| Commitments and Contingencies | Lease The Company leases its office and research facilities
in California, Colorado and Maryland under operating lease agreements that expire at various dates from September 2019 through
February 2024. Monthly lease payments range from $4,000 per month to $48,000 per month, and minimum lease payments escalate during
the terms of the leases. Generally accepted accounting principles require total minimum lease payments to be recognized as rent
expense on a straight-line basis over the term of the lease. The excess of such expense over amounts required to be paid under
the lease agreement is carried as a liability on the Company’s consolidated balance sheet. Minimum future rental payments under all of the leases as of December
31, 2018 are as follows:
(In thousands) Fiscal years ending:
2019 $ 787
2020 733
2021 627
2022 138
2023 143
Thereafter 24
$ 2,452 Rent expense was approximately $791,000 and
$729,000 for the years ended December 31, 2018 and December 30, 2017, respectively. During the year ended December 31, 2018, the
Company entered into lease amendments 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 $25,000 to $27,000, as
the payments escalate during the term of the lease. Pursuant to the term of the lease amendment, the landlord provided tenant improvements
for approximately $70,000 in 2018. The landlord provided lease incentive (a) has been recorded as leasehold improvement asset and
is amortized over the lease term which is through October 2021; and (b) has been recorded as deferred rent and is amortized as
reductions to lease expense over the lease term. 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 future payments under purchase obligations as of December
31, 2018 are as follows:
(In thousands) Fiscal year ending:
2019 $ 4,365,000
$ 4,365,000 Royalty The Company has nine licensing agreements with
leading research universities and other patent holders, pursuant to which the Company acquired patents related to certain products
the Company offers to its customers. These agreements afford for future royalty payments based on contractual minimums and expire
at various dates from December 31, 2019 through an estimated year of 2032. Yearly minimum royalty payments including license maintenance
fees range from $10,000 per year to $100,000 per year, however, these minimum payments escalate each year with a maximum of $150,000
per year. In addition, the Company is required to pay a range of 2% to 5% of sales related to the licensed products under these
agreements. Total royalty expenses including license maintenance fees for the years ended December 31, 2018 and December 30, 2017
were approximately $1.7 million and $1.0 million, respectively under these agreements. Minimum royalties including license maintenance
fees for the next five years are as follows:
(In thousands) Fiscal years ending:
2019 $ 333
2020 367
2021 385
2022 386
2023 388
$ 1,859 Supply agreement with Nestlé On December 19, Legal proceedings – Elysium Health,
LLC (A) California Action On December 29, 2016, ChromaDex, Inc. filed
a complaint in the United States District Court for the Central District of California, naming Elysium Health, Inc. (together with
Elysium Health, LLC, “Elysium”) as defendant (the “Complaint”). On January 25, 2017, Elysium filed an answer
and counterclaims in response to the Complaint (together with the Complaint, the “California Action”). Over the course
of the California Action, the parties have each filed amended pleadings several times and have each engaged in several rounds of
motions to dismiss and one round of motion for judgment on the pleadings with respect to various claims. Most recently, on November
27, 2018, ChromaDex filed a fifth amended complaint that added an individual, Mark Morris, as a defendant. Elysium and Morris (“the
Defendants”) moved to dismiss on December 21, 2018. The court denied Defendants’ motion on February 4, 2019. Following the court’s February 4, 2019
