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 result in substantial sales losses.
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.
-22-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/or notifications 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.
Risks Related to our Intellectual Property
Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain and may be inadequate, which wouldmay 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. As further described in Part I, Item 3 of this Annual Report on Form 10-K, we are currently involved in patent litigation, as Elysium is claiming that we misused certain patent rights, and has filed a petition with the U.S. Patent and Trademark Office for inter partes review of two patents to which we are the exclusive licensee. The U.S. Patent Trial and Appeal Board denied institution of an inter partes review for one patent, but granted institution on an inter partes review as to certain claims for the other patent. If we are unsuccessful in resolving the patent misuse claim on favorable terms, or if the U.S. Patent and Trademark Office invalidates the patent still subject to the inter partes review, we may lose the competitive advantage that is provided by the subject intellectual property rights, which could have a material adverse effect on our business. 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.upheld nor can we be certain we will prevail in an appeal. If one or more of those patents, patent applications, licenses and other intellectual property rights are invalidated, rejected or found unenforceable and we are unable to reverse that finding through an appeal, that could reduce or eliminate any competitive advantage we might otherwise have had. For example, as further described in Part I, Item 3 of this Annual Report on Form 10-K, we are currently involved in patent litigation, as Elysium is claiming that we misused certain patent rights, and has filed a petition with the U.S. Patent and Trademark Office for inter partes review of two patents to which we are the exclusive licensee. The U.S. Patent Trial and Appeal Board denied institution of an inter partes review for one patent, but granted institution on an inter partes review as to certain claims for the other patent. If we are unsuccessful in resolving the patent misuse claim on favorable terms, or if the U.S. Patent and Trademark Office invalidates the patent subject to the inter partes review, we may lose the competitive advantage that is provided by the subject intellectual property rights, which could have a material adverse effect on our business.
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.
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 Note 17, Commitments and Contingencies — Legal Proceedings in the Notes to the Consolidated Financial Statements, included in Item 8 of Part II 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.
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 ingredients and/or 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 partythird-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. As further described in Part I, Item 3 of this Annual Report on Form 10-K, Elysium has filed a petition with the U.S. Patent and Trademark Office for inter partes review of two patents to which we are the exclusive licensee. The U.S. Patent Trial and Appeal Board denied institution of an inter partes review for one patent, but granted institution on an inter partes review as to certain claims for the other patent. Pursuant to the exclusive license agreement with the Trustees of Dartmouth College (“Dartmouth”), Dartmouth controls all future preparation, filing, prosecution and maintenance of the patent subject to such inter partes review.
We may be subject to damages resulting from claims that we, our employees, or our independent contractors have wrongfully used or disclosed alleged trade secrets of others.
Some of our employees were previously employed at other dietary supplement, nutraceutical, food and beverage, functional food, analytical laboratories, pharmaceutical and cosmetic companies. We may also hire additional employees who are currently employed at other such companies, including our competitors. Additionally, consultants or other independent agents with which we may contract may be or have been in a contractual arrangement with one or more of our competitors. We may be subject to claims that these employees or independent contractors have used or disclosed such other party’s trade secrets or other proprietary information. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to our management. If we fail to defend such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to market existing or new products, which could severely harm our business.
Litigation may harm our business.
Substantial, complex or extended litigation could cause us to incur significant costs and distract our management. For example, lawsuits by employees, stockholders, collaborators, distributors, customers, competitors or others could be very costly and substantially disrupt our business. Disputes from time to time with such companies, organizations or individuals are not uncommon, and we cannot assure you that we will always be able to resolve such disputes or on terms favorable to us. As further described in Part I, Item 3 of this Annual Report on Form 10-K, we are currently involved in substantial and complex litigation with Elysium. Unexpected results could cause us to have financial exposure in these matters in excess of recorded reserves and insurance coverage, requiring us to provide additional reserves to address these liabilities, therefore impacting profits.
Our sales and results of operations for our core standards and contract services segment depend on our customers’ research and development efforts and their ability to obtain funding for these efforts.
Our core standards and contract services segment customers include researchers at pharmaceutical and biotechnology companies, chemical and related companies, academic institutions, government laboratories and private foundations. Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products. Our customers determine their research and development budgets based on several factors, including the need to develop new products, the availability of governmental and other funding, competition and the general availability of resources. As we continue to expand our international operations, we expect research and development spending levels in markets outside of the United States will become increasingly important to us.
Research and development budgets fluctuate due to changes in available resources, spending priorities, general economic conditions, institutional and governmental budgetary limitations and mergers of pharmaceutical and biotechnology companies. Our business could be harmed by any significant decrease in life science and high technology research and development expenditures by our customers. In particular, a small portion of our sales has been to researchers whose funding is dependent on grants from government agencies such as the United States National Institute of Health, the National Science Foundation, the National Cancer Institute and similar agencies or organizations. Government funding of research and development is subject to the political process, which is often unpredictable. Other departments, such as Homeland Security or Defense, or general efforts to reduce the United States federal budget deficit could be viewed by the government as a higher priority. Any shift away from funding of life science and high technology research and development or delays surrounding the approval of governmental budget proposals may cause our customers to delay or forego purchases of our products and services, which could seriously damage our business.
Some of our customers receive funds from approved grants at a particular time of year, many times set by government budget cycles. In the past, such grants have been frozen for extended periods or have otherwise become unavailable to various institutions without notice. The timing of the receipt of grant funds may affect the timing of purchase decisions by our customers and, as a result, cause fluctuations in our sales and operating results.
Demand for our products and services are subject to the commercial success of our customers’ products, which may vary for reasons outside our control.
Even if we are successful in securing utilization of our products in a customer’s manufacturing process, sales of many of our products and services remain dependent on the timing and volume of the customer’s production, over which we have no control. The demand for our products depends on regulatory approvals and frequently depends on the commercial success of the customer’s supported product. Regulatory processes are complex, lengthy, expensive, and can often take years to complete.
We may bear financial risk if we under-price our contracts or overrun cost estimates.
In cases where our contracts are structured as fixed price or fee-for-service with a cap, we bear the financial risk if we initially under-price our contracts or otherwise overrun our cost estimates. Such underpricing or significant cost overruns could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We rely on single or a limited number of third-party suppliers for the raw materials required to produce our products.
Our dependence on a limited number of third-party suppliers or on a single supplier, and the challenges we may face in obtaining adequate supplies of raw materials, involve several risks, including limited control over pricing, availability, quality and delivery schedules. We cannot be certain that our current suppliers will continue to provide us with the quantities of these raw materials that we require or satisfy our anticipated specifications and quality requirements. Any supply interruption in limited or sole sourced raw materials could materially harm our ability to manufacture our products until a new source of supply, if any, could be identified and qualified. Although we believe there are other suppliers of these raw materials, we may be unable to find a sufficient alternative supply channel in a reasonable time or on commercially reasonable terms. Any performance failure on the part of our suppliers could delay the development and commercialization of our products, or interrupt production of then existing products that are already marketed, which would have a material adverse effect on our business.
We maynot be successful in acquiring complementary businesses or products on favorable terms.
As part of our business strategy, we intend to consider acquisitions of similar or complementary businesses or products. No assurance can be given that we will be successful in identifying attractive acquisition candidates or completing acquisitions on favorable terms. In addition, any future acquisitions will be accompanied by the risks commonly associated with acquisitions. These risks include potential exposure to unknown liabilities of acquired companies or to acquisition costs and expenses, the difficulty and expense of integrating the operations and personnel of the acquired companies, the potential disruption to the business of the combined company and potential diversion of our management's time and attention, the impairment of relationships with and the possible loss of key employees and clients as a result of the changes in management, the incurrence of amortization expenses and write-downs and dilution to the shareholders of the combined company if the acquisition is made for stock of the combined company. In addition, successful completion of an acquisition may depend on consents from third parties, including regulatory authorities and private parties, which consents are beyond our control. There can be no assurance that products, technologies or businesses of acquired companies will be effectively assimilated into the business or product offerings of the combined company or will have a positive effect on the combined company's revenues or earnings. Further, the combined company may incur significant expense to complete acquisitions and to support the acquired products and businesses. Any such acquisitions may be funded with cash, debt or equity, which could have the effect of diluting or otherwise adversely affecting the holdings or the rights of our existing stockholders.
If we experience a significant disruption in our information technology systems or if we fail to implement new systems and software successfully, our business could be adversely affected.
We depend on information systems throughout our company to control our manufacturing processes, process orders, manage inventory, process and bill shipments and collect cash from our customers, respond to customer inquiries, contribute to our overall internal control processes, maintain records of our property, plant and equipment, and record and pay amounts due vendors and other creditors. If we were to experience a prolonged disruption in our information systems that involve interactions with customers and suppliers, it could result in the loss of sales and customers and/or increased costs, which could adversely affect our overall business operation.
Our cash flows and capital resources may be insufficient to make required payments on future indebtedness.
On November 4, 2016, we entered into entered into a business financing agreement (the “Financing Agreement”) with Western Alliance Bank (“Western Alliance”), to establish a formula based revolving credit line pursuant to which the Company may borrow an aggregate principal amount of up to $5,000,000, subject to the terms and conditions of the Financing Agreement. The interest rate will be calculated at a floating rate per month equal to (a) the greater of (i) 3.50% per year or (ii) the Prime Rate published in the Money Rates section of the Western Edition of The Wall Street Journal, or such other rate of interest publicly announced by Lender as its Prime Rate, plus (b) 2.50 percentage points. Any borrowings, interest or other fees or obligations that the Company owes Western Alliance pursuant to the Financing Agreement (the “Obligations”) will be become due and payable on November 4, 2018.
As of December 30, 2017, and March 14, 2018, we did not have any indebtedness under the Financing Agreement. However, we may incur indebtedness in the future and such indebtedness could have important consequences to you. For example, it could:
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make it difficult for us to satisfy our other debt obligations;
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make us more vulnerable to general adverse economic and industry conditions;
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limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate requirements;
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expose us to interest rate fluctuations because the interest rate on the debt under the Financing Agreement is variable;
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require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for operations and other purposes;
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
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place us at a competitive disadvantage compared to competitors that may have proportionately less debt and greater financial resources.
In addition, our ability to make payments or refinance our obligations depends on our successful financial and operating performance, cash flows and capital resources, which in turn depend upon prevailing economic conditions and certain financial, business and other factors, many of which are beyond our control. These factors include, among others:
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economic and demand factors affecting our industry;
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increased operating costs;
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competitive conditions; and
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other operating difficulties.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. In the event that we are required to dispose of material assets or operations to meet our debt service and other obligations, the value realized on such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not, among other things, be for a sufficient dollar amount. Our obligations pursuant to the Financing Agreement are secured by a security interest in all of our assets, exclusive of intellectual property. The foregoing encumbrances may limit our ability to dispose of material assets or operations. We also may not be able to restructure our indebtedness on favorable economic terms, if at all.
We may incur additional indebtedness in the future. Our incurrence of additional indebtedness would intensify the risks described above.
The Financing Agreement contains various covenants limiting the discretion of our management in operating our business.
The Financing Agreement contains various restrictive covenants that limit our management's discretion in operating our business. These instruments limit our ability to, among other things:
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make investments, including capital expenditures;
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sell or acquire assets outside the ordinary course of business; and
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make fundamental business changes.
If we fail to comply with the restrictions in the Financing Agreement, a default may allow the creditors under the relevant instruments to accelerate the related debt and to exercise their remedies under these agreements, which will typically include the right to declare the principal amount of that debt, together with accrued and unpaid interest and other related amounts, immediately due and payable, to exercise any remedies the creditors may have to foreclose on assets that are subject to liens securing that debt and to terminate any commitments they had made to supply further funds.
If we are unable to maintain sales, marketing and distribution capabilities or maintain arrangements with third parties to sell, market and distribute our products, our business may be harmed.
To achieve commercial success for our products, we must sell our product lines and/or technologies at favorable prices. In addition to being expensive, maintaining such a sales force is time-consuming. Qualified direct sales personnel with experience in the natural products industry are in high demand, and there can be no assurance that we will be able to hire or retain an effective direct sales team. Similarly, qualified independent sales representatives both within and outside the United States are in high demand, and we may not be able to build an effective network for the distribution of our product through such representatives. There can be no assurance that we will be able to enter into contracts with representatives on terms acceptable to us. Furthermore, there can be no assurance that we will be able to build an alternate distribution framework should we attempt to do so.
We may also need to contract with third parties in order to market our products. To the extent that we enter into arrangements with third parties to perform marketing and distribution services, our product revenue could be lower and our costs higher than if we directly marketed our products. Furthermore, to the extent that we enter into co-promotion or other marketing and sales arrangements with other companies, any revenue received will depend on the skills and efforts of others, and we do not know whether these efforts will be successful. If we are unable to establish and maintain adequate sales, marketing and distribution capabilities, independently or with others, we will not be able to generate product revenue, and may not become profitable.
Risks Related to Regulatory Approval of Our Products and Other Government Regulations
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, or 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.
Compliance with stringent and changing global privacy and data security laws and regulations could result in additional costs and liabilities to us or inhibit our ability to collect and, if applicable, process data globally, and the failure or perceived failure to comply with such laws and regulations could have a material adverse effect on our business, financial condition or results of operations.
We collect, receive, store, process, use, generate, transfer, disclose, make accessible, protect and share personal information and other sensitive information, including but not limited to proprietary and confidential business information, trade secrets, intellectual property, information collected about patients in connection with clinical trials and sensitive third-party information necessary to operate our business, for legal and marketing purposes. Accordingly, we are, or may become, subject to numerous federal, state, local, and foreign data privacy and security laws, regulations, guidance and industry standards as well as external and internal privacy and security policies, contracts and other obligations that apply to the processing of personal data by us and on our behalf. The legal framework for the collection, use, safeguarding, sharing, transfer and other processing of information worldwide is rapidly evolving and may remain unsettled for the foreseeable future.
Outside the United States, an increasing number of laws, regulations, and industry standards apply to data privacy and security. For example, the European Union’s General Data Protection Regulation (GDPR) and the United Kingdom’s GDPR (UK GDPR) imposes strict obligations on the processing of personal data, including, without limitation, and personal health data. The GDPR and UK GDPR set out extensive compliance requirements, including providing detailed disclosures about how personal data is collected and processed, demonstrating that an appropriate legal basis is in place or otherwise exists to justify data processing activities; granting new rights for data subjects in regard to their personal data, as well as enhancing pre-existing rights (e.g., data subject access requests); requiring the appointment of a data protection officer in certain circumstances; mandating the appointment of representatives in the United Kingdom and/or the EEA in certain circumstances; introducing the obligation to notify data protection regulators or supervisory authorities (and in certain cases, affected individuals) of significant data breaches; imposing limitations on retention of personal data; maintaining a record of data processing; and complying with the principle of accountability and the obligation to demonstrate compliance through policies, procedures, training and audit. The processing of sensitive personal data, such as health information, impose heightened compliance burdens under the GDPR and the UK Data Protection Act and is a topic of active interest among foreign regulators. Moreover, the GDPR and the UK Data Protection Act increase obligations with respect to clinical trials conducted in the EU and the UK by expanding the definition of personal data to include coded data and requiring changes to informed consent practices and more detailed notices for clinical trial participants and investigators.
Legal developments in Europe have created complexity and uncertainty regarding transfers of personal data from the European Economic Area, or EEA, to the United States. On July 16, 2020, in a case known as Schrems II, the Court of Justice of the European Union, or CJEU, invalidated the EU-US Privacy Shield Framework under which personal data could be transferred from the EEA to U.S. entities who had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the Standard Contractual Clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield), it made clear that reliance on them alone may not necessarily be sufficient in all circumstances. Use of the standard contractual clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals and additional measures and/or contractual provisions may need to be put in place. Additionally, new Standard Contractual Clauses that repealed the Standard Contractual Clauses adopted under the Data Protection Directive were adopted on June 4, 2021 by the European Commission. We thus are still in the process of updating all our contracts entailing the transfer of personal data outside of the European Economic Area with this new Standard Contractual Clauses. As supervisory authorities issue further guidance on personal data export mechanisms, including on the new Standard Contractual Clauses, and/or start taking enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we or third parties we work with are otherwise unable to transfer personal data between and among countries and regions in which clinical trials of our products are conducted, it could affect our business. The President of the United States and the President of the European Commission announced on March 25, 2022 that they had reached an agreement in principle for a Trans-Atlantic Data Privacy Framework, which would allow personal data to flow freely and safely between the EU and participating U.S. companies. On October 7, 2022, the President of the United States signed an Executive Order directing the steps that the United States will take to implement the U.S. commitments under the European Union-U.S. Data Privacy Framework (EU-U.S. DPF). The Executive Order includes the adoption, by the United States, of a new set of rules and binding safeguards to limit access to data by U.S. intelligence authorities and procedures to ensure effective oversight of new privacy and civil liberties standards, as well as the implementation of a new two-tier redress system to investigate and resolve complaints by European citizens on access of data by U.S. Intelligence authorities. The Executive Order further calls on the Privacy and Civil Liberties Oversight Board to review Intelligence Community policies and procedures to ensure that they are consistent with the Executive Order and to conduct an annual review of the redress process. In connection with the signing of this Executive Order and the directives contained therein, the European Commission has the basis to adopt an adequacy decision, which involves a proposal from the European Commission, an opinion of the European Data Protection Board, an approval from representatives of EU countries, and the adoption of the decision by the European Commission. Accordingly, the new Trans-Atlantic Data Privacy Framework may not be adopted in a near future and thus, the transfer of personal data from the EU to the United States still entail in-depth legal analysis and heavy paperwork requirements until then.
Relatedly, following the United Kingdom’s withdrawal from the EEA and the EU, we also have to comply with the UK-specific requirements related to data protection, including with respect to transfer of personal data outside of the UK, which increases our regulatory compliance burden. The UK updated its transfer mechanism and we will need to update all of our contracts entailing the transfer of personal data outside of the United Kingdom with this new UK-specific transfer tools.
If we cannot implement a valid compliance mechanism for cross-border data transfers, we may face increased exposure to regulatory actions, substantial fines, and injunctions against processing or transferring personal data from Europe or elsewhere. The inability to import personal data to the United States could significantly and negatively impact our business operations, including by limiting our ability to collaborate with parties that are subject to European and other data privacy and security laws; or requiring us to increase our personal data processing capabilities and infrastructure in Europe and/or elsewhere at significant expense.
Additionally, in the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, and consumer protection laws. The California Consumer Privacy Act of 2018 (CCPA) imposes obligations including, but not limited to, providing specific disclosures in privacy notices and affording California residents certain rights related to their personal data with statutory fines for noncompliance. The California Privacy Rights Act of 2020 (CPRA), effective January 1, 2023, will among other changes, establish a new California Privacy Protection Agency to implement and enforce the CPRA, which could increase the risk of an enforcement action. Other states have enacted data privacy laws. For example, Virginia passed the Consumer Data Protection Act, Colorado passed the Colorado Privacy Act, Connecticut passed the Connecticut Data Privacy Act and Utah passed the Utah Consumer Privacy Act all four of which differ from the CPRA and become effective in 2023. Each of these state laws adds potential compliance and risk for us with respect to data necessary to operate our business.
A United States federal privacy bill advanced to the U.S. House of Representatives on July 20, 2022, which has been amended as of December 30, 2022, and recommended for passage as law, would establish new requirements for how companies handle personal data, including information that identifies or is reasonably linked to an individual, such as our consumers. If this bill becomes law, we may be required to implement certain security practices to protect and secure personal data against unauthorized access, and we may be subject to further requirements for complying with this requirement if the FTC issues related regulations. Additionally, if we become subject to new data privacy laws, at the state level, the risk of enforcement action against us could increase because we may become subject to additional obligations, and the number of individuals or entities that can initiate actions against us may increase (including individuals, via a private right of action, and state actors).Other data privacy and security laws have been proposed at the federal, state, and local levels in recent years, which could further complicate compliance efforts.
Our obligations related to data privacy and security are quickly changing in an increasingly stringent fashion, creating some uncertainty as to the effective future legal framework. Additionally, these obligations may be subject to differing applications and interpretations, which may be inconsistent or in conflict among jurisdictions. Preparing for and complying with these obligations requires us to devote significant resources (including, without limitation, financial and time-related resources). These obligations may necessitate changes to our information technologies, systems, and practices and to those of any third parties that process personal data on our behalf. In addition, these obligations may require us to change our business model. Collectively, these laws may increase our compliance costs and potential liability. Although we endeavor to comply with our published policies, other documentation, and all applicable privacy and security laws, we may at times fail to do so or may be perceived to have failed to do so. Moreover, despite our efforts, our personnel or third parties upon whom we rely may fail to comply with such obligations, which could negatively impact our business operations and compliance posture. For example, any failure by a third-party processor to comply with applicable law, regulations, or contractual obligations could result in adverse effects, including inability to operate our business and proceedings against us by governmental entities or others. If we fail, or are perceived to have failed, to address or comply with obligations related to data privacy and security, we could face government enforcement actions that could include investigations, fines, penalties, audits and inspections; additional reporting requirements and/or oversight; temporary or permanent bans on all or some processing of personal data; orders to destroy or not use personal data; and imprisonment of company officials. Further, individuals or other relevant stakeholders could sue us for our actual or perceived failure to comply with our data privacy and security obligations, including, without limitation, in class action litigation. Any of these events could have a material adverse effect on our reputation, business, or financial condition, and could lead to a loss of actual or prospective customers, collaborators or partners; result in an inability to process personal data or to operate in certain jurisdictions; limit our ability to develop or commercialize our products; or require us to revise or restructure our operations. Moreover, such suits, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business or have other material adverse effects. Additionally, 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.
We are subject to regulation by various federal, state and foreign agencies that require us to comply with a wide variety of regulations, including those regarding the manufacture of products, advertising and product label claims, the distribution of our products and environmental matters. Failure to comply with these regulations could subject us to fines, penalties and additional costs.
Some of our operations are subject to regulation by various United States federal agencies and similar state and international agencies, including the Department of Commerce, the FDA, the FTC, the Department of Transportation and the Department of Agriculture. These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, handling, sales and distribution of products. If we fail to comply with any of these regulations, we may be subject to fines or penalties, have to recall products and/or cease their manufacture and distribution, which would increase our costs and reduce our sales.
We are also subject to various federal, state, local and international laws and regulations that govern the handling, transportation, manufacture, use and sale of substances that are or could be classified as toxic or hazardous substances. Some risk of environmental damage is inherent in our operations and the products we manufacture, sell, or distribute. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Current or future environmental laws and regulations may impair our research, development or production efforts. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions. 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,Good Manufacturing Practices, 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. Our business involves helping pharmaceutical and biotechnology companies navigate the regulatory drug approval process. Changes in regulation, such as a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, or an increase in regulatory requirements that we have difficulty satisfying or that make our services less competitive, could eliminate or substantially reduce the demand for our services. Also, if the government makes efforts to contain drug costs and pharmaceutical and biotechnology company profits from new drugs, our customers may spend less, or reduce their spending on research and development. If health insurers were to change their practices with respect to reimbursements for pharmaceutical products, our customers may spend less, or reduce their spending on research and development.
If we should in the future become required to obtain regulatory approval to market and sell our goods we will not be able to generate any revenues until such approval is received.
The pharmaceuticalnutraceutical industry is subject to stringent regulation by a wide range of authorities. While we believe that, given our present business, we are not currently required to obtain regulatory approval to market our goods because, among other things, we do not (i) produce or market any clinical devices or other products, or (ii) sell any medical products or services to the customer, we cannot predict whether regulatory clearance will be required in the future and, if so, whether such clearance will at such time be obtained for any products that we are developing or may attempt to develop. Should such regulatory approval in the future be required, our goods may be suspended or may not be able to be marketed and sold in the United States until we have completed the regulatory clearance process as and if implemented by the FDA. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product or service and would require the expenditure of substantial resources.
If regulatory clearance of a good that we propose to propose to market and sell is granted, this clearance may be limited to those particular states and conditions for which the good is demonstrated to be safe and effective, which would limit our ability to generate revenue. We cannot ensure that any good that we develop will meet all of the applicable regulatory requirements needed to receive marketing clearance. Failure to obtain regulatory approval will prevent commercialization of our goods where such clearance is necessary. There can be no assurance that we will obtain regulatory approval of our proposed goods that may require it.
Risks Related to the Securities Markets and Ownership of our Equity Securities
The market price of our common stock may be volatile and adversely affected by several factors.
The market price of our common stock could fluctuate significantly in response to various factors and events, including, but not limited to:
•our ability to develop and commercialize our products;
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•our ability to integrate operations, technology, products and services;
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•our ability to execute our business plan;
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•our operating results are below expectations;
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•our issuance of additional securities, including debt or equity or a combination thereof,;
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•announcements of technological innovations or new products by us or our competitors;
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•acceptance of and demand for our products by consumers;
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•media coverage or social media attention regarding our industry or us;
•litigation, arbitration, or other adverse non-judicial proceedings;
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•disputes with or our inability to collect from significant customers;
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•loss of any strategic relationship;
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•industry developments, including, without limitation, changes in healthcare policies or practices;
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•economic and other external factors;
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•reductions in purchases from our large customers;
•sales of our common stock by us, our insiders or other stockholders;
● •short positions, hedging, or other transactions in our securities;
•period-to-period fluctuations in our financial results; and
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•whether an active trading market in our common stock develops and is maintained.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
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.
We have a significant number of outstanding options and unvested restricted stock units. Future sales of these shares could adversely affect the market price of our common stock.
As of December 31, 2022, we had outstanding options for an aggregate of approximately 10.4 million shares of common stock at a weighted average exercise price of $4.21 per share and approximately 0.7 million of unvested restricted stock units. 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.
We have a limited operating history in China, and we face risks with respect to conducting business in connection with our joint venture in China due to certain legal, political, economic and social uncertainties relating to China.
During fiscal year 2022, we entered into an agreement to form a joint venture to expand the Company’s market strategy to include opportunities in Mainland China and its territories, excluding Hong Kong, Macau and Taiwan. Operating activity under the joint venture was not material during the year ended December 31, 2022. Our participation in the joint venture in China is subject to general, as well as industry-specific, economic, political and legal developments and risks in China. Disruptions in our relationships with our collaborators could also impact the success of our joint venture, and the anticipated benefits may not materialize. The Chinese government exercises significant control over the Chinese economy, including but not limited to, controlling capital investments, allocating resources, setting monetary policy, controlling and monitoring foreign exchange rates, implementing and overseeing tax regulations, providing preferential treatment to certain industry segments or companies and issuing necessary licenses to conduct business. In addition, we could face additional risks resulting from changes in China’s data privacy and cybersecurity requirements. Accordingly, any adverse change in the Chinese economy, the Chinese legal system or Chinese governmental, economic or other policies could have a material adverse effect on our joint venture in China and our prospects generally.
We face additional risks in China due to China’s historically limited recognition and enforcement of contractual and intellectual property rights. We may experience difficulty enforcing our intellectual property rights in China. Unauthorized use of our technologies and intellectual property rights by partners or competitors may dilute or undermine the strength of our brands. If we cannot adequately monitor the use of our technologies and products or enforce our intellectual property rights in China or contractual restrictions relating to use of our intellectual property by Chinese companies, our revenue could be adversely affected.
Our joint venture will be subject to laws and regulations applicable to foreign investment in China. There are uncertainties regarding the interpretation and enforcement of laws, rules and policies in China. Because many laws and regulations are relatively new, the interpretations of many laws, regulations and rules are not always uniform. Moreover, the interpretation of statutes and regulations may be subject to government policies reflecting domestic political agendas. Enforcement of existing laws or contracts based on existing law may be uncertain and sporadic. As a result of the foregoing, it may be difficult for us to obtain swift or equitable enforcement of laws ostensibly designed to protect companies like ours, which could have a material adverse effect on our business and results of operations. There is no guarantee that we will be able to successfully launch our joint venture.
The COVID-19 pandemic has adversely affected, and may 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.
The COVID-19 pandemic has previously adversely affected portions of our business and could have a material adverse effect on our financial condition and results of operations. Authorities in jurisdictions where we operate, or in which our suppliers, customers, or others operate, have imposed, and businesses and individuals have implemented, varied measures to try to manage or contain the virus or treat its impact, such as travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, shutdowns, and vaccine requirements. These measures have impacted and may further impact our workforce and operations, the operations and demands of our customers, and those of our respective suppliers and partners. Restrictions on our operations or workforce, similar limitations for our suppliers, and transportation restrictions or disruptions can limit our ability to meet customer demand and could have a material adverse effect on our financial condition and results of operations. We have experienced, and may in the future experience, delays due to global components and packaging shortages for our consumer products across our supply chain which can result in delayed, reduced, or cancelled orders and which may adversely affect our results of operations.
The pandemic caused us to modify our business practices, including with respect to flexible work and social distancing measures. These and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our day-to-day activities, which could have a material adverse effect on our operations. The pandemic has also previously resulted in substantial economic uncertainty, volatility and instability in the credit and financial markets. This economic environment may result in reduced consumer and investor confidence and reduced business and consumer spending. The result of which could adversely affect our results of operations by limiting our ability to secure future financing and reduce our sales, margins and/or net income. Further, any reduced demand for our products due to potential declines in consumer spending could lead to declines in our production volumes which may negatively impact any economies of scale we previously benefited from. The degree to which COVID-19 impacts our results will depend on future developments, and there is no certainty that measures we have taken or will take will be sufficient to mitigate the risks posed by the virus. Additional impacts and risks may arise that we or our customers, suppliers, and other partners are not aware of or able to respond to effectively, and which may adversely affect us. The impact of COVID-19 or outbreak of any other epidemic or infectious disease can also exacerbate other risks discussed in these risk factors and throughout this report.
Our ability to use our net operating loss (NOL) carryforwards and certain other tax attributes may be limited.
Our federal net operating losses (NOLs) generated in taxable years beginning on or prior to December 31, 2017 could expire unused. Under current law, 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 federal tax laws. 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.
Our bylaws, as amended (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 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. While the Delaware courts have determined that such choice of forum provisions are facially valid and several state trial courts have enforced such provisions, there is no guarantee that courts of appeal will affirm the enforceability of such provisions and a stockholder may nevertheless seek to bring a claim in a venue other than that designated in the exclusive forum provision. 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.
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.
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 and timely financial statements and disclosures. If we identify material weaknesses in our internal controls and/or fail to establish and maintain effective controls and procedures and internal control over financial reporting it could result in material misstatements in our financial statements and/or 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. The SEC has proposed new rules regarding climate change and cybersecurity that, if adopted, require significant new disclosure obligations of us and require us to update and develop our controls to accommodate these new obligations.
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, the Biden administration and Congress have proposed various U.S. federal tax law changes, which if enacted could have a material impact on our business, cash flows, financial condition or results of operations. In addition, it is uncertain if and to what extent various states will conform to federal tax laws. Future tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges, and could increase our future U.S. tax expense.
Our shares of common stock may be thinly traded, so you may be unable to sell at or near ask prices or at all.
We cannot predict the extent to which an active public market for our common stock will develop or be sustained. This situation may be attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community who generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we have become more seasoned and viable. As a consequence, there may be periods of several days or weeks when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot assure you that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained or not diminish.
We have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our capital stock and do not anticipate paying cash dividends on our capital stock in the foreseeable future. The payment of dividends on our capital stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if the common stock price appreciates.
The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.
On December 22, 2017, President Trump signed into law new legislation that significantly revises the Internal Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and our business and financial condition could be adversely affected. In addition, it is unknown if and to what extent various states will conform to the newly enacted federal tax law. The impact of this tax reform on holders of our common stock is likewise uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.
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.
Environmental, social and governance matters may impact our business and reputation.
Companies across many industries are facing increased scrutiny, including by consumers, investors, employees and other stakeholders, as well as by governmental and non-governmental organizations surrounding environmental, social and governance (ESG) practices. This increased scrutiny and changing expectations with respect to the Company’s ESG practices as well as new rules and regulations may result in additional costs or risks. The SEC has proposed new rules regarding climate change that, if adopted, require significant new disclosure obligations of us and require us to update and develop our controls to accommodate these new obligations. Standards and research regarding ESG practices could change as a result of these rules. If we are unable to satisfy such new criteria, investors may conclude that our policies with respect to corporate responsibility are inadequate. We risk damage to our brand and reputation in the event that our corporate responsibility procedures or standards do not meet the standards set by various constituencies, which could lead to the loss of existing or potential customers and reduced sales. There can be no assurance that investors or other constituents will not publicly advocate for us to not make corporate governance changes or engage in corporate actions and responding to challenges could be costly and time consuming.
Developing and achieving ESG initiatives may become involvedresult in securities class action litigation thatincreased costs in our supply chain, fulfillment, and/or corporate business operations, and could divert management’s attentiondeviate from our initial estimates and harmhave a material adverse effect on our business.
The stock marketbusiness and financial condition. Furthermore, if our competitors’ corporate responsibility performance is perceived to be greater than ours, potential or current investors may elect to invest with our competitors instead. Investor advocacy groups, certain institutional investors, investment funds and other influential investors are increasingly focused on ESG practices and in general,recent years have placed increasing importance on the non-financial impacts of their investments. Topics taken into account in such assessments include, among others, the company’s efforts and impacts on climate change and human rights, ethics and compliance with law 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 performancerole of the companies involved. If these fluctuations occurCompany’s board of directors in the future, the market pricesupervising various sustainability issues. In light of investors’ and other stakeholders’ increased focus on ESG matters, there can be no certainty that we will manage such issues successfully, or that we will successfully meet our shares could fall regardless ofinvestors’ or society’s ESG expectations. While 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 pricemission is to promote healthy aging, if our ESG practices do not meet investor or volume of our shares suffers extreme fluctuations, thenother industry stakeholder expectations, which continue to evolve, we may become involved in this type of litigation, which wouldincur additional costs and our brand’s ability to attract and retain qualified employees and business may 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 SEC.
We have a significant number of outstanding options and warrants, and future sales of these shares could adversely affect the market price of our common stock.
Item 2. Properties
As of December 30, 2017, we had outstanding options exercisable for an aggregate of 6,534,167 shares of common stock at a weighted average exercise price of $3.59 per share and outstanding warrants exercisable for an aggregate of 470,444 shares of common stock at a weighted average exercise price of $4.15 per share. The holders may sell many of these shares in the public markets from time to time, without limitations on the timing, amount or method of sale. As and when our stock price rises, if at all, more outstanding options and warrants will be in-the-money and the holders may exercise their options and warrants and sell a large number of shares. This could cause the market price of our common stock to decline.
Item 1B. | Unresolved Staff Comments |
None.
As of December 30, 2017,31, 2022, we lease approximately 15,000 square feet of office space in Irvine, California with 2 years remaining on the lease,(i) approximately 10,000 square feet of space for research and development laboratory in Longmont, Colorado with 7 years remaining on the lease, approximately 4,500 square feet of office space in Los Angeles, California with 4four years remaining on the lease, (ii) approximately 20,000 square feet of space for a research and development laboratory in Longmont, Colorado with three years remaining on the lease, and (iii) approximately 2,3008,000 square feet of office space in Rockville, MarylandTustin, California with 3six years remaining on the lease. We do not own any real estate. The below table illustrates the use of each property by our business segments.
Business Segment | Property Used | | | | | | | |
IngredientsBusiness Segment | All properties | Property Used |
| Consumer Products | | All properties |
CoreIngredients | | All properties |
Analytical Reference Standards and Contract Services | Irvine, CA, | Longmont, CO and Rockville, MD |
We also rent an apartment with approximately 1,000 square feet in Foothill Ranch, California, and an apartment with less than 1,100 square feet in Longmont, Colorado. We use the apartments to accommodate our traveling employees to each of our California and Colorado locations. We do not own any real estate. For the year ended December 30, 2017,31, 2022, our total annual rentalrent expense was approximately $729,000.$1,281,000.
Item 3. Legal Proceedings
On December 29, 2016, ChromaDex, Inc. filed a complaint (the “Complaint”)The information set forth under the heading “Legal Proceedings” in the United States District Court for the Central District of California, naming Elysium Health, Inc. (together with Elysium Health, LLC, “Elysium”) as defendant. Among other allegations, ChromaDex, Inc. allegedNote 17, Commitments and Contingencies, in the Complaint that (i) Elysium breached the Supply Agreement, dated June 26, 2014, by and between ChromaDex, Inc. and Elysium (the “pTeroPure® Supply Agreement”), by failing to make payments to ChromaDex, Inc. for purchases of pTeroPure® pursuantNotes to the pTeroPure® Supply Agreement, (ii) Elysium breached the Supply Agreement, dated February 3, 2014,Consolidated Financial Statements in Item 8 of Part II of this Form 10-K, is incorporated herein by and between ChromaDex, Inc. and Elysium, as amended (the “NIAGEN® Supply Agreement”), by failing to make payments to ChromaDex, Inc. for purchasesreference. For additional discussion of NIAGEN® pursuant to the NIAGEN® Supply Agreement, (iii) Elysium breached the Trademark License and Royalty Agreement, dated February 3, 2014, by and between ChromaDex, Inc. and Elysium (the “License Agreement”), by failing to make payments to ChromaDex, Inc. for royalties due pursuant to the License Agreement and (iv) certain officers of Elysium made false promises and representations to induce ChromaDex, Inc. into providing large supplies of pTeroPure® and NIAGEN® to Elysium pursuant to the pTeroPure® Supply Agreement and NIAGEN® Supply Agreement. ChromaDex, Inc. is seeking punitive damages, money damages and interest.
