Document/ExhibitDescriptionPagesSize 1: 8-K Current Report HTML 617K
2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, HTML 220K
Liquidation or Succession
3: EX-3.1 Articles of Incorporation/Organization or By-Laws HTML 20K
4: EX-3.2 Articles of Incorporation/Organization or By-Laws HTML 85K
5: EX-4.1 Instrument Defining the Rights of Security Holders HTML 59K
6: EX-4.2 Instrument Defining the Rights of Security Holders HTML 37K
7: EX-4.3 Instrument Defining the Rights of Security Holders HTML 118K
8: EX-4.4 Instrument Defining the Rights of Security Holders HTML 60K
9: EX-10.1 Material Contract HTML 37K
18: EX-10.10 Material Contract HTML 61K
19: EX-10.12 Material Contract HTML 86K
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10: EX-10.2 Material Contract HTML 61K
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12: EX-10.4 Exhibit 10.14 HTML 86K
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17: EX-10.9 Material Contract HTML 86K
22: EX-16.1 Letter re: Change in Certifying Accountant HTML 10K
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10005 Muirlands
Boulevard
Suite G, First Floor
Irvine, California
92618
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number,
including area code: (949) 419-0288
Cody Resources,
Inc.
2915 W. Charleston Blvd., Ste. 7, Las Vegas, NV89102
(Former name or former address if changed since last report.)
Check the appropriate box below if the
Form 8-K filing is intended to simultaneously satisfy the filing obligation of
the registrant under any of the following provisions:
o Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o Soliciting material pursuant
to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule
14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule
13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
This Current Report on Form 8-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934. Forward-looking statements reflect the current view about future events. When used
in the filings the words “anticipate,”“believe,”“estimate,”“expect,”“future,”“intend,”“plan”
or the negative of these terms and similar expressions as they relate to Registrant or Registrant’s
management identify forward looking statements. Such statements reflect the current view of
Registrant with respect to future events and are subject to risks, uncertainties, assumptions and
other factors (including the risks contained in the section of this report entitled “Risk Factors”)
relating to Registrant’s industry, Registrant’s operations and results of operations and any
businesses that may be acquired by Registrant. 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.
Although Registrant believes that the expectations reflected in the forward looking statements
are reasonable, Registrant cannot guarantee future results, levels of activity, performance or
achievements. Except as required by applicable law, including the securities laws of the United
States, Registrant does not intend to update any of the forward-looking statements to conform these
statements to actual results. The following discussion should be read in conjunction with
Registrant’s pro forma financial statements and the related notes filed herein.
In this Form 8-K, references to “we,”“our,”“us,”“the Company,”“our company,” the “combined
companies” or the “Registrant” for periods after the closing of the Merger as defined in Section
2.01 below refer to ChromaDex Corporation, a Delaware corporation (successor by merger with Cody
Resources, Inc., a Nevada corporation and referred to herein as “Cody”), and ChromaDex, Inc., a
California corporation (“ChromaDex”), a wholly-owned subsidiary of Cody. All references to “we,”“our” and “us” for periods prior to the closing of the Merger refer to ChromaDex. All references
to the “Registrant” prior to the closing of the Merger refer to Cody.
Item 1.01 Entry into a Material Definitive Agreement
On May 21, 2008, Cody Resources, Inc., a Nevada corporation, entered into an Agreement and
Plan of Merger (the “Merger Agreement”), by and among Cody Resources, Inc., CDI Acquisition, Inc.,
a California corporation and wholly-owned subsidiary of Cody (“Acquisition Sub”), and ChromaDex
(the “Merger”). Subsequent to the signing of the Merger Agreement, Cody Resources, Inc. merged
with and into a Delaware corporation for the sole purpose of changing the domicile of Cody
Resources, Inc. to the State of Delaware. Subsequent to the signing of the Merger Agreement, and
to changing its domicile, Cody Resources, Inc. amended its articles of incorporation to change its
name to “ChromaDex Corporation.”
Pursuant to the terms of the Merger Agreement, and upon satisfaction of specified conditions,
including approval by ChromaDex shareholders on June 18, 2008, Acquisition Sub merged with and into
ChromaDex, and ChromaDex, as the surviving corporation, became a wholly-owned subsidiary of Cody.
On the closing date, pursuant to the terms of the Merger Agreement, former ChromaDex
shareholders received approximately 23,522,122 shares of Cody Common Stock (the “Cody Common
Stock”), or approximately 83.94% of the post-merger company’s outstanding shares. The shares of
Cody Common Stock were issued pursuant to Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933. The shares are unregistered, restricted stock bearing a restrictive legend.
See “Cody Shares Eligible for Future Sale” at Item 2.01 of this Form 8-K.
The material terms of the Merger Agreement are described more fully in Item 2.01 of this
Current Report on Form 8-K. The information therein is hereby incorporated into this Item 1.01 by
reference.
Item 2.01 Completion of Acquisition or Disposition of Assets
As described in Item 1.01 above, on June 20, 2008, Cody acquired ChromaDex, a supplier of
phytochemical reference standards and reference materials, related contract services, and products
for the dietary supplement, nutraceutical, food and beverage, functional food, pharmaceutical and
cosmetic markets in a merger (“Merger”). CDI Acquisition, Inc., a California corporation and wholly-owned subsidiary of
Cody (“Acquisition Sub”), merged with and into ChromaDex. The outstanding ChromaDex common stock
was converted into 23,522,122 shares of Cody Common Stock, or approximately 83.94% of the
post-merger company’s outstanding shares. See “Cody Shares Eligible for Future Sale” below.
Pursuant to the Merger Agreement, the directors and executive officers of Cody, Donald Sampson
and Barbara Grant, resigned from their respective positions with Cody at the closing of the Merger.
The directors and executive officers of ChromaDex immediately prior to the Merger became the
directors and executive officers of Cody. See “Management” below.
Change in Corporate Headquarters
In connection with the closing of the Merger, Cody relocated its corporate headquarters from
2915 W. Charleston Blvd., Ste. 7, Las Vegas, NV89102 to 10005 Muirlands Boulevard, Suite G, First
Floor, Irvine, CA92618.
Accounting Treatment
For accounting purposes, the Merger is being accounted for as a reverse merger, which means
ChromaDex will be deemed to have acquired Cody. This accounting treatment was required since the
shareholders of ChromaDex now own a substantial majority of the issued and outstanding shares of
common stock of the Registrant, and certain of the directors and executive officers named by
ChromaDex became the directors and executive officers of the Registrant at the closing, replacing
the prior directors and executive officers. No agreements exist among present or former
controlling shareholders of the Registrant or present or former officers and directors of ChromaDex
with respect to the future election of the members of the Registrant’s Board of Directors, and to
the Registrant’s knowledge, no other agreements exist which might result in a change of control of
the Registrant. See the pro forma financial information in this Form 8-K for further details.
Treatment of Options and Warrants
Cody assumed each stock option to purchase shares of ChromaDex’s common stock that was
outstanding immediately prior to the Merger, whether or not then vested or exercisable (each, an
“Assumed ChromaDex Option”). Each Assumed ChromaDex Option was converted into an option to acquire
that number of shares of Cody Common Stock equal to the number of shares of ChromaDex common stock
subject to such option, at an exercise price equal to the exercise price stated in such option,
subject in all respects to all other terms and conditions of such option. At closing, Cody assumed
options representing rights to purchase up to approximately 3,301,937 shares of Cody Common Stock
at a weighted average exercise price of $1.35 per share of Cody Common Stock. Cody assumed both
the 2000 Non-Qualified Incentive Stock Option Plan effective October 1, 2000 (the “2000 Plan”) and
the Second Amended and Restated 2007 Equity Incentive Plan effective March 13, 2007 (the “2007
Plan”). The 2000 Plan and the 2007 Plan are each described below under “Equity Incentive Plans”
and are included as Exhibits 10.1 and 10.2 respectively, to this Current Report on Form 8-K.
Further, Cody assumed each warrant to purchase, acquire or otherwise receive ChromaDex shares,
exclusive of Assumed ChromaDex Options outstanding immediately prior to the Merger, whether or not
then vested or exercisable (each, an “Assumed ChromaDex Warrant”). Each Assumed ChromaDex Warrant
was converted into a warrant to acquire that number of shares of Cody Common Stock equal to the
number of shares of ChromaDex capital stock subject to such warrant at a purchase price per share
equal to the purchase price per share of such warrant, subject in all respects to all other terms
and conditions of such warrant. At closing, Cody assumed warrants representing rights to purchase
up to approximately 1,314,303 shares of Cody Common Stock at a weighted average exercise price of
$2.67 per share of Cody Common Stock. Warrants were originally issued in connection with a private
placement offering by ChromaDex discussed below in “Recent Sales of Unregistered Securities.” A
copy of the Form of Warrant to Purchase Shares of Common Stock of ChromaDex, Inc. is included as
Exhibit 4.4 to this Current Report on Form 8-K.
Prior to the Merger, Cody was a “shell company” as defined in Rule 12b-2 promulgated by the
SEC under the Securities Exchange Act of 1934, because it had no or nominal operations, and assets
consisting of cash, cash equivalents and nominal other assets. As disclosed elsewhere in this
report, on June 20, 2008, we acquired ChromaDex in the Merger. Item 2.01(f) of Form 8-K states
that if the registrant was a shell company, as we were immediately before the Merger disclosed
under Item 2.01, then the Registrant must disclose the information that would be required if the
Registrant were filing a general form for registration of securities under the Securities Exchange
Act of 1934, as amended.
Cody ceased to be a shell company upon consummation of the Merger. Accordingly, we are
providing the required information. Except where stated otherwise, the information provided below
relates to the combined company after the Merger.
DESCRIPTION OF BUSINESS
BACKGROUND: CODY BEFORE THE MERGER
Cody was incorporated on July 19, 2006 under the laws of the State of Nevada. Until its third
quarter of 2007, Cody was an exploration stage company engaged in the exploration of mineral
properties. Cody acquired an option to purchase an interest in mineral claims referred to as the
Vulture mineral claims. Cody’s plan of operations was to carry out exploration work on these
claims in order to ascertain whether they possessed commercially exploitable quantities of copper,
lead, zinc, gold, and other metallic minerals. During its third quarter of 2007, Cody commenced
exploration activities on the Vulture mineral claims. Specifically, Cody conducted a soil
geochemistry program under the guidance of its geological consultant, Mr. Marvin A. Mitchell. The
results of this program were discouraging. In his report, Mr. Mitchell reports that the program
failed to detect significant anomalous values of exploitable minerals. As such, no additional
exploration was recommended at this time. On January 16, 2007, Cody filed a registration statement
with the Securities and Exchange Commission to register the Company’s common stock under the
Securities Exchange Act of 1934, as amended.
Based on the recommendations of its consulting geologist, during its third quarter of 2007,
Cody decided to abandon its exploration program on the Vulture mineral claims. As such, Cody lost
all interest in the option that it acquired on the property. It has been an inactive shell
corporation since such time.
BACKGROUND: CHROMADEX BEFORE THE MERGER
ChromaDex was originally formed as a California corporation on February 19, 2000 under the
name ChromaDex, Inc. On April 23, 2003, ChromaDex acquired the research and development group of
natural product experienced chemists of Napro Biotherapeutics (currently Tapestry Pharmaceuticals)
located in Boulder, Colorado, and placed such assets in a newly-formed, wholly-owned subsidiary of
ChromaDex named ChromaDex Analytics, Inc., a Nevada corporation.
INFORMATION ABOUT CHROMADEX
Company Overview
Our business is now the business conducted by our principal subsidiaries, ChromaDex and
ChromaDex Analytics. ChromaDex supplies phytochemical reference standards and reference materials,
related contract services, and products for the dietary supplement, nutraceutical, food and
beverage, functional food, pharmaceutical and cosmetic markets. For the calendar years ended
December 29, 2007 and December 31, 2006, ChromaDex had revenues of $4,754,073 and $3,517,957,
respectively. Between January and May 21, 2008, ChromaDex raised approximately $3,574,900 in a
private placement and Chromadex is continuing to raise additional capital to reach a total of
$6,000,000 through the offering of shares of common stock and warrants. ChromaDex’s core business
strategy is to use the intellectual property harnessed by its expertise in the area of natural
products and in the creation of reference materials to the industry as the basis for providing new
and alternative, “green”, mass marketable products to its customers. The Company’s strategy is to license its intellectual
property (“IP”) to companies who will commercialize it. The Company anticipates that the net
result will be a long term flow of intellectual property milestone and royalty payments for the
Company.
ChromaDex is a leader in supplying phytochemical standards, reference materials and libraries.
We believe these phytochemicals are the current gold standards for the quality control of natural
products such as dietary supplements, cosmetics, food and beverages, and pharmaceuticals. In
addition, we believe these standards are essential elements for future product development in all
the above areas.
We believe there is a rapidly growing need both at the manufacturing and government regulatory
level for reference standards, analytical methods and other quality assurance methods to insure
that the products distributed to consumers contain not only what is claimed on the label, but are
also safe and effective. This need is driven by the increased awareness at the consumer level of
the lack of adequate quality controls as related to functional food, nutraceutical or dietary
supplement based products. ChromaDex has taken advantage of both the supply chain needs and
regulatory requirements to build its core standards business. The Company believes it is now in a
position to significantly expand its current business and capitalize on additional opportunities in
product development, contract research and the exploitation and commercialization of the
intellectual property that it has acquired from the development of its standards.
The Company’s core product catalog and contract service business effectively becomes a filter
for screening thousands of potential natural product candidates. By using the market information
gathered by the Company’s business model, followed by an investment in research and development,
new natural products-related IP can be brought to the market with a much lower investment cost and
an increased chance of success.
Our Strategy
Our business strategy is to identify, acquire, reduce-to-practice, and commercialize
innovative new natural products and “green chemistry” technologies, with an initial industry focus
on the dietary supplement, cosmetic, food and beverage markets, as well as novel pharmaceuticals.
We plan to utilize our experienced management team to commercialize these natural product
technologies by advancing them through the proper regulatory approval processes, arranging for
reliable and cost-effective manufacturing, and to ultimately either sell or license the product
lines to others.
•
Expansion and growth of the core business: ChromaDex intends to
continue to expand its phytochemical standards offerings, the core of its business.
Currently, the Company has 3,000 defined standards. The Company expects to add 500 to
1,000 new standards each and every year.
•
Expansion of manufacturing capacity: ChromaDex is expanding its pilot
manufacturing capacity to satisfy the growing need for customer clinical studies, new
product development and early stage manufacturing.
•
Expansion into new markets: ChromaDex is developing business in
untapped international markets and new and innovative product offerings, such as
screening compound libraries.
•
Commercialization of intellectual property: Many current ChromaDex
development products should and will spin off unique technologies that are or will be
themselves, independently capable of commercialization and becoming a significant new
revenue source. IP will also be developed from the Company’s expansion into new
markets.
•
Expansion through acquisitions: ChromaDex is a leader in the
phytochemical standards market. Other smaller competitors are having difficulty
expanding their revenue base and are prime candidates for acquisition. We believe this
roll-up strategy could eventually leave ChromaDex as the provider of choice for
phytochemical standards and libraries.
ChromaDex is headquartered in Irvine, California, with its analytical and research laboratory
facility situated in Boulder, Colorado. The Company’s wholly owned subsidiary, ChromaDex Analytics,
Inc. (“ChromaDex Analytics”), based in Boulder, Colorado, operates a modern, well-equipped facility
with 13,000 square feet of laboratory and office space. While ChromaDex performs many of the
contract services and research for our clients, ChromaDex Analytics manufactures our products and
provides all analytical services and a laboratory division of support for ChromaDex.
ChromaDex has invested in excess of $2-million in laboratory equipment along with personnel
possessing over 150 years of combined pharmaceutical and natural products chemistry experience.
Current products and services provided are:
•
Supply of reference standards, materials & kits. ChromaDex, through its
catalog, supplies a wide range of products which are necessary for quality control of
raw materials and consumer products. Reference standard and materials and the kits
created from them are used for research and quality control in dietary supplements,
cosmetics, food and beverages, and the pharmaceuticals industries.
•
Supply of fine chemicals and phytochemicals. As the demand for new natural
products and phytochemicals increases, ChromaDex can scale up and supply our core
products in the gram to kilogram scale as needed by companies who require these
products for research and new product development.
•
Bioluminex™. Bioluminex™ is a bio-analytical method which we developed
pursuant to a worldwide exclusive license agreement with Bayer Ag, to identify the
presence of toxic or harmful compounds in water, dietary ingredients, food products and
food ingredients. In October 2004, ChromaDex received a grant from The United States
Food and Drug Administration (“FDA”) of $525,000 to complete the development of
Bioluminex as a commercially viable test kit. The first phase launch of Bioluminex
which took place in March 2005, was a soft launch after the completion of the FDA
grant. ChromaDex is planning a more aggressive formal market launch for Bioluminex at
the end of 2008, or the beginning of 2009.
•
Contract services. ChromaDex, through ChromaDex Analytics, provides a wide
range of contract services to the industry ranging from routine contract analysis to
elaborate contract research.
•
Consulting services. ChromaDex provides a comprehensive range of consulting
services such as regulatory support, new ingredient or product development, risk
management and litigation support services.
•
Process development. Developing cost effective and efficient processes for
manufacturing natural products can be very difficult and time consuming. ChromaDex can
assist customers in creating processes for cost effectively manufacturing natural
products, using “green chemistry”.
•
Intellectual property. ChromaDex will utilize its expertise in natural
products and “green chemistry” to either license or develop new intellectual property
which will be licensed to the industry.
Products and services in development are:
•
Process scale manufacturing. ChromaDex intends to invest in a pilot plant
facility to have the capability of manufacturing at a process scale.
•
Phytochemical libraries. ChromaDex will continue to invest in the development
of natural product based libraries by both creating these libraries internally as well
as through licensing.
Plant extracts libraries. ChromaDex will create an extensive library of plant
extracts using its already extensive list of botanical reference materials.
•
Databases for cross-referencing phytochemicals. ChromaDex is working on
building a database for cross referencing phytochemicals against an extensive list of
plants, including links to possible references to ethnopharmacological,
enthnobotanical, biological activity, and clinical evidence.
•
Anthocyanidins. Intellectual property based on new licensed technology for
production of Anthocyanidins, which are a class of compounds with many novel uses in
food, cosmetics, dietary supplements, and Pharmaceuticals.
•
Simmondsin. Royalty payments for intellectual property for jojoba extract
(simmondsin) for weight loss.
In 2004, ChromaDex started receiving its first royalty payments for licensed intellectual
property for the naturally-derived compound Sclareolide. Sclareolide, as developed by ChromaDex, is
a novel diterpene isolated from Salvia sclarea (commonly known as clary sage), which was created as
a partnership with Avoca. ChromaDex anticipates launching its second IP licensable product in 2008.
Sales and Marketing Strategy
ChromaDex sales model for its products and services is based on direct inside technical sales.
The Company hires technical sales staff with appropriate scientific background in chemistry,
biology, biochemistry or other related scientific fields. All sales staff currently operate from
ChromaDex headquarters in Irvine, California and perform their sales duties by using combinations
of telemarketing and e-mail. Sales staff are required to perform both sales and customer service
duties. ChromaDex plans to add outside, field sales representatives in the future as needed. All
sales staff are compensated under a uniform basic pay model based on salary and commission.
USA and Canada:
ChromaDex employs the use of an aggressive direct mail marketing strategy in combination with
a range of other marketing activities to promote and sell both products and services.
•
Direct mail marketing (catalogs, brochures and flyers)
ChromaDex intends to use an aggressive direct marketing approach to promote both products and
services to all markets that the Company targets for direct sales.
International:
ChromaDex also uses international distributors to handle several foreign countries or markets.
The use of distributors for international markets has proven to be more effective than direct
sales for some countries.
Currently, ChromaDex has exclusive distribution agreements in place for the following
countries or regions:
ChromaDex also uses non-exclusive distributors for several other countries including:
•
Korea
•
India
•
Japan
•
Australia and New Zealand
•
China
•
Indonesia, Malaysia, Singapore and Thailand
•
Mexico
Non-exclusive distributors who show significant productivity are considered for becoming
exclusive distributors.
Business Opportunity
According to the Natural Marketing Institute, the Dietary Supplement, Functional Food and
Beverage, and Natural Personal Care markets represent approximately $200+-billion in sales
worldwide. The quality control and assurance of some of the products in these markets are, as
noted previously, largely “under regulated,” and represent the basis of ChromaDex’s substantial
growth potential — concentrating on overall content of products, active/marker components,
uniformity of production, and toxicology, as is the case in the pharmaceutical industry. There is
an increasing demand for new products, ingredients and ideas for natural products. The pressure for
new innovative products, which are “natural” or “green” based, cuts across all markets including
food, beverage, cosmetic and pharmaceutical.
While we believe that doctors and patients have become more receptive to the use of
botanical/herbal-based and natural/dietary ingredients to prevent or treat illnesses and improve
quality of life, the medical establishment has conditioned its acceptance on a significantly
improved demonstration of efficacy, safety and quality control comparable to that imposed on
pharmaceuticals. Nevertheless, little is currently known about the constituents, active compounds
and safety of many botanical/herbal and natural ingredients, and few qualified chemists and
technology based companies exist to supply the information and products necessary to meet the
burgeoning market need. Natural products are complex mixtures of many compounds, with significant
variability arising from growing and extraction conditions. Among developments, highlighting the
need for standards and quality assurance/control:
•
The FDA published its draft guidance for Good Manufacturing Practices (“GMPs”)
for dietary supplements on March 13, 2003. The final rule from this guidance was made
effective June 2007, with a 36 month phase-in period for full compliance;
•
The FDA published draft guidance for the approval of “Botanical Drugs” in June
2005;
•
According to the Washington Post, the FDA and the FTC have recently fined four
mass marketers of weight loss supplements a total of $25 million, because they could
not adequately substantiate their respective weight loss claims; and
•
Regulatory agencies around the world have started to review the need for the
regulation of herbal and natural supplements and are considering regulations that will
include testing for the presence
of toxic or adulterating compounds, drug/compound interactions and evidence that the
products are biologically active for their intended use.
