UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K  

☒     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the fiscal year ended December 31, 2020

 

or

 

☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from             to      

 

Commission file number 001-37752

 

CHROMADEX CORPORATION

(Exact name of Registrant as specified in its Charter)

   

Delaware

 

26-2940963

(State or other

jurisdiction of incorporation)

 

(I.R.S. Employer

Identification No.) 

 

10900 Wilshire Blvd. Suite 600, Los Angeles, CA

 

90024

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (310) 388-6706

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.001 par value per share

CDXC

The Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐    No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐    No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Non-accelerated filer

Accelerated filer

Smaller reporting company

 

 

Emerging growth company

    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financing accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐  No ☒

 

As of June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $190.2 million, based on the closing price of the registrant’s common stock on the NASDAQ Capital Market on June 30, 2020.

 

Number of shares of common stock of the registrant outstanding as of March 5, 2021: 66,739,000

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s proxy statement (the “Proxy Statement”) to be filed with the Securities and Exchange Commission (“SEC” or the “Commission”) pursuant to Regulation 14A in connection with the registrant’s 2021 Annual Meeting of Stockholders, which will be filed subsequent to the date hereof, are incorporated by reference into Part III of this Form 10‑K. Such Proxy Statement will be filed with the SEC not later than 120 days following the end of the registrant’s fiscal year ended December 31, 2020.

 

 

 

    

TABLE OF CONTENTS

 

Item

 

 

 

 

 

PART I

 

 

 

 

Cautionary Notice Regarding Forward-Looking Statements

 

3

 

 

Summary of Risk Factors

 

4

 

1.

Business

 

5

 

1A.

Risk Factors

 

18

 

1B.

Unresolved Staff Comments

 

36

 

2.

Properties

 

36

 

3.

Legal Proceedings

 

36

 

4.

Mine Safety Disclosures

 

36

 

 

PART II

 

 

 

5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

37

 

6.

Selected Financial Data

 

37

 

7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

38

 

7A

Quantitative and Qualitative Disclosures About Market Risk

 

46

 

8.

Financial Statements and Supplementary Data

 

47

 

9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

48

 

9A

Controls and Procedures

 

48

 

9B.

Other Information

 

50

 

 

PART III

 

 

 

10.

Directors, Executive Officers and Corporate Governance

 

51

 

11.

Executive Compensation

 

51

 

12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

51

 

13.

Certain Relationships and Related Transactions, and Director Independence

 

51

 

14.

Principal Accounting Fees and Services

 

51

 

 

PART IV

 

 

 

15.

Exhibits, Financial Statement Schedules

 

52

 

16.

Form 10-K Summary

 

56

 

 

Signatures

 

57

 

 

 
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Table of Contents

   

PART I

 

CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

 

This Annual Report on Form 10-K (the “Form 10-K”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the safe harbor created by those sections.

 

We may, in some cases, use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of these terms, and similar expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Such statements, include, but are not limited to, statements contained in this Form 10-K relating to our business, business strategy, products and services we may offer in the future, the outcome and impact of litigation, the timing and results of future regulatory filings, the timing and results of future clinical trials, our ability to collect from major customers, sales and marketing strategy and capital outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statement of historical fact nor guarantees of assurance of future performance. We caution you therefore against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward looking statements include, but are not limited to, a decline in general economic conditions nationally and internationally; decreased demand for our products and services; market acceptance of our products; the ability to protect our intellectual property rights; impact of any litigation or infringement actions brought against us; competition from other providers and products; risks in product development; inability to raise capital to fund continuing operations; changes in government regulation; the ability to complete customer transactions and capital raising transactions, and other factors (including the risks contained in Item 1A of this Form 10-K under the heading “Risk Factors”) relating to our industry, our operations and results of operations and any businesses that may be acquired by us. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

 

Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, we undertake no obligation to and do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

 
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SUMMARY OF RISK FACTORS

 

Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Item 1A - Risk Factors” in Part I of this Form 10-K and should be carefully considered, together with other information in this Form 10-K and our other filings with the SEC, before making an investment decision regarding our common stock.

 

 

·

The COVID-19 pandemic has adversely affected, and is expected to continue to pose risks to our business, results of operations, financial condition and cash flows, and other epidemics or outbreaks of infectious diseases may have a similar impact.

 

·

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.

 

·

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.

 

·

We are currently engaged in substantial and complex litigation with Elysium Health, Inc. and Elysium Health LLC (collectively, “Elysium”), the outcome of which could materially harm our business and financial results.

 

·

Our TRU NIAGEN® products are not approved by the United States Food and Drug Administration or any foreign regulatory authority to mitigate, prevent, treat, diagnose or cure COVID-19 or any other disease or condition.

 

·

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.

 

·

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.

 

·

Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control.

 

·

We rely on single or a limited number of third-party suppliers for the raw materials required to produce our products.

 

·

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.

 

·

Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements, our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our common stock to decline.

 

·

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 market price of our common stock may be volatile and adversely affected by several factors.

 

·

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 a significant number of outstanding options. Future sales of these shares could adversely affect the market price of our common stock.

 

·

We may become involved in securities class action litigation that could divert management’s attention and harm our business.

 

 
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Table of Contents

    

Item 1. Business

 

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 global bioscience company dedicated to healthy aging. The ChromaDex team, which includes world-renowned scientists, is pioneering research on nicotinamide adenine dinucleotide (“NAD+”), levels of which decline with age.

  

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 NAD+ depletion, such as poor diet, alcohol consumption and a number of disease states. NAD+ levels may also be increased, including through calorie restriction and moderate exercise. Healthy aging, mitochondrial health and NAD+ continue to be areas of focus in the research community. As of 2020, there were over 350 published human clinical studies related to NAD+. The areas of study include understanding NAD+’s role in 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 preclinical 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 the U.S. Food and Drug Administration’s new dietary ingredient (“NDI”) notification program, has been successfully notified to the U.S. Food and Drug Administration (the “FDA”) as generally recognized as safe (“GRAS”), and has been approved as safe by Health Canada, the European Commission and the Therapeutic Goods Administration of Australia. Clinical studies of NIAGEN® have demonstrated a variety of outcomes including increased NAD+ levels, increased cellular metabolism and increased energy production. NIAGEN® is the trade name for our proprietary ingredient NR, and is protected by patents to which we are the exclusive licensee.

 

ChromaDex is among the world leaders in the emerging NAD+ space. ChromaDex has amassed more than 200 research 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. Additional 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. Rudy 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. David Katz, the founder and former director of Yale University’s Yale-Griffin Prevention Research Center.

 
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Table of Contents

    

STRATEGIC SHIFT TO GLOBAL CONSUMER PRODUCT COMPANY

  

In 2017, ChromaDex made the strategic decision to commercialize TRU NIAGEN® as a consumer brand for the product containing NIAGEN® ingredient. This marked our strategic shift from an ingredient testing company to a global, bioscience company dedicated to healthy aging.

 

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, JD.com, Kaola.com and Wechat and on Amazon in Canada, Japan, the United Kingdom, Germany, France, Italy, Spain, Netherlands and Sweden. 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 (“TGA”) for use in listed complementary medicines. With the TGA approval we extended our partnership with our New Zealand partner, Matakana Superfoods, to also include Australia. 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 is 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 $4.0 million. In 2020, we received an additional one-time fee of $1.0 million, following the launch of the products in the United States. Nestlé will potentially pay us multiple one-time fees for a total aggregate payment up to $6.0 million in product launch fees, following the launch of the products in certain territories.

 

We are a leading provider of research and quality-control products and services to the natural products and life science industries. Through our analytical reference standards and services segment, customers worldwide in the dietary supplement, food and beverage, cosmetic, pharmaceutical, and life science 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, 2020 and December 31, 2019, our revenues were approximately $59.3 million and $46.3 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 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

2020

$47.1 million

$9.2 million

$3.0 million

$59.3 million

2019

$36.1 million

$6.2 million

$4.0 million

$46.3 million

 

 
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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 bioscience company dedicated to healthy aging. 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. On January 15, 2021, Healthspan Research LLC was dissolved. Prior to its dissolution, Healthspan Research, LLC contributed its assets and liabilities to ChromaDex, Inc.

 

Business Market

 

According to the data from Global Wellness Institute, the global wellness industry market was approximately $4.5 trillion in 2018. 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 $231 billion by 2027.

  

Business Model

 

CONSUMER PRODUCTS SEGMENT

  

Our business model is to sell TRU NIAGEN® to consumers worldwide. As one of the world leaders 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 potentially 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:

 

 

Ø

Corporate development and strategy

 

Ø

Research and development activities

 

Ø

Science

 

Ø

Global premium brand management and brand guidelines

 

Ø

Multi-platform global marketing campaigns and know-how

 

Ø

Build and evolve propriety ecommerce platform and data analytics

 

Ø

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.

 
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INGREDIENTS SEGMENT

 

We intend to continue to sell NIAGEN® in ingredient form to our strategic partners. In addition, we expect to 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, life science research, and personal care markets. We intend to 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® NR through our TRU NIAGEN® finished bottles. We will continue to build TRU NIAGEN® as a global brand and offer TRU NIAGEN® to consumers worldwide.

 

 INGREDIENTS

 

 

·

Nicotinamide riboside NIAGEN®. We intend to 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 supporting 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.

 

 
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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, life science, and pharmaceutical industries. In addition, we provide research services for customers exploring the frontier of natural product research and development. We assist by providing unique and well-characterized natural products, in the format of botanical libraries or as requested on custom “Scope of Work” request.

 

Impact of COVID-19

   

The COVID-19 pandemic continues to drive global uncertainty and disruption, which has created headwinds for our business. Our ecommerce consumer products business segment continues to perform relatively well in this challenging environment.

 

Our consumer products retail business, including sales to A.S. Watson group and other partners in international markets, has been more impacted by the effects of COVID-19, due to store closures and reduced operating hours.  To date, we have successfully navigated the business during the COVID-19 pandemic, managing our working capital effectively.

 

We have experienced shipment delays from our suppliers; however, we have not encountered any major disruptions in our supply chain.  We have been maintaining adequate safety stocks to support our growth and we currently have adequate inventory on hand to meet our current demands.  Overall, we believe the supply chain disruptions due to the COVID-19 pandemic will not have a material impact to our business operations.

 

In response to the outbreak, we prioritized the health and safety of our employees by closing our offices or enhancing safety protocols in place to ensure the well-being of our employees.  We have been able to successfully conduct business virtually.

  

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 distribute 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 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, JD.com, Kaola.com and Wechat and on Amazon in Canada, Japan, the United Kingdom, Germany, France, Italy, Spain, Netherlands and Sweden. 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 (“TGA”) for use in listed complementary medicines. With the TGA approval we extended our partnership with our New Zealand partner, Matakana Superfoods, to also include Australia. 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. and Europe.

 

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.

 

 
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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. Other regulations, for new dietary ingredients (“NDI”), require a pre-market 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:

 

 

·

product testing;

 

 

 

 

·

ingredient testing;

 

 

 

 

·

documentation process, batch records, specifications;

 

 

 

 

·

product labeling;

 

 

 

 

·

product manufacturing and storage;

 

 

 

 

·

product claims, advertising and promotion;

 

 

 

 

·

product sales and distribution; and

 

 

 

 

·

Product post-market surveillance

  

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 objection to such evidence could render products containing such dietary ingredients to be adulterated. The FDA is in the process of developing guidance for the industry that will aim to clarify the agency’s interpretation of the NDI notification requirements, and this guidance may raise new and significant regulatory barriers for NDIs.

 

 
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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 voluntarily notify the FDA of its own self-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 impact 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. Most countries, in particular major markets, have established regulations for (a) authorizing the introduction of novel ingredients to market in the food and/or dietary/food/health supplement sectors and (b) for allowing finished goods to be placed on the market for consumer access. Typically, novel ingredients must go through an extensive safety review process (similar to the NDI notification process in the US) by a regulatory or scientific authoritative body. Finished products typically must either be notified or registered (a limited approval process) with the relevant authorities. In some cases, new products can be brought to market without notifying the authorities.

 

The time required to obtain approval by a foreign country may be longer or shorter than that required for the FDA notification process, 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 of foods/food supplements 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 novel foods or new dietary ingredients.

 

Regulation in other major and established markets, including Canada, Japan, Brazil and Australia all maintain and enforce a clear regulatory framework for novel ingredients and dietary supplements (or their equivalent).

 
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Major Customers

 

Major customers who accounted for more than 10% of the Company’s total sales were as follows: 

 

 

 

Years Ended December 31

 

Major Customers

 

2020

 

 

2019

 

 

 

 

 

 

 

 

A.S. Watson Group - Related Party

 

 

13.0 %

 

 

15.8 %

  

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 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.