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risks associated with legal proceedings, see Item 1A, Risk Factors.On January 25, 2017, Elysium filed an answer and counterclaims (the “Counterclaim”) in response to the Complaint. Among other allegations, Elysium alleges in the Counterclaim that (i) ChromaDex, Inc. breached the NIAGEN® Supply Agreement by not issuing certain refunds or credits to Elysium and for violating certain confidential information provisions, (ii) ChromaDex, Inc. breached the implied covenant of good faith and fair dealing pursuant to the NIAGEN® Supply Agreement, (iii) ChromaDex, Inc. breached certain confidential provisions of the pTeroPure® Supply Agreement, (iv) ChromaDex, Inc. fraudulently induced Elysium into entering into the License Agreement (the “Fraud Claim”), (v) ChromaDex, Inc.’s conduct constitutes misuse of its patent rights (the “Patent Claim”) and (vi) ChromaDex, Inc. has engaged in unlawful or unfair competition under California state law (the “Unfair Competition Claim”). Elysium is seeking damages for ChromaDex, Inc.’s alleged breaches of the NIAGEN® Supply Agreement and pTeroPure® Supply Agreement, and compensatory damages, punitive damages and/or rescission of the License Agreement and restitution of any royalty payments conveyed by Elysium pursuant to the License Agreement, and a declaratory judgment that ChromaDex, Inc. has engaged in patent misuse.
On February 15, 2017, ChromaDex, Inc. filed an amended complaint. In the amended complaint, ChromaDex, Inc. re-alleges the claims in the Complaint, and also alleges that Elysium willfully and maliciously misappropriated ChromaDex, Inc.’s trade secrets. On February 15, 2017, ChromaDex, Inc. also filed a motion to dismiss the Fraud Claim, the Patent Claim and the Unfair Competition Claim. On March 1, 2017, Elysium filed a motion to dismiss ChromaDex, Inc.'s fraud and trade secret misappropriation causes of action. On March 6, 2017, Elysium filed a first amended counterclaim. On March 20, 2017, ChromaDex, Inc. moved to dismiss Elysium's amended fraud, declaratory judgment of patent misuse and the Unfair Competition Claim. On May 10, 2017, the court ruled on the motions to dismiss, denying ChromaDex, Inc.’s motion as to Elysium’s fraud and declaratory judgment claims and granting ChromaDex, Inc.’s motion with prejudice as to Elysium’s Unfair Competition Claim. With respect to Elysium’s motion, the court granted the motion with prejudice as to ChromaDex, Inc.’s fraud claim and granted with leave to amend the motion as to ChromaDex, Inc.’s trade secret misappropriation claims. On May 24, 2017, ChromaDex, Inc. answered the first amended counterclaim and asserted several affirmative defenses. Also on May 24, 2017, ChromaDex, Inc. filed a second amended complaint, amending the trade secret misappropriation claims and addressing Elysium’s declaratory judgment of patent misuse counterclaim. On June 7, 2017, ChromaDex, Inc. filed a third amended complaint dismissing the trade secret misappropriation claims and asserting two breach of contract claims for Elysium’s failure to pay for the product delivered. On June 16, 2017, Elysium answered the third amended complaint. On August 14, 2017, ChromaDex, Inc. moved for judgment on the pleadings as to Elysium’s declaratory judgment of patent misuse counterclaim. On September 26, 2017, the court denied ChromaDex’s motion without prejudice and directed Elysium to file an amended counterclaim if it intended to maintain its declaratory judgment counterclaim. On October 11, 2017, Elysium filed a second amended counterclaim, re-alleging the claims in the first amended counterclaim and adding a claim for unjust enrichment and restitution of the royalties Elysium paid to ChromaDex, Inc. pursuant to the License Agreement. On October 25, 2017, ChromaDex, Inc. filed a motion to dismiss the declaratory judgment of patent misuse and unjust enrichment claims and/or strike allegations in the unjust enrichment claim contained in the second amended counterclaim. On November 28, 2017, the court denied the motion. ChromaDex, Inc. answered the second amended counterclaim on December 12, 2017. The parties are currently in discovery.
On July 17, 2017, Elysium filed petitions with the U.S. Patent and Trademark Office for inter partes review of U.S. Patent No. 8,197,807 (the “’807 Patent”) and 8,383,086 (the “’086 Patent”), patents to which ChromaDex, Inc. is the exclusive licensee. The U.S. Patent Trial and Appeal Board (“PTAB”) denied institution of an inter partes review for the ’807 Patent on January 18, 2018. For the ’086 patent, on January 29, 2018 the PTAB granted institution of an inter partes review as to claims 1, 3, 4, and 5 and denied institution as to claim 2.
On September 27, 2017, Elysium Health Inc. ("Elysium Health") filed a complaint in the United States District Court for the Southern District of New York, against ChromaDex, Inc. (the “SDNY Complaint”). Elysium Health alleges in the SDNY Complaint that ChromaDex, Inc. made false and misleading statements in a citizen petition to the Food and Drug Administration it filed on or about August 18, 2017. Among other allegations, Elysium Health avers that the citizen petition made Elysium Health’s product appear dangerous, while casting ChromaDex, Inc.’s own product as safe. The SDNY Complaint asserts four claims for relief: (i) false advertising under the Lanham Act, 15 U.S.C. § 1125(a); (ii) trade libel; (iii) deceptive business practices under New York General Business Law § 349; and (iv) tortious interference with prospective economic relations. ChromaDex, Inc. denies the claims in the SDNY Complaint and intends to defend against them vigorously. On October 26, 2017, ChromaDex, Inc. moved to dismiss the SDNY Complaint on the grounds that, inter alia, its statements in the citizen petition are immune from liability under the Noerr-Pennington Doctrine, the litigation privilege, and New York’s Anti-SLAPP statute, and that the SDNY Complaint failed to state a claim. Elysium Health opposed the motion on November 2, 2017. ChromaDex, Inc. filed its reply on November 9, 2017. The motion is currently pending.
On October 26, 2017, ChromaDex, Inc. filed a complaint in the United States District Court for the Southern District of New York against Elysium Health (the “ChromaDex SDNY Complaint”). ChromaDex alleges that Elysium Health made material false and misleading statements to consumers in the promotion, marketing, and sale of its health supplement product, Basis, and asserts five claims for relief: (i) false advertising under the Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under 15 U.S.C. § 1125(a); (iii) deceptive practices under New York General Business Law § 349; (iv) deceptive practices under New York General Business Law § 350; and (v) tortious interference with prospective economic advantage. On November 16, 2017, Elysium Health moved to dismiss for failure to state a claim. ChromaDex, Inc. opposed the motion on November 30, 2017 and Elysium Health filed a reply on December 7, 2017. On November 3, 2017, the Court consolidated the SDNY Complaint and the ChromaDex SDNY Complaint actions under the caption In re Elysium Health-ChromaDex Litigation, 17-cv-7394, and stayed discovery in the consolidated action pending a Court-ordered mediation. The mediation was unsuccessful and the motion is currently pending.
The Company is unable to predict the outcome of these matters and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to the legal proceedings discussed herein. As of December 31, 2017, ChromaDex, Inc. did not accrue a potential loss for the Counterclaim or the SDNY Complaint because ChromaDex, Inc. believes that the allegations are without merit and thus it is not probable that a liability has been incurred.
From time to time we are involved in legal proceedings arising in the ordinary course of our business. We believe that there is no other litigation pending that is likely to have, individually or in the aggregate, a material adverse effect on our financial condition or results of operations.
Item 4. | Item 4. Mine Safety Disclosures |
Not applicable.
Item 5. | 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 NASDAQNasdaq Capital Market (“NASDAQ”)(NASDAQ) under the symbol “CDXC.” From November 10, 2014 to April 22, 2016, our common stock had been traded on the top tier of the OTC Markets Group, Inc. (the “OTCQX”) under the symbol “CDXC.”
On April 13, 2016, the Company effected a 1-for-3 reverse stock split. All information presented herein has been retrospectively adjusted to reflect the reverse stock split as if it took place as of the earliest period presented. An additional 1,632 shares were issued to round up fractional shares as a result of the reverse stock split.
The following table sets forth the range of high and low sale prices of our common stock for each of the periods indicated as reported by NASDAQ and OTCQX. Closing sale prices were used for the period when our common stock was traded on NASDAQ and closing bid quotations were used for the period when our common stock was traded on OTCQX. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Fiscal Year Ending December 30, 2017 |
| | |
| December 30, 2017 | $6.96 | $3.88 |
| September 30, 2017 | $4.71 | $2.91 |
| July 1, 2017 | $3.96 | $2.26 |
| April 1, 2017 | $3.67 | $2.50 |
Fiscal Year Ending December 31, 2016 |
| | |
| December 31, 2016 | $3.31 | $2.31 |
| October 1, 2016 | $4.39 | $2.88 |
| July 2, 2016 | $5.76 | $2.84 |
| April 2, 2016 | $4.77 | $3.60 |
On March 8, 2018,6, 2023, the closing sale price was $5.16.
Securities Authorized for Issuance under Equity Compensation Plans
Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report.
Performance Graph
The performance graph below compares the annual percentage change in the cumulative total return on our common stock with the NASDAQ Capital Market Composite Index and the S&P Small Cap 600 Health Care Index. The chart shows the value as of December 30, 2017, of $100 invested on December 29, 2012. The stock price performance below is not necessarily indicative of future performance.
The performance graph below is not “soliciting material,” shall not be deemed “filed” with the SEC and shall not be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing, except as shall be expressly set forth by specific reference in such filing.
| | | | | | |
| | | | | | | |
| ChromaDex Corporation | 100.00 | 288.03 | 162.02 | 219.62 | 198.62 | 352.84 |
| NASDAQ Composite | 100.00 | 141.58 | 162.13 | 173.35 | 187.34 | 242.49 |
| S&P Small Cap 600 Health Care Index | 100.00 | 135.35 | 152.67 | 165.19 | 159.35 | 211.40 |
$1.62.
Holders of Our Common Stock
As of March 8, 2018,6, 2023, we had approximately 5840 registered holders of record of our common stock.
stock, which does not include stockholders who hold shares in street name or stockholders whose shares may be held in trust by other entities.
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
On September 30, 2022, we entered into a Securities Purchase Agreement with Pioneer Step Holdings Limited (Pioneer Step), Champion River Ventures Limited (Champion) and Robert Fried (collectively, the “Purchasers”) pursuant to which we agreed to sell and issue approximately 2.5 million shares of common stock at a price of $1.25 per share (the “Financing”). Champion is indirectly owned by Li Ka-Shing and Pioneer Step is indirectly owned by Solina Chau, and each of Mr. Ka-Shing and Ms. Chau own through affiliated entities more than 5% of the Company’s common stock. Pursuant to previous agreements, each of Pioneer Step and Champion have appointed a member of our Board. Mr. Fried is our Chief Executive Officer. The transaction and related agreements were approved by the Audit Committee of the Board in accordance with our Related-Persons Transaction Policy. On October 7, 2022, we closed the Financing and received proceeds of approximately $2.9 million, net of offering costs of $0.2 million.
Other thanOn October 10, 2022, we entered into a Securities Purchase Agreement with Société des Produits Nestlé SA, a société anonyme organized under the laws of Switzerland (NHSc), as previously disclosed in our past Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,successor-in-interest to NESTEC Ltd., pursuant to which NHSc agreed to purchase 3.8 million shares of common stock at a price of $1.31 which is equal to the Company did not have any salesvolume weighted average price of unregistered securitiesthe Company’s common stock for the period covered by this Annual Report on Form 10-K.
ten trading days preceding October 10, 2022 (the “Securities Purchase Agreement”). On October 17, 2022, we closed the Securities Purchase Agreement and received proceeds of approximately $4.8 million, net of offering costs of $0.2 million.
The annual financial information set forth below has been derived from our audited consolidated financial statements. The information should be read together with, and is qualified in its entirety by reference to, “Management’s
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” the consolidated financial statements and notes included elsewhere in this Form 10-K and in our SEC filings. The selected financial data in this section are not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarily indicative of the results that may be expected in the future and results of interim periods are not necessarily indicative of the results for the entire year.
| | Years Ended |
Consolidated Statement of Operations Data | | | | | |
| | | | | |
| Sales, net | $21,201,482 | $21,664,648 | $17,884,886 | $11,861,099 | $7,438,857 |
| Cost of sales | 10,724,177 | 11,274,114 | 10,350,281 | 6,855,690 | 3,926,765 |
| Gross profit | 10,477,305 | 10,390,534 | 7,534,605 | 5,005,409 | 3,512,092 |
| | | | | | |
| Operating expenses: | | | | | |
| Sales and marketing | 4,459,224 | 1,558,213 | 1,507,868 | 1,482,784 | 1,627,795 |
| Research and development | 4,007,381 | 2,522,768 | 891,601 | 513,671 | 134,040 |
| General and administrative | 17,641,889 | 9,214,763 | 7,201,231 | 7,648,773 | 4,747,561 |
| Loss from investment in affiliate | - | - | - | 45,829 | 44,961 |
| Other | 745,773 | - | - | - | - |
| Operating expenses | 26,854,267 | 13,295,744 | 9,600,700 | 9,691,057 | 6,554,357 |
| Operating loss | (16,376,962) | (2,905,210) | (2,066,095) | (4,685,648) | (3,042,265) |
| | | | | | |
| Nonoperating income (expense): | | | | | |
| Interest expense, net | (152,784) | (333,286) | (566,917) | (123,976) | (4,006) |
| Loss on debt extinguishment | - | (313,099) | - | - | - |
| Nonoperating expenses | (152,784) | (646,385) | (566,917) | (123,976) | (4,006) |
| Loss before income taxes | (16,529,746) | (3,551,595) | (2,633,012) | (4,809,624) | (3,046,271) |
| Provision for income taxes | - | - | (4,527) | - | - |
| Loss from continuing operations | (16,529,746) | (3,551,595) | (2,637,539) | (4,809,624) | (3,046,271) |
| | | | | | |
| Income (loss) from discontinued operations | (315,140) | 623,410 | (133,528) | (578,561) | (1,373,254) |
| Gain on sale of discontinued operations | 5,467,268 | - | - | - | - |
| Income (loss) from discontinued operations, net | 5,152,128 | 623,410 | (133,528) | (578,561) | (1,373,254) |
| Net loss | $(11,377,618) | $(2,928,185) | $(2,771,067) | $(5,388,185) | $(4,419,525) |
| | | | | | |
| Basic and diluted earnings (loss) per common share: | | | | | |
| Loss from continuing operations | $(0.37) | $(0.10) | $(0.07) | $(0.14) | $(0.09) |
| Earnings (loss) from discontinued operations | $0.11 | $0.02 | $(0.01) | $(0.01) | $(0.04) |
| Basic and diluted loss per common share | $(0.26) | $(0.08) | $(0.08) | $(0.15) | $(0.13) |
| Basic and diluted weighted average | | | | | |
| common shares outstanding | 44,598,879 | 37,294,321 | 35,877,341 | 35,486,460 | 33,329,148 |
| At The End of Year
|
Consolidated Balance Sheet Data
| | | | | |
| | | | | | |
| Cash | $45,388,848 | $1,642,429 | $5,549,672 | $3,964,750 | $2,261,336 |
| Working capital (1) | 7,415,742 | 7,786,372 | 4,400,432 | 2,189,442 | 1,602,008 |
| Total assets | 62,723,600 | 19,752,068 | 18,749,209 | 11,516,847 | 8,986,892 |
| Long term debt | - | - | 3,345,335 | 1,977,113 | - |
| Total stockholders' equity | $53,833,668 | $9,974,358 | $5,274,674 | $3,998,391 | $5,665,451 |
| | | | | | |
(1) Trade receivables plus inventories less accounts payable. | | | | |
| Years Ended
|
Consolidated Cash Flow Data
| 2017 | 2016 | 2015 | 2014 | 2013 |
| | | | | | |
| Net cash used in operating activities | $(9,804,178) | $(2,936,596) | $(2,111,138) | $(2,580,406) | $(3,906,011) |
| Net cash provided by (used in) investing activities | 4,601,926 | (1,724,922) | (647,731) | 1,590,275 | 998,651 |
| Net cash provided by financing activities | $48,948,671 | $754,275 | $4,343,791 | $2,693,545 | $4,648,696 |
Item 7.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read theThe following discussion and analysis of financial condition and results of operation togetheroperations should be read in conjunction with “Selected Financial Data,” the consolidated financial statements and the relatedaccompanying notes included elsewhere this Form 10-K. This discussion containsOur actual results could differ materially from those anticipated in these forward-looking statements that involve risksas a result of various factors, including those discussed below and uncertainties. When reviewing the discussion below, you should keepelsewhere in mind the substantial risks and uncertainties that impact our business. In particular, wethis Annual Report on Form 10-K. We encourage you to review the risks and uncertainties described in “Risk Factors” in Part I,I. Item 1A in this Form 10-K. These risks1A. Risk Factors 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.Cautionary Notice Regarding Forward-Looking Statements.
Overview
ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., Healthspan Research, LLCChromaDex International, Inc., ChromaDex Analytics, Inc., ChromaDex Asia Limited, Asia Pacific Scientific, Inc., ChromaDex Europa B.V. and ChromaDex Analytics, Inc.Sağlik Ürünleri Anonim Şirketi (collectively, “ChromaDex”, the “Company” or, in the first person as “we” “us” and “our”) are an integrated,a global nutraceuticalbioscience company devoteddedicated to improving the way people age.healthy aging. The Company'sChromaDex team, which includes world-renowned scientists, partner with leading universities andis pioneering research institutions worldwide to uncover the full potential ofon nicotinamide adenine dinucleotide ("NAD"(NAD+), an essential coenzyme that is a key regulator of cellular metabolism and identifyis found in every cell of the human body. NAD+ levels in humans have been shown to decline with age, among other factors, and develop novel, science-based ingredients. ChromaDex'smay be increased through supplementation with NAD+ precursors.
ChromaDex is the innovator behind the NAD+ precursor nicotinamide riboside (NR), commercialized as the flagship ingredient NIAGEN® nicotinamideNiagen®. Nicotinamide riboside sold directly to consumers as TRU NIAGEN®, is backed with clinical and scientific research, as well as intellectual property protection.other NAD+ precursors are protected by ChromaDex’s patent and/or licensed rights portfolio. The Company also has a core standardsdelivers Niagen® as the sole active ingredient in its consumer product Tru Niagen®. The Company further develops and contract services segment, which focuses oncommercializes proprietary-based ingredient technologies and supplies these ingredients as raw materials to the manufacturers of consumer products. Additionally, the Company offers natural product fine chemicals, (knownknown as “phytochemicals”), chemistry services,phytochemicals, and regulatory consulting.related research and development services.
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 and similar regulations exist related to food additives.
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.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.
Recent Activities
Securities Purchase Agreement and Registration Rights Agreement - Related Parties
On September 30, 2022, we entered into a Securities Purchase Agreement with Pioneer Step Holdings Limited (Pioneer Step), Champion River Ventures Limited (Champion) and Robert Fried (collectively, the “Purchasers”) pursuant to which we agreed to sell and issue approximately 2.5 million shares of common stock at a price of $1.25 per share (the “Financing”). Champion is indirectly owned by Li Ka-Shing and Pioneer Step is indirectly owned by Solina Chau, and each of Mr. Ka-Shing and Ms. Chau own through affiliated entities more than 5% of the Company’s common stock. Pursuant to previous agreements, each of Pioneer Step and Champion have appointed a member of our Board. Mr. Fried is our Chief Executive Officer. The transaction and related agreements were approved by the Audit Committee of the Board in accordance with our Related-Persons Transaction Policy. On October 7, 2022, we closed the Financing and received proceeds of approximately $2.9 million, net of offering costs of $0.2 million.
In connection with the Financing, on September 30, 2022, we also entered into a Registration Rights Agreement with the Purchasers (the “Registration Rights Agreement”), pursuant to which we agreed to (i) file one or more registration statements with the SEC to cover the resale of the shares of Common Stock issued to the Purchasers, (ii) use reasonable best efforts to have all such registration statements declared effective within the timeframes set forth in the Registration Rights Agreement, and (iii) use commercially reasonable efforts to keep such registration statements effective during the timeframes set forth in the Registration Rights Agreement. We filed a Registration Statement registering the resale of the shares of Common Stock in November 2022. In the event that such registration statement subsequently becomes unavailable, or the Purchasers are unable to sell the shares of Common Stock issued pursuant to the Financing due to failure by us to satisfy the current public information requirement of Rule 144 under the Securities Act, we would be required to pay liquidated damages to the Purchasers equal to 1.0% of the aggregate purchase price per month for each default (up to a maximum of 5.0% of such aggregate purchase price)
Joint Venture
On September 30, 2022, Asia Pacific Scientific, Inc., an indirect wholly owned subsidiary of the Company, and Hong Kong (China) Taikuk Group Ltd (Taikuk) entered into a shareholders agreement pursuant to which, among other details, Taikuk will receive an 11% non-voting equity interest in ChromaDex Asia Pacific Ventures Limited, a subsidiary of Asia Pacific Scientific, Inc. (the “Joint Venture” or “JV”). We indirectly own an 89% equity interest (and all of the voting interests) in the JV and have the right to elect all three directors of the JV. The purpose of the JV is to commercialize Tru Niagen® and other products containing nicotinamide riboside to be developed by us (the “Products”) in Mainland China and its territories, excluding Hong Kong, Macau and Taiwan (the “Territory”).
Prior to being able to commercialize the Products in the Territory, the JV will have to obtain all applicable regulatory approvals, including “Blue Hat” or health food registration with the Peoples Republic of China State Administration for Market Regulation for Products in our name or our designee (collectively, the “Blue Hat Registration”). For further discussion, see Note 12, Joint Venture.
Supply Agreement and Securities Purchase Agreement - NHSc
On October 10, 2022, we along with Société des Produits Nestlé SA, a société anonyme organized under the laws of Switzerland (NHSc), as successor-in-interest to NESTEC Ltd., entered into an amended and restated supply agreement (the “Supply Agreement”), which amends and restates the supply agreement, dated December 19, 2018, entered into by the Company and NESTEC Ltd. Pursuant to the Supply Agreement, NHSc and its affiliates will exclusively purchase nicotinamide riboside chloride (NRCL) from us and NHSc and its affiliates will have the non-exclusive right to manufacture, market, distribute, and sell products using NRCL for human use in the (i) medical nutritional, (ii) functional food and beverage and (iii) multi-ingredient dietary supplements categories sold under one of the NHSc brands (the “Approved Products”) world-wide, but excluding certain countries and ingredient combinations. For further discussion, see Note 14, NHSc Revenue.
In connection with the entry into the Supply Agreement, we entered into a Securities Purchase Agreement with NHSc, pursuant to which NHSc agreed to purchase 3.8 million shares of common stock at a price of $1.31 which is equal to the volume weighted average price of our common stock for the ten trading days preceding October 10, 2022 (the “Securities Purchase Agreement”). On October 17, 2022, we closed the Securities Purchase Agreement and received proceeds of approximately $4.8 million, net of offering costs of $0.2 million.
Purchase Commitment
Effective as of December 14, 2022, we entered into an Eighth Amendment (Eighth Amendment) to the Manufacturing and Supply Agreement (such agreement as amended, the “Grace Manufacturing Agreement”), originally effective in January 2016 with W.R. Grace & Co. –Conn. (Grace). Beginning in January 2019, Grace was issued patents related to the manufacturing of the crystalline form of NR (Grace Patents). Pursuant to the Eighth Amendment, we are committed to purchase approximately $18.0 million of total inventory during fiscal year 2023, which is our only future purchase commitment with Grace. The Grace Manufacturing Agreement will expire on December 31, 2023, subject to further renewal of the agreement to be negotiated by the parties.
Impact of COVID-19
The worldwide outbreak of COVID-19 continues to drive global uncertainty and disruption, which has created headwinds for our business. Authorities have imposed, and businesses and individuals have implemented, numerous measures to try to contain the virus or treat its impact, such as travel bans and restrictions, remote working policies, quarantines, and store closures and reduced operating hours, among other measures. These measures have impacted and may further impact our workforce and operations and those of our respective suppliers and partners.
Our primary focus throughout the COVID-19 pandemic has remained ensuring the health and safety of our employees through office closures or implementing enhanced safety protocols to ensure the well-being of our employees. We have successfully adapted and have been able to conduct business virtually. Today, many of our employees continue to work remotely efficiently and we plan to continue to offer this flexible work environment.
Under the Coronavirus Aid, Relief, and Economic Security Act the employee retention tax credit (ERTC) was established and subsequently amended by other Acts. During the third quarter of 2022, we evaluated our eligibility for the ERTC and determined that we qualified in all three quarters of 2020 and the first three quarters in 2021. As a result, during August 2022, we filed a claim for the ERTC. During 2022, we recognized approximately $2.1 million in Other income - Employee Retention Tax Credit in our Consolidated Statements of Operations to reflect the ERTC. As of December 31, 2022, we have received $0.6 million of the ERTC claimed. Subsequent to December 31, 2022, the Company received an additional $0.8 million related to the ERTC. For further discussion, see Note 18, Employee Retention Tax Credit.
The degree to which COVID-19 impacts our results will depend on future developments, which are uncertain and cannot be predicted, including the duration and severity of the pandemic; surges related to new variants; the actions taken to contain the virus or treat its impact; other actions taken by governments, businesses, and individuals in response to the virus and resulting economic disruption; and how quickly and to what extent normal economic and operating conditions can resume. Additional impacts and risks may arise that we are not aware of or able to respond to effectively. We are similarly unable to predict the extent of the impact of the pandemic on our customers, suppliers, and other partners, but a material effect on these parties could also materially adversely affect us. The impact of COVID-19 can also exacerbate other risks discussed in Part II, Item 1A Risk Factors and throughout this report.
Supply chain disruptions, inflation and changing prices
We have in the past experienced, and could in the future experience, global supply chain delays including challenges with transportation, logistics and production lead-times, as well as labor shortages and cost inflation. Supply chain delays, among other factors such as store closures, impacted sales to our partners in international markets during the year ended December 31, 2022. While these headwinds appear to have mostly subsided for our partners, they could still affect future sales. We continue to collaborate with these partners and strive to maintain adequate safety stocks to sustain growth and prevent disruptions caused by supply chain delays. We believe we have adequate inventory on hand to fulfill current demands.
We have also experienced inflation in labor, raw materials, transportation and other costs. Inflation can have a long-term impact as increasing costs may affect our ability to maintain satisfactory margins. We may be unsuccessful in passing these increases on to our customers or finding other mitigating solutions. Furthermore, increases in inflation may not be matched by growth in consumer income, which could have a negative impact on customer spending. If customer sales diminish, we may be required to scale back production volumes which could negatively impact any economies of scale we have previously benefited from. We have also seen changing prices due to other macroeconomic factors including rising interest rates, fluctuations in currency exchange rates and geopolitical uncertainties such as those surrounding Russia’s invasion of Ukraine. We will continue to monitor changing prices and inflationary pressures closely as conditions may become more challenging due to ongoing and uncertain economic factors.
Results of Operations
Our results of operations for the years ended December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2022 | | 2021 |
| Sales | $ | 72,050 | | | $ | 67,449 | |
| Cost of sales | 29,253 | | | 25,959 | |
| Gross profit | 42,797 | | | 41,490 | |
| Operating expenses | | | |
| Sales and marketing | 28,313 | | | 28,352 | |
| Research and development | 4,826 | | | 3,832 | |
| General and administrative | 28,286 | | | 36,379 | |
| Nonoperating expenses: | | | |
| Other income, net - Employee Retention Tax Credit | 2,085 | | | — | |
| Interest income (expense), net | 3 | | | (55) | |
| Net loss | $ | (16,540) | | | $ | (27,128) | |
Our loss per share applicable to common stockholders for the years indicated is calculated as follows:
| | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (In thousands, except per share data) | | 2022 | | 2021 |
| Net loss | | $ | (16,540) | | | $ | (27,128) | |
| | | | |
| Basic and diluted loss per common share | | $ | (0.24) | | | $ | (0.40) | |
| | | | |
| Basic and diluted weighted average common shares outstanding (1): | | 69,729 | | | 67,185 | |
| | | | |
| Potentially dilutive securities (2): | | | | |
| Stock options | | 10,438 | | | 10,536 | |
| Restricted stock units | | 650 | | | 115 | |
(1) Includes approximately 0.2 million nonvested shares of restricted stock for the year ended December 31, 2022 and December 31, 2021 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. Our total net sales grew from $31.6 million in 2018 to $72.1 million in 2022, representing a 18% compound annual growth rate.
Total net sales by reportable segment for the years ended December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | Change |
| Net sales: | | | | | |
| Consumer Products | $ | 60,110 | | | $ | 56,705 | | | 6 | % |
| Ingredients | 8,736 | | | 7,407 | | | 18 | |
| Analytical reference standards and services | 3,204 | | | 3,337 | | | (4) | |
| Total net sales | $ | 72,050 | | | $ | 67,449 | | | 7 | % |
In 2022, our total net sales increased by 7%, up $4.6 million, from 2021.
•In 2022, Tru Niagen® sales continued to see steady e-commerce growth with $3.4 million, or 8%, higher sales compared to 2021 paired with $0.7 million in increased sales to A.S. Watson’s. This growth was partially offset by declines of $0.7 million in business-to-business sales to our distributor partners. Our distributor partners have experienced lower growth during fiscal year 2022 due to COVID-19 headwinds and other macroeconomic factors. We remain committed to working with these partners to collectively maximize sales while simultaneously continuing to grow our e-commerce channels.
•In 2022, our ingredients segment experienced a $1.3 million, or 18%, increase in overall net sales compared to 2021. The increase in sales during 2022 was largely driven by the amended and restated supply agreement with Nestlé (NHSc) including a $2.0 million upfront minimum purchase in the fourth quarter of 2022. In the future, we anticipate NHSc may purchase Niagen® in smaller batch quantities. The NHSc purchase was partially offset by a decline in sales of other, non-Niagen®, ingredients.
•Net sales for our analytical reference standards and services segment moderately decreased during 2022 compared to 2021 primarily due to a decline in demand for research and development services in 2022.
Cost of Sales. Costs of sales include raw materials, labor, overhead and delivery costs. The following table sets forth our total cost of sales by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | Change |
| (In thousands) | Amount | | % of
net sales | | Amount | | % of
net sales | | % of
net sales |
| Cost of sales: | | | | | | | | | |
| Consumer Products | $ | 21,726 | | | 36 | % | | $ | 19,864 | | | 35 | % | | 1 | % |
| Ingredients | 4,465 | | | 51 | | | 3,233 | | | 44 | | | 7 | |
| Analytical reference standards and services | 3,062 | | | 96 | | | 2,862 | | | 86 | | | 10 | |
| Total cost of sales | $ | 29,253 | | | 41 | % | | $ | 25,959 | | | 38 | % | | 3 | % |
Total cost of sales, as a percentage of net sales, increased 3% in 2022 compared to 2021. Changes in cost of sales, as a percentage of net sales, were primarily driven by the following:
During 2022, we continued to explore cost saving processes and opportunities and benefit from favorable product mix.
•Cost of sales, as a percentage of net sales, for the consumer products segment remained substantially similar with only a 1% increase in 2022 compared to 2021. The minor increase is attributable to increases in our supply chain headcount, including overall wage inflation, and other inflationary pressures, partially offset by a shift in our business mix as we experienced elevated e-commerce sales which provide higher gross margins during the year ended December 31, 2022 compared to the same period in 2021.
•Cost of sales, as a percentage of net sales, for the ingredients segment increased by 7% in 2022 compared to 2021. The increase is primarily a result of increases in supply chain headcount, including overall wage inflation, paired with higher costs of raw materials and customer mix.
•Cost of sales, as a percentage of net sales, for the analytical reference standards and services segment increased 10% in 2022 compared to the same period in 2021. Cost of sales for our analytical reference standards and services segment are largely driven by fixed supply chain overhead costs which do not increase in proportion to sales. Additionally, during fiscal year 2022, we increased our supply chain headcount to scale the business based on strong growth in 2021 and were impacted by overall wage inflation, increasing these overheads costs. Accordingly, due to the increased head count for supply chain labor paired with a decrease in sales during 2022, we experienced lower labor and overhead utilization rates resulting in higher cost of sales, as a percentage of net sales, compared to 2021.
Gross Profit. Gross profit is net sales less the cost of sales and is affected by a number of factors including business and product mix, competitive pricing and costs of products, labor, overhead, services and delivery. Since 2018, total gross profit grew from $16.1 million to $42.8 million in 2022, representing a 22% compound annual growth rate. For fiscal year 2022 gross profit increased $1.3 million, or 3%, compared to 2021. Our overall gross margin percentage remained strong at 59.4% for fiscal year 2022, however it declined 210 basis points compared to 2021 largely due to increases in supply chain headcount to scale the business, including higher wages, and other inflationary pressures.
The following table sets forth our total gross profit by reportable segment:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | Change |
| Gross profit: | | | | | |
| Consumer Products | $ | 38,384 | | | $ | 36,841 | | | 4 | % |
| Ingredients | 4,271 | | | 4,174 | | | 2 | |
| Analytical reference standards and services | 142 | | | 475 | | | (70) | |
| Total gross profit | $ | 42,797 | | | $ | 41,490 | | | 3 | % |
For details supporting year-over-year changes in gross profit refer to the discussions above surrounding changes in our net sales and cost of sales for each segment.
Operating Expenses - Sales and Marketing. Sales and marketing expense consists of salaries, advertising, public relations and marketing expenses. Sales and marketing expense by reportable segment is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2022 | | 2021 | | Change |
| (In thousands) | Amount | | % of
net sales | | Amount | | % of
net sales | | % of
net sales |
| Sales and marketing expenses: | | | | | | | | | |
| Consumer Products | $ | 27,661 | | | 46 | % | | $ | 27,821 | | | 49 | % | | (3) | % |
| Ingredients | 51 | | | 1 | | | 46 | | | 1 | | | — | |
| Analytical reference standards and services | 601 | | | 19 | | | 485 | | | 15 | | | 4 | |
| Total sales and marketing expenses | $ | 28,313 | | | 39 | % | | $ | 28,352 | | | 42 | % | | (3) | % |
•We continue to focus our primary marketing efforts on our consumer products segment to increase consumer awareness of Tru Niagen®. In 2022, we pivoted our marketing efforts to focus on the most efficient distribution channels and marketing campaigns which resulted in lower selling and marketing expenses as a percentage of net sales by 3%.
•For the ingredients segment, sales and marketing expenses were substantially similar totaling $51,000 in 2022 and $46,000 in 2021 with approximately no change when compared as a percentage of net sales.
•For the analytical reference standards and services segment, sales and marketing expenses increased by approximately $0.1 million in 2022 compared to 2021 as costs were impacted by overall wage inflation.
Operating Expenses - Research and Development. Research and development (R&D) expense consists primarily of clinical trials, product development and process development expenses. Research and development expenses by reportable segment are as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | Change |
| R&D expenses: | | | | | |
| Consumer Products | $ | 4,214 | | | $ | 3,427 | | | 23 | % |
| Ingredients | 612 | | | 405 | | | 51 | |
| Total R&D expenses | $ | 4,826 | | | $ | 3,832 | | | 26 | % |
•We allocate R&D expenses related to our Niagen® branded ingredient to the consumer products and ingredients segment, based on revenues recorded. Overall, R&D expenses increased approximately $1.0 million in 2022 compared to 2021 largely due to increased headcount, share-based compensation and timing of projects.
Operating Expenses - General and Administrative. General and administrative expense consists of general company administration, legal, royalties, information technology, accounting and executive management expenses. General and administrative expense is not allocated by segment and is instead classified under our Corporate and Other category. General and administrative expense for the periods indicated is as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | Change |
| General and administrative | $ | 28,286 | | | $ | 36,379 | | | (22) | % |
The decline in general and administrative expense for 2022, compared to 2021, of $8.1 million was driven by lower legal expense of $9.9 million which was partially offset by higher severance and restructuring expense of $0.7 million paired with investments in technology, overall wage inflation and higher royalties expense. For additional details regarding our litigation see Note 17, Commitments and Contingencies, Legal Proceedings in the Notes to the Consolidated Financial Statements, included in Part II, Item 8 of this Form 10-K.
Nonoperating - Interest Expense, net. Interest expense, net consists of interest earned from bank deposit accounts less interest expenses from the line of credit arrangement and finance leases. Interest expense, net totaled approximately $3,000 and $55,000 for the years ended December 31, 2022 and 2021, respectively.
Depreciation and Amortization. Depreciation expense was approximately $0.9 million for both of the years ended December 31, 2022 and 2021. We depreciate our assets on a straight-line basis, based on the estimated useful lives of the respective assets.
Amortization expense of intangible assets was approximately $0.2 million for each of the years ended December 31, 2022 and 2021. 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 life of subsequent milestone payments that are capitalized match the remaining useful life of the initial licensing payment that was originally capitalized. Amortization expense of right-of-use assets for the year ended December 31, 2022 was approximately $0.8 million as compared to $0.5 million for the year ended December 31, 2021.
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, 2022 and 2021, we maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of approximately 0% for both of the years ended December 31, 2022 and 2021. As defined in ASC 740, Income Taxes, future realization of the tax benefit will depend on the existence of sufficient taxable income, including the expectation of continued future taxable income.
Net cash used in operating activities. Cash used in operating activities is net loss adjusted for certain non-cash items and changes in operating assets and liabilities. Net cash used in operating activities was approximately $15.1 million and $24.2 million in 2022 and 2021, respectively. The decrease in cash used during the year ended December 31, 2022 compared to 2021 was primarily driven by improvements in our net loss of $8.5 million excluding Other income from the Employee Retention Tax Credit of $2.1 million.
We expect our operating cash flows to fluctuate significantly in future periods as a result of fluctuations in our operating results, shipment timetables, trade receivable collections, inventory management, and the timing of our payments, among other factors.
Net cash used in investing activities. Investing cash flows consist primarily of capital expenditures and investment activities. Net cash used in investing activities was approximately $0.3 million and $0.4 million in 2022 and 2021, respectively. The slight decrease in cash used during the year ended December 31, 2022 compared to 2021 was primarily due to fewer purchases of leasehold improvements and equipment in 2022.