The Company’s business model is built around supplying reference standards products and
services to its primary markets. This provides capital and brand positioning to allow ChromaDex
access to its markets in a ‘trusted advisor’ capacity, from where the Company can develop botanical
solutions with increased value to meet client needs.
ChromaDex is also unique in that it creates value throughout the supply chain of
pharmaceutical, dietary supplements, functional foods and personal care markets. It does this
specifically by:
•
Combining the analytical method and characterization of the material with the
technical support for the sale of reference materials;
•
Helping companies to comply with new government regulations and therefore
helping the government to regulate these industries; and
•
Providing value-added solutions to every layer of the supply chain therefore
increasing the overall quality of products being produced.
The Company will use the market information gathered through its core products and services
business to create and license intellectual property.
Government Regulation
Some of our operations are subject to regulation by various U.S. federal agencies and similar
state and international agencies, including the FDA, U.S. Federal Trade Commission, U.S. Department
of Commerce, the U.S. Department of Transportation, the U.S. Department of Agriculture and other
comparable state and international agencies. These regulations govern a wide variety of product
activities, from design and development to labeling, manufacturing, handling, sales and
distribution of products.
FDA Regulation
Our primary products and services, i.e. supplying photochemical standards, reference
materials, and libraries, are not directly subject to regulation by the FDA. However, companies
may use these products and services to comply with FDA regulatory requirements. For example, the
FDA’s final rule on Good Manufacturing Practices (GMPs) for dietary supplements was published in
June 2007, and outlines a timeline of one to three years for companies to become fully compliant,
depending on the size of the company. ChromaDex is in key position to benefit from the
implementation and enforcement of GMPs by the FDA which, in part, require companies to evaluate
products for identity, strength, purity and composition. ChromaDex provides tools necessary for
dietary supplement companies to comply with GMPs. ChromaDex also offers an extensive range of
contract services and consulting to assist companies with their compliance needs.
Our strategy to commercialize innovative new natural products may be subject to extensive FDA
regulation. Depending on the category of product, i.e., dietary supplement, cosmetic, food, or
pharmaceutical, the FDA, under the Food, Drug and Cosmetic Act (“FDCA”), can regulate:
The FDCA has been amended several times with respect to dietary supplements, in particular by
the Dietary Supplement Health and Education Act of 1994, known as DSHEA. DSHEA established a new
framework 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, a “new” dietary ingredient (a dietary
ingredient that was not marketed in the United States before October 15, 1994) must be the subject
of a new dietary ingredient (“NDI”) notification submitted to the FDA unless the ingredient has
been “present in the food supply as an article used for food” without being “chemically altered.” A
new dietary ingredient notification must provide the FDA evidence of a “history of use or other
evidence of safety” establishing that use of the dietary ingredient “will reasonably be expected to
be safe.” A new dietary ingredient notification must be submitted to the FDA at least 75 days
before the initial marketing of the new dietary ingredient. There can be no assurance that the FDA
will accept the evidence of safety for any new dietary ingredients 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 to clarify
the FDA’s interpretation of the new dietary ingredient notification requirements, and this guidance
may raise new and significant regulatory barriers for new dietary ingredients.
In order for any new ingredient developed by ChromaDex to be used in conventional food or
beverage products in the United States (“US”), it would either have to 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 outcome could prevent the marketing of
such ingredient.
We do not expect to be bearing the costs associated with NDI Notifications, FAPs, or GRAS
filings with the FDA, as we will generally be licensing any technology to partner companies who
have an interest in the product market segment before such filings would be necessary.
Advertising Regulation
In addition, the Federal Trade Commission (“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 also 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.
International
International sales of dietary ingredients 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. In addition, the export by us of certain of our products that have not yet been cleared or
approved for domestic distribution may be subject to FDA export restrictions. There can be no
assurance that we will receive on a timely basis, if at all, any foreign government or United
States export approvals necessary for the marketing of its products abroad.
The primary regulatory environment in Europe is that of the European Union, which consists of
twenty-seven countries, encompassing most of the major countries in Europe. Other countries, such
as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European
Union with respect to dietary ingredients.
Competitive Business Conditions
We believe that there are very few competitors within the standardization and quality testing
niche of the natural products market. Below is a current list of some competitors. Competitors
listed already have reference standards developed or are currently taking steps to develop
botanical standards. Of the competitors listed, some either currently sell fine chemicals, which by
default are sometimes being used as reference standards, or are closely aligned with our market
niche so as to reduce any barriers to entry if these companies wished to compete.
Competitors — Chemical
•
Sigma-Aldrich(SIAL) (USA)
•
Phytolab (Germany)
•
US Pharmacopoeia(USP) (USA)
•
Extrasynthese (France)
Competitors — Services
•
Covance
•
Eurofins
•
INB-Hauser
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts,
Including Duration
ChromaDex currently protects its IP through patents, trademarks, designs and copyrights on its
products and services. The Company currently has existing patents for products such as Bioluminex
and Jojoba extract (simmondsin) that require additional capital for product development and
marketing.
ChromaDex’s core business strategy is to use the intellectual property harnessed in the supply
of reference materials to the industry as the basis for providing new and alternative mass
marketable products to its customers. The Company’s strategy is to license its intellectual
property to companies who will commercialize it. The net result will be a long term flow of IP
milestone and royalty payments for the Company.
ChromaDex has created a mechanism for harnessing ideas and turning them into finished
products. For example, ChromaDex spent one to two years researching the viability of its Jojoba
concept, but lacked the ability to finalize the development and necessary patent protection. After
much scrutiny, ChromaDex selected Avoca, a subsidiary of RJ Reynolds Tobacco, as the appropriate
partner for completion of this project. Avoca finalized the manufacturing process for the Jojoba
extract and then the Company and Avoca jointly filed a patent to protect the intellectual property
created by this joint venture. RJ Reynolds was a compatible partner for not only its manufacturing
ability but also for its outstanding ability to defend the parties’ joint intellectual property and
patent.
The following table sets forth ChromaDex’s existing patents and those to which we have
licensed rights.
Filing
Issued
Patent Number
Title
Date
Date
Expires
Licensor
US 6,238,928
Analytical process for testing
09/02/93
05/21/01
05/25/18
Licensed from Bayer
mixtures for toxic
constituents
Aktiengesell-schaft
6,673,563
Luminous bacteria and methods for
9/18/2001
1/6/2004
01/09/21
Licensed from L & J
the isolation,
identification and
quantification of
toxicants
Becvar, LP (1)
6,340,572
Kit for the
isolation, identification
9/3/1999
1/22/2002
01/26/19
Licensed from L & J
and
quantification of
toxicants
Becvar, LP (1)
6,017,722
Luminous bacteria and methods for
4/4/1991
1/25/2000
01/28/17
Licensed from L & J
the isolation,
identification and
quantification of
toxicants
Becvar, LP (1)
6,852,342
Compounds for altering food
3/26/2002
2/8/2005
02/12/22
Co-owned by Avoca,
intake in humans
Inc. and ChromaDex
Manufacturing
In April 2003, ChromaDex acquired the ChromaDex Analytics group in Boulder, Colorado with
laboratory operations and a manufacturing facility. We currently maintain our own manufacturing
equipment and have the ability to manufacture our products in limited quantities, from milligrams
to kilograms. For more information on ChromaDex Analytics, see “Information about ChromaDex —
Products and Services” under Section 2.01 of this Current Report on Form 8-K. We intend to
contract the manufacturing of the products that are developed and enter into strategic
relationships or license agreements for sales and marketing of products that we develop when
quantities required exceed our capacity at our Boulder facility.
We intend to hire manufacturing companies that meet the standards imposed by the FDA, the
International Organization for Standardization (ISO), and the quality standards we will require
through our own internal policies and procedures. We expect to monitor and manage supplier
performance through a corrective action program. We believe these manufacturing relationships can
minimize our capital investment, help control costs, and allow us to compete with larger volume
manufacturers of phytochemicals and ingredients.
Following the receipt of products or product components from our third-party manufacturers, we
currently contemplate inspecting, packaging and labeling, as needed, at our facility. We expect to
reserve the right to inspect and assure conformance of each product and product component to our
specifications. We will also consider manufacturing certain products or product components
internally, if we have the capacity and when demand or quality requirements make it appropriate to
do so.
Sources and Availability of Raw Materials and The Names of Principal Suppliers
We have identified reliable sources and suppliers of chemicals, phytochemicals and reference
materials, which we believe will provide products in compliance with ChromaDex guidelines.
Research and Development
Our research and development efforts are initially focused on developing products and services
focused on our core product and service offerings. Our own laboratory group has extensive
experience in developing products related to our field of interest, and works closely with our sales and marketing group to
design products and services that are intended to improve revenue. To support development, we also
have a number of contracts with outside labs who aid us in our research and development process.
(1)
Improvements to information or discoveries covered by these
patents are licensed from the Board of Regents of the University of Texas
System until the full end of the term for which patent rights expire subject to
the terms of the Patent License Agreement included as Exhibit 12.12 to this
current report on Form 8-K.
We will incur significant expense in complying with good manufacturing practices and safe
handling and disposal of materials used in our research and manufacturing activities. We do not
anticipate incurring material additional expense in order to comply with Federal, state and local
environmental laws and regulations.
Facilities
See “Description of Property” below in this Item 2.01 of this Current Report on Form 8-K.
Employees
As of May 1, 2008, ChromaDex (including ChromaDex Analytics) had 39 employees, of whom 34 were
full-time and 5 were part-time employees. We consider our relationships with our employees to be
satisfactory. None of our employees is covered by a collective bargaining agreement.
Legal Proceedings
We are not involved in any legal proceedings which management believes may have a material
adverse effect on our business, financial condition, operations, cash flows, or prospects.
Recent Developments
On June 18, 2008, we repurchased 1,222,795 shares of our outstanding common stock from Bayer
Innovation GmbH (formerly Bayer Innovation Beteiligungsgescellschaft mbH), for an aggregate
purchase price of $1,002,691.90 pursuant to a Share Redemption Agreement. We funded the repurchase
by issuing a non-interest bearing promissory note for such amount, and the note is due on or before
December 20, 2008. If the principal amount of the promissory note, or any part thereof, is not
paid in full when due, the we must pay interest on the overdue principal amount at the rate of one
and one half percent (1 1/2%) per month beginning January 1, 2009. The Share Redemption Agreement
and the promissory note are included as Exhibits 10.13 and 10.14 respectively, to this Current
Report on Form 8-K.
RISK FACTORS
Investing in Cody Common Stock involves a high degree of risk. Owners and potential investors
should consider carefully the risks and uncertainties described below together with all other
information contained in this Current Report on Form 8-K before making investment decisions with
respect to our Common Stock. If any of the following risks actually occur, our business, financial
condition, results of operations and 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.
Risks Related to Our Business and Industry
We will need additional financing to meet our future capital requirements.
We will require significant additional funds, either through additional equity or debt
financings or collaborative agreements or from other sources to engage in research and development
activities with respect to our potential new product candidates and to establish the personnel
necessary to successfully implement our business strategy. We have no commitments to obtain such
financing, and we may not be able to obtain any such financing on terms favorable to us, or at all.
In the event we are unable to obtain additional financing, we may be unable to implement our
business plan.
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. Although we have taken steps 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, such agreements may not
be enforceable or may not provide meaningful protection for our trade secrets or other proprietary
information in the event of unauthorized use or disclosure or other breaches of the agreements.
Furthermore, the laws of foreign countries may not protect our intellectual property rights to the
same extent as do the laws of the United States.
In the event a competitor infringes upon our licensed or pending patent or other intellectual
property rights, enforcing those rights may be costly, uncertain, difficult and time consuming.
Even if successful, litigation to enforce our intellectual property rights or to defend our patents
against challenge could be expensive and time consuming and could divert our management’s
attention. We may not have sufficient resources to enforce our intellectual property rights or to
defend our patents rights against a challenge. The failure to obtain patents and/or protect our
intellectual property rights could have a material and adverse effect on our business, results of
operations, and financial condition.
We may become subject to claims of infringement or misappropriation of the intellectual
property rights of others, which could prohibit us from developing our products, require us
to obtain licenses from third parties or to develop non-infringing alternatives, and subject
us to substantial monetary damages.
Third parties could, in the future, assert infringement or misappropriation claims against us
with respect to products we develop. Whether a product infringes a patent or misappropriates other
intellectual property involves complex legal and factual issues, the determination of which is
often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual
property rights of others. Our potential competitors may assert that some aspect of our product
infringes their patents. Because patent applications may take years to issue, there also may be
applications now pending of which we are unaware that may later result in issued patents upon which
our products could infringe. There also may be existing patents or pending patent applications of
which we are unaware upon which our products may inadvertently infringe.
Any infringement or misappropriation claim could cause us to incur significant costs, place
significant strain on our financial resources, divert management’s attention from our business and
harm our reputation. If the relevant patents in such claim were upheld as valid and enforceable
and we were found to infringe, we could be prohibited from selling any product that is found to
infringe unless we could obtain licenses to use the technology covered by the patent or are able to
design around the patent. We may be unable to obtain such a license on terms acceptable to us, if
at all, and we may not be able to redesign our products to avoid infringement. A court could also
order us to pay compensatory damages for such infringement, plus prejudgment interest and could, in
addition, treble the compensatory damages and award attorney fees. These damages could be
substantial and could harm our reputation, business, financial condition and operating results. A
court also could enter orders that temporarily, preliminarily or permanently enjoin us and our
customers from making, using, or selling products, and could enter an order mandating that we
undertake certain remedial activities. Depending on the nature of the relief ordered by the court,
we could become liable for additional damages to third parties.
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.
The prosecution and enforcement of patents licensed to us by third parties are not within
our control, and without these technologies, our product may not be successful and our
business would be harmed if the patents were infringed or misappropriated without action by
such third parties.
We have obtained licenses from third parties for patents and patent application rights related
to the products we are developing, allowing us to use intellectual property rights owned by or
licensed to these third parties. We do not control the maintenance, prosecution, enforcement or
strategy for many of these patents or patent application rights and as such are dependent in part
on the owners of the intellectual property rights to maintain their viability. Without access to
these technologies or suitable design-around or alternative technology options, our ability to
conduct our business could be impaired significantly.
We may be subject to damages resulting from claims that we, our employees, or our
independent contractors have wrongfully used or disclosed alleged trade secrets of others.
Some of our employees were previously employed at other dietary supplement, nutraceutical,
food and beverage, functional food, analytical laboratories, pharmaceutical and cosmetic companies.
We may also hire additional employees who are currently employed at other dietary supplement,
nutraceutical, food and beverage, functional food, analytical laboratories, pharmaceutical and
cosmetic 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. Although no claims against us are currently pending, we may be subject to
claims that these employees or independent contractors have used or disclosed any 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 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, or competitors or others could be very costly and substantially disrupt
our business. Disputes from time to time with such companies, organizations or individuals are not
uncommon, and we cannot assure you that we will always be able to resolve such disputes or on terms
favorable to us. Unexpected results could cause us to have financial exposure in these matters in
excess of recorded reserves and insurance coverage, requiring us to provide additional reserves to
address these liabilities, therefore impacting profits.
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 and possibly profits. Failure to anticipate and respond to price
competition may also impact sales and profits.
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, distribution, 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 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 which consumers may find attractive.
We depend on key personnel.
We depend greatly on Frank L. Jaksch, Jr. and Thomas C. Varvaro, who are our Chief Executive
Officer and Chief Financial Officer, respectively. We also depend greatly on other key employees,
including key scientific personnel. In general, only highly qualified and trained scientists have
the necessary skills to develop and market our products and provide our services. In addition,
some of our manufacturing, quality control, safety and compliance, information technology, sales,
and e-commerce related positions are highly technical as well. Also, 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
that may be hired in the future may have a material and adverse effect on our business.
Partnering 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 the Company be certain that its 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.
Our operating results may fluctuate significantly as a result of a variety of factors, many
of which are outside of our control.
We are subject to the following factors, among others, that may negatively affect our
operating results:
•
the announcement or introduction of new products by our competitors;
•
our ability to upgrade and develop our systems and infrastructure to
accommodate growth;
•
our ability to attract and retain key personnel in a timely and cost effective
manner;
the amount and timing of operating costs and capital expenditures relating to
the expansion of our business, operations and infrastructure;
•
regulation by federal, state or local governments; and
•
general economic conditions as well as economic conditions specific to the
healthcare industry.
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 forecast accurately. 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,
the Company 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 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 it can provide us with any revenue. Despite our efforts, these products may not
become commercially successful products for a number of reasons, including:
•
we may not be able to obtain regulatory approvals for our products, or the
approved indication may be narrower than we seek;
•
our products may not prove to be safe and effective in clinical trials;
•
we may experience delays in our development program;
•
any products that are approved may not be accepted in the marketplace;
•
we may not have adequate financial or other resources to complete the
development or to commence the commercialization of our products and will not have
adequate financial or other resources to achieve significant commercialization of our
products;
•
we may not be able to manufacture any of our products in commercial quantities
or at an acceptable cost;
•
rapid technological change may make our products obsolete;
•
we may be unable to effectively protect our intellectual property rights or we
may become subject to a claim that our activities have infringed the intellectual
property rights of others; and
•
we may be unable to obtain or defend patent rights for our products.
We face the risk of product liability claims or recalls and may not be able to obtain or
maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the
testing, manufacturing and marketing of phytochemical products. We may be subject to such claims
if our products cause, or appear to have caused, an injury. Defending a lawsuit, regardless of
merit, could be costly, divert management attention and result in adverse publicity, which could
result in the withdrawal of, or reduced acceptance of, our product in the market.
Although we have product liability insurance that we believe is adequate, this insurance is
subject to deductibles and coverage limitations and we may not be able to maintain this insurance.
If we are unable to maintain product liability insurance at an acceptable cost or on acceptable
terms with adequate coverage or otherwise protect ourselves against potential product liability
claims, we could be exposed to significant liabilities, which may harm our business. A product
liability claim or other claim with respect to uninsured liabilities or for amounts in excess of
insured liabilities could result in significant costs and significant harm to our business.
If we are unable to establish or maintain sales, marketing and distribution capabilities or
enter into and 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 rights to our product lines at
favorable prices, develop a sales and marketing force, or enter into arrangements with others to
market and sell our products. In addition to being expensive, developing and maintaining such a
sales force is time consuming, and could delay or limit the success of any product launch. We may
not be able to develop this capacity on a timely basis or at all. Qualified direct sales personnel
with experience in the phytochemical industry are in high demand, and there is 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. We have no assurance that we will be able to enter into contracts with
representatives on terms acceptable to us. Furthermore, there is 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.
We rely on a limited number of third-party suppliers for the raw materials required for the
production of our products. Furthermore, in some cases we rely on a single supplier.
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 rely on a limited number of third-party manufacturers to manufacture our products.
Manufacturers often experience difficulties in scaling-up production, including problems with
production yields and quality control and assurance. If our third-party manufacturers are unable
to manufacture our products to keep up with demand, we will not meet expectations for growth of our
business.
Our sales and results of operations depend on our customers’ research and development
efforts and their ability to obtain funding for these efforts.
Our customers include researchers at pharmaceutical and biotechnology companies, chemical and
related companies, academic institutions, government laboratories and private foundations.
Fluctuations in the research and development budgets of these researchers and their organizations
could have a significant effect on the demand for our products. Our customers determine their
research and development budgets based on several factors, including the need to develop new
products, the availability of governmental and other funding, competition and the general
availability of resources. As we continue to expand our international operations, we expect
research and development spending levels in markets outside of the U.S. 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 seriously 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 have been to researchers whose
funding is dependent on grants from government agencies such as the U.S. 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 programs, such as Homeland Security or defense, or general
efforts to reduce the U.S. federal budget deficit could be viewed by the government as a higher
priority. Any shift away from funding of life science and high technology research and development
or delays surrounding the approval of governmental budget proposals may cause our customers to
delay or forego purchases of our products and services, which could seriously damage our business.
Some of our customers receive funds from approved grants at a particular time of year, many
times set by government budget cycles. In the past, such grants have been frozen for extended
periods or have otherwise become unavailable to various institutions without advance notice. The
timing of the receipt of grant funds may affect the timing of purchase decisions by our customers
and, as a result, cause fluctuations in our sales and operating results.
Demand for our products and services are subject to the commercial success of our customers’
products, which may vary for reasons outside our control.
Even if we are successful in securing utilization of our products in a customer’s
manufacturing process, sales of many of our products and services remain dependent on the timing
and volume of the customer’s production, over which we have no control. The demand for our
products depends on regulatory approvals and frequently depends on the commercial success of the
customer’s supported product. Regulatory processes are complex, lengthy, expensive, and can often
take years to complete.
We may bear financial risk if we under-price our contracts or overrun cost estimates.
In cases where our contracts are structured as fixed price or fee-for-service with a cap, we
bear the financial risk if we initially under-price our contracts or otherwise overrun our cost
estimates. Such under-pricing or significant cost overruns could have a material adverse effect on
our business, results of operations, financial condition, and cash flows.
