Blueprint
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For
the fiscal year ended December 31, 2018
or
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For
the transition period from to
Commission file number 001-37752
CHROMADEX
CORPORATION
(Exact
name of Registrant as specified in its Charter)
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Delaware
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26-2940963
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(State or other
jurisdiction of incorporation)
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(I.R.S. Employer
Identification No.)
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10900 Wilshire Blvd. Suite 650, Los
Angeles, California
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90024
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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 (310) 388-6706
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of Each Exchange on Which Registered
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Common Stock,
$0.001 par value
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The NASDAQ Capital
Market
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Securities
registered pursuant to Section 12(g) of the Act: None.
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes [ ] No [X
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Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No
[X]
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
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for
such shorter period that the registrant was required to submit such
files). Yes [X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [
]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “accelerated
filer,” “large accelerated filer,” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [
]
Smaller
reporting company [X] Emerging growth company [ ]
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financing accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
As of
June 30, 2018, the last business day of the registrant’s most
recently completed second fiscal quarter, the aggregate market
value of the registrant’s common stock held by non-affiliates
of the registrant was approximately $151.4 million, based on the
closing price of the registrant’s common stock on the NASDAQ
Capital Market on June 30, 2018.
Number
of shares of common stock of the registrant outstanding as of
February 28, 2019: 55,285,912.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the Registrant’s proxy statement (the “Proxy
Statement”) to be filed with the Securities and Exchange
Commission (“SEC” or the “Commission”)
pursuant to Regulation 14A in connection with the
registrant’s 2019 Annual Meeting of Stockholders, which will
be filed subsequent to the date hereof, are incorporated by
reference into Part III of this Form 10‑K. Such Proxy
Statement will be filed with the SEC not later than 120 days
following the end of the registrant’s fiscal year ended
December 31, 2018.
TABLE OF CONTENTS
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Item
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PART I
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PART II
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PART III
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PART IV
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PART
I
CAUTIONARY NOTICE REGARDING FORWARD
LOOKING STATEMENTS
This
Annual Report on Form 10-K (the “Form 10-K”) contains
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange
Act of 1934, as amended, which are subject to the safe harbor
created by those sections.
We may,
in some cases, use words such as “anticipate,”
“believe,” “could,” “estimate,”
“expect,” “intend,” “may,”
“plan,” “potential,” “predict,”
“project,” “should,” “will,”
“would” or the negative of these terms, and similar
expressions that convey uncertainty of future events or outcomes to
identify these forward-looking statements. Any statements contained
herein that are not statements of historical facts may be deemed to
be forward-looking statements and are based upon our current
expectations, beliefs, estimates and projections, and various
assumptions, many of which, by their nature, are inherently
uncertain and beyond our control. Such statements, include, but are
not limited to, statements contained in this Form 10-K relating to
our business, business strategy, products and services we may offer
in the future, the outcome and impact of litigation, the timing and
results of future regulatory filings, the timing and results of
future clinical trials, our ability to collect from major
customers, sales and marketing strategy and capital outlook.
Forward-looking statements are based on our current expectations
and assumptions regarding our business, the economy and other
future conditions. Because forward looking statements relate to the
future, they are subject to inherent uncertainties, risks and
changes in circumstances that are difficult to predict. Our actual
results may differ materially from those contemplated by the
forward-looking statements. They are neither statement of
historical fact nor guarantees of assurance of future performance.
We caution you therefore against relying on any of these
forward-looking statements. Important factors that could cause
actual results to differ materially from those in the forward
looking statements include, but are not limited to, a decline in
general economic conditions nationally and internationally;
decreased demand for our products and services; market acceptance of our products;
the ability to protect our intellectual property rights; impact of
any litigation or infringement actions brought against us;
competition from other providers and products; risks in product
development; inability to raise capital to fund continuing
operations; changes in government regulation; the ability to
complete customer transactions and capital raising transactions,
and other factors (including the risks contained in Item 1A of this
Form 10-K under the heading “Risk Factors”) relating to
our industry, our operations and results of operations and any
businesses that may be acquired by us. Should one or more of these
risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may differ
significantly from those anticipated, believed, estimated,
expected, intended or planned.
Factors
or events that could cause our actual results to differ may emerge
from time to time, and it is not possible for us to predict all of
them, nor can we assess the impact of all factors on our business
or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in
any forward-looking statements we may make. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements. We cannot guarantee future results,
levels of activity, performance or achievements. Except as required
by applicable law, we undertake no obligation to and do not intend
to update any of the forward-looking statements to conform these
statements to actual results.
Unless
otherwise indicated or the context otherwise requires, references
to the “Company”, “ChromaDex”,
“we”, “us” and “our” refer to
ChromaDex Corporation and its consolidated
subsidiaries.
Company Overview
ChromaDex
is a science-based integrated nutraceutical company devoted to
improving the way people age. ChromaDex scientists partner with
leading universities and research institutions worldwide to
discover, develop and create products to deliver the full potential
of nicotinamide adenine dinucleotide ("NAD") and its impact on
human health.
NAD is
an essential coenzyme and a key regulator of cellular metabolism.
Best known for its role in cellular adenosine triphosphate ("ATP")
production, NAD is now thought to play an important role in healthy
aging. Many cellular functions related to health and healthy aging
are sensitive to levels of locally available NAD and this
represents an active area of research in the field of
NAD.
NAD
levels are not constant, and in humans, NAD levels have been shown
to decline by more than 50% from young adulthood to middle age. NAD
continues to decline as humans grow older. There are other causes
of reduced NAD levels such as over-nutrition, alcohol consumption
and a number of disease states. NAD may also be increased,
including through calorie restriction and exercise. Healthy aging,
mitochondria and NAD continue to be areas of focus in the research
community. In 2018, there were over 160 studies on NAD. The areas
of study include Alzheimer’s disease, Parkinson’s
disease, neuropathy and heart failure.
In
2013, ChromaDex commercialized NIAGEN® nicotinamide riboside
("NR"), a novel form of vitamin B3. Data from numerous animal
studies, and confirmed in human clinical trials, show that NR is a
highly efficient NAD precursor that significantly raises NAD
levels. NIAGEN® is safe for human consumption with no adverse
side effects. NIAGEN® has twice been successfully reviewed
under FDA's new dietary ingredient (“NDI”) notification
program, and has also been successfully notified to the FDA as
generally recognized as safe (“GRAS”). Animal studies
of NIAGEN® have demonstrated a variety of outcomes ranging
from increased NAD levels, increased cellular metabolism and energy
production to improvements in insulin sensitivity. NIAGEN® is
the trade name for our proprietary ingredient NR, and is protected
by patents to which we are the exclusive licensee.
ChromaDex
is the world leader in the emerging NAD space. ChromaDex has
approximately 170 partnerships with leading universities and
research institutions around the world including the National
Institutes of Health, Cornell, Dartmouth, Harvard, Massachusetts
Institute of Technology, University of Cambridge and the Mayo
Clinic. Other relationships are currently being
developed.
Our
scientific advisory board is led by Chairman Dr. Roger Kornberg,
Nobel Laureate Stanford Professor, Dr. Charles Brenner, one of the
world’s recognized experts in NAD and inventor of
nicotinamide riboside, Dr. Rudi Tanzi, the co-chair of the
department of neurology at Harvard Medical School and one of the
world’s leading experts in food and nutrition, Sir John
Walker, Nobel Laureate and Emeritus Director, MRC Mitochondrial
Biology Unit in the University of Cambridge, England, Dr. Bruce
German, Chairman of food, nutrition and health at the University of
California, Davis, and Dr. Robert Beudeker, Vice President of
Innovation, who leads the innovation program for human nutrition
and health at DSM.
STRATEGIC SHIFT TO GLOBAL CONSUMER PRODUCT COMPANY
The
acquisition in March 2017 of Healthspan Research LLC, a company
that sold our TRU NIAGEN® branded product direct to consumers,
marked our strategic shift from an ingredient and testing company
to a global, science-based integrated nutraceutical company.
ChromaDex made the strategic decision to commercialize TRU
NIAGEN® as a consumer brand for the product containing
NIAGEN® ingredient, launching in 2017.
In
connection with our strategic decision to grow our global consumer
brand, we have reduced the number of NIAGEN® resellers to just
a few. As expected, our ingredients segment net sales decreased 23%
in 2018, from $11.1 million in 2017 to $8.6 million. However, our
net sales of TRU NIAGEN® increased by $13.0 million, from $5.5
million in 2017 to $18.5 million in 2018, to more than offset the
decrease in net sales of our ingredients segment.
We
believe the global market size for TRU NIAGEN® is substantial.
According to Orbis Research, Global Anti-Aging Market Research
Report and Forecast 2017-2021, June 19, 2017, over $250 billion was
spent on the business of youth worldwide in 2016 on looking, acting
and feeling younger, which included skin care, cosmetic surgery,
hair restoration, fitness, vitamins and supplements. According to
the same report from Orbis Research, the worldwide anti-aging
market is expected to grow at a compounded average growth rate
("CAGR") of 5.8% through 2021 to about $330 billion.
We
began the international expansion of our TRU NIAGEN® brand
with the launch in Hong Kong and Macau with our strategic partner,
A.S. Watson Group, in 2017, followed by the launch in Singapore in
the first quarter of 2018. In the third quarter of 2018, we
launched TRU NIAGEN® in New Zealand with retail partner
Matakana Superfoods. In the fourth quarter of 2018, we launched TRU
NIAGEN® in Canada by making it available at www.truniagen.ca
and to healthcare practitioners at Fullscript Canada after
receiving regulatory approval for sale from Health Canada. We will continue to
focus on obtaining additional regulatory approvals required to
expand our marketing and distribution of our TRU NIAGEN® brand
in new strategic international markets.
INGREDIENTS AND ANALYTICAL REFERENCE STANDARDS AND SERVICES
BUSINESS SEGMENTS
Through
our ingredients business segment, we will continue to sell
NIAGEN® in ingredient form to our strategic partners,
including Nestec Ltd. (“Nestlé”), a global leader
pioneering quality science-based nutritional health solutions. In
the fourth quarter of 2018, we entered into a supply agreement with
Nestlé, pursuant to which Nestlé will be our exclusive
customer for NIAGEN® for human use in the (i) medical
nutritional and (ii) functional food and beverage categories in
certain territories. As consideration for the rights granted to
Nestlé, we received an upfront fee of $4 million. Following
the launch of the products in certain territories, Nestlé will
additionally pay us a one-time fee for a potential total aggregate
payment of $6 million.
We are
a leading provider of research and quality-control products and
services to the natural products industry. Through our analytical
reference standards and services segment, customers worldwide in
the dietary supplement, food and beverage, cosmetic and
pharmaceutical industries use our products, which are small
quantities of highly-characterized, research-grade, plant-based
materials, to ensure the quality of their raw materials and
finished products. We have conducted this analytical reference
standards and services business since 1999.
Our
analytical reference standards and services 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. Through our regulatory consulting operations, we also
provide our clients in the food, supplement and pharmaceutical
industries with effective scientific solutions to manage their
potential health and regulatory risks.
For the
fiscal years ended December 31, 2018 and December 30, 2017, our
revenues were approximately $31.6 million and $21.2 million,
respectively. The following table summarizes the Company’s
total sales for each of the business segments in the last two
years. Please refer to Item 8 Financial Statements and
Supplementary Data of this Annual Report on Form 10-K for
additional financial information for each of the business
segments.
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Fiscal
Years
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Consumer
Products
Segment
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Ingredients
Segment
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Analytical
Reference Standards and Services Segment
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Total
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2018
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$18.5
million
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$8.6
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$4.5
million
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$31.6
million
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2017
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$5.5
million
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$11.1
million
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$4.6
million
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$21.2
million
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Company Background
On May
21, 2008, Cody Resources, Inc., a Nevada corporation and a public
company, (“Cody”) entered into an Agreement and Plan of
Merger (the “Merger Agreement”), by and among Cody, CDI
Acquisition, Inc., a California corporation and wholly-owned
subsidiary of Cody (“Acquisition Sub”), and ChromaDex,
Inc. (the “Merger”). Subsequent to the signing of the
Merger Agreement, Cody merged with and into a Delaware corporation.
On June 20, 2008, Cody amended its articles of incorporation to
change its name to ChromaDex Corporation. ChromaDex Corporation was
traded on the Over the Counter market under the symbol "CDXC." On
April 25, 2016, ChromaDex Corporation became listed on the NASDAQ
Capital Market under the symbol "CDXC."
ChromaDex,
Inc., a wholly owned subsidiary of ChromaDex Corporation, was
originally formed as a California corporation on February 19,
2000.
On
March 12, 2017, ChromaDex Corporation acquired Healthspan Research
LLC, a consumer product company offering TRU NIAGEN® branded
products. This marked the strategic shift to become a global,
science-based integrated nutraceutical company. On September 5,
2017, the Company completed the sale of its operating assets that
were used with the Company's quality verification program testing
and analytical chemistry business for food and food related
products to Covance Laboratories Inc.
Business Market
According
to Orbis Research, Global Anti-Aging Market Research Report and
Forecast 2017-2022, June 19, 2017, over $250 billion was spent on
the business of youth worldwide in 2016 on looking, acting and
feeling younger, which included skin care, cosmetic surgery, hair
restoration, fitness, vitamins and supplements. According to the
same report from Orbis Research, the worldwide anti-aging market is
expected to grow at a CAGR of 5.8% through 2021 to about $330
billion. According to the data from Euromonitor International, the
worldwide market for vitamins and dietary supplements was
approximately $106 billion in 2018, and is expected to grow at a
CAGR of 3.0% to about $123 billion in 2023.
Business Model
CONSUMER PRODUCTS SEGMENT
Our
business model is to sell TRU NIAGEN® to consumers worldwide.
As a world leader in the emerging NAD space and the science of
aging, we will continue to seek to discover and enhance patented
technology and evolve our TRU NIAGEN® products to improve
health by safely raising NAD levels. The TRU NIAGEN® brand is
built on scientific evidence, trust and the direct impact to our
consumers of aging better. The best way to be trusted as a brand is
to be trustworthy as a company.
We
intend to expand to the worldwide NAD-related healthy aging market
by entering into new international markets. We will continue to
focus on obtaining additional regulatory approvals required to
expand our marketing and distribution of our TRU NIAGEN®
products in new international markets. We will utilize our
proprietary ecommerce platforms, and the ecommerce and brick and
mortar platforms of strategic regional and local partners. Our
United States ("U.S.") based business will continue to support our
global operations, including:
➢
Corporate
development and strategy
➢
Research and
development activities
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Global premium
brand management and brand guidelines
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Multi-platform
global marketing campaigns and know-how
➢
Build and evolve
propriety ecommerce platform and data analytics
➢
Global
manufacturing and supply chain operations
We
expect to continue to supply our international operations with
finished products manufactured in the U.S, and to continue to
provide all our marketing materials and know-how to our
international strategic partners.
INGREDIENTS SEGMENT
We will
continue to sell NIAGEN® in ingredient form to our strategic
partners. In addition, we will also continue to identify, acquire
and commercialize other innovative new proprietary ingredients and
technologies. We have an experienced team that is capable of
advancing products through development into commercialization with
the required regulatory approval, safety, toxicology, clinical
trials, supply chain management, manufacturing, and ultimately
either directly selling the products or licensing to third
parties.
ANALYTICAL REFERENCE STANDARDS AND SERVICES SEGMENT
We have
taken advantage of both supply chain needs and regulatory
requirements to build our analytical reference standards and
services segment. We believe that we create value throughout the
supply chain of the dietary supplements, functional foods and
personal care markets. In addition, through regulatory consulting
operations, 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.
We will
capitalize on additional opportunities in product development and
commercialization of various kinds of intellectual property that we
have largely discovered and acquired through the sales process
associated with this segment.
Overview of our Products and Services
Current
products and services
provided are as follows:
CONSUMER PRODUCTS
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TRU NIAGEN® branded dietary
supplements. We currently offer our NIAGEN®
nicotinamide riboside through our TRU NIAGEN® finished
bottles. We will continue to build our TRU NIAGEN® as a global
brand and offer TRU NIAGEN® to consumers worldwide. We are
conducting additional clinical trials to further validate the
health benefits associated with NIAGEN® and TRU
NIAGEN®.
INGREDIENTS
●
Nicotinamide riboside NIAGEN®. We
will continue to develop and sell NIAGEN® in ingredient form
to strategic partners.
●
Spirulina Extract
Immulina™. IMMULINA™ is a spirulina
extract and the predominant active compounds are Braun-type
lipoproteins which are useful for improving human immune function.
These lipoproteins are present at much greater levels than those
found within commonly used immune enhancing botanicals such as
Echinacea and ginseng.
ANALYTICAL REFERENCE STANDARDS AND SERVICES
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Supply of reference standards and fine
chemicals. We supply a wide range of products necessary to
conduct quality control of raw materials and consumer products.
Reference standards and fine chemicals are used for research and
quality control in the dietary supplements, cosmetics, food and
beverages, and pharmaceutical industries.
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Consulting services. 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.