 

We also 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 Indirect Competitors

 

 

·

Royal DSM (the Netherlands)

 

 

 

 

·

Glanbia plc (Ireland)

 

 

 

 

·

BASF (Germany)

 

 

 

 

·

Lonza Group Ltd (Switzerland)

 

 

 

 

·

Sabinsa Corporation (India/USA)

  

For the analytical reference standards and services segment, we face competition within the standardization and quality testing niche of the markets we serve. Below is a current list of certain competitors. These competitors have already developed reference standards or services or are currently taking steps to develop them. Of the competitors listed, some currently sell fine chemicals, which, by default, are sometimes used as reference standards, and others are closely aligned with our market niche to reduce any barriers to entry if these companies wish to compete.

 

Analytical Reference Standards and Services Segment Competitors

  

 

·

MilliporeSigma (USA)

 

 

 

 

·

Phytolab (Germany)

 

 

 

 

·

US Pharmacopoeia (USA)

 

 

 

 

·

Extrasynthese (France)
 
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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.

 

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

 

6/24/2026

 

Licensed from Washington University

 

7,846,452

 

 

Potent immunostimulatory extracts from microalgae

 

 

7/28/2005

 

 

12/7/2010

 

 

7/28/2025

 

 

Licensed from University of Mississippi

 

8,106,184

 

 

Nicotinyl Riboside Compositions and Methods of Use

 

 

11/17/2006

 

 

1/31/2012

 

 

9/20/2027

 

 

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

 

 

1/5/2026

 

 

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

 

 

8/18/2025

 

 

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

 

 

4/20/2006

 

 

6/12/2012

 

 

11/19/2026

 

 

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

 

 

8/18/2025

 

 

Licensed from the University of Mississippi and U.S. Department of Agriculture

 

 
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8,383,086

 

 

Nicotinamide Riboside Kinase compositions and Methods for using the same

 

 

4/12/2012

 

 

2/26/2013

 

 

4/20/2026

 

 

Licensed from Dartmouth College

 

8,809,400

 

 

Method to Ameliorate Oxidative Stress and Improve Working Memory Via Pterostilbene Administration

 

 

8/8/2011

 

 

8/19/2014

 

 

10/2/2028

 

 

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

 

 

9/23/2014

 

 

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

 

 

6/3/2025

 

 

Licensed from Washington University

 

9,000,147

 

 

Nicotyl riboside compositions and methods of use

 

 

1/17/2012

 

 

4/7/2015

 

 

11/17/2026

 

 

Licensed from Cornell University

 

9,028,887

 

 

Method improve spatial memory via pterostilbene administration

 

 

5/22/2014

 

 

5/12/2015

 

 

6/10/2028

 

 

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

 

 

6/3/2025

 

 

Licensed from Washington University

 

9,321,797

 

 

Nicotyl riboside compositions and methods of use

 

 

11/17/2014

 

 

4/26/2016

 

 

11/17/2026

 

 

Licensed from Cornell University

 

9,439,875

 

 

Anxiolytic effect of pterostilbene

 

 

5/11/2011

 

 

9/13/2016

 

 

12/11/2031

 

 

Licensed from the University of Mississippi and U.S. Department of Agriculture

 

 

 
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9,975,915

 

 

Crystalline forms of nicotinoyl ribosides, modified derivatives thereof, and phosphorylated analogs thereof, and methods of preparation thereof

 

 

11/10/2017

 

 

5/22/2018

 

 

11/10/2037

 

 

Co-owned by ChromaDex and The Queen’s University of Belfast

 

10,000,519

 

 

Methods of Preparing Nicotinamide Riboside and Derivatives Thereof

 

 

7/24/2014

 

 

6/19/2018

 

 

7/24/2034

 

 

Licensed from The Queen’s University of Belfast

 

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

 

10,183,036

 

 

Use of nicotinic acid riboside or nicotinamide riboside derivatives, and reduced derivatives thereof, as NAD+ increasing precursors

 

 

4/20/2017

 

 

1/22/2019

 

 

4/20/2037

 

 

Owned by ChromaDex

 

10,280,190

 

 

Nicotinic acid riboside or nicotinamide riboside compositions, reduced derivatives thereof, and the use thereof to enhance skin permeation in treating skin conditions

 

 

3/16/2016

 

 

5/7/2019

 

 

5/31/2036

 

 

Co-owned by ChromaDex and The Queen’s University of Belfast

 

10,688,118

 

 

Nicotinamide riboside compositions for topical use in treating skin conditions

 

 

10/30/2014

 

 

6/23/2020

 

 

4/6/2035

 

 

Owned by ChromaDex

 

10,689,411

 

 

Efficient and scalable syntheses of nicotinoyl ribosides and reduced nicotinoyl ribosides, modified derivatives thereof, phosphorylated analogs thereof, adenylyl dinucleotide conjugates thereof, and novel crystalline forms thereof

 

 

11/10/2017

 

 

6/23/2020

 

 

11/10/2037

 

 

Co-owned by ChromaDex and The Queen’s University of Belfast

 

10,857,172

 

 

Methods for delivering at least one compound selected from nicotinamide riboside (NR), nicotinic acid riboside (NAR), and nicotinamide mononucleotide (NMN), derivatives thereof, or salts thereof, in combination with at least one of thiamine (vitamin B1), riboflavin (vitamin B2), niacin (vitamin B3), and pyridoxine (vitamin B6), to an infant human subject in need of said compound or compounds are provided

 

 

4/14/2017

 

 

12/8/2020

 

 

4/14/2037

 

 

Owned by ChromaDex

 

 

 
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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.

 

W.R. Grace & Co. -Conn. (“Grace”) is the Company’s exclusive manufacturer for the supply of NR. Effective as of September 17, 2020, the Company entered into a Sixth Amendment (the “Sixth Amendment”) to the Manufacturing and Supply Agreement (such agreement as amended, the “Grace Manufacturing Agreement”), originally effective in January 2016 with Grace. In January 2019, Grace was issued patents related to the manufacturing of the crystalline form of NR (the “Grace Patents”). Pursuant to the Sixth Amendment, the Grace Manufacturing Agreement expires on December 31, 2021, subject to additional two-year renewal periods to be negotiated by the parties. In addition, the Grace Manufacturing Agreement may be terminated by (a) the Company by providing 12 months’ notice prior to the end of the current term, (b) Grace by providing 12 months’ notice of its intent to cease manufacture of NR (a “Market Exit”) and (c) a party in the case of (1) a material breach by the other party that is not cured within 30 days, (2) three material breaches by the other party in any 12 month period, or (3) bankruptcy of the other party. In the event that certain conditions are met, then the Company will become a licensee of the Grace Patents.

 

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

 

To date, 11 human clinical trials have been published on our proprietary ingredient NIAGEN® demonstrating its safety and/or efficacy in healthy human volunteers. In addition, no adverse effects have been attributed to NIAGEN®. In both 2015 and 2018, NIAGEN® was successfully notified to the FDA as a “New Dietary Ingredient.” NIAGEN® was also successfully notified to FDA as “Generally Recognized as Safe” in August 2016.

 

 
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In June of 2020, the ChromaDex External Research Program (CERP) achieved its 200th research agreement and over 100 preclinical studies and 11 peer-reviewed human clinical trial publications involving NIAGEN®.

 

Through our research and development laboratory in Longmont, Colorado, we intend to develop and evaluate 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, 2020, and December 31, 2019, were approximately $3.7 million and $4.4 million, respectively.

 

Environmental Compliance

 

We 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 2020 and 2019 was approximately $4.9 million and $4.1 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, 2020 we did not have any significant 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, 2020, ChromaDex had approximately 110 employees. We consider our relationships with our employees to be satisfactory. None of our employees is covered by a collective bargaining agreement.

 

 
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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.

 

Item 1A. Risk Factors

 

Investing in our common stock involves a high degree of risk. Current investors and potential investors should consider carefully the risks and uncertainties described below together with all other information contained in this Form 10-K before making investment decisions with respect to our common stock. If any of the following risks 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

 

The COVID-19 pandemic has adversely affected, and is expected to continue to pose risks to our business, results of operations, financial condition and cash flows, and other epidemics or outbreaks of infectious diseases may have a similar impact.

 

As previously disclosed, we face risks related to the ongoing COVID-19 pandemic. COVID-19 has spread across the globe during 2020 and is impacting economic activity worldwide. COVID-19 has caused disruption and volatility in the global capital markets, and has caused an economic slowdown. The COVID-19 pandemic and its associated economic uncertainty may negatively impact our sales volumes in 2021. In response to COVID-19, national and local governments around the world have instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. The duration of these measures is unknown, may be extended and additional measures may be imposed.

 

Among the potential effects of COVID-19 include, but are not limited to, the following:

 

 

·

Reduced consumer and investor confidence, instability in the credit and financial markets, volatile corporate profits, and reduced business and consumer spending, which may adversely affect our results of operations by reducing our sales, margins and/or net income as a result of a slowdown in customer orders.

 

·

Reduced demand for our products due to store closures and reduced operating hours of our customers.

 

·

Disruptions in supply chain, leading to inadequate levels of inventory that may lower our sales.

 

For example, our retail business, including sales to A.S. Watson group and other partners in international markets, has been impacted by the effects of COVID-19, due to store closures and reduced operating hours.

  

 
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To the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and cash flows, it may also heighten many of the other risks described in this section. The ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time.

 

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 $19.9 million and $32.1 million for the years ended December 31, 2020 and December 31, 2019, respectively. 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, 2020, our cash and cash equivalents totaled approximately $16.7 million. Subsequent to the year ended December 31, 2020, we entered into a Securities Purchase Agreement with an investor, pursuant to which we sold and issued an aggregate of $25.0 million of the Company’s common stock. While we anticipate that our current cash, cash equivalents, cash to be generated from operations, $25.0 million received from the financing described above and available line of credit up to $7.0 million from Western Alliance Bank 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, including pursuant to the At Market Issuance Sales Agreement, dated as of June 12, 2020, with B. Riley FBR, Inc. and Raymond James & Associates, Inc. (the “ATM Facility”), 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. Further, as a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. If equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive. 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.

  

 
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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.

  

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 are currently engaged in substantial and complex litigation with Elysium Health, Inc. and Elysium Health LLC (collectively, “Elysium”), the outcome of which could materially harm our business and financial results.

 

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. 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.

 

 
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Interruptions in our relationships or declines in our business with major customers could materially harm our business and financial results.

 

A.S. Watson Group accounted for approximately 13% of our sales during the year ended December 31, 2020. 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 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.

  

Our TRU NIAGEN® products are not approved by the United States Food and Drug Administration or any foreign regulatory authority to mitigate, prevent, treat, diagnose or cure COVID-19 or any other disease or condition.

 

As previously disclosed, in November 2020, we received a warning letter (the “Letter”) from the FDA and Federal Trade Commission (“FTC”). The Letter references statements related to preclinical and clinical research and data involving NR and COVID-19 that were included in certain press releases and social media posts issued by us (the “Public Disclosures”). The Letter asserts that our TRU NIAGEN® products are intended to mitigate, prevent, treat, diagnose or cure COVID-19 in violation of certain sections of the Federal Food, Drug, and Cosmetic Act (the “FD&C Act”) and the Federal Trade Commission Act (the “FTC Act”). We provided a response (the “Response”) to the Letter stating that we disagree with the assertion in the Letter that our products are intended to mitigate, prevent, treat, diagnose or cure COVID-19 in violation of certain sections of the FD&C Act and the FTC Act. The Response notes that the Public Disclosures accurately describe the scientific research regarding NR and COVID-19, and that such Public Disclosures were not intended to suggest the use of our products for therapeutic purposes. However, in order to address the concerns from the Letter, we deleted certain social media posts and removed certain press releases from our website, including the Public Disclosures.

 

In February 2021, we announced that results from the study “Combined Metabolic Activators Accelerates Recovery in Mild-to-Moderate COVID-19” conducted by a third party were published on a preprint publication website. The randomized, placebo-controlled, and double-blind Phase 3 clinical trial conducted in Turkey demonstrated that patients with mild-to-moderate COVID-19 receiving Turkish standard of care experienced a 3.5 day reduction in recovery time when receiving an added nutritional protocol. Aimed at improving mitochondrial function, the protocol included NR, L-serine, N-acetyl-L-cysteine (NAC), and L-carnitine tartrate. However, our TRU NIAGEN® products are not approved by the FDA or any foreign regulatory authority to mitigate, prevent, treat, diagnose or cure COVID-19 or any other disease or condition, and are not intended for such use, and may never be approved for such use by the FDA or any foreign regulatory authority.

 

 
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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. For example, the COVID-19 pandemic and actions taken to slow its spread, have caused the global credit and financial markets to experience extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. 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.

 

 
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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.

  

 
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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 COVID-19, 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.