We will need to increase the size of our organization, and we may be unable to manage rapid
growth effectively.
Our failure to manage growth effectively could have a material and adverse effect on our
business, results of operations and financial condition. We anticipate that a period of
significant expansion will be required to address possible acquisitions of business, products, or
rights, and potential internal growth to handle licensing and research activities. This expansion
will place a significant strain on management, operational and financial resources. To manage the
expected growth of our operations and personnel, we must both improve our existing operational and
financial systems, procedures and controls and implement new systems, procedures and controls. We
must also expand our finance, administrative, and operations staff. Our current personnel,
systems, procedures and controls may not adequately support future operations. Management may be
unable to hire, train, retain, motivate and manage necessary personnel or to identify, manage and
exploit existing and potential strategic relationships and market opportunities.
Our future capital needs are uncertain and we may need to raise additional funds in the
future and such funds may not be available on acceptable terms or at all.
We believe that our current cash and cash equivalents will be sufficient to meet our projected
operating requirements for at least the next ten months. However, obtaining the required
regulatory approvals and clearances and the planned expansion of our business will be expensive and
we will in the future seek funds from public and private stock or debt offerings, borrowings under
lines of credit or other sources. Our capital requirements will depend on many factors, including:
•
the revenues generated by sales of our products, if any;
•
the costs associated with expanding our sales and marketing efforts, including
efforts to hire independent agents and sales representatives;
•
the expenses we incur in developing and commercializing our products, including
the cost of obtaining and maintaining regulatory approvals; and
•
unanticipated general and administrative expenses.
As a result of these factors, we may seek to raise additional funds and such funds may not be
available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to
raise additional funds, our existing shareholders may experience dilution and the new equity or
debt securities we issue may have rights, preferences and privileges senior to those of our
existing shareholders. 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.
Acquisitions.
We plan to acquire other entities in the future and these acquisitions are material to our
business, plans and projections. We may be unable to consummate these acquisitions on favorable
terms or at all. Even if we consummate one or more of these acquisitions, the integration of large
numbers of new employees, technology and businesses will subject us to numerous risks.
If we fail to maintain adequate quality standards for our products and services, our
business may be adversely affected and our reputation harmed.
Dietary supplement, nutraceutical, food and beverage, functional food, analytical
laboratories, pharmaceutical and cosmetic customers are often subject to rigorous quality standards
to obtain and maintain regulatory approval of their products and the manufacturing processes that
generate them. A failure to maintain, or, in some instances, upgrade our quality standards to meet
our customers’ needs, could cause damage to our reputation and potentially substantial sales
losses.
We heavily rely on third party air cargo carriers and other package delivery services, and a
significant disruption in these services or significant increases in prices may disrupt our
ability to ship products or import materials, increase our costs and lower our profitability
and harm our reputation.
We emphasize our prompt service and shipment of products as a key element of our sales and
marketing strategy. We ship a significant number of products to our customers through independent
package delivery companies. In addition, we transport materials between our worldwide facilities
and import raw materials from worldwide sources. Consequently, we heavily rely on air cargo
carriers and other third party package delivery providers. If any of our key third party providers
were to experience a significant disruption such that any of our products, components or raw
materials could not be delivered in a timely fashion or we would incur additional costs that we
could not pass on to our customers, our costs may increase and our relationships with certain
customers may be adversely affected. In addition, if these third party providers increase prices,
and we are not able to find comparable alternatives or make adjustments to our selling prices, our
profitability could be adversely affected.
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 to 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 business.
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, the distribution of our products and environmental matters.
Some of our operations are subject to regulation by various U.S. federal agencies and similar
state and international agencies, including the U.S. Department of Commerce, the FDA, the U.S.
Department of Transportation, the U.S. Department of Agriculture and other comparable state and
international agencies. 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 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.
We are subject to regulations that govern the handling of hazardous substances.
We are subject to various federal, states, 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 is extensive and is constantly changing.
The process by which our customer’s 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 negative
impact on our customers and, in turn, our business.
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
these 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.
Risks Related to the Securities Markets and Ownership of Cody Common Stock
The concentrated common stock ownership by certain of our executive officers and directors
will limit your ability to influence corporate matters.
The directors and executive officers of Cody together beneficially own approximately 28.59% of
Cody outstanding capital stock after the Merger. This group has significant influence over our
management and affairs and overall matters requiring shareholder approval, including the election
of directors and significant corporate transactions, such as a merger or sale of our company or our
assets, for the foreseeable future. This concentrated control will limit the ability of other
shareholders to influence corporate matters and, as a result, Cody may take actions that some of
its shareholders do not view as beneficial. In addition, such concentrated control could
discourage others from initiating changes of control. As a result, the market price of Cody shares
could be adversely affected.
Since Cody Common Stock was only minimally publicly traded before the Merger, and will
likely remain so for some time, the price may be subject to wide fluctuations.
Before the Merger, there was a minimal public market for Cody Common Stock. The market price
of Cody Common Stock after the Merger is likely to be highly volatile and subject to wide
fluctuations in response to the following factors, which are generally beyond the control of Cody.
These factors may include:
•
the ability to develop, obtain regulatory approvals for and market products on
a timely basis;
•
volume, price and timing of orders for products, if Cody is able to sell them;
•
the introduction of new products or products enhancements by competitors;
•
disputes or other developments with respect to intellectual property rights;
•
products liability claims or other litigation;
•
quarterly variations in Cody’s results of operations and those of competitors;
sales of large blocks of Cody Common Stock, including sales by its executive
officers and directors;
•
changes in governmental regulations or in the status of regulatory approvals,
clearances or applications;
•
changes in the availability of third party reimbursement in the United States
or other countries;
•
changes in earnings estimates or recommendations by securities analysts; and
•
general market conditions and other factors, including factors unrelated to our
operating performance or the operating performance of competitors.
Cody Common Stock is and likely will remain subject to the SEC’s “Penny Stock” rules, which
may make its shares more difficult to sell.
Because the price of Cody Common Stock is currently and is likely to remain less than $5.00
per share, it is expected to be classified as a “penny stock.” The SEC rules regarding penny
stocks may have the effect of reducing trading activity in Cody shares, making it more difficult
for investors to sell. Under these rules, broker-dealers who recommend such securities to persons
other than institutional accredited investors must:
•
make a special written suitability determination for the purchaser;
•
receive the purchaser’s written agreement to a transaction prior to sale;
•
provide the purchaser with risk disclosure documents which identify certain
risks associated with investing in “penny stocks” and which describe the market for
these “penny stocks” as well as a purchaser’s legal remedies;
•
obtain a signed and dated acknowledgment from the purchaser demonstrating that
the purchaser has received the required risk disclosure document before a transaction
in a “penny stock” can be completed; and
•
give bid and offer quotations and broker and salesperson compensation
information to the customer orally or in writing before or with the confirmation.
These rules make it more difficult for broker-dealers to effectuate customer transactions and
trading activity in our securities and may result in a lower trading volume of our common stock and
lower trading prices.
Cody Common Stock may be thinly traded.
There is a very minimal public market for Cody Common Stock. Cody cannot be certain that more
of a public market for its Common Stock will develop, or if developed, will be sustained.
Following the Merger, only 4,500,012 shares of approximately 28,022,134 outstanding shares will be
able to be publicly traded for up to one year after the Merger. Accordingly, Cody Common Stock will
likely be thinly traded compared to larger more widely known companies that lack such restrictions.
Cody cannot predict the extent to which an active public market for its Common Stock will develop
or be sustained at any time in the future. If Cody is unable to develop or sustain a market for
its Common Stock, investors may be unable to sell the Common Stock they own, and may lose the
entire value of their investment.
Securities analysts may elect not to report on the Cody Common Stock or may issue negative
reports that adversely affect the stock price.
At this time, no securities analysts provide research coverage of the Cody Common Stock, and
securities analysts may not elect not to provide such coverage in the future. It may remain
difficult for a company such as Cody, with a small market capitalization, to attract independent financial analysts that will
cover the Cody Common Stock. If securities analysts do not cover the Cody Common Stock, the lack
of research coverage may adversely affect its actual and potential market price. The trading
market for the Cody Common Stock may be affected in part by the research and reports that industry
or financial analysts publish about its business. If one or more analysts elect to cover Cody and
then downgrade the stock, the stock price would likely decline rapidly. If one or more of these
analysts cease coverage of Cody, Cody could lose visibility in the market, which in turn could
cause its stock price to decline. This could have a negative effect on the market price of Cody
shares.
When a significant number of shares will become eligible for future sale by Cody
shareholders the sale of those shares could adversely affect the stock price.
Prior to the Merger, up to 4,500,012 shares of Cody’s then-outstanding Common Stock could be
sold without restriction under the Securities Act of 1933, as amended (the “Securities Act”), and
approximately 11,538,461 outstanding shares of Cody Common Stock were not eligible for resale under
the Securities Act without restriction. Immediately following the issuance of 23,522,122 shares of
Cody Common Stock, or approximately 83.94% of the outstanding shares of the Cody Common Stock
pursuant to the terms of the Merger Agreement, such shares will be restricted from sale until
approximately one year after the Merger pursuant to Rule 144 of the Securities Act as detailed in
“Shares Eligible for Future Sale.” Most of the outstanding shares which are not currently eligible
for resale, as well as those issued in the Merger, will become eligible for resale over a time
period beginning one year after Cody files this Current Report on Form 8-K.
If the Cody shareholders whose shares are either registered for resale or become eligible for
resale as described do sell, or indicate an intention to sell, substantial amounts of Cody Common
Stock in the public market after the legal restrictions on resale discussed in this filing lapse,
the trading price of Cody Common Stock could decline.
Cody will incur increased costs as a result of the Merger and as a result of being a public
company.
Cody’s new management team will now be responsible for its operations and reporting. Because
Cody is a public company, and because operations of the Company will be significantly more complex
after the Merger, the new management team will require outside assistance from legal, accounting,
investor relations, or other professionals that could be more costly than planned. Cody may also
be required to incur additional costs to comply with additional SEC reporting requirements and
compliance under the Sarbanes-Oxley Act of 2002. For example, Section 404 of the Sarbanes-Oxley
Act of 2002 requires management to report on internal controls, and for the year ending 2008, our
independent registered public accounting firm will be required to attest to the effectiveness of
its internal control over financial reporting. Cody must establish an ongoing program to perform
the system and process evaluation and testing necessary to comply with these requirements as they
apply to its post-Merger business. This program will require that Cody incur significant expenses
and to devote resources to Section 404 compliance on an ongoing basis. Cody’s failure to comply
with reporting requirements and other provisions of securities laws could negatively affect its
stock price and adversely affect its results of operations, cash flow and financial condition.
In addition, these rules could make it more difficult or more costly to obtain certain types
of insurance, including directors’ and officers’ liability insurance and Cody may be forced to
accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or
similar coverage. The impact of these events could also make it more difficult to attract and
retain qualified persons to serve on the Board of Directors, on Board committees or as executive
officers.
Operating as a small public company also requires Cody to make forward-looking statements
about future operating results and to provide some guidance to the public markets. The new
management has limited experience as a management team in a public company and as a result
projections may not be made timely or set at expected performance levels and could materially
affect the price of Cody shares. Any failure to meet published forward-looking statements that
adversely affect the stock price could result in losses to investors, shareholder lawsuits or other
litigation, sanctions or restrictions issued by the SEC or the stock market upon which Cody stock
is traded.
Cody has never declared or paid cash dividends on its capital stock. It currently expects to
use available funds and any future earnings in the development, operation and expansion of its
business and does not anticipate paying any cash dividends in the foreseeable future. In addition,
the terms of any future debt or credit facility Cody may obtain may preclude it from paying any
dividends. As a result, capital appreciation, if any, of Cody Common Stock will be an investor’s
only source of potential gain from Cody Common Stock for the foreseeable future.
Shareholders 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 equity securities,
shareholders could experience significant dilution. In addition, securities issued in connection
with future financing activities or potential acquisitions may have rights and preferences senior
to the rights and preferences of Cody Common Stock. The issuance of shares of Cody Common Stock
upon the exercise of options may result in dilution to our shareholders.
We cannot be certain that Cody’s internal control over financial reporting will be effective
or sufficient in the future.
Cody’s ability to manage its operations and growth requires it to maintain effective
operations, compliance and management controls, as well as internal control over financial
reporting. After the Merger, management may not be able to implement necessary improvements to
internal control over financial reporting in an efficient and timely manner and may discover
deficiencies and weaknesses in existing systems and controls, especially when such systems and
controls are tested by an increased rate of growth or the impact of acquisitions. In addition,
upgrades or enhancements to computer systems could cause internal control weaknesses.
It may be difficult to design and implement effective internal control over financial
reporting for combined operations as Cody integrates ChromaDex, and perhaps other acquired
businesses in the future. In addition, differences in existing controls of acquired businesses may
result in weaknesses that require remediation when internal controls over financial reporting are
combined.
If Cody fails to maintain an effective system of internal control or if management or Cody’s
independent registered public accounting firm were to discover material weaknesses in internal
control systems Cody may be unable to produce reliable financial reports or prevent fraud. If Cody
is unable to assert that its internal control over financial reporting is effective at any time in
the future, or if its independent registered public accounting firm is unable to attest to the
effectiveness of internal controls, is unable to deliver a report at all or can deliver only a
qualified report, Cody could be subject to regulatory enforcement and investors may lose confidence
in its ability to operate in compliance with existing internal control rules and regulations,
either of which could result in a decline in Cody’s share price.
Cody may become involved in securities class action litigation that could divert
management’s attention and harm its business.
The stock market in general and the stocks of early stage technology 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 Cody’s shares could fall regardless of its
operating performance. In the past, following periods of volatility in the market price of a
particular company’s securities, securities class action litigation has been brought against that
company. If the market price or volume of Cody’s shares suffers extreme fluctuations, then it may
become involved in this type of litigation which would be expensive and divert management’s
attention and resources from managing the business.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION: CODY
Prior to the Merger, Cody was a “shell company” which had no or nominal operations and assets
consisting of cash, cash equivalents, and nominal other assets. Cody hereby incorporates herein by
reference Item 6 — Management’s Discussion and Analysis of Plan of Operation from its 10-KSB for
the fiscal year ended November 30, 2007.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION: CHROMADEX
You should read the following discussion and analysis of financial condition and results of
operations of ChromaDex, which now represent our ongoing business operations, together with the
financial statements and the related notes appearing at the end of this report. Some of the
information contained in this discussion and analysis or set forth elsewhere in this report,
including information with respect to our plans and related financing, includes forward-looking
statements that involve risks and uncertainties. You should read the “Risk Factors” section of
this report for a discussion of important factors that could cause actual results to differ
materially from the results described in or implied by the forward-looking statements contained in
the following discussion and analysis.
The discussion and analysis of our financial conditions 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.
The following discussion and analysis excludes the impact of Cody’s financial condition and
results of operations prior to the Merger because they were not material for any of the periods
presented.
ChromaDex has generated Net Sales of $4,754,073 for the fiscal year ending December 29, 2007
and $3,517,957 for the fiscal year ending December 31, 2006. ChromaDex incurred a net loss of
$189,275 for the fiscal year ending December 29, 2007 and a net loss of $1,284,260 for the fiscal
year ending December 31, 2006.
Over the next twelve months our business plan calls for us to expand our service capacity and
implement accreditation and certification programs related to quality initiatives. In addition, we
plan on expanding our chemical library program and establishing a Good Manufacturing Practices
(“GMP”) compliant pilot plant to support small to medium scale production of target compounds.
For the three months ending March 29, 2008, ChromaDex’s net sales decreased as compared to the
first three months of 2007, as a result of reduced demand for analytical services. In addition,
the consolidation of our laboratory facilities into our Boulder location reduced our direct costs
and corresponding overhead associated with our services business.
Net sales consist of Reference Standards and Contract Service sales. Net sales for the
three-month period ended March 29, 2008 were $1,059,716, a 12% decrease as compared to net sales of
$1,206,893 for the corresponding period in 2007. This decrease was caused by a reduced demand for
regular testing services and reduced foreign demand for reference standards.
Cost of Goods Sold
Costs of goods sold include Raw Materials, Labor, and Overhead. Cost of goods sold for the
three-month period ended March 29, 2008 was $660,612, a 1% decrease as compared to cost of goods
sold of $664,286 for the corresponding period in 2007. The percentage decrease in cost of goods
sold is smaller as compared to that of net sales because fixed labor and overhead costs make up the
majority of our expenses, and direct and indirect labor and overhead costs remained fixed as
compared to 2007.
Gross Profit
Gross profit is net revenues less the cost of sales and is affected by a number of factors
including product mix, competitive pricing and costs of products and services. Our gross profit
decreased 26% to $399,444 for the three-month period ended March 29, 2008 from $542,607 for the
corresponding period in 2007. The combination of decreased sales, and our fixed labor and
corresponding overhead costs all contributed to this decrease.
Operating Expenses-Sales and Marketing
Sales and Marketing Expenses consist of salaries, commissions to employees and advertising and
marketing. Sales and marketing expenses for the three-month period ended March 29, 2008 were
$171,984 as compared to $100,556 for the corresponding period in 2007. This increase was
primarily due to the delivery of our annual catalog and other direct mail expenses.
Operating Expenses-General and Administrative
General and Administrative Expenses consist of research and development, general company
administration, IT, accounting and executive management. General and Administrative Expenses for
the three-month period ended March 29, 2008 were $342,738 as compared to $319,324 for the
corresponding period in 2007. This increase was primarily the result of increased legal and
accounting costs related to the Private Placement and the Merger transaction.
Interest expense consists of interest on capital leases. Interest expenses for the
three-month period ended March 29, 2008 was $7,616 as compared to $9,633 for the corresponding
period in 2007. This large decrease was due to the expiration of certain capital equipment leases.
Non-operating Expenses- Interest Income
Interest Income consists of interest earned on short term investment and notes receivable.
Interest income for the three-month period ended March 29, 2008 was $404 as compared to $622 for
the corresponding period in 2007. This decrease was because of the paydown of a fully reserved
customer note receivable.
Non-operating Expenses- Other Income/Expense
Other Income/Expense consists of Income/Expense outside the ordinary course of business.
Other Income/Expense for the three-month period ended March 29, 2008 was $416 in income as compared
to expense of $723 for the corresponding period in 2007.
Depreciation and Amortization
For the three-month period ended March 29, 2008, we recorded approximately $59,664 in
depreciation. 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 over 10
years. In the three-month period ended March 29, 2008, we recorded amortization intangible assets
of approximately $28,453. We test intangible assets for impairment based on events or changes in
circumstances as they occur, at least annually.
Accounts receivable
As of March 29, 2008, we had $320,969 in accounts receivables as compared to $423,188 as of
March 30, 2007. This decrease is due to a decrease in sales during the first quarter 2008 as
compared to 2007.
Inventories
As of March 29, 2008, we had $557,863 in inventory as compared to $390,648 as of March 30,2007. This large increase is due to a combination of factors. First, the increase in sales demand
over 2006 forced us to stock larger quantities of higher demand items during the last two quarters
of 2007. Second, we have made a company wide effort to increase in stock items during 2007, and
last, with available capital we purchased larger quantities of raw materials and inventory to take
advantage of vendor price discounts.
Accounts payable
As of March 29, 2008, we had $257,224 in accounts payable as compared to $512,222 as of March31, 2007. This large decrease was due to both a large decrease in outsourced contract services
during the first quarter of 2008 and timing of large inventory purchases.
Advances from Customers
As of March 29, 2008, we had $105,757 in advances from customers as compared to $91,862 as of
March 31, 2007. These advances are for large scale contract services and contract research
projects where the company requires a deposit before beginning work. The increase as of March 29,2008 versus the same period in 2007 are due to the timing of delivery of certain projects.
As of March 29, 2008 we had $1,178,206 due to officers as compared to $1,048,729 as of March31, 2007. These consist of deferred officer salary for the two founders and are expected to be paid
out at an undetermined date in the future as non-cash compensation.
Liquidity and Capital Resources
Since inception and through March 29, 2008, we have incurred aggregate losses of $5.2
million. These losses are primarily due to overhead costs and general and administrative expenses.
Our operations have been financed through capital contributions and the issuance of common stock.
As of March 29, 2008, we had $1.7 million in cash. We have raised approximately $1.3 million
of net proceeds after March 29, 2008 through a private placement preceding the Merger. We expect
that our capital resources will permit us to meet our operational requirements through the fourth
quarter of 2009. This expectation is based on our current operating plan, which may change as a
result of many factors. Therefore, to execute our operating plan through fiscal year 2009,
additional financing may be required and there can be no assurance that it will be available on
terms favorable to us or at all. If adequate financing is not available we may have to delay,
postpone or terminate product and service expansions and curtail general and administrative
operations. The inability to raise additional financing may have a material adverse effect on us.
Off-Balance Sheet Arrangements
During the three months ended March 29, 2008, we had no off-balance sheet arrangements other
than ordinary operating leases as disclosed in the accompanying financial statements.
Contractual Obligations
The following table summarizes our future contractual obligations as of December 29, 2007.