Sales and Marketing Strategy
For our
consumer products segment, we employ a variety of strategies to
drive sales and consumer awareness of TRU NIAGEN®, including
social media and internet advertising, managing websites,
influencers, tradeshows, e-mail, paid search, distribution of
research publications and press releases. We also have a customer
care department that handles day-to-day communications with our end
customers addressing any needs or concerns related to our TRU
NIAGEN® product.
For our
ingredients segment and analytical reference standards and services
segment, our strategy is based on a direct, technically-oriented
model. We recruit and hire sales and marketing staff with
appropriate commercial and scientific backgrounds. Our regulatory
consulting operations generate scientific and regulatory consulting
revenue from an existing well-established list of Fortune 1000
customers and referrals.
USA and Canada:
For our
consumer products segment, we are distributing our TRU NIAGEN®
products direct to consumers through our propriety ecommerce
platform TRUNIAGEN.com, TRUNIAGEN.ca, Amazon and other established
internet marketplaces. We also have specialty retailers and direct
healthcare practitioners who are authorized resellers of TRU
NIAGEN® in the U.S. and Canada.
For our
ingredients segment and analytical reference standards and services
segment, we intend to
continue to use a direct marketing approach in the U.S. and Canada
to promote our products and services.
International:
For our
consumer products segment, we will utilize strategic partners on a
regional or local country basis to expand our distribution of TRU
NIAGEN® products. Our strategic partnerships could include
brick and mortar and/or ecommerce channels. We also are evaluating
strategic joint ventures to rapidly expand our distribution in
Asia. We began our international expansion of TRU NIAGEN®
products with the successful launch in Hong Kong and Macau with our
strategic partner, A.S. Watson Group in 2017, followed by the
launch in Singapore in the first quarter of 2018. In the third
quarter of 2018, we launched TRU NIAGEN® in New Zealand with
retail partner Matakana Superfoods. In the fourth quarter of 2018,
we launched TRU NIAGEN® in Canada by making it available at
www.truniagen.ca and to healthcare practitioners at Fullscript
Canada after receiving regulatory approval for sale from Health
Canada. We will continue to focus on obtaining additional
regulatory approvals required to expand our marketing and
distribution of our TRU NIAGEN® brand in new strategic
international markets.
For our
ingredients segment, most of our customers are based currently in
the U.S.
For our
analytical reference standards and services segment, 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. For our regulatory consulting
operations, we engage on 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.
Government Regulation
Some of
our operations are subject to regulation by various United States
federal agencies and similar state and international agencies,
including the Food and Drug Administration (“FDA”), the
Federal Trade Commission (“FTC”), the Department of
Commerce, the Department of Transportation, the Department of
Agriculture and other state and international agencies. These
regulators govern a wide variety of production activities, from
design and development to labeling, manufacturing, handling,
selling and distributing of products. From time to time, federal,
state and international legislation is enacted that may have the
effect of materially increasing the cost of doing business or
limiting or expanding our permissible activities. We cannot predict
whether or when potential legislation or regulations will be
enacted, and, if enacted, the effect of such legislation,
regulation, implementation, or any implemented regulations or
supervisory policies would have on our financial condition or
results of operations. In addition, the outcome of any litigation,
investigations or enforcement actions initiated by state or federal
authorities could result in changes to our operations being
necessary and in increased compliance costs.
U.S. FDA Regulation
In the
United States dietary supplements and food are subject to FDA
regulations. For example, the FDA’s final rule on Good
Manufacturing Practices (“GMPs”) for dietary
supplements published in June 2007 requires companies to evaluate
products for identity, strength, purity and composition. These
regulations, in some cases, particularly for new ingredients,
require a notification that must be submitted to the FDA along with
evidence of safety. In addition, depending on the type of product,
whether a dietary supplement, cosmetic, food, or pharmaceutical,
the FDA, under the Food, Drug and Cosmetic Act (the "FDCA"), can
regulate:
●
documentation
process, batch records, specifications;
●
product
manufacturing and storage;
●
health claims,
advertising and promotion; and
●
product sales and
distribution.
The
FDCA has been amended several times with respect to dietary
supplements, most notably by the Dietary Supplement Health and
Education Act of 1994 (“DSHEA”). DSHEA established a
new framework for governing the composition and labeling of dietary
supplements. Generally, under DSHEA, dietary ingredients that were
marketed in the United States before October 15, 1994, may be
used in dietary supplements without notifying the FDA. However, an
NDI (a dietary ingredient that was not marketed in the United
States before October 15, 1994) is subject to NDI notification
that must be submitted to the FDA unless the ingredient has
previously been “present in the food supply as an article
used for food” without being “chemically
altered.” An NDI notification must provide the FDA with
evidence of a “history of use or other evidence of
safety” establishing that the use of the dietary ingredient
“will reasonably be expected to be safe.” An NDI
notification must be submitted to the FDA at least 75 days before
the initial marketing of the NDI. There can be no assurance that
the FDA will accept the evidence of safety for any NDIs that we may
want to commercialize, and the FDA’s refusal to accept such
evidence could prevent the marketing of such dietary ingredients.
The FDA is in the process of developing guidance for the industry
that will aim to clarify the FDA’s interpretation of the NDI
notification requirements, and this guidance may raise new and
significant regulatory barriers for NDIs.
For any
new ingredient developed by us to be used in conventional food or
beverage products in the United States, the product either must be
approved by the FDA as a food additive pursuant to a food additive
petition ("FAP") or be generally recognized as safe ("GRAS"). The
FDA does not have to approve a company’s determination that
an ingredient is GRAS. However, a company can notify the FDA of its
determination. There can be no assurance that the FDA will approve
any FAP for any ingredient that we may want to commercialize, or
agree with our determination that an ingredient is GRAS, either of
which could prevent the marketing of such ingredient.
U.S. Advertising Regulations
In
addition to FDA regulations, the FTC regulates the advertising of
dietary supplements, foods, cosmetics, and over-the-counter
("OTC"), drugs. In recent years, the FTC has instituted numerous
enforcement actions against dietary supplement companies for
failure to adequately substantiate claims made in advertising or
for the use of false or misleading advertising claims. These
enforcement actions have often resulted in consent decrees and the
payment of civil penalties, restitution, or both, by the companies
involved. We may be subject to regulation under various state and
local laws that include provisions governing, among other things,
the formulation, manufacturing, packaging, labeling, advertising
and distribution of dietary supplements, foods, cosmetics and OTC
drugs.
In
addition, The National Advertising Division of the Council of
Better Business Bureaus reviews national advertising for
truthfulness and accuracy. The National Advertising Division of the
Council of Better Business Bureaus uses a form of alternative
dispute resolution, working closely with in-house counsel,
marketing executives, research and development departments and
outside consultants to decide whether claims have been
substantiated.
International Regulations
Our
international sales for the consumer products segment and
ingredients segment are subject to foreign government regulations,
which vary substantially from country to country. The time required
to obtain approval by a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may
differ. We may be unable to obtain on a timely basis, if at all,
any foreign government approvals necessary for the marketing of our
products abroad.
Regulation
in Europe is exercised primarily through the European Union, which
regulates the combined market of each of its member states. Other
countries, such as Switzerland, have voluntarily adopted laws and
regulations that mirror those of the European Union with respect to
dietary ingredients.
Major Customers
Major
customers who accounted for more than 10% of the Company’s
total sales were as follows:
|
|
|
|
Major
Customers
|
|
|
|
|
|
|
|
A.S. Watson Group -
Related Party
|
*
|
19.4%
|
|
Thorne
Research
|
*
|
10.2%
|
|
Life
Extension
|
10.0%
|
*
|
|
|
|
|
|
* Represents less
than 10%.
|
|
|
Generally,
we do not depend upon a single customer, or a few customers, and
the loss of any one or more would not have a material adverse
effect on the Company. However, due to the volume of consumer
products and ingredients we are selling in relation to the overall
Company’s sales, we do expect that at times one or more of
our customers may account for more than 10% of the Company’s
sales.
Competitive Business Conditions
For our
consumer products segment, we are in direct competition with
Elysium Health who offers a similar product to our TRU
NIAGEN®. There are also few resellers of NIAGEN®
as consumer products that are our customers. We believe these
resellers are focused on specific channels that we believe are
complementary to our business.
For our
ingredients segment, we face little direct competition as the
ingredients we offer are backed by intellectual property
exclusively licensed to us. We, however, face strong indirect
competition from other ingredient suppliers who may supply
alternative ingredients that may have similar characteristics to
ingredients we offer. Below is a list of some of the competitors
for our ingredients segment.
Ingredients Business Segment Competitors
●
Royal DSM (the
Netherlands)
●
Lonza Group Ltd
(Switzerland)
●
Sabinsa Corporation
(India/USA)
For the
analytical reference standards and services segment, we face
competition within the standardization and quality testing niche of
the natural products market. Below is a current list of certain
competitors. These competitors have already developed reference
standards or services or are currently taking steps to develop
botanical standards. Of the competitors listed, some currently sell
fine chemicals, which, by default, are sometimes used as reference
standards, and others are closely aligned with our market niche to
reduce any barriers to entry if these companies wish to
compete.
Analytical Reference Standards and Services Segment
Competitors
For
regulatory consulting operations 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 areas of our consulting expertise are
low.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty
Agreements or Labor Contracts, Including Duration
We
currently protect our intellectual property through patents,
trademarks, designs and copyrights on our products and services.
Our business strategy is to use the intellectual property harnessed
from our analytical reference standards and services segment as the
basis for providing new proprietary ingredients to our customers.
Our strategy is to develop these proprietary ingredients on our own
as well as to license our intellectual property to companies who
will commercialize it. We anticipate that the net result will be a
long-term flow of intellectual property milestone and royalty
payments to us.
The
following table sets forth our existing patents and those to which
we have licensed rights:
|
|
Title
|
Filing
Date
|
Issued
Date
|
Expires
|
Licensor
|
|
6,852,342
|
Compounds for
altering food intake in humans
|
3/26/2002
|
2/8/2005
|
2/12/2022
|
Co-owned by Avoca,
Inc. and ChromaDex
|
|
7,205,284
|
Potent
immunostimulants from microalgae
|
7/10/2001
|
4/17/2007
|
3/9/2022
|
Licensed from
University of Mississippi
|
|
7,776,326
|
Methods and
compositions for treating neuropathies
|
6/3/2005
|
8/17/2010
|
6/3/2025
|
Licensed from
Washington University
|
|
7,846,452
|
Potent
immunostimulatory extracts from microalgae
|
7/28/2005
|
10/7/2010
|
7/28/2025
|
Licensed from
University of Mississippi
|
|
8,106,184
|
Nicotinyl Riboside
Compositions and Methods of Use
|
11/17/2006
|
1/31/2012
|
11/17/2026
|
Licensed from
Cornell University
|
|
8,114,626
|
Yeast strain and
method for using the same to produce Nicotinamide
Riboside
|
3/26/2009
|
2/14/2012
|
3/26/2029
|
Licensed from
Dartmouth College
|
|
8,133,917
|
Pterostilbene as an
agonist for the peroxisome proliferator-activated receptor alpha
isoform
|
10/25/2010
|
3/13/2012
|
10/25/2030
|
Licensed from the
University of Mississippi and U.S. Department of
Agriculture
|
|
8,197,807
|
Nicotinamide
Riboside Kinase compositions and Methods for using the
same
|
11/20/2007
|
6/12/2012
|
11/20/2027
|
Licensed from
Dartmouth College
|
|
8,227,510
|
Combine use of
pterostilbene and quercetin to produce cancer treatment
medicaments
|
7/19/2005
|
7/24/2012
|
7/19/2025
|
Licensed from Green
Molecular S.L.
|
|
8,252,845
|
Pterostilbene as an
agonist for the peroxisome proliferator-activated receptor alpha
isoform
|
2/1/2012
|
8/28/2012
|
2/1/2032
|
Licensed from the
University of Mississippi and U.S. Department of
Agriculture
|
|
8,318,807
|
Pterostilbene
Caffeine Co-Crystal Forms
|
7/30/2010
|
11/27/2012
|
7/30/2030
|
Licensed from
Laurus Labs Private Limited
|
|
8,383,086
|
Nicotinamide
Riboside Kinase compositions and Methods for using the
same
|
4/12/2012
|
2/26/2013
|
4/12/2032
|
Licensed from
Dartmouth College
|
|
8,399,712
|
Pterostilbene
cocrystals
|
7/30/2010
|
3/19/2013
|
7/30/2020
|
Licensed from
Laurus Labs Private Limited
|
|
8,524,782
|
Key intermediate
for the preparation of Stilbenes, solid forms of Pterostilbene, and
methods for making the same
|
6/1/2009
|
9/3/2013
|
6/1/2029
|
Licensed from
Laurus Labs Private Limited
|
|
8,809,400
|
Method to
Ameliorate Oxidative Stress and Improve Working Memory Via
Pterostilbene Administration
|
6/10/2008
|
8/19/2014
|
6/10/2028
|
Licensed from the
University of Mississippi and U.S. Department of
Agriculture
|
|
8,841,350
|
Method for treating
non-melanoma skin cancer by inducing UDP-Glucuronosyltransferase
activity using pterostilbene
|
5/8/2012
|
9/22/2014
|
5/8/2032
|
Co-owned by
ChromaDex and University of California
|
|
8,889,126
|
Methods and
compositions for treating neuropathies
|
5/28/2010
|
11/18/2014
|
5/28/2030
|
Licensed from
Washington University
|
|
9,000,147
|
Nicotyl riboside
compositions and methods of use
|
1/17/2012
|
4/7/2015
|
1/17/2032
|
Licensed from
Cornell University
|
|
9,028,887
|
Method improve
spatial memory via pterostilbene administration
|
5/22/2014
|
5/12/2015
|
5/22/2034
|
Licensed from the
University of Mississippi and U.S. Department of
Agriculture
|
|
9,295,688
|
Methods and
compositions for treating neuropathies
|
10/10/2014
|
3/29/2016
|
10/10/2034
|
Licensed from
Washington University
|
|
9,321,797
|
Nicotyl riboside
compositions and methods of use
|
11/17/2014
|
4/26/2016
|
11/17/2034
|
Licensed from
Cornell University
|
|
9,439,875
|
Anxiolytic effect
of pterostilbene
|
5/11/2011
|
9/13/2016
|
5/11/2031
|
Licensed from the
University of Mississippi and U.S. Department of
Agriculture
|
|
9,975,915
|
Nicotinamide
riboside kinase compositions and methods for using the
same
|
4/12/2012
|
2/26/2013
|
4/12/2032
|
Licensed from
Dartmouth College
|
Manufacturing
We
currently utilize third-party manufacturers to produce and supply
dietary supplement, ingredients, products, and services. Following
the receipt of products or product components from third-party
manufacturers, we 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 and the quality standards that we will require for
our own internal policies and procedures. We expect to monitor and
manage supplier performance through a corrective action program
developed by us. We believe these manufacturing relationships can
minimize our capital investment, help control costs, and allow us
to compete with larger volume manufacturers of dietary supplements,
phytochemicals and ingredients.
Sources and Availability of Raw Materials
For all
three business segments, we believe that we have identified
reliable sources and suppliers of ingredients, chemicals,
phytochemicals and reference materials that will provide products
in compliance with our guidelines.
Research and Development
We have
completed the first human clinical trial on our proprietary
ingredient NIAGEN®
and the results demonstrated that a single dose of NIAGEN®
resulted in statistically significant increases in the co-enzyme
NAD+ in healthy human volunteers. In addition, no adverse events
were observed. In 2015,
NIAGEN®
was recognized by the FDA as a “New Dietary
Ingredient.” NIAGEN®
was also “Generally Recognized as Safe” by an
independent panel of expert toxicologists and in August 2016, the
FDA issued a GRAS No Objection Letter.
In
2018, we completed a second human clinical trial on NR which
evaluated the effect of repeated doses of NIAGEN® on NAD+
metabolite concentrations in blood, urine and muscle in healthy
adults. This study evaluated the impacts of three dose levels of
NIAGEN® compared to a placebo. One quarter of subjects
received the low dose of NIAGEN® (100 mg), one quarter
received the moderate dose of NIAGEN® (300 mg), one quarter
received the higher dose of NIAGEN® (1,000 mg) and one quarter
received the placebo. The results showed that NAD levels rose in
response to the dose of NIAGEN® and the elevated blood NAD
levels were sustained throughout the eight-week treatment
period.
Through
our research and development laboratory in Longmont, Colorado, we
intend to manufacture at a process scale for products that we are
planning to take to market as well as explore cost saving processes
for existing products.
Research
and development costs for the fiscal years ended December 31, 2018,
and December 30, 2017, were approximately $5.5 million and $4.0
million, respectively.
Environmental Compliance
We will
incur significant expense in complying with GMPs and safe handling
and disposal of materials used in our research and manufacturing
activities. We do not anticipate incurring additional material
expense to comply with federal, state and local environmental laws
and regulations.