 

 
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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 Lisa H. Harrington, 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.

 

For example, our operating results may be harmed by the effect of the COVID-19 pandemic on global economic conditions. 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.

 

 
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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 our sales and profit expectations resulting from this agreement may be reduced.

 

 
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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.

  

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.

 

 
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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. 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.

 

 
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We may bear financial risk if we underprice 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 underprice 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. Due to COVID-19, there may be delays in shipments from our suppliers. 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. 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. For example, W.R. Grace & Co.-Conn. (“Grace”) is the exclusive manufacturer to us for the supply of NR. There is no guarantee that we will be able to continue to contract with Grace for the supply of NR, or that such terms will be favorable to us.

  

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. Due to COVID-19, most of our employees have been working remotely from home and we have depended on communication tools and remote connections to our information technology systems to conduct business virtually. If we were to experience a prolonged disruption in our information systems that involve interactions amongst employees as well as 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.

 

 
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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. Due to COVID-19, there may be additional cyber security threats as most of our employees work from home, utilizing network connections outside of the Company premises. 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. Despite the implementation of preventative and detective security measures, our internal computer systems and those of our current and any future contractors, consultants, collaborators and third-party service providers, are vulnerable to damage or interruption from a variety of sources, including computer viruses, unauthorized access, accidental acts or omissions by those with authorized access, natural disasters, terrorism, war, telecommunication and electrical failure, and cybersecurity threats (including the deployment of harmful malware, ransomware, denial-of-service attacks, supply chain attacks, social engineering, and other means to affect service reliability and threaten the confidentiality, integrity, and availability of information). The procedures and controls we use to monitor these threats and mitigate our exposure may not be sufficient to prevent all 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. Additionally, some of the federal, state and foreign government requirements include obligations of companies to notify individuals of security breaches involving particular personally identifiable information, which could result from breaches experienced by us or by our vendors, contractors, or organizations with which we have formed strategic relationships. Notifications and follow-up actions related to a security breach could impact our reputation, cause us to incur significant costs, including legal expenses and remediation costs.

  

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; responding to 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. Furthermore, the vote in the United Kingdom in favor of exiting the European Union, referred to as Brexit, has complicated data protection regulation in the United Kingdom. As of January 1, 2021, the GDPR has been converted into United Kingdom law and the United Kingdom is now a “third country” under the GDPR. The United Kingdom and European Union agreed to an extendable four-month period as of January 1, 2021 during which the United Kingdom will be treated like an European Union member state in relation to transfers of personal data to the United Kingdom. However, following the expiration of the specified period, there will be an increasing scope for divergence in application, interpretation and enforcement of the data protection law as between the United Kingdom and the European Economic Area (“EEA”). 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.

   

 
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Similarly, European data protection laws also generally prohibit the transfer of personal data from Europe, including the EEA, United Kingdom and Switzerland, to the United States and most other countries unless the parties to the transfer have implemented specific safeguards to protect the transferred personal data. One of the primary safeguards used for transfers of personal data from the European Union to the United States, namely, the Privacy Shield framework administered by the U.S. Department of Commerce, was recently invalidated by a decision of the European Union’s highest court. The same decision also cast doubt on the ability to use one of the primary alternatives to the Privacy Shield, namely, the European Commission’s Standard Contractual Clauses, to lawfully transfer personal data from Europe to the United States and most other countries. At present, there are few if any viable alternatives to the Privacy Shield and the Standard Contractual Clauses. To the extent that we were to rely on the EU-U.S. Privacy Shield Framework or the Standard Contractual Clauses, we will not be able to do so in the future, which could increase our costs and limit our ability to process personal data from the European Union.

    

Additionally, the California Consumer Privacy Act (the “CCPA”), creates new individual privacy rights for consumers and places increased privacy and security obligations on entities handling personal data of consumers. Among other things, the CCPA 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. Moreover, effective starting on January 1, 2023, the California Privacy Rights Act (“CPRA”) will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain sensitive personal information. The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA. Likewise, new legislation proposed or enacted in Illinois, Massachusetts, Nevada, New Jersey, New York, Rhode Island, Virginia, Washington and other states, imposes, or has the potential to impose, additional obligations on companies that collect, store, use, retain, disclose, transfer and otherwise process confidential, sensitive and personal information. The CCPA, CPRA and other proposed or enacted state laws may increase our compliance costs and potential liability. We expect that there will continue to be new proposed laws and regulations concerning data privacy and security, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. 

  

Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements, our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our common stock to decline.

 

Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements. Our management previously identified a material weakness in our internal control over financial reporting and concluded that the material weakness has not been remediated and our disclosure controls and procedures were not effective as of December 31, 2020. The material weakness in internal control over financial reporting resulted from a deficiency in our disclosure controls and procedures which could have resulted in us not disclosing a material potential loss requiring a qualitative disclosure and recording a liability in our consolidated financial statements under ASC 450 – Contingencies.  If not remediated, or if we identify further material weaknesses in our internal controls, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.

  

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, and the effects of COVID-19 may make it more difficult for us to comply with such covenants. 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.

 

 
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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, and other 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. 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.

 

 
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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;

 

 

 

 

·

litigation;

 

 

 

 

·

disputes with or our inability to collect from significant customers;

 

 

 

 

·

loss of any strategic relationship;

 

 

 

 

·

industry developments, including, without limitation, changes in healthcare policies or practices;

 

 

 

 

·

economic and other external factors, including effects of the COVID-19 pandemic;

 

 

 

 

·

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.

 

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.

 

 
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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 beginning on or prior to December 31, 2017 could expire unused. Under the Tax Cuts and Jobs Act, as modified by the CARES Act, federal NOLs incurred in taxable years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal NOLs in tax years beginning after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act or the CARES 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 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. For example, California imposed limits on the usability of California state net operating losses to offset taxable income in tax years beginning after 2019 and before 2023.

 

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, 2020, we had outstanding options for an aggregate of approximately 11.9 million shares of common stock at a weighted average exercise price of $3.99 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 the following types of actions or proceedings under Delaware statutory or common law: (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.

 

 
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General Risks

 

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.

 

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. For example, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), modified certain provisions of the Tax Cuts and Jobs Act. In addition, it is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act, the CARES 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.

 

 
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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.

 

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.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

As of December 31, 2020, we lease (i) approximately 10,000 square feet of office space in Los Angeles, California with one year remaining on the lease, (ii) approximately 15,000 square feet of office space in Irvine, California on a month to month basis, and (iii) approximately 20,000 square feet of space for research and development laboratory in Longmont, Colorado with five years remaining on the lease. The below table illustrates the use of each property by our business segments.

 

Business Segment

 

Property Used

Consumer Products

 

All properties

Ingredients

 

All properties

Analytical Reference Standards and Services

 

Irvine, CA and Longmont, CO

 

We do not own any real estate. For the year ended December 31, 2020, our total annual rental expense was approximately $936,000.

 

Item 3. Legal Proceedings

 

The information set forth under the heading “Legal Proceedings” in Note 15, Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Form 10-K, is incorporated herein by reference. For additional discussion of certain risks associated with legal proceedings, see Item 1A, Risk Factors.

  

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 
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PART II

 

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Since April 25, 2016, our common stock has been traded on The Nasdaq Capital Market (“NASDAQ”) under the symbol “CDXC.” On March 5, 2021, the closing sale price was $10.73. 

 

Holders of Our Common Stock

 

As of March 5, 2021, we had approximately 41 registered holders of record of our common stock.

 

Dividend Policy

 

We have not declared or paid any cash dividends on our common stock during either of the two most recent fiscal years and have no current intention to pay any cash dividends. Our ability to pay cash dividends is governed by applicable provisions of Delaware law and is subject to the discretion of our Board of Directors.

 

Recent Sales of Unregistered Securities

 

Other than as previously disclosed in our past Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, the Company did not have any sales of unregistered securities for the period covered by this Annual Report on Form 10-K.

 

Item 6. Selected Financial Data

 

Not Applicable.

   

 
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis of financial condition and results of operation together with “Selected Financial Data,” the consolidated financial statements and the related notes included elsewhere this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that impact our business. In particular, we encourage you to review the risks and uncertainties described in “Risk Factors” in Part I, Item 1A in this Form 10-K. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends.

 

Overview

 

ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., ChromaDex Analytics, Inc., ChromaDex Asia Limited and ChromaDex Europa B.V. (collectively, “ChromaDex”, the “Company” or, in the first person as “we” “us” and “our”) are a global bioscience company dedicated to healthy aging. The ChromaDex team, which includes world-renowned scientists, is pioneering research on nicotinamide adenine dinucleotide (“NAD+”), levels of which decline with age. ChromaDex is the innovator behind NAD+ precursor nicotinamide riboside (“NR”), commercialized as the flagship ingredient NIAGEN®. Nicotinamide riboside and other NAD+ precursors are protected by ChromaDex’s patent portfolio. ChromaDex delivers NIAGEN® as the sole active ingredient in its consumer product, TRU NIAGEN®. The Company also has an analytical reference standards and services segment, which focuses on natural product fine chemicals (known as “phytochemicals”) and related chemistry services.

 

The discussion and analysis of our financial condition and results of operations are based on the ChromaDex financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues, if any, and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

As of December 31, 2020, cash and cash equivalents totaled approximately $16.7 million. Subsequent to the year ended December 31, 2020, the Company entered into a Securities Purchase Agreement with an investor, pursuant to which the Company sold and issued an aggregate of $25.0 million of the Company’s common stock. The Company anticipates that its current cash, cash equivalents and cash to be generated from operations, the $25.0 million received from the financing described above and available line of credit up to $7.0 million from Western Alliance Bank will be sufficient to meet its projected operating plans through at least the next twelve months from the issuance date of this report. The Company may, however, seek additional capital within the next twelve months, both to meet its projected operating plans within the next twelve months and/or to fund its longer term strategic objectives. In June 2020, we filed a $125.0 million registration statement on Form S-3 with the Commission, utilizing a “shelf” registration process. Under this shelf registration process, we may sell securities from time to time, including up to $50.0 million pursuant to the At Market Issuance Sales Agreement, dated as of June 12, 2020, with B. Riley FBR, Inc. and Raymond James & Associates, Inc. As of December 31, 2020, we have not sold any securities pursuant to the ATM Facility.

 

Additional capital may come from public and/or private stock or debt offerings, borrowings under lines of credit or other sources. These additional funds may not be available on favorable terms, or at all. Further, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities we issue may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products or proprietary technologies, or to grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, obtain the required regulatory clearances or approvals, achieve long term strategic objectives, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. Any of these events could adversely affect our ability to achieve our development and commercialization goals, which could have a material and adverse effect on our business, results of operations and financial condition.

 

 
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Some of our operations are subject to regulation by various state and federal agencies. Dietary supplements are subject to FDA, FTC and U.S. Department of Agriculture regulations relating to composition, labeling and advertising claims. These regulations may in some cases, particularly with respect to those applicable to new ingredients, require a notification that must be submitted to the FDA along with evidence of safety. There are similar regulations related to food additives.

 

Impact of COVID-19

 

The COVID-19 pandemic continues to drive global uncertainty and disruption, which has created headwinds for our business. Our ecommerce business continues to perform relatively well in this challenging environment.

 

Our retail business, including sales to A.S. Watson group and other partners in international markets, has been more impacted by the effects of COVID-19, due to store closures and reduced operating hours. To date, we have successfully navigated the business during the COVID-19 pandemic, managing our working capital effectively.

 

We have experienced shipment delays from our suppliers; however, we have not encountered any major disruptions in our supply chain. We have been maintaining adequate safety stocks to support our growth and we currently have adequate inventory on hand to meet our current demands. Overall, we believe the supply chain disruptions due to the COVID-19 pandemic will not have a material impact to our business operations.

 

In response to the outbreak, we prioritized the health and safety of our employees by closing our offices or enhancing safety protocols in place to ensure the well-being of our employees. We have been able to successfully conduct business virtually.

 

Results of Operations

 

Our losses per basic and diluted share were $0.33 and $0.56 for the twelve-month periods ended December 31, 2020 and December 31, 2019, respectively.

 

 

(In thousands)

 

Twelve months ending

 

 

 

Dec. 31, 2020

 

 

Dec. 31, 2019

 

Sales

 

$ 59,257

 

 

$ 46,291

 

Cost of sales

 

 

23,983

 

 

 

20,522

 

Gross profit

 

 

35,274

 

 

 

25,769

 

Operating expenses

 

 

 

 

 

 

 

 

 -Sales and marketing

 

 

20,948

 

 

 

18,216

 

-Research and development

 

 

3,732

 

 

 

4,420

 

-General and administrative

 

 

30,448

 

 

 

34,308

 

-Other

 

 

-

 

 

 

125

 

Nonoperating

 

 

 

 

 

 

 

 

 -Interest expense, net

 

 

(71 )

 

 

(847 )

Net loss

 

$ (19,925 )

 

$ (32,147 )

 

The following table sets forth the computations of loss per share amounts applicable to common stockholders for the years ended December 31, 2020 and December 31, 2019.