Payment Due by Period
Less than 1
More than 5
Total
Year
1-3 Years
3-5 Years
Years
Capital Leases
Principal
$
224,731
$
74,846
$
104,020
$
45,865
$
—
Interest
60,127
27,004
27,180
5,942
—
Operating Leases
1,409,882
396,370
841,197
172,314
—
Total
$
1,694,740
$
498,221
$
972,397
$
224,122
$
—
Recent Developments
On June 18, 2008, we repurchased 1,222,795 shares of our outstanding common stock from Bayer
Innovation GmbH (formerly Bayer Innovation Beteiligungsgescellschaft mbH), for an aggregate
purchase price of $1,002,691.90 pursuant to a Share Redemption Agreement. We funded the repurchase
by issuing a non-interest bearing promissory note for such amount, and the note is due on or before
December 20, 2008. If the principal amount of the promissory note, or any part thereof, is not
paid in full when due, the we must pay interest on the overdue principal amount at the rate of one
and one half percent (1 1/2%) per month beginning January 1, 2009. The Share Redemption Agreement
and the promissory note are included as Exhibits 10.13 and 10.14 respectively, to this Current
Report on Form 8-K.
For the fiscal year 2007, ChromaDex’s net sales and gross profit rose substantially over the
full year 2006. These increases were due to increased sales of each of our product and service
offerings. In addition, the consolidation of our laboratory facilities into our Boulder location reduced our direct costs
and corresponding overhead associated with our services business.
Net sales consist of Reference Standards and Contract Service sales. Net sales for the
twelve-month period ended December 29, 2007 were $4,754,073, a 35% increase as compared to net
sales of $3,517,957 for the corresponding period in 2006. This increase was due to our additional
service offerings and increased demand for our existing products and services.
Cost of Goods Sold
Costs of goods sold include Raw Materials, Labor, and Overhead. Cost of goods sold for the
twelve-month period ended December 29, 2007 were $3,122,461, a 13% increase as compared to cost of
goods sold of $2,753,919 for the corresponding period in 2006. The percentage increase in cost of
goods sold is smaller as compared to that of net sales because of the consolidation of our
laboratory facilities and the reduction of raw material costs due to increased volume purchases.
In addition, direct and indirect overhead costs remained fixed as compared to 2006.
Gross Profit
Gross profit is net revenues less the cost of sales and is affected by a number of factors
including product mix, competitive pricing and costs of products and services. Our Gross Profit
increased 113% to $1,631,612 for the twelve-month period ended December 29, 2007 from $764,038 for
the corresponding period in 2006. The combination of increased sales and a reduction in raw
material costs without corresponding overhead costs all contributed to this increase.
Operating Expenses-Sales and Marketing
Sales and Marketing Expenses consist of salaries, commissions to employees and advertising and
marketing. Sales and marketing expenses for the twelve-month period ended December 29, 2007 were
$387,816 as compared to $354,560 for the corresponding period in 2006. This small increase as
compared to the larger increase in net sales was primarily due to the delivery of our annual
catalog in 2006.
Operating Expenses-General and Administrative
General and Administrative Expenses consist of research and development, general company
administration, IT, accounting and executive management. General and administrative expenses for
the twelve-month period ending December 29, 2007 were $1,421,516 as compared to $1,510,926 for the
corresponding period in 2006. This decrease as compared to the larger increase in net sales was
primarily due to reduced legal costs related to a dismissed breach of contract suit.
Interest Expense consists of interest on capital leases. Interest expense for the
twelve-month period ending December 29, 2007 was $31,815 as compared to $30,175 for the
corresponding period in 2006.
Non-operating Expenses- Interest Income
Interest Income consists of interest earned on short term investment and notes receivable.
Interest income for the twelve-month period ending December 29, 2007 was $17,698 as compared to
$4,314 for the corresponding period in 2006. This large increase was due to the agreed settlement
on a note payable.
Non-operating Expenses- Other Income/Expense
Other Income/Expense consists of Income/Expense outside the ordinary course of business.
Other Income/Expense for the twelve-month period ending December 29, 2007 was $1,962 in income as
compared to expense of $156,951 for the corresponding period in 2006. The 2006 expense was due to
the settlement of litigation in connection with a lawsuit filed by Innovative Health Products
alleging breach of contract. In connection with the settlement agreement the Company recorded an
obligation of $155,000.
Depreciation and Amortization
For the twelve- month period ended December 29, 2007, we recorded approximately $236,647 in
depreciation. 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 over 10 years. In the twelve-month
period ended December 29, 2007, we recorded amortization on intangible assets of approximately
$116,000. We test intangible assets for impairment based on events or changes in circumstances as
they occur, at least annually.
Cash and Cash Equivalents
As of December 29, 2007 we had $303,785 in cash and cash equivalents as compared to $424,965
as of December 31, 2006. The decrease is primarily due to increased expenditures for inventory as
discussed below.
Accounts receivable
As of December 29, 2007 we had $375,233 in accounts receivables as compared to $303,062 as of
December 31, 2006. This increase is due to increased sales during the fourth quarter 2007 as
compared to 2006.
Inventories
As of December 29, 2007 we had $497,635 in inventory as compared to $281,044 as of December31, 2006. This large increase is due to a combination of factors. First, the increased sales demand
over 2006 forced us to stock larger quantities of high demand items. Second, we made a company
wide effort to increase in stock items during 2007, and last, with available capital we purchased
larger quantities of raw materials and inventory to take advantage of vendor price discounts.
Accounts payable
As of December 29, 2007 we had $500,538 in accounts payable as compared to $338,327 as of
December 31, 2006. This large increase was primarily due to a large increase in outsourced
contract services and on an increase in inventory purchases at year end.
As of December 29, 2007 we had $117,969 in advances from customers as compared to $115,067 as
of December 31, 2006. These advances are for large scale contract services and contract research
projects where the company requires a deposit before beginning work.
Due to officers
As of December 29, 2007 we had $1,167,822 due to officers as compared to $1,009,029 as of
December 31, 2006. These consist of deferred officer salary for the two founders and are expected
to be paid out at an undetermined date in the future as non-cash compensation.
Off-Balance Sheet Arrangements
During the Fiscal Years ended December 29, 2007 and December 31, 2006, the Company had no
off-balance sheet arrangements other than ordinary operating leases as disclosed in the
accompanying financial statements.
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 standards of the Public
Company Accounting Oversight Board (United States). 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.
We believe that of our significant accounting policies, which are described in Note 2 to our
financial statements appearing elsewhere in this report, the following accounting policies involve
a greater degree of judgment and complexity. Accordingly, these are the policies we believe are
the most critical to aid in fully understanding and evaluating our consolidated financial condition
and results of operations.
Revenue recognition:
The Company recognizes sales and the related cost of goods sold at the time the merchandise is
shipped to customers or service is performed, when each of the following conditions have been met:
an arrangement exists, delivery has occurred, there is a fixed price, and collectability is
reasonably assured.
Intangible assets:
Intangible assets include licensing rights and are accounted for based on Financial Accounting
Standard Statement No. 142 Goodwill and Other Intangible Assets (“FAS 142”). Intangible assets with
finite useful lives are amortized using the straight-line method over a period of 10 years, the
remaining term of the patents underlying the licensing rights (considered to be the remaining
useful life of the license).
Research and development costs:
Research and development costs consist of direct and indirect costs associated with the
development of the Company’s technologies. These costs are expensed as incurred.
Fair value determination of privately-held securities:
The fair values of the common stock as well as the common stock underlying options and
warrants granted as part of asset purchase prices or as compensation were estimated by management.
Determining the fair value of stock requires making complex and subjective judgments. The Company
used the market approach to estimate the value of the enterprise at each date on which securities
are issued or granted. The enterprise value was then allocated to preferred and common shares
taking into account the enterprise value available to all stockholders and allocating that value
among the various classes of stock based on the rights, privileges and preferences of the
respective classes. There is inherent uncertainty in these estimates.
Nature of Business and Significant Accounting Policies (continued)
Stock-based compensation: The Company follows the provisions of Statement of
Financial Accounting Standards No. 123R — Share-based Payments (“FAS123R”) which requires the use
of the fair-value based method to determine compensation for all arrangements under which employees
and others receive shares of stock or equity instruments (options).
The Company’s stock-based employee compensation plan is described in Note 8 of the 2007
Audited Financial Statements. Prior to 2006, the Company accounted for this plan under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company accounted for stock-based compensation to
non-employees at fair value.
In addition, the Company’s subsidiary also maintained a stock-based compensation plan. The
subsidiary also accounted for this plan under the recognition and measurement principles of APB 25
and related interpretations. The subsidiary accounted for stock-based compensation to
non-employees at fair value.
Beginning in 2006, the Company accounted for newly issued stock-based compensation under the
recognition and measurement provisions of SFAS 123(R). The standard requires entities to measure
the cost of services received in exchange for stock options based on the grant-date fair value of
the award, and to recognize the cost over the period the individual is required to provide services
for the award.
The Company applied the measurement provisions of SFAS 123(R) prospectively to all awards
granted, modified, repurchased, or cancelled after January 1, 2006 (required effective date). The
Company continues to account for any portion of awards outstanding at the date of initial
application using the accounting principles originally applied to those awards.
The Company recognizes compensation expense under Statement No. 123(R) over the requisite
service period using the straight-line method. The Company has determined that the fair value
method should be used in determining the value of its stock options. The fair value method requires
that the volatility assumption used in an option-pricing model be based on the historical
volatility of daily closing total returns from industry sector comparable companies.
New accounting pronouncements: The Financial Accounting Standards Board (FASB) has
issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement standard for the financial statement recognition
and measurement of an income tax position taken or expected to be taken in a tax return. In
addition, FIN 48 provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
The Company presently recognizes income tax positions based on management’s estimate of
whether it is reasonably possible that a liability has been incurred for unrecognized income tax
benefits by applying FASB Statement No. 5, Accounting for Contingencies.
In February 2008, the FASB delayed the effective date of FIN 48 for certain nonpublic
enterprises to annual financial statements for fiscal years beginning after December 15, 2007. The
Company will be required to adopt FIN 48 in their 2008 annual financial statements. The provisions
of FIN 48 are to be applied to all tax positions upon initial application of this standard. Only
tax positions that meet the more-likely-than-not recognition threshold at the effective date may be
recognized or continue to be recognized upon adoption.
In March, 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No.
161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is
intended to improve financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their effects on an
entity’s financial position, financial performance, and cash flows. It is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how derivative instruments
and related hedged items are accounted for under Statement 133; and how derivative instruments and
related hedged items affect its financial position, financial performance, and cash flows. FASB
Statement No. 161 achieves these improvements by requiring disclosure of the fair values of
derivative instruments and their gains and losses in a tabular format. It also provides more
information about an entity’s liquidity by requiring disclosure of derivative features that are
credit risk-related. Finally, it requires cross-referencing within footnotes to enable financial
statement users to locate important disclosure information. Based on current conditions, the
Company does not expect the adoption of SFAS 161 to have a significant impact on its results of
operations or statements of financial position.
In December 2007, FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51. This Statement applies to all entities that
prepare consolidated financial statements, except not-for-profit organizations, but will affect
only those entities that have an outstanding non-controlling interest in one or more subsidiaries
or that deconsolidate a subsidiary. Not-for-profit organizations should continue to apply the
guidance in Accounting Research Bulletin No. 51, Consolidated Financial Statements, before the
amendments made by this Statement, and any other applicable standards, until the Board issues
interpretative guidance. This Statement is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities
with calendar year-ends). Earlier adoption is prohibited. The effective date of this Statement is
the same as that of the related Statement 141(R). This Statement shall be applied prospectively as
of the beginning of the fiscal year in which this Statement is initially applied, except for the
presentation and disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for all periods presented. This statement has no effect on the financial
statements as the Company does not have any outstanding non-controlling interest.
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures for fiscal years beginning after November 15, 2007.
The adoption of this statement has no impact effect of the financial statements of the Company.
DESCRIPTION OF PROPERTY
ChromaDex currently leases less than 8,000 square feet of office space in Irvine, California
with four years remaining on the lease and laboratory manufacturing space of less than 13,000
square feet of space in Boulder, Colorado with three years remaining on the lease. We do not own
any real estate.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of June 20, 2008, the day of the Merger, 28,022,134 shares of Common Stock were issued and
outstanding. In addition, at June 20, 2008 there were options representing rights to purchase up
to approximately 3,301,937 shares of Cody Common Stock at a weighted average exercise price of
$1.35 per share of Cody Common Stock and warrants representing rights to purchase up to
approximately 1,314,303 shares of Cody Common Stock at a weighted average exercise price of $2.67
per share of Cody Common Stock. The following table sets forth certain information regarding our
capital stock, beneficially owned after the Merger as of June 20, 2008, by each person
known to us to beneficially own more than 5% of our Common Stock, each executive officer and
director, and all directors and executive officers as a group. We calculated beneficial ownership
according to Rule 13d-3 of the Securities Exchange Act as of that date. Shares issuable upon
exercise of options or warrants that are exercisable or convertible within 60 days after June 20,2008 are included as beneficially owned by the holder. Beneficial ownership generally includes
voting and investment power with respect to securities. Unless otherwise indicated below, the
persons and entities named in the table have sole voting and sole investment power with respect to
all shares beneficially owned.
All directors and executive officers as a group
(7 Individuals)
8,029,155
28.59
%
DIRECTORS AND EXECUTIVE OFFICERS
Our business and affairs are managed by our Board of Directors. Prior to the completion of
the Merger, we had two directors and executive officers, Donald Sampson and Barbara Grant.
Pursuant to the Merger, and effective as of the closing of the Merger, Mr. Sampson and Ms. Grant
each resigned as a director and officer of Cody. By actions of the prior Board of Directors, the
directors and executive officers were replaced by directors and officers of ChromaDex individuals
named by ChromaDex, who are identified below.
(1)
Addresses for the Beneficial Owners listed are: Frank Louis
Jaksch Jr., 8 Garzoni Aisle, Irvine, California92606; Margie Chassman, 445
West 23rd Street, Apt. 16E, New York, NY10011; Strtegic Biotech Advisors,
Inc., 4417 Downing Place Way, Mt. Pleasant SC 29466; Margery Germain, 15 Bank
Street, White Plains, NY10606; Jaksch Family Trust, 70 Pienza, Laguna Niguel,
CA92677; Bayer Innovation Beteiligungsgescellschaft mbH, 51368 Leverkusen,
Federal Republic of Germany.
(2)
Beneficial ownership is determined in accordance with the rules
of the SEC and includes voting or investment power with respect to shares
beneficially owned. Unless otherwise specified, reported ownership refers to
both voting and investment power. Shares of Common Stock issuable upon the
conversion of stock options within the next 60 days are deemed to be converted
and beneficially owned by the individual or group identified in the Aggregate
Percentage Ownership column.
(3)
Includes 1,429,000 shares owned by the Jaksch Family Trust,
beneficially owned by Frank L. Jaksch Jr. because Mr. Jaksch Jr. has shared
voting power for such shares. Includes 60,000 stock options exercisable within
60 days.
(4)
These shares are the same shares that are factored into Frank L.
Jaksch Jr’s beneficially owned shares in (2) above. Frank Louis Jaksch, Sr.
and Maria Jaksch are trustees of the Jaksch Family Trust.
(5)
Includes 75,000 stock options exercisable within 60 days.
The following table sets forth information regarding current directors, director nominees, and
executive officers, including their ages, as of June 20, 2008. The composition of the committees
of the Board of Directors will be determined as soon as practicable. Executive officers serve at
the request of the Board of Directors.
Name
Age
Position
Frank L. Jaksch, Jr.
39
Co-Chairman of the Board, Chief Executive
Officer, President, Director
The directors and executive officers were appointed to their positions on June 20, 2008, upon
consummation of the Merger.
Biographies
Frank L. Jaksch Jr., age 39, is a co-founder of ChromaDex and has served as Chairman of the
Board since 2000 and as Chief Executive Officer since 2000. He has also served as a director of
ChromaDex since 2000. Mr. Jaksch oversees strategy operations and marketing for the Company with a
focus on scientific products and pharmaceutical and nutraceutical markets. From 1993 to 1999 Mr.
Jaksch served as International Subsidiaries Manager of Phenomenex where he managed the
international subsidiary and international business development divisions. Mr. Jaksch earned a BS
in Chemistry and Biology from Valparaiso University. Frank L. Jaksch Jr. is the brother of Kevin
Jaksch.
Tom Varvaro, age 38, has served as Chief Financial Officer since 2004 and Secretary of
ChromaDex since 2006. He has also served as a director since 2006. Mr. Varvaro oversees
operations, accounting, information technology, inventory, distribution, and human resources
management for the Company. Mr. Varvaro has developed skills in process mapping, information
technology custom application design, enterprise risk systems deployment, plant automation and
reporting and bar code tracking implementation from his prior business experiences. From 1998 to
2004, Mr. Varvaro was employed by Fast Heat Inc., a Chicago, Illinois based global supplier to the
plastics, HVAC, packaging, and food processing industries, where he began as Controller and rose to
CIO and then CFO during his tenure. From 1993 to 1998, Mr. Varvaro was employed by Maple Leaf
Bakery, USA, a Chicago, Illinois based company during its rise to a national leader in specialty
food products, where he began as Staff Accountant and rose to Assistant Controller during his
tenure. He earned a BS in Accounting from University of Illinois, Urbana, and has been certified
as a CPA.
Stephen Block, age 63, has been a director of the ChromaDex since 2007 and on the Audit
Committee since 2007. Mr. Block is also a director and Chair of the Corporate Governance and
Nominating Committee and serves on the Audit Committee of Senomyx, Inc., a public biotech company. He has served on the board of
Senomyx, Inc. since 2005. He also serves as the Chairman of the Board of Blue Pacific Flavors and
Fragrances, Inc., and as director of Allylix, Inc. and XSCapacity.com, all privately held
companies. He has served on these boards since 2008, 2007, and 2007 respectively. Mr. Block is
also a member of the Executive Committee of the Orange County network of Tech Coast Angels, the
country’s largest angel investor group, and is a partner in Venture Farm, LLC, an early stage fund
providing capital, mentoring and education to entrepreneurs.
Mr. Block also serves on the board of directors of AirBee
Wireless, Inc., a wireless communications software company. For the 11 years prior to 2004,
Mr. Block was the Senior Vice President, General Counsel and Secretary and one of nine senior
executives at International Flavors & Fragrances Inc., a New York Stock Exchange listed corporation
with more $2.0 billion in revenue. Mr. Block has experience in domestic and international mergers
and acquisitions and joint ventures and financings, government affairs and lobbying, and corporate,
product liability and regulatory law. He has served on the Board of Governors, and in one case, as
President, of domestic and international trade associations. Mr. Block has a B.A. cum laude from
Yale University and a J.D. from Harvard Law School.
Reid Dabney, age 56, has served as a Director of the ChromaDex and has chaired the Audit
Committee since October 2007. Since March 2005, he has also served as Foldera, Inc.’s (and its
predecessor company’s) Senior Vice President and Chief Financial Officer. From July 2003 to
November 2005, Mr. Dabney was engaged by CFO911 as a business and financial consultant. From
January 2003 to August 2004, Mr. Dabney served as Vice President of National Securities, a
broker-dealer firm specializing in raising equity for private operating businesses that have agreed
to become public companies through reverse merger transactions with a publicly traded shell
companies. From June 2002 to January 2003, Mr. Dabney was the chief financial officer of House Ear
Institute in Los Angeles, California. Mr. Dabney received a B.A. degree from Claremont McKenna
College and an M.B.A. in Finance from the University of Pennsylvania’s Wharton School. Mr. Dabney
also holds Series 7, 24 and 63 licenses from Financial Industry Regulatory Authority (FINRA).
Hugh Dunkerley, age 34, has served as a Director of the ChromaDex since December 2005. From
October 2002 to December 2005 Mr. Dunkerley served as Director of Corporate Development at
ChromaDex. Mr. Dunkerley has been President and Chief Executive Officer of Foldera, Inc.
(OTCBB:FDRA.OB) since October 31, 2007. He had served as Foldera’s Chief Operating Officer from
June 2007 to October 31, 2007 and as Vice President of Corporate Finance from June 2006 to June
2007. From January 2006 to July 2006, Mr. Dunkerley served as Vice President of Small-Mid Cap
Equities at Hunter Wise Financial Group, LLC, specializing in investment banking advisory services
to US and EU companies. Mr. Dunkerley received his undergraduate degree from the University of
Westminster, London and earned a MBA from South Bank University, London. Mr. Dunkerley also holds
Series 7 and 66 licenses from FINRA.
Mark S. Germain, age 57, has served as Co-Chairman of the Board of Directors since he founded
ChromaDex in 2000 and on the audit committee since October 2007. Mr. Germain has extensive
experience as a merchant banker in the biotech and life sciences industries. He has been involved
as a founder, director, Chairman of the Board of, and/or investor in over twenty companies in the
biotech field, and assisted many of them in arranging corporate partnerships, acquiring technology,
entering into mergers and acquisitions, and executing financings and going public transactions. He
graduated New York University School of Law in 1975, Order of the Coif, and was a partner in a New
York law firm practicing corporate and securities law before leaving for the private sector in
1986. Since then, and until he entered the biotech field in 1991, he served in senior executive
capacities, including as president of a public company sold in 1991. In addition to his role as
Co-Chairman and director of the Company, Mr. Germain is currently a director of the following
publicly traded companies: Wellford Real Properties, Inc., Stem Cell Innovations, Inc., Collexis
Holdings, Inc., and Pluristem Therapeutics, Inc. He is also a co-founder and director of a number
of private companies in the biotechnology field.
Kevin Jaksch, age 37, has served as a Director of ChromaDex since 2000. Since 2000, Mr.