Working Capital
The
Company’s working capital at the end of years 2018 and 2017
was approximately $3.1 million and $7.4 million, respectively. The
Company measures working capital by adding trade receivables and
inventories, and subtracting accounts payable. Most of the working
capital is consumed by our consumer products segment and
ingredients segment as the operations require a large amount of
inventory to be on hand. As the consumer products segment and
ingredients segment grow, more working capital will likely be
needed to support the operations.
Backlog Orders
For our
consumer products segment where we ship products internationally to
a distributor, we may have a backlog from time to time as the
production of TRU NIAGEN® finished bottles require up to three
months lead time by our third-party contract manufacturers. As of
December 31, 2018, we did not have any backlog orders from the
distributor as all orders received have been shipped. For products
that are directly shipped to consumers, we have minimal backlog
orders as we carry inventory on hand to ship upon the receipt of
order.
For our
ingredients segment, we also have minimal backlog orders as we
carry inventory on hand for most of the products we offer and we
ship upon the receipt of customer’s order.
For our
analytical reference standards and services segment, we normally
have a small backlog of orders for reference standards. These
orders amount to approximately $25,000 or less. Because we list
over 1,500 phytochemicals and 300 botanical reference materials in
our catalog, we may not always have the items in stock at the time
of customers’ orders. These backlog orders are normally
fulfilled within 2 to 3 months.
Facilities
For
information on our facilities, see “Properties” in Item
2 of this Form 10-K.
Employees
As of
December 31, 2018, ChromaDex (including Healthspan Research LLC and
ChromaDex Analytics, Inc.) had approximately 100 employees, all of
whom were full-time. We consider our relationships with our
employees to be satisfactory. None of our employees is covered by a
collective bargaining agreement.
Financial Information about Geographic Areas
Please
refer to Item 8 Financial Statements and Supplementary Data of this
Annual Report on Form 10-K for financial information about
geographic areas.
Available
Information
Our Internet website address is www.chromadex.com. Information
found on, or accessible through, our website is not a part of, and
is not incorporated into, this Annual Report on Form 10-K. We make
available free of charge on our website our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practical
after we file such material with, or furnish it to, the Securities
and Exchange Commission. This information is also available in
print to any shareholder who requests it, with any such requests
addressed to ChromaDex Corporation, 10900 Wilshire Blvd. Ste 650,
Los Angeles, CA 90024. Certain of these documents may also be
obtained by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet website that contains reports, and other
information regarding issuers that file electronically with the SEC
at www.sec.gov. We
also make available free of charge on our website our Code of
Business Conduct and Ethics, and the Charters of our Audit
Committee, Nominating and Corporate Governance Committee, and
Compensation Committee of our Board of
Directors.
Investing in our common stock involves a high degree of risk.
Current investors and potential investors should consider carefully
the risks and uncertainties described below together with all other
information contained in this Form 10-K before making investment
decisions with respect to our common stock. If any of the following
risks occurs, our business, financial condition, results of
operations and our future growth prospects would be materially and
adversely affected. Under these circumstances, the trading price
and value of our common stock could decline, resulting in a loss of
all or part of your investment. The risks and uncertainties
described in this Form 10-K are not the only ones facing our
Company. Additional risks and uncertainties of which we are not
presently aware, or that we currently consider immaterial, may also
affect our business operations.
Risks Related to our Company and our Business
We have a history of operating losses, may need additional
financing to meet our future long-term capital requirements and may
be unable to raise sufficient capital on favorable terms or at
all.
We have
a history of losses and may continue to incur operating and net
losses for the foreseeable future. We incurred net losses of
approximately $33.3 million and $11.4 million for the years ended
December 31, 2018 and December 30, 2017, respectively. As of
December 31, 2018, our accumulated deficit was approximately $90
million. We have not achieved profitability on an annual basis. We
may not be able to reach a level of revenue to continue to achieve
and sustain profitability. If our revenues grow slower than
anticipated, or if operating expenses exceed expectations, then we
may not be able to achieve and sustain profitability in the near
future or at all, which may depress our stock price.
As of
December 31, 2018, our cash and cash equivalents totaled
approximately $22.6 million. While we anticipate that our current
cash, cash equivalents and cash to be generated from operations
will be sufficient to meet our projected operating plans through at
least the next twelve months, we may require additional funds,
either through additional equity or debt financings or
collaborative agreements or from other sources. We have no
commitments to obtain such additional financing, and we may not be
able to obtain any such additional financing on terms favorable to
us, or at all. If adequate financing is not available, the Company
will further delay, postpone or terminate product and service
expansion and curtail certain selling, general and administrative
operations. The inability to raise additional financing may have a
material adverse effect on the future performance of the
Company.
Our capital requirements will depend on many factors.
Our
capital requirements will depend on many factors,
including:
●
the
revenues generated by sales of our products;
●
the
costs associated with expanding our sales and marketing efforts,
including efforts to hire independent agents and sales
representatives and obtain required regulatory approvals and
clearances;
●
the
expenses we incur in developing and commercializing our products,
including the cost of obtaining and maintaining regulatory
approvals; and
●
unanticipated
general and administrative expenses, including expenses involved
with our ongoing litigation with Elysium.
Because
of these factors, we may seek to raise additional capital within
the next twelve months both to meet our projected operating plans
after the next twelve months and to fund our longer term strategic
objectives. Additional capital may come from public and private
equity or debt offerings, borrowings under lines of credit or other
sources. These additional funds may not be available on favorable
terms, or at all. There can be no assurance we will be successful
in raising these additional funds. Furthermore, if we issue equity
or debt securities to raise additional funds, our existing
stockholders may experience dilution and the new equity or debt
securities we issue may have rights, preferences and privileges
senior to those of our existing stockholders. In addition, if we
raise additional funds through collaboration, licensing or other
similar arrangements, it may be necessary to relinquish valuable
rights to our products or proprietary technologies, or grant
licenses on terms that are not favorable to us. If we cannot raise
funds on acceptable terms, we may not be able to develop or enhance
our products, obtain the required regulatory clearances or
approvals, execute our business plan, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
customer requirements. Any of these events could adversely affect
our ability to achieve our development and commercialization goals,
which could have a material and adverse effect on our business,
results of operations and financial condition.
We are currently engaged in substantial and complex litigation with
Elysium Health, Inc. and Elysium Health LLC ("Elysium"), the
outcome of which could materially harm our business and financial
results.
We are currently engaged in litigation with Elysium, a customer
that represented 19% of our net sales for the year
ended December 31, 2016. Elysium has made no purchases
from us since August 9, 2016. The litigation includes multiple
complaints and counterclaims by us and Elysium in venues in
California and New York, as well as a patent infringement complaint
filed by the Company and Trustees of Dartmouth College. For further
details on this litigation, please refer to Part I, Item 3 of this
Annual Report on Form 10-K.
The litigation is substantial and complex, and it has caused
and could continue to cause us to incur significant costs, as well
as distract our management over an extended period. The litigation
may substantially disrupt our business and we cannot assure you
that we will be able to resolve the litigation on terms favorable
to us. If we are unsuccessful in
resolving the litigation on favorable terms to us, we may be forced
to pay compensatory and punitive damages and restitution for any
royalty payments that we received from Elysium, which payments
could materially harm our business, or be subject to other
remedies, including injunctive relief. In addition, Elysium has not
paid us approximately $2.7 million for previous purchase orders. We
may not collect the full amount owed to us by Elysium, and as a
result, we may have to write off a large portion of that amount as
uncollectible expense. We cannot predict the outcome of our
litigation with Elysium, which could have any of the results
described above or other results that could materially adversely
affect our business.
Interruptions in our relationships or declines in our business with
major customers could materially harm our business and financial
results.
One of our customers accounted for approximately 10% of our sales
during the year ended December 31, 2018. Any interruption in our
relationship or decline in our business with this customer or other
customers upon whom we become highly dependent could cause harm to
our business. Factors that could influence our relationship with
our customers upon whom we may become highly dependent
include:
●
our
ability to maintain our products at prices that are competitive
with those of our competitors;
●
our
ability to maintain quality levels for our products sufficient to
meet the expectations of our customers;
●
our
ability to produce, ship and deliver a sufficient quantity of our
products in a timely manner to meet the needs of our
customers;
●
our
ability to continue to develop and launch new products that our
customers feel meet their needs and requirements, with respect to
cost, timeliness, features, performance and other
factors;
●
our
ability to provide timely, responsive and accurate customer support
to our customers; and
●
the
ability of our customers to effectively deliver, market and
increase sales of their own products based on ours.
In an effort to promote and better market our consumer products, we
have made a strategic decision to not ship NIAGEN® to certain
ingredient segment customers, which could potentially materially
adversely affect our overall sales.
By
developing and selling TRU NIAGEN®, our own consumer standalone
NIAGEN® supplement product, we are in direct competition with
some of our current ingredients segment customers that use
NIAGEN® in the products that are sold to consumers. In an
effort to promote and better market our consumer product, we have
made a strategic decision not to ship NIAGEN® to certain
ingredients segment customers, which will have a negative effect on
our ingredient segment sales. For example, sales for our
ingredients segment for the year ended December 31, 2018 decreased
23% compared to the year ended December 30, 2017. Additionally, as
our own consumer product becomes more prominent and widely adopted
by consumers, the competition with our consumer product could
potentially further harm the sales of our ingredients segment
business, and our sales of NIAGEN® for our ingredients segment
may further decrease. The sales of our consumer product may not
outweigh the decrease in sales of our ingredients segment, which
would lead to an overall decrease in our sales. Sales for our
ingredients segment represented approximately 27% of the
Company’s revenue for 2018, and sales of NIAGEN®
accounted for approximately 60% of our ingredient segment’s
total sales in 2018, or 16% of our overall revenue, so any harm to
our NIAGEN® ingredient sales, if not compensated for by sales
of our consumer product, may materially adversely affect our
business.
Our future success largely depends on sales of our TRU
NIAGEN®
product.
In
connection with our strategic shift from an ingredient and testing
company to a consumer focused company, we expect to generate a
significant percentage of our future revenue from sales of our TRU
NIAGEN® product. As a result, the market acceptance of TRU
NIAGEN® is critical to our continued success, and if we are
unable to expand market acceptance of TRU NIAGEN®, our
business, results of operations, financial condition, liquidity and
growth prospects would be materially adversely
affected.
Decline in the state of the global
economy and financial market conditions could adversely affect our
ability to conduct business and our results of
operations.
Global
economic and financial market conditions, including disruptions in
the credit markets and the impact of the global economic
deterioration may materially impact our customers and other parties
with whom we do business. These conditions could negatively affect
our future sales of our ingredient lines as many consumers consider
the purchase of nutritional products discretionary. Decline in
general economic and financial market conditions could materially
adversely affect our financial condition and results of operations.
Specifically, the impact of these volatile and negative conditions
may include decreased demand for our products and services, a
decrease in our ability to accurately forecast future product
trends and demand, and a negative impact on our ability to timely
collect receivables from our customers. The foregoing economic
conditions may lead to increased levels of bankruptcies,
restructurings and liquidations for our customers, scaling back of
research and development expenditures, delays in planned projects
and shifts in business strategies for many of our customers. Such
events could, in turn, adversely affect our business through loss
of sales.
We may need to increase the size of our organization, and we can
provide no assurance that we will successfully expand operations or
manage growth effectively.
Our
significant increase in the scope and the scale of our product
launches, including the hiring of additional personnel, has
resulted in significantly higher operating expenses. As a result,
we anticipate that our operating expenses will continue to
increase. Expansion of our operations may also cause a significant
demand on our management, finances and other resources. Our ability
to manage the anticipated future growth, should it occur, will
depend upon a significant expansion of our accounting and other
internal management systems and the implementation and subsequent
improvement of a variety of systems, procedures and controls. There
can be no assurance that significant problems in these areas will
not occur. Any failure to expand these areas and implement and
improve such systems, procedures and controls in an efficient
manner at a pace consistent with our business could have a material
adverse effect on our business, financial condition and results of
operations. There can be no assurance that our attempts to expand
our marketing, sales, manufacturing and customer support efforts
will be successful or will result in additional sales or
profitability in any future period. As a result of the expansion of
our operations and the anticipated increase in our operating
expenses, as well as the difficulty in forecasting revenue levels,
we expect to continue to experience significant fluctuations in our
results of operations.
Changes in our business strategy, including entering the consumer
product market, or restructuring of our businesses may increase our
costs or otherwise affect the profitability of our
businesses.
As
changes in our business environment occur we may adjust our
business strategies to meet these changes or we may otherwise
decide to restructure our operations or businesses or assets. In
addition, external events including changing technology, changing
consumer patterns and changes in macroeconomic conditions may
impair the value of our assets. When these changes or events occur,
we may incur costs to change our business strategy and may need to
write down the value of assets. In any of these events, our costs
may increase, we may have significant charges associated with the
write-down of assets or returns on new investments may be lower
than prior to the change in strategy or restructuring. For example,
if we are not successful in developing our consumer product
business, our sales may decrease and our costs may
increase.
The success of our consumer product and ingredient business is
linked to the size and growth rate of the vitamin, mineral and
dietary supplement market and an adverse change in the size or
growth rate of that market could have a material adverse effect on
us.
An
adverse change in the size or growth rate of the vitamin, mineral
and dietary supplement market could have a material adverse effect
on our business. Underlying market conditions are subject to change
based on economic conditions, consumer preferences and other
factors that are beyond our control, including media attention and
scientific research, which may be positive or
negative.
The future growth and profitability of our consumer product
business will depend in large part upon the effectiveness and
efficiency of our marketing efforts and our ability to select
effective markets and media in which to market and
advertise.
Our consumer products business success depends on our ability to
attract and retain customers, which significantly depends on our
marketing practices. Our future growth and profitability will
depend in large part upon the effectiveness and efficiency of our
marketing efforts, including our ability to:
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create greater awareness of our brand;
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identify the most effective and efficient levels of spending in
each market, media and specific media vehicle;
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determine the appropriate creative messages and media mix for
advertising, marketing and promotional expenditures;
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effectively manage marketing costs (including creative and media)
to maintain acceptable customer acquisition costs;
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acquire cost-effective television advertising;
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select the most effective markets, media and specific media
vehicles in which to market and advertise; and
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convert consumer inquiries into actual orders.
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Unfavorable publicity or consumer perception of our products and
any similar products distributed by other companies could have a
material adverse effect on our business.
We
believe the nutritional supplement market is highly dependent upon
consumer perception regarding the safety, efficacy and quality of
nutritional supplements generally, as well as of products
distributed specifically by us. Consumer perception of our products
can be significantly influenced by scientific research or findings,
regulatory investigations, litigation, national media attention and
other publicity regarding the consumption of nutritional
supplements. We cannot assure you that future scientific research,
findings, regulatory proceedings, litigation, media attention or
other favorable research findings or publicity will be favorable to
the nutritional supplement market or any product, or consistent
with earlier publicity. Future research reports, findings,
regulatory proceedings, litigation, media attention or other
publicity that are perceived as less favorable than, or that
question, such earlier research reports, findings or publicity
could have a material adverse effect on the demand for our products
and consequently on our business, results of operations, financial
condition and cash flows.
Our
dependence upon consumer perceptions means that adverse scientific
research reports, findings, regulatory proceedings, litigation,
media attention or other publicity, if accurate or with merit,
could have a material adverse effect on the demand for our products, the
availability and pricing of our ingredients, and our business,
results of operations, financial condition and cash flows. Further,
adverse public reports or other media attention regarding the
safety, efficacy and quality of nutritional supplements in general,
or our products specifically, or associating the consumption of
nutritional supplements with illness, could have such a material
adverse effect. Any such adverse public reports or other
media attention could arise even if the adverse effects associated
with such products resulted from consumers’ failure to
consume such products appropriately or as directed and the content
of such public reports and other media attention may be beyond our
control.
We may incur material product
liability claims, which could increase our costs and adversely
affect our reputation, revenues and operating
income.
As a
consumer product and ingredient supplier we market and manufacture
products designed for human and animal consumption, we are subject
to product liability claims if the use of our products is alleged
to have resulted in injury. Our products consist of vitamins,
minerals, herbs and other ingredients that are classified as food
ingredients, dietary supplements, or natural health products, and,
in most cases, are not necessarily subject to pre-market regulatory
approval in the United States. Some of our products contain
innovative ingredients that do not have long histories of human
consumption. Previously unknown adverse reactions resulting from
human consumption of these ingredients could occur. In addition,
the products we sell are produced by third-party manufacturers. As
a marketer of products manufactured by third parties, we also may
be liable for various product liability claims for products we do
not manufacture. We may, in the future, be subject to various
product liability claims, including, among others, that our
products include inadequate instructions for use or inadequate
warnings concerning possible side effects and interactions with
other substances. A product liability claim against us could result
in increased costs and could adversely affect our reputation with
our customers, which, in turn, could have a materially adverse
effect on our business, results of operations, financial condition
and cash flows.
We acquire 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 alleged to be mislabeled or to cause injury or
illness, or if we are alleged to have violated governmental
regulations. A product recall could result in substantial and
unexpected expenditures, which would reduce operating profit and
cash flow. In addition, a product recall may require significant
management attention. Product recalls may hurt the value of our
brands and lead to decreased demand for our products. Product
recalls also may lead to increased scrutiny by federal, state or
international regulatory agencies of our operations and increased
litigation and could have a material adverse effect on our
business, results of operations, financial condition and cash
flows.
