ChromaDex Corp. - Quarter Report: 2017 April (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
FORM 10-Q
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2017
Commission
File Number: 001-37752
CHROMADEX
CORPORATION
(Exact
Name of Registrant as Specified in its Charter)
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Delaware
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26-2940963
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer
Identification No.)
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10005 Muirlands Blvd. Suite
G,
Irvine,
California
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92618
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(Address of
Principal Executive Offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (949) 419-0288
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes X No
Indicate
by check mark whether the registrant is a large accelerated filer,
accelerated filer, non-accelerated filer, smaller reporting company
or emerging growth company. See definition of “large
accelerated filer, accelerated filer, smaller reporting company and
emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated
filer ____
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Accelerated filer
X
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Non-accelerated
filer ____
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Smaller reporting
company ____
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(Do not check if
smaller reporting company)
|
Emerging growth
company ____
|
If an
emerging growth company, indicate by checkmark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes ___
No
X
As of May 10, 2017 there were 39,790,080 shares of the
registrant’s common stock issued and
outstanding.
CHROMADEX CORPORATION
QUARTERLY
REPORT ON FORM 10-Q
TABLE OF CONTENTS
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4
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5
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13
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26
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26
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28
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43
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43
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44
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45
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-i-
PART I – FINANCIAL INFORMATION
(UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
ChromaDex
Corporation and Subsidiaries
Condensed
Consolidated Balance Sheets
April
1, 2017 and December 31, 2016
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April
1,
2017
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December
31,
2016
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Assets
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Current
Assets
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Cash
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$1,185,353
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$1,642,429
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Trade receivables,
net of allowances of $1,077,000 and $1,081,000,
respectively
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5,044,877
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5,852,030
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Inventories
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8,938,099
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7,912,630
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Prepaid expenses
and other assets
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420,265
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329,854
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Total
current assets
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15,588,594
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15,736,943
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Leasehold
Improvements and Equipment, net
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3,252,514
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3,111,374
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Deposits
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376,431
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397,207
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Intangible assets,
net
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1,833,781
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486,226
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Longterm
investment
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-
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20,318
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Total
assets
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$21,051,320
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$19,752,068
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Liabilities
and Stockholders' Equity
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Current
Liabilities
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Accounts
payable
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$7,865,099
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$5,978,288
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Accrued
expenses
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1,993,717
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2,170,172
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Current maturities
of capital lease obligations
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275,221
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255,461
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Customer deposits
and other
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399,010
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389,010
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Deferred rent,
current
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111,879
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76,219
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Due to
officer
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100,000
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-
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Total
current liabilities
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10,744,926
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8,869,150
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Capital lease
obligations, less current maturities
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365,393
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343,589
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Deferred rent, less
current
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568,943
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564,971
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Total
liabilities
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11,679,262
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9,777,710
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Commitments and
contingencies
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Stockholders'
Equity
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Common stock, $.001
par value; authorized 150,000,000 shares;
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issued
and outstanding April 1, 2017 37,918,048 shares and
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December
31, 2016 37,544,531 shares
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37,918
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37,545
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Additional paid-in
capital
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56,486,469
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55,160,387
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Accumulated
deficit
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(47,152,329)
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(45,223,574)
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Total
stockholders' equity
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9,372,058
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9,974,358
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Total
liabilities and stockholders' equity
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$21,051,320
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$19,752,068
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See Notes to
Consolidated Financial Statements.
ChromaDex
Corporation and
Subsidiaries
Condensed
Consolidated Statements of Operations
For
the Three Month Periods Ended April 1, 2017 and April 2,
2016
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April
1, 2017
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April 2,
2016
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Sales,
net
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$4,449,122
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$7,331,945
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Cost of
sales
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2,696,469
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3,880,526
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Gross
profit
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1,752,653
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3,451,419
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Operating
expenses:
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Sales and
marketing
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596,162
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544,722
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Research and
development
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664,190
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464,072
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General and
administrative
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2,383,146
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1,988,559
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Operating
expenses
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3,643,498
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2,997,353
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Operating
income (loss)
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(1,890,845)
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454,066
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Nonoperating income
(expense):
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Interest
income
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2
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794
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Interest
expense
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(37,912)
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(188,495)
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Nonoperating
expenses
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(37,910)
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(187,701)
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Income (loss)
before income taxes
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(1,928,755)
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266,365
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Provision for
income taxes
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-
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(10,740)
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Net
income (loss)
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$(1,928,755)
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$255,625
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Basic earnings
(loss) per common share
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$(0.05)
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$0.01
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Diluted earnings
(loss) per common share
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$(0.05)
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$0.01
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Basic weighted
average common shares outstanding
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38,030,688
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36,414,041
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Diluted weighted
average common shares outstanding
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38,030,688
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37,472,579
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See Notes to
Consolidated Financial Statements.
Condensed
Consolidated Statement of Stockholders' Equity
For
the Three Month Periods Ended April 1, 2017
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Common
Stock
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AdditionalPaid-in
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Accumulated
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Total
Stockholders' |
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Shares
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Amount
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Capital
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Deficit
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Equity
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Balance, January 1,
2017
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37,544,531
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$37,545
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$55,160,387
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$(45,223,574)
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9,974,358
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Issuance
of common stock associated with
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the acquisition of Healthspan Research LLC
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367,648
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367
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999,635
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-
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1,000,002
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Exercise of stock
options
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3,202
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3
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6,620
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-
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6,623
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Vested restricted
stock
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2,667
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3
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(3)
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-
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-
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Share-based
compensation
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-
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-
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319,830
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-
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319,830
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Net
loss
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-
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-
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-
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(1,928,755)
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(1,928,755)
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Balance,
April 1, 2017
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37,918,048
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$37,918
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$56,486,469
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$(47,152,329)
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$9,372,058
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See Notes to
Consolidated Financial Statements.
ChromaDex
Corporation and Subsidiaries
Condensed
Consolidated Statements of Cash
Flows
For
the Three Month Periods Ended April 1, 2017 and April 2,
2016
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April
1, 2017
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April 2,
2016
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Cash Flows From
Operating Activities
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Net
income (loss)
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$(1,928,755)
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$255,625
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Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
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Depreciation
of leasehold improvements and equipment
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129,472
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82,506
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Amortization
of intangibles
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23,833
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11,311
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Share-based
compensation expense
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319,830
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324,035
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Allowance
for doubtful trade receivables
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(3,470)
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(28,785)
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Loss
from disposal of equipment
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129
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-
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Non-cash
financing costs
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25,229
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53,449
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Changes
in operating assets and liabilities:
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Trade
receivables
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822,079
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(1,850,739)
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Inventories
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(964,555)
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1,464,561
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Prepaid
expenses and other assets
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(94,864)
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14,082
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Accounts
payable
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1,783,038
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(3,318,853)
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Accrued
expenses
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(179,662)
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47,995
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Customer
deposits and other
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10,000
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67,598
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Deferred
rent
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39,632
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(18,857)
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Due
to officer
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(32,500)
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-
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Net
cash used in operating activities
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(50,564)
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(2,896,072)
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Cash Flows From
Investing Activities
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Purchases
of leasehold improvements and equipment
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(161,998)
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(16,629)
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Purchases
of intangible assets
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(183,958)
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(15,000)
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Net
cash used in investing activities
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(345,956)
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(31,629)
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Cash Flows From
Financing Activities
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Proceeds
from issuance of common stock, net of issuance costs
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-
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480,000
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Proceeds
from exercise of stock options
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6,623
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93,872
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Principal
payment on loan payable
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-
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(146,795)
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Principal
payments on capital leases
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(67,179)
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(53,542)
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Net
cash provided by (used in) financing activities
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(60,556)
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373,535
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Net decrease in
cash
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(457,076)
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(2,554,166)
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Cash Beginning of
Year
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1,642,429
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5,549,672
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Cash Ending of
Year
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$1,185,353
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$2,995,506
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Supplemental
Disclosures of Cash Flow Information
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Cash
payments for interest
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$12,683
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$135,046
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Supplemental
Schedule of Noncash Investing Activity
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Noncash
consideration transferred for the acquisition of Healthspan
Research LLC
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$1,187,430
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$-
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Capital
lease obligation incurred for the purchase of
equipment
|
$108,743
|
$-
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Inventory
supplied to Healthspan Research LLC for equity interest, at
cost
|
$-
|
$20,318
|
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Retirement
of fully depreciated equipment - cost
|
$14,665
|
$26,666
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Retirement
of fully depreciated equipment - accumulated
depreciation
|
$(14,665)
|
$(26,666)
|
See Notes to
Consolidated Financial Statements.
Note
1. Interim
Financial Statements
The
accompanying financial statements of ChromaDex Corporation and its
wholly owned subsidiaries, ChromaDex, Inc., Healthspan Research,
LLC and ChromaDex Analytics, Inc. (collectively referred to herein
as “ChromaDex” or the “Company” or, in the
first person as “we”, “us” and
“our”) include all adjustments, consisting of normal
recurring adjustments and accruals, that, in the opinion of the
management of the Company, are necessary for a fair presentation of
the Company’s financial position as of April 1, 2017 and
results of operations and cash flows for the three months ended
April 1, 2017 and April 2, 2016. These unaudited interim financial
statements should be read in conjunction with the Company’s
audited financial statements and the notes thereto for the year
ended December 31, 2016 appearing in the Company’s Annual
Report on Form 10-K filed with the Securities and Exchange
Commission (the “Commission”) on March 16, 2017.
Operating results for the three months ended April 1, 2017 are not
necessarily indicative of the results to be achieved for the full
year ending on December 30, 2017. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America (“GAAP”)
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the period. Actual results could differ from those
estimates.
The
balance sheet at December 31, 2016 has been derived from the
audited financial statements at that date, but does not include all
of the information and footnotes required by GAAP for complete
financial statements.
Note
2. Nature
of Business and Liquidity
Nature of business: The Company is a natural products
company that discovers, acquires, develops and commercializes
patented and proprietary ingredient technologies that address the
dietary supplement, food, beverage, skin care and pharmaceutical
markets. With the recent acquisition of Healthspan Research, LLC,
the Company now has a direct to consumer (“DTC”)
product, which the Company plans to further develop. Along with our
ingredients segment that includes our DTC business, the Company
also has a core standards and contract services segment, which
focuses on natural product fine chemicals (known as
“phytochemicals”) and chemistry and analytical testing
services, and a regulatory consulting segment. As a result of the
Company’s relationships with leading universities and
research institutions, the Company is able to discover and license
early stage, intellectual property-backed ingredient technologies.
The Company then utilizes our business to develop commercially
viable proprietary ingredients. The Company’s proprietary
ingredient portfolio is backed with clinical and scientific
research, as well as extensive intellectual property
protection.
Liquidity: The Company has incurred loss from operations of
approximately $1,891,000 and net loss of approximately $1,929,000
for the three-month period ended April 1, 2017. As of April 1,
2017, the cash and cash equivalents totaled approximately
$1,185,000.
Subsequent
to the period ended April 1, 2017, the Company entered into a
Securities Purchase Agreement with certain purchasers named
therein, pursuant to which the Company agreed to sell and issue up
to $25.0 million of its Common Stock. The first tranche closed on
April 27, 2017 and the Company received $3.5 million.
While
we anticipate that our current cash, cash equivalents, cash to be
generated from operations and the funds from the financing
transaction described above will be sufficient to meet our
projected operating plans through at least May 12, 2018, we may
require additional funds, either through additional equity or debt
financings or collaborative agreements or from other sources. We
have no commitments to obtain such additional financing, and we may
not be able to obtain any such additional financing on terms
favorable to us, or at all. If adequate financing is not available,
the Company will further delay, postpone or terminate product and
service expansion and curtail certain selling, general and
administrative operations. The inability to raise additional
financing may have a material adverse effect on the future
performance of the Company.
Note
3. Significant
Accounting Policies
Basis of presentation: The financial statements and
accompanying notes have been prepared on a consolidated basis and
reflect the consolidated financial position of the Company and its
wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated from these financial
statements. The Company’s fiscal year ends on the Saturday
closest to December 31. Every fifth or sixth fiscal year, the
inclusion of an extra week occurs due to the Company’s
floating year-end date. The fiscal year 2016 ended on December 31,
2016 consisted of normal 52 weeks. The fiscal year 2017 ending on
December 30, 2017 will also include the normal 52
weeks.
Changes in accounting principle: In January 2017, the
Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a
Business. The ASU 2017-01 clarifies the definition of a business
with the objective of adding guidance to assist companies and other
reporting organizations with evaluating whether transactions should
be accounted for as acquisitions of assets or businesses. The
Company early adopted the amendments in this ASU effective as of
January 1, 2017. On March 12, 2017, the Company acquired all of the
outstanding equity interests of Healthspan Research, LLC
("Healthspan") pursuant to a Membership Interest Purchase Agreement
by and among (i) Robert Fried, Jeffrey Allen and Dr. Charles
Brenner (the “Sellers”) and (ii) ChromaDex Corporation.
Under ASU 2017-01, this transaction was treated as an acquisition
of assets, rather than a business. For details on the acquisition
of Heathspan, please refer to Note
5. Acquisition and Related Party Transaction appearing later
on this report.
In
March 2016, the FASB issued ASU 2016-09, Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting to simplify the accounting for stock
compensation. It focuses on income tax accounting, award
classification, estimating forfeitures, and cash flow presentation.
The Company adopted the amendments in this ASU effective as of
January 1, 2017. The adoption of ASU 2016-09 did not have a
material effect on our consolidated financial
statements.
In July
2015, the FASB issued ASU 2015-11, Inventory (Topic 330) -
Simplifying the Measurement of Inventory, which requires that
inventories, other than those accounted for under
Last-In-First-Out, will be reported at the lower of cost or net
realizable value. Net realizable value is the estimated selling
price less costs of completion, disposal and transportation. The
Company adopted the amendments in this ASU effective as of January
1, 2017. The adoption of ASU 2015-11 did not have a material effect
on our consolidated financial statements.
Inventories: Inventories are comprised of raw materials,
work-in-process and finished goods. They are stated at the lower of
cost, determined by the first-in, first-out method
(“FIFO”) method, or net realizable value. Labor and
overhead has been added to inventory that was manufactured or
characterized by the Company. The amounts of major classes of
inventory as of April 1, 2017 and December 31, 2016 are as
follows:
|
|
April
1,
2017
|
December
31,
2016
|
|
Bulk
ingredients
|
$8,025,000
|
$7,044,000
|
|
Reference
standards
|
1,034,000
|
1,033,000
|
|
Dietary Supplement
bottles - DTC
|
58,000
|
-
|
|
|
9,117,000
|
8,077,000
|
|
Less valuation
allowance
|
(179,000)
|
(164,000)
|
|
|
$8,938,000
|
$7,913,000
|
Note
4. Earnings
Per Share Applicable to Common Stockholders
The
following table sets forth the computations of earnings per share
amounts applicable to common stockholders for the three months
ended April 1, 2017 and April 2, 2016:
|
|
Three
Months Ended
|
|
|
|
April
1, 2017
|
April
2, 2016
|
|
|
|
|
|
Net income
(loss)
|
$(1,928,755)
|
$255,625
|
|
|
|
|
|
Basic weighted
average common shares outstanding (1):
|
38,030,688
|
36,414,041
|
|
|
|
|
|
Basic earnings
(loss) per common share
|
$(0.05)
|
$0.01
|
|
|
|
|
|
Dilutive effect of
stock options, net
|
-
|
1,024,428
|
|
Dilutive effect of
warrants, net
|
-
|
34,110
|
|
|
|
|
|
Diluted weighted
average common shares outstanding :
|
38,030,688
|
37,472,579
|
|
|
|
|
|
Diluted earnings
(loss) per common share
|
$(0.05)
|
$0.01
|
|
|
|
|
|
Potentially
dilutive securities, total (2):
|
|
|
|
Stock
options
|
5,757,195
|
5,203,419
|
|
Warrants
|
470,444
|
487,110
|
|
Convertible
debt
|
-
|
257,798
|
(1)
Includes approximately 0.4 million weighted average nonvested
shares of restricted stock for each of the three month periods
ending April 1, 2017 and April 2, 2016, which are participating
securities that feature voting and dividend rights.
