuccessful. On September 27, 2018,
the Court issued a combined ruling on both parties’ motions
to dismiss. For ChromaDex’s motion to dismiss, the Court
converted the part of the motion on the issue of whether the
citizen petition is immune under the Noerr-Pennington Doctrine into
a motion for summary judgment, and requested supplemental evidence
from both parties, which were submitted on October 29, 2018. The
Court otherwise denied the motion to dismiss. On January 3, 2019,
the Court granted ChromaDex, Inc.’s motion for summary
judgment under the Noerr-Pennington Doctrine and dismissed all
claims in the Elysium SDNY Complaint. Elysium moved for
reconsideration on January 17, 2019. The Court denied
Elysium’s motion for reconsideration on February 6, 2019, and
issued an amended final order granting ChromaDex, Inc.’s
motion for summary judgment as on February 7, 2019.
The Court granted in part and denied in part Elysium’s motion
to dismiss, sustaining three grounds for ChromaDex’s Lanham
Act claims while dismissing two others, sustaining the claim under
New York General Business Law § 349, and dismissing the claims
under New York General Business Law § 350 and for tortious
interference. Elysium filed an answer and counterclaims on October
10, 2018, alleging claims for (i) false advertising under the
Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under
15 U.S.C. § 1125(a); and (iii) deceptive practices under New
York General Business Law § 349. ChromaDex answered
Elysium’s counterclaims on November 2, 2018.
ChromaDex, Inc. filed an amended complaint on March 27, 2019,
adding new claims against Elysium Health for false advertising and
unfair competition under the Lanham Act, 15 U.S.C. § 1125(a).
On April 10, 2019, Elysium Health answered the amended complaint
and filed amended counterclaims, also adding new claims against
ChromaDex, Inc. for false advertising and unfair competition under
the Lanham Act, 15 U.S.C. § 1125(a). On July 1, 2019, Elysium
Health filed further amended counterclaims, adding new claims under
the Copyright Act §§ 106 & 501. On February 9, 2020,
ChromaDex, Inc. filed a motion for leave to amend its complaint to
add additional claims against Elysium Health for false advertising
and unfair competition. On February 10, 2020, Elysium Health filed
a motion for leave to amend its counterclaims to identify allegedly
false and misleading statements in ChromaDex’s advertising.
Those motions remain pending and the parties are currently in
discovery.
The Company is unable to predict the outcome of these matters and,
at this time, cannot reasonably estimate the possible loss or range
of loss with respect to the legal proceedings discussed herein. As
of December 31, 2019, ChromaDex, Inc. did not accrue a potential
loss for the California Action or the Elysium SDNY Complaint
because ChromaDex, Inc. believes that the allegations are without
merit and thus it is not probable that a liability has been
incurred.
(D) Delaware – Patent Infringement Action
On September 17, 2018, ChromaDex, Inc. and Trustees of Dartmouth
College filed a patent infringement complaint in the United States
District Court for the District of Delaware against Elysium Health,
Inc. The complaint alleges that Elysium’s BASIS® dietary
supplement violates U.S. Patents 8,197,807 (the “’807
Patent”) and 8,383,086 (the “’086 Patent”)
that comprise compositions containing isolated nicotinamide
riboside held by Dartmouth and licensed exclusively to ChromaDex,
Inc. On October 23, 2018, Elysium filed an answer to the complaint.
The answer asserts various affirmative defenses and denies that
Plaintiffs are entitled to any relief.
On November 7, 2018, Elysium filed a motion to stay the patent
infringement proceedings pending resolution of (1)
the inter
partes review of the
’807 Patent and the ’086 Patent before the Patent Trial
and Appeal Board (“PTAB”) and (2) the outcome of the
litigation in the California Action. ChromaDex, Inc. filed an
opposition brief on November 21, 2018 detailing the issues with
Elysium’s motion to stay. In particular, ChromaDex, Inc.
argued that given claim 2 of the ’086 Patent was only
included in the PTAB’s inter
partes review for
procedural reasons the PTAB was unlikely to invalidate claim 2 and
therefore litigation in Delaware would continue regardless. In
addition, ChromaDex, Inc. argued that the litigation in the
California Action is unlikely to have a significant effect on the
ongoing patent litigation. After the PTAB released its written
decision upholding claim 2 of the ’086 Patent, proving right
ChromaDex, Inc.’s prediction, ChromaDex, Inc. informed the
Delaware court of the PTAB’s decision on January 17, 2019. On
June 19, 2019, the Delaware court granted in part and denied in
part Elysium’s motion, ordering that the case was stayed
pending the resolution of Elysium’s patent misuse
counterclaim in the California Action.
On November 1, 2019, ChromaDex, Inc. filed a motion to lift the
stay due to changed circumstances in the California Action, among
other reasons. Briefing on the motion was completed on November 22,
2019. On January 6, 2020, the Delaware court issued an oral order
instructing the parties to submit a joint status report after the
January 13, 2020 motions hearing in the California Action. The
joint status report was submitted on January 30, 2020. On February
4, 2020, the Delaware court issued an order granting ChromaDex,
Inc.’s motion to lift the stay and setting a scheduling
conference for March 10, 2020.
Legal proceedings – Utah Lanham Act Action
On March 6, 2019, Novex Biotech LLC (“Novex”) filed an
action in the Third Judicial District Court County of Salt Lake,
State of Utah against ChromaDex, Inc. and 10 fictional defendants.
The complaint alleges that Novex markets a dietary supplement,
Oxydrene Elite, that competes with ChromaDex’s product, TRU
NIAGEN. The complaint further alleges that ChromaDex, Inc. has
violated the Lanham Act by making false or misleading claims for
TRU NIAGEN. Novex is seeking an injunction and damages for the
competitive harm it alleges to have suffered.
ChromaDex, Inc. timely removed the action to federal court in the
District of Utah. ChromaDex answered the complaint and also filed
counterclaims against Novex under the Lanham Act and California
state law. ChromaDex’s counterclaims allege that Novex has
falsely advertised its product called Oxydrene. Novex moved to
dismiss the counterclaims and ChromaDex has opposed this motion.
Discovery in the case is ongoing and no hearing has been set for
Novex’s motion to dismiss.
The Company is unable to predict the outcome of this matter and, at
this time, cannot reasonably estimate the possible loss or range of
loss with respect to the legal proceedings discussed herein. As of
December 31, 2019, ChromaDex, Inc. did not accrue a potential loss
for the Utah Lanham Act action because ChromaDex, Inc. believes
that the allegations are without merit and thus it is not probable
that a liability has been incurred.
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.