order, the claims that ChromaDex, Inc. presently asserts in the California Action, among other allegations, are that (i) Elysium
breached the Supply Agreement, dated June 26, 2014, by and between ChromaDex, Inc. and Elysium (the “pTeroPure® Supply
Agreement”), by failing to make payments to ChromaDex, Inc. for purchases of pTeroPure® and by improper disclosure of
confidential ChromaDex, Inc. information pursuant to the pTeroPure® Supply Agreement, (ii) Elysium breached the 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® and by improper disclosure of confidential ChromaDex,
Inc. information pursuant to the NIAGEN® Supply Agreement, (iii) Defendants willfully and maliciously misappropriated ChromaDex,
Inc. trade secrets concerning its ingredient sales business under both the California Uniform Trade Secrets Act and the Federal
Defend Trade Secrets Act, (iv) Morris breached two confidentiality agreements he signed by improperly stealing confidential ChromaDex,
Inc. documents and information, (v) Morris breached his fiduciary duty to ChromaDex, Inc. by lying to and competing with ChromaDex,
Inc. while still employed there, and (vi) Elysium aided and abetted Morris’s breach of fiduciary duty. ChromaDex, Inc. is
seeking damages and interest for Elysium’s alleged breaches of the NIAGEN® Supply Agreement and pTeroPure® Supply
Agreement and Morris’s alleged breaches of his confidentiality agreements, compensatory damages and interest, punitive damages,
injunctive relief, and attorney’s fees for Defendants’ alleged willful and malicious misappropriation of ChromaDex,
Inc.’s trade secrets, and compensatory damages and interest, disgorgement of all benefits received, and punitive damages
for Morris’s alleged breach of his fiduciary duty and Elysium’s aiding and abetting of that alleged breach. Defendants
filed their answer to ChromaDex, Inc.'s fifth amended complaint on February 19, 2019. Among other allegations, the claims that Elysium
presently alleges in the California Action are that (i) ChromaDex, Inc. breached the NIAGEN® Supply Agreement by not issuing
certain refunds or credits to Elysium, by not supplying NIAGEN® manufactured according to the defined standard, by distributing
the NIAGEN® product specifications attached to the parties’ agreement to other customers, and by failing to provide
Elysium with information concerning the quality and identity of NIAGEN® pursuant to the NIAGEN® Supply Agreement, (ii)
ChromaDex, Inc. breached the implied covenant of good faith and fair dealing pursuant to the NIAGEN® Supply Agreement, (iii)
ChromaDex, Inc. fraudulently induced Elysium into entering into the Trademark License and Royalty Agreement, dated February 3,
2014, by and between ChromaDex, Inc. and Elysium (the “License Agreement”), (iv) ChromaDex, Inc.’s conduct constitutes
misuse of its patent rights, and (v) ChromaDex, Inc. was unjustly enriched by the royalties Elysium paid pursuant to the License
Agreement. Elysium is seeking damages for ChromaDex, Inc.’s alleged breaches of the NIAGEN® Supply Agreement and 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. ChromaDex, Inc. answered Elysium’s present allegations on August 24, 2018. The parties are currently in
discovery. (B) Patent Office Proceedings On July 17, 2017, Elysium filed petitions with
the U.S. Patent and Trademark Office for inter partes inter partes inter partes inter partes inter partes (C) Southern District of New York Action On September 27, 2017, Elysium Health Inc. (“Elysium
Health”) filed a complaint in the United States District Court for the Southern District of New York, against ChromaDex,
Inc. (the “Elysium SDNY Complaint”). Elysium Health alleges in the Elysium SDNY Complaint that ChromaDex, Inc. made
false and misleading statements in a citizen petition to the Food and Drug Administration it filed on or about August 18, 2017.