(2)
Excluded from the computation of diluted loss per share for the
three month period ended April 1, 2017 as their impact is
antidilutive.
Note
5. Asset
Acquisition and Related Party Transaction
On
March 12, 2017, the Company acquired all of the outstanding equity
interests of Healthspan from Robert Fried, Jeffrey Allen and Dr.
Charles Brenner (the "Sellers"). Robert Fried is a member of the
Board of Directors ("Board") of the Company, a position he has held
since July 2015.
Upon
the closing of, and as consideration for, the acquisition, the
Company issued an aggregate of 367,648 shares of the
Company’s common stock to the Sellers. The fair value of
these shares was approximately $1.0 million based on the closing
price of $2.72 per share on March 12, 2017. Also on March 12, 2017,
the Company appointed Robert Fried as President and Chief Strategy
Officer, effective immediately. Mr. Fried continues to serve as a
member of the Board, but resigned as a member of the Nominating and
Corporate Governance Committee of the Board.
Healthspan
was formed in August 2015 to offer and sell finished bottle
products that contain NIAGEN® directly to consumers through
internet-based selling platforms. NIAGEN® is the leading
ingredient the Company currently sells. Prior to the acquisition,
the Company has supplied certain amount of NIAGEN® to
Healthspan as a raw material inventory in exchange for a 4% equity
interest in Healthspan. An additional 5% equity interest was
received for granting certain exclusive rights to resell
NIAGEN®.
The
Company acquired the Direct-To-Consumer ("DTC") internet based
selling business model that Healthspan has established. Included in
the business model acquired is the know-how marketing to date, and
the designs and procedures needed to operate a DTC internet based
selling business. This transaction was accounted for as an
acquisition of assets. An intangible asset of approximately $1.35
million was recorded as a result of this acquisition, which is the
difference of consideration transferred and the net amount of
assets acquired and liabilities assumed.
|
(A) Consideration transferred
|
|
|
(B) Net amount of assets and liabilities
|
||
|
|
Fair value
|
|
Assets acquired
|
Fair value
|
|
|
Common Stock
|
$
1,000,000
|
|
|
Cash and cash equivalents
|
$19,000
|
|
Transaction costs
|
178,000
|
|
|
Trade receivables
|
11,000
|
|
Previously held equity interest
|
20,000
|
|
|
Inventory
|
61,000
|
|
|
|
|
|
|
|
|
|
$ 1,198,000
|
|
Liabilities assumed
|
|
|
|
|
|
|
|
Due to officer
|
(132,000)
|
|
|
|
|
|
Accounts payable
|
(74,000)
|
|
|
|
|
|
Credit card payable
|
(30,000)
|
|
|
|
|
|
Other accrued expenses
|
(3,000)
|
|
DTC business model,
|
|
|
|
|
|
|
intangible asset (A) -(B)
|
$ 1,346,000
|
|
|
Net assets
|
$ (148,000)
|
|
|
|
|
|
|
|
The
acquired intangible asset is considered to have a useful life of 10
years as we believe the economic benefits from the acquisition will
last at least 10 years. The expense is amortized using the
straight-line method over the useful life.
In
cancellation of a loan owed by Healthspan to Mr. Fried prior to the
acquisition, the Company repaid $32,500 to Mr. Fried on March 13,
2017 and will also repay $100,000 on March 12, 2018. No interest is
to be paid for the outstanding $100,000 due to Mr.
Fried.
Note
6. Employee
Share-Based Compensation
Share-Based Compensation for Robert Fried
On
March 12, 2017, the Board appointed Robert Fried, as President and
Chief Strategy Officer. In connection with his appointment as
President and Chief Strategy Officer, the Company granted an option
to purchase up to 500,000 shares of ChromaDex common stock under
the ChromaDex Second Amended and Restated 2007 Equity Incentive
Plan or any subsequent equity plan, subject to monthly vesting over
a three-year period. The Company also granted 166,667 shares of
restricted stock, subject to annual vesting over a three-year
period. The fair value measured for the granted restricted stock
was approximately $453,000 and the expense will be amortized over
the vesting period of three years.
Service Period Based Stock Options
The
following table summarizes activity of service period based stock
options granted to employees at April 1, 2017 and changes during
the three months then ended:
|
|
|
Weighted
Average
|
|
||
|
|
|
|
Remaining
|
|
Aggregate
|
|
|
Number
of
|
Exercise
|
Contractual
|
Fair
|
Intrinsic
|
|
|
Shares
|
Price
|
Term
|
Value
|
Value
|
|
Outstanding at
December 31, 2016
|
4,281,151
|
$3.52
|
6.36
|
|
|
|
|
|
|
|
|
|
|
Options
Granted
|
553,334
|
2.78
|
10.00
|
$1.80
|
|
|
Options
Exercised
|
(3,202)
|
2.07
|
|
|
$3,000
|
|
Options
Forfeited
|
(3,271)
|
3.57
|
|
|
|
|
Outstanding at
April 1, 2017
|
4,828,012
|
$3.44
|
6.55
|
|
$375,000
|
|
|
|
|
|
|
|
|
Exercisable at
April 1, 2017
|
3,246,220
|
$3.41
|
5.21
|
|
$361,000
|
The
aggregate intrinsic values in the table above are based on the
Company’s stock price of $2.69, which is the closing price of
the Company’s stock on the last day of business for the
period ended April 1, 2017.
The
fair value of the Company’s stock options was estimated at
the date of grant using the Black-Scholes option pricing model. The
table below outlines the weighted average assumptions for options
granted to employees during the three months ended April 1,
2017.
|
Three Months Ended
April 1, 2017
|
|
|
Expected
term
|
5.8
years
|
|
Expected
volatility
|
73%
|
|
Expected
dividends
|
0.00%
|
|
Risk-free
rate
|
2.20%
|
As of
April 1, 2017, there
was approximately $3,154,000 of total unrecognized compensation
expected to be recognized over a weighted average period of 2.7
years.
Employee Share-Based Compensation
The
Company recognized compensation expense of approximately $306,000
and $307,000 in general and administrative expenses in the
statement of operations for the three months ended April 1, 2017
and April 2, 2016, respectively.
Note
7. Business
Segments
Since
the year ended December 31, 2016, the Company has made operational
changes to merge its Scientific and regulatory consulting segment
into Core standards and contract services segment. Also, the newly
acquired DTC operations are categorized as a part of ingredients
segment.
As a
result, the Company has the following two reportable
segments:
●
Ingredients segment
develops and commercializes proprietary-based ingredient
technologies and supplies these ingredients directly to consumers
in finished product or as raw materials to the manufacturers of
consumer products in various industries including the nutritional
supplement, food and beverage and animal health
industries.
●
Core standards and
contract services segment includes (i) supply of phytochemical
reference standards and (ii) analytical and chemistry based
services.
The
“Corporate and other” classification includes corporate
items not allocated by the Company to each reportable segment.
Further, there are no intersegment sales that require elimination.
The Company evaluates performance and allocates resources based on
reviewing gross margin by reportable segment.
Three months
ended
April 1,
2017
|
|
|
Core
Standards and
|
|
|
|
Ingredients
|
Contract
Services
|
Corporate
|
|
|
|
|
segment
|
segment
|
and
other
|
Total
|
|
|
|
|
|
|
|
Net
sales
|
$2,084,403
|
$2,364,719
|
$-
|
$4,449,122
|
|
Cost of
sales
|
914,767
|
1,781,702
|
-
|
2,696,469
|
|
|
|
|
|
|
|
Gross
profit
|
1,169,636
|
583,017
|
-
|
1,752,653
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Sales and
marketing
|
305,345
|
290,817
|
-
|
596,162
|
|
Research and
development
|
664,190
|
-
|
-
|
664,190
|
|
General and
administrative
|
-
|
-
|
2,383,146
|
2,383,146
|
|
Operating
expenses
|
969,535
|
290,817
|
2,383,146
|
3,643,498
|
|
|
|
|
|
|
|
Operating
income (loss)
|
$200,101
|
$292,200
|
$(2,383,146)
|
$(1,890,845)
|
Three months
ended
April 2,
2016
|
|
|
Core
Standards and
|
|
|
|
Ingredients
|
Contract
Services
|
Corporate
|
|
|
|
|
segment
|
segment
|
and
other
|
Total
|
|
|
|
|
|
|
|
Net
sales
|
$4,600,626
|
$2,731,319
|
$-
|
$7,331,945
|
|
Cost of
sales
|
2,099,162
|
1,781,364
|
-
|
3,880,526
|
|
|
|
|
|
|
|
Gross
profit
|
2,501,464
|
949,955
|
-
|
3,451,419
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Sales and
marketing
|
331,743
|
212,979
|
-
|
544,722
|
|
Research and
development
|
464,072
|
-
|
-
|
464,072
|
|
General and
administrative
|
-
|
-
|
1,988,559
|
1,988,559
|
|
Operating
expenses
|
795,815
|
212,979
|
1,988,559
|
2,997,353
|
|
|
|
|
|
|
|
Operating
income (loss)
|
$1,705,649
|
$736,976
|
$(1,988,559)
|
$454,066
|
At April 1,
2017
|
|
|
Core
Standards and
|
|
|
|
Ingredients
|
Contract
Services
|
Corporate
|
|
|
|
|
segment
|
segment
|
and
other
|
Total
|
|
|
|
|
|
|
|
Total
assets
|
$14,858,562
|
$4,059,395
|
$2,133,364
|
$21,051,320
|
At December 31,
2016
|
|
|
Core
Standards and
|
|
|
|
Ingredients
|
Contract
Services
|
Corporate
|
|
|
|
|
segment
|
segment
|
and
other
|
Total
|
|
|
|
|
|
|
|
Total
assets
|
$13,257,289
|
$3,918,440
|
$2,576,339
|
$19,752,068
|
Disclosure of major customers
Major
customers who accounted for more than 10% of the Company’s
total sales were as follows:
|
|
Three
months ended
|
|
|
Major
Customers
|
April 1,
2017
|
April 2,
2016
|
|
|
|
|
|
Customer C
(Ingredients segment)
|
*
|
27.4%
|
|
|
|
|
|
* Represents less
than 10%.
|
|
|
Major
customers who accounted for more than 10% of the Company’s
total trade receivables were as follows:
|
|
Percentage of the
Company's Total Trade Receivables
|
|
|
Major
Customers
|
At
April 1, 2017
|
At
December 31, 2016
|
|
|
|
|
|
Customer C
(Ingredients segment)
|
53.1%
|
45.8%
|
|
Customer D
(Ingredients and Core segment)
|
*
|
10.2%
|
|
|
|
|
|
* Represents less
than 10%.
|
|
|
Note
8. Commitments
and Contingencies
Legal proceedings
On
December 29, 2016, ChromaDex, Inc. filed a complaint (the
“Complaint”) in the United States District Court for
the Central District of California, naming Elysium Health, Inc. as
defendant. Among other allegations, ChromaDex, Inc. alleges in the
Complaint that (i) Elysium breached the Supply Agreement, dated
June 26, 2014, by and between ChromaDex, Inc. and Elysium Health,
LLC (“Elysium”) (the “pTeroPure® Supply
Agreement”), by failing to make payments to ChromaDex, Inc.
for purchases of pTeroPure® pursuant to the pTeroPure®
Supply Agreement, (ii) Elysium breached the Supply Agreement, dated
February 3, 2014, by and between ChromaDex, Inc. and Elysium, as
amended (the “NIAGEN®
Supply Agreement”), by failing to make payments to ChromaDex,
Inc. for purchases of NIAGEN®
pursuant to the NIAGEN®
Supply Agreement, (iii) Elysium breached the Trademark License and
Royalty Agreement, dated February 3, 2014, by and between
ChromaDex, Inc. and Elysium (the “License Agreement”),
by failing to make payments to ChromaDex, Inc. for royalties due
pursuant to the License Agreement and (iv) certain officers of
Elysium made false promises and representations to induce
ChromaDex, Inc. into providing large supplies of pTeroPure®
and NIAGEN® to Elysium pursuant to the pTeroPure® Supply
Agreement and NIAGEN® Supply Agreement. ChromaDex, Inc. is
seeking punitive damages, money damages and interest.
On
January 25, 2017, Elysium filed an answer and counterclaims (the
“Counterclaim”) in response to the Complaint. Among
other allegations, Elysium alleges in the Counterclaim that (i)
ChromaDex, Inc. breached the NIAGEN® Supply Agreement by not
issuing certain refunds or credits to Elysium and for violating
certain confidential information provisions, (ii) ChromaDex, Inc.
breached the implied covenant of good faith and fair dealing
pursuant to the NIAGEN® Supply Agreement, (iii) ChromaDex,
Inc. breached certain confidential provisions of the
pTeroPure® Supply Agreement, (iv) ChromaDex, Inc. fraudulently
induced Elysium into entering into the License Agreement (the
“Fraud Claim”), (v) ChromaDex, Inc.’s conduct
constitutes misuse of its patent rights (the “Patent
Claim”) and (vi) ChromaDex, Inc. has engaged in unlawful or
unfair competition under California state law (the “Unfair
Competition Claim”). Elysium is seeking damages for
ChromaDex, Inc.’s alleged breaches of the NIAGEN® Supply
Agreement and pTeroPure® Supply Agreement, and compensatory
damages, punitive damages and/or rescission of the License
Agreement and restitution of any royalty payments conveyed by
Elysium pursuant to the License Agreement.
On
February 15, 2017, ChromaDex, Inc. filed an amended complaint (the
“Amended Complaint”). In the Amended Complaint,
ChromaDex, Inc. re-alleges the claims in the Complaint, and also
alleges that Elysium willfully and maliciously misappropriated
ChromaDex, Inc.’s trade secrets. On February 15, 2017,
ChromaDex, Inc. also filed a motion to dismiss the Fraud Claim, the
Patent Claim and the Unfair Competition Claim. On March 1, 2017,
Elysium filed a motion to dismiss ChromaDex, Inc.'s fraud and trade
secret misappropriation causes of action. On March 6, 2017, Elysium
filed a first amended counterclaim. On March 20, 2017, ChromaDex,
Inc. moved to dismiss Elysium's amended fraud, patent misuse and
the Unfair Competition Claim. The hearing on both motions to
dismiss is set for May 15, 2017. While ChromaDex, Inc. expresses no
opinion as to the ultimate outcome of this matter, ChromaDex, Inc.
believes Elysium’s allegations are without merit and will
vigorously defend against them.
As of
April 1, 2017, ChromaDex, Inc. did not accrue a potential loss for
the Counterclaim because ChromaDex, Inc. believes that the
allegations are without merit and thus it is not probable that a
liability had been incurred, and the amount of loss cannot be
reasonably estimated.
From
time to time we are involved in legal proceedings arising in the
ordinary course of our business. We believe that there is no other
litigation pending that is likely to have, individually or in the
aggregate, a material adverse effect on our financial condition or
results of operations.
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 ChromaDex Second
Amended and Restated 2007 Equity Incentive Plan or any subsequent
equity plan, subject to monthly vesting over a three-year period;
and (iv) 166,667 shares of restricted Common Stock, subject to
annual vesting over a three-year period.
Subject
to requisite stockholder approval and Mr. Fried’s continuous
service through such date, Mr. Fried is also eligible to receive
(i) on March 12, 2018, 166,667 shares of restricted Common Stock,
subject to annual vesting over a two-year period, (ii) on March 12,
2019, 166,666 shares of restricted Common Stock that vest in full
on the one year anniversary of the grant date and (iii) up to
500,000 shares of fully-vested restricted Common Stock that will be
granted upon the achievement of certain performance goals. Any
unvested options or shares of restricted stock will vest in full
upon (a) a change in control of the Company, (b) Mr. Fried’s
death, (c) Mr. Fried’s disability, (d) termination by the
Company of Mr. Fried’s employment without cause or (e) Mr.
Fried’s resignation for good reason, subject in each case to
Mr. Fried’s continuous service as an employee or consultant
of the Company or any of its subsidiaries though such
event.
The
severance terms of the Fried Agreement provide that if (i) Mr.
Fried’s employment is terminated by the Company without
cause, for death or disability, or Mr. Fried resigns for good
reason, or (ii) (a) a change in control of the Company occurs and
(b) within one month prior to the date of such change in control or
twelve months after the date of such change in control R.