Jaksch has served as Vice President and Branch Manager at Charles Schwab & Co., Inc. (NASDAQ:
SCHW). Mr. Jaksch has been a registered representative for 15 years and a registered principal for
12 years overseeing two offices with over four billion in assets. Mr. Jaksch has broad experience
in the financial markets and financial advising. Mr. Jaksch earned a BA in Communications from the
University of Southern California in Los Angeles. Kevin Jaksch is the brother of Frank L. Jaksch
Jr.
Board of Directors and Committees of the Board
Our business and affairs are managed under the direction of our Board of Directors.
The Board of Directors is in the process of organizing several committees. We expect that the
standing committees of our Board of Directors will consist of an audit committee, a compensation
committee and a nominating and corporate governance committee.
Immediately following the merger, we plan to establish an audit committee for the purpose of
overseeing our accounting and financial reporting processes and audits of our financial statements
by our independent auditors. We believe that each of the future members of the audit committee
will meet the independence requirements of Marketplace Rule 4350(d)(2) of the NASDAQ Stock Market,
Inc. Each of the members of the audit committee is expected to be financially literate and will
have accounting and finance experience, and we plan to have an “audit committee financial expert”
on our audit committee, within the meaning of Securities and Exchange Commission regulations as
defined in Item 407 of Regulation S-K. Currently, Reid Dabney is considered an audit committee
financial expert.
We expect that our Board will adopt a code of conduct and ethics applicable to our directors,
officers and employees, in accordance with applicable rules and regulations of the SEC. A copy of
that code will be made available on our website.
Compensation of Executive Officers
ChromaDex has established executive compensation plans that link compensation with
performance. We plan to periodically review our executive compensation programs to ensure they are
competitive.
During the fiscal year ended November 30, 2007, no compensation was earned by or paid to
Donald Sampson or Barbara Grant, Cody’s only executive officers during that year. Accordingly, in
accordance with Item 402(a)(4) of Regulation S-B, we have omitted from this report the Summary
Compensation Table and Director Compensation Table otherwise required by that Item.
There were no post retirement benefit plans, medical, life, dental or other benefit plans,
cash bonus or other compensation arrangements in place during fiscal 2007. There were no stock
options or equity awards outstanding at November 30, 2007.
The following table sets forth information concerning the annual and long-term compensation
earned by ChromaDex’s Chief Executive Officer (the principal executive officer) and the only other
compensated executive officer who served during the year ended December 29, 2007 (the “Named
Executives”) as executive officers of ChromaDex. The compensation indicated below was paid by
ChromaDex. Each Named Executive became an executive officer of the Company as of the Effective
Date of the Merger.
The amounts in the column titled “Option Awards” above reflect the dollar amounts recognized
for financial statement reporting purposes in accordance with FAS 123R for the fiscal years
ended December 31, 2006. See Note 1 of the ChromaDex, Inc. Consolidated Financial Report
dated December 29, 2007 for a description of certain assumptions in the calculation of these
amounts pursuant to FAS 123R.
(2)
Frank Jaksch was paid $66,181 of his salary in cash in 2007 and the remainder is owed to him
as unpaid compensation. See “ChromaDex Transactions” below.
(3)
Frank Jaksch was paid $66,964 of his salary in cash in 2006 and the remainder is owed to him
as unpaid compensation. See “ChromaDex Transactions” below.
On December 1, 2006, Frank Jaksch, Jr. was granted options to purchase 300,000 shares of
ChromaDex common stock at an exercise price of $1.50. These options expire on December 1, 2016 and
vest at a rate of 20% per year. On December 1, 2006, Tom Varvaro was granted options to purchase
250,000 of ChromaDex common stock at an exercise price of $1.50. These options expire on December1, 2016 and vest at a rate of 20% per year. The bonuses granted to Mr. Jaksch and Mr. Varvaro were
discretionary and not pursuant to a formula.
DIRECTOR COMPENSATION
Non-Employee Board members currently receive an annual grant of 30,000 options to buy
ChromaDex common stock upon reelection by the Shareholders. These options are granted under the
2007 Plan and are granted on the same terms as those being issued to employees.
No compensation plan for directors has been formalized for services as Cody directors
following the effective date of the Merger.
The following table provides information concerning compensation of the directors of Cody who
(i) became directors upon consummation of the Merger and (ii) were directors of ChromaDex for the
fiscal year ended December 29, 2007. The compensation reported is for services as directors for the
fiscal year ended December 29, 2007.
The amounts in the column titled “Option Awards” above reflect the dollar amounts recognized
for financial statement reporting purposes in accordance with FAS 123R for the fiscal years
ended December 29, 2007. See Note 1 of the ChromaDex, Inc. Consolidated Financial Report
dated December 29, 2007 for a description of certain assumptions in the calculation of these
amounts pursuant to FAS 123R.
(2)
Stephen Block held an aggregate of 30,000 option awards as of December 29, 2007.
(3)
Reid Dabney held an aggregate of 30,000 option awards as of December 29, 2007.
(4)
Hugh Dunkerley held an aggregate of 230,000 option awards as of December 29, 2007.
(5)
Mark S. Germain held an aggregate of 30,000 option awards as of December 29, 2007.
(6)
Frank L. Jaksch held an aggregate of 300,000 option awards as of December 29, 2007.
(7)
Kevin M. Jaksch held an aggregate of 30,000 option awards as of December 29, 2007.
We believe that four of our directors, Stephen Block, Reid Dabney, Hugh Dunkerley and Mark
Germain, meet the independence requirements of Marketplace Rule 4350(d)(2) of the NASDAQ Stock
Market, Inc.
The material terms of employment agreements with the Named Executives previously entered into
by ChromaDex are described below.
Employment Agreement with Frank L. Jaksch Jr.
ChromaDex entered into a two-year, employment agreement dated April 14, 2008 with Frank L.
Jaksch Jr. its Chief Executive Officer. Pursuant to this agreement, Mr. Jaksch is entitled to
receive a base salary of $150,000 per year, subject to certain milestones. Following the Merger,
Mr. Jaksch will receive a base salary of $175,000. Mr. Jaksch is also eligible for bonuses as
determined by our Board of Directors.
Pursuant to the employment agreement, Mr. Jaksch is eligible to be granted stock options for
purchase of our shares, such options to be granted solely at the discretion of our Board of
Directors. Mr. Jaksch is also entitled to receive the standard benefits generally available to
other members of senior management.
In the event Mr. Jaksch’s employment with us is terminated voluntarily by Mr. Jaksch, he shall
be entitled to his accrued but unpaid base salary and any stock vested through the date of his
termination. In addition, if Mr. Jaksch provides good reason (as defined in the employment
agreement) he shall also be entitled to severance (as defined in the employment agreement),
whatever bonus he would have been entitled to for the year in which such termination occurs, and he
shall be deemed to have been employed for the entirety of such year. As used herein, “Good Reason”
means any of the following: (A) the assignment of duties materially inconsistent with those of
other employees in similar employment positions, and Mr. Jaksch provides written notice to
ChromaDex within 60 days of such assignment that such duties are materially inconsistent with those
duties of such similarly-situated employees and ChromaDex fails to release Mr. Jaksch from his
obligation to perform such inconsistent duties and to re-assign Mr. Jaksch to his customary duties
within 20 business days after ChromaDex’s receipt of such notice; or (B) if, without the consent of
Mr. Jaksch, Mr. Jaksch’s normal place of work is or becomes situated more than 50 linear miles from
Mr. Jaksch’s personal residence as of the effective date of the employment agreement, or (C) a
failure by ChromaDex to comply with any other material provision of the employment agreement which
has not been cured within 60 days after notice of such noncompliance has been given by Mr. Jaksch
to ChromaDex, or if such failure is not capable of being cured in such time, a cure shall not have
been diligently initiated by ChromaDex within such 60 day period. Severance will then consist of 16
weeks of pay, unless Mr. Jaksch signs a release, in which case he will receive compensation for the
remainder of the contract, or up to 12 months whichever is less.
In the event Mr. Jaksch is terminated as a result of his death or disability he shall be
entitled to his accrued but unpaid base salary, stock vested through the date of his termination
and, notwithstanding any policy of ChromaDex to the contrary, any bonus that would be due to him
for the fiscal year in which termination pursuant to death or disability will, at the option of the
Board, be either prorated or paid in full to him (or his estate, as the case may be) at the time he
would have received such bonus had he remained an employee of ChromaDex.
In the event that Mr. Jaksch is terminated by us for good reason (as defined in the employment
agreement), he shall only be entitled to his accrued but unpaid base salary, and any stock vested
through the date of his termination.
In the event we terminate Mr. Jaksch’s employment without cause (as defined in the employment
agreement), Mr. Jaksch is entitled to severance in the form of any stock vested through the date of
his termination and continuation of his base salary, together with applicable fringe benefits as
provided to other executive employees for the term of his employment agreement.
Employment Agreement with Thomas C. Varvaro CFO
ChromaDex entered into a two-year, employment agreement dated April 14, 2008 with Thomas C.
Varvaro its Chief Financial Officer. Pursuant to this agreement, Mr. Varvaro is entitled to
receive a base salary of $110,000 per year, subject to certain milestones. Following the Merger,
Mr. Varvaro will receive a base salary of $130,000. Mr. Varvaro is also eligible for bonuses as
determined by our Board of Directors.
Pursuant to the employment agreement, Mr. Varvaro is eligible to be granted stock options for
purchase of our shares, such option grants to be solely at the discretion of our Board of
Directors. Mr. Varvaro is also entitled to receive the standard benefits generally available to
other members of senior management.
In the event Mr. Varvaro’s employment with us is terminated voluntarily by Mr. Varvaro he
shall be entitled to his accrued but unpaid base salary, and any stock vested through the date of
his termination. In addition, if Mr. Varvaro provides good reason (as defined in the employment
agreement) he shall also be entitled to severance (as defined in the employment agreement),
whatever bonus he would have been entitled to for the year in which such termination occurs, and he
shall be deemed to have been employed for the entirety of such year. As used herein, “Good Reason”
means any of the following: (A) the assignment of duties materially inconsistent with those of
other employees in similar employment positions, and Mr. Varvaro provides written notice to
ChromaDex within 60 days of such assignment that such duties are materially inconsistent with those
duties of such similarly-situated employees and ChromaDex fails to release Mr. Varvaro from his
obligation to perform such inconsistent duties and to re-assign Mr. Varvaro to his customary duties
within 20 business days after ChromaDex’s receipt of such notice; or (B) if, without the consent of
Mr. Varvaro, Mr. Varvaro’s normal place of work is or becomes situated more than 50 linear miles
from Mr. Varvaro’s personal residence as of the effective date of the employment agreement, or (C)
a failure by ChromaDex to comply with any other material provision of the employment agreement
which has not been cured within 60 days after notice of such noncompliance has been given by Mr.
Varvaro to ChromaDex, or if such failure is not capable of being cured in such time, a cure shall
not have been diligently initiated by ChromaDex within such 60 day period. Severance will then
consist of 16 weeks of pay, unless Mr. Varvaro signs a release, in which case he will receive
compensation for the remainder of the contract or up to 12 months whichever is less.
In the event Mr. Varvaro is terminated as a result of his death or disability he shall be
entitled to his accrued but unpaid base salary, stock vested through the date of his termination
and, notwithstanding any policy of ChromaDex to the contrary, any bonus that would be due to him
for the fiscal year in which termination pursuant to death or disability will, at the option of the
Board, be either prorated or paid in full to him (or his estate, as the case may be) at the time he
would have received such bonus had he remained an employee of ChromaDex.
In the event that Mr. Varvaro is terminated by us for good reason (as defined in the
employment agreement), he shall only be entitled to his accrued but unpaid base salary, and any
stock vested through the date of his termination.
In the event we terminate Mr. Varvaro’s employment without cause (as defined in the employment
agreement), Mr. Varvaro is entitled to severance in the form of any stock vested through the date
of his termination and continuation of his base salary, together with applicable fringe benefits as
provided to other executive employees for the term of his employment agreement.
The following table sets forth certain information regarding stock options granted to our
named executive officers outstanding as of December 29, 2007.
60,000 of Mr. Jaksch’s options vest on December 1 of each year.
(2)
50,000 of Mr. Varvaro’s option vest on December 1 of each year.
Equity Incentive Plans
Each of the 2000 Plan and the 2007 Plan (collectively, the “Plans”) was assumed by Cody in the
Merger. The purpose of each of the Plans is to encourage and enable selected employees, directors
and independent contractors of the Company and its affiliates to acquire or increase their holdings
of common stock and other equity-based interests in the Company in order to promote a closer
identification of their interests with ours, thereby stimulating their efforts to enhance our
efficiency, soundness, profitability, growth and shareholder value. All share amounts in this
section have been adjusted to reflect the Merger, and represent number of shares of Cody Common
Stock.
2000 Non-Qualified Incentive Stock Option Plan
The 2000 Plan was assumed by Cody in the Merger. The 2000 Plan was terminated by ChromaDex
effective March 13, 2007, but such termination did not alter or impair any of the rights or
obligations under any option theretofore granted to an option holder under the 2000 Plan (each, an
“Assumed 2000 Option”). All share amounts in this section have been adjusted to reflect the
Merger, and represent number of shares of Cody Common Stock subject to all of the Assumed 2000
Options.
We will further adjust the number of shares reserved for issuance under the Assumed 2000
Options in the event of an adjustment in our capital stock structure or one of our affiliates due
to a merger, consolidation, reorganization, stock split, stock dividend or similar event.
Administration, Amendment and Termination
Our Board of Directors, or upon its delegation, the compensation committee of our Board of
Directors, will administer the Assumed 2000 Options under the 2000 Plan. Subject to certain
restrictions set forth in the 2000 Plan, the administrator has full and final authority to take
actions and make determinations with respect to the 2000 Plan.
The administrator may amend the 2000 Plan and any award, without participant consent and,
except where required by applicable laws, without shareholder approval, in order to comply with
applicable laws.
Non-Qualified Stock Options
The 2000 Plan only permitted the grant of nonqualified stock options. Under each Assumed 2000
Option, a participant may only pay the option price in cash or check. Notwithstanding the
foregoing, if the Company issues or sells Cody Common Stock in an underwritten offering to the
public pursuant to an effective registration statement under the Securities Act, then the Company,
at no additional cost or expense to each holder of an Assumed 2000
Option, during the period commencing 30 days before and ending 30 days after the effective date of
such registration (the “IPO Window”), permit such holder to simultaneously exercise his or her
Assumed 2000 Option and sell the Cody Common Stock to the Company at the issue price to effect a
cash-less exercise of the Assumed 2000 Option held by such participant during the IPO Window.
All Assumed 2000 Options are subject to certain restrictions on exercise if the participant
terminates employment or service.
Stock Dividend and Stock Splits
If (i) the shares of our common stock shall be subdivided or combined into a greater or
smaller number of shares or if the Company shall issue any shares of common stock as a stock
dividend on its outstanding common stock, or (ii) additional shares or new or different shares or
other securities of the Company or other non-cash assets are distributed with respect to such
shares of common stock, the number of shares of common stock deliverable upon the exercise or
acceptance of such option or stock grant may be appropriately increased or decreased
proportionately, and appropriate adjustments may be made including, in the purchase price per
share, to reflect such events.
Transfer and Other Restrictions
No Assumed 2000 Option is transferable other than for estate planning purposes, by will or the
laws of intestate succession or as may otherwise be permitted by the administrator, and
participants may not sell, transfer, assign, pledge or otherwise encumber shares subject to such
awards until the restriction period and/or performance period has expired and until all conditions
to vesting the award have been met. In the event the participant exercises an Assumed 2000 Option
and Cody Common Stock is issued to the participant, then, if the participant’s employment or
consulting relationship with the Company terminates for any reason, the Company has the right to
purchase all of such Cody Common Stock within 90 days after the effective date of such termination
at the bid price of the most recent trade of the Cody Common Stock.
Certain Federal Income Tax Consequences
The following generally describes the principal federal (and not state and local) income tax
consequences of Assumed 2000 Options. The following summary is general in nature and is not
intended to cover all tax consequences that may apply to a particular participant or to the
Company. The provisions of the Code, and related regulations and other guidance are complicated
and their impact in any one case may depend upon the particular circumstances.
If a participant received an Assumed 2000 Option, each of which is a nonqualified option, the
difference between the fair market value of the stock on the date of exercise and the option price
will constitute taxable ordinary income to the participant on the date of exercise. The Company
generally will be entitled to a deduction in the same year in an amount equal to the income taxable
to the participant.
Section 409A of the Internal Revenue Code
Section 409A of the Code imposes certain requirements on deferred compensation. The Company
believes, but no assurances can be given, that each Assumed 2000 Option was issued in compliance
with the requirements of Section 409A of the Code. If, however, any Assumed 2000 Option is
determined to not have satisfied the requirements of Section 409A of the Code during a taxable
year, the participant will have ordinary income in the year of non-compliance in the amount of all
deferrals subject to Section 409A of the Code to the extent that the award is not subject to a
substantial risk of forfeiture. The participant will be subject to an additional tax of 20% on all
amounts includible in income and may also be subject to interest charges under Section 409A of the
Code. The Company generally will be entitled to an income tax deduction with respect to the amount
of compensation includible as income to the participant. The Company undertakes no responsibility
to take, or to refrain from taking, any actions in order to achieve a certain tax result for any
participant.
Subject to specified adjustment, the maximum number of shares that we may issue pursuant to
awards granted under the 2007 Plan may not exceed the greater of: (i) four million (4,000,000)
shares of Common Stock or (ii) 10% of the shares of Common Stock issued and outstanding on any date
during the Plan Term, as determined in accordance with Section 13(a).
The following will not be included in calculating the share limitations set forth above:
•
dividends;
•
awards which by their terms are settled in cash rather than the issuance of shares; and
•
any shares subject to an award that is forfeited, cancelled, terminated, expires, or lapses for any reason and shares
subject to an award that are repurchased or reacquired by us.
We will further adjust the number of shares reserved for issuance under the 2007 Plan and the
terms of awards in the event of an adjustment in our capital stock structure or one of our
affiliates due to a merger, consolidation, reorganization, stock split, stock dividend or similar
event.
Administration, Amendment and Termination
Our Board of Directors, or upon its delegation, the compensation committee of our Board of
Directors or an other committee appointed by the Board of Directors, will administer the 2007 Plan;
provided, however, that the administration of awards granted under the 2007 Plan with respect to
any Participant who is subject to Section 16 of the Exchange Act may only be administered by a
committee of Independent Directors, as defined in the Plan. In this discussion, we refer to our
Board of Directors, the compensation committee and any other committee appointed to Administer the
Plan collectively as the “Administrator.” Subject to certain restrictions set forth in the 2007
Plan, the administrator has full and final authority to take actions and make determinations with
respect to the 2007 Plan.
Subject to certain terms and conditions, the Administrator may delegate to one or more
subcommittees consisting of our officers the authority to grant awards, other than to make awards
with respect to other officers of the Company, and to make determinations otherwise reserved for
the Administrator with respect to such awards.
Our Administrator may amend, alter, or terminate the 2007 Plan at any time, subject to certain
exceptions and restrictions set forth in the 2007 Plan. Our Administrator may also amend, alter, or
terminate any award, although participant consent may be required.
The Administrator may amend the 2007 Plan and any award, without participant consent and,
except where required by applicable laws, so long as in the case of any award, the amendment does
not impair any such award. Except to the extent otherwise required under Code Section 409A, the
Administrator also may modify or extend the terms and conditions for exercise, vesting, or earning
of an award and/or accelerate the date that any award may become exercisable, vested, or earned,
without any obligation to accelerate any other award.
Options
The 2007 Plan authorizes the grant of both incentive stock options and nonqualified stock
options. The administrator will determine the option price at which a participant may exercise an
option. The option price may not be less than 100% of the fair market value on the date of grant
(or 110% of the fair market value with respect to incentive stock options granted to 10% or more
shareholders).
Unless an individual award agreement provides otherwise, a participant may pay the option
price in cash or, to the extent permitted by the Administrator and applicable laws, (i) by delivery
to the Company of other Cody Common Stock, (ii) according to a deferred payment or other similar
arrangement with the participant, or (iii) in any other form of legal consideration that may be
acceptable to the Administrator, or a combination of the foregoing.
At the time of option grant, the Administrator will determine the terms and conditions of an
option, the period or periods during which an option is exercisable, and the option term (which, in
the case of incentive stock
options, may not exceed 10 years, or five years with respect to 10% or more shareholder). Options
are also subject to certain restrictions on exercise if the participant terminates employment or
service.
Restricted Stock Awards
Subject to the limitations of the 2007 Plan, the Administrator may grant restricted stock
awards to such individuals in such numbers, upon such terms, and at such times as the Administrator
shall determine. Restricted stock awards may be subject to certain conditions which must be met
for the restricted stock award to vest and be earned, in whole or in part, and be no longer subject
to forfeiture.
Subject to certain limitations in the 2007 Plan, the Administrator will determine the
restriction period during which a participant may earn a restricted award and the conditions to be
met in order for it to be granted or to vest or be earned. These conditions may include:
•
payment of a stipulated purchase price;
•
attainment of performance objectives;
•
retirement;
•
displacement;
•
disability;
•
death; or
•
any combination of these conditions.
Subject to the terms of the 2007, the Administrator determines whether and to what degree
restricted stock awards have vested and been earned and are payable. If a participant’s employment
or service is terminated for any reason and all or any part of a restricted stock award has not
vested or been earned pursuant to the terms of the 2007 Plan and the individual award, the
participant will forfeit the award and related benefits unless the Administrator determines
otherwise.