We depend on key personnel, the
loss of any of which could negatively affect our
business.
We
depend greatly on Frank L. Jaksch Jr., Robert N. Fried, Kevin M.
Farr, Mark J. Friedman, Lisa Bratkovich and Matthew Roberts, who
are our Executive Chairman of the Board, Chief Executive Officer,
Chief Financial Officer, General Counsel, Chief Marketing Officer
and Chief Scientific 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:
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the
announcement or introduction of new products by our
competitors;
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our
ability to upgrade and develop our systems and infrastructure to
accommodate growth;
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the
decision by significant customers to reduce purchases;
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disputes
and litigation with competitors;
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our
ability to attract and retain key personnel in a timely and
cost-effective manner;
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technical
difficulties;
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the
amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations and
infrastructure;
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regulation
by federal, state or local governments; and
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general
economic conditions as well as economic conditions specific to the
healthcare industry.
As a
result of our limited operating history and the nature of the
markets in which we compete, it is extremely difficult for us to
make accurate forecasts. We have based our current and future
expense levels largely on our investment plans and estimates of
future events although certain of our expense levels are, to a
large extent, fixed. Assuming our products reach the market, we may
be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues relative to our planned expenditures would
have an immediate adverse effect on our business, results of
operations and financial condition. Further, as a strategic
response to changes in the competitive environment, we may from
time to time make certain pricing, service or marketing decisions
that could have a material and adverse effect on our business,
results of operations and financial condition. Due to the foregoing
factors, our revenues and operating results are and will remain
difficult to forecast.
We face significant competition, including changes in
pricing.
The
markets for our products and services are both competitive and
price sensitive. Many of our competitors have significant
financial, operations, sales and marketing resources and experience
in research and development. Competitors could develop new
technologies that compete with our products and services or even
render our products obsolete. If a competitor develops superior
technology or cost-effective alternatives to our products and
services, our business could be seriously harmed.
The
markets for some of our products are also subject to specific
competitive risks because these markets are highly price
competitive. Our competitors have competed in the past by lowering
prices on certain products. If they do so again, we may be forced
to respond by lowering our prices. This would reduce sales revenues
and increase losses. Failure to anticipate and respond to price
competition may also impact sales and aggravate
losses.
We
believe that customers in our markets display a significant amount
of loyalty to their supplier of a particular product. To the extent
we are not the first to develop, offer and/or supply new products,
customers may buy from our competitors or make materials
themselves, causing our competitive position to
suffer.
Many of our competitors are larger and have greater financial and
other resources than we do.
Our
products compete and will compete with other similar products
produced by our competitors. These competitive products could be
marketed by well-established, successful companies that possess
greater financial, marketing, distributional, personnel and other
resources than we possess. Using these resources, these companies
can implement extensive advertising and promotional campaigns, both
generally and in response to specific marketing efforts by
competitors, and enter into new markets more rapidly to introduce
new products. In certain instances, competitors with greater
financial resources also may be able to enter a market in direct
competition with us, offering attractive marketing tools to
encourage the sale of products that compete with our products or
present cost features that consumers may find
attractive.
We may never develop any additional products to
commercialize.
We have
invested a substantial amount of our time and resources in
developing various new products. Commercialization of these
products will require additional development, clinical evaluation,
regulatory approval, significant marketing efforts and substantial
additional investment before they can provide us with any revenue.
Despite our efforts, these products may not become commercially
successful products for a number of reasons, including but not
limited to:
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we may
not be able to obtain regulatory approvals for our products, or the
approved indication may be narrower than we seek;
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our
products may not prove to be safe and effective in clinical
trials;
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we may
experience delays in our development program;
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any
products that are approved may not be accepted in the
marketplace;
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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;
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we may
not be able to manufacture any of our products in commercial
quantities or at an acceptable cost;
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rapid
technological change may make our products obsolete;
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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
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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 our licensed or pending patent or
other intellectual property rights, enforcing those rights may be
costly, uncertain, difficult and time consuming. Even if
successful, litigation to enforce our intellectual property rights
or to defend our patents against challenge could be expensive and
time consuming and could divert our management’s attention.
We may not have sufficient resources to enforce our intellectual
property rights or to defend our patents rights against a
challenge. The failure to obtain patents and/or protect our
intellectual property rights could have a material and adverse
effect on our business, results of operations and financial
condition.
Our patents and licenses may be subject to challenge on validity
grounds, and our patent applications may be rejected.
We rely
on our patents, patent applications, licenses and other
intellectual property rights to give us a competitive advantage.
Whether a patent is valid, or whether a patent application should
be granted, is a complex matter of science and law, and therefore
we cannot be certain that, if challenged, our patents, patent
applications and/or other intellectual property rights would be
upheld. If one or more of those patents, patent applications,
licenses and other intellectual property rights are invalidated,
rejected or found unenforceable, that could reduce or eliminate any
competitive advantage we might otherwise have had.
We may become subject to claims of infringement or misappropriation
of the intellectual property rights of others, which could prohibit
us from developing our products, require us to obtain licenses from
third parties or to develop non-infringing alternatives and subject
us to substantial monetary damages.
Third
parties could, in the future, assert infringement or
misappropriation claims against us with respect to products we
develop. Whether a product infringes a patent or misappropriates
other intellectual property involves complex legal and factual
issues, the determination of which is often uncertain. Therefore,
we cannot be certain that we have not infringed the intellectual
property rights of others. There may be third-party patents or
patent applications with claims to materials, formulations, methods
of manufacture or methods for use related to the use or manufacture
of our products, and our potential competitors may assert that some
aspect of our product infringes their patents. Because patent
applications may take years to issue, there also may be
applications now pending of which we are unaware that may later
result in issued patents upon which our products could infringe.
There also may be existing patents or pending patent applications
of which we are unaware upon which our products may inadvertently
infringe.
Any
infringement or misappropriation claim could cause us to incur
significant costs, place significant strain on our financial
resources, divert management’s attention from our business
and harm our reputation. If the relevant patents in such claim were
upheld as valid and enforceable and we were found to infringe them,
we could be prohibited from manufacturing or selling any product
that is found to infringe unless we could obtain licenses to use
the technology covered by the patent or are able to design around
the patent. We may be unable to obtain such a license on terms
acceptable to us, if at all, and we may not be able to redesign our
products to avoid infringement, which could materially impact our
revenue. A court could also order us to pay compensatory damages
for such infringement, plus prejudgment interest and could, in
addition, treble the compensatory damages and award attorney fees.
These damages could be substantial and could harm our reputation,
business, financial condition and operating results. A court also
could enter orders that temporarily, preliminarily or permanently
enjoin us and our customers from making, using, or selling
products, and could enter an order mandating that we undertake
certain remedial activities. Depending on the nature of the relief
ordered by the court, we could become liable for additional damages
to third parties.
The prosecution and enforcement of patents licensed to us by third
parties are not within our control. Without these technologies, our
products may not be successful and our business would be harmed if
the patents were infringed on or misappropriated without action by
such third parties.
We have
obtained licenses from third parties for patents and patent
application rights related to the products we are developing,
allowing us to use intellectual property rights owned by or
licensed to these third parties. We do not control the maintenance,
prosecution, enforcement or strategy for many of these patents or
patent application rights and as such are dependent in part on the
owners of the intellectual property rights to maintain their
viability. If any third party licensor is unable to successfully
maintain, prosecute or enforce the licensed patents and/or patent
application rights related to our products, we may become subject
to infringement or misappropriate claims or lose our competitive
advantage. Without access to these technologies or suitable
design-around or alternative technology options, our ability to
conduct our business could be impaired significantly.
We may be subject to damages resulting from claims that we, our
employees, or our independent contractors have wrongfully used or
disclosed alleged trade secrets of others.
Some of
our employees were previously employed at other dietary supplement,
nutraceutical, food and beverage, functional food, analytical
laboratories, pharmaceutical and cosmetic companies. We may also
hire additional employees who are currently employed at other such
companies, including our competitors. Additionally, consultants or
other independent agents with which we may contract may be or have
been in a contractual arrangement with one or more of our
competitors. We may be subject to claims that these employees or
independent contractors have used or disclosed such other
party’s trade secrets or other proprietary information.
Litigation may be necessary to defend against these claims. Even if
we are successful in defending against these claims, litigation
could result in substantial costs and be a distraction to our
management. If we fail to defend such claims, in addition to paying
monetary damages, we may lose valuable intellectual property rights
or personnel. A loss of key personnel or their work product could
hamper or prevent our ability to market existing or new products,
which could severely harm our business.
Litigation may harm our business.
Substantial,
complex or extended litigation could cause us to incur significant
costs and distract our management. For example, lawsuits by
employees, stockholders, collaborators, distributors, customers,
competitors or others could be very costly and substantially
disrupt our business. Disputes from time to time with such
companies, organizations or individuals are not uncommon, and we
cannot assure you that we will always be able to resolve such
disputes or on terms favorable to us. As further described in Part
I, Item 3 of this Annual Report on Form 10-K, we are currently
involved in substantial and complex litigation with Elysium.
Unexpected results could cause us to have financial exposure in
these matters in excess of recorded reserves and insurance
coverage, requiring us to provide additional reserves to address
these liabilities, therefore impacting profits.
Our sales and results of operations for our analytical reference
standards and services segment depend on our customers’
research and development efforts and their ability to obtain
funding for these efforts.
Our
analytical reference standards and services segment customers
include researchers at pharmaceutical and biotechnology companies,
chemical and related companies, academic institutions, government
laboratories and private foundations. Fluctuations in the research
and development budgets of these researchers and their
organizations could have a significant effect on the demand for our
products. Our customers determine their research and development
budgets based on several factors, including the need to develop new
products, the availability of governmental and other funding,
competition and the general availability of resources. As we
continue to expand our international operations, we expect research
and development spending levels in markets outside of the United
States will become increasingly important to us.
Research
and development budgets fluctuate due to changes in available
resources, spending priorities, general economic conditions,
institutional and governmental budgetary limitations and mergers of
pharmaceutical and biotechnology companies. Our business could be
harmed by any significant decrease in life science and high
technology research and development expenditures by our customers.
In particular, a small portion of our sales has been to researchers
whose funding is dependent on grants from government agencies such
as the United States National Institute of Health, the National
Science Foundation, the National Cancer Institute and similar
agencies or organizations. Government funding of research and
development is subject to the political process, which is often
unpredictable. Other departments, such as Homeland Security or
Defense, or general efforts to reduce the United States federal
budget deficit could be viewed by the government as a higher
priority. Any shift away from funding of life science and high
technology research and development or delays surrounding the
approval of governmental budget proposals may cause our customers
to delay or forego purchases of our products and services, which
could seriously damage our business.
Some of
our customers receive funds from approved grants at a particular
time of year, many times set by government budget cycles. In the
past, such grants have been frozen for extended periods or have
otherwise become unavailable to various institutions without
notice. The timing of the receipt of grant funds may affect the
timing of purchase decisions by our customers and, as a result,
cause fluctuations in our sales and operating results.
Demand for our products and services are subject to the commercial
success of our customers’ products, which may vary for
reasons outside our control.
Even if
we are successful in securing utilization of our products in a
customer’s manufacturing process, sales of many of our
products and services remain dependent on the timing and volume of
the customer’s production, over which we have no control. The
demand for our products depends on regulatory approvals and
frequently depends on the commercial success of the
customer’s supported product. Regulatory processes are
complex, lengthy, expensive, and can often take years to
complete.
We may bear financial risk if we under-price our contracts or
overrun cost estimates.
In
cases where our contracts are structured as fixed price or
fee-for-service with a cap, we bear the financial risk if we
initially under-price our contracts or otherwise overrun our cost
estimates. Such underpricing or significant cost overruns could
have a material adverse effect on our business, results of
operations, financial condition and cash flows.
We rely on single or a limited number of third-party suppliers for
the raw materials required to produce our products.
Our
dependence on a limited number of third-party suppliers or on a
single supplier, and the challenges we may face in obtaining
adequate supplies of raw materials, involve several risks,
including limited control over pricing, availability, quality and
delivery schedules. We cannot be certain that our current suppliers
will continue to provide us with the quantities of these raw
materials that we require or satisfy our anticipated specifications
and quality requirements. Any supply interruption in limited or
sole sourced raw materials could materially harm our ability to
manufacture our products until a new source of supply, if any,
could be identified and qualified. Although we believe there are
other suppliers of these raw materials, we may be unable to find a
sufficient alternative supply channel in a reasonable time or on
commercially reasonable terms. Any performance failure on the part
of our suppliers could delay the development and commercialization
of our products, or interrupt production of then existing products
that are already marketed, which would have a material adverse
effect on our business.
We may not
be successful in acquiring complementary businesses or products on
favorable terms.
As part of our business strategy, we intend to consider
acquisitions of similar or complementary businesses or products. No
assurance can be given that we will be successful in identifying
attractive acquisition candidates or completing acquisitions on
favorable terms. In addition, any future acquisitions will be
accompanied by the risks commonly associated with acquisitions.
These risks include potential exposure to unknown liabilities of
acquired companies or to acquisition costs and expenses, the
difficulty and expense of integrating the operations and personnel
of the acquired companies, the potential disruption to the business
of the combined company and potential diversion of our management's
time and attention, the impairment of relationships with and the
possible loss of key employees and clients as a result of the
changes in management, the incurrence of amortization expenses and
write-downs and dilution to the shareholders of the combined
company if the acquisition is made for stock of the combined
company. In addition, successful completion of an acquisition may
depend on consents from third parties, including regulatory
authorities and private parties, which consents are beyond our
control. There can be no assurance that products, technologies or
businesses of acquired companies will be effectively assimilated
into the business or product offerings of the combined company or
will have a positive effect on the combined company's revenues or
earnings. Further, the combined company may incur significant
expense to complete acquisitions and to support the acquired
products and businesses. Any such acquisitions may be funded with
cash, debt or equity, which could have the effect of diluting or
otherwise adversely affecting the holdings or the rights of our
existing stockholders.
If we experience a significant disruption in our information
technology systems or if we fail to implement new systems and
software successfully, our business could be adversely
affected.
We
depend on information systems throughout our company to control our
manufacturing processes, process orders, manage inventory, process
and bill shipments and collect cash from our customers, respond to
customer inquiries, contribute to our overall internal control
processes, maintain records of our property, plant and equipment,
and record and pay amounts due vendors and other creditors. If we
were to experience a prolonged disruption in our information
systems that involve interactions with customers and suppliers, it
could result in the loss of sales and customers and/or increased
costs, which could adversely affect our overall business
operation.
If we are unable to maintain sales, marketing and distribution
capabilities or maintain arrangements with third parties to sell,
market and distribute our products, our business may be
harmed.
To
achieve commercial success for our products, we must sell our
product lines and/or technologies at favorable prices. In addition
to being expensive, maintaining such a sales force is
time-consuming. Qualified direct sales personnel with experience in
the natural products industry are in high demand, and there can be
no assurance that we will be able to hire or retain an effective
direct sales team. Similarly, qualified independent sales
representatives both within and outside the United States are in
high demand, and we may not be able to build an effective network
for the distribution of our product through such representatives.
There can be no assurance that we will be able to enter into
contracts with representatives on terms acceptable to us.
Furthermore, there can be no assurance that we will be able to
build an alternate distribution framework should we attempt to do
so.
We may
also need to contract with third parties in order to market our
products. To the extent that we enter into arrangements with third
parties to perform marketing and distribution services, our product
revenue could be lower and our costs higher than if we directly
marketed our products. Furthermore, to the extent that we enter
into co-promotion or other marketing and sales arrangements with
other companies, any revenue received will depend on the skills and
efforts of others, and we do not know whether these efforts will be
successful. If we are unable to establish and maintain adequate
sales, marketing and distribution capabilities, independently or
with others, we will not be able to generate product revenue, and
may not become profitable.
Our business could be negatively impacted by cyber security
threats.
In the
ordinary course of our business, we use our data centers and our
networks to store and access our proprietary business information.
We face various cyber security threats, including cyber security
attacks to our information technology infrastructure and attempts
by others to gain access to our proprietary or sensitive
information. The procedures and controls we use to monitor these
threats and mitigate our exposure may not be sufficient to prevent
cyber security incidents. The result of these incidents could
include disrupted operations, lost opportunities, misstated
financial data, liability for stolen assets or information,
increased costs arising from the implementation of additional
security protective measures, litigation and reputational damage.
Any remedial costs or other liabilities related to cyber security
incidents may not be fully insured or indemnified by other
means.
Risks Related to Regulatory Approval of Our Products and Other
Government Regulations
We are subject to regulation by various federal, state and foreign
agencies that require us to comply with a wide variety of
regulations, including those regarding the manufacture of products,
advertising and product label claims, the distribution of our
products and environmental matters. Failure to comply with these
regulations could subject us to fines, penalties and additional
costs.