Fried’s employment is terminated by the Company other than
for cause, then, subject to executing a release, Mr. Fried will
receive (w) continuation of his base salary for 12 months, (x)
health care continuation coverage payments premiums for 12 months,
(y) a prorated annual cash bonus earned for the fiscal year in
which such termination or resignation occurs, and (z) an extended
exercise period for his options
Note
9. Subsequent
Events
On
April 26, 2017, the Company entered into a Securities Purchase
Agreement (the “Purchase Agreement”) with certain
purchasers named therein (the “Purchasers”), pursuant
to which the Company agreed to sell and issue up to $25.0 million
of its Common Stock at a purchase price of $2.60 per share in three
tranches of approximately $3.5 million, $16.4 million and $5.1
million, respectively. The first tranche closed on April 27, 2017,
pursuant to which the Company issued 1,346,154 shares of its Common
Stock. The second tranche is expected to occur within 30 days of
the closing of the first tranche, pursuant to which the Company has
agreed to issue 6,303,814 shares of its Common Stock. The third
tranche is expected to occur following a related stockholder
approval to be solicited as soon as possible after completion of
the second tranche.
Subject
to completion of the second tranche, the Purchase Agreement
requires that the Company’s Board of Directors increase the
number of authorized directors so as to create two vacant seats on
the Board, which vacancies shall be filled by nominees selected by
the Purchasers on a date following the Company’s 2017 Annual
Meeting of Stockholders.
ITEM
2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS
Certain statements in this Management's Discussion and Analysis
(“MD&A”), other than purely historical information,
including estimates, projections, statements relating to our
business plans, objectives and expected operating results, and the
assumptions upon which those statements are based, are
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements generally can
be identified by the use of forward-looking terminology such as
“may,” “would,” “expect,”
“intend,” “could,” “estimate,”
“should,” “anticipate,” or
“believe,” and similar
expressions. Forward-looking statements are based on
current expectations and assumptions that are subject to risks and
uncertainties which may cause actual results to differ materially
from the forward-looking statements. We undertake no
obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events,
or otherwise. Readers should carefully review the risk
factors and related notes set forth below in Part II,
Item 1A, “Risk Factors” and included under Part I, Item
1A, “Risk Factors” of our Annual Report on Form 10-K
for the year ended December 31, 2016 filed with the Securities and
Exchange Commission on March 16, 2017 (our “Annual
Report”).
The following MD&A is intended to help readers understand the
results of our operation and financial condition, and is provided
as a supplement to, and should be read in conjunction with, our
Interim Unaudited Financial Statements and the accompanying Notes
to Interim Unaudited Financial Statements under Part 1, Item 1 of
this Quarterly Report on Form 10-Q.
Growth and percentage comparisons made herein generally refer to
the three months ended April 1, 2017 compared with the three months
ended April 2, 2016 unless otherwise noted. Unless otherwise
indicated or unless the context otherwise requires, all references
in this document to “we,” “us,”
“our,” the “Company,” and similar
expressions refer to ChromaDex Corporation, and depending on the
context, its subsidiaries.
Company Overview
The
business of ChromaDex Corporation is conducted by our principal
subsidiaries, ChromaDex, Inc., Healthspan Research, LLC and
ChromaDex Analytics, Inc. The Company is a natural products company
that discovers, acquires, develops and commercializes patented and
proprietary ingredient technologies that address the dietary
supplement, food, beverage, skin care and pharmaceutical markets.
With the recent acquisition of Healthspan Research, LLC, the
Company now has a direct to consumer (“DTC”) product,
which the Company plans to further develop. Along with our
ingredients segment that includes our DTC business, the Company
also has a core standards and contract services segment, which
focuses on natural product fine chemicals (known as
“phytochemicals”) and chemistry and analytical testing
services, and a regulatory consulting segment. As a result of the
Company’s relationships with leading universities and
research institutions, the Company is able to discover and license
early stage, intellectual property-backed ingredient technologies.
The Company then utilizes our business to develop commercially
viable proprietary ingredients. The Company’s proprietary
ingredient portfolio is backed with clinical and scientific
research, as well as extensive intellectual property
protection.
CORE
BUSINESS ACTIVITIES
PROPRIETARY INGREDIENTS
Through
our ingredients business segment, we develop and commercialize new
proprietary ingredients. One of our proprietary ingredients that we
commercialized under this business model is nicotinamide riboside
(“NR”), for which our brand name is NIAGEN®. NR is
found naturally in trace amounts in milk and other foods and is a
B3 vitamin. The potential beneficial effects of NR in humans
include increased anti-aging properties, fatty acid oxidation,
mitochondrial activity, resistance to negative consequences of
high-fat diets, protection against oxidative stress, prevention of
peripheral neuropathy and blocking muscle degeneration. Published
research has shown that NR is a potent precursor to the co-enzyme
nicotinamide adenine dinucleotide (“NAD+”) in the
mitochondria of animals. NAD+ is an important cellular co-factor
for improvement of mitochondrial performance and energy metabolism.
The Company has built a significant patent portfolio pertaining to
NR by separately acquiring patent rights from Cornell University,
Dartmouth College and Washington University. We have successfully
completed the first human clinical trial using NR and the results
demonstrated that a single dose of NR resulted in statistically
significant increases in NAD+ in healthy human volunteers. In
addition, NR was also found to be safe as no adverse events were
observed throughout the clinical trial. In 2015, NR was recognized
by the FDA as a “New Dietary Ingredient.” NR was also
“Generally Recognized As Safe” by an independent panel
of expert toxicologists and in August 2016, the U.S. FDA issued a
GRAS No Objection Letter. In 2016, we noted continued growth in the
number of published research studies, as well as subsequent media
attention regarding NR and NAD+ and their importance in healthy
aging. Since the launch of NIAGEN®, there have been more than
60 published studies involving NR. Over the past three years, we
have established over 100 collaborative agreements with leading
universities and research institutions to study the safety and
efficacy of NIAGEN®. For years 2016, 2015 and 2014,
NIAGEN® accounted for approximately 71%, 68% and 54% of our
ingredient segment’s total sales, respectively.
Another
one of our proprietary ingredients is pterostilbene, which is
marketed and sold under our brand name, pTeroPure®.
Pterostilbene is a polyphenol and a powerful antioxidant that shows
promise in a range of health-related fields. We have exclusive
in-licensed patents and patents pending related to the use of
pterostilbene for a number of these benefits, and have filed
additional patents related to supplementary benefits, such as a
patent jointly filed with University of California at Irvine
related to its effects on non-melanoma skin cancer. We have
successfully conducted a clinical trial, together with the
University of Mississippi, related to its blood pressure lowering
effects and expect to conduct additional clinical trials on
pterostilbene and anticipate entering the dietary supplement and,
if clinical results are favorable, the pharmaceutical market. We
believe that we also have opportunities in the skin care market and
will continue to investigate developing these opportunities
internally or through third party partners. We anticipate
conducting additional clinical trials on NR, pterostilbene and
other compounds in our pipeline to provide differentiation as we
market these proprietary ingredients and support various
health-related claims or obtain additional regulatory
clearances.
DIRECT TO CONSUMER SUPPLMENT BUSINESS
Through Healthspan Research LLC ("Healthspan"), the Company is
planning to develop and sell a standalone nicotinamide
riboside NIAGEN® supplement direct to consumers, with a goal
of launching exclusively in the United States DTC channel in the
second half of 2017, pending the development of certain marketing
elements and optimization of the fulfillment
infrastructure.
On
March 12, 2017, ChromaDex Corporation acquired all of the
outstanding equity interests of Healthspan and appointed Robert
Fried as President and Chief Strategy Officer. Mr. Fried has been a
member of the Board of the Company since July 2015, is a manager of
Healthspan, and owned approximately 85% of the outstanding equity
interests of Healthspan prior to the acquisition by the Company.
Mr. Fried is managing the Company's new DTC business and will
implement the launch of the new DTC product. We will be
executing several strategies to
re-brand, re-name and re-position the Healthspan consumer product
to penetrate the United States DTC segment with the intent of
significantly and sustainably growing the consumption of
NR.
The DTC channel is quickly becoming one of the most common and
on-trend consumer sales channels for dietary supplements. Entering
this channel may give us speed to market and lower market entry
costs. We intend to employ a range of marketing activities to sell
our DTC product, including internet advertising, managing a
website, email campaigns, distribution of research publications and
press releases.
ANALYTICAL & CHEMISTRY BASED SERVICES, REGULATORY CONSULTING
SERVICES AND NATURAL PRODUCT FINE CHEMICALS
Through
ChromaDex Analytics, Inc., a part of our core standards and
contract services business segment, we perform chemistry-based
analytical services at our laboratory in Boulder, Colorado,
supporting quality control or quality assurance activities for the
dietary supplement industry. On January 5, 2017, we opened a 10,000
square foot research and development laboratory in Longmont,
Colorado. The newly opened laboratory will support the discovery
and development of molecules and compounds that add to our
proprietary ingredient portfolio, while also allowing for the
expansion of existing analytical service offerings at our Boulder,
Colorado, location.
We are
a leading provider of research and quality-control products and
services to the natural products industry. Through our core
standards and contract services segment, customers worldwide in the
dietary supplement, food and beverage, cosmetic and pharmaceutical
industries use our products, which are small quantities of highly
characterized, research-grade, plant-based materials, to ensure the
quality of their raw materials and finished products. Customers
also use our analytical chemistry services to support their quality
assurance activities, primarily to ensure the identity, potency and
safety of their consumer products. We have conducted this core
standards and contract services business since 1999.
We
believe there is a growing need at both the manufacturing and
government regulatory levels for reference standards, analytical
methods and other quality assurance methods to ensure that products
that contain plants, plant extracts and naturally occurring
compounds distributed to consumers are safe. We further believe
that this need is driven by the perception at the consumer level
regarding a lack of adequate quality controls related to certain
functional food or dietary supplement based products, as well as
increased effort on the part of the Food and Drug Administration
(“FDA”) to assure Good Manufacturing Practices
(“GMP”).
Our
core standards and contract service business segment provides us
with the opportunity to become aware of the results from research
and screening activities performed on thousands of potential
natural product candidates through our relationships with various
universities and research institutions. By selecting the most
promising ingredients leveraged from this market-based screening
model, which is grounded by primary research performed through
leading universities and institutions, followed by selective
investments in further research and development, new proprietary
ingredients can be identified and brought to various markets with a
much lower investment cost and an increased chance of
success.
We also
provide our clients in the food, supplement and pharmaceutical
industries with effective scientific solutions to manage their
potential health and regulatory risks. Our science-based solutions
are for both new and existing products that may be subject to
product liability and/or exposed to changing scientific standards
or public perceptions, literature evaluations, and design and
assessment of pre-clinical and clinical safety testing. We
specialize in regulatory submissions for food and dietary
supplement ingredients. For our clients involved in drug
development within the pharmaceutical industry, we provide similar
services as well as risk-based strategies, including intellectual
property data and compliance gap identification, due diligence
assessments and investigational new drug writing. Through our
regulatory consulting segment, we have more efficiently advanced
products in the dietary supplement, food and beverage, animal
health, cosmetic and pharmaceutical markets.
PHARMACEUTICAL
The
Company is focused on developing and commercializing proprietary
NAD+ precursors for the treatment of several rare
diseases.
Initial
proof of concept studies, with a focus on rare orphan diseases,
have identified the following conditions linked to NAD+
depletion:
●
Cockayne Syndrome
(“CS”) - completed a pre-Investigational New Drug
(“IND”) meeting with the FDA
●
Ataxia-telangiectasia
(“AT”)
●
Mitochondrial
Myopathies (“Mitochondrial disease”)
Other
orphan diseases with connection to NAD+ depletion or mitochondrial
dysfunction include:
●
Progeria
●
Duchenne Muscular
Dystrophy (“DMD”)
●
Friedreich’s
Ataxia (“FA”)
We also
believe that these other diseases should be a good proof of concept
for other main stream NAD+ therapeutic platforms, with multiple
research-based Rx therapeutic targets where there is a link between
a disease or condition and NAD+ depletion, for
example:
●
Chemotherapy-induced
and diabetic-induced neuropathies
●
Fatty liver
disease
●
Neurodegenerative
diseases (Alzheimer’s)
●
Breast
cancer
We
completed our pre-IND meeting with the FDA in November 2016. The
FDA provided greater clarity on the requirements needed to file an
IND to initiate a Phase I/II clinical trial in patients with CS.
The Company anticipates filing this IND in 2017. The FDA has
indicated it will consider a Fast Track designation for NR at the
time of the IND submission.
The
results of a mouse study performed in collaboration with National
Institute on Aging (“NIA”) at the National Institutes
of Health (“NIH”), were published in Cell Metabolism in
November 2014. The results indicated that NR was effective at
restoring NAD+ levels in mitochondria and rescuing phenotypes
associated with CS.
Business Model
Our
business model is to identify, acquire, reduce-to-practice, and
commercialize innovative new proprietary ingredients and
technologies, with an initial industry focus on the dietary
supplement, food, beverage, skin care and pharmaceutical markets.
With the acquisition of our own DTC company, we have entered the
DTC market with our own branded NIAGEN® supplement. We have an
experienced team that is highly capable of advancing products
through development into commercialization with the required
regulatory approval, safety, toxicology, clinical trials, supply
chain management, manufacturing, and ultimately either directly
selling the products or licensing to third parties. Our clinical
trials will potentially reinforce the health benefits that may be
associated with our proprietary ingredients, improve the quality or
specificity of FDA approved claim we can make with respect to these
health benefits, and lead us toward pharmaceutical applications for
our proprietary ingredients.
We have
taken advantage of both supply chain needs and regulatory
requirements such as good manufacturing practices
(“GMPs”) for dietary supplements to build our core
standards and contract services segment. We believe that we create
value throughout the supply chain of the pharmaceutical, dietary
supplements, functional foods and personal care markets. We do this
by:
●
Combining the
analytical methodology and characterization of materials with the
technical support for the sale of reference materials by our
clients;
●
Helping companies
to comply with government regulations; and
●
Providing
value-added solutions to every layer of the supply chain in order
to increase the overall quality of products being
produced.
In
addition, we provide product regulatory approval and scientific
advisory services to our clients in the food, supplement and
pharmaceutical industries with effective solutions to manage
potential health and regulatory risks. Our science-based solutions
are for both new and existing products that may be subject to
product liability and/or exposed to changing scientific standards
or public perceptions; literature evaluations; and design and
assessment of pre-clinical and clinical safety testing. We
specialize in regulatory submissions for food and dietary
supplement ingredients. For our clients involved in drug
development within the pharmaceutical industry, we provide similar
services as well as risk-based strategies, including intellectual
property data and compliance gap identification, due diligence
assessments and investigational new drug writing. By providing a
more comprehensive suite of science-based and regulatory services,
we will be able to more efficiently advance products in the dietary
supplement, food and beverage, animal health, cosmetic and
pharmaceutical markets.
We will
continue to expand this aspect of our business and, more
importantly, capitalize on additional opportunities in product
development and commercialization of various kinds of intellectual
property that we have largely discovered and acquired through the
sales process associated with our core standards and contract
services segment.
Our
core standards and contract services segment provides us with the
opportunity to become aware of the results from research and
screening activities performed on thousands of potential natural
product candidates through our relationships with various
universities and research institutions. By selecting the most
promising ingredients leveraged from this market-based screening
model, which is grounded by primary research performed through
leading universities and institutions, followed by selective
investments in further research and development, new proprietary
ingredient technologies can be identified and brought to various
markets with a much lower investment cost and an increased chance
of success.
We
continue to identify and in-license novel, proprietary ingredients
with significant potential health benefits. Among these
next generation compounds are pterostilbene and caffeine
co-crystal, which allows formulators of energy products to reduce
the amount of caffeine in their products, and anthocyanins, which
are compounds responsible for the dark pigment found in certain
berries and flowers. Like NIAGEN® and pTeroPure®, these
compounds also have potential in multiple markets.
Overview of our Products and Services
Current
products and services
provided are as follows:
PROPRIETARY INGREDIENTS
●
Nicotinamide riboside NIAGEN®
(ingredients segment). We are working to develop and conduct
additional clinical trials to validate the health benefits
associated with NR, a recently discovered vitamin found naturally
in milk. NR is the most efficient B3 vitamin to enhance NAD+
energetics. NR has shown promise for improving cardiovascular
health, glucose levels and cognitive function and has demonstrated
evidence of anti-aging effects.