Among other allegations, Elysium Health avers that the citizen petition made Elysium Health’s product appear dangerous, while
casting ChromaDex, Inc.’s own product as safe. The Elysium SDNY Complaint asserts four claims for relief: (i) false advertising
under the Lanham Act, 15 U.S.C. § 1125(a); (ii) trade libel; (iii) deceptive business practices under New York General Business
Law § 349; and (iv) tortious interference with prospective economic relations. ChromaDex, Inc. denies the claims in the Elysium
SDNY Complaint and intends to defend against them vigorously. On October 26, 2017, ChromaDex, Inc. moved to dismiss the Elysium
SDNY Complaint on the grounds that, inter alia, its statements in the citizen petition are immune from liability under the Noerr-Pennington
Doctrine, the litigation privilege, and New York’s Anti-SLAPP statute, and that the Elysium SDNY Complaint failed to state
a claim. Elysium Health opposed the motion on November 2, 2017. ChromaDex, Inc. filed its reply on November 9, 2017. On October 26, 2017, ChromaDex, Inc. filed a
complaint in the United States District Court for the Southern District of New York against Elysium Health (the “ChromaDex
SDNY Complaint”). ChromaDex, Inc. alleges that Elysium Health made material false and misleading statements to consumers
in the promotion, marketing, and sale of its health supplement product, Basis, and asserts five claims for relief: (i) false advertising
under the Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under 15 U.S.C. § 1125(a); (iii) deceptive practices
under New York General Business Law § 349; (iv) deceptive practices under New York General Business Law § 350; and (v)
tortious interference with prospective economic advantage. On November 16, 2017, Elysium Health moved to dismiss for failure to
state a claim. ChromaDex, Inc. opposed the motion on November 30, 2017 and Elysium Health filed a reply on December 7, 2017. On November 3, 2017, the Court consolidated
the Elysium SDNY Complaint and the ChromaDex SDNY Complaint actions under the caption In re Elysium Health-ChromaDex Litigation,
17-cv-7394, and stayed discovery in the consolidated action pending a Court-ordered mediation. The mediation was unsuccessful.
On September 27, 2018, the Court issued a combined ruling on both parties’ motions to dismiss. For ChromaDex’s motion
to dismiss, the Court converted the part of the motion on the issue of whether the citizen petition is immune under the Noerr-Pennington
Doctrine into a motion for summary judgment, and requested supplemental evidence from both parties, which were submitted on October
29, 2018. The Court otherwise denied the motion to dismiss. On January 3, 2019, the Court granted ChromaDex, Inc.’s motion
for summary judgment under the Noerr-Pennington Doctrine and dismissed all claims in the Elysium SDNY Complaint. Elysium moved
for reconsideration on January 17, 2019. The Court denied Elysium’s motion for reconsideration on February 6, 2019, and issued
an amended final order granting ChromaDex, Inc.’s motion for summary judgment as on February 7, 2019. The Court granted it 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, Inc. answered Elysium’s counterclaims on November 2,
2018. The parties are conferring on a proposed scheduling order. 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, 2018, ChromaDex, Inc. did not accrue a potential loss for the California Action or the Elysium
SDNY Complaint because ChromaDex, Inc. believes that the allegations are without merit and thus it is not probable that a liability
has been incurred. (D) Delaware – Patent Infringement
Action On September 17, 2018, ChromaDex, Inc. and Trustees
of Dartmouth College filed a patent infringement complaint in the United States District Court for the District of Delaware against
Elysium Health, Inc. The complaint alleges that Elysium’s BASIS® dietary supplement violates U.S. Patents 8,197,807
(the “’807 Patent”) and 8,383,086 (the “’086 Patent”) that comprise compositions containing
isolated nicotinamide riboside held by Dartmouth and licensed exclusively to ChromaDex, Inc. On October 23, 2018, Elysium filed
an answer to the complaint. The answer asserts various affirmative defenses and denies that Plaintiffs are entitled to any relief. On November 7, 2018, Elysium filed a motion
to stay the patent infringement proceedings pending resolution of (1) the inter partes inter partes Legal proceedings – Covance Laboratories
Inc. On January 10, 2019, Covance Laboratories Inc.
(“Covance”) filed a complaint in the United States District Court for the District of Delaware against ChromaDex, Inc.
and ChromaDex Analytics, Inc. (collectively “ChromaDex”). The complaint alleges that ChromaDex breached an Asset Purchase
Agreement (“APA”), dated August 21, 2017, between Covance and ChromaDex in which Covance purchased certain assets related
to ChromaDex’s Lab Business for $7,500,000. Specifically, the complaint alleges that ChromaDex failed to deliver to Covance
its entire ComplyID library. On February 4, 2019, ChromaDex filed an answer to the complaint. The answer asserts various affirmative
defenses and denies that Covance is entitled to any relief. 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. |