Corporate Transaction
Upon a “Corporate Transaction,” as defined in the 2007 Plan and subject to any Code Section
409A requirements, any surviving corporation or acquiring corporation may assume or continue any or
all options or restricted stock awards outstanding under the 2007 Plan or may substitute similar
options or restricted stock awards for those outstanding under the 2007 Plan. In the event that
any surviving corporation or acquiring corporation does not assume or continue any or all such
outstanding options or restricted stock awards or substitute similar options or restricted stock
awards for such outstanding options or restricted stock awards, then with respect to options or
restricted stock awards that have not been assumed, continued or substituted, the Administrator
may:
•
cancel all outstanding options or restricted stock awards, and terminate
the 2007 Plan, effective as of the consummation of such Corporate Transaction,
provided that it will notify all participants of the proposed Corporate
Transaction so that each such participant will be given an opportunity to
exercise the then exercisable portion of such options or restricted stock
awards prior to the cancellation thereof, and provided that the Company
exercises its repurchase option with respect to outstanding stock awards, to
the extent such right has not lapsed; or
•
deem the vesting of all or a portion of options or restricted stock awards
that have not been assumed, continued or substituted prior to the Closing
accelerated in full, and any reacquisition or repurchase rights held by the
Company with respect to such options or restricted stock awards shall lapse.
Transfer and Other Restrictions
Awards generally are not transferable other than by will or the laws of intestate succession
or as may otherwise be permitted by the Administrator, and participants may not sell, transfer,
assign, pledge or otherwise encumber shares subject to such awards until the restriction period
and/or performance period has expired and until all conditions to vesting the award have been met.
As a condition to the issuance or transfer of common stock or the grant of any other 2007 Plan
benefit, we may require a participant or other person to become a party to an agreement imposing
such conditions or restrictions as we may require.
The following generally describes the principal federal (and not state and local) income tax
consequences of awards granted under the 2007 Plan as of this time. The summary is general in
nature and is not intended to cover all tax consequences that may apply to a particular participant
or to the Company. The provisions of the Internal Revenue Code of 1986, as amended (the “Code”),
and related regulations and other guidance are complicated and their impact in any one case may
depend upon the particular circumstances.
Incentive Options
The grant and exercise of an incentive stock option generally will not result in taxable
“compensation” income to the participant if the participant does not dispose of shares received
upon exercise of such option less than one year after the date of exercise and two years after the
date of grant, and if the participant has continuously been an employee of the Company from the
date of grant to three months before the date of exercise (or 12 months in the event of
disability). However, the excess of the fair market value of the shares received upon exercise of
the option over the option price generally will constitute an item of adjustment in computing the
participant’s alternative minimum taxable income for the year of exercise. Thus, certain
participants may incur federal income tax liability as a result of the exercise of an incentive
option under the alternative minimum tax rules of the Code.
The Company generally is not entitled to a deduction upon the exercise of an incentive option
unless the employee recognizes compensation income as described below. Upon the disposition of
shares acquired upon exercise of an incentive option, the participant will be taxed on the amount
by which the amount realized exceeds the option price. This amount will be treated as capital gain
or loss.
If the holding period requirements described above are not met, the participant will have
compensation income in the year of disposition to the extent of the lesser of: (i) the fair market
value of the stock on the date of exercise minus the option price or (ii) the amount realized on
disposition of the stock minus the option price. The Company generally is entitled to deduct as
compensation the amount of compensation income realized by the participant.
Pursuant to the Code and the terms of the 2007 Plan, in no event can there first become
exercisable by a participant in any one calendar year incentive stock options granted by the
Company with respect to shares having an aggregate fair market value (determined at the time an
option is granted) greater than $100,000. To the extent an incentive option granted under the 2007
Plan exceeds this limitation, it will be treated as a nonqualified option.
Nonqualified Options
The grant of a nonqualified option is a non-taxable event. However, upon exercise the
difference between the fair market value of the stock on the date of exercise and the option price
will constitute taxable compensation income to the participant on the date of exercise. The Company
generally will be entitled to a deduction in the same year in an amount equal to the income taxable
to the participant.
Restricted Stock Awards
The grant of restricted stock awards will not result in taxable compensation income to the
participant or a tax deduction to the Company. In the year that the restricted stock becomes
vested and is no longer subject to a substantial risk of forfeiture, the fair market value of such
shares at such date, less cash or other consideration paid (if any), will be taxed to the
participant as compensation income. However, the participant may elect under Code Section 83(b) to
include in his ordinary income at the time the restricted stock is granted, the fair market value
of such shares at such time, less any amount paid for the shares. The Company generally will be
entitled to a corresponding tax deduction.
Section 409A of the Code imposes certain requirements on deferred compensation. The Company
intends for the 2007 Plan to comply in good faith with the requirements of Section 409A of the Code
including related regulations and guidance, where applicable and to the extent practicable. If,
however, Section 409A of the Code is deemed to apply to an award, and the 2007 Plan and award do
not satisfy the requirements of Section 409A of the Code during a taxable year, the participant
will have ordinary income in the year of non-compliance in the amount of all deferrals subject to
Section 409A of the Code to the extent that the award is not subject to a substantial risk of
forfeiture. The participant may be subject to additional tax liabilities under Section 409A of the
Code (40% combined federal and California) on all amounts includible in income and may also be
subject to interest charges if the 409A violation is discovered in a later tax year.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Cody Transactions
None of the following parties has, since Cody’s date of incorporation, had any material
interest, direct or indirect, in any transaction with us or in any presently proposed transaction
that has or will materially affect us:
•
Any of our directors or officers;
•
Any person proposed as a nominee for election as a director;
•
Any person who beneficially owns, directly or indirectly, shares carrying more
than 10% of the voting rights attached to our outstanding shares of common stock;
•
Any of our promoters; or
•
Any relative or spouse of any of the foregoing persons who has the same house
address as such person
ChromaDex Transactions
At December 29, 2007 and December 31, 2006, the Company owed $1,167,828 and $1,009,029,
respectively, to Frank L Jaksch Jr. and Mark Germain relating to unpaid compensation. The amounts
owed to officers are unsecured, non-interest bearing, and payable on demand.
The Company sold $50,000 and $11,000 worth of product development services to Pagoda Pharma
Group, Inc. (BVI) formerly Can-Nan Horizon Quest, Inc. (BVI) (“Pagoda”) in 2008 and 2007,
respectively. Frank L. Jaksch Jr. owns 1,500 shares of Pagoda, which is 1.27% of Pagoda’s
outstanding shares and served as its director until April 2007. Frank L. Jaksch Sr. (Frank L.
Jaksch Jr’s father) effectively owns 11,500.62 shares of Pagoda (4,216 through direct ownership and
7,284.62 through his ownership interest in Horizon Quest LLC), which is 9.77% of Pagoda’s
outstanding shares and serves as its Executive Chairman and director. Thomas C. Varvaro is
currently a director of Pagoda.
On June 20, 2007, ChromaDex and Pagoda entered into a business development agreement whereby
Pagoda will market ChromaDex products in China. Each company will jointly own products that are
developed and commercialized pursuant to the agreement. The business terms of the agreement vary
for each product that is developed. As of May 2008, the companies had agreed to the development of
one product that would lead to the sale of between $25,000 and $75,000 worth of product development
services from ChromaDex to Pagoda during the remainder of 2008. The term of the agreement extends
through June 20, 2010 and automatically renews each year thereafter, however, arrangements for
individual products may have separate lengths of terms.
The following description is only a summary of certain significant provisions of the rights,
preferences, qualifications and restrictions of Cody’s capital stock.
Authorized Capital Stock
Cody’s authorized capital stock consists of 50,000,000 shares of common stock, $0.001 par
value per share.
As of June 20, 2008, 4,500,012 shares of Cody Common Stock were outstanding held of record by
43 holders. Following the Merger, there were 28,022,134 shares of Common Stock outstanding held by
124 holders.
Common Stock
We are authorized to issue 50,000,000 shares of common stock. The holders of common stock are
entitled to equal dividends and distributions, per share, on the common stock when, as and if
declared by the board of directors from funds legally available for that. No holder of any shares
of common stock has a pre-emptive right to subscribe for any securities nor are any common shares
subject to redemption or convertible into other securities. Upon liquidation, dissolution or
winding up, and after payment of creditors and preferred stockholders, if any, the assets will be
divided pro-rata on a share-for-share basis among the holders of the shares of common stock. All
shares of common stock now outstanding are fully paid, validly issued and non-assessable. Each
share of common stock is entitled to one vote on the election of any director or any other matter
upon which shareholders are required or permitted to vote. Holders of our common stock do not have
cumulative voting rights, so that the holders of more than 50% of the combined shares voting for
the election of directors may elect all of the directors, if they choose to do so and, in that
event, the holders of the remaining shares will not be able to elect any members to the board of
directors. Issuance of additional common stock in the future will reduce proportionate ownership
and voting power of each share outstanding. Directors can issue additional common stock without
shareholder approval to the extent authorized.
The Certificate of Incorporation of Code provides that no director or officer will be
personally liable to the corporation or its stockholders for monetary damages for any breach of
fiduciary duty by such person as a director or officer to the fullest extent permitted by Delaware
law.
Business Combinations with Interested Shareholders.
Delaware law prohibits certain business combinations with interested shareholders, which are
defined as owners of 15% or more of the outstanding voting power of the Company (or certain
affiliates or associates of the Company who have held 15% or more of the outstanding shares in the
past three years), for three years after the date that the person first became an interested
stockholder, unless (1) prior to such time the board of directors of the Company approved either
the business combination or the transaction which resulted in the stockholder becoming an
interested stockholder or (2) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of
the voting stock of the Company outstanding at the time the transaction commenced, subject to
certain exclusions, or (3) at or subsequent to the time the business combination is approved by the
board of directors and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder.
Meetings of the stockholders may be called by the Chairman of the Board, the Chief Executive
Officer, or the Board of Directors. Annual meetings shall be held on such date and at such time as
shall be designated from time to time by the Board of Directors. A majority of the outstanding
shares entitled to vote constitutes a quorum at a meeting of the stockholders. Each outstanding
share, regardless of class, is entitled to one vote on each matter at the meeting of stockholders.
Cumulative voting is not permitted in the election of directors.
The Board of Directors is composed of between a minimum of one and a maximum of thirteen
persons, as determined by the Board of Directors. Any vacancy may be filled by the affirmative
vote of a majority of the remaining directors, or the sole remaining director unless the Board of
Directors determines by resolution to fill the vacancy by a vote of the stockholders. Directors
may be removed, without cause, by a vote of a majority of the shares entitled to vote at the
election of directors. The directors may be paid their expenses, if any, of attendance at each
meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director.
Officers are elected by the board at the meeting of the board next following the annual
meeting of the stockholders, or at any meeting if an office is vacant. The term of office and
compensation of the officers is determined by the Board of Directors. Subject to the rights, if
any, of an officer under any contract of employment, officers can be removed by the board at any
meeting thereof whenever in its judgment the best interests of the Company would be served thereby.
The bylaws of Cody may be amended or repealed and new bylaws adopted by the Board of
Directors, or by a majority of the stockholders.
MARKET PRICE OF AND DIVIDENDS ON CODY’S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently quoted on the OTC Bulletin Board (“OTCBB”), which is sponsored
by the NASD. The OTCBB is a network of security dealers who buy and sell stock. The dealers are
connected by a computer network that provides information on current “bids” and “asks”, as well as
volume information. Our shares are quoted on the OTCBB under the symbol “CDYE.OB.”
The following table sets forth the range of high and low bid quotations for our common stock
for each of the periods indicated as reported by the OTCBB. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
On June 20, 2008, the day before we announced the Merger Agreement, there were no bids for the
Common Stock of Cody.
Penny Stock
The SEC has adopted rules that regulate broker-dealer practices in connection with
transactions in penny stocks. Penny stocks are generally equity securities with a market price of
less than $5.00, other than securities registered on certain national securities exchanges or
quoted on the NASDAQ system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system. The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk
disclosure document prepared by the SEC, that: (a) contains a description of the nature and level
of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains
a description of the broker’s or dealer’s duties to the customer and of the rights and remedies
available to the customer with respect to a violation of such duties or other requirements of the
securities laws; (c) contains a brief, clear, narrative description of a dealer market, including
bid and ask prices for penny stocks and the significance of the spread between the bid and ask
price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines
significant terms in
the disclosure document or in the conduct of trading in penny stocks; and (f) contains such
other information and is in such form, including language, type size and format, as the SEC shall
require by rule or regulation.
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the
customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the
broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid
and ask prices apply, or other comparable information relating to the depth and liquidity of the
market for such stock; and (d) a monthly account statement showing the market value of each penny
stock held in the customer’s account.
In addition, the penny stock rules require that prior to a transaction in a penny stock not
otherwise exempt from those rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the purchaser’s written
acknowledgment of the receipt of a risk disclosure statement, a written agreement as to
transactions involving penny stocks, and a signed and dated copy of a written suitability
statement.
These disclosure requirements may have the effect of reducing the trading activity for our
common stock. Therefore, stockholders may have difficulty selling our securities.
Holders of Our Common Stock
As of March 29, 2008, we had 38 holders of record of our common stock.
Equity Compensation Plan Information
Equity Compensation Plan Information for Cody
As of December 29, 2007, Cody had no outstanding equity compensation plans.
Equity Compensation Plan Information for ChromaDex
For a narrative description of the 2007 Plan and the 2000 Plan, see “Equity Incentive Plans”
under Item 2.01 of this Current Report and Form 8-K.
The following table provides information about the equity compensation plans of ChromaDex as
of December 29, 2007:
A
B
C
Number of
securities
Weighted
remaining
average
available for
Number of
exercise
future
securities
price of
issuance
to be issued
outstanding
under equity
upon
options,
compensation
exercise of
warrants
plans
outstanding
and rights
(excluding
options,
securities
securities
warrants
reflected in
reflected in
Plan Category
and rights
column (A)
column (A))
Equity compensation plans approved by security holders
1,473,950
$
1.16
2,526,050
(1)
Equity compensation plans not approved by security holders
—
—
—
Total
1,473,950
$
1.16
2,526,050
(1)
(1)
The ChromaDex, Inc. 2007 Second Amended and Restated Equity Incentive
Plan. The maximum number of shares authorized for issuance under this
plan is the greater of 4,000,000 shares of common stock or 10% of the
shares of common stock of the company issued and outstanding on any
date during the Plan Term, as determined in accordance with Section
13(a), subject to specified adjustment.
Cody is not involved in any pending or threatened legal proceedings.
Claims against ChromaDex
ChromaDex is not involved in any pending or threatened legal proceedings.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
We have had no disagreements with our independent and registered public accounting firm on
accounting and financial disclosure. See Item 4.01 to this Form 8-K for information regarding a
change in our accountants. That information is incorporated herein by reference.
RECENT SALES OF UNREGISTERED SECURITIES
Recent Sales by Cody
None.
Recent Sales by ChromaDex
On December 31, 2005, ChromaDex issued 310,023 shares of common stock to the University of
Mississippi Research Foundation (the “Foundation”) in return for cancellation of $262,500.00 in
fees owed by ChromaDex to the Foundation pursuant to that certain Licensing Agreement Nutraceutical
Standards effective as of December 31, 1999. These shares were issued in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933.
On November 8, 2005, AAPE AAP Holdings S.A. exercised warrants to purchase 100,000 shares of
common stock at a blended strike price of $1.25 per share. The warrants were issued to AAPE AAP
Holdings S.A. in December, 2004 in reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933. On January 31, 2008, ChromaDex sold an additional 50,000
shares of common stock to AAPE AAP Holdings S.A. at a price of $1.00 per share. The warrants were
issued to AAPE AAP Holdings S.A. in December, 2004 in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933.
On November 8, 2005, ChromaDex issued 338,154 shares of common stock to L & J Becvar, L.P. as
partial consideration for the licensing of patented rights from L & J Becvar, L.P. pursuant to that
certain License Agreement dated August 19, 2005. The fair value to ChromaDex in monetary terms of
the shares was determined to be $0.87 per share. The number of shares issued was adjusted on
December 31, 2005, September 19, 2006 and on June 18, 2007 to an aggregate total of 392,490 shares
pursuant to the terms of the license agreement. These shares were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of 1933.
On September 19, 2006, ChromaDex issued 46,503 shares of common stock to Tapestry
Pharmaceuticals, Inc. (formerly NaPro BioTherapeutics, Inc.) pursuant to section 1.3(f) of that
certain Asset Purchase Agreement dated April 8, 2003, which provides antidilution protection for
Tapestry as part of the consideration it received for the transfer of certain of its assets to
ChromaDex. These shares were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933.
On August 28, 2007, ChromaDex sold 4,407,640 shares of common stock to Margie Chassman at a
purchase price of approximately $0.255 per share. These shares were issued in reliance on the
exemption from registration provided by 4(2) of the Securities Act of 1933.
On April 1, 2008, ChromaDex issued 25,502 shares of common stock to Jolley & Jolley, a
professional law corporation as partial consideration for legal services provided to the company by
Jolley & Jolley, pursuant to that certain Contract for Legal Services, dated September 8, 2005.
The fair value to ChromaDex in monetary terms of the shares was determined to be $0.87 per share.
These shares were issued in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933.
During the past three years, ChromaDex has issued 632,500 stock options to 14 employees,
directors and officers under the 2000 Plan. 25,000 of these options were terminated in cases where
5 employees ended their employment with the Company before their options vested. The stock options
can be exercised at a price of $1.50 per share and vest at a rate of 20% per year for each of the
employees. These shares were issued in reliance on the exemption from registration provided by
Rule 701 of the Securities Act of 1933. For additional information on the 2000 Plan see “Equity
Incentive Plans” under Item 2.01 of this Form 8-K.
During the past three years, ChromaDex has issued 2,022,987 stock options to 37 employees,
directors and officers under the 2007 Plan. The stock options can be exercised at a price of $1.50
per share and vest at a rate of 20% per year for each employee. These shares were issued in
reliance on the exemption from registration provided by Rule 701 of the Securities Act of 1933.
For additional information on the 2007 Plan see “Equity Incentive Plans” under Item 2.01 of this
Current Report and Form 8-K.
ChromaDex is currently offering up to 4,411,764 shares of common stock and warrants to
purchase an additional 2,205,882 shares of common stock to investors for a price of $1.36 per share
through a private placement. Concurrently with the purchase of shares of common stock, each
investor receives a warrant to purchase one-half of the number of shares of common stock purchased
by the investor at an exercise price of $3.00 per share, exercisable for five years. The warrants
can be repurchased by ChromaDex at a price of $4.50 per share or cancelled by ChromaDex at a
cancellation price of $1.50 per share. As of May 21, 2008, ChromaDex has sold 2,628,618 shares to
69 investors. These shares were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933 and Regulation D thereunder.
New Castle Financial Services LLC (“New Castle”) is acting as agent in connection with
the private placement and as consideration for such service New Castle is entitled to (i) a cash
payment equal to 10% of the gross proceeds raised from the sale of common stock (excluding common
stock issuable upon exercise of the warrants) in the offering from qualified potential investors
identified by New Castle and accepted in writing by the ChromaDex, and (ii) five-year warrants to
purchase at an exercise price of $1.36 that number of shares of common stock equal to 10% of the
number of shares of common stock (excluding common stock issuable upon exercise of the warrants)
placed by New Castle with such investors. The five-year warrants are to be issued to New Castle
upon completion of the offering. As of the date of the closing of the latest sale by New Castle on
May 21, 2008, the warrants to be issued to New Castle amounted to a warrant for the purchase of
262,861 shares of common stock at $1.36 per share.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law (the “GCL”) of Delaware empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or enterprise.
Depending on the character of the proceeding, a corporation may indemnify against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if the person identified acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no cause to believe his or her conduct was
unlawful. In the case of an action by or in the right of the corporation, no indemnification may be
made in respect of any claim, issue or matter as to which such person shall have been adjudged to
be liable to the corporation unless and only to the extent that the court in which such action or
suit was brought shall determine that despite the adjudication of liability such person is fairly
and reasonably entitled to indemnity for such expenses that the court shall deem proper. Section
145 further provides that to the extent a present or former director or officer of a corporation
has been successful in the defense of any action, suit or proceeding referred to above or in the
defense of any claim, issue or matter herein, he or she shall be indemnified against expenses
(including attorneys’ fees) actually and reasonably incurred by him or her in connection therewith.
The statute provides that indemnification pursuant to its provisions is not exclusive of other
rights of indemnification to which a person may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
Cody’s Certificate of Incorporation and Bylaws, provide, in effect, that to the full extent
and under the circumstances permitted by Section 145 of the GCL, Cody shall indemnify any person
who was or is a party or is threatened to be made a party to any action, suit or proceeding of the
type described above by reason of the fact that he or she is or was a director or officer or serves
or served at Cody’s request as a director or officer of another corporation, joint venture, trust
or other enterprise. Cody’s Certificate of Incorporation and Bylaws also provides that it shall
have the power, under the circumstances permitted by Section 145 of the GCL, to indemnify any
employees and other agents as permitted by the GCL.
Cody’s Certificate of Incorporation relieves its directors from monetary damages to Cody or
its stockholders for breach of such director’s fiduciary duty as a director to the fullest extent
permitted by the GCL. Under Section 102(b)(7) of the GCL, a corporation may relieve its directors
from personal liability to such corporation or its stockholders for monetary damages for any breach
of their fiduciary duty as directors except (i) for a breach of the duty of loyalty, (ii) for
failure to act in good faith, (iii) for intentional misconduct or knowing violation of law, (iv)
for willful or negligent violation of certain provisions of the GCL imposing certain requirements
with respect to stock purchases, redemptions and dividends or (v) for any transaction from which
the director derived an improper personal benefit.