●
Pterostilbene pTeroPure® (ingredients
segment). Pterostilbene is a polyphenol and a powerful
antioxidant that shows promise in a range of health related fields.
We have exclusive in-licensed patents and patents pending related
to the use of pterostilbene for a number of these benefits, and
have filed additional patents related to supplementary benefits,
such as a patent jointly filed with University of California at
Irvine related to its effects on non-melanoma skin cancer. We have
successfully conducted a clinical trial, together with the
University of Mississippi, related to its blood pressure lowering
effects and expect to conduct additional clinical trials on
pterostilbene and anticipate entering the dietary supplement and,
if clinical results are favorable, the pharmaceutical
market.
●
Pterostilbene and caffeine co-crystal
PURENERGY® (ingredients segment). We are working to
develop and conduct additional clinical trials to validate the
benefits of the co-crystal ingredient comprised of caffeine and
pterostilbene. The first human study of this ingredient
demonstrated that it delivers 30 percent more caffeine, stays in
the blood stream longer, and is absorbed more slowly than ordinary
caffeine. With this ingredient, formulators of energy products may
have the ability to reduce the total amount of caffeine in their
products by as much as 50% without sacrificing consumers’
expectations from such products.
●
Anthocyanin AnthOrigin™ (ingredients
segment). We plan to develop an extraction process to
concentrate the anthocyanins in Suntava® Purple Corn which
will be used to produce a concentrated anthocyanin ingredient. We
will utilize the expertise of a toll manufacturer to produce the
commercial ingredient. We believe there is a ready market for
cost-effective concentrated anthocyanins having application in
dietary supplements, sports nutrition, food & beverage and skin
care.
●
Spirulina Extract Immulina™ (ingredients
segment). IMMULINA™ is a spirulina extract and the
predominant active compounds are Braun-type lipoproteins which are
useful for improving human immune function. These lipoproteins are
present at much greater levels than those found within commonly
used immune enhancing botanicals such as Echinacea and
ginseng.
DIRECT TO CONSUMER PRODUCT
●
We currently offer
a branded NIAGEN product direct to consumers through our
subsidiary, Healthspan Research LLC. Our DTC business will focus
solely on the sale of our branded NIAGEN® and other NAD+
related precursors products.
ANALYTICAL & CHEMISTRY BASED SERVICES, REGULATORY CONSULTING
SERVICES AND NATURAL PRODUCT FINE CHEMICALS
●
Supply of reference standards,
materials & kits (core standards and contract services
segment). We supply a wide range of products necessary to
conduct quality control of raw materials and consumer products.
Reference standards and materials and the kits created from them
are used for research and quality control in the dietary
supplements, cosmetics, food and beverages, and pharmaceutical
industries.
●
Supply of fine chemicals and phytochemicals
(core standards and contract services segment). As demand
for new natural products and phytochemicals increases, we can scale
up and supply our core products in the gram to kilogram scale for
companies that require these products for research and new product
development.
●
Contract services (core standards and contract
services segment). We provide a wide range of contract
services ranging from routine contract analysis for the production
of dietary supplements, cosmetics, foods and other natural products
to elaborate contract research for clients in these
industries.
●
Regulatory consulting services (core standards
and contract services segment). We provide a comprehensive
range of consulting services in the areas of regulatory support,
new ingredient or product development, risk management and
litigation support. We provide and offer product regulatory
approval and scientific advisory services.
●
Process development (core standards and
contract services segment). Developing cost effective and
efficient processes for manufacturing natural products can be very
difficult and time consuming. We assist customers in creating
processes for cost-effective manufacturing of natural products,
using “green chemistry.”
●
Quality verification seal program (core
standards and contract services segment). We intend to
further develop and expand our offering of “ChromaDex®
Quality Verified Seal” program which currently includes (i)
supply chain facility audits and inspections to verify compliance
with Good Manufacturing Practices as specified by the FDA; (ii) a
comprehensive identity testing program for raw materials and
finished products; (iii) finished product testing for potential
contaminants such as microbials, heavy metals and residual
solvents; and (iv) provisions for ongoing monitoring to be
performed as part of a quality protocol design and managed by the
Company.
●
Phytochemical libraries (core standards and
contract services segment). We intend to continue investing
in the development of natural product based libraries by continuing
to create these libraries internally as well as through product
licensing.
●
Databases for cross-referencing phytochemicals
(core standards and contract services segment). We are
working on building a database for cross referencing phytochemicals
against an extensive list of plants, including links to references
to ethnopharmacological, ethnobotanical, and biological activity,
as well as clinical evidence.
Sales and Marketing Strategy
Our
sales structure for the ingredients segment and core standards and
contract services segment is based on a direct,
technically-oriented model. We recruit and hire sales and marketing
staff with appropriate commercial and scientific backgrounds. Our
sales staff currently operates out of our Irvine, California office
and performs sales duties by using combinations of telemarketing,
e-mail, tradeshows and customer visits. The Inside Sales portion of
the organization also has customer service responsibilities. All
sales and marking staff are compensated based on salary and
performance-based bonus.
Our DTC
business will employee a variety of strategies to drive sales and
consumer awareness of NIAGEN®, including internet advertising, managing websites,
email campaigns, distribution of research publications and press
releases.
The
regulatory consulting segment, operating out of Rockville,
Maryland, generates scientific and regulatory consulting revenue
from an existing well-established list of Fortune 1000 customers
and referrals. Our sales staff for the ingredients, reference
standards and analytical service business in Irvine, California
also generates leads for the regulatory consulting
segment.
USA and Canada:
For our
all of our business, we employ a range of the following marketing
activities to promote and sell our products and
services:
●
Catalogs, research
publications, brochures and flyers
●
Tradeshows and
conferences
●
Newsletters (via
e-mail)
●
Internet
●
Website
●
Advertising in
trade publications
●
Press
releases
We
intend to continue to use a direct marketing approach to promote
our products and services to all markets that we target for direct
sales.
International:
For our
ingredients segment, most of our customers are based currently in
U.S. We are looking to expand into international markets through
our international business partners.
For our
core standards contract services segment, we use international distributors
to market and sell to several foreign countries or markets. The use
of distributors in some international markets has proven to be more
effective than direct sales. Currently, we have distribution
agreements in place with the following distributors for the
following countries or regions:
●
Europe (LGC
Limited)
●
China (MeiTech
International LLC)
●
Japan (Wako Pure
Chemical Industries, Ltd.)
●
Korea (Dongmyung
Scientific Co.)
●
Brazil (JMC,
Inc.)
●
Australia and New
Zealand (Phenomenex)
●
Taiwan (Uni
Onward)
●
South Africa
(Industrial Analytical)
●
India
●
Indonesia,
Malaysia, Singapore and Thailand
●
Mexico
For our
regulatory consulting services, we engage in consulting projects
for customers all over the world, including Europe, South America,
and Asia. Consulting revenues are generated from an existing
well-established list of Fortune 1000 customers and
referrals.
Competitive Business Conditions
For our
ingredients segment, we face little direct competition as the
ingredients we offer, such as NIAGEN® and pTeroPure® are
backed by intellectual property exclusively licensed to us. We,
however, face strong indirect competition from other ingredient
suppliers who may supply alternative ingredients that may have
similar characteristics compared to the ingredients we offer. Below
is a list of some of the competitors for our ingredients
segment.
Ingredients Business Segment Competitors
●
Royal DSM (the
Netherlands)
●
Glanbia plc
(Ireland)
●
BASF
(Germany)
●
Lonza Group Ltd
(Switzerland)
●
Sabinsa Corporation
(India/USA)
For our
own DTC standalone NIAGEN® supplement product, we may
eventually be in direct competition with some of our current
ingredients segment customers that use NIAGEN® in the products
that are sold to consumers.
For the
core standards and contract services segment, we face competition
within the standardization and quality testing niche of the natural
products market, though we know of no other companies that offer
both reference standards and testing to their customers. Below is a
current list of certain competitors. These competitors have already
developed reference standards or contract services or are currently
taking steps to develop botanical standards or contract services.
Of the competitors listed, some currently sell fine chemicals,
which, by default, are sometimes used as reference standards, and
others are closely aligned with our market niche so as to reduce
any barriers to entry if these companies wish to compete. Some of
these competitors currently offer similar services and have the
scale and resources to compete with us for larger customer
accounts. Because some of our competitors are larger in total size
and capitalization, they likely have greater access to capital
markets, and are in a better position than we are to compete
nationally and internationally.
Core Standards and Contract Services Segment
Competitors
●
Sigma-Aldrich
(USA)
●
Phytolab
(Germany)
●
US Pharmacopoeia
(USA)
●
Extrasynthese
(France)
●
Covance
(USA)
●
Eurofins
(France)
●
Silliker Canada Co.
(Canada)
For
regulatory consulting services, there are numerous competitors,
including some that are much larger companies with more resources.
The success in winning and retaining clients is heavily dependent
on the efforts and reputation of our consultants. We believe the
barriers to entry in particular areas of our consulting expertise
are low.
Manufacturing
For our
ingredients segment, DTC, and our core standards and contract
services segment, we currently utilize third-party manufacturers to
produce and supply the ingredients, products, and services.
Following the receipt of products or product components from
third-party manufacturers, we currently inspect products, as
needed. We expect to reserve the right to inspect and ensure
conformance of each product and product component to our
specifications. We will also consider manufacturing certain
products or product components internally, if our capacity permits,
when demand or quality requirements make it appropriate to do
so.
We
intend to work with manufacturing companies that can meet the
standards imposed by the FDA, the International Organization for
Standardization (“ISO”) and the quality standards that
we will require for our own internal policies and procedures. We
expect to monitor and manage supplier performance through a
corrective action program developed by us. We believe these
manufacturing relationships can minimize our capital investment,
help control costs, and allow us to compete with larger volume
manufacturers of dietary supplements, phytochemicals and
ingredients.
Financial Condition and Results of Operations
The
discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been
prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”). The preparation of these financial
statements requires our management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported
revenues, if any, and expenses during the reporting periods. On an
ongoing basis, we evaluate such estimates and judgments, including
those described in greater detail below. We base our estimates on
historical experience and on various other factors that we believe
are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
Some of
our operations are subject to regulation by various state and
federal agencies. In addition, we expect a significant increase in
the regulation of our target markets. Dietary supplements are
subject to FDA, Federal Trade Commission and U.S. Department of
Agriculture regulations relating to composition, labeling and
advertising claims. These regulations may in some cases,
particularly with respect to those applicable to new ingredients,
require a notification that must be submitted to the FDA along with
evidence of safety. There are similar regulations related to food
additives.
Our net
sales and net income (loss) for the three-month periods ending on
April 1, 2017 and April 2, 2016 were as follows:
|
|
Three months
ending
|
|
|
|
April
1, 2017
|
April 2,
2016
|
|
|
|
|
|
Net
sales
|
$4,449,000
|
$7,332,000
|
|
Net income
(loss)
|
(1,929,000)
|
256,000
|
|
|
|
|
|
Basic income (loss)
per common share
|
$(0.05)
|
$0.01
|
|
Diluted income
(loss) per common share
|
$(0.05)
|
$0.01
|
Over
the next twelve months, we plan to continue to increase research
and development efforts for our line of proprietary ingredients,
subject to available financial resources.
Net Sales
Net
sales consist of gross
sales less discounts and returns.
|
|
Three months
ending
|
||
|
|
April
1, 2017
|
April 2,
2016
|
Change
|
|
Net
sales:
|
|
|
|
|
Ingredients
|
$2,084,000
|
$4,600,000
|
-55%
|
|
Core
standards and contract services
|
2,365,000
|
2,732,000
|
-13%
|
|
|
|
|
|
|
Total
net sales
|
$4,449,000
|
$7,332,000
|
-39%
|
●
The decrease in
sales for the ingredients segment for the three months ended April
1, 2017 is mainly due to decreased sales of
“NIAGEN®.” Certain customers that placed large
orders during the period ended April 2, 2016 did not place orders
of similar size during the three months ended April 1,
2017.
●
The decrease in
sales for the core standards and contract services segment is
primarily due to decreased sales of analytical testing and contract
services.
Cost of Sales
Cost of
sales include raw materials, labor, overhead, and
delivery costs.
|
|
Three months
ending
|
|||
|
|
April
1, 2017
|
April 2,
2016
|
||
|
|
Amount
|
% of
net sales
|
Amount
|
% of
net sales
|
|
Cost
of sales:
|
|
|
|
|
|
Ingredients
|
$914,000
|
44%
|
$2,099,000
|
46%
|
|
Core
standards and contract services
|
1,782,000
|
75%
|
1,782,000
|
65%
|
|
|
|
|
|
|
|
Total
cost of sales
|
$2,696,000
|
61%
|
$3,881,000
|
53%
|
|
|
|
|
|
|
The
cost of sales, as a percentage of net sales, increased 8% for the
three-month periods ended April 1, 2017, compared to the comparable
period in 2016.
●
The cost of sales,
as a percentage of net sales, for the ingredients segment decreased
slightly as we were able to manage favorable pricing
levels.
●
The cost of sales,
as a percentage of net sales for the core standards and contract
services segment, increased 8% for the three-month period ended
April 1, 2017, compared to the comparable period in 2016. The
decrease in analytical testing and contract services sales led to a
lower labor utilization rate, which resulted in increasing our cost
of sales as a percentage of net sales.
Gross Profit
Gross
profit is net sales less the cost of sales and is affected by a
number of factors including product mix, competitive pricing and
costs of products and services.
|
|
Three months
ending
|
||
|
|
April
1, 2017
|
April 2,
2016
|
Change
|
|
Gross
profit:
|
|
|
|
|
Ingredients
|
$1,170,000
|
$2,501,000
|
-53%
|
|
Core
standards and contract services
|
583,000
|
950,000
|
-39%
|
|
|
|
|
|
|
Total
gross profit
|
$1,753,000
|
$3,451,000
|
-49%
|
|
|
|
|
|
●
The decreased gross
profit for the ingredients segment for the three months ended April
1, 2017 is due to the decreased sales of
“NIAGEN®.”
●
The decreased gross
profit for the core standards and contract services segment is
largely due to the decreased sale of analytical testing and
contract services. Fixed labor costs make up the majority of costs
for analytical testing and contract services and these fixed labor
costs did not decrease in proportion to sales, hence yielding lower
profit margin.
Operating Expenses-Sales and Marketing
Sales
and marketing expenses consist of salaries, advertising
and marketing expenses.
|
|
Three months
ending
|
||
|
|
April
1, 2017
|
April 2,
2016
|
Change
|
|
Sales
and marketing expenses:
|
|
|
|
|
Ingredients
|
$305,000
|
$332,000
|
-8%
|
|
Core
standards and contract services
|
291,000
|
213,000
|
37%
|
|
|
|
|
|
|
Total
sales and marketing expenses
|
$596,000
|
$545,000
|
9%
|
|
|
|
|
|
●
For the ingredients
segment, the decrease for the three months ended April 1, 2017 is
largely due to a decrease in third party commission expenses, as
sales to certain customers that Company pays commissions on
decreased.
●
For the core
standards and contract services segment, the increase is largely
due to increasing our marketing efforts and hiring additional
staff.
Operating Expenses-Research and Development
Research
and development expenses mainly consist of clinical trials and
process development expenses.
|
|
Three months
ending
|
||
|
|
April
1, 2017
|
April 2,
2016
|
Change
|
|
Research
and development expenses:
|
|
|
|
|
Ingredients
|
$664,000
|
$464,000
|
43%
|
|
|
|
|
|
●
We increased our
research and development efforts for the ingredients segment with a
focus on our “NIAGEN®” brand. Subject to available
financial resources, we plan to continue to increase research and
development efforts for our line of proprietary
ingredients.
Operating Expenses-General and Administrative
General
and administrative expenses consist of general
company administration, IT, accounting and executive
management.
|
|
Three months
ending
|
||
|
|
April
1, 2017
|
April 2,
2016
|
Change
|
|
|
|
|
|
|
General
and administrative
|
$2,383,000
|
$1,989,000
|
20%
|
|
|
|
|
|
●
The increase was
primarily related to legal expenses. For the three-month period
ended April 1, 2017, our legal expenses increased to approximately
$432,000 compared to approximately $12,000 for the comparable
period in 2016. The ongoing litigation with Elysium Health, Inc.
was the main reason for the increase in legal
expenses.