 

 
39

Table of Contents

    

 

 

Years Ended

 

(In thousands, except per share data)

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Net loss

 

$ (19,925 )

 

$ (32,147 )

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$ (0.33 )

 

$ (0.56 )

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding (1):

 

 

61,067

 

 

 

57,056

 

 

 

 

 

 

 

 

 

 

Potentially dilutive securities (2):

 

 

 

 

 

 

 

 

Stock options

 

 

11,914

 

 

 

10,551

 

____________ 

(1)

Includes approximately 0.2 million shares of restricted stock for each of the years 2020 and 2019,  which are participating securities that feature voting and dividend rights.

 

 

(2)

Excluded from the computation of loss per share as their impact is antidilutive.

 

Net Sales. Net sales consist of gross sales less discounts and returns.

 

 

 

Twelve months ending

 

(In thousands)

 

December 31, 2020

 

 

December 31, 2019

 

 

Change

 

Net sales:

 

 

 

 

 

 

 

 

 

Consumer Products

 

$ 47,090

 

 

$ 36,075

 

 

 

31 %

Ingredients

 

 

9,198

 

 

 

6,196

 

 

 

48 %

Analytical reference standards and services

 

 

2,969

 

 

 

4,020

 

 

 

-26 %

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$ 59,257

 

 

$ 46,291

 

 

 

28 %

 

Total net sales increased by 28% for the twelve-month period ended December 31, 2020, compared to the comparable period in 2019.

  

 

·

The Company’s TRU NIAGEN® sales for consumer products segment continue to increase after the Company’s strategic shift towards consumer products in 2017.

 

 

 

 

·

The increase in sales for the ingredients segment is largely due to strong demand from our NIAGEN® ingredient customers, who resell NIAGEN® under their own brands.

 

 

 

 

·

The decrease in sales for the analytical reference standards and services is largely due to the spinoff of the regulatory consulting business unit in November 2019. The regulatory consulting business generated net sales of approximately $0.7 million in 2019. In addition, sales of analytical reference standards decreased largely due to the effects of COVID-19.

 

 
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Table of Contents

    

Cost of Sales. Costs of sales include raw materials, labor, overhead, and delivery costs.

 

 

 

Twelve months ending

 

(In thousands)

 

December 31, 2020

 

 

December 31, 2019

 

 

 

Amount

 

 

% of
net sales

 

 

Amount

 

 

% of
net sales

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Products

 

$ 17,541

 

 

 

37 %

 

$ 14,550

 

 

 

40 %

Ingredients

 

 

3,593

 

 

 

39 %

 

 

2,980

 

 

 

48 %

Analytical reference standards and services

 

 

2,849

 

 

 

96 %

 

 

2,992

 

 

 

74 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of sales

 

$ 23,983

 

 

 

40 %

 

$ 20,522

 

 

 

44 %

 

The cost of sales, as a percentage of net sales, decreased 4% for the twelve-month period ended December 31, 2020 compared to the comparable period in 2019.

 

 

·

The cost of sales, as a percentage of net sales, for the consumer products segment decreased 3% for the twelve-month period ended December 31, 2020 compared to the comparable period in 2019. Product cost savings initiatives and overall scale on our supply chain drove the decrease in cost of sales.

 

 

 

 

·

The cost of sales, as a percentage of net sales, for the ingredients segment decreased 9% for the twelve-month period ended December 31, 2020 compared to the comparable period in 2019. In 2020, we were able to lower our cost of NIAGEN® ingredient through supply chain cost savings initiatives, which resulted in a decrease in cost of sales. Also, a portion of this decrease was realized in the form of a rebate from a supplier for prior year efficiency initiatives, which was recorded in the second quarter of 2020. In addition, we had an inventory write off of approximately $0.2 million related to our decision to wind down sales for a certain ingredient in the first quarter of 2019.

 

 

 

 

·

The cost of sales, as a percentage of net sales for the analytical reference standards and services segment, increased 22% for the twelve-month period ended December 31, 2020 compared to the comparable period in 2019. The decrease in sales of analytical reference standards and services due to the spinoff of the regulatory consulting business in November 2019 and the effects of COVID-19 led to a lower labor and overhead utilization rate, which resulted in our cost of sales increasing as a percentage of net sales.

 

 
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Gross Profit. Gross profit is net sales less the cost of sales and is affected by a number of factors including product mix, competitive pricing and costs of products, labor, overhead, services and delivery.

 

 

 

Twelve months ending

 

(In thousands)

 

December 31, 2020

 

 

December 31, 2019

 

 

Change

 

Gross profit:

 

 

 

 

 

 

 

 

 

Consumer Products

 

$ 29,549

 

 

$ 21,525

 

 

 

37 %

Ingredients

 

 

5,605

 

 

 

3,216

 

 

 

74 %

Analytical reference standards and services

 

 

120

 

 

 

1,028

 

 

 

-88 %

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross profit

 

$ 35,274

 

 

$ 25,769

 

 

 

37 %

 

 

·

The consumer products segment posted gross profit of $29.5 million for the twelve-month period ending December 31, 2020, an increase of 37% compared to the comparable period in 2019. The increased gross profit was due to higher sales, product cost savings initiatives and scale on our supply chain operations.

 

 

 

 

·

The ingredients segment posted gross profit of $5.6 million for the twelve-month period ending December 31, 2020, an increase of 74% compared to the comparable period in 2019. The increased gross profit for the ingredients segment was largely due to higher sales to key customers, scale on our supply chain operations, a rebate related to savings from prior year efficiency initiatives, and the absence of $0.2 million inventory write-off related to our decision to wind down sales for a certain ingredient in the first quarter of 2019.

 

 

 

 

·

The decreased gross profit for the analytical reference standards and services segment was largely due to the decreased sales resulting from the spinoff of the regulatory consulting business and the effects of COVID-19. Fixed supply chain labor and overhead costs make up a substantial portion of the costs and these fixed labor and overhead costs did not decrease in proportion to sales, yielding lower profit margin.

  

Operating Expenses - Sales and Marketing. Sales and Marketing Expenses consist of salaries, advertising, public relations and marketing expenses.

 

 

 

Twelve months ending

 

(In thousands)

 

December 31, 2020

 

 

December 31, 2019

 

 

Change

 

Sales and marketing expenses:

 

 

 

 

 

 

 

 

 

Consumer Products

 

$ 20,323

 

 

$ 17,343

 

 

 

17 %

Ingredients

 

 

41

 

 

 

245

 

 

 

-83 %

Analytical reference standards and services

 

 

584

 

 

 

628

 

 

 

-7 %

 

 

 

 

 

 

 

 

 

 

 

 

 

Total sales and marketing expenses

 

$ 20,948

 

 

$ 18,216

 

 

 

15 %

 

 

·

For the consumer products segment, the increase during the twelve-month period ended December 31, 2020 is largely due to increased staffing as well as direct marketing expenses associated with social media, public relations and other customer awareness and acquisition programs.

 

 

 

 

·

For the ingredients segment, selling and marketing expenses decreased by 83% during the twelve-month period ended December 31, 2020 compared to comparable period in 2019. We reversed approximately $114,000 of certain accrued commission expense during the first quarter of 2020, as we were no longer obligated to pay the commission.

 

 

 

 

·

For the analytical reference standards and services segment, the selling and marketing expenses decreased by 7% during the twelve-month period ended December 31, 2020. The selling expense in 2020 were less due to decreased sales.

 

 
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Table of Contents

    

Operating Expenses - Research and Development. Research and Development Expenses consist primarily of clinical trials, regulatory approvals, product development and process development expenses.

 

 

 

Twelve months ending

 

(In thousands)

 

December 31, 2020

 

 

December 31, 2019

 

 

Change

 

Research and development expenses:

 

 

 

 

 

 

 

 

 

Consumer Products

 

$ 3,245

 

 

$ 3,699

 

 

 

-12 %

Ingredients

 

 

487

 

 

 

721

 

 

 

-32 %

 

 

 

 

 

 

 

 

 

 

 

 

 

Total research and development expenses

 

$ 3,732

 

 

$ 4,420

 

 

 

-16 %

 

 

·

We allocate the research and development expenses related to our NIAGEN® branded ingredient to the consumer products and ingredients segment, based on revenues recorded. Overall, we decreased our research and development efforts during the twelve-month period ended December 31, 2020 as we evaluate and realign the priorities of our ongoing research and development efforts of our flagship ingredient, NIAGEN® nicotinamide riboside.

  

Operating Expenses - General and Administrative. General and Administrative Expenses consist of general company administration, legal, royalties, IT, accounting and executive management expenses.

 

 

 

Twelve months ending

 

(In thousands)

 

December 31, 2020

 

 

December 31, 2019

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$ 30,448

 

 

$ 34,308

 

 

 

-11 %

 

The following expenses contributed to the decrease in general and administrative expenses for the twelve-month period ended December 31, 2020, compared to the comparable period in 2019:

  

 

·

A decrease in legal expenses. Our legal expense decreased to approximately $8.6 million in the twelve-month period ended December 31, 2020 compared to approximately $11.3 million in the comparable period in 2019.

 

 

 

 

·

A decrease in bad debt expense. Our bad debt expense decreased to an insignificant amount in the twelve-month period ended December 31, 2020 compared to approximately $2.2 million in 2019. This is due to recording a write off of $2.2 million related to the trade receivable from Elysium Health in 2019 by increasing the allowance from $0.5 million to the entire trade receivable balance of $2.7 million. We placed a reserve for the entire outstanding balance as it was no longer deemed collectible.

 

Nonoperating - Interest Expense, net. Interest expense, net consists of interest earned from bank deposit accounts less interest expenses from convertible notes, the line of credit arrangement and finance leases.

 

 

 

Twelve months ending

 

(In thousands)

 

December 31, 2020

 

 

December 31, 2019

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

$ 71

 

 

$ 847

 

 

 

-92 %

 

 

·

In the second and third quarter of 2019, we incurred debt issuance costs of approximately $0.8 million in connection with the issuance of convertible promissory notes in the aggregate principal amount of $10.0 million to Winsave Resources Limited and Pioneer Step Holdings Limited. The issuance costs were recorded as a debt discount and have been amortized as interest expense using the effective interest method.

 

 
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Table of Contents

    

Depreciation and Amortization. For the twelve-month period ended December 31, 2020, we recorded approximately $0.9 million in depreciation compared to approximately $0.8 million for the twelve-month period ended December 31, 2019. We depreciate our assets on a straight-line basis, based on the estimated useful lives of the respective assets. We amortize intangible assets using a straight-line method, generally over 10 years. For licensed patent rights, the useful lives are 10 years or the remaining term of the patents underlying licensing rights, whichever is shorter. The useful lives of subsequent milestone payments that are capitalized are the remaining useful life of the initial licensing payment that was capitalized. In the twelve-month period ended December 31, 2020, we recorded amortization on intangible assets of approximately $0.2 million compared to approximately $0.2 million for the twelve-month period ended December 31, 2019.

 

Income Taxes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2020 and December 31, 2019, the Company maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of 0% for each of 2020 and 2019. As defined in ASC 740, Income Taxes, future realization of the tax benefit will depend on the existence of sufficient taxable income, including the expectation of continued future taxable income.

 

Net cash provided by (used in) operating activities. Net cash used in operating activities for the twelve-month period ended December 31, 2020 was approximately $10.6 million as compared to approximately $20.4 million for the twelve-month period ended December 31, 2019. Along with the net loss, an increase in trade receivables and payments on operating leases were the largest use of cash during the twelve-month period ended December 31, 2020. Net cash used in operating activities for the twelve-month period ended December 31, 2019 largely reflects an increase in inventories along with the net loss.

 

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

 

Net cash provided by (used in) investing activities. Net cash used in investing activities was approximately $0.2 million for the twelve-month period ended December 31, 2020, compared to approximately $0.2 million for the twelve-month period ended December 31, 2019. Net cash used in investing activities for the twelve-month period ended December 31, 2020, mainly consisted of purchases of leasehold improvements and equipment. Net cash used in investing activities for the twelve-month period ended December 31, 2019, mainly consisted of purchases of leasehold improvements and equipment, offset by proceeds from disposal of assets held at escrow.

 

Net cash provided by (used in) financing activities. Net cash provided by financing activities was approximately $8.7 million for the twelve-month period ended December 31, 2020, compared to approximately $16.9 million for the twelve-month period ended December 31, 2019. Net cash provided by financing activities for 2020 primarily consisted of proceeds from issuance of our common stock and exercise of stock options, offset by principal payments on finance leases. Net cash used in financing activities for 2019 mainly consisted of proceeds from issuances of our common stock, sale of convertible notes and exercise of stock options, offset by principal payments on finance leases.