Net cash provided by financing activities. Financing cash flows consist primarily of proceeds from issuance of our common stock, exercise of stock options through employee equity incentive plans and repayment of short-term and long-term debt. Net cash provided by financing activities was approximately $7.7 million and $36.1 million in 2022 and 2021, respectively. The decrease in cash provided during the year ended December 31, 2022 compared to 2021 was primarily due to decreased proceeds from issuance of our common stock of $19.0 million and no proceeds related to the exercise of employee stock options resulting in a decrease of $9.5 million.
Trade Receivables. As of December 31, 2022, we had approximately $8.5 million in trade receivables as compared to approximately $5.2 million as of December 31, 2021. The increase in 2022 is driven by the timing of customer orders and collections, including the upfront minimum purchase by NHSc during the fourth quarter of 2022.
Inventories. As of December 31, 2022, we had approximately $14.7 million in inventory, compared to approximately $13.6 million as of December 31, 2021. As of December 31, 2022, our inventory consisted of approximately $10.9 million of consumer products, $3.3 million of bulk ingredients and $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 1,750 phytochemicals and 400 botanical reference materials in our catalog and holds a lot of these as inventory in small quantities, mostly in grams and milligrams.
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, 2022, we had $9.7 million in accounts payable compared to approximately $10.4 million as of December 31, 2021 driven by the timing of purchases and payments to our vendors.
Liquidity and Capital Resources
For the year ended December 31, 2022, we incurred losses from operations of approximately $16.5 million. Net cash used in operating activities for the year ended December 31, 2022 was approximately $15.1 million. The losses and the uses of cash are primarily attributable to expenses associated with the development and expansion of our operations, as well as legal expenditures. These operations have been financed through capital contributions, primarily through the issuance of common stock in private placements, and cash generated from net sales.
As of December 30, 2017, the31, 2022, we had purchase obligations of approximately $18.0 million related to inventory purchase commitments and approximately $4.9 million related to future minimum lease obligations to be paid over one year and six years, respectively. As of December 31, 2022 and 2021, we had no material off-balance sheet arrangements. We have an available line of credit with Western Alliance Bank for up to $10.0 million, subject to certain terms and conditions which as of December 31, 2022 allows for $6.1 million of borrowing. As of December 31, 2022, unrestricted cash and cash equivalents totaled approximately $45.4 million. The Company anticipates$20.3 million and we had no borrowings outstanding under our line of credit. We anticipate that itsour current unrestricted cash and cash equivalents and cash to be generated from operationsnet sales will be sufficient to meet itsour projected operating plans through at least March 16, 2019. The Companythe next twelve months from the issuance date of these financial statements. We may, however, seek additional capital prior to March 16, 2019,within the next twelve months, both to meet itsour projected operating plans after March 16, 2019the next twelve months and/or to fund itsour longer term strategic objectives.
In June 2020, we filed a $125 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 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. (ATM Facility). As of December 31, 2022, approximately $47.8 million remains available under the ATM Facility. Our potential use of the ATM facility is subject to the satisfaction of various conditions in the ATM Facility agreement as well as market conditions. As a result, our ability to rely on the ATM Facility to raise liquidity is limited to a material extent.
Our Board of Directors periodically reviews our material cash 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 capital may come from other 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 ofcapitalize on future opportunities, or respond to competitive pressures or unanticipated customer requirements. Any of these events could adversely affect our ability to achieve our development and commercialization goals, which could have a material and adverse effect on our business, results of operations and financial condition.
Some of our operations are subject to regulation by various state Further, the global credit and federal agencies. Dietary supplements are subject to FDA, FTCfinancial markets have experienced extreme volatility, including diminished liquidity and U.S. Department of Agriculture regulations relating to composition, labeling and advertising claims. These regulations maycredit availability, declines in some cases, particularly with respect to those applicable to new ingredients, require a notification that must be submitted to the FDA along with evidence of safety. There are similar regulations related to food additives.
Results of Operations
Our losses per basic and diluted share were $0.26, $0.08 and $0.08 for the twelve-month periods ended December 30, 2017, December 31, 2016 and January 2, 2016, respectively. Over the next two years, we plan to continue to increase marketing, research and development efforts for our flagship ingredient, NIAGEN® nicotinamide riboside, and our consumer branded product TRU NIAGEN®.
| | |
| | | | |
| Sales | $21,201,482 | $21,664,648 | $17,884,886 |
| Cost of sales | 10,724,177 | 11,274,114 | 10,350,281 |
| Gross profit | 10,477,305 | 10,390,534 | 7,534,605 |
| Operating expenses -Sales and marketing | 4,459,224 | 1,558,213 | 1,507,868 |
| -Research and development | 4,007,381 | 2,522,768 | 891,601 |
| -General and administrative | 17,641,889 | 9,214,763 | 7,201,231 |
| -Other | 745,773 | - | - |
| Nonoperating -Interest expense, net | (152,784) | (333,286) | (566,917) |
| -Loss on debt extinguishment | - | (313,099) | - |
| Provision for income taxes | - | - | (4,527) |
| Loss from continuing operations | (16,529,746) | (3,551,595) | (2,637,539) |
| Income (loss) from discontinued operations, net | 5,152,128 | 623,410 | (133,528) |
| Net loss | $(11,377,618) | $(2,928,185) | $(2,771,067) |
Year Ended December 30, 2017 Compared to Year Ended December 31, 2016
Net Sales. Net sales consist of gross sales less discounts and returns.
| | |
| | | | |
| Net sales: | | | |
| Ingredients | $11,153,000 | $16,775,000 | -34% |
| Consumer Products | 5,465,000 | - | - |
| Core standards and contract services | 4,583,000 | 4,890,000 | -6% |
| | | | |
| Total net sales | $21,201,000 | $21,665,000 | -2% |
●
The decreaseconfidence, declines in sales for the ingredients segment is mainly due to decreased sales of NIAGEN®. The Company made a strategic decision to transition from an ingredient and testing company to a consumer driven nutraceutical company. This has resulted in a shift in our sales away from resellers of NIAGEN® to our TRU NIAGEN® branded consumer product.
●
With the acquisition of Healthspan Research LLC in March 2017, the Company began selling consumer products that contain the Company's branded NIAGEN® ingredient. Segregation of the financial results for the consumer products segment coincides with the Company's strategic shift towards the consumer products. The Company expects the sales for consumer products segment to grow over the next twelve months.
●
The decrease in sales for the core standards and contract services segment is primarily due to decreased sales of analytical reference standards.
Cost of Sales. Costs of sales include raw materials, labor, overhead, and delivery costs.
| | |
| | | |
| | | | | |
| Cost of sales: | | | | |
| Ingredients | $5,492,000 | 49% | $7,920,000 | 47% |
| Consumer Products | 2,189,000 | 40% | - | - |
| Core standards and contract services | 3,043,000 | 66% | 3,354,000 | 69% |
| | | | | |
| Total cost of sales | $10,724,000 | 51% | $11,274,000 | 52% |
The cost of sales, as a percentage of net sales, decreased 1%.
●
The cost of sales, as a percentage of net sales, for the ingredients segment increased 2%. This increase as a percentage of net sales was primarily due to a write-off of our NIAGEN® related inventory of approximately $183,000 in 2017.
●
The cost of sales, as a percentage of net sales for the core standards and contract services segment, decreased 3%. We were able to lower our reference standards purchasing costs by diversifying our sources.
Gross Profit. Gross profit is net sales less the cost of sales and is affected by a number of factors including product mix, competitive pricing and costs of products and services.
| | |
| | | | |
| Gross profit: | | | |
| Ingredients | $5,661,000 | $8,855,000 | -36% |
| Consumer Products | 3,276,000 | - | - |
| Core standards and contract services | 1,540,000 | 1,536,000 | 0% |
| | | | |
| Total gross profit | $10,477,000 | $10,391,000 | 1% |
●
The decreased gross profit for the ingredients segment is due to the decreased sales of NIAGEN®. The Company made a strategic decision to transition from an ingredient and testing company to a consumer driven nutraceutical company. This has resulted in a shift in our sales away from resellers of NIAGEN® to our TRU NIAGEN® branded consumer product.
●
The consumer products segment posted gross profit of $3.3 million for the year ending in December 30, 2017. The Company expects the sales and gross profit for consumer products segment to grow over the next twelve months.
●
The gross profit for the core standards and contract services segment remained the same as the decrease in sales was offset by improved profitability.
Operating Expenses – Sales and Marketing. Sales and Marketing Expenses consist of salaries, advertising and marketing expenses.
| | |
| | | | |
| Sales and marketing expenses: | | | |
| Ingredients | $1,280,000 | $1,197,000 | 7% |
| Consumer Products | 2,673,000 | - | - |
| Core standards and contract services | 506,000 | 361,000 | 40% |
| | | | |
| Total sales and marketing expenses | $4,459,000 | $1,558,000 | 186% |
●
For the ingredients segment, the increase is largely due to increased marketing efforts to raise consumer awareness for our line of proprietary ingredients.
●
For the consumer products segment, we have increased staffing as well as direct marketing expenses associated with social media and other customer awareness and acquisition programs. We will continue to expand both staffing as well as increase other marketing expense as we invest in building out our own global branded consumer product business.
●
For the core standards and contract services segment, the increase is mainly due to our increased marketing efforts.
Operating Expenses – Research and Development. Research and Development Expenses consist of clinical trials and process development expenses.
| | |
| | | | |
| Research and development expenses: | | | |
| Ingredients | $2,903,000 | $2,488,000 | 17% |
| Consumer Products | 1,104,000 | - | - |
| Core standards and contract services | - | 35,000 | -100% |
| | | | |
| Total research and development expenses | $4,007,000 | $2,523,000 | 59% |
●
In 2017, we began allocating the research and development expenses related to our NIAGEN® branded ingredient to the ingredients and consumer products segment, proportional to revenues recorded. Previously, these expenses were recorded all in the ingredients segment. Overall, we increased our research and development efforts compared to 2016 and we plan to continue to increase research and development efforts for our flagship ingredient, NIAGEN® nicotinamide riboside.
●
For the core standards and contract services segment, we explored processes to develop certain compounds at a larger scale during the year ended December 31, 2016.
Operating Expenses – General and Administrative. General and Administrative Expenses consist of general company administration, IT, accounting and executive management expenses.
| | |
| | | | |
| | | | |
| General and administrative | $17,642,000 | $9,215,000 | 91% |
| | | | |
The following expenses contributed to the increase in general and administrative expenses in 2017:
●
An increase in legal expenses. Our legal expenses increased to approximately $5.1 million in 2017 compared to approximately $1.3 million in 2016. The ongoing litigation with Elysium and our increased efforts to file and maintain patents related to the proprietary ingredient technologies were the main reasons for the increase in legal expenses.
●
An increase in share-based compensation. Our share-based compensation expense for 2017 increased to approximately $4.6 million compared to approximately $1.2 million for 2016.
●
Severance payments related our former Chief Financial Officer, Thomas Varvaro. The Company made an accrual of $0.6 million for future payments to be made over the next two years.
●
An increaseof approximately $0.4 million in expenses associated with information and technology. We invested in additional staff and as well as external consulting in developing and maintaining our Ecommerce platform, which we use to sell our branded consumer product TRU NIAGEN®.
Operating Expenses – Other. Other expense consists of loss from an ongoing litigation.
●
In relation to the ongoing litigation, the Company incurred a write-off of approximately $746,000 in gross trade receivable from Elysium related to royalties billed as part of the existing Trademark License and Royalty Agreement.
Nonoperating – Interest Expense, net. Interest expense, net consists of interest on loan payable and capital leases offset by interest income.
| | |
| | | | |
| | | | |
| Interest expense, net | $153,000 | $333,000 | -54% |
●
The decrease in interest expense was mainly due to the term loan from Hercules Technology II, L.P. which the Company drew down an initial $2.5 million on September 29, 2014 and a second $2.5 million on June 18, 2015. The Company fully repaid the loan on June 14, 2016.
Depreciation and Amortization. For the twelve-month period ended December 30, 2017, we recorded approximately $0.5 million in depreciation compared to approximately $0.3 million for the twelve-month period ended December 31, 2016. We depreciate our assets on a straight-line basis, based on the estimated useful lives of the respective assets. We amortize intangible assets using a straight-line method, generally over 10 years. For licensed patent rights, the useful lives are 10 years or the remaining term of the patents underlying licensing rights, whichever is shorter. The useful lives of subsequent milestone payments that are capitalized are the remaining useful life of the initial licensing payment that was capitalized. In the twelve-month period ended December 30, 2017, we recorded amortization on intangible assets of approximately $0.2 million compared to approximately $0.1 million for the twelve-month period ended December 31, 2016.
Income Taxes. At December 30, 2017 and December 31, 2016, the Company maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of 0% for each of 2017 and 2016.
Net cash used in operating activities. Net cash used in operating activities for the twelve-month period ended December 30, 2017 was approximately $9.8 million as compared to approximately $2.9 million for the twelve-month period ended December 31, 2016. Along with the net loss, a decrease in accounts payable was the largest use of cash during the twelve-month period ended December 30, 2017. Net cash used in operating activities for the twelve-month period ended December 31, 2016 largely reflects increase in trade receivables along with the net loss.
We expect our operating cash flows to fluctuate significantly in future periods as a result of fluctuations in our operating results, shipment timetables, accounts receivable collections, inventory management, and the timing of our payments, among other factors.
Net cash used in investing activities. Net cash provided by investing activities was approximately $4.6 million for the twelve-month period ended December 30, 2017, compared to approximately $1.7 million used in for the twelve-month period ended December 31, 2016. Net cash provided by investing activities for the twelve-month period ended December 30, 2017 mainly consisted of proceeds from disposal of assets, offset by purchases of leasehold improvements and equipment and intangible assets. Net cash used in investing activities for the twelve-month period ended December 31, 2016 mainly consisted of purchases of leasehold improvements and equipment and intangible assets.
Net cash provided by financing activities. Net cash provided by financing activities was approximately $48.9 million for the twelve-month period ended December 30, 2017, compared to approximately $0.8 million for the twelve-month period ended December 31, 2016. Net cash provided by financing activities for 2017 mainly consisted of proceeds from issuances of our common stock and exercise of stock options, offset by principal payments on capital leases. Net cash provided by financing activities for 2016 mainly consisted of proceeds from issuances of our common stock and warrants through a private offering to our existing stockholders and exercise of stock options, offset by principal payments on loan payable and capital leases.
Trade Receivables. As of December 30, 2017, we had approximately $5.3 million in trade receivables as compared to approximately $5.9 million as of December 31, 2016.
Inventories. As of December 30, 2017, we had approximately $5.8 million in inventory, compared to approximately $7.9 million as of December 31, 2016. As of December 30, 2017, our inventory consisted of approximately $4.2 million of bulk ingredients, approximately $0.7 million of consumer products and approximately $0.9 million of phytochemical reference standards. Bulk ingredients are proprietary compounds sold to customers in larger quantities, typically in kilograms. These ingredients are used by our customers in the dietary supplement, food and beverage, animal health, cosmetic and pharmaceutical industries to manufacture their final products. Consumer products inventory consists of TRU NIAGEN® branded finished bottles of dietary supplement products that contain NIAGEN® ingredient and related work-in-process inventory. Phytochemical reference standards are small quantities of plan-based compounds typically used to research an array of potential attributes or for quality control purposes. The Company currently lists over 1,800 phytochemicals and 400 botanical reference materials in our catalog and holds a lot of these as inventory in small quantities, mostly in grams and milligrams.
Our normal operating cycle for reference standards is currently longer than one year. Due to the large number of different items we carry, certain groups of these reference standards have a sales frequency that is slower than others and varies greatly year to year. In addition, for certain reference standards, the cost saving is advantageous when purchased in larger quantities and we have taken advantage of such opportunities when available. Such factors have resulted in an operating cycle to be more than one year on average. The Company gains competitive advantage through the broad offering of reference standards and it is critical for the Company to continue to expand its library of reference standards it offers for theeconomic growth, of business. Nevertheless, the Company has recently made changes in its reference standards inventory purchasing practice, which the management believes will result in an improved turnover rate and shorter operating cycle without impacting our competitive advantage.
The Company regularly reviews inventories on hand and reduces the carrying value for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The reduction of the carrying value for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.
We strive to optimize our supply chain as we constantly search for better and more reliable sources and suppliers of bulk ingredients and phytochemical reference standards. By doing so, we believe we can lower the costs of our inventory, which we can then pass along the savings to our customers. In addition, we are working with our suppliers and partners to develop more efficient manufacturing methods of the raw materials, in an effort to lower the costs of our inventory.
Accounts Payable. As of December 30, 2017, we had $3.7 million in accounts payable compared to approximately $6.0 million as of December 31, 2016.
Advances from Customers. As of December 30, 2017, we had approximately $0.4 million in advances from customers compared to approximately $0.4 million as of December 31, 2016. These advances are for large-scale consulting projects, contract services and contract research projects where we require a deposit before beginning work.
Year Ended December 31, 2016 Compared to Year Ended January 2, 2016
Net Sales. Net sales consist of gross sales less discounts and returns.
| | |
| | | | |
| Net sales: | | | |
| Ingredients | $16,775,000 | $12,542,000 | 34% |
| Core standards and contract services | 4,890,000 | 5,343,000 | -8% |
| | | | |
| Total net sales | $21,665,000 | $17,885,000 | 21% |
●
The increase in sales for the ingredients segment is due to increased sales of NIAGEN® and PTEROPURE®.
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The decrease in sales for the core standards and contract services segment is primarily due to decreased sales from our regulatory consulting operations. For regulatory consulting operations, we put a further emphasis on intercompany work supporting our ingredients segment.
Cost of Sales. Costs of sales include raw materials, labor, overhead, and delivery costs.
| | |
| | | |
| | | | | |
| Cost of sales: | | | | |
| Ingredients | $7,920,000 | 47% | $6,664,000 | 53% |
| Core standards and contract services | 3,354,000 | 69% | 3,686,000 | 69% |
| | | | | |
| Total cost of sales | $11,274,000 | 52% | $10,350,000 | 58% |
The cost of sales, as a percentage of net sales, decreased 6%.
●
The decrease in cost of sales, as a percentage of net sales, for the ingredients segment is largely due to price reductions from our suppliers through increased purchase volumes.
●
The cost of sales, as a percentage of net sales for the core standards and contract services segment remained the same at 69%.
Gross Profit. Gross profit is net sales less the cost of sales and is affected by a number of factors including product mix, competitive pricing and costs of products and services.
| | |
| | | | |
| Gross profit: | | | |
| Ingredients | $8,855,000 | $5,878,000 | 51% |
| Core standards and contract services | 1,536,000 | 1,657,000 | -7% |
| | | | |
| Total gross profit | $10,391,000 | $7,535,000 | 38% |
| | | | |
●
The gross profit for the ingredients segment increased due to the increased sales of the ingredient portfolio we offer, coupled with lower prices from our suppliers due to increased purchase volumes.
●
The decreased gross profit for the core standards and contract services segment is largely due to decreased sales from our regulatory consulting operations, which put a greater focus on intercompany work supporting our ingredients segment.
Operating Expenses – Sales and Marketing. Sales and Marketing Expenses consist of salaries, advertising and marketing expenses.
| | |
| | | | |
| Sales and marketing expenses: | | | |
| Ingredients | $1,197,000 | $1,112,000 | 8% |
| Core standards and contract services | 361,000 | 396,000 | -9% |
| | | | |
| Total sales and marketing expenses | $1,558,000 | $1,508,000 | 3% |
| | | | |
●
For the ingredients segment, the increase is largely due to increased marketing efforts to raise the consumer awareness for our line of proprietary ingredients.
●
For the core standards and contract services segment, the decrease is largely due to making certain operational changes as certain personnel who were previously assigned to the sales and marketing group were moved to an administrative group.
Operating Expenses – Research and Development. Research and Development Expenses consist of clinical trials and process development expenses.
| | |
| | | | |
| Research and development expenses: | | | |
| Ingredients | $2,488,000 | $892,000 | 179% |
| Core standards and contract services | 35,000 | - | - |
| | | | |
| Total research and development expenses | $2,523,000 | $892,000 | 183% |
●
For the ingredients segment, we increased our research and development efforts with a focus on NIAGEN®.
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For the core standards and contract services segment, the expense is mainly associated with exploring processes to develop certain compounds at a larger scale.
Operating Expenses – General and Administrative. General and Administrative Expenses consist of general company administration, IT, accounting and executive management expenses.
| | |
| | | | |
| | | | |
| General and administrative | $9,215,000 | $7,201,000 | 28% |
●
One of the factors that contributed to the increase in general and administrative expenses was an increase in bad debt expense. Our bad debt expense for 2016 increased to approximately $0.9 million compared to $0.4 million for 2015. In December 2016, we recorded an allowance of $0.5 million for a certain doubtful account against bad debt expenses.
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Another factor that contributed to the increase was an increase in patent maintenance expense. Our patent maintenance expense for 2016 increased to approximately $0.7 million compared to approximately $0.4 million for 2015.
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Another factor that contributed to the increase was an increase of approximately $0.5 million in expenses associated with administrative staff. We made certain operational changes as certain personnel who were previously assigned to our sales and marketing group were moved to an administrative group in 2016.
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Another factor that contributed to the increase in general and administrative expense was an increase in royalties we pay to patent holders as the sales for licensed products increased in 2016. For 2016, royalty expense increased to approximately $0.7 million, compared to approximately $0.5 million for 2015.
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Also, there were one-time expenses of approximately $0.1 million associated with the initial listing of the Company’s stock on the NASDAQ Capital Market in 2016.
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These increases in expenses were offset by the decrease in share-based compensation expense. For 2016, our share-based compensation expense decreased to approximately $1.2 million compared to approximately $2.0 million for 2015.
Nonoperating – Interest Expense, net. Interest expense consists of interest on loan payableunemployment rates and capital leases offset by interest income.
| | |
| | | | |
| | | | |
| Interest expense, net | $333,000 | $567,000 | -41% |
| | | | |
●
The decrease in interest expense was mainly related to the Term Loan Agreement dated September 29, 2014, between the Company and Hercules Technology II, L.P, which the Company drew down an initial $2.5 million on September 29, 2014 and a second $2.5 million on June 18, 2015. The Company fully repaid the loan on June 14, 2016.
Depreciation and Amortization. For the twelve-month period ended December 31, 2016, we recorded approximately $0.3 million in depreciation compared to approximately $0.3 million for the twelve-month period ended January 2, 2016. We depreciate our assets on a straight-line basis, based on the estimated useful lives of the respective assets. We amortize intangible assets using a straight-line method, generally over 10 years. For licensed patent rights, the useful lives are 10 years or the remaining term of the patents underlying licensing rights, whichever is shorter. The useful lives of subsequent milestone payments that are capitalized are the remaining useful life of the initial licensing payment that was capitalized. In the twelve-month period ended December 31, 2016, we recorded amortization on intangible assets of approximately $88,000 compared to approximately $45,000 for the twelve-month period ended January 2, 2016.
Income Taxes. At December 31, 2016 and January 2, 2016, the Company maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of 0% for 2016 and 0.2% for 2015.
Net cash used in operating activities. Net cash used in operating activities for the twelve-month period ended December 31, 2016 was approximately $2.9 million as compared to approximately $2.1 million for the twelve-month period ended January 2, 2016. Along with the net loss, an increase in trade receivables were the largest uses of cash during the twelve-month period ended December 31, 2016. Net cash used in operating activities for the twelve-month period ended January 2, 2016 largely reflects increase in inventories, trade receivables along with the net loss, as well.
We expect our operating cash flows to fluctuate significantly in future periods as a result of fluctuations in our operating results, shipment timetables, accounts receivable collections, inventory management, and the timing of our payments, among other factors.
Net cash used in investing activities. Net cash used in investing activities was approximately $1.7 million for the twelve-month period ended December 31, 2016, compared to approximately $0.6 million for the twelve-month period ended January 2, 2016. Net cash used in investing activities for the twelve-month period ended December 31, 2016 mainly consisted of purchases of leasehold improvements and equipment and intangible assets. Net cash used in investing activities for the twelve-month period ended January 2, 2016 also consisted of purchases of leasehold improvements and equipment and intangible assets.
Net cash provided by financing activities. Net cash provided by financing activities was approximately $0.8 million for the twelve-month period ended December 31, 2016, compared to approximately $4.3 million for the twelve-month period ended January 2, 2016. Net cash provided by financing activities for 2016 mainly consisted of proceeds from issuances of our common stock and warrants through a private offering to our existing stockholders and exercise of stock options, offset by principal payments on loan payable and capital leases. Net cash provided by financing activities for 2015 consisted of proceeds from loan payable and issuances of our common stock and warrants through a private offering to our existing stockholders.
Liquidity and Capital Resources
For the twelve-month periods ended December 30, 2017, December 31, 2016 and January 2, 2016, the Company has incurred losses from continuing operations of approximately $16.5 million, $3.6 million and $2.6 million, respectively. Net cash used in operating activities for the twelve-month periods ended December 30, 2017, December 31, 2016 and January 2, 2016 was approximately $9.8 million, $2.9 million and $2.1 million, respectively. The losses and the uses of cash are primarily due to expenses associated with the development and expansion of our operations. These operations have been financed through capital contributions, the issuance of common stock and warrants through private placements, and the issuance of debt.
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.uncertainty about economic stability. There can be no assurance wethat further deterioration in credit and financial markets and confidence in economic conditions will be successful in raising these additional funds. Without adequatenot occur. If equity and credit markets deteriorate, it may make any necessary debt or equity financing we may havemore difficult 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 30, 2017, the cash and cash equivalents totaled approximately $45.4 million. The Company anticipates that its current cash, cash equivalents and cash to be generated from operations will be sufficient to meet its projected operating plans through at least March 16, 2019. The Company may, however, seek additional capital prior to March 16, 2019, both to meet its projected operating plans after March 16, 2019obtain, more costly and/or to fund its longer term strategic objectives.more dilutive.
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 30, 2017 and December 31, 2016, we had no off-balance sheet arrangements other than ordinary operating leases as disclosed in the accompanying financial statements.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and other commitments as of December 30, 2017:
| | |
| | | | | | | |
| | | | | | | |
| Capital leases | $576,000 | $236,000 | $196,000 | $126,000 | $18,000 | $- |
| Operating leases | 2,093,000 | 601,000 | 590,000 | 424,000 | 340,000 | 138,000 |
| Purchase obligations | 3,571,000 | 3,489,000 | 82,000 | - | - | - |
| Total | $6,240,000 | $4,326,000 | $868,000 | $550,000 | $358,000 | $138,000 |
Capital leases. We lease equipment under capitalized lease obligations with a term of typically 4 or 5 years. We make monthly instalment payments for these leases.
Operating leases. We lease our office and research facilities in California, Colorado and Maryland under operating lease agreements that expire at various dates from September 2018 through February 2024. We make monthly payments on these leases.
Purchase obligations. We enter into purchase obligations with various vendors for goods and services that we need for our operations. The purchase obligations for goods and services include inventory, research and development, and laboratory supplies.
Critical Accounting Policies
Estimates
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.payments and deferred revenue recognition. We base our estimates on historical experience and onother various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that For a summary of our significant accounting policies, which are described inincluding the accounting policy discussed below, see Note 2 of the Financial Statements, set forth in Item 8 of this Form 10-K.
Revenue recognition: Beginning in fiscal year 2018, we adopted Financial Accounting Standards Board (FASB) Topic 606 - Revenue for Contracts from Customers which amended revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and across all industries.
The revenue standard provides a five-step framework for recognizing revenue as control of promised goods or services is transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of the revenue standard, we perform the following accounting policies involvefive step analyses: (i) identify the greatest degree of judgmentcontract; (ii) identify the performance obligations; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and complexity. Accordingly, these are the policies(v) recognize revenue when (or as) we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue recognition: The Company recognizessatisfy a performance obligation. We recognize sales and the related cost of sales atwhen the timeperformance obligations are satisfied. The performance obligations are typically satisfied upon shipment of physical goods or as the merchandise is shipped to customers or service isservices are performed when each of the following conditions have been met: an arrangement exists, delivery has occurred, there is a fixed price, and collectability is reasonably assured.over time. Discounts, returns and allowances related to sales, including an estimated reserve for the returns and allowances, are recorded as reduction of revenue.
Shipping and handling fees billed to customers and the cost
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.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles ("GAAP"). The core principle of ASU 2014-09 is to recognize revenues when promisedWhenever we determine that goods or services are transferred to customerspromised in an amount that reflectsa contract should be accounted for as a combined performance obligation over time, we determine the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required withinperiod over which the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations inwill be performed and revenue will be recognized. If we determine that the contract, estimatingperformance obligation is satisfied over time, any upfront payment received is initially recorded as deferred revenue on our consolidated balance sheets.
Revenue is then recognized utilizing the amount of variable considerationoutput method based on an estimated rate to include inallocate the transaction price and allocatingfor this performance obligation as products or services are supplied over the transaction priceduration of the contract. We believe this most appropriately depicts our performance towards complete satisfaction of the performance obligation to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented withcustomer. Certain judgments affect the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09.
The Company will adopt ASU 2014-09, effective the first day of our fiscal year 2018, usingrevenue recognition policy. For example, when utilizing the modified retrospective transition method. Under thisoutput method, we estimate total delivery volume based on our current operating plan, forecast inputs received from the Company could electcustomer for expected purchases, minimum purchase commitments by the customer and historical experience with similar customer contracts. Accordingly, we may recognize a different amount of deferred revenue over the next 12-month period if our plan changes in the future or if our customer informs us of changes to apply the cumulative effect method to either all contracts as of the date of initial application or only to contracts that are not complete as of that date. The Company elected to apply the modified retrospective method to contracts that are not complete astheir expected purchases. As of December 31, 2017. 2022 and 2021, we held deferred revenue balances of $4.0 million and $4.3 million, respectively.
We domay periodically enter into bill-and-hold arrangements upon request by certain customers according to the terms in the contract. Under the terms, the customer makes a fixed commitment to purchase our goods, however the customer delays the physical transfer of the goods until a later date. In such instances, revenue is recognized when a customer obtains control of the promised goods and we have satisfied all of our performance obligations. We consider indicators of the transfer of control, which include, but are not expectlimited to, the adoption of ASU 2014-09 tofollowing: (i) we have a material impact on our financial statements.
Inventories: Inventories are comprised of raw materials, work-in-process and finished goods. They are stated atpresent right to payment for the lower of cost, determined byasset, (ii) the first-in, first-out method, or market. The inventory oncustomer has legal title to the balance sheet is reflected net of valuation allowances. Labor and overhead has been added to inventory that was manufactured or characterized by the Company.
The Company regularly reviews inventories on hand and reduces the carrying value for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The reductionasset, (iii) we have transferred physical possession of the carrying value for slow-movingasset, (iv) the customer has the significant risks and obsolete inventory is based on current estimatesrewards of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.
Share-based compensation: Under the Company's 2017 Equity Incentive Plan, as amended, the Board of Directors may grant restricted stock or stock options to employees and non-employees. For employees, share-based compensation cost is recorded for all option grants and awards of non-vested stock based on the grant date fair valueownership of the award,asset and is recognized over(v) the periodcustomer has accepted the employee is requiredasset.
In addition, all of the following criteria in a bill-and-hold arrangement must be met to provide servicesfurther indicate a customer has obtained control of the goods: (i) the reason for the award. For non-employees, share-based compensation cost is recordedbill-and-hold arrangement must be substantive, (ii) the requested goods must be identified separately as belonging to the customer, (iii) the requested goods must be ready for all option grantsphysical transfer to the customer, and awards of non-vested stock and is remeasured over(iv) we cannot have the vesting term as earned. The expense is recognized overability to use the periodgoods or direct the non-employee is requiredgoods to provide servicesanother customer. Revenue under bill-and-hold arrangements was $1.7 million for the award.year ended December 31, 2022. There was no revenue under bill-and-hold arrangements for the year ended December 31, 2021.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 8. Financial Statements and Supplementary Data
The Company recognizes compensation expense over the requisite service period using the straight-line method for option grants without performance conditions. For stock options that have both service and performance conditions, the Company recognizes compensation expense using the graded attribution method. Compensation expense for stock options with performance conditions is recognized only for those awards expected to vest.
From time to time, the Company awards shares of its common stock to non-employees for services provided or to be provided. The fair value of the awards are measured either based on the fair market value of stock at the date of grant or the value of the services provided, based on which is more reliably measurable. Since these stock awards are fully vested and non-forfeitable, upon issuance the measurement date for the award is usually reached on the date of the award.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | | | | |
Interest Rate Risk
We may become exposed to risks associated with changes in interest rates in connection with our credit facility with Western Alliance. As of December 30, 2017, we did not have an outstanding loan payable balance, however, we established a formula based revolving credit line with Western Alliance Bank, pursuant to which we may borrow an aggregate principal amount of up to $5,000,000, subject to certain terms and conditions. If we decide to borrow from this credit line, the interest rate will be calculated at a floating rate per month equal to the greater of 3.50% per year or the Prime Rate published in the Money Rates section of the Western Edition of The Wall Street Journal, or such other rate of interest publicly announced by Lender as its Prime Rate, plus 2.50 percentage points, plus an additional 5.00 percentage points during any period that an event of default has occurred and is continuing. If the Prime Rate rises, we will incur more interest expenses. Any borrowing, interest or other fees or obligations that we owe Western Alliance will become due and payable on November 4, 2018.
Our capital lease obligations bear interest at a fixed rate and therefore have no exposure to changes in interest rates.
The Company’s cash consists of short term, highly liquid investments in money market funds managed by banks. Due to the short-term duration of our investment portfolio and the relatively low risk profile of our investments, a sudden change in interest rates would not have a material effect on either the fair market value of our portfolio, our operating results or our cash flows.
Foreign Currency Risk
All of our long-lived assets are located within the United States and we do not hold any foreign currency denominated financial instruments. Our international sales are denominated in U.S. dollars and we collect in U.S. dollars.
Effects of Inflation
We do not believe that inflation has had a material effect on our results of operations or financial condition during the periods presented.
Item 8.Index to Consolidated Financial Statements | Financial Statements and Supplementary Data |
The financial statements are set forth in the pages listed below.
REPORTREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo 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 30, 201731, 2022 and December 31, 2016,2021, the related consolidated statements of operations,, changes in stockholders’ equity and cash flows for each of the threetwo years in the period ended December 30 2017,31, 2022, and the related notes(collectively (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 30, 201731, 2022 and December 31, 2016,2021, and the results of its operations and its cash flows for each of the threetwo years in the period ended December 30, 2017,31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 30, 2017, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 15, 2018, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic 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
Critical audit matters 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 our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
Marcum llp
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2013.
2013.
New York, NY
March 15, 2018
8, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors of
ChromaDex Corporation and Subsidiaries
Consolidated Balance Sheets
Opinion on Internal Control over Financial Reporting
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands, except par values, unless otherwise indicated) |
| Assets | | | |
| Current assets | | | |
| Cash and cash equivalents, including restricted cash of $0.2 million for both periods presented | $ | 20,441 | | | $ | 28,219 | |
| Trade receivables, net of allowances of $122 and $65, respectively; Including receivables from Related Party of $3.1 million and $2.1 million, respectively. | 8,482 | | | 5,226 | |
| Inventories | 14,677 | | | 13,601 | |
| Prepaid expenses and other assets | 2,967 | | | 1,859 | |
| Total current assets | 46,567 | | | 48,905 | |
| | | |
| Leasehold improvements and equipment, net | 2,799 | | | 3,003 | |
| Intangible assets, net | 671 | | | 857 | |
| Right-of-use assets | 3,523 | | | 4,352 | |
| Other long-term assets | 497 | | | 723 | |
| Total assets | $ | 54,057 | | | $ | 57,840 | |
| Liabilities and Stockholders' Equity | | | |
| Current liabilities | | | |
| Accounts payable | $ | 9,679 | | | $ | 10,423 | |
| Accrued expenses | 7,337 | | | 6,481 | |
| Current maturities of operating lease obligations | 680 | | | 528 | |
| Current maturities of finance lease obligations | 16 | | | 20 | |
| Customer deposits | 157 | | | 161 | |
| Total current liabilities | 17,869 | | | 17,613 | |
| Deferred revenue | 3,955 | | | 4,346 | |
| Operating lease obligations, less current maturities | 3,539 | | | 4,154 | |
| Finance lease obligations, less current maturities | 22 | | | — | |
| Total liabilities | 25,385 | | | 26,113 | |
| | | |
| Commitments and Contingencies (Notes 10 and 17) | | | |
| | | |
| Stockholders' Equity | | | |
| Common stock, $0.001 par value; authorized 150,000 shares; 74,567 shares and 68,126 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively. | 74 | | | 68 | |
| Additional paid-in capital | 214,094 | | | 200,614 | |
| Accumulated deficit | (185,493) | | | (168,953) | |
| Cumulative translation adjustments | (3) | | | (2) | |
| Total stockholders' equity | 28,672 | | | 31,727 | |
| Total liabilities and stockholders' equity | $ | 54,057 | | | $ | 57,840 | |
We have audited ChromaDex Corporation's (the “Company”) internal control over financial reporting as of December 30, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), theSee accompanying notes to consolidated balance sheets as of December 30, 2017 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended of the Company and our report dated March 15, 2018 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.