Non-operating income- Interest Income
Interest
income consists of interest earned on money market accounts. The Company
had approximately $0 interest income for the thee-month period
ended April 1, 2017, compared to approximately $1,000 for the
three-month period ended April 2, 2016.
Non-operating Expenses- Interest Expense
Interest
expense consists of interest on loan payable and capital
leases.
|
|
Three months
ending
|
||
|
|
April
1, 2017
|
April 2,
2016
|
Change
|
|
|
|
|
|
|
Interest
expense
|
$38,000
|
$188,000
|
-80%
|
|
|
|
|
|
●
The decrease in
interest expense was mainly due to the term loan from Hercules
Technology II, L.P. which the Company drew down an initial $2.5
million on September 29, 2014 and a second $2.5 million on June 18,
2015. The Company fully repaid the loan on June 14,
2016.
Income Taxes
At
April 1, 2017 and April 2, 2016, the Company maintained a full
valuation allowance against the entire deferred income tax balance
which resulted in an effective tax rate of approximately 0% and 4%
for the three-month periods ended April 1, 2017 and April 2, 2016,
respectively.
Depreciation and Amortization
Depreciation
expense for the three-month period ended April 1, 2017 was
approximately $129,000 as compared to $83,000 for the three-month
period ended April 2, 2016. We depreciate our assets on a
straight-line basis, based on the estimated useful lives of the
respective assets.
Amortization
expense of intangible assets for the three-month period ended April
1, 2017 was approximately $24,000 as compared to $11,000 for the
three-month period ended April 2, 2016. We amortize intangible
assets using a straight-line method, generally over 10 years. For
licensed patent rights, the useful lives are 10 years or the
remaining term of the patents underlying licensing rights,
whichever is shorter. The useful lives of subsequent milestone
payments that are capitalized are the remaining useful life of the
initial licensing payment that was capitalized.
Liquidity and Capital Resources
From
inception through April 1, 2017, we have incurred aggregate losses
of approximately $47 million. These losses are primarily due to
expenses associated with the development and expansion of our
operations. These operations have been financed through capital
contributions, the issuance of common stock and warrants through
private placements, and the issuance of debt.
Our
board of directors periodically reviews our capital requirements in
light of our proposed business plan. Our future capital
requirements will remain dependent upon a variety of factors,
including cash flow from operations, the ability to increase sales,
increasing our gross profits from current levels, reducing selling
and administrative expenses as a percentage of net sales, continued
development of customer relationships, and our ability to market
our new products successfully. However, based on our results from
operations, we may determine that we need additional financing to
implement our business plan. There can be no assurance that any
such financing will be available on terms favorable to us or at
all. Without adequate financing we may have to further delay or
terminate product and service expansion and curtail certain
selling, general and administrative expenses. Any inability to
raise additional financing would have a material adverse effect on
us.
Subsequent
to the period ended April 1, 2017, on April 26, 2017, the Company
entered into a Securities Purchase Agreement with certain
purchasers named therein, pursuant to which the Company agreed to
sell and issue up to $25.0 million of its Common Stock at a
purchase price of $2.60 per share in three tranches of
approximately $3.5 million, $16.4 million and $5.1 million,
respectively. The first tranche closed on April 27, 2017, pursuant
to which the Company issued 1,346,154 shares of its Common Stock.
The second tranche is expected to occur within 30 days of the
closing of the first tranche, pursuant to which the Company has
agreed to issue 6,303,814 shares of its Common Stock. The third
tranche is expected to occur following a related stockholder
approval to be solicited as soon as possible after completion of
the second tranche.
While
we anticipate that our current cash, cash equivalents, cash to be
generated from operations and the funds from the financing
transaction described above will be sufficient to meet our
projected operating plans through at least May 12, 2018, we may
require additional funds, either through additional equity or debt
financings or collaborative agreements or from other sources. We
have no commitments to obtain such additional financing, and we may
not be able to obtain any such additional financing on terms
favorable to us, or at all. If adequate financing is not available,
the Company will further delay, postpone or terminate product and
service expansion and curtail certain selling, general and
administrative operations. The inability to raise additional
financing may have a material adverse effect on the future
performance of the Company.
Net cash used in operating activities
Net
cash used in operating activities for the three months ended April
1, 2017 was approximately $51,000 as compared to approximately
$2,896,000 for the three months ended April 2, 2016. Along with the
net loss, an increase in inventories and a decrease in accrued
expenses were the largest uses of cash during the three-month
period ended April 1, 2017, partially offset by the increase in
accounts payable. Net cash used in operating activities for the
three months ended April 2, 2016 largely reflects a decrease in
accounts payable and an increase in trade receivables along with
the net loss.
We
expect our operating cash flows to fluctuate significantly in
future periods as a result of fluctuations in our operating
results, shipment timetables, accounts receivable collections,
inventory management, and the timing of our payments, among other
factors.
Net cash used in investing activities
Net
cash used in investing activities was approximately $346,000 for
the three months ended April 1, 2017, compared to approximately
$32,000 for the three months ended April 2, 2016. Net cash used in
investing activities for the three months ended April 1, 2017
consisted of purchases of leasehold improvements and equipment and
intangible assets. Net cash used in investing activities for the
three months ended April 2, 2016 also consisted of purchases of
leasehold improvements and equipment and intangible
assets.
Net cash used in (provided by) financing activities
Net
cash used in financing activities was approximately $61,000 for the
three months ended April 1, 2017, compared to approximately
$374,000 provided by for the three months ended April 2, 2016. Net
cash used in financing activities for the three months ended April
1, 2017 mainly consisted of principal payments on capital leases.
Net cash provided by financing activities for the three months
ended April 2, 2016 mainly consisted of proceeds from the issuance
of our common stock and warrants through a private offering to our
existing stockholder and exercise of stock options, offset by
principal payments on loan payable and capital leases.
Contractual Obligations and Commitments
During
the three months ended April 1, 2017, there were no material
changes outside of the ordinary course of business in the specified
contractual obligations disclosed in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” as contained in our Annual Report, other than as
disclosed in “Item 1 Financial Statements” of this
Quarterly Report.
Off-Balance Sheet Arrangements
During
the three months ended April 1, 2017, we had no material
off-balance sheet arrangements other than with respect to ordinary
operating leases as disclosed in the “Financial Statements
and Supplementary Data” section of our Annual
Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our
capital lease obligations bear interest at a fixed rate and
therefore have no exposure to changes in interest
rates.
The
Company’s cash investments consist of short term, high liquid
investments in money market funds managed by banks. Due to the
short-term duration of our investment portfolio and the relatively
low risk profile of our investments, a sudden change in interest
rates would not have a material effect on either the fair market
value of our portfolio, or our operating results or cash
flows.
Foreign Currency Risk
All of
our long-lived assets are located within the United States and we
do not hold any foreign currency denominated financial
instruments.
Effects of Inflation
We do
not believe that inflation and changing prices during the three
months ended April 1, 2017 and April 2, 2016 had a significant
impact on our results of operations.
ITEM 4. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the supervision of our Chief Executive Officer
and Chief Financial Officer (our principal executive officer and
principal financial officer, respectively), evaluated the
effectiveness of our disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended,
as of the end of the period covered by this Quarterly Report on
Form 10-Q. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control
objectives. In addition, the design of disclosure controls and
procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment
in evaluating the benefits of possible controls and procedures
relative to their costs.
Based on our evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of April 1, 2017, our
disclosure controls and procedures are designed at a reasonable
assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we
file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC
rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
An
evaluation was also performed under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of any change in our internal
control over financial reporting (as defined in Rule
13a−15(f) promulgated under the Securities Exchange Act of
1934, as amended) that occurred during our last fiscal quarter and
that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. There were
no changes in internal control over financial reporting that
occurred during the Company’s first fiscal quarter that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II - OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
As
previously disclosed, on December 29, 2016, ChromaDex, Inc. filed a
complaint (the “Complaint”) in the United States
District Court for the Central District of California, naming
Elysium Health, Inc. as defendant. Among other allegations,
ChromaDex, Inc. alleges in the Complaint that (i) Elysium breached
the Supply Agreement, dated June 26, 2014, by and between
ChromaDex, Inc. and Elysium Health, LLC (“Elysium”)
(the “pTeroPure® Supply Agreement”), by failing to
make payments to ChromaDex, Inc. for purchases of pTeroPure®
pursuant to the pTeroPure® Supply Agreement, (ii) Elysium
breached the Supply Agreement, dated February 3, 2014, by and
between ChromaDex, Inc. and Elysium, as amended (the
“NIAGEN® Supply Agreement”), by failing to make
payments to ChromaDex, Inc. for purchases of NIAGEN® pursuant
to the NIAGEN® Supply Agreement, (iii) Elysium breached the
Trademark License and Royalty Agreement, dated February 3, 2014, by
and between ChromaDex, Inc. and Elysium (the “License
Agreement”), by failing to make payments to ChromaDex, Inc.
for royalties due pursuant to the License Agreement and (iv)
certain officers of Elysium made false promises and representations
to induce ChromaDex, Inc. into providing large supplies of
pTeroPure® and NIAGEN® to Elysium pursuant to the
pTeroPure® Supply Agreement and NIAGEN® Supply Agreement.
ChromaDex, Inc. is seeking punitive damages, money damages and
interest.
On
January 25, 2017, Elysium filed an answer and counterclaims (the
“Counterclaim”) in response to the Complaint. Among
other allegations, Elysium alleges in the Counterclaim that (i)
ChromaDex, Inc. breached the NIAGEN® Supply Agreement by not
issuing certain refunds or credits to Elysium and for violating
certain confidential information provisions, (ii) ChromaDex, Inc.
breached the implied covenant of good faith and fair dealing
pursuant to the NIAGEN® Supply Agreement, (iii) ChromaDex,
Inc. breached certain confidential provisions of the
pTeroPure® Supply Agreement, (iv) ChromaDex, Inc. fraudulently
induced Elysium into entering into the License Agreement (the
“Fraud Claim”), (v) ChromaDex, Inc.’s conduct
constitutes misuse of its patent rights (the “Patent
Claim”) and (vi) ChromaDex, Inc. has engaged in unlawful or
unfair competition under California state law (the “Unfair
Competition Claim”). Elysium is seeking damages for
ChromaDex, Inc.’s alleged breaches of the NIAGEN® Supply
Agreement and pTeroPure® Supply Agreement, and compensatory
damages, punitive damages and/or rescission of the License
Agreement and restitution of any royalty payments conveyed by
Elysium pursuant to the License Agreement.
On
February 15, 2017, ChromaDex, Inc. filed an amended complaint (the
“Amended Complaint”). In the Amended Complaint,
ChromaDex, Inc. re-alleges the claims in the Complaint, and also
alleges that Elysium willfully and maliciously misappropriated
ChromaDex, Inc.’s trade secrets. On February 15, 2017,
ChromaDex, Inc. also filed a motion to dismiss the Fraud Claim, the
Patent Claim and the Unfair Competition Claim. On March 1, 2017,
Elysium filed a motion to dismiss ChromaDex, Inc.'s fraud and trade
secret misappropriation causes of action. On March 6, 2017, Elysium
filed a first amended counterclaim. On March 20, 2017, ChromaDex,
Inc. moved to dismiss Elysium's amended fraud, patent misuse and
the Unfair Competition Claim. The hearing on both motions to
dismiss is set for May 15, 2017. While ChromaDex, Inc. expresses no
opinion as to the ultimate outcome of this matter, ChromaDex, Inc.
believes Elysium’s allegations are without merit and will
vigorously defend against them.
As of
April 1, 2017, ChromaDex, Inc. did not accrue a potential loss for
the Counterclaim because ChromaDex, Inc. believes that the
allegations are without merit and thus it is not probable that a
liability had been incurred, and the amount of loss cannot be
reasonably estimated.
From
time to time we are involved in legal proceedings arising in the
ordinary course of our business. We believe that there is no other
litigation pending that is likely to have, individually or in the
aggregate, a material adverse effect on our financial condition or
results of operations.
Investing in our common stock involves a high degree of risk.
Current investors and potential investors should consider carefully
the risks and uncertainties described below and in our Annual
Report, together with all other information contained in this Form
10-Q and our Annual Report, including our financial statements, the
related notes and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” before
making investment decisions with respect to our common stock. If
any of the following risks actually occur, our business, financial
condition, results of operations and future growth prospects would
likely be materially and adversely affected. Under these
circumstances, the trading price and value of our common stock
could decline, and you may lose all or part of your investment. The
risks and uncertainties described in this Form 10-Q and in our
Annual Report are not the only ones facing our Company. Additional
risks and uncertainties of which we are not presently aware, or
that we currently consider immaterial, may also impair our business
operations. The risk factors set forth below that are marked with
an asterisk (*) contain changes to the similarly titled risk
factors included in Part I, Item 1A of our Annual
Report.
Risks Related to our Company and our Business
*We have a history of operating losses, we may need additional
financing to meet our future long-term capital requirements and may
be unable to raise sufficient capital on favorable terms or at
all.
We have
recorded a net loss of approximately $1,929,000 for the three
months ended April 1, 2017, and we have a history of losses and may
continue to incur operating and net losses for the foreseeable
future. We incurred net losses of approximately $2,928,000,
$2,771,000 and $5,388,000 for the years ended December 31, 2016,
January 2, 2016 and January 3, 2015, respectively. As of April 1,
2017, our accumulated deficit was approximately $47.2 million. We
have not achieved profitability on an annual basis. We may not be
able to reach a level of revenue to continue to achieve and sustain
profitability. If our revenues grow slower than anticipated, or if
operating expenses exceed expectations, then we may not be able to
achieve and sustain profitability in the near future or at all,
which may depress our stock price.
Subsequent
to the period ended April 1, 2017, the Company entered into a
Securities Purchase Agreement with certain purchasers named
therein, pursuant to which the Company agreed to sell and issue up
to $25.0 million of its Common Stock at a purchase price of $2.60
per share in three tranches of approximately $3.5 million, $16.4
million and $5.1 million, respectively. The first tranche closed on
April 27, 2017, pursuant to which the Company issued 1,346,154
shares of its Common Stock. The second tranche is expected to occur
within 30 days of the closing of the first tranche, pursuant to
which the Company has agreed to issue 6,303,814 shares of its
Common Stock. The third tranche is expected to occur following a
related stockholder approval to be solicited as soon as possible
after completion of the second tranche.
While
we anticipate that our current cash, cash equivalents, cash to be
generated from operations and the funds from the financing
transaction described above will be sufficient to meet our
projected operating plans through at least May 2018, the second and
the third tranches of the financing transaction are not certain to
close and we may require additional funds, either through
additional equity or debt financings or collaborative agreements or
from other sources. We have no commitments to obtain such
additional financing, and we may not be able to obtain any such
additional financing on terms favorable to us, or at all. If
adequate financing is not available, the Company will further
delay, postpone or terminate product and service expansion and
curtail certain selling, general and administrative operations. The
inability to raise additional financing may have a material adverse
effect on the future performance of the Company.
* Our capital requirements will depend on many
factors.
Our
capital requirements will depend on many factors,
including:
●
the
revenues generated by sales of our products;
●
the costs
associated with expanding our sales and marketing efforts,
including efforts to hire independent agents and sales
representatives and obtain required regulatory approvals and
clearances;
●
the
expenses we incur in developing and commercializing our products,
including the cost of obtaining and maintaining regulatory
approvals; and
●
unanticipated
general and administrative expenses.
As a
result of these factors, we may seek to raise additional capital
prior to May 2018 both to meet our projected operating plans after
May 2018 and to fund our longer term strategic objectives.