 

Trade Receivables. As of December 31, 2020, we had approximately $2.7 million in trade receivables as compared to approximately $2.2 million as of December 31, 2019.

 

 
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Table of Contents

     

Inventories. As of December 31, 2020, we had approximately $11.7 million in inventory, compared to approximately $11.5 million as of December 31, 2019. As of December 31, 2020, our inventory consisted of approximately $8.1 million of consumer products, approximately $3.1 million of bulk ingredients and approximately $0.5 million of reference standards. Consumer products inventory consists of TRU NIAGEN® branded finished bottles of dietary supplement products and related work-in-process inventory. Bulk ingredients are proprietary compounds sold to customers in larger quantities, typically in kilograms. These ingredients are used by our customers in the dietary supplement, food and beverage industries to manufacture their final products. Reference standards are small quantities of plant-based compounds typically used to research an array of potential attributes or for quality control purposes. The Company currently lists over 1,500 phytochemicals and 300 botanical reference materials in our catalog and holds a lot of these as inventory in small quantities, mostly in grams and milligrams.

 

The Company regularly reviews inventories on hand and reduces the carrying value for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The reduction of the carrying value for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.

 

We strive to optimize our supply chain as we constantly search for better and more reliable sources and suppliers. By doing so, we believe we can lower the costs of our inventory and yield higher gross profit. In addition, we are working with our suppliers and partners to develop more efficient manufacturing methods, in an effort to lower the costs of our inventory.

 

Accounts Payable. As of December 31, 2020, we had $9.4 million in accounts payable compared to approximately $9.6 million as of December 31, 2019.

  

Liquidity and Capital Resources

 

For the twelve-month period ended December 31, 2020, the Company incurred losses from operations of approximately $19.9 million. Net cash used in operating activities for the twelve-month period ended December 31, 2020 was approximately $10.6 million. The losses and the uses of cash are primarily due to expenses associated with the development and expansion of our operations, as well as legal expenses. These operations have been financed through capital contributions, primarily through the issuance of common stock in private placements.

 

Our Board of Directors periodically reviews our capital requirements in light of our proposed business plan. Our future capital requirements will remain dependent upon a variety of factors, including cash flow from operations, the ability to increase sales, increasing our gross profits from current levels, reducing sales and administrative expenses as a percentage of net sales, continued development of customer relationships, and our ability to market our new products successfully. However, based on our results from operations, we may determine that we need additional financing to implement our business plan. Additional financing may come from public and private equity or debt offerings, borrowings under lines of credit or other sources. These additional funds may not be available on favorable terms, or at all. There can be no assurance we will be successful in raising these additional funds. Without adequate financing we may have to further delay or terminate product or service expansion plans. Any inability to raise additional financing would have a material adverse effect on us.

 

As of December 31, 2020, the cash and cash equivalents totaled approximately $16.7 million. Subsequent to the year ended December 31, 2020, the Company entered into a Securities Purchase Agreement with an investor, pursuant to which the Company sold and issued an aggregate of $25.0 million of the Company’s common stock. The Company anticipates that its current cash, cash equivalents and cash to be generated from operations, the $25.0 million received from the financing described above and available line of credit up to $7.0 million from Western Alliance Bank will be sufficient to meet its projected operating plans through at least the next twelve months from the issuance date of this report. The Company may, however, seek additional capital within the next twelve months, both to meet its projected operating plans within the next twelve months and/or to fund its longer term strategic objectives. In June 2020, we filed a $125.0 million registration statement on Form S-3 with the Commission, utilizing a “shelf” registration process. Under this shelf registration process, we may sell securities from time to time, including up to $50.0 million pursuant to the ATM Facility. As of December 31, 2020, we have not sold any securities pursuant to the ATM Facility.

 

 
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Table of Contents

     

Dividend Policy

 

We have not declared or paid any cash dividends on our common stock. We presently intend to retain earnings for use in our operations and to finance our business. Any change in our dividend policy is within the discretion of our board of directors and will depend, among other things, on our earnings, debt service and capital requirements, restrictions in financing agreements, if any, business conditions, legal restrictions and other factors that our board of directors deems relevant.

 

Off-Balance Sheet Arrangements

 

During the fiscal years ended December 31, 2020 and December 31, 2019, we had no material off-balance sheet arrangements.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations and other commitments as of December 31, 2020:

 

 

 

Payments due by period

 

(In thousands)

 

Total

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

$ 1,836

 

 

$ 655

 

 

$ 299

 

 

$ 308

 

 

$ 310

 

 

$ 263

 

Finance leases

 

 

53

 

 

 

32

 

 

 

21

 

 

 

-

 

 

 

-

 

 

 

-

 

Purchase obligations

 

 

17,251

 

 

 

17,251

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$ 19,140

 

 

$ 17,938

 

 

$ 320

 

 

$ 308

 

 

$ 310

 

 

$ 263

 

  

Operating leases. We lease our offices and research facilities in California and Colorado under operating lease agreements that expire in October 2021 and October 2025, respectively. We make monthly payments on these leases.

 

Finance leases. We lease equipment under finance lease obligations with a term of typically two to four years. We make monthly installment payments for these leases.

 

Purchase obligations. We enter into purchase obligations with various vendors for goods and services that we need for our operations. The purchase obligations for goods and services include inventory, advertising, research and development, and laboratory supplies.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates, including those related to the valuation of share-based payments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Our significant accounting policies are described in Note 3 of the Financial Statements, set forth in Item 8 of this Form 10-K.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable

 

 
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Table of Contents

  

Item 8. Financial Statements and Supplementary Data

 

The financial statements are set forth in the pages listed below.

 

 

 

Page

 

Reports of Independent Registered Public Accounting Firm

 

 

F-1

 

Consolidated Balance Sheets at December 31, 2020 and December 31, 2019

 

 

F-2

 

Consolidated Statements of Operations for the Years Ended December 31, 2020 and December 31, 2019

 

 

F-3

 

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and December 31, 2019

 

 

F-4

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and December 31, 2019

 

 

F-4

 

Notes to Consolidated Financial Statements

 

 

F-5

 

 

 
47

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Shareholders and Board of Directors of

ChromaDex Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of ChromaDex Corporation and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Revenue recognition – identification of contractual terms in certain customer arrangements

 

Critical Audit Matter Description

 

We identified a critical audit matter in the ingredients reportable segment associated with a contract that includes determining the performance obligations and an allocation of consideration as further described in Note 10 to the consolidated financial statements.   

 

The principal considerations for our determination in performing procedures relating to revenue recognition, specifically the identification and evaluation of terms and conditions in the contract, is a critical audit matter as there was significant judgment by management in identifying and evaluating terms and conditions in the contract that impacted revenue recognition. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing such procedures and in evaluating the audit evidence to determine whether the terms and conditions in the contract were appropriately identified and evaluated by management.

 

How the Critical Audit Matter Was Addressed in the Audit

 

Addressing the matter involved performing procedures and evaluation of audit evidence that included, among others (i) evaluating contract terms and conditions, (ii) reviewing and assessing the methodology applied and testing the reliability and mathematical accuracy of the underlying data and calculations, (iii) testing management’s identification of performance obligations by evaluating whether the promises were both capable of being distinct and distinct within the context of the contract, including reading the selected contracts and inquiring of certain of the Company’s accounting and operations personnel to understand the nature of the promises and how they are delivered to the customer, (iv) evaluating and concluding on the reasonableness of managements judgments and estimates.

 

/s/ Marcum LLP

 

Marcum LLP

 

We have served as the Company’s auditor since 2013.

 

New York, NY
March 12, 2021

 

 
F-1

Table of Contents

  

ChromaDex Corporation and Subsidiaries                                   

Consolidated Balance Sheets                                              

December 31, 2020 and December 31, 2019                                  

(In thousands, except per share data)                                    

 

 

 

Dec. 31, 2020

 

 

Dec. 31, 2019

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash, including restricted cash of $0.2 million and $0.2 million, respectively

 

$ 16,697

 

 

$ 18,812

 

Trade receivables, net of allowances of $0.2 million and $2.8 million, respectively; Receivables from Related Party: $0.9 million and $0.8 million, respectively

 

 

2,694

 

 

 

2,175

 

Inventories

 

 

11,683

 

 

 

11,535

 

Prepaid expenses and other assets

 

 

1,145

 

 

 

996

 

Total current assets

 

 

32,219

 

 

 

33,518

 

 

 

 

 

 

 

 

 

 

Leasehold Improvements and Equipment, net

 

 

3,206

 

 

 

3,765

 

Intangible Assets, net

 

 

1,082

 

 

 

1,311

 

Right of Use Assets

 

 

1,226

 

 

 

891

 

Other Long-term Assets

 

 

625

 

 

 

762

 

 

 

 

 

 

 

 

 

 

Total assets

 

$ 38,358

 

 

$ 40,247

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$ 9,445

 

 

$ 9,626

 

Accrued expenses

 

 

6,133

 

 

 

4,415

 

Current maturities of operating lease obligations

 

 

589

 

 

 

595

 

Current maturities of finance lease obligations

 

 

31

 

 

 

258

 

Customer deposits

 

 

278

 

 

 

169

 

Total current liabilities

 

 

16,476

 

 

 

15,063

 

 

 

 

 

 

 

 

 

 

Deferred Revenue

 

 

4,441

 

 

 

3,873

 

Operating Lease Obligations, Less Current Maturities

 

 

997

 

 

 

848

 

Finance Lease Obligations, Less Current Maturities

 

 

20

 

 

 

18

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

21,934

 

 

 

19,802

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 -

 

 

 

 -

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock, $.001 par value; authorized 150,000 shares; issued and outstanding December 31, 2020 61,881 shares and December 31, 2019 59,562 shares

 

 

62

 

 

 

60

 

Additional paid-in capital

 

 

158,190

 

 

 

142,285

 

Accumulated deficit

 

 

(141,825 )

 

 

(121,900 )

Cumulative translation adjustments

 

 

(3 )

 

 

-

 

Total stockholders’ equity

 

 

16,424

 

 

 

20,445

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$ 38,358

 

 

$ 40,247

 

 

See Notes to Consolidated Financial Statements.

 

 
F-2

Table of Contents

  

ChromaDex Corporation and Subsidiaries

Consolidated Statements of Operations

Years Ended December 31, 2020 and December 31, 2019

(In thousands, except per share data)

  

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Sales, net

 

$ 59,257

 

 

$ 46,291

 

Cost of sales

 

 

23,983

 

 

 

20,522

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

35,274

 

 

 

25,769

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

20,948

 

 

 

18,216

 

Research and development

 

 

3,732

 

 

 

4,420

 

General and administrative

 

 

30,448

 

 

 

34,308

 

Other

 

 

-

 

 

 

125

 

Operating expenses

 

 

55,128

 

 

 

57,069

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(19,854 )

 

 

(31,300 )

 

 

 

 

 

 

 

 

 

Nonoperating expense:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(71 )

 

 

(847 )

Nonoperating expenses

 

 

(71 )

 

 

(847 )

 

 

 

 

 

 

 

 

 

Net loss

 

 

(19,925 )

 

 

(32,147 )

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share:

 

$ (0.33 )

 

$ (0.56 )

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

 

61,067

 

 

 

57,056

 

 

See Notes to Consolidated Financial Statements.                