/s/ Marcum LLP
Marcum llp
New York, NY
March 15, 2018
ChromaDex Corporation and Subsidiaries
Consolidated Statements of Operations
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| (In thousands, except per share data) | | | |
| Sales, net | $ | 72,050 | | | $ | 67,449 | |
| Cost of sales | 29,253 | | | 25,959 | |
| Gross profit | 42,797 | | | 41,490 | |
| | | |
| Operating expenses: | | | |
| Sales and marketing | 28,313 | | | 28,352 | |
| Research and development | 4,826 | | | 3,832 | |
| General and administrative | 28,286 | | | 36,379 | |
| Total operating expenses | 61,425 | | | 68,563 | |
| Operating loss | (18,628) | | | (27,073) | |
| | | |
| Nonoperating expenses: | | | |
| Other income, net - Employee Retention Tax Credit | 2,085 | | | — | |
| Interest income (expense), net | 3 | | | (55) | |
| Net loss | $ | (16,540) | | | $ | (27,128) | |
| | | |
| Basic and diluted loss per common share | $ | (0.24) | | | $ | (0.40) | |
| | | |
| Basic and diluted weighted average common shares outstanding | 69,729 | | | 67,185 | |
See accompanying notes to consolidated financial statements.
| ChromaDex Corporation and Subsidiaries | | |
Consolidated Balance Sheets | | |
| December 30, 2017 and December 31, 2016 | | |
| | | |
| Assets | | |
| | | |
| Current Assets | | |
| Cash | $45,388,848 | $1,642,429 |
| Trade receivables, net of allowance of $0.7 million and $1.1 million, repectively; | | |
| Receivables from Related Party: $1.0 million and $0, respectively | 5,337,868 | 5,852,030 |
| Inventories | 5,796,281 | 7,912,630 |
| Prepaid expenses and other assets | 655,321 | 311,539 |
| Current assets held for sale | - | 18,315 |
| Total current assets | 57,178,318 | 15,736,943 |
| | | |
| Leasehold Improvements and Equipment, net | 2,871,886 | 1,778,171 |
| Deposits | 271,631 | 377,532 |
| Receivable held at escrow | 750,358 | - |
| Intangible assets, net | 1,651,407 | 486,226 |
| Long-term investment, related party | - | 20,318 |
| Noncurrent assets held for sale | - | 1,352,878 |
| Total assets | $62,723,600 | $19,752,068 |
| | | |
| Liabilities and Stockholders' Equity | | |
| | | |
| Current Liabilities | | |
| Accounts payable | $3,718,407 | $5,978,288 |
| Accrued expenses | 3,645,355 | 2,170,172 |
| Current maturities of capital lease obligations | 195,533 | 255,461 |
| Customer deposits and other | 314,335 | 389,010 |
| Deferred rent, current | 114,304 | 76,219 |
| Due to officer | 100,000 | - |
| Total current liabilities | 8,087,934 | 8,869,150 |
| | | |
| Capital lease obligations, less current maturities | 310,089 | 343,589 |
| Deferred rent, less current | 491,909 | 380,205 |
| Noncurrent liabilities held for sale | - | 184,766 |
| Total liabilities | 8,889,932 | 9,777,710 |
| | | |
| Commitments and contingencies | | |
| | | |
| Stockholders' Equity | | |
| Common stock, $.001 par value; authorized 150,000,000 shares; | | |
| issued and outstanding 2017 54,696,741 shares and 2016 37,544,531 shares | 54,697 | 37,545 |
| Additional paid-in capital | 110,380,163 | 55,160,387 |
| Accumulated deficit | (56,601,192) | (45,223,574) |
| Total stockholders' equity | 53,833,668 | 9,974,358 |
| Total liabilities and stockholders' equity | $62,723,600 | $19,752,068 |
| | | |
See Notes to Consolidated Financial Statements. |
ChromaDex Corporation and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(In thousands, unless otherwise indicated)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional
Paid-in Capital | | Accumulated
Deficit | | Cumulative
Translation
Adjustments | | Total
Stockholders'
Equity |
| Shares | | Amount | | | | |
| Balance, January 1, 2021 | 61,881 | | | $ | 62 | | | $ | 158,190 | | | $ | (141,825) | | | $ | (3) | | | $ | 16,424 | |
| Issuance of common stock, net of offering costs of $0.4 million | 4,059 | | | 4 | | | 26,736 | | | | | | | 26,740 | |
| Exercise of stock options | 2,186 | | | 2 | | | 9,493 | | | — | | | — | | | 9,495 | |
| Share-based compensation | — | | | — | | | 6,195 | | | — | | | — | | | 6,195 | |
| Translation adjustment | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Net loss | — | | | — | | | — | | | (27,128) | | | | | (27,128) | |
| Balance, December 31, 2021 | 68,126 | | | $ | 68 | | | $ | 200,614 | | | $ | (168,953) | | | $ | (2) | | | $ | 31,727 | |
| Issuance of common stock, net of offering costs of $0.4 million | 6,297 | | | 6 | | | 7,741 | | | — | | | — | | | 7,747 | |
| Issuance of restricted stock | 144 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Share-based compensation | — | | | — | | | 5,739 | | | — | | | — | | | 5,739 | |
| Translation adjustment | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| Net loss | — | | | — | | | — | | | (16,540) | | | — | | | (16,540) | |
| Balance, December 31, 2022 | 74,567 | | | $ | 74 | | | $ | 214,094 | | | $ | (185,493) | | | $ | (3) | | | $ | 28,672 | |
See accompanying notes to consolidated financial statements.
| ChromaDex Corporation and Subsidiaries | | | |
Consolidated Statements of Operations | | | |
| Years Ended December 30, 2017, December 31, 2016 and January 2, 2016 | | |
| | | | |
| | | | |
| Sales, net | $21,201,482 | $21,664,648 | $17,884,886 |
| Cost of sales | 10,724,177 | 11,274,114 | 10,350,281 |
| | | | |
| Gross profit | 10,477,305 | 10,390,534 | 7,534,605 |
| | | | |
| Operating expenses: | | | |
| Sales and marketing | 4,459,224 | 1,558,213 | 1,507,868 |
| Research and development | 4,007,381 | 2,522,768 | 891,601 |
| General and administrative | 17,641,889 | 9,214,763 | 7,201,231 |
| Other | 745,773 | - | - |
| Operating expenses | 26,854,267 | 13,295,744 | 9,600,700 |
| | | | |
| Operating loss | (16,376,962) | (2,905,210) | (2,066,095) |
| | | | |
| Nonoperating income (expense): | | | |
| Interest expense, net | (152,784) | (333,286) | (566,917) |
| Loss on debt extinguishment | - | (313,099) | - |
| Nonoperating expenses | (152,784) | (646,385) | (566,917) |
| | | | |
| Loss before income taxes | (16,529,746) | (3,551,595) | (2,633,012) |
| Provision for income taxes | - | - | (4,527) |
| | | | |
| Loss from continuing operations | (16,529,746) | (3,551,595) | (2,637,539) |
| | | | |
| Income (loss) from discontinued operations | (315,140) | 623,410 | (133,528) |
| Gain on sale of discontinued operations | 5,467,268 | - | - |
| | | | |
| Income (loss) from discontinued operations, net | 5,152,128 | 623,410 | (133,528) |
| | | | |
| Net loss | $(11,377,618) | $(2,928,185) | $(2,771,067) |
| | | | |
| Basic and diluted earnings (loss) per common share: | | | |
| Loss from continuing operations | $(0.37) | $(0.10) | $(0.07) |
| Earnings (loss) from discontinued operations | $0.11 | $0.02 | $(0.01) |
| | | | |
| Basic and diluted loss per common share | $(0.26) | $(0.08) | $(0.08) |
| | | | |
| Basic and diluted weighted average common shares outstanding | 44,598,879 | 37,294,321 | 35,877,341 |
| | | | |
See Notes to Consolidated Financial Statements. |
ChromaDex Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands, unless otherwise indicated)
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| |
| Cash Flows From Operating Activities | | | |
| Net loss | $ | (16,540) | | | $ | (27,128) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation of leasehold improvements and equipment | 869 | | | 890 | |
| Amortization of intangibles | 186 | | | 225 | |
| Amortization of right of use assets | 829 | | | 511 | |
| Share-based compensation expense | 5,739 | | | 6,195 | |
| Loss on disposal of leasehold improvements and equipment | 7 | | | — | |
| Provision for doubtful trade receivables | 63 | | | 46 | |
| | | |
| | | |
| Non-cash financing costs | 67 | | | 108 | |
| Changes in operating assets and liabilities: | | | |
| Trade receivables | (3,319) | | | (2,578) | |
| Inventories | (1,076) | | | (1,918) | |
| Implementation costs for cloud computing arrangement | (304) | | | (278) | |
| Prepaid expenses and other assets | (872) | | | (810) | |
| Accounts payable | (744) | | | 978 | |
| Accrued expenses | 856 | | | 348 | |
| Deferred revenue | (391) | | | (95) | |
| Customer deposits and other | (5) | | | (116) | |
| Operating lease liabilities | (463) | | | (541) | |
| Net cash used in operating activities | (15,098) | | | (24,163) | |
| Cash Flows From Investing Activities | | | |
| Purchases of leasehold improvements and equipment | (334) | | | (409) | |
| | | |
| | | |
| Net cash used in investing activities | (334) | | | (409) | |
| Cash Flows From Financing Activities | | | |
| Proceeds from issuance of common stock, net | 7,747 | | | 26,740 | |
| Proceeds from exercise of stock options | — | | | 9,495 | |
| Payment of debt issuance costs | (77) | | | (110) | |
| Principal payments on finance leases | (16) | | | (31) | |
| Net cash provided by financing activities | 7,654 | | | 36,094 | |
| | | |
| Net (decrease) increase in cash and cash equivalents | (7,778) | | | 11,522 | |
| Cash and cash equivalents, including restricted cash of $0.2 million for both 2022 and 2021 - beginning of year | 28,219 | | | 16,697 | |
| Cash and cash equivalents, including restricted cash of $0.2 million for both 2022 and 2021 - end of year | $ | 20,441 | | | $ | 28,219 | |
| | | |
| Supplemental Disclosures of Cash Flow Information | | | |
| Cash payments for interest on finance leases | $ | 1 | | | $ | 1 | |
| Cash payments for principal on operating lease liabilities | $ | 507 | | | $ | 541 | |
| Supplemental Schedule of Noncash Operating Activity | | | |
| Right-of-use assets and operating lease obligations incurred for entering into lease amendment | $ | — | | | $ | 3,637 | |
| Supplemental Schedule of Noncash Investing Activity | | | |
| Financing lease obligation incurred for computer equipment and software | $ | 34 | | | $ | — | |
| | | |
| | | |
See accompanying notes to consolidated financial statements.
| ChromaDex Corporation and Subsidiaries | | | | | |
Consolidated Statement of Stockholders' Equity | | | | | |
| Years Ended December 30, 2017, December 31, 2016 and January 2, 2016 | | | |
| | | | | | |
| | | | | |
| | | | | | |
| | | | | | |
| Balance, January 3, 2015 | 35,090,352 | 35,090 | 43,487,623 | (39,524,322) | 3,998,391 |
| | | | | | |
| Issuance of common stock, net of | | | | | |
| offering costs of $25,000 | 533,334 | 534 | 1,974,359 | - | 1,974,893 |
| | | | | | |
| Exercise of stock options | 40,236 | 40 | 94,806 | - | 94,846 |
| | | | | | |
| Vested restricted stock | 228,000 | 228 | (228) | - | - |
| | | | | | |
| Share-based compensation | 111,667 | 112 | 1,977,499 | - | 1,977,611 |
| | | | | | |
| Net loss | - | - | - | (2,771,067) | (2,771,067) |
| | | | | | |
| Balance, January 2, 2016 | 36,003,589 | 36,004 | 47,534,059 | (42,295,389) | 5,274,674 |
| | | | | | |
| 1 for 3 reverse stock split, isssuance | | | | | |
| due to fractional shares round up | 1,632 | 2 | (2) | - | - |
| | | | | | |
| Issuance of common stock, net of | | | | | |
| offering costs of $33,000 | 1,245,227 | 1,245 | 5,716,230 | - | 5,717,475 |
| | | | | | |
| Exercise of stock options | 280,086 | 280 | 716,332 | - | 716,612 |
| | | | | | |
| Vested restricted stock | 13,997 | 14 | (14) | - | - |
| | | | | | |
| Share-based compensation | - | - | 1,193,782 | - | 1,193,782 |
| | | | | | |
| Net loss | - | - | - | (2,928,185) | (2,928,185) |
| | | | | | |
| Balance, December 31, 2016 | 37,544,531 | $37,545 | $55,160,387 | $(45,223,574) | $9,974,358 |
| | | | | | |
| Issuance of common stock, net of | | | | | |
| offering costs of $1,420,000 | 15,592,788 | 15,593 | 47,578,626 | - | 47,594,219 |
| | | | | | |
| Exercise of stock options | 884,754 | 885 | 3,037,075 | - | 3,037,960 |
| | | | | | |
| Vested restricted stock | 674,668 | 674 | (674) | - | - |
| | | | | | |
| Share-based compensation | | | 4,604,749 | - | 4,604,749 |
| | | | | | |
| Net loss | - | - | - | (11,377,618) | (11,377,618) |
| | | | | | |
| Balance, December 30, 2017 | 54,696,741 | $54,697 | $110,380,163 | $(56,601,192) | $53,833,668 |
| | | | | | |
| See Notes to Consolidated Financial Statements. | | | | | |
| ChromaDex Corporation and Subsidiaries | | | |
Consolidated Statements of Cash Flows | | | |
| Years Ended December 30, 2017, December 31, 2016 and January 2, 2016 | | | |
| | | | |
| | | | |
| Cash Flows From Operating Activities | | | |
| Net loss | $(11,377,618) | $(2,928,185) | $(2,771,067) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation of leasehold improvements and equipment | 509,933 | 331,734 | 285,536 |
| Amortization of intangibles | 206,208 | 87,826 | 45,014 |
| Share-based compensation expense | 4,604,749 | 1,193,782 | 1,977,611 |
| Allowance for doubtful trade receivables | (411,475) | 713,122 | 329,844 |
| Gain from disposal of assets | (5,467,268) | - | - |
| Loss from disposal of equipment | 4,649 | 7,114 | 19,643 |
| Loss from impairment of intangibles | - | - | 19,495 |
| Loss on debt extinguishment | - | 313,099 | - |
| Non-cash financing costs | 120,759 | 110,161 | 188,442 |
| Changes in operating assets and liabilities: | | | |
| Trade receivables | 937,093 | (4,114,561) | (873,726) |
| Inventories | 2,177,263 | 240,851 | (4,439,458) |
| Prepaid expenses and other assets | (296,312) | (133,855) | (82,124) |
| Accounts payable | (2,363,653) | (245,670) | 2,772,350 |
| Accrued expenses | 1,471,976 | 867,307 | 449,180 |
| Customer deposits and other | (67,855) | 117,008 | 37,567 |
| Deferred rent | 179,873 | 503,671 | (69,445) |
| Due to officer | (32,500) | - | - |
| Net cash used in operating activities | (9,804,178) | (2,936,596) | (2,111,138) |
| | | | |
| Cash Flows From Investing Activities | | | |
| Proceeds from disposal of assets, net of transaction costs | 5,953,390 | - | - |
| Purchases of leasehold improvements and equipment | (1,167,506) | (1,504,922) | (525,231) |
| Purchases of intangible assets | (183,958) | (220,000) | (122,500) |
| Net cash provided by (used in) investing activities | 4,601,926 | (1,724,922) | (647,731) |
| | | | |
| Cash Flows From Financing Activities | | | |
| Proceeds from issuance of common stock, net of issuance costs | 46,594,216 | 5,717,474 | 1,974,893 |
| Proceeds from exercise of stock options | 3,037,960 | 716,612 | 94,846 |
| Proceeds from loan payable | - | - | 2,500,000 |
| Payment of debt issuance costs | (75,178) | (176,836) | (15,000) |
| Principal payment on loan payable | - | (5,000,000) | - |
| Cash paid for debt extinguishment costs | - | (281,092) | - |
| Principal payments on capital leases | (608,327) | (221,883) | (210,948) |
| Net cash provided by financing activities | 48,948,671 | 754,275 | 4,343,791 |
| | | | |
| Net increase (decrease) in cash | 43,746,419 | (3,907,243) | 1,584,922 |
| | | | |
| Cash Beginning of Year | 1,642,429 | 5,549,672 | 3,964,750 |
| | | | |
| Cash Ending of Year | $45,388,848 | $1,642,429 | $5,549,672 |
| | | | |
| Supplemental Disclosures of Cash Flow Information | | | |
| Cash payments for interest | $57,024 | $261,738 | $427,591 |
| | | | |
| Supplemental Schedule of Noncash Investing Activity | | | |
| Noncash consideration transferred for the acquisition of Healthspan Research LLC | $1,187,430 | $- | $- |
| Capital lease obligation incurred for the purchase of equipment | $514,899 | $156,655 | $303,933 |
| Receivable from disposal of assets held at escrow | $750,000 | $- | $- |
| Inventory supplied to Healthspan Research, LLC for equity interest, at cost | $- | $20,318 | $- |
| Retirement of fully depreciated equipment - cost | $57,424 | $90,803 | $121,213 |
| Retirement of fully depreciated equipment - accumulated depreciation | $(57,424) | $(90,803) | $(121,213) |
| | | | |
See Notes to Consolidated Financial Statements. |
| | | | | | | | |
| Nature of BusinessChromaDex Corporation and LiquiditySubsidiaries
Notes to the Consolidated Financial Statements | |
Note 1. Nature of business: Business
ChromaDex Corporation and its wholly owned subsidiaries, ChromaDex, Inc., Healthspan Research, LLCChromaDex International, Inc., ChromaDex Analytics, Inc., ChromaDex Asia Limited, Asia Pacific Scientific, Inc., ChromaDex Europa B.V. and ChromaDex Analytics, Inc.Sağlik Ürünleri Anonim Şirketi (collectively, “ChromaDex” or 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+), an integrated, global nutraceutical company devotedessential coenzyme that is a key regulator of cellular metabolism and is found in every cell of the human body. NAD+ levels in humans have been shown to improvingdecline with age, among other factors, and may be increased through supplementation with NAD+ precursors.
ChromaDex is the way people age. The Company's scientists partner with leading universities and research institutions worldwide to uncoverinnovator behind the full potential of NAD and identify and develop novel, science-based ingredients. ItsNAD+ precursor nicotinamide riboside (NR), commercialized as the flagship ingredient NIAGEN® nicotinamideNiagen®. Nicotinamide riboside sold directly to consumers as TRU NIAGEN®, is backed with clinical and scientific research, as well as intellectual property protection.other NAD+ precursors are protected by ChromaDex’s patent and/or licensed rights portfolio. The Company also has core standardsdelivers Niagen® as the sole active ingredient in its consumer product Tru Niagen®. The Company further develops and contract services segment, which focuses oncommercializes proprietary-based ingredient technologies and supplies these ingredients as raw materials to the manufacturers of consumer products. Additionally, the Company offers natural product fine chemicals, (knownknown as “phytochemicals”), chemistry services,phytochemicals, and regulatory consulting.related research and development services.
Liquidity: The Company has incurred a loss from continuing operationsNote 2. Summary of approximately $16.5 million and a net loss of approximately $11.4 million for the year ended December 30, 2017, and net losses of approximately $2.9 million and $2.8 million for the years ended December 31, 2016 and January 2, 2016, respectively. As of December 30, 2017, the cash and cash equivalents totaled approximately $45.4 million.Significant Accounting Policies
The Company anticipates that its current cash, cash equivalents and cash to be generated from operations will be sufficient to meet its projected operating plans through at least March 16, 2019. The Company may, however, seek additional capital prior to March 16, 2019, both to meet its projected operating plans after March 16, 2019 and/or to fund its longer term strategic objectives.
Note 2. | Significant Accounting Policies |
Significant accounting policies are as follows:
Basis of presentation: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 years 2017, 2016 and 2015 ended on the Saturday closest to December 31.
Change in Fiscal Year: On January 25, 2018, the Board of Directors of ChromaDex Corporation approved a resolution to change the Company’s fiscal year from a 52/53-week fiscal year that ends on the Saturday closest to December 31 to a calendar year. As such, the Company’s 2018 fiscal year will be extended from December 29, 2018 to December 31, 2018, with subsequent fiscal years beginning on January 1 and ending on December 31 of each year. Effective fiscal year 2018, the Company’s quarterly results will be for the periods ending March 31, June 30, September 30 and December 31.
Adopted Accounting Pronouncements Fiscal 2017: In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The Company early adopted the amendments in this ASU effective as of January 1, 2017. On March 12, 2017, the Company acquired all the outstanding equity interests of Healthspan Research, LLC ("Healthspan") pursuant to a Membership Interest Purchase Agreement by and among (i) Robert Fried, Jeffrey Allen and Dr. Charles Brenner (the “Sellers”) and (ii) ChromaDex Corporation. Under ASU 2017-01, this transaction was treated as an acquisition of assets, rather than a business.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting to simplify the accounting for stock compensation. It focuses on income tax accounting, award classification, estimating forfeitures, and cash flow presentation. The Company adopted the amendments in this ASU effective as of January 1, 2017. The adoption of ASU 2016-09 did not have a material effect on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory, which requires that inventories, other than those accounted for under Last-In-First-Out, will be reported at the lower of cost or net realizable value. Net realizable value is the estimated selling price less costs of completion, disposal and transportation. The Company adopted the amendments in this ASU effective as of January 1, 2017. The adoption of ASU 2015-11 did not have a material effect on our consolidated financial statements.
Use of accounting estimatesAccounting 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 recognitionRecognition: The Company recognizes sales and the related cost of sales atwhen the timeperformance obligations are satisfied. The performance obligations are typically satisfied upon shipment of physical goods or as the merchandise is shippedservices are performed over time. In addition to customers or service is performed, when eachthe satisfaction of the performance obligations, the following conditions have been met:are required for revenue recognition: an arrangement exists, delivery has occurred, there is a fixed price, and collectability is reasonably assured. Discounts, returns and allowances related to sales, including an estimated reserve for the returns and allowances, are recorded as reduction of revenue.
Whenever the Company determines that goods or services promised in a contract should be accounted for as a combined performance obligation over time, the Company determines the period over which the performance obligations will be performed and revenue will be recognized. If the Company determines that the performance obligation is satisfied over time, any upfront payment received is initially recorded as deferred revenue on its consolidated balance sheets.
Revenue is then recognized utilizing the output method based on an estimated rate to allocate the transaction price for this performance obligation as products are supplied over the duration of the contract. Certain judgments affect the application of the Company’s revenue recognition policy. For example, when utilizing the output method, the Company estimates total delivery volume based on the Company’s current operating plan, forecast inputs for expected purchases received from the customer, minimum purchase commitments by the customer and historical experience with similar customer contracts. Accordingly, the Company may recognize a different amount of deferred revenue over the next 12-month period if the Company’s plan changes in the future or if the customer informs the Company of changes to their expected purchases. As of December 31, 2022 and 2021, the Company held deferred revenue balances of $4.0 million and $4.3 million, respectively.
The Company may periodically enter into bill-and-hold arrangements upon request by certain customers according to the terms in the contract. Under the terms, the customer makes a fixed commitment to purchase the Company’s goods, however the customer delays the physical transfer of the goods until a later date. In such instances, revenue is recognized when a customer obtains control of the promised goods and the Company has satisfied all of its performance obligations. The Company considers indicators of the transfer of control, which include, but are not limited to, the following: (i) the Company has a present right to payment for the asset, (ii) the customer has legal title to the asset, (iii) the Company has transferred physical possession of the asset, (iv) the customer has the significant risks and rewards of ownership of the asset and (v) the customer has accepted the asset.
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
In addition, all of the following criteria in a bill-and-hold arrangement must be met to further indicate a customer has obtained control of the goods: (i) the reason for the bill-and-hold arrangement must be substantive, (ii) the requested goods must be identified separately as belonging to the customer, (iii) the requested goods must be ready for physical transfer to the customer, and (iv) the Company cannot have the ability to use the goods or direct the goods to another customer. Revenue under bill-and-hold arrangements totaled $1.7 million for the year ended December 31, 2022. The company recognized no revenue under bill-and-hold arrangements during the year ended December 31, 2021.
Net sales include the revenue related to shipping and handling charges billed to customers. The related costs associated with shipping and handling is included as a component of cost of goods sold.
Shipping and handling fees billed to customers and the cost of shipping and handling fees billed to customers are included in net sales. Shipping and handling fees billed to customers and the cost of shipping and handling fees billed to customerssales for the years ending December 30, 2017, December 31, 2016 and January 2, 2016periods indicated are as follows:
| | | | |
| Shipping and handling fees billed | $137,000 | $110,000 | $113,000 |
| Cost of shipping and handling fees billed | $185,000 | $108,000 | $112,000 |
Shipping and handling fees not billed to customers are recognized as cost of sales.
| | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2022 | | 2021 |
| Shipping and handling fees billed | $ | 428 | | | $ | 336 | |
Taxes collected from customers and remitted to governmental authorities are excluded from revenue, which is presented on a net basis in the statement of operations.
Cash, Cash Equivalents and Restricted Cash: All highly liquid interest-bearing investments with short-terms are classified as cash equivalents. The Company’s investments primarily include investments in money market funds managed by banks with maturities of three months or less when purchased. The carrying value of these cash equivalents approximate their fair value.
Cash concentration: The Company maintains itsclassifies cash as restricted if the withdrawal or usage is restricted for more than three months. For each of the years ended December 31, 2022 and 2021, there was $0.2 million restricted cash held as collateral associated with letters of credit for the Company’s office space in one bank.Los Angeles, California. The Los Angeles, California office lease currently expires in March 2027.
Trade accounts receivable,Receivables, net: Trade accounts receivablereceivables 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 30, 2017 and December 31, 2016 are as follows:
| | | |
| Allowances Related to | | |
| Customer C | $500,000 | $800,000 |
| Customer E | - | 198,000 |
| Other Allowances | 169,000 | 83,000 |
| | $669,000 | $1,081,000 |
Trade accounts receivablereceivables are written off when deemed uncollectible. Recoveries of trade accounts receivablereceivables previously written off are recorded when received.
Credit riskRisk: Financial instruments that potentially subject usexpose the Company to concentrationsconcentration of credit risk consist primarily of cash and cash equivalents and trade receivables. For cashCash and cash equivalents, the Company has them either in a formconsist of bank deposits or highly liquid investment-grade debt instruments in investment-gradewith an original maturity of three months or less when purchased pursuant to the Company'sCompany’s investment policy. AccountsThe Company maintains several bank accounts for its operations primarily at eachthree financial institutions in the U.S. and one financial institution in Hong Kong. The Company’s U.S. bank accounts are insured by the Federal Deposit Insurance Corporation ("FDIC")(FDIC) up to $250,000. As of December 30, 2017, we held a total deposit of approximately $45.4 million with one institution which exceeded$250,000 at each institution. Management believes the FDIC limit. We, however, believe we have very littleCompany is not exposed to significant credit risk exposure for our cash and cash equivalents. Ourdue to the financial position of the depository institutions in which these deposits are held. The Company’s trade receivables are derived from sales to ourits customers. We assessThe Company assesses credit risk of ourits customers through quantitative and qualitative analysis. From this analysis, we establishthe Company establishes credit limits and managemanages the risk exposure. We,The Company, however, may from time-to-time incur credit losses due to bankruptcy or other failure of the customerfailures from its customers to pay.
Inventories: Inventories are comprised of primarilywork-in-process and finished goods. TheyInventories 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. The amounts of major classes of inventory for the periods ended December 30, 2017 and December 31, 2016 are as follows:
| | | |
| Bulk ingredients | $4,159,000 | $7,044,000 |
| Reference standards | 1,027,000 | 1,033,000 |
| Consumer Products - Finished Goods | 503,000 | - |
| Consumer Products - Work in Process | 249,000 | - |
| | 5,938,000 | 8,077,000 |
| Less valuation allowance | 142,000 | 164,000 |
| | $5,796,000 | $7,913,000 |
OurCompany’s 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.
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
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 net:are comprised of leasehold improvements, laboratory equipment, furniture and fixtures, computer equipment, construction in progress and implementations costs for cloud computing arrangements. 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 equipmentImplementation costs related to a cloud computing arrangement are comprised of leasehold improvements, laboratory equipment, furniture and fixtures, and computer equipment.deferred or expensed as incurred, in accordance with the Accounting Standards Update (ASU) 2018-15. Depreciation on equipment under capitalfinance lease is included with depreciation on owned assets. Maintenance and repairs are charged to operating expenses as they are incurred. Improvements and betterments, which extend the lives of the assets, are capitalized.
Long-lived assets are reviewed for impairment on a periodic basis and when changes in circumstances indicate the possibility that the carrying amount may not be recoverable. Long-lived assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the forecast of undiscounted future cash flows is less than the carrying amount of the assets, an impairment charge would be recognized to reduce the carrying value of the assets to fair value. If a possible impairment is identified, the asset group’s fair value is measured relying primarily on a discounted cash flow methodology.
Customer deposits and otherDeposits: Customer deposits and other represent cash received from customers in advance of product shipment or delivery of services.
Income taxesTaxes: 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 notmore-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 20142019 to 2017,2022, which statutes expire in 20182023 to 2021,2026, 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 30, 2017,31, 2022, the Company has no liability for unrecognized tax benefits.
Research and development costs:Development Costs: Research and development costs consist of direct and indirect costs associated with theclinical trials, product development of the Company’s technologies.and process development expenses. 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 periodsyears ended December 30, 2017, December 31, 20162022 and January 2, 20162021 were approximately $1,914,000, $58,000$11.4 million and $104,000,$12.5 million, respectively.
Share-based compensationCompensation: The Company has angrants equity awards to recipients through its 2017 Equity Incentive Plan, underas amended (the “2017 Plan”), which was approved by stockholders and the Board of Directors. Under the 2017 Plan, the Board of Directors may grant restricted stock or stock options to employees and non-employees. ForThe accounting treatment for share-based payments to employees and non-employees is substantially equivalent. The Company accounts for all share-based compensation cost is recorded for all option grants and awards of non-vested stock based oncosts under the grant date fair value of the award, and is recognized over the period the employee is required to provide services for the award. For non-employees, share-based compensation cost is recorded for all option grants and awards of non-vested stock and is remeasured over the vesting term as earned. The expense is recognized over the period the non-employee is required to provide services for the award.method.
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
The fair value of the Company’s stock options is estimated at the date of grant using the Black-Scholes based option valuation model. The volatility assumption is based on the historical volatility of the Company's common stock. The dividend yield assumption is based on the Company’s history and expectation of future dividend payouts on the common stock. The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term. For the expected term, the Company uses SEC Staff Accounting Bulletin No. 107 simplified method since most of the options granted werefor “plain vanilla” options with following characteristics: (i) the share options are granted at the market price on the grant date; (ii) exercisability is conditional on performing service through the vesting date on most options; (iii) 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.
The fair-value of restricted stock unit awards is determined at the grant date and is based on the market price on the grant date.
TheFor option grants and restricted stock unit awards without performance conditions, the Company recognizes compensation expense over the requisite servicevesting period usingratably, recognizing expense for each tranche of each grant starting on the straight-line method for option grants without performance conditions.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.
Effective January 1, 2017, the The Company made an election to recognizerecognizes forfeitures when they occur as a result of the adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting to simplify the accounting for stock compensation.occur.
From time to time, the Company awards shares of its common stock to non-employees for services provided or to be provided. The fair value of the awards are measured either based on the fair market value of stock at the date of grant or the value of the services provided, based on which is more reliably measureable. Since these stock awards are fully vested and non-forfeitable, upon issuance the measurement date for the award is usually reached on the date of the award.
Fair Value Measurement: The Company follows the provisions of the accounting standard which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fairFair value is defined as the pricemeasurements are based on a three-tier hierarchy 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 maximizesprioritizes 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:inputs. These tiers include:
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.
As of December 31, 2022 and 2021, the Company did not have any Level 2 or Level 3 assets or liabilities.
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:Accounting Standards Recently Issued but Not Yet Adopted by the Company: In May 2014,June 2016, the FASBFinancial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles ("GAAP").(ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The core principle of ASU 2014-09standard’s main goal is to recognize revenuesimprove 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 promised goods or services are transferreda 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 customers in an amount that reflects the consideration that is expected to be received for those goods or services.financial assets measured at amortized cost; and (ii) available-for-sale debt securities impairment model (Subtopic 326-30). ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-092016-13 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09.
The Company will adopt ASU 2014-09, effective the first day of our fiscal year 2018, using the modified retrospective transition method. Under this method, the Company could elect to apply the cumulative effect method to either all contracts as of the date of initial application or only to contracts that are not complete as of that date. The Company elected to apply the modified retrospective method to contracts that are not complete as of the first day of our fiscal year 2018. In 2017, approximately $19.7 million of the Company's total revenue of $21.2 million, or 93% of the total revenue, was as a result of shipping physical goods to the customers. For such revenue streams which we ship physical goods, we believe that there will be a minimal impact compared to our current accounting policies as the duration of the contract term is short and it ends when control of the goods transfers to the customer. We also have a revenue stream which we provide regulatory consulting services to our clients. In 2017, our revenue from this stream was approximately $0.7 million, or 3% of the total revenue. For some of these services, we are currently recognizing revenue based on achievements of milestones as prescribed in the contracts with the customers. ASU 2014-09 states that an entity should recognize revenue over time by measuring the progress toward complete satisfaction of the performance obligation. This revenue stream will be impacted by the adoption of ASU 2014-09.
We have begun the implementation process of adopting ASU 2014-09 and we do not believe there are any significant implementation matters that have not yet been addressed. We do not expect the adoption of ASU 2014-09 to have a material impact on our financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Public businesspublic entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018,2019, including interim periods within those fiscal years. Early applicationPublic entities that qualify as a smaller reporting company can elect to defer compliance effective for fiscal years beginning after December 15, 2022. The Company is permitted for all public business entities and all nonpublic business entities upon issuance. We are currently evaluating the impact of our pending adoptionASU 2016-13 and anticipates there will be no material impact on the Company's financial position, results of ASU 2016-02operations and liquidity.
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
Note 3. Liquidity
Evaluation of Ability to Maintain Current Level of Operations
In connection with the preparation of these financial statements for the year ended December 31, 2022, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to meet its obligations as they became due over the next twelve months from the date of issuance of these financial statements for the fourth quarter of 2022. Management assessed that there were such conditions and events, including a history of recurring operating losses, negative cash flows from operating activities and inflationary pressures and the continued impact of the COVID-19 pandemic. For the year ended December 31, 2022, the Company incurred a net loss of approximately $16.5 million and used net cash in operating activities of $15.1 million. As of December 31, 2022, the Company had unrestricted cash and cash equivalents of $20.3 million which consists of bank deposits or highly liquid investment-grade debt instruments with an original maturity of three months or less.
Management evaluated these conditions and anticipates that its current unrestricted cash and cash equivalents and cash to be generated from net sales will be sufficient to meet its financial obligations as they become due over at least the next twelve months from the issuance date of these financial statements. The Company may, however, seek additional capital within the next twelve months, both to fund its projected operating plans after the next twelve months and/or to fund the Company’s longer-term strategic objectives.
The Company has an available line of credit with Western Alliance Bank for up to $10.0 million, subject to certain terms and conditions which as of December 31, 2022 allows for $6.1 million of borrowing. There are no outstanding borrowings as of December 31, 2022. In June 2020, the Company filed a $125 million registration statement on our consolidated financial statements.Form S-3 with the SEC, utilizing a “shelf” registration process. Under this shelf registration process, the Company 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. (ATM Facility). As of December 31, 2022, approximately $47.8 million remains available under the ATM Facility. The Company’s potential use of the ATM facility is subject to the satisfaction of various conditions in the ATM Facility agreement as well as market conditions. As a result, the Company’s ability to rely on the ATM Facility to raise liquidity is limited to a material extent.
Note 3. | 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 30, 2017, December 31, 2016 and January 2, 2016.periods indicated.
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands, except per share data) | 2022 | | 2021 |
| | | |
| Net loss | $ | (16,540) | | | $ | (27,128) | |
| | | |
| Basic and diluted loss per common share | $ | (0.24) | | | $ | (0.40) | |
| | | |
| Basic and diluted weighted average common shares outstanding (1): | 69,729 | | | 67,185 | |
| | | |
| Potentially dilutive securities (2): | | | |
| Stock options | 10,438 | | | 10,536 | |
| Restricted stock units | 650 | | | 115 | |
| | |
| | | | |
| | | | |
| Net loss | $(11,377,618) | $(2,928,185) | $(2,771,067) |
| | | | |
| Basic and diluted loss per common share | $(0.26) | $(0.08) | $(0.08) |
| | | | |
| Basic and diluted weighted average common shares outstanding (1): | 44,598,879 | 37,294,321 | 35,877,341 |
| | | | |
| Potentially dilutive securities (2): | | | |
| Stock options | 6,534,167 | 5,210,334 | 5,244,918 |
| Warrants | 470,444 | 470,444 | 423,007 |
| Convertible debt | - | - | 257,798 |
| | | |
(1) Includes approximately 0.5 million, 0.4 million and 0.4 million nonvested restricted stock | |
for the years 2017, 2016 and 2015, respectively, which are participating securities that feature | |
| voting and dividend rights. | | | |
| | | | |
(2) Excluded from the computation of loss per share as their impact is antidilutive. | | |
Note 4.
| Intangible Assets |
Intangible assets consisted of the following:
| | | | Weighted Average Total Amortization Period |
| | | | |
| Healthspan Research LLC Acquisition (See Note 9) | $1,346,000 | $-
| 10 years
|
| License agreements and other | 1,494,000 | 1,469,000 | 9 years
|
| Less accumulated depreciation | (1,189,000) | (983,000) | |
| | $1,651,000 | $486,000 | |
Amortization expenses on amortizable intangible assets included in the consolidated statement of operationsrestricted stock for the years ended December 30, 2017,31, 2022 and 2021 which are participating securities that feature voting and dividend rights.
(2) Excluded from the computation of loss per share as their impact is antidilutive.