Some of
our operations are subject to regulation by various United States
federal agencies and similar state and international agencies,
including the Department of Commerce, the FDA, the FTC, the
Department of Transportation and the Department of Agriculture.
These regulations govern a wide variety of product activities, from
design and development to labeling, manufacturing, handling, sales
and distribution of products. If we fail to comply with any of
these regulations, we may be subject to fines or penalties, have to
recall products and/or cease their manufacture and distribution,
which would increase our costs and reduce our sales.
We are
also subject to various federal, state, local and international
laws and regulations that govern the handling, transportation,
manufacture, use and sale of substances that are or could be
classified as toxic or hazardous substances. Some risk of
environmental damage is inherent in our operations and the products
we manufacture, sell, or distribute. Any failure by us to comply
with the applicable government regulations could also result in
product recalls or impositions of fines and restrictions on our
ability to carry on with or expand in a portion or possibly all of
our operations. If we fail to comply with any or all of these
regulations, we may be subject to fines or penalties, have to
recall products and/or cease their manufacture and distribution,
which would increase our costs and reduce our sales.
Government regulations of our customer’s business are
extensive and are constantly changing. Changes in these regulations
can significantly affect customer demand for our products and
services.
The
process by which our customers’ industries are regulated is
controlled by government agencies and depending on the market
segment can be very expensive, time consuming, and uncertain.
Changes in regulations or the enforcement practices of current
regulations could have a negative impact on our customers and, in
turn, our business. At this time, it is unknown how the FDA will
interpret and to what extent it will enforce GMPs, regulations that
will likely affect many of our customers. These uncertainties may
have a material impact on our results of operations, as lack of
enforcement or an interpretation of the regulations that lessens
the burden of compliance for the dietary supplement marketplace may
cause a reduced demand for our products and services.
Changes in government regulation or in practices relating to the
pharmaceutical, dietary supplement, food and cosmetic industry
could decrease the need for the services we provide.
Governmental
agencies throughout the world, including in the United States,
strictly regulate the pharmaceutical, dietary supplement, food and
cosmetic industries. Our business involves helping pharmaceutical
and biotechnology companies navigate the regulatory drug approval
process. Changes in regulation, such as a relaxation in regulatory
requirements or the introduction of simplified drug approval
procedures, or an increase in regulatory requirements that we have
difficulty satisfying or that make our services less competitive,
could eliminate or substantially reduce the demand for our
services. Also, if the government makes efforts to contain drug
costs and pharmaceutical and biotechnology company profits from new
drugs, our customers may spend less, or reduce their spending on
research and development. If health insurers were to change their
practices with respect to reimbursements for pharmaceutical
products, our customers may spend less, or reduce their spending on
research and development.
If we should in the future become required to obtain regulatory
approval to market and sell our goods we will not be able to
generate any revenues until such approval is received.
The
pharmaceutical industry is subject to stringent regulation by a
wide range of authorities. While we believe that, given our present
business, we are not currently required to obtain regulatory
approval to market our goods because, among other things, we do not
(i) produce or market any clinical devices or other products, or
(ii) sell any medical products or services to the customer, we
cannot predict whether regulatory clearance will be required in the
future and, if so, whether such clearance will at such time be
obtained for any products that we are developing or may attempt to
develop. Should such regulatory approval in the future be required,
our goods may be suspended or may not be able to be marketed and
sold in the United States until we have completed the regulatory
clearance process as and if implemented by the FDA. Satisfaction of
regulatory requirements typically takes many years, is dependent
upon the type, complexity and novelty of the product or service and
would require the expenditure of substantial
resources.
If
regulatory clearance of a good that we propose to propose to market
and sell is granted, this clearance may be limited to those
particular states and conditions for which the good is demonstrated
to be safe and effective, which would limit our ability to generate
revenue. We cannot ensure that any good that we develop will meet
all of the applicable regulatory requirements needed to receive
marketing clearance. Failure to obtain regulatory approval will
prevent commercialization of our goods where such clearance is
necessary. There can be no assurance that we will obtain regulatory
approval of our proposed goods that may require it.
Risks Related to the Securities Markets and Ownership of our Equity
Securities
The market price of our common stock may be volatile and adversely
affected by several factors.
The
market price of our common stock could fluctuate significantly in
response to various factors and events, including, but not limited
to:
●
our ability to
integrate operations, technology, products and
services;
●
our ability to
execute our business plan;
●
our operating
results are below expectations;
●
our issuance of
additional securities, including debt or equity or a combination
thereof,;
●
announcements of
technological innovations or new products by us or our
competitors;
●
acceptance of and
demand for our products by consumers;
●
media coverage
regarding our industry or us;
●
disputes with or
our inability to collect from significant customers;
●
loss of any
strategic relationship;
●
industry
developments, including, without limitation, changes in healthcare
policies or practices;
●
economic and other
external factors;
●
reductions in
purchases from our large customers;
●
period-to-period
fluctuations in our financial results; and
●
whether an active
trading market in our common stock develops and is
maintained.
In
addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These market
fluctuations may also materially and adversely affect the market
price of our common stock.
Our shares of common stock may be thinly traded, so you may be
unable to sell at or near ask prices or at all.
We
cannot predict the extent to which an active public market for our
common stock will develop or be sustained. This situation may be
attributable to a number of factors, including the fact that we are
a small company that is relatively unknown to stock analysts, stock
brokers, institutional investors and others in the investment
community who generate or influence sales volume, and that even if
we came to the attention of such persons, they tend to be risk
averse and would be reluctant to follow an unproven company such as
ours or purchase or recommend the purchase of our shares until such
time as we have become more seasoned and viable. As a consequence,
there may be periods of several days or weeks when trading activity
in our shares is minimal or non-existent, as compared to a seasoned
issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect
on share price. We cannot assure you that a broader or more active
public trading market for our common stock will develop or be
sustained, or that current trading levels will be sustained or not
diminish.
We have not paid cash dividends in the past and do not expect to
pay cash dividends in the foreseeable future. Any return on
investment may be limited to the value of our common
stock.
We have
never paid cash dividends on our capital stock and do not
anticipate paying cash dividends on our capital stock in the
foreseeable future. The payment of dividends on our capital stock
will depend on our earnings, financial condition and other business
and economic factors affecting us at such time as the board of
directors may consider relevant. If we do not pay dividends, our
common stock may be less valuable because a return on your
investment will only occur if the common stock price
appreciates.
Comprehensive tax reform could adversely affect our business and
financial condition.
On
December 22, 2017, U.S. federal income tax signed into law (H.R. 1,
“An Act to provide for reconciliation pursuant to titles II
and V of the concurrent resolution on the budget for fiscal year
2018”), informally titled the Tax Cuts and Jobs Act, that
significantly revises the Internal Revenue Code of 1986, as
amended. The Tax Cuts and Jobs Act, among other things,
contains significant changes to corporate taxation, including
reduction of the corporate tax rate from a top marginal rate of 35%
to a flat rate of 21%, limitation of the tax deduction for interest
expense to 30% of adjusted taxable income (except for certain small
businesses), limitation of the deduction for net operating losses
carried forward from taxable years beginning after December 31,
2017 to 80% of current year taxable income and elimination of net
operating loss carrybacks, one time taxation of offshore earnings
at reduced rates regardless of whether they are repatriated,
elimination of U.S. tax on foreign earnings (subject to certain
important exceptions), immediate deductions for certain new
investments instead of deductions for depreciation expense over
time, and modifying or repealing many business deductions and
credits (including reducing the business tax credit for certain
clinical testing expenses incurred in the testing of certain drugs
for rare diseases or conditions). Notwithstanding the
reduction in the corporate income tax rate, the overall impact of
the Tax Cuts and Jobs Act is uncertain and our business and
financial condition could be adversely affected. In addition,
it is unknown if and to what extent various states will conform to
the Tax Cuts and Jobs Act. The impact of the Tax Cuts and
Jobs Act on holders of our common stock is likewise uncertain and
could be adverse. We urge our stockholders to consult with
their legal and tax advisors with respect to this legislation and
the potential tax consequences of investing in or holding our
common stock.
Our ability to use our net operating loss carryforwards and certain
other tax attributes may be limited.
Our
federal net operating losses (“NOL”s) generated in
taxable years ending prior to 2018 could expire unused. Under the
Tax Cuts and Jobs Act, federal NOLs incurred in taxable years
ending after December 31, 2017, may be carried forward
indefinitely, but the deductibility of federal NOLs generated in
tax years beginning after December 31, 2017, is limited. It is
uncertain if and to what extent various states will conform to the
Tax Cuts and Jobs Act. In addition, under Sections 382 and 383
of the Internal Revenue Code of 1986, as amended, and corresponding
provisions of state law, if a corporation undergoes an
“ownership change,” which is generally defined as a
greater than 50% change (by value) in its equity ownership over a
three-year period, the corporation’s ability to use its
pre-change NOL carryforwards, or NOLs, and other pre-change tax
attributes (such as research tax credits) to offset its post-change
income may be limited. In addition, we may also experience
ownership changes in the future as a result of subsequent shifts in
our stock ownership some of which may be outside of our control. As
a result, if we earn net taxable income, our ability to use our
pre-ownership change NOL carryforwards to offset U.S. federal
taxable income may be subject to limitations, which could
potentially result in increased future tax liability to us. In
addition, at the state level, there may be periods during which the
use of NOLs is suspended or otherwise limited, which could
accelerate or permanently increase state taxes owed.
Stockholders may experience significant dilution if future equity
offerings are used to fund operations or acquire complementary
businesses.
If
future operations or acquisitions are financed through the issuance
of additional equity securities, stockholders could experience
significant dilution. Securities issued in connection with future
financing activities or potential acquisitions may have rights and
preferences senior to the rights and preferences of our common
stock. In addition, the issuance of shares of our common stock upon
the exercise of outstanding options or warrants may result in
dilution to our stockholders.
We may become involved in securities class action litigation that
could divert management’s attention and harm our
business.
The
stock market in general, and the stocks of early stage companies in
particular, have experienced extreme price and volume fluctuations.
These fluctuations have often been unrelated or disproportionate to
the operating performance of the companies involved. If these
fluctuations occur in the future, the market price of our shares
could fall regardless of our operating performance. In the past,
following periods of volatility in the market price of a particular
company’s securities, securities class action litigation has
often been brought against that company. If the market price or
volume of our shares suffers extreme fluctuations, then we may
become involved in this type of litigation, which would be
expensive and divert management’s attention and resources
from managing our business.
As a
public company, we may also from time to time make forward-looking
statements about future operating results and provide some
financial guidance to the public markets. Projections may not be
made in a timely manner or we might fail to reach expected
performance levels and could materially affect the price of our
shares. Any failure to meet published forward-looking statements
that adversely affect the stock price could result in losses to
investors, stockholder lawsuits or other litigation, sanctions or
restrictions issued by the Securities and Exchange
Commission.
We have a significant number of outstanding options and warrants,
and future sales of these shares could adversely affect the market
price of our common stock.
As of
December 31, 2018, we had outstanding options for an aggregate
of approximately 9.1 million shares of common stock at a
weighted average exercise price of $3.79 per share and outstanding
warrants exercisable for an aggregate of approximately 0.2 million
shares of common stock at a weighted average exercise price of
$3.69 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.
Unresolved
Staff Comments
None.
As of
December 31, 2018, we lease (i) approximately 10,000 square feet of
office space in Los Angeles, California with three years remaining
on the lease approximately, (ii) 15,000 square feet of office space
in Irvine, California with nine months remaining on the lease,
(iii) approximately 10,000 square feet of space for research and
development laboratory in Longmont, Colorado with six years
remaining on the lease, and (iv) approximately 2,300 square feet of
office space in Rockville, Maryland with two years remaining on the
lease. The below table illustrates the use of each property by our
business segments.
|
Business
Segment
|
Property
Used
|
|
Consumer
Products
|
All
properties
|
|
Ingredients
|
All
properties
|
|
Analytical
Reference Standards and Services
|
Irvine,
CA, Longmont, CO and Rockville, MD
|
We do
not own any real estate. For the year ended December 31, 2018, our
total annual rental expense was approximately $791,000.
Elysium
Health, LLC
(A) California Action
On
December 29, 2016,
ChromaDex, Inc. filed a complaint in the United States District
Court for the Central District of California, naming Elysium
Health, Inc. (together with Elysium Health, LLC,
“Elysium”) as defendant (the “Complaint”).
On January 25, 2017, Elysium filed an answer and counterclaims in
response to the Complaint (together with the Complaint, the
“California Action”). Over the course of the California
Action, the parties have each filed amended pleadings several times
and have each engaged in several rounds of motions to dismiss and
one round of motion for judgment on the pleadings with respect to
various claims. Most recently, on November 27, 2018, ChromaDex,
Inc. filed a fifth amended complaint that added an individual, Mark
Morris, as a defendant. Elysium and Morris (“the
Defendants”) moved to dismiss on December 21, 2018. The court
denied Defendants’ motion on February 4, 2019.
Following
the court’s February 4, 2019 order, the claims that
ChromaDex, Inc. presently asserts in the California Action, among
other allegations, are that (i) Elysium breached the Supply
Agreement, dated June 26, 2014, by and between ChromaDex, Inc. and
Elysium (the “pTeroPure® Supply Agreement”), by
failing to make payments to ChromaDex, Inc. for purchases of
pTeroPure® and by improper disclosure of confidential
ChromaDex, Inc. information pursuant to the pTeroPure® Supply
Agreement, (ii) Elysium breached the Supply Agreement, dated
February 3, 2014, by and between ChromaDex, Inc. and Elysium, as
amended (the “NIAGEN® Supply Agreement”), by
failing to make payments to ChromaDex, Inc. for purchases of
NIAGEN® and by improper disclosure of confidential ChromaDex,
Inc. information pursuant to the NIAGEN® Supply Agreement,
(iii) Defendants willfully and maliciously misappropriated
ChromaDex, Inc. trade secrets concerning its ingredient sales
business under both the California Uniform Trade Secrets Act and
the Federal Defend Trade Secrets Act, (iv) Morris breached two
confidentiality agreements he signed by improperly stealing
confidential ChromaDex, Inc. documents and information, (v) Morris
breached his fiduciary duty to ChromaDex, Inc. by lying to and
competing with ChromaDex, Inc. while still employed there, and (vi)
Elysium aided and abetted Morris’s breach of fiduciary duty.
ChromaDex, Inc. is seeking damages and interest for Elysium’s
alleged breaches of the NIAGEN® Supply Agreement and
pTeroPure® Supply Agreement and Morris’s alleged
breaches of his confidentiality agreements, compensatory damages
and interest, punitive damages, injunctive relief, and
attorney’s fees for Defendants’ alleged willful and
malicious misappropriation of ChromaDex, Inc.’s trade
secrets, and compensatory damages and interest, disgorgement of all
benefits received, and punitive damages for Morris’s alleged
breach of his fiduciary duty and Elysium’s aiding and
abetting of that alleged breach. Defendants filed their answer to
ChromaDex, Inc.'s fifth amended complaint on February 19,
2019.
Among
other allegations, the claims that Elysium presently alleges in the
California Action are that (i) ChromaDex, Inc. breached the
NIAGEN® Supply Agreement by not issuing certain refunds or
credits to Elysium, by not supplying NIAGEN® manufactured
according to the defined standard, by distributing the NIAGEN®
product specifications attached to the parties’ agreement to
other customers, and by failing to provide Elysium with information
concerning the quality and identity of NIAGEN® pursuant to the
NIAGEN® Supply Agreement, (ii) ChromaDex, Inc. breached the
implied covenant of good faith and fair dealing pursuant to the
NIAGEN® Supply Agreement, (iii) ChromaDex, Inc. fraudulently
induced Elysium into entering into the Trademark License and
Royalty Agreement, dated February 3, 2014, by and between
ChromaDex, Inc. and Elysium (the “License Agreement”),
(iv) ChromaDex, Inc.’s conduct constitutes misuse of its
patent rights, and (v) ChromaDex, Inc. was unjustly enriched by the
royalties Elysium paid pursuant to the License Agreement. Elysium
is seeking damages for ChromaDex, Inc.’s alleged breaches of
the NIAGEN® Supply Agreement and pTeroPure® Supply
Agreement, and compensatory damages, punitive damages, and/or
rescission of the License Agreement and restitution of any royalty
payments conveyed by Elysium pursuant to the License Agreement, and
a declaratory judgment that ChromaDex, Inc. has engaged in patent
misuse. ChromaDex, Inc. answered Elysium’s present
allegations on August 24, 2018. The parties are currently in
discovery.