 
F-3

Table of Contents

  

ChromaDex Corporation and Subsidiaries

Consolidated Statement of Stockholders Equity

Years Ended December 31, 2020 and December 31, 2019

(In thousands)

  

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

 Amount

 

 

 Paid-in Capital

 

 

 Deficit

 

 

 Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

 

55,089

 

 

$ 55

 

 

$ 116,876

 

 

$ (89,753 )

 

$ 27,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock, net of offering costs of $0.2 million

 

 

1,568

 

 

 

2

 

 

 

6,770

 

 

 

-

 

 

 

6,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for conversion of debt and accrued interest

 

 

2,267

 

 

 

2

 

 

 

10,121

 

 

 

 

 

 

 

10,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt discount to covertible notes

 

 

-

 

 

 

-

 

 

 

281

 

 

 

-

 

 

 

281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

427

 

 

 

1

 

 

 

1,065

 

 

 

-

 

 

 

1,066

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of of warrants

 

 

44

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

167

 

 

 

-

 

 

 

7,172

 

 

 

-

 

 

 

7,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(32,147 )

 

 

(32,147 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

 

59,562

 

 

$ 60

 

 

$ 142,285

 

 

$ (121,900 )

 

$ 20,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock, net of offering costs of $0.1 million

 

 

1,225

 

 

 

1

 

 

 

4,855

 

 

 

-

 

 

 

4,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

1,094

 

 

 

1

 

 

 

4,114

 

 

 

-

 

 

 

4,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

6,936

 

 

 

-

 

 

 

6,936

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3 )

 

 

(3 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(19,925 )

 

 

(19,925 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2020

 

 

61,881

 

 

$ 62

 

 

$ 158,190

 

 

$ (141,828 )

 

$ 16,424

 

 

See Notes to Consolidated Financial Statements.                                                   

 

 
F-4

Table of Contents

  

ChromaDex Corporation and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2020 and December 31, 2019

(In thousands)

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Cash Flows From Operating Activities

 

 

 

 

 

 

Net loss

 

$ (19,925 )

 

$ (32,147 )

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation of leasehold improvements and equipment

 

 

871

 

 

 

762

 

Amortization of intangibles

 

 

243

 

 

 

246

 

Amortization of right of use assets

 

 

399

 

 

 

515

 

Share-based compensation

 

 

6,936

 

 

 

7,172

 

Allowance for doubtful trade receivables

 

 

(2,576 )

 

 

2,228

 

Loss from investment in long-term assets

 

 

395

 

 

 

-

 

Loss from impairment of intangibles

 

 

4

 

 

 

-

 

Loss from disposal of equipment

 

 

-

 

 

 

7

 

Amortization of convertible notes issuance costs and discount

 

 

-

 

 

 

846

 

Non-cash financing costs

 

 

94

 

 

 

134

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables

 

 

2,057

 

 

 

(44 )

Inventories

 

 

(148 )

 

 

(3,286 )

Implementation costs for cloud computing arrangement

 

 

(142 )

 

 

-

 

Prepaid expenses and other assets

 

 

(427 )

 

 

(191 )

Accounts payable

 

 

(181 )

 

 

78

 

Accrued expenses

 

 

1,717

 

 

 

103

 

Deferred revenue

 

 

568

 

 

 

3,873

 

Customer deposits and other

 

 

106

 

 

 

(106 )

Payments on operating leases

 

 

(591 )

 

 

(629 )

Net cash used in operating activities

 

 

(10,600 )

 

 

(20,439 )

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Proceeds from disposal of assets held at escrow

 

 

-

 

 

 

553

 

Purchases of leasehold improvements and equipment

 

 

(124 )

 

 

(743 )

Purchases of intangible assets

 

 

(18 )

 

 

(10 )

Investment in other long-term assets

 

 

(23 )

 

 

(49 )

Net cash used in investing activities

 

 

(165 )

 

 

(249 )

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

 

4,856

 

 

 

6,772

 

Proceeds from sale of convertible notes

 

 

-

 

 

 

10,000

 

Payment of convertible notes issuance costs

 

 

-

 

 

 

(565 )

Payment of debt issuance costs

 

 

(49 )

 

 

(113 )

Proceeds from exercise of stock options

 

 

4,115

 

 

 

1,066

 

Principal payments on finance leases

 

 

(272 )

 

 

(276 )

Net cash provided by financing activities

 

 

8,650

 

 

 

16,884

 

 

 

 

 

 

 

 

 

 

Net decrease in cash

 

 

(2,115 )

 

 

(3,804 )

 

 

 

 

 

 

 

 

 

Cash Beginning of Year, including restricted cash of $0.2 million for both 2020 and 2019

 

 

18,812

 

 

 

22,616

 

 

 

 

 

 

 

 

 

 

Cash Ending of Year, including restricted cash of $0.2 million for both 2020 and 2019

 

$ 16,697

 

 

$ 18,812

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Cash payments for interest on finance leases

 

$ 13

 

 

$ 33

 

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Noncash Operating Activity

 

 

 

 

 

 

 

 

Finance lease obligation incurred on licensing fees

 

$ -

 

 

$ 99

 

Right of use assets transferred

 

$ -

 

 

$ 62

 

Operating lease obligation transferred

 

$ -

 

 

$ 65

 

Operating lease obligation incurred for entering into lease amendment

 

$ 734

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Noncash Investing Activity

 

 

 

 

 

 

 

 

Finance lease obligation incurred for purchase of computer equipment and software

 

$ 47

 

 

$ 143

 

Operating lease obligation incurred for tenant improvement credit received

 

$ -

 

 

$ 64

 

Retirement of fully depreciated equipment - cost

 

$ 5

 

 

$ -

 

Retirement of fully depreciated equipment - accumulated depreciation

 

$ 5

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Noncash Financing Activity

 

 

 

 

 

 

 

 

Issuance of common stock for conversion of debt and accrued interest

 

$ -

 

 

$ 10,123

 

 

See Notes to Consolidated Financial Statements.                               

 

 
F-5

Table of Contents

  

Note 1. Nature of Business

 

ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., ChromaDex Analytics, Inc., ChromaDex Asia Limited and ChromaDex Europa B.V. (collectively, “ChromaDex”, the “Company” or, in the first person as “we” “us” and “our”) are a global bioscience company dedicated to healthy aging. The ChromaDex team, which includes world-renowned scientists, is pioneering research on nicotinamide adenine dinucleotide (“NAD+”), levels of which decline with age. ChromaDex is the innovator behind NAD+ precursor nicotinamide riboside (“NR”), commercialized as the flagship ingredient NIAGEN®. Nicotinamide riboside and other NAD+ precursors are protected by ChromaDex’s patent portfolio. ChromaDex delivers NIAGEN® as the sole active ingredient in its consumer product TRU NIAGEN®. The Company also has analytical reference standards and services segment, which focuses on natural product fine chemicals (known as “phytochemicals”) and related chemistry services.

 

On January 15, 2021, Healthspan Research, LLC was dissolved. Prior to its dissolution, Healthspan Research, LLC contributed its assets and liabilities to ChromaDex Inc.

 

Note 2. Liquidity

 

The Company has incurred a net loss of approximately $19.9 million for the year ended December 31, 2020. As of December 31, 2020, cash and cash equivalents totaled approximately $16.7 million, which includes restricted cash of approximately $0.2 million.

 

Subsequent to the year ended December 31, 2020, the Company entered into a Securities Purchase Agreement with an investor, pursuant to which the Company sold and issued an aggregate of $25.0 million of the Company’s common stock (the “Financing”). Please refer to Note 17. Subsequent Events for more details.

 

The Company anticipates that its current cash, cash equivalents and cash to be generated from operations, $25.0 million received from the Financing described above and available line of credit up to $7.0 million from Western Alliance Bank will be sufficient to meet its projected operating plans through at least the next twelve months from the issuance date of this report. The Company may, however, seek additional capital within the next twelve months, both to meet its projected operating plans within the next twelve months and/or to fund its longer term strategic objectives. In June 2020, we filed a $125.0 million registration statement on Form S-3 with the Commission, utilizing a “shelf” registration process. Under this shelf registration process, we may sell securities from time to time, including up to $50.0 million pursuant to the At Market Issuance Sales Agreement, dated as of June 12, 2020, with B. Riley FBR, Inc. and Raymond James & Associates, Inc. (the “ATM Facility”). As of December 31, 2020, we have not sold any securities pursuant to the ATM Facility.

 

Note 3. Significant Accounting Policies

 

Significant accounting policies are as follows:

 

Basis of presentation: The financial statements and accompanying notes have been prepared on a consolidated basis and reflect the consolidated financial position of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated from these financial statements. The Company’s fiscal year ends on December 31.

 

 
F-6

Table of Contents

   

Adopted Accounting Standards in Fiscal 2020:

 

Effective the first day of fiscal year 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” Under the new standard, implementation costs related to a cloud computing arrangement will be deferred or expensed as incurred, in accordance with the existing internal-use software guidance for similar costs. The new standard also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense. The Company adopted this guidance on a prospective basis in 2020. The implementation costs the Company capitalized during 2020 are included in “Leasehold Improvements and Equipment, net” in the Company’s Consolidated Balance Sheets. The corresponding cash flows related to these arrangements are included in “Net cash used in operating activities” in the Company’s Consolidated Statements of Cash Flows.

 

Use of accounting estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Revenue recognition: The Company recognizes sales and the related cost of sales when the performance obligations are satisfied. The performance obligations are typically satisfied upon shipment of physical goods or as the services are performed over time. In addition to the satisfaction of the performance obligations, the following conditions are required for revenue recognition: an arrangement exists, there is a fixed price, and collectability is reasonably assured. Discounts, returns and allowances related to sales, including an estimated reserve for the returns and allowances, are recorded as reduction of revenue.

 

The Company accounts for shipping and handling activities performed as cost of sales under a fulfillment cost and any fee received for shipping and handling as part of the transaction price and recognize revenue when control of the good transfers. Shipping and handling fees billed to customers included in net sales for the years ending December 31, 2020 and December 31, 2019 are as follows:

 

(In thousands)

 

2020

 

 

2019

 

Shipping and handling fees billed

 

$ 278

 

 

$ 360

 

 

Taxes collected from customers and remitted to governmental authorities are excluded from revenue, which is presented on a net basis in the statement of operations.

 

Restricted cash: The Company classifies cash as restricted if the withdrawal or its usage is restricted for more than three months. In connection with a lease amendment entered on November 9, 2018 to lease additional office space located in Los Angeles, California through October 2021, the Company delivered a letter of credit issued by a bank to the landlord in the amount of $0.2 million. The issuing bank required a collateral for the letter of credit and the Company made a deposit covering the letter of credit amount with the issuing bank. The letter of credit expires on October 18, 2021.

 

Trade accounts receivable, net: Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on monthly and quarterly reviews of all outstanding amounts. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. The allowance amounts for the periods ended December 31, 2020 and December 31, 2019 are as follows:

 

(In thousands)

 

2020

 

 

2019

 

Allowances Related to

 

 

 

 

 

 

Elysium Health

 

$ -

 

 

$ 2,733

 

Other Allowances

 

 

189

 

 

 

31

 

 

 

$ 189

 

 

$ 2,764

 

 

 
F-7

Table of Contents

   

Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received.

 

Credit risk: Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and trade receivables. For cash and cash equivalents, the Company has them either in a form of bank deposits or highly liquid debt instruments in investment-grade pursuant to the Company’s investment policy. U.S. bank accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of December 31, 2020, we held a total deposit of approximately $14.7 million with one institution and $1.8 million with another institution which exceeded the FDIC limit. We, however, believe we have very little credit risk exposure for our cash and cash equivalents. Our trade receivables are derived from sales to our customers. We assess credit risk of our customers through quantitative and qualitative analysis. From this analysis, we establish credit limits and manage the risk exposure. We, however, incur credit losses due to bankruptcy or other failure of the customer to pay.

 

Inventories: Inventories are comprised of work in process and finished goods. They are stated at the lower of cost, determined by the first-in, first-out method, or net realizable value. The inventory on the balance sheet is recorded net of valuation allowances. Labor and overhead has been added to inventory that was manufactured or characterized by the Company. Our normal operating cycle for reference standards is currently longer than one year. The Company regularly reviews inventories on hand and reduces the carrying value for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The reduction of the carrying value for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.

 

Intangible assets: Intangible assets include licensing rights and are accounted for based on the fair value of consideration given or the fair value of the net assets acquired, whichever is more reliable. Intangible assets with finite useful lives are amortized using the straight-line method over a period of 10 years, or, for licensed patent rights, the remaining term of the patents underlying licensing rights (considered to be the remaining useful life of the license), whichever is shorter. The useful lives of subsequent milestone payments that are capitalized are the remaining useful life of the initial licensing payment that was capitalized.

 

Leasehold improvements and equipment, net: Leasehold improvements and equipment are carried at cost and depreciated on the straight-line method over the lesser of the estimated useful life of each asset or lease term. Leasehold improvements and equipment are comprised of leasehold improvements, laboratory equipment, furniture and fixtures, computer equipment and implementations costs for cloud computing arrangement. Depreciation on equipment under finance lease is included with depreciation on owned assets. Maintenance and repairs are charged to operating expenses as they are incurred. Improvements and betterments, which extend the lives of the assets, are capitalized.

 

Long-lived assets are reviewed for impairment on a periodic basis and when changes in circumstances indicate the possibility that the carrying amount may not be recoverable. Long-lived assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the forecast of undiscounted future cash flows is less than the carrying amount of the assets, an impairment charge would be recognized to reduce the carrying value of the assets to fair value. If a possible impairment is identified, the asset group’s fair value is measured relying primarily on a discounted cash flow methodology.

 

Customer deposits: Customer deposits represent cash received from customers in advance of product shipment or delivery of services.

 

 
F-8

Table of Contents

   

Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

The Company has not recorded a reserve for any tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The Company files tax returns in all appropriate jurisdictions, which include a U.S. federal tax return and various state tax returns. Open tax years for these jurisdictions are 2017 to 2020, which statutes expire in 2021 to 2024, respectively. When and if applicable, potential interest and penalty costs are accrued as incurred, with expenses recognized in general and administrative expenses in the statements of operations. As of December 31, 2020, the Company has no liability for unrecognized tax benefits.