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
Note 5. Business Segments and Geographical Distribution
The Company has the following three reportable segments for the years ended December 31, 20162022 and January 2, 20162021:
•Consumer Products segment: provides finished dietary supplement products that contain the Company's proprietary ingredients directly to consumers as well as to distributors;
•Ingredients segment: develops and commercializes proprietary-based ingredient technologies and supplies these ingredients as raw materials to the manufacturers of consumer products; and
•Analytical Reference Standards and Services segment: offers the supply of phytochemical reference standards and other research and development services.
The Company’s reportable segments are significant operating segments that offer differentiated services. This structure reflects the Company’s current operational and financial management and provides the best structure to maximize the Company's objectives and investment strategy, while maintaining financial discipline. The Company's Chief Executive Officer, who is its chief operating decision maker (CODM), reviews financial information for each operating segment to evaluate performance and allocate resources. The Company evaluates performance and allocates resources based on reviewing gross margin by reportable segment. The Company's CODM does not review assets by segment in his evaluation and therefore assets by segment are not disclosed below. There are no intersegment sales that require elimination. The “Corporate and other” classification includes corporate items not allocated by the Company to each reportable segment.
The following tables set forth financial information by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Consumer Products segment | | Ingredients segment | | Analytical Reference Standards and Services segment | | Corporate and other | | Total |
| | | | |
| (In thousands) | | | | | |
| Net sales | | $ | 60,110 | | | $ | 8,736 | | | $ | 3,204 | | | $ | — | | | $ | 72,050 | |
| Cost of sales | | 21,726 | | | 4,465 | | | 3,062 | | | — | | | 29,253 | |
| Gross profit | | 38,384 | | | 4,271 | | | 142 | | | — | | | 42,797 | |
| Operating expenses: | | | | | | | | | | |
| Sales and marketing | | 27,661 | | | 51 | | | 601 | | | — | | | 28,313 | |
| Research and development | | 4,214 | | | 612 | | | — | | | — | | | 4,826 | |
| General and administrative | | — | | | — | | | — | | | 28,286 | | | 28,286 | |
| Operating expenses | | 31,875 | | | 663 | | | 601 | | | 28,286 | | | 61,425 | |
| | | | | | | | | | |
| Operating income (loss) | | $ | 6,509 | | | $ | 3,608 | | | $ | (459) | | | $ | (28,286) | | | $ | (18,628) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | Consumer Products segment | | Ingredients segment | | Analytical Reference Standards and Services segment | | Corporate and other | | Total |
| | | | |
| (In thousands) | | | | | |
| Net sales | | $ | 56,705 | | | $ | 7,407 | | | $ | 3,337 | | | $ | — | | | $ | 67,449 | |
| Cost of sales | | 19,864 | | | 3,233 | | | 2,862 | | | — | | | 25,959 | |
| Gross profit | | 36,841 | | | 4,174 | | | 475 | | | — | | | 41,490 | |
| Operating expenses: | | | | | | | | | | |
| Sales and marketing | | 27,821 | | | 46 | | | 485 | | | — | | | 28,352 | |
| Research and development | | 3,427 | | | 405 | | | — | | | — | | | 3,832 | |
| General and administrative | | — | | | — | | | — | | | 36,379 | | | 36,379 | |
| Operating expenses | | 31,248 | | | 451 | | | 485 | | | 36,379 | | | 68,563 | |
| | | | | | | | | | |
| Operating income (loss) | | $ | 5,593 | | | $ | 3,723 | | | $ | (10) | | | $ | (36,379) | | | $ | (27,073) | |
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
Disaggregation of revenue
The Company disaggregates its revenue from contracts with customers by type of goods or services for each of its segments, as the Company believes it best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors. Disaggregated revenues are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Consumer
Products
Segment | | Ingredients
Segment | | Analytical Reference
Standards and Services Segment | | Total |
| (In thousands) | | | | |
| Tru Niagen®, Consumer Product | | $ | 60,110 | | | $ | — | | | $ | — | | | $ | 60,110 | |
| Niagen® Ingredient | | — | | | 8,280 | | | — | | | 8,280 | |
| Subtotal Niagen® Related | | 60,110 | | | 8,280 | | | — | | | 68,390 | |
| | | | | | | | |
| Other Ingredients | | — | | | 456 | | | — | | | 456 | |
| Reference Standards | | — | | | — | | | 3,081 | | | 3,081 | |
| Consulting and Other | | — | | | — | | | 123 | | | 123 | |
| Subtotal Other Goods and Services | | — | | | 456 | | | 3,204 | | | 3,660 | |
| | | | | | | | |
| Total Net Sales | | $ | 60,110 | | | $ | 8,736 | | | $ | 3,204 | | | $ | 72,050 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | Consumer
Products
Segment | | Ingredients
Segment | | Analytical Reference
Standards and Services Segment | | Total |
| (In thousands) | | | | |
| Tru Niagen®, Consumer Product | | $ | 56,705 | | | $ | — | | | $ | — | | | $ | 56,705 | |
| Niagen® Ingredient | | — | | | 6,700 | | | — | | | 6,700 | |
| Subtotal Niagen® Related | | 56,705 | | | 6,700 | | | — | | | 63,405 | |
| | | | | | | | |
| Other Ingredients | | — | | | 707 | | | — | | | 707 | |
| Reference Standards | | — | | | — | | | 3,061 | | | 3,061 | |
| Consulting and Other | | — | | | — | | | 276 | | | 276 | |
| Subtotal Other Goods and Services | | — | | | 707 | | | 3,337 | | | 4,044 | |
| | | | | | | | |
| Total Net Sales | | $ | 56,705 | | | $ | 7,407 | | | $ | 3,337 | | | $ | 67,449 | |
Net sales frominternational sources*
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | | 2022 | | 2021 |
| Consumer Products Segment | | $ | 18.4 | | | $ | 18.0 | |
| Ingredients Segment | | 2.1 | | | $ | 0.7 | |
| Analytical Reference Standards and Services Segment | | 1.3 | | | $ | 1.1 | |
| Total net sales from international sources | | $ | 21.8 | | | $ | 19.8 | |
*International sources include Europe, North America, South America, Asia and Oceania.
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
Long-lived assets
The Company’s long-lived assets are located within the United States.
Disclosure of major customers
Major customers are defined as customers whose sales or accounts receivables individually consist of more than 10% of total sales or total trade receivables, respectively. Percentage of revenues from major customers of the Company’s consumer products segment for the periods indicated were as follows:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Major Customers | | 2022 | | 2021 |
| | | | |
| A.S. Watson Group - Related Party | | 13.9 | % | | 13.8 | % |
| | | | |
| | | | |
The percentage of the amounts due from major customers to total accounts receivable, net for the periods indicated were as follows:
| | | | | | | | | | | | | | |
| | At December 31, |
| Major Customers | | 2022 | | 2021 |
| | | | |
| A.S. Watson Group - Related Party | | 36.6 | % | | 39.6 | % |
| | | | |
| Nestlé (NHSc) | | 23.6 | % | | * |
| Life Extension | | * | | 22.1 | % |
| Persona | | * | | 10.3 | % |
| | | | |
| | | | |
* Represents less than 10%
Disclosure of major vendor
The Company’s major vendor who accounted for more than 10% of the Company’s total accounts payable is as follows:
| | | | | | | | | | | | | | |
| Major Vendor | | At December 31, |
| 2022 | | 2021 |
| | | | |
| Vendor A | | 50.1 | % | | 32.1 | % |
Note 6. Related Party Transactions
A.S. Watson Group is a related party through common ownership of an enterprise that beneficially owns more than 10% of the common stock of the Company. The sale of consumer products and corresponding trade receivables to related parties during the periods indicated are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | Trade Receivable as of |
| Year Ended December 31, | | December 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| A.S. Watson Group | $10.0 | million | | $9.3 | million | | $3.1 | million | | $2.1 | million |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
Note 7. Inventories
The Company's major classes of inventory and corresponding balances for the periods indicated are as follows:
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2022 | | 2021 |
| Consumer Products - Finished goods | $ | 7,901 | | | $ | 6,823 | |
| Consumer Products - Work-in-process | 2,992 | | | 4,131 | |
| Bulk ingredients | 3,284 | | | 2,131 | |
| Reference standards | 500 | | | 516 | |
| Inventories | $ | 14,677 | | | $ | 13,601 | |
Note 8. Intangible Assets, Net
Intangible assets for the periods indicated consisted of the following:
| | | | | | | | | | | | | | | | | |
| | | December 31, |
| (In thousands, except years) | Weighted Average
Life (Years) | | 2022 | | 2021 |
| | | | | |
| Healthspan Research LLC Acquisition | 10 | | $ | 1,346 | | | $ | 1,346 | |
| License agreements and other | 9 | | 1,643 | | | 1,643 | |
| Less: Accumulated amortization | | | (2,318) | | | (2,132) | |
| Intangible assets, net | | | $ | 671 | | | $ | 857 | |
For the years ended December 31, 2022 and 2021, amortization expense was approximately $206,000, $88,000$186,000 and $45,000,$225,000, respectively.
Estimated aggregate amortization expense for each of the next five years ending December 31 is as follows:
| | | | | | | | |
| (In thousands) | | |
| Year | | Amount |
| 2023 | | $ | 158 | |
| 2024 | | 154 | |
| 2025 | | 151 | |
| 2026 | | 151 | |
| 2027 | | 42 | |
| Thereafter | | 15 | |
| | $ | 671 | |
| Years ending December: | |
| 2018 | $233,000 |
| 2019 | 233,000 |
| 2020 | 228,000 |
| 2021 | 209,000 |
| 2022 | 171,000 |
| Thereafter | 577,000 |
| | $1,651,000 |
| | |
Note 5. | Leasehold Improvements | | | | | | | |
| ChromaDex Corporation and Equipment, NetSubsidiaries
Notes to the Consolidated Financial Statements | |
Leasehold improvements and equipment, net of assets held for sale, consisted of the following:
| | | | |
| | | | |
| Laboratory equipment | $1,869,000 | $1,142,000 | 10 years
|
| Leasehold improvements | 1,699,000 | 1,332,000 | Lesser of lease term or estimated useful life |
| Computer equipment | 511,000 | 400,000 | 3 to 5 years
|
| Furniture and fixtures | 90,000 | 41,000 | 7 years
|
| Office equipment | 18,000 | 10,000 | 10 years
|
| Construction in progress | 131,000 | 170,000 | |
| | 4,318,000 | 3,095,000 | |
| Less accumulated depreciation | 1,446,000 | 1,317,000 | |
| | $2,872,000 | $1,778,000 | |
| | | | |
Depreciation expenses on leasehold improvements and equipment included in the consolidated statement of operations for the years ended December 30, 2017, December 31, 2016 and January 2, 2016 were approximately $510,000, $332,000 and $286,000, respectively.
The Company leases equipment under capitalized lease obligations with a total cost of approximately $871,000 and $1,214,000 and accumulated amortization of $126,000 and $277,000 as of December 30, 2017 and December 31, 2016, respectively.
Note 6. | Capitalized Lease Obligations |
Minimum future lease payments under capital leases as of December 30, 2017, are as follows:
| Year ending December: | |
| 2018 | $236,000 |
| 2019 | 196,000 |
| 2020 | 126,000 |
| 2021 | 18,000 |
| Total minimum lease payments | 576,000 |
| Less amount representing interest at a rate of approximately 9.8% per year | 70,000 |
| Present value of net minimum lease payments | 506,000 |
| Less current portion | 196,000 |
| Long-term obligations under capital leases | $310,000 |
Interest expenses related to capital leases were approximately $57,000, $48,000 and $62,000 for the years ended December 30, 2017, December 31, 2016 and January 2, 2016, respectively.
On November 4, 2016, the Company entered into a business financing agreement (“Financing Agreement”) with Western Alliance Bank (“Western Alliance”), in order to establish a formula based revolving credit line pursuant to which the Company may borrow an aggregate principal amount of up to $5,000,000, subject to the terms and conditions of the Financing Agreement. As of December 30, 2017 and December 31, 2016, the Company did not have any outstanding loan payable from this line of credit arrangement.
The interest rate will be calculated at a floating rate per month equal to (a) the greater of (i) 3.50% per year or (ii) the Prime Rate published in the Money Rates section of the Western Edition of The Wall Street Journal, or such other rate of interest publicly announced by Lender as its Prime Rate, plus (b) 2.50 percentage points, plus an additional 5.00 percentage points during any period that an event of default has occurred and is continuing. The Company’s obligations under the Financing Agreement are secured by a security interest in substantially all of the Company’s current and future personal property assets, including intellectual property. Any borrowings, interest or other fees or obligations that the Company owes Western Alliance pursuant to the Financing Agreement will be become due and payable on November 4, 2018.
Debt Issuance Costs
The Company incurred debt issuance costs of approximately $252,000 in connection with this line of credit arrangement and had an unamortized balance of approximately $115,000 as of December 30, 2017. For the line of credit arrangement, the Company has elected a policy to keep the debt issuance costs as an asset, regardless of whether an amount is drawn. The remaining unamortized deferred asset will be amortized over the remaining life of the line of credit arrangement.
The provision for income tax consists of following:
| | | | |
| Current | | | |
| Federal | $- | $- | $- |
| State | - | - | 4,527 |
| Deferred (net of valuation allowance) | | | |
| Federal | - | - | - |
| State | - | - | - |
| Income tax provision | $- | $- | $4,527 |
| | | | |
At December 30, 2017 and December 31, 2016, the Company maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rates of 0%, 0% and 0.2% for years 2017, 2016 and 2015, respectively. At December 30, 2017 and December 31, 2016, we recorded a valuation allowance of $12.9 million and $15.5 million, respectively. The valuation allowance decreased by $2.6 million during 2017.
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:
| | | | |
| | | | |
| Federal income tax expense at statutory rate | (34.0)% | (34.0)% | (34.0)% |
| State income tax, net of federal benefit | (5.3)% | (5.3)% | (5.1)% |
| Permanent differences | 7.6% | 8.4% | 5.7% |
| Change in tax rates | 0% | (0.3)% | 0.7% |
| Changes of state net operating losses | 1.3% | 1.8% | 17.4% |
| Change in stock options and restricted stock | (1.3)% | 11.8% | 0.0% |
| Change in valuation allowance | (23.1)% | 16.4% | 13.7% |
| Remeasurement of deferred taxes asset / liability | 53.4% | - | - |
| Other | 1.4% | 1.2% | 1.8% |
| Effective tax rate | 0.0% | 0.0% | 0.2% |
On December 22, 2017, new legislation was signed into law, informally titled the Tax Cuts and Jobs Act, which included, among other things, a provision to reduce the federal corporate income tax rate to 21%. Under ASC 740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies, to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. There is no further change to its assertion on maintaining a full valuation allowance against its U.S. deferred tax assets. The Company’s gross deferred tax assets have been revalued from 34% to 21% with a corresponding offset to the valuation allowance and any potential other taxes arising due to the Tax Act will result in reductions to its net operating loss carryforward and valuation allowance. Deferred tax assets of approximately $19.1 million have been revalued to approximately $13.0 million with a corresponding decrease to the Company’s valuation allowance. Upon completion of our 2017 U.S. income tax return in 2018 we may identify additional remeasurement adjustments to our recorded deferred tax liabilities and the one-time transition tax. We will continue to assess our provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.
The deferred income tax assets and liabilities consisted of the following components as of December 30, 2017 and December 31, 2016:
| | | |
| Deferred tax assets: | | |
| Net operating loss carryforward | $9,963,000 | $11,023,000 |
| Capital loss carryforward | - | 811,000 |
| Stock options and restricted stock | 1,873,000 | 2,694,000 |
| Inventory reserve | 143,000 | 195,000 |
| Allowance for doubtful accounts | 183,000 | 425,000 |
| Accrued expenses | 674,000 | 487,000 |
| Deferred revenue | 19,000 | 13,000 |
| Intangibles | 27,000 | 29,000 |
| Deferred rent | 166,000 | 252,000 |
| | 13,048,000 | 15,929,000 |
| Less valuation allowance | (12,904,000) | (15,530,000) |
| | 144,000 | 399,000 |
| | | |
| Deferred tax liabilities: | | |
| Leasehold improvements and equipment | (9,000) | (282,000) |
| Prepaid expenses | (135,000) | (117,000) |
| | (144,000) | (399,000) |
| | | |
| | $- | $- |
The Company has tax net operating loss carryforwards for federal and state income tax purposes of approximately $40.0 million and $29.6 million, respectively which begin to expire in the year ending December 31, 2023 and 2022, respectively.
Under the Internal Revenue Code, certain ownership changes may subject the Company to annual limitations on the utilization of its net operating loss carryforward. The Company has determined that the stock issued in the year of 2017 did not create a change in control under the Internal Revenue Code Section 382. The Company will continue to analyze the potential impact of any additional transactions undertaken upon the utilization of the net operating losses on a go forward basis.
The Company is currently not under examination by the Internal Revenue Service or any other jurisdictions for any tax years. The Company has not identified any uncertain tax positions requiring a reserve as of December 30, 2017 and December 31, 2016.
Note 9. | Related Party Transactions |
Note 9. Leasehold Improvements and Equipment, Net
Asset acquisition
On March 12, 2017,Leasehold improvements and equipment for the Company acquired allperiods indicated consisted of the outstanding equity interests of Healthspan from Robert Fried, Jeffrey Allenfollowing:
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2022 | | 2021 |
| Laboratory equipment | $ | 3,268 | | | $ | 3,281 | |
| Leasehold improvements | 2,060 | | | 2,387 | |
| Computer equipment | 602 | | | 814 | |
| Implementation costs - cloud computing arrangements | 1,075 | | | 771 | |
| Furniture and fixtures | 176 | | | 203 | |
| Construction in progress | 172 | | | 91 | |
| 7,353 | | | 7,547 | |
| Less: Accumulated depreciation | (4,554) | | | (4,544) | |
| Leasehold improvements and equipment, net | $ | 2,799 | | | $ | 3,003 | |
Depreciation expense on leasehold improvements and Dr. Charles Brenner (the "Sellers"). Robert Fried is a member of the Board of Directors ("Board") of the Company, a position he has held since July 2015.
Upon the closing of, and as considerationequipment for the acquisition, the Company issued an aggregate of 367,648 shares of the Company’s common stock to the Sellers. The fair value of these sharesyears ended December 31, 2022 and 2021 was approximately $1.0 million based on the closing price of $2.72 per share on March 12, 2017. Also on March 12, 2017, the Company appointed Robert Fried as President$869,000 and Chief Strategy Officer, effective immediately. Mr. Fried continues to serve as a member of the Board, but resigned as a member of the Nominating and Corporate Governance Committee of the Board.
Healthspan was formed in August 2015 to offer and sell finished bottle product TRU NIAGEN® directly to consumers through internet-based selling platforms. TRU NIAGEN®$890,000, respectively. Depreciation is currently the Company's leading product. Prior to the acquisition, the Company has supplied certain amount of NIAGEN® to Healthspan as a raw material inventory in exchange for a 4% equity interest in Healthspan. An additional 5% equity interest was received for granting certain exclusive rights to resell NIAGEN® prior to the total acquisition on March 12, 2017.
This transaction was accounted for as an acquisition of assets. An intangible asset of approximately $1.35 million was recorded as a result of this acquisition, which is the difference of consideration transferred and the net amount of assets acquired and liabilities assumed.
(A) Consideration transferred | | | (B) Net amount of assets and liabilities | |
| | | | Assets acquired | |
| Common Stock | $1,000,000 | | Cash and cash equivalents | $19,000 |
| Transaction costs | 178,000 | | Trade receivables | 11,000 |
| Previously held equity interest | 20,000 | | Inventory | 61,000 |
| | | | | |
| | $1,198,000 | | Liabilities assumed | |
| | | | Due to officer | (132,000) |
| | | | Accounts payable | (74,000) |
| | | | Credit card payable | (30,000) |
| | | | Other accrued expenses | (3,000) |
| Consumer product business model, | | | | |
| intangible asset (A) -(B) | $1,346,000 | | Net assets | $(148,000) |
| | | | | |
The acquired intangible asset is considered to have a useful life of 10 years. The expense is amortizedcomputed using the straight-line method over the estimated useful life andlives of the Company recognized an amortization expensedepreciable assets (ranging from three to ten years). Leasehold improvements are amortized on a straight-line basis over the shorter of approximately $109,000 fortheir estimated useful lives or the year ended December 30, 2017.remaining lease term.
In cancellation of a loan owed by Healthspan to Mr. Fried prior to the acquisition, the Company repaid $32,500 to Mr. Fried on March 13, 2017 and also repaid $100,000 on March 9, 2018. No interest was paid for the $100,000 repaid on March 9, 2018.
Sale of consumer products, related party
During July 2017, the Company entered into an exclusivity agreement (the "Customer G Agreement") with Customer G, whereby the Company agreed to exclusively sell its TRU NIAGEN® dietary supplement product to Customer G in certain territories in Asia. During the year ended December 30, 2017,31, 2022, the Company sold approximately $4.1 millionretired or disposed certain leasehold improvements and equipment resulting in a loss of TRU NIAGEN® dietary supplement product pursuant to$7,000. At the Customer G Agreement. time of retirement or disposal, the related cost and accumulated depreciation were removed from the respective accounts.
Note 10. Leases
Operating Leases
As of December 30, 2017, the trade receivable from Customer G was approximately $1.0 million.
Li Ka Shing, who beneficially owns more than 10% of the Company's common stock, beneficially owns approximately 30% of Entity A31, 2022 and Entity A beneficially owns approximately 75% of Customer G. In accordance with the Company's Related-Person Transactions Policy, the Audit Committee of the Company's Board of Directors ratified the terms of sales agreement with Customer G.
Note 10.
| Discontinued Operations |
On September 5, 2017,2021, the Company completed the salehad ROU assets of its$3.5 million and $4.4 million, respectively, and corresponding operating assets that were used with the Company's quality verification program testinglease liabilities of $4.2 million and analytical chemistry business for food and food related products (the "Lab Business") to Covance Laboratories Inc. ("Covance"). In consideration of the Lab Business sale, the Company received $6.75$4.7 million, from Covance and additional cash consideration of $0.8 million is currently held in escrow to satisfy any potential indemnification claims by Covance. The Company was also eligible to receive an additional earnout payment from Covance in an amount equal to up to $1.0 million, tied to 2017 revenue of the Lab Business. However, 2017 revenue of the Lab Business came up short of the required threshold and this contingent consideration was not earned.respectively.
The Company recorded a gaincomponents of approximately $5.5 million from the disposal.
| (A) Consideration received | | | | (C) Carrying value of the Lab Business | |
| | | | | | |
| | | | | Assets disposed | |
| Cash payment | $6,750,000 | | | Leasehold improvements and equipment, net | $1,427,000 |
| Cash payment held in escrow (1) | 750,000 | | | Prepaid expenses | 11,000 |
| Additional earnout payment | - | | | Deposits | 20,000 |
| | $7,500,000 | | | | |
| | | | | Liabilities disposed | |
| (B) Selling costs | | | | Deferred revenue | (7,000) |
| | | | | Deferred rent
| (215,000) |
| Legal | $428,000 | | | | |
| Financial consulting | 250,000 | | | | |
| Other | 118,000 | | | | |
| | $796,000 | | | Net assets | $1,236,000 |
| Gain from disposal (A) - (B) - (C) | $5,468,000 | | | | |
| | | | | | |
(1) $750,000 is expected to be held in escrow until March 2019 to satisfy any indemnification claims. |
The sale of the Lab Business qualifies as a discontinued operation as the sale represents a strategic shift that has (or will have) a major effect on operations and financial results.
The results of operations from the discontinued operationsoperating lease expense for the years ended December 30, 2017, December 31, 2016 and January 2, 2016periods indicated are as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2022 | | 2021 |
| Operating leases | | | |
| Operating lease expense | $ | 941 | | | $ | 625 | |
| Variable lease expense | 176 | | | 195 | |
| Operating lease expense | 1,117 | | | 820 | |
| Short-term lease rent expense | 164 | | | 249 | |
| Total expense | $ | 1,281 | | | $ | 1,069 | |
| Statements of Operations - Discontinued operations | | | |
| Years Ended December 30, 2017, December 31, 2016 and January 2, 2016 | | |
| | | | |
| | | | |
| | | | |
| Sales | $2,820,631 | $5,146,438 | $4,129,254 |
| Cost of sales | 2,478,827 | 3,615,840 | 3,182,851 |
| | | | |
| Gross profit | 341,804 | 1,530,598 | 946,403 |
| | | | |
| Operating expenses: | | | |
| Sales and marketing | 482,134 | 692,376 | 818,920 |
| General and administrative | 150,171 | 178,446 | 215,220 |
| Operating expenses | 632,305 | 870,822 | 1,034,140 |
| | | | |
| Operating income (loss) | (290,501) | 659,776 | (87,737) |
| | | | |
| Nonoperating income (expense): | | | |
| Interest expense, net | (24,639) | (36,366) | (45,791) |
| Nonoperating expenses | (24,639) | (36,366) | (45,791) |
| | | | |
Income (loss) from discontinued operations | $(315,140) | $623,410 | $(133,528) |
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
The assets and liabilities that are classified as held for saleFuture minimum lease payments under operating leases as of December 31, 20162022 are as follows:
| | | | | | | | |
| (In thousands) | | |
| Year | | Amount |
| 2023 | | $ | 843 | |
| 2024 | | 1,101 | |
| 2025 | | 1,135 | |
| 2026 | | 901 | |
| 2027 | | 491 | |
| Thereafter | | 387 | |
| Total | | 4,858 | |
| Less: Present value discount | | (639) | |
| Present value of total operating lease liabilities | | 4,219 | |
| Less: Current portion | | (680) | |
| Long-term obligations under operating leases | | $ | 3,539 | |
| |
Current assets held for sale | |
Prepaid expenses | $18,315
|
| |
Leasehold Improvements and Equipment, net | 1,333,203
|
Deposits | 19,675
|
| |
Total assets held for sale | 1,371,193
|
| |
Deferred rent | 184,766
|
| |
Total liabilities held for sale | $184,766
|
Depreciation, capital expenditures and significant noncash investing activities of the discontinued operations for the years ended December 30, 2017, December 31, 2016 and January 2, 2016 are as follows:
| | | | |
| | | | |
| Depreciation | $169,250 | $254,755 | $234,010 |
| Purchase of leasehod improvements and equipment | $111,232 | $313,842 | $190,632 |
| | | | |
| Noncash investing activity | | | |
| Capital lease obligation incurred for the purchase of equipment | $- | $156,655 | $303,933 |
| Retirement of fully depreciated equipment - cost | $55,947 | $76,050 | $119,888 |
| Retirement of fully depreciated equipment - accumulated depreciation | $(55,947) | $(76,050) | $(119,888) |
11A. Employee Share-Based Compensation
Equity Plans
Stock Option Plans
AtThe Company grants awards to recipients through the discretion of the Company’s compensation committee (the “Compensation Committee”), and with the approval of the Company’s board of directors (the “Board of Directors”), the Company may grant options to purchase the Company’s common stock to certain individuals from time to time. Management and the Compensation Committee determine the terms of awards which include the exercise price, vesting conditions and expiration dates at the time of grant. Expiration dates for stock options are not to exceed 10 years from their date of issuance.
On June 20, 2017, the stockholders of the Company approved the ChromaDex Corporation 2017 Equity Incentive Plan, (the "2017 Plan").as amended (2017 Plan), which was approved by stockholders and the Board of Directors. The 2017 Plan is intended to beprovided for the successor to the ChromaDex Corporation Second Amended and Restated 2007 Equity Incentive Plan (the "2007 Plan"). Under the 2017 Plan, the Company is authorized to issue stock optionsissuance of shares that total no more than the sum of (i) 3,000,00014,500,000 new shares, (ii) approximately 384,000 unallocated shares remaining available for the grant of new awards under the Second Amended and Restated 2007 Equity Incentive Plan, and (iii) any returnedreturning shares from the 2007 Plan or the 2017 Plan, such as forfeited, cancelled, or expired shares.
Under both 2007 Planshares and 2017 Plan, the total(iv) 500,000 shares pursuant to an inducement award. The number of shares available to be issued under the Company may grant, excluding returned2017 Plan will be reduced by (i) one share for each share that relates to an option or stock appreciation right award and (ii) 1.5 shares wasfor each share which relates to an award other than a stock option or stock appreciation right award (a full-value award). As of December 31, 2022, there were approximately 10.84.0 million shares. The remaining amountshares available for issuance under this plan. Options expire 10 years from the 2017 Plan totaled approximately 1.4 million shares at December 30, 2017.
grant.
General Vesting Conditions
The Company’s stock optionoptions and restricted stock unit awards are generally subject to a one-year cliff vesting period after which 1/3rd of the shares vest with the remaining shares vesting ratably each month over a threetwo-year period subject to four-year period following grant date after athe passage of time. However, someBeginning in the second quarter of 2022, newly granted restricted stock units are generally subject to a three-year vesting period with 1/3rd vesting per year on the anniversary of the grant date. Certain stock option awards are market or performance based and vest based on certain triggering events established by the Compensation Committee, subject to approval by the Board of Directors.Committee. Certain executive and board member equity awards provide for accelerated vesting if there is a change in control or termination without cause.
Stock Options
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 to employees during the years ended December 30, 2017, December 31, 2016 and January 2, 2016.periods indicated:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Weighted Average: | | 2022 | | 2021 |
| Expected term (years) | | 5.8 | | 5.8 |
| Volatility | | 76.4 | % | | 74.6 | % |
| Risk-free rate | | 2.3 | % | | 1.0 | % |
| Dividend Yield | | 0 | % | | 0 | % |
| Year Ended December | | | |
| Expected term | | | |
| Volatility | 72% | 73% | 76% |
| Dividend Yield | 0% | 0% | 0% |
| Risk-free rate | 2% | 1% | 2% |
1)
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
Service Period Based Stock Options
The majority of options granted by the Company are comprised of service based options granted to employees.options. These options vest ratably over a definedthe requisite service period following grant date after a passage of a service period.the award.
The following table summarizes activity of service period basedperiod-based stock options activity:during the periods indicated:
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| (In thousands except per-share data and remaining contractual term) | Number of Options | | Weighted Average | Aggregate Intrinsic Value | |
| Exercise Price | | Remaining Contractual Term (Years) | |
| Outstanding at December 31, 2020 | 10,833 | | | $ | 3.96 | | | 6.8 | | $ | 10,472 | | |
| Options Granted | 1,724 | | | 8.67 | | | | | | |
| Options Exercised | (2,146) | | | 4.34 | | | | | 13,301 | | |
| Options Forfeited / Expired | (916) | | | 4.83 | | | | | | |
| Outstanding at December 31, 2021 | 9,495 | | | $ | 4.65 | | | 6.5 | | $ | 2,452 | | |
| Options Granted | 2,445 | | | 2.41 | | | | | | |
| Options Exercised | — | | | — | | | | | — | | |
| Options Forfeited / Expired | (2,543) | | | 4.11 | | | | | | |
| Outstanding at December 31, 2022 | 9,397 | | | $ | 4.21 | | | 6.2 | | $ | 44 | | * |
| | | | | | | | |
| Exercisable at December 31, 2022 | 6,540 | | | $ | 4.46 | | | 5.0 | | $ | — | | * |
| | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Outstanding at January 3, 2015 | 4,241,386 | $3.39 | 7.00 | | |
| | | | | | |
| Options Granted | 730,562 | 3.66 | 10.00 | $2.28 | |
Options Classification from Employee to Non-Employee | (514,024) | 2.79 | 7.78 | | |
| Options Exercised | (40,236) | 2.37 | | | $58,000 |
| Options Forfeited | (103,425) | 3.93 | | | |
| Outstanding at January 2, 2016 | 4,314,263 | $3.50 | 6.44 | | |
| | | | | | |
| Options Granted | 742,485 | 3.91 | 10.00 | $2.49 | |
| Options Exercised | (238,423) | 2.67 | | | $502,000 |
| Options Expired | (183,334) | 4.50 | | | |
| Options Forfeited | (353,840) | 4.15 | | | |
| Outstanding at December 31, 2016 | 4,281,151 | $3.52 | 6.36 | | $1,352,000 |
| | | | | | |
| Options Granted | 1,110,404 | 3.25 | 10.00 | $2.07 | |
| Options Exercised | (863,712) | 2.42 | | | $2,455,000 |
| Options Expired | (3,334) | 4.50 | | | |
| Options Forfeited | (73,483) | 3.88 | | | |
| Outstanding at December 30, 2017 | 4,451,026 | $4.45 | 5.76 | | $10,740,000* |
| | | | | | |
| Exercisable at December 30, 2017 | 2,937,613 | $3.54 | 5.18 | | $7,230,000* |
*The aggregate intrinsic values in the table above are based on the Company’s closing stock price of $5.88$1.68, which is the closing price of the Company’s stock on the last day of business for the year ended December 30, 2017.31, 2022
2) Performance BasedStock 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. IfThe related performance criteria has passed for these performance based stock options and no further stock options are pending performance determinations. For performance criteria aremet, the applicable stock options vested and expense was recognized. For performance criteria not met, the compensation expenses areexpense was not recognized and the expenses that have been recognized will be reversed.
applicable stock options were forfeit.
The following table summarizes activity of performance based stock options activity:during the periods indicated:
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| (In thousands except per-share data and remaining contractual term) | Number of Shares | | Weighted Average | Aggregate Intrinsic Value | |
| Exercise Price | | Remaining Contractual Term (Years) | |
| Outstanding at December 31, 2020 | 81 | | | $ | 4.34 | | | 3.1 | | $ | 37 | | |
| Options Granted | — | | | — | | | | | | |
| Options Exercised | (40) | | | 4.34 | | | | | 401 | | |
| Options Forfeited | — | | | — | | | | | | |
| Outstanding at December 31, 2021 | 41 | | | $ | 4.34 | | | 2.1 | | $ | — | | |
| Options Granted | — | | | — | | | | | | |
| Options Exercised | — | | | — | | | | | — | | |
| Options Forfeited | — | | | — | | | | | | |
| Outstanding and Exercisable at December 31, 2022 | 41 | | | $ | 4.34 | | | 1.1 | | $ | — | | * |
| | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Outstanding at January 3, 2015 | 66,668 | $1.89 | 8.08 | | |
| Options Granted | - | - | | | |
| Options Exercised | - | - | | | |
| Options Forfeited | - | - | | | |
| Outstanding at January 2, 2016 | 66,668 | $1.89 | 7.08 | | |
| Options Granted | - | - | | | |
| Options Exercised | - | - | | | |
| Options Forfeited | - | - | | | |
| Outstanding at December 31, 2016 | 66,668 | $1.89 | 6.08 | | |
| Options Granted | - | - | | | |
| Options Exercised | - | - | | | |
| Options Forfeited | - | - | | | |
| Outstanding at December 30, 2017 | 66,668 | $1.89 | 5.08 | | $266,000 |
| | | | | | |
| Exercisable at December 30, 2017 | 66,668 | $1.89 | 5.08 | | $266,000 |
*The aggregate intrinsic valuevalues in the table above are based on the Company’s closing stock price of $5.88$1.68, which is the closing price of the Company’s stock on the last day of business for the periodyear ended December 30, 2017.31, 2022.
3) | | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
Market BasedStock 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'sCompany’s stock price. The following table summarizes market based stock options activity:
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| Outstanding at December 31, 2016 | - | $- | - | | |
| Options Granted | 1,000,000 | 4.24 | 10.00 | $3.04 | |
| Options Exercised | - | - | | | |
| Options Forfeited | - | - | | | |
| Outstanding at December 30, 2017 | 1,000,000 | $4.24 | 9.24 | | $1,640,000 |
| | | | | | |
| Exercisable at December 30, 2017 | 55,556 | $4.24 | 9.24 | | $91,000 |
| | | | | | |
The aggregate intrinsic value in the table above are, based on the Company’s closing stock price of $5.88 on the last day of business for the period ended December 30, 2017.
The fair value of 1,000,000 options granted during the period ended December 30, 2017 was measured using Monte Carlo simulations based on a lattice approach with following assumptions:
| Volatility: | 67% | |
| Contractual Term: | 10 years | |
| Risk Free Rate: | 2.4% | |
| Cost of Equity: | 15.7% | |
For the contractual term, we are using 10 years as this is not a "plain vanilla" option. SEC Staff Accounting Bulletin No. 107 simplified method for estimating the expected term can be only used if the option is a "plain vanilla" option.
As of December 30, 2017, there was approximately $5.7 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the plans for employee stock options. That cost is expected to be recognized over a weighted average period of 2.5 years.
Restricted Stock Awards
Restricted stock awards granted by the Company to employees have vesting conditions that are unique to each award.
The following table summarizes activity of restricted stock awards granted to employees:
| | | |
| | | |
| | | |
| Unvested shares at January 3, 2015 | 530,007 | $3.54 |
| Granted | - | - |
| Vested | (173,336) | 4.23 |
| Forfeited | - | - |
| Unvested shares at January 2, 2016 | 356,671 | $3.21 |
| Granted | - | - |
| Vested | (6,668) | 4.23 |
| Forfeited | - | - |
| Unvested shares at December 31, 2016 | 350,003 | $3.20 |
| Granted | 500,000 | 5.08 |
| Vested | (666,668) | 4.60 |
| Forfeited | - | - |
| Unvested shares at December 30, 2017 | 183,335 | $3.25 |
| | | |
| Expected to Vest as of December 30, 2017 | 183,335 | $3.25 |
During the year ended December 30, 2017, the Company granted 500,000 shares of restricted stock award to the Company's President and Chief Operating Officer Robert Fried, which vested during the year ended December 30, 2017. The expense for vested restricted stock was approximately $2.5 million and was recognized during the year ended December 30, 2017.