Additional capital may come from public and private equity or debt
offerings, borrowings under lines of credit or other sources. These
additional funds may not be available on favorable terms, or at
all. There can be no assurance we will be successful in raising
these additional funds. Furthermore, if we issue equity or debt
securities to raise additional funds, our existing stockholders may
experience dilution and the new equity or debt securities we issue
may have rights, preferences and privileges senior to those of our
existing stockholders. In addition, if we raise additional funds
through collaboration, licensing or other similar arrangements, it
may be necessary to relinquish valuable rights to our products or
proprietary technologies, or grant licenses on terms that are not
favorable to us. If we cannot raise funds on acceptable terms, we
may not be able to develop or enhance our products, obtain the
required regulatory clearances or approvals, execute our business
plan, take advantage of future opportunities, or respond to
competitive pressures or unanticipated customer requirements. Any
of these events could adversely affect our ability to achieve our
development and commercialization goals, which could have a
material and adverse effect on our business, results of operations
and financial condition.
* We are currently engaged in litigation with Elysium Health, LLC
that may harm our business, and a disruption in sales to or the
ability to collect from this customer or other significant
customers in the future, could also materially harm our financial
results.
We are currently engaged in litigation with Elysium Health, LLC, a
customer that represented 19% of our net sales for the year
ending December 31, 2016. This customer has not paid us
approximately $3.0 million for previous purchase orders. We may not
collect the full amount owed to us by this customer, and as a
result, we may have to write off a large portion of that amount as
uncollectible expense. We may also have to discount future sales,
if any, to this customer.
The litigation may turn out to be substantial and complex,
and it could cause us to incur significant costs and distract our
management over an extended period of time. The litigation may
substantially disrupt our business and we cannot assure you that we
will be able to resolve the litigation on terms favorable to us.
The customer has filed a counterclaim
against us, and if we are unsuccessful in resolving the litigation
on favorable terms to us, we may be forced to pay compensatory and
punitive damages and restitution for any royalty payments that we
received from the customer. We cannot guarantee that the customer
will continue to make purchases at previous volumes or prices,
which may harm our future sales if we cannot replace their volume
with other existing and new customers and which may materially
affect our future financial results.
Going forward, we may have additional customers upon whom we become
highly dependent. Factors that could influence our relationship
with our significant customer and other customers upon whom we may
become highly dependent include:
●
our
ability to maintain our products at prices that are competitive
with those of our competitors;
●
our
ability to maintain quality levels for our products sufficient to
meet the expectations of our customers;
●
our
ability to produce, ship and deliver a sufficient quantity of our
products in a timely manner to meet the needs of our
customers;
●
our
ability to continue to develop and launch new products that our
customers feel meet their needs and requirements, with respect to
cost, timeliness, features, performance and other
factors;
●
our
ability to provide timely, responsive and accurate customer support
to our customers; and
●
the
ability of our customers to effectively deliver, market and
increase sales of their own products based on ours.
Decline in the state of the global
economy and financial market conditions could adversely affect our
ability to conduct business and our results of
operations.
Global
economic and financial market conditions, including disruptions in
the credit markets and the impact of the global economic
deterioration may materially impact our customers and other parties
with whom we do business. These conditions could negatively affect
our future sales of our ingredient lines as many consumers consider
the purchase of nutritional products discretionary. Decline in
general economic and financial market conditions could materially
adversely affect our financial condition and results of operations.
Specifically, the impact of these volatile and negative conditions
may include decreased demand for our products and services, a
decrease in our ability to accurately forecast future product
trends and demand, and a negative impact on our ability to timely
collect receivables from our customers. The foregoing economic
conditions may lead to increased levels of bankruptcies,
restructurings and liquidations for our customers, scaling back of
research and development expenditures, delays in planned projects
and shifts in business strategies for many of our customers. Such
events could, in turn, adversely affect our business through loss
of sales.
We may need to increase the size of our organization, and we can
provide no assurance that we will successfully expand operations or
manage growth effectively.
Our
significant increase in the scope and the scale of our product
launches, including the hiring of additional personnel, has
resulted in significantly higher operating expenses. As a result,
we anticipate that our operating expenses will continue to
increase. Expansion of our operations may also cause a significant
demand on our management, finances and other resources. Our ability
to manage the anticipated future growth, should it occur, will
depend upon a significant expansion of our accounting and other
internal management systems and the implementation and subsequent
improvement of a variety of systems, procedures and controls. There
can be no assurance that significant problems in these areas will
not occur. Any failure to expand these areas and implement and
improve such systems, procedures and controls in an efficient
manner at a pace consistent with our business could have a material
adverse effect on our business, financial condition and results of
operations. There can be no assurance that our attempts to expand
our marketing, sales, manufacturing and customer support efforts
will be successful or will result in additional sales or
profitability in any future period. As a result of the expansion of
our operations and the anticipated increase in our operating
expenses, as well as the difficulty in forecasting revenue levels,
we expect to continue to experience significant fluctuations in our
results of operations.
*Changes in our business strategy, including entering the DTC
market, or restructuring of our businesses may increase our costs
or otherwise affect the profitability of our
businesses.
As
changes in our business environment occur we may adjust our
business strategies to meet these changes or we may otherwise
decide to restructure our operations or particular businesses or
assets. In addition, external events including changing technology,
changing consumer patterns and changes in macroeconomic conditions
may impair the value of our assets. When these changes or events
occur, we may incur costs to change our business strategy and may
need to write down the value of assets. In any of these events, our
costs may increase, we may have significant charges associated with
the write-down of assets or returns on new investments may be lower
than prior to the change in strategy or restructuring. For example,
if we are not successful in developing our DTC business, our sales
may decrease and our costs may increase.
*The success of our ingredient and DTC business is linked to the
size and growth rate of the vitamin, mineral and dietary supplement
market and an adverse change in the size or growth rate of that
market could have a material adverse effect on us.
An
adverse change in the size or growth rate of the vitamin, mineral
and dietary supplement market could have a material adverse effect
on our business. Underlying market conditions are subject to change
based on economic conditions, consumer preferences and other
factors that are beyond our control, including media attention and
scientific research, which may be positive or
negative.
*Our future growth and profitability of our DTC business will
depend in large part upon the effectiveness and efficiency of our
marketing expenditures and our ability to select effective markets
and media in which to advertise.
Our business success depends on our ability to attract and retain
customers, which significantly depends on our marketing practices.
Our future growth and profitability will depend in large part upon
the effectiveness and efficiency of our marketing expenditures,
including our ability to:
●
create
greater awareness of our brand;
●
identify
the most effective and efficient levels of spending in each market,
media and specific media vehicle;
●
determine
the appropriate creative messages and media mix for advertising,
marketing and promotional expenditures;
●
effectively
manage marketing costs (including creative and media) in order to
maintain acceptable customer acquisition costs;
●
acquire
cost-effective television advertising;
●
select
the most effective markets, media and specific media vehicles in
which to advertise; and
●
convert
consumer inquiries into actual orders.
Unfavorable publicity or consumer perception of our products and
any similar products distributed by other companies could have a
material adverse effect on our business.
We
believe the nutritional supplement market is highly dependent upon
consumer perception regarding the safety, efficacy and quality of
nutritional supplements generally, as well as of products
distributed specifically by us. Consumer perception of our products
can be significantly influenced by scientific research or findings,
regulatory investigations, litigation, national media attention and
other publicity regarding the consumption of nutritional
supplements. We cannot assure you that future scientific research,
findings, regulatory proceedings, litigation, media attention or
other favorable research findings or publicity will be favorable to
the nutritional supplement market or any particular product, or
consistent with earlier publicity. Future research reports,
findings, regulatory proceedings, litigation, media attention or
other publicity that are perceived as less favorable than, or that
question, such earlier research reports, findings or publicity
could have a material adverse effect on the demand for our products
and consequently on our business, results of operations, financial
condition and cash flows.
Our
dependence upon consumer perceptions means that adverse scientific
research reports, findings, regulatory proceedings, litigation,
media attention or other publicity, whether or not accurate or with
merit, could have a material adverse effect on the demand for our products, the
availability and pricing of our ingredients, and our business,
results of operations, financial condition and cash flows. Further,
adverse public reports or other media attention regarding the
safety, efficacy and quality of nutritional supplements in general,
or our products specifically, or associating the consumption of
nutritional supplements with illness, could have such a material
adverse effect. Any such adverse public reports or other
media attention could arise even if the adverse effects associated
with such products resulted from consumers’ failure to
consume such products appropriately or as directed and the content
of such public reports and other media attention may be beyond our
control.
*We may incur material product
liability claims, which could increase our costs and adversely
affect our reputation, revenues and operating
income.
As an
ingredient supplier and consumer product supplier we market and
manufacture products designed for human and animal consumption, we
are subject to product liability claims if the use of our products
is alleged to have resulted in injury. Our products consist of
vitamins, minerals, herbs and other ingredients that are classified
as foods, dietary supplements, or natural health products, and, in
most cases, are not necessarily subject to pre-market regulatory
approval in the United States. Some of our products contain
innovative ingredients that do not have long histories of human
consumption. Previously unknown adverse reactions resulting from
human consumption of these ingredients could occur. In addition,
the products we sell are produced by third-party manufacturers. As
a marketer of products manufactured by third parties, we also may
be liable for various product liability claims for products we do
not manufacture. We may, in the future, be subject to various
product liability claims, including, among others, that our
products include inadequate instructions for use or inadequate
warnings concerning possible side effects and interactions with
other substances. A product liability claim against us could result
in increased costs and could adversely affect our reputation with
our customers, which, in turn, could have a materially adverse
effect on our business, results of operations, financial condition
and cash flows.
We acquire a significant amount of
key ingredients for our products from foreign suppliers, and may be
negatively affected by the risks associated with international
trade and importation issues.
We
acquire a significant amount of key ingredients for a number of our
products from suppliers outside of the United States, particularly
India and China. Accordingly, the acquisition of these
ingredients is subject to the risks generally associated with
importing raw materials, including, among other factors, delays in
shipments, changes in economic and political conditions, quality
assurance, nonconformity to specifications or laws and regulations,
tariffs, trade disputes and foreign currency fluctuations. While we
have a supplier certification program and audit and inspect our
suppliers’ facilities as necessary both in the United States
and internationally, we cannot assure you that raw materials
received from suppliers outside of the United States will conform
to all specifications, laws and regulations. There have
in the past been quality and safety issues in our industry with
certain items imported from overseas. We may incur
additional expenses and experience shipment delays due to
preventative measures adopted by the Indian and U.S. governments,
our suppliers and our company.
The insurance industry has become
more selective in offering some types of coverage and we may not be
able to obtain insurance coverage in the
future.
The
insurance industry has become more selective in offering some types
of insurance, such as product liability, product recall, property
and directors’ and officers’ liability insurance. Our
current insurance program is consistent with both our past level of
coverage and our risk management policies. However, we cannot
assure you that we will be able to obtain comparable insurance
coverage on favorable terms, or at all, in the
future. Certain of our customers as well as prospective
customers require that we maintain minimum levels of coverage for
our products. Lack of coverage or coverage below these minimum
required levels could cause these customers to materially change
business terms or to cease doing business with us
entirely.
*If we experience product recalls, we may incur significant and
unexpected costs, and our business reputation could be adversely
affected.
We may be exposed to product recalls and adverse public relations
if our products are mislabeled or alleged to cause injury or
illness, or if we are alleged to have violated governmental
regulations. A product recall could result in substantial and
unexpected expenditures, which would reduce operating profit and
cash flow. In addition, a product recall may require significant
management attention. Product recalls may hurt the value of our
brands and lead to decreased demand for our products. Product
recalls also may lead to increased scrutiny by federal, state or
international regulatory agencies of our operations and increased
litigation and could have a material adverse effect on our
business, results of operations, financial condition and cash
flows.
*Launching our new DTC product could put us in direct competition
with our current ingredients segment customers and could
potentially harm the sales of our ingredients segment
business.
By
developing and selling our own DTC standalone NIAGEN®
supplement product, we may eventually be in direct competition with
some of our current ingredients segment customers that use
NIAGEN® in the products that are sold to consumers. As our own
DTC product becomes more prominent and widely adopted by consumers,
this competition could potential harm the sales of our ingredients
segment business, and our sales of NIAGEN® for our ingredients
segment may decrease. Sales for our ingredients segment represented
approximately 63% of the Company’s revenue for 2016, and
sales of NIAGEN® accounted for approximately 71% of our
ingredient segment’s total sales in 2016, or 45% of our
overall revenue, so any harm to our NIAGEN® ingredient sales
may materially and negatively affect our business.
We depend on key personnel, the
loss of any of which could negatively affect our
business.
We
depend greatly on Frank L. Jaksch Jr., Thomas C. Varvaro, Troy A.
Rhonemus and Robert N. Fried who are our Chief Executive Officer,
Chief Financial Officer, Chief Operating Officer, and President and
Chief Strategy Officer, respectively. We also depend greatly on
other key employees, including key scientific and marketing
personnel. In general, only highly qualified and trained scientists
have the necessary skills to develop our products and provide our
services. Only marketing personnel with specific experience and
knowledge in health care are able to effectively market our
products. In addition, some of our manufacturing,
quality control, safety and compliance, information technology,
sales and e-commerce related positions are highly technical as
well. We face intense competition for these professionals from our
competitors, customers, marketing partners and other companies
throughout the
industries in which we compete. Our success will depend, in part,
upon our ability to attract and retain additional skilled
personnel, which will require substantial additional funds. There
can be no assurance that we will be able to find and attract
additional qualified employees or retain any such personnel. Our
inability to hire qualified personnel, the loss of services of our
key personnel, or the loss of services of executive officers or key
employees that may be hired in the future may have a material and
adverse effect on our business.
Our operating results may fluctuate significantly as a result of a
variety of factors, many of which are outside of our
control.
We are
subject to the following factors, among others, that may negatively
affect our operating results:
●
the announcement or
introduction of new products by our competitors;
●
our ability to
upgrade and develop our systems and infrastructure to accommodate
growth;
●
the decision by
significant customers to reduce purchases;
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disputes and
litigation with significant customers;
●
our ability to
attract and retain key personnel in a timely and cost-effective
manner;
●
technical
difficulties;
●
the amount and
timing of operating costs and capital expenditures relating to the
expansion of our business, operations and
infrastructure;
●
regulation by
federal, state or local governments; and
As a
result of our limited operating history and the nature of the
markets in which we compete, it is extremely difficult for us to
make accurate forecasts. We have based our current and future
expense levels largely on our investment plans and estimates of
future events although certain of our expense levels are, to a
large extent, fixed. Assuming our products reach the market, we may
be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues relative to our planned expenditures would
have an immediate adverse effect on our business, results of
operations and financial condition. Further, as a strategic
response to changes in the competitive environment, we may from
time to time make certain pricing, service or marketing decisions
that could have a material and adverse effect on our business,
results of operations and financial condition. Due to the foregoing
factors, our revenues and operating results are and will remain
difficult to forecast.
We face significant competition, including changes in
pricing.
The
markets for our products and services are both competitive and
price sensitive. Many of our competitors have significant
financial, operations, sales and marketing resources and experience
in research and development. Competitors could develop new
technologies that compete with our products and services or even
render our products obsolete. If a competitor develops superior
technology or cost-effective alternatives to our products and
services, our business could be seriously harmed.
The
markets for some of our products are also subject to specific
competitive risks because these markets are highly price
competitive. Our competitors have competed in the past by lowering
prices on certain products. If they do so again, we may be forced
to respond by lowering our prices. This would reduce sales revenues
and increase losses. Failure to anticipate and respond to price
competition may also impact sales and aggravate
losses.
We
believe that customers in our markets display a significant amount
of loyalty to their supplier of a particular product. To the extent
we are not the first to develop, offer and/or supply new products,
customers may buy from our competitors or make materials
themselves, causing our competitive position to
suffer.
Many of our competitors are larger and have greater financial and
other resources than we do.
Our
products compete and will compete with other similar products
produced by our competitors. These competitive products could be
marketed by well-established, successful companies that possess
greater financial, marketing, distributional, personnel and other
resources than we possess. Using these resources, these companies
can implement extensive advertising and promotional campaigns, both
generally and in response to specific marketing efforts by
competitors, and enter into new markets more rapidly to introduce
new products. In certain instances, competitors with greater
financial resources also may be able to enter a market in direct
competition with us, offering attractive marketing tools to
encourage the sale of products that compete with our products or
present cost features that consumers may find
attractive.
We may never develop any additional products to
commercialize.