CODY SHARES ELIGIBLE FOR FUTURE SALE
As of June 20, 2008, 28,022,134 shares of Cody Common Stock were outstanding, of which
approximately 23,522,122 were issued to former holders of ChromaDex Common Stock, pursuant to the
Merger Agreement. The following sets forth certain information regarding shares of Cody Common
Stock that are, or may be in the future, eligible for resale.
Resales of Common Stock Issued Prior to the Merger
Prior to the merger, Cody had 4,500,012 shares of common stock listed on the OTCBB. These
shares may be sold pursuant to the penny stock rules described in “Penny Stock” above.
Resales of Cody Common Stock received in the Merger
Former ChromaDex shareholders now own approximately 83.94% of the outstanding shares of the
Cody Common Stock. Shares of Cody capital stock issued in the Merger were issued pursuant to an
exemption from the registration requirements of the Securities Act. In order to be resold to the
public, the resale of those shares must be either registered under the Securities Act, the shares
must be sold in compliance with Rule 144, or another exemption from the registration requirements.
Registration of the Cody Common Stock received in the Merger under existing agreements.
Section 3.1(b) of that certain License Agreement, effective September 15, 2005, between L&J
Becvar, L.P. (“Becvar”) and ChromaDex provides that Becvar shall have “piggy-back” registration
rights, with respect to the stock transferred under this agreement, “on terms consistent with
industry standards and any previous agreements granted by ChromaDex, including the NaPro asset
purchase agreement.
Section 2.1 of that certain Investor’s Rights Agreement, effective as of December 31, 2005, by
and between the Foundation and ChromaDex provides that if ChromaDex proposes to file a registration
statement under the Securities Act with respect to an offering for its own account of any class of
its equity securities (other than a registration statement on Form S-8 (or any successor form) or
any other registration statement relating solely to employee benefit plans or an offering of
securities solely to ChromaDex’s existing shareholder), then ChromaDex shall offer the Foundation
or its assignee the opportunity to register such number of shares of restricted stock as the
Foundation may request. If ChromaDex’s offering is to be an underwritten offering, ChromaDex
shall, subject to the further provisions of this Agreement, use its reasonable best efforts to
cause the managing underwriter or underwriters to permit the Foundation’s stock requested to be
included in the registration of such offering to include such stock in such offering on the same
terms and conditions as any similar securities of ChromaDex included therein. If the managing
underwriter of such offering determines in its sole discretion that would be adversely affected by
inclusion of the stock requested to be included, then in such managing underwriter’s discretion,
the number of shares of stock to be registered and offered for the accounts of the Foundation shall
be either (i) eliminated entirely from such registration and offering or (ii) reduced pro rata on
the basis of the number of securities requested by the Foundation to be registered and offered to
the extent necessary to reduce the total amount of securities to be included in such offering to
the amount recommended by such managing underwriter (provided that if securities are being
registered and offered for the account of other persons or entities in addition to ChromaDex, such
reduction shall not be proportionately greater than any similar reduction imposed on such other
persons or entities.)
Rule 144
In general, under the newly revised Rule 144, effective February 15, 2008, beginning one year
after the filing of this Form 8-K (the “Anniversary”), a person who has beneficially owned shares
of Cody Common Stock for at least six months, who is not an affiliate of Cody is entitled to resell
their shares of Cody Common Stock without restriction. Beginning on the Anniversary, any person
who may be deemed to be an “affiliate” of Cody (as the term “affiliate” is defined under Rule 144),
is entitled to sell, within any three-month period, a number of shares that does not exceed the
greater of:
•
1% of the number of shares of Cody Common Stock then outstanding (after the
Merger there would be approximately 28,022,134 such shares outstanding); or
•
the average weekly trading volume of Cody Common Stock during the four calendar
weeks preceding the sale.
However, since Cody Common Stock is quoted on the NASD’s Over-The-Counter Bulletin Board,
which is not an “automated quotation system,” its shareholders cannot rely on the market-based
volume limitation described in the second bullet above. If in the future Cody Common Stock is
listed on an exchange or quoted on NASDAQ, then its shareholders would be able to rely on the
market-based volume limitation. Unless and until Cody Common Stock is so listed or quoted, its
shareholders can only rely on the percentage based volume limitation described in the first bullet
above.
Under the newly revised Rule 144, effective February 15, 2008, and assuming no shares are sold
pursuant to registration under the Investor’s Rights Agreement, effective as of December 31, 2005,
by and between the Foundation and ChromaDex, up to approximately 23,522,122 additional shares of
Cody Common Stock will become eligible for sale in the public market under the Securities Act
pursuant to Rule 144 by former ChromaDex shareholders beginning on the Anniversary. In addition,
4,616,240 shares of Cody Common Stock subject to outstanding options or warrants reserved for
future issuance may become eligible for sale in the public market to the extent permitted by the
provisions of the related agreements and Rules 144 and 701 under the Securities Act. Shares
subject to the 2000 plan and the 2007 plan may also be registered on Form S-8, and become
eligible for resale. If these additional shares are sold, or if it is perceived that they will be
sold, in the public market, the trading price of the Cody Common Stock, if any, could decline.
The information disclosed in Item 2.01 of this Form 8-K is incorporated into this Item 3.02.
The issuance at the consummation of the Merger on June 20, 2008, of 23,522,122 shares of Cody
Common Stock and the conversion of outstanding ChromaDex, Inc. options and warrants into options
and warrants to acquire Cody common stock in connection with the Merger were made in a private
placement in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder, and pursuant to Rule 701 promulgated under
the Securities Act as to options and warrants. The class of persons who received the shares was
the former holders of ChromaDex, Inc. capital stock, and holders of options and warrants to acquire
such stock. As consideration for the issuance of its stock, Cody Resources, Inc. acquired 100%
ownership of ChromaDex, Inc. in the Merger.
Upon closing of the Merger each share of ChromaDex common stock held by: (i) an “accredited
investor” as defined in Rule 501 of Regulation D promulgated by the SEC under the Securities Act of
1933, as amended; or (ii) a person who does not qualify as an accredited investor, but who, either
alone or together with such person’s purchaser representative, has such knowledge and experience in
financial and business matters that such person is capable of evaluating the merits and risks of an
investment in Cody stock and can bear the economic risk of such an investment, was converted into
the right to receive one share of Cody Common Stock for each share of ChromaDex Common Stock. If,
however, a former holder of ChromaDex capital stock does not demonstrate to Cody, in its sole
discretion, that such person meets the tests, Cody may elect to pay $1.36 for each share of
ChromaDex previously held by that person in lieu of Cody shares. Cody does not anticipate that it
will pay cash to any former ChromaDex shareholder.
The terms of conversion or exercise of the options and warrants assumed are disclosed at Item
2.01 of this Form 8-K.
Item 4.01 Changes in Registrant’s Certifying Accountant
On June 20, 2008, by action of our Board of Directors, effective upon consummation of the
Merger, we dismissed Moore & Associates Chartered as our independent accountants. Moore &
Associates Chartered had previously been engaged as the principal accountant to audit our financial
statements. The reason for the dismissal of Moore & Associates Chartered is that, following the
consummation of the Merger on June 20, 2008, (i) the former stockholders of ChromaDex owned a
significant amount of the outstanding shares of our capital stock and (ii) our primary business
became the business previously conducted by ChromaDex. The independent registered public
accountant of ChromaDex was the firm of McGladrey & Pullen, LLP (“McGladrey”). We believe that it
is in our best interest to have McGladrey continue to work with our business, and we therefore
retained McGladrey our new principal independent registered accounting firm, effective as of June20, 2008. McGladrey is located at 20 North Martingale Rd., Ste 500, Schaumburg, IL60173-2419. The
decision to change accountants was approved by our Board of Directors on June 20, 2008.
The report of Moore & Associates Chartered on our financial statements for and during the
fiscal years ending November 30, 2006 and November 30, 2007, did not contain an adverse opinion or
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or
accounting principles, except that the report was qualified as to our ability to continue as a
going concern.
From the date of their initial engagement through June 20, 2008, there were no disagreements
with Moore & Associates Chartered on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of
Moore & Associates Chartered would have caused it to make reference to the matter in connection
with its reports.
Through June 20, 2008 Cody did not consult McGladrey regarding either: (i) the application of
accounting principles to a specific completed or contemplated transaction, or the type of audit
opinion that might be rendered on our financial statements; or (ii) any matter that was the subject
of a disagreement as defined in Item 304(a)(1)(iv) of Regulation S-B.
We have made the contents of this Current Report on Form 8-K available to Moore & Associates
Chartered and requested that Moore & Associates Chartered furnish us a letter addressed to the SEC
as to whether Moore & Associates Chartered agrees or disagrees with, or wishes to clarify our
expression of, our views, or containing any additional information. A copy of Moore & Associates
Chartered’s letter to the SEC is included as Exhibit 16.1 to this Current Report on Form 8-K.
Item 5.01 Change in Control of Registrant
In connection with the Merger, Cody experienced a change in control. The disclosure set forth
in Item 2.01 to the Current Report on Form 8-K is incorporated herein by reference.
No agreements exist among present or former controlling stockholders of the Cody or present or
former officers and directors of ChromaDex with respect to the future election of the members of
the Cody Board of Directors, and to Cody’s knowledge, no other agreements exist which might result
in a change of control of the Cody.
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers.
Pursuant to the Merger Agreement, the directors and executive officers of Cody, Donald Sampson
and Barbara Grant, resigned at the closing of the Merger and appointed the directors and executive
officers of ChromaDex to become the directors and executive officers of Cody. See Item 2.01 of
this Form 8-K, which is incorporated herein by reference, for additional information regarding the
persons who resigned as directors and executive officers and those who now constitute the Board of
Directors and executive officers of Cody, and their compensation.
Pursuant to the Merger Agreement and in connection with the Merger, the Registrant changed its
name from “Cody Resources, Inc.” to “ChromaDex Corporation.”
Pursuant to the Merger Agreement and following the Effective Time of the Merger, the
Registrant changed its fiscal year end from November 30 to the closest Saturday to January first of
the subsequent year. The change in our fiscal year will take effect on June 20, 2008 and,
therefore there will be no transition period in connection with this change of fiscal year-end.
Our 2008 fiscal year will end on January 1, 2009.
Item 5.06 Change in Shell Company Status.
The transactions reported in Item 2.01 of this Current Report on Form 8-K have the effect of
causing the Registrant to cease being a shell company as defined in Rule 12b-2 promulgated under
the Securities Exchange Act of 1934. For a discussion of the transactions, see Item 2.01 herein
and the content of Exhibit 2.1 filed as an exhibit to this Current Report on Form 8-K.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
As a result of its acquisition of ChromaDex described in Item 2.01 above, the Registrant is
filing ChromaDex’s audited financial statements for the fiscal years ended December 29, 2007 and
December 31, 2006, and for the quarter ended March 29, 2008, incorporated in this Current Report on
Form 8-K.
As a result of its acquisition of ChromaDex described in Item 2.01 above, the Registrant is
filing pro forma financial information incorporated in this Current Report on Form 8-K.
Certificate
of Incorporation of Cody Resources, Inc., a Delaware corporation and
Certificate of Amendment of Cody Resources, Inc.
3.2
Bylaws
of Cody Resources, Inc., a Delaware corporation
4.1
Investor’s Rights Agreement, effective as of December 31, 2005, by and between The University of
Mississippi Research Foundation and ChromaDex
4.2
Tag-Along Agreement effective as of December 31, 2005, by and among the Company, Frank Louis Jaksch,
Snr. & Maria Jaksch, Trustees of the Jaksch Family Trust, Margery Germain, Lauren Germain, Emily
Germain, Lucie Germain, Frank Louis Jaksch, Jr., and the University of Mississippi Research
Foundation
4.3
License Agreement, effective September 15, 2005 between L&J Becvar, L.P. and ChromaDex, Inc.
4.4
Form of Warrant to Purchase Shares of Common Stock of ChromaDex Corporation
10.1
ChromaDex, Inc. 2000 Non-Qualified Incentive Stock Option Plan effective October 1, 2000
10.2
Second Amended and Restated 2007 Equity Incentive Plan effective March 13, 2007
10.3
Form of Stock Option Agreement under the ChromaDex, Inc. Second Amended and Restated 2007 Equity
Incentive Plan
10.4
Form of Restricted Stock Purchase Agreement under the ChromaDex, Inc. 2007 Equity Incentive Plan
10.5
Employment Agreement dated April 14, 2008, by and between Frank L. Jaksch, Jr. and ChromaDex, Inc.
10.6
Employment Agreement dated April 14, 2008, by and between Thomas C. Varvaro and the ChromaDex, Inc.
10.7
Standard Industrial/Commercial Multi-Tenant Lease – Net dated December 19, 2006, by and between the
ChromaDex, Inc. and SCIF Portfolio II, LLC
10.8
Lease Agreement dated October 26, 2001, by and between Railhead Partners, LLC and NaPro
BioTherapeutics, Inc., as assigned to ChromaDex Analytics, Inc. on April 9, 2003 and amended on
September 24, 2003
10.9
Licensing Agreement Nutraceutical Standards effective as of December 31, 1999 between the University
of Mississippi Research Foundation and ChromaDex
License Agreement, effective September 15, 2005 between L&J Becvar, L.P. and ChromaDex, Inc. (1)
10.12
Option
Agreement, and Patent License Agreement, both effective on
August 19, 2005 and both between the Board of Regents of The University of Texas Systems and
ChromaDex, Inc.
10.13
Stock Redemption Agreement, dated June 18, 2008 between ChromaDex, Inc. and Bayer Innovation GmbH
(formerly named Bayer Innovation Beteiligungsgesellschaft mbH)
10.14
Promissory Note, dated June 18, 2008 between ChromaDex, Inc. as borrower and Bayer Innovation GmbH as
lender
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
To the Board of Directors
ChromaDex, Inc. and Subsidiary
Irvine, California
We have audited the accompanying consolidated balance sheets of ChromaDex, Inc. and Subsidiary as
of December 29, 2007 and December 31, 2006, and the related consolidated statements of operations,
stockholders’ equity and cash flows for the years then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated balance sheets referred to above present fairly, in all material
respects, the financial position of ChromaDex, Inc. and Subsidiary as of December 29, 2007 and
December 31, 2006, and the results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United States of America.
/s/
McGladrey & Pullen LLP Schaumburg, Illinois April 10, 2008
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: ChromaDex, Inc. and its wholly owned subsidiary, ChromaDex Analytics,
Inc. (the Company) create and supply botanical reference standards along with related phytochemical
products and services. The Company’s main priority is to create industry-accepted information,
products and services to every layer of the functional food, pharmaceutical, personal care and
dietary supplement markets. The Company provides these services at terms of 30 days.
Significant accounting policies are as follows:
Principles of consolidation: The consolidated financial statements include the accounts of
ChromaDex, Inc. and its wholly owned subsidiary, ChromaDex Analytics, Inc. Intercompany
transactions and balances have been eliminated in consolidation.
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.
Trade accounts receivable: Trade accounts receivable are carried at original invoice
amount less an estimate made for doubtful receivables based on a periodic review 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. Trade accounts
receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable
previously written off are recorded when received.
Inventories: Inventories are comprised of finished goods and are stated at the lower of
cost, determined by the first-in, first-out method (FIFO) method, or market.
Intangibles: Intangibles consist of licensing costs and are amortized on the straight-line
method over the contract life of 10 years.
Leasehold improvements and equipment: Leasehold improvements and equipment are carried at
cost and depreciated on the straight-line method over the estimated useful life of each asset.
Leasehold improvements and equipment are comprised of laboratory equipment, furniture and fixtures,
vehicles and computer equipment. Useful lives range from 3 to 10 years. Depreciation on equipment
under capital lease is included with depreciation on owned assets.
Customer deposits: Customer deposits represent cash received from customers in advance of
product shipment or delivery of services.
Deferred taxes: Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss and tax credit
carryforwards and deferred liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not
be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
Note 1. Nature of Business and Significant Accounting Policies (continued)
Fair value determination of privately-held securities: The fair values of the common stock
as well as the common stock underlying options and warrants granted as part of asset purchase
prices or as compensation were estimated by management. Determining the fair value of stock requires making complex and subjective judgments.
The Company used the market approach to estimate the value of the enterprise at each date on which
securities are issued or granted. The enterprise value available to all stockholders and allocating
that value among the various classes of stock based on the rights, privileges and preferences of
the respective classes. There is inherent uncertainty in these estimates.
Stock-based compensation: The Company’s stock-based employee compensation plan is
described in Note 8. Prior to 2006, the Company accounted for this plan under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The Company accounted for stock-based compensation to non-employees at fair value.
In addition, the Company’s subsidiary also maintained a stock-based compensation plan. The
subsidiary also accounted for this plan under the recognition and measurement principles of APB 25
and related interpretations. The subsidiary accounted for stock-based compensation to non-employees
at fair value.
Beginning in 2006, the Company accounted for newly issued stock-based compensation under the
recognition and measurement provisions of SFAS 123(R). The standard requires entities to measure
the cost of services received in exchange for stock options based on the grant-date fair value of
the award, and to recognize the cost over the period the individual is required to provide services
for the award.
The Company adopted SFAS 123 (R) utilizing the prospective method and applied the measurement
provisions of SFAS 123(R) prospectively to all awards granted, modified, repurchased, or cancelled
after January 1, 2006 (required effective date). The Company continues to account for any portion
of awards outstanding at the date of initial application using the accounting principles originally
applied to those awards.
The Company recognizes compensation expense under Statement No. 123(R) over the requisite service
period using the straight-line method. The Company has determined that the fair value method should
be used in determining the value of its stock options. The fair value method requires that the
volatility assumption used in an option-pricing model be based on the historical volatility of
daily closing total returns from industry sector comparable companies.
New accounting pronouncements: The Financial Accounting Standards Board (FASB) has issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in
accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement standard for the financial statement recognition and
measurement of an income tax position taken or expected to be taken in a tax return. In addition,
FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.
The Company presently recognizes income tax positions based on management’s estimate of whether it
is reasonably possible that a liability has been incurred for unrecognized income tax benefits by
applying FASB Statement No. 5, Accounting for Contingencies.
In February 2008, the FASB delayed the effective date of FIN 48 for certain nonpublic enterprises
to annual financial statements for fiscal years beginning after December 15, 2007. The Company
will be required to adopt FIN 48 in its
2008 annual financial statements. The provisions of FIN 48 are to be applied to all tax positions
upon initial application of this standard. Only tax positions that meet the more-likely-than-not
recognition threshold at the effective date may be recognized or continue to be recognized upon
adoption.
Note 1. Nature of Business and Significant Accounting Policies (continued)
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value
measurement. SFAS No. 157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the highest priority being
quoted prices in active markets. Under SFAS No. 157, fair value measurements are disclosed by
level within that hierarchy. SFAS No. 157 is effective for fiscal years beginning after November15, 2007, except for nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis for which delayed
application is permitted until fiscal years beginning after November 15, 2008. The Company has not
yet determined the impact of the adoption of SFAS No. 157, if any, on its financial position,
results of operations and cash flows.
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No.
159”). SFAS No. 159 permits companies to elect to follow fair value accounting for certain
financial assets and liabilities in an effort to mitigate volatility in earnings without having to
apply complex hedge accounting provisions. The standard also establishes presentation and
disclosure requirements designed to facilitate comparison between entities that choose different
measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company has not yet determined the impact of
the adoption of SFAS No. 159, if any, on its financial position, results of operations and cash
flows.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business
Combinations (SFAS 141(R)). This Statement provides greater consistency in the accounting and
financial reporting for business combinations. SFAS 141(R) establishes new disclosure requirements
and, among other things, requires the acquiring entity in a business combination to record
contingent consideration payable, to expense transaction costs, and to recognize all assets
acquired and liabilities assumed at acquisition-date fair value. This standard is effective for the
beginning of the Company’s first fiscal year beginning after December 15, 2008. SFAS 141(R) will
have a significant impact on the accounting for future business combinations after the effective
date and will impact financial statements both on the acquisition date and subsequent periods.
Revenue recognition: The Company recognizes sales and the related cost of goods sold at
the time the merchandise is shipped to customers or service is performed, when each of the
following conditions have been met: an arrangement exists, delivery has occurred, there is a fixed
price, and collectability is reasonably assured.
Reclassifications: Certain prior year balances have been reclassified to conform to the
2007 presentation.
Amortized expense on amortizable intangible assets included in the consolidated statement of
operations for each of the years ended December 29, 2007 and December 31, 2006 was $116,000.
Estimated aggregate amortization expense for each of the next five years is as follows:
Years ending December:
2008
$
116,000
2009
116,000
2010
63,500
2011
58,030
2012
36,000
Thereafter
97,500
$
487,030
Note 3. Leasehold improvements and Equipment
Leasehold improvements and equipment consisted of the following:
At December 31, 2006, notes payable totaling $112,500 consisted of two unsecured promissory notes
payable upon demand with interest at 8%. These notes were repaid during 2007. Interest expense
related to notes payable was $5,133 and $14,333 for the years ended December 29, 2007 and December31, 2006, respectively.
Note 5. Capitalized Lease Obligations
The Company leases equipment under capitalized lease obligations with a total cost of $224,003 and
$260,351 and accumulated amortization of $112,284 and $75,479 as of December 29, 2007 and December31, 2006, respectively.