 

Research and development costs: Research and development costs consist of direct and indirect costs associated with the development of the Company’s technologies. These costs are expensed as incurred.

 

Advertising: The Company expenses the production costs of advertising the first time the advertising takes place. Advertising expense for the years ended December 31, 2020 and December 31, 2019 were approximately $7,417,000 and $6,689,000, respectively.

 

Share-based compensation: The Company has an Equity Incentive Plan under which the Board of Directors may grant restricted stock or stock options to employees and non-employees. The accounting treatment for share-based payments to employees and non-employees is substantially equivalent.

 

Share-based compensation cost is recorded for all option grants and awards of non-vested stock based on the grant date fair value of the award, and is recognized over the service period required for the award. Prior to October 1, 2018, share-based compensation cost for non-employees was remeasured over the vesting term as earned.

 

The fair value of the Company’s stock options is estimated at the date of grant using the Black-Scholes based option valuation model. For the expected term, the Company uses SEC Staff Accounting Bulletin No. 107 simplified method for “plain vanilla” options with following characteristics: (i) the share options are granted at the market price on the grant date; (ii) exercisability is conditional on performing service through the vesting date on most options; (iii) if an employee terminates service prior to vesting, the employee would forfeit the share options; (iv) if an employee terminates service after vesting, the employee would have 30 to 90 days to exercise the share options; and (v) the share options are nontransferable and nonhedgeable. The volatility assumption is based on the historical volatility of the Company’s common stock with an equivalent remaining expected term. The dividend yield assumption is based on the Company’s history and expectation of future dividend payouts on the common stock. The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining expected term.

 

Market conditions that affect vesting of stock options are considered in the grant-date fair value. The issues surrounding the valuation for such awards can be complex and consideration needs to be given for how the market condition should be incorporated into the valuation of the award. The Company considers using other valuation techniques, such as Monte Carlo simulations based on a lattice approach, to value awards with market conditions.

 

For option grants without performance conditions, the Company recognizes compensation expense over the requisite service period ratably, recognizing expense for each tranche of each grant starting on the grant date. For stock options that have both service and performance conditions, the Company recognizes compensation expense using the graded attribution method. Compensation expense for stock options with performance conditions is recognized only for those awards expected to vest. The Company recognizes forfeitures when they occur.

 

 
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Table of Contents

  

Fair Value Measurement: The Company follows the provisions of the accounting standard which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

Financial instruments: The estimated fair value of financial instruments has been determined based on the Company’s assessment of available market information and appropriate valuation methodologies. The fair value of the Company’s financial instruments that are included in current assets and current liabilities approximates their carrying value due to their short-term nature.

 

The carrying amounts reported in the balance sheet for capital lease obligations are present values of the obligations, excluding the interest portion.

 

Recent accounting standards: In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope. The new guidance represents significant changes to accounting for credit losses: (i) full lifetime expected credit losses will be recognized upon initial recognition of an asset in scope; (ii) the current incurred loss impairment model that recognizes losses when a probable threshold is met will be replaced with the expected credit loss impairment method without recognition threshold; and (iii) the expected credit losses estimate will be based upon historical information, current conditions, and reasonable and supportable forecasts. ASU 2016-13 introduces two distinctive credit loss impairment models: (i) current expected credit loss impairment model (Subtopic 326-20) applicable to financial assets measured at amortized cost; and (ii) available-for-sale debt securities impairment model (Subtopic 326-30). ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Public entities that qualify as a smaller reporting company can elect to defer compliance effective for fiscal years beginning after December 15, 2022. We are currently evaluating the impact of our pending adoption of ASU 2016-13 on our consolidated financial statements.

 

 
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Note 4. Loss Per Share Applicable to Common Stockholders

 

The following table sets forth the computations of loss per share amounts applicable to common stockholders for the years ended December 31, 2020 and December 31, 2019. 

 

 

 

Years Ended

 

(In thousands, except per share data)

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Net loss

 

$ (19,925 )

 

$ (32,147 )

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$ (0.33 )

 

$ (0.56 )

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding (1):

 

 

61,067

 

 

 

57,056

 

 

 

 

 

 

 

 

 

 

Potentially dilutive securities (2):

 

 

 

 

 

 

 

 

Stock options

 

 

11,914

 

 

 

10,551

 

____________ 

(1) Includes approximately 0.2 million shares of restricted stock for each of the years 2020 and 2019, which are participating securities that feature voting and dividend rights.                                                             

 

(2) Excluded from the computation of loss per share as their impact is antidilutive.                                           

 

Note 5. Inventory

 

The amounts of major classes of inventory for the periods ended December 31, 2020 and December 31, 2019 are as follows:

 

 

(In thousands)

 

2020

 

 

2019

 

Consumer Products - Finished Goods

 

$ 2,358

 

 

$ 4,877

 

Consumer Products - Work in Process

 

 

5,718

 

 

 

4,659

 

Bulk ingredients

 

 

3,065

 

 

 

1,364

 

Reference standards

 

 

542

 

 

 

635

 

 

 

$ 11,683

 

 

$ 11,535

 

 

Note 6. Intangible Assets

 

Intangible assets consisted of the following:

 

(In thousands)

 

2020

 

 

2019

 

 

Weighted Average

Total Amortization

Period

 

 

 

 

 

 

 

 

 

 

 

Healthspan Research LLC Acquisition

 

$ 1,346

 

 

$ 1,346

 

 

10 years

 

License agreements and other

 

 

1,643

 

 

 

1,635

 

 

9 years

 

Less accumulated depreciation

 

 

(1,907 )

 

 

(1,670 )

 

 

 

 

 

$ 1,082

 

 

$ 1,311

 

 

 

 

 

Amortization expenses on amortizable intangible assets included in the consolidated statement of operations for the years ended December 31, 2020 and December 31, 2019 were approximately $0.2 million per year.

 

 
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Estimated aggregate amortization expense for each of the next five years is as follows:

 

(In thousands)

Years ending December:

 

 

 

2021

 

$ 224

 

2022

 

 

186

 

2023

 

 

158

 

2024

 

 

154

 

2025

 

 

151

 

Thereafter

 

 

209

 

 

 

$ 1,082

 

 

Note 7. Leasehold Improvements and Equipment, Net

 

Leasehold improvements and equipment consisted of the following:

 

 

(In thousands)

 

2020

 

 

2019

 

 

Useful Life

 

 

 

 

 

 

 

 

 

 

 

Laboratory equipment

 

$ 2,967

 

 

$ 2,859

 

 

10 years

 

Leasehold improvements

 

 

2,357

 

 

 

2,320

 

 

Lesser of lease term or estimated useful life

 

Computer equipment

 

 

751

 

 

 

682

 

 

3 to 5 years

 

Implementation costs -

Cloud computing arrangements

 

 

582

 

 

 

422

 

 

5 years

 

Furniture and fixtures

 

 

201

 

 

 

201

 

 

7 to 10 years

 

Construction in progress

 

 

2

 

 

 

71

 

 

 

 

 

 

 

6,860

 

 

 

6,555

 

 

 

 

Less accumulated depreciation

 

 

3,654

 

 

 

2,790

 

 

 

 

 

 

$ 3,206

 

 

$ 3,765

 

 

 

 

 

Depreciation expenses on leasehold improvements and equipment included in the consolidated statement of operations for the years ended December 31, 2020 and December 31, 2019 were approximately $0.9 million and $0.8 million, respectively.

 

Note 8. Leases

 

Operating Leases

 

On August 3, 2020, the Company entered into a lease amendment to lease additional space located in Longmont, Colorado. The lease amendment extends the expiration of the lease period from February 2024 to December 2025. Pursuant to the lease amendment, the Company will make additional total lease payments of approximately $0.9 million during the term of the lease.

 

 
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As of December 31, 2020 and December 31, 2019 the Company had operating lease assets in right of use assets of approximately $1.2 million and $0.9 million, respectively, and corresponding operating lease liabilities of approximately $1.6 million and $1.4 million, respectively. For the years ended December 31, 2020 and December 31, 2019, the following were expenses incurred in connection with operating leases:

  

(In thousands)

 

For the Year

Ended

Dec. 31, 2020

 

 

For the Year

Ended

Dec. 31, 2019

 

Operating leases

 

 

 

 

 

 

Operating lease expense

 

$ 501

 

 

$ 663

 

Variable lease expense

 

 

182

 

 

 

246

 

Operating lease expense

 

 

683

 

 

 

909

 

Short-term lease rent expense

 

 

253

 

 

 

70

 

Total expense

 

$ 936

 

 

$ 979

 

 

 

 

 

 

 

 

 

 

 

 

At Dec. 31, 2020

 

 

 

 

 

Weighted-average remaining lease term (years) - operating leases

 

 

2.6

 

 

 

 

 

Weighted-average discount rate - operating leases

 

 

7.2 %

 

 

 

 

  

Minimum future lease payments under operating leases as of December 31, 2020 are as follows:

 

(In thousands)

 

 

 

Year Ending December 31, 2021

 

$ 655

 

Year Ending December 31, 2022

 

 

299

 

Year Ending December 31, 2023

 

 

308

 

Year Ending December 31, 2024

 

 

310

 

Year Ending December 31, 2025

 

 

263

 

Total

 

 

1,836

 

Less present value discount

 

 

249

 

Operating lease liabilities

 

 

1,586

 

Less current portion

 

 

589

 

Long-term obligations under operating leases

 

$ 997

 

 

 
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Table of Contents

  

Finance Leases

 

As of December 31, 2020 and December 31, 2019, the Company had finance lease assets in equipment assets of approximately $0.2 million and $0.7 million, respectively and corresponding finance lease liabilities of approximately $0.1 million and $0.3 million, respectively. For the years ended December 31, 2020 and December 31, 2019, following were expenses incurred in connection with finance leases:

  

(In thousands)

 

For the Year

Ended

Dec. 31, 2020

 

 

For the Year

Ended

Dec. 31, 2019

 

Finance leases

 

 

 

 

 

 

Amortization of equipment assets

 

$ 93

 

 

$ 83

 

Interest on lease liabilities

 

 

13

 

 

 

33

 

Total expenses

 

$ 106

 

 

$ 116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At Dec. 31, 2020

 

Weighted-average remaining lease term (years) - finance leases

 

 

 

 

 

 

1.3

 

Weighted-average discount rate - finance leases

 

 

 

 

 

 

7.3 %

 

Minimum future lease payments under finance leases as of December 31, 2020 are as follows: 

 

(In thousands)

 

 

 

Year Ending December 31, 2021

 

$ 32

 

Year Ending December 31, 2022

 

 

21

 

Total

 

 

53

 

Less present value discount

 

 

2

 

Finance lease liabilities

 

 

51

 

Less current portion

 

 

31

 

Long-term obligations under finance leases

 

$ 20

 

 

Note 9. Line of Credit

 

On November 12, 2019, the Company entered into a business financing agreement with Western Alliance Bank (the “Credit Agreement”), in order to establish a formula based revolving credit line pursuant to which the Company may borrow an aggregate principal amount of up to $7.0 million, subject to the terms and conditions of the Credit Agreement. As of December 31, 2020, the Company did not have any outstanding balance from this line of credit arrangement.

 

The interest rate as of December 31, 2020 was 6.25%. The interest rate is calculated at a floating rate per month equal to (a) the greater of (i) 4.75% per year or (ii) the Prime Rate published by The Wall Street Journal, plus (b) 1.50 percentage points, plus an additional 5.00 percentage points during any period that an event of default has occurred and is continuing. The Company’s obligations under the Credit Agreement are secured by a security interest in substantially all of the Company’s current and future personal property assets, including intellectual property. Any borrowings, interest or other fees or obligations that the Company owes will become due and payable on November 12, 2021.

 

The Credit Agreement includes quick ratio and minimum liquidity financial covenants. The Company is also subject to a number of 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.

 

Debt Issuance Costs

 

For the years ended December 31, 2020 and December 31, 2019, The Company incurred debt issuance costs of approximately $113,000 and $49,000, respectively, in connection with this line of credit arrangement and had an unamortized balance of approximately $57,000 as of December 31, 2020. For the line of credit arrangement, the Company elected a policy to keep the debt issuance costs as an asset, regardless of whether an amount is drawn. The remaining unamortized deferred asset will be amortized over the remaining life of the line of credit arrangement.