During the year ended December 30, 2017, the Company's former Chief Financial Officer, Thomas Varvaro resigned and received immediate vesting of his unvested restricted stock of 166,668 shares. The expense for the vested restricted stock was approximately $525,000 and was recognized prior to the fiscal year 2015.
During the years ended December 31, 2016 and January 2, 2016, several members of the Board resigned from the Board and received immediate vesting of their unvested restricted stock of 6,668 shares and 173,336 shares, respectively. The expense for the vested restricted stock was approximately $761,000 and was recognized all during the fiscal year ended January 3, 2015.
Employee Option and Restricted Stock Compensation
The Company recognized share-based compensation expense of approximately $4.4 million, $1.1 million and $1.5 million in general and administrative expenses in the statement of operations for the years ended December 30, 2017, December 31, 2016 and January 2, 2016, respectively.
11B.
| Non-Employee Share-Based Compensation |
Stock Option Plan
The following table summarizes activity of market based stock options granted to non-employees:during the periods indicated:
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| (In thousands except per-share data and remaining contractual term) | Number of Shares | | Weighted Average | Aggregate Intrinsic Value | |
| Exercise Price | | Remaining Contractual Term (Years) | |
| Outstanding at December 31, 2020 | 1,000 | | | $ | 4.24 | | | 6.8 | | $ | 560 | | |
| Options Granted | — | | | — | | | | | | |
| Options Exercised | — | | | — | | | | | — | | |
| Options Forfeited | — | | | — | | | | | | |
| Outstanding at December 31, 2021 | 1,000 | | | $ | 4.24 | | | 5.8 | | $ | — | | |
| Options Granted | — | | | — | | | | | | |
| Options Exercised | — | | | — | | | | | — | | |
| Options Forfeited | — | | | — | | | | | | |
| Outstanding and Exercisable at December 31, 2022 | 1,000 | | | $ | 4.24 | | | 4.8 | | $ | — | | * |
| | | | |
| | | | | |
| | | | | |
| | | | | |
| Outstanding at January 3, 2015 | 350,158 | $4.05 | 5.46 | |
| Options Granted | - | - | | |
Options Classification from Employee to Non-Employee | 514,024 | 2.79 | 7.78 | |
| Options Exercised | - | - | | |
| Options Forfeited | - | - | | |
| Outstanding at January 2, 2016 | 864,182 | $3.31 | 6.04 | |
| Options Granted | 40,000 | 2.85 | 10.00 | |
| Options Exercised | (41,667) | 1.92 | | $98,000 |
| Options Forfeited | - | - | | |
| Outstanding at December 31, 2016 | 862,515 | $3.35 | 5.23 | |
| Options Granted | 175,000 | 4.89 | 10.00 | |
| Options Exercised | (21,042) | 3.88 | | $24,000 |
| Options Forfeited | - | - | | |
| Outstanding at December 30, 2017 | 1,016,473 | $3.61 | 5.16 | $2,361,000* |
| | | | | |
| Exercisable at December 30, 2017 | 824,806 | $3.35 | 4.15 | $2,088,000* |
*The aggregate intrinsic values in the table above are based on the Company’s closing stock price of $5.88$1.68, which is the closing price of the Company’s stock on the last day of business for the year ended December 30, 2017.31, 2022.
Restricted Stock Units
The fair valuefollowing table summarizes activity of the Company’srestricted stock options was estimated at the date of grant using the Black-Scholes based option valuation model. The table below outlines the weighted average assumptions for options granted to non-employeesunits during the years ended December 30, 2017 and December 31, 2016.periods indicated:
| | | | | | | | | | | |
| (In thousands except per share fair value) | Number of Units | | Weighted Average Fair Value |
| Unvested shares at December 31, 2020 | — | | | $ | — | |
| Granted | 135 | | | 10.29 | |
| Vested | — | | | — | |
| Forfeited | (20) | | | 10.77 | |
| Unvested shares at December 31, 2021 | 115 | | | $ | 10.21 | |
| Granted | 700 | | | 2.16 | |
| Vested | (144) | | | 5.05 | |
| Forfeited | (21) | | | 7.49 | |
| Unvested shares at December 31, 2022 | 650 | | | $ | 2.77 | |
| | | |
| Expected to vest as of December 31, 2022 | 650 | | | $ | 2.77 | |
| Year Ended December | | | |
| Contractual term | 6 years
| 5 years
| N/A |
| Volatility | 69% | 73% | N/A |
| Dividend yield | 0% | 0% | N/A |
| Risk-free rate | 2% | 2% | N/A |
As of December 30, 2017, there was approximately $651,000 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the plans for non-employee stock options. That cost is expected to be recognized over a weighted average period of 2.4 years.
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
Stock and Restricted Stock Awards
Restricted stock awards granted by the Company to non-employees generally feature time vesting service conditions, specified in the respective service agreements. Restricted stock awards issued to non-employees are accounted for at current fair value through the vesting period. The following table summarizes activity of restricted stock awards issued to non-employees:during the periods indicated:
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| | | | |
| Unvested shares at January 3, 2015 | 25,333 | $2.70 | |
| (In thousands except per share fair value) | | (In thousands except per share fair value) | Number of Awards | | Weighted Average Fair Value |
| Unvested shares at December 31, 2020 | | Unvested shares at December 31, 2020 | 183 | | | $ | 3.25 | |
| Granted | 46,668 | 2.58 | Granted | — | | | — | |
| Vested | (54,668) | 3.63 | Vested | — | | | — | |
| Forfeited | - | Forfeited | — | | | — | |
| Unvested shares at January 2, 2016 | 17,333 | $3.66 | |
| Unvested shares at December 31, 2021 | | Unvested shares at December 31, 2021 | 183 | | | $ | 3.25 | |
| Granted | - | Granted | — | | | — | |
| Vested | (7,333) | 3.79 | Vested | — | | | — | |
| Forfeited | - | Forfeited | — | | | — | |
| Unvested shares at December 31, 2016 | 10,000 | $3.31 | |
Granted | - | |
Vested | (8,000) | 3.63 | |
| Forfeited | - | |
| Unvested shares expected to vest at December 30, 2017 | 2,000 | $5.88 | |
| Unvested shares at December 31, 2022 | | Unvested shares at December 31, 2022 | 183 | | | $ | 3.25 | |
| | Expected to vest as of December 31, 2022 | | Expected to vest as of December 31, 2022 | 183 | | | $ | 3.25 | |
Share-based Compensation
As of December 30, 2017, there was approximately $12,000 of total unrecognizedShare-based compensation expense related to the restricted stock award to a non-employee. That cost is expected to be recognized over a period of 2 months as of December 30, 2017.
The Company did not award any stock grants to non-employees in 2017 and 2016. For the year ended January 2, 2016, the Company awarded 116,668 shares of the Company’s common stock to non-employees and recognized expenses of $361,000.
Non-Employee Option, Stock and Restricted Stock Awards
For non-employee share-based compensation, the Company recognized share-based compensation expense of approximately $171,000, $61,000 and $435,000 in general and administrative expenses in the statement of operations for the years ended December 30, 2017,31, 2022 and December 31, 20162021 were as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2022 | | 2021 |
| Share-based compensation expense | | | |
| Cost of sales | $ | 276 | | | $ | 204 | |
| Sales and marketing | 1,519 | | | 1,689 | |
| Research and development | 973 | | | 877 | |
| General and administrative | 2,971 | | | 3,425 | |
| Total | $ | 5,739 | | | $ | 6,195 | |
On August 10, 2022, the Company entered into a separation agreement with Kevin Farr, the Company’s former Chief Financial Officer. Pursuant to the terms of the agreement, Mr. Farr received an equity grant of 89,189 restricted stock units vesting fully in 90 days, accelerated vesting of 88,480 stock options that would have otherwise become vested by the one-year anniversary of the termination date and January 2, 2016,a period of three years after the termination date to exercise any vested stock options, among other terms. The related expense from these awards has been included during the year ended December 31, 2022.
In future periods, the Company expects to recognize approximately $5.4 million and $1.4 million in share-based compensation expense for unvested options and unvested restricted stock units, respectively, that were outstanding as of December 31, 2022. Future share-based compensation expense will be recognized over 1.6 and 1.7 weighted average years for unvested options and restricted stock units, respectively. The Company also has total unrecognized share-based compensation expense of $1.0 million pertaining to the Joint Venture. Such expense will only be recognized if Blue Hat Registration is achieved, the timing of which is uncertain as of December 31, 2022. See Note 12, Joint Venture for further discussion.
Note 12. | Stock Issuance | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
Note 12. Joint Venture
Fiscal year 2017
On April 26, 2017,September 30, 2022, Asia Pacific Scientific, Inc., an indirect wholly owned subsidiary of the Company, and Hong Kong (China) Taikuk Group Ltd (Taikuk) entered into a shareholders agreement (the “Shareholders Agreement”) pursuant to which Taikuk has agreed to contribute $1.0 million (the “Subscription Price”) in exchange for an 11% non-voting equity interest in ChromaDex Asia Pacific Ventures Limited, a subsidiary of Asia Pacific Scientific, Inc. (the “Joint Venture” or “JV”). Additionally, the Company shall pay $1.0 million in cash to Taikuk (the “Taikuk Fee”) upon the closing of the Shareholders Agreement (the “Closing”). The Company and Taikuk have mutually agreed that no exchange of funds for the Taikuk Fee and Subscription Price was necessary and, accordingly, no cash has or will exchange hands related to these provisions of the Shareholders Agreement. The articles of association of the JV were amended and restated simultaneously with the Closing.
The purpose of the JV is to commercialize Tru Niagen® and other products containing nicotinamide riboside to be developed by the Company in the ordinary course (the “Products”) in Mainland China and its territories, excluding Hong Kong, Macau and Taiwan (the “Territory”). The Shareholders Agreement has an initial term of 20 years, unless earlier terminated. The Company indirectly owns an 89% equity interest (and all of the voting interests) in the JV and has the right to elect all three directors of the JV.
Prior to being able to commercialize the Products in the Territory, the JV will have to obtain all applicable regulatory approvals, including “Blue Hat” or health food registration with the Peoples Republic of China State Administration for Market Regulation for Products in the name of the Company or its designee (collectively, the “Blue Hat Registration”). Upon completion of Blue Hat Registration, the Company shall make a payment of $1.0 million in cash to Taikuk (the “Blue Hat Registration Fee”). If the Blue Hat Registration is not obtained within 24 months of the Closing (which may be extended by an additional 12 months upon mutual consent of the parties), the JV may repurchase the 11% non-voting interest purchased by Taikuk for $1 (the “Right of Repurchase”). The Right of Repurchase functions as a performance vesting condition under ASC 718 and the 11% non-voting equity interest is accounted for as nonemployee share-based compensation. The equity interest will only vest if Blue Hat Registration is achieved, at which time the minority interest will be recorded. As of December 31, 2022, it is uncertain when Blue Hat Registration will be achieved. Consequently, no amounts related to the Blue Hat Registration Fee or the 11% non-voting interest have been recognized in the Consolidated Statements of Operations for the year ended December 31, 2022.
The fair value of the 11% non-voting interest and corresponding share-based compensation expense of $1.0 million was determined as of the grant date of September 30, 2022 and based on a discounted cash flow model, which utilizes Level 3, or unobservable, inputs. The most significant of these inputs were the combined weighted averages of the a) discount rate at 27.5%, b) present value of estimated future cash flows of $3.9 million and c) the present value of the terminal value at $5.6 million.
Once Blue Hat Registration is complete and certain distribution agreements relating to the commercialization of the Products in the Territory are assigned and entered into (the “Distribution Agreements”), Taikuk would be entitled to certain royalty payments based on the Company’s and the JV’s net revenue for sales of the Products in the Territory under the Distribution Agreements. Operating activity under the JV was not material during the year ended December 31, 2022.
Note 13. Line of Credit
On November 12, 2019, the Company entered into a business financing agreement with Western Alliance Bank (Credit Agreement), to establish a formula based revolving credit line. On December 11, 2021, the Company amended the Credit Agreement to increase the aggregate principal amount available to the Company from $7.0 million to $10.0 million subject to the terms and conditions of the agreement, as amended, and extended the maturity date to November 12, 2023. The amendment also reduced the interest rate to be calculated at a floating rate per month equal to (a) the greater of 3.25% per year (previously 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. As of December 31, 2022, the interest rate was 9.00% and the Company had no outstanding debt under this line of credit arrangement.
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
If the Company draws from the line of credit, 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 the maturity date. 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. The Company was in compliance with all covenants as of December 31, 2022.
Debt Issuance Costs
For the years ended December 31, 2022 and 2021, the Company incurred debt issuance costs of approximately $77,000 and $110,000, respectively, in connection with this line of credit arrangement and had an unamortized balance of approximately $69,000 as of December 31, 2022. 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.
Note 14. NHSc Revenue
On October 10, 2022, the Company and Société des Produits Nestlé SA, a société anonyme organized under the laws of Switzerland (NHSc), as successor-in-interest to NESTEC Ltd., entered into an amended and restated supply agreement (the “Supply Agreement”), which amends and restates the supply agreement, dated December 19, 2018, entered into by the Company and NESTEC Ltd. Pursuant to the Supply Agreement, NHSc and its affiliates will exclusively purchase nicotinamide riboside chloride (NRCL) from the Company and NHSc and its affiliates will have the non-exclusive right to manufacture, market, distribute, and sell products using NRCL for human use in the (i) medical nutritional, (ii) functional food and beverage and (iii) multi-ingredient dietary supplements categories sold under one of the NHSc brands (the “Approved Products”) world-wide, but excluding certain countries and ingredient combinations. The term of the Supply Agreement is five years, unless earlier terminated, and is subject to automatic extensions provided certain minimum purchases by NHSc are met.
As consideration for the rights granted to NHSc under the Supply Agreement, NHSc agreed to an initial purchase commitment of NRCL equal to approximately $2.0 million. During the fourth quarter of 2022, NHSc purchased the full consideration under this commitment, of which $1.7 million relates to a bill-and-hold arrangement. The Supply Agreement also provides for NHSc to pay a royalty to the Company at tiered percentage rates in the low-single digits based on worldwide annual net sales of the Approved Products, subject to certain deductions. Furthermore, the Supply Agreement provides for NHSc to pay the Company two separate one-time milestone payments in the low seven figures depending on whether NHSc achieves certain net sales targets in any contract year. No royalty or milestone payments were received during the year ended December 31, 2022.
Under the Supply Agreement, the Company will continue to recognize the deferred revenue balance received in connection with the original Nestec Ltd. agreement utilizing the output method. Deferred revenue will be recognized by the Company based on the percentage of NRCL kilograms delivered to-date compared to the total forecasted NRCL kilograms to be delivered for the duration of the contract term including renewal options as estimated by the Company. Revenue recognized from deferred revenue and the corresponding deferred revenue balance for the years indicated is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Year Ended December 31, | | At December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenue recognized from deferred revenue | $ | 391 | | | $ | 432 | | | | | |
| Deferred revenue balance | | | | | $ | 3,955 | | | $ | 4,346 | |
In addition, in connection with the entry into the Supply Agreement, the Company entered into a Securities Purchase Agreement with NHSc. For further discussion regarding the Securities Purchase Agreement see Note 16, Stock Issuances.
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
Note 15. Income Taxes
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:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Federal income tax expense at statutory rate | (21.0) | % | | (21.0) | % |
| State income tax, net of federal benefit | (5.5) | | | (4.8) | |
| Permanent differences | 3.2 | | | (1.8) | |
| Change in state tax rate | 0.3 | | | (0.1) | |
| Changes of state net operating losses | (1.6) | | | 2.8 | |
| Change in stock options and restricted stock | 7.8 | | | (4.9) | |
| Change in valuation allowance | 17.7 | | | 29.8 | |
| Other | (0.9) | | | — | |
| Effective tax rate | 0.0 | % | | 0.0 | % |
The Company's deferred tax assets and liabilities for the periods indicated are summarized below:
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2022 | | 2021 |
| Deferred tax assets: | | | |
| Net operating loss carryforward | $ | 37,308 | | | $ | 36,136 | |
| Stock options and restricted stock | 4,528 | | | 4,805 | |
| Interest expense | 258 | | | 244 | |
| Inventory reserve | 410 | | | 399 | |
| Allowance for doubtful accounts | 32 | | | 17 | |
| Accrued expenses | 1,654 | | | 1,073 | |
| Research and development expense | 922 | | | — | |
| Deferred revenue | 1,050 | | | 880 | |
| Leasehold improvements and equipment | 60 | | | 74 | |
| Intangibles | 104 | | | 95 | |
| Operating leases | 185 | | | 85 | |
| 46,511 | | | 43,808 | |
| Less: Valuation allowance | (46,254) | | | (43,363) | |
| Total deferred tax assets | 257 | | | 445 | |
| Deferred tax liabilities: | | | |
| Prepaid expenses | (257) | | | (445) | |
| Total deferred tax liabilities | (257) | | | (445) | |
| Net deferred tax assets (liabilities) | $ | — | | | $ | — | |
As of December 31, 2022 and 2021, the Company maintained a full valuation allowance against the entire deferred income tax balance which resulted in an effective tax rate of 0% for both of the years ended December 31, 2022, and 2021. The Company increased its valuation allowance by approximately $2.9 million to $46.2 million as of December 31, 2022 from $43.3 million as of December 31, 2021. For fiscal year 2022, the Company identified no U.S. tax on global intangible low-taxed income (GILTI) due to a loss.
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
As of December 31, 2022, the Company’s net operating loss (NOL) carryforwards for federal and state income tax purposes are approximately $141.9 million and $116.8 million, respectively, portions of which begin to expire in the years ending December 31, 2023 and 2022, respectively. During the year ended December 31, 2022, $46 thousand and $0.5 million of state NOL carryforwards expired and was written-off, respectively. The write-off of state NOL carryforwards was due to the fact the Company no longer has employees in such state. The Company’s federal NOL carryforward of $101.9 million generated in tax years beginning after December 31, 2017 may be carried forward indefinitely but the deductibility of such NOL carryforwards in taxable years beginning after December 31, 2020, is limited to 80% of taxable income.
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% to 50% 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 NOL carryforwards 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 CARES Act has not materially impacted the Company’s income tax provision.
Under the Internal Revenue Code of 1986, as amended (the Code), certain purchasers named therein,ownership changes may subject the Company to annual limitations on the utilization of its net operating loss carryforwards. The Company determined that stock issued during fiscal year 2022 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 Company is currently not under examination by the Internal Revenue Service or any other major income tax jurisdiction. The Company has not identified any material uncertain tax positions requiring a reserve as of December 31, 2022 or December 31, 2021.
Note 16. Stock Issuances
On September 30, 2022, the Company entered into a Securities Purchase Agreement with Pioneer Step Holdings Limited (Pioneer Step), Champion River Ventures Limited (Champion) and Robert Fried (collectively, the “Purchasers”) pursuant to which the Company agreed to sell and issue up to $25.0approximately 2.5 million shares of its common stock at a purchase price of $2.60$1.25 per share (the “2022 Financing”). Champion is indirectly owned by Li Ka-Shing and Pioneer Step is indirectly owned by Solina Chau, and each of Mr. Ka-Shing and Ms. Chau own through affiliated entities more than 5% of the Company’s common stock. Pursuant to previous agreements, each of Pioneer Step and Champion have appointed a member of the Company’s Board. Mr. Fried is the Company’s Chief Executive Officer. The transaction and related agreements were approved by the Audit Committee of the Board in three tranchesaccordance with the Company’s Related-Persons Transaction Policy. On October 7, 2022, the Company closed the 2022 Financing and received proceeds of approximately $3.5 million, $16.4 million and $5.1 million, respectively. All three tranches closed during the year ended December 30, 2017, whereby approximately 9.6 million shares were issued for proceeds of $23.7$2.9 million, net of offering costs.costs of $0.2 million.
On November 3, 2017In connection with the 2022 Financing, on September 30, 2022, the Company also entered into a Registration Rights Agreement with the Purchasers (the “Registration Rights Agreement”), pursuant to which the Company agreed to (i) file one or more registration statements with the SEC to cover the resale of the shares of Common Stock issued to the Purchasers, (ii) use reasonable best efforts to have all such registration statements declared effective within the timeframes set forth in the Registration Rights Agreement, and (iii) use commercially reasonable efforts to keep such registration statements effective during the timeframes set forth in the Registration Rights Agreement. The Company filed a Registration Statement registering the resale of Common Stock in November 2022. In the event that such registration statement subsequently becomes unavailable, or the Purchasers are unable to sell the shares of Common Stock issued pursuant to the Financing due to failure by the Company to satisfy the current public information requirement of Rule 144 under the Securities Act, the Company would be required to pay liquidated damages to the Purchasers equal to 1.0% of the aggregate purchase price per month for each default (up to a maximum of 5.0% of such aggregate purchase price).
On October 10, 2022, in connection with the entry into the NHSc Supply Agreement, the Company also entered into a Securities Purchase Agreement for the salewith NHSc pursuant to which NHSc agreed to purchase 3.8 million shares of approximately $23.0 million of its common stock in a private placement, in return for which the purchasers received approximately 5.6 million shares at a per share price of $4.10. The private placement closed during the year ended December 30, 2017 and the Company received proceeds of $22.9 million, net of offering costs.
Fiscal year 2016
On March 11, 2016, the Company entered into a Securities Purchase Agreement (the "March 2016 SPA") to raise $500,000 in a registered direct offering. Pursuant$1.31 which is equal to the March 2016 SPA, the Company sold a total of 128,205 Units at a purchasevolume weighted average price of $3.90 per Unit, with each Unit consisting of one share of the Company’s common stock and a warrant to purchase one half of a share of common stock (64,103 total) with an exercise price of $4.80 and a term of 3 years. The estimated fair value of the warrant was approximately $108,000 and the warrant was determined to be classified as equity. The fair value was estimated at the date of issuance using the Black-Scholes based valuation model. The table below outlines the assumptions for the warrant issued.10 trading days preceding October 10, 2022 (the “Securities Purchase Agreement”). On October 17, 2022, the Company closed the Securities Purchase Agreement and received proceeds of approximately $4.8 million, net of offering costs of $0.2 million.
| | | | | | | | |
Fair value | $4.41
|
Contractual termChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | 3.0 years
|
Volatility | 60%
|
Risk-free rate | 1.16%
|
Expected dividends | 0%
|
On June 3, 2016, the Company entered into securities purchase agreements to raise $5,250,000 in a registered direct offering, pursuant to which, the Company sold a total of 1,117,022 shares of the Company’s common stock at a purchase price of $4.70 per share.
Fiscal year 2015
In Fiscal Year 2015, the Company entered into securities purchase agreements with certain existing stockholders to raise $2,000,000 in a registered direct offering. Pursuant to those securities purchase agreements, the Company sold a total of 200,000 Units at a purchase price of $10.00 per Unit, with each Unit consisting of 2.667 shares of the Company’s common stock and a warrant to purchase 1.333 shares of common stock (266,667 total) with an exercise price of $4.50 and a term of 3 years. The aggregate estimated fair value of the warrants was approximately $489,000 and these warrants were determined to be classified as equity. The fair value was estimated at the date of issuance using the Black-Scholes based valuation model. The table below outlines the assumptions for the warrants issued.
| |
Fair value of common stock | $4.41
|
Contractual term | 3.0 years
|
Volatility | 62%
|
Risk-free rate | 1.27%
|
Expected dividends | 0%
|
The following table summarizes activity of warrants at December 30, 2017, December 31, 2016 and January 2, 2016 and changes during the years then ended:
| | | | |
| | | | | |
| | | | | |
| | | | | |
| Outstanding and exercisable at January 3, 2015 | 156,341 | 3.21 | 4.43 | |
| Warrants Issued | 266,667 | 4.50 | | |
| Warrants Exercised | - | - | | |
| Warrants Expired | - | - | | |
| Outstanding and exercisable at January 2, 2016 | 423,008 | 4.02 | 3.07 | |
| Warrants Issued | 64,103 | 4.80 | | |
Warrants Exercised | - | - | | |
Warrants Expired | (16,667) | 3.30 | | |
| Outstanding and exercisable at December 31, 2016 | 470,444 | 4.15 | 2.17 | |
Warrants Issued | - | - | | |
Warrants Exercised | - | - | | |
| Warrants Expired | - | - | | |
| Outstanding and exercisable at December 30, 2017 | 470,444 | $4.15 | 1.17 | $814,000 |
| | | | | |
The aggregate intrinsic values in the table above are based on the Company’s closing stock price of $5.88 on the last day of business for the year ended December 30, 2017.
The fair values of warrants issued were estimated at the date of issuance using the Black-Scholes based valuation model. The table below outlines the weighted average assumptions for the warrants issued during the years ended December 31, 2016 and January 2, 2016.
| | | |
| Fair value of common stock | $4.41 | $4.41 |
| Contractual term | 3.0 years
| 3.0 years
|
| Volatility | 60% | 62% |
| Risk-free rate | 1.16% | 1.27% |
| Expected dividends | 0% | 0% |
Note 14.
| Note 17. Commitments and Contingencies |
Purchaseobligations
Lease
The Company leases its office and research facilities in California, Colorado and Maryland under operating lease agreements that expire at various dates from September 2018 through February 2024. Monthly lease payments range from $1,500 per monthFrom time to $24,000 per month, and minimum lease payments escalate duringtime, the terms of the leases. Generally accepted accounting principles require total minimum lease payments to be recognized as rent expense on a straight-line basis over the term of the lease. The excess of such expense over amounts required to be paid under the lease agreement is carried as a liability on the Company’s consolidated balance sheet.
Minimum future rental payments under all of the leases as of December 30, 2017 are as follows:
| Fiscal years ending: | |
| 2018 | $601,000 |
| 2019 | 590,000 |
| 2020 | 424,000 |
| 2021 | 340,000 |
| 2022 | 138,000 |
| Thereafter | 167,000 |
| | $2,260,000 |
Rent expense was approximately $729,000, $606,000 and $536,000 for the years ended December 30, 2017, December 31, 2016 and January 2, 2016, respectively.
As of December 30, 2017, deferred rent from these operating lease agreements increased to $492,000 compared to $380,000 as of December 31, 2016. On July 6, 2017, the Company entered into a lease for an office space located in Los Angeles, California. Pursuant to the term of the lease, the landlord provided tenant improvements for approximately $122,000. The landlord provided lease incentive (a) has been recorded as leasehold improvement asset and is amortized over the lease term which is through September 2021; and (b) has been recorded as deferred rent and is amortized as reductions to lease expense over the lease term.
Subsequent to the year ended December 30, 2017, the Company entered into a lease amendment to lease additional office space located in Los Angeles, California through October 2021. Pursuant to the lease, the Company will make additional monthly lease payments ranging from approximately $9,000 to $11,000, as the payments escalate during the term of the lease.
Purchase obligations
The Company enters into purchase obligations with various vendors for goods and services that we need for our operations. The purchase obligations for goods and services include inventory, research and development, and laboratory supplies. Minimum futurerequired in its operations, primarily consisting of inventory. Future minimum payments under inventory purchase obligations as of December 30, 201731, 2022 are as follows:
| Fiscal years ending: | |
| 2018 | $3,489,000 |
| 2019 | 82,000 |
| | $3,571,000 |
| | | | | | | | |
| (In thousands) | | |
| Year | | Amount |
| 2023 | | $ | 18,000 | |
| | |
| | $ | 18,000 | |
Royalty
The Company has 11various licensing agreements with leading research universities and other patent holders, pursuant to which the Company acquired patents related to certain products the Company offers to its customers. These agreements afford for future royalty payments based on contractual minimums and expire at various dates ranging from December 31, 20192025 through an estimated year2037, often correlated to the expiration date of 2037. Yearly minimum royalty payments including license maintenance fees range from $10,000 per year to $83,000 per year, however, these minimum payments escalate each year with a maximum of $200,000 per year.patent. In addition, the Company is required to pay a range of 2%1% to 8%5% of sales related to the licensed products under these agreements. Total royalty expenses including license maintenance fees from continuing operations for the years ended December 30, 2017, December 31, 20162022 and January 2, 20162021 were approximately $992,000, $773,000$2.0 million and $583,000,$1.8 million, respectively, under these agreements. Minimum
As of December 31, 2022, future minimum royalties including license maintenance fees for the next five years are as follows:
| | | | | | | | |
| (In thousands) | | |
| Year | | Amount |
| 2023 | | $ | 415 | |
| 2024 | | 426 | |
| 2025 | | 413 | |
| 2026 | | 364 | |
| 2027 | | 174 | |
| | $ | 1,792 | |
| Fiscal years ending: | |
| 2018 | $446,000 |
| 2019 | 612,000 |
| 2020 | 467,000 |
| 2021 | 485,000 |
| 2022 | 450,000 |
| | $2,460,000 |
| | |
Legal proceedings
Legal proceedings
1. Elysium Health, LLC
(A) California Action
On December 29, 2016, ChromaDex Inc. filed a complaint (the “Complaint”) in the United States District Court for the Central District of California, naming Elysium Health, Inc. (together with Elysium Health, LLC, “Elysium”) as defendant (Complaint). On January 25, 2017, Elysium filed an answer and counterclaims in response to the Complaint (together with the Complaint, the “California Action”). Over the course of the California Action, the parties have each filed amended pleadings several times and have each engaged in several rounds of motions to dismiss and one round of motion for judgment on the pleadings with respect to various claims. Most recently, on November 27, 2018, ChromaDex filed a fifth amended complaint that added an individual, Mark Morris, as a defendant. AmongElysium and Morris (Defendants) moved to dismiss on December 21, 2018. The court denied Defendants’ motion on February 4, 2019. Defendants filed their answer to ChromaDex’s fifth amended complaint on February 19, 2019. ChromaDex filed an answer to Elysium’s restated counterclaims on March 5, 2019. Discovery closed on August 9, 2019.
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
On August 16, 2019, the parties filed motions for partial summary judgment as to certain claims and counterclaims. The parties filed opposition briefs on August 28, 2019, and reply briefs on September 4, 2019. On October 9, 2019, among other things, the court vacated the previously scheduled trial date, ordered supplemental briefing with respect to certain issues related to summary judgment. Elysium filed its opening supplemental brief on October 30, 2019, ChromaDex filed its opening supplemental brief on November 18, 2019, and Elysium filed a reply brief on November 27, 2019, and the court heard argument on January 13, 2020. On January 16, 2020, the court granted both parties’ motions for summary judgment in part and denied both in part. On ChromaDex’s motion, the court granted summary judgment in favor of ChromaDex on Elysium’s counterclaims for (i) breach of contract related to manufacturing NIAGEN® according to the defined standard, selling NIAGEN and ingredients that are substantially similar to pterostilbene to other customers, distributing the NIAGEN® product specifications, and failing to provide information concerning the quality and identity of NIAGEN®, and (ii) breach of the implied covenant of good faith and fair dealing. The court denied summary judgment on Elysium’s counterclaims for (i) fraudulent inducement of the Trademark License and Royalty Agreement, dated February 3, 2014, by and between ChromaDex and Elysium (License Agreement), (ii) patent misuse, and (iii) unjust enrichment. On Elysium’s motion, the court granted summary judgment in favor of Elysium on ChromaDex’s claim for damages related to $110,000 in avoided costs arising from documents that Elysium used in violation of the Supply Agreement, dated February 3, 2014, by and between ChromaDex and Elysium, as amended (NIAGEN® Supply Agreement). The court denied summary judgment on Elysium’s counterclaim for breach of contract related to certain refunds or credits to Elysium. The court also denied summary judgment on ChromaDex’s breach of contract claim against Morris and claims for disgorgement of $8.3 million in Elysium’s resale profits, $600,000 for a price discount received by Elysium, and $684,781 in Morris’s compensation.
Following the court’s January 16, 2020 order, ChromaDex’s claims asserted in the California Action, among other allegations, ChromaDex, Inc. alleged in the Complaintwere that (i) Elysium breached the Supply Agreement, dated June 26, 2014, by and between ChromaDex Inc. and Elysium (the “pTeroPure®(pTeroPure® Supply Agreement”)Agreement), by failing to make payments to ChromaDex Inc. for purchases of pTeroPure® and by improper disclosure of confidential ChromaDex information pursuant to the pTeroPure® Supply Agreement, (ii) Elysium breached the NIAGEN® Supply Agreement, dated February 3, 2014, by and between ChromaDex, Inc. and Elysium, as amended (the “NIAGEN® Supply Agreement”), by failing to make payments to ChromaDex Inc. for purchases of NIAGEN® pursuant, (iii) Defendants willfully and maliciously misappropriated ChromaDex trade secrets concerning its ingredient sales business under both the California Uniform Trade Secrets Act and the Federal Defend Trade Secrets Act, (iv) Morris breached two confidentiality agreements he signed by improperly stealing confidential ChromaDex documents and information, (v) Morris breached his fiduciary duty to ChromaDex by lying to and competing with ChromaDex while still employed there, and (vi) Elysium aided and abetted Morris’s breach of fiduciary duty. ChromaDex sought damages and interest for Elysium’s alleged breaches of the NIAGEN® Supply Agreement (iii) Elysium breached the Trademark License and Royalty Agreement, dated February 3, 2014, by and between ChromaDex, Inc. and Elysium (the “License Agreement”), by failing to make payments to ChromaDex, Inc. for royalties due pursuant to the License Agreement and (iv) certain officers of Elysium made false promises and representations to induce ChromaDex, Inc. into providing large supplies of pTeroPure® and NIAGEN® to Elysium pursuant to the pTeroPure® Supply Agreement and NIAGEN® Supply Agreement. ChromaDex, Inc. is seekingMorris’s alleged breaches of his confidentiality agreements, compensatory damages and interest, punitive damages, moneyinjunctive relief, and attorney’s fees for Defendants’ alleged willful and malicious misappropriation of ChromaDex’s trade secrets, and compensatory damages and interest.interest, disgorgement of all benefits received, and punitive damages for Morris’s alleged breach of his fiduciary duty and Elysium’s aiding and abetting of that alleged breach.
On January 25, 2017, Elysium filed an answer and counterclaims (the “Counterclaim”) in response to the Complaint. Among other allegations, Elysium allegesElysium’s claims alleged in the CounterclaimCalifornia Action were that (i) ChromaDex Inc. breached the NIAGEN® Supply Agreement by not issuing certain refunds or credits to Elysium, and for violating certain confidential information provisions, (ii) ChromaDex Inc. breached the implied covenant of good faith and fair dealing pursuant to the NIAGEN® Supply Agreement, (iii) ChromaDex, Inc. breached certain confidential provisions of the pTeroPure® Supply Agreement, (iv) ChromaDex, Inc. fraudulently induced Elysium into entering into the License Agreement, (the “Fraud Claim”), (v) ChromaDex, Inc.’s(iv) ChromaDex’s conduct constitutes misuse of its patent rights, (the “Patent Claim”) and (vi)(v) ChromaDex Inc. has engaged in unlawful or unfair competition under California state law (the “Unfair Competition Claim”).was unjustly enriched by the royalties Elysium is seekingpaid pursuant to the License Agreement. Elysium sought damages for ChromaDex, Inc.’sChromaDex’s alleged breaches of the NIAGEN® Supply Agreement and pTeroPure® Supply Agreement, and compensatory damages, punitive damages, and/or rescission of the License Agreement and restitution of any royalty payments conveyed by Elysium pursuant to the License Agreement, and a declaratory judgment that ChromaDex Inc. has engaged in patent misuse.
On January 17, 2020, Elysium moved to substitute its counsel. The same day, the court ordered hearing on that motion for January 21, 2020, and granted Elysium’s motion at the hearing. On January 23, 2020, the court issued a scheduling order that, among other things, set trial on the remaining claims to begin on May 12, 2020. On March 19, 2020, in light of the global 2019 coronavirus disease (COVID-19) pandemic and ongoing private mediation efforts, the parties jointly stipulated to adjourn the trial date. The court vacated the trial date on March 20, 2020. The court held a telephonic status conference on June 9, 2020, during which the court indicated that it will reschedule the jury trial as soon as conditions permit. On November 4, 2020, the parties submitted a joint status report indicating that they will propose a new trial date as soon as the court announces that it will resume jury trials. On November 18, 2020, the court set trial to begin on September 21, 2021.
| | | | | | | | |
| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
On February 15, 2017,December 11, 2020, Elysium filed a “Notice of Correction of Depositions” related to the depositions of its chief executive officer, Eric Marcotulli, and chief operating officer, Daniel Alminana, both taken in March 2019. On March 8, 2021, based in part on information that Elysium submitted under seal with that notice, ChromaDex Inc. filed an amended complaint. In the amended complaint, ChromaDex, Inc. re-alleges the claimsa motion for sanctions or, in the Complaint,alternative, reconsideration of the court’s January 16, 2020 order regarding summary judgment, in which ChromaDex moved to dismiss Elysium’s third, fourth, and also allegesfifth counterclaims. Elysium’s opposition brief was filed on March 22, 2021. ChromaDex filed its reply brief on March 29, 2021. On April 27, 2021, the court denied ChromaDex, Inc’s motion for terminating sanctions, but concluded that the evidence at issue in the motion will be admissible at trial.