Minimum future lease payments under capital leases as of December 29, 2007, are as follows:
Year ending December:
2008
$
101,851
2009
95,298
2010
38,518
2011
38,518
2012
13,289
Total minimum lease payments
287,474
Less amount representing interest
60,137
Present value of net minimum lease payments
227,337
Less current portion
74,571
Long-term obligations under capital leases
$
152,766
Interest expense related to capital leases was $26,682 and $11,826 for the years ended December 29,2007 and December 31, 2006, respectively.
A reconciliation of income tax expense (benefit) computed at the statutory federal income tax rate
of 34% for 2007 and 2006 compared to the Company’s income tax expense for the years ended December29, 2007 and December 31, 2006, is as follows:
The Company has tax net operating loss carryforwards available to offset future federal taxable
income and future state taxable income of approximately $2,987,195 and $2,500,571, respectively
which expire in December 31, 2025 and 2026, respectively. A full valuation allowance has been
established as the Company believes it is more likely than not that deferred tax assets as of
December 29, 2007 and December 31, 2006 will not be realized in future periods.
Note 8. Stock Options and Unearned Stock-Based Compensation
Company’s stock option plan: At the discretion of management and with approval of the
Board of Directors, the Company may grant options to purchase the Company’s common stock to certain
individuals from time to time. Management and the Board of Directors determine the exercise price,
vesting periods and expiration dates at the time of grant. Expiration dates are not to exceed 10
years. The Company under its 2007 option plan is authorized to issue stock options that total no
more than 3,000,000 shares and was authorized to issue stock options that totaled no more than
2,198,490 under its 2000 option plan which was terminated at the beginning of 2007. The remaining
amount available for issuance totaled 2,805,000 at December 29, 2007. The option awards generally
vest over a five-year period following grant date after a passage of time.
During the year ended December 31, 2006, by agreement with the option holders, the Company
exchanged options that were previously outstanding in the subsidiary’s plan for options in the
Company’s plan. All new options were issued with vesting and terms consistent with the previously
issued options. This effectively resulted in a cancellation of the previously issued options in
the subsidiary’s plan and a new issuance of options in the Company’s plan and a reclassification of
unearned stock based compensation to additional paid-in capital.
The Company recognized share-based compensation expense of $198 and $160,152 in general and
administrative expenses in the statement of operations for the years ended December 29, 2007 and
December 31, 2006, respectively.
The fair value of the Company’s stock options was estimated at the date of grant using the
Black-Scholes based option valuation model. The table below outlines the weighted average
assumptions for options granted during the years ended December 29, 2007 and December 31, 2006.
Year Ended December
2007
2006
Expected volatility
28.81%
15.81%
Expected dividends
0.00%
0.00%
Expected term
6.4 years
7 - 10 years
Risk-free rate
3.86%
4.55%
The Company uses historical data to estimate option exercise and employee termination within the
valuation model. The assumption for expected future volatility is based on a benchmark volatility
index of publicly held companies in similar industries. The expected term of options granted is
derived from the output of the option valuation model and represents the period of time that
options granted are expected to be outstanding. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of
grant.
As of December 29, 2007 and December 31, 2006, there was $3,458 and $0 of total unrecognized
compensation expense, respectively, related to nonvested share based compensation arrangements
granted under the plans. That cost is expected to be recognized over a weighted average period of
4.03 and 4.06 years, respectively as of December 29, 2007 and December 31, 2006. The weighted
average fair value of options granted during the years ended December 29, 2007 and December 31,2006 was $.44 and $1.19, respectively.
Note 9. Lease Commitments
The Company leases its office and research facilities in California and Colorado under operating
lease agreements that expire at various dates from June 2008 through March 2012. Monthly lease
payments range from $2,031 per month to $23,612 per month, and minimum lease payments escalate
during the terms of the leases. Generally accepted accounting principles require total minimum
lease payments to be recognized as rent expense on a straight-line basis over the term of the
lease. The excess of such expense over amounts required to be paid under the lease agreement is
carried as a noncurrent liability on the Company’s consolidated balance sheet.
At December 29, 2007 and December 31, 2006, the Company owed $1,167,828 and $1,009,029,
respectively, to two officers relating to unpaid compensation. The amounts owed to officers are
unsecured, non-interest bearing, and payable on demand.
Note 11. Litigation
On August 21, 2006the Company and Innovative Health Products Inc entered into a settlement
agreement (the settlement agreement) in connection with a lawsuit filed by Innovative Health
Products alleging breach of contract. In connection with the settlement agreement the Company
recorded an obligation of $155,000.
From time to time the Company has and expects to have claims and pending legal proceedings that
generally involve product liability, professional service and employment issues. These proceedings
are, in the opinion of management, ordinary routine matters incidental to the normal business
conducted by the Company. In the opinion of management, such proceedings are substantially covered
by insurance and/or are without merit, and the ultimate disposition of such proceedings is not
expected to have a material adverse effect on the Company’s financial position, results of
operations or cash flows.
Note 12. Management’s Plans for Operations and Subsequent Event
The Company has incurred a loss from operations of $177,720 and a net loss of $189,875 for the year
ended December 29, 2007, and a net loss of $1,284,260 for the year ended December 31, 2006,
attributable primarily to the analytical services line of business. The Company’s business plan
for 2008 reflects positive earnings before income taxes, depreciation and amortization. Management
has implemented strategic operational structure changes which it believes will allow the Company to
achieve profitability with future growth without incurring additional overhead costs. The Company
expects to grow the analytical services business and achieve break-even by mid-year 2008.
Management’s anticipation of future growth is largely related to the Food and Drug Administration’s
(FDA’s) guideline releases in the dietary supplement industry. The Company has implemented a
comprehensive marketing plan design targeted on leveraging its capabilities concurrent with the
FDA’s releases. Management believes that these changes along with
information technology and process initiatives will position the Company for growth without the
need for additional capital spending.
Note 12. Management’s Plans for Operations and Subsequent Event (continued)
The Company is currently conducting a private placement equity offering using Newcastle Financial
Services, Inc. as a broker. The total offering is for 4,411,765 shares at $1.36 for a total of
$6,000,000. Investors who purchase these shares will also receive one warrant to purchase an
additional share of the Company at $3.00 for every two shares they purchase. The Company has the
right to call these warrants at $4.50 per share. The total warrants to be issued under this
placement if fully subscribed will be 2,205,882. Newcastle Financial Services, Inc., in exchange
for their services as a broker will receive 10% of the cash proceeds from the offering and will
also receive a warrant to purchase one share at $1.36 for every ten shares subscribed under the
offering.
Subsequent to year-end, the Company received capital contributions from third party investors
totaling $2,625,000 and has issued 1,930,148 shares of common stock. In addition, 193,014 warrants
were issued with a strike price of $1.36 and 965,074 warrants were issued with a strike price of
$3.00. The Company has paid $262,500 in brokerage fees in connection with these transactions.
The accompanying condensed financial statements of ChromaDex, Inc. and its wholly owned subsidiary,
ChromaDex Analytics, Inc. (the “Company”) include all adjustments, consisting of normal recurring
adjustments and accruals, that in the opinion of the management of the Company are necessary for a
fair presentation of our financial position as of March 29, 2008 and results of operations and cash
flows for the three months ended March 29, 2008 and March 31, 2007. These unaudited interim
condensed financial statements should be read in conjunction with the Company’s audited financial
statements and the notes thereto for the year ended December 29, 2007 appearing elsewhere in the
filing. Operating results for the three months ended March 29, 2008 are not necessarily indicative
of the results to be achieved for the full year of trading ending on
January 3, 2009. The
preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reports amounts of revenues and expenses during the
period. Actual results could differ from those estimates.
Note 2. Nature of Business and Significant Accounting Policies
Nature of business: The Company creates and supplies botanical reference standards along
with related phytochemical products and services. The Company’s main priority is to create
industry-accepted information, products and services to every layer of the functional food,
pharmaceutical, personal care and dietary supplement markets. The Company provides these services
at terms of 30 days.
Basis of presentation: The financial statements and accompanying notes have been prepared
on a consolidated basis and reflect the consolidated financial position of the Company and its
wholly owned subsidiaries. All significant intercompany balances and transactions have been
eliminated from these financial statements. The Company’s fiscal year ends on the Saturday closest
to the end of December and the Company’s fiscal quarters end on the Saturday closest to calendar
quarter end. Fiscal 2008 includes 53 weeks instead of the normal 52 weeks. The inclusion of an
extra week occurs every fifth or sixth fiscal year due to the Company’s floating year-end date.
New accounting pronouncements: In March 2008, the Financial Accounting Standards Board
(“FASB”) issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging
Activities”. The new standard is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial performance, and cash flows.
It is effective for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged. The new standard also improves
transparency about the location and amounts of derivative instruments in an entity’s financial
statements; how derivative instruments and related hedged items are accounted for under Statement
133; and how derivative instruments and related hedged items affect its financial position,
financial performance, and cash flows. FASB Statement No. 161 achieves these improvements by
requiring disclosure of the fair values of derivative instruments and their gains and losses in a
tabular format. It also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it requires
cross-referencing within footnotes to enable financial statement users to locate important
disclosure information Based on current conditions, the Company does not expect the adoption of
SFAS 161 to have a significant impact on its results of operations or financial position.
In December 2007, FASB issued FASB Statement No. 160, Non-controlling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51. This Statement applies to all entities that
prepare consolidated financial statements, except not-for-profit organizations, but will affect
only those entities that have an outstanding non-controlling interest in one or more subsidiaries
or that deconsolidate a subsidiary. Not-for-profit organizations should continue to apply the
guidance in Accounting Research Bulletin No. 51, Consolidated Financial Statements, before the
amendments made by this Statement, and any other applicable standards, until the Board issues
interpretative guidance. This Statement is effective for fiscal years, and interim periods within
those fiscal years, beginning on or
after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier
adoption is prohibited. The effective date of this Statement is the same as that of the related
Statement 141(R). This Statement shall be applied prospectively as of the beginning of the fiscal
year in which this Statement is initially applied, except for the presentation and disclosure
requirements. The presentation and disclosure requirements shall be applied retrospectively for all
periods presented. This statement has no effect on the financial statements as the Company does not
have any outstanding non-controlling interest.
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures for fiscal years beginning after November 15, 2007.
There was no impact effect on the Company’s March 29, 2008 quarterly financial statements resulting
from the adoption of this standard.
Note 3. Property and Equipment
Property and equipment consisted of the following:
Due to the continuing operating losses, no tax benefit is being recorded. The Company continues to
provide a full valuation allowance for any future tax benefits resulting from the Company’s net
operating losses.
Note 5. Capital Stock
During the three month period ending March 29, 2008, the Company received net capital contributions
from third party investors through a private placement offering of $1,912,502 in exchange for
issuing 1,562,481 shares of common stock. In conjunction with this offering, warrants to purchase
781,250 shares of common stock were issued to such investors at $3.00 per share of which the
Company has a call at $4.50 per share and the Company was obligated to issue an additional warrant
for the purchase of 156,248 shares of common stock at $1.36 per share to the placement agent. The
warrant to the placement agent will be issued at the conclusion of the private placement offering.
Additionally, the Company sold 50,000 shares for $50,000 to one of its shareholders.
Note 6. Stock Options and Unearned Stock-Based Compensation
The Company issued 5,000 options to purchase the Company’s stock in the three month period ending
March 29, 2008. These were issued under the company’s Amended and Restated 2007 Equity Incentive
Plan and were considered immaterial.
Note 7. Related Party Transactions
At March 29, 2008 and December 29, 2007, the Company owed $1,178,206 and $1,167,822, respectively,
to two officers relating to unpaid compensation. The amounts owed to officers are unsecured,
non-interest bearing, and payable on demand.
Note 8. Management’s Plans for Continuing Operations and Subsequent Event
The Company has incurred a loss from continuing operations of $115,278 and a net loss of $122,906
for the three month period ended March 29, 2008, and a net Income of $112,993 for the three month
period ended March 31, 2007, attributable primarily to the analytical services line of business.
The Company’s business plan for 2008 reflects positive earnings before income taxes, depreciation
and amortization. Management has implemented strategic operational structure changes, which it
believes, will allow the Company to achieve profitability with future growth without incurring
additional overhead costs. The Company expects to grow the analytical services business and
achieve break-even by mid-year 2008. Management’s anticipation of future growth is largely related
to the Food and Drug Administration’s (FDA’s) upcoming guideline releases in the dietary supplement
industry. The Company has implemented a comprehensive marketing plan design targeted on leveraging
its capabilities concurrent with the FDA’s releases.
Subsequent to three month period ending March 29, 2008, the Company received net capital
contributions from third party investors through the private placement offering totaling
$1,304,973. The Company issued 1,066,137 shares of common stock in connection with the private
placement.
In addition, in connection with the private placement, warrants for the purchase of 533,067 shares
of common stock were issued with a strike price of $3.00, of which the Company has a call at $4.50
per share. The Company is also obligated to issue an additional warrant for the purchase of
106,613 shares of common stock with a strike price of $1.36 to the placement agent. The warrant to
the placement agent will be issued at the conclusion of the private placement offering.
The following unaudited pro forma consolidated financial statements (“pro forma statements”) give
effect to the reverse acquisition of ChromaDex, Inc (“ChromaDex”) by Cody Resources, Inc (“Cody”)
and are based on the estimates and assumptions set forth herein and in the notes to such Pro Forma
statements.
On May 21, 2008, Cody, CDI Acquisition, Inc. and ChromaDex, entered into an Agreement and Plan of
Merger (the “Agreement”). The Agreement provides for a merger of CDI Acquisition with and into
ChromaDex, with ChromaDex remaining as the surviving entity after the merger (the “Merger”),
whereby the stockholders of ChromaDex will receive common stock of Cody in exchange for their
common stock in ChromaDex. ChromaDex is the acquirer for accounting purposes. The following
unaudited financial information gives effect to the above. The unaudited pro forma financial
information is derived from (1) Cody’s audited historical financial statements included in Cody’s
Form 10-KSB for the period ended November 30, 2007; (2) Cody’s unaudited historical financial
statements included in Cody’s amended Form 10-QSB for the period ended February 29, 2008; (3)
ChromaDex’s audited historical financial statements for the year ended December 29, 2007; and, (4)
ChromaDex’s unaudited historical financial statements for the three months ended March 29, 2008.
The unaudited pro forma consolidated balance sheet at March 29, 2008 assumes the effects of the
above merger took place on March 29, 2008. The unaudited pro forma consolidated statement of
operations for the year ended December 29, 2007 combines the historical statements of operations of
Cody for the year ended November 30, 2007 and of ChromaDex for the year ended December 29, 2007.
The unaudited pro forma consolidated statement of operations for the three months ended March 29,2008 combines the historical statements of operations of Cody for the three months ended February29, 2008 and of ChromaDex for the three months ended March 29, 2008. The unaudited pro forma
consolidated statements of operations assume that the above merger took place as of January 1,2007. The unaudited pro forma consolidated financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results of financial position that
would have occurred if the transaction had been completed as of the date presented. Upon the
completion of the Merger, Cody adopted the fiscal year of ChromaDex as the accounting acquirer. As
a result, the fiscal year presented in these pro forma condensed combined financial statements is
December 29, 2007 and the interim period is the period ended March 29, 2008. You should read this
information in conjunction with:
1.
Accompanying notes to the Unaudited Pro Forma Condensed Consolidated Financial
Statements;
2.
Separate historical consolidated financial statements of Cody as of and for the
year ended November 30, 2007, included in the annual report on Form 10-KSB for the year
ended November 30, 2007;
3.
Separate historical consolidated financial statements of ChromaDex as of and
for year ended December 29, 2007 included elsewhere in this Current Report on Form 8-k;
4.
Separate unaudited consolidated financial statements of Cody as of and for the
three months ending February 29, 2008 included in the 10-QSB for the three month period
ended February 29, 2008;
5.
Separate unaudited consolidated financial statements of ChromaDex as of and for
the three months ended March 29, 2008 included elsewhere in this Current Report on Form
8-k.
Pro Forma Condensed Combined Statement of Operations (Unaudited)
For the Year Ended December 29, 2007
Pro Forma
ChromaDex
Cody
Adjustments
Consolidated
Sales
$
4,754,073
$
—
$
—
$
4,754,073
Cost of goods sold
3,122,461
—
—
3,122,461
Gross profit
1,631,612
—
—
1,631,612
Operating expenses:
Selling
387,816
—
—
387,816
General and administrative
1,421,516
38,382
—
1,459,898
1,809,332
38,382
—
1,847,714
Operating loss
(177,720
)
(38,382
)
(216,102
)
Nonoperating (income) expenses:
Interest expense
31,815
—
—
31,815
Interest income
(17,698
)
—
—
(17,698
)
Other
(1,962
)
—
—
(1,962
)
12,155
—
—
12,155
Net loss
$
(189,875
)
$
(38,382
)
$
—
$
(228,257
)
Basic and Diluted Loss per Share
$
(0.01
)
$
(0.00
)
—
$
(0.01
)
Weighted average shares outstanding
22,014,235
16,038,473
(3)
(11,538,461
)(3)
26,514,247
Notes to Pro Forma Condensed Combined Financial Statements
Note 1 — Basis of Presentation
The Unaudited Pro Forma financial statements reflect financial information, which gives effect to
the acquisition of all the outstanding common stock of ChromaDex, Inc (“ChromaDex”) in exchange for
approximately 23,522,122 shares of Cody Resources, Inc. (“Cody”).The acquisition has been accounted
for as a reverse acquisition. The combination of the two companies (the Company) is recorded as a
recapitalization of Cody pursuant to which ChromaDex is treated as the continuing entity. Because
the acquisition was accounted for as a reverse acquisition, there was neither goodwill recognized
nor any adjustments to the book value of the net assets of ChromaDex that would affect the Pro
Forma Statement of Operations.
Note
2 — Earnings per share
Dilutive securities, consisting of options to purchase the Company’s common stock and restricted
stock awards, are included in the calculation of diluted weighted average common shares. Dilutive
securities for the three month period ended March 29, 2008 were 0 given the fact that it cannot be
determined at this time if these shares are in the money given the lack of a market for said
shares. In addition, due to the Company’s net loss, any common stock equivalents would be
anti-dilutive and therefore would be excluded for this reason as well.
On March 28, 2008, Cody completed a forward stock split of 11.538461 Cody shares for every one
share of Cody then outstanding per Cody’s 8-K/A filed April 24, 2008. Immediately prior to the
merger Cody cancelled 11,538,461 shares as contemplated by the Agreement. The result of the
foregoing two events led to a net increase of Cody shares from 1,390,000 to 4,500,012. The amount
shown under Cody in the accompanying pro forma statement give effect to the split discussed above
and vary from Cody’s previous filings.
Certificate
of Incorporation of Cody Resources, Inc., a Delaware corporation and
Certificate of Amendment of Cody Resources, Inc.
3.2
Bylaws
of Cody Resources, Inc., a Delaware corporation
4.1
Investor’s Rights Agreement, effective as of December 31, 2005, by and between The University of
Mississippi Research Foundation and ChromaDex
4.2
Tag-Along Agreement effective as of December 31, 2005, by and among the Company, Frank Louis Jaksch,
Snr. & Maria Jaksch, Trustees of the Jaksch Family Trust, Margery Germain, Lauren Germain, Emily
Germain, Lucie Germain, Frank Louis Jaksch, Jr., and the University of Mississippi Research
Foundation
4.3
License Agreement, effective September 15, 2005 between L&J Becvar, L.P. and ChromaDex, Inc.
4.4
Form of Warrant to Purchase Shares of Common Stock of ChromaDex Corporation
10.1
ChromaDex, Inc. 2000 Non-Qualified Incentive Stock Option Plan effective October 1, 2000
10.2
Second Amended and Restated 2007 Equity Incentive Plan effective March 13, 2007
10.3
Form of Stock Option Agreement under the ChromaDex, Inc. Second Amended and Restated 2007 Equity
Incentive Plan
10.4
Form of Restricted Stock Purchase Agreement under the ChromaDex, Inc. 2007 Equity Incentive Plan
10.5
Employment Agreement dated April 14, 2008, by and between Frank L. Jaksch, Jr. and ChromaDex, Inc.
10.6
Employment Agreement dated April 14, 2008, by and between Thomas C. Varvaro and the ChromaDex, Inc.
10.7
Standard Industrial/Commercial Multi-Tenant Lease – Net dated December 19, 2006, by and between the
ChromaDex, Inc. and SCIF Portfolio II, LLC
10.8
Lease Agreement dated October 26, 2001, by and between Railhead Partners, LLC and NaPro
BioTherapeutics, Inc., as assigned to ChromaDex Analytics, Inc. on April 9, 2003 and amended on
September 24, 2003
10.9
Licensing Agreement Nutraceutical Standards effective as of December 31, 1999 between the University
of Mississippi Research Foundation and ChromaDex
License Agreement, effective September 15, 2005 between L&J Becvar, L.P. and ChromaDex, Inc. (1)
10.12
Option
Agreement, and Patent License Agreement, both effective on
August 19, 2005 and both between the Board of Regents of The University of Texas Systems and
ChromaDex, Inc.
10.13
Stock Redemption Agreement, dated June 18, 2008 between ChromaDex, Inc. and Bayer Innovation GmbH
(formerly named Bayer Innovation Beteiligungsgesellschaft mbH)
10.14
Promissory Note, dated June 18, 2008 between ChromaDex, Inc. as borrower and Bayer Innovation GmbH as
lender