 

 
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Table of Contents

  

Note 10. Deferred Revenue

 

In December 2018, the Company entered into a supply agreement with Nestec Ltd. (“Nestlé”), pursuant to which Nestlé is the 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, the Company received an upfront fee of $4.0 million in January 2019. In December 2020, the Company also received $1.0 million for the launch of product in certain territory pursuant to the supply agreement. The Company determined that both the $4.0 million upfront fee and the $1.0 million product launch fee are treated as advance payments for future performance obligations, and utilized output method to recognize the allocated transaction price for this performance obligation as products are supplied over the duration of the exclusivity period. In utilizing output method, the Company estimated total delivery volume based on forecast inputs received from Nestlé on expected purchases of NIAGEN® over the course of the supply agreement.

 

Revenue recognized from deferred revenue were as follows:

 

 

 

Year ending

 

 

At

 

 

At

 

(In thousands)

 

Dec. 31, 2020

 

 

Dec. 31, 2019

 

 

Dec. 31, 2020

 

 

Dec. 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue recognized from deferred revenue

 

$ 432

 

 

$ 127

 

 

 

 

 

 

 

Deferred Revenue Balance

 

 

 

 

 

 

 

 

 

$ 4,441

 

 

$ 3,873

 

 

Note 11. Income Taxes

 

At December 31, 2020 and December 31, 2019, the Company maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rates of 0% for both years 2020 and 2019. At December 31, 2020 and December 31, 2019, we recorded a valuation allowance of $35.2 million and $30.3 million, respectively. The valuation allowance increased by $4.9 million during 2020.

 

A reconciliation of income taxes computed at the statutory federal income tax rate to income taxes as reflected in the financial statements is summarized as follows:

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Federal income tax expense at statutory rate

 

 

(21.0 )%

 

 

(21.0 )%

State income tax, net of federal benefit

 

 

(5.7 )%

 

 

(6.4 )%

Permanent differences

 

 

1.4 %

 

 

1.1 %

Change in state tax rate

 

 

(0.1 )%

 

 

0.0 %

Changes of state net operating losses

 

 

(0.3 )%

 

 

0.3 %

Change in stock options and restricted stock

 

 

0.3 %

 

 

(0.2 )%

Change in valuation allowance

 

 

25.2 %

 

 

26.2 %

Other

 

 

0.2 %

 

 

0.0 %

Effective tax rate

 

 

0.0 %

 

 

0.0 %

 

 
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Table of Contents

  

The deferred income tax assets and liabilities consisted of the following components as of December 31, 2020 and December 31, 2019:

 

 

(In thousands)

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryforward

 

$ 28,496

 

 

$ 24,233

 

Stock options and restricted stock

 

 

5,051

 

 

 

3,988

 

Interest expense

 

 

220

 

 

 

278

 

Inventory reserve

 

 

272

 

 

 

353

 

Allowance for doubtful accounts

 

 

50

 

 

 

758

 

Accrued expenses

 

 

1,190

 

 

 

689

 

Deferred revenue

 

 

5

 

 

 

-

 

Leasehold improvements and equipment

 

 

32

 

 

 

14

 

Intangibles

 

 

85

 

 

 

66

 

Operating leases

 

 

96

 

 

 

152

 

 

 

 

35,497

 

 

 

30,531

 

Less valuation allowance

 

 

(35,244 )

 

 

(30,313 )

 

 

 

253

 

 

 

218

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

(253 )

 

 

(218 )

 

 

 

(253 )

 

 

(218 )

 

 

$ -

 

 

$ -

 

 

As of December 31, 2020, the Company has tax net operating loss carryforwards for federal and state income tax purposes of approximately $106.6 million and $92.7 million, respectively, portions of which begin to expire in the year ending December 31, 2023 and 2022, respectively. The federal net operating loss carryforward of $66.6 million generated in tax years beginning after December 31, 2017 can be carried forward indefinitely but the deductibility of such net operating loss carryforwards in taxable years beginning after December 31, 2020, is limited to 80% of taxable income.

  

Under the Internal Revenue Code of 1986, as amended (the “Code”), certain ownership changes may subject the Company to annual limitations on the utilization of its net operating loss carryforwards. The Company has determined that the stock issued in the year of 2020 did not create a change in control under the Section 382 of the Code. The Company will continue to analyze the potential impact of any additional transactions undertaken upon the utilization of the net operating losses on a go forward basis.

 

The Tax Cuts and Jobs Act created new Section 951A, which set forth a new set of tax rules affecting U.S. shareholders of controlled foreign corporations (“CFCs”). Section 951A defined a new category of income, global intangible low-taxed income (“GILTI”), which must be included on the U.S. shareholder’s tax return as it is earned, regardless of when it is distributed (similar to subpart F income). This provision is effective for CFC tax years beginning after December 31, 2017. The Company has prepared the GILTI calculation for 2020 and there is no U.S. tax on GILTI for 2020 due to a loss.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other provisions, increases the limitation on the allowed business interest expense deduction from 30 percent to 50 percent of adjusted taxable income for tax years beginning January 1, 2019 and 2020 and allows businesses to immediately expense the full cost of Qualified Improvement Property, retroactive to tax years beginning on or after January 1, 2018. Additionally, the CARES Act permits net operating loss carryovers (“NOLs”) and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently evaluating the impact of the CARES Act, but at present does not expect it to have a material impact on the income tax provision.

 

The Company is currently not under examination by the Internal Revenue Service or any other jurisdictions for any tax years for income taxes. The Company has not identified any material uncertain tax positions requiring a reserve as of December 31, 2020 and December 31, 2019.

 

 
F-16

Table of Contents

  

Note 12. Related Party Transactions

 

Sale of consumer products

 

 

 

Net sales
Year ended
Dec. 31, 2020

 

Net sales
Year ended
Dec. 31, 2019

 

 

Trade receivable at
Dec. 31, 2020

 

 

Trade receivable at
Dec. 31, 2019

 

A.S. Watson Group

 

$7.7 million

 

$7.3 million

 

 

$0.9 million

 

 

$0.8 million

 

Horizon Ventures (1)

 

$1.6 million

 

-

 

 

-

 

 

-

 

Total

 

$9.3 million

 

$7.3 million

 

 

$0.9 million

 

 

$0.8 million

 

 

*A.S. Watson Group and Horizon Ventures are related parties through common ownership of an enterprise that beneficially owns more than 10% of the common stock of the Company.

 

(1) For the year ended December 31, 2020, Horizon Ventures made purchases to donate to the healthcare workers in Hong Kong hospitals.

 

Note 13. Share-Based Compensation

 

Stock Option Plans     

 

At the discretion of the compensation committee of the Board of Directors (the “Compensation Committee”), the Company may grant options to purchase the Company’s common stock to certain individuals from time to time. Management and the Compensation Committee determine the terms of awards which include the exercise price, vesting conditions and expiration dates at the time of grant. Expiration dates for stock options are not to exceed 10 years from their date of issuance.

 

The Company grant awards to recipients through the 2017 Equity Incentive Plan, as amended (the “2017 Plan”), which is approved by the stockholders and Board of Directors. As of December 31, 2020, under the 2017 Plan, the Company is authorized to issue shares subject to awards that total no more than the sum of (i) 14,500,000 new shares, (ii) approximately 384,000 unallocated shares remaining available for the grant of new awards under the 2007 Plan, (iii) any returning shares such as forfeited, cancelled, or expired shares and (iv) 500,000 shares pursuant to an inducement award. The remaining number of shares available for issuance under the 2017 Plan totaled approximately 5.9 million shares at December 31, 2020. 

 

General Vesting Conditions

 

The stock option awards generally vest ratably over a three-year period following grant date after a passage of time. However, some stock option awards are market or performance based and vest based on certain triggering events established by the Compensation Committee.

 

 
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Table of Contents

  

The fair value of the Company’s stock options that are not market or performance based was estimated at the date of grant using the Black-Scholes based option valuation model. The table below outlines the weighted average assumptions for options granted during the years ended December 31, 2020 and December 31, 2019.

 

Year Ended December

 

2020

 

 

2019

 

Expected term

 

 6 years

 

 

 6 years

 

Volatility

 

 

67 %

 

 

67 %

Risk-free rate

 

 

1 %

 

 

2 %

Dividend Yield

 

 

0 %

 

 

0 %

 

1) Service Period Based Stock Options

 

The majority of options granted by the Company are comprised of service based options. These options vest ratably over a defined period following grant date after a passage of a service period.

 

The following table summarizes service period based stock options activity (in thousands except per share data and remaining contractual term):

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

Aggregate

 

 

 

 Number of

 

 

Exercise

 

 

Contractual

 

 

 Fair

 

 

Intrinsic

 

 

 

 Shares

 

 

 Price

 

 

Term

 

 

 Value

 

 

Value

 

Outstanding at December 31, 2018

 

 

8,023

 

 

$ 3.75

 

 

 

7.11

 

 

 

 

 

$ 2,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Granted

 

 

2,603

 

 

 

4.03

 

 

 

10.00

 

 

$ 2.46

 

 

 

 

 

Options Exercised

 

 

(402 )

 

 

2.54

 

 

 

 

 

 

 

 

 

 

$ 389

 

Options Expired

 

 

(3 )

 

 

4.50

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Forfeited

 

 

(712 )

 

 

3.89

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2019

 

 

9,509

 

 

$ 3.86

 

 

 

6.90

 

 

 

 

 

 

$ 6,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Granted

 

 

3,609

 

 

 

4.18

 

 

 

10.00

 

 

$ 2.45

 

 

 

 

 

Options Exercised

 

 

(1,052 )

 

 

3.84

 

 

 

 

 

 

 

 

 

 

$ 1,271

 

Options Expired

 

 

(259 )

 

 

4.66

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Forfeited

 

 

(974 )

 

 

3.75

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2020

 

 

10,833

 

 

$ 3.96

 

 

 

6.84

 

 

 

 

 

 

$ 10,472 *

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2020

 

 

6,670

 

 

$ 3.83

 

 

 

5.39

 

 

 

 

 

 

$ 7,562 *

 

*The aggregate intrinsic values in the table above are based on the Company’s closing stock price of $4.80 on the last day of business for the year ended December 31, 2020.

 

2) Performance Based Stock Options

 

The Company also grants stock option awards that are performance based and vest based on the achievement of certain criteria established from time to time by the Compensation Committee. If these performance criteria are not met, the compensation expenses are not recognized and the expenses that have been recognized will be reversed.

 

 
F-18

Table of Contents

  

The following table summarizes performance based stock options activity (in thousands except per share data and remaining contractual term):

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Fair

 

 

Intrinsic

 

 

 

Shares

 

 

Price

 

 

Term

 

 

Value

 

 

Value

 

Outstanding at December 31, 2018

 

 

67

 

 

$ 1.89

 

 

 

4.08

 

 

 

 

 

 

 

Options Granted

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

Options Exercised

 

 

(25 )

 

 

1.89

 

 

 

 

 

 

 

 

 

$ 69

 

Options Forfeited

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2019

 

 

42

 

 

$ 1.89

 

 

 

3.08

 

 

 

 

 

$ 101

 

Options Granted

 

 

164

 

 

 

4.34

 

 

 

4.00

 

 

$ 2.26

 

 

 

 

 

Options Exercised

 

 

(42 )

 

 

1.89

 

 

 

 

 

 

 

 

 

 

$ 100

 

Options Forfeited

 

 

(83 )

 

 

4.34

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2020

 

 

81

 

 

$ 4.34

 

 

 

3.06

 

 

 

 

 

 

$ 37 *

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2020

 

 

81

 

 

$

 4.34

 

 

 

3.06

 

 

 

 

 

 

$

 37

*

 

*The aggregate intrinsic value in the table above are, based on the Company’s closing stock price of $4.80 on the last day of business for the period ended December 31, 2020.

 

3) Market Based Stock Options

 

The Company also grants stock option awards that are market based which have vesting conditions associated with a service condition as well as performance of the Company’s stock price. The following table summarizes market based stock options activity (in thousands except per share data and remaining contractual term):

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

Remaining

 

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Fair

 

Intrinsic

 

 

 

Shares

 

 

Price

 

 

Term

 

 

Value

 

Value

 

Outstanding at December 31, 2018

 

 

1,000

 

 

$ 4.24

 

 

 

8.76

 

 

 

 

 

 

Options Granted

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Options Exercised

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Options Forfeited

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2019

 

 

1,000

 

 

$ 4.24

 

 

 

7.76

 

 

 

 

$ 70

 

Options Granted

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

Options Exercised

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

Options Forfeited

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

Outstanding and Exercisable at December 31, 2020

 

 

1,000

 

 

$ 4.24

 

 

 

6.76

 

 

 

 

$ 560 *

 

*The aggregate intrinsic value in the table above are, based on the Company’s closing stock price of $4.80 on the last day of business for the period ended December 31, 2020.

 

 
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Table of Contents

  

Total Remaining Unamortized Compensation for Stock Options

 

As of December 31, 2020, there was a