We have
invested a substantial amount of our time and resources in
developing various new products. Commercialization of these
products will require additional development, clinical evaluation,
regulatory approval, significant marketing efforts and substantial
additional investment before they can provide us with any revenue.
Despite our efforts, these products may not become commercially
successful products for a number of reasons, including but not
limited to:
●
we may not be able
to obtain regulatory approvals for our products, or the approved
indication may be narrower than we seek;
●
our products may
not prove to be safe and effective in clinical trials;
●
we may experience
delays in our development program;
●
any products that
are approved may not be accepted in the marketplace;
●
we may not have
adequate financial or other resources to complete the development
or to commence the commercialization of our products or will not
have adequate financial or other resources to achieve significant
commercialization of our products;
●
we may not be able
to manufacture any of our products in commercial quantities or at
an acceptable cost;
●
rapid technological
change may make our products obsolete;
●
we may be unable to
effectively protect our intellectual property rights or we may
become subject to claims that our activities have infringed the
intellectual property rights of others; and
●
we may be unable to
obtain or defend patent rights for our products.
We may not be able to partner with others for technological
capabilities and new products and services.
Our
ability to remain competitive may depend, in part, on our ability
to continue to seek partners that can offer technological
improvements and improve existing products and services that are
offered to our customers. We are committed to attempting to keep
pace with technological change, to stay abreast of technology
changes and to look for partners that will develop new products and
services for our customer base. We cannot assure prospective
investors that we will be successful in finding partners or be able
to continue to incorporate new developments in technology, to
improve existing products and services, or to develop successful
new products and services, nor can we be certain that newly
developed products and services will perform satisfactorily or be
widely accepted in the marketplace or that the costs involved in
these efforts will not be substantial.
If we fail to maintain adequate quality standards for our products
and services, our business may be adversely affected and our
reputation harmed.
Dietary
supplement, nutraceutical, food and beverage, functional food,
analytical laboratories, pharmaceutical and cosmetic customers are
often subject to rigorous quality standards to obtain and maintain
regulatory approval of their products and the manufacturing
processes that generate them. A failure to maintain, or, in some
instances, upgrade our quality standards to meet our
customers’ needs, could cause damage to our reputation and
potentially substantial sales losses.
Our ability to protect our intellectual property and proprietary
technology through patents and other means is uncertain and may be
inadequate, which would have a material and adverse effect on
us.
Our
success depends significantly on our ability to protect our
proprietary rights to the technologies used in our products. We
rely on patent protection, as well as a combination of copyright,
trade secret and trademark laws and nondisclosure, confidentiality
and other contractual restrictions to protect our proprietary
technology, including our licensed technology. However, these legal
means afford only limited protection and may not adequately protect
our rights or permit us to gain or keep any competitive advantage.
For example, our pending United States and foreign patent
applications may not issue as patents in a form that will be
advantageous to us or may issue and be subsequently successfully
challenged by others and invalidated. In addition, our pending
patent applications include claims to material aspects of our
products and procedures that are not currently protected by issued
patents. Both the patent application process and the process of
managing patent disputes can be time consuming and expensive.
Competitors may be able to design around our patents or develop
products which provide outcomes which are comparable or even
superior to ours. Steps that we have taken to protect our
intellectual property and proprietary technology, including
entering into confidentiality agreements and intellectual property
assignment agreements with some of our officers, employees,
consultants and advisors, may not provide us with meaningful
protection for our trade secrets or other proprietary information
in the event of unauthorized use or disclosure or other breaches of
the agreements. Furthermore, the laws of foreign countries may not
protect our intellectual property rights to the same extent as do
the laws of the United States.
In the
event a competitor infringes upon our licensed or pending patent or
other intellectual property rights, enforcing those rights may be
costly, uncertain, difficult and time consuming. Even if
successful, litigation to enforce our intellectual property rights
or to defend our patents against challenge could be expensive and
time consuming and could divert our management’s attention.
We may not have sufficient resources to enforce our intellectual
property rights or to defend our patents rights against a
challenge. The failure to obtain patents and/or protect our
intellectual property rights could have a material and adverse
effect on our business, results of operations and financial
condition.
Our patents and licenses may be subject to challenge on validity
grounds, and our patent applications may be rejected.
We rely
on our patents, patent applications, licenses and other
intellectual property rights to give us a competitive advantage.
Whether a patent is valid, or whether a patent application should
be granted, is a complex matter of science and law, and therefore
we cannot be certain that, if challenged, our patents, patent
applications and/or other intellectual property rights would be
upheld. If one or more of those patents, patent applications,
licenses and other intellectual property rights are invalidated,
rejected or found unenforceable, that could reduce or eliminate any
competitive advantage we might otherwise have had.
We may become subject to claims of infringement or misappropriation
of the intellectual property rights of others, which could prohibit
us from developing our products, require us to obtain licenses from
third parties or to develop non-infringing alternatives and subject
us to substantial monetary damages.
Third
parties could, in the future, assert infringement or
misappropriation claims against us with respect to products we
develop. Whether a product infringes a patent or misappropriates
other intellectual property involves complex legal and factual
issues, the determination of which is often uncertain. Therefore,
we cannot be certain that we have not infringed the intellectual
property rights of others. Our potential competitors may assert
that some aspect of our product infringes their patents. Because
patent applications may take years to issue, there also may be
applications now pending of which we are unaware that may later
result in issued patents upon which our products could infringe.
There also may be existing patents or pending patent applications
of which we are unaware upon which our products may inadvertently
infringe.
Any
infringement or misappropriation claim could cause us to incur
significant costs, place significant strain on our financial
resources, divert management’s attention from our business
and harm our reputation. If the relevant patents in such claim were
upheld as valid and enforceable and we were found to infringe them,
we could be prohibited from selling any product that is found to
infringe unless we could obtain licenses to use the technology
covered by the patent or are able to design around the patent. We
may be unable to obtain such a license on terms acceptable to us,
if at all, and we may not be able to redesign our products to avoid
infringement. A court could also order us to pay compensatory
damages for such infringement, plus prejudgment interest and could,
in addition, treble the compensatory damages and award attorney
fees. These damages could be substantial and could harm our
reputation, business, financial condition and operating results. A
court also could enter orders that temporarily, preliminarily or
permanently enjoin us and our customers from making, using, or
selling products, and could enter an order mandating that we
undertake certain remedial activities. Depending on the nature of
the relief ordered by the court, we could become liable for
additional damages to third parties.
The prosecution and enforcement of patents licensed to us by third
parties are not within our control. Without these technologies, our
products may not be successful and our business would be harmed if
the patents were infringed on or misappropriated without action by
such third parties.
We have
obtained licenses from third parties for patents and patent
application rights related to the products we are developing,
allowing us to use intellectual property rights owned by or
licensed to these third parties. We do not control the maintenance,
prosecution, enforcement or strategy for many of these patents or
patent application rights and as such are dependent in part on the
owners of the intellectual property rights to maintain their
viability. Without access to these technologies or suitable
design-around or alternative technology options, our ability to
conduct our business could be impaired significantly.
We may be subject to damages resulting from claims that we, our
employees, or our independent contractors have wrongfully used or
disclosed alleged trade secrets of others.
Some of
our employees were previously employed at other dietary supplement,
nutraceutical, food and beverage, functional food, analytical
laboratories, pharmaceutical and cosmetic companies. We may also
hire additional employees who are currently employed at other such
companies, including our competitors. Additionally, consultants or
other independent agents with which we may contract may be or have
been in a contractual arrangement with one or more of our
competitors. We may be subject to claims that these employees or
independent contractors have used or disclosed such other
party’s trade secrets or other proprietary information.
Litigation may be necessary to defend against these claims. Even if
we are successful in defending against these claims, litigation
could result in substantial costs and be a distraction to our
management. If we fail to defend such claims, in addition to paying
monetary damages, we may lose valuable intellectual property rights
or personnel. A loss of key personnel or their work product could
hamper or prevent our ability to market existing or new products,
which could severely harm our business.
Litigation may harm our business.
Substantial,
complex or extended litigation could cause us to incur significant
costs and distract our management. For example, lawsuits by
employees, stockholders, collaborators, distributors, customers,
competitors or others could be very costly and substantially
disrupt our business. Disputes from time to time with such
companies, organizations or individuals are not uncommon, and we
cannot assure you that we will always be able to resolve such
disputes or on terms favorable to us. Unexpected results could
cause us to have financial exposure in these matters in excess of
recorded reserves and insurance coverage, requiring us to provide
additional reserves to address these liabilities, therefore
impacting profits.
Our sales and results of operations depend on our customers’
research and development efforts and their ability to obtain
funding for these efforts.
Our
customers include researchers at pharmaceutical and biotechnology
companies, chemical and related companies, academic institutions,
government laboratories and private foundations. Fluctuations in
the research and development budgets of these researchers and their
organizations could have a significant effect on the demand for our
products. Our customers determine their research and development
budgets based on several factors, including the need to develop new
products, the availability of governmental and other funding,
competition and the general availability of resources. As we
continue to expand our international operations, we expect research
and development spending levels in markets outside of the United
States will become increasingly important to us.
Research
and development budgets fluctuate due to changes in available
resources, spending priorities, general economic conditions,
institutional and governmental budgetary limitations and mergers of
pharmaceutical and biotechnology companies. Our business could be
harmed by any significant decrease in life science and high
technology research and development expenditures by our customers.
In particular, a small portion of our sales has been to researchers
whose funding is dependent on grants from government agencies such
as the United States National Institute of Health, the National
Science Foundation, the National Cancer Institute and similar
agencies or organizations. Government funding of research and
development is subject to the political process, which is often
unpredictable. Other departments, such as Homeland Security or
Defense, or general efforts to reduce the United States federal
budget deficit could be viewed by the government as a higher
priority. Any shift away from funding of life science and high
technology research and development or delays surrounding the
approval of governmental budget proposals may cause our customers
to delay or forego purchases of our products and services, which
could seriously damage our business.
Some of
our customers receive funds from approved grants at a particular
time of year, many times set by government budget cycles. In the
past, such grants have been frozen for extended periods or have
otherwise become unavailable to various institutions without
advance notice. The timing of the receipt of grant funds may affect
the timing of purchase decisions by our customers and, as a result,
cause fluctuations in our sales and operating results.
Demand for our products and services are subject to the commercial
success of our customers’ products, which may vary for
reasons outside our control.
Even if
we are successful in securing utilization of our products in a
customer’s manufacturing process, sales of many of our
products and services remain dependent on the timing and volume of
the customer’s production, over which we have no control. The
demand for our products depends on regulatory approvals and
frequently depends on the commercial success of the
customer’s supported product. Regulatory processes are
complex, lengthy, expensive, and can often take years to
complete.
We may bear financial risk if we under-price our contracts or
overrun cost estimates.
In
cases where our contracts are structured as fixed price or
fee-for-service with a cap, we bear the financial risk if we
initially under-price our contracts or otherwise overrun our cost
estimates. Such under-pricing or significant cost overruns could
have a material adverse effect on our business, results of
operations, financial condition and cash flows.
We rely on single or a limited number of third-party suppliers for
the raw materials required for the production of our
products.
Our
dependence on a limited number of third-party suppliers or on a
single supplier, and the challenges we may face in obtaining
adequate supplies of raw materials, involve several risks,
including limited control over pricing, availability, quality and
delivery schedules. We cannot be certain that our current suppliers
will continue to provide us with the quantities of these raw
materials that we require or satisfy our anticipated specifications
and quality requirements. Any supply interruption in limited or
sole sourced raw materials could materially harm our ability to
manufacture our products until a new source of supply, if any,
could be identified and qualified. Although we believe there are
other suppliers of these raw materials, we may be unable to find a
sufficient alternative supply channel in a reasonable time or on
commercially reasonable terms. Any performance failure on the part
of our suppliers could delay the development and commercialization
of our products, or interrupt production of then existing products
that are already marketed, which would have a material adverse
effect on our business.
We may not be successful in
acquiring complementary businesses on favorable
terms.
As part
of our business strategy, we intend to consider acquisitions of
similar or complementary businesses. No assurance can be given that
we will be successful in identifying attractive acquisition
candidates or completing acquisitions on favorable terms. In
addition, any future acquisitions will be accompanied by the risks
commonly associated with acquisitions. These risks include
potential exposure to unknown liabilities of acquired companies or
to acquisition costs and expenses, the difficulty and expense of
integrating the operations and personnel of the acquired companies,
the potential disruption to the business of the combined company
and potential diversion of our management's time and attention, the
impairment of relationships with and the possible loss of key
employees and clients as a result of the changes in management, the
incurrence of amortization expenses and dilution to the
shareholders of the combined company if the acquisition is made for
stock of the combined company. In addition, successful completion
of an acquisition may depend on consents from third parties,
including regulatory authorities and private parties, which
consents are beyond our control. There can be no assurance that
products, technologies or businesses of acquired companies will be
effectively assimilated into the business or product offerings of
the combined company or will have a positive effect on the combined
company's revenues or earnings. Further, the combined company may
incur significant expense to complete acquisitions and to support
the acquired products and businesses. Any such acquisitions may be
funded with cash, debt or equity, which could have the effect of
diluting or otherwise adversely affecting the holdings or the
rights of our existing stockholders.
If we experience a significant disruption in our information
technology systems or if we fail to implement new systems and
software successfully, our business could be adversely
affected.
We
depend on information systems throughout our company to control our
manufacturing processes, process orders, manage inventory, process
and bill shipments and collect cash from our customers, respond to
customer inquiries, contribute to our overall internal control
processes, maintain records of our property, plant and equipment,
and record and pay amounts due vendors and other creditors. If we
were to experience a prolonged disruption in our information
systems that involve interactions with customers and suppliers, it
could result in the loss of sales and customers and/or increased
costs, which could adversely affect our overall business
operation.
*Our cash flows and capital resources may be
insufficient to make required payments on future
indebtedness.
On
November 4, 2016, we entered into entered into a business financing
agreement (the “Financing Agreement”) with Western
Alliance Bank (“Western Alliance”), in order to
establish a formula based revolving credit line pursuant to which
the Company may borrow an aggregate principal amount of up to
$5,000,000, subject to the terms and conditions of the Financing
Agreement. The interest rate will be calculated at a floating rate
per month equal to (a) the greater of (i) 3.50% per year or (ii)
the Prime Rate published in the Money Rates section of the Western
Edition of The Wall Street Journal, or such other rate of interest
publicly announced by Lender as its Prime Rate, plus (b) 2.50
percentage points. Any borrowings, interest or other fees or
obligations that the Company owes Western Alliance pursuant to the
Financing Agreement (the “Obligations”) will be become
due and payable on November 4, 2018.
As of
April 1, 2017 and May 10, 2017, we did not have any indebtedness
under the Financing Agreement. However, we may incur indebtedness
in the future and such indebtedness could have important
consequences to you. For example, it could:
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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.
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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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pricing
pressures;
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increased
operating costs;
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competitive
conditions; and
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other
operating difficulties.
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If our
cash flows and capital resources are insufficient to fund our debt
service obligations, we may be forced to reduce or delay capital
expenditures, sell material assets or operations, obtain additional
capital or restructure our debt. In the event that we are required
to dispose of material assets or operations to meet our debt
service and other obligations, the value realized on such assets or
operations will depend on market conditions and the availability of
buyers. Accordingly, any such sale may not, among other things, be
for a sufficient dollar amount. Our obligations pursuant to the
Financing Agreement are secured by a security interest in all of
our assets, exclusive of intellectual property. The foregoing
encumbrances may limit our ability to dispose of material assets or
operations. We also may not be able to restructure our indebtedness
on favorable economic terms, if at all.
We may
incur additional indebtedness in the future. Our incurrence of
additional indebtedness would intensify the risks described
above.
The Financing Agreement contains various covenants limiting
the discretion of our management in operating our
business.
The
Financing Agreement contains various restrictive covenants that
limit our management's discretion in operating our business. In
particular, these instruments limit our ability to, among other
things:
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incur
additional debt;
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grant
liens on assets;
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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.
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If we
fail to comply with the restrictions in the Financing Agreement, a
default may allow the creditors under the relevant instruments to
accelerate the related debt and to exercise their remedies under
these agreements, which will typically include the right to declare
the principal amount of that debt, together with accrued and unpaid
interest and other related amounts, immediately due and payable, to
exercise any remedies the creditors may have to foreclose on assets
that are subject to liens securing that debt and to terminate any
commitments they had made to supply further funds.