The jury trial portion of the case commenced on September 21, 2021. The jury returned a verdict on September 27, 2021. The verdict found (i) Elysium willfullyliable for breaches of the NIAGEN® and maliciously misappropriatedpTeroPure® Supply Agreements for failing to pay for purchases of the ingredients totaling approximately $3.0 million, (ii) Mark Morris liable for breach of a confidentiality agreement, requiring him to disgorge approximately $17,307, (iii) ChromaDex liable for breaching the NIAGEN® Supply Agreement for not issuing certain refunds or credits to Elysium in the amount of $625,000, and (iv) ChromaDex liable for fraudulent inducement of the Licensing Agreement in the amount of $250,000, along with $1,025,000 in punitive damages arising from the same counterclaim. On January 17, 2022, ChromaDex filed a motion for prejudgment interest on the approximately $3.0 million in damages awarded by the jury for Elysium’s breaches of the NIAGEN® and pTeroPure® Supply Agreements. Elysium’s opposition brief was filed on January 24, 2022, and ChromaDex, Inc.’s trade secrets.reply brief was filed on January 31, 2022. On February 15, 2017, ChromaDex, Inc. also filed a motion to dismiss the Fraud Claim, the Patent Claim and the Unfair Competition Claim. On March 1, 2017, Elysium filed a motion to dismiss ChromaDex, Inc.'s fraud and trade secret misappropriation causes of action. On March 6, 2017, Elysium filed a first amended counterclaim. On March 20, 2017, ChromaDex, Inc. moved to dismiss Elysium's amended fraud, declaratory judgment of patent misuse and the Unfair Competition Claim. On May 10, 2017,2022, the court ruled on the motions to dismiss, denyingdenied ChromaDex Inc.’s motion asfor prejudgment interest.
On February 18, 2022, ChromaDex, Inc. and Elysium jointly filed a notice informing the court that ChromaDex, Inc. had filed in the U.S. District Court for the Southern District of New York (SDNY Court) a motion to Elysium’s fraudenforce a settlement agreement between ChromaDex, Inc. and declaratory judgment claimsElysium that ChromaDex, Inc. asserts would materially affect the California Action. On April 22, 2022, ChromaDex, Inc. and grantingElysium jointly filed a notice informing the court that the SDNY Court had granted ChromaDex, Inc.’s motion with prejudice as to Elysium’s Unfair Competition Claim. With respect to Elysium’s motion,enforce the court granted the motion with prejudice as to ChromaDex, Inc.’s fraud claim and granted with leave to amend the motion as to ChromaDex, Inc.’s trade secret misappropriation claims.settlement agreement. On May 24, 2017, ChromaDex, Inc. answered the first amended counterclaim and asserted several affirmative defenses. Also on May 24, 2017,April 29, 2022, ChromaDex, Inc. filed a second amended complaint, amending the trade secret misappropriation claims and addressing Elysium’s declaratory judgment of patent misuse counterclaim. On June 7, 2017, ChromaDex, Inc. filed a third amended complaint dismissing the trade secret misappropriation claims and asserting two breach of contract claims for Elysium’s failure to pay for the product delivered. On June 16, 2017, Elysium answered the third amended complaint. On August 14, 2017, ChromaDex, Inc. moved for judgment on the pleadings as to Elysium’s declaratory judgment of patent misuse counterclaim. On September 26, 2017,notice informing the court denied ChromaDex’s motion withoutthat the SDNY Court had dismissed the SDNY action with prejudice and directed Elysium to file an amended counterclaim if it intended to maintain its declaratory judgment counterclaim. On October 11, 2017, Elysium filed a second amended counterclaim, re-alleging the claims in the first amended counterclaim and adding a claim for unjust enrichment and restitution of the royalties Elysium paid to ChromaDex, Inc. pursuant to the License Agreement.settlement agreement. On October 25, 2017,August 22, 2022, ChromaDex, Inc. filed a motion for entry of judgment pursuant to dismissFederal Rule of Civil Procedure 54(b) on the declaratory judgment of patent misusebasis that the settlement agreement was enforceable and unjust enrichmentresolved the claims and/or strike allegationsand counterclaims tried to the jury in the unjust enrichment claim contained in the second amended counterclaim.California Action. Elysium’s opposition brief was filed on August 29, 2022, and ChromaDex, Inc.’s reply brief was filed on September 2, 2022. On November 28, 2017,September 13, 2022, the court denied ChromaDex, Inc.’s motion for entry of judgment pursuant to Rule 54(b).
On September 28, 2022, ChromaDex, Inc., Elysium, and Mark Morris filed a joint stipulation requesting that the motion.court stay the California Action pending the final resolution of ChromaDex, Inc.’s appeal in the U.S. Court of Appeals for the Federal Circuit captioned ChromaDex, Inc. answeredv. Elysium Health, Inc., No. 2022-1116 (the “Federal Circuit Appeal”). On September 28, 2022, the second amended counterclaim on December 12, 2017. The parties are currently in discovery.court issued an order staying the California Action pending the final resolution of the Federal Circuit Appeal.
On July 17, 2017, Elysium filed petitions with the U.S. Patent and Trademark Office for inter partes review(B) Southern District of U.S. Patent No. 8,197,807 (the “’807 Patent”) and 8,383,086 (the “’086 Patent”), patents to which ChromaDex, Inc. is the exclusive licensee. The U.S. Patent Trial and Appeal Board (“PTAB”) denied institution of an inter partes review for the ’807 Patent on January 18, 2018. For the ’086 patent, on January 29, 2018 the PTAB granted institution of an inter partes review as to claims 1, 3, 4, and 5 and denied institution as to claim 2.New York Action
On September 27, 2017, Elysium Health Inc. ("Elysium Health")(Elysium Health) filed a complaint in the United States District Court for the Southern District of New York, against ChromaDex Inc. (the “SDNY Complaint”)(Elysium SDNY Complaint). Elysium Health allegesalleged in the Elysium SDNY Complaint that ChromaDex Inc. made false and misleading statements in a citizen petition to the Food and Drug Administration it filed on or about August 18, 2017. Among other allegations, Elysium Health aversaverred that the citizen petition made Elysium Health’s product appear dangerous, while casting ChromaDex, Inc.’sChromaDex’s own product as safe. The Elysium SDNY Complaint assertsasserted four claims for relief: (i) false advertising under the Lanham Act, 15 U.S.C. § 1125(a); (ii) trade libel; (iii) deceptive business practices under New York General Business Law § 349; and (iv) tortious interference with prospective economic relations. ChromaDex, Inc. denies the claims in the SDNY Complaint and intends to defend against them vigorously.On October 26, 2017, ChromaDex Inc. moved to dismiss the Elysium SDNY Complaint on the grounds that, inter alia,, its statements in the citizen petition are immune from liability under the Noerr-Pennington Doctrine, the litigation privilege, and New York’s Anti-SLAPP statute, and that the Elysium SDNY Complaint failed to state a claim. Elysium Health opposed the motion on November 2, 2017. ChromaDex Inc. filed its reply on November 9, 2017. The motion is currently pending.
On October 26, 2017, ChromaDex Inc. filed a complaint in the United States District Court for the Southern District of New York against Elysium Health (the “ChromaDex(ChromaDex SDNY Complaint”)Complaint). ChromaDex alleges that Elysium Health made material false and misleading statements to consumers in the promotion, marketing, and sale of its health supplement product, Basis, and asserts five claims for relief: (i) false advertising under the Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under 15 U.S.C. § 1125(a); (iii) deceptive practices under New York General Business Law § 349; (iv) deceptive practices under New York General Business Law § 350; and (v) tortious interference with prospective economic advantage. On November 16, 2017, Elysium Health moved to dismiss for failure to state a claim. ChromaDex Inc. opposed the motion on November 30, 2017 and Elysium Health filed a reply on December 7, 2017.
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| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
On November 3, 2017, the Court consolidated the Elysium SDNY Complaint and the ChromaDex SDNY Complaint actions under the caption In re Elysium Health-ChromaDex Litigation,, 17-cv-7394, and stayed discovery in the consolidated action pending a Court-ordered mediation. The mediation was unsuccessfulunsuccessful. On September 27, 2018, the Court issued a combined ruling on both parties’ motions to dismiss. For ChromaDex’s motion to dismiss, the Court converted the part of the motion on the issue of whether the citizen petition is immune under the Noerr-Pennington Doctrine into a motion for summary judgment, and requested supplemental evidence from both parties, which were submitted on October 29, 2018. The Court otherwise denied the motion to dismiss. On January 3, 2019, the Court granted ChromaDex’s motion for summary judgment under the Noerr-Pennington Doctrine and dismissed all claims in the Elysium SDNY Complaint. Elysium moved for reconsideration on January 17, 2019. The Court denied Elysium’s motion for reconsideration on February 6, 2019, and issued an amended final order granting ChromaDex’s motion for summary judgment on February 7, 2019.
The Court granted in part and denied in part Elysium’s motion to dismiss, sustaining three grounds for ChromaDex’s Lanham Act claims while dismissing two others, sustaining the claim under New York General Business Law § 349, and dismissing the claims under New York General Business Law § 350 and for tortious interference. Elysium filed an answer and counterclaims on October 10, 2018, alleging claims for (i) false advertising under the Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under 15 U.S.C. § 1125(a); and (iii) deceptive practices under New York General Business Law § 349. ChromaDex answered Elysium’s counterclaims on November 2, 2018.
ChromaDex filed an amended complaint on March 27, 2019, adding new claims against Elysium Health for false advertising and unfair competition under the Lanham Act, 15 U.S.C. § 1125(a). On April 10, 2019, Elysium Health answered the amended complaint and filed amended counterclaims, also adding new claims against ChromaDex for false advertising and unfair competition under the Lanham Act, 15 U.S.C. § 1125(a). On July 1, 2019, Elysium Health filed further amended counterclaims, adding new claims under the Copyright Act §§ 106 & 501. On February 9, 2020, ChromaDex filed a motion for leave to amend its complaint to add additional claims against Elysium Health for false advertising and unfair competition. On February 10, 2020, Elysium Health filed a motion for leave to amend its counterclaims to identify allegedly false and misleading statements in ChromaDex’s advertising. Those motions were both granted after respective stipulations. On March 12, 2020, Elysium Health answered the second amended complaint. On March 13, 2020, ChromaDex filed an answer and objection to Elysium Health’s third amended counterclaims.
On December 14, 2020, Elysium Health filed a motion to supplement and amend its counterclaims to add claims regarding alleged advertising related to COVID-19, to add an allegation about a change to the ChromaDex website, and to remove its copyright infringement claim under the Copyright Act. On January 19, 2021, the Court denied Elysium Health’s motion to add claims regarding alleged advertising related to COVID-19. The Court granted the unopposed requests to add an allegation about a change to ChromaDex’s website and to remove Elysium’s Copyright Act claim. Pursuant to the Court’s order, Elysium filed fourth amended counterclaims on April 21, 2021.
All discovery closed on April 23, 2021. The Court vacated a previously scheduled joint pretrial order and trial date because of COVID-19, and the Court has informed the Parties that trial date will be rescheduled in November or December 2021.
Both parties filed dispositive and Daubert motions on June 4, 2021. Opposition papers were filed by both parties on June 25, 2021, and reply papers were filed on July 9, 2021. On January 10, 2022, both parties appeared for oral argument on the dispositive and Daubert motions.
On February 3, 2022, ChromaDex reached a settlement in order to resolve the SDNY action in its entirety as well as the claims tried to the jury in the Central District of California (the “Settlement Agreement”). Shortly thereafter, before the parties could notify the Court, the Court issued a ruling on the pending dispositive and Daubert motions, dismissing ChromaDex’s SDNY complaint in its entirety on the grounds that ChromaDex’s damages were uncertain, and dismissing some of Elysium’s claims. Elysium then asserted that a settlement had not been reached. ChromaDex thereafter filed a motion is currently pending.to enforce the Settlement Agreement in its entirety on February 16, 2022. Elysium’s opposition to that motion was filed on March 2, 2022, and ChromaDex’s reply was filed on March 9, 2022. On April 19, 2022, the Court concluded that a settlement had been reached and granted ChromaDex’s motion to enforce the Settlement Agreement. On April 28, 2022, pursuant to the Settlement Agreement, the Court dismissed the entire action with prejudice. On May 11, 2022, Elysium filed a notice of appeal. On May 25, 2022, ChromaDex filed a notice of cross-appeal. Elysium filed its opening brief on August 24, 2022. ChromaDex filed its opening and response brief on November 22, 2022. Elysium filed its reply and response brief on January 20, 2023. ChromaDex filed its reply brief on February 10, 2023.
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| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
The Company is unable to predict the outcome of these mattersthe Elysium SDNY Complaint and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to the legal proceedingsproceeding discussed herein. As of December 31, 2017,2022, ChromaDex Inc. did not accrue a potential loss for the Counterclaim or theElysium SDNY Complaint because ChromaDex Inc. believes that the allegations are without merit and thus it is not probable that a liability has been incurred.
(C) Delaware-Patent Infringement Action
From time to time we are involved in legal proceedings arisingOn September 17, 2018, ChromaDex and Trustees of Dartmouth College filed a patent infringement complaint in the ordinary courseUnited States District Court for the District of our business. WeDelaware against Elysium Health, Inc. The complaint alleges that Elysium’s BASIS® dietary supplement infringes U.S. Patent Nos. 8,197,807 (‘807 Patent) and 8,383,086 (‘086 Patent) that comprise compositions containing isolated nicotinamide riboside held by Dartmouth and licensed exclusively to ChromaDex On October 23, 2018, Elysium filed an answer to the complaint. The answer asserts various affirmative defenses and denies that Plaintiffs are entitled to any relief.
On November 7, 2018, Elysium filed a motion to stay the patent infringement proceedings pending resolution of (1) the inter partes review of the ‘807 Patent and the ‘086 Patent before the Patent Trial and Appeal Board (PTAB) and (2) the outcome of the litigation in the California Action. ChromaDex filed an opposition brief on November 21, 2018 detailing the issues with Elysium’s motion to stay. In particular, ChromaDex argued that given claim 2 of the ‘086 Patent was only included in the PTAB’s inter partes review for procedural reasons the PTAB was unlikely to invalidate claim 2 and therefore litigation in Delaware would continue regardless. In addition, ChromaDex argued that the litigation in the California Action is unlikely to have a significant effect on the ongoing patent litigation. After the PTAB released its written decision upholding claim 2 of the ‘086 Patent, proving right ChromaDex’s prediction, ChromaDex informed the Delaware court of the PTAB’s decision on January 17, 2019. On June 19, 2019, the Delaware court granted in part and denied in part Elysium’s motion, ordering that the case was stayed pending the resolution of Elysium’s patent misuse counterclaim in the California Action.
On November 1, 2019, ChromaDex filed a motion to lift the stay due to changed circumstances in the California Action, among other reasons. Briefing on the motion was completed on November 22, 2019. On January 6, 2020, the Delaware court issued an oral order instructing the parties to submit a joint status report after the January 13, 2020 motions hearing in the California Action. The joint status report was submitted on January 30, 2020. On February 4, 2020, the Delaware court issued an order granting ChromaDex’s motion to lift the stay and setting a scheduling conference for March 10, 2020. On March 19, 2020, the Delaware court entered a scheduling order, which, among other things, set the claim-construction hearing for December 17, 2020 and trial for the week of September 27, 2021. On April 17, 2020, ChromaDex served infringement contentions. Elysium filed a Second Amended Answer on July 10, 2020.
On April 24, 2020, ChromaDex moved for leave to amend the complaint to add Healthspan Research, LLC as a plaintiff. On May 5, 2020, Elysium filed its opposition to ChromaDex’s motion for leave to amend and moved to dismiss ChromaDex for alleged lack of standing. ChromaDex filed its opposition to Elysium’s motion to dismiss and reply in support of its motion to amend on May 19, 2020. Elysium filed its reply in support of its motion to dismiss on May 26, 2020. The Court held a hearing on the motion for leave to amend the complaint and Elysium’s motion to dismiss on September 16, 2020. On December 15, 2020, the Court entered orders (i) granting in part and denying in part Elysium’s motion to dismiss ChromaDex for alleged lack of standing; and (ii) denying ChromaDex’s motion for leave to amend. ChromaDex filed a motion for reargument on December 29, 2020. Elysium filed a response to the motion for reargument on January 28, 2021. ChromaDex filed a motion for leave to file a reply on February 8, 2021. Elysium filed a response to the motion for leave to file a reply on February 12, 2021. ChromaDex filed a reply to the motion for leave to file a reply on February 19, 2021. The Court granted the motion for leave to file the reply on April 26, 2021 and denied the motion for reargument on April 27, 2021.
On July 22, 2020, the parties filed a Joint Claim Construction Chart and respective motions for claim construction. The parties filed a Joint Claim Construction Brief on November 5, 2020. The Court held a Markman hearing on claim-construction issues on December 17, 2020. The Court entered a claim-construction ruling on January 5, 2021.
Fact discovery closed on January 26, 2021. Opening expert reports were served on February 9, 2021. Responsive expert reports were served on March 9, 2021. Reply expert reports were served on March 30, 2021. Both parties filed dispositive and Daubert motions on April 27, 2021.
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| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
On September 21, 2021, the Court granted Elysium’s motion for summary judgment that the claims of the ‘807 and ‘086 patents are invalid based on patent-ineligible subject matter. ChromaDex filed a notice of appeal on November 2, 2021. ChromaDex’s opening brief was filed on February 2, 2022. Elysium’s response brief was filed on April 11, 2022. ChromaDex’s reply brief was filed on May 9, 2022. Oral argument occurred on December 6, 2022. On February 13, 2023, the court of appeals issued a decision affirming the district court’s decision. The deadline to file a petition for a panel rehearing and/or rehearing en banc is March 15, 2023. The Company does not believe that therethis decision will have a material impact on the Company’s NR business.
2. Thorne Research, Inc.
(A) Inter Partes Review Proceedings
On or around September 28, 2020, Thorne Research, Inc. (Thorne) provided notice to ChromaDex that it intended to terminate its March 25, 2019 Supply Agreement and subsequent amendments with ChromaDex, effective as of December 31, 2020. A discussion between ChromaDex and Thorne followed, and Thorne asserted that it could challenge the ‘086 Patent in an inter partes review (IPR) proceeding on the basis of prior art, but would be willing to enter into a mutual existence agreement that would permit Thorne to source NR from a third party. Thorne did not offer substantive information supporting a prior art claim or about the nature of the threatened IPR.
On December 1, 2020, Thorne filed a petition for IPR of the ‘086 Patent. Dartmouth’s preliminary response to the petition was filed on March 15, 2021. On June 10, 2021, the Patent Trial and Appeal Board (PTAB) issued a decision instituting an IPR on the ‘086 Patent. On September 21, 2021, Dartmouth filed its Patent Owner Response. On December 21, 2021, Thorne filed its reply. Oral argument was held on March 15, 2022. On May 31, 2022, the PTAB issued a final written decision holding that the challenged claim was unpatentable. On August 2, 2022, Dartmouth filed a notice of appeal. On December 29, 2022, the parties filed a joint stipulation to dismiss the appeal. On January 3, 2023, the appeal was dismissed.
On February 1, 2021, Thorne filed a petition for IPR of the ‘807 Patent. Dartmouth’s preliminary response to the petition was filed on May 18, 2021. On August 12, 2021, the Patent Trial and Appeal Board (PTAB) issued a decision instituting an IPR on the ‘807 Patent. On November 9, 2021, Dartmouth filed its Patent Owner Response. On February 15, 2022, Thorne filed its reply. Oral argument was held on May 17, 2022. On August 10, 2022, the PTAB issued a final written decision holding that the challenged claims were not unpatentable. On October 12, 2022, Thorne filed a notice of appeal. Thorne’s opening brief is no other litigation pending that is likely to have, individually orcurrently due on March 16, 2023.
(B) Southern District of New York – Patent Infringement Action
On May 12, 2021, ChromaDex and Trustees of Dartmouth College filed a patent infringement complaint in the aggregate,United States District Court for the Southern District of New York. The complaint alleges that certain of Thorne’s dietary supplements containing isolated NR infringe the ‘807 and ‘086 Patents, which claim compositions containing isolated nicotinamide riboside and are held by Dartmouth and licensed exclusively to ChromaDex. On July 6, 2021, Thorne filed an answer and counterclaims to the complaint. The answer asserts various affirmative defenses and denies that Plaintiffs are entitled to any relief. The counterclaims seek declaratory judgment of patent invalidity for the ‘807 and ‘086 Patents. On July 8, 2021, the parties filed a proposed stipulation and order staying the matter pending issuance of the institution decision in the ‘807 Patent IPR. On July 9, 2021, the Court granted the stipulation and order to stay. On August 19, 2021, the parties filed a proposed stipulation and order staying the matter pending issuance of final written decisions in the IPRs. On August 20, 2021, the Court granted the stipulation and order to stay. On August 24, 2022, the parties filed a status report agreeing to continue to stay until fourteen days after the deadline to appeal the final written notice decision in the ‘807 Patent IPR. On October 26, 2022, the parties filed a further status report agreeing to continue the stay through resolution of the appeals.
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| ChromaDex Corporation and Subsidiaries
Notes to the Consolidated Financial Statements | |
3. Contingencies
(A) In September 2019, the Company received a letter from a licensor stating that the Company owed the licensor $1.6 million plus interest for sublicense fees as a result of the Company entering into a supply agreement with a customer. After reviewing the relevant facts and circumstances, the Company believes that the Company does not owe any sublicense fees to the licensor and has corresponded with the licensor to resolve the matter. The Company does not believe that the ultimate resolution of this matter will be material adverse effect on ourto the Company’s results of operations, financial condition or cash flows.
(B) On November 17, 2020, the Company received a warning letter (the Letter) from the United States Food and Drug Administration (FDA) and Federal Trade Commission (FTC). The Letter references statements issued by the Company relating to preclinical and clinical research results involving nicotinamide riboside and COVID-19. The statements were included in press releases and referenced in social media posts.
On November 18, 2020, the Company provided a response to the Letter stating that the Company disagrees with the assertion in the Letter that the Company’s 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 or that they were unsubstantiated under the FTC Act, but rather accurately reflected the state of the science and the results of operations.scientific research. Nonetheless, the Company also responded that it had deleted social media references to the studies and removed related press releases from its website.
On April 30, 2021, the Company received an additional warning letter (the Second Letter) from only the FTC. The Second Letter references the original Letter, and cites additional statements issued by the Company and certain officers and advisors of the Company relating to nicotinamide riboside and scientific studies related to COVID-19. The Second Letter asserts that such statements contain coronavirus-related prevention or treatment claims and are deceptive in violation of the Federal Trade Commission Act.
Severance paymentsOn May 4, 2021, the Company provided a response to named executive officersthe Second Letter stating that it had removed the social media posts from its accounts identified in the Second Letter and requested that third parties remove the post from their accounts that were identified in the Second Letter. The Company stated that the press release identified in the Second Letter is appropriate and not a deceptive act or practice under applicable law. The Company affirmed its belief in the need to accurately report on the scientific results of its studies to its investors and welcomed the opportunity to discuss its research and development program with the FTC and receive guidance on future releases.
The Company does not believe that the ultimate resolution of this matter will be material to the Company’s results of operations, financial condition or cash flows.
Note 18. Employee Retention Tax Credit
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law, providing numerous tax provisions and other stimulus measures, including the Employee Retention Tax Credit (ERTC): a refundable tax credit against certain employment taxes for qualifying businesses keeping employees on their payroll during the COVID-19 pandemic. The ERTC was subsequently amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Consolidated Appropriation Act of 2021, and the American Rescue Plan Act of 2021, all of which amended and extended the ERTC availability and guidelines under the CARES Act. During the third quarter of 2022, the Company evaluated its eligibility for the ERTC and is eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to fifty percent (50%) of the qualified wages paid to employees between March 27, 2020 and December 31, 2020 and seventy percent (70%) of the qualified wages paid to employees between January 1, 2021 and September 30, 2021. For fiscal year 2020, qualified wages are limited to $10,000 annually per employee for a maximum allowable ERTC per employee of $5,000 annually and qualified wages are limited to $10,000 per calendar quarter in 2021 for a maximum allowable ERTC per employee of $7,000 for each calendar quarter in 2021.
The Company qualified for the ERTC in the last three quarters of 2020 and all three quarters of 2021 and filed a claim for the credit in August 2022. During the third quarter of 2022, the Company recorded an aggregate benefit of approximately $2.1 million in Other income, net - Employee Retention Tax Credit in its Consolidated Statements of Operations to reflect the ERTC for all eligible quarters. During the fourth quarter of 2022, the Company received $0.6 million related to the ERTC. As of December 30, 2017,31, 2022, the Company's Consolidated Balance Sheets include an ERTC benefit of $1.8 million and associated commissions payable of $0.3 million recorded within prepaid expenses and other current assets and accrued expenses, respectively. Subsequent to December 31, 2022, the Company has four named executive officers, Frank Jaksch, Jr., Chief Executive Officer, Robert Fried, President and Chief Operating Officer, Kevin Farr, Chief Financial Officer and Troy Rhonemus, Executive Vice President. Upon termination, Mr. Jaksch, Mr. Fried, Mr. Farr and Mr. Rhonemus will receive severance payments perreceived an additional $0.8 million related to the terms of the respective employment agreements entered with the Company. The key terms of the employment agreements, including the severance terms are as follows:ERTC.
Employment Agreement with Frank L. Jaksch Jr.
On April 19, 2010, the Company entered into an Amended and Restated Employment Agreement (the “Jaksch Agreement”) with Frank L. Jaksch Jr. The Jaksch Agreement automatically renews unless terminated in accordance with its terms. On January 2, 2014, the Board approved raising the annual base salary of Mr. Jaksch to $275,000 per year and the annual cash bonus target up to 50% of his base salary. On March 14, 2016, the Board increased the base salary of Mr. Jaksch to $320,000. On April 25, 2016, Mr. Jaksch’s base salary increased to $370,000 as the Company’s common stock was listed on Nasdaq Stock Market.
The severance terms provide that in the event Mr. Jaksch’s employment with the Company is terminated voluntarily, he will be entitled to any accrued but unpaid base salary, any stock vested through the date of his termination and a pro-rated portion of 50% of his salary for the bonus. In addition, if Mr. Jaksch leaves the Company for “Good Reason”, (as defined in Jaksch Agreement), he will also be entitled to severance equal to 50% of his salary, and he will be deemed to have been employed for the entirety of such year. Severance will then consist of 16 weeks of paid salary, unless Mr. Jaksch signs a release, in which case he will receive compensation up to 12 months paid salary.
In the event the Company terminates Mr. Jaksch’s employment “without Cause” (as definedItem 9. Changes in the Jaksch Agreement), Mr. Jaksch will be entitled to severance in the form of any stock vested through the date of his termination and continuation of his base salary for a period of eight weeks, or, if Mr. Jaksch enters into a standard separation agreement, Mr. Jaksch will receive continuation of base salaryDisagreements with Accountants on Accounting and health benefits, together with applicable fringe benefits until 24 months from the date of termination (the “Severance Period”), and he will receive a bonus of 50% of his base salary as well as the full vesting of any otherwise unvested stock awards.
Employment Agreement with Robert Fried
On March 12, 2017, the Company entered into an Employment Agreement (the "Fried Agreement") with Robert Fried. Mr. Fried is entitled to receive certain severance payments per the terms of the Fried Agreement. The key terms of the Fried Agreement, including the severance terms are as follows:
Mr. Fried is entitled to: (i) an annual base salary of $300,000; (ii) an annual cash bonus equal to (a) 1% of net direct-to-consumer sales of products with nicotinamide riboside as a lead ingredient by the Company plus (b) 2% of direct to consumer net sales of products with nicotinamide riboside as a lead ingredient for the portion of such sales that exceeded prior year sales plus (c) 1% of the gross profit derived from nicotinamide riboside ingredient sales to dietary supplement producers; (iii) an option to purchase up to 500,000 shares of Common Stock under the 2007 Plan, subject to monthly vesting over a three-year period, which option grant Mr. Fried received on March 12, 2017; and (iv) 166,667 shares of restricted Common Stock, which vested on December 20, 2017 in connection with an amendment to the Fried Agreement (the "Fried Amendment") by and between the Company and Mr. Fried, dated December 20, 2017. In addition, Mr. Fried received 333,333 shares of restricted stock on December 20, 2017, which were immediately vested in connection with the Fried Amendment.
Subject to Mr. Fried’s continuous service through such date, Mr. Fried is also eligible to receive up to 500,000 shares of fully-vested restricted Common Stock that will be granted upon the achievement of certain performance goals. The Fried Amendment also provides that Mr. Fried will be granted these shares of performance-based restricted Common Stock immediately prior to the consummation of a change in control of the Company, subject to Mr. Fried's continuous service through such change in control.
Any unvested options or shares of restricted stock will vest in full upon (a) a change in control of the Company, (b) Mr. Fried’s death, (c) Mr. Fried’s disability, (d) termination by the Company of Mr. Fried’s employment without cause or (e) Mr. Fried’s resignation for good reason, subject in each case to Mr. Fried’s continuous service as an employee or consultant of the Company or any of its subsidiaries though such event.
The severance terms of the Fried Agreement provide that if (i) Mr. Fried’s employment is terminated by the Company without cause, for death or disability, or Mr. Fried resigns for good reason, or (ii) (a) a change in control of the Company occurs and (b) within one month prior to the date of such change in control or twelve months after the date of such change in control Mr. Fried’s employment is terminated by the Company other than for cause, then, subject to executing a release, Mr. Fried will receive (w) continuation of his base salary for 12 months, (x) health care continuation coverage payments premiums for 12 months, (y) a prorated annual cash bonus earned for the fiscal year in which such termination or resignation occurs, and (z) an extended exercise period for his options.
Employment Agreement with Kevin Farr
On October 5, 2017, the Company entered into an Employee Agreement (the "Farr Agreement") with Kevin M. Farr who was appointed by the Board to serve as Chief Financial Officer, principal accounting officer and principal financial officer. Mr. Farr is entitled to receive certain severance payments per the terms of the Farr Agreement. The key terms of the Farr Agreement, including the severance terms are as follows:
Mr. Farr is entitled to: (i) an annual base salary of $300,000 and (ii) a discretionary annual bonus based on the achievement of certain performance goals to be determined by the Board. Pursuant to the Farr Agreement, Mr. Farr also received an option to purchase up to 1,000,000 shares of ChromaDex common stock under the ChromaDex 2017 Equity Incentive Plan, subject to monthly vesting over a three-year period, with an exercise price equal to $4.24 per share. Any unvested options will vest in full (a) upon a change of control of the Company, subject to Mr. Farr’s continuous service through such change of control, (b) on the date (the “Price Threshold Date”) that the unweighted average closing price of the Company’s common stock as quoted on the Nasdaq Capital Market (or such similar established stock exchange) over the previous 20 trading days (including the date such calculation is measured) first equals or exceeds $10.00 per share, subject to Mr. Farr’s continuous service through such Price Threshold Date, or (c) if Mr. Farr is terminated by the Company without cause or if Mr. Farr resigns for good reason within 90 days prior to such change of control or Price Threshold Date.
If Mr. Farr’s employment is terminated by the Company without cause or Mr. Farr resigns for good reason, then, subject to executing a release, Mr. Farr will receive (i) continuation of his base salary for 12 months, (ii) COBRA premiums for 12 months, (iii) a prorated annual cash bonus, based on the good faith determination of the Board of the actual results and period of employment during the year of such termination, (iv) accelerated vesting of time-based equity that would have otherwise become vested by the one year anniversary of such termination date and (v) an extended exercise period for his options.
Employment Agreement with Troy A. Rhonemus
On March 6, 2014, the Company entered into an Employment Agreement (the “Rhonemus Agreement”) with Mr. Troy Rhonemus pursuant to which Mr. Rhonemus was appointed to serve as the Chief Operating Officer of the Company. On March 17, 2015, the Board increased the base salary to $190,000. The Rhonemus Agreement provides for an annual cash bonus (based on performance targets) of up to 30% of his base salary. On March 14, 2016, the Board increased the base salary of Mr. Rhonemus to $210,000. On April 25, 2016, Mr. Rhonemus’ base salary increased to $235,000 as the Company’s common stock was listed on Nasdaq Stock Market. On February 1, 2018, the Compensation Committee increased the base salary of Mr. Rhonemus to $250,000.
In the event of a termination, Mr. Rhonemus will be entitled to any accrued but unpaid base salary and any accrued but unpaid welfare and retirement benefits up to the termination date. In addition, if Mr. Rhonemus leaves the Company for “Good Reason” (as defined in the Rhonemus Agreement), he will also be entitled to severance equal to two weeks of base salary for each full year of service to a maximum of eight weeks of the base salary.
In the event the Company terminates Mr. Rhonemus’ employment without "Cause,” (as defined in the Rhonemus Agreement) Mr. Rhonemus will be entitled to severance equal to two weeks of base salary for each full year of service to a maximum of eight weeks of the base salary, or, if Mr. Rhonemus enters into a standard separation agreement, Mr. Rhonemus will receive continuation of base salary and health benefits, together with applicable fringe benefits as provided until the expiration of the term or renewal term then in effect, however, that in the case of medical and dental insurance, until the expiration of 12 months from the date of termination.
Note 15. | Business Segmentation and Geographical Distribution |
Since the year ended December 31, 2016, the Company has made operational changes to merge its scientific and regulatory consulting segment into core standards and contract services segment. Additionally, with the acquisition of Healthspan in March 2017, the Company began selling consumer products that contain the Company's branded NIAGEN® ingredient. The Company made operational changes and began segregating its financial results for consumer products operations.
As a result, the Company has the following three reportable segments:
●
Ingredients segment develops and commercializes proprietary-based ingredient technologies and supplies these ingredients to consumers in finished products or as raw materials to the manufacturers of consumer products in various industries including the nutritional supplement, food and beverage and animal health industries.
●
Consumer products segment provides directly to consumers as well as to distributors finished dietary supplement products that contain the Company's proprietary ingredients.
●
Core standards and contract services segment includes (i) supply of phytochemical reference standards, (ii) scientific and regulatory consulting and (iii) other research and development services.
On September 5, 2017, the Company completed the sale of the Lab Business which was a part of the core standards and contract services segment. The discontinued operations related to the Lab Business are not included in following statement of operations for business segments.
The “Corporate and other” classification includes corporate items not allocated by the Company to each reportable segment. Further, there are no intersegment sales that require elimination. The Company evaluates performance and allocates resources based on reviewing gross margin by reportable segment.
| Year ended | | | | | |
| December 30, 2017 | | | Core Standards and Contract Services | | |
| | | | | | |
| | | | | | |
| Net sales | $11,153,371 | $5,464,843 | $4,583,268 | $- | $21,201,482 |
| Cost of sales | 5,491,920 | 2,189,597 | 3,042,660 | - | 10,724,177 |
| | | | | | |
| Gross profit | 5,661,451 | 3,275,246 | 1,540,608 | - | 10,477,305 |
| | | | | | |
| Operating expenses: | | | | | |
| Sales and marketing | 1,280,004 | 2,672,810 | 506,410 | - | 4,459,224 |
| Research and development | 2,903,249 | 1,104,132 | | | 4,007,381 |
| General and administrative | - | - | - | 17,641,889 | 17,641,889 |
| Other | 745,773 | - | - | - | 745,773 |
| Operating expenses | 4,929,026 | 3,776,942 | 506,410 | 17,641,889 | 26,854,267 |
| | | | | | |
| Operating income (loss) | $732,425 | $(501,696) | $1,034,198 | $(17,641,889) | $(16,376,962) |
| Year ended | | | | | |
| December 31, 2016 | | | Core Standards and Contract Services | | |
| | | | | | |
| | | | | | |
| Net sales | $16,774,641 | $- | $4,890,007 | $- | $21,664,648 |
| Cost of sales | 7,920,516 | - | 3,353,598 | - | 11,274,114 |
| | | | | | |
| Gross profit | 8,854,125 | - | 1,536,409 | - | 10,390,534 |
| | | | | | |
| Operating expenses: | | | | | |
| Sales and marketing | 1,196,711 | - | 361,502 | - | 1,558,213 |
| Research and development | 2,487,978 | - | 34,790 | - | 2,522,768 |
| General and administrative | - | - | - | 9,214,763 | 9,214,763 |
| Operating expenses | 3,684,689 | - | 396,292 | 9,214,763 | 13,295,744 |
| | | | | | |
| Operating income (loss) | $5,169,436 | $- | $1,140,117 | $(9,214,763) | $(2,905,210) |
| Year ended | | | | | |
| January 2, 2016 | | | Core Standards and Contract Services | | |
| | | | | | |
| | | | | | |
| Net sales | $12,542,314 | $- | $5,342,572 | $- | $17,884,886 |
| Cost of sales | 6,664,164 | - | 3,686,117 | - | 10,350,281 |
| | | | | | |
| Gross profit | 5,878,150 | - | 1,656,455 | - | 7,534,605 |
| | | | | | |
| Operating expenses: | | | | | |
| Sales and marketing | 1,111,993 | - | 395,875 | - | 1,507,868 |
| Research and development | 891,601 | - | - | - | 891,601 |
| General and administrative | - | - | - | 7,201,231 | 7,201,231 |
| Operating expenses | 2,003,594 | - | 395,875 | 7,201,231 | 9,600,700 |
| | | | | | |
| Operating income (loss) | $3,874,556 | $- | $1,260,580 | $(7,201,231) | $(2,066,095) |
| | | | | | |
| At December 30, 2017 | | | Core Standards and Contract Services | | |
| | | | | | |
| | | | | | |
| Total assets | $9,742,400 | $3,398,800 | $2,558,801 | $47,023,599 | $62,723,600 |
| | | | | | |
| At December 31, 2016 | | | Core Standards and Contract Services | | |
| | | | | | |
| | | | | | |
| Total assets | $13,257,289 | $- | $2,547,427 | $3,947,352 | $19,752,068 |
Revenues from international sources for the ingredients segment approximated $0.4 million, $0.5 million and $0.3 million for the years ended December 30, 2017, December 31, 2016 and January 2, 2016, respectively. Revenues from international sources for the consumer products segment approximated $4.2 million for the year ended December 30, 2017. Revenues from international sources for the core standards and contract services segment from continuing operations approximated $1.0 million, $1.6 million and $1.8 million for the years ended December 30, 2017, December 31, 2016 and January 2, 2016, respectively. International sources which the Company generates revenue from include Europe, North America, South America, Asia, and Oceania.
The Company’s long-lived assets are located within the United States.