(B) Patent Office Proceedings
On July
17, 2017, Elysium filed petitions with the U.S. Patent and
Trademark Office for inter
partes review of U.S. Patents 8,197,807 (the
“’807 Patent”) and 8,383,086 (the
“’086 Patent”), patents to which ChromaDex, Inc.
is the exclusive licensee. The Patent Trial and Appeal Board
(“PTAB”) denied institution of the inter partes review for the ’807
Patent on January 18, 2018. On January 29, 2018, the PTAB granted
institution of the inter
partes review as to claims 1, 3, 4, and 5 and denied
institution as to claim 2 of the ’086 Patent. Based upon a
recent U.S. Supreme Court decision, and solely on a procedural
basis, the PTAB was required to include claim 2 in the trial of the
inter partes review. The
matter was heard on October 2, 2018. The PTAB issued its written
decision on January 16, 2019, upholding claim 2 of the ’086
Patent which relates to the use of isolated NR in a pharmaceutical
composition as valid. Elysium is now prevented from raising
invalidity arguments against the ’086 Patent in the ongoing
patent litigation in Delaware that it brought or could have brought
before the PTAB in its inter
partes review.
(C) Southern District of New York Action
On
September 27, 2017, Elysium Health Inc. ("Elysium Health") filed a
complaint in the United States District Court for the Southern
District of New York, against ChromaDex, Inc. (the “Elysium
SDNY Complaint”). Elysium Health alleges in the Elysium SDNY
Complaint that ChromaDex, Inc. made false and misleading statements
in a citizen petition to the Food and Drug Administration it filed
on or about August 18, 2017. Among other allegations, Elysium
Health avers that the citizen petition made Elysium Health’s
product appear dangerous, while casting ChromaDex, Inc.’s own
product as safe. The Elysium SDNY
Complaint asserts four claims for relief: (i) false advertising
under the Lanham Act, 15 U.S.C. § 1125(a); (ii) trade libel;
(iii) deceptive business practices under New York General Business
Law § 349; and (iv) tortious interference with prospective
economic relations. ChromaDex, Inc. denies the claims in the
Elysium SDNY
Complaint and intends to defend against them vigorously. On October
26, 2017, ChromaDex, Inc. moved to dismiss the Elysium SDNY
Complaint on the grounds that, inter alia, its statements in the
citizen petition are immune from liability under the
Noerr-Pennington Doctrine, the litigation privilege, and New
York’s Anti-SLAPP statute, and that the Elysium SDNY
Complaint failed to state a claim. Elysium Health opposed the
motion on November 2, 2017. ChromaDex, Inc. filed its reply on
November 9, 2017.
On
October 26, 2017, ChromaDex, Inc. filed a complaint in the United
States District Court for the Southern District of New York against
Elysium Health (the “ChromaDex SDNY Complaint”).
ChromaDex, Inc. alleges that Elysium Health made material false and
misleading statements to consumers in the promotion, marketing, and
sale of its health supplement product, Basis, and asserts five
claims for relief: (i) false advertising under the Lanham Act, 15
U.S.C. §1125(a); (ii) unfair competition under 15 U.S.C.
§ 1125(a); (iii) deceptive practices under New York General
Business Law § 349; (iv) deceptive practices under New York
General Business Law § 350; and (v) tortious interference with
prospective economic advantage. On November 16, 2017, Elysium
Health moved to dismiss for failure to state a claim. ChromaDex,
Inc. opposed the motion on November 30, 2017 and Elysium Health
filed a reply on December 7, 2017.
On
November 3, 2017, the Court consolidated the Elysium SDNY
Complaint and the ChromaDex SDNY Complaint actions under the
caption In re Elysium Health-ChromaDex Litigation, 17-cv-7394, and
stayed discovery in the consolidated action pending a Court-ordered
mediation. The mediation was unsuccessful. On September 27, 2018,
the Court issued a combined ruling on both parties’ motions
to dismiss. For ChromaDex’s motion to dismiss, the Court
converted the part of the motion on the issue of whether the
citizen petition is immune under the Noerr-Pennington Doctrine into
a motion for summary judgment, and requested supplemental evidence
from both parties, which were submitted on October 29, 2018. The
Court otherwise denied the motion to dismiss. On January 3, 2019,
the Court granted ChromaDex, Inc.’s motion for summary
judgment under the Noerr-Pennington Doctrine and dismissed all
claims in the Elysium SDNY
Complaint. Elysium moved for reconsideration on January 17, 2019.
The Court denied Elysium’s motion for reconsideration on
February 6, 2019, and issued an amended final order granting
ChromaDex, Inc.’s motion for summary judgment as on February
7, 2019.
The
Court granted in part and denied in part Elysium’s motion to
dismiss, sustaining three grounds for ChromaDex’s Lanham Act
claims while dismissing two others, sustaining the claim under New
York General Business Law § 349, and dismissing the claims
under New York General Business Law § 350 and for tortious
interference. Elysium filed an answer and counterclaims on October
10, 2018, alleging claims for (i) false advertising under the
Lanham Act, 15 U.S.C. §1125(a); (ii) unfair competition under
15 U.S.C. § 1125(a); and (iii) deceptive practices under New
York General Business Law § 349. ChromaDex answered
Elysium’s counterclaims on November 2, 2018. The parties are
conferring on a proposed scheduling order.
The
Company is unable to predict the outcome of these matters and, at
this time, cannot reasonably estimate the possible loss or range of
loss with respect to the legal proceedings discussed herein. As of
December 31, 2018, ChromaDex, Inc. did not accrue a potential loss
for the California Action or the Elysium SDNY
Complaint because ChromaDex, Inc. believes that the allegations are
without merit and thus it is not probable that a liability has been
incurred.
(D) Delaware – Patent Infringement Action
On
September 17, 2018, ChromaDex, Inc. and Trustees of Dartmouth
College filed a patent infringement complaint in the United States
District Court for the District of Delaware against Elysium Health,
Inc. The complaint alleges that Elysium’s BASIS® dietary
supplement violates U.S. Patents 8,197,807 (the “’807
Patent”) and 8,383,086 (the “’086 Patent”)
that comprise compositions containing isolated nicotinamide
riboside held by Dartmouth and licensed exclusively to ChromaDex,
Inc. On October 23, 2018, Elysium filed an answer to the complaint.
The answer asserts various affirmative defenses and denies that
Plaintiffs are entitled to any relief.
On
November 7, 2018, Elysium filed a motion to stay the patent
infringement proceedings pending resolution of (1) the inter partes review of the ’807
Patent and the ’086 Patent before the Patent Trial and Appeal
Board (“PTAB”) and (2) the outcome of the litigation in
the California Action. ChromaDex, Inc. filed an opposition brief on
November 21, 2018 detailing the issues with Elysium’s motion
to stay. In particular, ChromaDex, Inc. argued that given claim 2
of the ’086 Patent was only included in the PTAB’s
inter partes review for
procedural reasons the PTAB was unlikely to invalidate claim 2 and
therefore litigation in Delaware would continue regardless. In
addition, ChromaDex, Inc. argued that the litigation in the
California Action is unlikely to have a significant effect on the
ongoing patent litigation. After the PTAB released its written
decision upholding claim 2 of the ’086 Patent proving right
ChromaDex, Inc.’s prediction ChromaDex, Inc. informed the
Delaware court of the PTAB’s decision on January 17, 2019.
Both Elysium and ChromaDex, Inc. have informed the court that they
are available for oral argument on the motion to stay, and though
the court’s docket is very crowded, ChromaDex, Inc. currently
anticipates a ruling this spring.
Covance Laboratories Inc.
On
January 10, 2019, Covance Laboratories Inc. (“Covance”)
filed a complaint in the United States District Court for the
District of Delaware against ChromaDex, Inc. and ChromaDex
Analytics, Inc. (collectively “ChromaDex”). The
complaint alleges that ChromaDex breached an Asset Purchase
Agreement (“APA”), dated August 21, 2017, between
Covance and ChromaDex in which Covance purchased certain assets
related to ChromaDex’s Lab Business for $7,500,000.
Specifically, the complaint alleges that ChromaDex failed to
deliver to Covance its entire ComplyID library. On February 4,
2019, ChromaDex filed an answer to the complaint. The answer
asserts various affirmative defenses and denies that Covance is
entitled to any relief.
From
time to time we are involved in legal proceedings arising in the
ordinary course of our business. We believe that there is no other
litigation pending that is likely to have, individually or in the
aggregate, a material adverse effect on our financial condition or
results of operations.
Not
applicable.
PART II
Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Since
April 25, 2016, our common stock has been traded on The NASDAQ
Capital Market (“NASDAQ”) under the symbol
“CDXC.” On February 28, 2019, the closing sale price
was $3.49.
Holders of Our Common Stock
As of
February 28, 2019, we had approximately 51 registered holders of
record of our common stock.
Dividend Policy
We have
not declared or paid any cash dividends on our common stock during
either of the two most recent fiscal years and have no current
intention to pay any cash dividends. Our ability to pay cash
dividends is governed by applicable provisions of Delaware law and
is subject to the discretion of our Board of
Directors.
Recent Sales of Unregistered Securities
Other than as previously disclosed in our past Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, the Company did not have
any sales of unregistered securities for the period covered by this
Annual Report on Form 10-K.
Not
Applicable.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
You should read the following discussion and analysis of financial
condition and results of operation together with “Selected
Financial Data,” the consolidated financial statements and
the related notes included elsewhere this Form 10-K. This
discussion contains forward-looking statements that involve risks
and uncertainties. When reviewing the discussion below, you should
keep in mind the substantial risks and uncertainties that impact
our business. In particular, we encourage you to review the risks
and uncertainties described in “Risk Factors” in Part
I, Item 1A in this Form 10-K. These risks and uncertainties could
cause actual results to differ materially from those projected in
forward-looking statements contained in this report or implied by
past results and trends.
Overview
ChromaDex
Corporation and its wholly owned subsidiaries, ChromaDex, Inc.,
Healthspan Research, LLC and ChromaDex Analytics, Inc.
(collectively, the “Company” “ChromaDex”
or, in the first person as “we” “us” and
“our”) are a science-based integrated nutraceutical
company devoted to improving the way people age. ChromaDex
scientists partner with leading universities and research
institutions worldwide to discover, develop and create products to
deliver the full potential of nicotinamide adenine dinucleotide
("NAD") and its impact on human health. Our flagship ingredient,
NIAGEN® nicotinamide riboside, a precursor to NAD sold
directly to consumers as TRU NIAGEN®, is backed with clinical
and scientific research, as well as intellectual property
protection. The Company also has analytical reference standards and
services segment, which focuses on natural product fine chemicals
(known as “phytochemicals”), chemistry services, and
regulatory consulting.
The
discussion and analysis of our financial condition and results of
operations are based on the ChromaDex financial statements, which
have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial
statements requires making estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial
statements, as well as the reported revenues, if any, and expenses
during the reporting periods. On an ongoing basis, we evaluate such
estimates and judgments, including those described in greater
detail below. We base our estimates on historical experience and on
various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
As of
December 31, 2018, cash and cash equivalents totaled approximately
$22.6 million. The Company anticipates that its current cash, cash
equivalents and cash to be generated from operations will be
sufficient to meet its projected operating plans through at least
the next twelve months from the issuance date of this report. The
Company may, however, seek additional capital in the next twelve
months, both to meet its projected operating plans after the next
twelve months and/or to fund its longer term strategic
objectives.
Additional
capital may come from public and/or private stock or debt
offerings, borrowings under lines of credit or other sources. These
additional funds may not be available on favorable terms, or at
all. Further, if we issue equity or debt securities to
raise additional funds, our existing stockholders may experience
dilution and the new equity or debt securities we issue may have
rights, preferences and privileges senior to those of our existing
stockholders. In addition, if we raise additional funds through
collaboration, licensing or other similar arrangements, it may be
necessary to relinquish valuable rights to our products or
proprietary technologies, or to grant licenses on terms that are
not favorable to us. If we cannot raise funds on acceptable terms,
we may not be able to develop or enhance our products, obtain the
required regulatory clearances or approvals, achieve long term
strategic objectives, take advantage of future opportunities, or
respond to competitive pressures or unanticipated customer
requirements. Any of these events could adversely affect our
ability to achieve our development and commercialization goals,
which could have a material and adverse effect on our business,
results of operations and financial condition.
Some of
our operations are subject to regulation by various state and
federal agencies. Dietary supplements are subject to FDA, FTC and
U.S. Department of Agriculture regulations relating to composition,
labeling and advertising claims. These regulations may in some
cases, particularly with respect to those applicable to new
ingredients, require a notification that must be submitted to the
FDA along with evidence of safety. There are similar regulations
related to food additives.
Results of Operations
Our
losses per basic and diluted share were $0.61 and $0.26 for the
twelve-month periods ended December 31, 2018 and December 30, 2017,
respectively. Over the next two years, we plan to continue to
increase marketing, research and development efforts for our
flagship ingredient, NIAGEN® nicotinamide riboside, and our
consumer branded product TRU NIAGEN®.
|
(In
thousands)
|
|
|
|
|
|
|
Sales
|
$31,557
|
$21,201
|
|
Cost of
sales
|
15,502
|
10,724
|
|
Gross
profit
|
16,055
|
10,477
|
|
Operating expenses
-Sales and marketing
|
16,537
|
4,459
|
|
-Research and development
|
5,478
|
4,007
|
|
-General and administrative
|
27,137
|
17,642
|
|
-Other
|
75
|
746
|
|
Nonoperating
-Interest expense, net
|
(79)
|
(153)
|
|
-Other
|
(65)
|
-
|
|
Loss from
continuing operations
|
(33,316)
|
(16,530)
|
|
Income (loss) from
discontinued operations, net
|
-
|
5,152
|
|
Net
loss
|
$(33,316)
|
$(11,378)
|
Net Sales. Net sales consist of gross
sales less discounts and returns.
|
|
|
|
(In
thousands)
|
|
|
|
|
Net
sales:
|
|
|
|
|
Consumer
Products
|
$18,451
|
$5,465
|
238%
|
|
Ingredients
|
8,565
|
11,153
|
-23%
|
|
Analytical
reference standards and services
|
4,541
|
4,583
|
-1%
|
|
|
|
|
|
|
Total
net sales
|
$31,557
|
$21,201
|
49%
|
●
The Company's TRU
NIAGEN® sales for consumer products segment increased after
the Company's strategic shift towards consumer products in 2017.
The Company expects the sales for the consumer products segment to
continue to grow over the next twelve months.
●
The decrease in
sales for the ingredients segment is mainly due to decreased sales
of NIAGEN®. The Company made a strategic decision to
transition from an ingredient company to a consumer-facing company
that has resulted in a shift in our sales away from resellers of
NIAGEN® to our TRU NIAGEN® branded consumer
product
●
The decrease in
sales for the analytical reference standards and services segment
is primarily due to decreased sales of regulatory consulting and
other research and development services.
Cost of Sales. Costs of sales include raw materials, labor,
overhead, and delivery costs.
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
Consumer
Products
|
$7,222
|
39%
|
$2,190
|
40%
|
|
Ingredients
|
4,831
|
56%
|
5,492
|
49%
|
|
Analytical
reference standards and services
|
3,449
|
76%
|
3,042
|
66%
|
|
|
|
|
|
|
|
Total
cost of sales
|
$15,502
|
49%
|
$10,724
|
51%
|
The
cost of sales, as a percentage of net sales, decreased
2%.
●
The cost of sales,
as a percentage of net sales, for the consumer products segment
decreased 1%. Compared to the other segments, the consumer products
segment experienced better margins due to the positive impact of
TRU NIAGEN® consumer product sales.
●
The cost of sales,
as a percentage of net sales, for the ingredients segment increased
7%. The increase is largely due to a write off of our inventory of
approximately $442,000 in 2018.
●
The cost of sales,
as a percentage of net sales for the analytical reference standards
and services segment, increased 10%. The decrease in other research
and development services sales led to a lower labor utilization
rate, which resulted in increasing our cost of sales as a
percentage of 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.
|
|
|
|
(In
thousands)
|
|
|
|
|
Gross
profit:
|
|
|
|
|
Consumer
Products
|
$11,229
|
$3,275
|
243%
|
|
Ingredients
|
3,734
|
5,661
|
-34%
|
|
Analytical
reference standards and services
|
1,092
|
1,541
|
-29%
|
|
|
|
|
|
|
Total
gross profit
|
$16,055
|
$10,477
|
53%
|
●
The consumer
products segment posted gross profit of $11.2 million in 2018. The
Company expects the sales and gross profit for consumer products
segment to continue to grow over the next twelve
months.
●
The decreased gross
profit for the ingredients segment was largely due to a decrease in
sales as the Company transitions from an ingredient company to a
consumer driven nutraceutical company. In addition, we had a write
off of our inventory of approximately $442,000 in
2018.
●
The decreased gross
profit for the analytical reference standards and services segment
is largely due to the decreased sale of other research and
development services. Fixed labor costs make up the majority of
costs of other 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.
|
|
|
|
(In
thousands)
|
|
|
|
|
Sales
and marketing expenses:
|
|
|
|
|
Consumer
Products
|
$15,063
|
$2,673
|
464%
|
|
Ingredients
|
727
|
1,280
|
-43%
|
|
Analytical
reference standards and services
|
747
|
506
|
48%
|
|
|
|
|
|
|
Total
sales and marketing expenses
|
$16,537
|
$4,459
|
271%
|
●
For the consumer
products segment, the Company has increased staffing as well as
direct marketing expenses associated with social media and other
customer awareness and acquisition programs. The Company plans to
continue to invest in building out our own global branded consumer
product business.