If we are unable to maintain sales, marketing and distribution
capabilities or maintain arrangements with third parties to sell,
market and distribute our products, our business may be
harmed.
To
achieve commercial success for our products, we must sell our
product lines and/or technologies at favorable prices. In addition
to being expensive, maintaining such a sales force is
time-consuming. Qualified direct sales personnel with experience in
the natural products industry are in high demand, and there can be
no assurance that we will be able to hire or retain an effective
direct sales team. Similarly, qualified independent sales
representatives both within and outside the United States are in
high demand, and we may not be able to build an effective network
for the distribution of our product through such representatives.
There can be no assurance that we will be able to enter into
contracts with representatives on terms acceptable to us.
Furthermore, there can be no assurance that we will be able to
build an alternate distribution framework should we attempt to do
so.
We may
also need to contract with third parties in order to market our
products. To the extent that we enter into arrangements with third
parties to perform marketing and distribution services, our product
revenue could be lower and our costs higher than if we directly
marketed our products. Furthermore, to the extent that we enter
into co-promotion or other marketing and sales arrangements with
other companies, any revenue received will depend on the skills and
efforts of others, and we do not know whether these efforts will be
successful. If we are unable to establish and maintain adequate
sales, marketing and distribution capabilities, independently or
with others, we will not be able to generate product revenue, and
may not become profitable.
Risks Related to Regulatory Approval of Our Products and Other
Government Regulations
We are subject to regulation by various federal, state and foreign
agencies that require us to comply with a wide variety of
regulations, including those regarding the manufacture of products,
advertising and product label claims, the distribution of our
products and environmental matters. Failure to comply with these
regulations could subject us to fines, penalties and additional
costs.
Some of
our operations are subject to regulation by various United States
federal agencies and similar state and international agencies,
including the Department of Commerce, the FDA, the FTC, the
Department of Transportation and the Department of Agriculture.
These regulations govern a wide variety of product activities, from
design and development to labeling, manufacturing, handling, sales
and distribution of products. If we fail to comply with any of
these regulations, we may be subject to fines or penalties, have to
recall products and/or cease their manufacture and distribution,
which would increase our costs and reduce our sales.
We are
also subject to various federal, state, local and international
laws and regulations that govern the handling, transportation,
manufacture, use and sale of substances that are or could be
classified as toxic or hazardous substances. Some risk of
environmental damage is inherent in our operations and the products
we manufacture, sell, or distribute. Any failure by us to comply
with the applicable government regulations could also result in
product recalls or impositions of fines and restrictions on our
ability to carry on with or expand in a portion or possibly all of
our operations. If we fail to comply with any or all of these
regulations, we may be subject to fines or penalties, have to
recall products and/or cease their manufacture and distribution,
which would increase our costs and reduce our sales.
Government regulations of our customer’s business are
extensive and are constantly changing. Changes in these regulations
can significantly affect customer demand for our products and
services.
The
process by which our customers’ industries are regulated is
controlled by government agencies and depending on the market
segment can be very expensive, time consuming, and uncertain.
Changes in regulations or the enforcement practices of current
regulations could have a negative impact on our customers and, in
turn, our business. At this time, it is unknown how the FDA will
interpret and to what extent it will enforce GMPs, regulations that
will likely affect many of our customers. These uncertainties may
have a material impact on our results of operations, as lack of
enforcement or an interpretation of the regulations that lessens
the burden of compliance for the dietary supplement marketplace may
cause a reduced demand for our products and services.
*Changes in government regulation or in practices relating to the
pharmaceutical, dietary supplement, food and cosmetic industry
could decrease the need for the services we provide.
Governmental
agencies throughout the world, including in the United States,
strictly regulate the pharmaceutical, dietary supplement, food and
cosmetic industries. Our business involves helping pharmaceutical
and biotechnology companies navigate the regulatory drug approval
process. Changes in regulation, such as a relaxation in regulatory
requirements or the introduction of simplified drug approval
procedures, or an increase in regulatory requirements that we have
difficulty satisfying or that make our services less competitive,
could eliminate or substantially reduce the demand for our
services. Also, if the government makes efforts to contain drug
costs and pharmaceutical and biotechnology company profits from new
drugs, our customers may spend less, or reduce their spending on
research and development. If health insurers were to change their
practices with respect to reimbursements for pharmaceutical
products, our customers may spend less, or reduce their spending on
research and development.
If we should in the future become required to obtain regulatory
approval to market and sell our goods we will not be able to
generate any revenues until such approval is received.
The
pharmaceutical industry is subject to stringent regulation by a
wide range of authorities. While we believe that, given our present
business, we are not currently required to obtain regulatory
approval to market our goods because, among other things, we do not
(i) produce or market any clinical devices or other products, or
(ii) sell any medical products or services to the customer, we
cannot predict whether regulatory clearance will be required in the
future and, if so, whether such clearance will at such time be
obtained for any products that we are developing or may attempt to
develop. Should such regulatory approval in the future be required,
our goods may be suspended or may not be able to be marketed and
sold in the United States until we have completed the regulatory
clearance process as and if implemented by the FDA. Satisfaction of
regulatory requirements typically takes many years, is dependent
upon the type, complexity and novelty of the product or service and
would require the expenditure of substantial
resources.
If
regulatory clearance of a good that we propose to propose to market
and sell is granted, this clearance may be limited to those
particular states and conditions for which the good is demonstrated
to be safe and effective, which would limit our ability to generate
revenue. We cannot ensure that any good that we develop will meet
all of the applicable regulatory requirements needed to receive
marketing clearance. Failure to obtain regulatory approval will
prevent commercialization of our goods where such clearance is
necessary. There can be no assurance that we will obtain regulatory
approval of our proposed goods that may require it.
Risks Related to the Securities Markets and Ownership of our Equity
Securities
The market price of our common stock may be volatile and adversely
affected by several factors.
The
market price of our common stock could fluctuate significantly in
response to various factors and events, including, but not limited
to:
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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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media
coverage regarding our industry or us;
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litigation;
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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;
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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.
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In
addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These market
fluctuations may also materially and adversely affect the market
price of our common stock.
Our shares of common stock may be thinly traded, so you may be
unable to sell at or near ask prices or at all.
We
cannot predict the extent to which an active public market for our
common stock will develop or be sustained. This situation may be
attributable to a number of factors, including the fact that we are
a small company that is relatively unknown to stock analysts, stock
brokers, institutional investors and others in the investment
community who generate or influence sales volume, and that even if
we came to the attention of such persons, they tend to be risk
averse and would be reluctant to follow an unproven company such as
ours or purchase or recommend the purchase of our shares until such
time as we have become more seasoned and viable. As a consequence,
there may be periods of several days or weeks when trading activity
in our shares is minimal or non-existent, as compared to a seasoned
issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect
on share price. We cannot assure you that a broader or more active
public trading market for our common stock will develop or be
sustained, or that current trading levels will be sustained or not
diminish.
We have not paid cash dividends in the past and do not expect to
pay cash dividends in the foreseeable future. Any return on
investment may be limited to the value of our common
stock.
We have
never paid cash dividends on our capital stock and do not
anticipate paying cash dividends on our capital stock in the
foreseeable future. The payment of dividends on our capital stock
will depend on our earnings, financial condition and other business
and economic factors affecting us at such time as the board of
directors may consider relevant. If we do not pay dividends, our
common stock may be less valuable because a return on your
investment will only occur if the common stock price
appreciates.
Stockholders may experience significant dilution if future equity
offerings are used to fund operations or acquire complementary
businesses.
If
future operations or acquisitions are financed through the issuance
of additional equity securities, stockholders could experience
significant dilution. Securities issued in connection with future
financing activities or potential acquisitions may have rights and
preferences senior to the rights and preferences of our common
stock. In addition, the issuance of shares of our common stock upon
the exercise of outstanding options or warrants may result in
dilution to our stockholders.
*We may become involved in securities class action litigation that
could divert management’s attention and harm our
business.
The
stock market in general, and the stocks of early stage companies in
particular, have experienced extreme price and volume fluctuations.
These fluctuations have often been unrelated or disproportionate to
the operating performance of the companies involved. If these
fluctuations occur in the future, the market price of our shares
could fall regardless of our operating performance. In the past,
following periods of volatility in the market price of a particular
company’s securities, securities class action litigation has
often been brought against that company. If the market price or
volume of our shares suffers extreme fluctuations, then we may
become involved in this type of litigation, which would be
expensive and divert management’s attention and resources
from managing our business.
As a
public company, we may also from time to time make forward-looking
statements about future operating results and provide some
financial guidance to the public markets. Projections may not be
made timely or set at expected performance levels and could
materially affect the price of our shares. Any failure to meet
published forward-looking statements that adversely affect the
stock price could result in losses to investors, stockholder
lawsuits or other litigation, sanctions or restrictions issued by
the SEC.
*We have a significant number of outstanding options and warrants,
and future sales of these shares could adversely affect the market
price of our common stock.
As of
April 1, 2017, we had outstanding options exercisable for an
aggregate of 5,757,195 shares of common stock at a weighted
average exercise price of $3.41 per share and outstanding warrants
exercisable for an aggregate of 470,444 shares of common stock at a
weighted average exercise price of $4.15 per share. The holders may
sell many of these shares in the public markets from time to time,
without limitations on the timing, amount or method of sale. As and
when our stock price rises, if at all, more outstanding options and
warrants will be in-the-money and the holders may exercise their
options and warrants and sell a large number of shares. This could
cause the market price of our common stock to decline.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
On
March 12, 2017, ChromaDex Corporation (the "Company") acquired all
of the outstanding equity interests of Healthspan Research, LLC
(“Healthspan”) pursuant to a Membership Interest
Purchase Agreement (the “Purchase Agreement”) by and
among (i) Robert Fried, Jeffrey Allen and Dr. Charles Brenner (the
“Sellers”) and (ii) the Company (the
“Acquisition”). Pursuant to the Purchase Agreement, the
Company purchased all of the outstanding membership interests from
the Sellers.
Upon
the closing of, and as consideration for, the Acquisition, the
Company issued an aggregate of 367,648 unregistered shares of the
Company’s common stock to the Sellers (the “Stock
Consideration”) and, in cancellation of a loan owed by
Healthspan to Mr. Fried, paid $32,500 to Mr. Fried and will also
pay Mr. Fried $100,000 on March 12, 2018. The issuance of the Stock
Consideration was not registered under the Securities Act of 1933,
as amended (the “Securities Act”), and therefore may
not be offered or sold in the United States absent registration or
an applicable exemption from registration requirements. The Company
is relying on the exemption from federal registration under Section
4(a)(2) of the Securities Act and/or Rule 506 promulgated
thereunder.
On
April 26, 2017, the Company entered into a Securities Purchase
Agreement with certain purchasers named therein (the
“Purchasers”), pursuant to which the Company agreed to
sell and issue up to $25.0 million of its common stock at a
purchase price of $2.60 per share in three tranches of
approximately $3.5 million, $16.4 million and $5.1 million,
respectively. The first tranche closed on April 27, 2017, pursuant
to which the Company issued 1,346,154 shares of its common stock.
The second tranche is expected to occur within 30 days of the
closing of the first tranche, pursuant to which the Company has
agreed to issue 6,303,814 shares of its common stock. The third
tranche is expected to occur following a related stockholder
approval to be solicited as soon as possible after completion of
the second tranche.
Subject
to completion of the second tranche, the Securities Purchase
Agreement requires that the Company’s Board of Directors (the
“Board”) increase the number of authorized directors so
as to create two vacant seats on the Board, which vacancies shall
be filled by nominees selected by the Purchasers on a date
following the Company’s 2017 Annual Meeting of
Stockholders.
The
shares of the Company’s common stock sold pursuant to the
Securities Purchase Agreement are not registered under the
Securities Act, or any state securities laws. The Company has
relied on the exemption from the registration requirements of the
Securities Act by virtue of Section 4(a)(2) thereof and Rule 506 of
Regulation D thereunder. In connection with the Purchasers’
execution of the Securities Purchase Agreement, the
Purchasers’ represented to the Company that they are each an
“accredited investor” as defined in Regulation D of the
Securities Act and that the securities purchased by them were
acquired solely for their own account and for investment purposes
and not with a view to the future sale or
distribution.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
None.
Not
applicable.
ITEM 5. OTHER
INFORMATION
None.
ITEM 6. EXHIBITS
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Exhibit
No.
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Description
of Exhibits
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2.1
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Agreement
and Plan of Merger, dated as of May 21, 2008, by and among Cody
Resources, Inc., CDI Acquisition, Inc. and ChromaDex, Inc., as
amended on June 10, 2008 (incorporated by reference to, and filed
as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed with the Commission on June 24, 2008)
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3.1
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Amended
and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to, and filed as Exhibit 3.1 to the
Registrant’s Annual Report on Form 10-K filed with the
Commission on March 16, 2017)
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3.2
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Bylaws
of the Registrant (incorporated by reference to, and filed as
Exhibit 3.2 to the Registrant’s Current Report on Form 8-K
filed with the Commission on June 24, 2008)
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3.3
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Certificate
of Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant (incorporated by reference to, and
filed as Exhibit 3.1 to the Registrant’s Current Report on
Form 8-K filed with the Commission on April 12, 2016)
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3.4
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Amendment
to Bylaws of the Registrant (incorporated by reference to, and
filed as Exhibit 3.1 to the Registrant’s Current Report on
Form 8-K filed with the Commission on July 19, 2016)
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4.1
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Form of
Stock Certificate representing shares of the Registrant’s
Common Stock (incorporated by reference to, and filed as Exhibit
4.1 to the Registrant’s Annual Report on Form 10-K filed with
the Commission on April 3, 2009)
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4.2
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Investor’s
Rights Agreement, effective as of December 31, 2005, by and between
The University of Mississippi Research Foundation and the
Registrant (incorporated by reference to, and filed as Exhibit 4.1
to the Registrant’s Current Report on Form 8-K filed with the
Commission on June 24, 2008)
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4.3
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Tag-Along
Agreement effective as of December 31, 2005, by and among the
Registrant, Frank Louis Jaksch, Snr. & Maria Jaksch, Trustees
of the Jaksch Family Trust, Margery Germain, Lauren Germain, Emily
Germain, Lucie Germain, Frank Louis Jaksch, Jr., and the University
of Mississippi Research Foundation (incorporated by reference to,
and filed as Exhibit 4.2 to the Registrant’s Current Report
on Form 8-K filed with the Commission on June 24,
2008)
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4.4
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Form of
Stock Certificate representing shares of the Registrant’s
Common Stock effective as of January 1, 2016 (incorporated by
reference to, and filed as Exhibit 4.4 to the Registrant’s
Annual Report on Form 10-K filed with the Commission on March 17,
2016)
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10.1
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Membership
Interest Purchase Agreement effective as of March 12, 2017, by and
among Robert Fried, Charles Brenner, Jeffrey Allen and the
Registrant ❖
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10.2
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Executive
Employment Agreement, dated as of March 12, 2017, between Robert
Fried and the Registrant (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) +
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10.3
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Form of
Restricted Stock Award Agreement for Robert Fried ❖+
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10.4
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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)
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10.5
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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)
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31.1
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Certification
of the Chief Executive Officer pursuant to Rule 13a-14(A) of the
Securities Exchange Act of 1934, as amended❖
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31.2
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Certification
of the Chief Financial Officer pursuant to Rule 13a-14(A) of the
Securities Exchange Act of 1934, as amended❖
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32.1
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Certification
pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section
906 of the Sarbanes−Oxley Act of 2002) ❖
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101.INS
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XBRL
Instance Document
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101.SCH
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XBRL
Taxonomy Extension Schema Document
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101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase Document
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101.DEF
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XBRL
Taxonomy Extension Definition Linkbase Document
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101.LAB
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XBRL
Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase Document
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❖ Filed herewith
+
Indicates management contract or compensatory plan or
arrangement.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
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CHROMADEX
CORPORATION
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Date: May 11,
2017
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By:
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/s/
THOMAS
C. VARVARO
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Thomas C.
Varvaro
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Chief Financial
Officer
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(principal financial and accounting officer
and duly authorized on behalf of the registrant)
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-45-