Disclosure of major customers
Major customers who accounted for more than 10% of the Company’s total sales from continuing operations were as follows:
| | Years Ended |
| Major Customers | | | |
| | | | |
| Customer G - Related Party | 19.4% | * | * |
| Customer D | 10.2% | 11.0% | * |
| Customer C (1) | * | 23.9% | * |
| Customer B | * | * | 13.6% |
| | | | |
| * Represents less than 10%. | | | |
| (1) There is ongoing litigation with Customer C | | | |
Major customers who accounted for more than 10% of the Company’s total trade receivables were as follows:
| | Percentage of the Company's Total Trade Receivables
|
| Major Customers | | |
| | | |
| Customer G - Related Party | 18.1% | * |
| Customer D | 13.4% | 10.2% |
| Customer C (1) | 41.8% | 45.8% |
| | | |
| * Represents less than 10%. | | |
| (1) There is ongoing litigation with Customer C | | |
Disclosure of major vendors
Major vendors who accounted for more than 10% of the Company's total accounts payable were as follows:
| Percentage of the Company's
Total Accounts Payable
|
Major Vendors | | |
| | |
Vendor A | *
| 39.5%
|
Vendor B | *
| 20.8%
|
Vendor C | 14.5%
| *
|
Vendor D | 10.4%
| *
|
Vendor E | 10.3%
| *
|
| | |
* Represents less than 10%. | | |
Loss from an ongoing litigation, Elysium
During the year ended December 30, 2017, the Company incurred a write-off of approximately $746,000 in gross trade receivable from Elysium related to royalties, due to inherent uncertainty about collecting all damages sought by the Company, as well as the Company’s decision to not seek damages for any unpaid royalty payments under the License Agreement in connection with the defense of Elysium’s claims for patent misuse and unjust enrichment. As a result of this write-off and after further analysis, the Company made an adjustment to the total allowance amount from ($800,000) to ($500,000).
Note 17. | Quarterly Financial Information (unaudited) |
| | |
| | | | | |
| | | | | |
| Sales, net | $3,367,647 | $4,218,310 | $6,084,690 | $7,530,836 |
| Cost of sales | 1,749,911 | 2,109,109 | 3,169,321 | 3,695,837 |
| | | | | |
| Gross profit | 1,617,736 | 2,109,201 | 2,915,369 | 3,834,999 |
| | | | | |
| Operating expenses | 3,390,625 | 4,758,708 | 6,092,153 | 12,612,782 |
| | | | | |
| Operating loss | (1,772,889) | (2,649,507) | (3,176,784) | (8,777,783) |
| | | | | |
| Nonoperating expenses | (28,349) | (35,894) | (44,508) | (44,033) |
| | | | | |
| Loss from continuing operations | (1,801,238) | (2,685,401) | (3,221,292) | (8,821,816) |
| | | | | |
| Income (loss) from discontinued operations | (127,517) | (78,723) | 5,358,369 | - |
| | | | | |
| Net income (loss) | $(1,928,755) | $(2,764,124) | $2,137,077 | $(8,821,816) |
| | | | | |
| Basic earnings (loss) per common share | $(0.05) | $(0.07) | $0.05 | $(0.17) |
| | | | | |
| Diluted earnings (loss) per common share | $(0.05) | $(0.07) | $0.04 | $(0.17) |
| | | | | |
| Basic weighted average common shares outstanding | 38,030,688 | 42,121,150 | 47,065,009 | 51,178,664 |
| | | | | |
| Diluted weighted average common shares outstanding | 38,030,688 | 42,121,150 | 47,556,697 | 51,178,664 |
| | Three Months Ended
|
| | April 2, 2016 | July 2, 2016 | October 1, 2016 | |
| Sales, net | $5,852,109 | $7,422,470 | $3,937,286 | $4,452,783 |
| Cost of sales | 3,008,391 | 3,748,684 | 2,074,325 | 2,442,714 |
| | | | | |
| Gross profit | 2,843,718 | 3,673,786 | 1,862,961 | 2,010,069 |
| | | | | |
| Operating expenses | 2,811,652 | 3,514,974 | 2,787,123 | 4,181,995 |
| | | | | |
| Operating income (loss) | 32,066 | 158,812 | (924,162) | (2,171,926) |
| | | | | |
| Nonoperating expenses | (177,350) | (448,416) | (2,260) | (18,360) |
| Provision for income taxes | (10,740) | 4,087 | 3,153 | 3,500 |
| | | | | |
| Loss from continuing operations | (156,024) | (285,517) | (923,269) | (2,186,786) |
| | | | | |
| Income (loss) from discontinued operations | 411,649 | 202,850 | (31,121) | 40,033 |
| | | | | |
| Net income (loss) | $255,625 | $(82,667) | $(954,390) | $(2,146,753) |
| | | | | |
| Basic earnings (loss) per common share | $0.01 | $(0.00) | $(0.03) | $(0.06) |
| | | | | |
| Diluted earnings (loss) per common share | $0.01 | $(0.00) | $(0.03) | $(0.06) |
| | | | | |
| Basic weighted average common shares outstanding | 36,414,041 | 36,990,032 | 37,868,672 | 37,904,534 |
| | | | | |
| Diluted weighted average common shares outstanding | 37,472,579 | 36,990,032 | 37,868,672 | 37,904,534 |
Note 18. | Subsequent Events |
Subsequent to the year ended December 30, 2017, the Board granted a total of 470,000 stock options at an exercise price of $5.85 per share and 500,000 stock options at an exercise price $5.65 per share to the Company's executive officers.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. Controlsand Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of December 30, 2017.31, 2022. Pursuant to Rule13a−15(e) promulgated by the Commission pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), “disclosure controls and procedures” means controls and other procedures that are designed to insureensure that information required to be disclosed by us in the reports that we file with the Commission is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to insureensure that information that we are required to disclose in the reports we file with the Commission is accumulated and communicated to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 30, 2017.31, 2022.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting include those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Our management, including the undersigned principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In conducting its assessment, our management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework in 2013. Based on this assessment, our management concluded that, as of December 31, 2022, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, that occurred during the fourth fiscal quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Disclosure Controls and Procedures
The effectiveness of our disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures, no matter how well conceived, will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.
Changes in Internal Control over Financial Reporting
There were no change in internal controls over financial reporting (as defined in Rule 13a−15(f) promulgated under the Exchange Act) that occurred during our fourth fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting include those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Our management, including the undersigned principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 30, 2017. In conducting its assessment, our management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework in 2013. Based on this assessment, our management concluded that, as of December 30, 2017, our internal control over financial reporting was effective based on those criteria.
Inherent Limitations on Internal Control
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of control. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, our internal control over financial reporting is designed to provide reasonable assurance of achieving their objectives.
Attestation ReportItem 9B. OtherInformation
Not Applicable.
Item 9C. Disclosures regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item will be contained in the Proxy Statement as follows:
•The information relating to our executive officers is to be included in the section entitled “Information about our Executive Officers,”
•The information relating to our directors and nominees for director is to be included in the section entitled “Election of Directors” and “Information Regarding the Board of Directors and Corporate Governance,”
•The information relating to our audit committee and audit committee financial expert is to be included in the section “Information Regarding the Board of Directors and Corporate Governance,” and
•If required, the information regarding compliance with Section 16(a) of the Registered Public Accounting FirmExchange Act is to be included in the section entitled “Delinquent Section 16(a) Reports.”
Such information will be included in the Proxy Statement and is incorporated herein by reference.
We have adopted a written Code of Business Conduct and Ethics (Code of Conduct) that applies to all officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The effectivenessCode of Conduct is available on our internal control over financial reporting has been audited by Marcum LLP, an independent registered public accounting firm, as statedwebsite at www.chromadex.com. If we make any substantive amendments to the Code of Conduct or grant any waiver from a provision of the Code of Conduct to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website in their attestation reportlieu of filing such waiver or amendment in Item 8 of this Annuala Current Report on Form 10-K, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 30, 2017.
None.
8-K.
PART III
Item 10.
| Directors, Executive Officers and Corporate Governance |
Item 11. Executive Compensation
Information required by this item will be contained in the Proxy Statement under the headings “Managementcaption “Executive Officers and Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance,”Management Compensation” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The informationInformation required by this item regarding executive compensation is incorporated by reference to the information set forth in the sections titled “Executive Compensation”will be contained in the Proxy Statement.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference toStatement under the information set forth in the section titledcaption “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference.
Item 13. Certain Relationshipsand Related Transactions, and Director Independence
Information required by this item will be contained in the Proxy Statement.
The information required by Item 201(d)Statement under the caption “Certain Relationships and Related Transactions” and “Information Regarding the Board of Regulation S-KDirectors and Corporate Governance” and is incorporated herein by reference to the information set forth in the section titled “Executive Compensation” in the Proxy Statement.reference.
Item 13.
| Certain Relationships and Related Transactions, and Director Independence |
Item 14. PrincipalAccounting Fees and ServicesOur independent registered public accounting firm is Marcum LLP, New York, NY, Audit Firm ID: 688.
The information required by this item regarding certain relationshipsis to be included in our Proxy Statement under the caption “Ratification of the Appointment of Independent Registered Public Accounting Firm” and related transactions and director independence is incorporated herein by reference to the information set forth in the sections titled “Certain Relationships and Related Transactions” and “Management and Corporate Governance – Director Independence,” respectively, in the Proxy Statement.
Item 14. | Principal Accounting Fees and Services |
The information required by this item regarding principal accountant fees and services is incorporated by reference to the information set forth in the section titled “Audit Fees” in the Proxy Statement.
reference.
PART IV
Item 15.
| Exhibits and Financial Statement Schedules |
Item 15. Exhibits andFinancial Statement Schedules
(a)(1) Financial Statements
Reference is made to Item 8 of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All schedules have been omitted because they are not required or because the required information is given in the Financial Statements or Notes thereto set forth under Part II, Item 8 of this Annual Report on Form 10-K.
(a)(3) Listof Exhibits
INDEX TO EXHIBITS
Exhibit No. | | Description |
| | Agreement and Plan of Merger, dated as of May 21, 2008, among Cody, CDI Acquisition, Inc. and ChromaDex, Inc. as amended on June 10, 2008 (incorporated by reference from, and filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 24, 2008)
|
| | Asset Purchase Agreement, dated as of August 21, 2017, by and among Covance Laboratories Inc., ChromaDex, Inc., ChromaDex Analytics, Inc., and ChromaDex Corporation (incorporated by reference from, and filed as Exhibit 2.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 9, 2017)*(2)
|
| | Amendment to Asset Purchase Agreement, dated as of September 5, 2017, by and among Covance Laboratories Inc., ChromaDex, Inc., ChromaDex Analytics, Inc., and ChromaDex Corporation (incorporated by reference from, and filed as Exhibit 2.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 9, 2017)
|
| | Amended and Restated Certificate of Incorporation of ChromaDex Corporation, a Delaware corporation❖ |
| | Certificate of Amendment to the Certificate of Incorporation of ChromaDex Corporation, a Delaware corporation (incorporated by reference from, and filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 12, 2016)
|
| | Bylaws of ChromaDex Corporation, a Delaware corporation (incorporated by reference from, and filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Commission on June 24, 2008)
|
| | Amendment to Bylaws of ChromaDex Corporation, a Delaware corporation (incorporated by reference from, and filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 19, 2016)
|
| | Form of Stock Certificate representing shares of ChromaDex Corporation Common Stock (incorporated by reference from, and filed as Exhibit 4.1 of the Company’s Annual Report on Form 10-K filed with the Commission on April 3, 2009)
|
| | Investor’s Rights Agreement, effective as of December 31, 2005, by and between The University of Mississippi Research Foundation and ChromaDex (incorporated by reference from, and filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 24, 2008)
|
| | Tag-Along Agreement effective as of December 31, 2005, by and among the Company, Frank Louis Jaksch, Snr. & Maria Jaksch, Trustees of the Jaksch Family Trust, Margery Germain, Lauren Germain, Emily Germain, Lucie Germain, Frank Louis Jaksch, Jr., and the University of Mississippi Research Foundation (incorporated by reference from, and filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Commission on June 24, 2008)
|
| | Form of Stock Certificate representing shares of ChromaDex Corporation Common Stock (New design effective as of January 1, 2016, incorporated as by reference from and filed as Exhibit 4.4 to the Company’s Annual Report on Form 10-K filed with the Commission on March 17, 2016)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | Filed or
Furnished
Herewith |
| Exhibit No. | | Description | | Form | | File Number | | Exhibit | | Filing Date | |
| | | | 8-K | | 333-140056 | | 2.1 | | 6/24/2008 | | |
| | | | 10-K | | 001-37752 | | 3.1 | | 3/15/2018 | | |
| | | | 8-K | | 000-53290 | | 3.1 | | 4/12/2016 | | |
| | | | 10-K | | 001-37752 | | 3.3 | | 3/15/2022 | | |
| | | | 8-K | | 333-140056 | | 4.1 | | 6/24/2008 | | |
| | Tag-Along Agreement effective as of December 31, 2005, by and among the Registrant, Frank Louis Jaksch, Snr. & Maria Jaksch, Trustees of the Jaksch Family Trust, Margery Germain, Lauren Germain, Emily Germain, Lucie Germain, Frank Louis Jaksch, Jr., and the University of Mississippi Research Foundation | | 8-K | | 333-140056 | | 4.2 | | 6/24/2008 | | |
| | | | 10-K | | 001-37752 | | 4.5 | | 3/7/2019 | | |
| | | | 10-K | | 001-37752 | | 4.6 | | 3/10/2020 | | |
| | | | 8-K | | 001-37752 | | 99.2 | | 5/10/2019 | | |
| | | | 8-K | | 001-37752 | | 99.1 | | 8/15/2019 | | |
| | | | 8-K | | 001-37752 | | 99.2 | | 4/29/2020 | | |
| | | | 8-K | | 001-37752 | | 99.2 | | 2/22/2021 | | |
| | | | 8-K | | 001-37752 | | 10.3 | | 10/3/2022 | | |
| | Second Amended and Restated 2007 Equity Incentive Plan effective March 13, 2007, as amended May 20, 2010 (incorporated by reference from, and filed as Appendix B to the Company’s Current Definitive Proxy Statement on Schedule 14A filed with the Commission on May 4, 2010)(1)+
|
| | Form of Stock Option Agreement under the ChromaDex, Inc. Second Amended and Restated 2007 Equity Incentive Plan (incorporated by reference from, and filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on June 24, 2008)(1)+
|
| | Form of Restricted Stock Purchase Agreement under the ChromaDex, Inc. 2007 Equity Incentive Plan (incorporated by reference from, and filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on June 24, 2008)(1)+ |
| | Amended and Restated Employment Agreement dated April 19, 2010, by and between Frank L. Jaksch, Jr. and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 22, 2010)(1)+
|
| | Amended and Restated Employment Agreement dated April 19, 2010, by and between Thomas C. Varvaro and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on April 22, 2010)(1)+
|
| | Transition and Separation Agreement, dated December 15, 2017, by and between ChromaDex Corporation and Thomas C. Varvaro (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 21, 2017)+
|
| | Standard Industrial/Commercial Multi-Tenant Lease – Net dated December 19, 2006, by and between ChromaDex, Inc. and SCIF Portfolio II, LLC (incorporated by reference from, and filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the Commission on June 24, 2008)
|
| | First Amendment to Standard Industrial/Commercial Multi-Tenant Lease, made as of July 18, 2008, between SCIF Portfolio II, LLC (“Lessor”) and ChromaDex, Inc. (“Lessee”) (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 23, 2008)
|
| | Second Amendment to Standard Industrial/Commercial Multi-Tenant Lease, made as of May 7, 2013, between SCIF Portfolio II, LLC (“Lessor”) and ChromaDex, Inc. (“Lessee”) (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 7, 2013) |
| | Licensing Agreement Nutraceutical Standards effective as of December 31, 1999 between the University of Mississippi Research Foundation and ChromaDex (incorporated by reference from, and filed as Exhibit 10.9 to the Company’s Current Report on Form 8-K filed with the Commission on June 24, 2008)
|
| | Equity Based License Agreement dated October 25, 2001, by and between the Company and Bayer Innovation, as amended as of October 30, 2003 (incorporated by reference from, and filed as Exhibit 10.10 to the Company’s Current Report on Form 8-K filed with the Commission on June 24, 2008)
|
| | Stock Redemption Agreement, dated June 18, 2008 between ChromaDex, Inc. and Bayer Innovation GmbH (formerly named Bayer Innovation Beteiligungsgesellschaft mbH) (incorporated by reference from, and filed as Exhibit 10.13 to the Company’s Current Report on Form 8-K filed with the Commission on June 24, 2008)
|
| | License Agreement, dated March 25, 2010 between the University of Mississippi and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Commission on May 18, 2010)*
|
| | First Amendment to License Agreement, made as of June 3, 2011 between the University of Mississippi and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 11, 2011)*
|
| | Restated and Amended License Agreement, effective as of June 3, 2015 between the University of Mississippi and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 13, 2015)*
|
| | License Agreement, dated July 5, 2011 between ChromaDex, Inc. and Cornell University (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 10, 2011)*
|
| | Exclusive License Agreement, dated September 8, 2011 between the Regents of the University of California and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 10, 2011)*
|
| | First Amendment to the License Agreement, effective as of September 5, 2014 between the Regents of the University of California and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 6, 2014)*
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | Filed or
Furnished
Herewith |
| Exhibit No. | | Description | | Form | | File Number | | Exhibit | | Filing Date | |
| 10.1 | | | | DEF 14A | | 000-53290 | | Appendix B | | 5/4/2010 | | |
| 10.2 | | | | 8-K | | 333-140056 | | 10.3 | | 6/24/2008 | | |
| 10.3 | | | | 8-K | | 333-140056 | | 10.4 | | 6/24/2008 | | |
| 10.4 | | | | 8-K | | 000-53290 | | 10.1 | | 4/22/2010 | | |
| 10.5 | | | | 8-K | | 001-37752 | | 10.2 | | 6/28/2018 | | |
| 10.6 | | | | | | | | | | | | X |
| 10.7 | | | | 10-Q | | 000-53290 | | 10.1 | | 5/18/2010 | | |
| 10.8 | | | | 10-Q | | 000-53290 | | 10.1 | | 8/11/2011 | | |
| 10.9 | | | | 10-Q | | 000-53290 | | 10.2 | | 8/13/2015 | | |
| 11.0 | | | | 10-Q | | 000-53290 | | 10.1 | | 11/6/2014 | | |
| 10.10 | | | | 10-Q | | 001-37752 | | 10.8 | | 11/10/2026 | | |
| 10.11 | | | | 10-Q | | 001-37752 | | 10.3 | | 11/10/2016 | | |
| 10.12 | | | | 10-Q | | 000-53290 | | 10.1 | | 8/12/2014 | | |
| 10.13 | | | | 10-Q | | 001-37752 | | 10.10 | | 11/10/2016 | | |
| 10.14 | | | | 10-K | | 000-53290 | | 10.40 | | 3/19/2015 | | |
| 10.15 | | | | 10-Q | | 001-37752 | | 10.7 | | 11/10/2016 | | |
| 10.16 | | | | 8-K | | 000-53290 | | 10.1 | | 4/20/2016 | | |
| | Second Amendment to the License Agreement, effective as of December 31, 2015, between the Regents of the University of California and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 10, 2016)*
|
| | Exclusive License Agreement, dated July 13, 2012 between Dartmouth College and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 10, 2016)
|
| | Exclusive License Agreement, dated March 7, 2013 between Washington University and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 10, 2016)
|
| | Amendment #1 to Exclusive License Agreement, effective as of December 15, 2015, between Washington University and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 10, 2016)
|
| | NIAGEN® Supply Agreement, dated July 9, 2013, by and between ChromaDex, Inc. and Thorne Research, Inc. (incorporated by reference from, and filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 12, 2013)
|
| | Addendum to the Nicotinamide Riboside Supply Agreement, dated July 24, 2015, by and between ChromaDex, Inc. and Thorne Research, Inc. (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 10, 2016)*
|
| | Second Addendum to the Nicotinamide Riboside Supply Agreement, dated September 14, 2016, by and between ChromaDex, Inc. and Thorne Research, Inc. (incorporated by reference from, and filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 10, 2016)*
|
| | License Agreement, made as of August 1, 2013, between Green Molecular S.L., Inc. and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 10, 2016)
|
| | NIAGEN® Supply Agreement by and between ChromaDex, Inc. and 5Linx Enterprises, Inc. effective as of January 3, 2014 (incorporated by reference from, and filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 8, 2014)*
|
| | Purenergy Supply Agreement by and between ChromaDex, Inc. and 5Linx Enterprises, Inc. effective as of January 3, 2014 (incorporated by reference from, and filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 8, 2014)*
|
| | Addendum to NIAGEN® Supply Agreement, effective as of June 26, 2014, between 5Linx Enterprises, Inc. and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 12, 2016)
|
| | First Amendment to NIAGEN® Supply Agreement, effective as of March 31, 2015, between 5Linx Enterprises, Inc. and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 12, 2016)*
|
| | Second Amendment to NIAGEN® Supply Agreement, effective as of March 3, 2016, between 5Linx Enterprises, Inc. and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 12, 2016)*
|
| | Employment Agreement by and between ChromaDex Corp. and Troy Rhonemus dated March 6, 2014 (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 10, 2014)+
|
| | Exclusive License Agreement, effective as of May 16, 2014 between Dartmouth College and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 12, 2014)*
|
| | First Amendment to Exclusive License Agreement, effective as of June 13, 2016, between Dartmouth College and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 10, 2016)*
|
| | Loan and Security Agreement by and between ChromaDex Corporation and Hercules Technology II, L.P., as Lender and Hercules Technology Growth Capital, Inc., as agent dated September 29, 2014 (incorporated by reference from, and filed as Exhibit 10.39 to the Company’s Annual report on Form 10-K filed with the Commission on March 19, 2015)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | Filed or
Furnished
Herewith |
| Exhibit No. | | Description | | Form | | File Number | | Exhibit | | Filing Date | |
| 10.17 | | | | 10-Q | | 001-37752 | | 10.8 | | 11/4/2020 | | |
| 10.18 | | | | 8-K | | 001-37752 | | 10.1 | | 12/16/2016 | | |
| 10.19 | | | | 10-Q | | 001-37752 | | 10.4 | | 8/9/2018 | | |
| 10.20 | | | | 10-Q | | 001-37752 | | 10.1 | | 5/11/2017 | | |
| 10.21 | | | | 10-Q | | 001-37752 | | 10.3 | | 5/11/2017 | | |
| 10.22 | | | | 8-K | | 001-37752 | | 10.1 | | 6/28/2018 | | |
| 10.23 | | | | 8-K | | 001-37752 | | 99.1 | | 6/22/2020 | | |
| 10.24 | | | | 10-K | | 001-37752 | | 10.50 | | 3/7/2019 | | |
| 10.25 | | | | 10-K | | 001-37752 | | 10.51 | | 3/7/2019 | | |
| 10.26 | | | | 10-K | | 001-37752 | | 10.52 | | 3/7/2019 | | |
| 10.27 | | | | 10-K | | 001-37752 | | 10.53 | | 3/7/2019 | | |
| 10.28 | | | | 10-Q | | 001-37752 | | 10.1 | | 8/3/2021 | | |
| 10.29 | | | | 10-Q | | 001-37752 | | 10.1 | | 8/3/2021 | | |
| 10.30 | | | | 8-K | | 001-37752 | | 10.1 | | 10/10/2017 | | |
| 10.31 | | | | 8-K | | 001-37752 | | 99.1 | | 4/27/2017 | | |
| 10.32 | | | | 10-K | | 001-37752 | | 10.34 | | 3/14/2022 | | |
| 10.33 | | | | 8-K | | 001-37752 | | 99.1 | | 5/10/2019 | | |
| | Amendment No. 1 to Loan and Security Agreement by and between ChromaDex Corporation and Hercules Technology II, L.P., as Lender and Hercules Technology Growth Capital, Inc., as agent dated June 17, 2015 (incorporated by reference from and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 19, 2015)
|
| | License Agreement, effective as of October 15, 2014 between University of Mississippi and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.40 to the Company’s Annual report on Form 10-K filed with the Commission on March 19, 2015)*
|
| | First Amendment to Exclusive License Agreement, effective as of July 6, 2015, between University of Mississippi and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.7 to the Company’s Quarterly report on Form 10-Q filed with the Commission on November 10, 2016)
|
| | Exclusive License and Supply Agreement, effective as of May 12, 2015 between Suntava, Inc. and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 13, 2015)*
|
| | Exclusive Supply Agreement, effective as of August 27, 2015 between Healthspan Research, LLC and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 12, 2015)*
|
| | Limited Liability Company Agreement, effective as of August 27, 2015 between Healthspan Research LLC and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 12, 2015)*
|
| | Interest Purchase Agreement, effective as of August 27, 2015 between Healthspan Research LLC and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 12, 2015)*
|
| | Second Addendum to Supply Agreement, effective as of January 28, 2016, between Nectar7 LLC and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 10, 2016)*
|
| | Form of Securities Purchase Agreement, dated as of March 11, 2016, between an existing stockholder and ChromaDex Corporation (incorporated by reference from and filed as Exhibit 10.01 to the Company’s Current Report on Form 8-K filed with the Commission on March 11, 2016)
|
| | Form of Warrant under the Securities Purchase Agreement, dated as of March 11, 2016, between an existing stockholder and ChromaDex Corporation (incorporated by reference from and filed as Exhibit 10.02 to the Company’s Current Report on Form 8-K filed with the Commission on March 11, 2016)
|
| | Lease Agreement, made as of April 14, 2016, by and between Longmont Diagonal Investments LLC and ChromaDex Analytics, Inc. (incorporated by reference from and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 20, 2016)
|
| | Supply Agreement, effective as of February 3, 2014, between Elysium Health, Inc. and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 12, 2016)*
|
| | Supply Agreement, effective as of June 26, 2014, between Elysium Health, Inc. and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 12, 2016)*
|
| | Amendment to Supply Agreement, effective as of February 19, 2016, between Elysium Health, Inc. and ChromaDex, Inc. (incorporated by reference from, and filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 12, 2016)*
|
| | Form of Securities Purchase Agreement, dated as of June 3, 2016, between an existing stockholder and ChromaDex Corporation (incorporated by reference from and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 6, 2016)
|
| | Business Financing Agreement, dated as of November 4, 2016, between Western Alliance Bank and ChromaDex Corporation (incorporated by reference to, and filed as Exhibit 10.60 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 16, 2017)
|
| | First Business Financing Modification Agreement, dated as of February 16, 2017, between Western Alliance Bank and ChromaDex Corporation (incorporated by reference to, and filed as Exhibit 10.61 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 16, 2017)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | Filed or
Furnished
Herewith |
| Exhibit No. | | Description | | Form | | File Number | | Exhibit | | Filing Date | |
| 10.34 | | | | 8-K | | 001-37752 | | 99.1 | | 7/1/2019 | | |
| 10.35 | | | | 8-K | | 001-37752 | | 99.1 | | 8/14/2019 | | |
| 10.36 | | | | 8-K | | 001-37752 | | 99.1 | | 4/29/2020 | | |
| 10.37 | | | | S-3 | | 333-237144 | | 1.2 | | 6/12/2020 | | |
| 10.38 | | | | 10-K | | 001-37752 | | 10.45 | | 3/10/2020 | | |
| 10.39 | | | | 10-K | | 001-37752 | | 10.43 | | 3/12/2021 | | |
| 10.40 | | | | 10-K | | 001-37752 | | 10.42 | | 3/14/2022 | | |
| 10.41 | | | | 8-K | | 001-37752 | | 10.1 | | 12/14/2021 | | |
| 10.42 | | | | 10-Q | | 001-37752 | | 10.1 | | 11/4/2020 | | |
| 10.43 | | | | 10-Q | | 001-37752 | | 10.2 | | 11/4/2020 | | |
| 10.44 | | | | 10-Q | | 001-37752 | | 10.3 | | 11/4/2020 | | |
| 10.45 | | | | 10-Q | | 001-37752 | | 10.4 | | 11/4/2020 | | |
| 10.46 | | | | 10-Q | | 001-37752 | | 10.5 | | 11/4/2020 | | |
| 10.47 | | | | 10-Q | | 001-37752 | | 10.6 | | 11/4/2020 | | |
| 10.48 | | | | 10-Q | | 001-37752 | | 10.7 | | 11/4/2020 | | |
| | Second Business Financing Modification Agreement, dated as of March 12, 2017, between Western Alliance Bank and ChromaDex Corporation (incorporated by reference to, and filed as Exhibit 10.62 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 16, 2017)
|
| | Third Business Financing Modification Agreement, dated as of April 19, 2017, between Western Alliance Bank and ChromaDex Corporation (incorporated by reference from, and filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 10, 2017)
|
| | Fourth Business Financing Modification Agreement, dated as of July 13, 2017, between Western Alliance Bank and ChromaDex Corporation (incorporated by reference from, and filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 10, 2017)
|
| | Fifth Business Financing Modification Agreement, dated as of August 21, 2017, by and among Western Alliance Bank, ChromaDex Corporation, ChromaDex, Inc., ChromaDex Analytics, Inc. and Healthspan Research, LLC (incorporated by reference from, and filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 9, 2017)
|
| | Form of Indemnity Agreement, between ChromaDex Corporation and each of its existing directors and executive officers. (incorporated by reference from and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 16, 2016)+
|
| | Amended and Restated Non-Employee Director Compensation Policy (incorporated by reference from, and filed as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 10, 2017)+
|
| | Membership Interest Purchase Agreement effective as of March 12, 2017, by and among Robert Fried, Charles Brenner, Jeffrey Allen and the Registrant (incorporated by reference from and filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the Commission on May 11, 2017)
|
| | Executive Employment Agreement, dated as of March 12, 2017, between Robert Fried and ChromaDex Corporation (incorporated by reference to, and filed as Exhibit 10.65 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 16, 2017)+
|
| | Amendment to Executive Employment Agreement, dated December 20, 2017, by and between ChromaDex Corporation and Robert Fried (incorporated by reference from and filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the Commission on December 21, 2017)+
|
| | Form of Restricted Stock Award Agreement for Robert Fried (incorporated by reference from and filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with the Commission on May 11, 2017)+
|
| | Securities Purchase Agreement dated April 26, 2017, by and among the Company and the Purchasers (incorporated by reference from and filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the Commission on April 27, 2017)
|
| | Registration Rights Agreement, dated April 29, 2017, by and among the Company and the Purchasers (incorporated by reference from and filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the Commission on May 2, 2017)
|
| | First Amendment to Securities Purchase Agreement, dated May 24, 2017, by and among the Company and the Purchasers (incorporated by reference from and filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the Commission on May 25, 2017)
|
| | ChromaDex Corporation 2017 Equity Incentive Plan, as amended ❖+
|
| | License Agreement dated June 9, 2017, by and between ChromaPharma, Inc. and the Scripps Research Institute (incorporated by reference from and filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed with the Commission on August 10, 2017)*
|
| | Research Funding Agreement dated June 9, 2017, by and between ChromaPharma, Inc. and the Scripps Research Institute (incorporated by reference from and filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed with the Commission on August 10, 2017)*
|
| | Executive Employment Agreement, dated October 5, 2017, by and between Kevin M. Farr and ChromaDex Corporation (incorporated by reference from and filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on October 10, 2017)+
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | Filed or
Furnished
Herewith |
| Exhibit No. | | Description | | Form | | File Number | | Exhibit | | Filing Date | |
| 10.49 | | | | 10-Q | | 001-37752 | | 10.3 | | 8/3/2021 | | |
| 10.50 | | | | | | | | | | | | X |
| 10.51 | | | | 8-K | | 001-37752 | | 99.1 | | 2/22/2021 | | |
| 10.52 | | | | 10-Q | | 001-37752 | | 10.4 | | 5/6/2021 | | |
| 10.53 | | | | 10-Q | | 001-37752 | | 10.1 | | 11/3/2021 | | |
| 10.54 | | | | 10-K | | 001-37752 | | 10.59 | | 3/14/2022 | | |
| 10.55 | | | | 10-Q | | 001-37752 | | 10.2 | | 5/12/2022 | | |
| 10.56 | | | | 10-Q | | 001-37752 | | 10.1 | | 5/12/2022 | | |
| 10.57 | | | | 10-Q | | 001-37752 | | 10.3 | | 5/12/2022 | | |
| 10.58 | | | | 10-Q | | 001-37752 | | 10.4 | | 5/12/2022 | | |
| 10.59 | | | | 10-Q | | 001-37752 | | 10.5 | | 5/12/2022 | | |
| 10.60 | | | | 10-Q | | 001-37752 | | 10.6 | | 5/12/2022 | | |
| 10.61 | | | | 8-K | | 001-37752 | | 10.1 | | 10/3/2022 | | |
| 10.62 | | | | 8-K | | 001-37752 | | 10.2 | | 10/3/2022 | | |
| 10.63 | | | | 8-K | | 001-37752 | | 10.1 | | 1/5/2023 | | |
| 10.64 | | | | 8-K | | 001-37752 | | 10.1 | | 10/11/2022 | | |
| 10.65 | | | | 10-Q | | 001-37752 | | 10.6 | | 11/2/2022 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | Filed or
Furnished
Herewith |
| Exhibit No. | | Description | | Form | | File Number | | Exhibit | | Filing Date | |
| 10.66 | | | | 8-K | | 001-37752 | | 10.1 | | 8/10/2022 | | |
| 10.67 | | | | 8-K | | 001-37752 | | 10.2 | | 8/10/2022 | | |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| 24.1 | | Power of Attorney (included on the signature page of this Annual Report on Form 10-K) | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| 101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | |
| 104 | | Cover Page Interactive Data File - formatted in Inline XBRL and included in Exhibit 101 | | | | | | | | | | |
| | Securities Purchase Agreement dated November 3, 2017, by and among the Company and the Purchasers (incorporated by reference from and filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the Commission on November 6, 2017)
| | | |
| (1) | | Registration Rights Agreement, dated November 3, 2017, by and among the Company and the Purchasers (incorporated by reference from and filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed with the Commission on November 6, 2017)
|
| | Executive Employment Agreement, dated as of January 22, 2018, by and between Mark Friedman and ChromaDex Corporation❖+
|
| | Subsidiaries of ChromaDex Corporation❖
|
| | Consent of Marcum, LLP, Independent Registered Public Accounting Firm❖
|
| | Certification of the Chief Executive Officer pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended❖
|
| | Certification of the Chief Financial Officer pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended❖
|
| | Certification pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)❖
|
_________
❖
| Filed herewith. |
(1) | Plan and related Forms were assumed by ChromaDex Corporation pursuant to Agreement and Plan of Merger, dated as of May 21, 2008, among ChromaDex Corporation (formerly Cody Resources, Inc.), CDI Acquisition, Inc. and ChromaDex, Inc. |
(2)
| Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. ChromaDex Corporation undertakes to furnish supplemental copies of any of the omitted schedules upon request by the Securities and Exchange Commission; provided, however, that ChromaDex Corporation may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule so furnished. |
+
| Indicates management contract or compensatory plan or arrangement. |
*
| This Exhibit has been granted confidential treatment and has been filed separately with the Commission. The confidential portions of this Exhibit have been omitted and are marked by an asterisk. |
| ** | Certain portions of this exhibit are omitted because they are both not material and are the type that the Registrant treats as private or confidential. |
Item 16. Form10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of March 2018.
authorized.
| | | | | | | | |
| CHROMADEX CORPORATION | |
| By: | /s/ FRANK L. JAKSCH JR. | |
| Frank L. Jaksch Jr.By: | /s/ ROBERT FRIED |
| | Robert Fried Chief Executive Officer | |
|
Date: March 8, 2023
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Frank L. Jaksch Jr.Robert Fried and Kevin Farr,Brianna Gerber, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this report,Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature | | Title | | Date | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
/s/ FRANK L. JAKSCH JR.ROBERT FRIED | | Chief Executive Officer and Director | | March 15, 20188, 2023 |
Frank L. Jaksch Jr.Robert Fried | | (Principal Executive Officer) | | |
| | | | |
/s/ KEVIN FARRBRIANNA GERBER | | Chief Financial Officer | | March 15, 20188, 2023 |
Kevin FarrBrianna Gerber | | (Principal Financial and Accounting Officer) | | |
| | | | |
/s/ ROBERT FRIEDFRANK JAKSCH JR. | | President, Chief Operating Officer and Director | | March 15, 2018 |
Robert Fried | | | | |
| | | | |
/s/ STEPHEN ALLEN | | Chairman of the Board and Director | | March 15, 20188, 2023 |
Stephen AllenFrank Jaksch Jr. | | | | |
| | | | |
/s/ STEPHEN BLOCK | | Director | | March 15, 2018 |
Stephen Block | | | | |
| | | | |
/s/ JEFF BAXTER | | Director | | March 15, 2018 |
Jeff Baxter | | | | |
| | | | |
/s/ KURT GUSTAFSON | | Director | | March 15, 2018 |
Kurt Gustafson | | | | |
| | | | |
| /s/ STEVEN RUBIN | | Director | | March 15, 20188, 2023 |
| Steven Rubin | | | | |
| | | | |
/s/ TONY LAUWENDY YU | | Director | | March 15, 20188, 2023 |
Tony LauWendy Yu | | | | |
| | | | |
| /s/ GARY NG | | Director | | March 15, 20188, 2023 |
Wendy YuGary Ng | | | | |
| | | | |
| /s/ ANN COHEN | | Director | | March 8, 2023 |
| Ann Cohen | | | | |
| | | | |
| /s/ KRISTIN PATRICK | | Director | | March 8, 2023 |
| Kristin Patrick | | | | |
| | | | |
| /s/ HAMED SHAHBAZI | | Director | | March 8, 2023 |
| Hamed Shahbazi | | | | |
| | | | |