●
For the ingredients
segment, the decrease in 2018 is largely due to decreased marketing
efforts as the Company shifts towards consumer
products.
●
For the analytical
reference standards and services segment, the increase is mainly
due to increased marketing efforts.
Operating Expenses – Research and Development.
Research and Development Expenses consist of clinical trials and
process development expenses.
|
|
|
|
(In
thousands)
|
|
|
|
|
Research
and development expenses:
|
|
|
|
|
Consumer
Products
|
$3,852
|
$1,104
|
249%
|
|
Ingredients
|
1,626
|
2,903
|
-44%
|
|
|
|
|
|
|
Total
research and development expenses
|
$5,478
|
$4,007
|
37%
|
●
In 2017, we began
allocating the research and development expenses related to our
NIAGEN® branded ingredient to the consumer products and
ingredients segment, based on revenues recorded. Previously, these
expenses were recorded all in the ingredients segment. Overall, we
increased our research and development efforts and we plan to
continue to increase research and development efforts for our
flagship ingredient, NIAGEN® nicotinamide riboside. In 2018,
we focused on technology development to lower production costs as
well as obtaining international regulatory approvals.
Operating Expenses – General and Administrative.
General and Administrative Expenses consist of general company
administration, IT, accounting and executive management
expenses.
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
$27,137
|
$17,642
|
54%
|
The
following expenses contributed to the increase in general and
administrative expenses in 2018:
●
An increase in
legal expenses. Our legal expenses increased to approximately $9.8
million in 2018 compared to approximately $5.1 million in 2017. The
ongoing litigation with Elysium and our increased efforts to file
and maintain patents related to the proprietary ingredient
technologies were the main reasons for the increase in legal
expenses.
●
An increase in
share-based compensation. Our share-based compensation recorded as
general and administrative expense increased to approximately $5.6
million in 2018 compared to approximately $4.6 million in
2017.
●
An increase in
information and technology expense. Our information and technology
expense increased to approximately $1.5 million in 2018, compared
to approximately $0.8 million in 2017. We invested in additional
staff as well as external consulting in developing and maintaining
our Ecommerce platform, which we use to sell our branded consumer
product TRU NIAGEN®.
●
An increase in
royalties we paid to patent holders. Our royalty expense increased
to approximately $1.6 million in 2018, compared to approximately
$0.9 million in 2017. The increases are due to increased sales for
licensed products in 2018.
Operating Expenses – Other. Other expense consists of
reserve placed against escrow receivable and loss from an ongoing
litigation with Elysium.
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Other
|
$75
|
$746
|
-90%
|
●
In 2017, in
relation to the ongoing litigation, the Company incurred a
write-off of approximately $746,000 in gross trade receivable from
Elysium related to royalties billed as part of the existing
Trademark License and Royalty Agreement.
Nonoperating – Interest Expense, net. Interest
expense, net consists of interest on loan payable and capital
leases offset by interest income.
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
$79
|
$153
|
-48%
|
●
The decrease in
interest expense was mainly due to the costs related to maintaining
the line of credit the Company established with Western Alliance
Bank. In June 2018, the Company notified Western Alliance that it
did not intend to draw from the line of credit established by the
Financing Agreement. As a result, the Company has not incurred
maintenance costs related to the line of credit in the second half
of 2018.
Depreciation and Amortization. For the twelve-month period
ended December 31, 2018, we recorded approximately $0.6 million in
depreciation compared to approximately $0.5 million for the
twelve-month period ended December 30, 2017. We depreciate our
assets on a straight-line basis, based on the estimated useful
lives of the respective assets. We amortize intangible assets using
a straight-line method, generally over 10 years. For licensed
patent rights, the useful lives are 10 years or the remaining term
of the patents underlying licensing rights, whichever is shorter.
The useful lives of subsequent milestone payments that are
capitalized are the remaining useful life of the initial licensing
payment that was capitalized. In the twelve-month period ended
December 31, 2018, we recorded amortization on intangible assets of
approximately $0.2 million compared to approximately $0.2 million
for the twelve-month period ended December 30, 2017.
Income Taxes. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will
not be realized. At December 31, 2018 and December 30, 2017, the
Company maintained a full valuation allowance against the entire
deferred income tax balance which resulted in an effective tax rate
of 0% for each of 2018 and 2017. As defined in ASC 740,
Income Taxes, future
realization of the tax benefit will depend on the existence of
sufficient taxable income, including the expectation of continued
future taxable income.
Net cash used in operating activities. Net cash used in
operating activities for the twelve-month period ended December 31,
2018 was approximately $20.9 million as compared to approximately
$9.8 million for the twelve-month period ended December 30, 2017.
Along with the net loss, an increase inventories was the largest
use of cash during the twelve-month period ended December 31, 2018.
Net cash used in operating activities for the twelve-month period
ended December 30, 2017 largely reflects a decrease in accounts
payable 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 by
investing activities was approximately $1.8 million for the
twelve-month period ended December 31, 2018, compared to
approximately $4.6 million provided for the twelve-month period
ended December 30, 2017. Net cash used by investing activities for
the twelve-month period ended December 31, 2018, mainly consisted
of purchases of leasehold improvements and equipment and intangible
assets, as well as a long-term related party investment. Net cash
provided by investing activities for the twelve-month period ended
December 30, 2017, mainly consisted of proceeds from disposal of
assets, offset by purchases of leasehold improvements and equipment
and intangible assets.
Net cash provided by financing activities. Net cash used in
financing activities was approximately $90,000 for the twelve-month
period ended December 31, 2018, compared to approximately $48.9
million provided financing activities for the twelve-month period
ended December 30, 2017. Net cash used in financing activities for
2018 primarily consisted of repurchase of common stock and
principal payments on capital leases, partially offset by proceeds
from the exercise of stock options. Net cash provided by financing
activities for 2017 mainly consisted of proceeds from issuances of
our common stock and exercise of stock options, offset by principal
payments on capital leases.
Trade Receivables. As of December 31, 2018, we had
approximately $4.4 million in trade receivables as compared to
approximately $5.3 million as of December 30, 2017.
Inventories. As of December 31, 2018, we had approximately
$8.2 million in inventory, compared to approximately $5.8 million
as of December 30, 2017. As of December 31, 2018, our inventory
consisted of approximately $2.3 million of bulk ingredients,
approximately $5.2 million of consumer products and approximately
$0.7 million of phytochemical reference standards. Bulk
ingredients are proprietary compounds sold to customers in larger
quantities, typically in kilograms. These ingredients are
used by our customers in the dietary supplement, food and beverage,
animal health, cosmetic and pharmaceutical industries to
manufacture their final products. Consumer products inventory
consists of TRU NIAGEN® branded finished bottles of dietary
supplement products and related work-in-process inventory.
Phytochemical reference standards are small quantities of
plan-based compounds typically used to research an array of
potential attributes or for quality control purposes. The
Company currently lists over 1,500 phytochemicals and 300 botanical
reference materials in our catalog and holds a lot of these as
inventory in small quantities, mostly in grams and
milligrams.
Our
normal operating cycle for reference standards is currently longer
than one year. Due to the large number of different items we carry,
certain groups of these reference standards have a sales frequency
that is slower than others and varies greatly year to year. In
addition, for certain reference standards, the cost saving is
advantageous when purchased in larger quantities and we have taken
advantage of such opportunities when available. Such factors have
resulted in an operating cycle to be more than one year on average.
The Company gains competitive advantage through the broad offering
of reference standards and it is critical for the Company to
continue to expand its library of reference standards it offers for
the growth of business. Nevertheless, the Company has recently made
changes in its reference standards inventory purchasing practice,
which the management believes will result in an improved turnover
rate and shorter operating cycle without impacting our competitive
advantage.
The
Company regularly reviews inventories on hand and reduces the
carrying value for slow-moving and obsolete inventory, inventory
not meeting quality standards and inventory subject to expiration.
The reduction of the carrying value for slow-moving and obsolete
inventory is based on current estimates of future product demand,
market conditions and related management judgment. Any significant
unanticipated changes in future product demand or market conditions
that vary from current expectations could have an impact on the
value of inventories.
We
strive to optimize our supply chain as we constantly search for
better and more reliable sources and suppliers. By doing so, we
believe we can lower the costs of our inventory and yield higher
gross profit. In addition, we are working with our suppliers and
partners to develop more efficient manufacturing methods of the raw
materials, in an effort to lower the costs of our
inventory.
Accounts Payable. As of December 31, 2018, we had $9.5
million in accounts payable compared to approximately $3.7 million
as of December 30, 2017. The increase was mainly due to an increase
in inventory and higher advertising and legal
expenses.
Contract liabilities and customer deposits. As of December
31, 2018, we had approximately $0.3 million in contract liabilities
and customer deposits compared to approximately $0.3 million as of
December 30, 2017. These deposits are for large-scale consulting
projects, contract services and research projects where we require
a deposit before beginning work.
Liquidity and Capital Resources
For the
twelve-month periods ended December 31, 2018, and December 30,
2017, the Company has incurred losses from continuing operations of
approximately $33.3 million and $16.5 million, respectively. Net
cash used in operating activities for the twelve-month periods
ended December 31 2018, and December 30, 2017, was approximately
$20.9 million and $9.8 million, respectively. The losses and the
uses of cash are primarily due to expenses associated with the
development and expansion of our operations. These operations have
been financed through capital contributions, the issuance of common
stock through private placements.
Our
Board of Directors periodically reviews our capital requirements in
light of our proposed business plan. Our future capital
requirements will remain dependent upon a variety of factors,
including cash flow from operations, the ability to increase sales,
increasing our gross profits from current levels, reducing sales
and administrative expenses as a percentage of net sales, continued
development of customer relationships, and our ability to market
our new products successfully. However, based on our results from
operations, we may determine that we need additional financing to
implement our business plan. Additional financing may come from
public and private equity or debt offerings, borrowings under lines
of credit or other sources. These additional funds may not be
available on favorable terms, or at all. There can be no assurance
we will be successful in raising these additional funds. Without
adequate financing we may have to further delay or terminate
product or service expansion plans. Any inability to raise
additional financing would have a material adverse effect on
us.
As of
December 31, 2018, the cash and cash equivalents totaled
approximately $22.6 million. The Company anticipates that its
current cash, cash equivalents and cash to be generated from
operations will be sufficient to meet its projected operating plans
through at least the next twelve months from the issuance date of
this report. The Company may, however, seek additional capital
within the next twelve months, both to meet its projected operating
plans after the next twelve months and/or to fund its longer term
strategic objectives.
Dividend Policy
We have
not declared or paid any cash dividends on our common stock. We
presently intend to retain earnings for use in our operations and
to finance our business. Any change in our dividend policy is
within the discretion of our board of directors and will depend,
among other things, on our earnings, debt service and capital
requirements, restrictions in financing agreements, if any,
business conditions, legal restrictions and other factors that our
board of directors deems relevant.
Off-Balance Sheet Arrangements
During
the fiscal years ended December 31, 2018 and December 30, 2017, we
had no off-balance sheet arrangements other than ordinary operating
leases as disclosed in the accompanying financial
statements.
Contractual Obligations and Commitments
The
following table summarizes our contractual obligations and other
commitments as of December 31, 2018:
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
leases
|
$340
|
$196
|
$126
|
$18
|
$-
|
$-
|
|
Operating
leases
|
2,428
|
787
|
733
|
627
|
138
|
143
|
|
Purchase
obligations
|
4,365
|
4,365
|
-
|
-
|
-
|
-
|
|
Total
|
$7,133
|
$5,348
|
$859
|
$645
|
$138
|
$143
|
Capital leases. We lease equipment under capitalized lease
obligations with a term of typically 4 or 5 years. We make monthly
installment payments for these leases.
Operating leases. We lease our office and research
facilities in California, Colorado and Maryland under operating
lease agreements that expire at various dates from September 2019
through February 2024. We make monthly payments on these
leases.
Purchase obligations. We enter into purchase obligations
with various vendors for goods and services that we need for our
operations. The purchase obligations for goods and services include
inventory, research and development, and laboratory
supplies.
Critical Accounting Policies
The
discussion and analysis of our financial condition and results of
operations are based on our financial statements, which have been
prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related
disclosures. On an ongoing basis, we evaluate these estimates,
including those related to the valuation of share-based payments.
We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
Our
significant accounting policies are described in Note 2 of the
Financial Statements, set forth in Item 8 of this Form
10-K.
Quantitative
and Qualitative Disclosures About Market Risk
Not
applicable
Financial
Statements and Supplementary Data
The
financial statements are set forth in the pages listed
below.
|
|
Page
|
|
Reports
of Independent Registered Public Accounting Firm
|
46
|
|
Consolidated
Balance Sheets at December 31, 2018 and December 30,
2017
|
48
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2018 and
December 30, 2017
|
49
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended
December 31, 2018 and December 30, 2017
|
50
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2018 and
December 30, 2017
|
51
|
|
Notes
to Consolidated Financial Statements
|
52
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Shareholders and Board of Directors of
ChromaDex Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of
ChromaDex Corporation and Subsidiaries (the “Company”)
as of December 31, 2018 and December 30, 2017, the related
consolidated statements of operations, stockholders’ equity and cash flows for each
of the two years in the period ended December 31 2018, and the
related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2018 and December 30, 2017, and the
results of its operations and its cash flows for each of the two
years in the period ended December 31, 2018, in conformity with
accounting principles generally accepted in the United States of
America.
We also
have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) ("PCAOB"), the
Company's internal control over financial reporting as of December
31, 2018, based on the
criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in 2013 and our report dated March 7,
2019, expressed an
unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Marcum
llp
/s/ Marcum LLP
We have
served as the Company’s auditor since 2013.
New
York, NY
March
7, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
To the
Shareholders and Board of Directors of
ChromaDex
Corporation
Opinion on Internal Control over Financial Reporting
We have
audited ChromaDex Corporation's (the “Company”)
internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control-Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission. In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets as of
December 31, 2018 and December 30, 2017 and the related
consolidated statements of operations, stockholders’ equity,
and cash flows for each of the years then ended of the Company and
our report dated March 7, 2019 expressed an
unqualified opinion on
those financial statements.
Basis for Opinion
The
Company's management is responsible for maintaining effective
internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting,
included in the accompanying “Management Annual Report on
Internal Control over Financial Reporting”. Our
responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial
Reporting
A
company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial
statements.
Because
of the inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that degree of compliance with the
policies or procedures may deteriorate.
/s/
Marcum LLP
Marcum
llp
New
York, NY
March
7, 2019
ChromaDex
Corporation and Subsidiaries
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
December
31, 2018 and December 30, 2017
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
Cash, including
restricted cash of $0.2 million and $0, respectively
|
$22,616
|
$45,389
|
|
Trade receivables,
net of allowances of $0.5 million and $0.7 million,
respectively;
|
|
|
|
Receivables from
Related Party: $0.7 million and $1.0 million,
respectively
|
4,359
|
5,338
|
|
Contract
assets
|
56
|
-
|
|
Receivable held at
escrow, net of allowance of $0.1 million
|
677
|
-
|
|
Inventories
|
8,249
|
5,796
|
|
Prepaid expenses
and other assets
|
577
|
655
|
|
Total
current assets
|
36,534
|
57,178
|
|
|
|
|
|
Leasehold
Improvements and Equipment, net
|
3,585
|
2,872
|
|
Deposits
|
243
|
272
|
|
Receivable Held at
Escrow
|
-
|
750
|
|
Intangible Assets,
net
|
1,547
|
1,652
|
|
Other Long-term
Assets
|
323
|
-
|
|
|
|
|
|
Total
assets
|
$42,232
|
$62,724
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts
payable
|
$9,548
|
$3,719
|
|
Accrued
expenses
|
4,313
|
3,645
|
|
Current maturities
of capital lease obligations
|
173
|
196
|
|
Contract
liabilities and customer deposits
|
275
|
314
|
|
Deferred rent,
current
|
131
|
114
|
|
Due to
officer
|
-
|
100
|
|
Total
current liabilities
|
14,440
|
8,088
|
|
|
|
|
|
Capital Lease
Obligations, Less Current Maturities
|
137
|
310
|
|
Deferred Rent, Less
Current
|
477
|
492
|
|
|
|
|
|
Total
liabilities
|
15,054
|
8,890
|
|
|
|
|
|
Commitments and
Contingencies
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
Common stock, $.001
par value; authorized 150,000 shares;
|
|
|
|
issued
and outstanding December 31, 2018 55,089 shares and
|
|
|
|
December
30, 2017 54,697 shares
|
55
|
55
|
|
Additional paid-in
capital
|
116,876
|
110,380
|
|
Accumulated
deficit
|
(89,753)
|
(56,601)
|
|
Total
stockholders' equity
|
27,178
|
53,834
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
$42,232
|
$62,724
|
See Notes to
Consolidated Financial Statements.
|
ChromaDex
Corporation and Subsidiaries
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
|
Years
Ended December 31, 2018 and December 30, 2017
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
$31,557
|
$21,201
|
|
Cost of
sales
|
15,502
|
10,724
|
|
|
|
|
|
Gross
profit
|
16,055
|
10,477
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Sales and
marketing
|
16,537
|
4,459
|
|
Research and
development
|
5,478
|
4,007
|
|
General and
administrative
|
27,137
|
17,642
|
|
Other
|
75
|
746
|
|
Operating
expenses
|
49,227
|
26,854
|
|
|
|
|
|
Operating
loss
|
(33,172)
|
(16,377)
|
|
|
|
|
|
Nonoperating
expense:
|
|
|
|
Interest expense,
net
|
(79)
|
(153)
|
|
Other
|
(65)
|
-
|
|
Nonoperating
expenses
|
(144)
|
(153)
|
|
|
|
|
|
Loss
from continuing operations
|
(33,316)
|
(16,530)
|
|
|
|
|
|
Loss from
discontinued operations
|
-
|
(315)
|
|
Gain on sale of
discontinued operations
|
-
|
5,467
|
|
Income
from discontinued operations, net
|
-
|
5,152
|
|
|
|
|
|
Net
loss
|
$(33,316)
|
$(11,378)
|
|
|
|
|
|
Basic and diluted
earnings (loss) per common share:
|
|
|
|
Loss
from continuing operations
|
$(0.61)
|
$(0.37)
|
|
Earnings
from discontinued operations
|
$-
|
$0.11
|
|
|
|
|
|
Basic and diluted
loss per common share
|
$(0.61)
|
$(0.26)
|
|
|
|
|
|
Basic and diluted
weighted average common shares outstanding
|
55,006
|
44,599
|
See Notes to
Consolidated Financial Statements.
|
ChromaDex
Corporation and Subsidiaries
|
|
|
|
|
|
|
Consolidated
Statement of Stockholders' Equity
|
|
|
|
|
|
|
Years
Ended December 31, 2018 and December 30, 2017
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
37,545
|
$37
|
$55,160
|
$(45,223)
|
$9,974
|
|
|
|
|
|
|
|
|
Issuance of common
stock, net of
|
|
|
|
|
|
|
offering
costs of $1,420
|
15,593
|
16
|
47,579
|
-
|
47,595
|
|
|
|
|
|
|
|
|
Exercise of stock
options
|
885
|
1
|
3,037
|
-
|
3,038
|
|
|
|
|
|
|
|
|
Vested restricted
stock
|
674
|
1
|
(1)
|
-
|
-
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
4,605
|
-
|
4,605
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
(11,378)
|
(11,378)
|
|
|
|
|
|
|
|
|
Balance,
December 30, 2017
|
54,697
|
$55
|
$110,380
|
$(56,601)
|
$53,834
|
|
|
|
|
|
|
|
|
Adjustment to
retained earnings:
|
|
|
|
|
|
|
cumulative
effect of initially applying ASC 606
|
-
|
-
|
-
|
164
|
164
|
|
|
|
|
|
|
|
|
Exercise of stock
options
|
132
|
-
|
529
|
-
|
529
|
|
|
|
|
|
|
|
|
Repurchase of
common stock
|
(75)
|
-
|
(404)
|
-
|
(404)
|
|
|
|
|
|
|
|
|
Vested restricted
stock
|
2
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
333
|
-
|
6,371
|
-
|
6,371
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
(33,316)
|
(33,316)
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2018
|
55,089
|
$55
|
$116,876
|
$(89,753)
|
$27,178
|
See
Notes to Consolidated Financial Statements.
|
ChromaDex
Corporation and Subsidiaries
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
Years
Ended December 31, 2018 and December 30, 2017
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From
Operating Activities
|
|
|
|
Net
loss
|
$(33,316)
|
$(11,378)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
of leasehold improvements and equipment
|
607
|
510
|
|
Amortization
of intangibles
|
235
|
206
|
|
Share-based
compensation expense
|
6,371
|
4,605
|
|
Allowance
for doubtful trade receivables
|
(132)
|
(411)
|
|
Gain from disposal
of assets
|
-
|
(5,467)
|
|
Loss
from disposal of equipment
|
1
|
5
|
|
Non-cash
financing costs
|
70
|
121
|
|
Other
Non-cash expense
|
65
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Trade
receivables
|
1,111
|
937
|
|
Inventories
|
(2,453)
|
2,177
|
|
Prepaid
expenses and other assets
|
65
|
(296)
|
|
Accounts
payable
|
5,829
|
(2,364)
|
|
Accrued
expenses
|
668
|
1,472
|
|
Customer
deposits and other
|
69
|
(68)
|
|
Deferred
rent
|
2
|
180
|
|
Due
to officer
|
(100)
|
(33)
|
|
Net
cash used in operating activities
|
(20,908)
|
(9,804)
|
|
|
|
|
|
Cash Flows From
Investing Activities
|
|
|
|
Proceeds
from disposal of assets, net of transaction costs
|
-
|
5,953
|
|
Purchases
of leasehold improvements and equipment
|
(1,321)
|
(1,167)
|
|
Purchases
of intangible assets
|
(131)
|
(184)
|
|
Investment
in other long-term assets
|
(323)
|
-
|
|
Net
cash (used in) provided by investing activities
|
(1,775)
|
4,602
|
|
|
|
|
|
Cash Flows From
Financing Activities
|
|
|
|
Proceeds
from issuance of common stock, net of issuance costs
|
-
|
46,594
|
|
Proceeds
from exercise of stock options
|
529
|
3,038
|
|
Repurchase
of common stock
|
(404)
|
-
|
|
Payment
of debt issuance costs
|
(19)
|
(75)
|
|
Principal
payments on capital leases
|
(196)
|
(608)
|
|
Net
cash (used in) provided by financing activities
|
(90)
|
48,949
|
|
|
|
|
|
Net increase
(decrease) in cash
|
(22,773)
|
43,747
|
|
|
|
|
|
Cash Beginning of
Year
|
45,389
|
1,642
|
|
|
|
|
|
Cash Ending of
Year, including restricted cash $0.2 million for 2018
|
$22,616
|
$45,389
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
Cash
payments for interest
|
$41
|
$57
|
|
|
|
|
|
Supplemental
Schedule of Noncash Operating Activity
|
|
|
|
Adjustment
to retained earnings - cumulative effect of initially applying ASC
606
|
$164
|
$-
|
|
|
|
|
|
Supplemental
Schedule of Noncash Investing Activity
|
|
|
|
Noncash
consideration transferred for the acquisition of Healthspan
Research LLC
|
$-
|
$1,187
|
|
Capital
lease obligation incurred for the purchase of
equipment
|
$-
|
$515
|
|
Receivable
from disposal of assets held at escrow
|
$-
|
$750
|
|
Retirement
of fully depreciated equipment - cost
|
$-
|
$57
|
|
Retirement
of fully depreciated equipment - accumulated
depreciation
|
$-
|
$(57)
|
See Notes to
Consolidated Financial Statements.
Note
1.
Nature
of Business and Liquidity
Nature of business: ChromaDex Corporation and its wholly
owned subsidiaries, ChromaDex, Inc., Healthspan Research, LLC and
ChromaDex Analytics, Inc. (collectively, the “Company”
or, in the first person as “we” “us” and
“our”) are a science-based integrated nutraceutical
company devoted to improving the way people age. The Company's
scientists partner with leading universities and research
institutions worldwide to discover, develop and create products to
deliver the full potential of NAD and identify and develop novel,
science-based ingredients. Its flagship ingredient, NIAGEN®
nicotinamide riboside, a precursor to NAD sold directly to
consumers as TRU NIAGEN®, is backed with clinical and
scientific research, as well as intellectual property protection.
The Company also has analytical reference standards and services
segment, which focuses on natural product fine chemicals (known as
“phytochemicals”), chemistry services, and regulatory
consulting.
Liquidity: The Company has incurred a net loss of
approximately $33.3 million for the year ended December 31, 2018,
and net loss of approximately $11.4 million for the year ended
December 30, 2017. As of December 31, 2018, cash and cash
equivalents totaled approximately $22.6 million, which includes
restricted cash of approximately $0.2 million.
The
Company anticipates that its current cash, cash equivalents and
cash to be generated from operations will be sufficient to meet its
projected operating plans through at least the next twelve months
from the issuance date of this report. The Company may, however,
seek additional capital within the next twelve months, both to meet
its projected operating plans within the next twelve months and/or
to fund its longer term strategic objectives.
Note
2.
Significant
Accounting Policies
Significant
accounting policies are as follows:
Basis of presentation: The financial statements and
accompanying notes have been prepared on a consolidated basis and
reflect the consolidated financial position of the Company and its
wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated from these financial
statements. The Company's fiscal year 2018 ended on December 31,
2018 and the fiscal year 2017 ended on December 30,
2017.
Change in Fiscal Year: On January 25, 2018, the Board of
Directors of ChromaDex Corporation approved a resolution to change
the Company’s fiscal year from a 52/53-week fiscal year that
ends on the Saturday closest to December 31 to a calendar year. As
such, the Company’s 2018 fiscal year was extended from
December 29, 2018 to December 31, 2018, with subsequent fiscal
years beginning on January 1 and ending on December 31 of each
year. Effective fiscal year 2018, the Company’s quarterly
results are for the periods ending March 31, June 30, September 30
and December 31.
Adopted Accounting Standards in Fiscal 2018:
Revenue from Contracts with Customers, Topic 606: Effective
the first day of fiscal year 2018, the Company adopted Accounting
Standards Update No. 2014-09, Revenue from Contracts with
Customers: Topic 606 ("ASC 606"). ASC 606 supersedes nearly all
existing revenue recognition guidance under U.S. Generally Accepted
Accounting Principles ("GAAP"). The core principle of ASC 606 is to
recognize revenues when promised goods or services are transferred
to customers in an amount that reflects the consideration that is
expected to be received for those goods or services. ASC 606
defines a five step process to achieve this core principle and, in
doing so, it is possible more judgment and estimates may be
required within the revenue recognition process than required under
previous GAAP including identifying performance obligations in the
contract, estimating the amount of variable consideration to
include in the transaction price and allocating the transaction
price to each separate performance obligation.
The
Company adopted ASC 606 using the modified retrospective transition
method. Under this method, the Company elected to apply the
modified retrospective method to contracts that are not complete as
of the first day of fiscal year 2018. The adoption of ASC 606
resulted in an adjustment to opening retained earnings of $164,000.
See Note 10, Contract Assets and Contract Liabilities for
additional disclosure regarding the opening balance
adjustment.
For the
year ended December 31, 2018, approximately $30.6 million of the
Company's total revenue of $31.6 million, or 97% of the total
revenue, was as a result of shipping physical goods to the
customers. For such revenue streams, the performance obligations
are typically satisfied upon shipment of physical goods. Typical
payment terms for such revenue streams are upon shipment or net 30
to 60 days. We require customers that are not creditworthy to make
advance payments prior to shipment. The Company is taking the
practical expedient on not adjusting the promised amount of
consideration for the effects of a significant financing component,
since the Company expects the customer to pay for the transferred
goods within one year. There are obligations for the Company to
accept returns and provide refunds for the goods that are shipped,
if the customer claims that the Company has not fully fulfilled the
performance obligations. Returns, refunds and allowances related to
sales including a reserve for estimated variable consideration for
the returns, refunds and allowances are recorded as reduction of
revenue. The Company uses historical rates when estimating returns,
refunds and allowances. The Company also elected to account for
shipping and handling activities performed as cost of sales under a
fulfillment cost and any fee received for shipping and handling as
part of the transaction price and recognize revenue when control of
the good transfers. The related fulfillment costs are accrued at
the time of revenue recognition.
The
Company also has revenue streams for providing consulting services
to its clients. For the year ended December 31, 2018, our revenue
from these streams was approximately $1.0 million, or 3% of the
total revenue. For these consulting services, the performance
obligations are typically satisfied over time as the consulting
services are performed. Payment terms for these projects vary based
on the nature of the projects, from advance payment at the
beginning of the project to net 30 days from the completion of the
project. The Company typically requires advance payments from
customers for large-scale consulting projects that have a contract
duration of 30 days or longer. The original expected duration of
these contracts are typically one year or less. As such, the
Company is applying an optional exemption from ASC 606 to not make
the disclosures related to the remaining performance obligations.
The Company is also taking the practical expedient on not adjusting
the promised amount of consideration for the effects of a
significant financing component, since the Company expects the
customer to pay for the transferred services within one year. If
contracts are terminated prior to the completion, the Company
typically has a right to bill the customer for all services that
have been performed through the termination date.
These
consulting projects typically have one common performance
obligation for our clients, thus the Company typically does not
allocate the transaction price over many performance obligations.
Some of these consulting projects require measurement of the
progress toward complete satisfaction of the performance
obligation. The Company uses a cost-to-cost method to measure such
progress, which is an input method that recognizes revenue on the
bases of direct measurements for the costs incurred to date in
relation to the total estimated costs to complete the performance
obligation. Any costs that do not depict the Company's performance
in transferring control of the consulting services to the customer
have been excluded.
Improvements to Non-employee Share-Based Payment Accounting:
In June 2018, the FASB issued ASU 2018-07, “Compensation
– Stock Compensation (Topic 718): Improvements to
Non-employee Share-Based Payment Accounting,” which expands
the scope of Topic 718 to include all share-based payment
transactions for acquiring goods and services from non-employees.
This pronouncement is effective for fiscal years, and for interim
periods within those fiscal years, beginning after December 15,
2018, with early adoption permitted. The Company early-adopted the
amendments in this ASU effective as of October 1, 2018. The
adoption of ASU 2017-08 did not have a material effect on our
consolidated financial statements.
SEC Disclosure Update and Simplification: In August 2018,
the SEC adopted the final rule under SEC Release No. 33-10532,
Disclosure Update and Simplification, amending certain disclosure
requirements that were redundant, duplicative, overlapping,
outdated or superseded. In addition, the amendments expanded the
disclosure requirements on the analysis of stockholders' equity for
interim financial statements. Under the amendments, an analysis of
changes in each caption of stockholders' equity presented in the
balance sheet must be provided in a note or separate statement. The
analysis should present a reconciliation of the beginning balance
to the ending balance of each period for which a statement of
comprehensive income is required to be filed. This final rule was
effective on November 5, 2018. The adoption of this guidance did
not have a material effect on our consolidated financial
statements.
Restricted Cash: In November 2016, ASU 2016-18 was issued
related to the inclusion of restricted cash in the statement of
cash flows. The new guidance requires that a statement of cash
flows present the change during the period in the total of cash,
cash equivalents and amounts generally described as restricted cash
or restricted cash equivalents. The adoption of this guidance
results in the inclusion of the restricted cash balances within the
overall cash balance and removal of the changes in restricted cash
activity. The Company adopted ASU 2016-18 effective January 1,
2018. The adoption of ASU 2016-18 did not have a material impact on
our consolidated financial statements.
Use of accounting estimates: The preparation of financial
statements requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Revenue recognition: The Company recognizes sales and the
related cost of sales when the performance obligations are
satisfied. The performance obligations are typically satisfied upon
shipment of physical goods or as the services are performed over
time. In addition to the satisfaction of the performance
obligations, the following conditions are required for revenue
recognition: an arrangement exists, there is a fixed price, and
collectability is reasonably assured. Discounts, returns and
allowances related to sales, including an estimated reserve for the
returns and allowances, are recorded as reduction of
revenue.
With
the adoption of ASC 606 as of January 1, 2018, the Company elected
to account for shipping and handling activities performed as cost
of sales under a fulfillment cost and any fee received for shipping
and handling as part of the transaction price and recognize revenue
when control of the good transfers. For fiscal year 2017, shipping
and handling fees billed to the customers and the cost of shipping
and handling fees billed to customers are both included in net
sales. Shipping and handling fees billed to customers and the
associated cost included in net sales for the years ending December
31, 2018 and December 30, 2017 are as follows:
|
(In
thousands)
|
|
|
|
Shipping and
handling fees billed
|
$287
|
$137
|
|
Cost of shipping
and handling fees billed
|
-
|
$185
|
Taxes
collected from customers and remitted to governmental authorities
are excluded from revenue, which is presented on a net basis in the
statement of operations.
Restricted cash: The Company classifies cash as restricted
if the withdrawal or its usage is restricted for more than three
months. In connection with a lease amendment entered on November 9,
2018 to lease additional office space located in Los Angeles,
California through October 2021, the Company delivered a letter of
credit issued by a bank to the landlord in the amount of $152,000.
The issuing bank required a collateral for the letter of credit and
the Company made a deposit covering the letter of credit amount
with the issuing bank. The letter of credit expires on October 18,
2019.
Trade accounts receivable, net: Trade accounts receivable
are carried at original invoice amount less an estimate made for
doubtful receivables based on monthly and quarterly reviews of all
outstanding amounts. Management determines the allowance for
doubtful accounts by identifying troubled accounts and by using
historical experience applied to an aging of accounts. The
allowance amounts for the periods ended December 31, 2018 and
December 30, 2017 are as follows:
|
(In
thousands)
|
|
|
|
Allowances Related
to
|
|
|
|
Elysium
Health
|
$500
|
$500
|
|
Other
Allowances
|
37 |